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REGISTRATION NO. 333-80431
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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FAIRFIELD MANUFACTURING COMPANY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 3566 63-0500160
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
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U.S. ROUTE 52 SOUTH
LAFAYETTE, INDIANA 47905
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
RICHARD A. BUSH
VICE PRESIDENT--FINANCE
FAIRFIELD MANUFACTURING COMPANY, INC.
U.S. ROUTE 52 SOUTH
LAFAYETTE, INDIANA 47905
(765) 474-3474
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
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Copy to:
RALPH R. ARDITI
DEBEVOISE & PLIMPTON
875 THIRD AVENUE
NEW YORK, NEW YORK 10022
(212) 909-6000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS
PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this form is filed to register additional securities of an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(b)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / /
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CALCULATION OF REGISTRATION FEE
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PROPOSED
TITLE OF EACH CLASS MAXIMUM OFFERING PROPOSED
OF SECURITIES TO BE AMOUNT TO BE PRICE PER MAXIMUM AGGREGATE AMOUNT OF
REGISTERED REGISTERED(1) SHARE(1) OFFERING PRICE(1) REGISTRATION FEE
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9 5/8% Senior Subordinated
Notes due 2008.............. $100,000,000 100% $100,000,000 $27,800
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(f) under the Securities Act of 1933, as amended.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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PROSPECTUS
FAIRFIELD
GEARED FOR EXCELLENCE
OFFER TO EXCHANGE FOR ALL OUTSTANDING
9 5/8% SENIOR SUBORDINATED NOTES DUE 2008
------------------------------
We are offering to exchange (the "Exchange Offer") all of our outstanding
9 5/8% Senior Subordinated Notes Due 2008 (the "Old Notes") for our registered
9 5/8% Senior Subordinated Notes Due 2008 (the "New Notes"). The Old Notes and
the New Notes are collectively referred to as the "Notes".
THE NEW NOTES:
The terms of the New Notes are identical in all material respects to the
terms of the Old Notes except that the New Notes:
o are registered under the Securities Act of 1933, and therefore will not
contain restrictions on transfer;
o will not contain certain provisions relating to additional interest; and
o will contain terms of an administrative nature that differ from those of
the Old Notes.
YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 10 OF THIS
PROSPECTUS BEFORE INVESTING.
THE EXCHANGE OFFER:
o Our offer to exchange Old Notes for New Notes will be open until 5:00
p.m., New York City time, on August 9, 1999, unless we extend the offer.
o You should carefully review the procedures for tendering the Old Notes
beginning on page 80 of this prospectus.
o The Exchange Offer is subject to customary conditions. We may waive
these conditions.
o If you fail to tender your Old Notes, you will continue to hold
unregistered securities and your ability to transfer them could be
adversely affected.
o No public market currently exists for the Notes.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE NOTES OR DETERMINED THAT THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------------
The date of this Prospectus is July 7, 1999.
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CUSTOM GEAR
Fairfield's custom gear products are used in a variety of applications,
including those pictured below.
This prospectus incorporates important business and financial information
about us that is not included in or delivered with this Prospectus. We will
provide without charge to each person to whom a copy of this Prospectus is
delivered, upon written or oral request of any such person, a copy of any and
all such information. Requests for such copies should be directed to the Vice
President--Finance, Fairfield Manufacturing Company, Inc., U.S. Route 52 South,
Lafayette, Indiana 47903 (telephone number (765) 474-3474). You should request
any such information at least five days in advance of the date on which you
expect to make your decision with respect to this offer. In any event, you must
request such information prior to August 3, 1999.
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IMPORTANT INFORMATION ABOUT THIS PROSPECTUS
The information in this Prospectus is current only as of the date on its
cover, and may change after that date. For any time after the cover date of this
Prospectus, we do not represent that our affairs are the same as described or
that the information in this Prospectus is correct--nor do we imply those things
by delivering this Prospectus, or offering to exchange securities.
We have used information that we believe comes from reliable sources, but
we do not assure you that the information in this Prospectus is accurate or
complete. This Prospectus contains summaries, believed to be accurate, of
certain terms of certain documents. All such summaries are qualified in their
entirety by reference to the actual documents. Copies of the actual documents
will be made available upon request to the Company. In making an investment
decision, you must rely upon your own examination of this Prospectus and the
terms of the offering and the Notes, including the merits and risks involved.
You should rely only on the information contained in this Prospectus. We
have not authorized any other person to provide you with different information.
If anyone provides you with different or inconsistent information, you should
not rely on it.
You might not be legally able to participate in this exchange offering--we
are not giving you legal, business, financial or tax advice about any matter.
You should consult with your own attorney, accountant and other advisors about
those matters (including to see if you may legally participate in this private,
unregistered offering).
WE ARE NOT MAKING THE EXCHANGE OFFER, NOR WILL WE ACCEPT SURRENDERS FOR
EXCHANGE FROM ANY HOLDER OF OLD NOTES, IN ANY JURISDICTION IN WHICH THE EXCHANGE
OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE SECURITIES
OR "BLUE SKY" LAWS OF SUCH JURISDICTION.
FORWARD-LOOKING STATEMENTS
WE MAKE FORWARD-LOOKING STATEMENTS THROUGHOUT THIS PROSPECTUS. WHENEVER YOU
READ A STATEMENT THAT IS NOT SIMPLY A STATEMENT OF HISTORICAL FACT (SUCH AS WHEN
WE DESCRIBE WHAT WE BELIEVE, EXPECT OR ANTICIPATE WILL OCCUR, AND OTHER SIMILAR
STATEMENTS), YOU MUST REMEMBER THAT OUR EXPECTATIONS MAY NOT BE CORRECT, EVEN
THOUGH WE BELIEVE THEY ARE REASONABLE. WE DO NOT GUARANTEE THAT THE TRANSACTIONS
AND EVENTS DESCRIBED IN THIS PROSPECTUS WILL HAPPEN AS DESCRIBED (OR THAT THEY
WILL HAPPEN AT ALL). YOU SHOULD READ THIS PROSPECTUS COMPLETELY AND WITH THE
UNDERSTANDING THAT ACTUAL FUTURE RESULTS MAY BE MATERIALLY DIFFERENT FROM WHAT
WE EXPECT. WE WILL NOT UPDATE THESE FORWARD-LOOKING STATEMENTS, EVEN THOUGH OUR
SITUATION WILL CHANGE IN THE FUTURE. WHETHER ACTUAL RESULTS WILL CONFORM WITH
OUR EXPECTATIONS AND PREDICTIONS IS SUBJECT TO A NUMBER OF RISKS AND
UNCERTAINTIES, INCLUDING:
o THE FACTORS DISCUSSED UNDER "RISK FACTORS" IN THIS PROSPECTUS;
o OUR OUTSTANDING INDEBTEDNESS AND OUR LEVERAGE;
o RESTRICTIONS IMPOSED BY THE TERMS OF OUR INDEBTEDNESS;
o THE HIGH DEGREE OF COMPETITION IN OUR BUSINESS;
o THE SUSCEPTIBILITY OF OUR BUSINESS TO GENERAL ECONOMIC CONDITIONS;
o THE CYCLICAL NATURE OF OUR BUSINESS;
o FUTURE MODIFICATIONS OF EXISTING ENVIRONMENTAL LAWS AND HUMAN HEALTH
REGULATIONS;
o DISCOVERY OF UNKNOWN CONTINGENT LIABILITIES, INCLUDING ENVIRONMENTAL
CONTAMINATION AT OUR FACILITY;
o OUR DEPENDENCE ON SUPPLIERS OF RAW MATERIALS AND MAJOR CUSTOMERS;
o RISKS RELATED TO YEAR 2000 ISSUES; AND
o FUTURE CAPITAL REQUIREMENTS.
AVAILABLE INFORMATION
We have filed a Registration Statement on Form S-4 (the "Registration
Statement") to register, under the Securities Act of 1933, as amended (the
"Securities Act"), the New Notes to be issued in exchange for the Old Notes.
This Prospectus is a part of the Registration Statement. As allowed by the rules
of the
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Securities and Exchange Commission (the "Commission"), this Prospectus does not
contain all the information you can find in the Registration Statement or the
exhibits to the Registration Statement.
We currently file with the Commission annual reports containing the
information required to be contained in Form 10-K promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), quarterly
reports containing the information required to be contained in Form 10-Q
promulgated under the Exchange Act and from time to time such other information
as is required to be contained in Form 8-K promulgated under the Exchange Act.
Such filings can be inspected and copied at the public reference facilities
maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549, and at Regional Offices of the Commission located
at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661
and at Seven World Trade Center, Suite 1300, New York, New York 10048. Copies of
such material can be obtained from the Public Reference Room of the Commission
at 450 Fifth Street, N.W., Washington D.C. 20549, at prescribed rates. You may
obtain information on the operation of the Public Reference Room by calling the
Commission at 1-800-SEC-0330. The Commission maintains a site on the World Wide
Web that contains filings of registrants who file such material with the
Commission electronically. The Commission's internet address on the World Wide
Web is http://www.sec.gov.
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PROSPECTUS SUMMARY
This summary highlights selected information from this document, but does
not contain all the details of the Notes and information about us, including
information that may be important to you. Therefore, we urge you to read this
entire document carefully, including the Risk Factors and the Consolidated
Financial Statements. Unless the context otherwise requires, references in this
document to "us", "we", "our", "ours", the "Company" or "Fairfield" mean
Fairfield Manufacturing Company, Inc. and its subsidiaries.
THE COMPANY
We believe we are the leading independent manufacturer (based on sales) of
high precision custom gears and assemblies and planetary gear systems in North
America. In each of the "custom products" and "planetary gear system" markets in
which we participate, we estimate that our market share is twice that of any
other independent manufacturer. Most of our custom gears and assemblies and
planetary gear systems are used by original equipment manufacturers, or OEMs, as
components in various kinds of heavy mobile equipment. Our customers include
such industry leaders as General Electric, General Motors, John Deere,
Caterpillar and Ingersoll-Rand. In 1998, our net sales increased by 14.6% over
1997 to $220.3 million and EBITDA (as defined) increased by 18.8% over 1997 to
$37.1 million. For the quarter ended March 31, 1999, we had net sales of
$60.4 million and EBITDA of $11.9 million, compared with net sales of
$55.4 million and EBITDA of $9.0 million, for the same period in 1998. For the
twelve months ended March 31, 1999, we had net sales of $225.3 million and
EBITDA of $40.0 million.
Custom Products. Custom gears are components of larger systems, such as
axles, drive differentials and transmission units. Custom assemblies are
differentials, wheel drives, power transmissions and conveyor/tram drives that
are generally produced as complete units. Most of the businesses who purchase
our custom gears and assemblies are OEMs; for many of them we are the sole
independent supplier of selected gear products. Our custom gear customers
include OEMs who produce:
o rail equipment, such as locomotives;
o mining equipment, such as underground mining and transfer equipment and
above-ground haul trucks;
o agricultural equipment, such as tractors and harvesting equipment;
o industrial equipment, such as mixers, printing presses and compressors;
o construction equipment, such as loaders, scrapers and excavators; and
o materials-handling equipment, such as forklifts and conveyors.
Custom gears and assemblies accounted for $118.5 million (or 53.8%) of our 1998
net sales and $30.6 million (or 50.7%) of our 1999 first quarter net sales.
Planetary Gear Systems. Planetary gear systems 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 conventional axles would otherwise present design
difficulties. We market our planetary gear systems under the
Torque-Hub(Registered) name. As a result of the performance history and
reputation for quality of our Torque-Hub(Registered) products, we believe the
Torque-Hub(Registered) name has become closely identified with planetary gear
systems. Torque-Hub(Registered) customers include OEMs who produce:
o access platform equipment, such as aerial-lifts and utility trucks;
o road rehabilitation equipment, such as pavers and road compactors;
o construction equipment, such as excavators and trenchers;
o forestry equipment, such as logging loaders and feller bunchers;
o agricultural equipment, such as crop sprayers and windrowers; and
o marine equipment, such as hoist and jack-up boats.
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Planetary gear systems accounted for $101.8 million (or 46.2%) of our 1998 net
sales and $29.8 million (or 49.3%) of our 1999 first quarter net sales.
We have been granted "preferred supplier" status by a majority of our
customers due to our ability to meet their business requirements, including
General Electric, General Motors, John Deere, Caterpillar and Ingersoll-Rand. We
have also been certified as meeting "ISO-9001" standards, which are increasingly
being used by OEMs in lieu of individual certification procedures. In addition,
we have been certified as meeting "QS-9000" standards. We believe ISO-9001 and
QS-9000 certifications provide us with a competitive advantage because a number
of OEMs now require one of these certifications as a condition to doing
business.
COMPETITIVE STRENGTHS
We have a leading market position in the custom product and planetary gear
system markets in which we participate. We believe our competitive strengths
are:
o the breadth and quality of our product offerings;
o our long-standing relationships (in many cases 20 years or more) with
our major customers;
o our state-of-the-art engineering and manufacturing technology, including
our heat treating facilities, computer-aided design and manufacturing
systems, and computer controlled machine tools and gear grinders;
o our cost-competitiveness;
o our experienced engineering staff, and its close collaboration with our
sales force and customers in designing and developing products to meet
our customers' needs; and
o our stable, knowledgeable sales force, many of whose members have
engineering degrees and have worked with the same customers for many
years.
In addition, we believe that our management team, with an average of over 20
years of experience in manufacturing, will be instrumental in further
strengthening our market position.
BUSINESS STRATEGY
We intend to enhance our market position and improve our profitability by:
CAPITALIZING ON INDUSTRY TRENDS. We seek to increase our revenues
and market share by taking advantage of industry trends, including:
o the trend among OEMs to purchase complete gear assemblies or
systems rather than individual gear products;
o 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
similar to us, rather than manufacture such products in-house; and
o 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 similar to
us.
These trends are driven by the OEMs' desire to reduce their
production and supply costs and focus on their core competencies. We
have capitalized upon these trends as evidenced by increasing sales
of complete gear assemblies and systems, particularly to
manufacturers of agricultural and heavy-duty equipment. For example,
in 1998 we started delivering a new complete gearbox assembly to a
baler manufacturer and a family of bull gears and pinions to an axle
manufacturer for on-highway Class 8 vehicles. In addition, we
continue to receive orders from a number of captive gear
manufacturers, such as those of General Electric, General Motors and
John Deere, for certain gear products that these OEMs previously
produced in-house. We have also established sole sourcing
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relationships with many of our major customers for selected gear
products. We believe we can continue to take advantage of these
industry trends because of our broad product offerings, large
manufacturing capacity, sophisticated manufacturing and design
capabilities and established reputation for producing high-quality
products.
IMPROVING PRODUCTION EFFICIENCY AND REDUCING OVERALL COSTS. We have
taken a number of steps to improve our efficiency and increase our
profit margins. Specifically, we are:
o converting various operations to cellular manufacturing;
o reorganizing the physical layout of our plant;
o installing new, more efficient machinery; and
o improving our employee training programs.
In addition, we are actively working to reduce the price we pay for
raw materials by using suppliers throughout the world, purchasing
more from fewer suppliers and entering into long-term supply
agreements. We are also controlling our selling, general and
administrative expenses. We believe these initiatives will help us
to lower our costs.
MAINTAINING OUR POSITION AS A HIGH-QUALITY, LOW-COST
MANUFACTURER. We have broad-based, integrated manufacturing
capabilities which, we believe, provide us with an advantage over
our competitors. These capabilities include:
o state-of-the-art heat treating facilities;
o computer-aided design and manufacturing systems; and
o computer numerically controlled machine tools and gear grinders.
Since 1994, we have invested $57.0 million in capital equipment and
in our manufacturing facility. We believe our manufacturing capacity
is substantially larger than that of our independent competitors,
enabling us to fill large orders at a lower cost. We plan to
continue to selectively purchase more equipment to improve our
manufacturing processes and expand capacity.
LEVERAGING OUR LONG-TERM RELATIONSHIPS WITH MAJOR CUSTOMERS;
INTRODUCING NEW PRODUCTS.
We believe we have strong relationships with our customers due to
the following factors:
o the continuity of our customer relationships;
o our awareness of and involvement in our customers' planning
processes; and
o our commitment to provide ongoing engineering services.
We believe we are better able to proactively design and implement
solutions to our customers' evolving requirements based upon our
strong customer relationships.
We are developing, testing and marketing new products, and new
applications for existing products, to increase sales, profit and
market share. Historically, our planetary gear system business has
generated a significant portion of our new products and new product
applications. We are continually working to add new custom gear and
assembly product offerings and are currently developing a number of
new applications including: (1) differentials for automotive,
industrial and commercial vehicles, and off-highway trucks,
(2) transmissions, and (3) axles.
EVALUATING SELECTED ACQUISITIONS. We intend to examine and, if
appropriate, to pursue strategic acquisitions of complementary
businesses in order to increase product manufacturing capacity,
broaden product offerings and penetrate new geographic markets.
------------------------
Our principal executive offices are located at U.S. 52 South, Lafayette,
Indiana 47905. Our telephone number is (765) 474-3474.
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SUMMARY OF THE TERMS OF THE EXCHANGE OFFER
We completed on May 19, 1999 the private offering (the "Original Offering")
of $100,000,000 aggregate principal amount of 9 5/8% Senior Subordinated Notes
due 2008 (the "Old Notes").
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The Exchange Offer.................. You are entitled to exchange in this exchange offer (the "Exchange Offer")
Old Notes for our registered 9 5/8% Senior Subordinated Notes due 2008 (the
"New Notes"). The Old Notes and the New Notes are collectively referred to
as the "Notes".
Resale of New Notes................. We believe that the New Notes that will be issued in this Exchange Offer
may be resold by most investors without compliance with the registration
and prospectus delivery provisions of the Securities Act, subject to
certain conditions. You should read the discussion under the heading "The
Exchange Offer" for further information regarding the Exchange Offer and
resale of the New Notes.
Registration Rights Agreement....... In connection with the sale of the Old Notes to the initial purchasers, we
entered into a Registration Rights Agreement with the initial purchasers
(the "Registration Rights Agreement") requiring us to use our best efforts
to make the Exchange Offer.
Consequence of Failure to Exchange
Old Notes........................... You will continue to hold Old Notes which will remain subject to their
existing transfer restrictions if:
o you do not tender your Old Notes; or
o you tender your Old Notes and they are not accepted for exchange.
Subject to certain limited exceptions, we will have no obligation to
register the Old Notes after we consummate the Exchange Offer. See "The
Exchange Offer--Terms of the Exchange Offer" and "--Consequences of Failure
to Exchange."
Expiration Date..................... The Exchange Offer will expire at 5:00 p.m., New York City time, on
August 9, 1999, unless we extend it, in which case "Expiration Date" means
the latest date and time to which the Exchange Offer is extended.
Interest on the New Notes........... The New Notes will accrue interest at a rate of 9 5/8% per annum from
May 19, 1999, the issue date of the Old Notes (the "Issue Date") or from
the most recent date to which interest has been paid or provided for on the
Old Notes. No additional interest will be paid on Old Notes tendered and
accepted for exchange.
Conditions to the Exchange Offer.... The Exchange Offer is subject to certain customary conditions, which may be
waived by us. See "The Exchange Offer--Conditions."
Procedures for Tendering Old
Notes............................... If you wish to accept the Exchange Offer, you must submit a Letter of
Transmittal, and any other required documentation and effect a tender of
Old Notes pursuant to the procedures for book-entry transfer (or other
applicable procedures), all in accordance with the instructions described
in this prospectus and in the Letter of Transmittal. See "The Exchange
Offer--Procedures for Tendering", "--Book-Entry Transfer", and
"--Guaranteed Delivery Procedures." Certain other procedures may apply with
respect to certain book-entry transfers. See "The Exchange
Offer--Exchanging Book-Entry Notes."
Guaranteed Delivery Procedures...... If you wish to tender your Old Notes, but cannot properly do so prior to
the Expiration Date, you may tender your Old Notes according to the
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guaranteed delivery procedures set forth in "The Exchange Offer--
Guaranteed Delivery Procedures."
Withdrawal Rights................... Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New
York City time, on the Expiration Date. To withdraw a tender of Old Notes,
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 Old Notes and Delivery
of New Notes........................ Subject to certain conditions, any and all Old Notes that are validly
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 Notes issued
pursuant to the Exchange Offer will be delivered as soon as practicable
following the Expiration Date. See "The Exchange Offer--Terms of the
Exchange Offer."
Certain U.S. Tax Consequences....... We believe that the exchange of Old Notes for New Notes will not constitute
a taxable exchange for U.S. federal income tax purposes. See "Certain
United States Federal Income Tax Considerations."
Exchange Agent...................... First Union National Bank is serving as the Exchange Agent.
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SUMMARY OF THE TERMS OF THE NEW NOTES
The terms of the New Notes are identical in all material respects to the
terms of the Old Notes except that the New Notes:
o are registered under the Securities Act, and therefore will not contain
restrictions on transfer;
o will not contain certain provisions relating to additional interest; and
o will contain terms of an administrative nature that differ from those of
the Old Notes.
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Maturity Date....................... October 15, 2008.
Interest Rate:...................... 9 5/8% per year.
Interest Payment Dates.............. Each April 15 and October 15, beginning on October 15, 1999.
Security and Ranking................ The Notes will not be secured by any collateral.
The Notes will rank below all of our senior debt and will rank equal to our
other senior subordinated debt. Therefore, if we default, your right to
payment under the Notes will be junior to the rights of holders of our
senior debt to collect money we owe them at the time. See our Consolidated
Financial Statements elsewhere in this Prospectus.
Guarantees.......................... The Notes will not be guaranteed by anyone on the issue date. We have
agreed that, under some circumstances, our subsidiaries may guarantee the
Notes in the future.
Optional Redemption
beginning April 15, 2004............ Except in the case of certain equity offerings by us, we cannot choose to
redeem the Notes before April 15, 2004.
At any time after that date (which may be more than once), we can choose to
redeem some or all of the Notes at certain specified prices, plus accrued
interest.
Optional Redemption
after Equity Offerings.............. At any time (which may be more than once) before April 15, 2002 we can
choose to buy back up to 35% of the outstanding Notes (including
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the original principal amount of any additional Notes issued under the
Indenture) with money that we raise in one or more public equity offerings,
as long as:
o we pay 109.625% of the face amount of the Notes bought, plus accrued
interest;
o we buy the Notes back within 90 days of completing the equity offering;
and
o at least 65% of the Notes originally issued remain outstanding afterwards
(including the original principal amount of any additional Notes issued
under the Indenture).
Change of Control Offer............. If we experience a change in control, we must give holders of the Notes the
opportunity to sell us their Notes at 101% of their face amount, plus
accrued interest.
We might not be able to pay you the required price for Notes you present to
us at the time of a change of control, because:
o we might not have enough funds at that time; or
o the terms of our senior debt may prevent us from purchasing them.
Asset Sale Proceeds................. We may have to use the cash proceeds from certain sales of assets to offer
to buy back the Notes at their face amount, plus accrued interest.
Certain Indenture Provisions........ The indenture governing the Notes (the "Indenture") will limit what we may
do. The provisions of the indenture will limit our ability to:
o incur more debt;
o pay dividends and make distributions;
o issue stock of subsidiaries;
o make certain investments;
o repurchase stock;
o create liens;
o enter into transactions with affiliates; and
o merge, consolidate or sell assets.
These covenants are subject to a number of important exceptions. See
"Description of the Notes--Certain Covenants."
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RISK FACTORS
PROSPECTIVE PURCHASERS OF THE NOTES SHOULD CAREFULLY CONSIDER THE
INFORMATION SET FORTH UNDER THE CAPTION "RISK FACTORS" AND ALL OTHER INFORMATION
SET FORTH IN THIS PROSPECTUS IN EVALUATING AN INVESTMENT IN THE NOTES.
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SUMMARY CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL DATA
The summary financial data for the three years ended December 31, 1998 are
derived from our audited Consolidated Financial Statements included in this
Offering Memorandum.
The summary financial data for the three months ended March 31, 1998 and
March 31, 1999 are derived from our unaudited Consolidated Financial Statements
included in this Offering Memorandum. These unaudited Consolidated Financial
Statements, in our opinion, have been prepared on the same basis as the audited
Consolidated Financial Statements and include all adjustments necessary for a
fair presentation of our financial condition and results of operations for such
periods. The results of operations for the three month period ended March 31,
1999 are not necessarily indicative of results of operations for the full fiscal
year ending December 31, 1999.
The summary pro forma financial data are derived from historical financial
data modified, as described in the notes to the summary below, to reflect the
use of the proceeds of the offering of the Old Notes (a) to redeem
$67.15 million outstanding aggregate principal amount of our previously
outstanding 11 3/8% Senior Subordinated Notes due 2001 (the "2001 Notes"), for
an aggregate redemption price of approximately $68.6 million, (b) to repay
approximately $27.7 million of our borrowings under our senior credit facility
and (c) to pay the fees and expenses of the offering of the Old Notes, estimated
at approximately $3.7 million. The issuance of the Old Notes, the redemption of
the 2001 Notes and the repayment of $27.7 million of our borrowings under our
senior credit facility (the "Credit Facility") are collectively referred to as
the "Refinancing." The summary pro forma financial data are not necessarily
indicative of the financial position or results of operations had the
Refinancing actually been completed on the dates assumed and are not necessarily
indicative of the financial position or results of operations that may be
expected for any future period.
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.
7
<PAGE>
SUMMARY CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------- ------------------
1996 1997 1998 1998 1999
-------- -------- -------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED INCOME STATEMENT DATA:
Net sales.............................................. $195,205 $192,281 $220,316 $55,388 $60,399
Cost of sales.......................................... 158,668 157,715 178,933 45,368 47,341
Selling, general and administrative expenses........... 16,868 16,989 16,816 4,201 4,339
-------- -------- -------- ------- -------
Operating income....................................... 19,669 17,577 24,567 5,819 8,719
Interest expense, net.................................. 11,930 12,676 12,697 3,303 2,825
Net income............................................. 3,919 2,181 6,074 1,372 3,235
Dividends and discount accretion of cumulative
exchangeable preferred stock (1) .................... -- 4,686 5,817 1,453 1,454
Net income (loss) available to common stockholder...... 3,919 (2,505) 257 (81) 1,781
OTHER FINANCIAL DATA:
EBITDA (2) ............................................ $ 32,016 $ 31,235 $ 37,104 $ 9,009 $11,922
Depreciation........................................... 10,830 11,000 11,000 2,803 2,804
Amortization (3) ...................................... 2,277 2,278 2,267 572 554
Cash interest expense, net (4) ........................ 11,260 12,005 12,037 3,132 2,672
Capital expenditures................................... 11,165 10,902 10,536 4,061 3,568
Cash flows from operations............................. 26,619 12,099 15,364 (3,307) 6,607
Cash flows from financing activities................... (13,593) (4,323) (5,065) 4,687 (4,673)
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1998 MARCH 31, 1999
-------------------- -------------------
ACTUAL PRO FORMA ACTUAL PRO FORMA
------- --------- ------ ---------
<S> <C> <C> <C> <C>
PRO FORMA FINANCIAL DATA: (5)
Cash interest expense, net (dollars in thousands).................. $12,037 $11,217 $2,672 $ 2,727
Ratio of total debt to EBITDA (2).................................. 3.0x 3.1x (6) 2.7x 2.9x (6)
Ratio of EBITDA to cash interest expense, net (2).................. 3.1x 3.3x 4.5x 4.4x
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999
-------------------------
ACTUAL PRO FORMA (7)
-------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
SELECTED BALANCE SHEET DATA:
Working capital, excluding current portions of long-term debt........ $ 14,709 $ 15,954
Total assets......................................................... 173,550 175,581
Long-term debt (including current maturities)........................ 109,150 114,293
Cumulative exchangeable preferred stock (8).......................... 48,090 48,090
Stockholder's equity (deficit)....................................... (46,099) (47,966)(9)
</TABLE>
(see footnotes on the following page)
8
<PAGE>
NOTES TO SUMMARY CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL DATA
(1) Our 11 1/4% Cumulative Exchangeable Preferred Stock (the "Exchangeable
Preferred Stock"), with an aggregate liquidation preference of $50.0
million, was issued on March 12, 1997.
(2) EBITDA represents income (loss) before interest expense, income taxes,
preferred stock dividends and discount accretion, extraordinary items and
cumulative effect of a change in accounting principle (net), depreciation
and amortization. EBITDA is included because we understand that such
information is considered to be an additional basis on which to evaluate
our ability to pay interest, repay debt and make capital expenditures.
Excluded from EBITDA are interest expense, income taxes, depreciation,
amortization and preferred stock dividends and discount accretion, each of
which can significantly affect our results of operations and liquidity and
should be considered in evaluating our financial performance. EBITDA is not
intended to represent and should not be considered more meaningful than, or
as an alternative to, measures of operating performance determined in
accordance with generally accepted accounting principles.
Our EBITDA for 1997 has also been adjusted to exclude the effect of a
$1.1 million non-recurring charge. This charge included a $1.0 million
consulting agreement with our former Chairman of the Board for services to
be rendered through 2001. See "Management--Consulting Agreement."
(3) Includes the amortization of deferred financing costs and the amortization
of the excess of investment over net assets acquired.
(4) Cash interest expense, net includes interest income, but excludes
amortization of deferred financing costs of $670,000 for 1996, $671,000 for
1997, $660,000 for 1998, $171,000 for the three months ended March 31,
1998, and $153,000 for the three months ended March 31, 1999.
(5) Adjusted to give effect to the Refinancing as if (i) with respect to the
year ended December 31, 1998 the Refinancing had occurred on January 1,
1998, and (ii) with respect to the three months ended March 31, 1999, as if
the Refinancing had occurred on January 1, 1999. See "Use of Proceeds,"
"Capitalization" and "Description of Other Indebtedness and Preferred
Stock--Credit Facility."
(6) The ratio of total debt to EBITDA for the year ended December 31, 1998
represents the ratio of pro forma long-term debt (including current
maturities) as of December 31, 1998 to EBITDA for the year ended December
31, 1998. The ratio of total debt to EBITDA for the three months ended
March 31, 1999 represents the ratio of pro forma long-term debt (including
current maturities) as of such date to EBITDA for the 12 month period ended
March 31, 1999.
(7) Adjusted to give effect to the Refinancing as if such event had occurred on
March 31, 1999.
(8) Represents the book value of the Exchangeable Preferred Stock.
(9) Adjusted to reflect the after-tax cost of redeeming our 2001 Notes. This
cost reflects (i) the premium on the redemption along with the write-off of
the deferred financing charges in connection with the original issue of the
2001 Notes, and (ii) the interest on the Notes from issuance until
redemption of the 2001 Notes on July 1, 1999, net of the interest savings
on repayment of the Credit Facility over the same period.
9
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors as well as the
other information in this Prospectus before making an investment decision.
IF YOU DO NOT PROPERLY TENDER YOUR OLD NOTES, YOU WILL CONTINUE TO HOLD
UNREGISTERED OLD NOTES
We will only issue New Notes in exchange for Old Notes that are timely and
properly tendered. Therefore, you should allow sufficient time to ensure timely
delivery of the Old Notes and you should carefully follow the instructions on
how to tender your Old Notes. Neither we nor the Exchange Agent are required to
tell you of any defects or irregularities with respect to your tender of the Old
Notes. If you do not exchange your Old Notes for New Notes pursuant to the
Exchange Offer, the Old Notes you hold will continue to be subject to the
existing transfer restrictions. In general, the Old Notes may not be offered or
sold, unless registered under the Securities Act, or exempt from registration
under the Securities Act and applicable state securities laws. We do not
anticipate that we will register Old Notes under the Securities Act.
OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION AND
PREVENT US FROM FULFILLING OUR OBLIGATIONS UNDER THE NOTES
We are a highly leveraged company, remain so after the Refinancing and will
remain so after the completion of the Exchange Offer. After giving effect to the
Refinancing:
o as of March 31, 1999, we would have had $114.3 million of long-term debt
including current maturities, representing 99.9% of our total
capitalization (including our Exchangeable Preferred Stock);
o for fiscal year 1998, our pro forma ratio of earnings to fixed charges,
excluding preferred stock dividends and accretion, would have been
2.1:1; and
o as of March 31, 1999, we would have had the ability to borrow an
additional $19.6 million under our Credit Facility.
In addition, we have our Exchangeable Preferred Stock outstanding which we
must redeem on March 15, 2009 with a payment of $50.0 million (plus accumulated
dividends).
Our level of indebtedness could have important consequences to holders of
the Notes, including the following:
o a substantial portion of our cash flow from operations must be dedicated
to the payment of interest on our indebtedness and dividends on our
Exchangeable Preferred Stock;
o our leverage may make us more vulnerable to economic downturns, limit
our ability to withstand competitive pressures, and limit our
flexibility to plan for (or react to) changes in our business and the
industry in which we operate;
o our ability to obtain additional financing in the future for working
capital, capital expenditures, acquisitions or general corporate
purposes may be impaired; and
o borrowings under the Credit Facility will bear interest at fluctuating
rates making us more susceptible to the above risks.
If we are unable to generate sufficient cash flow from operations in the
future, we may be unable to repay or refinance all or a portion of our then
existing debt or to obtain additional financing. There can be no assurance that
any such refinancing would be possible or that any additional financing could be
obtained on terms that are acceptable to us.
10
<PAGE>
OUR CREDIT FACILITY, THE INDENTURE FOR THE NOTES AND THE TERMS OF THE
EXCHANGEABLE PREFERRED STOCK IMPOSE SIGNIFICANT OPERATING AND FINANCIAL
RESTRICTIONS
Our Credit Facility and the Indenture for the Notes, as well as the
Certificate of Designation for the Exchangeable Preferred Stock, will impose
significant operating and financial restrictions on us. These restrictions will
affect, and in certain cases will, among other things, limit our ability to:
o incur additional indebtedness and liens;
o make capital expenditures;
o make investments and sell assets;
o enter into transactions with affiliates; or
o consolidate, merge or sell all or substantially all of our assets.
There can be no assurance that such covenants will not adversely affect our
ability to finance our future operations or capital needs or to engage in other
business activities that may be in our interest. See "Description of the Notes"
and "Description of Other Indebtedness and Preferred Stock."
THE NOTES WILL BE CONTRACTUALLY SUBORDINATED IN RIGHT OF PAYMENT TO OUR SENIOR
DEBT
The Notes will be subordinated in right of payment to all of our senior
debt, including indebtedness under the Credit Facility. In addition, the
Indenture will permit us to incur additional senior debt, if certain conditions
are met. In the event of our insolvency, liquidation, reorganization,
dissolution or other winding-up or upon a default in payment with respect to, or
the acceleration of, any senior debt, the holders of such senior debt must be
paid in full before the holders of the Notes may be paid. If we incur any
additional senior subordinated debt, the holders of such debt would be entitled
to share ratably with the holders of the Notes in any proceeds distributed in
connection with any insolvency, liquidation, reorganization, dissolution or
other winding-up. This may have the effect of reducing the amount of proceeds
paid to holders of the Notes. In addition, no payments may be made with respect
to the principal of, or interest on the Notes if a payment default exists with
respect to our senior debt and, under certain circumstances, no payments may be
made with respect to the principal of, or interest on the Notes for a certain
period if a non-payment default exists with respect to senior debt. See
"Description of the Notes--Subordination."
WE MAY NOT BE ABLE TO FINANCE THE CHANGE OF CONTROL OFFER REQUIRED BY THE
INDENTURE
Upon the occurrence of a Change of Control (as defined), we will be
required to make an offer to purchase the Notes at a price in cash equal to 101%
of the aggregate principal amount thereof, plus accrued and unpaid interest
thereon, if any, to the date of repurchase. Certain events involving a Change of
Control may result in an event of default under the Credit Facility and our
other indebtedness that may be incurred in the future. An event of default under
the Credit Facility or other future indebtedness could result in an acceleration
of such indebtedness, in which case the subordination provisions of the Notes
would require payment in full (or provision therefor) of all senior debt before
we can repurchase or make other payments in respect of the Notes. See
"Description of the Notes--Change of Control," "Description of the Notes--
Subordination" and "Description of Other Indebtedness and Preferred Stock."
There can be no assurance that we would have sufficient resources to repurchase
the Notes or pay our obligations if the indebtedness under the Credit Facility
or other future senior debt were accelerated upon the occurrence of a Change of
Control. There can be no assurance that we will be able to obtain the consent of
the lenders under the Credit Facility to enable us to repurchase the Notes.
WE ARE SUSCEPTIBLE TO GENERAL ECONOMIC CONDITIONS
Our sales and profits change based upon the general economy. In the event
of a general economic downturn or a recession in the United States or certain
other markets, we believe that certain of our customers may reduce or delay
purchases of our products, reducing our sales. During prior recessionary
periods, our profits declined. Any future downturn would likely have a similar
impact. In addition, there can
11
<PAGE>
be no assurance that the markets for custom gears and planetary gear systems
will grow or that any growth will result in increased demand for our products.
WE ARE CONTROLLED BY LANCER INDUSTRIES INC.
We are wholly owned by Lancer Industries Inc. ("Lancer"), a Delaware
corporation. As a result, Lancer is able to direct and control our policies.
Some of our directors and officers are stockholders of Lancer, including Paul S.
Levy who controls over 50% of the voting power of Lancer's shares. Circumstances
could occur in which the interests of Lancer could be in conflict with the
interests of the holders of the Notes. In addition, Lancer may have an interest
in pursuing acquisitions, divestitures or other transactions that Lancer
believes would enhance its equity investment in us, even though such
transactions might involve risks to the holders of the Notes. See "Ownership of
Capital Stock" and "Related Transactions."
A LARGE PORTION OF OUR EMPLOYEES ARE UNIONIZED
Approximately 84% of our employees are unionized. In the fourth quarter of
1998, we agreed to a new three year collective bargaining agreement with
UAW-Local 2317. We consider relations with our employees to be satisfactory. We
believe that we will be able to negotiate a new labor contract with our union
employees on acceptable terms after the current contract expires; however, there
can be no assurance that we will be able to do so or that the negotiation
process will not involve material disruptions in our business.
OUR INDUSTRY IS HIGHLY COMPETITIVE
We operate in a highly competitive industry. Our custom gear business
competes primarily with major domestic manufacturers, regional domestic
manufacturers, foreign producers and captive gear manufacturers. Our planetary
gear business competes primarily with several large competitors, as well as a
large number of relatively small suppliers. There can be no assurance that our
products will compete successfully with those of our competitors or that we will
be able to maintain our operating margins if the competitive environment
changes.
WE ARE SUBJECT TO ENVIRONMENTAL REGULATIONS
Our operations and properties 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, "Environmental Laws"). Because Environmental Laws frequently are
revised and supplemented, with a trend towards greater stringency, the cost of
compliance is difficult to estimate and may be more than we anticipate. We
believe that complying with existing and publicly proposed Environmental Laws
and the resolution of our existing environmental liabilities associated with
waste disposal and releases will not have a material adverse effect on our
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."
WE DEPEND ON SIGNIFICANT CUSTOMERS
Our six largest customers accounted for approximately 45% of our net sales
in 1998. We anticipate a similar or greater concentration of customers for the
foreseeable future. These major customers may exert significant bargaining
leverage when negotiating with us or other suppliers. There can be no assurance
that our customers will continue to purchase our products to the degree they
have in the past or at all. The loss of, or a significant adverse change in, our
relationship with any major customer could have a material adverse effect on us.
In addition, an affiliate of General Electric Corporation, our largest customer,
is the lender under our Credit Facility.
12
<PAGE>
WE MAY BE AFFECTED BY YEAR 2000 ISSUES
The Year 2000 issue concerns the potential exposures related to the
erroneous generation of business and financial information resulting from
computer systems and programs that use two digits, rather than four, to define
the applicable year. These programs may not distinguish between a year that
begins with "20" and "19". These programs may process data incorrectly or stop
processing data altogether. We rely upon our own and vendor-supplied technology
and recognize the potential business risk to our assets and systems associated
with the arrival of the Year 2000.
We are currently addressing potential Year 2000 issues associated with our
systems and our suppliers' products, services, systems and operations. We expect
to complete this process by September 30, 1999. Our failure, or the failure of
our customers or suppliers, to be Year 2000 compliant could have a material
adverse effect on our results of operations, cash flow, business and financial
condition. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Impact of the Year 2000."
THERE IS NO PUBLIC TRADING MARKET FOR THE NEW NOTES
To the extent that Old Notes are tendered and accepted in the Exchange
Offer, the trading market for the remaining untendered or tendered but not
accepted Old Notes could be adversely affected. Because we anticipate that most
holders of the Old Notes will elect to exchange the Old Notes for New Notes due
to the absence of restrictions on the resale of New Notes under the Securities
Act, we anticipate that the liquidity of the market for any Old Notes remaining
after the consummation of the Exchange Offer may be substantially limited.
The New Notes are a new issue of securities for which there is currently no
active trading market. If the New Notes are traded after their initial issuance,
they may trade at a discount from their initial offering price, depending upon
prevailing interest rates, the market for similar securities, our financial
condition and other factors beyond our control, including general economic
conditions. We do not intend to apply for a listing or quotation of the New
Notes. No assurance can be given as to the development or liquidity of any
trading market for the New Notes. Likewise, no assurance can be given regarding
the ability of holders of the New Notes to sell their New Notes or the prices at
which such holders may be able to sell their New Notes.
