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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 3, 1999
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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GENERAC PORTABLE PRODUCTS, INC.
GENERAC PORTABLE PRODUCTS, LLC
GPPW, INC.
(EXACT NAME OF REGISTRANTS AS SPECIFIED IN THEIR RESPECTIVE CHARTERS)
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DELAWARE 3621 13-4006887
DELAWARE (PRIMARY STANDARD INDUSTRIAL 39-1932782
WISCONSIN CLASSIFICATION 13-4012695
(STATE OR OTHER JURISDICTION OF CODE NUMBER) (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBERS)
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1 GENERAC WAY
JEFFERSON, WISCONSIN 53549
(920) 674-3750
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANTS' PRINCIPAL EXECUTIVE OFFICES)
DORRANCE J. NOONAN, JR.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
GENERAC PORTABLE PRODUCTS, LLC
1 GENERAC WAY
JEFFERSON, WISCONSIN 53549
(920) 674-3750
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
WITH A COPY TO:
MARK ZVONKOVIC, ESQ.
KING & SPALDING
1185 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10036
(212) 556-2100
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED EXCHANGE OFFER: As soon as
practicable after the effective date of this Registration Statement.
If the only 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, please check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration number of the earlier effective
registration number for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier, effective registration statement
for the same offering. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
AMOUNT TO AGGREGATE PRICE AGGREGATE AMOUNT OF
TITLE OF CLASS OF SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT(1) OFFERING PRICE(1) REGISTRATION FEE
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11 1/4% Senior Subordinated Notes Due 2006... $110,000,000 100% $110,000,000 $30,580
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(1) Estimated solely for the purpose of computing the registration fee.
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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PROSPECTUS
GENERAC PORTABLE PRODUCTS, LLC
GPPW, INC.
ISSUERS
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OFFER TO EXCHANGE
11 1/4% SENIOR SUBORDINATED NOTES DUE 2006
FOR ALL OUTSTANDING
11 1/4% SENIOR SUBORDINATED NOTES DUE 2006
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THE NEW NOTES --
- -- Identical in all material respects to the Old Notes, except for certain
transfer restrictions, registration rights and additional interest provisions
relating to the Old Notes
- -- Interest accrues from the date of issuance at the rate of 11 1/4% per annum,
payable semi-annually in arrears on each January 1 and July 1, commencing
January 1, 1999
- -- Unsecured and subordinated to all existing and future Senior Debt
- -- Rank without preference with all future senior subordinated indebtedness and
as senior to all future subordinated indebtedness
- -- Fully and unconditionally guaranteed by Generac Portable Products, Inc.
THE EXCHANGE OFFER --
- -- For all of the Old Notes
- -- Expires at 5:00 p.m., New York City time, on [ ],
1999
- -- Subject to customary conditions
CONSIDER CAREFULLY THE "RISK FACTORS" BEGINNING ON PAGE 8 OF THIS PROSPECTUS.
You should rely only on the information contained in this Prospectus or that we
have referred you to. We have not authorized anyone to provide you with
information that is different. We are not offering to sell or asking you to buy
anything other than the New Notes. We are not offering to sell or asking you to
buy anything in any jurisdiction where doing so would be against the law.
Neither the Securities and Exchange Commission nor any state securities
commission has approved the New Notes or determined if this Prospectus is
accurate or complete. Any representation to the contrary is a criminal offense.
SUBJECT TO COMPLETION, DATED , 1999.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE AMENDED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
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WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission (the "SEC") a
registration statement on Form S-4 (the "Registration Statement") under the
Securities Act with respect to the 11 1/4% Senior Subordinated Notes due 2006
(the "New Notes"). As allowed by SEC rules, this Prospectus does not contain all
of the information included in the Registration Statement. Our descriptions in
this Prospectus concerning the contents of any contract, agreement or document
are not necessarily complete. For those contracts, agreements or documents that
we filed as exhibits to the Registration Statement, you should read the exhibit
for a more complete understanding of the document or subject matter involved.
As a result of the filing of the Registration Statement with the SEC, we
will be required to file annual, quarterly and special reports, proxy statements
and other information with the SEC. You may read and copy any document we file
with the SEC, including the Registration Statement, at the SEC's public
reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call
the SEC at 1-800-SEC-0330 for further information on the public reference room.
You may also request copies of such documents, upon payment of a duplicating
fee, by writing to the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549 or
obtain copies of such documents over the Internet at the SEC's website at
http://www.sec.gov.
FORWARD-LOOKING STATEMENTS
The statements, other than statements of historical facts included in this
Prospectus, including statements set forth under the "Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and "Business" regarding the Issuers' future financial position,
business strategy, budgets, projected costs and plans and objectives of
management for future operations, are forward-looking statements. In addition,
forward-looking statements generally can be identified by the use of
forward-looking terminology such as "may," "will," "expect," "intend,"
"estimate," "anticipate" or "believe" or the negative thereof or variations
thereon or similar terminology. Although we believe that the expectations
reflected in such forward-looking statements will prove to have been correct, we
can give no assurance that such expectations will prove to have been correct.
You are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of this Prospectus. Except as
required by law, we are not obligated to publicly release any revision to these
forward-looking statements to reflect events or circumstances after the date of
this Prospectus or to reflect the occurrence of unanticipated events. Important
factors that could cause actual results to differ materially from our
expectations (the "Cautionary Statements") are disclosed under "Risk Factors"
and elsewhere in this Prospectus including in conjunction with some of the
forward-looking statements included in this Prospectus. All subsequent written
and oral forward-looking statements attributable to the Issuers, or persons
acting on their behalf, are expressly qualified in their entirety by the
Cautionary Statements.
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SUMMARY
This summary highlights some information from this Prospectus, but does not
contain all material features of the Exchange Offer. Please read the detailed
information and consolidated financial statements and the notes thereto
appearing elsewhere in this Prospectus. Except as otherwise required by the
context, references in this Prospectus to "we," "us" or the "Issuers" refer to
Generac Portable Products, LLC and GPPW, Inc. References to the "Operating
Company" means Generac Portable Products, LLC. References to "Holdings" means
Generac Portable Products, Inc. Except as noted in the section "Description of
the New Notes," references to the "Company" means Holdings and its subsidiaries,
including the Issuers, on a consolidated basis and, as the context requires, the
Company's predecessor. References to the "Predecessor" refers to the Portable
Products Division of Generac Corporation. The term "Old Notes" refers to the
11 1/4% Senior Subordinated Notes due 2006 that were issued on July 9, 1998. The
term "New Notes" refers to the 11 1/4% Senior Subordinated Notes due 2006 to be
issued in the Exchange Offer. The term "Notes" refers to the Old Notes and the
New Notes collectively. The term "you" refers to prospective investors in the
New Notes.
ABOUT THE COMPANY
The Company designs, manufactures and markets engine-powered tools for use
in both industrial and residential applications, with its two principal product
lines being portable generators and pressure washers. In 1998, as measured by
net sales, the Company believes it was the largest U.S. manufacturer of portable
generator sets and the second largest U.S. manufacturer of consumer pressure
washers, with a domestic market share in each category as follows:
ESTIMATED 1998
PRODUCT U.S. MARKET SHARE
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Portable generators........................... 29%
Pressure washers.............................. 33%
The Company sells its portable generators, pressure washers and other
products primarily to home center chains, mass merchants and warehouse clubs as
well as to independent representatives. Since 1961, the Company has been the
major supplier of portable generators to Sears, Roebuck and Co., and has been
one of two suppliers of pressure washers to Sears, both marketed under the
Craftsman(R) label. The Company is also a core supplier of portable generators
and pressure washers, both marketed under the Generac(R) label, to The Home
Depot, Inc., the largest and one of the fastest growing retail home center
chains in North America.
The Company's performance has benefited from strong growth in the
engine-powered tools market as well as favorable demographic trends. Over the
past three years, the Company's net sales have grown at a compound annual rate
of approximately 38%, increasing from $104.8 million in 1995 to $276.4 million
in 1998.
The Company believes that its strength in each product category is the
result of its strategic approach to engineering and manufacturing, its
innovation in product development and its focus on product quality. In addition
to the manufacture of portable generators and pressure washers, the Company
manufactures some of the components for those products, such as alternators,
pressure washer pumps and blow-molded gas tanks. The benefits of this
"strategic" vertical integration for the Company are (1) significant cost
advantages
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over certain competitors who source components from third party suppliers and
(2) improved operating profitability through the reconfiguration of production
processes and the standardization of components. The Company also has
long-standing customer relationships and a unique, nationwide service network to
build and support its customer base. The Company believes that these strengths
facilitate the Company's ability to serve its increasingly sophisticated and
demanding retail customers.
The Company has been designing, building and marketing portable generators
since its founding in 1959. The principal executive offices of the Company are
located at 1 Generac Way, Jefferson, Wisconsin 53549, telephone (920) 674-3750.
THE EXCHANGE OFFER
New Notes....................... The forms and terms of the New Notes are
identical in all material respects to the
terms of the Old Notes for which they may be
exchanged pursuant to the Exchange Offer,
except for certain transfer restrictions,
registration rights and additional interest
provisions relating to the Old Notes
described elsewhere in this Prospectus under
"Description of the Old Notes" and "Old
Notes Registration Rights Agreement."
The Exchange Offer.............. We are offering to exchange up to
$110,000,000 aggregate principal amount of
the New Notes for up to $110,000,000
aggregate principal amount of Old Notes. Old
Notes may be exchanged only in integral
multiples of $1,000.
Expiration Date; Withdrawal of
Tender........................ Unless we extend the Exchange Offer, it will
expire at 5:00 p.m., New York City time, on
[ ], 1999. We will not extend this
term period to a date later than [ ],
1999. You may withdraw any Old Notes you
tender pursuant to the Exchange Offer at any
time prior to [ ], 1999. We will
return, as promptly as practicable after the
expiration or termination of the Exchange
Offer, any Old Notes not accepted for
exchange for any reason without expense to
you.
Certain Conditions to the
Exchange Offer.................. The Exchange Offer is subject to customary
conditions, which may be waived by us. These
conditions are included in the Letter of
Transmittal we have provided to you with
this Prospectus.
Procedures for Tendering Old
Notes........................... If you wish to accept the Exchange Offer,
you must complete, sign and date the Letter
of Transmittal in accordance with the
instructions and deliver the Letter of
Transmittal, along with the
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Old Notes and any other required
documentation, to the Exchange Agent. By
executing the Letter of Transmittal, you
will represent to us that, among other
things:
- any New Notes you receive will be acquired
in the ordinary course of your business,
- you have no arrangement with any person to
participate in the distribution of the New
Notes, and
- you are not an "affiliate," as defined in
Rule 405 of the Securities Act of 1933, as
amended, of the Issuers or, if you are an
affiliate, you will comply with the
registration and prospectus delivery
requirements of the Securities Act to the
extent applicable.
If you hold your Old Notes through The
Depository Trust Company ("DTC") and wish to
participate in the Exchange Offer, you may
do so through DTC's Automated Tender Offer
Program ("ATOP"). By participating in the
Exchange Offer, you will agree to be bound
by the Letter of Transmittal as though you
had executed such Letter of Transmittal.
Interest on the New Notes....... Interest on the New Notes:
- accrues from the date of issuance at the
rate of 11 1/4% per annum, and
- is payable semi-annually in arrears on
each January 1 and July 1, commencing on
January 1, 1999.
Interest on the Old Notes accepted for
exchange will stop accruing upon the
issuance of the New Notes.
Special Procedures for
Beneficial Owners............... If you are a beneficial owner whose Old
Notes are registered in the name of a
broker, dealer, commercial bank, trust
company or other nominee and wish to tender
such Old Notes in the Exchange Offer, please
contact the registered holder as soon as
possible and instruct them to tender on your
behalf and comply with our instructions set
forth elsewhere in this Prospectus.
Guaranteed Delivery Procedure... If you wish to tender your Old Notes, you
may, in certain instances, do so according
to the guaranteed delivery procedures set
forth elsewhere in this Prospectus under
"The Exchange Offer -- Proce-
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dures for Tendering Old Notes -- Guaranteed
Delivery."
Registration Rights Agreement... We sold the Old Notes to the Initial
Purchaser in a transaction exempt from the
registration requirements of the Securities
Act of 1933, as amended, on July 9, 1998. At
that time, the Issuers and the Initial
Purchaser entered into a Registration Rights
Agreement which grants the holders of the
Old Notes certain exchange and registration
rights. This Exchange Offer satisfies those
rights, which terminate upon consummation of
the Exchange Offer. You will not be entitled
to any exchange or registration rights with
respect to the New Notes. Also, after
consummation of the Exchange Offer no
exchange or registration rights will exist
with respect to any Old Notes that remain
outstanding.
Certain Federal Tax
Considerations ..
With respect to the exchange of the Old
Notes for the New Notes:
- the exchange will not constitute a taxable
exchange for U.S. federal income tax
purposes,
- you will not recognize gain or loss upon
receipt of the New Notes,
- you must include interest in gross income
to the same extent as the Old Notes, and
- your holding period for the New Notes will
include the holding period for the Old
Notes.
Use of Proceeds................. We will not receive any proceeds from the
exchange of Notes pursuant to the Exchange
Offer.
Exchange Agent.................. We have appointed Bankers Trust Company as
the Exchange Agent for the Exchange Offer.
The telephone number of the Exchange Agent
is (800) 735-7777.
TERMS OF THE NOTES
The form and terms of the New Notes are substantially the same as the form
and terms of the Old Notes, except that the New Notes are registered under the
Securities Act. As a result, the New Notes will not bear legends restricting
their transfer and will not contain the registration rights and additional
interest provisions contained in the Old Notes.
Issuers......................... Generac Portable Products, LLC and GPPW,
Inc.
Securities Offered.............. $110,000,000 aggregate principal amount of
11 1/4% Senior Subordinated Notes due 2006.
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Maturity........................ July 1, 2006
Interest Payment Dates.......... January 1 and July 1 of each year,
commencing January 1, 1999.
Sinking Fund.................... None.
Optional Redemption............. Except as described below and under "Change
of Control," we may not redeem the Notes
prior to July 1, 2002. After July 1, 2002,
we may redeem any amount of the Notes at any
time at the respective redemption prices,
together with accrued and unpaid interest,
if any, to the date of redemption. In
addition, at any time prior to July 1, 2001,
we may redeem up to 35% of the original
aggregate principal amount of the Notes with
the cash proceeds of one or more Public
Equity Offerings (as defined) at a
redemption price equal to 111.250% of the
principal amount to be redeemed, together
with accrued and unpaid interest, if any, to
the date of redemption, as long as at least
65% of the original aggregate principal
amount of the Notes remain outstanding after
such redemption.
Holdings Guarantee.............. Holdings will issue a guarantee of the Notes
under which Holdings, as primary obligor,
will fully and unconditionally guarantee the
payment of the Notes when due on a senior
subordinated basis.
Change of Control............... Upon the occurrence of a Change of Control
(as defined), the holders of the Notes have
the right to require us to repurchase the
Notes at a price equal to 101% of the
original aggregate principal amount,
together with accrued and unpaid interest,
if any, to the date of repurchase.
Ranking......................... The Notes will be unsecured and will be
subordinated to all existing and future
Senior Debt of the Issuers. The Notes will
rank without preference with all existing
and future senior subordinated indebtedness
of the Issuers and will rank senior to all
existing and future subordinated
indebtedness of the Issuers.
Restrictive Covenants........... The Indenture under which the New Notes will
be issued and the Old Notes were issued
limits:
- the incurrence of additional indebtedness
by us and our subsidiaries,
- the payment of dividends on, and
redemption of, our capital stock and our
subsidiaries' capital stock and the
redemption of our and our subsidiaries'
subordinated obligations,
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- investments,
- sales of assets and subsidiary stock,
- transactions with affiliates, and
- liens.
In addition, the Indenture limits our
ability to engage in consolidations, mergers
and transfers of substantially all of our
assets and also contains certain
restrictions on distributions from our
subsidiaries. All of these limitations and
prohibitions are subject to a number of
important qualifications and exceptions.
Absence of a Public Market for
the New Notes................... In general, you may freely transfer the New
Notes. However, there are exceptions to this
general statement described elsewhere in
this Prospectus under the section "The
Exchange Offer -- Resales of New Notes."
Further, the New Notes will be new
securities for which there will not
initially be a market. As a result, the
development or liquidity of any market for
the New Notes may not occur. BT Alex. Brown
Incorporated, the initial purchaser of the
Old Notes, has advised us that it currently
intends to make a market in the New Notes.
However, you should be aware that the
initial purchaser is not obligated to do so.
In the event such a market may develop, the
initial purchaser may discontinue it at any
time without notice. We do not intend to
apply for a listing of the New Notes on any
securities exchange or on any automated
dealer quotation system.
For additional information regarding the New Notes, see "Description of the
New Notes" and "Certain United States Federal Income Tax Consequences."
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RISK FACTORS
You should consider carefully the information set forth under the caption
"Risk Factors" beginning on page 8 and all the other information set forth in
this Prospectus before deciding whether to participate in the Exchange Offer.
RATIO OF EARNINGS TO FIXED CHARGES
The ratio of earnings to fixed charges for the Company and Predecessor is
set forth below for the periods indicated.
PREDECESSOR COMPANY PRO FORMA(1)
------------------------------- ----------------- -----------------
YEAR ENDED
DECEMBER 31, JANUARY 1, 1998 JULY 10, 1998
------------- THROUGH THROUGH YEAR ENDED
1996 1997 JULY 9, 1998 DECEMBER 31, 1998 DECEMBER 31, 1998
----- ----- --------------- ----------------- -----------------
Ratio of earnings to
fixed charges....... 4.0x 9.3x 10.2x 1.6x 1.4x
==== ==== ===== ==== ====
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(1) To reflect the transactions described later in this Prospectus under the
section "The Transaction."
In computing the ratio of earnings to fixed charges, "earnings" represents
income (loss) before income taxes plus fixed charges. "Fixed charges" consists
of interest, amortization of debt issuance costs and a portion of rent, which is
representative of the interest factor (approximately one-third of rent expense).
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RISK FACTORS
Holders tendering Old Notes in the Exchange Offer should carefully review
the information contained elsewhere in this Prospectus and should particularly
consider the matters set forth below.
SIGNIFICANT LEVERAGE; ABILITY TO SERVICE DEBT
Because of the July 9, 1998 acquisition of the Portable Products Division
of Generac Corporation as described under the caption "The Transaction" later in
this Prospectus, we have a significant amount of debt outstanding. You should be
aware that this significant amount of debt could have important consequences to
you as a holder of the Notes. Below we have identified for you many, but not
all, of the consequences resulting from this significant amount of debt that we
now owe.
- We may be unable to obtain additional financing in the future for working
capital, capital expenditures, acquisitions and general corporate
purposes.
- A significant portion of our cash flow from operations must be dedicated
to the repayment of the indebtedness, thereby reducing the amount of cash
we have available for other purposes.
- We may be disadvantaged as compared to our competitors as a result of the
significant amount of debt we now owe.
- Our ability to adjust to changing market conditions and our ability to
withstand competition may be hampered by the amount of debt we now owe.
It may also make us more vulnerable in a downturned market or a
recession.
You should be aware that our ability to repay or refinance our current debt
depends on our successful financial and operating performance. Our ability to
meet our payment obligations may depend on our ability to successfully implement
our business strategy. Unfortunately, we cannot assure you that we will be
successful in implementing our strategy or in realizing our anticipated
financial results. You should also be aware that our financial and operational
performance depends upon a number of factors, many of which are beyond our
control. These factors include:
- the current economic and competitive conditions in the engine-powered
tools industry,
- any operating difficulties, operating costs or pricing pressures we may
experience,
- the passage of legislation or other regulatory developments that affects
us adversely, and
- any delays in implementing any strategic projects we may have.
Our inability to repay our current debt may result in a number of serious
consequences, including (1) a reduction or delay of expansion, (2) a sale of
some of our assets, or (3) a reorganization or recapitalization of the Company.
Any one or more of these consequences could adversely affect your investment in
the Notes. For more information about the Company's indebtedness or business
strategy, you should read the information we have included under the captions
"Description of the Senior Secured Credit Facility," "Description of the New
Notes," and "Business -- Business Strategy" later in this Prospectus.
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ABSENCE OF INDEPENDENT OPERATING HISTORY; DEPENDENCE ON GENERAC CORPORATION
We have operated as an independent entity only since July 1998, when the
Company acquired the Portable Products Division of Generac Corporation. The
principal operations of the Company were established in 1959. In January, 1997,
as part of a corporate reorganization, the Company's operations were placed in a
separate division of Generac Corporation. The Company has historically been
dependent on Generac Corporation for certain financial support and
administrative systems and services. Our future results depend largely upon our
ability to operate effectively as an independent company. We believe that we can
accomplish this task. However, we cannot guarantee to you that we will.
In addition, we have used the Generac-Nagano overhead valve industrial
engine (the "GN OHVI engine") in certain of our products since 1992. At the time
of the acquisition of the Portable Products Division of Generac Corporation, we
entered into an engine supply agreement with Generac Corporation. This agreement
provides that Generac Corporation will exclusively supply us with the GN OHVI
engine for use on welders, pressure washers and consumer portable generators,
and for other approved applications. The engine supply agreement obligates us to
make minimum annual purchases of the GN OHVI engine over the next nine years and
gives us the right to increase the amount of engines purchased based on its
forecast requirements. Assuming that we make the minimum annual purchases,
Generac Corporation may not sell the GN OHVI engine to other manufacturers or
assemblers for use in pressure washers, consumer portable generators and
welders. Although we believe the terms of the engine supply agreement are fair
and reasonable, we cannot assure you that the engine supply agreement will
adequately provide for the Company's future engine requirements. On the one
hand, Generac Corporation may not be able to supply all the GN OHVI engines we
may require, and on the other, the annual minimum purchase requirement may be
for a greater number of engines than what we require in any given year. Our
inability to obtain all of the engines we need or our obligation to buy more
engines than we need could affect the Company's financial performance in a
negative way.
GOVERNMENT REGULATION
As is the case with most businesses, we are subject to certain governmental
regulations with respect to environmental and health and safety matters, many of
which provide for substantial fines and criminal sanctions for violations. We
believe that our operations and facilities have been and are being operated in
compliance in all material respects with applicable environmental and health and
safety laws and regulations. However, the operation of manufacturing plants
entails risks in these areas. We cannot assure you that the Company will not
incur costs related to such matters in the future that will negatively affect
us. In addition, potentially significant expenditures could be required in order
to comply with evolving environmental and health and safety laws or regulations
that may be adopted or imposed in the future. You should also read the section
entitled "Business -- Environmental Matters" appearing later in this Prospectus
for additional discussion related to this matter.
DEPENDENCE UPON KEY PERSONNEL
As a holder of Notes, you have no right to participate in the Company's
management. The Company's continued success is highly dependent upon the
personal efforts and abilities of our senior management, including Dorrance J.
Noonan, Jr., our President and
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Chief Executive Officer, Gary J. Lato, our Chief Financial Officer, and James H.
Deneffe, our Senior Vice President of Sales and Marketing. We do not have
employment contracts with any of these officers and the loss of any one of them
could impact the Company in a negative way. Please also read the "Management"
section later in this Prospectus for additional information.
CONTROL BY PRINCIPAL STOCKHOLDER
You should be aware that a total of approximately 55% of Generac Portable
Products, Inc.'s voting stock is controlled by The Beacon Group III -- Focus
Value Fund, L.P. ("Beacon"). Accordingly, Beacon indirectly owns a majority of
the equity interest in the Issuers. As a result, it has the ability to exercise
practical control over the outcome of actions requiring the approval of our
equity holders, including potential acquisitions, elections of the Issuers'
Boards of Directors and sales or changes in control of the Issuers. You should
read the section entitled "Security Ownership" later in this Prospectus for
additional information.
YEAR 2000
Year 2000 issues exist when dates are recorded in computers using two
digits (rather than four) and are then used for arithmetic operations,
comparisons or sorting. A two-digit recording may recognize a date using "00" as
1900 rather than 2000, which could cause our computer systems to perform
inaccurate computations. We have adopted a three phase approach of assessment,
correction and testing. Although we have not yet completed our Year 2000
project, we currently estimate that our information technology systems will be
Year 2000 compliant by September 1, 1999. You should be aware that Year 2000
issues relate not only to our systems, but also to those used by our suppliers.
We anticipate that system replacements and modifications will resolve any Year
2000 issues that may exist with our suppliers or their suppliers. However, we
cannot guarantee to you that such replacements or modifications will be
completed successfully or on time and, as a result, any failure to complete such
modification on time may materially affect our financial and operating results
in a negative way. You should read the section "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Year 2000 Strategy"
later in this Prospectus for additional information.
RESTRICTIVE DEBT COVENANTS
The Indenture and our Credit Facility (as defined below) impose significant
operating and financial restrictions on us and our subsidiaries. These
restrictions may significantly limit or prohibit us from engaging in certain
transactions, including the following:
- borrowing additional money,
- paying dividends or other distributions to our stockholders,
- making certain investments,
- creating certain liens on our assets,
- selling certain assets currently held by us,
- entering into transactions with any of our affiliates, and
- engaging in certain mergers or consolidations.
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The senior subordinated credit facility we entered into in financing the
acquisition of the Portable Products Division of Generac Corporation (the
"Credit Facility") imposes significant restrictive covenants and requires
Generac Portable Products, LLC to maintain specified financial ratios and
satisfy certain financial tests. Our ability to meet these financial ratios and
tests may be affected by events beyond our control and, as a result, we cannot
guarantee to you that we will be able to meet such tests. In addition, the
restrictions contained in the Credit Facility could limit our ability to obtain
future financing, make needed capital expenditures, withstand a future downturn
in our business or in the economy or otherwise conduct necessary corporate
activities. Our failure to comply with the restrictions in the Indenture and the
Credit Facility could lead to a default under the terms of those documents. In
the event of such a default, the applicable lender could declare all amounts
borrowed and all amounts due under other instruments that contain certain
provisions of cross-acceleration or cross-default due and payable, including all
interest that is accrued and unpaid. In addition, the lenders under such
agreements could terminate their commitments to lend to us. If that does occur,
we cannot assure you that we would be able to make the necessary payments to the
lenders and we cannot give you any assurance that we would be able to find
additional alternative financing. Even if we could obtain additional alternative
financing, we cannot assure you that it would be on terms that are favorable or
acceptable to us.
You should also be aware that the existing indebtedness under the Credit
Facility is secured by substantially all of our and our affiliates' assets.
Should a default or acceleration of such indebtedness occur, the holders of such
indebtedness could seize these assets securing the indebtedness and sell the
assets to satisfy all or a part of what is owed. Please refer to the sections in
this Prospectus entitled "Description of the New Notes -- Certain Covenants" and
"Description of the Senior Secured Credit Facility" later in this Prospectus for
additional information.
HOLDINGS GUARANTEE
Holdings will issue a guarantee of the Notes under which Holdings, as
primary obligor, will fully and unconditionally guarantee the payment of the
Notes when due on a senior subordinated basis. This guarantee will be
subordinated in right of payment to all senior indebtedness of Holdings and
effectively subordinated to all indebtedness and other liabilities (including
trade payables) of Holdings' subsidiaries. Since Holdings is a holding company
with no significant operations and no significant investments in businesses
other than the Issuers, this guarantee by Holdings provides little, if any,
additional credit support for the Notes. Investors should not rely on this
guarantee in evaluating an investment in the Notes.
COMPETITION
We operate in a highly competitive industry. Competition is based primarily
on price, availability, product differentiation, quality of products and breadth
of product offerings. Several of our competitors have significantly greater
financial and operating resources and name recognition than we have. As a result
of these competitive conditions, we may not be able to sustain past levels of
revenue or continue our recent revenue growth or profitability. Please refer to
the section entitled "Business -- Competition" later in this Prospectus for
additional information.
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DEPENDENCE ON LIMITED NUMBER OF CUSTOMERS
Our three largest customers, Home Depot, Sears and Costco, accounted for
approximately 74% of the Company's sales for each of 1998 and 1997. We do not
have contractual agreements with any of these customers for the supply of
products. The loss of any of these customers or a significant decrease in the
volume of products supplied to any of these customers, particularly Home Depot
or Sears, could affect our financial performance in a negative way. Please read
the section entitled "Business -- Distribution and Marketing" later in this
Prospectus for additional information.
AVAILABILITY AND PRICING OF RAW MATERIALS AND COMPONENTS
We obtain some raw materials and components (including, among others, steel
and copper and small engines used in the Company's product lines) from third
parties. We believe that we have developed reliable sources for these raw
materials and components and that we could find qualified alternative sources to
supply such materials and components. Our operating results could suffer if we
are unable to obtain raw materials or components for a prolonged period of time.
Increases in the prices of raw materials or components resulting from tight
supplies could affect our financial performance in a negative way.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
We expect that international sales will continue to represent a significant
percentage of our total sales. In addition, we have significant operations
outside the United States, including a plant located in the United Kingdom. A
number of factors could adversely effect our international sales and operations,
including (1) periodic economic downturns, (2) fluctuations in interest and
foreign currency exchange rates, (3) the imposition of government controls, (4)
export license requirements, (5) political instability or nationalization of
businesses, (6) trade restrictions and changes in tariffs and (7) difficulties
in staffing and managing international operations. We cannot assure you that
such risks will not affect our financial performance in a negative way in the
future. As a result, we may need to modify our current business practices.
RISKS ASSOCIATED WITH LIMITED MANUFACTURING FACILITIES
The Company produces all of its United States products in its manufacturing
facility located in Jefferson, Wisconsin. The Company produces all of the
products required for its European operations at its manufacturing facility
located in Cheshire, England. The Company's manufacturing processes are highly
complex and require sophisticated and costly equipment. As a result, any
prolonged interruption in the operations of either of the Company's
manufacturing facilities could result in delays or cancellations of shipments. A
number of factors could cause interruptions, including labor difficulties,
equipment failures or destruction of or damage to a facility. We cannot assure
you that alternative qualified capacity would be available on a timely basis or
at all. Interruptions could result in a loss of customers and could affect our
financial performance in a negative way.
FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements concerning our
operations, economic performances and financial condition. These statements are
based upon a number of assumptions and estimates which are inherently subject to
significant uncertainties and contingencies, many of which are beyond our
control, and reflect future
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business decisions which are subject to change. Some of these assumptions
inevitably will not materialize, and unanticipated events will occur which will
affect our results of operations.