Historically, the market for noninvestment grade debt has been subject to
disruptions that have caused substantial volatility in the prices of such
securities. There can be no assurance that the market for the New Notes will not
be subject to similar disruptions. Any such disruptions may have an adverse
effect on holders of the New Notes.
13
<PAGE>
USE OF PROCEEDS
There will no proceeds to the Company from the issuance of New Notes
pursuant to the Exchange Offer.
The gross proceeds from the sale of the Old Notes pursuant to the Original
Offering were $100.0 million. We used such proceeds for the Refinancing as
follows: (1) approximately $68.6 million was used to redeem our 2001 Notes,
(2) approximately $27.7 million was used to reduce outstanding amounts under our
Credit Facility, and (3) approximately $3.7 million was applied for the fees and
expenses of the Original Offering (including the commissions of the initial
purchasers and payment of the incremental interest expense for the Notes from
the issue date until the completion of the Refinancing). See "Description of
Other Indebtedness and Preferred Stock--Credit Facility."
The outstanding aggregate principal amount of our 2001 Notes was
$67.2 million. We redeemed our 2001 Notes on July 1, 1999 at a redemption price
of 102.125% of the principal amount thereof, together with accrued and unpaid
interest thereon from December 31, 1998 to the date of redemption.
The following table sets forth the estimated sources and uses of funds of
the offering (dollars in thousands):
<TABLE>
<S> <C>
SOURCES OF FUNDS:
Existing Notes.................................................................. $100,000
--------
Total sources of funds....................................................... $100,000
--------
--------
USES OF FUNDS:
Redemption of 2001 Notes........................................................ $ 68,577
Reduction of outstanding amounts under Credit Facility.......................... 27,707
Estimated transaction fees and expenses......................................... 3,716
--------
Total uses of funds.......................................................... $100,000
--------
--------
</TABLE>
14
<PAGE>
CAPITALIZATION
The following table sets forth our actual capitalization as of March 31,
1999 and pro forma to give effect to the Refinancing as if such event had
occurred on March 31, 1999. 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 Offering Memorandum.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999
-------------------------
ACTUAL PRO FORMA (1)
-------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Total debt, including current portion:
Credit Facility
Revolving credit facility (2)..................................................... $ -- $ --
Term loans........................................................................ 42,000 14,293
2001 Notes........................................................................... 67,150 --
Notes offered hereby................................................................. -- 100,000
-------- ---------
Total debt........................................................................ 109,150 114,293
Exchangeable Preferred Stock (3)....................................................... 48,090 48,090
Stockholder's equity (deficit):
Common stock, par value $.01 per share (10,000,000 shares authorized, 8,554,000
shares issued and outstanding).................................................... 86 86
Additional paid-in capital........................................................... 43,461 43,461
Accumulated deficit.................................................................. (89,646) (91,513)(4)
-------- ---------
Total stockholder's equity (deficit).............................................. (46,099) (47,966)
-------- ---------
Total capitalization.............................................................. $111,141 $ 114,417
-------- ---------
-------- ---------
</TABLE>
- ------------------
(1) Adjusted to give effect to the Refinancing as if such event had occurred on
March 31, 1999. See "Use of Proceeds" and "Description of Other Indebtedness
and Preferred Stock--Credit Facility."
(2) Advances under the revolving credit facility are subject to borrowing base
availability. After giving effect to the Refinancing, as of March 31, 1999,
we would have had $19.6 million of total unused availability under the
revolving credit facility, plus the option (subject to certain conditions)
to increase the availability by an additional $20.0 million. See
"Description of Other Indebtedness and Preferred Stock--Credit Facility."
(3) The Exchangeable Preferred Stock has a $50.0 million liquidation preference.
(4) Adjusted to reflect the after-tax cost of redeeming the 2001 Notes. This
cost reflects (i) the premium on the redemption along with the write-off of
the deferred financing charges in connection with the original issue of the
2001 Notes, and (ii) the estimated interest on the Old Notes from their
issuance until redemption of the 2001 Notes on July 1, 1999, net of the
interest savings on repayment of the Credit Facility over the same period.
15
<PAGE>
UNAUDITED PRO FORMA FINANCIAL DATA
The unaudited pro forma financial data below have been derived from, and
should be read in conjunction with, the Consolidated Financial Statements and
the notes thereto included elsewhere in this Prospectus. The unaudited pro forma
balance sheet as of March 31, 1999 has been prepared on the basis that the
Refinancing occurred on March 31, 1999. The unaudited pro forma statement of
operations for the year ended December 31, 1998 has been prepared on the basis
that the Refinancing occurred on January 1, 1998. The unaudited pro forma
statement of operations for the three month period ended March 31, 1999 has been
prepared on the basis that the Refinancing occurred on January 1, 1999.
Adjustments for the Refinancing are based upon our historical financial
information and certain assumptions that management believes are reasonable. The
pro forma financial data do not necessarily reflect what our results of
operations or our financial position actually would have been if the Refinancing
had in fact occurred at the date or dates indicated, nor is it indicative of our
results of operations or financial position for any future date or period.
UNAUDITED PRO FORMA BALANCE SHEET
MARCH 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS TOTAL
---------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................. $ 1,188 $ 1,188
Trade receivables, less allowance of $700................................. 26,901 26,901
Inventory................................................................. 26,280 26,280
Prepaid expenses.......................................................... 377 377
-------- ------- ---------
Total current assets.................................................... 54,746 54,746
Property, plant and equipment, net of accumulated depreciation of $97,015... 68,557 68,557
-------- ------- ---------
Other assets:
Excess of investment over net assets acquired, less accumulated
amortization of $15,483................................................. 48,876 48,876
Deferred financing costs, less accumulated amortization of $3,837......... 1,371 2,031 (1) 3,402
-------- ------- ---------
Total other assets...................................................... 50,247 2,031 52,278
-------- ------- ---------
Total assets............................................................ $173,550 $ 2,031 $ 175,581
-------- ------- ---------
-------- ------- ---------
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................................... $ 14,988 $ 14,988
Due to parent............................................................. 1,366 1,366
Accrued liabilities....................................................... 21,636 21,636
Deferred income taxes..................................................... 2,047 (1,245)(2) 802
-------- ------- ---------
Total current liabilities............................................... 40,037 (1,245) 38,792
-------- ------- ---------
Accrued retirement costs.................................................... 15,257 15,257
Deferred income taxes....................................................... 7,115 7,115
Long-term debt.............................................................. 109,150 5,143 (3) 114,293
Exchangeable Preferred Stock................................................ 48,090 48,090
-------- ------- ---------
Stockholder's equity (deficit):
Common stock: par value $.01 per share, 10,000,000 shares authorized,
8,554,000 issued and outstanding........................................ 86 86
Additional paid-in capital................................................ 43,461 43,461
Accumulated deficit....................................................... (89,646) (1,867)(4) (91,513)
-------- ------- ---------
Total stockholder's deficit............................................. (46,099) (1,867) (47,966)
-------- ------- ---------
Total liabilities and stockholder's deficit............................. $173,550 $ 2,031 $ 175,581
-------- ------- ---------
-------- ------- ---------
</TABLE>
16
<PAGE>
UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS TOTAL
---------- ----------- ---------
<S> <C> <C> <C>
Net sales................................................................... $220,316 $ 220,316
Cost of sales............................................................... 178,933 178,933
Selling, general and administrative expenses................................ 16,816 16,816
-------- ------- ---------
Operating income.......................................................... 24,567 24,567
Interest expense, net....................................................... 12,697 (1,038)(5) 11,659
Other expense, net.......................................................... 70 70
-------- ------- ---------
Income before income taxes and extraordinary item......................... 11,800 1,038 12,838
Provision for income taxes.................................................. 5,300 415 (6) 5,715
-------- ------- ---------
Income before extraordinary item.......................................... 6,500 623 7,123
Loss on early extinguishment of debt, net of tax............................ (426) (1,861)(7) (2,287)
-------- ------- ---------
Net income................................................................ $ 6,074 $(1,238) $ 4,836
-------- ------- ---------
-------- ------- ---------
Preferred stock dividends and discount accretion............................ (5,817) (5,817)
-------- ------- ---------
Net income (loss) available to common stockholder......................... $ 257 $(1,238) $ (981)
-------- ------- ---------
-------- ------- ---------
</TABLE>
THREE MONTHS ENDED MARCH 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS TOTAL
---------- ----------- ---------
<S> <C> <C> <C>
Net sales................................................................... $ 60,399 $ 60,399
Cost of sales............................................................... 47,341 47,341
Selling, general and administrative expenses................................ 4,339 4,339
-------- ------- ---------
Operating income.......................................................... 8,719 8,719
Interest expense, net....................................................... 2,825 30 (8) 2,855
Other expense, net.......................................................... 2 2
-------- ------- ---------
Income before income taxes and extraordinary item......................... 5,892 (30) 5,862
Provision for income taxes.................................................. 2,657 (12)(6) 2,645
-------- ------- ---------
Income before extraordinary item.......................................... 3,235 (18) 3,217
Loss on early extinguishment of debt, net of tax............................ -- (1,536)(9) (1,536)
-------- ------- ---------
Net income................................................................ $ 3,235 $(1,554) $ 1,681
-------- ------- ---------
-------- ------- ---------
Preferred stock dividends and discount accretion............................ (1,454) (1,454)
-------- ------- ---------
Net income available to common stockholder................................ $ 1,781 $(1,554) $ 227
-------- ------- ---------
-------- ------- ---------
</TABLE>
17
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL DATA
(1) Represents the writeoff of $1,019 in deferred financing costs associated
with our 2001 Notes offset by an increase of $3,050 in deferred financing
costs incurred in the Refinancing.
(2) Income tax benefit associated with the loss on the early extinguishment of
the existing debt at 40% rate.
(3) Net increase in outstanding long-term debt based upon: (i) redemption of
$67,150 in 2001 Notes; (ii) reduction in outstanding term loans of $27,707;
and (iii) issuance of $100,000 in the Notes.
(4) Represents the after-tax cost of redeeming the 2001 Notes. This cost
reflects (i) the premium on the redemption along with the write-off of the
deferred financing charges in connection with the original issue of the 2001
Notes, and (ii) the estimated interest on the Notes from their issuance
until redemption of the 2001 Notes on July 1, 1999, net of the interest
savings on repayment of the Credit Facility over the same period.
(5) Interest expense was adjusted to reflect (i) $11,217 resulting from the
following borrowings:
<TABLE>
<CAPTION>
AVERAGE INTEEST INTEREST
DEBT INSTRUMENT PRINCIPAL RATE EXPENSE
- ------------------------------------------------------------- --------- -------- --------
<S> <C> <C> <C>
The Notes.................................................... $ 100,000 9.625% 9,625
Term Loans................................................... 21,678 7.060% 1,530
Unused revolver fees and letter of credit fees............... 62
--------
Total................................................. $ 11,217
--------
--------
</TABLE>
(ii) the elimination of $9,125 interest on the 2001 Notes; (iii) the
elimination of $2,912 interest on the Credit Facility; (iv) the elimination
of amortization of $541 in deferred financing fees on the 2001 Notes; and
(v) the amortization of deferred financing fees on the Refinancing of $323.
Borrowings under the Credit Facility represent floating rate debt.
(6) Income tax benefit at 40% rate.
(7) Represents the reversal of the $426 historical extraordinary loss on early
extinguishment of debt, net of tax, and the after-tax cost of redeeming the
2001 Notes, which reflects (i) the premium on the redemption; (ii) the
write-off of the deferred financing charges in connection with the original
issue of the 2001 Notes; and (iii) the tax benefit associated with the loss
at a tax rate of 40%.
(8) Interest expense was adjusted to reflect (i) $2,727 resulting from the
following borrowings:
<TABLE>
<CAPTION>
AVERAGE INTEEST INTEREST
DEBT INSTRUMENT PRINCIPAL RATE EXPENSE
- ------------------------------------------------------------- --------- -------- --------
<S> <C> <C> <C>
The Notes.................................................... $ 100,000 9.625% 2,406
Term Loans................................................... 17,293 7.060% 305
Unused revolver fees and letter of credit fees............... 16
--------
Total................................................. $ 2,727
--------
--------
</TABLE>
(ii) the elimination of $1,910 interest on the 2001 Notes; (iii) the
elimination of $762 interest on the Credit Facility; (iv) the elimination of
amortization of $114 in deferred financing fees on the 2001 Notes; and
(v) the amortization of deferred financing fees on the Refinancing of $89.
Borrowings under the Credit Facility represent floating rate debt.
(9) Represents the after-tax cost of redeeming the 2001 Notes, which includes
(i) the premium on the redemption; (ii) the write-off of the deferred
financing charges in connection with the original issue of the 2001 Notes;
and (iii) the tax benefit associated with the loss at a tax rate of 40%.
18
<PAGE>
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
The following table sets forth our selected consolidated historical
financial data for each of the years in the five-year period ended December 31,
1998 and for the three months ended March 31, 1998 and March 31, 1999.
The selected financial data for the three years ended December 31, 1998 are
derived from our audited Consolidated Financial Statements included in this
Prospectus. They have been audited by PricewaterhouseCoopers LLP, independent
accountants. The selected financial data for the years ended December 31, 1994
and 1995 are derived from our audited financial statements for such years.
The selected financial data for the three months ended March 31, 1998 and
March 31, 1999 are derived from our unaudited Consolidated Financial Statements
included in this Prospectus. Such unaudited Consolidated Financial Statements,
in our opinion, have been prepared on the same basis as the audited Consolidated
Financial Statements and include all adjustments necessary for a fair
presentation of the financial condition and results of operations for such
periods. The results of operations for the three month period ended March 31,
1999 are not necessarily indicative of results of operations for the full fiscal
year ending December 31, 1999.
The following selected consolidated 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.
19
<PAGE>
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------- -----------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- -------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............................ $150,689 $192,111 $195,205 $192,281 $220,316 $55,388 $60,399
Cost of sales........................ 123,092 151,890 158,668 157,715 178,933 45,368 47,341
Selling, general and administrative
expenses........................... 15,924 14,759 16,868 16,989 16,816 4,201 4,339
-------- -------- -------- -------- -------- ------- -------
Operating income..................... 11,673 25,462 19,669 17,577 24,567 5,819 8,719
Interest expense, net................ 12,377 12,905 11,930 12,676 12,697 3,303 2,825
Net income (loss) (1)................ (2,293) 6,910 3,919 2,181 6,074 1,372 3,235
Dividends and discount accretion of
cumulative exchangeable preferred
stocks (2)......................... -- -- -- 4,686 5,817 1,453 1,454
Net income (loss) available to common
stockholder........................ 2,293 6,910 3,919 (2,505) 257 (81) 1,781
OTHER FINANCIAL DATA:
EBITDA (3)........................... $ 22,621 $ 36,971 $ 32,016 $ 31,235 $ 37,104 $ 9,009 $11,922
Depreciation......................... 9,540 10,027 10,830 11,000 11,000 2,803 2,804
Amortization (4)..................... 2,310 2,245 2,277 2,278 2,267 572 554
Cash interest expense, net (5)....... 11,674 12,269 11,260 12,005 12,037 3,132 2,672
Capital expenditures................. 9,164 11,645 11,165 10,902 10,536 4,061 3,568
Cash flow from operations............ 9,590 13,856 26,619 12,099 15,364 (3,307) 6,607
Cash flow from financing
activities......................... (5,434) 663 (13,593) (4,323) (5,065) 4,687 (4,673)
Ratio of earnings to fixed
charges, excluding preferred stock
dividends and accretion (6)........ -- 2.0x 1.6x 1.4x 1.9x 1.8x 3.1x
Ratio of earnings to fixed
charges (7)........................ -- 2.0x 1.6x -- 1.1x -- 1.6x
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
---------------------------------------------------- MARCH 31,
1994 1995 1996 1997 1998 1999
-------- -------- -------- -------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital, excluding current portions of
long-term debt.............................. $ 11,848 $ 20,280 $ 15,123 $ 11,824 $ 15,870 $ 14,709
Total assets.................................. 170,581 183,155 176,370 173,212 175,118 173,550
Long-term debt (including current
maturities)................................. 115,000 113,000 118,000 114,000 112,150 109,150
Cumulative exchangeable preferred
stock (8)................................... -- -- -- 47,850 48,042 48,090
Stockholder's equity (deficit)................ 45 9,958 (4,570) (52,188) (49,020) (46,099)
</TABLE>
(see footnotes on the following page)
20
<PAGE>
NOTES TO SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
<TABLE>
<S> <C>
(1) During 1998, we recorded an extraordinary loss of $0.4 million, net of tax, relating to the early
extinguishment of $17.9 million of Existing Notes. During 1994, we 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, "Employer's Accounting for Post-employment Benefits."
(2) The Exchangeable Preferred Stock was issued on March 12, 1997.
(3) EBITDA represents income (loss) before interest expense, income taxes, preferred stock dividends and discount
accretion, extraordinary items and cumulative effect of a change in accounting principle (net), depreciation
and amortization. EBITDA is included because we understand that such information is considered to be an
additional basis on which to evaluate our ability to pay interest, repay debt and make capital expenditures.
Excluded from EBITDA are interest expense, income taxes, other income, depreciation, amortization and
preferred stock dividends and discount accretion, each of which can significantly affect our results of
operations and liquidity and should be considered in evaluating our financial performance. EBITDA is not
intended to represent and should not be considered more meaningful than, or as an alternative to, measures of
operating performance as determined in accordance with generally accepted accounting principles.
Our EBITDA for 1997 has also been adjusted to exclude the effect of a $1.1 million non-recurring charge. This
charge included a $1.0 million consulting agreement with our former Chairman of the Board for services to be
rendered through 2001. See "Management--Consulting Agreement."
(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
$703,000 for 1994, $638,000 for 1995, $670,000 for 1996, $671,000 for 1997, $660,000 for 1998, $171,000 for
the three months ended March 31, 1998 and $153,000 for the three months ended March 31, 1999.
(6) The ratio of earnings to fixed charges has been calculated by dividing earnings before income taxes and fixed
charges by fixed charges. Fixed charges consist of interest expense, amortization of deferred financing costs
and the component of operating lease expense which we believe represents an appropriate interest factor.
Earnings were insufficient to cover fixed charges by $0.9 million in 1994.
(7) The ratio of earnings to fixed charges has been calculated by dividing earnings before income taxes and fixed
charges by fixed charges. Fixed charges consist of interest expense, amortization of deferred financing costs,
the component of operating lease expense which we believe represents an appropriate interest factor and
preferred stock dividends and accretion. Earnings were insufficient to cover fixed charges by $0.9 million in
1994 $5.6 million in 1997 and $0.1 million in the first three months of 1998.
(8) Represents the book value of the Exchangeable Preferred Stock.
</TABLE>
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Our net sales increased from $150.7 million in 1994 to $220.3 million in
1998, representing a compound annual growth rate of 10.0%. Our 1998 net sales of
$220.3 million, represented a 14.6% increase from 1997 net sales of $192.3
million. Our net sales for the three months ended March 31, 1999 were $60.4
million, an increase of $5.0 million, or 9.0%, from the same period in 1998.
We believe that the increase in the demand for our products has been
principally a result of:
o our increased marketing efforts;
o new product introductions, both in the planetary gear system and
the custom gear and assemblies businesses; and
o increased demand for our customers' products, including the effect
of favorable economic conditions.
The sales increases have also been accompanied by a shift in our product mix.
Sales of our planetary gear system products increased as a percentage of net
sales from 34.0% in 1994 to 46.2% in 1998. Conversely, sales of our custom gear
products as a percentage of net sales decreased from 66.0% to 53.8% during the
same period.
RECENT DEVELOPMENT
On Saturday, June 12, 1999, we had a fire at our manufacturing plant
in Lafayette, Indiana. By 11 p.m., Sunday, June 13, 1999, we had resumed
operations and began shipping products to our customers on the morning of
Monday, June 14, 1999. The fire damaged our facility and equipment and we are
currently in the process of restoring our operations to the same level as
before the fire. We believe that the damages of the fire, including the costs
of business interruption, are covered by our current insurance policies. We
expect, however, that the incident will have a negative impact on our results
of operations in the second quarter of 1999 and the remainder of 1999.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1999 Compared with Three Months Ended
March 31, 1998
Our net sales for the three months ended March 31, 1999 were $60.4 million,
an increase of $5.0 million, or 9.0%, from the same period in 1998. The increase
in sales for the three months ended March 31, 1999 resulted from continued
strong market demand for our products as well as increased productive capacity
from our capital investment program.
Our cost of sales for the three months ended March 31, 1999 increased by
$1.9 million, to $47.3 million, compared to $45.4 million for the same period in
1998. Gross margin was 21.6% for the first quarter of 1999 compared to 18.1% for
the first quarter of 1998. The increase in cost of sales compared to the same
period in 1998 was primarily a result of increased sales volume during 1999
while the increase in gross margin was driven by improved raw material prices,
increased productivity as well as improved product pricing and a more favorable
product mix.
Our selling, general and administrative expenses ("SG&A"), including
goodwill amortization, were $4.3 million, or 7.2% of net sales, for the three
months ended March 31, 1999, compared to $4.2 million, or 7.6% of net sales, for
the same period in 1998.
Our earnings from operations for the three months ended March 31, 1999
increased 49.8% to $8.7 million, or 14.4% of net sales, compared to $5.8
million, or 10.5% of net sales, for the comparable 1998 period.
22
<PAGE>
Our interest expense in the first quarter of 1999 decreased to $2.8 million
from $3.3 million for the first quarter of 1998. This decrease reflects lower
debt balances and lower average interest rates in the first quarter of 1999
versus the first quarter of 1998.
We had net income before income taxes of $5.9 million in the first quarter
of 1999 compared to $2.5 million for the first quarter of 1998.
Our net income of $3.2 million for the first quarter of 1999 represents a
135.8% increase over net income of $1.4 million for the same period of 1998.
The net income available to our common stockholder was $1.8 million for the
first quarter of 1999 compared to a net loss available to our common stockholder
of $0.1 million for the same period in 1998.
Fiscal Year 1998 Compared with Fiscal Year 1997
Our net sales for 1998 increased $28.0 million to $220.3 million compared
to $192.3 million in 1997. This 14.6% increase was due to strong market demand
for our products in specific markets as well as a strong overall economy. Net
sales of our Torque-Hub(Registered) products increased to $101.8 million in
1998, a 19.5% increase from 1997, primarily due to strong demand in the access
platform and road rehabilitation markets. Net sales of custom gears and
assemblies increased to $118.5 million in 1998, a 10.6% increase from 1997
primarily due to strong demand in the rail, mining and off highway industries.
Our cost of sales for 1998 increased $21.2 million to $178.9 million, or
81.2% of net sales, compared to $157.7 million, or 82.0% of net sales in 1997.
Cost of sales increased over 1997 in conjunction with the increase in sales. The
0.8% improvement in cost of sales as a percentage of net sales, was due to
operating efficiencies from increased volume and favorable sales mix.
Our SG&A, including goodwill amortization, decreased to $16.8 million in
1998, compared to $17.0 million in 1997. SG&A expenses for 1997 included a
charge of $1.1 million primarily related to a consulting agreement with our
former Chairman of the Board (see Note 2 to the Consolidated Financial
Statements and "Management--Consulting Agreement").
Our operating income increased $7.0 million, or 39.8%, to $24.6 million in
1998 compared to $17.6 million in 1997 due to the reasons discussed above.
Our interest expense, including amortization of deferred financing costs,
was $12.7 million for 1998 and 1997. Although interest rates decreased slightly
in 1998, interest expense was essentially unchanged from 1997 due to higher
average outstanding principal throughout the year.
Our effective tax rates for 1998 and 1997 were 44.9% and 54.8%,
respectively. See Note 7 to the Consolidated Financial Statements for a further
discussion of income taxes.
Our net income increased $3.9 million to $6.1 million for 1998 compared to
$2.2 million for 1997.
We recorded a loss on early extinguishment of debt, net of tax, of $0.4
million in 1998 related to the repurchase of $17.9 million of our Existing Notes
(see Note 8 to the Consolidated Financial Statements).
Our net income available to our common stockholder for 1998 increased
$2.8 million to $0.3 million compared to a $2.5 million net loss available to
our common stockholder for 1997.
Fiscal Year 1997 Compared with Fiscal Year 1996
Our net sales decreased to $192.3 million in 1997, a 1.5% decrease from
1996 net sales of $195.2 million, principally due to weaker demand for our
products during the first quarter of 1997 versus the first quarter of 1996. Net
sales of custom gears for 1997 decreased to $107.1 million, a 4.6% decrease from
1996 net sales of $112.3 million, due primarily to the end of programs related
to the defense industry. The decrease in custom net sales was partially offset
by an increase of $2.3 million (or 2.8%) in net sales of Torque-Hub(Registered)
products, primarily due to demand for compact units.
Our cost of sales for 1997 decreased by 0.6% to $157.7 million or 82.0% of
net sales, compared to $158.7 million, or 81.3% of net sales in 1996. This
decrease is primarily due to the decrease in net sales
23
<PAGE>
partially offset by increased employment and training costs during the second
half of 1997 to meet increased demand.
Our SG&A, including goodwill amortization, increased to $17.0 million in
1997, compared to $16.9 million in 1996. SG&A expenses for 1997 included a
$1.1 million charge primarily related to a consulting agreement with our former
Chairman of the Board (see Note 2 to the Consolidated Financial Statements and
"Management--Consulting Agreement") and for 1996 included a $0.5 million
write-off of a receivable due to a customer's bankruptcy.
Our earnings from operations for 1997 decreased $2.1 million to $17.6
million compared to $19.7 million in 1996, primarily due to the factors above.
Our interest expense, including amortization of deferred financing costs,
was $12.7 million for 1997, compared to $11.9 million for 1996. The principal
reason for the increase was higher outstanding debt levels during 1997 due to a
$15.0 million increase in debt during December 1996 which was used to fund a
$17.0 million dividend to Lancer.
Our effective tax rates for 1997 and 1996 were 54.8% and 48.8%,
respectively (See Note 7 to the Consolidated Financial Statements).
Our net income for 1997 was $2.2 million compared to $3.9 million for 1996.
We had a net loss available to our common stockholder for 1997 of $2.5
million as compared to $3.9 million in net income available to our common
stockholder for 1996.
IMPACT OF THE YEAR 2000
During 1997, we began the process of assessing the magnitude of the year
2000 ("Y2K") on our primary computer systems ("Business System"). Following this
assessment, we established a plan to modify, upgrade, or replace noncompliant
hardware and software applications with a target completion date of March 1999
for all "critical" applications and continuing through 1999 for "non-critical"
applications. We are currently on schedule with regard to critical applications.
Testing is being performed on an ongoing basis upon completion of an application
and is expected to continue throughout 1999. As of March 31, 1999, all critical
applications and approximately 90% of all Business System applications have been
remediated and tested. We have not developed a comprehensive contingency plan
with regard to the Business System as all critical applications are expected to
be Y2K ready. If progress toward Y2K readiness deviates from the anticipated
time line or we identify significant additional risks, appropriate contingency
plans will be developed at that time.
None of our products contain imbedded electronics or other potentially date
sensitive components and as such do not require any Y2K compliance effort.
Several types of systems and equipment such as phones, facilities,
manufacturing equipment, etc. (collectively, "non-IT systems"), that are not
typically thought of as computer systems may contain imbedded hardware or
software that may have a time element. We have completed an inventory of non-IT
systems and have contacted vendors of these systems and equipment to determine
if they are Y2K compliant. As of March 31, 1999 we have received responses from
vendors confirming the compliance of approximately 80% of all manufacturing
equipment and identifying non-compliance with approximately 5% of machines. We
are in the process of repairing, upgrading or replacing non-IT systems that have
been identified as being non-compliant and are actively following up with
vendors from whom responses have not been received. We have not developed a
comprehensive contingency plan with regard to non-IT systems and equipment, as
all identified mission critical systems and equipment are expected to be Y2K
ready by the end of 1999. If progress toward Y2K readiness deviates from the
anticipated time line or we identify significant additional risks, appropriate
contingency plans will be developed at that time.
We are primarily utilizing internal IT resources with the additional
assistance of contract programmers who are familiar with the software. It is
currently estimated that the total cost associated with required modifications
for both the Business System and non-IT systems to become Y2K ready will be
approximately
24
<PAGE>
$0.4 million to $0.5 million, of which approximately $0.2 million had been spent
as of March 31, 1999. These costs are being expensed as incurred and are being
funded from existing operating budgets.
We rely on third party suppliers for raw materials, water, utilities,
transportation, and other services. Interruption of supplier operations due to
Y2K issues could affect our operations. We are in the process of evaluating and
monitoring the status of key suppliers' progress toward Y2K compliance. As a
component of this process, we have sent a questionnaire to suppliers inquiring
about their Y2K plans and state of readiness. At March 31, 1999, we had received
responses from 25 key suppliers, which together represented over 75% of our
total material purchases in 1998. All respondents have acknowledged the issues
surrounding Y2K, have a plan in place, and have stated their intent to be
compliant by the end of 1999 or earlier. We will continue to monitor the
progress of key suppliers during 1999, and, if necessary, determine potential
alternative suppliers and/or develop contingency requirements. These activities,
while a means of risk management, cannot eliminate the potential for disruption
of our operations due to third party failure.
We are also dependent upon our customers for sales and cash flow. We are in
the process of contacting key customers to ascertain their Y2K readiness. The
progress of key customers toward Y2K compliance will continue to be monitored
throughout 1999.
The failure to correct a material Y2K problem in our critical Business
System applications and non-IT systems could result in an interruption in, or
failure of, certain normal business activities or operations. Additionally, in
the event that any of our key suppliers and customers fail to successfully and
timely achieve Y2K compliance and we are unable to replace them with alternate
suppliers or new customers, our normal business activities could be adversely
affected. Such interruptions or failures could have a material adverse impact on
our results of operations, cash flows, and financial condition.
The above discussion of Y2K and its potential impact on us contains forward
looking statements that are based on our best estimates of future events.
Specific factors that could affect the actual outcome of these estimates and
conclusions include a possible loss of technical resources to perform the work,
failure to identify all susceptible systems, non-compliance by third parties
whose operations impact us, and other similar uncertainties.
LIQUIDITY AND CAPITAL RESOURCES
We use funds provided by operations and short-term borrowings under our
Credit Facility to meet liquidity requirements. Net cash provided by operations
for the three months ended March 31, 1999 was $6.6 million, an increase of
$9.9 million compared with the same period in 1998 when net cash used by
operations was $3.3 million. Net cash provided by operations was $15.4 million,
$12.1 million and $26.6 million for the years ended December 31, 1998, 1997 and
1996, respectively.
Working capital at March 31, 1999 decreased to $14.7 million from $15.9
million at December 31, 1998 reflecting improved management of receivables and
inventory. Working capital at December 31, 1998 increased from $7.8 million at
December 31, 1997. The increase was primarily due to increases in accounts
receivable and inventory in conjunction with higher sales levels and a decrease
in current maturities of long term debt due to the amendment of the Credit
Facility.
Capital expenditures for manufacturing equipment, machine tools, and
building improvement totaled $3.6 million and $4.1 million during the first
three months of 1999 and 1998, respectively, of which $0.4 million and $0.2
million in 1999 and 1998, respectively, was funded by an increase in accounts
payable. Capital expenditures for both 1999 and 1998 have been primarily for
increased capacity and productivity to support increased sales. We expect
capital expenditures will be approximately $10.0 million in both 1999 and 2000.
Net cash used by financing activities was $4.7 million during the first
quarter of 1999 compared to net cash provided by financing activities of $4.7
million in the first quarter of 1998. Strong operating cash flows and capital
contributions during 1999 were used to fund the preferred stock dividend as well
as repayments of long term debt. Net cash used by financing activities was
$5.1 million, $4.3 million and $13.6 million in 1998, 1997 and 1996,
respectively. Net use in 1998 resulted primarily from cash dividends on our
outstanding preferred stock. Net use in 1997 resulted primarily from cash
dividends on preferred stock and
25
<PAGE>
the repayment of long-term debt. We paid a $47.7 million dividend to Lancer in
1997 that was offset by the net proceeds from the issuance of preferred stock of
$47.7 million. Net use in 1996 resulted primarily from a $17.0 million dividend
we paid to Lancer, partially offset by $5.0 million in net additional borrowings
under our Credit Facility.
Under the Tax Sharing Agreement (See "Related Transactions--Tax Sharing
Agreement"), Lancer made capital contributions to us of $2.7 million, $2.6
million and $1.6 million in 1998, 1997 and 1996, respectively. See Note 7 to the
Consolidated Financial Statements for a further discussion of capital
contributions made pursuant to the Tax Sharing Agreement.
Our Credit Facility provides for a $20 million revolving line of credit,
$35 million in term loans, and a $10 million debt repurchase line for
repurchases of our 2001 Notes. At March 31, 1999, we had $19.6 million available
under the revolving line of credit since we have letters of credit of
approximately $0.4 million issued under this facility. We also have the option
to increase our availability under this line of credit by $20 million (subject
to certain conditions). Prior to the Original Offering, we had $35.0 million of
term loans, and $7.0 million under the debt repurchase line outstanding under
our Credit Facility. We used a portion of the proceeds of the Original Offering
to repay our debt repurchase line and a portion of the term loans. Following the
Refinancing, we have approximately $14.3 million of term loans outstanding and
$19.6 million of availability for borrowings under the Credit Facility, which we
can increase (subject to certain conditions) by $20.0 million to $39.6 million.
See "Use of Proceeds" and "Description of Other Indebtedness and Preferred
Stock".
The 2001 Notes were issued in 1993 in the principal amount of
$85.0 million. During 1998, we repurchased $17.9 million of the 2001 Notes on
the open market with funds provided under the Credit Facility. We recorded a
$0.4 million loss, net of tax, in conjunction with these repurchases related to
the write-off of deferred financing charges and premium paid on repurchase. At
December 31, 1998, $67.2 million of the 2001 Notes remained outstanding. We
redeemed the 2001 Notes on July 1, 1999 from the proceeds of the offering of the
Old Notes pursuant to the Original Offering. See "Use of Proceeds".
We expect to use cash flows from operations to fund our planned capital
requirements for 1999, including capital expenditures, interest on long term
debt and preferred stock dividends. Our Credit Facility, as discussed above, may
also be utilized to meet additional liquidity needs. See "Description of Other
Indebtedness and Preferred Stock".
26
<PAGE>
BUSINESS
We believe we are the leading independent manufacturer (based on sales) of
high precision custom gears and assemblies and planetary gear systems in North
America. In each of the "custom products" and "planetary gear system" markets in
which we participate, we estimate that our market share is twice that of any
other independent manufacturer. Most of our custom gears and assemblies and
planetary gear systems are used by original equipment manufacturers, or OEMs, as
components in various kinds of heavy mobile equipment. Our customers include
such industry leaders as General Electric, General Motors, John Deere,
Caterpillar and Ingersoll-Rand. In 1998, our net sales increased by 14.6% over
1997 to $220.3 million and EBITDA increased by 18.8% over 1997 to
$37.1 million. For the quarter ended March 31, 1999, we had net sales of
$60.4 million and EBITDA of $11.9 million, compared with net sales of
$55.4 million and EBITDA of $9.0 million, for the same period in 1998. For the
twelve months ended March 31, 1999, we had net sales of $225.3 million and
EBITDA of $40.0 million.
Custom Products. Custom gears are components of larger systems, such as
axles, drive differentials and transmission units. Custom assemblies are
differentials, wheel drives, power transmissions and conveyor/tram drives that
are generally produced as complete units. Most of the businesses who purchase
our custom gears and assemblies are OEMs; for many of them we are the sole
independent supplier of selected gear products. Our custom gear customers
include OEMs who produce:
o rail equipment, such as locomotives;
o mining equipment, such as underground mining and transfer equipment and
above-ground haul trucks;
o agricultural equipment, such as tractors and harvesting equipment;
o industrial equipment, such as mixers, printing presses and compressors;
o construction equipment, such as loaders, scrapers and excavators; and
o materials-handling equipment, such as forklifts and conveyors.
Custom gears and assemblies accounted for $118.5 million (or 53.8%) of our 1998
net sales and $30.6 million (or 50.7%) of our 1999 first quarter net sales.
Planetary Gear Systems. Planetary gear systems 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 conventional axles would otherwise present design
difficulties. We market our planetary gear systems under the
Torque-Hub(Registered) name. As a result of the performance history and
reputation for quality of our Torque-Hub(Registered) products, we believe the
Torque-Hub(Registered) name has become closely identified with planetary gear
systems. Torque-Hub(Registered) customers include OEMs who produce:
o access platform equipment, such as aerial-lifts and utility trucks;
o road rehabilitation equipment, such as pavers and road compactors;
o construction equipment, such as excavators and trenchers;
o forestry equipment, such as logging loaders and feller bunchers;
o agricultural equipment, such as crop sprayers and windrowers; and
o marine equipment, such as hoist and jack-up boats.
Planetary gear systems accounted for $101.8 million (or 46.2%) of our 1998 net
sales and $29.8 million (or 49.3%) of our 1999 first quarter net sales.
COMPETITIVE STRENGTHS
We have a leading market position in the custom product and planetary gear
system markets in which we participate. We believe our competitive strengths
are:
o the breadth and quality of our product offerings;
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<PAGE>
o our long-standing relationships (in many cases 20 years or more) with our
major customers;
o our state-of-the-art engineering and manufacturing technology, including
our heat treating facilities, computer-aided design and manufacturing
systems, and computer controlled machine tools and gear grinders;
o our cost-competitiveness;
o our experienced engineering staff, and its close collaboration with our
sales force and customers in designing and developing products to meet
our customers' needs; and
o our stable, knowledgeable sales force, many of whose members have
engineering degrees and have worked with the same customers for many
years.
In addition, we believe that our management team, with an average of over 20
years of experience in manufacturing, will be instrumental in further
strengthening our market position.
BUSINESS STRATEGY
We intend to enhance our market position and improve our profitability by:
CAPITALIZING ON INDUSTRY TRENDS. We seek to increase our revenues and
market share by taking advantage of industry trends, including:
o the trend among OEMs to purchase complete gear assemblies or systems
rather than individual gear products;
o 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
similar to us, rather than manufacture such products in-house; and
o 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 similar to
us.
These trends are driven by the OEMs' desire to reduce their production and
supply costs and focus on their core competencies. We have capitalized upon
these trends as evidenced by increasing sales of complete gear assemblies
and systems, particularly to manufacturers of agricultural and heavy-duty
equipment. For example, in 1998 we started delivering a new complete
gearbox assembly to a baler manufacturer and a family of bull gears and
pinions to an axle manufacturer for on-highway Class 8 vehicles. In
addition, we continue to receive orders from a number of captive gear
manufacturers, such as those of General Electric, General Motors and John
Deere, for certain gear products that these OEMs previously produced
in-house. We have also established sole sourcing relationships with many of
our major customers for selected gear products. We believe we can continue
to take advantage of these industry trends because of our broad product
offerings, large manufacturing capacity, sophisticated manufacturing and
design capabilities and established reputation for producing high-quality
products.
IMPROVING PRODUCTION EFFICIENCY AND REDUCING OVERALL COSTS. We have taken
a number of steps to improve our efficiency and increase our profit
margins. Specifically, we are:
o converting various operations to cellular manufacturing;
o reorganizing the physical layout of our plant;
o installing new, more efficient machinery; and
o improving our employee training programs.
In addition, we are actively working to reduce the price we pay for raw
materials by using suppliers throughout the world, purchasing more from
fewer suppliers and entering into long-term supply agreements. We are also
controlling our selling, general and administrative expenses. We believe
these initiatives will help us to lower our costs.
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<PAGE>
MAINTAINING OUR POSITION AS A HIGH-QUALITY, LOW-COST MANUFACTURER. We have
broad-based, integrated manufacturing capabilities which, we believe,
provide us with an advantage over our competitors. These capabilities
include:
o state-of-the-art heat treating facilities;
o computer-aided design and manufacturing systems; and
o computer numerically controlled machine tools and gear grinders.
Since 1994, we have invested $57.0 million in capital equipment and in our
manufacturing facility. We believe our manufacturing capacity is substantially
larger than that of our independent competitors, enabling us to fill large
orders at a lower cost. We plan to continue to selectively purchase more
equipment to improve our manufacturing processes and expand capacity.
LEVERAGING OUR LONG-TERM RELATIONSHIPS WITH MAJOR CUSTOMERS; INTRODUCING
NEW PRODUCTS.
We believe we have strong relationships with our customers due to the
following factors:
o the continuity of our customer relationships;
o our awareness of and involvement in our customers' planning
processes; and
o our commitment to provide ongoing engineering services.
We believe we are better able to proactively design and implement solutions
to our customers' evolving requirements based upon our strong customer
relationships.
We are developing, testing and marketing new products, and new applications
for existing products, to increase sales, profit and market share.
Historically, our planetary gear system business has generated a
significant portion of our new products and new product applications. We
are continually working to add new custom gear and assembly product
offerings and are currently developing a number of new applications
including: (1) differentials for automotive, industrial and commercial
vehicles, and off-highway trucks, (2) transmissions, and (3) axles.
EVALUATING SELECTED ACQUISITIONS. We intend to examine and, if
appropriate, to pursue strategic acquisitions of complementary businesses
in order to increase product manufacturing capacity, broaden product
offerings and penetrate new geographic markets.