FRAUDULENT TRANSFER CONSIDERATIONS
The incurrence of indebtedness by the Issuers, such as the Notes, may be
subject to review under federal bankruptcy law or relevant state fraudulent
conveyance or transfer laws if a bankruptcy case or lawsuit is commenced by or
on behalf of unpaid creditors of the Issuers. In such a case, if a court were to
find under such laws that the Issuers had actual intent to defraud or did not
receive fair consideration or reasonably equivalent value for incurring the debt
represented by the Notes, and that, at the time the Issuers incurred
indebtedness (including indebtedness under the Notes), the Issuers (1) were
insolvent, (2) were rendered insolvent by reason of such incurrence, (3) were
engaged in a business or transaction for which the assets remaining with the
Issuers constituted unreasonably small capital, or (4) intended to incur, or
believed that they would incur, debts beyond their ability to pay such debts as
they matured, then such court could void or subordinate the amounts owing under
the Notes to presently existing and future indebtedness of the Issuers and take
other actions detrimental to the holders of the Notes. We believe that at the
time we incurred the indebtedness constituting the Notes, we did not meet any of
the criteria that would permit a court to void or subordinate the Notes. Our
belief is based upon our analyses of internal cash flow projections and
estimated values of our assets and liabilities. We cannot assure you, however,
that a court would agree with us.
ABSENCE OF PUBLIC MARKET
Currently, there is no public market for the New Notes or the Old Notes. We
do not intend to apply for listing of the Notes on any securities exchange or on
any automated dealer quotation system. Although the Initial Purchaser has
informed us that it intends to make a market in the Notes, it is not obligated
to do so and may discontinue any such market at any time without notice. In
addition, such market making activity may be limited during this Exchange Offer
or the effectiveness of a shelf registration statement in lieu thereof. As a
result, we can make no assurances to you as to the development or liquidity of
any market for the Notes, your ability to sell the Notes, or the price at which
you may be able to sell the Notes. Future trading prices of the Notes will
depend on many factors, including among other things, prevailing interest rates,
our operating results and the market for similar securities. Historically, the
market for securities similar to the Notes, including non-investment grade debt,
has been subject to disruptions that have caused substantial volatility in the
prices of such securities. We cannot assure you that, if a market develops, it
will not be subject to similar disruptions.
PROCEDURES FOR TENDER OF OLD NOTES
The New Notes will be issued in exchange for the Old Notes only after
timely receipt by the Exchange Agent of certificates for Old Notes and a
properly completed and duly executed Letter of Transmittal or a book-entry
confirmation of a book-entry transfer of Old Notes into the Exchange Agent's
account at DTC, and all other required documentation. If you desire to tender
your Old Notes in exchange for New Notes, you should allow sufficient time to
ensure timely delivery. Neither the Exchange Agent nor we are under any duty to
give you notification of defects or irregularities with respect to tenders of
Old Notes for exchange. Old Notes that are not tendered or are tendered but not
accepted will, following the consummation of the Exchange Offer, continue to be
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subject to the existing transfer restrictions. In addition, if you tender the
Old Notes in the Exchange Offer for the purpose of participating in a
distribution of the New Notes, you will be required to comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. For additional information, please refer
to the sections entitled "The Exchange Offer" and "Plan of Distribution" later
in this Prospectus.
CONSEQUENCES OF A FAILURE TO EXCHANGE OLD NOTES
We did not register the sale of the Old Notes under the Securities Act. As
a result, the Old Notes are subject to substantial transfer restrictions. Old
Notes that are not tendered in exchange for New Notes or are tendered but not
accepted will, following consummation of the Exchange Offer, continue to be
subject to the existing transfer restrictions. We do not currently anticipate
that after the Exchange Offer we will register any additional resale of 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 due to the limited amount,
or "float," of the Old Notes that are expected to remain outstanding following
the Exchange Offer. Generally, a lower "float" of a security could result in
less demand to purchase such security and, as a result, could result in lower
prices for such security. For the same reason, to the extent that a large amount
of Old Notes are not tendered or are tendered and not accepted in the Exchange
Offer, the trading market for the New Notes could be adversely affected. For
additional information, please refer to the sections entitled "The Exchange
Offer" and "Plan of Distribution" later in this Prospectus.
THE ISSUERS
Generac Portable Products, Inc., a Delaware corporation ("Holdings"),
together with its subsidiaries, is a leader in the design, manufacture and sales
of portable generators and pressure washers as described under "Business."
Holdings was formed on April 29, 1998 as a Delaware corporation. The primary
business activity of Holdings consists of its indirect ownership of 100% of the
limited liability company interests in Generac Portable Products, LLC, a
Delaware limited liability company (the "Operating Company"), through two wholly
owned subsidiaries: GPPW, Inc., a Wisconsin corporation ("GPPW"), and GPPD,
Inc., a Delaware corporation ("GPPD"). GPPW and GPPD hold, respectively, 5% and
95% limited liability company interests in the Operating Company.
GPPW was incorporated in Wisconsin on May 28, 1998. GPPW does not conduct
any operations. Accordingly, investors in the Notes should look only to the cash
flow and assets of the Operating Company for payment of the Notes.
The Operating Company was formed on June 1, 1998 as a Delaware limited
liability company. On July 9, 1998, the Operating Company purchased
substantially all of the assets, and assumed certain of the liabilities, of
Generac Corporation's Portable Products Division, consisting of its production,
marketing, sales, engineering, research and development (and in the U.K., Spain
and Germany, importation) and administration operations located at its
facilities in Wisconsin, England, Spain and Germany.
The principal executive offices of the Issuers are located at 1 Generac
Way, Jefferson, Wisconsin 53549, telephone (920) 674-3750.
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THE TRANSACTION
Holdings and Generac Corporation are parties to an Asset Purchase and Sale
Agreement dated as of May 5, 1998 (the "Asset Purchase Agreement"), pursuant to
which Holdings caused the Operating Company to purchase substantially all of the
assets, and assume certain of the liabilities, of Generac Corporation's Portable
Products Division (the "Division") for $305.5 million in cash after post closing
adjustments estimated to total $1.0 million. In connection with the Transaction,
Beacon, certain members of management of the Company and certain other investors
(collectively, the "Equity Investors") purchased an aggregate of $110.0 million
of common stock, par value $.01 per share, of Holdings (the "Holdings Common
Stock"), constituting 100% of the outstanding Holdings Common Stock. The
investments by the Equity Investors are collectively referred to herein as the
"Equity Investment."
The Operating Company entered into a new bank credit facility (the "Credit
Facility") in connection with the Transaction that provided for (i) two senior
secured term loan facilities in the aggregate amount of $85.0 million and (ii) a
senior secured revolving credit facility of up to $30.0 million. At the closing
of the Transaction, $85.0 million was borrowed under the term loans and
borrowings of $11.6 million were made under the revolving credit facility to
fund the Transaction. The balance of the funds available under the revolving
credit facility are available to fund the Company's general corporate and
additional working capital requirements. The Credit Facility has availability
for letter of credit usage, is secured by substantially all the assets of the
Operating Company, GPPW and, upon the occurrence of certain events, GPPD and is
guaranteed by Holdings, GPPW and, upon the occurrence of certain events, GPPD.
Additionally, the Operating Company entered into a capital lease arrangement
with Generac Corporation for manufacturing equipment with a fair value of
approximately $2.6 million (the "Capital Lease").
The acquisition of the Division by the Operating Company, the borrowings by
the Operating Company of funds under the Credit Facility, the Equity Investment,
the Capital Lease and the issuance of the Old Notes are referred to herein
collectively as the "Transaction."
The following table illustrates the sources and uses of funds in the
Transaction (dollars in millions):
SOURCES USES
- ------- ----
Credit Facility............... $ 94.2(1) Purchase Price................ $305.5
Transaction Fees and
Old Notes..................... 110.0 Expenses...................... 8.7
------
Equity Investment............. 110.0
------
Total Sources............ $314.2 Total Uses.................... $314.2
====== ======
- -------------------------
(1) Amount borrowed by the Operating Company under the Credit Facility at the
closing of the Transaction was $96.6 million, which was subsequently reduced
by $2.4 million on account of post closing adjustments and a refund of an
overpayment of transaction expenses.
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USE OF PROCEEDS OF THE NEW NOTES
This Exchange Offer is intended to satisfy obligations of the Issuers under
the Registration Rights Agreement dated as of July 2, 1998 (the "Registration
Rights Agreement") by and among the Issuers and BT Alex. Brown Incorporated (the
"Initial Purchaser"). The Issuers will not receive any proceeds from the
issuance of the New Notes offered hereby. In consideration for issuing the New
Notes in exchange for Old Notes as described in this Prospectus, the Issuers
will receive Old Notes in like principal amount. The Old Notes surrendered in
exchange for the New Notes will be retired and canceled and cannot be reissued.
Accordingly, issuance of the New Notes will not result in any increase in the
outstanding debt of the Issuers.
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CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company at December 31, 1998 and July 9, 1998 after giving effect to the
Transaction. This table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
the consolidated financial statements of the Company and the notes thereto
appearing elsewhere in this Prospectus.
AS OF AS OF
DECEMBER 31, JULY 9,
1998 1998(4)
------------ --------
(DOLLARS IN THOUSANDS)
LONG-TERM DEBT, INCLUDING CURRENT PORTION:
Revolving credit facility(1)......................... $ 600 $ 11,608
Term loans(1)........................................ 84,800 85,000
Notes................................................ 110,000 110,000
Capital lease obligations(2)......................... 2,383 2,617
-------- --------
Total long-term debt.............................. 197,783 209,225
-------- --------
STOCKHOLDERS' EQUITY:
Common stock and additional paid-in capital.......... 110,000 110,000
Retained earnings.................................... 4,202 --
Accumulated other comprehensive income............... 723 --
Excess of purchase price over book value of net
assets acquired from entities partially under
common control(3)................................. (11,658) (11,658)
-------- --------
Total stockholders' equity........................ 103,267 98,342
-------- --------
Total capitalization.............................. $301,050 $307,567
======== ========
- -------------------------
(1) The senior secured credit facility consists of a revolving credit facility
providing for $30.0 million of borrowings and term loans aggregating $85.0
million.
(2) Represents the lease of certain manufacturing equipment from Generac
Corporation resulting in capital lease treatment for accounting purposes.
(3) The Company has limited its accounting basis resulting from the Transaction
as a result of certain stockholders which also owned an interest in Generac
Corporation. The difference between the total consideration paid in
connection with the Transaction and the accounting basis recognized is
reported as a separate component of stockholders' equity.
(4) Amounts presented give effect to the Transaction.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
In connection with the sale of the Old Notes, the Issuers entered into the
Registration Rights Agreement with the Initial Purchaser, pursuant to which the
Issuers agreed to file and to use their reasonable best efforts to cause to
become effective with the Commission a registration statement with respect to
the exchange of the Old Notes for senior subordinated notes with terms identical
in all material respects to the terms of the Old Notes. A copy of the
Registration Rights Agreement has been filed as an Exhibit to the Registration
Statement of which this Prospectus is a part.
The Exchange Offer is being made to satisfy the contractual obligations of
the Issuers under the Registration Rights Agreement. The forms and terms of the
New Notes are identical in all material respect to the forms and terms of the
Old Notes, except that the New Notes have been registered under the Securities
Act and therefore will not be subject to certain restrictions on transfer
applicable to the Old Notes and will not provide for any increase in the
interest rate thereon. In that regard, the Old Notes provide, among other
things, that if a registration statement relating to the Exchange Offer has not
been filed on or by February 4, 1999 and declared effective on or by April 5,
1999 the interest rate borne by the Old Notes commencing on July 9, 1998 will
increase by 0.50% per annum until the Exchange Offer is consummated. Upon
consummation of the Exchange Offer, holders of Old Notes will not be entitled to
any increase in the interest rate thereon or any further registration rights
under the Registration Rights Agreement, except under limited circumstances. See
"Risk Factors -- Consequences of a Failure to Exchange Old Notes" and
"Description of the Old Notes."
The Exchange Offer is not being made to, nor will the Issuers accept
tenders for exchange from, holders 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.
Unless the context requires otherwise, the term "holder" with respect to
the Exchange Offer means any person in whose name the Old Notes are registered
on the books of the Issuers or any other person who has obtained a properly
completed bond power from the registered holder, or any person who beneficially
owns Old Notes which are held of record by DTC who desires to deliver such Old
Notes by book-entry transfer into the Exchange Agent's account at DTC, or any
person who beneficially owns Old Notes which are held of record by a nominee
other than DTC (or its nominee).
Pursuant to the Exchange Offer, the Issuers will exchange as soon as
practicable after the date hereof, all of the Old Notes, of which $110,000,000
aggregate principal amount is outstanding, for a like aggregate principal amount
of the New Notes. The issuance of the New Notes has been registered under the
Securities Act.
TERMS OF THE EXCHANGE OFFER
The Issuers hereby offer, upon the terms and subject to the conditions set
forth in this Prospectus and in the accompanying Letter of Transmittal, to
exchange up to $110,000,000 aggregate principal amount of New Notes for a like
aggregate principal amount of Old Notes properly tendered on or prior to the
Expiration Date and not properly withdrawn in accordance with the procedures
described below. The Issuers will issue, promptly after the Expiration Date, an
aggregate principal amount of up to $110,000,000 of New Notes in
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exchange for a like aggregate principal amount of outstanding Old Notes tendered
and accepted in connection with the Exchange Offer. Holders may tender their Old
Notes for exchange in whole or in part in any integral multiple of $1,000. The
Exchange Offer is not conditioned upon any minimum principal amount of Old Notes
being tendered.
Holders of Old Notes do not have any appraisal or dissenters' rights in
connection with the Exchange Offer. Old Notes which are not tendered for or are
tendered but not accepted in connection with the Exchange Offer will remain
outstanding and remain entitled to the benefits of the Indenture, but will not
be entitled to any further registration rights under the Registration Rights
Agreement, except under limited circumstances. See "Risk Factors -- Consequences
of a Failure to Exchange Old Notes" and "Description of the Old Notes."
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering holder thereof promptly after the Expiration
Date.
Holders who tender Old Notes in connection with the Exchange Offer will not
be required to pay brokerage commissions or fees or transfer taxes with respect
to the exchange of Old Notes in connection with the Exchange Offer, except under
those circumstances described in the Letter of Transmittal. The Issuers will pay
all charges and expenses, other than certain applicable taxes described below,
in connection with the Exchange Offer. See "-- Fees and Expenses."
THE BOARDS OF DIRECTORS OF THE ISSUERS MAKE NO RECOMMENDATION TO HOLDERS OF
OLD NOTES AS TO WHETHER TO TENDER OR REFRAIN FROM TENDERING ALL OR ANY PORTION
OF THEIR OLD NOTES PURSUANT TO THE EXCHANGE OFFER. IN ADDITION, NO ONE HAS BEEN
AUTHORIZED TO MAKE ANY SUCH RECOMMENDATION. HOLDERS OF OLD NOTES MUST MAKE THEIR
OWN DECISION WHETHER TO TENDER PURSUANT TO THE EXCHANGE OFFER AND, IF SO, THE
AGGREGATE PRINCIPAL AMOUNT OF OLD NOTES TO TENDER AFTER READING THIS PROSPECTUS
AND THE LETTER OF TRANSMITTAL AND CONSULTING WITH THEIR ADVISERS, IF ANY, BASED
ON THEIR OWN FINANCIAL POSITION AND REQUIREMENTS.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" means 5:00 p.m., New York City time, on
, 1999 unless the Exchange Offer is extended by the Issuers (in
which case the term "Expiration Date" shall mean the latest date and time to
which the Exchange Offer is extended).
The Issuers expressly reserve the right in their sole and absolute
discretion, subject to applicable law, at any time and from time to time, (i) to
delay the acceptance of the Old Notes for exchange, (ii) to terminate the
Exchange Offer (whether or not any Old Notes have been accepted for exchange) if
the Issuers determine, in their sole and absolute discretion, that any of the
conditions referred to under "-- Conditions to the Exchange Offer" has occurred
or exist or has not been satisfied, (iii) to extend the Expiration Date and
retain all Old Notes tendered pursuant to the Exchange Offer, subject, however,
to the right of holders of Old Notes to withdraw their tendered Old Notes as
described under "-- Withdrawal Rights," and (iv) to waive any condition or
otherwise amend the terms of
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the Exchange Offer in any respect. If the Exchange Offer is amended in a manner
determined by the Issuers to constitute a material change, or if the Issuers
waive a material condition of the Exchange Offer, the Issuers will promptly
disclose such amendment by means of a prospectus supplement that will be
distributed to the registered holders of the Old Notes, and the Issuers will
extend the Exchange Offer to the extent required by Rule 14e-1 under the
Exchange Act.
Any such delay in acceptance, extension, termination or amendment will be
followed promptly by oral (promptly confirmed in writing) or written notice
thereof to the Exchange Agent and by making a public announcement thereof, and
such announcement in the case of an extension will be made no later than 9:00
a.m., New York City time, on the next business day after the previously
scheduled Expiration Date. Without limiting the manner in which the Issuers may
choose to make any public announcement and subject to applicable law, the
Issuers shall have no obligation to publish, advertise or otherwise communicate
any such public announcement other than by issuing a release to an appropriate
news agency.
ACCEPTANCE FOR EXCHANGE AND ISSUANCE OF NEW NOTES
Upon the terms and subject to the conditions of the Exchange Offer, the
Issuers will exchange New Notes for Old Notes validly tendered and not withdrawn
(pursuant to the withdrawal rights described under "-- Withdrawal Rights")
promptly after the Expiration Date.
Subject to the conditions set forth under "-- Conditions to the Exchange
Offer," delivery of New Notes in exchange for Old Notes tendered and accepted
for exchange pursuant to the Exchange Offer will be made only after timely
receipt by the Exchange Agent of (i) certificates for Old Notes or a book-entry
confirmation of a book-entry transfer of Old Notes into the Exchange Agent's
account at DTC, including an Agent's Message if the tendering holder does not
deliver a Letter of Transmittal, (ii) a completed and signed Letter of
Transmittal (or facsimile thereof), with any required signature guarantees, or,
in the case of a book-entry transfer, an Agent's Message in lieu of the Letter
of Transmittal, and (iii) any other documents required by the Letter of
Transmittal. Accordingly, the delivery of New Notes might not be made to all
tendering holders at the same time, and will depend upon when certificates for
Old Notes, book-entry confirmations with respect to Old Notes and other required
documents are received by the Exchange Agent.
The term "book-entry confirmation" means a timely confirmation of a
book-entry transfer of Old Notes into the Exchange Agent's account at DTC. See
"-- Procedures for Tendering Old Notes -- Book-Entry Transfer." The term
"Agent's Message" means a message, transmitted by DTC to and received by the
Exchange Agent and forming a part of a book-entry confirmation, which states
that DTC has received an express acknowledgment from the tendering participant,
which acknowledgment states that such participant has received and agrees to be
bound by the Letter of Transmittal and that the Issuers may enforce such Letter
of Transmittal against such participant.
Subject to the terms and conditions of the Exchange Offer, the Issuers will
be deemed to have accepted for exchange, and thereby exchanged, Old Notes
validly tendered and not withdrawn as, if and when the Issuers give oral
(promptly confirmed in writing) or written notice to the Exchange Agent of the
Issuers' acceptance of such Old Notes for exchange pursuant to the Exchange
Offer. The Exchange Agent will act as agent for the Issuers for the purpose of
receiving tenders of Old Notes, Letters of Transmittal and
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related documents, and as agent for tendering holders for the purpose of
receiving Old Notes, Letters of Transmittal and related documents and
transmitting New Notes which will not be held in global form by DTC or a nominee
of DTC to validly tendering holders. Such exchange will be made promptly after
the Expiration Date. If for any reason whatsoever, acceptance for exchange or
the exchange of any Old Notes tendered pursuant to the Exchange Offer is delayed
(whether before or after the Issuers' acceptance for exchange of Old Notes) or
the Issuers extend the Exchange Offer or are unable to accept for exchange or
exchange Old Notes tendered pursuant to the Exchange Offer, then, without
prejudice to the Issuers' rights set forth herein, the Exchange Agent may,
nevertheless, on behalf of the Issuers and subject to Rule 14e-l(c) under the
Exchange Act, retain tendered Old Notes and such Old Notes may not be withdrawn
except to the extent tendering holders are entitled to withdrawal rights as
described under "-- Withdrawal Rights."
Pursuant to an Agent's Message or a Letter of Transmittal, a holder of Old
Notes will represent, warrant and agree in the Agent's Message or Letter of
Transmittal that it has full power and authority to tender, exchange, sell,
assign and transfer Old Notes, that the Issuers will acquire good, marketable
and unencumbered title to the tendered Old Notes, free and clear of all liens,
restrictions, charges and encumbrances, and the Old Notes tendered for exchange
are not subject to any adverse claims or proxies. The holder also will warrant
and agree that it will, upon request, execute and deliver any additional
documents deemed by the Issuers or the Exchange Agent to be necessary or
desirable to complete the exchange, sale, assignment, and transfer of the Old
Notes tendered pursuant to the Exchange Offer.
PROCEDURES FOR TENDERING OLD NOTES
VALID TENDER. Except as set forth below, in order for Old Notes to be
validly tendered by book-entry transfer, an Agent's Message must be transmitted
by DTC to the Exchange Agent or a completed and signed Letter of Transmittal (or
facsimile thereof), with any required signature guarantees, and in either case
any other documents required by the Letter of Transmittal, must be delivered to
the Exchange Agent by mail, facsimile, hand delivery or overnight carrier at one
of the Exchange Agent's addresses set forth under "-- Exchange Agent" on or
prior to the Expiration Date and either (i) such Old Notes must be tendered
pursuant to the procedures for book-entry transfer set forth below or (ii) the
guaranteed delivery procedures set forth below must be complied with.
Except as set forth below, in order for Old Notes to be validly tendered by
a means other than by book-entry transfer, a completed and signed Letter of
Transmittal (or facsimile thereof), with any required signature guarantees, and
any other documents required by the Letter of Transmittal, must be delivered to
the Exchange Agent by mail, facsimile, hand delivery or overnight carrier at one
of the Exchange Agent's addresses set forth under "-- Exchange Agent" on or
prior to the Expiration Date and either (i) such Old Notes must be delivered to
the Exchange Agent on or prior to the Expiration Date or (ii) the guaranteed
delivery procedures set forth below must be complied with.
If less than all Old Notes are tendered, a tendering holder should fill in
the amount of Old Notes being tendered in the appropriate box on the Letter of
Transmittal. The entire amount of Old Notes delivered to the Exchange Agent will
be deemed to have been tendered unless otherwise indicated.
THE METHOD OF DELIVERY OF CERTIFICATES, THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS IS AT THE
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25
OPTION AND SOLE RISK OF THE TENDERING HOLDER, AND DELIVERY WILL BE DEEMED MADE
ONLY WHEN ACTUALLY RECEIVED BY THE EXCHANGE AGENT. IF DELIVERY IS TO BE BY MAIL,
THE USE OF REGISTERED MAIL, RETURN RECEIPT REQUESTED, PROPERLY INSURED, OR AN
OVERNIGHT DELIVERY SERVICE IS RECOMMENDED. IN ALL CASES, SUFFICIENT TIME SHOULD
BE ALLOWED TO ENSURE TIMELY DELIVERY.
BOOK-ENTRY TRANSFER. The Exchange Agent and DTC have confirmed that any
participant in DTC's book-entry transfer facility system may utilize DTC's ATOP
procedures to tender Old Notes. The Exchange Agent will establish an account
with respect to the Old Notes at DTC for purposes of the Exchange Offer within
two business days after the date of this Prospectus. Any participant may make a
book-entry delivery of the Old Notes by causing DTC to transfer such Old Notes
into the Exchange Agent's account at DTC in accordance with DTC's ATOP
procedures for transfer. However, although delivery of Old Notes may be effected
through book-entry transfer into the Exchange Agent's account at DTC, an Agent's
Message or a completed and signed Letter of Transmittal (or facsimile thereof),
with any required signature guarantees and any other documents required by the
Letter of Transmittal, must in any case be delivered to and received by the
Exchange Agent at one of its addresses set forth under "-- Exchange Agent" on or
prior to the Expiration Date, or the guaranteed delivery procedure set forth
below must be complied with.
DELIVERY OF DOCUMENTS TO DTC IN ACCORDANCE WITH DTC'S PROCEDURES DOES NOT
CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
SIGNATURE GUARANTEES. Certificates for Old Notes need not be endorsed and
signature guarantees on a Letter of Transmittal are unnecessary unless (a) a
certificate for the Old Notes is registered in a name other than that of the
person surrendering the certificate or (b) such registered holder completes the
box entitled "Special Issuance Instructions" or "Special Delivery Instructions"
in the Letter of Transmittal. In the case of (a) or (b) above, such certificates
for Old Notes must be duly endorsed or accompanied by a properly executed bond
power, with the endorsement or signature on the bond power and on the Letter of
Transmittal guaranteed by a firm or other entity identified in Rule 17Ad-15
under the Exchange Act as an "eligible guarantor institution," including (as
such terms are defined therein): (i) a bank; (ii) a broker, dealer, municipal
securities broker or dealer or government securities broker or dealer; (iii) a
credit union; (iv) a national securities exchange, registered securities
association or clearing agency; or (v) a savings association that is a
participant in a Securities Transfer Association (each, an "Eligible
Institution"), unless surrendered on behalf of such Eligible Institution. See
Instructions 2 and 6 to the Letter of Transmittal.
GUARANTEED DELIVERY. If a holder desires to tender Old Notes pursuant to
the Exchange Offer and the certificates for such Old Notes are not immediately
available or time will not permit all required documents to reach the Exchange
Agent on or before the Expiration Date, or the procedures for book-entry
transfer cannot be completed on a timely
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26
basis, such Old Notes may nevertheless be tendered, provided that all of the
following guaranteed delivery procedures are complied with:
(i) such tenders are made by or through an Eligible Institution;
(ii) a completed and signed Notice of Guaranteed Delivery,
substantially in the form accompanying the Letter of Transmittal, is
delivered to the Exchange Agent, as provided below, on or prior to
Expiration Date; and
(iii) the certificates (or a book-entry confirmation) representing all
tendered Old Notes, in proper form for transfer, together with a completed
and signed Letter of Transmittal (or facsimile thereof) or, in the case of
a book-entry transfer, an Agent's Message in lieu of the Letter of
Transmittal, with any required signature guarantees and any other documents
required by the Letter of Transmittal, are received by the Exchange Agent
within three New York Stock Exchange trading days after the date of
execution of such Notice of Guaranteed Delivery.
The Notice of Guaranteed Delivery may be delivered by hand, or transmitted
by facsimile or mail to the Exchange Agent and must include a guarantee by an
Eligible Institution in the form set forth in such notice.
The Issuers' acceptance for exchange of Old Notes tendered pursuant to any
of the procedures described above will constitute a binding agreement between
the tendering holder and the Issuers upon the terms and subject to the
conditions of the Exchange Offer.
DETERMINATION OF VALIDITY. All questions as to the form of documents,
validity, eligibility (including time of receipt) and acceptance for exchange of
any tendered Old Notes will be determined by the Issuers, in their sole
discretion, whose determination shall be final and binding on all parties. The
Issuers reserve the absolute right, in their sole and absolute discretion, to
reject any and all tenders determined by them not to be in proper form or the
acceptance of which, or exchange for, may, in the view of counsel to the
Issuers, be unlawful. The Issuers also reserve the absolute right, subject to
applicable law, to waive any of the conditions of the Exchange Offer as set
forth under "-- Conditions to the Exchange Offer" or any condition, defect or
irregularity in any tender of Old Notes of any particular holder whether or not
similar conditions, defects or irregularities are waived in the case of other
holders.
The Issuers' interpretation of the terms and conditions of the Exchange
Offer (including the Letter of Transmittal and the instructions thereto) will be
final and binding on all parties. No tender of Old Notes will be deemed to have
been validly made until all irregularities with respect to such tender have been
cured or waived. Neither the Issuers, any affiliates or assigns of the Issuers,
the Exchange Agent nor any other person shall be under any duty to give any
notification of any defects or irregularities in tenders or incur any liability
for failure to give any such notification.
If any Letter of Transmittal, endorsement, bond power, power of attorney or
any other document required by the Letter of Transmittal is signed by a trustee,
executor, administrator, guardian, attorney-in-fact, officer of a corporation or
other person acting in a fiduciary or representative capacity, such person
should so indicate when signing and, unless waived by the Issuers, proper
evidence satisfactory to the Issuers, in their sole discretion, of such person's
authority to so act must be submitted.
A beneficial owner of Old Notes that are held by or registered in the name
of a broker, dealer, commercial bank, trust companies or other nominee or
custodian is urged to
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contact such entity promptly if such beneficial holder wishes to participate in
the Exchange Offer.
RESALES OF NEW NOTES
The Issuers are making the Exchange Offer for the Old Notes in reliance on
the position of the SEC staff as set forth in certain interpretive letters
addressed to third parties in other transactions. However, the Issuers have not
sought their own interpretive letter and there can be no assurance that the SEC
staff would make a similar determination with respect to the Exchange Offer as
it has in such interpretive letters to third parties. Based on these
interpretations by the SEC staff, and subject to the two immediately following
sentences, the Issuers believe that New Notes issued pursuant to this Exchange
Offer in exchange for Old Notes may be offered for resale, resold and otherwise
transferred by a holder thereof (other than a holder who is a broker-dealer)
without further compliance with the registration and prospectus delivery
requirements of the Securities Act, provided that such New Notes are acquired in
the ordinary course of such holder's business and that such holder is not
participating, and has no arrangement or understanding with any person to
participate, in a distribution (within the meaning of the Securities Act) of
such New Notes. However, any holder of Old Notes who is an "affiliate" of the
Issuers or who intends to participate in the Exchange Offer for the purpose of
distributing New Notes, or any broker-dealer who purchased Old Notes from the
Issuers to resell pursuant to Rule 144A or any other available exemption under
the Securities Act, (a) will not be able to rely on the interpretations of the
SEC staff set forth in the above-mentioned interpretive letters, (b) will not be
permitted or entitled to tender such Old Notes in the Exchange Offer and (c)
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any sale or other transfer of such Old Notes
unless such sale is made pursuant to an exemption from such requirements. In
addition, as described below, if any broker-dealer holds Old Notes acquired for
its own account as a result of market-making or other trading activities and
exchanges such Old Notes for New Notes, then such broker-dealer must deliver a
prospectus meeting the requirements of the Securities Act in connection with any
resales of such New Notes.