PRODUCTS
Custom Products. Custom gears and assemblies accounted for approximately
$30.6 million of our net sales in the first quarter of 1999 and approximately
$118.5 million, $107.1 million and $112.3 million of our net sales in 1998, 1997
and 1996, respectively. We manufacture a wide variety of custom gears, ranging
in type (e.g. helical, spiral bevel, spur and HYPOID(Registered)) and size (from
one inch to 60 inches in diameter), and have a manufacturing capability which we
believe is one of the broadest in the custom gear business. We manufacture
custom gears and assemblies to customers' specifications, which are often
developed by us or with our assistance. Our custom gears and assemblies are used
in a wide variety of applications and markets, ranging from off-highway heavy
equipment to high speed precision gears for industrial purposes.
Historically, we have focused on severe application custom business. These
custom products, which are design and engineering intensive, are used in rail,
mining, agricultural, construction, 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, the trend among OEMs to focus on their core competencies
(final assembly and system integration) rather than produce gears and
gear-related assemblies in-house appears to be continuing.
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<PAGE>
Planetary Gear Systems. We market our planetary gear systems under the
Torque-Hub(Registered) name. These products accounted for approximately
$29.8 million of our net sales in the first quarter of 1999 and approximately
$101.8 million, $85.2 million and $82.9 million of our net sales in 1998, 1997
and 1996, respectively. We believe 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. Planetary gear systems
are primarily employed in cases where the use of axles presents design
difficulties. We produce a broad line of planetary gear systems 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 (which power the drive wheels of vehicles with small
diameter wheels such as small lift trucks and mowers).
We have introduced a number of new Torque-Hub(Registered) products in
recent years, including two-speed drives (Torque II(Registered) series) and
compact drives (CW and CT series) for wheeled or tracked vehicles. We believe
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 we believe
allows for better flexibility and is well-suited for a variety of applications.
These 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
Our customers are almost exclusively OEMs and include many industry leaders
with whom we have had relationships of 20 years or more. Sales to General
Electric accounted for approximately 10.6% of our net sales in 1998. No customer
accounted for more than 10% of total net sales in 1997 or 1996.
We have been granted "preferred supplier" status by a majority of our
customers due to our ability to meet their business requirements, including
General Electric, General Motors, John Deere, Caterpillar and Ingersoll-Rand. We
have also been certified as meeting "ISO-9001" standards, which are increasingly
being used by OEMs in lieu of individual certification procedures. In addition,
we have been certified as meeting "QS-9000" standards. We believe ISO-9001 and
QS-9000 certifications provide us with a competitive advantage because a number
of OEMs now require one of these certifications as a condition to doing
business.
We believe that our stable, experienced sales force is a primary reason for
our success in maintaining customer loyalty and building new customer
relationships. Our sales department is organized geographically and consists
primarily of sales engineers, who have an average of over 14 years of experience
with us and many of whom have worked with the same customers for many years. In
addition, each sales engineer has substantial expertise concerning our products
and product applications. Application engineers work closely with our 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, we have developed close working relationships with many of
them. Customer loyalty to us 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 our custom gear products and approximately 70% of our
Torque-Hub(Registered) products are sold directly to OEMs. Since
Torque-Hub(Registered) products can be sold to more than one customer, we use
distributors to increase our penetration of the planetary gear systems market.
Approximately 30% of our Torque-Hub(Registered) line is sold through a network
of approximately 40 distributors located in the United States and abroad.
International sales, principally Canada, accounted for approximately
$3.7 million of our net sales in the first quarter of 1999 and approximately
$16.2 million, $13.3 million and $11.3 million of our net sales in 1998, 1997
and 1996, respectively.
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<PAGE>
DESIGN AND MANUFACTURING
We believe that our state-of-the-art technology and experienced engineering
staff provide us with a competitive advantage and are major factors behind our
strong market position.
We have selectively invested in state-of-the-art manufacturing technology
in recent years to improve product quality and price competitiveness, and to
reduce lead time. Our manufacturing technology includes the latest
computer-aided design and manufacturing (CAD/CAM) systems, and over 150 computer
numerically controlled (CNC) lathes, machine tools and gear grinders.
Our engineering department consists of over 65 engineers and technicians,
including specialists in product, tool, manufacturing, and industrial
engineering. In addition, we have 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 meet specific customer requirements. These capabilities enable us
to service clients who demand high quality, creative solutions to their product
needs.
Our engineers and designers are skilled in the use of, and have available,
certain of the latest tools and techniques to create cost efficient designs.
Procedures such as finite element analysis are routinely used by our engineers
and designers to optimize material content and ensure functional reliability of
designed components. This type of analysis and simulation 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, our 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.
We have our own comprehensive heat treating facilities. These in-house
facilities allow us to control the annealing and carburizing processes that
determine the load-carrying capacity of the final product. Our heat treating
operations help ensure proper development and maintenance of gear tooth
characteristics. As a result, we believe that we are able to provide our
customers with improved quality and reduced lead times in filling orders.
MATERIALS AND SUPPLY ARRANGEMENTS
We generally manufacture our custom and Torque-Hub(Registered) products to
our customers' specifications and, as a result, do not generally contract for or
maintain substantial inventory in raw materials or components. We purchase our
three principal raw material needs (steel forgings, steel bars and castings) on
a spot basis based on specific customer orders. Raw material purchases from one
supplier represented approximately 13.9% of raw material purchases in 1998 and
1997. During 1996, purchases from a single supplier did not exceed 10% of raw
material purchases. Alternative sources are available to fulfill each of our
major raw material requirements. We have never experienced a delay in production
as a result of a supply shortage of a major raw material.
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, we believe there is a trend among such manufacturers
to outsource, or purchase their gears from independent manufacturers like
Fairfield. The North American planetary gear 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. We compete with
other manufacturers based on a number of factors, including
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<PAGE>
delivery capability, quality and price. We believe that our breadth of
manufacturing, engineering and technological capabilities provide us with a
competitive advantage.
EMPLOYEES
At December 31, 1998, we had 1,322 employees, of whom approximately 92%
were employed in manufacturing. Our production and maintenance employees,
representing approximately 84% of our employees, became members of the United
Auto Workers (UAW) union in October 1994. In October 1998 a new three year labor
agreement was ratified by our union employees. We consider our relations with
our employees to be satisfactory.
BACKLOG
We had total order backlog of approximately $102.6 million, $121.2 million
and $110.8 million as of March 31, 1999, December 31, 1998 and December 31,
1997, respectively, for shipments due to be delivered by us for the six-month
period following such dates.
ENVIRONMENTAL MATTERS
Our operations and properties are subject to a wide variety of increasingly
complex and stringent environmental laws. As such, the nature of our operations
exposes us 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. We believe our operations and properties are in
substantial compliance with such environmental laws. Based upon our experience
to date, we believe that the future cost of compliance with existing
environmental laws, and liability for known environmental claims pursuant to
such environmental laws, will not have a material adverse effect on our
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.
INTELLECTUAL PROPERTY
The trade names Torque-Hub(Registered) and Torque II(Registered) are
registered trademarks. Our planetary gear systems are sold under the
Torque-Hub(Registered) trade name. Directly and through our wholly-owned
subsidiary, T-H Licensing, Inc., we own numerous patents worldwide. None of such
patents is individually considered material to our business.
PROPERTIES
We own and operate a single facility in Lafayette, Indiana, consisting of
39 acres of land, approximately 540,000 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.
LEGAL PROCEEDINGS
We are a party to routine litigation incidental to the conduct of our
business, much of which is covered by insurance and none of which is expected to
have a material adverse effect.
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<PAGE>
MANAGEMENT
The following table sets forth certain information with respect to the
directors and executive officers of the Company, including their respective ages
as of March 31, 1999.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Paul S. Levy......................................... 51 Chairman of the Board and Vice President
Peter A. Joseph...................................... 46 Director, Vice President and Secretary
Stephen K. Clough.................................... 45 Director, President and Chief Executive Officer
Jess C. Ball......................................... 57 Director
W.B. Lechman......................................... 66 Director
Andrew R. Heyer...................................... 41 Director
Richard A. Bush...................................... 41 Vice President Finance
James R. Dammon...................................... 55 Vice President Engineering
Mark D. Gustus....................................... 40 Vice President Operations
Dan E. Phebus........................................ 42 Vice President Marketing
Clem L. Strimel...................................... 37 Vice President Sales
</TABLE>
Mr. Levy was elected Chairman of the Board effective August 1998. 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 Jackson Automotive Group, Inc., Hayes Lemmerz
International, Inc., New World Pasta Company, and BSL Holdings, Inc.
Mr. Joseph has been Vice President and a Director of the Company since
1989. Mr. Joseph has served as President of Lancer since April 1992 and a
Director of Lancer since July 1989. Mr. Joseph has been a partner of Palladium
Equity Partners, L.L.C. since December 1998. Prior to joining Palladium Equity
Partners, L.L.C., Mr. Joseph was a Melton Fellow at Hebrew University from July
1997 until August 1998, and was a General Partner of Joseph Littlejohn & Levy
until July 1997.
Mr. Clough was appointed President and Chief Executive Officer and elected
to the Board of Directors effective August 1998. Prior to his appointment,
Mr. Clough was employed by Kaydon Corporation, where he served as the President
and Chief Executive Officer from June 1996 to June 1998 and the President and
Chief Operating Officer from September 1989 to June 1996.
Mr. Ball has been a Director of the Company since 1991. Mr. Ball was
President and Chief Executive Officer of the Company from October 1994 to May
1996. From December 1991 through September 1994, Mr. Ball was President and
Chief Executive Officer of Alford Industries (a company which filed for
bankruptcy protection and has been liquidated).
Mr. Lechman has been a Director of the Company since 1989. Mr. Lechman
served as Chairman of the Board from October 1994 to July 1997 and as President
and Chief Executive Officer of the Company from 1989 to October 1994.
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 is President Emeritus of the American Gear
Manufacturers Association.
Mr. Heyer has been a Director of the Company since August 1998. Mr. Heyer
is a Managing Director at CIBC World Markets Corp., where he serves as co-head
of The High Yield Group. Prior to joining CIBC World Markets Corp., Mr. Heyer
was founder and Managing Director of the Argosy Group L.P. which was acquired by
CIBC World Markets Corp. in 1995. Mr. Heyer is also Chairman of the Board of
Directors of The Hain Food Group, Inc. and serves on the Board of Directors of
Niagara Corporation and Hayes Lemmerz International, Inc.
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.
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<PAGE>
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. Gustus has been Vice President Operations since July 1997. Prior to his
present position, Mr. Gustus was Director of Materials and Assembly. Mr. Gustus
has been with the Company for over 15 years.
Mr. Phebus has been the Vice President Marketing since March 1999. Prior to
his present position, Mr. Phebus was acting Vice President Sales and Marketing,
Director of Business Development, Quality Assurance Manager, and Sales Engineer.
Mr. Phebus has been with the Company for nearly 20 years.
Mr. Strimel has been Vice President Sales since March 1999. Prior to his
current position, Mr. Strimel was Director of Custom Sales from October 1996 to
February 1999. Prior to joining Fairfield, Mr. Strimel was with United Defense
for nine years where he served as a Program Manager from 1991 to 1996.
COMPENSATION OF DIRECTORS
Messrs. Ball and Lechman each receive an annual fee of $30,000 per year for
services as a director. Mr. Lechman entered into a consulting agreement with the
Company (see Note 2 to the Consolidated Financial Statements and the description
below) in August 1997. No other directors receive any additional compensation
for services performed as a director or for serving on committees of the Board
of Directors of the Company or for meeting attendance.
EXECUTIVE COMPENSATION
The following table sets forth, for each of the fiscal years ending
December 31, 1998, 1997 and 1996, the compensation paid to or accrued by the
Chief Executive Officer ("CEO") of the Company and each of the four most highly
compensated executive officers other than the CEO (the "Named Executive
Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------------- ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (1) COMPENSATION (2)
- ------------------------------------------------------------ ---- -------- --------- ----------------
<S> <C> <C> <C> <C>
Stephen K. Clough (2) ...................................... 1998 $154,872 $ 155,600 $ 18,869
President and Chief Executive Officer
Richard A. Bush ........................................... 1998 $107,500 $ 44,000 $ 6,038
Vice President Finance 1997 104,004 30,000 6,874
1996 103,537 52,000 5,950
James R. Dammon ........................................... 1998 $118,560 $ 47,424 $ 6,852
Vice President Engineering 1997 114,000 30,000 6,079
1996 114,437 57,000 4,988
Mark D. Gustus ............................................ 1998 $110,000 $ 44,000 $ 3,698
Vice President Operations 1997 91,272 30,000 3,475
1996 84,536 41,094 3,460
Kenneth A. Burns (4) ....................................... 1998 $166,671 $ -- $198,324 (5)
1997 250,000 65,000 12,900
1996 185,279 100,000 3,325
</TABLE>
- ------------------
(1) Amounts shown were earned under the Fairfield Manufacturing Company, Inc.
Management Incentive Compensation Plan.
(2) Mr. Clough joined the Company as President and Chief Executive Officer
effective August 12, 1998.
(footnotes continued on next page)
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<PAGE>
(footnotes continued from previous page)
(3) 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.
Other compensation for Mr. Clough includes moving expenses and the value of
other fringe benefits provided by the Company.
(4) Mr. Burns resigned as Chairman of the Board, President and Chief Executive
Officer of the Company effective August 12, 1998.
(5) Other compensation for Mr. Burns includes contributions by the Company to
the Savings Plan, imputed value of life insurance benefits provided by the
Company, severance and the value of other benefits provided by the Company.
As of December 31, 1998 the Company has no further obligations due
Mr. Burns.
INCENTIVE PLAN FOR SENIOR MANAGEMENT
The Company intends to establish the Incentive Plan for Senior Management
(the "Equity Incentive Plan") to provide incentive compensation arrangements for
its senior executives and other key management employees, including each of the
executive officers of the Company listed under the caption "Management." The
Company's Board of Directors is currently considering the terms and conditions
of the Equity Incentive Plan, which is expected to be adopted before the end of
1999. The Company expects that the Equity Incentive Plan will have a notional
incentive compensation pool to record amounts available to fund awards granted
under the Equity Incentive Plan, and that amounts will be credited to the pool
if the Company achieves the performance objectives established by the Board of
Directors. In that case, recipients of awards under the Equity Incentive Plan
will be entitled to payment of a percentage of the pool, subject to the
recipient's continued employment with the Company.
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").
ESTIMATED ANNUAL BENEFITS FOR
YEARS OF BENEFIT SERVICE INDICATED (2)
<TABLE>
<CAPTION>
AVERAGE ANNUAL COMPENSATION (1) 5 10 15 20 25 30
- ------------------------------------------------ ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
$100,000........................................ $ 6,705 $13,411 $20,116 $26,821 $33,526 $40,232
$125,000........................................ 8,518 17,036 25,553 34,071 42,589 51,107
$150,000........................................ 10,330 20,661 30,991 41,321 51,651 61,982
$160,000 and over............................... 11,055 22,111 33,166 44,221 55,276 66,332
</TABLE>
- ------------------
(1) The preceding table illustrates the pension benefits provided by the Pension
Plan, calculated on a straight life annuity basis for an eligible employee
retiring at age 65 in 1998. Average annual compensation covered under the
Pension Plan is the highest average annual total compensation received from
the Company for any 5 calendar years during the 10 years immediately
preceding the participant's separation from service. Annual total
compensation for Pension Plan purposes includes all compensation disclosed
in the Summary Compensation Table excluding moving expenses and fringe
benefits provided by the Company. Average annual compensation, used in
determining a participant's pension benefit, is limited under the Pension
Plan to comply with the Internal Revenue Code. This limit was $160,000 for
1998.
(2) At December 31, 1998 Messrs. Clough, Bush, Dammon, and Gustus had 0, 4, 33,
and 17 years of credited service, respectively, for purposes of calculating
their benefits under the Pension Plan.
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<PAGE>
EMPLOYMENT AGREEMENT
The Company entered into an employment agreement with Stephen K. Clough,
effective August 12, 1998 in connection with his appointment as President and
Chief Executive Officer of the Company. The agreement is for a three year term
expiring on August 12, 2001. The agreement provides for Mr. Clough to receive a
base salary of $400,000 or such greater amount as may be determined by the Board
of Directors of the Company upon periodic review. In addition, Mr. Clough is
eligible to receive bonuses in each fiscal year covered by the agreement based
on the achievement of target performance objectives for himself and the Company
as established by the Board of Directors. Mr. Clough is eligible to participate
in any other benefit plan that the Company provides to its executives and
employees from time to time.
CONSULTING AGREEMENT
In August 1997, the Company entered into a consulting agreement with W.B.
Lechman (the "Consulting Agreement") the previous Chairman of the Company's
Board of Directors. In consideration for services being rendered under the
Consulting Agreement, Mr. Lechman will receive total payments of $1.0 million,
which will be paid in installments through July 31, 2001 ("the consulting
period"). In the event that Mr. Lechman dies prior to the end of the consulting
period or is unable to perform the services requested due to mental or physical
disabilities, the Company shall pay to his legal representatives or
beneficiaries the remaining unpaid balance under the Consulting Agreement which
would have been due under the agreement had Mr. Lechman continued to provide
such services for the term of the Consulting Agreement. Due to the provisions of
the agreement, the Company has recognized the entire $1.0 million as expense in
1997.
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<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 Named 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 March 31, 1999. The number of authorized shares of the Company's capital
stock as of March 31, 1999 was 10,150,000, consisting of 10,000,000 shares of
common stock and 150,000 shares of Preferred Stock. As of March 31, 1999, the
Company had 8,554,000 shares of Common Stock and 50,000 shares of Exchangeable
Preferred Stock issued and outstanding.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
SHARES SHARES
NAME OWNED OUTSTANDING
- ---------------------------------------------------------------------------------------- --------- -----------
<S> <C> <C>
Lancer Industries Inc.(1) .............................................................. 8,554,000 100%
450 Lexington Avenue, Suite 3350
New York, New York 10017
Peter A. Joseph (2)..................................................................... -- --
Paul S. Levy (2)........................................................................ -- --
Andrew R. Heyer (2)..................................................................... -- --
Stephen K. Clough....................................................................... -- --
Richard A. Bush......................................................................... -- --
James R. Dammon......................................................................... -- --
Jess C. Ball............................................................................ -- --
W.B. Lechman............................................................................ -- --
Mark D. Gustus.......................................................................... -- --
All directors and executive officers ................................................... -- --
as a group (11 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 Credit Facility as security
for the Company's obligations thereunder.
(2) Lancer has one class of common stock, Class B Common Stock, with a par value
of $478.44 per share. Lancer's common stock is held as follows:
(i) Canadian Imperial Bank of Commerce ("CIBC"), through affiliates,
beneficially owns approximately 23% of Lancer's common stock, (ii) certain
entities affiliated with Mutual Series Fund (the "Mutual Entities") own
approximately 27% of Lancer's common stock, (iii) Mr. Paul S. Levy, the
Chairman of the Board and Chief Executive Officer of the Company, directly
and through his participation in the Lancer Employee Stock Ownership Plan
(the "ESOP") beneficially owns approximately 22% of Lancer's common stock,
and through a proxy in his favor to vote the shares of Lancer's common stock
beneficially owned by CIBC and others, has the right to direct the voting of
over 50% of Lancer's common stock, and (iv) Mr. Peter A. Joseph, a Vice
President and a Director of the Company, directly, through a trust and
through his participation in the ESOP, beneficially owns and has the right
to direct the voting of approximately 16% of Lancer's common stock.
Mr. Levy, the Mutual Entities and an affiliate of CIBC are parties to a
stockholders' arrangement relating to the composition of the Board of
Directors of Lancer and certain other matters.
Mr. Levy is the Chairman of the Board and Chief Executive Officer of Lancer.
Mr. Joseph is the President and a Director of Lancer. Mr. Heyer, a Director
of the Company, is a Director of Lancer and a Managing Director of an
affiliate of CIBC.
37
<PAGE>
RELATED TRANSACTIONS
CONTROL BY LANCER INDUSTRIES INC.
The Company is wholly owned by Lancer, a Delaware corporation. As a result,
Lancer is able to direct and control the policies of the Company and its
subsidiaries. Certain stockholders of Lancer are Directors and officers of the
Company. Certain stockholders of Lancer are parties to a stockholders'
arrangement relating to the composition of the Board of Directors of Lancer and
certain other matters. Circumstances could occur in which the interests of
Lancer could be in conflict with the interests of the Company and/or the holders
of the Notes. In addition, Lancer may have an interest in pursuing acquisitions,
divestitures or other transactions that Lancer believes would enhance its equity
investment in the Company, even though such transactions might involve risks to
the holders of the Notes. See "Ownership of Capital Stock."
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 federal tax return filed by Lancer. The
Company and Lancer have entered into a tax sharing agreement (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 a separate federal tax return (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. See Note 7 to the Consolidated
Financial Statements for a further discussion of income taxes.
OTHER ARRANGEMENTS WITH LANCER
From time to time, Lancer incurs legal, accounting and miscellaneous other
expenses on behalf of the Company. In fiscal 1998, 1997 and 1996, the Company
made aggregate payments to Lancer in respect of such expenses incurred by Lancer
on the Company's behalf in the amounts of $730,000, $484,000 and $570,000,
respectively.
38
<PAGE>
DESCRIPTION OF OTHER INDEBTEDNESS AND PREFERRED STOCK
CREDIT FACILITY
The Company, T-H Licensing and General Electric Capital Corporation ("GE
Capital") are party to the Loan Agreement, dated as of July 7, 1993 as amended
(the "GE Credit Agreement"), which sets forth the terms and conditions of the
Credit Facility. The GE Credit Agreement provides for (i) $35 million of term
loans and a $10 million debt repurchase line (the "Term Loans") and (ii) a
$20.0 million revolving credit facility (the "Revolver" and, together with the
Term Loans, the "Credit Facility"), including up to $2.0 million under a letter
of credit subfacility, subject to borrowing base availability. At the Company's
option, the Revolver availability may be increased by up to $20.0 million,
subject to the satisfaction of certain conditions. Currently, the only
borrowings under the Revolver are letters of credit issued for $0.4 million.
As of March 31, 1999, the Company's total borrowings under the Credit
Facility were $42.0 million, all of which amount was represented by Term Loans.
The Company repaid $27.7 million of such loans from the proceeds of the Original
Offering. The Company's current borrowings under the Credit Facility consist of
$14.3 million of Term Loans. The Company does not have any borrowings
outstanding under the Revolver other than $0.4 million in respect of letters of
credit.
The following description of the Credit Facility does not purport to be
complete and is qualified in its entirety by reference to the GE Credit
Agreement.
Commitments under the Revolver terminate on July 1, 2005. The
$14.3 million of Term Loans currently outstanding are payable in a single
principal payment on July 1, 2005. The GE Credit Agreement permits the Company
to make optional prepayments under the Credit Facility. The Company is required
to make prepayments on the Term Loans in an amount equal to the net proceeds
received from certain pension plan reversions and permitted dispositions of
assets out of the ordinary course of business by the Company or its
subsidiaries.
Interest under the Credit Facility is payable at one of the two specified
rates, as selected by the Company, as follows: (i) 0.75% 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) a margin ranging between 0.75% and 1.75% over a
rate calculated based on the one-, two-, three- or six-month Eurodollar rate.
The margin on the Eurodollar rate will be based on the Company's ratio of
consolidated EBITDA to interest expense calculated on a rolling four quarter
basis.
Borrowings under the Credit Facility are guaranteed by T-H Licensing and
any future subsidiaries of the Company. Indebtedness under the Credit Facility
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.
The GE Credit Agreement contains certain restrictive covenants limiting,
among other things, additional debt, additional liens, transactions with
affiliates, mergers and consolidations, liquidations and dissolutions, sales of
assets, dividends, capital expenditures, sale and leaseback transactions,
operating leases, investments, loans and advances, prepayment and modification
of debt instruments, the taking, or the failure to take, certain actions with
respect to the Tax Sharing Agreement and other matters customarily restricted in
such agreements. The GE Credit Agreement also requires that the Company maintain
compliance with certain specified financial ratios and tests including ratios
with respect to fixed charges, interest coverage and working capital. In
addition, the GE Credit Agreement contains certain customary affirmative
covenants and events of default.
EXCHANGEABLE PREFERRED STOCK AND EXCHANGE DEBENTURES
On March 12, 1997 the Company issued 50,000 shares of 11 1/4% Cumulative
Exchangeable Preferred Stock, liquidation preference $1,000 per share,
representing an aggregate liquidation preference of $50.0 million. The
Exchangeable Preferred Stock is exchangeable at the option of the Company, in
whole but not in part, for 11 1/4% Subordinated Exchange Debentures Due 2009
(the "Exchange Debentures"), in aggregate principal amount equal to the
liquidation preference of the Exchangeable Preferred Stock following the
redemption of the Existing Notes, subject to the satisfaction of certain
conditions. Certain terms of the
39
<PAGE>
Preferred Stock and Exchange Debentures are set forth below. The Exchangeable
Preferred Stock issued pursuant to a Certificate of Designation of the
Exchangeable Preferred Stock (the "Certificate of Designation"), which sets
forth the terms and conditions of such stock, including, in certain
circumstances, voting rights. The Exchange Debentures, if issued, will be issued
under the Exchange Indenture, dated as of March 12, 1997, by and between the
Company and the United States Trust Company of New York, as Trustee.
Mandatory Redemption/Maturity Date. The Company is required, subject to
certain conditions, to redeem all of the Exchangeable 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. The maturity date of the Exchange
Debentures is March 15, 2009.
Optional Redemption. The Exchangeable Preferred Stock, or, as the case may
be, 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 12, 2002, at
the following redemption prices (expressed as percentages of the then effective
liquidation preference, or, as the case may be, the principal amount thereof)
together with all accrued and unpaid dividends in the case of the Exchangeable
Preferred Stock, and all accrued and unpaid interest in the case of the Exchange
Debentures: for the 12-month period beginning March 15, 2002: 105.625%; for the
12-month period beginning March 15, 2003: 104.219%; for the 12-month period
beginning March 15, 2004: 102.813%; for the 12-month period beginning March 15,
2005: 101.406%; and on or after March 15, 2006: 100.000%.
Dividends/Interest Rate. The Exchangeable Preferred Stock pays dividends at
a rate equal to 11 1/4% per annum of the liquidation preference per share,
payable semiannually on each March 15 and September 15 in cash, or, on or prior
to March 15, 2002, in kind, on each March 15 and September 15. Interest on the
Exchange Debentures is 11 1/4% per annum, payable semiannually on each March 15
and September 15 in cash, or, on or prior to March 15, 2002, in kind.
Ranking. The Exchangeable 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 Facility and
indebtedness in respect of the Notes. The Exchange Debentures are unsecured
subordinated obligations of the Company, subordinated to all existing and future
senior debt of the Company, including without limitation, the indebtedness under
the Credit Agreement and indebtedness in respect to the Notes.
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 other
indebtedness of the Company then outstanding, the Company is required to offer
to redeem the Exchangeable Preferred Stock or, as the case may be, the Exchange
Debentures, at a redemption price equal to 101% of the liquidation preference,
or, as the case may be, the principal amount, plus, without duplication,
accumulated and unpaid dividends or 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 Exchangeable
Preferred Stock or, as the case may be, the Exchange Debentures, in whole but
not in part, at a redemption price equal to 101% of the liquidation preference,
or, as the case may be, the principal amount thereof, plus, without duplication,
accumulated and unpaid dividends or 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 Exchangeable Preferred Stock or the Exchange Debentures, the
annual dividend rate of the Exchangeable Preferred Stock or, as the case may be,
the Exchange Debentures, will increase by 4.0% over the then-applicable annual
dividend or interest rate.
Certain Restrictive Provisions. The Certificate of Designation of the
Exchangeable Preferred Stock contains 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 Exchangeable Preferred Stock that ranks on a parity with or senior to
the Exchangeable Preferred Stock. The Exchange Indenture for the Exchange
Debentures contains similar restrictive provisions.
40
<PAGE>
DESCRIPTION OF THE NOTES
The Company issued the Old Notes under an Indenture, dated as of May 19,
1999 (the "Indenture"), between the Company and First Union National Bank, as
trustee (the "Trustee"). The New Notes will also be issued under the Indenture.
The terms of the New Notes are identical in all material respects to the terms
of the Old Notes except that the New Notes are registered under the Securities
Act (and therefore will not contain restrictions on transfer), will not contain
certain provisions relating to additional interest, and will contain terms of an
administrative nature that differ from those of the Old Notes.
The terms of the Notes include those stated in the Indenture and those made
part of the Indenture by reference to the Trust Indenture Act of 1939, as
amended (the "TIA"), as in effect on the date of the Indenture. The Notes are
subject to all such terms, and holders of the Notes are referred to the
Indenture and the TIA for a statement of them. The following is a summary of
material terms and provisions of the Notes. This summary does not purport to be
a complete description of the Notes and is subject to the detailed provisions
of, and qualified in its entirety by reference to, the Notes and the Indenture
(including the definitions contained therein). The Indenture has been filed as
an exhibit to the Registration Statement of which this Prospectus is a part.
Definitions relating to certain capitalized terms are set forth under "--Certain
Definitions." Capitalized terms that are used but not otherwise defined herein
have the meanings ascribed to them in the Indenture and such definitions are
incorporated herein by reference.
The Notes are expected to be eligible for trading in the PORTAL market.
GENERAL
The Indenture provides for the issuance of the $100 million principal
amount of Notes and additional series of Notes to be issued from time to time in
aggregate principal amounts of not less than $25 million per series, subject to
compliance with the covenant described below under "--Limitation on Increased
Additional Indebtedness" and provided that no Default or Event of Default exists
under the Indenture at the time of issuance or would result therefrom. All Notes
will be substantially identical in all material respects other than issuance
dates. The Notes will be general unsecured obligations of the Company,
subordinated in right of payment to Senior Indebtedness of the Company and
senior in right of payment to any current or future subordinated indebtedness of
the Company, including the Exchange Debentures.
MATURITY, INTEREST AND PRINCIPAL
The Notes will mature on October 15, 2008. The Notes will bear interest at
a rate of 9 5/8% per annum from the Issue Date until maturity. Interest is
payable semi-annually in arrears on each April 15 and October 15, commencing
October 15, 1999, to holders of record of the Notes at the close of business on
the immediately preceding April 1 and October 1, respectively. The Notes are not
subject to any mandatory sinking fund.
OPTIONAL REDEMPTION
The Company may redeem the Notes at its option, in whole at any time or in
part from time to time, on or after April 15, 2004 at the following redemption
prices (expressed as percentages of the principal amount thereof), together, in
each case, with accrued and unpaid interest, if any, to the redemption date, if
redeemed during the twelve-month period beginning on April 15 of each year
listed below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ------------------------------------------------------------ ----------
<S> <C>
2004........................................................ 104.813%
2005........................................................ 103.208%
2006........................................................ 101.604%
2007 and thereafter......................................... 100.000%
</TABLE>
Notwithstanding the foregoing, the Company may redeem in the aggregate up
to 35% of the original principal amount of Notes (including the original
principal amount of any additional Notes issued under the Indenture) at any time
and from time to time prior to April 15, 2002 at a redemption price equal to
41
<PAGE>
109.625% of the aggregate principal amount so redeemed, plus accrued and unpaid
interest, if any, to the redemption date out of the Net Proceeds of one or more
Qualified Equity Offerings; provided that:
(1) at least 65% of the original principal amount of Notes (including
the original principal amount of any additional Notes) originally issued
remains outstanding immediately after the occurrence of any such
redemption; and
(2) any such redemption occurs within 90 days following the closing of
any such Qualified Equity Offering.
In the event of a redemption of fewer than all of the Notes, the Trustee
shall select the Notes to be redeemed in compliance with the requirements of the
principal national securities exchange, if any, on which such Notes are listed
or, if such Notes are not then listed on a national securities exchange, by lot
or in such other manner as the Trustee shall deem fair and equitable. The Notes
will be redeemable in whole or in part upon not less than 30 nor 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
Notes. Any such redemption or notice may, at the Company's discretion, be
subject to the satisfaction of one or more conditions precedent. On and after
any redemption date, interest will cease to accrue on the Notes or portions
thereof called for redemption unless the Company shall fail to redeem any such
Note.
SUBORDINATION
The Obligations represented by the Notes are, to the extent and in the
manner provided in the Indenture, subordinated in right of payment to the
payment when due of all existing and future Senior Indebtedness of the Company,
will rank pari passu in right of payment with all existing and future Senior
Subordinated Indebtedness of the Company and will be senior in right of payment
to all existing and future Subordinated Obligations of the Company. As of March
31, 1999, after giving pro forma effect to the Refinancing we would have had
approximately $14.3 million of Senior Indebtedness, approximately $19.6 million
available for borrowings under the Senior Credit Facility and $100 million of
Senior Subordinated Indebtedness. Although the Indenture contains limitations on
the amount of additional Indebtedness that the Company may incur, under certain
circumstances the amount of such Indebtedness could be substantial and, in any
case, such Indebtedness may be Senior Indebtedness.
In the event of any:
(1) 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;
(2) liquidation, dissolution or other winding-up of the Company,
whether voluntary or involuntary and whether or not involving insolvency or
bankruptcy;
(3) general assignment for the benefit of creditors of the Company; or
(4) 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 or Sale of Assets"),
(all of the foregoing events described in clauses (1) through (4) referred to
herein individually as a "Bankruptcy Proceeding" and collectively as "Bankruptcy
Proceedings"), the holders of Senior Indebtedness 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 Indebtedness of the Company before the holders of
the Notes are entitled to receive or retain any payment or distribution of any
kind on account of the Notes. In the event that, notwithstanding the foregoing,
the Trustee or any holder of Notes 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
Notes before all Senior Indebtedness 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 Indebtedness and will be immediately
paid over or delivered to the holders of Senior Indebtedness
42
<PAGE>
or their representative or representatives to the extent necessary to make
payment in full of all Senior Indebtedness remaining unpaid, after giving effect
to any concurrent payment or distribution, or provision therefor, to or for the
holders of Senior Indebtedness. By reason of such subordination, in the event of
any such Bankruptcy Proceeding, creditors of the Company who are holders of
Senior Indebtedness may recover more, ratably, than other creditors of the
Company, including holders of the Notes, and creditors of the Company who are
not holders of Senior Indebtedness or of the Notes may recover more, ratably,
than the holders of the Notes.
Upon the occurrence of a Payment Default on Designated Senior Indebtedness,
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 Notes by the Company) may be made by or
on behalf of the Company or any Restricted Subsidiary of the Company, including,
without limitation, by way of set-off or otherwise, for or on account of the
Notes, or for or on account of the purchase, redemption or other acquisition of
any Notes, and neither the Trustee nor any holder or owner of any Notes shall
take or receive from the Company or any Restricted Subsidiary of the Company,
directly or indirectly in any manner, payment in respect of all or any portion
of Notes commencing on the date of receipt by the Trustee of written notice from
the representative of the holders of Designated Senior Indebtedness (the
"Representative") of the occurrence of such 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 Notes, including any missed payments.
Upon the occurrence of a Non-Payment Event of Default on Designated Senior
Indebtedness, no payment or distribution of any assets of the Company of any
kind may be made by the Company or any Restricted Subsidiary of the Company,
including, without limitation, by way of set-off or otherwise, for or on account
of the Notes, or for or on account of the purchase or redemption or other
acquisition of any Notes, 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
(1) more than 179 days shall have elapsed since receipt of such
written notice by the Trustee,
(2) such Non-Payment Event of Default shall have been cured or waived
in writing or shall have ceased to exist or such Designated Senior
Indebtedness shall have been paid in full or
(3) 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 (1), (2) or (3), the Company shall resume
making any and all required payments in respect of the Notes, including any
missed payments, unless the holders of such Designated Senior Indebtedness or
the Representative of such holders have or has accelerated the maturity of such
Designated Senior Indebtedness, or any Payment Default otherwise exists.
Notwithstanding any other provision of the Indenture, in no event shall a
Payment Blockage Period commenced in accordance with the provisions of the
Indenture described in this paragraph extend beyond 179 days from the date of
the receipt by the Trustee of the notice referred to above (the "Initial
Blockage Period"). Any number of additional Payment Blockage Periods may be
commenced during the Initial Blockage Period; provided, however, that no 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 Indenture, no Non-Payment Event of Default with respect to Designated
Senior Indebtedness 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
43
<PAGE>
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.
Each Guarantee will, to the extent set forth in the Indenture, be
subordinated in right of payment to the prior payment in full of all Senior
Indebtedness of the respective Guarantor and will be subject to the rights of
holders of Designated Senior Indebtedness of such Guarantor to initiate blockage
periods, upon terms substantially comparable to the subordination of the Notes
to all Senior Indebtedness of the Company.
If the Company or any Guarantor fails to make any payment on the Notes 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 Indenture and would enable the
holders of the Notes to accelerate the maturity thereof. See "--Events of
Default."
A holder of Notes by his acceptance of Notes 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 Indenture and appoints the Trustee its
attorney-in-fact for such purpose.
CERTAIN COVENANTS
The 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 2.25 to 1.00.
Limitation on Other Subordinated Indebtedness. The Company will not, and
will not permit any of its Restricted Subsidiaries to, directly or indirectly,
incur, contingently or otherwise, any Indebtedness (other than the Notes and the
Guarantees, as the case may be) that is both (i) expressly subordinated in right
of payment to any Senior Indebtedness of the Company or any of its Restricted
Subsidiaries, as the case may be, and (ii) senior in right of payment to the
Notes and the Guarantees, as the case may be. Unsecured Indebtedness is not
deemed to be subordinate or junior to secured Indebtedness merely because it is
unsecured and Indebtedness that is not guaranteed by a particular Person is not
deemed to be subordinate or junior to Indebtedness that is so guaranteed merely
because it is not so guaranteed. For purposes of this covenant, Indebtedness is
deemed to be senior in right of payment to the Notes if it is not explicitly
subordinated in right of payment to Senior Indebtedness at least to the same
extent as the Notes are subordinated to such Senior Indebtedness.
Limitation on Restricted Payments. 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:
(1) any Default or Event of Default shall have occurred and be
continuing; or
(2) 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
(3) 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
44
<PAGE>
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, without
duplication,
(x) as capital contributions to the Company after the Issue
Date; and
(y) 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 (D) 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.
For purposes of the preceding clause (3)(b)(y), 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.
Notwithstanding the foregoing, these provisions will not prohibit:
(A) 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;
(B) the redemption of the Existing Notes; provided, the notice of
redemption for the Existing Notes shall be given in accordance with Article
Eleven of the Existing Indenture on or prior to June 30, 1999;
(C) 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 is 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;
(D) the purchase, redemption, retirement, defeasance or other
acquisition of Indebtedness of the Company that is subordinate or junior in
right of payment to the Notes 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 Notes, at least to the extent that the Indebtedness
being acquired is subordinated to the Notes and has a Weighted Average
Life to Maturity no less than that of the Notes; 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
Notes, at least to the extent that the Indebtedness being acquired is
subordinated to the Notes and has a Weighted Average Life to Maturity no
less than that of the Notes;
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(E) payments by the Company to Lancer pursuant to the Tax Sharing
Agreement;
(F) 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;
(G) the declaration and payment of regularly accruing dividends to
holders of the Existing Preferred Stock; provided that at the time of the
applicable dividend payment date, and after giving pro forma effect to such
dividend, the Company would have been able to incur at least $1.00 of
additional Indebtedness pursuant to the "--Limitation of Incurrence of
Additional Indebtedness" covenant;
(H) the declaration and payment of regularly accruing dividends to
holders of any class or series of Disqualified Capital Stock of the Company
or its Restricted Subsidiaries issued after the Issue Date in accordance
with the "--Limitation on Incurrence of Additional Indebtedness" covenant;
(I) the declaration and payment of regularly accruing dividends to
holders of any class or series of Designated Preferred Stock of the Company
issued after the Issue Date; provided that at the time of such issuance,
and after giving effect to such issuance on a pro forma basis (for purposes
of making determinations on a pro forma basis pursuant to this clause (I),
treating all dividends which will accrue on such Designated Preferred Stock
during the four full fiscal quarters immediately following such issuance,
as well as all other Designated Preferred Stock then outstanding, as if
same will in fact be, or have in fact been, paid in cash), the Company
would have been able to incur at least $1.00 of additional Indebtedness
pursuant to the "--Limitation on Incurrence of Additional Indebtedness"
covenant;
(J) Investments constituting Restricted Payments made as a result of
the receipt of non-cash consideration from any Asset Sale;
(K) Restricted Payments in aggregate amount not to exceed
$10 million; and
(L) the declaration and payment of regularly accruing dividends to
holders of Preferred Stock of Restricted Subsidiaries issued after the
Issue Date in accordance with the "--Limitation on Incurrence of Additional
Indebtedness"covenant;
provided that in calculating the aggregate amount of Restricted Payments made
subsequent to the Issue Date for purposes of clause (3) above amounts expended
pursuant to clauses (A) and (L) of this paragraph shall be included in such
calculation and amounts expended pursuant to clauses (B) through (K) shall be
excluded from such calculation.
Limitation on Liens. The Company will not, and will not permit any of its
Restricted Subsidiaries to, create, incur or otherwise cause or suffer to exist
or become effective any Liens of any kind (other than Permitted Liens) upon any
property or asset of the Company or any of its Restricted Subsidiaries or any
shares of Capital Stock or Indebtedness of any Restricted Subsidiary of the
Company which owns property or assets (an "Initial Lien"), now owned or
hereafter acquired, unless:
(1) if such Initial Lien secures Indebtedness which is pari passu with
the Notes, then the Notes are secured on an equal and ratable basis with
the obligations so secured until such time as such obligation is no longer
secured by a Lien; or
(2) if such Initial Lien secures Indebtedness which is subordinated to
the Notes, any such Lien shall be subordinated to the Lien granted to the
holders of the Notes to the same extent as such Indebtedness is
subordinated to the Notes.
Any Lien created in favor of the Notes pursuant hereto will be
automatically and unconditionally released and discharged upon (i) the
unconditional release and discharge of the Initial Lien to which it relates or
(ii) the sale, exchange or transfer to any Person that is not an Affiliate of
the Company or any Restricted Subsidiary of the property or assets secured by
such Initial Lien, or of all of the equity interests held by the Company and the
Restricted Subsidiaries in, or all or substantially all of the assets of, the
Restricted Subsidiary whose property or assets were the subject of such Lien,
provided that, in the case of clause (ii), the provisions of the covenant
"--Limitation on Asset Sales" are complied with in connection with such sale,
exchange or transfer.
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Limitations on Transactions with Affiliates. The Company will not, and
will not permit any Restricted Subsidiary to, directly or indirectly, enter
into, renew or extend any transaction (including, without limitation, the
purchase, sale, lease or exchange of property or assets, or the rendering of any
service) with any holder (or any Affiliate of such holder) of 10% or more of any
class of Capital Stock of the Company or with any Affiliate of the Company or
any Restricted Subsidiary, except upon fair and reasonable terms no less
favorable to the Company or such Restricted Subsidiary than could be obtained,
at the time of such transaction or, if such transaction is pursuant to a written
agreement, at the time of the execution of the agreement providing therefore, in
a comparable arm's length transaction with a Person that is not such a holder or
an Affiliate.
The foregoing limitation does not limit, and shall not apply to:
(A) transactions (1) approved by a majority of the disinterested
members of the Board of Directors or (2) for which the Company or a
Restricted Subsidiary delivers to the Trustee a written opinion of a
nationally recognized accounting, valuation or investment banking firm
stating that the transaction is fair to the Company or such Restricted
Subsidiary from a financial point of view;
(B) any transaction solely between the Company and any of its
Restricted Subsidiaries or solely between Restricted Subsidiaries;
(C) any Permitted Investment or any Restricted Payment that is not
prohibited by the provisions described under the "--Limitation on
Restricted Payments" covenant above;
(D) payments to Lancer under the Tax Sharing Agreement;
(E) 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;
(F) reasonable and customary regular fees to directors of the Company;
(G) 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;
(H) in the event T-H Licensing is not a Guarantor at the time of such
payment, 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;
(I) payments or distributions to participants in the Equity Incentive
Plan pursuant to the terms thereof;
(J) transactions in connection with Permitted Receivables Financing;
and
(K) 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 and monitoring 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); and
(L) any transaction between the Company and any of its Affiliates
involving ordinary course of business investment banking, commercial
banking, financial advisory services and related activities.
Notwithstanding the foregoing, any transaction or series of related
transactions covered by the first paragraph of this "--Limitation on
Transactions with Affiliates" covenant and not covered by clauses (B) through
(L) of this paragraph, (a) the aggregate amount of which exceeds $5 million in
value, must be approved to be fair in the manner provided for in clause (A) (1)
or (2) above and (b) the aggregate amount of which exceeds $10 million in value,
must be determined to be fair in the manner provided for in clause (A) (2)
above.
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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 consensual encumbrance or restriction on the
ability of any Restricted Subsidiary of the Company to:
(1) pay dividends, in cash or otherwise, or make any other
distributions on or in respect of its Capital Stock owned by the Company or
a Restricted Subsidiary;
(2) pay any Indebtedness owed to the Company or any other Restricted
Subsidiary of the Company;
(3) make loans or advances to the Company or any other Restricted
Subsidiary of the Company;
(4) transfer any of its properties or assets to the Company or any
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
(5) 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:
(A) applicable law;
(B) 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;
(C) any encumbrance or restriction in any agreement:
(1) that restricts in a customary manner the subletting,
assignment or transfer of any property or asset that is subject to a
lease, license or similar contract, or the subletting, assignment or
transfer of any lease, license, conveyance or contract or similar
property or asset;
(2) contained in any mortgage, pledge or other security
agreement securing Indebtedness of a Restricted Subsidiary to the
extent restricting the transfer of the property subject thereto; or
(3) pursuant to customary provisions restricting dispositions of
real property interests set forth in any reciprocal easement
agreements of the Company or any Restricted Subsidiary;
(D) Purchase Money Indebtedness permitted under the "--Limitation
on Incurrence of Additional Indebtedness" covenant;
(E) with respect to a Restricted Subsidiary (or any of its property
or assets) imposed pursuant to an agreement entered into for the direct
or indirect sale or disposition of all or substantially all of the
Capital Stock or assets of such Restricted Subsidiary (or the property
or assets that are subject to such restriction) pending the closing of
such sale or disposition;
(F) on the transfer of property or assets required by any
regulatory authority having jurisdiction over the Company or any
Restricted Subsidiary or any of their businesses;
(G) with respect to a Receivables Subsidiary, an agreement relating
to Indebtedness of a Receivable Subsidiary which is permitted under the
"--Limitation on Incurrence of Additional Indebtedness" covenant above
or pursuant to an agreement relating to a Permitted Receivables
Financing by a Receivables Subsidiary;
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(H) 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 by virtue of any transfer of,
agreement to transfer, option or right with respect to, or Lien on, any
property or assets of the Company or any Restricted Subsidiary not
otherwise prohibited by the Indenture;
(I) existing under Senior Indebtedness otherwise permitted to be
incurred pursuant to the
"--Limitation on Incurrence of Additional Indebtedness" covenant that
limits the right of the debtor to dispose of assets securing such
Indebtedness;
(J) any encumbrance or restriction pursuant to any agreement that
extends, refinances, renews or replaces any agreement described in
clause (B) above, which is not materially more restrictive or less
favorable to the holders of Notes than those existing under the
agreement being extended, refinanced or renewed (as determined in good
faith by the Company); and
(K) pursuant to an agreement or instrument relating to Indebtedness
permitted by clause (18) of the definition of "Permitted Indebtedness"
(a "Refinancing Agreement"); provided, however, that the encumbrances
and restrictions contained in any such Refinancing Agreement or
amendment are no less favorable to the holders of the Notes taken as a
whole than encumbrances and restrictions contained in the initial
agreement or agreements to which such Refinancing Agreement or amendment
relates (as determined in good faith by the Board of Directors, whose
determination shall be conclusive).
Limitation on Asset Sales. The Company will not, and will not permit any
of its Restricted Subsidiaries to, consummate an Asset Sale unless:
(1) 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 of the assets sold or otherwise
disposed of (as determined in good faith by the Board of Directors of the
Company, and evidenced by a board resolution, which determination shall be
conclusive);
(2) not less than 75% of the consideration (excluding, in the case of
an Asset Sale (or series of related Asset Sales) of assets, by way of
relief from, or by another Person assuming responsibilities for, any
liabilities, contingent or otherwise, that are not Indebtedness) received
by the Company or such applicable Restricted Subsidiary, as the case may
be, is in the form of cash or Cash Equivalents; provided that this clause
(2) shall not apply to any Asset Sale (or series of related Asset Sales),
involving assets that accounted for less than one percent of Consolidated
EBITDA during the period of the most recent four consecutive fiscal
quarters ending prior to the date of such Asset Sale for which consolidated
financial statements of the Company are available; provided, further, that
only for purposes of this clause (2) the following shall be deemed to
constitute cash:
(a) the oustanding principal amount of Indebtedness of the Company
or any Restricted Subsidiary (other than (x) Capital Stock which
constitutes Indebtedness and (y) Indebtedness to the Company or any
Restricted Subsidiary) assumed by the transferee (which shall not
consitute the Company or a Restricted Subsidiary) pursuant to the
respective Asset Sale, so long as the Company or such Restricted
Subsidiary is irrevocably and unconditionally released from all
liability under such Indebtedness; and
(b) any notes or other obligations received by the Company or any
Restricted Subsidiary from such transferee that are, within 180 days
after the date of the respective Asset Sale converted by the Company
into cash (to the extent of the cash received in that conversion); and
(3) the Asset Sale Proceeds received by the Company or such Restricted
Subsidiary are applied:
(a) to the extent the Company or any such Restricted Subsidiary, as
the case may be, elects, or is required, to prepay, repay or purchase
indebtedness under any then existing Senior Indebtedness of the Company
or any such Restricted Subsidiary within 365 days following the receipt
of the Asset Sale Proceeds from any Asset Sale;
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(b) 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, reasonably related, ancillary or
complementary to the business of the Company (including extensions or
developments thereof) or any such Restricted Subsidiary as conducted on
the Issue Date; provided that such investment occurs (or a definitive
agreement committing so to invest is entered) within 365 days following
receipt of such Asset Sale Proceeds;
(c) to the extent of the balance of Available Asset Sale Proceeds
after the application in accordance with clause (a) or (b), if on such
365th day in the case of clauses (3)(a) and (3)(b), the Available Asset
Sale Proceeds exceed $10.0 million, the Company shall apply an amount
equal to the Available Asset Sale Proceeds to an offer to repurchase the
Notes, at a purchase price in cash equal to 100% of the principal amount
thereof plus accrued and unpaid interest, if any, to the purchase date
(an "Excess Proceeds Offer").
Notwithstanding the foregoing, in the event that a Restricted Subsidiary
that is not a Wholly-Owned Restricted Subsidiary dividends or distributes to all
of its stockholders on a pro rata basis any proceeds of an Asset Sale to the
Company or another Restricted Subsidiary, the Company or such Restricted
Subsidiary need only apply its share of such proceeds in accordance with the
preceding clauses (a), (b) and (c).
If an Excess Proceeds Offer is not fully subscribed, the Company may retain
the portion of the Available Asset Sale Proceeds not required to repurchase
Notes.
If the Company is required to make an Excess Proceeds Offer, the Company
shall mail, within 30 days following the date specified in clause (3)(c) above,
a notice to the holders stating, among other things:
(1) that such holders have the right to require the Company to apply
the Available Asset Sale Proceeds to repurchase such Notes at a purchase
price in cash equal to 100% of the principal amount thereof plus accrued
and unpaid interest, if any, to the purchase date;
(2) the purchase date, which shall be no earlier than 30 days and not
later than 45 days from the date such notice is mailed;
(3) the instructions that each holder must follow in order to have
such Notes purchased; and
(4) the calculations used in determining the amount of Available Asset
Sale Proceeds to be applied to the purchase of such Notes.
In the event of the transfer of substantially all of the property and
assets of the Company and its Restricted Subsidiaries, taken as a whole, to a
Person in a transaction permitted under "--Merger, Consolidation or Sale of
Assets" below, the successor Person shall be deemed to have sold the properties
and assets of the Company and its Restricted Subsidiaries not so transferred for
purposes of this covenant, and shall comply with the provisions of this covenant
with respect to such deemed sale as if it were an Asset Sale.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and other securities laws and regulations thereunder to the extent
such laws and regulations are applicable in connection with the repurchase of
Notes pursuant to an Excess Proceeds Offer. To the extent that the provisions of
any securities laws or regulations conflict with the "Asset Sale" provisions of
the Indenture, the Company shall comply with the applicable securities laws and
regulations and shall not be deemed to have breached its obligations under the
"Asset Sale" provisions of the Indenture by virtue thereof.
Limitation on Preferred Stock of Restricted Subsidiaries. The Company will
not permit any of its Restricted Subsidiaries to issue any Preferred Stock
(other than to the Company or to a Restricted Subsidiary) unless the Company or
such Restricted Subsidiary would be entitled to incur or assume Indebtedness
under "--Limitation on Incurrence of Additional Indebtedness" above in an
aggregate principal amount equal to the aggregate liquidation value of the
Preferred 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
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any Indebtedness of the Company or any Guarantor, (excluding any Guarantee of a
Restricted Subsidiary which constitutes Acquired Indebtedness of such Subsidiary
so long as such Guarantee does not apply to any other Indebtedness of the
Company and its Restricted Subsidiaries not acquired pursuant to the respective
acquisition or merger) unless such Restricted Subsidiary is a Guarantor or
simultaneously executes and delivers a supplemental indenture providing for the
guarantee of payment of the Notes by such Restricted Subsidiary; provided,
however, that a Restricted Subsidiary may guarantee the Company's obligations
under any Senior Indebtedness without executing and delivering such supplemental
indenture or guaranteeing the Notes; provided, further, that in the case of any
guarantee of any Guarantor with respect to Senior Subordinated Indebtedness, the
guarantee of the payment of the Notes by such Guarantor to be provided in
accordance herewith shall be pari passu with the guarantee with respect to such
Senior Subordinated Indebtedness in the same manner and to the same extent as
the Senior Subordinated Indebtedness is guaranteed. 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 a Restricted
Subsidiary or a holder, directly or indirectly, of any Capital Stock of the
Company or any of its Restricted Subsidiaries which is otherwise in compliance
with the terms of the 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. In addition, a Guarantor shall be deemed to be released from
all obligations under its Guarantee in the event such Guarantor is designated an
Unrestricted Subsidiary.
Limitation on Creation of Subsidiaries. The Company will not create or
acquire, and it will not permit any of its Restricted Subsidiaries to create or
acquire, any Subsidiary other than:
(1) a Restricted Subsidiary existing as of the Issue Date;
(2) a Restricted Subsidiary conducting a business similar or
reasonably related, ancillary or complementary thereto or extensions or
developments thereof to the business of the Company and its Subsidiaries on
the Issue Date; or
(3) an Unrestricted Subsidiary;
provided, however, that each Restricted Subsidiary organized under the laws of
the United States or any State thereof or the District of Columbia acquired or
created pursuant to clause (2) shall, at the time it has either assets or
shareholder's equity in excess of $10,000, have executed a guarantee, in the
form attached to the Indenture and reasonably satisfactory in form and substance
to the Trustee (and with such documentation relating thereto as the Trustee
shall require, including, without limitation a supplement or amendment to the
Indenture and opinions of counsel as to the enforceability of such guarantee);
provided, further, in the event the Company and its Restricted Subsidiaries, on
a consolidated basis, incurs Acquired Indebtedness (assuming such incurrence is
in accordance with the "--Limitation on Incurrence of Additional Indebtedness"
covenant) as a result of the acquisition of a Restricted Subsidiary and the
terms of such Acquired Indebtedness prohibits the guarantee of the Notes by such
newly-acquired Restricted Subsidiary or such newly-acquired Restricted
Subsidiary would be in breach or default of the terms of the Acquired
Indebtedness as a result of such guarantee, such Restricted Subsidiary will not
be required to execute a guarantee; however, until such Restricted Subsidiary
executes and delivers a guarantee in accordance with this covenant, none of the
Company or any other Restricted Subsidiary will transfer any assets (other than
in the ordinary
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course of business) to such newly-acquired Restricted Subsidiary and such newly
acquired Restricted Subsidiary will not transfer such Acquired Indebtedness to
the Company or any other Restricted Subsidiary.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, the Company shall be obligated
to make an offer to purchase (the "Change of Control Offer") each holder's
outstanding Notes at a purchase price (the "Change of Control Purchase Price")
equal to 101% of the principal amount thereof plus accrued and unpaid interest,
if any, to the Change of Control Payment Date (as defined) in accordance with
the procedures set forth below.
Within 30 days of the occurrence of a Change of Control, the Company shall
(i) cause a notice of the Change of Control Offer to be sent at least once to
the Dow Jones News Service or similar business news service in the United States
and (ii) send by first-class mail, postage prepaid, to the Trustee and to each
holder of the Notes, at the address appearing in the register maintained by the
Registrar of the Notes, a notice stating:
(1) that the Change of Control Offer is being made pursuant to this
covenant and that all Notes tendered will be accepted for payment;
(2) the Change of Control Purchase Price and the purchase date (which
shall be a business day no earlier than 30 days nor later than 60 days from
the date such notice is mailed (the "Change of Control Payment Date"));
(3) that any Note not tendered will continue to accrue interest;
(4) that, unless the Company defaults in the payment of the Change of
Control Purchase Price, any Notes accepted for payment pursuant to the
Change of Control Offer shall cease to accrue interest after the Change of
Control Payment Date;
(5) that holders accepting the offer to have their Notes purchased
pursuant to a Change of Control Offer will be required to surrender the
Notes to the Paying Agent at the address specified in the notice prior to
the close of business on the business day preceding the Change of Control
Payment Date;
(6) that holders will be entitled to withdraw their acceptance if the
Paying Agent receives, not later than the close of business on the third
business day preceding the Change of Control Payment Date, a telegram,
telex, facsimile transmission or letter setting forth the name of the
holder, the principal amount of the Notes delivered for purchase, and a
statement that such holder is withdrawing his election to have such Notes
purchased;
(7) that holders whose Notes are being purchased only in part will be
issued new Notes equal in principal amount to the unpurchased portion of
the Notes surrendered;
(8) any other procedures that a holder must follow to accept a Change
of Control Offer or effect withdrawal of such acceptance; and
(9) the name and address of the Paying Agent.
On the Change of Control Payment Date, the Company shall, to the extent
lawful,
(1) accept for payment Notes or portions thereof tendered pursuant to
the Change of Control Offer,
(2) deposit with the Paying Agent money sufficient to pay the purchase
price of all Notes or portions thereof so tendered, and
(3) deliver or cause to be delivered to the Trustee Notes so accepted
together with an Officer's Certificate stating the Notes or portions
thereof tendered to the Company.
The Paying Agent shall promptly mail to each holder of Notes so accepted
payment in an amount equal to the purchase price for such Notes, and the Company
shall execute and issue, and the Trustee shall promptly authenticate and mail to
such holder, a new Note equal in principal amount to any unpurchased
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portion of the Notes surrendered; provided that each such new Note shall be
issued in an original principal amount in denominations of $1,000 and integral
multiples thereof.
The Indenture requires that if the Credit Agreement is in effect, or any
amounts are owing thereunder or in respect thereof, at the time of the
occurrence of a Change of Control, prior to the mailing of the notice to holders
described in the second preceding paragraph, but in any event within 30 days
following any Change of Control, the Company covenants to:
(1) repay in full all obligations and terminate all commitments under
or in respect of the Credit Agreement and all other Senior Indebtedness the
terms of which require repayment upon a Change of Control or offer to repay
in full all obligations and terminate all commitments under or in respect
of the Credit Agreement and all such Senior Indebtedness and repay the
Indebtedness owed to each such lender who has accepted such offer; or
(2) obtain the requisite consents under the Credit Agreement and all
such other Senior Indebtedness to permit the repurchase of the Notes as
described above.
The Company must first comply with the covenant described in the preceding
sentence before it shall be required to purchase Notes in the event of a Change
of Control; provided that the Company's failure to comply with the covenant
described in the preceding sentence constitutes an Event of Default described in
clause (3) under "--Events of Default" below if not cured within 30 days after
the notice required by such clause. As a result of the foregoing, a holder of
the Notes may not be able to compel the Company to purchase the Notes unless the
Company is able at the time to refinance all of the obligations under or in
respect of the Credit Agreement and all such other Senior Indebtedness or obtain
requisite consents under the Credit Agreement and all such other Senior
Indebtedness.
The Indenture will further provide that (1) if the Company or any
Restricted Subsidiary thereof has issued any outstanding (a) indebtedness that
is subordinated in right of payment to the Notes or (b) Preferred Stock, and the
Company or such Restricted Subsidiary is required to make a change of control
offer or to make a distribution with respect to such subordinated indebtedness
or Preferred Stock in the event of a change of control, the Company shall not
consummate any such offer or distribution with respect to such subordinated
indebtedness or Preferred Stock until such time as the Company shall have paid
the Change of Control Purchase Price in full to the holders of Notes that have
accepted the Company's change of control offer and shall otherwise have
consummated the change of control offer made to holders of the Notes and
(2) the Company will not issue Indebtedness that is subordinated in right of
payment to the Notes or Preferred Stock with change of control provisions
requiring the payment of such Indebtedness or Preferred Stock prior to the
payment of the Notes in the event of a Change in Control under the Indenture.
The Company will comply with the requirements of Rule 14e-1 of the Exchange
Act and any other securities laws and regulations thereunder to the extent such
laws and regulations are applicable in connection with the repurchase of Notes
pursuant to a Change of Control Offer. To the extent that the provisions of any
securities laws or regulations conflict with the provisions of the Indenture,
the Company shall comply with the applicable securities laws and regulations and
shall not be deemed to have breached its obligations under the "Change of
Control" provisions of the Indenture by virtue thereof.
MERGER, CONSOLIDATION OR SALE OF ASSETS
The Company will not and will not permit any of its Restricted Subsidiaries
to consolidate with, merge with or into, or sell, assign, transfer, lease,
convey or otherwise dispose of all or substantially all of its assets of the
Company (as an entirety or substantially as an entirety in one transaction or a
series of related transactions), to any Person unless:
(1) the Company or such Restricted Subsidiary, as the case may be,
shall be the continuing Person, or the Person (if other than the Company or
such Restricted Subsidiary) formed by such consolidation or into which the
Company or such Restricted Subsidiary, as the case may be, is merged or to
which the properties and assets of the Company or such Restricted
Subsidiary, as the case may be, are sold, assigned, transferred, leased,
conveyed or otherwise disposed of shall be a corporation organized and
existing under the laws of the United States or any State thereof or the
District of Columbia and shall
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expressly assume, by a supplemental indenture, executed and delivered to
the Trustee, in form satisfactory to the Trustee, all of the obligations of
the Company or such Restricted Subsidiary, as the case may be, under the
Indenture, the Notes and any Guarantees and the obligations thereunder
shall remain in full force and effect;
(2) immediately before and immediately after giving effect to such
transaction, no Default or Event of Default shall have occurred and be
continuing; and
(3) immediately after giving effect to such transaction on a pro forma
basis the Company or such Person could incur at least $1.00 of additional
Indebtedness (other than Permitted Indebtedness) under "--Certain
Covenants--Limitation on Additional Indebtedness" above;
provided that (x) any Restricted Subsidiary may merge into the Company or
another Person that is a Restricted Subsidiary and (y) the Company may merge
with an Affiliate incorporated or organized for the purpose of reincorporating
or reorganizing the Company in another jurisdiction to realize tax benefits
without complying with clause (3) provided, in the case of a transaction
pursuant to subclause (y), immediately after giving effect to such transaction
on a pro forma basis, either (A) the surviving entity could incur at least $1.00
of additional Indebtedness (other than Permitted Indebtedness) under "--Certain
Covenants--Limitation on Incurrence of Additional Indebtedness" or (B) the Fixed
Charge Coverage Ratio of the surviving entity is not less than the Fixed Charge
Coverage Ratio of the Company immediately prior to such transaction and the
surviving entity conducts business in the same line or an extension of the same
line of business as that of the Company immediately prior to such transaction.
In connection with any consolidation, merger or transfer of assets
contemplated by this provision, the Company shall deliver, or cause to be
delivered, to the Trustee, in form and substance not unsatisfactory to the
Trustee, an Officer's Certificate stating that such consolidation, merger or
transfer and the supplemental indenture in respect thereto comply with this
provision and that all conditions precedent herein provided for relating to such
transaction or transactions have been complied with.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more Restricted
Subsidiaries of the Company the Capital Stock of which constitutes all or
substantially all of the properties and assets of the Company, shall be deemed
to be the transfer of all or substantially all of the properties and assets of
the Company.
EVENTS OF DEFAULT
The following events are defined in the Indenture as "Events of Default":
(1) default in payment of any principal of, or premium, if any, on the
Notes whether at maturity, upon redemption or otherwise (whether or not
such payment shall be prohibited by the subordination provisions of the
Indenture);
(2) default for 30 days in payment of any interest on the Notes;
(3) default by the Company or any Restricted Subsidiary in the
observance or performance of any other covenant in the Notes or the
Indenture for 60 consecutive days after written notice from the Trustee or
the holders of not less than 25% in aggregate principal amount of the Notes
then outstanding (except in the case of a default with respect to the
"Change of Control" or "Merger, Consolidation or Sale of Assets" covenant
which shall constitute an Event of Default with such notice requirement but
without such passage of time requirement);
(4) failure to pay when due principal, interest or premium in an
aggregate amount of $7.5 million or more with respect to any Indebtedness
of the Company or any Restricted Subsidiary thereof, or the acceleration of
any such Indebtedness aggregating $7.5 million or more, which default shall
not be cured, waived or postponed pursuant to an agreement with the holders
of such Indebtedness within 60 consecutive days after written notice as
provided in the Indenture, or acceleration shall not be rescinded or
annulled within 20 consecutive days after written notice as provided in the
Indenture;
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(5) any final judgment or judgments which can no longer be appealed
for the payment of money in excess of $7.5 million (excluding (i) amounts
covered by insurance for which coverage is not being challenged or denied,
and (ii) amounts for which coverage has been challenged or denied that the
Company is contesting in good faith) 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
(6) certain events involving bankruptcy, insolvency or reorganization
of the Company or any Restricted Subsidiary thereof.
The Indenture provides that the Trustee may withhold notice to the holders
of the Notes of any Default (except in payment of principal or premium, if any,
or interest on the Notes) if the Trustee considers it to be in the best interest
of the holders of the Notes to do so.
The Indenture will provide that if an Event of Default (other than an Event
of Default of the type described in clause (6) above) shall have occurred and be
continuing, then the Trustee or the holders of not less than 25% in aggregate
principal amount of the Notes then outstanding may declare to be immediately due
and payable the entire principal amount of all the Notes then outstanding plus
accrued interest to the date of acceleration (1) and the same shall become
immediately due and payable or (2) if there are any amounts outstanding under
the Credit Agreement, shall become immediately due and payable upon the first to
occur of an acceleration under the Credit Agreement or five business days after
receipt by the Company and the Representative under the Credit Agreement of a
notice of acceleration; provided, however, that after such acceleration but
before a judgment or decree based on acceleration is obtained by the Trustee,
the holders of a majority in aggregate principal amount of outstanding Notes
may, under certain circumstances, rescind and annul such acceleration if,
(1) the rescission would not conflict with judgment or decree;
(2) all Events of Default, other than nonpayment of principal,
premium, if any, or interest that has become due solely because of the
acceleration, have been cured or waived as provided in the Indenture,
(3) to the extent the payment of such interest is lawful, interest on
overdue installments of interest and overdue principal which has become due
otherwise than by such declaration of acceleration, has been paid,
(4) the Company has paid the Trustee its reasonable compensation and
reimbursed the Trustee for its expenses, disbursements and advances, and
(5) in the event of the cure or waiver of an Event of Default of the
type described in clause (5) of the above Events of Default, the Trustee
shall have received an Officers' Certificate and an opinion of counsel that
such Event of Default has been cured or waived.
No such rescission shall affect any subsequent Default or impair any right
consequent thereto. In case an Event of Default resulting from certain events of
bankruptcy, insolvency or reorganization shall occur, the principal, premium and
interest amount with respect to all of the Notes shall be due and payable
immediately without any declaration or other act on the part of the Trustee or
the holders of the Notes. In addition, if within 60 days after such Event of
Default arising from certain events of bankruptcy, insolvency or reorganization
arose (x) the Indebtedness that is the basis for such Event of Default has been
discharged, or (y) the holders thereof have rescinded or waived the
acceleration, notice or action (as the case may be) giving rise to such Event of
Default, or (z) the default in respect of such Indebtedness that is the basis
for such Event of Default has been cured, the declaration of acceleration of the
Notes referred to in the preceding clause and such Event of Default and all
consequences thereof (including without limitation any acceleration or resulting
payment default) shall be annulled, waived and rescinded, automatically and
without any action by the Trustee or the holders of the Notes, and be of no
further effect.
The holders of a majority in principal amount of the Notes then outstanding
shall have the right to waive any existing default or compliance with any
provision of the Indenture or the Notes and to direct the time, method and place
of conducting any proceeding for any remedy available to the Trustee, subject to
certain limitations provided for in the Indenture and under the Trust Indenture
Act.
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No holder of any Note will have any right to institute any proceeding with
respect to the Indenture or for any remedy thereunder, unless such holder shall
have previously given to the Trustee written notice of a continuing Event of
Default and unless the holders of at least 25% in aggregate principal amount of
the outstanding Notes shall have made written request and offered reasonable
indemnity to the Trustee to institute such proceeding as Trustee, and unless the
Trustee shall not have received from the holders of a majority in aggregate
principal amount of the outstanding Notes a direction inconsistent with such
request and shall have failed to institute such proceeding within 60 days.
Notwithstanding the foregoing, such limitations do not apply to a suit
instituted on such Note on or after the respective due dates expressed in such
Note.
DEFEASANCE AND COVENANT DEFEASANCE
The Indenture provides that prior to any redemption date or to the maturity
date of the Notes the Company may elect either:
(1) to defease and be discharged from any and all of its and any
Guarantor's obligations with respect to the Notes (except for the
obligations to register the transfer or exchange of such Notes, to replace
temporary or mutilated, destroyed, lost or stolen Notes, to maintain an
office or agency in respect of the Notes and to hold monies for payment in
trust) ("legal defeasance"); or
(2) to be released from its obligations with respect to the Notes
under certain covenants contained in the Indenture ("covenant defeasance").
The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises
its legal defeasance option, payment of the Notes may not be accelerated
because of an Event of Default with respect thereto. If the Company
exercises its covenants defeasance option, payment of the Notes may not be
accelerated because of an Event of Default specified in clause (3) under
"Events of Defaults" above.
In order to exercise either defeasance option, the Company must deposit
with the Trustee (or other qualifying trustee), in trust for such purpose, money
and/or non-callable U.S. government obligations which through the payment of
principal and interest in accordance with their terms will provide money, in an
amount sufficient to pay the principal of, premium, if any, and interest on the
Notes, on the scheduled due dates therefor or on a selected date of redemption
in accordance with the terms of the Indenture. Such a trust may only be
established if, among other things, the Company has delivered to the Trustee an
opinion of counsel (as specified in the Indenture), (a) 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 (b) describing
either a private ruling concerning the Notes or a published ruling of the
Internal Revenue Service, to the effect that holders of the Notes or persons in
their positions will not recognize income, gain or loss for federal income tax
purposes as a result of such deposit, defeasance and discharge and will be
subject to federal income tax on the same amount and in the same manner and at
the same times, as would have been the case if such deposit, defeasance and
discharge had not occurred.
MODIFICATION OF INDENTURE
From time to time, the Company, any Guarantors and the Trustee may, without
the consent of holders of the Notes, amend or supplement the Indenture for
certain specified purposes, including providing for uncertificated Notes in
addition to certificated Notes, and curing any ambiguity, defect or
inconsistency, or making any other change that does not, in the opinion of the
Trustee, materially and adversely affect the rights of any holder. Without the
consent of any holder, the Company and the Trustee may amend the Indenture to
cure any ambiguity, omission, defect or inconsistency, to provide for the
assumption by a successor of the obligations of the Company under the Indenture,
to provide for uncertificated Notes in addition to or in place of certificated
Notes (provided, however, that the uncertificated Notes are issued in registered
form for purposes of Section 163(f) of the Code, or in a manner such that the
uncertificated Notes are described in Section 163(f)(2)(B) of the Code), to add
Guarantees with respect to the Notes, to secure the Notes, to add to the
covenants of the Company for the benefit of the holders of the Notes or to
surrender any right or power conferred upon the Company, to provide that any
Indebtedness that becomes or will become an obligation of the Successor Company
pursuant to a transaction governed by the provisions described under "--Merger,
Consolidation or Sale of Assets" (and that is not a Subordinated Obligation) is
Senior
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Subordinated Indebtedness for purposes of this Indenture, to make any change
that does not adversely affect the rights of any holder of the Notes or to
comply with any requirement of the SEC in connection with the qualification of
the Indenture under the TIA. However, no amendment may be made to the
subordination provisions of the Indenture that adversely affects the rights of
any holder of Senior Indebtedness then outstanding unless the holders of such
Senior Indebtedness (or any group or representative thereof authorized to give a
consent) consent to such change.
The Indenture contains provisions permitting the Company, any Guarantors
and the Trustee, with the consent of holders of at least a majority in principal
amount of the outstanding Notes, to modify or supplement the Indenture, except
that no such modification shall, without the consent of each holder affected
thereby:
(1) reduce the amount of Notes whose holders must consent to an
amendment, supplement, or waiver to the Indenture;
(2) reduce the rate of or change the time for payment of interest,
including defaulted interest, on any Note;
(3) reduce the principal of or premium on or change the stated
maturity of any Note or change the date on which any Notes may be subject
to redemption or repurchase or reduce the redemption or repurchase price
therefor;
(4) make any Note payable in money other than that stated in the Note
or change the place of payment from New York, New York;
(5) waive a default on the payment of the principal of, interest on or
redemption payment with respect to any Note;
(6) make any change in provisions of the Indenture protecting the
right of each holder of Notes to receive payment of principal of and
interest on such Notes 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 Notes to waive Defaults or Events of Default;
(7) amend, change or modify in any material respect the obligation of
the Company to make and consummate a Change of Control Offer in the event
of a Change of Control or make and consummate an Excess Proceeds Offer with
respect to any Asset Sale that has been consummated or modify any of the
provisions or definitions with respect thereto; or
(8) modify or change any provision of the Indenture or the related
definitions affecting the subordination or ranking of the Notes or any
Guarantee in a manner which adversely affects the holders of Notes.
In addition, without the consent of the holders of 90% in principal amount
of the Notes then outstanding, no amendment may release any Guarantor from any
of its obligations under its Guarantee or the Indenture otherwise than in
accordance with the terms of the Indenture.
The consent of the holders of the Notes is not necessary under the
Indenture to approve the particular form of any proposed amendment. It is
sufficient if such consent approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, the Company is
required to mail to the holders of the Notes a notice briefly describing such
amendment. However, the failure to give such notice to all holders of the Notes,
or any defect thereby will not impair or affect the validity of the amendment.
REPORTS TO HOLDERS
So long as the Company is subject to the periodic reporting requirements of
Section 13(a) or 15(d) of the Exchange Act, it will continue to furnish (if
permitted) the information required thereby to the Commission and to the holders
of the Notes. The Indenture provides that even if the Company is entitled under
the Exchange Act not to furnish (if permitted) such information to the
Commission or to the holders of the Notes, it will nonetheless continue to
furnish such information to the Commission and holders of the Notes.
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COMPLIANCE CERTIFICATE
The Company is required to deliver to the Trustee, on or before 120 days
after the end of the Company's fiscal year and on or before 60 days after the
end of each of the first, second and third fiscal quarters in each year, an
Officers' Certificate stating whether or not the signers know of any Default or
Event of Default that has occurred and is in existence, and whether the Company
has complied with its obligations under the 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.
THE TRUSTEE
The Trustee under the Indenture will be the Registrar and Paying Agent with
regard to the Notes. The Indenture provides that, except during the continuance
of an Event of Default, the Trustee will perform only such duties as are
specifically set forth in the Indenture. During the existence of an Event of
Default, the Trustee will exercise such rights and powers vested in it under the
Indenture and use the same degree of care and skill in its exercise as a prudent
person would exercise under the circumstances in the conduct of such person's
own affairs.
The Indenture and the TIA will impose certain limitations on the rights of
the Trustee, should it become a creditor of the Company, to obtain payment of
claims in certain cases or to realize on certain property received by it in
respect of any such claims, as security or otherwise. The Trustee is permitted
to engage in other transactions; provided, that if it acquires any conflicting
interest as described in the TIA, it must eliminate such conflict, apply to the
SEC for permission to continue as Trustee with such conflict, or resign.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee or stockholder of the Company, any Guarantor
or any Subsidiary of any thereof shall have any liability for any obligation of
the Company or any Guarantor under the Indenture, the Notes or any Guarantor or
for any claim based on, in respect of, or by reason of, any such obligation or
its creation. Each holder of the Notes, by accepting the Notes, waives and
releases all such liability. The waiver and release are part of the
consideration for issuance of the Notes.
GOVERNING LAW
The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York, without giving
effect to any principles of conflict of laws to the extent that the application
of the law of another jurisdiction would be required thereby.
TRANSFER AND EXCHANGE
Holders of the Notes may transfer or exchange Notes in accordance with the
Indenture. The Registrar under such Indenture may require a holder, among other
things, to furnish appropriate endorsements and transfer documents, and to pay
any taxes and fees required by law or permitted by the Indenture. The Registrar
is not required to transfer or exchange any Note selected for redemption and,
further, is not required to transfer or exchange any Note for a period of
15 days before selection of the Notes to be redeemed.
The registered holder of a Note may be treated as the owner of it for all
purposes.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms as well as any other capitalized terms used herein for which no
definition is provided.
"Acquired Indebtedness" means Indebtedness of a Person (including an
Unrestricted Subsidiary) existing at the time such Person becomes a Restricted
Subsidiary or is merged into or consolidated with any
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other Person or which is assumed in connection with the acquisition of assets
from such Person and, in each case, not incurred by such Person in connection
with, or in anticipation or contemplation of, such Person becoming a Restricted
Subsidiary or such merger, consolidation or acquisition; provided that
Indebtedness of such Person which is redeemed, defeased, retired or otherwise
repaid at the time of or immediately upon consummation of such merger,
consolidation or acquisition shall not be Acquired Indebtedness.
"Affiliate" means, with respect to any specific Person, any other Person
that directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, such specified Person. For the
purposes of this definition, "control" (including, with correlative meanings,
the terms "controlling," "controlled by," and "under common control with"), as
used with respect to any Person, means the possession, directly or indirectly,
of the power to direct or cause the direction of the management or policies of
such Person, whether through the ownership of voting securities, by agreement or
otherwise; provided that, for purposes of the covenant described under "
- --Certain Covenants--Limitation on Transactions with Affiliates" beneficial
ownership of at least 10% of the voting securities of a Person, either directly
or indirectly, shall be deemed to be control.
"Asset Acquisition" means
(1) an Investment by the Company or any Restricted 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
(2) 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, other than to the Company or a Restricted Subsidiary of the
Company, in one or a series of related transactions, of:
(1) any Capital Stock in any Restricted Subsidiary of the Company;
(2) 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
(3) any other properties or assets of the Company or any 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,
damaged equipment or equipment unsuitable for the Company's business or any
sale of any of the Company's products is in the ordinary course of
business) thereof.
For purposes of this definition, the term Asset Sales shall not
include:
(A) 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";
(B) 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 $1.0 million;
(C) any Restricted Payment made in compliance with the "--Certain
Covenants--Limitations on Restricted Payments" covenant, and any
disposition of any Permitted Investment;
(D) surrender or waiver of contract rights or the settlement,
release or surrender of contract, tort or other claims of any kind;
(E) the licensing of intellectual property;
(F) any Sale-Leaseback Transaction; and
(G) any Permitted Receivables Financing.
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"Asset Sale Proceeds" means, with respect to any Asset Sale:
(1) cash received by the Company or any Restricted Subsidiary of the
Company from such Asset Sale, after
(a) provision for all income or other taxes measured by or
resulting from such Asset Sale,
(b) payment of all brokerage commissions, underwriting and other
fees and expenses, including, without limitation, legal, accounting,
investment advisory and appraisal fees, related to such Asset Sale,
(c) provision for minority interest holders in any Restricted
Subsidiary of the Company as a result of such Asset Sale,
(d) repayment of Indebtedness that is required to be repaid in
connection with such Asset Sale or is secured by a Lien on the property
or assets sold, and
(e) deduction of appropriate amounts to be provided by the Company
or a Restricted Subsidiary of the Company as a reserve, in accordance
with GAAP, against any liabilities associated with the assets sold or
disposed of in such Asset Sale and retained by the Company or a
Restricted Subsidiary after such Asset Sale, including, without
limitation, pension, severance, relocation and other post-employment
benefit liabilities and liabilities related to environmental matters or
against any indemnification obligations associated with the assets sold
or disposed of in such Asset Sale; and
(2) promissory notes and other noncash consideration received by the
Company or any Restricted Subsidiary of the Company from such Asset Sale or
other disposition upon the liquidation or conversion of such notes or
noncash consideration into cash, net of any fees, discounts, commissions or
taxes paid or payable as a result of such conversion or liquidation.
"Available Asset Sale Proceeds" means, with respect to any Asset Sale, the
aggregate Asset Sale Proceeds from such Asset Sale that have not been applied in
accordance with clauses (3)(a) or (3)(b), and which have not yet been the basis
for an Excess Proceeds Offer in accordance with clause (3)(c) of the first
paragraph of "--Certain Covenants--Limitation on Asset Sales".
"Capital Stock" means
(1) 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
(2) 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:
(1) any evidence of Indebtedness with a maturity of 365 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);
(2) certificates of deposit, time deposits, Eurodollar time deposits
and bankers' acceptances with a maturity of 365 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;
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(3) commercial paper with a maturity of 365 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;
(4) 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 365 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; and
(5) investments in money market funds with assets of $5.0 million or
greater.
"Certificate of Designation" means the certificate of designation of the
powers, preferences and relative, participating, optional and other special
rights of the Existing Preferred Stock.
"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
either (x) the Permitted Holders or (y) 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.
"Code" means the Internal Revenue Code of 1986, as amended.