Each holder of Old Notes who wishes to exchange Old Notes for New Notes in
the Exchange Offer will be required to represent that (i) it is not an
"affiliate" of the Issuers or Holdings, (ii) any New Notes to be received by it
are being acquired in the ordinary course of its business, (iii) it has no
arrangement or understanding with any person to participate in a distribution
(within the meaning of the Securities Act) of such New Notes, and (iv) if such
holder is not a broker-dealer, such holder is not engaged in, and does not
intend to engage in, a distribution (within the meaning of the Securities Act)
of such New Notes. The Letter of Transmittal contains the foregoing
representations.
In addition, the Issuers may require a holder, as a condition to such
holder's eligibility to participate in the Exchange Offer, to furnish to the
Issuers (or an agent thereof) in writing information as to the number of
"beneficial owners" (within the meaning of Rule 13d-3 under the Exchange Act) on
behalf of whom such holder holds the Notes to be exchanged in the Exchange
Offer. Each broker-dealer that receives New Notes for its own account pursuant
to the Exchange Offer must acknowledge that it acquired the Old Notes for its
own account as the result of market-making activities or other trading
activities and must agree that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of such New
Notes. The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be
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deemed to admit that it is an "underwriter" within the meaning of the Securities
Act. Based on the position taken by the SEC staff in the interpretive letters
referred to above, the Issuers believe that broker-dealers who acquired Old
Notes for their own accounts as a result of market-making activities or other
trading activities ("Participating Broker-Dealers") may fulfill their prospectus
delivery requirements with respect to the New Notes received upon exchange of
such Old Notes (other than Old Notes which represent an unsold allotment from
the original sale of the Old Notes) with a prospectus meeting the requirements
of the Securities Act, which may be the prospectus prepared for an Exchange
Offer so long as it contains a description of the plan of distribution with
respect to the resale of such New Notes. Accordingly, this Prospectus, as it may
be amended or supplemented from time to time, may be used by a Participating
Broker-Dealer during the 90-day period referred to below in connection with
resales of New Notes received in exchange for Old Notes where such Old Notes
were acquired by such Participating Broker-Dealer for its own account as a
result of market-making or other trading activities. Subject to certain
provisions set forth in the Registration Rights Agreement and to the limitations
described herein, the Issuers have agreed that this Prospectus, as it may be
amended or supplemented from time to time, may be used by a Participating
Broker-Dealer in connection with resales of such New Notes for a period ending
90 days after the Expiration Date or, if earlier, when all such New Notes have
been disposed of by such Participating Broker-Dealer. See "Plan of
Distribution." Any person, including any Participating Broker-Dealer, who is an
"affiliate" of the Issuers may not rely on such interpretive letters and must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction.
In that regard, each Participating Broker-Dealer who surrenders Old Notes
pursuant to the Exchange Offer will be deemed to have agreed, by execution of
the Letter of Transmittal or delivery of any Agent's Message in lieu thereof,
that, upon receipt of notice from the Issuers of the occurrence of any event or
the discovery of any fact which makes any statement contained in this Prospectus
untrue in any material respect or which causes this Prospectus to omit to state
a material fact necessary in order to make the statements contained herein, in
light of the circumstances under which they were made, not misleading or of the
occurrence of certain other events specified in the Registration Rights
Agreement, such Participating Broker-Dealer will suspend the sale of New Notes
pursuant to this Prospectus until the Issuers have amended or supplemented this
Prospectus to correct such misstatement or omission and has furnished copies of
the amended or supplemented Prospectus to such Participating Broker-Dealer or
the Issuers have given notice that the sale of the New Notes may be resumed, as
the case may be.
WITHDRAWAL RIGHTS
As set forth below, tenders of Old Notes may be withdrawn at any time on or
prior to the Expiration Date.
In order for a withdrawal to be effective a written or facsimile
transmission of such notice of withdrawal must be received by the Exchange Agent
at one of its addresses set forth under "-- Exchange Agent" on or prior to the
Expiration Date. Any such notice of withdrawal must specify the name of the
person who tendered the Old Notes to be withdrawn, the aggregate principal
amount of Old Notes to be withdrawn, and (if certificates for such Old Notes
have been tendered) the name of the registered holder of the Old Notes as set
forth on the certificate for the Old Notes, if different from that of the person
who tendered such Old Notes. If certificates for the Old Notes have been
delivered or otherwise identified to the Exchange Agent, then prior to the
physical release of such
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certificates for the Old Notes, the tendering holder must submit the serial
numbers shown on the particular certificates for the Old Notes to be withdrawn
and the signature on the notice of withdrawal must be guaranteed by an Eligible
Institution, except in the case of Old Notes tendered for the account of an
Eligible Institution. If Old Notes have been tendered pursuant to the procedures
for book-entry transfer set forth in "-- Procedures for Tendering Old Notes,"
the notice of withdrawal must specify the name and number of the account at DTC
to be credited with the withdrawn Old Notes. Withdrawals of tenders of Old Notes
may not be rescinded. Old Notes properly withdrawn will not be deemed validly
tendered for purposes of the Exchange Offer, but may be retendered at any
subsequent time on or prior to the Expiration Date by following any of the
procedures described above under "-- Procedures for Tendering Old Notes."
All questions as to the validity, form and eligibility (including time of
receipt) of such withdrawal notices will be determined by the Issuers, in their
sole discretion, whose determination shall be final and binding on all parties.
None of the Issuers, any affiliates or assigns of the Issuers, the Exchange
Agent or any other person shall be under any duty to give any notification of
any irregularities in any notice of withdrawal or incur any liability for
failure to give any such notification. Any Old Notes which have been tendered
but which are withdrawn will be returned to the holder thereof promptly after
withdrawal.
INTEREST ON NEW NOTES
Each New Note will accrue interest from the most recent interest payment
date on the Old Notes surrendered in exchange for such New Notes or, if no
interest has been paid or provided for on such Old Notes, from July 9, 1998. As
a result, holders of Old Notes that are accepted for exchange will not receive
accrued and unpaid interest on such Old Notes for any period from and after the
most recent interest payment date on such Old Notes or, if no interest has been
paid or provided for on such Old Notes, from and after July 9, 1998, and such
holders will be deemed to have waived the right to receive any interest on such
Old Notes.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provisions of the Exchange Offer, or any
extension of the Exchange Offer, the Issuers will not be required to accept any
Old Notes for exchange or to exchange any New Notes for any Old Notes, and, as
described below, may terminate the Exchange Offer (whether or not any Old Notes
have been accepted for exchange) or may waive any conditions to or amend the
Exchange Offer, if any of the following conditions have occurred or exists or
have not been satisfied:
(a) there shall occur a change in the current interpretation by the
SEC staff which permits the New Notes issued pursuant to the Exchange Offer
in exchange for Old Notes to be offered for resale, resold and otherwise
transferred by holders thereof (other than broker-dealers and any such
holder which is an "affiliate" of the Issuers within the meaning of Rule
405 under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act provided that such New
Notes are acquired in the ordinary course of such holders' business and
such holders have no arrangement or understanding with any person to
participate in the distribution of such New Notes;
(b) any action or proceeding shall have been instituted or threatened
in any court or by or before any governmental agency or body with respect
to the Exchange
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Offer which, in the Issuers' judgment, would reasonably be expected to
impair the ability of the Issuers to proceed with the Exchange Offer;
(c) any law, statute, rule or regulation shall have been adopted or
enacted which, in the Issuers' judgment, would reasonably be expected to
impair the ability of the Issuers to proceed with the Exchange Offer;
(d) trading on the New York Stock Exchange or generally in the United
States over-the-counter market shall have been suspended by order of the
SEC or any other governmental authority which, in the Issuers' judgment,
would reasonably be expected to impair the ability of the Issuers to
proceed with the Exchange Offer;
(e) a stop order shall have been issued by the SEC or any state
securities authority suspending the effectiveness of the Registration
Statement or proceedings shall have been initiated or, to the knowledge of
the Issuers, threatened for that purpose, or any governmental approval has
not been obtained, which approval the Issuers shall, in their sole
discretion, deem necessary for the consummation of the Exchange Offer as
contemplated hereby; or
(f) any change, or any development involving a prospective change, in
the business or financial affairs of the Issuers or any of their
subsidiaries has occurred which, in the sole judgment of the Issuers, might
materially impair the ability of the Issuers to proceed with the Exchange
Offer.
If the Issuers determine in their sole and absolute discretion that any of
the foregoing events or conditions has occurred or exists or has not been
satisfied, the Issuers may, subject to applicable law, terminate the Exchange
Offer (whether or not any Old Notes have theretofore been accepted for exchange)
or may waive any such condition or otherwise amend the terms of the Exchange
Offer in any respect. If such waiver or amendment constitutes a material change
to the Exchange Offer, the Issuers will promptly disclose such waiver by means
of a prospectus supplement that will be distributed to the registered holders of
the Old Notes, and the Issuers will extend the Exchange Offer to the extent
required by Rule 14e-1 under the Exchange Act.
EXCHANGE AGENT
Bankers Trust Company has been appointed as Exchange Agent for the Exchange
Offer. Delivery of a Letter of Transmittal and any other documents required by
the Letter of Transmittal, questions, requests for assistance, and requests for
additional copies of this Prospectus or of a Letter of Transmittal should be
directed to the Exchange Agent as follows:
By Facsimile: By Overnight Mail or Courier: By Hand Delivery:
BT Services Tennessee, Inc. BT Services Tennessee, Inc. Bankers Trust Company
Reorganization Unit Corporate Trust & Agency Group Corporate Trust & Agency Group
P.O. Box 292737 Reorganization Unit Attn: Reorganization Department
Nashville, Tennessee 648 Grassmere Park Road Receipt & Delivery Window
372229-2737 Nashville, Tennessee 37211 123 Washington Street, 1st Floor
New York, New York 10006
Facsimile Transmission Confirm by Telephone:
Number: Information:
(615) 835-3572
(615) 835-3701 (800) 735-7777
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Delivery to other than the above addresses or facsimile number will not
constitute a valid delivery.
FEES AND EXPENSES
The Issuers have agreed to pay the Exchange Agent reasonable and customary
fees for its services and will reimburse it for its reasonable out-of-pocket
expenses in connection therewith. The Issuers will also pay brokerage houses and
other custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding copies of this Prospectus and related documents
to the beneficial owners of Old Notes, and in handling or tendering for their
customers.
Holders who tender their Old Notes for exchange will not be obligated to
pay any transfer taxes in connection therewith. If, however, New Notes are to be
delivered to, or are to be issued in the name of, any person other than the
registered holder of the Old Notes tendered, or if a transfer tax is imposed for
any reason other than the exchange of Old Notes in connection with the Exchange
Offer, then the amount of any such transfer taxes (whether 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.
The Issuers will not make any payment to brokers, dealers or others
soliciting acceptances of the Exchange Offer.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following Unaudited Pro Forma Consolidated Financial Information of the
Company for the year ended December 31, 1998 has been prepared to reflect (i)
the July 2, 1998 Offer and Sale of the Old Notes (the "Offering") and (ii) the
consummation of the Transaction as if it had occurred on January 1, 1998 using
the purchase method of accounting. The Unaudited Pro Forma Consolidated
Financial Information does not purport to be indicative of the operating results
of the Company that would have actually been obtained if the Offering and the
Transaction had been consummated as of and for the dates and periods presented
or that may be obtained in the future. The pro forma adjustments as described in
the Notes to Unaudited Pro Forma Consolidated Financial Information are based on
available information and upon certain assumptions that management believes are
reasonable. The Unaudited Pro Forma Consolidated Financial Information should be
read in conjunction with the audited financial statements and the notes thereto
appearing elsewhere in this Prospectus.
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GENERAC PORTABLE PRODUCTS, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
JULY 10 THROUGH JANUARY 1 YEAR ENDED
DECEMBER 31, THROUGH JULY 9, DECEMBER 31,
1998 1998 1998
--------------- --------------- ------------
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
--------------- --------------- ----------- ------------
(DOLLARS IN THOUSANDS)
Net sales...................... $136,862 $139,551 $ -- $276,413
Cost of goods sold............. 98,245 104,537 (162)(a) 202,620
-------- -------- -------- --------
Gross profit................... 38,617 35,014 162 73,793
-------- -------- -------- --------
Operating expenses:
Selling and service
expense................... 16,935 16,624 -- 33,559
General and administrative
expense................... 2,865 2,380 -- 5,245
Intangible asset
amortization.............. 2,531 -- 2,813(b) 5,344
-------- -------- -------- --------
Total operating expenses..... 22,331 19,004 2,813 44,148
-------- -------- -------- --------
Income from operations......... 16,286 16,010 (2,651) 29,645
-------- -------- -------- --------
Other (income) expense:
Interest expense............. 9,674 1,409 10,314(c) 19,988
(1,409)(d)
Deferred financing cost
amortization.............. 401 -- 424(e) 825
Other........................ (171) 108 -- (63)
-------- -------- -------- --------
9,904 1,517 9,329 20,750
-------- -------- -------- --------
Income before income taxes..... 6,382 14,493 (11,980) 8,895
Provision for income taxes..... 2,180 -- 880(f) 3,060
-------- -------- -------- --------
Net Income..................... $ 4,202 $ 14,493 $(12,860) $ 5,835
======== ======== ======== ========
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NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The Transaction was accounted for under the purchase method of accounting.
The unaudited pro forma consolidated results of operations were determined based
on the fair value of the assets acquired and liabilities assumed and associated
amortization of goodwill and other acquired intangibles. Prior to July 9, 1998,
certain costs and expenses were allocated to the Company from Generac
Corporation. Management believes that the allocation of these costs and expenses
approximate the equivalent costs expected to be incurred on a stand alone basis.
(a) Reflects the effect on cost of sales of the recognition of a
capital lease obligation as part of the Transaction arising from certain
equipment leases:
Actual lease expense incurred.......................... $(336)
Amortization of assets under capital lease
obligations.......................................... 174
-----
$(162)
=====
(b) Reflects the amortization of goodwill of $213,738 over a 40 year
period and other intangible assets of $200 over a 10 year period. Goodwill
was calculated as the purchase price of $306,865 (including acquisition
costs of $1,385) less the fair value of net assets acquired and liabilities
assumed of $81,469 and less the excess of purchase price over book value of
net assets acquired from entities partially under common control of
$11,658. Other intangible assets are comprised of patents, trademarks and a
non-compete agreement with Generac Corporation which have a remaining life
and/or contractual term of approximately 10 years.
(c) Interest expense reflects the following:
Senior Secured Credit Facility........................ $ 3,754
Senior Subordinated Notes at 11.25%................... 6,462
Interest on capitalized leases........................ 98
-------
$10,314
=======
Borrowings under the Senior Secured Credit Facility bear interest at the
Eurodollar rate, plus an applicable percentage, as defined. For the purposes of
the pro forma interest expense adjustment, the Eurodollar rate is estimated to
be 5.76% for the period January 1 through July 9, 1998. The rate approximates
the average Eurodollar rate during the period. A 1/8% variance in Eurodollar
rates for the Senior Secured Credit Facility would change assumed interest
expense by approximately $106. A commitment fee of .5% per annum is charged on
the unused portion of the Senior Secured Credit Facility.
(d) Reflects the elimination of historical interest expense allocated
from Generac Corporation.
(e) The deferred financing costs are amortized using the effective
interest rate and straight line methods over the term of the associated
debt as follows:
Senior Secured Credit Facility.......................... $201
Senior Subordinated Notes............................... 223
----
$424
====
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(f) Reflects adjustment for income tax expense to provide taxes at a
pro forma effective tax rate of 35% for the respective period.
Historically, the Company's taxable income was included in Generac
Corporation's taxable income. Generac Corporation and its stockholders
elected to be treated as an S Corporation for federal and certain state
income tax purposes. Accordingly, no provision for income taxes is included
in the historical financial statements prior to July 9, 1998.
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SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
The selected historical financial information of the Company for July 10,
1998 through December 31, 1998 has been derived from, and should be read in
conjunction with, the audited historical financial statements of the Company
(including the notes thereto) appearing elsewhere in this Prospectus. The
selected historical financial information of the Predecessor from January 1,
1998 through July 9, 1998 and for each of the years in the two year period ended
December 31, 1997 have been derived from, and should be read in conjunction
with, the audited historical financial statements of Generac Corporation's
Portable Products Division (including the notes thereto) appearing elsewhere in
this Prospectus. The selected historical financial information for the years
ended December 31, 1995 and 1994 have been derived from the Company's unaudited
financial statements and include, in the opinion of the Company's management,
all adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the data for such periods. The pro forma financial information
for the year ended December 31, 1998 has been derived from and should be read in
conjunction with the "Unaudited Pro Forma Consolidated Financial Information"
appearing elsewhere in this Prospectus. The following table should also be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" appearing elsewhere in this Prospectus.
PREDECESSOR COMPANY PRO FORMA
---------------------------------------------------------- ------------- ------------
JANUARY 1, JULY 10, 1998 FOR THE YEAR
FOR THE YEAR ENDED DECEMBER 31, 1998 THROUGH ENDED
------------------------------------------- THROUGH DECEMBER 31, DECEMBER 31,
1994(a) 1995(a) 1996 1997 JULY 9, 1998 1998 1998
----------- ----------- ------ ------ ------------ ------------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(DOLLARS IN MILLIONS)
STATEMENT OF OPERATIONS DATA:
Net sales........................ $72.3 $104.8 $122.6 $178.0 $139.6 $136.9 $276.4
Gross profit..................... N/A N/A 27.3 46.9 35.0 38.6 73.8
Selling and service expense...... N/A N/A 13.9 21.7 16.6 16.9 33.6
General and administrative
expense........................ N/A N/A 4.4 4.2 2.4 2.9 5.3
Intangible asset amortization.... N/A N/A -- -- -- 2.5 5.3
Direct expenses.................. 69.1 98.5
----- ------ ------ ------ ------ ------ ------
Income from operations........... N/A N/A 9.0 21.0 16.0 16.3 29.6
Interest expense................. N/A N/A 2.2 2.1 1.4 9.7 20.0
Deferred financing cost
amortization................... N/A N/A -- -- -- 0.4 0.8
Other (income) expense........... N/A N/A -- 0.2 0.1 (0.2) (0.1)
Income taxes(b).................. N/A N/A -- -- -- 2.2 3.1
Excess of revenues over direct
expenses(c).................... $ 3.2 $ 6.3
----- ------ ------ ------ ------ ------ ------
Net income....................... N/A N/A $ 6.8 $ 18.7 $ 14.5 $ 4.2 $ 5.8
===== ====== ====== ====== ====== ====== ======
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PREDECESSOR COMPANY PRO FORMA
---------------------------------------------------------- ------------- ------------
JANUARY 1, JULY 10, 1998 FOR THE YEAR
FOR THE YEAR ENDED DECEMBER 31, 1998 THROUGH ENDED
------------------------------------------- THROUGH DECEMBER 31, DECEMBER 31,
1994(a) 1995(a) 1996 1997 JULY 9, 1998 1998 1998
----------- ----------- ------ ------ ------------ ------------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(DOLLARS IN MILLIONS)
BALANCE SHEET DATA:
Working capital.................. N/A N/A $ 29.3 $ 40.5 $ 68.5 $ 57.5
Total assets..................... N/A N/A 53.1 65.3 105.8 332.0
Divisional assets(d)............. N/A $ 57.4
Total debt, including current
portion........................ N/A N/A -- -- -- 197.8
Stockholders' equity(e).......... N/A N/A 41.6 52.8 81.9 103.3
OTHER FINANCIAL DATA:
EBITDA(f)........................ N/A N/A 10.5 22.3 16.7 20.0 37.0
Depreciation and amortization.... 0.9 1.0 1.5 1.5 0.8 3.9 8.1
Interest expense................. N/A N/A 2.2 2.1 1.4 9.7 20.0
Capital expenditures............. 5.9 4.0 2.3 1.4 1.6 3.8 5.4
Ratio of earnings to fixed
charges(g)..................... N/A N/A 4.0x 9.3x 10.2x 1.6x 1.4x
CASH FLOW DATA:
Net cash provided by (used in)
operating activities........... N/A N/A 17.3 8.2 (13.6) 16.2
Net cash provided by (used in)
investing activities........... N/A N/A (2.3) (1.4) (1.6) (3.8)
Net cash provided by (used in)
financing activities........... N/A N/A (14.2) (6.8) 14.8 (11.5)
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NOTES TO SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
(a) Beginning in 1997, the Company operated as a business unit of
Generac Corporation with separate financial reporting. During 1995, a
dedicated manufacturing facility was completed to accommodate the portable
products business. In connection with its move to this new facility, the
Company began to separately identify certain assets and liabilities as
specific to the portable products business which enabled the preparation of
carve out financial statements as of and for the year ended December 31,
1996, albeit on a basis that includes certain estimates and allocations
that, in the opinion of management, are considered to be reasonable. Prior
to 1996, all financial information of the Company was commingled with that
of Generac Corporation and, therefore, the Company's summary data as of and
for the years ended December 31, 1995 and 1994 is limited and certain
historical financial data is not available.
(b) Historically, the Company's taxable income was included in Generac
Corporation's taxable income. Generac Corporation and its stockholders
elected to be treated as an S Corporation for federal and certain state
income tax purposes. Accordingly, no provision for income taxes is included
in the Predecessor financial statements. The Company is subject to state
and federal income taxes after July 9, 1998.
(c) Direct expenses are those costs of goods sold, selling and
service expenses and general and administrative expenses associated with
the Division.
(d) Divisional assets include property, plant and equipment, cash,
accounts receivable and inventories.
(e) Stockholders' equity represents business unit investment for all
Predecessor periods shown and represents common stock, paid-in-capital,
retained earnings, accumulated other comprehensive income and excess of
purchase price over book value of net assets acquired from entities
partially under common control for periods subsequent to the Transaction.
(f) EBITDA represents earnings before interest, taxes, depreciation
and amortization. EBITDA is a widely recognized financial indicator of a
company's ability to service or incur debt. EBITDA is not a measure of
operating performance computed in accordance with generally accepted
accounting principles and should not be considered as a substitute for
operating performance computed in accordance with generally accepted
accounting principles and should not be considered as a substitute for
operating income, net income, cash flows from operations, or other
statement of operations or cash flow data prepared in conformity with
generally accepted accounting principles, or as a measure of profitability
or liquidity. In addition, EBITDA may not be comparable to similarly titled
measures of other companies. EBITDA may not be indicative of the historical
operating results of the Company or the Predecessor, nor is it meant to be
predictive of future results of operations or cash flows. See also the
statement of cash flows contained within the historical financial
statements included elsewhere in this document.
(g) In computing the ratio of earnings to fixed charges, "earnings"
represents income (loss) before income taxes plus fixed charges. "Fixed
charges" consists of interest, amortization of debt issuance costs and a
portion of rent, which is representative of the interest factor
(approximately one-third of rent expense).
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the financial statements of the
Company, and the notes thereto, and the other financial information appearing
elsewhere in this Prospectus. The following discussion includes forward-looking
statements that involve certain risks and uncertainties. See "Risk Factors."
References to the "Company" means Generac Portable Products, Inc. and its
subsidiaries, on a consolidated basis and, as the context requires, the
Company's predecessor. The "Predecessor" refers to the Portable Products
Division of Generac Corporation.
GENERAL
The Company has experienced strong growth, with net sales, operating income
and EBITDA increasing at compounded annual growth rates of 50%, 81% and 88%,
respectively, from 1996 through 1998 (pro forma). The Company's growth has been
driven by product innovation, cost competitiveness, and proactive category
management in the Company's main product lines of portable generators and
pressure washers. The most important factors influencing demand for the
Company's products are increased awareness of consumer utility, favorable
demographic trends, broadened channels of distribution, and improved price
performance. The expected continuing growth of the home center and warehouse
club retail distribution channel should provide the Company with an opportunity
to increase its market share. Moreover, the Company has long-standing core
relationships with those retailers best positioned to take advantage of this
channel's rapid growth.
The table below sets forth the Company's results of operations for the
periods indicated (dollars in millions).
PRO FORMA PREDECESSOR
-------------------- -------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, % OF DECEMBER 31, % OF DECEMBER 31, % OF
1998 SALES 1997 SALES 1996 SALES
------------ ----- ------------ ----- ------------ -----
(UNAUDITED)
Net sales
Domestic............. $255.4 92.4% $164.0 92.1% $110.1 89.8%
International........ 21.0 7.6% 14.0 7.9% 12.5 10.2%
------ ----- ------ ----- ------ -----
Total net sales........ 276.4 100.0% 178.0 100.0% 122.6 100.0%
Gross profit........... 73.8 26.7% 46.9 26.3% 27.3 22.3%
Operating expenses..... 44.2 16.0% 25.9 14.6% 18.3 14.9%
Operating income....... 29.6 10.7% 21.0 11.8% 9.0 7.3%
Net income............. 5.8 2.1% 18.7 10.5% 6.8 5.5%
EBITDA................. 37.0 13.4% 22.3 12.5% 10.5 8.6%
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COMPANY PRO FORMA PREDECESSOR
------------------------- ------------------------- -----------------------------------------------
JULY 10, 1998 SIX MONTHS JANUARY 1, 1998 SIX MONTHS
THROUGH % OF ENDED % OF THROUGH % OF ENDED % OF
DECEMBER 31, 1998 SALES DECEMBER 31, 1997 SALES JULY 9, 1998 SALES JUNE 30, 1997 SALES
----------------- ----- ----------------- ----- --------------- ----- ------------- -----
(UNAUDITED) (UNAUDITED)
Net sales
Domestic........... $126.8 92.6% $72.8 91.9% $128.6 92.1% $91.2 92.3%
International...... 10.1 7.4% 6.4 8.1% 11.0 7.9% 7.6 7.7%
------ ----- ----- ----- ------ ----- ----- -----
Total net sales...... 136.9 100.0% 79.2 100.0% 139.6 100.0% 98.8 100.0%
Gross profit......... 38.6 28.2% 22.6 28.5% 35.0 25.1% 24.4 24.7%
Operating expenses... 22.3 16.3% 15.8 19.9% 19.0 13.6% 12.8 13.0%
Operating income..... 16.3 11.9% 6.8 8.6% 16.0 11.5% 11.6 11.7%
Net income........... 4.2 3.1% (2.4) (3.0%) 14.5 10.4% 10.4 10.5%
EBITDA............... 20.0 14.6% 10.3 13.0% 16.7 12.0% 12.2 12.3%
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 (PRO FORMA) COMPARED TO YEAR ENDED DECEMBER 31,
1997 (PREDECESSOR BASIS)
NET SALES. Net sales increased $98.4 million, or 55.3%, to $276.4 million
for 1998 pro forma from $178.0 million for 1997.
Domestic sales increased $91.4 million, or 55.7%, to $255.4 million for
1998 pro forma from $164.0 million for 1997. This increase was primarily due to
strong overall consumer demand for generator and pressure washer product
categories throughout 1998. The broad sales increase was further reflective of
the store growth for existing customers, expanded pressure washer product
offerings to Home Depot, and strong overall generator sales resulting from
winter and summer storm activity.
International sales increased $7.0 million, or 50.0%, to $21.0 million for
1998 pro forma from $14.0 million for 1997. This increase was primarily due to
increased penetration into European home center accounts.
GROSS PROFIT. Gross profit increased $26.9 million, or 57.4%, to $73.8
million for 1998 pro forma from $46.9 million for 1997. This increase was
primarily due to increased sales volume as described above and improved gross
margins. Gross profit margin increased to 26.7% in 1998 pro forma from 26.3% in
1997 as a result of the improved mix of higher margin generator sales versus
lower margin pressure washer sales and improved gross margins for International
sales.
OPERATING EXPENSES. Operating expenses increased $18.3 million, or 70.7%,
to $44.2 million for 1998 pro forma from $25.9 million for 1997. This increase
was primarily a result of increased selling and distribution expenses related to
the shift of domestic sales distribution into national home center markets, and
increased sales distribution costs into German home centers. In addition, 1998
pro forma operating expenses include $5.3 million (1.9% as a percentage of
sales) in amortization of goodwill and other intangible assets recorded in
connection with the Transaction. As a percentage of sales, operating expenses
increased to 16.0% in 1998 pro forma from 14.6% in 1997.
NET INCOME. Net income decreased $12.9 million, or 69.0%, to $5.8 million
for 1998 pro forma from $18.7 million for 1997. This decrease in net income was
primarily due to increases in certain expenses resulting from effects of the
Transaction including interest expense; amortization of goodwill, deferred
financing costs and other intangibles assets; and
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provision for income taxes. These expenses decreased 1998 pro forma net income
by an additional $27.1 million (9.8% as a percentage of sales) as compared to
1997. As a percentage of sales, net income decreased to 2.1% in 1998 pro forma
from 10.5% in 1997.
EBITDA. EBITDA increased $14.7 million, or 65.9%, to $37.0 million in 1998
pro forma from $22.3 million for 1997. This increase was primarily due to
increased sales volume and improved gross margins as described above. As a
percentage of sales, EBITDA increased to 13.4% in 1998 pro forma from 12.5% in
1997.
JULY 10, 1998 THROUGH DECEMBER 31, 1998 (NEW BASIS) COMPARED TO SIX MONTHS ENDED
DECEMBER 31, 1997 (PRO FORMA)
NET SALES. Net sales increased $57.7 million, or 72.9%, to $136.9 million
for the period July 10, 1998 through December 31, 1998 from $79.2 million for
the pro forma six months ended December 31, 1997.
Domestic sales increased $54.0 million, or 74.2%, to $126.8 million for the
period July 10, 1998 through December 31, 1998 from $72.8 million for the pro
forma six months ended December 31, 1997. This increase was primarily due to
strong demand for generator products sold through existing customers resulting
from summer storm activity and increased consumer awareness.
International sales increased $3.7 million, or 57.8%, to $10.1 million for
the period July 10, 1998 through December 31, 1998 from $6.4 million for the pro
forma six months ended December 31, 1997. This increase was primarily due to
increased penetration into European home center accounts.