"Common Stock" 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 Equity
Incentive Plan (to the extent such
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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
during the four full fiscal quarters for which financial information is
available (the "Four Quarter Period") ending on or prior to the date of the
transaction giving rise to the need to calculate the Consolidated Fixed Charge
Coverage Ratio (the "Transaction Date") 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
(1) 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") and the discharge
of any other Indebtedness repaid, repurchased or otherwise discharged with
as if the discharge had occurred on the first day of 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
(2) 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 Restricted 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 (including any Consolidated EBITDA
associated with such Asset Acquisition and including any pro forma expense
and cost reductions determined in accordance with Article 11 of Regulation
S-X relating to such 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":
(1) 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;
(2) 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;
(3) notwithstanding clauses (1) and (2) 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
(4) interest on any Indebtedness incurred pursuant to a revolving
credit facility will be based on the average monthly 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.
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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, without duplication, of
(i) Consolidated Interest Expense, plus
(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,
plus
(iii) the product of (a) all dividend accruals, whether or not paid or
payable in cash, during such period on any Disqualified Capital Stock of
the Company or any of its Restricted Subsidiaries, and on any Preferred
Stock of Restricted Subsidiaries of the Company, times (b) a fraction, the
numerator of which is one and the denominator of which is one minus the
then current combined federal, state and local statutory tax rate of the
Company, expressed as a decimal, in each case, on a consolidated basis and
in accordance with GAAP, plus
(iv) the product of (a) all dividends actually paid, whether paid in
cash or in any other consideration (but excluding any dividends to the
extent paid through the issuance of additional shares of Qualified Capital
Stock of the Company), during such period with respect to any Designated
Preferred Stock of the Company, times (b) a fraction, the numerator of
which is one and the denominator of which is one minus the then current
combined federal, state and local statutory tax rate of the Company,
expressed as a decimal, in each on a consolidated basis in accordance with
GAAP.
"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,
(1) the 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,
(i) any amortization of debt discount,
(ii) the net cost under Interest Rate Agreements (including any
amortization of discounts),
(iii) the interest portion of any deferred payment obligation
which in accordance with GAAP is required to be reflected on an
income statement,
(iv) all commissions, discounts and other fees and charges owed
with respect to letters of credit and bankers' acceptance financing,
(v) all accrued interest,
(vi) interest-equivalent costs associated with any Permitted
Receivables Financing, whether accounted for as interest expense or
loss on the sale of Receivables and Related Assets, and
(b) the interest component of Capitalized Lease Obligations paid,
accrued and/or scheduled to be paid or accrued by such person and its
Subsidiaries during such period as determined on a consolidated basis in
accordance with GAAP consistently applied, minus,
(2) any non-cash interest expense of the Company in respect of
Permitted Indebtedness incurred in connection with the Equity Incentive
Plan, minus
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(3) 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 determined in accordance with GAAP consistently
applied, adjusted:
(a) to the extent included in calculating such net income, by
excluding, without duplication,
(1) all extraordinary gains and losses, non-recurring cumulative
effect of accounting changes and, without duplication, non-recurring or
unusual gains and losses and all restructuring charges,
(2) 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,
(3) solely for purposes of determining the aggregate amount
available for Restricted Payments under clause (3) of the covenant
"--Limitation on Restricted Payments," 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,
(4) one time unusual non-cash charges,
(5) any gain or loss realized upon the termination of any employee
pension benefit plan, on an after-tax basis,
(6) gains or losses in respect of any Asset Sales (without giving
effect to clause (B) under the definition of Asset Sale) 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,
(7) the net income of any Restricted Subsidiary that is not a
Guarantor 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
(8) the amount of any Consolidated Non-cash Charges attributable to
applying the purchase method of accounting in accordance with GAAP; and
(b) by adding, in the case of the Company,
(1) 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
(2) 100% (without duplication) of all non-cash accruals or cash
expenses relating to the Equity Participation Plan or 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 Senior Credit Facility, together with all amendments,
documents and instruments from time to time delivered in connection with
the Senior Credit Facility (including, without limitation, any guaranty
agreements and security documents), as in effect on the date hereof and as
the Senior Credit Facility and such other agreements, documents and
instruments may be amended, amended and restated,
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refunded, refinanced, replaced, repaid, 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 Senior Credit Facility or any other agreement
deemed a Credit Agreement under clause (a) hereof or under this clause
(b) whether or not with the same agent, trustee, representative lenders or
holders, and 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 agreement deemed a
Credit Agreement under clause (a) or (b) hereof, and all refundings,
refinancings and replacements of any Credit Agreement, including any agreement
(i) changing the maturity of any Indebtedness incurred thereunder or
contemplated thereby, (ii) adding or deleting borrowers or guarantors
thereunder, so long as borrowers and guarantors 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.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Designated Preferred Stock" means Preferred Stock (not constituting
Disqualified Capital Stock) of the Company (excluding the Existing Preferred
Stock, any other Preferred Stock issued on or prior to the Issue Date and any
Preferred Stock issued in exchange or substitution for any of the foregoing)
that is designated as Designated Preferred Stock pursuant to an officer's
certificate executed by the principal executive officer or the principal
financial officer of the Company, on the issuance date thereof, the cash
proceeds of which are excluded from the calculation set forth in the clause
(3)(b) of the "--Limitation on Restricted Payments" covenant.
"Designated Senior Indebtedness," as to the Company or any Guarantor, as
the case may be, means:
(1) any Senior Indebtedness under the Credit Agreement; and
(2) any other Senior Indebtedness which at the time of determination
exceeds $15.0 million in aggregate principal amount (or accreted value in
the case of Indebtedness issued at a discount) outstanding or available
under a committed facility, which is specifically designated in the
instrument evidencing such Senior Indebtedness as "Designated Senior
Indebtedness" by such Person and as to which the Trustee has been given
written notice of such designation.
"Disqualified Capital Stock" means any Capital Stock of a Person or a
Restricted Subsidiary thereof which, by its terms (or by the terms of any
security into which it is convertible or for which it is exchangeable at the
option of the holder), or upon the happening of any event, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable solely at the option of the holder thereof, in whole or in part,
on or prior to the maturity date of the Notes, for cash or securities
constituting Indebtedness; provided, however, that Capital Stock of a Person or
any Restricted Subsidiary thereof that is issued with the benefit of provisions
requiring an offer to be made for such Preferred Stock in the event of a change
of control of or asset sale by such Person or Restricted Subsidiary, which
provisions have substantially the same effect as the provisions of the Indenture
described under "--Change of Control" and "--Certain Covenants--Limitation on
Asset Sales," shall not be deemed to be Disqualified Capital Stock solely by
virtue of such provisions; provided, further, that if such Capital Stock is
issued pursuant to any plan for the benefit of employees of the Company or its
Subsidiaries or by any such plan to such employees, such Capital Stock shall not
constitute Disqualified Capital Stock solely because it may be required to be
repurchased by the Company in order to satisfy applicable statutory or
regulatory obligations.
"Equity Incentive Plan" means any long-term incentive compensation plan
(other than the Equity Participation Plan) adopted by the Company covering the
Company's executives and selected other key management employees, as such plans
may be amended from time to time by the Board of Directors of the Company
pursuant to their terms.
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"Equity Participation Plan" means the Fairfield Manufacturing Company, Inc.
Equity Participation Plan, as such plan may be amended from time to time.
"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 Existing 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 11 1/4% Cumulative
Exchangeable Preferred Stock, par value $.01 per share.
"Event of Default" has the meaning set forth under "--Events of Default"
herein.
"fair market value" means, with respect to any asset or property, the
price, taking into account any liabilities, which could be negotiated in an
arm's-length, free market transaction, for cash, between a willing seller and a
willing and able buyer, neither of whom is under undue pressure or compulsion to
complete the transaction. Fair market value shall be determined by the Board of
Directors of the Company acting reasonably and in good faith and shall be
evidenced by a resolution of the Board of Directors of the Company delivered to
the Trustee.
"GAAP" means generally accepted accounting principles in the United States
applicable as of the Issue Date.
"Guarantee" means the guarantee of the Obligations of the Company with
respect to the Notes by each Guarantor.
"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).
"Hedging Obligations" means, with respect to any Person, the net payment
obligations of such Person under (a) Interest Rate Agreements and (b) other
agreements or arrangements entered into in order to protect such Person against
fluctuations in commodity prices, interest rates or currency exchange rates.
"incur" means, with respect to any Indebtedness of any Person, to create,
issue, incur (by conversion, exchange or otherwise), assume, enter into any
guarantee of, or otherwise become liable in respect of such Indebtedness or the
recording, as required pursuant to GAAP or otherwise, of any such Indebtedness
on the balance sheet of such Person (and "incurrence," "incurred," "incurrable,"
and "incurring" shall have meanings correlative to the foregoing); provided that
a change in GAAP that results in an obligation of such Person that exists at
such time becoming Indebtedness shall not be deemed an incurrence of such
Indebtedness.
"Indebtedness" means, with respect to any Person, without duplication:
(1) all indebtedness of such Person for borrowed money or for the
deferred purchase price of property or services, excluding any trade
payables and other accrued current liabilities incurred in the ordinary
course of business, but including, without limitation, all obligations,
including reimbursement and similar obligations, of such Person in
connection with any letters of credit, banker's acceptance or other similar
credit transaction;
(2) all obligations of such Person evidenced by bonds, notes,
debentures or other similar instruments;
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(3) 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;
(4) all Capitalized Lease Obligations and Purchase Money Indebtedness
of such Person;
(5) all Indebtedness referred to in the preceding clauses of other
Persons, the payment of which is 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);
(6) all guarantees of Indebtedness referred to in this definition by
such Person;
(7) all Disqualified Capital Stock valued at its mandatory maximum
redemption price or liquidation preference plus accrued dividends;
(8) all net obligations under or in respect of Hedging Obligations of
such Person; and
(9) any amendment, supplement, modification, deferral, renewal,
extension or refunding of any liability of the types referred to in clauses
(1) through (8) above.
For purposes hereof, 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.
For purposes of determining compliance with, and the outstanding principal
amount of any particular Indebtedness:
(1) any other obligation of the obligor of such Indebtedness (or of
any other Person who could have incurred such Indebtedness under this
covenant) arising under any guarantee, Lien, or letter of credit supporting
such Indebtedness shall be disregarded to the extent that such guarantee,
Lien or letter of credit secures the principal amount of such Indebtedness;
(2) in the event that Indebtedness meets the criteria of more than one
type of Indebtedness, the Company, in its sole discretion, shall classify
such item of Indebtedness and only be required to include the amount and
type of such Indebtedness in one of such clauses;
(3) Indebtedness which provides that an amount less than the principal
amount thereof shall be due upon any declaration of acceleration thereof
shall be deemed to be incurred or outstanding in an amount equal to the
accreted value thereof at the date of determination; and
(4) for purposes of determining compliance with any U.S.
dollar-denominated restrictions on the incurrence of Indebtedness
denominated in a foreign currency, the U.S. dollar-equivalent principal
amount of such Indebtedness incurred pursuant thereto shall be calculated
based on the relevant currency exchange rate in effect on the date that
such Indebtedness was incurred if such Indebtedness is incurred to
refinance other Indebtedness denominated in a foreign currency, and such
refinancing would cause the applicable U.S. dollar-denominated restriction
to be exceeded if calculated at the relevant currency exchange rate in
effect on the date of such refinancing, such U.S. dollar-denominated
restriction shall be deemed not to have been exceeded so long as the
principal amount of such refinancing Indebtedness does not exceed the
principal amount of such Indebtedness being refinanced.
"Independent Financial Advisor" means an accounting, valuation or
investment banking firm of national reputation in the United States which, in
the judgment of the Board of Directors of the Company, is otherwise independent
and qualified to perform the task for which it is to be engaged.
"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
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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 of 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 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 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 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 the Notes are first issued by the Company and
authenticated by the Trustee under the Indenture.
"Lancer" means Lancer Industries Inc., a Delaware corporation.
"Lien" means, with respect to any property or assets of any Person, any
mortgage or deed of trust, pledge, hypothecation, assignment, deposit
arrangement, security interest, lien, charge, easement, encumbrance, preference,
priority, or other security agreement of any kind on or with respect to such
property or assets (including without limitation, any Capitalized Lease
Obligation, conditional sales, or other title retention agreement having
substantially the same economic effect as any of the foregoing).
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Proceeds" means:
(1) in the case of any sale of Capital Stock by or equity contribution
to any Person, the aggregate net proceeds received by such Person, after
payment of expenses, commissions and the like incurred in connection
therewith, whether such proceeds are in cash or in property (valued at the
fair market value thereof, as determined in good faith by the Board of
Directors of such Person, at the time of receipt);
(2) in the case of any exchange, exercise, conversion or surrender of
outstanding securities of any kind for or into shares of Capital Stock of
the Company which is not Disqualified Capital Stock, the net book value of
such outstanding securities on the date of such exchange, exercise,
conversion or surrender (plus any additional amount required to be paid by
the holder to such Person upon such exchange, exercise, conversion or
surrender, less any and all payments made to the holders, e.g., on account
of fractional shares and less all expenses incurred by such Person in
connection therewith); and
(3) in the case of any issuance of any Indebtedness by the Company or
any Restricted Subsidiary, the aggregate net cash proceeds received by such
Person after the payments of expenses, commissions, underwriting discounts
and the like incurred in connection therewith.
"Non-Payment Event of Default" means any event (other than a Payment
Default) the occurrence of which entitles, or, after passage of time, would
entitle one or more Persons to accelerate the maturity of any Designated Senior
Indebtedness.
"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.
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"Officer's Certificate" means, with respect to any Person, a certificate
signed by the Chief Executive Officer, the Chief Operating Officer, Chief
Financial Officer, the President, any Vice President or any Treasurer or
Secretary of such Person that shall comply with applicable provisions of the
Indenture.
"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 Indebtedness.
"Permitted Holders" means (i) Lancer and its Affiliates, (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), (iii) Canadian
Imperial Bank of Commerce and its Affiliates, and (iv) Paul S. Levy and his
Affiliates.
"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 sum of (A) the greater of (x) $60,000,000 and (y) the amount
equal to the sum of 85% 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 and (B) any amounts outstanding under the Senior
Credit Facility that utilize subclause (13) of this definition (less the
amount of net proceeds which have been received in connection with the
applicable Permitted Receivables Financing; provided that such reduction
shall apply only for so long as a Permitted Receivables Financing is in
effect);
(2) Indebtedness of the Company and its Restricted Subsidiaries
pursuant to the Initial Notes, the Exchange Notes issued in exchange for
the Initial Notes and any Notes issued in exchange or replacement of the
Initial Notes or the Exchange Notes, and any Guarantees of the foregoing;
(3) Indebtedness of the Company outstanding on the date of the
Indenture; provided, a notice of redemption for the Existing Notes shall be
given in accordance with Article Eleven of the Existing Indenture on or
prior to June 30, 1999;
(4) Hedging Obligations entered into in the ordinary course of the
Company's or its Restricted Subsidiaries' business and not for speculative
purposes;
(5) Indebtedness of a Restricted Subsidiary of the Company (x) to the
Company or (y) to another Restricted Subsidiary of the Company; provided,
however, that any such Indebtedness of a 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 (other than Permitted
Indebtedness of such Restricted Subsidiary);
(6) Indebtedness of the Company to a 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 Notes 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
Indenture and the Notes; provided, however, that any subsequent issuance or
transfer of Capital Stock that results in such Restricted Subsidiary
ceasing to be such, or any subsequent transfer of such Indebtedness (other
than to the Company or a Restricted Subsidiary) will be deemed, in each
case, to constitute the issuance of such Indebtedness by the Company or of
such Indebtedness by such Restricted Subsidiary;
(7) Indebtedness of the Company to T-H Licensing which complies with
the "--Limitation on Transactions with Affiliates" covenant;
(8) Indebtedness of the Company or any Guarantor representing
Capitalized Lease Obligations and Purchase Money Indebtedness 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
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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;
(9) 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;
(10) Indebtedness of the Company or any Restricted Subsidiary
consisting of guarantees, indemnities or obligations in respect of purchase
price adjustments (including adjustments in the purchase price related to
the performance or results of any acquired business) in connection with the
acquisition or disposition of assets permitted under the Indenture;
(11) Any Indebtedness or other obligations of the Company issued to
participants in the Equity Incentive Plan or Equity Participation Plan,
provided that such Indebtedness is subordinated in right of payment to the
Notes;
(12) Indebtedness arising by reason of any Lien created or permitted
to exist in compliance with the "--Limitation on Liens" covenant;
(13) Indebtedness of a Receivables Subsidiary pursuant to a Permitted
Receivables Financing; provided that after giving effect to the incurrence
thereof, the Company could incur at least $1.00 of Indebtedness under
subclause (1) of this definition in compliance with the "--Limitation on
Incurrence of Additional Indebtedness" covenant;
(14) Indebtedness of the Company or any of its Restricted Subsidiaries
represented by letters of credit for the account of the Company or such
Restricted Subsidiary, as the case may be, issued in the ordinary course of
business of the Company or such Restricted Subsidiary, including, without
limitation, in order to provide security for worker's compensation claims
or payment obligations in connection with self-insurance or similar
requirements in the ordinary course of business and other Indebtedness with
respect to workers' compensation claims, self-insurance obligations,
insurance purposes, performance, surety and similar bonds and completion
guarantees provided by the Company or any Restricted Subsidiary in the
ordinary course of business;
(15) Guarantees of Indebtedness otherwise permitted under the
Indenture;
(16) Obligations in respect of trade letters of credit, performance
and surety bonds and completion guarantees provided by the Company or any
Restricted Subsidiary in the ordinary course of business;
(17) Indebtedness of the Company or any Guarantor (which may but is
not required to be incurred under the Credit Agreement) in addition to that
described in clauses (1) through (16) above not to exceed $20 million
outstanding at any time in the aggregate; Indebtedness may be incurred
under the Credit Agreement; or
(18) (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 Notes but excluding the Existing Notes) 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 (18) (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 accrued and unpaid interest thereon 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
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accomplish such refinancing by means of a tender offer or privately
negotiated purchase, plus the amount of expenses (including discounts and
commissions) in connection therewith and (B) in the case of any refinancing
of Indebtedness that is not Senior Indebtedness, (1) such new Indebtedness
is made subordinated to or pari passu with the Notes 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.
For purposes of determining compliance with the covenant under
"--Limitation on Incurrence of Additional Indebtedness," in the event an item of
Indebtedness meets the criteria of more than one of the categories of Permitted
Indebtedness, or is entitled to be incurred pursuant to the second sentence of
the covenant under "--Limitation on Incurrence of Additional Indebtedness," the
Company shall, at its sole discretion, classify such item of Indebtedness as any
of the appropriate items of Permitted Indebtedness or as Indebtedness being
incurred pursuant to the second sentence of the covenant under "--Limitation on
Incurrence of Additional Indebtedness" and thereafter may, at its sole
discretion, reclassify such item of Indebtedness from time to time in any manner
that complies with the definition of Permitted Indebtedness and/or the second
sentence of the covenant under "--Limitation on Incurrence of Additional
Indebtedness."
"Permitted Investment" means any of the following:
(1) Investments by the Company or any 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 Restricted
Subsidiary;
(2) 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;
(3) Investments in commercial paper issued by corporations, each of
which shall have a consolidated net worth of at least $100,000,000 maturing
within 365 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;
(4) 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;
(5) 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;
(6) Investments in cash and Cash Equivalents;
(7) Investments in prepaid expenses, negotiable instruments held for
collection and lease, utility and workers compensation, performance and
similar deposits entered into as a result of the operations of the business
in the ordinary course;
(8) loans and advances to officers of the Company and its Restricted
Subsidiaries made in compliance with clause (G) of the second paragraph
under the covenant "--Limitation on Transactions with Affiliates" described
above;
(9) Investments by the Company or a Restricted Subsidiary in a
Restricted Subsidiary;
(10) 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 (2), (3),
(4) or (6) above;
(11) Investments in any of the Notes;
(12) receivables owing to the Company or any Restricted Subsidiary
created in the ordinary course of business;
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(13) Investments consisting of Indebtedness permitted under clause
(5) of the definition of Permitted Indebtedness; and
(14) Hedging obligations entered into in the ordinary course of the
Company's or its Restricted Subsidiaries business and not for speculative
purposes;
(15) Guarantees of Indebtedness and other obligations otherwise
permitted under the Indenture;
(16) Investments made by the Company or its Restricted Subsidiaries as
a result of consideration received in connection with an Asset Sale made in
compliance with the "Limitation on Asset Sales" covenant;
(17) Investments in connection with a Permitted Receivables Financing
by or to any Receivables Subsidiary, including Investments of funds held in
accounts permitted or required by the arrangements governing such Permitted
Receivables Financing or any related Indebtedness; and
(18) Investments in the aggregate amount of $20 million at any time
outstanding.
"Permitted Liens" means the following types of Liens:
(1) Liens for taxes, assessments or governmental charges or claims
either (a) not delinquent, (b) that would not have a material adverse
effect on the business, condition (financial or otherwise), results of
operations or prospects of the Company and its Subsidiaries, taken as a
whole, or (c) 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;
(2) 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);
(3) deposits or pledges in connection with bids, tenders, leases and
contracts (other than contracts for the payment of money);
(4) 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;
(5) 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;
(6) 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;
(7) 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; or that would not have a material adverse effect on the business,
condition (financial or otherwise), results of operations or prospects of
the Company and its Subsidiaries, taken as a whole;
(8) leases, subleases, licenses or sublicenses to third parties;
(9) Liens securing Indebtedness incurred in compliance with the
"--Limitation on Incurrence of Additional Indebtedness" covenant;
(10) Liens existing on, or provided for under written arrangements
existing on, the Issue Date, or (in the case of any such Liens securing
Indebtedness of the Company or any of its Subsidiaries existing
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or arising under written arrangements existing on the Issue Date) securing
any Refinancing Indebtedness in respect of such Indebtedness so long as the
Lien securing such Refinancing Indebtedness is limited to all or part of
the same property or assets (plus improvements, accessions, proceeds or
dividends or distributions in respect thereof) that secured (or under such
written arrangements could secure) the original Indebtedness;
(11) Liens securing Hedging Obligations;
(12) Liens arising out of judgments, decrees, orders or awards in
respect of which the Company shall in good faith be prosecuting an appeal
or proceedings for review, which appeal or proceedings shall not have been
finally terminated, or if the period within which such appeal or
proceedings may be initiated shall not have expired;
(13) Liens on properties or assets of the Company or any Restricted
Subsidiary securing Senior Indebtedness;
(14) Liens existing on property or assets of a Person at the time such
Person becomes a Subsidiary of the Company (or at the time the Company or a
Restricted Subsidiary acquires such property or assets); provided, however,
that such Liens are not created in connection with, or in contemplation of,
such other Person becoming such a Subsidiary (or such acquisition of such
property or assets), and that such Liens are limited to all or part of the
same property or assets (plus improvements, accessions, proceeds or
dividends or distributions in respect thereof) that secured (or, under the
written arrangements under which such Liens arose, could secure) the
obligations to which such Liens relate;
(15) Liens on Capital Stock of an Unrestricted Subsidiary that secure
Indebtedness or other obligation of such Unrestricted Subsidiary;
(16) Liens securing the Existing Notes, the Notes, the Exchange Notes
or the Exchange Debentures;
(17) Liens securing Refinancing Indebtedness incurred in respect of
any Indebtedness secured by, or securing any refinancing, refunding,
extension, renewal or replacement (in whole or in part) of any other
obligation secured by, any other Permitted Liens, provided that any such
new Lien is limited to all or part of the same property or assets (plus
improvements, accessions, proceeds or dividends or distributions in respect
thereof) that secured (or, under the written arrangements under which the
original Lien arose could secure) the obligations to which such Liens
relate; and
(18) Liens securing letters of credit entered into the ordinary course
of business and consistent with past business practice;
(19) Liens in favor of the Company or any Restricted Subsidiary;
(20) Liens securing Purchase Money Indebtedness;
(21) Liens on and pledges of the stock of any Unrestricted Subsidiary
securing any Indebtedness of such Unrestricted Subsidiary;
(22) Liens on Receivables and Related Assets securing Indebtedness or
otherwise permitted to be incurred, in each case, with a Permitted
Receivables Financing.
"Permitted Receivables Financing" means a transaction or series of
transactions (including amendments, supplements, extensions, renewals,
replacements, refinancings or modifications thereof) pursuant to which a
Receivables Subsidiary purchases Receivables and Related Assets from the Company
or any Subsidiary and finances such Receivables and Related Assets through the
issuance of indebtedness or equity interests or through the sale of the
Receivables and Related Assets or a fractional undivided interest in the
Receivables and Related Assets; provided that:
(1) the Board of Directors shall have determined in good faith that
such Permitted Receivables Financing is economically fair and reasonable to
the Company and the Receivables Subsidiary;
(2) all sales of Receivables and Related Assets to or by the
Receivables Subsidiary are made at fair market value (as determined in good
faith by the Board of Directors of the Company);
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(3) the financing terms, covenants, termination events and other
provisions thereof shall be market terms (as determined in good faith by
the Board of Directors of the Company);
(4) no portion of the Indebtedness of a Receivables Subsidiary is
Guaranteed by or is recourse to the Company or any Restricted Subsidiary
(other than recourse for customary representations, warranties, covenants
and indemnities, none of which shall relate to the collectibility of the
Receivables and Related Assets); and
(5) neither the Company nor any Subsidiary has any obligation to
maintain or preserve the Receivable Subsidiary's financial condition.
"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 Stock" means any Capital Stock of a Person, however designated,
which entitles the holder thereof to a preference with respect to dividends,
distributions or liquidation proceeds of such Person over the holders of other
Capital Stock issued by such Person.
"Property" of any Person means all types of real, personal, tangible,
intangible or mixed property owned by such Person whether or not included in the
most recent consolidated balance sheet of such Person and its Subsidiaries under
GAAP.
"Purchase Money Indebtedness" means any Indebtedness incurred in the
ordinary course of business by a Person to finance the cost (including the cost
of construction) of an item of property, the principal amount of which
Indebtedness does not exceed the sum of (i) 100% of such cost and (ii)
reasonable fees and expenses of such Person incurred in connection therewith.
"Qualified Capital Stock" means any Capital Stock that is not Disqualified
Capital Stock.
"Qualified Equity Offering" means a sale by the Company of shares of its
Qualified Capital Stock (however designated and whether voting or non-voting)
and any and all rights, warrants or options to acquire such Qualified Capital
Stock.
"Receivables and Related Assets" means accounts receivable and instruments,
chattel paper, obligations, general intangibles and other similar assets, in
each case relating to such receivables, including interests in merchandise or
goods, the sale or lease of which gave rise to such receivable, related
contractual rights, guarantees, insurance proceeds, collections, other related
assets and proceeds of all of the foregoing.
"Receivables Subsidiary" means a wholly owned Subsidiary which is
established for the limited purpose of acquiring and financing Receivables and
Related Assets and engaging in activities ancillary thereto.
"Restricted Payment" means any of the following:
(1) the declaration or payment of any dividend or any other
distribution or payment on Capital Stock of the Company or any Restricted
Subsidiary of the Company or any payment made to the direct or indirect
holders (in their capacities as such) of Capital Stock of the Company or
any Restricted Subsidiary of the Company (other than (a) dividends or
distributions payable solely in Capital Stock (other than Disqualified
Capital Stock) or in options, warrants or other rights to purchase such
Capital Stock (other than Disqualified Capital Stock), (b) in the case of
Restricted Subsidiaries of the Company, dividends or distributions payable
to the Company or to a Wholly Owned Restricted Subsidiary of the Company
and (c) other pro rata dividends or other distributions made by a
Restricted Subsidiary of the Company that is not a Wholly Owned Restricted
Subsidiary to minority stockholders);
(2) the purchase, redemption or other acquisition or retirement for
value of any Capital Stock of the Company or any of its Restricted
Subsidiaries (other than Capital Stock owned by the Company or a Wholly
Owned Restricted Subsidiary of the Company, excluding Disqualified Capital
Stock) or any option, warrants or other rights to purchase such Capital
Stock;
(3) the making of any principal payment on, or the purchase,
defeasance, repurchase, redemption or other acquisition or retirement for
value, prior to any scheduled maturity, scheduled repayment or scheduled
sinking fund payment, of any Indebtedness which is subordinated in right of
payment to the Notes (other than
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subordinated Indebtedness acquired in anticipation of satisfying a
scheduled sinking fund obligation, principal installment or final maturity,
in each case due within one year of the date of acquisition);
(4) the making of any Investment in any Person other than a Permitted
Investment; and
(5) forgiveness of any Indebtedness of an Affiliate of the Company to
the Company or a Restricted Subsidiary of the Company.
For purposes of determining the amount expended for Restricted Payments,
cash distributed or invested shall be valued at the face amount thereof and
property other than cash shall be valued at its fair market value.
"Restricted Subsidiary" means (i) T-H Licensing, Inc. and (ii) any other
Subsidiary of the Company other than an Unrestricted Subsidiary.
"Sale and Lease-Back Transaction" means any arrangement with any Person
providing for the leasing by the Company or any Restricted Subsidiary of the
Company of any real or tangible personal property, which property has been or is
to be sold or transferred by the Company or such Restricted Subsidiary to such
Person in contemplation of such leasing.
"S&P" means Standard & Poor's Corporation and its successors.
"Senior Credit Facility" means the Loan Agreement, dated as of July 7,
1993, among the Company, the lenders named therein and General Electric Capital
Corporation, as agent for such lenders and other financial institutions party
thereto from time to time as such agreement may be assumed by any successor in
interest, and as such agreement may be amended, supplemented, waived or
otherwise modified from time to time, or refunded, refinanced, restructured,
replaced, renewed, repaid, increased or extended from time to time (whether in
whole or in part, whether with the original agent and lenders or other agents
and lenders or otherwise).
"Senior Indebtedness" means the principal of and premium, if any, and
interest on, and any and all other fees, expense reimbursement obligations and
other amounts due pursuant to the terms of all agreements, documents and
instruments providing for, creating, securing or evidencing or otherwise entered
into in connection with:
(1) all Indebtedness of the Company owed to lenders under the Credit
Agreement or Designated Senior Indebtedness;
(2) all obligations of the Company with respect to any Hedging
Obligations;
(3) all obligations of the Company to reimburse any bank or other
person in respect of amounts paid under letters of credit, acceptances or
other similar instruments;
(4) all other Indebtedness of the Company which does not provide that
it is to rank pari passu with or subordinate to the Notes; and
(5) all deferrals, renewals, extensions and refundings of, and
amendments, modifications and supplements to, any of the Senior
Indebtedness described above.
Notwithstanding anything to the contrary in the foregoing, Senior
Indebtedness will not include:
(A) Indebtedness of the Company to any of its Subsidiaries, or to any
Affiliate of the Company (other than in connection with customary
commercial banking services);
(B) Indebtedness represented by the Notes;
(C) Indebtedness represented by the Exchange Debentures, if issued in
accordance with the Exchange Indenture;
(D) any Indebtedness which by the express terms of the agreement or
instrument creating, evidencing or governing the same is junior or
subordinate in right of payment to any item of Senior Indebtedness;
(E) any trade payable arising from the purchase of goods or materials
or for services obtained in the ordinary course of business;
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(F) that portion of any Indebtedness of the Company that at the time
of incurrence is incurred in violation of the Indenture, unless such
Indebtedness consists of Designated Senior Indebtedness, and the holder(s)
of such Indebtedness and their agents and representatives (i) had no actual
knowledge at the time of incurrence that the incurrence of such
Indebtedness violated the Indenture and (ii) shall have received a
certificate from an officer of the Company to the effect that the
incurrence of such Indebtedness does not violate the provisions of the
Indenture;
(G) Indebtedness represented by Disqualified Capital Stock; and
(H) any Indebtedness to or guaranteed on behalf of any shareholders of
the Company or any Subsidiary of the Company.
"Senior Subordinated Indebtedness" means the Notes and any other
Indebtedness of the Company that specifically provides that such indebtedness is
to rank pari passu in right of payment with the Notes.
"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 Note or any
installment of interest thereon, the date specified in such Note as the fixed
date on which any principal of such Note 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.
"Subordinated Obligation" means any Indebtedness of the Company (whether
outstanding on the date of the Indenture or thereafter incurred) that is
expressly subordinate in right of payment to the Notes pursuant to a written
agreement.
"Subsidiary", with respect to any Person, means:
(1) 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
(2) 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. See
"Related Transactions--Tax Sharing Agreement."
"Unrestricted Subsidiary" means a Subsidiary of the Company designated as
such by the Company:
(1) no portion of the Indebtedness or any other obligation (contingent
or otherwise) of which
(a) is guaranteed by the Company or any Restricted Subsidiary of
the Company,
(b) is recourse to or obligates the Company or any Restricted
Subsidiary of the Company in any way (other than solely with respect to
the stock of such Unrestricted Subsidiary) or
(c) subjects any property or asset of the Company or any Restricted
Subsidiary of the Company, directly or indirectly, contingently or
otherwise, to the satisfaction thereof (other than solely with respect
to the stock of such Unrestricted Subsidiary); and
(2) with which neither the Company nor any Restricted Subsidiary of
the Company has any obligation (other than by the terms of the Indenture)
(a) to subscribe for additional shares of Capital Stock or other equity
interest therein or (b) 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 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
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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 Indenture.
"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
(1) the then outstanding aggregate principal amount of such
Indebtedness into
(2) the total of the product obtained by multiplying (a) 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 (b) 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.
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THE EXCHANGE OFFER
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and reference is made to the
provisions of the Registration Rights Agreement, which has been filed as an
exhibit to the Registration Statement.
TERMS OF THE EXCHANGE OFFER
General
In connection with the issuance of the Old Notes pursuant to a Notes
Purchase Agreement, dated as of May 12, 1999, between Fairfield Manufacturing
Company, Inc. and CIBC World Markets Corp., Fleet Securities, Inc., ING Baring
Furman Selz LLC and Schroder & Co. Inc. (the "Initial Purchasers"), the Initial
Purchasers and their respective assignees became entitled to the benefits of the
Registration Rights Agreement.
Under the Registration Rights Agreement, the Company has agreed (1) to use
its best efforts to cause to be filed with the Commission the Registration
Statement of which this prospectus is a part with respect to a registered offer
to exchange the Old Notes for the New Notes and (2) to use its reasonable best
efforts to consummate the Exchange Offer within 45 days after the date on which
the Registration Statement is declared effective. 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 Old Notes. The Exchange Offer being
made hereby, if consummated within 180 days after the initial issuance of the
Old Notes, will satisfy those requirements under the Registration Rights
Agreement.
Upon the terms and subject to the conditions set forth in this prospectus
and in the Letters of Transmittal, all Old Notes 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 Notes will be issued in exchange for an equal
principal amount of outstanding Old Notes accepted in the Exchange Offer. Old
Notes may be tendered only in integral multiples of $1,000. This Prospectus,
together with the Letters of Transmittal, is being sent to all registered
holders as of July 7, 1999. The Exchange Offer is not conditioned upon any
minimum principal amount of Old Notes being tendered for exchange. However, the
obligation to accept Old Notes for exchange pursuant to the Exchange Offer is
subject to certain customary conditions as set forth herein under
"--Conditions."
Old Notes 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 Old
Notes for the purposes of receiving the New Notes and delivering New Notes 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 Holdings
Corporation (available May 13, 1988), Morgan Stanley & Co. Incorporated
(available June 5, 1991), K-III Communications Corporation (available May 14,
1993) and Shearman & Sterling (available July 2, 1993)), the Company believes
that the New Notes issued pursuant to the Exchange Offer may be offered for
resale, resold and otherwise transferred by any holder thereof (other than any
such holder that is 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:
o such New Notes are acquired in the ordinary course of business;
o at the time of the commencement of the Exchange Offer such holder has no
arrangement or understanding with any person to participate in a
distribution of such New Notes; and
o such holder is not engaged in, and does not intend to engage in, a
distribution of such New Notes.
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 Notes as it has in such no-action letters.
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By tendering Old Notes in exchange for New Notes and executing the Letter
of Transmittal, each holder will represent to the Company that:
o any New Notes to be received by it will be acquired in the ordinary
course of business;
o it has no arrangements or understandings with any person to participate
in the distribution of the Old Notes or New Notes within the meaning of
the Securities Act; and
o it is not an "affiliate," as defined in Rule 405 under the Securities
Act, of the Company.
If such holder is a broker-dealer who acquired the Old Notes, as a result
of market-making activities or other trading activities, such holder must
acknowledge it will deliver a prospectus in connection with any resale of New
Notes. See "Plan of Distribution." Each holder, whether or not it is a
broker-dealer, shall also represent that it is not acting on behalf of any
person that could not truthfully make any of the foregoing representations
contained in this paragraph. If a holder of Old Notes 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.
Upon consummation of the Exchange Offer, subject to certain limited
exceptions, holders of Old Notes who do not exchange their Old Notes for New
Notes in the Exchange Offer will no longer be entitled to registration rights
and will not be able to offer or sell their Old Notes, unless such Old Notes are
subsequently 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. Subject to limited exceptions, the Company
will have no obligation to effect a subsequent registration of the Old Notes.
Expiration Date; Extensions; Amendments; Termination
The term "Expiration Date" shall mean August 9, 1999, 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.
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
Old Notes 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 (1) to delay acceptance of any Old Notes, to
extend the Exchange Offer or to terminate the Exchange Offer and not permit
acceptance of Old Notes 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 prior to the Expiration Date, by giving oral or written
notice of such delay, extension or termination to the Exchange Agent, or (2) to
amend the terms of the Exchange Offer in any manner deemed by it to be
advantageous to the holders of the Old Notes. 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 Old Notes 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.
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INTEREST ON THE NEW NOTES
The New Notes will accrue interest at the rate of 9 5/8% per annum from the
last interest payment date on which interest was paid on the Old Note
surrendered in exchange therefor, or, if no interest has been paid on such Old
Note, from the Issue Date, provided, that if an Old Note is surrendered for
exchange on or after a record date for an interest payment date that will occur
on or after the date of such exchange and as to which interest will be paid,
interest on the New Note received in exchange therefor will accrue from the date
of such interest payment date. Interest on the New Notes is payable on April 15
and October 15 of each year, commencing October 15, 1999. No additional interest
will be paid on Old Notes tendered and accepted for exchange.
PROCEDURES FOR TENDERING
To tender in the Exchange Offer, a holder must complete, sign and date the
applicable 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:
o certificates of such Old Notes must be received by the Exchange Agent
along with the applicable Letter of Transmittal; or
o a timely confirmation of a book-entry transfer (a "Book-Entry
Confirmation") of such Old Notes, if such procedure is available, 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 with the applicable Letter of Transmittal; or
o the holder must comply with the guaranteed delivery procedures described
below.
The method of delivery of Old Notes, Letter of Transmittal and all other
required documents 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 Old Notes, Letters of Transmittal or other
required documents should be sent to the Company. Delivery of all Old Notes (if
applicable), Letters of Transmittal and other 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 Old Notes 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 Old Notes are registered in the name of a broker, dealer, commercial
bank, trust company or other nominee and who wishes to tender should contact
such registered holder promptly and instruct such registered holder to tender on
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
Rule17Ad-15 under the Exchange Act (each an "Eligible Institution") unless the
Old Notes tendered pursuant thereto are tendered (i) by a registered holder of
Old Notes who has not completed the box entitled "Special Issuance Instructions"
or " Special Delivery Instructions" on the applicable Letter of Transmittal or
(ii) 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, time of receipt and
withdrawal of the tendered Old Notes will be determined by the Company in its
sole discretion, which determination will be final and
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binding. the Company reserves the absolute right to reject any and all Old Notes
not properly tendered or any Old Notes 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 Old
Notes. The Company's interpretation of the terms and conditions of the Exchange
Offer, including the instructions in the Letters of Transmittal, will be final
and binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Old Notes must be cured within such time as the
Company shall determine. 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 Old Notes, nor shall any of them incur any liability
for failure to give such notification. Tenders of Old Notes will not be deemed
to have been made until such irregularities have been cured or waived. Any Old
Notes received by the Exchange Agent that are not properly tendered and as to
which the defects or irregularities have not been cured or waived will be
returned 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 Indenture:
o to purchase or make offers for any Old Notes that remain outstanding
subsequent to the Expiration Date or, as set forth under "--Conditions,"
to terminate the Exchange Offer;
o to redeem Old Notes as a whole or in part at any time and from time to
time, as set forth under "Description of the Notes--Optional Redemption;"
and
o to the extent permitted under applicable law, to purchase Old Notes 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 OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
all Old Notes properly tendered will be accepted promptly after the Expiration
Date, and the New Notes will be issued promptly after acceptance of the Old
Notes. See "--Conditions." For purposes of the Exchange Offer, Old Notes 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. For
each Old Note accepted for exchange, the holder of such Old Note will receive a
New Note having a principal amount equal to that of the surrendered Old Note. In
all cases, issuance of New Notes for Old Notes that are accepted for exchange
pursuant to the Exchange Offer will be made only after timely receipt by the
Exchange Agent of:
o certificates for such Old Notes or a timely Book-Entry Confirmation of
such Old Notes into the Exchange Agent's account at the applicable
Book-Entry Transfer Facility;
o a properly completed and duly executed Letter of Transmittal; and
o all other required documents.
If any tendered Old Notes are not accepted for any reason set forth in the
terms and conditions of the Exchange Offer, such unaccepted or such nonexchanged
Old Notes will be returned without expense to the tendering holder thereof (if
in certificated form) or 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 Old Notes at the applicable 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 such Book-Entry Transfer
Facility's systems may make book-entry delivery of Old Notes by causing such
Book-Entry Transfer Facility to transfer such Old Notes 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, although
delivery of
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Old Notes may be effected through book-entry transfer at the applicable
Book-Entry Transfer Facility, the applicable Letter of Transmittal or facsimile
thereof with any required signature guarantees 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.