GROSS PROFIT. Gross profit increased $16.0 million, or 70.8%, to $38.6
million for the period July 10, 1998 through December 31, 1998 from $22.6
million for the pro forma six months ended December 31, 1997. This increase was
primarily due to increased sales volume as described above. Gross profit margin
decreased slightly to 28.2% for the period July 10, 1998 through December 31,
1998 from 28.5% for the pro forma six months ended December 31, 1997 as a result
of reduced gross margins on international sales due to heavy promotional pricing
into German home centers.
OPERATING EXPENSES. Operating expenses increased $6.5 million, or 41.1%,
to $22.3 million for the period July 10, 1998 through December 31, 1998 from
$15.8 million for the pro forma six months ended December 31, 1997. This
increase was attributable to increased sales volume as described above. As a
percent of sales, operating expenses decreased to 16.3% for the period July 10,
1998 through December 31, 1998 from 19.9% for the pro forma six months ended
December 31, 1997 due to the leveraging of fixed operating expenses, including
goodwill amortization.
NET INCOME. Net income increased $6.6 million for the period July 10, 1998
through December 31, 1998 to $4.2 million from a $2.4 million net loss for the
pro forma six months ended December 31, 1997. This increase was primarily due to
the availability of operating earnings from the increased sales volume to cover
certain fixed charges including interest expense; amortization of goodwill,
deferred financing costs, and other intangibles; and other operating expenses.
As a percentage of sales, net income increased to 3.1% for the period July 10,
1998 through December 31, 1998 from a net loss of 3.0% for the pro forma six
months ended December 31, 1997.
EBITDA. EBITDA increased $9.7 million or 94.2% to $20.0 million for the
period July 10, 1998 through December 31, 1998 from $10.3 million for the pro
forma six months ended December 31, 1997. This increase was due to the increased
sales volume and
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41
improved coverage of fixed operating expenses as described above. As a
percentage of sales, EBITDA increased to 14.6% for the period July 10, 1998
through December 31, 1998 from 13.0% for the pro forma six months ended December
31, 1997.
JANUARY 1, 1998 THROUGH JULY 9, 1998 (PREDECESSOR BASIS) COMPARED TO SIX MONTHS
ENDED JUNE 30, 1997 (PREDECESSOR BASIS)
NET SALES. Net sales increased $40.8 million, or 41.3%, to $139.6 million
for the period January 1, 1998 through July 9, 1998 from $98.8 million for the
six months ended June 30, 1997.
Domestic sales increased $37.4 million, or 41.0%, to $128.6 million for the
period January 1, 1998 through July 9, 1998, from $91.2 million for the six
months ended June 30, 1997. This increase was primarily due to product
placements into new home center accounts, strong sales of generators to
customers located in the northeastern United States and Canada following the
winter 1998 ice storm and subsequent prolonged power outages, and expansion of
pressure washer offerings to Home Depot.
International sales increased $3.4 million, or 44.7%, to $11.0 million for
the period January 1, 1998 through July 9, 1998, from $7.6 million for the six
months ended June 30, 1997. This increase was primarily due to increased
penetration into German home center accounts.
GROSS PROFIT. Gross profit increased $10.6 million, or 43.4%, to $35.0
million for the period January 1, 1998 through July 9, 1998, from $24.4 million
for the six months ended June 30, 1997. This increase was primarily due to
increased sales volume as described above and improved gross margins. Gross
profit margin increased to 25.1% for the period January 1, 1998 through July 9,
1998, from 24.7% for the six months ended June 30, 1997, as a result of the
improved mix of higher margin generator sales versus lower margin pressure
washer sales.
OPERATING EXPENSES. Operating expenses increased $6.2 million, or 48.4%,
to $19.0 million for the period January 1, 1998 through July 9, 1998, from $12.8
million for the six months ended June 30, 1997. This increase was primarily a
result of increased selling and distribution expenses related to the shift of
sales distribution into national home center markets. As a percentage of sales,
operating expenses increased to 13.6% for the period January 1, 1998 through
July 9, 1998, from 13.0% for the six months ended June 30, 1997.
NET INCOME. Net income increased $4.1 million, or 39.4%, to $14.5 million
for the period January 1, 1998 through July 9, 1998, from $10.4 million for the
six months ended June 30, 1997. This increase was primarily due to increased
sales volume and improved gross margins, offset by increased operating expenses
as described above. As a percentage of sales, net income decreased to 10.4% for
the period January 1, 1998 through July 9, 1998, from 10.5% for the six months
ended June 30, 1997.
EBITDA. EBITDA increased $4.5 million, or 36.9%, to $16.7 million for the
period January 1, 1998 through July 9, 1998, from $12.2 million for the six
months ended June 30, 1997. This increase was primarily due to increased sales
volume and improved gross margins, offset by increased operating expenses as
described above. As a percentage of sales, EBITDA decreased to 12.0% for the
period January 1, 1998 through July 9, 1998, from 12.3% for the six months ended
June 30, 1997.
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YEAR ENDED DECEMBER 31, 1997 (PREDECESSOR BASIS) COMPARED TO THE YEAR ENDED
DECEMBER 31, 1996 (PREDECESSOR BASIS)
NET SALES. Net sales increased $55.4 million, or 45.2%, to $178.0 million
for 1997 from $122.6 million for 1996.
Domestic sales increased $53.9 million, or 49.0%, to $164.0 million for
1997 from $110.1 million for 1996. This increase was primarily due to increased
sales volume of overhead valve industrial engine driven generators to Home
Depot, improved pressure washer sales to Sears and expansion of product
offerings into other home center accounts.
International sales increased $1.5 million, or 12.0%, to $14.0 million for
1997 from $12.5 million for 1996. This increase was primarily due to increased
penetration into European home center accounts.
GROSS PROFIT. Gross profit increased $19.6 million, or 71.8%, to $46.9
million for 1997 from $27.3 million for 1996. This increase was primarily due to
increased sales volume as described above and improved gross margins. Gross
profit margin increased to 26.3% in 1997 from 22.3% in 1996 as a result of the
migration into higher margin portable generator products, improved mix of sales
distribution, continued product cost reductions for both generator and pressure
washer product lines, and overall product cost improvements due to
diversification of worldwide supply arrangements.
OPERATING EXPENSES. Operating expenses increased $7.6 million, or 41.5%,
to $25.9 million for 1997 from $18.3 million for 1996. This increase was
primarily a result of increased selling and distribution expenses related to the
shift of sales distribution into national home center markets and incremental
warranty costs of $2.8 million related to the launch of new pressure washer
products. As a percentage of sales, operating expenses decreased to 14.6% in
1997 from 14.9% in 1996.
NET INCOME. Net income increased $11.9 million, or 175.0%, to $18.7
million for 1997 from $6.8 million for 1996. This increase was primarily due to
increased sales volume and improved gross margins as described above. As a
percentage of sales, net income increased to 10.5% in 1997 from 5.5% in 1996.
EBITDA. EBITDA increased $11.8 million, or 112.4%, to $22.3 million in
1997 from $10.5 million in 1996. This increase was primarily due to increased
sales volume and improved gross margins as described above. As a percentage of
sales, EBITDA increased to 12.5% in 1997 from 8.6% in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Following the Transaction, the Company's principal sources of liquidity are
cash flow generated from operations and borrowings under the $30 million
revolving credit portion of the Credit Facility. See "Description of the Senior
Secured Credit Facility" later in this Prospectus. The Company's principal uses
of liquidity are to meet debt service requirements, finance the Company's
capital expenditures and provide working capital. The Company expects that the
ongoing uses of liquidity will be adequately funded by the principal sources of
liquidity.
The Company has incurred substantial indebtedness in connection with the
Transaction. Following the Transaction, the Company had approximately $209.2
million of combined indebtedness outstanding. The Company's ability to make
scheduled payments of principal of, or to pay the interest on its indebtedness,
or to fund planned capital expenditures, will depend upon its future
performance, which in turn, is subject to general
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43
economic, financial, competitive and other factors that are beyond its control.
Based upon the current level of operations and anticipated growth, the Company
believes that future cash flow from operations, together with available
borrowings under the Credit Facility, will be adequate to meet the Company's
anticipated requirements for capital expenditures, working capital, interest
payments and scheduled principal payments. There can be no assurance, however,
that the Company's business will continue to generate sufficient cash flow from
operations in the future to service its debt and make necessary capital
expenditures after satisfying certain liabilities arising in the ordinary course
of business. If unable to generate sufficient cash flow, the Company may be
required to delay necessary capital expenditures, refinance all or a portion of
its existing debt, including the Notes, to sell assets or to obtain additional
financing. There can be no assurance that any such refinancing would be
available or that any such sales of assets or additional financing could be
obtained. See "Risk Factors -- Significant Leverage; Ability to Service Debt."
Prior to the Transaction, the Company historically met its working capital
needs and capital expenditure requirements through a combination of operating
cash flow and availability under a revolving credit agreement maintained by, and
industrial revenue bonds supported by, Generac Corporation.
Cash provided by operating activities totaled $16.2 million for the period
July 10, 1998 through December 31, 1998 and cash used for operating activities
totaled $13.6 million for the period January 1, 1998 through July 9, 1998. This
increase in cash generated from operations during the second half of 1998
resulted primarily from seasonal factors related to sales of pressure washers in
which the Company's level of receivables is typically highest during the second
quarter of the year as compared to other quarters.
Cash provided by operating activities totaled $8.2 million for the year
ended December 31, 1997 as compared to $17.3 million for the year ended December
31, 1996. This decrease in cash generated from operating activities was
primarily a result of reductions in inventory during 1996 and the subsequent
build-up of inventory during 1997 to support increased sales activity.
The Company's receivables are largely derived from large, well-established
retailers. Three customers accounted for approximately 74% of net sales for both
1998 and 1997, and account for 59% of total accounts receivable as of both
December 31, 1998 and 1997.
CAPITAL EXPENDITURES
The Company's capital expenditures were $5.4 million, $1.4 million and $2.3
million in 1998, 1997, and 1996, respectively. The 1998 capital expenditures
related primarily to plant expansions at the Company's facilities, production
machinery and equipment and software. In an economic downturn, the Company
believes it will be able to adjust the amount spent on capital expenditures
without compromising the base requirements of its operations. The Company
expects to spend approximately $6.5 million in 1999 for various capital
projects, including increased capacity through plant expansion, cost improvement
and quality enhancement initiatives, and updating management information
systems. The Company spent approximately $1.9 million, $1.7 million and $2.5
million in 1998, 1997, and 1996, respectively, on research and development.
SEASONALITY, WORKING CAPITAL AND CYCLICALITY
Sales of certain products of the Company are subject to seasonal variation.
Due to seasonal and regional weather factors, sales of pressure washers and
related working capital are typically higher during the second quarter than at
other times of the year. The
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residential and commercial construction markets are sensitive to cyclical
changes in the economy.
RAW MATERIAL COSTS AND INFLATION
The rate of inflation over recent years has been relatively low and has not
had a significant effect on the Company's results of operations. Approximately
44% of the Company's cost of goods sold relate to small gasoline engines which
have not been subject to material price fluctuations. The Company purchases
steel, copper, paperboard, and plastics from various suppliers. While all such
materials are available from numerous independent suppliers, commodity raw
materials are subject to price fluctuations.
YEAR 2000 STRATEGY
Many currently installed computer systems and software products use two
digits rather than four to define the applicable year. For example,
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in systems failures or miscalculations
causing disruptions of the Company's operations. The Company is continuing a
process of making all necessary software changes to ensure that it does not
experience any loss of critical business functionality due to the Year 2000
issue. The Company has adopted and is implementing a three phase approach of
assessment, correction and testing. The scope of the project includes all
internal software, hardware, operating systems, and assessment of risk to the
business from vendors and other parties' Year 2000 issues. The Company believes
that this formal assessment (including prioritization by business risk),
correction (including conversions to new software), and testing of necessary
changes will minimize the business risk of Year 2000 from internal systems.
Although the Company has not yet fully completed its Year 2000 project,
many of the Company's information sub-systems are currently Year 2000 ready. The
balance of the Company's systems are currently being modified or replaced, with
all significant systems targeted for Year 2000 readiness by September 1, 1999.
The need for contingency plans will be evaluated as this target date approaches.
In most instances, the Company has replaced, or is in the process of replacing,
older software with new programs and systems, rather than modifying existing
systems solely to become Year 2000 ready. Replacing these systems results in a
significant upgrade in systems and capabilities, as well as providing the
ability to properly interpret Year 2000 data. Although the timing of the system
replacements is influenced by the Year 2000, in most instances these systems
would have been replaced in the normal course of business.
The Company is currently unable to predict the extent to which Year 2000
issues will affect vendors with which the Company does a material amount of
business, or the extent to which the Company would be vulnerable to the failure
of any of these vendors to convert their systems on a timely basis. The Company
could face a material financial risk if its customers or suppliers are unable to
complete critical Year 2000 readiness efforts in a timely manner. The Company is
continuing to work with its customers and suppliers to evaluate their Year 2000
readiness, identify material risks, and develop solutions so that all critical
processes needed to conduct its business are Year 2000 ready. In addition, the
Company's exposure to these external risks is partially mitigated by the size
and sophistication of its primary customers, as well as by the diversity of its
suppliers and geographic locations.
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The Company has spent approximately $0.9 million during 1998 to upgrade and
replace its systems to ensure Year 2000 readiness. The Company estimates it will
incur additional costs of approximately $1.8 million to upgrade and replace its
systems, the majority of which will be incurred in fiscal 1999. The Company
believes it continues to appropriately reduce the risks of not being Year 2000
ready through the identification and remediation process described above. During
1999, the Company will continue to evaluate the need for contingency planning as
it relates to the readiness for each business related software and hardware
item.
EURO CONVERSION
On January 1, 1999, member countries of the European Monetary Union (EMU)
began a three-year transition from their national currencies to a new common
currency, the "Euro". In the first phase, the permanent rates of exchange
between the members' national currency and the Euro has been established and
monetary, capital, foreign exchange, and interbank markets will be converted to
the Euro. National currencies will continue to exist as legal tender and may
continue to be used in commercial transactions. By January 2002, Euro currency
will be issued and by July 2002, the respective national currencies will be
withdrawn. The Company has operations in member countries of the EMU and,
accordingly, has established action plans that are continuing to be implemented
to address the Euro's impact on information systems, currency exchange rate
risk, taxation, contracts, competition and pricing. Based on its current
assessment, management believes that the costs of the Euro conversion will not
have a material impact on the operations, cash flows or financial condition of
the Company.
FUTURE ACCOUNTING CHANGES
The Financial Accounting Standards Board has issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities" which is
effective for periods beginning after June 15, 1999. Due to the Company's
current limited use of derivative instruments, the adoption of this statement is
not expected to have a material effect on the Company's financial condition or
results of operations.
RISK MANAGEMENT
The Company is exposed to market risk from changes in interest rates and,
to a lesser extent, foreign exchange rates and commodities. To reduce such
risks, the Company selectively uses financial instruments. All hedging
transactions are authorized and executed pursuant to clearly defined policies
and procedures, which strictly prohibit the use of financial instruments for
trading purposes. A discussion of the Company's accounting policies for
derivative financial instruments is included in the summary of Significant
Accounting Policies in Note 2 to the Consolidated Financial Statements included
herein.
The fair value of the Company's Notes is estimated as $110 million as of
December 31, 1998 based upon the average yield of similar debt instruments as of
that date. The Company estimates that this fair value would increase by
approximately $6 million based upon an assumed 10% decrease in market interest
rates and that the fair value would decrease by approximately $6 million based
upon an assumed 10% increase in market interest rates, compared with the average
yield on similar debt instruments on December 31, 1998.
The Company uses interest rate swaps to modify the Company's exposure to
interest rate movements. Net interest payments or receipts from interest rate
swaps are recorded as
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adjustments to interest expense in the consolidated statement of income on a
current basis. The Company's earnings exposure related to adverse movements in
interest rates is primarily derived from outstanding floating rate debt
instruments that are indexed to Eurodollar money rates. A 10% increase/decrease
in the average cost of the Company's debt under its bank credit facility would
result in an increase/decrease in annual pre-tax interest expense of
approximately $356,000 after giving effect to an outstanding interest rate swap.
A 10% increase/decrease in Eurodollar rates would not have a material effect on
the fair value of the interest rate swap as compared to its fair value at
December 31, 1998.
The Company has manufacturing, sales and distribution facilities throughout
Europe and sources raw materials from around the world. Accordingly, the Company
makes investments and enters into transactions denominated in various foreign
currencies. The Company is primarily exposed to fluctuations in various European
currencies. Due to the relative stability of these currencies, management has
not deemed it necessary to currently pursue a foreign currency hedging strategy.
This exposure is not material to the Company.
The Company's exposure to commodity price changes relates to certain
manufacturing operations that utilize raw commodities. The Company manages its
exposure to changes in those prices primarily through its procurement and sales
practices. This exposure is not material to the Company.
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BUSINESS
GENERAL
The Company designs, manufacturers and markets engine-powered tools for use
in both industrial and residential applications, with its two principal product
lines being portable generators and pressure washers. Management estimates that
in 1998, as measured by net sales, the Company was the largest U.S. manufacturer
of portable generator sets, with an overall domestic market share of
approximately 29%, and the second largest U.S. manufacturer of consumer pressure
washers, with a domestic market share of approximately 33%. In both product
categories, the Company offers one of the broadest lines of innovative products
across all major price points. The Company sells its products through multiple
channels of retail distribution, including the leading home center chains, mass
merchants and warehouse clubs as well as independent representatives. Since
1961, the Company has been a major supplier of portable generators to Sears, and
has been one of two suppliers to Sears of pressure washers, both marketed under
the Craftsman(R) label. The Company is also a core supplier of portable
generators and pressure washers, both marketed under the Generac(R) label, to
Home Depot, the largest and one of the fastest growing retail home center chains
in the U.S.
The Company has benefited from strong growth in the engine-powered tools
market as well as favorable demographic trends. The Company believes that its
strength in each product category is the result of its strategic approach to
engineering and manufacturing which emphasizes delivering superior customer
value through innovation in product development and focus on product quality.
The Company is a vertically integrated manufacturer. In addition to the
manufacture of portable generators and pressure washers, the Company also
manufactures components for those products, including alternators, pressure
washer pumps and blow-molded gas tanks. As a vertically integrated manufacturer,
the Company believes it enjoys significant cost advantages over its competitors
who source many of their components from third party suppliers. In addition, the
Company has been successful in improving operating profitability through the
strategic integration of its manufacturing processes, the reconfiguration of
production processes and the standardization of components. The Company has
long-standing customer relationships and effectively utilizes its unique,
nationwide service network to build and support its customer base. These
strengths have enabled the Company to service the increasingly sophisticated and
demanding customers in the retail channel. Over the past three years, the
Company's net sales have grown at a compound annual rate of approximately 38%,
increasing from $104.8 million in 1995 to $276.4 million in 1998.
The Company, based in Jefferson, Wisconsin, has been designing, building
and marketing portable generators since its founding in 1959. The Company has
exclusive supply rights to the GN OHVI family of engines for use in consumer
portable generators, pressure washers and welders.
COMPETITIVE STRENGTHS
The Company attributes its excellent performance, market leadership and
significant opportunities for continued growth and increased profitability to
the following competitive strengths:
LEADING MARKET POSITIONS. The Company is a market leader in the U.S.
engine-powered tools industry, with an overall domestic market share of
approximately 29% in portable generators in 1998 (up from approximately 26% in
1997) and approximately 33%
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in pressure washers in 1998 (up from approximately 31% in 1997). In 1997, as
measured by net sales, the Company was the largest U.S. supplier of portable
generators and the second largest U.S. supplier of pressure washers. In
addition, the Company is a core supplier for many of the leading retail home
centers and Do-it-Yourself ("DIY") retailers. The Company believes that its
broad and innovative product offerings, its commitment to quality and its
reputation for customer service have enabled it to achieve rapid revenue and
earnings growth and its leading market positions.
LEADING DESIGN AND ENGINEERING CAPABILITIES. The Company attributes much
of its success to its innovative design and engineering expertise. The Company's
portable generators and pressure washers are highly engineered, durable,
precision manufactured products. The Company has capitalized on its design and
engineering capabilities by strategically integrating certain manufacturing
processes, such as the Company-designed alternator and the Company-designed and
manufactured pressure washer pumps. As a strategically integrated manufacturer,
the Company believes it is better able to control product quality and therefore
offer a consistently superior finished product. In addition, the Company
believes its vertical integration allows it to enjoy significant cost advantages
and differentiates it from many of its competitors who source many of their
components from third party suppliers. The Company believes such engineering and
design expertise is readily extendible to new product categories, as well.
STRENGTH IN MULTIPLE DISTRIBUTION CHANNELS. For over 35 years, the
Company's portable generators have been sold under the Craftsman(R) label
through Sears' mall-based stores and, more recently, through Sears' growing
chain of freestanding hardware and dealer stores. Over the last five years, the
Company has expanded the distribution of its products marketed under the
Generac(R) name to include seven of the top ten "big box" retailers. Its
products are also well represented in other mass merchants, warehouse clubs,
home centers and hardware stores as well as through the Company's independent
dealer network. The Company believes that its distribution strategy maximizes
the Company's market penetration, as the Company can sell its products into the
same geographic market under different brand names and through different
distribution channels. In addition, since 1995, the Company has significantly
increased its sales to Home Depot, the largest and one of the fastest growing
home center chains in North America. The Company believes that its strong
strategic relationships with leading DIY hardware vendors, such as Sears and
Home Depot, will facilitate continued market share gains as these chains grow
and as hardware channels of distribution continue to consolidate.
LOW COST MANUFACTURING OPERATIONS AND STATE-OF-THE-ART FACILITIES. The
Company believes that its low cost operations are attributable to its strategic
integration and increased levels of standardization in its manufacturing
processes resulting primarily from commonality of design. This commonality,
along with the Company's efficient manufacturing processes, enable it to realize
savings through reduced inventory levels, greater leverage with suppliers and
improved production flexibility. In 1994, the Company built its current facility
in Jefferson, Wisconsin, which was expanded in 1996. This facility incorporates
state-of-the-art manufacturing technology and processes and was custom designed
to manufacture both of the Company's major product lines. The Company is
currently in the process of expanding capacity in its Jefferson facility which
it expects to complete in the second quarter of 1999. The Company believes that
it is one of the more vertically integrated manufacturers of portable generators
and pressure washers in the U.S., and therefore is more cost-efficient and
better able to respond to customer demands than its competitors.
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SUPERIOR CUSTOMER SERVICE AND COMMITMENT TO QUALITY. The Company has
developed strong relationships with several of the leading home center chains
and DIY retailers, including Sears and Home Depot. These relationships are
supported by its program sales approach, which includes innovative sales and
marketing programs to educate end-users and increase retailers' effectiveness in
selling the Company's full line of products. To this end, the Company has
developed comprehensive category management services which include merchandising
and providing informational materials, sales associate training and product
support. To ensure after-sale support, the Company differentiates itself by
maintaining a competitive independent dealer network, consisting of over 2,700
outdoor power equipment dealers. The Company believes that the independent
dealer network serves as a strong incentive for retailers to allocate shelf
space to the Company's products and minimizes customer returns. In addition, the
Company maintains strict quality inspection procedures throughout the
manufacturing process. These procedures, which include the testing of each unit
prior to shipment, enable the Company to ensure consistent quality. As evidence
of its strong position with its customers and its ability to provide reliable,
high quality products, the Company has been selected as a core supplier of
portable generators and pressure washers to Home Depot, and is the largest
supplier of portable generators and pressure washers to Sears.
ESTABLISHED BRAND NAME AND REPUTATION. The Generac brand name has a 35
year heritage in the engine-powered tools industry. The Company has established
its leading brand name primarily by providing high-quality, innovative, reliable
products as well as a high level of customer service. The Company is a key
supplier to leading home center chains, including Sears, Home Depot, Lowe's and
Costco Companies, Inc. ("Costco"), and has reinforced its reputation with these
chains by tailoring its product offerings and product features to suit certain
major customers' desires for differentiated product lines.
EXPERIENCED AND COMMITTED MANAGEMENT TEAM WITH SIGNIFICANT EQUITY
INCENTIVE. The Company has assembled a strong management team with over 100
years of collective experience in the engine-powered tools industry. The
management team has successfully demonstrated its ability to manage the
Company's rapid revenue and earnings growth through maintenance of high quality
standards, continuous product innovation and commitment to customer service. The
Company's senior management team has a substantial financial interest in the
Company's continued success through its direct investment in Holdings and
participation in an incentive option program.
BUSINESS STRATEGY
The key elements of the Company's strategy include:
STRATEGIC ALLIANCES WITH STRONG, FAST-GROWING CUSTOMERS IN THE DIY HOME
CENTER CHANNELS. The Company believes that its strong strategic relationships
with leading DIY hardware vendors such as Sears and Home Depot will enable it to
gain market share as these chains grow and as hardware channels of distribution
continue to consolidate. For example, Sears and Home Depot together plan to have
approximately 3,800 stores by the year 2000, up from approximately 2,300 in
1997. In addition, these leading retailers are continuing to develop a variety
of store formats to broaden their customer reach. These dominant retailers are
actively expanding beyond the traditional DIY market and into the commercial
contractor markets and the Company intends to develop products to support these
retailers' commercial needs. The effectiveness of the Company's customer
strategy is best illustrated by its relationship with Home Depot. In 1995, the
Company sold three generator stock keeping units ("SKUs") in three of Home
Depot's seven regions and no
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pressure washer SKUs. Currently, the Company sells two pressure washer SKUs and
six generator SKUs in all eight of Home Depot's regions. In addition, the
Company will be implementing full point-of-purchase support to Home Depot. The
Company believes that it has the potential to add important new DIY accounts
and, upon the completion of the planned expansion of its Jefferson facility,
will have the capacity to meet expected demand.
WELL DEFINED AND STRATEGICALLY MANAGED PRODUCT LINES. The Company's
strategy is to develop a continuous stream of innovative products which are
regarded as delivering the highest quality and best overall value in the
industry. A driving force behind the Company's growth in both product categories
and in expanding its gross margins has been its proven ability to develop and
deliver new products at entry-level price points and then to successfully
migrate end-users to more sophisticated products with unique features, designed
around the Company's proprietary components. This strategy has been a key
attribute for leading retailers, such as Home Depot, who consider the Company a
core supplier in both product categories. By offering the broadest selection of
portable generators and pressure washers supported by comprehensive sales
associate training, field merchandising support and informative
point-of-purchase signage and packaging, the Company has become a preferred
supplier to its key customers such as Home Depot and Sears.
CONTINUED COST REDUCTIONS AND PRODUCTIVITY IMPROVEMENTS. The Company
believes that it can maintain its position as a low cost, high-quality
manufacturer by continuing to take advantage of further opportunities to
strategically integrate and manufacture components. The Company's decision to
manufacture certain core components, including pressure washer pumps,
alternators and blow-molded gas tanks, enables it to lower costs, better control
product quality, shorten supply lead times, maintain lower inventory levels and
achieve greater overall manufacturing flexibility. The Company believes that it
is one of the U.S. industry's more vertically integrated manufacturers and
intends to continue to improve operating profitability and maintain a high
standard of product quality by focusing on reducing costs and developing
performance-enhancing product features. In addition, the Company intends to
continue to improve productivity and profitability through focused industrial
engineering efforts and the standardization of components.
PRODUCT INNOVATION AND DIVERSIFICATION INTO NEW AND RELATED PRODUCTS. High
level engineering capabilities and efficient manufacturing operations provide
the Company with significant resources for continued product innovations as well
as new product development. Its product development program for the portable
generator product line includes: (i) computer controlled features; (ii) manual
transfer switches for home and commercial use; (iii) a family of new home
security packages; (iv) development of higher kilowatt ("KW") output units for
commercial use; and (v) new vertical shaft units. Its product development
program for the pressure washer product line includes: (i) a new commercial line
of gasoline-powered pressure washers; (ii) development of an engine idle down
system; (iii) an expanded line of accessories; and (iv) a pump family for
products with higher pounds per square inch ("PSI") ratings. The Company also
has new product categories under development. The Company's research and
development group is developing and field testing various prototypes, which the
Company expects to introduce as new products over the next 12 to 24 months.
INTERNATIONAL MARKET OPPORTUNITIES. The Company offers its portable
generators throughout Europe and has been successful in building long-term
customer relationships with leading "big box" retailers in six markets: the
U.K., Germany, Switzerland, Spain, Belgium and France. Management expects its
European sales growth to accelerate over the
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next five years as the Company leverages its product line breadth and brand
equity to gain shelf space and placements in new and existing European markets.
Management believes that, as the major U.S.-based DIY home center chains expand
internationally, there will be a growing need for their relationship suppliers,
such as the Company, to establish a direct presence overseas. The Company plans
to use its U.K. manufacturing base to support its marketing efforts in Europe,
thus realizing enhanced operating leverage at that facility.
INDUSTRY
The Company competes primarily in the portable generator and pressure
washer product lines of the engine-powered tools industry.
PORTABLE GENERATORS.
The Company estimates that the U.S. portable generator market was $492
million in 1998, and has grown at a 16% compounded annual growth rate ("CAGR")
from $230 million since 1993. The Company believes that this market will
continue to grow at a 16% CAGR to reach approximately $900 million in 2002. In
1998, the U.S. portable generator market consisted of approximately ten
manufacturers, ranging from small regional producers to large manufacturers with
nationwide distribution capabilities. Sales of the six largest manufacturers
accounted for approximately 85% of the total market in 1997. Growth in this
market is driven by (i) increased consumer awareness of utility; (ii) favorable
demographic trends; (iii) the momentum of home center retailers; and (iv)
improving price performance.
INCREASED CONSUMER AWARENESS OF UTILITY. Historically, applications for
portable generators have included (i) running power tools and other appliances
at residential as well as remote construction sites and (ii) providing
electrical power in connection with the use of recreational vehicles and at
camping sites. In recent years, growth in the portable generator market has
increasingly been driven by the demand by homeowners for alternative, or
stand-by, power sources. The Company believes that demand for stand-by power has
increased in part by the trend toward utility deregulation, which has increased
the threat of power supply interruptions, and by increasing requirements of
homeowners for home security. Power generator sales are not highly seasonal, nor
are sales significantly affected by storms or other natural disasters, as the
Company's consumer research indicates that only approximately 4% of generator
sales are attributable to an immediate need for electrical power. In 1998, the
stand-by power product line represented approximately 75% of total portable
generator sales, and the Company believes that the demand for stand-by power
will continue to be a primary factor in the growth of the overall market.
FAVORABLE DEMOGRAPHIC TRENDS. Recent industry data indicate that
approximately 60% of portable generator purchasers are between 45 and 65 years
old. According to U.S. census estimates, this segment of the population is
expected to grow by approximately 25% over the next six years. In addition, the
U.S. census projects that there will be over three million new homeowners over
the next five years.
BROADENING CHANNELS OF DISTRIBUTION. Channels of distribution for portable
generators were historically independent dealers, commercial and industrial
supply houses and lawn and garden outlets. These channels were fragmented, and
retailers assumed many costs associated with these products, such as the costs
of freight, inventory and handling and in-store product support. These costs
were passed on to consumers in higher prices. In
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recent years, the emergence of home center chains and warehouse clubs has
enhanced the market and distribution infrastructure for engine powered tools,
including portable generators. These retailers have also driven their suppliers
to offer more competitively-priced products with higher perceived value, to
offer continuous product innovation, and to assist in the development of
marketing and merchandising efforts. As a result, these home center chains have
been instrumental in driving the growth of products such as portable generators.
IMPROVING PRICE PERFORMANCE. Improved price-performance has led to
increased demand for portable generators. Improvements in customer value can be
attributed to significant strides in the design, engineering and manufacturing
cost of overhead valve industrial ("OHVI") engines, pressure washer pumps and,
to a lesser degree, electric motors and lawn mower-type gasoline engines. The
most significant enhancement to customer value has been the development of the
OHVI engine, a highly engineered product that established new industry standards
for the highest power-to-weight ratio, the lowest noise level and the longest
operating life. In 1998, portable generators equipped with OHVI engines
represented approximately 30% of the total portable generator market, up from
less than approximately 6% of the market in 1993. By the year 2002, the Company
believes that approximately 40% of the portable generators sold in the U.S. will
be powered by OHVI engines.
PRESSURE WASHERS.
The Company estimates that the U.S. consumer pressure washer market was
$300 million in 1998, and has grown at a 43% CAGR from $50 million since 1993.
The Company believes that this market will grow at a 15% CAGR to reach
approximately $527 million in 2002. In addition, the commercial pressure washer
market was approximately $120 million in 1998. In 1998, the U.S. pressure washer
market consisted of approximately ten manufacturers, ranging from small regional
producers to large manufacturers with nationwide distribution capabilities. The
market is consolidating, with sales of the four largest manufacturers accounting
for an estimated 80% of the total market in 1998, which reflects the exit of a
leading manufacturer of consumer pressure washers during that year. Growth in
the market is driven by (i) increased awareness of consumer applications; (ii)
broadening channels of distribution; and (iii) improved price-performance.
INCREASED AWARENESS OF CONSUMER APPLICATIONS. Pressure washers have been
used in commercial applications for over 50 years. In recent years, the consumer
pressure washer market has evolved, driven by increasing awareness of utility
and the ease of use of the products. Consumer applications include car washing,
deck cleaning, and pre-treating exterior surfaces prior to painting. Common
commercial applications include stripping paint, removing graffiti, farm and
agricultural uses, automotive uses, and factory and warehouse applications.
Consumer demand for pressure washers reflects the considerable increase in home
ownership, real estate values, boat and recreational vehicle ownership and
consumers' desire to preserve the value of, and enhance the appearance of, these
investments. Pressure washers also have a strong appeal to homeowners faced with
increasing demands on their time.
BROADENING CHANNELS OF DISTRIBUTION. In 1993, Sears was the first retailer
to offer an effectively merchandised and well-balanced assortment of pressure
washers for consumer applications, including car washing, deck cleaning and
paint surface preparation. Other leading home center chains began offering
pressure washers shortly thereafter, and contributed to the rapid development of
the consumer market. These home center chains
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have required their suppliers to provide broader product lines and to
continually improve quality, price and product performance. The Company believes
that such pressure from the home center chains will lead to further industry
consolidation to the detriment of the smaller participants.
IMPROVING PRICE PERFORMANCE. Improved price-performance has led to
increased consumer demand for gasoline powered pressure washers. These products
offer a significant step up in cleaning power, durability, engine life and
safety features at only a modest premium to the opening price point of a basic
electric pressure washer. The axial cam pump, introduced in 1994, significantly
lowered the manufacturing cost of a pressure washer in addition to improving
quality and overall customer satisfaction. The shift to axial cam pumps from
crank shaft pumps allowed the use of high-volume, low-cost vertical shaft
engines. This innovation has not only reduced retail prices but has also made
this product more convenient to use, adding to its continued growth in the
consumer market.
PRODUCTS
The Company primarily produces portable generators and pressure washers
built around (i) commercially available lawn mower-type engines and (ii) the GN
OHVI engine. The GN OHVI engine, to which the Company has exclusive access for
its portable generators, pressure washers and welders, offers several
value-added features to home, recreational and commercial end-users. For
example, a typical lawn mower-type engine is expected to provide a 400-700 hour
operating life, while the GN OHVI engine has a life expectancy of up to 3,000
hours. Engines comparable to the GN OHVI which are available to the Company's
competitors tend to sell at a premium relative to a comparable proprietary GN
OHVI engine. This has enabled the Company to gain market share by offering a
superior value to consumers and a differentiated product to retailers.
PORTABLE GENERATORS
The Company believes it manufactures and markets the broadest line of
portable generator products in the industry. The Company's product offering
ranges from premium-priced models, incorporating advanced operating features and
performance characteristics built around the Company's proprietary GN OHVI
engine, to value-priced products built around conventional commercially
available lawn mower-type engines. The Company's generator line includes the
most basic units without protective frames to complete units, and the simplest
electrical outlet features to full control panels with related features that are
attractive to the industrial and contractor markets. The Company's entire
product line incorporates various value-added features such as low oil shutdown
and reduced noise levels.
The Company's competitive position in the portable generator category is
the result of its state-of-the-art product design and engineering capabilities.
Many of the Company's premium GN OHVI engine-powered generators are equipped
with voltage regulators which provide superior voltage control and surge
capacity for starting large electrical loads. The GN OHVI engine-powered units
also feature lighter weight for portability, compact size, reduced maintenance
and lower fuel consumption. Electric start is available on certain models and
the contractor units incorporate a unique idle control device which further
reduces noise, greatly extends engine operating life and additionally reduces
fuel consumption. Oversized fuel tanks for longer operating times are standard
with these units.
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PRESSURE WASHERS
The Company's engine-driven pressure washers incorporate unique value added
features such as a thermal overload device, which prevents overheating and
resulting failures, and an exclusive unloading circuit which makes starting
easier. The Company's electric pressure washer product line offers reduced noise
levels, a long operating life and an automatic start-stop feature which protects
against damage from overheating or running dry. The Company's proprietary pump,
based on different combinations of internally designed components and a low-cost
aluminum pump head, promotes greater manufacturing flexibility and a faster
response to evolving end-user needs. As with portable generators, end-users are
offered a premium GN OHVI engine-powered product which features lower fuel
consumption, longer life and lower noise levels, all of which the Company
believes are of great value to the end-user. The Company believes it is the only
U.S. manufacturer in this industry to have this level of integration in the
manufacture of pressure washers.
NEW AND RELATED PRODUCTS
All of the Company's new product initiatives are based on the Company's
core manufacturing and marketing philosophy. The Company's strategy to expand
its presence in related product lines has three major components. In the power
generator market, the Company plans to leverage its exclusive access to the GN
OHVI engine to introduce high value models at competitive price points. For
example, the Company's 4000XL model, as currently priced to the end-user, will
offer technically advanced consumer benefits at half to 2/3 the retail price of
a Honda product. Management anticipates that this compelling price performance
ratio will significantly increase demand in the premium-priced line relative to
low-end, lower-margin generator sets.
In the pressure washer category, the Company plans to introduce its first
product designed specifically for the commercial market in 1998. This commercial
product has been designed around the same GN OHVI engine as used in portable
generators, providing longer life for trouble-free power compared to competitive
offerings. Management believes that as the large home center chains focus
increasingly on the commercial contractor and home construction markets, the
Company's established position in these channels, as well as in various catalogs
directed at professionals, should enable the Company to penetrate this segment
rapidly. The Company estimates that the market for these products was
approximately $120 million in 1998.
Finally, over the next 12 to 24 months, the Company plans to continue to
competitively position its entry level vertical shaft gasoline pressure washer
to encourage the present electric pressure washer owner to trade-up to a higher
powered gasoline unit. The Company's product positioning is focused on providing
significantly greater cleaning power, longer engine life and user-friendly
accessories at a modest premium to competitive electric pressure washers.
Superior design and engineering capabilities and low-cost manufacturing
operations provide the Company with a significant resource for developing new
product categories. The Company has identified several new product and business
opportunities in which the Company can provide added value to end-users and
attractive profit margins to retailers. The Company's research and development
group is in the latter stages of developing and field testing these products.
Management expects to introduce these products over the next 12 to 24 months.
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DISTRIBUTION AND MARKETING
The Company's three largest customers are Home Depot, Sears and Costco,
which together accounted for approximately 74% of sales for the year ended
December 31, 1998. The Company also sells to other consumer home centers and
warehouse clubs, as well as outdoor power equipment dealers. In addition to
traditional retail distribution, the Company offers its products through
national catalog companies such as Northern Hydraulic, Sears Power Tool catalog
and the Company's own "special-order" service.
Since 1961, the Company has been the major supplier of portable generators
to Sears, and one of two suppliers of pressure washers since Sears first
introduced that product category in 1994. Sears and the Company have developed a
longstanding partnership involving the development of exclusive product
offerings under the Craftsman(R) label, high levels of in-store sales support,
well-coordinated merchandising and promotional campaigns and access to Sears'
nationwide service network. This partnership is considered to have been highly
effective in building up both product categories for Sears. In both the portable
generator and pressure washer categories, the Company has collaborated with
Sears to create high-impact in-store displays that provide both an assortment of
products and informative point-of-purchase materials to help guide end-users in
their purchasing decision. The Company continues to increase its sales through
Sears' expanding hardware distribution channels including its new local hardware
stores, dealer stores and Orchard Supply.
Over the past three years, the Company has expanded the distribution of its
products, marketed under the Generac(R) name, to home centers and warehouse
clubs. Borrowing from its experience at Sears, the Company offers to its
customers a total category management approach, including value-added, in-store
services such as merchandising, informational materials, sales associate
training and product support. The Company believes that its ability to affect
merchandise presentation at the point-of-purchase, particularly its visual
merchandising and packaging, has had a strong impact on retailers' portable
generator and pressure washer sales and profitability. Major U.S. retail
customers now include Home Depot, Lowe's, Costco and Tru-Serve Incorporated. The
Company is well-represented in seven of the top ten "big box" retailers in the
U.S.
The Company employs a two-tiered sales force to sell its products through
mass merchants, home centers and independent dealer channels. Product Managers
are responsible for developing sales programs tailored to retailer-specific
needs in the home center and warehouse club channels. Territory Sales Managers
("TSMs") are responsible for establishing new independent dealers, training
sales associates at a store level, and managing and reducing product returns.
TSMs also serve as the primary interface between the Company's manufacturing
operation and its independent dealer network.
The Company has assembled a comprehensive after-sales service network in
North America for generator sets and pressure washers comprised of: (i) 2,700
authorized independent dealers; (ii) 11 independently owned master parts
distributors ("Master Generac Express Network" or "Master G.E.N."); and (iii) a
Company-owned fleet of mobile service training vehicles. In today's retail
environment, most independent dealers do not generate the traffic to be
competitive with mass merchants, home centers or warehouse clubs. Nevertheless,
the Company has made a strategic decision to maintain the viability of the
independent dealer network for the express purpose of providing a service that
supports the Company's product. The Company has positioned itself not only to
respond to short-term warranty needs but to maintain service capability
throughout the life of the
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product as well. Many of the Master G.E.N.s have their own sales force, which
effectively broadens the availability of the Company's products and spare parts.
PRODUCT DEVELOPMENT; ENGINEERING
The Company's ability to serve both retailers and end-users is effectively
driven by the strength of its engineering and product development capabilities,
particularly in alternator and pump design. In 1959, the Company was the first
to exploit silicon-diode technology to completely redesign the alternator,
thereby fundamentally improving the manufacturing economics and performance
characteristics of portable generators. Similar performance improvements have
been associated with the GN OHVI engine, the pressure washer pump and the
computer-controlled generator. In recognition of its design and engineering
competency, the Company was contracted by Briggs & Stratton ("B&S"), one of the
world's largest commercial engine manufacturers, to design and set up
manufacturing for B&S of its first V Twin Vanguard engine. The Company was
instrumental in assisting in the establishment of the joint venture company of
Dihatsu Briggs & Stratton in Japan, which is the manufacturer of the Vanguard
engine.
In the pressure washer category, the Company has leveraged its
engineering-driven culture to turn areas of potential vulnerability into
competitive strengths. For example, in response to the constrained supply chain
for highly engineered pressure washer pumps from inflexible and often
unpredictable overseas suppliers, the Company designed and now manufactures its
own pressure washer pump. This pump is based on its axial cam technology,
resulting in increased responsiveness to market demands and avoiding the costly
air freight expenses incurred in the past.
The Company's ability to successfully commercialize technical innovations
is a core competency and is expected to continue to contribute to revenue and
profit growth. Today's retail environment demands a continuous flow of new,
value-enhanced offerings to maintain product placements and shelf space
allocations. The majority of the Company's new product development initiatives
are based on the portable generator and pressure washer markets. However, the
Company's new product development group is in the latter stages of developing
and field testing products outside of these core markets that the Company
expects to introduce over the next 12 to 24 months. See "-- Products -- New and
Related Products."
INTERNATIONAL SALES AND DISTRIBUTION
The Company has been successful in building long-term customer
relationships with the leading "big box" retailers in six European markets: the
U.K., Germany, Switzerland, Spain, Belgium and France. To support the Company's
growing European power generator business, local sales offices have been
established in Manchester, Cologne and Barcelona. To service its European
customer base more effectively, the Company designs and assembles its European
products in its Cheshire, England facility. This facility imports alternators,
engines and pumps and other components, and assembles portable generators to
meet local product requirements and quality assurance regulations.
The Company's international operations have contributed approximately 8% of
total net sales for calendar year 1998. The Company plans to focus on
international expansion as a key part of its strategy. See "-- Business
Strategy -- International Market Opportunities."
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COMPETITION
The U.S. engine powered tools industry has experienced significant
consolidation over the last 10 to 15 years. The number of competitors in its
product categories has decreased from approximately 20 in 1985 to approximately
ten today, of which only four companies have national distribution capabilities.
Although the Company experiences substantial competition from these competitors,
the Company believes that it is a market leader in each of its core products. In
the manufacture and sale of portable generators, the Company competes primarily
with Coleman Powermate, a division of The Coleman Company, Inc. and Honda. In
the manufacture and sale of pressure washers, the Company competes primarily
with DeVilbiss Air Power Company, a subsidiary of Falcon Building Products,
Inc., and, to a lesser extent, with Alfred Karcher GmbH & Co. and Campbell
Hausfeld, a division of The Campbell Group.
MANUFACTURING
The Company believes that it is one of the more vertically-integrated
manufacturers of portable generators and pressure washers in the U.S. Management
believes that sustained levels of capital investment and a commitment to
manufacturing and technological excellence are important to remain competitive
from both a price and product offering perspective.
The Company operates a state-of-the-art manufacturing facility in
Jefferson, Wisconsin. Completed in January 1995, the original 120,000-square
foot facility was expanded by 57,500 square feet in January 1997 to add capacity
for the manufacturing of electric pressure washers and pressure washer pumps.
The Company is currently in the process of further expanding capacity in this
facility by approximately 72,000 square feet and expects to complete this
expansion in the second quarter of 1999.
The Jefferson plant incorporates facilities for blow molding of plastic
tanks; robotic welding of cradles; powder coat painting of metal components;
machining; a complete rotor and stator production line with an automated
varnishing system representing the latest winding technology available;
high-volume assembly lines for one to 12 KW portable generators and 1300 PSI to
3500 PSI pressure washers; and on-line testing, packaging and warehousing
facilities.
The Company also owns and operates a manufacturing facility in Cheshire,
England, which was built in 1990 and recently expanded from approximately 18,000
square feet to approximately 45,000 square feet.
Pursuant to the terms of the Engine Supply Agreement, the Company has the
exclusive right to purchase certain models of Generac Corporation's GN OHVI
engines for use in its pressure washers, consumer portable generators and
welders. The initial term of the Engine Supply Agreement is for a period of nine
years, with provision for three year renewals, subject to certain conditions.
See "Risk Factors -- Absence of Independent Operating History; Dependence on
Generac Corporation."
EMPLOYEES
As of December 31, 1998, the Company employed approximately 980 persons,
the majority of whom were involved in production and distribution, with the
balance engaged in technical, administration, sales and clerical work. Of these
employees, 930 were employed in the United States and 50 in the U.K. Although
all the Company's production employees are covered by a collective bargaining
agreement, only up to ten of the
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Company's employees have been unionized. The collective bargaining agreement
expires in October 1999, which the Company expects to negotiate and renew when
it expires. The Company believes that its relationship with its employees is
good.
ENVIRONMENTAL MATTERS
The Company's operations are subject to federal, state and local laws and
regulations governing, among other things, emissions to air, discharge to
waters, the generation, handling, storage, transportation, treatment and
disposal of waste and other materials and health and safety matters. The Company
believes that its business, operations and facilities have been and are being
operated in compliance in all material respects with applicable environmental
and health and safety laws and regulations, many of which provide for
substantial fines and criminal sanctions for violations. However, the operation
of manufacturing plants entails risks in these areas, and there can be no
assurance that the Company will not incur material costs or liabilities in the
future. In addition, potentially significant expenditures could be required in
order to comply with evolving environmental and health and safety laws,
regulations or requirements that may be adopted or imposed in the future.
LEGAL PROCEEDINGS
The Company is involved from time to time in litigation arising out of its
business operations. Most of such litigation involves claims for personal
injury, property damage, breach of contract and claims involving employee
relations and certain administrative proceedings. The Company believes such
claims are either adequately covered by insurance or do not involve a risk of
material loss to the Company.
PROPERTIES
The Company currently owns and operates an approximately 177,500 square
foot manufacturing and warehouse facility in Jefferson, Wisconsin, which will be
expanded by approximately 72,000 square feet by the second quarter of 1999, and
an approximately 45,000 square foot manufacturing facility in Cheshire, England.
The Company believes that its manufacturing plants are generally
well-maintained, in good condition and, upon completion of the expansion, are
adequate to meet its present needs. In addition, the Company has sales offices
in Cologne, Germany and Barcelona, Spain, and warehousing facilities in
Jefferson and Waukesha, Wisconsin, all of which are leased. The Company does not
believe that it will have any difficulty renewing any real property lease or
finding alternative sites.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the name, age and position of each of the
directors and executive officers of the Issuers and Holdings.
NAME AGE POSITION
- ---- --- --------
OPERATING COMPANY:
Dorrance J. Noonan, Jr............... 46 President, Chief Executive Officer and
Director
Gary J. Lato......................... 39 Chief Financial Officer and Secretary
James H. Deneffe..................... 54 Senior Vice President -- Sales and
Marketing
Wesley C. Sodemann................... 55 Vice President of Engineering
Jay C. Sugar......................... 38 Vice President of Operations
J. David Bramhill.................... 43 Vice President of International Operations
Robert M. Saeger..................... 53 Vice President of Planning
Richard A. Aube...................... 30 Director
GPPW:
Faith Rosenfeld...................... 47 President
Richard A. Aube...................... 30 Secretary, Treasurer and Director
HOLDINGS:
Eric R. Wilkinson(1)................. 43 President and Director
Richard A. Aube...................... 30 Secretary and Treasurer
R. Eugene Cartledge(1),(2)........... 69 Chairman of the Board
Robert D. Kern(1),(2)................ 72 Director
Thomas G. Mendell.................... 51 Director
Dorrance J. Noonan, Jr............... 46 Director
R. Ralph Parks(1),(2)................ 55 Director
Richard A. Van Deuren(2)............. 69 Director
- -------------------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
DORRANCE J. NOONAN, JR., President, Chief Executive Officer and Director of
the Operating Company and Director of Holdings, served in various management
positions with Generac Corporation from 1990 to 1998, most recently as Chief
Operating Officer from 1997 to 1998. Prior to joining Generac Corporation, Mr.
Noonan was Manager of Sales and Marketing at Artcraft Industries from 1988 to
1990, a registered securities broker at Prudential-Bache Securities from 1985 to
1988, and Manager of International Sales and Marketing at the Perfex Division of
McQuay-Perfex from 1981 to 1985.
GARY J. LATO, Chief Financial Officer and Secretary of the Operating
Company, joined Generac Corporation in 1991, serving as Director of Finance in
1991 and as Vice President -- Finance from 1992 to 1998. Prior to joining
Generac Corporation, Mr. Lato held various positions, including Senior Audit
Manager, at Price Waterhouse LLP from 1981 to 1991.
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JAMES H. DENEFFE, Senior Vice President -- Sales and Marketing of the
Operating Company, held that position at Generac Corporation from 1996 to 1998.
Mr. Deneffe has been with Generac Corporation since 1978, serving as Vice
President -- Consumer Products Sales and Marketing from 1982 to 1995 and as
Group Sales Manager from 1978 to 1981.
WESLEY C. SODEMANN, Vice President of Engineering of the Operating Company,
held that position at Generac Corporation from 1996 to 1998. Mr. Sodemann also
served as Chief Engineer of Generac Corporation from 1979 to 1996 and as
Associate Engineer from 1965 to 1979.
JAY C. SUGAR, Vice President of Operations of the Operating Company, held
that position at Generac Corporation from 1996 to 1998. Mr. Sugar also served as
Manufacturing Manager of Generac Corporation from 1993 to 1996 and as Manager of
Production and Inventory Control in 1993. Prior to joining Generac Corporation,
Mr. Sugar held various positions at Cadence Design Systems -- ASI Division (1990
to 1992), Data General Corporation (1987 to 1990) and General Dynamics (1982 to
1985).
J. DAVID BRAMHILL, Vice President of International Operations, has held
that position since 1997 and served as European Operations Manager for Generac
Corporation from 1992 to 1996. Prior to joining the Company, Mr. Bramhill served
in various management and engineering positions at Heulins Manufacturing, Crewe,
Cheshire, England (1991 to 1992) and Rolls-Royce Motor Car Company, Ltd. and
Rolls-Royce Aerospace, Crewe, Cheshire, England (1972 to 1991).
ROBERT M. SAEGER, Vice President of Planning of the Operating Company, has
held that position since 1998. From 1997 to 1998, Mr. Saeger served as Director
of Accounting/Controller with Generac Corporation and also served as Director of
Accounting and Financial Control from 1990 to 1996, as Accounting Manager from
1983 to 1990 and as Assistant Controller from 1976 to 1983.
ERIC R. WILKINSON, President and Director of Holdings, has been a managing
director of The Beacon Group, LLC (an affiliate of Beacon) since 1994. Prior to
joining The Beacon Group, LLC, Mr. Wilkinson was a partner of Apax Partners &
Cie SA, a European private equity firm, from 1989 to 1994 and a partner of Bain
& Company, the strategy consulting firm, from 1983 to 1989. Mr. Wilkinson is a
director of Doctors Health Systems, Intek Information Inc., Hollywood Theaters,
Inc., The Identity Group, OnCare Inc., National Century Financial Enterprises,
Inc. and International Components Corporation.
RICHARD A. AUBE, Secretary and Treasurer of Holdings, Director of the
Operating Company and Secretary, Treasurer and Director of GPPW, has been with
The Beacon Group, LLC since 1993, most recently as Director. Prior to joining
The Beacon Group, LLC, Mr. Aube was a financial analyst in the Natural Resources
Group of Morgan Stanley & Co. Mr. Aube is a director of Vessels Energy, Inc.
R. EUGENE CARTLEDGE, Chairman of the Board of Holdings, was Chairman of the
Board and Chief Executive Officer of Union Camp Corp. from 1986 until his
retirement in June 1994. Mr. Cartledge is a director of Blount, Inc., Chase
Brass Industries, Inc., Delta Airlines Incorporated, Sunoco, Inc., Union Camp
Corp. and UCAR International Inc.
ROBERT D. KERN, Director of Holdings, has been Chairman and Chief Executive
Officer of Generac Corporation since its founding in 1959.
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THOMAS G. MENDELL, Director of Holdings, has been a managing director of
The Beacon Group, LLC since 1994. Prior to joining The Beacon Group, LLC, Mr.
Mendell was employed by Goldman, Sachs & Co. for nineteen years where he served
as a member of the firm's Investment Committee and head of GS Capital. Mr.
Mendell is a director of Doctors Health Systems, Hollywood Theaters, Inc.,
SmartMaps, International, Inc., The Identity Group and OnCare Inc.
R. RALPH PARKS, Director of Holdings, has been a limited partner of The
Beacon Group, LP (an affiliate of Beacon) since 1997. Prior to joining The
Beacon Group, LP, Mr. Parks was a partner of Goldman, Sachs & Co. and head of
its Investment Banking Services for Europe and Canada.
RICHARD A. VAN DEUREN, Director of Holdings, has been a partner in the law
firm of Reinhart, Boerner, Van Deuren, Norris & Rieselbach, s.c., Attorneys at
Law. Mr. Van Deuren is a director of Allen Edmonds Corporation, Allrubber
Products & Supply Co., Arandell Corporation, Ataco Steel Products Corporation,
F.W. Busch Corp., Campbell, Newman, Pottinger & Associates, Inc., Construction
Forms, Inc., Energy Ventures, Ltd., Foran Spice Company, Inc., Generac
Corporation, Marshall W. Nelson & Associates, Inc., MSI General Corporation,
UNICO, INC., Valuation Research Corporation and Waukee Engineering Company, Inc.
FAITH ROSENFELD, President of GPPW, has been a managing director of The
Beacon Group, LLC since its inception in 1993. Prior to joining The Beacon
Group, LLC, Ms. Rosenfeld was employed by Goldman, Sachs & Co. for 14 years
where she held various positions, including, most recently, Vice President,
Investment Banking Division. Ms. Rosenfeld is a director of SBL, Inc. and Savia
International, Ltd.
Directors of each of the Issuers will hold office until his or her
successor has been elected and qualified. Officers of each of the Issuers and
Holdings will be elected by the respective Boards of Directors at the annual
meeting of stockholders and will serve at the discretion of such Board of
Directors.
EXECUTIVE COMPENSATION
The following table sets forth information regarding the compensation paid
during the Company's last completed fiscal year to the Chief Executive Officer
and each of the other four most highly compensated executive officers of the
Company as of December 31, 1998.
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------- ------------
OTHER AWARDS
ANNUAL SECURITIES ALL OTHER
NAME AND COMPEN- UNDERLYING COMPEN-
PRINCIPAL POSITION YEAR SALARY($) BONUS($) SATION($) OPTIONS(#) SATION($)(1)
- ------------------ ---- --------- -------- --------- ------------ ------------
Dorrance J. Noonan, 1998 136,500 26,340 -- -- 5,287
Jr.....................
Chief Executive Officer
Gary J. Lato............. 1998 131,250 25,500 -- -- 3,127
Chief Financial Officer
James H. Deneffe......... 1998 131,250 25,500 -- -- 11,737
Senior Vice
President --
Sales and Marketing
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LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------- ------------
OTHER AWARDS
ANNUAL SECURITIES ALL OTHER
NAME AND COMPEN- UNDERLYING COMPEN-
PRINCIPAL POSITION YEAR SALARY($) BONUS($) SATION($) OPTIONS(#) SATION($)(1)
- ------------------ ---- --------- -------- --------- ------------ ------------
Wesley C. Sodemann....... 1998 101,923 24,000 47,500 -- 8,758
Vice President of
Engineering
Jay C. Sugar............. 1998 101,923 19,000 47,500 -- 1,882
Vice President of
Operations
- -------------------------
(1) All other compensation includes the value of deferred compensation
agreements maintained with the officers of the Operating Company.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information with respect to the executive
officers named in the Summary Compensation Table concerning the grants of
options made under the Company's Stock Option Plan during fiscal 1998.
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
----------------------------- VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF STOCK
SECURITIES PERCENT OF TOTAL PRICE APPRECIATION
UNDERLYING OPTIONS GRANTED EXERCISE OR FOR OPTION TERM(1)
OPTION TO EMPLOYEES IN BASE PRICE EXPIRATION -----------------------
NAME GRANTED(#) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
- ---- ---------- ---------------- ----------- ---------- ---------- ----------
Dorrance J. Noonan,
Jr. .................... 252.976 23.8% $12,941.00 7/8/08 $2,062,090 $5,236,889
Gary J. Lato.............. 202.381 19.0% 12,941.00 7/8/08 1,649,672 4,189,511
James H. Deneffe.......... 101.190 9.5% 12,941.00 7/8/08 824,836 2,094,755
Wesley C. Sodemann........ 101.190 9.5% 12,941.00 7/8/08 824,836 2,094,755
Jay C. Sugar.............. 101.190 9.5% 12,941.00 7/8/08 824,836 2,094,755
- -------------------------
(1) These gains are based on arbitrary compounded rates of growth of stock
prices mandated by the Securities and Exchange Commission of 5% and 10% per
year from the date the option was granted over the full option term. These
rates do not represent the Company's estimate or projection of future prices
of Holdings Common Stock. There is no assurance that the values that may be
realized by any executive officer upon exercise of his options will be at or
near the value estimated in the foregoing table.
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AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information with respect to the executive
officers named in the Summary Compensation Table concerning the options granted
during fiscal 1998. To date, no such options have been exercised.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FY-END AT FY-END(1)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ------------ ------------ ----------- ------------- ----------- -------------
Dorrance J. Noonan,
Jr. ................... -- -- -- 252.976 0 0
Gary J. Lato............. -- -- -- 202.381 0 0
James H. Deneffe......... -- -- -- 101.190 0 0
Wesley C. Sodemann....... -- -- -- 101.190 0 0
Jay C. Sugar............. -- -- -- 101.190 0 0
- -------------------------
(1) Assumes the fair market value of the shares underlying the options is the
same as the exercise price ($12,941.00 per share) payable for such shares.