EXCHANGING BOOK-ENTRY NOTES
The Exchange Agent and the Book-Entry Transfer Facility have confirmed that
any financial institution that is a participant in the Book-Entry Transfer
Facility may utilize the Book-Entry Transfer Facility Automated Tender Offer
Program ("ATOP") procedures to tender Old Notes.
Any participant in the applicable Book-Entry Transfer Facility may make
book-entry delivery of Old Notes by causing such Book-Entry Transfer Facility to
transfer such Old Notes into the Exchange Agent's account in accordance with
such Book-Entry Transfer Facility's ATOP procedures for transfer. However, the
exchange for the Old Notes so tendered will only be made after a Book-Entry
Confirmation of such book-entry transfer of Old Notes into the Exchange Agent's
account, and timely receipt by the Exchange Agent of an Agent's Message and any
other documents required by the Letter of Transmittal. The term "Agent's
Message" means a message, transmitted by the Book-Entry Transfer Facility and
received by the Exchange Agent and forming part of a Book-Entry Confirmation,
which states that the Book-Entry Transfer Facility has received an express
acknowledgment from a participant tendering Old Notes that are the subject of
such Book-Entry Confirmation that such participant has received and agrees to be
bound by the terms of the Letter of Transmittal, and that the 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:
o the tender is made through an Eligible Institution;
o prior to the Expiration Date, the Exchange Agent receives by facsimile
transmission, mail or hand delivery from such Eligible Institution a
properly completed and duly executed Letter of Transmittal and Notice of
Guaranteed Delivery, substantially in the form provided by the Company,
which:
(1) sets forth the name and address of the holder of Old Notes and the
amount of Old Notes tendered;
(2) states that the tender is being made thereby; and
(3) guarantees that within three New York Stock Exchange ("NYSE")
trading days after the date of execution of the Notice of
Guaranteed Delivery, the certificates for all physically tendered
Old Notes, in proper form for transfer, or a Book-Entry
Confirmation, as the case may be, and any other documents required
by the Letter of Transmittal will be deposited by the Eligible
Institution with the Exchange Agent; and
o the certificates for all physically tendered Old Notes, in proper form
for transfer, or a Book-Entry Confirmation, as the case may be, 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 Old Notes 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:
o specify the name of the person having tendered the Old Notes to be
withdrawn;
o identify the Old Notes to be withdrawn, including the principal amount of
such Old Notes;
o in the case of Old Notes tendered by book-entry transfer, specify the
number of the account at the Book-Entry Transfer Facility from which the
Old Notes were tendered and specify the name and number of the account at
the Book-Entry Transfer Facility to be credited with the withdrawn Old
Notes and otherwise comply with the procedures of such facility;
o contain a statement that such holder is withdrawing its election to have
such Old Notes exchanged;
o be signed by the holder in the same manner as the original signature on
the Letter of Transmittal by which such Old Notes were tendered,
including any required signature guarantees, or be accompanied by
documents of transfer to have the trustee with respect to the Old Notes
register the transfer of such Old Notes in the name of the person
withdrawing the tender; and
o specify the name in which such Old Notes are registered, if different
from the person who tendered such Old Notes.
All questions as to the validity, form, eligibility and time of receipt of
such notice will be determined by the Company, whose determination shall be
final and binding on all parties. Any Old Notes so withdrawn will be deemed not
to have been validly tendered for exchange for purposes of the Exchange Offer.
Any Old Notes which have been tendered for exchange but which are not exchanged
for any reason will be returned to the tendering holder thereof without cost to
such holder, in the case of physically tendered Old Notes, or credited to an
account maintained with the applicable Book-Entry Transfer Facility for the Old
Notes as soon as practicable after withdrawal, rejection of tender or
termination of the Exchange Offer. Properly withdrawn Old Notes may be
retendered by following one of the procedures described under "--Procedures for
Tendering" and "--Book-Entry Transfer" above at any time on or prior to
5:00 p.m., New York City time, on the Expiration Date.
CONDITIONS
Notwithstanding any other provision of the Exchange Offer, the Company
shall not be required to accept for exchange, or to issue New Notes in exchange
for, any Old Notes and may terminate or amend the Exchange Offer if at any time
prior to 5:00 p.m., New York City time, on the Expiration Date, the Company
determines that the Exchange Offer violates applicable law, any applicable
interpretation of the staff of the Commission or any order of any governmental
agency or court of competent jurisdiction.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company in whole or in part at any time and
from time to time in its sole discretion. The failure by the Company at any time
to exercise any of the foregoing rights shall not be deemed a waiver of any such
right and each such right shall be deemed an ongoing right which may be asserted
at any time and from time to time.
In addition, the Company will not accept for exchange any Old Notes
tendered, and no New Notes will be issued in exchange for any such Old Notes, if
at such time any stop order shall be threatened or in effect with respect to the
Registration Statement of which this prospectus constitutes a part or the
qualification of the Indenture under the Trust Indenture Act of 1939, as
amended. the Company is required to use every reasonable effort to obtain the
withdrawal of any order suspending the effectiveness of the Registration
Statement at the earliest possible moment.
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EXCHANGE AGENT
First Union National Bank 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 Letters of Transmittal should be
directed to the Exchange Agent addressed as follows:
<TABLE>
<S> <C>
By Mail, Hand Delivery or For Information Call:
Overnight Courier: (704) 590-7413
First Union National Bank Facsimile Transmission Number:
1525 West W.T. Harris Boulevard (704) 590-7628
Corporate Actions
Charlotte, North Carolina 28288
Attention: Marsha Rice
</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 Old Notes, and in handling or forwarding tenders for exchange.
The expenses to be incurred by the Company in connection with the Exchange
Offer will be paid by the Company, including fees and expenses of the Exchange
Agent and Trustee and accounting, legal, printing and related fees and expenses.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, New Notes or Old Notes
for principal amounts not tendered or accepted for exchange are to be registered
or issued in the name of any person other than the registered holder of the Old
Notes tendered, or if tendered Old Notes are registered in the name of any
person other than the person signing the Letter of Transmittal, or if a transfer
tax is imposed for any reason other than the exchange of Old Notes pursuant to
the Exchange Offer, then the amount of any such transfer taxes imposed on the
registered holder or any other persons will be payable by the tendering holder.
If satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering holder.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon as a
consequence of the issuance of the Old Notes pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Securities Act
and applicable state securities laws. In general, the Old Notes may not be
offered or sold, unless registered under the Securities Act, 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 Old Notes under the Securities Act. To the extent that Old
Notes are tendered and accepted in the Exchange Offer, the trading market for
untendered and tendered but unaccepted Old Notes could be adversely affected.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain United States federal income tax
consequences of the exchange of the Old Notes for the New Notes and the
ownership and disposition of the New Notes. This summary applies only to a
beneficial owner of a New Note who acquires the New Notes in exchange for Old
Notes purchased at the Initial Offering from the Initial Purchasers and for the
Original Offering price thereof.
This summary is based on provisions of the Internal Revenue Code of 1986,
as amended (the "Code"), existing and proposed Treasury regulations promulgated
thereunder (the "Treasury Regulations") and administrative and judicial
interpretations thereof, all as of the date hereof and all of which are subject
to change, possibly on a retroactive basis.
This summary does not address the tax consequences to subsequent purchasers
of the New Notes and is limited to the New Notes that are held as "capital
assets" within the meaning of section 1221 of the Code. This summary is for
general information only, and does not address all of the tax consequences that
may be relevant to particular acquirors in light of their personal
circumstances, or to certain types of acquirors (such as banks and other
financial institutions, real estate investment trusts, regulated investment
companies, insurance companies, tax-exempt organizations, dealers in securities,
persons who own Notes through partnerships or other pass-through entities,
persons who hold a Note as part of a straddle, hedge, conversion transaction or
other integrated investment, or persons whose functional currency is not the
U.S. dollar). In addition, this summary does not include any description of the
tax laws of any state, local or non-U.S. government that may be applicable to a
particular acquiror.
PROSPECTIVE ACQUIRORS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS WITH
RESPECT TO THE PARTICULAR U.S. FEDERAL INCOME AND ESTATE TAX CONSEQUENCES TO
THEM OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF THE NOTES, AS WELL AS THE
TAX CONSEQUENCES UNDER STATE, LOCAL, NON-U.S. AND OTHER TAX LAWS AND THE
POSSIBLE EFFECTS OF CHANGES IN TAX LAWS.
As used herein, the term "U.S. Holder" means a beneficial owner of a Note
that is, for U.S. federal income tax purposes, (a) a citizen or resident of the
United States, (b) a corporation created or organized in the United States or
under the laws of the United States or of any political subdivision of the
United States, (c) an estate whose income is subject to U.S. federal income tax
regardless of its source or (d) a trust if (i) a court within the United States
is able to exercise primary supervision over the administration of the trust and
(ii) at least one U.S. person has authority to control all substantial decisions
of the trust.
THE EXCHANGE OFFER
The Exchange of an Old Note for a New Note of a U.S. Holder pursuant to the
Exchange Offer will not constitute a taxable exchange of the Old Notes, and thus
a U.S. Holder will not recognize taxable gain or loss upon receipt of a New
Note. As a result, each U.S. Holder will have the same adjusted tax basis and
holding period in the New Notes as it had in the Old Notes immediately before
the exchange.
INCOME TAXATION OF U.S. HOLDERS
Payment of Interest on the Notes. In general, interest paid on a Note will
be taxable to a U.S. Holder as ordinary interest income, as received or accrued,
in accordance with such holder's method of accounting for federal income tax
purposes.
Liquidated Damages. Since the Notes provide for the payment of liquidated
damages in the form of additional interest in certain circumstances described
under "Exchange Offer; Registration Rights" ("Liquidated Damages"), the Notes
may be subject to special rules under the Treasury Regulations that are
applicable to debt instruments that provide for one or more contingent payments.
Under the Treasury Regulations, however, the special rules applicable to
contingent payment debt instruments will not apply if, as of the issue date, the
contingency is either "remote" or "incidental." The Company believes that, for
these purposes, the payment of Liquidated Damages is a remote or incidental
contingency. The Company's determination that such payments are a remote or
incidental contingency for these purposes is binding on a U.S. Holder, unless
such U.S. Holder discloses in the proper manner to the Internal Revenue Service
(the
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"IRS") that it is taking a different position. Prospective investors should
consult their tax advisors as to the tax considerations relating to the payment
of Liquidated Damages, in particular in connection with the Treasury Regulations
relating to contingent payment interests.
Sale, Exchange or Retirement of the Notes. Upon the sale, exchange,
redemption, retirement at maturity or other disposition of a Note, a U.S. Holder
will generally recognize taxable gain or loss equal to the difference between
the sum of the cash and the fair market value of all other property received on
such disposition (except to the extent such cash or property is attributable to
accrued interest, which will be taxable as ordinary income) and such holder's
adjusted tax basis in the Note.
Gain or loss recognized on the disposition of a Note generally will be
capital gain or loss, and will be long-term capital gain or loss if, at the time
of such disposition, the holder's holding period for the Note is more than one
year.
Backup Withholding and Information Reporting. In general, a U.S. Holder
will be subject to backup withholding at the rate of 31% with respect to
interest, principal and premium, if any, paid on a Note, unless the holder
(a) is an entity that is exempt from withholding (including corporations,
tax-exempt organizations and certain qualified nominees) and, when required,
demonstrates this fact, or (b) provides the Company with its taxpayer
identification number ("TIN") (which for an individual would be the holder's
social security number), certifies that the TIN provided to the Company is
correct and that the holder has not been notified by the IRS that it is subject
to backup withholding due to underreporting of interest or dividends, and
otherwise complies with applicable requirements of the backup withholding rules.
In addition, such payments of principal, premium and interest to U.S. Holders
that are not exempt entities will generally be subject to information reporting
requirements. A U.S. Holder who does not provide the Company with its correct
TIN may be subject to penalties imposed by the IRS.
The Company will report to U.S. Holders and the IRS the amount of any
"reportable payments" (including any interest paid) and any amounts withheld
with respect to the Notes during the calendar year.
The amount of any backup withholding from a payment to a U.S. Holder will
be allowed as a credit against such holder's federal income tax liability and
may entitle such holder to a refund, provided that the required information is
furnished to the IRS. Treasury Regulations, generally effective for payments
made after December 31, 2000 (the "New Withholding Regulations"), modify certain
of the certification requirements for backup withholding. It is possible that
the Company and other withholding agents may request a new withholding exemption
from holders in order to qualify for continued exemption from backup withholding
under the New Withholding Regulations.
TAXATION OF NON-U.S. HOLDERS
Payment of Interest on the Notes. In general, payments of interest
received by any beneficial owner of a Note that is not a U.S. Holder (a
"Non-U.S. Holder") will not be subject to a U.S. federal withholding tax (except
as described below under "Backup Withholding and Information Reporting"),
provided that (a) under an exemption for certain portfolio interest, (i) the
Non-U.S. Holder does not actually or constructively own 10% or more of the total
combined voting power of all classes of stock of the Company that is entitled to
vote, (ii) the holder is not a "controlled foreign corporation" (generally, a
non-U.S. corporation controlled by U.S. shareholders) that is related to the
Company actually or constructively through stock ownership and (iii) either
(x) the beneficial owner of the Note, under penalties of perjury, provides the
Company or its agent with the beneficial owner's name and address and certifies
that it is not a U.S. person on IRS Form W-8 (or a suitable substitute form) or
(y) a securities clearing organization, bank or other financial institution that
holds customers' securities in the ordinary course of its trade or business
holds the Note and certifies to the Company or its agent under penalties of
perjury that such a Form W-8 (or suitable substitute form) has been received by
it from the beneficial owner or qualifying intermediary and furnishes the payor
a copy thereof, (b) the Non-U.S. Holder is subject to U.S. federal income tax
with respect to the Note on a net basis because payments received with respect
to the Note are effectively connected with the conduct of a trade or business
within the United States by the holder (in which case the holder may also be
subject to U.S. "branch profits tax") and the holder provides the Company with a
properly executed IRS Form 4224 (or a suitable substitute therefor), or (c) the
Non-U.S. Holder is entitled to the benefits of an income tax treaty under which
the
86
<PAGE>
interest is exempt from U.S. withholding tax and the holder or such holder's
agent provides a properly executed IRS Form 1001 (or a suitable substitute
therefor) claiming the exemption. Payments of interest not exempt from U.S.
federal withholding tax as described above will be subject to withholding at the
rate of 30% (subject to reduction under the applicable income tax treaty).
The New Withholding Regulations generally will not affect the certification
rules described in the preceding paragraph, but will provide alternative methods
for satisfying such requirements. The New Withholding Regulations also generally
will require, in the case of Notes held by a non-U.S. partnership, that (a) the
certification described in the preceding paragraph be provided by the partners
rather than the foreign partnership and (b) the partnership provide certain
information. A look-through rule will apply in the case of tiered partnerships.
In addition, the New Withholding Regulations may require that a Non-U.S. Holder
(including a non-U.S. partnership or a partner thereof) obtain a TIN and make
certain certifications if interest in respect of a Note is not portfolio
interest and the Non-U.S. Holder wishes to claim a reduced rate of withholding
under an income tax treaty. It is possible that the Company and other
withholding agents may request a new withholding exemption from Non-U.S. Holders
in order to qualify for continued exemption from withholding under the New
Withholding Regulations. Each Non-U.S. Holder should consult its own tax advisor
regarding the application of the New Withholding Regulations.
Sale, Exchange or Retirement of the Notes. A Non-U.S. Holder generally
will not be subject to U.S. federal income tax (or withholding thereof) in
respect of gain realized on the sale, exchange, redemption, retirement at
maturity or other disposition of Notes, unless (a) the gain is effectively
connected with the conduct of a trade or business within the United States by
the holder, or (b) the holder is an individual who is present in the United
States for a period or periods aggregating 183 or more days in the taxable year
of the disposition and certain other conditions are met.
With respect to a Non-U.S. Holder subject to U.S. federal income tax as
described in the preceding paragraph, an exchange of a Note for an Exchange Note
will not be treated as a taxable exchange of the Note. As described under
"--Taxation of U.S. Holders--Liquidated Damages," the Notes provide for the
payment of Liquidated Damages in certain circumstances. Non-U.S. Holders should
consult their tax advisors as to the tax considerations relating to debt
instruments that provide for one or more contingent payments, in particular as
to the availability of the exemption for portfolio interest, and the ability of
holders to claim the benefits of income tax treaty exemptions from U.S.
withholding tax on interest, in respect of such Liquidated Damages.
Backup Withholding and Information Reporting. Under current Treasury
Regulations, backup withholding and information reporting do not apply to
payments made by the Company or a paying agent to Non-U.S. Holders if the
requisite certification is received, provided that the payor does not have
actual knowledge that the holder is a U.S. person. If any payments of principal
and interest are made to a Non-U.S. Holder by or through the non-U.S. office of
a non-U.S. custodian, non-U.S. nominee or other non-U.S. agent of such holder,
or if the non-U.S. office of a non-U.S. "broker" (as defined in applicable
Treasury Regulations) pays the proceeds of the sale of a Note or a coupon to the
seller thereof, backup withholding and information reporting will not apply.
Information reporting requirements (but not backup withholding) will apply,
however, to a payment by a non-U.S. office of a broker that is a U.S. person,
that derives 50% or more of its gross income for certain periods from the
conduct of a trade or business in the United States, or that is a "controlled
foreign corporation" (generally, a non-U.S. corporation controlled by U.S.
shareholders) with respect to the United States, unless the broker has
documentary evidence in its records that the holder is a non-U.S. person and
certain other conditions are met, or the holder otherwise establishes an
exemption. Payment by a U.S. office of a broker is subject to both backup
withholding at a rate of 31% and information reporting unless the holder
certifies under penalties of perjury that it is a non-U.S. person, or otherwise
establishes an exemption. A Non-U.S. Holder may obtain a refund or a credit
against such holder's U.S. federal income tax liability of any amounts withheld
under the backup withholding rules, provided the required information is
furnished to the IRS.
In addition, in certain circumstances, interest on a Note owned by a
Non-U.S. Holder will be required to be reported annually on IRS Form 1042S, in
which case such form will be filed with the IRS and furnished to the holder.
87
<PAGE>
The New Withholding Regulations revise (substantially in certain respects)
the procedures that withholding agents and payees must follow to comply with, or
to establish an exemption, from these information reporting and backup
withholding provisions for payments after December 31, 2000. It is possible that
the Company and other withholding agents may request a new withholding exemption
from Non-U.S. Holders in order to qualify for continued exemption from backup
withholding under the New Withholding Regulations. Each Non-U.S. Holder should
consult its own tax advisor regarding the application to such holder of the New
Withholding Regulations.
Estate Tax. Subject to applicable estate tax treaty provisions, Notes held
at the time of death (or theretofore transferred subject to certain retained
rights or powers) by an individual who at the time of death is a Non-U.S. Holder
will not be included in such holder's gross estate for U.S. federal estate tax
purposes, provided that (a) the individual does not actually or constructively
own 10% or more of the total combined voting power of all classes of stock of
the Company entitled to vote and (b) the income on the Notes is not effectively
connected with the conduct of a U.S. trade or business by the individual.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge and represent that it will deliver a
prospectus in connection with any resale of such New Notes. This Prospectus, as
it may be amended or supplemented from time to time, may be used by certain
broker-dealers (as specified in the Registration Rights Agreement) in connection
with resales of New Notes received in exchange for Old Notes where such Old
Notes were acquired as a result of market-making activities or other trading
activities. The Company has agreed that, for a period not to exceed 180 days
after the Expiration Date, it will furnish additional copies of this prospectus,
as amended or supplemented, to any such broker-dealer that reasonably requests
such documents for use in connection with any such resale. In addition, during
the same period, all dealers effecting transactions in the New Notes may be
required to deliver a prospectus.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such New Notes. Any broker-dealer
that resells New Notes that were received by it for its own account pursuant to
the Exchange Offer and any broker or dealer that participates in a distribution
of such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of New Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that, by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
The Company has agreed to pay certain expenses incident to the Exchange
Offer. In addition, the Company has agreed to indemnify the holders of the Old
Notes against certain liabilities.
88
<PAGE>
LEGAL MATTERS
The validity of the New Notes will be passed upon for the Company by
Debevoise & Plimpton, New York.
EXPERTS
The financial statements as of December 31, 1998 and 1997 and for each of
the three years in the period ended December 31, 1998 included in this
Prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
89
<PAGE>
FAIRFIELD MANUFACTURING COMPANY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheet as of March 31, 1999............................................................ F-2
Consolidated Statements of Operations for the three months ended March 31, 1999 and 1998................... F-3
Consolidated Statements of Stockholder's Equity (Deficit) for the three months
ended March 31, 1999..................................................................................... F-4
Consolidated Statements of Cash Flows for the three months ended March 31, 1999 and 1998................... F-5
Notes to Consolidated Financial Statements................................................................. F-6
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants.......................................................................... F-7
Consolidated Balance Sheets as of December 31, 1998 and 1997............................................... F-8
Consolidated Statements of Operations for the three years ended December 31, 1998.......................... F-9
Consolidated Statements of Stockholder's Equity (Deficit) for the three years
ended December 31, 1998.................................................................................. F-10
Consolidated Statements of Cash Flows for the three years ended December 31, 1998.......................... F-11
Notes to Consolidated Financial Statements................................................................. F-12
Schedule II - Valuation and Qualifying Accounts and Reserves, for the three years ended December 31,
1998..................................................................................................... F-21
</TABLE>
F-1
<PAGE>
FAIRFIELD MANUFACTURING COMPANY, INC.
CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
MARCH 31,
1999
-----------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................................................... $ 1,188
Trade receivables, less allowance of $700.......................................................... 26,901
Inventory.......................................................................................... 26,280
Prepaid expenses................................................................................... 377
---------
Total current assets............................................................................ 54,746
Property, plant and equipment, net of accumulated depreciation of $97,015............................ 68,557
---------
Other assets:
Excess of investment over net assets acquired, less accumulated amortization of $15,483............ 48,876
Deferred financing costs, less accumulated amortization of $3,837.................................. 1,371
---------
Total other assets.............................................................................. 50,247
---------
Total assets.................................................................................... $ 173,550
---------
---------
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................................................................... $ 14,988
Due to parent...................................................................................... 1,366
Accrued liabilities................................................................................ 21,636
Deferred income taxes.............................................................................. 2,047
---------
Total current liabilities....................................................................... 40,037
---------
Accrued retirement costs............................................................................. 15,257
Deferred income taxes................................................................................ 7,115
Long-term debt....................................................................................... 109,150
11 1/4% Cumulative exchangeable preferred stock...................................................... 48,090
---------
Stockholder's equity (deficit):
Common stock: par value $.01 per share, 10,000,000 shares authorized, 8,554,000 issued and
outstanding..................................................................................... 86
Additional paid-in capital......................................................................... 43,461
Accumulated deficit................................................................................ (89,646)
---------
Total stockholder's deficit..................................................................... (46,099)
---------
Total liabilities and stockholder's deficit..................................................... $ 173,550
---------
---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
FAIRFIELD MANUFACTURING COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Net sales................................................................................ $60,399 $55,388
Cost of sales............................................................................ 47,341 45,368
Selling, general and administrative expenses............................................. 4,339 4,201
------- -------
OPERATING INCOME......................................................................... 8,719 5,819
Interest expense, net.................................................................... 2,825 3,303
Other expense, net....................................................................... 2 14
------- -------
INCOME BEFORE INCOME TAXES............................................................... 5,892 2,502
Provision for income taxes............................................................... 2,657 1,130
------- -------
NET INCOME............................................................................... $ 3,235 $ 1,372
------- -------
------- -------
Preferred stock dividends and discount accretion......................................... (1,454) (1,453)
------- -------
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDER........................................ $ 1,781 $ (81)
------- -------
------- -------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
FAIRFIELD MANUFACTURING COMPANY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
For the Three Months Ended March 31, 1999
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
STOCK-
ADDITIONAL HOLDER'S
COMMON PAID-IN ACCUMULATED EQUITY
STOCK CAPITAL DEFICIT (DEFICIT)
------ ---------- ----------- ---------
<S> <C> <C> <C> <C>
Balance, December 31, 1998....................................... $ 85 $ 42,322 $ (91,427) $ (49,020)
Capital contribution............................................. 1 1,139 -- 1,140
Preferred stock dividends........................................ -- -- (1,406) (1,406)
Preferred stock discount accretion............................... -- -- (48) (48)
Net income....................................................... -- -- 3,235 3,235
---- -------- --------- ---------
Balance, March 31, 1999.......................................... $ 86 $ 43,461 $ (89,646) $ (46,099)
---- -------- --------- ---------
---- -------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
FAIRFIELD MANUFACTURING COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income............................................................................... $ 3,235 $ 1,372
Adjustments to reconcile net income to net cash provided (used) by operating
activities:
Depreciation and amortization.......................................................... 3,358 3,375
Deferred income taxes.................................................................. (345) (160)
Accrued retirement costs............................................................... (1,021) (1,026)
Changes in working capital:
Trade receivables................................................................... 467 (6,026)
Inventory........................................................................... (761) (3,210)
Prepaid expenses.................................................................... (8) (95)
Accounts payable.................................................................... 1,467 3,122
Due to parent....................................................................... 844 600
Accrued liabilities................................................................. (629) (1,259)
------- -------
Net cash provided (used) by operating activities....................................... 6,607 (3,307)
------- -------
INVESTING ACTIVITIES:
Additions to property, plant and equipment, net.......................................... (3,568) (4,061)
------- -------
Net cash used by investing activities.................................................. (3,568) (4,061)
------- -------
FINANCING ACTIVITIES:
Capital contributions, principally under tax sharing agreement........................... 1,140 500
Repayment of long-term debt.............................................................. (2,000) (1,000)
Net change in revolving credit facility.................................................. (1,000) 8,000
Payment of preferred stock dividends..................................................... (2,813) (2,813)
------- -------
Net cash provided (used) by financing activities.................................... (4,673) 4,687
------- -------
CASH AND CASH EQUIVALENTS:
Decrease in cash and cash equivalents.................................................... (1,634) (2,681)
------- -------
Beginning of year........................................................................ 2,822 3,059
------- -------
End of year.............................................................................. $ 1,188 $ 378
------- -------
------- -------
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Interest............................................................................... $ 4,677 $ 5,549
Federal taxes to parent under tax sharing agreement (Note 2)........................... 1,640 500
Non-cash investing and financing activities:
Additions to property, plant and equipment included in accounts payable at end of
period.............................................................................. $ 399 $ 246
Preferred stock dividends accrued........................................................ 1,406 1,405
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
FAIRFIELD MANUFACTURING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
(Unaudited)
1. INTERIM FINANCIAL INFORMATION
The accompanying consolidated financial statements have been prepared by
Fairfield Manufacturing Company, Inc. and subsidiaries (the "Company"), without
audit, pursuant to the rules and regulations of the Securities Exchange
Commission. Certain information and footnote disclosures normally included in
annual financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
enable a reasonable understanding of the information presented. These
consolidated financial statements should be read in conjunction with the audited
financial statements and the notes thereto for the year ended December 31, 1998.
In the opinion of management the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation of the Company's
financial position at March 31, 1999 and the results of operations and cash
flows for the three months ended March 31, 1999 and 1998. However, interim
financial results are not necessarily indicative of the results for a full year.
Certain prior year information has been reclassified to conform to current year
presentation.
2. PARENT COMPANY OF REGISTRANT
The Company is wholly-owned by Lancer Industries Inc. ("Lancer").
The Company is included in the consolidated federal income tax return of
Lancer. The Company and Lancer have entered into a Tax Sharing Agreement under
which the Company is required to calculate its current federal income tax
liability on a separate return basis and pay that amount to Lancer. To the
extent such tax liability subsequently reduces Lancer's available tax benefits,
Lancer is required to reimburse the Company in an amount equivalent to 50% of
such reduction by making a capital contribution to the Company. Lancer made
capital contributions to the Company pursuant to this agreement of $1,140 and
$500 during the three months ended March 31, 1999 and 1998, respectively. The
Company issued 74,000 and 73,000 shares of common stock to Lancer during the
three months ended March 31, 1999 and 1998, respectively, in recognition of
these capital contributions.
3. INVENTORY
Inventory, which is valued at the lower of last-in, first-out (LIFO) cost
or market, consists of the following:
<TABLE>
<CAPTION>
MARCH 31, 1999
--------------
<S> <C>
Raw materials....................................................... $ 3,542
Work in process..................................................... 12,190
Finished goods...................................................... 10,548
--------
26,280
Less: excess of FIFO cost over LIFO cost............................ --
--------
$ 26,280
--------
--------
</TABLE>
F-6
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholder
of Fairfield Manufacturing Company, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholder's equity (deficit), and of
cash flows present fairly, in all material respects, the financial position of
Fairfield Manufacturing Company, Inc. and its subsidiary (collectively the
"Company") at December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998, in conformity with generally accepted accounting principles. In
addition, in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial statement
schedule are the responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
/S/ PRICEWATERHOUSECOOPERS LLP
Indianapolis, Indiana
January 28, 1999
F-7
<PAGE>
FAIRFIELD MANUFACTURING COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
(In thousands, except share data)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:...........................................................................
Cash and cash equivalents............................................................... $ 2,822 $ 3,059
Trade receivables, less allowance of $700 and $600 in 1998 and 1997, respectively....... 27,368 22,733
Inventory............................................................................... 25,519 23,875
Prepaid expenses........................................................................ 369 1,048
-------- --------
Total current assets................................................................. 56,078 50,715
Property, plant and equipment, net........................................................ 68,239 69,227
-------- --------
Other assets:
Excess of investment over net assets acquired, less accumulated amortization of $15,082
and $13,475 in 1998 and 1997, respectively........................................... 49,277 50,884
Deferred financing costs, less accumulated amortization of $3,684 and $3,026 in 1998 and
1997, respectively................................................................... 1,524 2,386
-------- --------
Total other assets................................................................... 50,801 53,270
-------- --------
Total assets......................................................................... $175,118 $173,212
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:......................................................................
Current maturities of long-term debt.................................................... $ -- $ 4,000
Accounts payable........................................................................ 13,967 10,896
Due to parent........................................................................... 482 2,208
Accrued liabilities..................................................................... 23,712 22,987
Deferred income taxes................................................................... 2,047 2,800
-------- --------
Total current liabilities............................................................ 40,208 42,891
Accrued retirement costs.................................................................. 16,278 15,778
Deferred income taxes..................................................................... 7,460 8,881
Long-term debt............................................................................ 112,150 110,000
Commitments and contingencies (Note 11)................................................... -- --
11 1/4% Cumulative exchangeable preferred stock........................................... 48,042 47,850
-------- --------
Stockholder's equity (deficit):
Common stock: par value $.01 per share, 10,000,000 shares authorized, 8,480,000 and
8,190,000 issued and outstanding in 1998 and 1997, respectively...................... 85 82
Additional paid-in capital.............................................................. 42,322 39,414
Accumulated deficit..................................................................... (91,427) (91,684)
-------- --------
Total stockholder's deficit.......................................................... (49,020) (52,188)
-------- --------
Total liabilities and stockholder's deficit.......................................... $175,118 $173,212
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE>
FAIRFIELD MANUFACTURING COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Years Ended December 31, 1998
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net sales.................................................................... $220,316 $192,281 $195,205
Cost of sales................................................................ 178,933 157,715 158,668
Selling, general and administrative expenses................................. 16,816 16,989 16,868
-------- -------- --------
OPERATING INCOME............................................................. 24,567 17,577 19,669
Interest expense, net........................................................ 12,697 12,676 11,930
Other expense, net........................................................... 70 80 90
-------- -------- --------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM............................ 11,800 4,821 7,649
Provision for income taxes................................................... 5,300 2,640 3,730
-------- -------- --------
INCOME BEFORE EXTRAORDINARY ITEM............................................. 6,500 2,181 3,919
Loss on early extinguishment of debt, net of tax............................. (426) -- --
-------- -------- --------
NET INCOME................................................................... $ 6,074 $ 2,181 $ 3,919
-------- -------- --------
-------- -------- --------
Preferred stock dividends and discount accretion............................. (5,817) (4,686) --
-------- -------- --------
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDER............................ $ 257 $ (2,505) $ 3,919
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
<PAGE>
FAIRFIELD MANUFACTURING COMPANY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
For the Three Years Ended December 31, 1998
(In thousands)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN ACCUMULATED STOCK-HOLDER'S
STOCK CAPITAL DEFICIT EQUITY (DEFICIT)
------ ---------- ----------- ----------------
<S> <C> <C> <C> <C>
Balance, January 1, 1996..................................... $ 77 $ 35,209 $ (25,328) $ 9,958
Capital contribution......................................... 1 1,579 -- 1,580
Common stock 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)
---- -------- --------- --------
---- -------- --------- --------
Capital contribution......................................... $ 4 $ 2,616 $ -- $ 2,620
Common stock dividends....................................... -- -- (50,770) (50,770)
Preferred stock dividends.................................... -- -- (4,536) (4,536)
Preferred stock discount accretion........................... -- -- (150) (150)
Advance to parent............................................ -- -- 3,027 3,027
Merger with First Colony Farms............................... -- 10 -- 10
Net income................................................... -- -- 2,181 2,181
---- -------- --------- --------
Balance, December 31, 1997................................... $ 82 $ 39,414 $ (91,684) $(52,188)
---- -------- --------- --------
---- -------- --------- --------
Capital contribution......................................... $ 3 $ 2,908 $ -- $ 2,911
Preferred stock dividends.................................... -- -- (5,625) (5,625)
Preferred stock discount accretion........................... -- -- (192) (192)
Net income................................................... -- -- 6,074 6,074
---- -------- --------- --------
Balance, December 31, 1998................................... $ 85 $ 42,322 $ (91,427) $(49,020)
---- -------- --------- --------
---- -------- --------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
<PAGE>
FAIRFIELD MANUFACTURING COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Years Ended December 31, 1998
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income..................................................................... $ 6,074 $ 2,181 $ 3,919
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization................................................ 13,267 13,277 13,108
Deferred income tax benefit.................................................. (2,097) (4,107) (170)
Increase in accrued retirement costs......................................... 687 355 665
Loss on early extinguishment of debt......................................... 426 -- --
Changes in working capital:
Trade receivables......................................................... (5,085) 1,963 (368)
Inventory................................................................. (1,644) (4,957) 5,994
Prepaid expenses.......................................................... 679 (195) 44
Accounts payable.......................................................... 3,595 (1,467) 3,289
Due to parent............................................................. (1,726) 1,921 (520)
Accrued liabilities....................................................... 1,188 3,128 658
-------- -------- --------
Net cash provided by operating activities.................................... 15,364 12,099 26,619
-------- -------- --------
INVESTING ACTIVITIES:
Additions to property, plant and equipment, net................................ (10,536) (10,902) (11,165)
-------- -------- --------
Net cash used by investing activities........................................ (10,536) (10,902) (11,165)
-------- -------- --------
FINANCING ACTIVITIES:
Capital contributions, principally under tax sharing agreement................. 2,911 2,620 1,580
Payment of dividends........................................................... -- (50,770) (17,000)
Advance to Parent.............................................................. -- 3,027 (3,027)
Proceeds from issuance of long-term debt....................................... 19,000 -- 15,000
Repayment of long-term debt.................................................... (20,218) (6,000) (3,000)
Net change in Revolver......................................................... (1,000) 2,000 (7,000)
Proceeds of preferred stock offering........................................... -- 50,000 --
Payment of preferred stock issuance costs...................................... -- (2,300) --
Payment of debt issuance costs................................................. (133) (41) (146)
Payment of preferred stock dividends........................................... (5,625) (2,859) --
-------- -------- --------
Net cash used by financing activities........................................ (5,065) (4,323) (13,593)
-------- -------- --------
CASH AND CASH EQUIVALENTS:
Increase (decrease) in cash and cash equivalents............................... (237) (3,126) 1,861
Beginning of year.............................................................. 3,059 6,185 4,324
-------- -------- --------
End of year.................................................................... $ 2,822 $ 3,059 $ 6,185
-------- -------- --------
-------- -------- --------
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Interest..................................................................... $ 13,442 $ 12,135 $ 11,627
Federal taxes to parent under tax sharing agreement (Note 7)................. 7,710 4,020 4,030
State taxes.................................................................. 1,550 120 1,310
Non-cash investing and financing activities:
Additions to property, plant and equipment included in accounts payable at
end of period............................................................. $ 845 $ 1,369 $ 2,266
Preferred stock dividends accrued............................................ $ 1,677 $ 1,677 --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-11
<PAGE>
FAIRFIELD MANUFACTURING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands, except share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Fairfield Manufacturing Company, Inc. ("Fairfield") is wholly owned by
Lancer Industries Inc. ("Lancer"). Fairfield has one wholly owned subsidiary,
T-H Licensing, Inc. ("T-H Licensing"). Fairfield, T-H Licensing and Lancer are
all Delaware corporations.
Fairfield manufactures high precision custom gears and assemblies 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. T-H Licensing owns certain intangible assets
including various patents and trademarks.
Principles of Consolidation
These consolidated financial statements include the accounts of Fairfield
and T-H Licensing (jointly the "Company"). All significant intercompany accounts
and transactions have been eliminated.
Concentrations of Risk
The Company grants credit without collateral to most of its customers.
Sales to one customer accounted for 10.6% of total net sales in 1998. No
customer accounted for more than 10% of total net sales in 1997 or 1996.
Revenue
Sales are recognized at the time of shipment to the customer. International
sales, as determined by ship to location, accounted for $16,195, $13,286 and
$11,312 of the Company's net sales in 1998, 1997 and 1996, respectively, and
were primarily to Canada. Custom gears and assemblies accounted for
approximately $118,500, $107,100 and $112,300 of the Company's 1998, 1997 and
1996 net sales, respectively. Planetary gear systems accounted for approximately
$101,800, $85,200 and $82,900 of the Company's 1998, 1997 and 1996 net sales,
respectively.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
Inventory
Inventory is valued at the lower of last-in, first-out (LIFO) cost or
market.
Property, Plant and Equipment, Net
Property, plant and equipment, net are carried at cost less accumulated
depreciation. Depreciation is computed on the straight-line method over the
estimated useful lives of the assets which range from 15 to 30 years for land
improvements, 5 to 40 years for buildings and improvements, and 3 to 20 years
for machinery and equipment.
F-12
<PAGE>
FAIRFIELD MANUFACTURING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
($ in thousands, except share data)
Income Taxes
Income taxes are provided based on the liability method of accounting. 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 cost over net assets acquired is amortized using the
straight-line method over 40 years. The Company's criteria for periodically
evaluating the carrying value of the excess of investment over net assets
acquired includes evaluation of products and markets as well as current and
expected levels of undiscounted cash flow from operations. The Company has
concluded the excess of investment over net assets acquired is not impaired and
the products and markets continue to support a 40-year life.
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.
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 financial liabilities, other than Senior
Subordinated Notes ("Notes"), also approximate their carrying value. The
estimated fair value of the Notes at December 31, 1998 was approximately 102% of
carrying value based on recent market purchases by the Company.
Reclassifications
Certain prior year amounts have been reclassified to conform with the
current presentation.
2. RELATED PARTY TRANSACTIONS
On December 5, 1996, the Company advanced $3,000 to Lancer. This advance
was classified as a component of stockholder's equity (deficit) at December 31,
1996, at which date the related accrued interest was $27. During February 1997,
the Company declared a dividend $3,070 ($0.39 per share) in settlement of the
advance and the accrued interest of $70.
Effective August 1, 1997, Mr. Lechman, former Chairman of the Board, and
Director, entered into a consulting agreement (the "Agreement") with the
Company. In consideration for services to be rendered under the Agreement,
Mr. Lechman will receive quarterly payments through July 31, 2001 ("the
consulting period") totaling $1.0 million. In the event that Mr. Lechman dies
prior to the end of the consulting period or is unable to perform the services
requested due to mental or physical disabilities, the Company shall pay to his
legal representatives or beneficiaries the remaining unpaid balance under the
Agreement which would have been due under the agreement had Mr. Lechman
continued to provide such services for the term of the Agreement. Due to the
provisions of the agreement, the Company recognized the entire $1.0 million as
expense in 1997.
F-13
<PAGE>
FAIRFIELD MANUFACTURING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
($ in thousands, except share data)
3. INVENTORY
Inventory at December 31, consists of:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Raw materials....................................... $ 3,852 $ 3,495
Work in process..................................... 11,933 11,892
Finished products................................... 9,734 8,488
------- -------
25,519 23,875
Less: Excess of FIFO cost over LIFO cost............ -- --
------- -------
$25,519 $23,875
------- -------
------- -------
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net at December 31, includes the following:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Land and improvements............................. $ 1,346 $ 1,256
Buildings and improvements........................ 20,758 19,248
Machinery and equipment........................... 141,091 133,024
-------- --------
163,195 153,528
Less: Accumulated depreciation.................... (94,956) (84,301)
-------- --------
$ 68,239 $ 69,227
-------- --------
-------- --------
</TABLE>
Depreciation expense was $11,000, $11,000 and $10,830 for the years ended
December 31, 1998, 1997 and 1996, respectively.