DIRECTORS' COMPENSATION
Directors of the Company do not receive director's fees or attendance fees.
Directors are reimbursed for their reasonable expenses incurred in connection
with attending meetings and performing their duties as directors. Outside
directors are eligible to receive options to purchase Holdings Common Stock
pursuant to the Stock Option Plan (as defined). See "-- Stock Option Plan."
Options to purchase 101.19 shares of Holdings Common Stock were granted to
certain directors during 1998.
BENEFIT PLANS
In connection with the Transaction, the Company established two
non-contributory defined benefit plans covering substantially all employees:
bargaining/hourly and non-bargaining/salaried groups. Participants begin vesting
after three years of service and fully vest after seven years of service. The
benefits paid under the salaried plan are based upon years of service and the
participant's defined final monthly compensation. Benefits paid under the hourly
plan are based on a unit amount at the date of termination multiplied by the
participants' credited service. The plans provide for a continuation of
participant's years of service credited with Generac Corporation.
In connection with the Transaction, the Company also established 401(k)
employee retirement savings plans for the benefit of its employees. The Company
pays all administrative costs of the plans but makes no contributions. There are
unfunded deferred compensation plans for certain key employees.
STOCK OPTION PLAN
In order to attract, retain and motivate selected employees, officers and
directors, and to encourage such persons to devote their best efforts to the
business and financial success of the Company, the Company has adopted the
Generac Portable Products, Inc. Stock Option Plan (the "Stock Option Plan").
Under the Stock Option Plan, stock options to acquire up to 1,619 shares, or
approximately 16.0% on a fully diluted basis, of Holdings Common Stock, in the
aggregate, may be granted under a time-vesting formula at an
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exercise price equal to the fair market value of the Holdings Common Stock at
the date of grant. On July 9, 1998, 1,063 options, or approximately 10.5% on a
fully diluted basis (assuming the grant of all available options), were granted
at an exercise price of $12,941.00 per share to certain members of management
and the Company's board of directors.
The Stock Option Plan is administered by Holding's Board of Directors (the
"Board"). The Board will designate which employees of the Company shall be
eligible to receive awards under the Stock Option Plan, and the amount, timing
and other terms and conditions applicable to such awards. Approximately 5.5% of
the outstanding shares of such stock will be reserved for future grants. Options
are exercisable in accordance with the terms established by the Board.
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SECURITY OWNERSHIP
All of the common stock of GPPW is held by Holdings. All of the equity
interest in the Operating Company is held indirectly by Holdings through two
wholly owned subsidiaries: GPPD and GPPW. GPPD and GPPW hold 95% and 5% limited
liability company interests, respectively, in the Operating Company.
The following table sets forth certain information with respect to the
beneficial ownership of Holdings Common Stock by (i) each person who
beneficially owns more than 5% of such shares; (ii) certain directors of the
Company; (iii) each of the executive officers named in the Summary Compensation
Table; and (iv) all executive officers and directors of the Company as a group.
Unless otherwise indicated, the address for each officer and director of the
Company is c/o Generac Portable Products, Inc., 1 Generac Way, Jefferson,
Wisconsin 53549.
NAME OF BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF CLASS
- ------------------------ ---------------- ----------------
5% HOLDERS:
The Beacon Group III -- Focus Value Fund,
L.P.(1)....................................... 4,698.182 55.3%
California Public Employees' Retirement
System(2)..................................... 1,931.818 22.7%
Capital d'Amerique CDPQ Inc.(3)................. 571.818 6.7%
DIRECTORS:
R. Eugene Cartledge............................. 46.364 *
Robert D. Kern.................................. 77.273 *
Thomas G. Mendell............................... 4,698.182(4) 55.3%
Richard A. Van Deuren........................... 7.727 *
Eric R. Wilkinson............................... 4,698.182(4) 55.3%
OFFICERS:
Dorrance J. Noonan, Jr.......................... 77.273 *
Gary J. Lato.................................... 77.273 *
James H. Deneffe................................ 77.273 *
Wesley C. Sodemann.............................. 1.932 *
Jay C. Sugar.................................... 1.159 *
Faith Rosenfeld................................. 4,698.182(4) 55.3%
All directors and executive officers as a group
(15 individuals)(5)........................... 370.136 4.4%
- -------------------------
* Less than 1%.
(1) The address of The Beacon Group III -- Focus Value Fund, L.P. ("Beacon") is
399 Park Avenue, New York, New York 10022.
(2) The address of California Public Employees' Retirement System is Lincoln
Plaza -- 400 P Street, P.O. Box 942707, Sacramento, California 94229.
(3) The address of Capital d'Amerique CDPQ Inc. is 1981, Avenue McGill College,
9th Floor, Montreal, Quebec H3A3C7.
(4) Messrs. Wilkinson and Mendell and Ms. Rosenfeld may be deemed to share
beneficial ownership of shares of Holdings Common Stock owned of record by
Beacon by virtue of their status as partners of The Beacon Group, an
affiliate of the general partner of
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Beacon. Messrs. Wilkinson and Mendell and Ms. Rosenfeld disclaim beneficial
ownership of the shares of Holdings Common Stock owned by Beacon. The
business address of Messrs. Wilkinson and Mendell and Ms. Rosenfeld is c/o
The Beacon Group III -- Focus Value Fund, L.P., 399 Park Avenue, New York,
New York 10022.
(5) Does not include 4,698.182 shares as to which Messrs. Wilkinson and Mendell
and Ms. Rosenfeld may be deemed to have beneficial ownership by virtue of
their indirect control of Beacon. See "Management -- Directors and Executive
Officers."
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
STOCKHOLDERS AGREEMENTS
Beacon, the other stockholders of Holdings and Holdings are parties to a
Stockholders' Agreement which includes certain transfer restrictions, voting
agreements and registration rights. Employees who own stock of Holdings are also
subject to agreements that restrict their right to transfer their stock and,
under certain conditions, will require them to sell a pro rata portion of their
stock in a transaction in which Beacon is selling its stock.
DESCRIPTION OF THE SENIOR SECURED CREDIT FACILITY
The Operating Company has entered into a senior secured credit facility
with a group of lenders and Bankers Trust Company, as administrative agent and
arranger, providing for up to $115.0 million of loans. The credit facility
consists of (i) a $45.0 million senior secured term loan facility (the "A Term
Loan Facility"), (ii) a $40.0 million senior secured term loan facility (the "B
Term Loan Facility" and together with the A Term Loan Facility, the "Term Loan
Facilities"), and (iii) a $30.0 million senior secured revolving credit
facility. The revolving credit facility will have a letter of credit sublimit to
be agreed upon.
USE OF PROCEEDS; MATURITY. Proceeds of the Term Loan Facilities, together
with the Equity Investment and the net proceeds of the issuance of the Old
Notes, were used to fund the Operating Company's acquisition of the Portable
Products Division of Generac Corporation and pay the fees and expenses related
thereto. Proceeds of the revolving credit facility will be used for general
corporate and working capital purposes. The A Term Loan Facility will mature
5 1/2 years from the closing date. The B Term Loan Facility will mature seven
years from the closing date. The A Term Loan Facility will provide for
amortization of $2.5 million in the first year, $6.25 million in the second
year, $7.5 million in the third year, $10.0 million in the fourth year, $12.5
million in the fifth year and $6.25 million in the sixth year. The B Term Loan
Facility will provide for nominal annual amortization in the first five years
and amortization of $19 million in each of the sixth and seventh years. The
revolving credit facility will mature 5 1/2 years from the closing date.
PREPAYMENT; REDUCTION OF COMMITMENTS. Borrowings under the credit facility
will be required to be prepaid, subject to certain exceptions, from (i) 100% of
the net proceeds of asset sales by the Operating Company and its subsidiaries
(subject to (a) exceptions for reinvestment of certain asset sale proceeds and
(b) certain de minimis exceptions); (ii) 100% of the net proceeds from certain
issuances of debt obligations by Holdings, the Operating Company or their
subsidiaries; (iii) 100% of the first $50.0 million and 75% thereafter of net
proceeds from issuances of equity by Holdings or the Operating Company; (iv)
certain percentages of annual excess cash flow; and (v) 100% of the net proceeds
from certain insurance recovery events of Holdings and its subsidiaries.
Voluntary prepayments will be permitted, without premium or penalty,
subject to reimbursement of lenders' costs in the case of voluntary prepayment
of Eurodollar borrowings other than on the last day of the relevant interest
period. Voluntary prepayments under the Term Loan Facilities will be allocated
among those facilities on a pro rata basis, with the amounts so allocated to be
applied to reduce future scheduled amortization payments on a pro rata basis.
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INTEREST. The interest rates under the A Term Loan Facility and the
revolving credit facility will be based, at the option of the Operating Company,
on either a Eurodollar rate plus 2.25% per annum or a base rate plus 1.25% per
annum, subject to a pricing grid that will provide for reductions in the
applicable interest rate margins based on Holdings' consolidated debt to EBITDA
ratio. The interest rate under the B Term Loan Facility is based, at the option
of the Operating Company, on a Eurodollar rate plus 2.75% or a base rate plus
1.75%, subject to a pricing grid that will provide for reductions in the
applicable interest rate margins based on Holdings' consolidated debt to EBITDA
ratio. A commitment fee of 0.50% per annum will be charged on the unused portion
of the Senior Secured Credit Facility, subject to a pricing grid that will
provide for reductions in the applicable commitment fee margin based on
Holdings' consolidated debt to EBITDA ratio.
COLLATERAL AND GUARANTEES. The credit facility will be guaranteed by
Holdings, GPPW, all of the Operating Company's existing and future domestic
subsidiaries and, upon the occurrence of certain events, GPPD. The credit
facility will be secured by a first priority lien on substantially all, subject
to certain exceptions, of the properties and assets of Holdings, the Operating
Company, each direct or indirect subsidiary of the Operating Company, GPPW and,
upon the occurrence of certain events, GPPD.
COVENANTS. The credit facility will contain covenants restricting the
ability of the Operating Company and its subsidiaries to, among other, (i) incur
additional debt; (ii) engage in mergers, acquisitions and asset sales; (iii)
engage in sale-leaseback transactions; (iv) declare dividends and make other
restricted payments; (v) prepay, redeem or purchase debt or amend existing debt
agreements; (vi) engage in transactions with affiliates; (vii) make investments;
(viii) incur liens; and (ix) make capital expenditures. The Company will also be
required to comply with financial covenants with respect to (a) a maximum
leverage ratio, (b) a minimum interest coverage ratio, and (c) a minimum EBITDA
test.
EVENTS OF DEFAULT. Events of default under the credit facility will
include but are not limited to (i) the Operating Company's failure to pay
principal when due or interest after a grace period; (ii) material breach of any
covenant, representation or warranty contained in the loan documents; (iii)
customary cross-default and cross-acceleration provisions; (iv) certain events
of bankruptcy, insolvency or dissolution of Holdings or its subsidiaries; (v)
certain judgments against Holdings and its subsidiaries or their assets; (vi)
the actual or asserted invalidity of security documents or guarantees of
Holdings, the Operating Company or the Operating Company's subsidiaries; and
(vii) a Change in Control (as defined) of Holdings or the Operating Company.
The preceding discussion of certain of the provisions of the credit
facility is not intended to be exhaustive and is qualified in its entirety by
reference to the provisions of the credit facility.
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DESCRIPTION OF THE NEW NOTES
The Old Notes were issued and the New Notes will be issued under an
Indenture (the "Indenture"), dated as of July 1, 1998, by and among the Issuers
and Marine Midland Bank, as Trustee (the "Trustee"). The following summary of
certain provisions of the Indenture does not purport to be complete and is
subject to, and is qualified in its entirety by reference to, the Trust
Indenture Act of 1939, as amended (the "TIA"), and to all of the provisions of
the Indenture, including the definitions of certain terms therein and those
terms made a part of the Indenture by reference to the TIA as in effect on the
date of the Indenture. A copy of the Indenture may be obtained from the Company
or the Initial Purchaser. The definitions of certain capitalized terms used in
the following summary are set forth below under "-- Certain Definitions." For
purposes of this section, references to the "Company" mean the Operating Company
and the terms "Company" and "Issuers" do not include their respective
Subsidiaries or Holdings.
The New Notes will be unsecured obligations of the Issuers, ranking
subordinate in right of payment to all Senior Debt of the Issuers.
The New Notes will be issued in fully registered form only, without
coupons, in denominations of $1,000 and integral multiples thereof. Initially,
Bankers Trust Company will act as Paying Agent and Registrar for the New Notes.
The New Notes may be presented for registration or transfer and exchange at the
offices of the Registrar, which initially will be Bankers Trust Company's
corporate trust office. The Issuers may change any Paying Agent and Registrar
without notice to holders of the New Notes (the "Holders"). The Issuers will pay
principal (and premium, if any) on the New Notes at Bankers Trust Company's
corporate office in New York, New York. At the Issuers' option, interest may be
paid at Bankers Trust Company's corporate trust office or by check mailed to the
registered address of Holders. Any Old Notes that remain outstanding after the
completion of the Exchange Offer, together with the Exchange Notes issued in
connection with the Exchange Offer, will be treated as a single class of
securities under the Indenture.
PRINCIPAL, MATURITY AND INTEREST
Under the Indenture, the New Notes will be limited in aggregate principal
amount to $160.0 million, of which $110.0 million in aggregate principal amount
has been issued, and all of which will mature on July 1, 2006. Additional Notes
in an aggregate amount of up to $50.0 million may be issued from time to time,
subject to the limitations set forth under "-- Certain Covenants -- Limitation
on Incurrence of Additional Indebtedness." Interest on the New Notes will accrue
at the rate of 11 1/4% per annum and will be payable semiannually in arrears in
cash on each January 1 and July 1 commencing on January 1, 1999, to the persons
who are registered Holders at the close of business on the December 15 and June
15 immediately preceding the applicable interest payment date. Interest on the
New Notes will accrue from the most recent date to which interest has been paid
or, if no interest has been paid, from and including the date of issuance.
The New Notes will not be entitled to the benefit of any mandatory sinking
fund.
REDEMPTION
OPTIONAL REDEMPTION. The New Notes will be redeemable, at the Issuers'
option, in whole at any time or in part from time to time, on and after July 1,
2002, upon not less than 30 nor more than 60 days' notice, at the following
redemption prices (expressed as percentages of the principal amount thereof) if
redeemed during the twelve-month period
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commencing on July 1 of the year set forth below, plus, in each case, accrued
and unpaid interest thereon, if any, to the date of redemption:
YEAR PERCENTAGE
- ---- ----------
2002........................................ 107.625%
2003........................................ 104.750%
2004........................................ 102.875%
2005 and thereafter......................... 100.000%
OPTIONAL REDEMPTION UPON PUBLIC EQUITY OFFERINGS. At any time, or from
time to time, on or prior to July 1, 2001, the Issuers may, at their option, use
the net cash proceeds of one or more Public Equity Offerings (as defined below)
to redeem the New Notes at a redemption price equal to 111.25% of the principal
amount thereof plus accrued and unpaid interest thereon, if any, to the date of
redemption; provided that at least 65% of the principal amount of Notes
originally issued remains outstanding immediately after any such redemption. In
order to effect the foregoing redemption with the proceeds of any Public Equity
Offering, the Issuers shall make such redemption not more than 120 days after
the consummation of any such Public Equity Offering.
As used in the preceding paragraph, "Public Equity Offering" means an
underwritten public offering of Qualified Capital Stock of Holdings or the
Company pursuant to a registration statement filed with the Commission in
accordance with the Securities Act, other than an offering pursuant to Form S-8
(or any successor thereto); provided that, in the event of a Public Equity
Offering by Holdings, Holdings contributes to the capital of the Company the
portion of the net cash proceeds of such Public Equity Offering necessary to pay
the aggregate redemption price (plus accrued interest to the redemption date) of
the New Notes to be redeemed pursuant to the preceding paragraph.
SELECTION AND NOTICE OF REDEMPTION
In the event that less than all of the New Notes are to be redeemed at any
time, selection of such Notes for redemption will be made by the Trustee in
compliance with the requirements of the principal national securities exchange,
if any, on which such Notes are listed or, if such Notes are not then listed on
a national securities exchange, on a pro rata basis, by lot or by such method as
the Trustee shall deem fair and appropriate; provided, however, that no Notes of
a principal amount of $1,000 or less shall be redeemed in part; provided,
further, that if a partial redemption is made with the proceeds of a Public
Equity Offering, selection of the New Notes or portions thereof for redemption
shall be made by the Trustee only on a pro rata basis or on as nearly a pro rata
basis as is practicable (subject to DTC procedures), unless such method is
otherwise prohibited. Notice of redemption shall be mailed by first-class mail
at least 30 but not more than 60 days before the redemption date to each Holder
of Notes to be redeemed at its registered address. If any Note is to be redeemed
in part only, the notice of redemption that relates to such Note shall state the
portion of the principal amount thereof to be redeemed. A new Note in a
principal amount equal to the unredeemed portion thereof will be issued in the
name of the Holder thereof upon cancellation of the original Note. On and after
the redemption date, interest will cease to accrue on Notes or portions thereof
called for redemption as long as the Company has deposited with the Paying Agent
funds in satisfaction of the applicable redemption price pursuant to the
Indenture.
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SUBORDINATION
The payment of all Obligations on the New Notes is subordinated in right of
payment to the prior payment in full in cash or Cash Equivalents of all
Obligations on Senior Debt subject to the limitations described below. Upon any
payment or distribution of assets of the Issuers of any kind or character,
whether in cash, property or securities, to creditors upon any liquidation,
dissolution, winding up, reorganization, assignment for the benefit of creditors
or marshaling of assets of the Company or in a bankruptcy, reorganization,
insolvency, receivership or other similar proceeding relating to the Issuers or
their property, whether voluntary or involuntary, all Obligations due or to
become due upon all Senior Debt shall first be paid in full in cash or Cash
Equivalents, or such payment duly provided for to the satisfaction of the
holders of Senior Debt, before any payment or distribution of any kind or
character is made on account of any Obligations on the New Notes, or for the
acquisition of any of the New Notes for cash or property or otherwise. If any
default occurs and is continuing in the payment when due, whether at maturity,
upon any redemption, by acceleration or otherwise, of any principal of, interest
on, unpaid drawings for letters of credit issued in respect of, or regularly
accruing fees with respect to, any Senior Debt, no payment of any kind or
character shall be made by or on behalf of the Issuers or any other Person on
its or their behalf with respect to any Obligations on the New Notes or to
acquire any of the New Notes for cash or property or otherwise (except that
holders of the New Notes may receive payments from a trust described under
"Legal Defeasance and Covenant Defeasance" below so long as, on the date or
dates the respective amounts were paid into the trust, such payments were made
with respect to the New Notes without violating the subordination provisions
described therein).
In addition, if any other event of default occurs and is continuing with
respect to any Designated Senior Debt, as such event of default is defined in
the instrument creating or evidencing such Designated Senior Debt, permitting
the holders of such Designated Senior Debt then outstanding to accelerate the
maturity thereof and if the Representative for the respective issue of
Designated Senior Debt gives written notice of the event of default to the
Trustee (a "Payment Blockage Notice"), then, unless and until all events of
default have been cured or waived or have ceased to exist or the Trustee
receives notice from the Representative for the respective issue of Designated
Senior Debt terminating the Payment Blockage Period (as defined below), during
the 180 days after the delivery of such Payment Blockage Notice (the "Payment
Blockage Period"), neither the Issuers nor any other Person on their behalf
shall (x) make any payment of any kind or character with respect to any
Obligations on the New Notes or (y) acquire any of the New Notes for cash or
property or otherwise (except that holders of the New Notes may receive payments
from a trust described under "Legal Defeasance and Covenant Defeasance" below so
long as, on the date or dates the respective amounts were paid into the trust,
such payments were made with respect to the New Notes without violating the
subordination provisions described therein). Notwithstanding anything herein to
the contrary, in no event will a Payment Blockage Period extend beyond 180 days
from the date the payment on the New Notes was due and only one such Payment
Blockage Period may be commenced within any 360 consecutive days. No event of
default which existed or was continuing on the date of the commencement of any
Payment Blockage Period with respect to the Designated Senior Debt shall be, or
be made, the basis for commencement of a second Payment Blockage Period by the
Representative of such Designated Senior Debt whether or not within a period of
360 consecutive days, unless such event of default shall have been cured or
waived for a period of not less than 90 consecutive days (it being acknowledged
that any subsequent action, or any breach of any financial covenants for a
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period commencing after the date of commencement of such Payment Blockage Period
that, in either case, would give rise to an event of default pursuant to any
provisions under which an event of default previously existed or was continuing
shall constitute a new event of default for this purpose).
By reason of such subordination, in the event of the insolvency of either
of the Issuers, creditors of either of the Issuers who are not holders of Senior
Debt, including the Holders of the New Notes, may recover less, ratably, than
holders of Senior Debt.
At , 1999, the aggregate amount of Senior Debt was
approximately $ million.
HOLDINGS GUARANTEE
The obligations of the Issuers under the Notes and the Indenture will be
guaranteed (the "Holdings Guarantee") on a senior subordinated basis by
Holdings. The Holdings Guarantee will be subordinated in right of payment to all
Senior Debt of Holdings to the same extent that the Notes are subordinated to
the Senior Debt of the Issuers. Since Holdings is a holding company with no
significant operations, the Holdings Guarantee provides little, if any,
additional credit support for the Notes, and investors should not rely on the
Holdings Guarantee in evaluating an investment in the Notes.
CHANGE OF CONTROL
The Indenture provides that upon the occurrence of a Change of Control,
each Holder will have the right to require that the Issuers purchase all or a
portion of such Holder's Notes pursuant to the offer described below (the
"Change of Control Offer"), at a purchase price equal to 101% of the principal
amount thereof plus accrued interest to the date of purchase.
The Indenture provides that, prior to the mailing of the notice referred to
below, but in any event within 30 days following any Change of Control, the
Issuers covenant to (i) repay in full and terminate all commitments under
Indebtedness under the Credit Agreement and all other Senior Debt the terms of
which require repayment upon a Change of Control or offer to repay in full and
terminate all commitments under all Indebtedness under the Credit Agreement and
all other such Senior Debt and to repay the Indebtedness owed to each lender
which has accepted such offer or (ii) obtain the requisite consents under the
Credit Agreement and all other Senior Debt to permit the repurchase of the New
Notes as provided below. The Issuers shall first comply with the covenant in the
immediately preceding sentence before they shall be required to repurchase Notes
pursuant to the provisions described below. The Issuers' failure to comply with
the covenant described in the second preceding sentence shall constitute an
Event of Default described in clause (iii) and not in clause (ii) under "Events
of Default" below.
Within 30 days following the date upon which the Change of Control
occurred, the Issuers must send, by first class mail, a notice to each Holder,
with a copy to the Trustee, which notice shall govern the terms of the Change of
Control Offer. Such notice shall state, among other things, the purchase date,
which must be no earlier than 30 days nor later than 60 days from the date such
notice is mailed, other than as may be required by law (the "Change of Control
Payment Date"). Holders electing to have a Note purchased pursuant to a Change
of Control Offer will be required to surrender the Note, with the form entitled
"Option of Holder to Elect Purchase" on the reverse of the Note completed, to
the Paying Agent at the address specified in the notice prior to the close of
business on the third business day prior to the Change of Control Payment Date.
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If a Change of Control Offer is made, there can be no assurance that the
Issuers will have available funds sufficient to pay the Change of Control
purchase price for all the New Notes that might be delivered by Holders seeking
to accept the Change of Control Offer. In the event the Issuers are required to
purchase outstanding Notes pursuant to a Change of Control Offer, the Issuers
expect that they would seek third party financing to the extent they do not have
available funds to meet their purchase obligations. However, there can be no
assurance that the Issuers would be able to obtain such financing.
None of the Board of Directors of either of the Issuers or the Trustee may
waive the covenant relating to a Holder's right to redemption upon a Change of
Control. Restrictions in the Indenture described herein on the ability of the
Issuers and its Restricted Subsidiaries to incur additional Indebtedness, to
grant liens on their property, to make Restricted Payments and to make Asset
Sales may also make more difficult or discourage a takeover of Holdings or the
Issuers, whether favored or opposed by the management of Holdings or the
Issuers. Consummation of any such transaction in certain circumstances may
require redemption or repurchase of the New Notes, and there can be no assurance
that the Issuers or the acquiring party will have sufficient financial resources
to effect such redemption or repurchase. Such restrictions and the restrictions
on transactions with Affiliates may, in certain circumstances, make more
difficult or discourage any leveraged buyout of the Issuers or any of their
respective Subsidiaries by the management of the Issuers. While such
restrictions cover a wide variety of arrangements traditionally used to effect
highly leveraged transactions, the Indenture may not afford the Holders of Notes
protection in all circumstances from the adverse aspects of a highly leveraged
transaction, reorganization, restructuring, merger or similar transaction.
The Issuers will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Change of Control Offer. To the extent that
the provisions of any securities laws or regulations conflict with the "Change
of Control" provisions of the Indenture, the Issuers shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached their obligations under the "Change of Control" provisions of the
Indenture by virtue thereof.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS. The Company will not,
and will not permit any of its Restricted Subsidiaries to, directly or
indirectly, create, incur, assume, guarantee, acquire, become liable,
contingently or otherwise, with respect to, or otherwise become responsible for
payment of (collectively, "incur") any Indebtedness (other than Permitted
Indebtedness); provided, however, that if no Default or Event of Default shall
have occurred and be continuing at the time of or as a consequence of the
incurrence of any such Indebtedness, the Company may incur Indebtedness
(including, without limitation, Acquired Indebtedness) and Restricted
Subsidiaries of the Company may incur Acquired Indebtedness, in each case if on
the date of the incurrence of such Indebtedness, after giving effect to the
incurrence thereof, the Consolidated Fixed Charge Coverage Ratio of the Company
is greater than (a) 2.0 to 1.0 if the date of such incurrence is on or prior to
December 31, 1999, or (b) 2.25 to 1.0 if the date of such incurrence is after
December 31, 1999.
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LIMITATION ON RESTRICTED PAYMENTS. The Company will not, and will not
cause or permit any of its Restricted Subsidiaries to, directly or indirectly,
(a) declare or pay any dividend or make any distribution (other than dividends
or distributions by the Company payable in Qualified Capital Stock of the
Company) on or in respect of shares of the Company's Capital Stock to holders of
such Capital Stock, (b) purchase, redeem or otherwise acquire or retire for
value any Capital Stock of the Company or any warrants, rights or options to
purchase or acquire shares of any class of such Capital Stock, (c) make any
principal payment on, purchase, defease, redeem, prepay, decrease or otherwise
acquire or retire for value, prior to any scheduled final maturity, scheduled
repayment or scheduled sinking fund payment, any Indebtedness of the Company
that is subordinate or junior in right of payment to the New Notes or (d) make
any Investment (other than Permitted Investments) (each of the foregoing actions
set forth in clauses (a), (b), (c) and (d) being referred to as a "Restricted
Payment"), if at the time of such Restricted Payment or immediately after giving
effect thereto, (i) a Default or an Event of Default shall have occurred and be
continuing; or (ii) the Company is not able to incur at least $1.00 of
additional Indebtedness (other than Permitted Indebtedness) in compliance with
the "Limitation on Incurrence of Additional Indebtedness" covenant; or (iii) the
aggregate amount of Restricted Payments (including such proposed Restricted
Payment) 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 in good faith by the Board of Directors of the Company) shall exceed
the sum of: (w) 50% of the cumulative Consolidated Net Income (or if cumulative
Consolidated Net Income shall be a loss, minus 100% of such loss) of the Company
earned subsequent to the Issue Date and on or prior to the date the Restricted
Payment occurs (the "Reference Date") (treating such period as a single
accounting period); plus (x) 100% of the aggregate net cash proceeds received by
the Company from any Person (other than a Subsidiary of the Company) from the
issuance and sale subsequent to the Issue Date and on or prior to the Reference
Date of Qualified Capital Stock of the Company; plus (y) without duplication of
any amounts included in clause (iii)(x) above, 100% of the aggregate net cash
proceeds of any equity contribution received by the Company from a holder of the
Company's Capital Stock (excluding, in the case of clauses (iii)(x) and (y), any
net cash proceeds from a Public Equity Offering to the extent used to redeem the
New Notes in compliance with the provisions set forth under
"Redemption -- Optional Redemption Upon Public Equity Offerings"); plus (z)
without duplication, the sum of (1) the aggregate amount returned in cash on or
with respect to Investments (other than Permitted Investments) made subsequent
to the Issue Date whether through interest payments, principal payments,
dividends or other distributions or payments; (2) the net cash proceeds received
by the Company or any of its Restricted Subsidiaries from the disposition of all
or any portion of such Investments (other than to a Subsidiary of the Company);
and (3) upon redesignation of an Unrestricted Subsidiary as a Restricted
Subsidiary, the fair market value of such Subsidiary; provided, however, that
the sum of clauses (1), (2) and (3) above shall not exceed the aggregate amount
of all such Investments made subsequent to the Issue Date.
Notwithstanding the foregoing, the provisions set forth in the immediately
preceding paragraph do not prohibit: (1) the payment of any dividend within 60
days after the date of declaration of such dividend if the dividend would have
been permitted on the date of declaration; (2) the acquisition of any shares of
Capital Stock of the Company, either (i) solely in exchange for shares of
Qualified Capital Stock of the Company or (ii) through the application of net
proceeds of a substantially concurrent sale for cash (other than to a Subsidiary
of the Company) of shares of Qualified Capital Stock of the
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Company; (3) the acquisition of any Indebtedness of the Company that is
subordinate or junior in right of payment to the New Notes either (i) solely in
exchange for shares of Qualified Capital Stock of the Company or (ii) through
the application of net proceeds of a substantially concurrent sale for cash
(other than to a Subsidiary of the Company) of (A) shares of Qualified Capital
Stock of the Company or (B) Refinancing Indebtedness; (4) if no Default or Event
of Default shall have occurred and be continuing, repurchases by the Company of
Common Stock of the Company or Holdings from employees of the Company or any of
its Subsidiaries or their authorized representatives upon the death, disability
or termination of employment of such employees; provided that the aggregate
amount of all such repurchases shall not exceed $3.0 million in any fiscal year
and $10.0 million in aggregate; provided, further, that at the time of any such
repurchase, the Consolidated Fixed Charge Coverage Ratio of the Company is
greater than 2.0 to 1.0; (5) the payment of any dividend or distribution to the
extent necessary to permit direct or indirect beneficial owners of shares of
Capital Stock of the Company, including Holdings, to pay federal, state or local
income tax liabilities arising from income of the Company and attributable to
them solely as a result of the Company (and any intermediate entity through
which the Holder owns such shares) being a limited liability company,
partnership or similar entity for federal income tax purposes ("Permitted Tax
Distributions"); and (6) any dividend or distribution to Holdings in respect of
overhead expenses, legal, accounting, SEC reporting and other professional fees
and expenses of Holdings directly attributable to the operations of the Company
and its Restricted Subsidiaries. In determining the aggregate amount of
Restricted Payments made subsequent to the Issue Date in accordance with clause
(iii) of the immediately preceding paragraph, amounts expended pursuant to
clauses (1), (2) (ii) and (4) shall be included in such calculation.
LIMITATION ON ASSET SALES. The Company will not, and will not permit any
of its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the
Company or the applicable Restricted Subsidiary, as the case may be, receives
consideration at the time of such Asset Sale at least equal to the fair market
value of the assets sold or otherwise disposed of (as determined in good faith
by the Company's Board of Directors) and (ii) at least 75% of the consideration
received by the Company or the Restricted Subsidiary, as the case may be, from
such Asset Sale shall be in the form of cash or Cash Equivalents; provided that
the amount of (x) any liabilities (as shown on the Company's or such Restricted
Subsidiary's most recent balance sheet) of the Company or any Restricted
Subsidiary (other than contingent liabilities and liabilities that are by their
terms subordinated to the New Notes or any guarantee thereof) that are assumed
by the transferee of any such assets and (y) any securities, notes or other
obligations received by the Company or any such Restricted Subsidiary from such
transferee that are converted within 180 days by the Company or such Restricted
Subsidiary into cash (to the extent of the cash received) shall be deemed to be
cash for purposes of this provision. Upon the consummation of an Asset Sale, the
Company shall apply, or cause such Restricted Subsidiary to apply, the Net Cash
Proceeds relating to such Asset Sale within 270 days of receipt thereof either
(A) to prepay any Senior Debt and, in the case of any Senior Debt under any
revolving credit facility, effect a permanent reduction in the availability
under such revolving credit facility; (B) to make an investment in properties
and assets that replace the properties and assets that were the subject of such
Asset Sale or in properties and assets that will be used in the business of the
Company and its Restricted Subsidiaries as existing on the Issue Date or in
businesses reasonably related thereto ("Replacement Assets"); or (C) a
combination of prepayment and investment permitted by the foregoing clauses (A)
and (B). On the 271st day after an Asset Sale or such earlier date, if any, as
the Board of Directors of the Company or of such Restricted Subsidiary
determines not to
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apply the Net Cash Proceeds relating to such Asset Sale as set forth in the
preceding sentence (each, a "Net Proceeds Offer Trigger Date"), such aggregate
amount of Net Cash Proceeds that is an integral multiple of $1,000 which have
not been applied on or before such Net Proceeds Offer Trigger Date as permitted
in the preceding sentence (each a "Net Proceeds Offer Amount") shall be applied
by the Company or such Restricted Subsidiary to make an offer to purchase (the
"Net Proceeds Offer") on a date (the "Net Proceeds Offer Payment Date") not less
than 30 nor more than 60 days following the applicable Net Proceeds Offer
Trigger Date, from all Holders on a pro rata basis, that amount of Notes equal
to the Net Proceeds Offer Amount at a price equal to 100% of the principal
amount of the New Notes to be purchased, plus accrued and unpaid interest
thereon, if any, to the date of purchase; provided, however, that if at any time
any non-cash consideration received by the Company or any Restricted Subsidiary
of the Company, as the case may be, in connection with any Asset Sale is
converted into or sold or otherwise disposed of for cash (other than interest
received with respect to any such non-cash consideration), then such conversion
or disposition shall be deemed to constitute an Asset Sale hereunder and the Net
Cash Proceeds thereof shall be applied in accordance with this covenant. The
Company may defer the Net Proceeds Offer until there is an aggregate unutilized
Net Proceeds Offer Amount equal to or in excess of $10.0 million resulting from
one or more Asset Sales (at which time, the entire unutilized Net Proceeds Offer
Amount, and not just the amount in excess of $10.0 million, shall be applied as
required pursuant to this paragraph).
In the event of the transfer of substantially all (but not all) of the
property and assets of the Company and its Restricted Subsidiaries as an
entirety to a Person in a transaction permitted under "-- Merger, Consolidation
and Sale of Assets," the successor corporation 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 deemed net cash proceeds from such deemed sale.
In addition, the fair market value of such properties and assets of the Company
or its Restricted Subsidiaries deemed to be sold shall be deemed to be Net Cash
Proceeds for purposes of this covenant.
Notwithstanding the two immediately preceding paragraphs, the Company and
its Restricted Subsidiaries will be permitted to consummate an Asset Sale
without complying with such paragraphs to the extent (i) at least 75% of the
consideration for such Asset Sale constitutes Replacement Assets and (ii) such
Asset Sale is for fair market value; provided that any consideration not
constituting Replacement Assets received by the Company or any of its Restricted
Subsidiaries in connection with any Asset Sale permitted to be consummated under
this paragraph shall constitute Net Cash Proceeds subject to the provisions of
the two preceding paragraphs.
Each Net Proceeds Offer will be mailed to the record Holders as shown on
the register of Holders within 25 days following the Net Proceeds Offer Trigger
Date, with a copy to the Trustee, and shall comply with the procedures set forth
in the Indenture. Upon receiving notice of the Net Proceeds Offer, Holders may
elect to tender their Notes in whole or in part in integral multiples of $1,000
in exchange for cash. To the extent Holders properly tender Notes in an amount
exceeding the Net Proceeds Offer Amount, Notes of tendering Holders will be
purchased on a pro rata basis (based on amounts tendered). A Net Proceeds Offer
shall remain open for a period of 20 business days or such longer period as may
be required by law.
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The Issuers will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Net Proceeds Offer. To the extent that the
provisions of any securities laws or regulations conflict with the "Asset Sale"
provisions of the Indenture, the Issuers 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 DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING
SUBSIDIARIES. The Company will not, and will not cause or permit any of its
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or
permit to exist or become effective any encumbrance or restriction on the
ability of any Restricted Subsidiary of the Company to (a) pay dividends or make
any other distributions on or in respect of its Capital Stock; (b) make loans or
advances or to pay any Indebtedness or other obligation owed to the Company or
any other Restricted Subsidiary of the Company; or (c) transfer any of its
property or assets to the Company or any other Restricted Subsidiary of the
Company, except for such encumbrances or restrictions existing under or by
reason of: (1) applicable law; (2) the Indenture; (3) the Credit Agreement; (4)
customary non-assignment provisions of any contract or any lease governing a
leasehold interest of any Restricted Subsidiary of the Company; (5) any
instrument governing Acquired Indebtedness, which encumbrance or restriction is
not applicable to any Person, or the properties or assets of any Person, other
than the Person or the properties or assets of the Person so acquired; (6)
agreements existing on the Issue Date to the extent and in the manner such
agreements are in effect on the Issue Date; (7) an agreement governing
Indebtedness incurred to Refinance the Indebtedness issued, assumed or incurred
pursuant to an agreement referred to in clause (2), (3), (5) or (6) above;
provided, however, that the provisions relating to such encumbrance or
restriction contained in any such Indebtedness are no less favorable to the
Company in any material respect as determined by the Board of Directors of the
Company in their reasonable and good faith judgment than the provisions relating
to such encumbrance or restriction contained in agreements referred to in such
clause (2), (3), (5) or (6); or (8) any agreement or instrument governing
Indebtedness (whether or not outstanding) of Foreign Restricted Subsidiaries
incurred in reliance on clause (xiii) of the definition of Permitted
Indebtedness.
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 Wholly Owned Restricted Subsidiary of the
Company) or permit any Person (other than the Company or a Wholly Owned
Restricted Subsidiary of the Company) to own any Preferred Stock of any
Restricted Subsidiary of the Company.
LIMITATION ON LIENS. The Company will not, and will not cause or permit
any of its Restricted Subsidiaries to, directly or indirectly, create, incur,
assume or permit or suffer to exist any Liens of any kind against or upon any
property or assets of the Company or any of its Restricted Subsidiaries whether
owned on the Issue Date or acquired after the Issue Date, or any proceeds
therefrom, or assign or otherwise convey any right to receive income or profits
therefrom unless (i) in the case of Liens securing Indebtedness that is
expressly subordinate or junior in right of payment to the New Notes, the New
Notes are secured by a Lien on such property, assets or proceeds that is senior
in priority to such Liens and (ii) in all other cases, the New Notes are equally
and ratably secured, except for (A) Liens existing as of the Issue Date to the
extent and in the manner such Liens are in effect on the Issue Date; (B) Liens
securing Senior Debt; (C) Liens securing the New Notes; (D) Liens of the Company
or a Wholly Owned Restricted Subsidiary of the
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Company on assets of any Restricted Subsidiary of the Company; (E) Liens
securing Refinancing Indebtedness incurred to Refinance any Indebtedness
incurred in accordance with the provisions of the Indenture and secured by a
Lien permitted thereunder; provided, however, that such Liens (x) are no less
favorable to the Holders and are not more favorable to the lienholders with
respect to such Liens than the Liens in respect of the Indebtedness being
Refinanced and (y) do not extend to or cover any property or assets of the
Company or any of its Restricted Subsidiaries not securing the Indebtedness so
Refinanced; and (F) Permitted Liens.
PROHIBITION ON INCURRENCE OF SENIOR SUBORDINATED DEBT. The Company will
not incur or suffer to exist Indebtedness that is both senior in right of
payment to the New Notes and subordinate in right of payment to any other
Indebtedness of the Company.
MERGER, CONSOLIDATION AND SALE OF ASSETS. The Company will not, in a
single transaction or series of related transactions, consolidate or merge with
or into any Person, or sell, assign, transfer, lease, convey or otherwise
dispose of (or cause or permit any Restricted Subsidiary of the Company to sell,
assign, transfer, lease, convey or otherwise dispose of) all or substantially
all of the Company's assets (determined on a consolidated basis for the Company
and the Company's Restricted Subsidiaries) whether as an entirety or
substantially as an entirety to any Person unless: (i) either (1) the Company
shall be the surviving or continuing entity or (2) the Person (if other than the
Company) formed by such consolidation or into which the Company is merged or the
Person which acquires by sale, assignment, transfer, lease, conveyance or other
disposition the properties and assets of the Company and of the Company's
Restricted Subsidiaries substantially as an entirety (the "Surviving Entity")
(x) shall be a corporation or a partnership or a limited liability company, in
each case organized and validly existing under the laws of the United States or
any State thereof or the District of Columbia and (y) shall expressly assume, by
supplemental Indenture (in form and substance satisfactory to the Trustee),
executed and delivered to the Trustee, the due and punctual payment of the
principal of, and premium, if any, and interest on all of the New Notes and the
performance of every covenant of the New Notes, the Indenture and the
Registration Rights Agreement on the part of the Company to be performed or
observed, provided that at any time the Company or its successor is a limited
liability company, there shall be a co-issuer of the New Notes that is a
corporation; (ii) immediately after giving effect to such transaction and the
assumption contemplated by clause (i)(2)(y) above (including giving effect to
any Indebtedness and Acquired Indebtedness incurred or anticipated to be
incurred in connection with or in respect of such transaction), the Company or
such Surviving Entity, as the case may be, shall be able to incur at least $1.00
of additional Indebtedness (other than Permitted Indebtedness) pursuant to the
"-- Limitation on Incurrence of Additional Indebtedness" covenant; (iii)
immediately before and immediately after giving effect to such transaction and
the assumption contemplated by clause (i)(2)(y) above (including, without
limitation, giving effect to any Indebtedness and Acquired Indebtedness incurred
or anticipated to be incurred and any Lien granted in connection with or in
respect of the transaction), no Default or Event of Default shall have occurred
or be continuing; and (iv) the Company or the Surviving Entity shall have
delivered to the Trustee an officers' certificate and an opinion of counsel,
each stating that such consolidation, merger, sale, assignment, transfer, lease,
conveyance or other disposition and, if a supplemental Indenture is required in
connection with such transaction, such supplemental Indenture comply with the
applicable provisions of the Indenture and that all conditions precedent in the
Indenture relating to such transaction have been satisfied. Notwithstanding the
foregoing clauses (ii) and (iii), (a) any Restricted Subsidiary may consolidate
with, merge
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into or transfer all or part of its properties and assets to the Company or to
another Restricted Subsidiary and (b) the Company may merge with or transfer all
of its properties and assets to an Affiliate incorporated or formed solely for
the purpose of either reforming the Company in another State of the United
States or changing the legal structure of the Company to a corporation so long
as the amount of Indebtedness of the Company and its Restricted Subsidiaries is
not increased thereby (it being understood that after the transfer of such
property and assets for the purpose of changing its legal structure to a
corporation, the Company may dissolve).
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.
The Indenture provides that upon any consolidation, combination or merger
or any transfer of all or substantially all of the assets of the Company in
accordance with the foregoing, in which the Company is not the continuing
corporation, the successor Person formed by such consolidation or into which the
Company is merged or to which such conveyance, lease or transfer is made shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Indenture and the New Notes with the same effect as if
such surviving entity had been named as such.
LIMITATIONS ON TRANSACTIONS WITH AFFILIATES. (a) The Company will not, and
will not permit any of its Restricted Subsidiaries to, directly or indirectly,
enter into or permit to exist any transaction or series of related transactions
(including, without limitation, the purchase, sale, lease or exchange of any
property or the rendering of any service) with, or for the benefit of, any of
its Affiliates (each an "Affiliate Transaction"), other than (x) Affiliate
Transactions permitted under paragraph (b) below and (y) Affiliate Transactions
on terms that are no less favorable than those that might reasonably have been
obtained in a comparable transaction at such time on an arm's-length basis from
a Person that is not an Affiliate of the Company or such Restricted Subsidiary.
All Affiliate Transactions (and each series of related Affiliate Transactions
which are similar or part of a common plan) involving aggregate payments or
other property with a fair market value in excess of $1.0 million shall be
approved by the Board of Directors of the Company or such Restricted Subsidiary,
as the case may be, such approval to be evidenced by a Board Resolution stating
that such Board of Directors has determined that such transaction complies with
the foregoing provisions. If the Company or any Restricted Subsidiary of the
Company enters into an Affiliate Transaction (or a series of related Affiliate
Transactions related to a common plan) that involves an aggregate fair market
value of more than $5.0 million, the Company or such Restricted Subsidiary, as
the case may be, shall, prior to the consummation thereof, obtain a favorable
opinion as to the fairness of such transaction or series of related transactions
to the Company or the relevant Restricted Subsidiary, as the case may be, from a
financial point of view, from an Independent Financial Advisor and file the same
with the Trustee.
(b) The restrictions set forth in clause (a) shall not apply to (i)
reasonable fees and compensation paid to and indemnity provided on behalf of,
officers, directors, employees or consultants of the Company or any Restricted
Subsidiary of the Company as determined in good faith by the Company's Board of
Directors or senior management; (ii) transactions exclusively between or among
the Company and any of its Wholly Owned Restricted
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Subsidiaries or exclusively between or among such Wholly Owned Restricted
Subsidiaries, provided such transactions are not otherwise prohibited by the
Indenture; (iii) any agreement as in effect as of the Issue Date or any
amendment thereto or any transaction contemplated thereby (including pursuant to
any amendment thereto) in any replacement agreement thereto so long as any such
amendment or replacement agreement is not more disadvantageous to the Holders in
any material respect than the original agreement as in effect on the Issue Date;
(iv) Restricted Payments permitted by the Indenture; and (v) transactions with
customers, clients, suppliers or purchasers or sellers of goods or services, in
each case in the ordinary course of business and otherwise in compliance with
the Indenture and on terms fair to the Company and its Restricted Subsidiaries
in the reasonable determination of the Board of Directors of the Company, or at
least as favorable as might reasonably have been obtained at such time from an
unaffiliated party.
LIMITATION OF GUARANTEES BY RESTRICTED SUBSIDIARIES. The Company will not
permit any of its Restricted Subsidiaries, directly or indirectly, by way of the
pledge of any intercompany note or otherwise, to assume, guarantee or in any
other manner become liable with respect to any Indebtedness of the Company or
any other Restricted Subsidiary of the Company (other than (A) Indebtedness and
other obligations under the Credit Agreement; (B) Permitted Indebtedness of a
Restricted Subsidiary of the Company; (C) Indebtedness under Currency Agreements
in reliance on clause (v) of the definition of Permitted Indebtedness; or (D)
Interest Swap Obligations incurred in reliance on clause (iv) of the definition
of Permitted Indebtedness), unless, in any such case (a) such Restricted
Subsidiary executes and delivers a supplemental indenture to the Indenture,
providing a guarantee of payment of the New Notes by such Restricted Subsidiary
(the "Guarantee") and (b) (x) if any such assumption, guarantee or other
liability of such Restricted Subsidiary is provided in respect of Senior Debt,
the guarantee or other instrument provided by such Restricted Subsidiary in
respect of such Senior Debt may be superior to the Guarantee pursuant to
subordination provisions no less favorable to the Holders of the New Notes than
those contained in the Indenture and (y) if such assumption, guarantee or other
liability of such Restricted Subsidiary is provided in respect of Indebtedness
that is expressly subordinated to the New Notes, the guarantee or other
instrument provided by such Restricted Subsidiary in respect of such
subordinated Indebtedness shall be subordinated to the Guarantee pursuant to
subordination provisions no less favorable to the Holders of the New Notes than
those contained in the Indenture.
Notwithstanding the foregoing, any such Guarantee by a Restricted
Subsidiary of the New Notes shall provide by its terms that it shall be
automatically and unconditionally released and discharged, without any further
action required on the part of the Trustee or any Holder, upon: (i) the
unconditional release of such Restricted Subsidiary from its liability in
respect of the Indebtedness in connection with which such Guarantee was executed
and delivered pursuant to the preceding paragraph; or (ii) any sale or other
disposition (by merger or otherwise) to any Person which is not a Restricted
Subsidiary of the Company of all of the Company's Capital Stock in, or all or
substantially all of the assets of, such Restricted Subsidiary; provided that
(a) such sale or disposition of such Capital Stock or assets is otherwise in
compliance with the terms of the Indenture and (b) such assumption, guarantee or
other liability of such Restricted Subsidiary has been released by the holders
of the other Indebtedness so guaranteed.
CONDUCT OF BUSINESS OF THE COMPANY AND THE CO-ISSUER. The Company and its
Restricted Subsidiaries will not engage in any businesses which are not the
same, similar or reasonably related to the businesses in which the Company and
its Restricted Subsidiaries are engaged on the Issue Date. Co-Issuer will not
own any operating assets or
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conduct any business other than to own equity interests in the Company and serve
as an issuer and an obligor on the New Notes.
REPORTS TO HOLDERS. The Indenture provides that the Issuers will deliver
to the Trustee within 15 days after the filing of the same with the Commission,
copies of the quarterly and annual reports and of the information, documents and
other reports, if any, which the Issuers are required to file with the
Commission pursuant to Section 13 or 15(d) of the Exchange Act. The Indenture
further provides that, notwithstanding that the Issuers may not be subject to
the reporting requirements of Section 13 or 15(d) of the Exchange Act, the
Issuers will file with the Commission, to the extent permitted, and provide the
Trustee and Holders with such annual reports and such information, documents and
other reports specified in Sections 13 and 15(d) of the Exchange Act. The
Issuers will also comply with the other provisions of TIA sec. 314(a).
EVENTS OF DEFAULT
The following events are defined in the Indenture as "Events of Default":
(i) the failure to pay interest on any Notes when the same becomes due
and payable and the default continues for a period of 30 days (whether or
not such payment shall be prohibited by the subordination provisions of the
Indenture);
(ii) the failure to pay the principal on any Notes, when such
principal becomes due and payable, at maturity, upon redemption or
otherwise (including the failure to make a payment to purchase Notes
tendered pursuant to a Change of Control Offer or a Net Proceeds Offer
which has actually been made) (whether or not such payment shall be
prohibited by the subordination provisions of the Indenture);
(iii) a default in the observance or performance of any other covenant
or agreement contained in the Indenture which default continues for a
period of 60 days after the Company receives written notice specifying the
default (and demanding that such default be remedied) from the Trustee or
the Holders of at least 25% of the outstanding principal amount of the New
Notes (except in the case of a default with respect to the "Merger,
Consolidation and Sale of Assets" covenant, which will constitute an Event
of Default with such notice requirement but without such passage of time
requirement);
(iv) the failure to pay at final maturity (giving effect to any
applicable grace periods and any extensions thereof) the principal amount
of any Indebtedness of the Company or any Restricted Subsidiary of the
Company, or the acceleration of the final stated maturity of any such
Indebtedness (which acceleration is not rescinded, annulled or otherwise
cured within 20 days of receipt by the Company or such Restricted
Subsidiary of notice of any such acceleration) if the aggregate principal
amount of such Indebtedness, together with the principal amount of any
other such Indebtedness in default for failure to pay principal at final
maturity or which has been accelerated, aggregates $10.0 million or more at
any time;
(v) one or more judgments in an aggregate amount in excess of $10.0
million shall have been rendered against the Company or any of its
Restricted Subsidiaries and such judgments remain undischarged, unpaid or
unstayed for a period of 60 days after such judgment or judgments become
final and non-appealable; or
(vi) certain events of bankruptcy affecting the Company or any of its
Significant Subsidiaries.
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If an Event of Default (other than an Event of Default specified in clause
(vi) above with respect to the Company) shall occur and be continuing, the
Trustee or the Holders of at least 25% in principal amount of outstanding Notes
may declare the principal of and accrued interest on all the New Notes to be due
and payable by notice in writing to the Company and the Trustee specifying the
respective Event of Default and that it is a "notice of acceleration" (the
"Acceleration Notice"), and the same (i) shall become immediately due and
payable or (ii) if there are any amounts outstanding under the Credit Agreement,
shall become immediately due and payable upon the first to occur of an
acceleration under the Credit Agreement or 5 business days after receipt by the
Company and the Representative under the Credit Agreement of such Acceleration
Notice but only if such Event of Default is then continuing. If an Event of
Default specified in clause (vi) above with respect to the Company occurs and is
continuing, then all unpaid principal of, and premium, if any, and accrued and
unpaid interest on all of the outstanding Notes shall ipso facto become and be
immediately due and payable without any declaration or other act on the part of
the Trustee or any Holder.
The Indenture provides that, at any time after a declaration of
acceleration with respect to the New Notes as described in the preceding
paragraph, the Holders of a majority in principal amount of the New Notes may
rescind and cancel such declaration and its consequences (i) if the rescission
would not conflict with any judgment or decree; (ii) if all existing Events of
Default have been cured or waived except nonpayment of principal or interest
that has become due solely because of the acceleration; (iii) 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 but only if such Event of Default is then
continuing; and (iv) if the Company has paid the Trustee its reasonable
compensation and reimbursed the Trustee for its expenses, disbursements and
advances. No such rescission shall affect any subsequent Default or impair any
right consequent thereto.
The Holders of a majority in principal amount of the New Notes may waive
any existing Default or Event of Default under the Indenture, and its
consequences, except a default in the payment of the principal of or interest on
any Notes.
Holders of the New Notes may not enforce the Indenture or the New Notes
except as provided in the Indenture and under the TIA. Subject to the provisions
of the Indenture relating to the duties of the Trustee, the Trustee is under no
obligation to exercise any of its rights or powers under the Indenture at the
request, order or direction of any of the Holders, unless such Holders have
offered to the Trustee reasonable indemnity. Subject to all provisions of the
Indenture and applicable law, the Holders of a majority in aggregate principal
amount of the then outstanding Notes have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee
or exercising any trust or power conferred on the Trustee.
Under the Indenture, the Company is required to provide to the Trustee
annually, an officers' certificate as to such officers' knowledge of the
Issuers' compliance with all conditions and covenants under the Indenture and
promptly, upon any such officer obtaining knowledge of any Default or Event of
Default that has occurred, an officers' certificate describing such Default or
Event of Default and the status thereof.
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NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES, STOCKHOLDERS AND
MEMBERS
No director, officer, employee, stockholder or member of the Issuers, as
such, shall have any liability for any obligations of the Issuers under the New
Notes, the Indenture or for any claim based on, in respect of, or by reason of,
such obligations or their creation. Each Holder of Notes, by accepting a Note,
waives and releases all such liability. The waiver and release are part of the
consideration for issuance of the New Notes. Such waiver may not be effective to
waive liabilities under the federal securities laws and it is the view of the
Commission that such waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Issuers may, at their option and at any time, elect to have their
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance"). Such Legal Defeasance means that the Issuers shall be deemed to
have paid and discharged the entire indebtedness represented by the outstanding
Notes, except for (i) the rights of Holders to receive payments in respect of
the principal of, premium, if any, and interest on the New Notes when such
payments are due; (ii) the Issuers' obligations with respect to the New Notes
concerning issuing temporary Notes, registration of Notes, mutilated, destroyed,
lost or stolen Notes and the maintenance of an office or agency for payments;
(iii) the rights, powers, trust, duties and immunities of the Trustee and the
Issuers' obligations in connection therewith; and (iv) the Legal Defeasance
provisions of the Indenture. In addition, the Issuers may, at their option and
at any time, elect to have the obligations of the Issuers released with respect
to certain covenants described in the Indenture ("Covenant Defeasance") and
thereafter any omission to comply with such obligations shall not constitute a
Default or Event of Default with respect to the New Notes. In the event Covenant
Defeasance occurs, certain events (not including non-payment, bankruptcy,
receivership, reorganization and insolvency events) described under "Events of
Default" will no longer constitute an Event of Default with respect to the New
Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Issuers must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders cash in U.S. dollars, non-callable U.S. government obligations,
or a combination thereof, in such amounts as will be sufficient, in the opinion
of a nationally recognized firm of independent public accountants, to pay the
principal of, premium, if any, and interest on the New Notes on the stated date
for payment thereof or on the applicable redemption date, as the case may be;
(ii) in the case of Legal Defeasance, the Issuers shall have delivered to the
Trustee an opinion of counsel in the United States reasonably acceptable to the
Trustee confirming that (A) the Issuers have received from, or there has been
published by, the Internal Revenue Service a ruling or (B) since the date of the
Indenture, there has been a change in the applicable federal income tax law, in
either case to the effect that, and based thereon such opinion of counsel shall
confirm that, the Holders will not recognize income, gain or loss for federal
income tax purposes as a result of such Legal Defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same times
as would have been the case if such Legal Defeasance had not occurred; (iii) in
the case of Covenant Defeasance, the Issuers shall have delivered to the Trustee
an opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that the Holders will not recognize income, gain or loss for federal
income tax purposes as a result of such Covenant Defeasance and will be subject
to federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Covenant Defeasance had not occurred;
(iv) no Default or Event of Default shall
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have occurred and be continuing on the date of such deposit or insofar as Events
of Default from bankruptcy or insolvency events are concerned, at any time in
the period ending on the 91st day after the date of deposit; (v) such Legal
Defeasance or Covenant Defeasance shall not result in a breach or violation of,
or constitute a default under the Indenture or any other material agreement or
instrument to which the Issuers or any of their Subsidiaries is a party or by
which the Issuers or any of their Subsidiaries is bound; (vi) each of the
Issuers shall have delivered to the Trustee an officers' certificate stating
that the deposit was not made by the Issuers with the intent of preferring the
Holders over any other creditors of the Issuers or with the intent of defeating,
hindering, delaying or defrauding any other creditors of the Issuers or others;
(vii) each of the Issuers shall have delivered to the Trustee an officers'
certificate and an opinion of counsel, each stating that all conditions
precedent provided for or relating to the Legal Defeasance or the Covenant
Defeasance have been complied with; (viii) each of the Issuers shall have
delivered to the Trustee an opinion of counsel to the effect that (A) the trust
funds will not be subject to any rights of holders of Senior Debt, including,
without limitation, those arising under the Indenture and (B) after the 91st day
following the deposit, the trust funds will not be subject to the effect of any
applicable bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally; and (ix) certain other customary conditions
precedent are satisfied. Notwithstanding the foregoing, the opinion of counsel
required by clause (ii) above with respect to a Legal Defeasance need not be
delivered if all Notes not theretofore delivered to the Trustee for cancellation
(x) have become due and payable or (y) will become due and payable on the
maturity date within one year under arrangements satisfactory to the Trustee for
the giving of notice of redemption by the Trustee in the name, and at the
expense, of the Company.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of the
New Notes, as expressly provided for in the Indenture) as to all outstanding
Notes when (i) either (a) all the New Notes theretofore authenticated and
delivered (except lost, stolen or destroyed Notes which have been replaced or
paid and Notes for whose payment money has theretofore been deposited in trust
or segregated and held in trust by the Issuers and thereafter repaid to the
Issuers or discharged from such trust) have been delivered to the Trustee for
cancellation or (b) all Notes not theretofore delivered to the Trustee for
cancellation have become due and payable and the Issuers have irrevocably
deposited or caused to be deposited with the Trustee funds in an amount
sufficient to pay and discharge the entire Indebtedness on the New Notes not
theretofore delivered to the Trustee for cancellation, for principal of,
premium, if any, and interest on the New Notes to the date of deposit together
with irrevocable instructions from the Issuers directing the Trustee to apply
such funds to the payment thereof at maturity or redemption, as the case may be;
(ii) the Issuers have paid all other sums payable under the Indenture by the
Issuers; and (iii) each of the Issuers have delivered to the Trustee an
officers' certificate and an opinion of counsel stating that all conditions
precedent under the Indenture relating to the satisfaction and discharge of the
Indenture have been complied with.