5. ACCRUED LIABILITIES
Accrued liabilities at December 31, are as follows:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Compensation and employee benefits.................. $ 6,940 $ 6,610
Accrued retirement and postemployment............... 3,058 2,902
Interest payable.................................... 4,340 5,075
Other............................................... 9,374 8,400
------- -------
$23,712 $22,987
------- -------
------- -------
</TABLE>
F-14
<PAGE>
FAIRFIELD MANUFACTURING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
($ in thousands, except share data)
6. EMPLOYEE BENEFIT PLANS
<TABLE>
<CAPTION>
OTHER
POSTRETIREMENT
PENSION BENEFITS BENEFITS
------------------- -------------------
1998 1997 1998 1997
-------- ------- -------- -------
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year................... $ 43,671 $42,972 $ 9,433 $ 9,329
Service cost.............................................. 1,622 1,445 362 342
Interest cost............................................. 3,099 2,911 658 646
Participant contributions................................. -- -- 184 208
Amendments................................................ 758 -- -- --
Actuarial loss (gain)..................................... 3,522 (2,055) 620 (9)
Benefits paid............................................. (1,663) (1,602) (1,102) (1,083)
-------- ------- -------- -------
Benefit obligation at end of year......................... 51,009 43,671 10,155 9,433
-------- ------- -------- -------
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year............ 33,684 31,348 -- --
Actual return on plan assets.............................. 2,831 2,109 -- --
Company contribution...................................... 1,731 1,829 918 875
Participant contributions................................. -- -- 184 208
Benefits paid............................................. (1,663) (1,602) (1,102) (1,083)
-------- ------- -------- -------
Fair value of plan assets at end of year.................. 36,583 33,684 -- --
-------- ------- -------- -------
Funded status............................................. (14,426) (9,987) (10,155) (9,433)
Unrecognized actuarial loss............................... 2,040 (1,512) 3,145 2,676
Unrecognized prior service cost........................... 2,302 1,733 (188) (251)
-------- ------- -------- -------
Accrued benefit........................................... $(10,084) $(9,766) $ (7,198) $(7,008)
-------- ------- -------- -------
-------- ------- -------- -------
WEIGHTED AVERAGE ASSUMPTIONS AS OF DECEMBER 31:
Discount rate............................................. 6.50% 7.25% 6.50% 7.25%
Expected return on plan assets............................ 8.50% 8.50%
</TABLE>
Other postretirement benefits provided by the Company include limited
health care and life insurance benefits for certain retired employees. The
health care cost trend rate is not a factor in the calculation of the other
postretirement benefit obligation as the plan limits per capita benefits to a
fixed level. Claims in excess of this amount are the responsibility of the
retiree.
<TABLE>
<CAPTION>
OTHER POSTRETIREMENT
PENSION BENEFITS BENEFITS
----------------------------- --------------------------
1998 1997 1996 1998 1997 1996
------- ------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost......................................... $ 1,622 $ 1,445 $ 1,387 $ 362 $ 342 $ 332
Interest cost........................................ 3,099 2,911 2,862 658 646 656
Expected return on plan assets....................... (2,861) (2,685) (2,549) -- -- --
Recognized actuarial loss............................ -- -- -- 151 166 214
Amortization of prior service cost................... 189 189 189 (63) (63) (63)
------- ------- ------- ------ ------ ------
Net periodic benefit cost............................ $ 2,049 $ 1,860 $ 1,889 $1,108 $1,091 $1,139
------- ------- ------- ------ ------ ------
------- ------- ------- ------ ------ ------
</TABLE>
As discussed above, healthcare benefits provided by the Company are set at
a fixed per capita amount. Consequently, changes in health care rates have no
effect on the other postretirement benefit obligation, service cost or interest
cost.
The Company has a contributory defined contribution savings plan which
covers all of its eligible employees. Eligibility in the plan is obtained the
month following hire with no minimum age requirement.
F-15
<PAGE>
FAIRFIELD MANUFACTURING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
($ in thousands, except share data)
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, 1998, 1997
and 1996 was $1,510, $1,347 and $1,356, respectively.
The Company provides postemployment benefits to certain former and inactive
employees. Net periodic postemployment benefit cost for years ended
December 31, included the following components:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Service cost.................................................................... $153 $137 $115
Interest cost................................................................... 185 179 157
Amortization of unrecognized losses............................................. 19 -- --
---- ---- ----
$357 $316 $272
---- ---- ----
---- ---- ----
</TABLE>
The recorded liabilities for these postemployment benefits, none of which
have been funded, are $2,053 and $1,906 at December 31, 1998 and 1997,
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.
The expense equivalent to provision for income taxes in each of the three
years in the period ended December 31, consists of:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- ------
<S> <C> <C> <C>
Current, principally federal............................................. $ 7,397 $ 5,120 $3,900
Deferred, principally federal............................................ (2,097) (2,480) (170)
------- ------- ------
$ 5,300 $ 2,640 $3,730
------- ------- ------
------- ------- ------
Tax benefit of extraordinary loss........................................ $ (277) $ -- $ --
------- ------- ------
------- ------- ------
</TABLE>
The expense equivalent to provision for income taxes for 1998, 1997 and
1996 results principally from current year operating results.
A reconciliation of the expected expense equivalent to provision for income
taxes at the statutory federal income tax rate and the actual tax provision each
of the three years ended December 31, is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Tax provision at 35% statutory rate........................................ $4,130 $1,687 $2,677
State taxes, net of federal................................................ 519 370 231
Non-deductible amortization of excess of investment over net assets
acquired................................................................. 555 555 555
Other, net................................................................. 96 28 267
------ ------ ------
$5,300 $2,640 $3,730
------ ------ ------
------ ------ ------
Effective Rate............................................................. 44.9% 54.8% 48.8%
------ ------ ------
------ ------ ------
</TABLE>
F-16
<PAGE>
FAIRFIELD MANUFACTURING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
($ in thousands, except share data)
Deferred income taxes applicable to temporary differences at December 31,
1998 and 1997 (net of a $1.6 million reclassification from deferred tax
liabilities to currently payable taxes made in conjunction with the filing of
the 1996 tax return) are as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Assets:
Employee benefits.................................................... $ 9,646 $ 9,450
-------- --------
Gross deferred tax assets............................................ 9,646 9,450
-------- --------
Liabilities:
Inventory basis difference........................................... (4,864) (4,824)
Property, plant and equipment basis difference....................... (14,022) (16,242)
Other net............................................................ (267) (65)
-------- --------
Gross deferred tax liabilities....................................... (19,153) (21,131)
-------- --------
Net deferred tax liability........................................... $ (9,507) $(11,681)
-------- --------
-------- --------
</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 subsequently reduces Lancer's available tax benefits, Lancer is
required to reimburse the Company in an amount equivalent to 50% of such
reduction by making a capital contribution to the Company. Lancer made capital
contributions to the Company pursuant to this agreement of $2,710, $2,620, and
$1,580 during 1998, 1997 and 1996, respectively. The Company issued common stock
to Lancer in recognition of these capital contributions (see Note 10).
The Company has certain federal net operating loss carryforwards of
approximately $200,000 from its merger with First Colony Farms, Inc. which begin
expiring in 2001. These carryforwards are subject to limitations imposed by the
Internal Revenue Code. At December 31, 1998 and 1997, these carryforwards have
been fully reduced by a valuation allowance.
8. LONG-TERM DEBT
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Senior Revolving Credit Facility, due July 1, 2005
Rate at December 31, 1998: 6.8%............................................... $ 1,000 $ 2,000
Senior Term Loan, due July 1, 2005
Rates at December 31, 1998: 6.6%-6.8%......................................... 35,000 27,000
Senior Debt Repurchase Line, due in 20 equal quarterly installments beginning
August 15, 2000
Rates at December 31, 1998: 6.9%-7.3%......................................... 9,000 --
Senior Subordinated Notes, 11.375%, due July 1, 2001............................ 67,150 85,000
-------- --------
Total debt.................................................................... 112,150 114,000
Less: Current maturities........................................................ -- (4,000)
-------- --------
Total long-term debt.......................................................... $112,150 $110,000
-------- --------
-------- --------
</TABLE>
The Company's Senior Subordinated Notes (the "Notes") are redeemable at the
option of the Company, in whole or in part, at certain specified call prices on
or after July 1, 1998.
F-17
<PAGE>
FAIRFIELD MANUFACTURING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
($ in thousands, except share data)
During the third and fourth quarters of 1998, the Company repurchased
$17,850 of Notes on the open market. The loss on early extinguishment of debt
represents the write off of related deferred financing charges and premium paid
on repurchase, net of a $277 tax benefit.
In 1993 concurrent with the issuance of the Notes, the Company entered into
a loan agreement (the "Loan Agreement") with a senior lending institution which
established the Revolving Credit Facility ("Revolver") and Term Loan
(collectively with the Debt Repurchase Line the "Credit Facilities"). This Loan
Agreement was most recently amended in October 1998, to extend the maturity of
the Revolver and Term Loan to July, 1, 2005, lower the interest rate, and
establish the Debt Repurchase Line, to be used for repurchases of the Company's
Notes up to $10,000.
The Revolver permits the Company to borrow up to $20,000 subject to
borrowing base availability (as defined in the agreement) and, at the option of
the Company (subject to certain conditions), may be increased by two additional
$5,000 options.
The Loan Agreement was also amended during March 1997, to allow the sale of
the Preferred Stock (see Note 9) and the $47,700 dividend to Lancer.
Interest under the Credit Facilities is payable at varying rates based on
prime or LIBOR. The unused Revolver at December 31, 1998, net of $449 of
outstanding letters of credit, was $18,551. The unused Debt Repurchase Line
(subject to certain conditions) at December 31, 1998 was $1,000.
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
Credit Facility and the Notes allow the payment of dividends provided certain
financial covenants are met.
The future maturities of long-term debt at December 31, 1998 are as
follows:
<TABLE>
<S> <C>
1999........................................................ $ --
2000........................................................ 900
2001........................................................ 68,950
2002........................................................ 1,800
2003........................................................ 1,800
Thereafter.................................................. 38,700
--------
$112,150
--------
--------
</TABLE>
9. REDEEMABLE EXCHANGEABLE PREFERRED STOCK
On March 12, 1997, the Company completed a private offering of 50,000
shares of 11 1/4% Series A Cumulative Exchangeable Preferred Stock ("Preferred
Stock"). Each share has a liquidation preference of one thousand dollars, 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 (prior to March 15,
2002) be paid, at the Company's option, either in cash or in additional shares
of Preferred Stock. Semi-annual dividends have been paid in cash since issuance.
The net proceeds from this offering of $47,700 were used to fund a dividend
to Lancer, and used by Lancer to redeem approximately $47,700 of its Series C
Preferred Stock.
F-18
<PAGE>
FAIRFIELD MANUFACTURING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
($ in thousands, except share data)
10. STOCKHOLDER'S EQUITY
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 in cash and certain net operating loss carryforwards.
Issuance of Common Stock
The Company issued 73,000, 94,000, 50,000, and 73,000 additional shares of
its common stock on March 31, June 30, September 30, and December 31, 1998,
respectively, to Lancer in consideration of certain capital contributions made
by Lancer to the Company pursuant to the Tax Sharing Agreement and other capital
contributions.
The Company issued 52,000, 53,000 and 280,000 additional shares of its
common stock on March 31, June 30, and December 31, 1997, respectively, to
Lancer in consideration of certain capital contributions made by Lancer to the
Company pursuant to the Tax Sharing Agreement and other capital contributions.
Dividends
On March 12, 1997 and December 5, 1996 the Company, with the approval of
its senior lender, declared and paid dividends of $47,700 ($6.11 per share) and
$17,000 ($2.19 per share), respectively, to Lancer.
11. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company is obligated to make payments under noncancellable operating
leases expiring at various dates through 2003.
Future minimum payments by year under operating leases consist of the
following at December 31, 1998:
<TABLE>
<CAPTION>
YEAR MINIMUM RENTAL
- --------------------------------------------------------- --------------
<S> <C>
1999..................................................... $ 518
2000..................................................... 430
2001..................................................... 133
2002..................................................... 86
2003..................................................... 30
------
$1,197
------
------
</TABLE>
Rental expense for the years ended December 31, 1998, 1997 and 1996 was
$506, $447, and $446, respectively.
Equity Participation Plan
The Company maintains an Equity Participation Plan (the "Plan") which
provides for the award of up to an aggregate of 180,000 Equity Participation
Rights ("Rights") to certain current and past officers and key employees. At
December 31, 1998, all 180,000 rights were granted and have vested and 117,000
rights were outstanding.
F-19
<PAGE>
FAIRFIELD MANUFACTURING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
($ in thousands, except share data)
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.
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, 1998 and 1997 the exercise price exceeds estimated fair
market value of the Company's common stock. During 1997, the Company paid $25 to
redeem 63,000 rights. No additional compensation was charged to earnings for
this plan during 1998, 1997 or 1996.
F-20
<PAGE>
FAIRFIELD MANUFACTURING COMPANY, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO
BEGINNING OF COSTS CHARGED TO BALANCE AT
DESCRIPTION PERIOD AND EXPENSES OTHER ACCOUNTS DEDUCTIONS END OF PERIOD
- --------------------------------------- ------------ --------------- -------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
1998
Allowance for doubtful accounts........ $600 $ 100 $-- $ -- $ 700
1997
Allowance for doubtful accounts........ $600 $ 32 $-- $ (32) $ 600
1996
Allowance for doubtful accounts........ $600 $ 520 $-- $ (520) $ 600
</TABLE>
F-21
<PAGE>
TORQUE-HUB(REGISTERED)
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.
Torque-Hub(Registered) is a registered trademark of Fairfield Manufacturing
Company, Inc.
<PAGE>
------------------------------------------------------
------------------------------------------------------
WE HAVE NOT AUTHORIZED ANY DEALER, SALES-PERSON OR OTHER PERSON TO GIVE ANY
INFORMATION OR REPRESENT ANYTHING TO YOU OTHER THAN THE INFORMATION CONTAINED IN
THIS PROSPECTUS. YOU MUST NOT RELY ON UNAUTHORIZED INFORMATION OR
REPRESENTATIONS.
THIS PROSPECTUS DOES NOT OFFER TO EXCHANGE OR ASK FOR OFFERS TO EXCHANGE
ANY OF THE SECURITIES IN ANY JURISDICTION WHERE IT IS UNLAWFUL, WHERE THE PERSON
MAKING THE OFFER IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON WHO CANNOT LEGALLY
BE OFFERED TO EXCHANGE THE SECURITIES.
THE INFORMATION IN THIS PROSPECTUS IS CURRENT ONLY AS OF THE DATE ON ITS
COVER, AND MAY CHANGE AFTER THAT DATE. FOR ANY TIME AFTER THE COVER DATE OF THIS
PROSPECTUS, WE DO NOT REPRESENT THAT OUR AFFAIRS ARE THE SAME AS DESCRIBED OR
THAT THE INFORMATION IN THIS PROSPECTUS IS CORRECT--NOR DO WE IMPLY THOSE THINGS
BY DELIVERING THIS PROSPECTUS OR SELLING SECURITIES TO YOU.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 1
Risk Factors................................... 10
Use of Proceeds................................ 14
Capitalization................................. 15
Unaudited Pro Forma Financial Data............. 16
Selected Consolidated Historical Financial
Data......................................... 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 22
Business....................................... 27
Management..................................... 33
Ownership of Capital Stock..................... 37
Related Transactions........................... 38
Description of Other Indebtedness and Preferred
Stock........................................ 39
Description of the Notes....................... 41
The Exchange Offer............................. 78
Certain United States Federal Tax
Considerations............................... 85
Plan of Distribution........................... 88
Legal Matters.................................. 89
Experts........................................ 89
Index to Consolidated Financial Statements..... F-1
</TABLE>
Until 180 days after the expiration of this exchange on August 9, 1999, all
dealers effecting transactions in the New Notes, whether or not participating in
this distribution, may be required to deliver a prospectus. This is in addition
to the obligation of dealers to deliver a prospectus when acting as underwriters
and with respect to their unsold allotments or subscriptions.
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
[LOGO]
FAIRFIELD MANUFACTURING
COMPANY, INC.
OFFER TO EXCHANGE FOR
ALL OUTSTANDING
9 5/8% SENIOR SUBORDINATED
NOTES DUE 2008
-------------------
PROSPECTUS
-------------------
JULY 7, 1999
------------------------------------------------------
------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company is incorporated under the laws of the State of Delaware.
Section 145 of the Delaware Corporation Law, as amended, and paragraph (e) of
Article Fifth of the Company's Restated Certificate of Incorporation, as
amended, provide for the indemnification, except in certain circumstances set
forth below, of officers, directors, employees and agents of the Company for
certain expenses incurred in connection with any threatened, pending or
completed action, suit, or proceeding, whether civil, criminal, administrative
or investigative, and for the purchase and maintenance of insurance by the
Company on behalf of officers, directors, employees and agents of The Company
against any liability asserted against, and incurred by, any such officer,
director, employee or agent in such capacity. Set forth below is the text of
Section 145 and the text of paragraph (e) of Article Fifth of the Company's
Certificate of Incorporation.
Section 145 of the Delaware Corporation Law, as amended, provides as
follows:
"145 INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS;
INSURANCE.--(a) A corporation shall have power to indemnify any person who
was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of
the corporation) by reason of the fact that the person is or was a
director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by the
person in connection with such action, suit or proceeding if the person
acted in good faith and in a manner the person reasonably believed to be in
or not opposed to the best interests of the corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe
the person's conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement, conviction, or upon a plea of
nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which
the person reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that the person's conduct was
unlawful.
(b) A corporation shall have power to indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending
or completed action or suit by or in the right of the corporation to
procure a judgment in its favor by reason of the fact that the person is or
was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise against expenses (including attorneys' fees) actually and
reasonably incurred by the person in connection with the defense or
settlement of such action or suit if the person acted in good faith and in
a manner the person reasonably believed to be in or not opposed to the best
interests of the corporation and except that no indemnification shall be
made in respect of any claim, issue or matter as to which such person shall
have been adjudged to be liable to the corporation unless and only to the
extent that the Court of Chancery or the court in which such action or suit
was brought shall determine upon application that, despite the adjudication
of liability but in view of all the circumstances of the case, such person
is fairly and reasonably entitled to indemnity for such expenses which the
Court of Chancery or such other court shall deem proper.
(c) To the extent that a present or former director or officer of a
corporation has been successful on the merits or otherwise in defense of
any action, suit or proceeding referred to in subsections (a) and (b) of
this section, or in defense of any claim, issue or matter therein, such
person shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by such person in connection therewith.
(d) Any indemnification under subsections (a) and (b) of this section
(unless ordered by a court) shall be made by the corporation only as
authorized in the specific case upon a determination that indemnification
II-1
<PAGE>
of the present or former director, officer employee or agent is proper in
the circumstances because the person has met the applicable standard of
conduct set forth in subsections (a) and (b) of this section. Such
determination shall be made, with respect to a person who is a director or
officer at the time of such determination, (1) by a majority vote of the
directors who are not parties to such action, suit or proceeding, even
though less than a quorum, or (2) by a committee of such directors
designated by majority vote of such directors, even though less than a
quorum, or (3) if there are no such directors, or if such directors so
direct, by independent legal counsel in a written opinion, or (4) by the
stockholders.
(e) Expenses (including attorneys' fees) incurred by an officer or
director in defending any civil, criminal, administrative or investigative
action, suit or proceeding may be paid by the corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such
amount if it shall ultimately be determined that such person is not
entitled to be indemnified by the corporation as authorized in this
section. Such expenses (including attorneys' fees) incurred by former
directors and officers or other employees and agents may be so paid upon
such terms and conditions, if any, as the corporation deems appropriate.
(f) The indemnification and advancement of expenses provided by, or
granted pursuant to, the other subsections of this section shall not be
deemed exclusive of any other rights to which those seeking indemnification
or advancement of expenses may be entitled under any bylaw, agreement, vote
of stockholders or disinterested directors or otherwise, both as to action
in such person's official capacity and as to action in another capacity
while holding such office.
(g) A corporation shall have power to purchase and maintain insurance
on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
any liability asserted against such person and incurred by such person in
any such capacity, or arising out of such person's status as such, whether
or not the corporation would have the power to indemnify such person
against such liability under this section.
(h) For purposes of this section, references to "the corporation"
shall include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued,
would have had power and authority to indemnify its directors, officers,
and employees or agents, so that any person who is or was a director,
officer, employee or agent of such constituent corporation, or is or was
serving at the request of such constituent corporation as a director,
officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, shall stand in the same position under
this section with respect to the resulting or surviving corporation as such
person would have with respect to such constituent corporation if its
separate existence had continued.
(i) For purposes of this section, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include
any excise taxes assessed on a person with respect to any employee benefit
plan; and references to "serving at the request of the corporation" shall
include any service as a director, officer, employee or agent of the
corporation which imposes duties on, or involves services by, such
director, officer, employee, or agent with respect to an employee benefit
plan, its participants or beneficiaries; and a person who acted in good
faith and in a manner such person reasonably believed to be in the interest
of the participants and beneficiaries of an employee benefit plan shall be
deemed to have acted in a manner "not opposed to the best interests of the
corporation" as referred to in this section.
(j) The indemnification and advancement of expenses provided by, or
granted pursuant to, this section shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person."
(k) The Court of Chancery is hereby vested with exclusive jurisdiction
to hear and determine all actions for advancement of expenses or
indemnification brought under this section or under any bylaw, agreement,
vote of stockholders or disinterested directors, or otherwise. The Court of
Chancery may summarily determine a corporation's obligation to advance
expenses (including attorneys' fees).
II-2
<PAGE>
Paragraph (e) of Article Fifth of the Restated Certificate of Incorporation
of the Company, as amended, provides as follows:
"(e) No director of the Corporation shall be liable to the Corporation
or its stockholders for monetary damages for breach of his or her fiduciary
duty as a director, provided that nothing contained in this Article shall
eliminate or limit the liability of a director (i) for any breach of the
director's duty of loyalty to the Corporation or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of the law, (iii) under Section 174 of
the General Corporation Law of the State of Delaware or (iv) for any
transaction from which the director derived an improper personal benefit."
As permitted by Section 145 of the General Corporation Law of the State of
Delaware, as amended, the Company has purchased and maintains insurance
providing for reimbursement to elected directors and officers, subject to
certain exceptions, of amounts they may be legally obligated to pay, including
but not limited to damages, judgments, settlements, costs and attorneys' fees
(but not including fines, penalties or matters not insurable under the law), as
a result of claims and legal actions instituted against them to recover for
their acts while serving as directors or officers.
II-3
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) List of Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
3.01 -- Restated Certificate of Incorporation of Fairfield, together with the Certificate of Amendment, dated
March 7, 1997, and filed on March 11, 1997, incorporated by reference from Exhibit 3(a) to the
Registration Statement on Form S-4 (file no. 333-24823) of the Company as filed with the Securities
and Exchange Commission on April 9, 1997 (the "1997 Form S-4").
3.02 -- By-Laws of Fairfield, incorporated by reference from Exhibit 3(c) to the Company's Form 10-K for the
fiscal year ended December 31, 1994 as filed with the Securities and Exchange Commission on
March 22, 1995 (the "1994 Form 10-K").
4.01* -- Indenture, dated as of May 19, 1999, between the Company and First Union National Bank, as trustee.
4.02 -- Indenture, dated as of March 12, 1997, between Fairfield and United States Trust Company of New York
as Trustee, incorporated by reference from Exhibit 4(c) to the 1997 Form S-4.
4.03 -- Certificate of Designation, dated March 12, 1997, for the 11 1/4% Cumulative Exchangeable Preferred
Stock, incorporated by reference from Exhibit 4(d) to the 1997 Form S-4.
5.01* -- Opinion of Debevoise & Plimpton as to the legality of the securities being registered.
10.01 -- Loan Agreement, dated as of July 7, 1993, among Fairfield, the lenders named therein and General
Electric Capital Corporation ("GECC"), as agent, incorporated by reference from Exhibit 10(a) to the
Company's Form 10-Q for the six months ended June 30, 1993 and filed with the Securities and Exchange
Commission on August 16, 1993, (the "1993 Second Quarter Form 10-Q").
10.02 -- Security Agreement, dated as of July 7, 1993, between T-H Licensing, Inc. ("T-H Licensing") and GECC,
as agent, incorporated by reference from Exhibit 10(d) to the 1993 Second Quarter Form 10-Q.
10.03 -- Stock Pledge Agreement, dated as of July 7, 1993, between Fairfield and GECC, as agent, incorporated
by reference from Exhibit 10(e) to the 1993 Second Quarter Form 10-Q.
10.04 -- Trademark Security Agreement, dated as of July 7, 1993, between Fairfield and GECC, as agent,
incorporated by reference from Exhibit 10(g) to the 1993 Second Quarter Form 10-Q.
10.05 -- Trademark Security Agreement, dated as of July 7, 1993, between T-H Licensing and GECC, as agent,
incorporated by reference from Exhibit 10(h) to the 1993 Second Quarter Form 10-Q.
10.06 -- Patent Security Agreement, dated as of July 7, 1993, between Fairfield and GECC, as agent,
incorporated by reference from Exhibit 10(i) to the 1993 Second Quarter Form 10-Q.
10.07 -- Patent Security Agreement, dated as of July 7, 1993, between T-H Licensing and GECC, as agent,
incorporated by reference from Exhibit 10(j) to the 1993 Second Quarter Form 10-Q.
10.08 -- Subsidiary Guaranty, dated as of July 7, 1993, between T-H Licensing and GECC, as agent, incorporated
by reference from Exhibit 10(k) to the 1993 Second Quarter Form 10-Q.
10.09 -- Mortgage, Assignment of Leases, Rents and Profits, Security Agreement and Fixture Filing, dated as of
July 7, 1993, between Fairfield and GECC, as agent, incorporated by reference from Exhibit 10(l) to
the 1993 Second Quarter Form 10-Q.
10.10 -- Collection Account Agreement, dated as of July 7, 1993, among Fairfield and GECC, and acknowledged by
Bank One, Lafayette, N.A., incorporated by reference from Exhibit 10(m) to the 1993 Second Quarter
Form 10-Q.
10.11 -- Used Machinery Account Agreement, dated as of July 7, 1993, among Fairfield and GECC, and
acknowledged by Bank One, Lafayette, N.A., incorporated by reference from Exhibit 10(n) to the 1993
Second Quarter Form 10-Q.
10.12 -- Quitclaim Grant of Security Interest, dated as of July 7, 1993, between Fairfield and GECC, as agent,
incorporated by reference from Exhibit 10(o) to the 1993 Second Quarter Form 10-Q.
10.13 -- Supplemental Quitclaim Grant of Security Interest (Patents only), dated as of July 7, 1993, between
Fairfield and GECC, as agent, incorporated by reference from Exhibit 10(p) to the 1993 Second Quarter
Form 10-Q.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
10.14 -- First Amendment to Mortgage Assignment of Leases, Rents and Profits, Security Agreement and Fixture
Filing, dated as of March 31, 1995, between Fairfield and GECC, as agent, incorporated by reference
from Exhibit 10(t) to the 1994 Form 10-K.
10.15 -- Stock Pledge Agreement, dated as of March 31, 1995, between Lancer Industries Inc. ("Lancer") and
GECC, as agent, incorporated by reference from Exhibit 10(u) to the 1994 Form 10-K.
10.16 -- Amended and Restated Security Agreement, dated as of March 31, 1995, between Fairfield and GECC, as
agent, incorporated by reference from Exhibit 10(v) to the 1994 Form 10-K.
10.17 -- Collective Bargaining Agreement, ratified October 29, 1998, between the Company and United Auto
Workers' Local 2317 incorporated by reference to Exhibit 10(a) to the Company's Form 10-Q for the
three months ended March 30, 1999 as filed with the Securities and Exchange Commission on April 26,
1999.
10.18 -- Tax Sharing Agreement, dated as of July 18, 1990, between Fairfield and Lancer, incorporated by
reference from Exhibit 10(z) to the Company's Form 10-K for the fiscal year ended December 31, 1995
as filed with the Securities and Exchange Commission on March 15, 1996 (the "1995 Form 10-K").
10.19 -- The Fairfield Manufacturing Company, Inc. (1992) Supplemental Executive Retirement Plan incorporated
by reference from Exhibit 10(aa) to the 1995 Form 10-K.
10.20 -- Letter Agreement, dated December 29, 1989, granting exclusive license from T-H Licensing to Fairfield
incorporated by reference from Exhibit 10(bb) to the 1995 Form 10-K.
10.21 -- Second Amendment to Mortgage Assignment of Leases, Rents and Profits, Security Agreement and Fixture
Filing, dated as of December 5, 1996, between Fairfield and GECC, as agent, incorporated by reference
from Exhibit 10(dd) to the Company's Form 10-K for the fiscal year ended December 31, 1996 as filed
with the Securities and Exchange Commission on February 25, 1997 (the "1996 Form 10-K").
10.22 -- Consulting Agreement, dated August 1, 1997, between Fairfield and Wolodymyr B. Lechman, incorporated
by reference from Exhibit 10(hh) to the Company's Form 10-Q for the nine months ended September 30,
1997 as filed with the Securities and Exchange Commission on November 12, 1997.
10.23 -- Consent and Amendment, dated as of March 27, 1997, among Fairfield and GECC, as sole lender and
agent, incorporated by reference from Exhibit 10(gg) to the 1997 Form S-4.
10.24 -- Third Amendment to Mortgage Assignment of Leases, Rents and Profits, Security Agreement and Fixture
Filing, dated as of October 12, 1998 between Fairfield and GECC, as agent, incorporated by reference
from Exhibit 10(hh) to the Company's Form 10-Q for the nine months ended September 30, 1998 as filed
with the Securities and Exchange Commission on November 13, 1998 (the "1998 Third Quarter
Form 10-Q").
10.25 -- Employment Agreement dated as of August 4, 1998, between Fairfield and S. K. Clough, incorporated by
reference from Exhibit 10(ii) to the 1998 Third Quarter Form 10-Q.
10.26 -- First Amendment to Loan Agreement, dated as of September 30, 1994, among Fairfield, the lenders named
therein and GECC, as agent, incorporated by reference from Exhibit 10(q) as filed with the Securities
and Exchange Commission on November 14, 1994.
10.27 -- Second Amendment to Loan Agreement, dated as of March 30, 1995, among Fairfield, the lenders named
therein and GECC, as agent, incorporated by reference from Exhibit 10(r) to the 1994 Form 10-K.
10.28 -- Third Amendment to Loan Agreement, dated as of March 31, 1995, among Fairfield, the lenders named
therein and GECC, as agent, incorporated by reference from Exhibit 10(s) to the 1994 Form 10-K.
10.29 -- Fourth Amendment to Loan Agreement, dated as of December 5, 1996, among Fairfield, the lenders named
therein and GECC, as agent, incorporated by reference from Exhibit 10(cc) to the 1996 Form 10-K.
10.30 -- Fifth Amendment to the Loan Agreement, dated as of February 26, 1997, among Fairfield, the lenders
named therein and GECC, as agent, incorporated by reference from Exhibit 10(ee) to the 1997 Form S-4.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
10.31 -- Sixth Amendment to the Loan Agreement, dated as of October 12, 1998, among Fairfield, the lenders
named therein, and GECC, as agent, incorporated by reference from Exhibit 10(gg) to the 1998 Third
Quarter Form 10-Q.
10.32 -- Seventh Amendment to the Loan Agreement, dated as of May 19, 1999, among Fairfield, the lenders named
therein, and GECC, as agent.
10.33* -- Registration Rights Agreement, dated as of May 19, 1999, between Fairfield and the initial purchasers
named therein of the 9 5/8% Senior Subordinated Notes due 2008.
12.01* -- Computations of Ratio of Earnings to Fixed Charges.
23.01 -- Consent of Debevoise & Plimpton (included in opinion filed as Exhibit 5.01).
23.02* -- Consent of PricewaterhouseCoopers LLP.
24.01* -- Powers of Attorney.
25.01 -- Statement of Eligibility and Qualification Under the Trust Indenture Act of 1939 (Form T-1) of First
Union National Bank.
27.01* -- Financial Data Schedule
99.01* -- Form of Letter of Transmittal used in connection with the Exchange Offer.
99.02* -- Form of Notice of Guaranteed Delivery used in connection with the Exchange Offer.
</TABLE>
- ------------------
* Previously filed
(B) FINANCIAL STATEMENT SCHEDULES.
See the index to the Consolidated Financial Statements on page F-1 of the
Prospectus included in this Registration Statement.
ITEM 22. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
(c) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the Registration Statement through the
date of responding to the request.
(d) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
II-6
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, FAIRFIELD
MANUFACTURING COMPANY, INC. HAS CAUSED THIS REGISTRATION STATEMENT ON FORM S-4
TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF LAFAYETTE, STATE OF INDIANA, ON THE 1ST DAY OF JULY, 1999.
FAIRFIELD MANUFACTURING COMPANY, INC.
By: /s/ STEPHEN K. CLOUGH
----------------------------------
Stephen K. Clough
President and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THIS SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<S> <C> <C>
PRINCIPAL EXECUTIVE OFFICER:
/s/ STEPHEN K. CLOUGH Director, President and Chief Executive July 1, 1999
- ------------------------------------------ Officer
Stephen K. Clough
PRINCIPAL FINANCIAL OFFICER:
/s/ RICHARD A. BUSH Vice President--Finance July 1, 1999
- ------------------------------------------
Richard A. Bush
PRINCIPAL ACCOUNTING OFFICER:
/s/ RICHARD A. BUSH Vice President--Finance July 1, 1999
- ------------------------------------------
Richard A. Bush
DIRECTORS:
* Director July 1, 1999
- ------------------------------------------
Jess C. Ball
* Director July 1, 1999
- ------------------------------------------
Andrew R. Heyer
* Director July 1, 1999
- ------------------------------------------
W.B. Lechman
* Director and Chairman of the Board July 1, 1999
- ------------------------------------------
Paul S. Levy
*By: /s/ STEPHEN K. CLOUGH July 1, 1999
-------------------------------------
Stephen K. Clough
Attorney-in-Fact
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
3.01 -- Restated Certificate of Incorporation of Fairfield, together with the Certificate of Amendment, dated
March 7, 1997, and filed on March 11, 1997, incorporated by reference from Exhibit 3(a) to the
Registration Statement on Form S-4 (file no. 333-24823) of the Company as filed with the Securities
and Exchange Commission on April 9, 1997 (the "1997 Form S-4").
3.02 -- By-Laws of Fairfield, incorporated by reference from Exhibit 3(c) to the Company's Form 10-K for the
fiscal year ended December 31, 1994 as filed with the Securities and Exchange Commission on
March 22, 1995 (the "1994 Form 10-K").
4.01* -- Indenture, dated as of May 19, 1999, between the Company and First Union National Bank, as trustee.
4.02 -- Indenture, dated as of March 12, 1997, between Fairfield and United States Trust Company of New York
as Trustee, incorporated by reference from Exhibit 4(c) to the 1997 Form S-4.
4.03 -- Certificate of Designation, dated March 12, 1997, for the 11 1/4% Cumulative Exchangeable Preferred
Stock, incorporated by reference from Exhibit 4(d) to the 1997 Form S-4.
5.01* -- Opinion of Debevoise & Plimpton as to the legality of the securities being registered.
10.01 -- Loan Agreement, dated as of July 7, 1993, among Fairfield, the lenders named therein and General
Electric Capital Corporation ("GECC"), as agent, incorporated by reference from Exhibit 10(a) to the
Company's Form 10-Q for the six months ended June 30, 1993 and filed with the Securities and Exchange
Commission on August 16, 1993, (the "1993 Second Quarter Form 10-Q").
10.02 -- Security Agreement, dated as of July 7, 1993, between T-H Licensing, Inc. ("T-H Licensing") and GECC,
as agent, incorporated by reference from Exhibit 10(d) to the 1993 Second Quarter Form 10-Q.
10.03 -- Stock Pledge Agreement, dated as of July 7, 1993, between Fairfield and GECC, as agent, incorporated
by reference from Exhibit 10(e) to the 1993 Second Quarter Form 10-Q.
10.04 -- Trademark Security Agreement, dated as of July 7, 1993, between Fairfield and GECC, as agent,
incorporated by reference from Exhibit 10(g) to the 1993 Second Quarter Form 10-Q.
10.05 -- Trademark Security Agreement, dated as of July 7, 1993, between T-H Licensing and GECC, as agent,
incorporated by reference from Exhibit 10(h) to the 1993 Second Quarter Form 10-Q.
10.06 -- Patent Security Agreement, dated as of July 7, 1993, between Fairfield and GECC, as agent,
incorporated by reference from Exhibit 10(i) to the 1993 Second Quarter Form 10-Q.
10.07 -- Patent Security Agreement, dated as of July 7, 1993, between T-H Licensing and GECC, as agent,
incorporated by reference from Exhibit 10(j) to the 1993 Second Quarter Form 10-Q.
10.08 -- Subsidiary Guaranty, dated as of July 7, 1993, between T-H Licensing and GECC, as agent, incorporated
by reference from Exhibit 10(k) to the 1993 Second Quarter Form 10-Q.
10.09 -- Mortgage, Assignment of Leases, Rents and Profits, Security Agreement and Fixture Filing, dated as of
July 7, 1993, between Fairfield and GECC, as agent, incorporated by reference from Exhibit 10(l) to
the 1993 Second Quarter Form 10-Q.
10.10 -- Collection Account Agreement, dated as of July 7, 1993, among Fairfield and GECC, and acknowledged by
Bank One, Lafayette, N.A., incorporated by reference from Exhibit 10(m) to the 1993 Second Quarter
Form 10-Q.
10.11 -- Used Machinery Account Agreement, dated as of July 7, 1993, among Fairfield and GECC, and
acknowledged by Bank One, Lafayette, N.A., incorporated by reference from Exhibit 10(n) to the 1993
Second Quarter Form 10-Q.
10.12 -- Quitclaim Grant of Security Interest, dated as of July 7, 1993, between Fairfield and GECC, as agent,
incorporated by reference from Exhibit 10(o) to the 1993 Second Quarter Form 10-Q.
10.13 -- Supplemental Quitclaim Grant of Security Interest (Patents only), dated as of July 7, 1993, between
Fairfield and GECC, as agent, incorporated by reference from Exhibit 10(p) to the 1993 Second Quarter
Form 10-Q.
10.14 -- First Amendment to Mortgage Assignment of Leases, Rents and Profits, Security Agreement and Fixture
Filing, dated as of March 31, 1995, between Fairfield and GECC, as agent, incorporated by reference
from Exhibit 10(t) to the 1994 Form 10-K.
10.15 -- Stock Pledge Agreement, dated as of March 31, 1995, between Lancer Industries Inc. ("Lancer") and
GECC, as agent, incorporated by reference from Exhibit 10(u) to the 1994 Form 10-K.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
10.16 -- Amended and Restated Security Agreement, dated as of March 31, 1995, between Fairfield and GECC, as
agent, incorporated by reference from Exhibit 10(v) to the 1994 Form 10-K.
10.17 -- Collective Bargaining Agreement, ratified October 29, 1998, between the Company and United Auto
Workers' Local 2317 incorporated by reference to Exhibit 10(a) to the Company's Form 10-Q for the
three months ended March 30, 1999 as filed with the Securities and Exchange Commission on April 26,
1999.
10.18 -- Tax Sharing Agreement, dated as of July 18, 1990, between Fairfield and Lancer, incorporated by
reference from Exhibit 10(z) to the Company's Form 10-K for the fiscal year ended December 31, 1995
as filed with the Securities and Exchange Commission on March 15, 1996 (the "1995 Form 10-K").
10.19 -- The Fairfield Manufacturing Company, Inc. (1992) Supplemental Executive Retirement Plan incorporated
by reference from Exhibit 10(aa) to the 1995 Form 10-K.
10.20 -- Letter Agreement, dated December 29, 1989, granting exclusive license from T-H Licensing to Fairfield
incorporated by reference from Exhibit 10(bb) to the 1995 Form 10-K.
10.21 -- Second Amendment to Mortgage Assignment of Leases, Rents and Profits, Security Agreement and Fixture
Filing, dated as of December 5, 1996, between Fairfield and GECC, as agent, incorporated by reference
from Exhibit 10(dd) to the Company's Form 10-K for the fiscal year ended December 31, 1996 as filed
with the Securities and Exchange Commission on February 25, 1997 (the "1996 Form 10-K").
10.22 -- Consulting Agreement, dated August 1, 1997, between Fairfield and Wolodymyr B. Lechman, incorporated
by reference from Exhibit 10(hh) to the Company's Form 10-Q for the nine months ended September 30,
1997 as filed with the Securities and Exchange Commission on November 12, 1997.
10.23 -- Consent and Amendment, dated as of March 27, 1997, among Fairfield and GECC, as sole lender and
agent, incorporated by reference from Exhibit 10(gg) to the 1997 Form S-4.
10.24 -- Third Amendment to Mortgage Assignment of Leases, Rents and Profits, Security Agreement and Fixture
Filing, dated as of October 12, 1998 between Fairfield and GECC, as agent, incorporated by reference
from Exhibit 10(hh) to the Company's Form 10-Q for the nine months ended September 30, 1998 as filed
with the Securities and Exchange Commission on November 13, 1998 (the "1998 Third Quarter
Form 10-Q").
10.25 -- Employment Agreement dated as of August 4, 1998, between Fairfield and S. K. Clough, incorporated by
reference from Exhibit 10(ii) to the 1998 Third Quarter Form 10-Q.
10.26 -- First Amendment to Loan Agreement, dated as of September 30, 1994, among Fairfield, the lenders named
therein and GECC, as agent, incorporated by reference from Exhibit 10(q) as filed with the Securities
and Exchange Commission on November 14, 1994.
10.27 -- Second Amendment to Loan Agreement, dated as of March 30, 1995, among Fairfield, the lenders named
therein and GECC, as agent, incorporated by reference from Exhibit 10(r) to the 1994 Form 10-K.
10.28 -- Third Amendment to Loan Agreement, dated as of March 31, 1995, among Fairfield, the lenders named
therein and GECC, as agent, incorporated by reference from Exhibit 10(s) to the 1994 Form 10-K.
10.29 -- Fourth Amendment to Loan Agreement, dated as of December 5, 1996, among Fairfield, the lenders named
therein and GECC, as agent, incorporated by reference from Exhibit 10(cc) to the 1996 Form 10-K.
10.30 -- Fifth Amendment to the Loan Agreement, dated as of February 26, 1997, among Fairfield, the lenders
named therein and GECC, as agent, incorporated by reference from Exhibit 10(ee) to the 1997 Form S-4.
10.31 -- Sixth Amendment to the Loan Agreement, dated as of October 12, 1998, among Fairfield, the lenders
named therein, and GECC, as agent, incorporated by reference from Exhibit 10(gg) to the 1998 Third
Quarter Form 10-Q.
10.32 -- Seventh Amendment to the Loan Agreement, dated as of May 19, 1999, among Fairfield, the lenders named
therein, and GECC, as agent.
10.33* -- Registration Rights Agreement, dated as of May 19, 1999, between Fairfield and the initial purchasers
named therein of the 9 5/8% Senior Subordinated Notes due 2008.
12.01* -- Computations of Ratio of Earnings to Fixed Charges.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
23.01 -- Consent of Debevoise & Plimpton (included in opinion filed as Exhibit 5.01).
23.02* -- Consent of PricewaterhouseCoopers LLP.
24.01* -- Powers of Attorney.
25.01 -- Statement of Eligibility and Qualification Under the Trust Indenture Act of 1939 (Form T-1) of First
Union National Bank.
27.01* -- Financial Data Schedule
99.01* -- Form of Letter of Transmittal used in connection with the Exchange Offer.
99.02* -- Form of Notice of Guaranteed Delivery used in connection with the Exchange Offer.
</TABLE>
- ------------------
* Previously filed.
<PAGE>
Exhibit 10.32
SEVENTH AMENDMENT TO LOAN AGREEMENT
THIS SEVENTH AMENDMENT TO LOAN AGREEMENT (this "Amendment"), made and
entered into as of May 19, 1999, but effective upon satisfaction of each of the
conditions precedent specified in Section 2 hereof, by and between FAIRFIELD
MANUFACTURING COMPANY, INC., a Delaware corporation ("Borrower"), and GENERAL
ELECTRIC CAPITAL CORPORATION, a New York corporation ("GE Capital"), as sole
"Lender" under the "Loan Agreement" hereinafter referred to and as agent for
itself and the other "Lenders" who may hereafter become parties to the Loan
Agreement (GE Capital, in such capacity, the "Agent").
RECITALS:
A. Borrower and GE Capital, as a Lender and as Agent, entered into a
certain Loan Agreement, dated as of July 7, 1993, as amended pursuant to a First
Amendment to Loan Agreement, dated as of September 30, 1994, a Second Amendment
to Loan Agreement, dated March 30, 1995, but effective as of December 31, 1994,
a Third Amendment to Loan Agreement, dated as of March 31, 1995, a Fourth
Amendment to Loan Agreement, dated as of December 5, 1996, a Fifth Amendment to
Loan Agreement, dated as of February 26, 1997, and a Sixth Amendment to Loan
Agreement, dated as of October 12, 1998 (the "Loan Agreement"; capitalized terms
used herein and not defined herein shall have the meanings ascribed to them in
the Loan Agreement) whereby, subject to the terms and conditions set forth
therein, GE Capital, as sole Lender thereunder, made the Commitment, the Debt
Repurchase Line and the Term Loans available to Borrower.
B. Pursuant to a certain Consent Letter, dated as of April 22, 1999,
between Borrower and GE Capital, as Agent and sole Lender (the "Consent
Letter"), at the request of Borrower, subject to the conditions precedent set
forth therein, GE Capital has consented to (i) Borrower's issuance of unsecured
senior subordinated notes in an aggregate principal amount of up to One Hundred
Million Dollars ($100,000,000), the proceeds of which will be used (A) to redeem
all outstanding Senior Subordinated Notes, (B) to pay in full all outstanding
Debt Repurchase Loans, (C) to make a prepayment of the Term Note in the amount
of at least Fifteen Million Dollars ($15,000,000) and (D) to pay transaction
costs in the amount of approximately Three Million Five Hundred Thousand Dollars
($3,500,000), (ii) Borrower's redemption of the Senior Subordinated Notes from
the proceeds of the 1999 Senior Subordinated Notes as described in the preceding
clause (i), and (iii) Borrower's issuance, in exchange for the 1999 Senior
Subordinated Notes of certain notes having terms substantially identical to the
1999 Senior Subordinated Notes, which notes, pursuant to a certain Exchange
Offer Registration Rights Agreement to be entered into by Borrower, will be the
subject of a registration statement with the Securities and Exchange Commission.
C. In satisfaction of one of the conditions precedent to GE Capital's
consent set forth in the Consent Letter, Borrower wishes to enter into this
Amendment with GE Capital.
<PAGE>
In consideration of the premises and the mutual covenants and agreements
herein contained, the parties hereto covenant and agree as follows:
1. Amendments to Loan Agreement. Effective upon fulfillment, to the
satisfaction of Lenders, of the conditions precedent set forth in Section 2
hereof, the Loan Agreement shall be deemed to be amended as follows:
(a) Amendments to Section 1.1 of the Loan Agreement.
(i) Section 1.1 of the Loan Agreement shall be deemed to be amended
by deleting the definitions of "Agreement", "Change of Control",
"Commitment", "Loan Documents" and "Subordinated Indebtedness" therein
in their entireties and substituting in lieu thereof the following
revised definitions of "Agreement", "Change of Control", "Commitment",
"Loan Documents" and "Subordinated Indebtedness":
"Agreement" means this Loan Agreement, either as originally executed
or as it may from time to time be supplemented, modified, amended,
renewed, extended or supplanted (including, without limitation, by
the First Amendment, the Second Amendment, the Third Amendment, the
Fourth Amendment, the Fifth Amendment, the Sixth Amendment and the
Seventh Amendment).
"Change of Control" means (a) the sale, in one or a series of
related transactions, of all or substantially all of Lancer's or
Borrower's assets as an entirety to any Person or related group of
Persons, (b) except as permitted under Section 6.2, the merger or
consolidation of Lancer or Borrower with or into another Person or
the consolidation or merger of any other Person with or into Lancer
or Borrower, (c) the failure of Lancer at any time (i) to maintain
in the aggregate a direct or indirect beneficial interest in
Borrower at least equal to 50% of the entire beneficial equity
interest held by all Persons in Borrower or (ii) to own
beneficially, directly or indirectly, Capital Stock representing
voting control of Borrower, or (d) a "Change of Control" as defined
in the Senior Subordinated Note Indenture or the 1999 Senior
Subordinated Note Indenture or any other indenture or governing
instrument with respect to any Subordinated Indebtedness.
"Commitment" means Twenty Million Dollars ($20,000,000), as such
amount may be increased to Forty Million Dollars ($40,000,000)
pursuant to the Subsequent Commitment Increases provided for in
Section 2.8, unless and until reduced to zero pursuant to Section
3.2(a).
"Loan Documents" means, collectively, this Agreement, the First
Amendment, the Second Amendment, the Third Amendment, the Fourth
Amendment, the Fifth Amendment, the Sixth Amendment, the Seventh
Amendment, the Notes, the Blocked Account Agreements, the
Subsidiary Guaranty, the Collateral Documents, the Lancer
2
<PAGE>
Pledge Agreement and any other agreements of any type or nature
heretofore or hereafter executed and delivered by Borrower or any of
its Affiliates in favor of the Agent or Lenders in any way relating
to or in furtherance of this Agreement, in each case either as
originally executed or as the same may from time to time be
supplemented, modified, amended, restated, extended or supplanted.
"Subordinated Indebtedness" means the Indebtedness evidenced by or
in respect of (a) prior to the 1999 Debt Repayment, the Senior
Subordinated Notes, (b) the 1999 Senior Subordinated Notes and (c)
any refinancing of the 1999 Senior Subordinated Notes with the prior
written consent of the Majority Lenders on terms and conditions
satisfactory to the Majority Lenders (but in no event less favorable
to Borrower than the terms and conditions of the 1999 Senior
Subordinated Notes), which Indebtedness shall not exceed the
principal amount then outstanding under the 1999 Senior Subordinated
Notes and shall be subordinated in right of payment to the
Obligations in a manner reasonably satisfactory to the Majority
Lenders.
(ii) Section 1.1 of the Loan Agreement shall be deemed further
amended by adding therein, in appropriate alphabetical order, the
following additional definitions:
"Exchange Notes" means any Senior Subordinated Notes due 2008,
having terms substantially similar to the 1999 Senior Subordinated
Notes, in an aggregate principal amount not in excess of One Hundred
Million Dollars ($100,000,000), issued by Borrower to holders of the
1999 Senior Subordinated Notes in exchange therefor pursuant to the
Exchange Offer. From and after the issuance of any Exchange Notes in
exchange for 1999 Senior Subordinated Notes pursuant to the Exchange
Offer, such Exchange Notes shall be "1999 Senior Subordinated Notes"
for all purposes of this Agreement.
"Exchange Offer" means Borrower's offer to exchange the 1999 Senior
Subordinated Notes for the Exchange Notes pursuant to the terms of
the Exchange Offer Registration Rights Agreement.
"Exchange Offer Registration Rights Agreement" means the Exchange
Offer Registration Rights Agreement, dated as of May 19, 1999, made
by Borrower in favor of the holders of the 1999 Senior Subordianted
Notes, a copy of which has been delivered to the Agent, as such
Exchange Offer Registration Rights Agreement may be amended,
modified or supplemented after the Seventh Amendment Date, subject
to the limitations set forth in Section 6.4.
"1999 Debt Repayment" means, collectively, the redemption in full of
the Senior Subordinated Notes, the prepayment in full of the Debt
Repurchase Loans and the prepayment of at least Fifteen Million
Dollars ($15,000,000) of the outstanding
3
<PAGE>
principal balance of the Term Loans, all from the proceeds of the
issuance of the 1999 Senior Subordinated Notes.
"1999 Senior subordinated Note Indenture" means the Indenture, dated
as of May 19, 1999, between Borrower and First Union National Bank,
as trustee, pursuant to which the 1999 Senior Subordinated Notes
will be issued and governed, a copy of which has been delivered to
the Agent, as such Indenture may be amended, modified or
supplemented after the Seventh Amendment Date, subject to the
limitations set forth in Section 6.4.
"1999 Senior Subordinated Notes" means, collectively, the
$100,000,000 aggregate original principal amount of 1999 Senior
Subordinated Notes due 2008, being issued on May 19, 1999 pursuant
to the 1999 Senior Subordinated Note Indenture, in the form attached
to such Indenture, as such notes may be amended, modified,
supplemented, extended or renewed after the Seventh Amendment Date,
subject to the limitations set forth in Section 6.4.
"Seventh Amendment" means the Seventh Amendment to the Loan
Agreement, dated as of May 19, 1999, among Borrower, the Agent and
GE Capital, as sole Lender.
"Seventh Amendment Date" means May 19, 1999, or such later date as
all conditions precedent to the effectiveness of the Seventh
Amendment set forth in Section 2 thereof shall have been satisfied.
(b) Amendment to Section 2.8 to the Loan Agreement. The Loan
Agreement shall be deemed further amended by deleting Section 2.8
thereof in its entirety and substituting in lieu thereof the following
revised Section 2.8:
2.8 Subsequent Commitment Increases.
(a) Subsequent Commitment Increases. Subject to the
satisfaction of each of the conditions set forth in Section 2.8(b),
at Borrower's written request, delivered by Borrower to the Agent at
least fifteen (15) days prior to the requested increase date and
specifying the requested increase date (each individually a
"Subsequent Commitment Increase Date" and collectively the
"Subsequent Commitment Increase Dates"), the Commitment shall be
increased (each individually a "Subsequent Commitment Increase" and
collectively the "Subsequent Commitment Increases") on no more than
four Subsequent Commitment Increase Dates by an amount not in excess
of Twenty Million Dollars ($20,000,000) in the aggregate as to all
Subsequent Commitment Increases.
(b) Conditions Precedent to Subsequent Commitment Increases.
The obligations of the Lenders to make the Subsequent Commitment
Increases available to Borrower are
4
<PAGE>
subject to the following conditions precedent each of which shall be
satisfied prior to or on the applicable Subsequent Commitment
Increase Date:
(i) Unless and until the 1999 Senior Subordinated Notes have
been issued and the 1999 Debt Repayment has occurred, there shall be
no more than two Subsequent Commitment Increases, and, in any event,
there shall be no more than four (4) Subsequent Commitment
Increases.
(ii) Each Subsequent Commitment Increase shall be in a
minimum amount of Five Million Dollars ($5,000,000).
(iii) The Agent shall have received all of the following, each
dated as of the applicable Subsequent Commitment Increase Date and
all in form and substance satisfactory to the Agent and legal
counsel for the Agent:
(1) amendments to the then existing Revolving Credit
Note executed by Borrower in favor or each Lender pursuant to
which the principal amount of the Revolving Credit Note held by
each Lender shall be increased by an amount equal to such
Lender's Pro Rata Share of the Subsequent Commitment Increase;
(2) an Officer's Certificate affirming that the
conditions set forth in clauses (iv), (v), (vi), (vii) and
(viii) below have been satisfied;
(3) to the extent deemed necessary by the Agent, an
amendment to the Mortgage giving effect to the Subsequent
Commitment Increase, executed by Borrower, and in form
acceptable for recordation with the appropriate Governmental
Agency;
(4) to the extent deemed necessary by the Agent,
assurance from the Title Company that it is committed to cause
such amendment to the Mortgage to be recorded, and, upon
recordation of such amendment to issue an endorsement to the
title insurance policy issued by the Title Company with regard
to the Mortgage, in a form acceptable to the Agent, insuring
the continued validity and priority of the Mortgage as a lien
upon the Owned Real Property, subject to only those title
exceptions which are set forth in such title insurance policy
and such other title exceptions as may be approved by the Agent
in its sole discretion; and
(5) such other assurances, certificates, documents,
consents or opinions (in addition to those hereinbelow) as the
Agent may reasonably require.
5
<PAGE>
(iv) The representations and warranties contained in Article
4 shall be true and correct in all material respects on and as of
the Subsequent Commitment Increase Date as though made on and as of
that date (except to the extent that such representations and
warranties relate solely to an earlier date and except as affected
by transactions expressly contemplated by this Agreement).
(v) There shall not then be pending or, to the best
knowledge of Borrower, threatened, any litigation, arbitration,
injunction, proceeding, governmental investigation or inquiry
against or affecting Borrower or any Property of Borrower before any
Governmental Agency that could reasonably be expected to have a
Material Adverse Effect.
(vi) Each of Lancer, Borrower and each of Borrower's
Subsidiaries shall be in compliance with all the terms and
provisions of the Loan Documents to which it is party, and no
Default or Event of Default shall have occurred and be continuing.
(vii) Since March 31, 1999, there shall not have occurred:
(A) any event or circumstance that could reasonably be expected to
have a Material Adverse Effect, or (B) any dividends or other
distributions made to the stockholders of Borrower, except as
permitted by Section 6.3 of this Agreement or Section 7(b) of the
Lancer Pledge Agreement.
(viii) Lenders shall be satisfied that Borrower and its
Subsidiaries are in compliance with all applicable Laws, including,
without limitation, all Environmental Laws and all Laws pertaining
to labor, occupational safety and health and ERISA matters except to
the extent that noncompliance could not reasonably be expected to
have a Material Adverse Effect. Lenders shall be satisfied that the
consummation of the Subsequent Commitment Increase will not cause
Borrower or any Subsidiary to violate any Contractual Obligation to
which it is party or by which it is bound or any Laws applicable to
it.
(xi) Lenders shall be satisfied that Borrower's incurrence
of Indebtedness pursuant to the Subsequent Commitment Increase is
permissible pursuant to Section 1010 of the Senior Subordinated Note
Indenture, prior to the Debt Repayment Date, and Section 4.06 of the
1999 Senior Subordinated Note Indenture, and that after giving
effect thereto, each of the representations and warranties set forth
in Section 4.21 shall continue to be true and correct in all
respects and shall have received such assurances in regard thereto
as Lenders shall request, including, without limitation,
certifications of Senior Officers of Borrower and an opinion of
Borrower's counsel with regard to such matters, each to be in form
and substance satisfactory to Lenders.
6
<PAGE>
(x) Borrower shall pay to Lenders a fee for each Subsequent
Commitment Increase in an amount of one-fourth percent (.25%) of the
amount of such increase which fee shall be fully-earned and
non-refundable on the date of such increase.
(c) Amendment to Section 4.21 of the Loan Agreement. Section 4.21
of the Loan Agreement is hereby amended by deleting such Section in its entirety
and substituting in lieu thereof the following revised Section 4.21:
4.21 Subordination of Subordinated Indebtedness. (a) This
Agreement, as amended by the First Amendment, the Second Amendment,
the Third Amendment, the Fourth Amendment, the Fifth Amendment, the
Sixth Amendment and the Seventh Amendment, and the other Loan
Documents to which Borrower or any Subsidiary is party, and, to the
extent permissible under Section 1010 of the Senior Subordinated
Note Indenture, all further amendments, amendments and restatements,
renewals, extensions, restructurings, supplements, modifications,
refinancings, refundings, or replacements hereof and thereof
constitute the "Credit Agreement" within the meaning of the Senior
Subordinated Note Indenture, and the Term Loans, the Revolving
Credit Loan, the Letter of Credit Obligations, the Debt Repurchase
Loans and all other Obligations of Borrower to the Agent and the
Lenders under this Agreement, the Notes and any of the other Loan
Documents, and, to the extent permissible pursuant to Section 1010
of the Senior Subordinated Note Indenture, all further amendments,
amendments and restatements, renewals, extensions, restructurings,
supplements, modifications, refinancings, refundings and
replacements of any of the foregoing, constitute "Senior
Indebtedness" of Borrower within the meaning of the Senior
Subordinated Note Indenture, and the holders thereof from time to
time shall be entitled to all of the rights of a holder of "Senior
Indebtedness" pursuant to Article 13 of the Senior Subordinated Note
Indenture.
(b) This Agreement, as amended by the First Amendment, the
Second Amendment, the Third Amendment, the Fourth Amendment, the
Fifth Amendment, the Sixth Amendment and the Seventh Amendment and
the other Loan Documents to which Borrower or any Subsidiary is
party, and, to the extent permissible under Section 4.06 of the 1999
Senior Subordinated Note Indenture, all further amendments,
amendments and restatements, renewals, extensions, restructurings,
supplements, modifications, refinancings, refundings, or
replacements hereof and thereof constitute the "Credit Agreement"
within the meaning of the 1999 Senior Subordinated Note Indenture,
and the Term Loans, the Revolving Credit Loan, the Letter of Credit
Obligations, the Debt Repurchase Loans and all other Obligations of
Borrower to the Agent and the Lenders under this Agreement, the
Notes and any of the other Loan Documents, and, to the extent
permissible pursuant to Section 4.06 of the 1999 Senior Subordinated
Note Indenture, all further amendments, amendments and restatements,
renewals, extensions, restructurings, supplements, modifications,
refinancings, refundings and replacements of any of the foregoing,
7
<PAGE>
constitute "Senior Indebtedness" of Borrower within the meaning of
the 1999 Senior Subordinated Note Indenture, and the holders thereof
from time to time shall be entitled to all of the rights of a holder
of "Senior Indebtedness" pursuant to Article Eleven of the 1999
Senior Subordinated Note Indenture.
(d) Amendment to Section 4.25 of the Loan Agreement. Section 4.25 of
the Loan Agreement is hereby deleted in its entirety and the following revised
Section 4.25 is hereby substituted in lieu thereof.
4.25 Brokers; Transaction Fees. Neither Borrower nor any of
its Subsidiaries has any obligation to any Person in respect of any
finder's, broker's or investment banker's fee in connection herewith
or with any of the transactions contemplated hereby except customary
underwriting commissions and other customary offering expenses in
connection with the issuance of the 1999 Senior Subordinated Notes.
(e) Amendment to Section 5.10 of the Loan Agreement. Section 5.10 of
the Loan Agreement is deleted in its entirety and the following revised Section
5.10 is hereby substituted in lieu thereof:
5.10 Compliance With Agreements; Payment of Indebtedness.
Borrower shall, and shall cause each Subsidiary to, promptly and
fully comply with all Contractual Obligations under all agreements,
indentures, leases and/or instruments to which Borrower or any
Subsidiary is a party, whether such agreements, indentures, leases
or instruments are with the Lenders or another Person, where the
failure so to comply could reasonably be expected to have a Material
Adverse Effect. Without limitation of the foregoing, Borrower shall
pay, and shall cause each Subsidiary to pay, all Indebtedness in
respect of such Contractual Obligations, subject to the
subordination provisions contained in the Senior Subordinated Note
Indenture and the 1999 Senior Subordinated Note Indenture or any
other instruments or agreements evidencing Indebtedness of Borrower
or any Subsidiary.
(f) Amendments to Section 6.3 of the Loan Agreement. (i) Section 6.3
of the Loan Agreement is hereby amended by deleting clause (a) thereof in its
entirety and substituting in lieu thereof the following revised clause (a):
(a) (i) prior to the consummation of the 1999 Debt Repayment,
regularly scheduled payments of interest in respect of the Senior
Subordinated Notes (but only to the extent permitted to be made pursuant
to Section 1303 of the Senior Subordinated Note Indenture), (ii) the
redemption of the Senior Subordinated Notes as part of the 1999 Debt
Repayment and (iii) regularly scheduled payments of interest in respect
of the 1999 Senior Subordinated Notes (but only to the extent permitted
to be made pursuant to Section 11.03 of the 1999 Senior Subordinated
Note Indenture);
8
<PAGE>
(ii) Section 6.3 of the Loan Agreement is hereby further
amended by deleting subclause (C) of clause (k) thereof in its entirety
and substituting in lieu thereof the following revised subclause (C):
(C) such dividends are permitted to be paid (x) until
the 1999 Debt Repayment, under Section 1011 of the Senior
Subordinated Note Indenture as in effect on the Closing Date
(without requiring the obtaining of any waiver or consents from
the holders of the Senior Subordinated Notes), and (y) under
Section 4.08 of the 1999 Senior Subordinated Note Indenture as
in effect on the Seventh Amendment Date (without requiring the
obtaining of any waiver or consent from the holders of the 1999
Senior Subordinated Notes);
(iii) Section 6.3 of the Loan Agreement is hereby further
amended by adding the following clause (q) at the end of such
Section:
(q) the exchange of 1999 Senior Subordinated Notes for
the Exchange Notes pursuant to the Exchange Offer.
(g) Amendment to Section 6.4 of the Loan Agreement. Section 6.4 of
the Loan Agreement is hereby deleted in its entirety and the following
revised Section 6.4 is hereby substituted in lieu thereof;
6.4 Restrictions on Amendments, Etc. Borrower shall not (a) amend,
modify or change, or consent or agree to any amendment, modification or
change to, the Senior Subordinated Note Indenture, the 1999 Senior
Subordinated Note Indenture, any Subordinated Note, any 1999 Senior
Subordinated Note or the Exchange Offer Registration Rights Agreement or
any of the terms relating to Subordinated Indebtedness (other than (i)
any such amendment, modification or change which would extend the
maturity or reduce the amount of any payment of principal thereof or
which would reduce the rate or extend the date of payment of interest
thereon or other amounts with respect thereto and (ii) amendments of the
type described in Sections 901(4), (5) and (8) of the Senior
Subordinated Note Indenture and Sections 8.01(2), (3), (4) and (8) of
the 1999 Senior Subordinated Note Indenture, provided, however, that any
amendment, modification or change with respect to the definitions of
"Credit Agreement", "Designated Senior Indebtedness", "Senior
Indebtedness" or "Guarantor Senior Indebtedness" (as defined in the
Senior Subordinated Note Indenture and the 1999 Senior Subordinated Note
Indenture), "Senior Credit Facility" (as defined in the 1999 Senior
Subordinated Note Indenture) or with respect to Article 13 of the Senior
Subordinated Note Indenture or Article Eleven of the 1999 Senior
Subordinated Note Indenture shall require the consent of the Majority
Lenders); (b) designate any "Senior Indebtedness" other than the
Obligations as "Designated Senior Indebtedness" (as such terms are
defined in the Senior Subordinated Note Indenture and the 1999 Senior
Subordinated Note Indenture) or (c) amend, modify or change, or consent
or agree to any amendment, modification or change to, the Certificate of
Designations or any of the terms relating to the New Preferred Stock or
the Exchange Preferred Stock.
9
<PAGE>
(h) Amendments to Section 9.1 of the Loan Agreement.
(i) Section 9.1 of the Loan Agreement is hereby amended by deleting the
third parenthetical phrase in clause (e) thereof, which begins with the word
"including" and ends with the word "Indenture", and substituting in lieu thereof
the following parenthetical phrase: (including, without limitation, a "Change of
Control", as defined in the Senior Subordinated Note Indenture and the 1999
Senior Subordinated Note Indenture);
(ii) Section 9.1 of the Loan Agreement is hereby further amended by
deleting clause (j) thereof in its entirety and substituting in lieu
thereof the following revised clause (j):
(j) Subordinated Indebtedness. Any determination is made by a
court of competent jurisdiction that payment of principal or
interest or both is due to any holder of any Subordinated
Indebtedness which would not be permitted by Section 6.3, that the
Senior Subordinated Notes are not subordinated to the Obligations in
accordance with the terms of the Senior Subordinated Note Indenture
or that the 1999 Senior Subordinated Notes are not subordinated to
the Obligations in accordance with the terms of the 1999 Senior
Subordinated Note Indenture; or
(iii) Section 9.1 of the Loan Agreement is hereby further amended by
adding at the end of such Section a new clause (s) to read as follows:
(s) 1999 Debt Repayment. Borrower fails to complete the 1999
Debt Repayment on or prior to July 30, 1999.
2. Conditions Precedent. This Amendment shall not become effective
unless and until each of the following conditions precedent shall have been
fulfilled, to Lenders' and its counsel's satisfaction:
(a) Documents. The Agent shall have received all of the following,
all in form and substance reasonably satisfactory to the Agent and
legal counsel for the Agent:
(i) a reaffirmation of the Subsidiary Guaranty and Subsidiary
Security Agreement signed by T-H Licensing and a reaffirmation of the
Lancer Pledge Agreement signed by Lancer;
(ii) an Officer's Certificate affirming that the conditions set
forth in clauses (b), (c), (d), (e), (f) and (g) below have been
satisfied;
(iii) corporate resolutions of Borrower's Board of Directors
authorizing Borrower's execution, delivery and performance of this
Amendment, issuance of the 1999 Senior Subordinated Notes, execution and
delivery of the 1999 Senior Subordinated Notes.
10
<PAGE>
Indenture, the 1999 Senior Subordinated Notes, the Exchange Agreement
and the Exchange Notes and all related transactions, certified by
Borrower's Secretary or Assistant Secretary to be true, correct and
complete; and
(iv) such other assurances, certificates, documents, consents or
opinions (in addition to those described hereinbelow) as the Agent may
reasonably require.
(b) 1999 Senior Subordinated Notes. (i) Borrower shall have
delivered to Lenders a certificate of a Senior Officer certifying that
its issuance of the 1999 Senior Subordinated Notes, and the application
of the proceeds thereof in connection with the 1999 Debt Repayment, will
not violate the Senior Subordinated Notes Indenture or the Certificate
of Designations and, as applicable, attaching calculations so
demonstrating.
(ii) Borrower and as applicable, the other parties thereto, shall
have executed and delivered the Exchange Offer Registration Rights
Agreement and the 1999 Senior Subordinated Note Indenture and Borrower
shall have issued the 1999 Senior Subordinated Notes pursuant thereto.
(c) Representations and Warranties. The representations and
warranties contained in Article 4 of the Loan Agreement (as amended
hereby) shall be true and correct in all material respects on and as of
the effective date hereof as though made on and as of that date (except
to the extent that such representations and warranties relate solely to
an earlier date and except as affected by transactions expressly
contemplated by the Loan Agreement).
(d) Absence of Litigation. There shall not be pending or, to the
best knowledge of Borrower, threatened, any litigation, arbitration,
injunction, proceeding, governmental investigation or inquiry against or
affecting Borrower or any Property of Borrower before any Governmental
Agency that could reasonably be expected to have a Material Adverse
Effect.
(e) No Default; Contractual Obligations. After giving effect to
this Amendment, Lancer, Borrower and T-H Licensing shall be in
compliance with all the terms and provisions of the Loan Documents to
which they are party, and no Default or Event of Default shall have
occurred and be continuing. The execution and delivery by Borrower of
this Amendment and the consummation of the transactions contemplated
hereby shall not cause Borrower to violate any Contractual Obligation to
which it is party or by which it is bound.
(f) No Material Adverse Effect. Since March 31, 1999, there shall
not have occurred: (1) any event or circumstance that could reasonably
be expected to have a Material Adverse Effect, or (2) any dividends or
other distributions made to the stockholders of Borrower, except as
permitted by Section 6.3 of the Loan Agreement and Section 7(b) of the
Lancer Pledge Agreement.
11
<PAGE>
(g) Compliance with Laws. Lenders shall be satisfied that
Borrower and its Subsidiaries are in compliance with all applicable
Laws, including, without limitation, all Environmental Laws and all Laws
pertaining to labor, occupational safety and health and ERISA matters
except to the extent that noncompliance could not reasonably be expected
to have a Material Adverse Effect.
3. Other Agreement
(a) Except as set forth expressly herein and above, all terms of
the Loan Agreement and the other Loan Decuments shall be and remain in
full force and effect and shall constitute the legal, valid, binding and
enforceable obligations of Borrower to the Agent and Lenders. In
furtherance of the foregoing, Borrower acknowledges that from and after
the date hereof, it shall continue to be bound by all provisions of the
Loan Agreement as amended hereby. To the extent any terms and conditions
in any of the other Loan Documents shall contradict or be in conflict
with any terms or conditions of the Loan Agreement, after giving effect
to this Amendment, such terms and conditions are hereby deemed modified
and amended accordingly to reflect the terms and conditions of the Loan
Agreement as modified and amended hereby.
(b) Borrower agrees to pay on demand the reasonable fees and
out-of-pocket expenses of counsel to GE Capital incurred in connection
with the preparation, execution, delivery and enforcement of this
Amendment, the closing hereof, and any other transactions contemplated
hereby.
(c) To induce the Agent and Lenders to enter into this Amendment,
Borrower hereby acknowledges and agrees that, as of the date hereof,
there exists no right of offset, defense or counterclaim in favor of
Borrower as against the Agent or Lenders with respect to the
Obligations.
(d) This Amendment shall be governed by, and construed in
accordance with the laws of the State of New York applicable to
contracts made and performed in such State and all applicable laws of
the United States of America.
(e) This Amendment may be executed in two or more counterparts, all
of which shall constitute one and the same agreement.
12
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.
FAIRFIELD MANUFACTURING
COMPANY, INC.
By: /s/ Richard A. Bush
------------------------
Richard A. Bush
Vice President-Finance
GENERAL ELECTRIC CAPITAL
CORPORATION, as Agent
By: /s/ Elaine L. Moore
------------------------
Elaine L. Moore
Senior Vice President,
as duly authorized
GENERAL ELECTRIC CAPITAL
CORPORATION, as Lender
By: /s/ Elaine L. Moore
------------------------
Elaine L. Moore
Senior Vice President,
as duly authorized
13
<PAGE>
ACKNOWLEDGMENT OF GUARANTOR
The undersigned, T-H Licensing, Inc., hereby (a) acknowledges its
receipt of a copy of and consents to the within and foregoing Amendment, (b)
agrees to be bound by the provisions thereof and (c) acknowledges and agrees
that the Subsidiary Guaranty, the Subsidiary Security Agreement and all other
Loan Documents to which the undersigned is a party shall continue in full force
and effect from and after the execution and delivery of the within and foregoing
Amendment without diminution or impairment.
IN WITNESS WHEREOF, the undersigned has set its hand as of the 19th day
of May, 1999.
T-H LICENSING, INC.
By: /s/ Craig Dolinick
-------------------
14
<PAGE>
ACKNOWLEDGMENT OF LANCER
The undersigned, Lancer Industries, Inc., hereby (a) acknowledges its
receipt of a copy of and consents to the within and foregoing amendment, (b)
agrees to be bound by the provisions therof and (c) acknowledges and agrees that
the Lancer Pledge Agreement shall continue in full force and effect from and
after the execution and delivery of the within and foregoing Amendment without
diminution or impairment.
IN WITNESS WHEREOF, the undersigned has set its hand as of the 19th
day of May, 1999.
LANCER INDUSTRIES, INC.
By: /s/ Craig Dolinick
----------------------
15
<PAGE>
SECURITIES AND EXCHANGE COMMISION
WASHINGTON, D.C. 20549
FORM T-1
STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A
TRUSTEE PURSUANT TO SECTION 305(b)(2)
FIRST UNION NATIONAL BANK
(Exact Name of Trustee as Specified in its Charter)
22-1147033
(I.R.S. Employer Identification No.)
301 SOUTH COLLEGE STREET, CHARLOTTE, NORTH CAROLINA
(Address of Principal Executive Offices)
28288-0630
(Zip Code)
FIRST UNION NATIONAL BANK
123 SOUTH BROAD STREET
PHILADELPHIA, PA 19109
ATTENTION: CORPORATE TRUST ADMINISTRATION
(215) 985-6000
(Name, address and telephone number of Agent for Service)
FAIRFIELD MANUFACTURING COMPANY, INC.
(Exact Name of Obligor as Specified in its Charter)
DELAWARE
(State or other jurisdiction of Incorporation or Organization)
63-0500160
(I.R.S. Employer Identification No.)
U.S. ROUTE 52 SOUTH
LAFAYETTE, INDIANA
(Address of Principal Executive Offices)
47905
(Zip Code)
9 5/8% SENIOR SUBORDINATED NOTES DUE 2008
(Title of Indenture Securities)
<PAGE>
1. General information.
Furnish the following information as to the trustee:
a) Name and address of each examining or supervisory authority to which it is
subject:
Comptroller of the Currency
United States Department of the Treasury
Washington, D.C. 20219
Federal Reserve Bank
Richmond, Virginia 23219
Federal Deposit Insurance Corporation
Washington, D.C. 20429
b) Whether it is authorized to exercise corporate trust powers.
Yes.
2. Affiliations with obligor.
If the obligor is an affiliate of the trustee, describe each such
affiliation.
None.
3. Voting securities of the trustee.
Furnish the following information as to each class of voting securities of
the trustee:
Not applicable - see answer to Item 13.
4. Trusteeships under other indentures.
If the trustee is a trustee under another indenture under which any other
securities, or certificates of interest or participation in any other
securities, of the obligor are outstanding, furnish the following information:
Not applicable - see answer to Item 13.
5. Interlocking directorates and similar relationships with the obligor or
underwriters.
If the trustee or any of the directors or executive officers of the
trustee is a director, officer, partner, employee, appointee, or
representative of the obligor or of any underwriter for the obligor, identify
each such person having any such connection and state the nature of each such
connection.
Not applicable - see answer to Item 13.
<PAGE>
6. Voting securities of the trustee owned by the obligor or its officials.
Furnish the following information as to the voting securities of the
trustee owned beneficially by the obligor and each director, partner, and
executive officer of the obligor:
Not applicable - see answer to Item 13.
7. Voting securities of the trustee owned by underwriters or their officials.
Furnish the following information as to the voting securities of the
trustee owned beneficially by each underwriter for the obligor and each
director, partner, and executive officer of each such underwriter:
Not applicable - see answer to Item 13.
8. Securities of the obligor owned or held by the trustee.
Furnish the following information as to securities of the obligor owned
beneficially or held as collateral security for obligations in default by the
trustee:
Not applicable - see answer to Item 13.
9. Securities of underwriters owned or held by the trustee.
If the trustee owns beneficially or holds as collateral security for
obligations in default any securities of an underwriter for the obligor,
furnish the following information as to each class of securities of such
underwriter any of which are so owned or held by the trustee:
Not applicable - see answer to Item 13.
10. Ownership or holdings by the trustee of voting securities of certain
affiliates or security holders of the obligor.
If the trustee owns beneficially or holds as collateral security for
obligations in default voting securities of a person who, to the knowledge of
the trustee (1) owns 10 percent or more of the voting stock of the obligor or
(2) is an affiliate, other than a subsidiary, of the obligor, furnish the
following information as to the voting securities of such person:
Not applicable - see answer to Item 13.
11. Ownership or holdings by the trustee of any securities of a person
owning 50 percent or more of the voting securities of the obligor.
<PAGE>
If the trustee owns beneficially or holds as collateral security for
obligations in default any securities of a person who, to the knowledge of the
trustee, owns 50 percent or more of the voting securities of the obligor,
furnish the following information as to each class of securities of such
person any of which are so owned or held by the trustee:
Not applicable - see answer to Item 13.
12. Indebtedness of the obligor to the trustee.
Except as noted in the instructions, if the obligor is indebted to the
trustee, furnish the following information:
Not applicable - see answer to Item 13.
13. Defaults by the obligor.
(a) State whether there is or has been a default with respect to the
securities under this indenture. Explain the nature of any such default.
None.
(b) If the trustee is a trustee under another indenture under which any
other securities, or certificates of interest or participation in any other
securities, of the obligor are outstanding, or is trustee for more than one
outstanding series of securities under the indenture, state whether there has
been a default under any such indenture or series, identify the indenture or
series affected, and explain the nature of any such default.
None
14. Affiliations with the underwriters.
If any underwriter is an affiliate of the trustee, describe each such
affiliation.
Not applicable - see answer to Item 13.
15. Foreign trustee.
Identify the order or rule pursuant to which the trustee is authorized
to act as sole trustee under indentures qualified or to be qualified under the
Act.
Not applicable - trustee is a national banking association organized
under the laws of the United States.
<PAGE>
16. List of Exhibits.
List below all exhibits filed as part of this statement of eligibility.
___ 1. Copy of Articles of Association of the trustee as now in effect.*
___ 2. Copy of the Certificate of the Comptroller of the Currency dated March
4, 1998, evidencing the authority of the trustee to transact business.**
___ 3. Copy of the Certification of Fiduciary Powers of the trustee by the
Office of the Comptroller of the Currency dated April 7, 1999.***
___ 4. Copy of existing by-laws of the trustee.***
___ 5. Copy of each indenture referred to in Item 4, if the obligor is in
default.
-Not Applicable.
X 6. Consent of the trustee required by Section 321(b) of the Act.
___ 7. Copy of report of condition of the trustee at the close of business on
March 31, 1999, published pursuant to the requirements of its supervising
authority.***
___ 8. Copy of any order pursuant to which the foreign trustee is authorized
to act as sole trustee under indentures qualified or to be qualified
under the Act.
- Not Applicable
___ 9. Consent to service of process required of foreign trustees pursuant to
Rule 10a-4 under the Act.
- Not Applicable
- ---------------------
*Previously filed with the Securities and Exchange Commission on
March 16, 1998 as an Exhibit to Form T-1 in connection with Registration
Statement Number 333-47985, ** and filed with the Securities and Exchange
Commission on July 15, 1998 as an Exhibit to Form T-1 in connection with
Registration Statement Number 333-59145, and incorporated herein by reference
*** and filed with the Securities and Exchange Commission on May 20, 1999 as
an Exhibit to Form T-1 in connection with Registration Statement Number
33-49851.
<PAGE>
NOTE
The trustee disclaims responsibility for the accuracy or completeness
of information contained in this Statement of Eligibility and Qualification
not known to the trustee and not obtainable by it through reasonable
investigation and as to which information it has obtained from the obligor and
has had to rely or will obtain from the principal underwriters and will have
to rely.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, the
trustee, First Union National Bank, a national banking association organized
and existing under the laws of the United States of America, has duly caused
this Statement of Eligibility and Qualification to be signed on its behalf by
the undersigned, thereunto duly authorized, all in the City of Philadelphia
and Commonwealth of Pennsylvania, on the 1st Day of July, 1999.
FIRST UNION NATIONAL BANK
By: /s/ George J. Rayzis
------------------------
George J. Rayzis
Vice President
<PAGE>
EXHIBIT 6
CONSENT OF TRUSTEE
Pursuant to the requirements of Section 321(b) of the Trust Indenture Act of
1939, and in connection with the proposed issue of Fairfield Manufacturing
Company, Inc. 9 5/8% Senior Subordinated Notes due 2008, First Union National
Bank, hereby consents that reports of examinations by Federal, State,
Territorial or District authorities may be furnished by such authorities to
the Securities and Exchange Commission upon request therefor.
FIRST UNION NATIONAL BANK
By: /s/ George J. Rayzis
------------------------
George J. Rayzis
Vice President
Philadelphia, Pennsylvania
July 1, 1999