MODIFICATION OF THE INDENTURE
From time to time, the Issuers and the Trustee, without the consent of the
Holders, may amend the Indenture for certain specified purposes, including
curing ambiguities, defects or inconsistencies, so long as such change does not,
in the opinion of the Trustee,
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adversely affect the rights of any of the Holders in any material respect. In
formulating its opinion on such matters, the Trustee will be entitled to rely on
such evidence as it deems appropriate, including, without limitation, solely on
an opinion of counsel. Other modifications and amendments of the Indenture may
be made with the consent of the Holders of a majority in principal amount of the
then outstanding Notes issued under the Indenture, except that, without the
consent of each Holder affected thereby, no amendment may: (i) reduce the amount
of Notes whose Holders must consent to an amendment; (ii) reduce the rate of or
change or have the effect of changing the time for payment of interest,
including defaulted interest, on any Notes; (iii) reduce the principal of or
change or have the effect of changing the fixed maturity of any Notes, or change
the date on which any Notes may be subject to redemption or reduce the
redemption price therefor; (iv) make any Notes payable in money other than that
stated in the New Notes; (v) make any change in provisions of the Indenture
protecting the right of each Holder to receive payment of principal of and
interest on such Note 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; (vi) after the Company's
obligation to purchase Notes arises thereunder, 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 a
Net Proceeds Offer with respect to any Asset Sale that has been consummated or,
after such Change of Control has occurred or such Asset Sale has been
consummated, modify any of the provisions or definitions with respect thereto;
or (vii) modify or change any provision of the Indenture or the related
definitions affecting the subordination or ranking of the New Notes in a manner
which adversely affects the Holders.
GOVERNING LAW
The Indenture provides that it and the New Notes will be governed by, and
construed in accordance with, the laws of the State of New York but without
giving effect to applicable principles of conflicts of law to the extent that
the application of the law of another jurisdiction would be required thereby.
THE TRUSTEE
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 by the Indenture, and use the same
degree of care and skill in its exercise as a prudent man would exercise or use
under the circumstances in the conduct of his own affairs.
The Indenture and the provisions of the TIA contain certain limitations on
the rights of the Trustee, should it become a creditor of the Company, to obtain
payments of claims in certain cases or to realize on certain property received
in respect of any such claim as security or otherwise. Subject to the TIA, the
Trustee will be permitted to engage in other transactions; provided that if the
Trustee acquires any conflicting interest as described in the TIA, it must
eliminate such conflict or resign.
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 terms used herein for which no definition is
provided.
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"Acquired Indebtedness" means Indebtedness of a Person or any of its
Subsidiaries existing at the time such Person becomes a Restricted Subsidiary of
the Company or at the time it merges or consolidates with the Company or any of
its Subsidiaries or 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 of the Company or such acquisition, merger or consolidation.
"Affiliate" means, with respect to any specified Person, any other Person
who directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, such specified Person. The term
"control" means the possession, directly or indirectly, of the power to direct
or cause the direction of the management and policies of a Person, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative of the foregoing.
"Asset Acquisition" means (a) 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 any Restricted
Subsidiary of the Company, or shall be merged with or into the Company or any
Restricted Subsidiary of the Company, or (b) the acquisition by the Company or
any Restricted Subsidiary of the Company of the assets of any Person (other than
a Restricted Subsidiary of the Company) which constitute all or substantially
all of the assets of such Person or comprises any division or line of business
of such Person or any other properties or assets of such Person other than in
the ordinary course of business.
"Asset Sale" means any direct or indirect sale, issuance, conveyance,
transfer, lease (other than operating leases entered into in the ordinary course
of business), assignment or other transfer for value by the Company or any of
its Restricted Subsidiaries (including any Sale and Leaseback Transaction) to
any Person other than the Company or a Wholly Owned Restricted Subsidiary of the
Company of (a) any Capital Stock of any Restricted Subsidiary of the Company or
(b) any other property or assets of the Company or any Restricted Subsidiary of
the Company other than in the ordinary course of business; provided, however,
that Asset Sales shall not include (i) a transaction or series of related
transactions for which the Company or its Restricted Subsidiaries receive
aggregate consideration of less than $1,000,000 or (ii) the sale, lease,
conveyance, disposition or other transfer of all or substantially all of the
assets of the Company as permitted under "Merger, Consolidation and Sale of
Assets."
"Beacon" means The Beacon Group III -- Focus Value Fund, L.P., a limited
partnership organized under the laws of the State of Delaware.
"Board of Directors" means, as to any Person, the board of directors of
such Person or any duly authorized committee thereof.
"Board Resolution" means, with respect to any Person, a copy of a
resolution certified by the Secretary or an Assistant Secretary of such Person
to have been duly adopted by the Board of Directors of such Person and to be in
full force and effect on the date of such certification, and delivered to the
Trustee.
"Capital Stock" means (i) with respect to any Person that is a corporation,
any and all shares, interests, participations or other equivalents (however
designated and whether or not voting) of corporate stock, including each class
of Common Stock and Preferred Stock of such Person and (ii) with respect to any
Person that is not a corporation, any and all
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partnership, membership or other equity interests conferring to the holder
thereof the right to receive a share of the profits, losses or distributions of
assets of such Person.
"Capitalized Lease Obligation" means, as to any Person, the obligations of
such Person under a lease that are required to be classified and accounted for
as capital lease obligations under GAAP and, for purposes of this definition,
the amount of such obligations at any date shall be the capitalized amount of
such obligations at such date, determined in accordance with GAAP.
"Cash Equivalents" means (i) marketable direct obligations issued by, or
unconditionally guaranteed by, the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States, in
each case maturing within one year from the date of acquisition thereof; (ii)
marketable direct obligations issued by any state of the United States of
America or any political subdivision of any such state or any public
instrumentality thereof maturing within one year from the date of acquisition
thereof and, at the time of acquisition, having one of the two highest ratings
obtainable from either Standard & Poor's Ratings Group ("S&P") or Moody's
Investors Service, Inc. ("Moody's"); (iii) commercial paper maturing no more
than one year from the date of creation thereof and, at the time of acquisition,
having a rating of at least A-1 from S&P or at least P-1 from Moody's; (iv)
certificates of deposit, time deposits, eurodollar time deposits or bankers'
acceptances maturing within one year from the date of acquisition thereof and
overnight bank deposits issued by any bank organized under the laws of the
United States of America or any state thereof or the District of Columbia or any
U.S. branch of a foreign bank having at the date of acquisition thereof combined
capital and surplus of not less than $250,000,000; (v) repurchase obligations
with a term of not more than seven days for underlying securities of the types
described in clauses (i) and (iv) above entered into with any bank meeting the
qualifications specified in clause (iv) above; and (vi) investments in money
market funds which invest substantially all their assets in securities of the
types described in clauses (i) through (v) above.
"Change of Control" means the occurrence of one or more of the following
events: (i) any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all or substantially all of the assets of the
Company or Holdings to any Person or group of related Persons for purposes of
Section 13(d) of the Exchange Act (a "Group"), together with any Affiliates
thereof (whether or not otherwise in compliance with the provisions of the
Indenture) other than to the Permitted Holders; (ii) the approval by the holders
of Capital Stock of the Company or Holdings of any plan or proposal for the
liquidation or dissolution of the Company or Holdings, as the case may be,
(whether or not otherwise in compliance with the provisions of the Indenture);
(iii) any Person or Group (other than the Permitted Holders) shall become the
owner, directly or indirectly, beneficially or of record, of shares representing
more than 50% of the aggregate ordinary voting power represented by the issued
and outstanding Capital Stock of the Company or Holdings; or (iv) the
replacement of a majority of the Board of Directors of the Company or Holdings
over a two-year period from the directors who constituted the Board of Directors
of the Company or Holdings, as the case may be, at the beginning of such period,
and such replacement shall not have been approved by a vote of at least a
majority of the Board of Directors of the Company or Holdings, as the case may
be, then still in office who either were members of such Board of Directors at
the beginning of such period or whose election as a member of such Board of
Directors was previously so approved.
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"Co-Issuer" means GPPW, Inc., a corporation incorporated under the laws of
the State of Wisconsin.
"Common Stock" of any Person means any and all shares, interests or other
participations in, and other equivalents (however designated and whether voting
or non-voting) of such Person's common stock, whether outstanding on 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,
the sum (without duplication) of (i) Consolidated Net Income and (ii) to the
extent Consolidated Net Income has been reduced thereby, (A) all income taxes of
such Person and its Restricted Subsidiaries, or Permitted Tax Distributions made
by such Person, paid or accrued in accordance with GAAP for such period (other
than income taxes attributable to extraordinary, unusual or nonrecurring gains
or losses or taxes attributable to sales or dispositions outside the ordinary
course of business); (B) Consolidated Interest Expense and; (C) Consolidated
Non-cash Charges less any non-cash items increasing Consolidated Net Income for
such period, all as determined on a consolidated basis for such Person and its
Restricted Subsidiaries in accordance with GAAP.
"Consolidated Fixed Charge Coverage Ratio" means, with respect to any
Person, the ratio of Consolidated EBITDA of such Person during the four full
fiscal quarters (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 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 (i) the incurrence or
repayment of any Indebtedness of such Person or any of its Restricted
Subsidiaries (and the application of the proceeds thereof) giving rise to the
need to make such calculation and any incurrence or repayment of other
Indebtedness (and the application of the proceeds thereof), other than the
incurrence or repayment of Indebtedness in the ordinary course of business for
working capital purposes pursuant to working capital facilities, occurring
during the Four Quarter Period or at any time subsequent to the last day of the
Four Quarter Period and on or prior to the Transaction Date, as if such
incurrence or repayment, as the case may be (and the application of the proceeds
thereof), occurred on the first day of the Four Quarter Period and (ii) any
asset sales or other dispositions 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 and also including any Consolidated EBITDA (including any pro forma
expense and cost reductions calculated on a basis consistent with Regulation S-X
of the Exchange Act) attributable to the assets which are the subject of the
Asset Acquisition or asset sale or other disposition during the Four Quarter
Period) occurring during the Four Quarter Period or at any time subsequent to
the last day of the Four Quarter Period and on or prior to the Transaction Date,
as if such asset sale or other disposition or Asset Acquisition (including the
incurrence, assumption or liability for any such Acquired Indebtedness) occurred
on the first day of the Four Quarter Period. If such Person or any of its
Restricted Subsidiaries directly or indirectly guarantees Indebtedness of a
third Person, the preceding sentence shall give effect to the incurrence of such
guaranteed Indebtedness as if such Person or any Restricted Subsidiary of such
Person had directly incurred or otherwise
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assumed such guaranteed Indebtedness. 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 and (2) notwithstanding clause
(1) above, interest on Indebtedness determined on a fluctuating basis, to the
extent such interest is covered by agreements relating to Interest Swap
Obligations, shall be deemed to accrue at the rate per annum resulting after
giving effect to the operation of such agreements.
"Consolidated Fixed Charges" means, with respect to any Person for any
period, the sum, without duplication, of (i) Consolidated Interest Expense, plus
(ii) the product of (x) the amount of all dividend payments on any series of
Preferred Stock of such Person (other than dividends paid in Qualified Capital
Stock) paid, accrued or scheduled to be paid or accrued during such period times
(y) a fraction, the numerator of which is one and the denominator of which is
one minus the then current effective consolidated federal, state and local tax
rate of such Person, expressed as a decimal.
"Consolidated Interest Expense" means, with respect to any Person for any
period, the sum of, without duplication: (i) the aggregate of the interest
expense of such Person and its Restricted Subsidiaries for such period
determined on a consolidated basis in accordance with GAAP, including without
limitation, (a) any amortization of debt discount and amortization or write-off
deferred financing costs; (b) the net costs under Interest Swap Obligations; (c)
all capitalized interest; and (d) the interest portion of any deferred payment
obligation; and (ii) the interest component of Capitalized Lease Obligations
paid, accrued and/or scheduled to be paid or accrued by such Person and its
Restricted Subsidiaries during such period as determined on a consolidated basis
in accordance with GAAP.
"Consolidated Net Income" means, with respect to any Person, for any
period, the aggregate net income (or loss) of such Person and its Restricted
Subsidiaries for such period on a consolidated basis, determined in accordance
with GAAP; provided that there shall be excluded therefrom (a) the amount of
Permitted Tax Distributions with respect to such period; (b) after-tax gains
from Asset Sales or abandonments or reserves relating thereto; (c) after-tax
items classified as extraordinary or nonrecurring gains; (d) the net income of
any Person acquired in a "pooling of interests" transaction accrued prior to the
date it becomes a Restricted Subsidiary of the referent Person or is merged or
consolidated with the referent Person or any Restricted Subsidiary of the
referent Person; (e) the net income (but not loss) of any Restricted Subsidiary
of the referent Person to the extent that the declaration of dividends or
similar distributions by that Restricted Subsidiary of that income is restricted
by a contract, operation of law or otherwise; (f) the net income of any Person,
other than a Restricted Subsidiary of the referent Person, except to the extent
of cash dividends or distributions paid to the referent Person or to a Wholly
Owned Restricted Subsidiary of the referent Person by such Person; (g) any
restoration to income of any contingency reserve, except to the extent that
provision for such reserve was made out of Consolidated Net Income accrued at
any time following the Issue Date; (h) income or loss attributable to
discontinued operations (including, without limitation, operations disposed of
during such period whether or not such operations were classified as
discontinued); and (i) in the case of a successor to the referent Person by
consolidation or merger or as a transferee of the referent Person's assets, any
earnings of the successor corporation prior to such consolidation, merger or
transfer of assets.
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"Consolidated Net Worth" of any Person means the consolidated stockholders'
equity of such Person, determined on a consolidated basis in accordance with
GAAP, less (without duplication) amounts attributable to Disqualified Capital
Stock of such Person.
"Consolidated Non-cash Charges" means, with respect to any Person, for any
period, the aggregate depreciation, amortization and other non-cash expenses 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 (excluding any such charges
constituting an extraordinary item or loss or any such charge which requires an
accrual of or a reserve for cash charges for any future period).
"Credit Agreement" means the Credit Agreement dated as of July 9, 1998,
among the Company, Holdings, the lenders party thereto in their capacities as
lenders thereunder and Bankers Trust Company, as administrative agent, together
with the related documents thereto (including, without limitation, any guarantee
agreements and security documents), in each case as such agreements may be
amended (including any amendment and restatement thereof), supplemented or
otherwise modified from time to time, including any agreement extending the
maturity of, refinancing, replacing or otherwise restructuring (including
increasing the amount of available borrowings thereunder (provided that such
increase in borrowings is permitted by the "Limitation on Incurrence of
Additional Indebtedness" covenant above) or adding Restricted Subsidiaries of
the Company as additional borrowers or guarantors thereunder) all or any portion
of the Indebtedness under such agreement or any successor or replacement
agreement and whether by the same or any other agent, lender or group of
lenders.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any Restricted Subsidiary of the Company against fluctuations in
currency values.
"Default" means an event or condition the occurrence of which is, or with
the lapse of time or the giving of notice or both would be, an Event of Default.
"Designated Senior Debt" means (i) Indebtedness under or in respect of the
Credit Agreement and (ii) any other Indebtedness constituting Senior Debt which,
at the time of determination, has an aggregate principal amount of at least
$25.0 million and is specifically designated in the instrument evidencing such
Senior Debt as "Designated Senior Debt" by the Company.
"Disqualified Capital Stock" means that portion of any Capital Stock which,
by its terms (or by the terms of any security into which it is convertible or
for which it is exchangeable), or upon the happening of any event, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the sole option of the holder thereof on or prior to the final
maturity date of the Senior Subordinated Notes.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or
any successor statute or statutes thereto.
"fair market value" means, with respect to any asset or property, the price
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
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evidenced by a Board Resolution of the Board of Directors of the Company
delivered to the Trustee.
"Foreign Restricted Subsidiary" means any Restricted Subsidiary of the
Company that is not organized under the laws of the United States of America or
any State thereof or the District of Columbia.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, which are in effect as of the Issue Date.
"Guarantor" means each of the Company's Restricted Subsidiaries that in the
future executes a supplemental Indenture in which such Restricted Subsidiary
agrees to be bound by the terms of the Indenture as a Guarantor; provided that
any Person constituting a Guarantor as described above shall cease to constitute
a Guarantor when its respective Guarantee is released in accordance with the
terms of the Indenture.
"Holdings" means Generac Portable Products, Inc., a corporation
incorporated under the laws of the State of Delaware.
"Indebtedness" means with respect to any Person, without duplication, (i)
all Obligations of such Person for borrowed money; (ii) all Obligations of such
Person evidenced by bonds, debentures, notes or other similar instruments; (iii)
all Capitalized Lease Obligations of such Person; (iv) all Obligations of such
Person issued or assumed as the deferred purchase price of property, all
conditional sale obligations and all Obligations under any title retention
agreement (but excluding trade accounts payable and other accrued liabilities
arising in the ordinary course of business that are not overdue by 90 days or
more or are being contested in good faith by appropriate proceedings promptly
instituted and diligently conducted); (v) all Obligations for the reimbursement
of any obligor on any letter of credit, banker's acceptance or similar credit
transaction; (vi) guarantees and other contingent obligations in respect of
Indebtedness referred to in clauses (i) through (v) above and clause (viii)
below; (vii) all Obligations of any other Person of the type referred to in
clauses (i) through (vi) which are secured by any lien on any property or asset
of such Person, the amount of such Obligation being deemed to be the lesser of
the fair market value of such property or asset or the amount of the Obligation
so secured; (viii) all Obligations under currency agreements and interest swap
agreements of such Person; and (ix) all Disqualified Capital Stock issued by
such Person with the amount of Indebtedness represented by such Disqualified
Capital Stock being equal to the greater of its voluntary or involuntary
liquidation preference and its maximum fixed repurchase price, but excluding
accrued dividends, if any. For purposes hereof, the "maximum fixed repurchase
price" of any Disqualified Capital Stock which does not have a fixed repurchase
price shall be calculated in accordance with the terms of such Disqualified
Capital Stock as if such Disqualified Capital Stock were purchased on any date
on which Indebtedness shall be required to be determined pursuant to the
Indenture, and if such price is based upon, or measured by, the fair market
value of such Disqualified Capital Stock, such fair market value shall be
determined reasonably and in good faith by the Board of Directors of the issuer
of such Disqualified Capital Stock.
"Independent Financial Advisor" means a firm (i) which does not, and whose
directors, officers and employees or Affiliates do not, have a direct or
indirect financial
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interest in the Company and (ii) 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 Swap Obligations" means the obligations of any Person pursuant to
any arrangement with any other Person, whereby, directly or indirectly, such
Person is entitled to receive from time to time periodic payments calculated by
applying either a floating or a fixed rate of interest on a stated notional
amount in exchange for periodic payments made by such other 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 (including, without limitation, a guarantee) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition by such Person of any Capital Stock,
bonds, notes, debentures or other securities or evidences of Indebtedness issued
by, any Person. "Investment" shall exclude extensions of trade credit by the
Company and its Restricted Subsidiaries on commercially reasonable terms in
accordance with normal trade practices of the Company or such Restricted
Subsidiary, as the case may be. For the purposes of the "Limitation on
Restricted Payments" covenant, (i) "Investment" shall include and be valued at
the fair market value of the net assets of any Restricted Subsidiary at the time
that such Restricted Subsidiary is designated an Unrestricted Subsidiary and
shall exclude the fair market value of the net assets of any Unrestricted
Subsidiary at the time that such Unrestricted Subsidiary is designated a
Restricted Subsidiary and (ii) the amount of any Investment shall be the
original cost of such Investment plus the cost of all additional Investments by
the Company or any of its Restricted Subsidiaries, without any adjustments for
increases or decreases in value, or write-ups, write-downs or write-offs with
respect to such Investment, reduced by the payment of dividends or distributions
in connection with such Investment or any other amounts received in respect of
such Investment; provided that no such payment of dividends or distributions or
receipt of any such other amounts shall reduce the amount of any Investment if
such payment of dividends or distributions or receipt of any such amounts would
be included in Consolidated Net Income. If the Company or any Restricted
Subsidiary of the Company sells or otherwise disposes of any Common Stock of any
direct or indirect Restricted Subsidiary of the Company such that, after giving
effect to any such sale or disposition, the Company no longer owns, directly or
indirectly, 100% of the outstanding Common Stock of such Restricted Subsidiary,
the Company shall be deemed to have made an Investment on the date of any such
sale or disposition equal to the fair market value of the Common Stock of such
Restricted Subsidiary not sold or disposed of.
"Issue Date" means the date of original issuance of the Notes.
"Issuers" means the Operating Company and Co-Issuer.
"Lien" means any lien, mortgage, deed of trust, pledge, security interest,
charge or encumbrance of any kind (including any conditional sale or other title
retention agreement, any lease in the nature thereof and any agreement to give
any security interest).
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds in
the form of cash or Cash Equivalents including payments in respect of deferred
payment obligations when received in the form of cash or Cash Equivalents (other
than the portion of any such
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deferred payment constituting interest) received by the Company or any of its
Restricted Subsidiaries from such Asset Sale net of (a) reasonable out-of-pocket
expenses and fees relating to such Asset Sale (including, without limitation,
legal, accounting and investment banking fees and sales commissions); (b) taxes
paid or payable after taking into account any reduction in consolidated tax
liability due to available tax credits or deductions and any tax sharing
arrangements; (c) repayment of Indebtedness that is required to be repaid in
connection with such Asset Sale; and (d) appropriate amounts to be provided by
the Company or any Restricted Subsidiary, as the case may be, as a reserve, in
accordance with GAAP, against any liabilities associated with such Asset Sale
and retained by the Company or any Restricted Subsidiary, as the case may be,
after such Asset Sale, including, without limitation, pension and other
post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated with
such Asset Sale.
"Obligations" means all obligations for principal, premium, interest,
penalties, fees, indemnification, reimbursements, damages and other liabilities
payable under the documentation governing any Indebtedness.
"Operating Company" or "Company" means Generac Portable Products, LLC, a
limited liability company organized under the laws of the State of Delaware.
"Permitted Holder(s)" means Beacon and its Affiliates.
"Permitted Indebtedness" means, without duplication, each of the following:
(i) Indebtedness under the Notes issued in the Offering in an
aggregate amount of $110.0 million;
(ii) Indebtedness incurred pursuant to the Credit Agreement in an
aggregate outstanding principal amount at any time outstanding not to
exceed $115.0 million (A) less the amount of all mandatory principal
payments actually made in respect of the term loans thereunder and (B)
reduced by any required permanent repayments (which are accompanied by a
corresponding permanent commitment reduction) thereunder, in each case,
actually effected in satisfaction of the Net Cash Proceeds requirement
described under the covenant described under "Limitation on Asset Sales"
(it being recognized that a reduction in any borrowing base thereunder in
and of itself shall not be deemed a required permanent repayment);
(iii) other Indebtedness of the Company and its Restricted
Subsidiaries outstanding on the Issue Date reduced by the amount of any
scheduled amortization payments or mandatory prepayments when actually paid
or permanent reductions thereon;
(iv) Interest Swap Obligations of the Company covering Indebtedness of
Holdings, the Company or any of its Restricted Subsidiaries and Interest
Swap Obligations of any Restricted Subsidiary of the Company covering
Indebtedness of such Restricted Subsidiary; provided, however, that such
Interest Swap Obligations are entered into to protect the Company and its
Restricted Subsidiaries from fluctuations in interest rates on Indebtedness
incurred in accordance with the Senior Subordinated Indenture to the extent
the notional principal amount of such Interest Swap Obligation does not
exceed the principal amount of the Indebtedness to which such Interest Swap
Obligation relates;
(v) Indebtedness under Currency Agreements; provided that in the case
of Currency Agreements which relate to Indebtedness, such Currency
Agreements do
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not increase the Indebtedness of the Company and its Restricted
Subsidiaries outstanding other than as a result of fluctuations in foreign
currency exchange rates or by reason of fees, indemnities and compensation
payable thereunder;
(vi) Indebtedness of a Wholly Owned Restricted Subsidiary of the
Company to the Company or to a Wholly Owned Restricted Subsidiary of the
Company for so long as such Indebtedness is held by the Company or a Wholly
Owned Restricted Subsidiary of the Company, in each case subject to no Lien
held by a Person other than the Company or a Wholly Owned Restricted
Subsidiary of the Company or the lenders and collateral agent under the
Credit Agreement; provided that if as of any date any Person other than the
Company or a Wholly Owned Restricted Subsidiary of the Company or the
lenders and collateral agent under the Credit Agreement owns or holds any
such Indebtedness or holds a Lien in respect of such Indebtedness, such
date shall be deemed the incurrence of Indebtedness not constituting
Permitted Indebtedness by the issuer of such Indebtedness unless such
Indebtedness is otherwise permitted hereunder;
(vii) Indebtedness of the Company to a Wholly Owned Restricted
Subsidiary of the Company for so long as such Indebtedness is held by a
Wholly Owned Restricted Subsidiary of the Company or the lenders and
collateral agent under the Credit Agreement, in each case subject to no
Lien other than under the Credit Agreement; provided that (a) any
Indebtedness of the Company to any Wholly Owned Restricted Subsidiary of
the Company is unsecured and subordinated, pursuant to a written agreement,
to the Company's obligations under the Indenture and the Notes and (b) if
as of any date any Person other than a Wholly Owned Restricted Subsidiary
of the Company owns or holds any such Indebtedness or any Person holds a
Lien in respect of such Indebtedness, such date shall be deemed the
incurrence of Indebtedness not constituting Permitted Indebtedness by the
Company unless such Indebtedness is otherwise permitted hereunder;
(viii) Indebtedness arising from the honoring by a bank or other
financial institution of a check, draft or similar instrument inadvertently
(except in the case of daylight overdrafts) drawn against insufficient
funds in the ordinary course of business; provided, however, that such
Indebtedness is extinguished within two business days of incurrence;
(ix) 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, in order to provide security for
workers' compensation claims, payment obligations in connection with
self-insurance or similar requirements in the ordinary course of business;
(x) Indebtedness represented by Capitalized Lease Obligations and
Purchase Money Indebtedness of the Company and its Restricted Subsidiaries
incurred in the ordinary course of business not to exceed $7.5 million at
any one time outstanding;
(xi) Refinancing Indebtedness;
(xii) additional Indebtedness of the Company and its Restricted
Subsidiaries in an aggregate principal amount not to exceed $20.0 million
at any one time outstanding; and
(xiii) Indebtedness of Foreign Restricted Subsidiaries not to exceed
$10.0 million at any one time outstanding; provided that no Indebtedness
may be incurred under
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this clause (xiii) if after giving effect to such incurrence the sum of the
Indebtedness outstanding under clause (ii) above and the Indebtedness
outstanding under this clause (xiii) would exceed the maximum amount of
Indebtedness permitted to be outstanding under clause (ii) above.
"Permitted Investments" means (i) Investments by the Company or any
Restricted Subsidiary of the Company in any Person that is or will become
immediately after such Investment a Wholly Owned Restricted Subsidiary of the
Company or that will merge or consolidate into the Company or a Wholly Owned
Restricted Subsidiary of the Company; (ii) Investments in the Company by any
Restricted Subsidiary of the Company; provided that any Indebtedness evidencing
such Investment is unsecured and subordinated, pursuant to a written agreement,
to the Company's obligations under the Notes and the Indenture; (iii)
investments in cash and Cash Equivalents; (iv) loans and advances to employees
and officers of the Company and its Restricted Subsidiaries in the ordinary
course of business for bona fide business purposes not in excess of $1.0 million
at any one time outstanding; (v) Currency Agreements and Interest Swap
Obligations entered into in the ordinary course of the Company's or its
Restricted Subsidiaries' businesses and otherwise in compliance with the
Indenture; (vi) additional Investments not to exceed $7.5 million at any one
time outstanding; (vii) Investments in securities of trade creditors or
customers received pursuant to any plan of reorganization or similar arrangement
upon the bankruptcy or insolvency of such trade creditors or customers; and
(viii) 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.
"Permitted Liens" means the following types of Liens:
(i) Liens for taxes, assessments or governmental charges or claims
either (a) not delinquent or (b) contested in good faith by appropriate
proceedings and as to which the Company or its Restricted Subsidiaries
shall have set aside on its books such reserves as may be required pursuant
to GAAP;
(ii) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen and other Liens imposed by law
incurred in the ordinary course of business for sums not yet delinquent or
being contested in good faith, if such reserve or other appropriate
provision, if any, as shall be required by GAAP shall have been made in
respect thereof;
(iii) Liens incurred or deposits made in the ordinary course of
business in connection with workers' compensation, unemployment insurance
and other types of social security, including any Lien securing letters of
credit issued in the ordinary course of business consistent with past
practice in connection therewith, or to secure the performance of tenders,
statutory obligations, surety and appeal bonds, bids, leases, government
contracts, performance and return-of-money bonds and other similar
obligations (exclusive of obligations for the payment of borrowed money);
(iv) judgment Liens not giving rise to an Event of Default so long as
such Lien is adequately bonded and any appropriate legal proceedings which
may have been duly initiated for the review of such judgment shall not have
been finally terminated or the period within which such proceedings may be
initiated shall not have expired;
(v) easements, rights-of-way, zoning restrictions and other similar
charges or encumbrances in respect of real property not interfering in any
material respect with
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the ordinary conduct of the business of the Company or any of its
Restricted Subsidiaries;
(vi) any interest or title of a lessor under any Capitalized Lease
Obligation; provided that such Liens do not extend to any property or
assets which is not leased property subject to such Capitalized Lease
Obligation;
(vii) purchase money Liens to finance property or assets of the
Company or any Restricted Subsidiary of the Company acquired in the
ordinary course of business; provided, however, that (A) the related
purchase money Indebtedness shall not exceed the cost of such property or
assets and shall not be secured by any property or assets of the Company or
any Restricted Subsidiary of the Company other than the property and assets
so acquired and (B) the Lien securing such Indebtedness shall be created
within 90 days of such acquisition;
(viii) Liens upon specific items of inventory or other goods and
proceeds of any Person securing such Person's obligations in respect of
bankers' acceptances issued or created for the account of such Person to
facilitate the purchase, shipment or storage of such inventory or other
goods;
(ix) Liens securing reimbursement obligations with respect to
commercial letters of credit which encumber documents and other property
relating to such letters of credit and products and proceeds thereof;
(x) Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual, or warranty requirements of the Company
or any of its Restricted Subsidiaries, including rights of offset and
set-off;
(xi) Liens securing Interest Swap Obligations which Interest Swap
Obligations relate to Indebtedness that is otherwise permitted under the
Indenture;
(xii) Liens securing Capitalized Lease Obligations and Purchase Money
Indebtedness permitted pursuant to clause (x) of the definition of
"Permitted Indebtedness"; provided, however, that in the case of Purchase
Money Indebtedness (A) the Indebtedness shall not exceed the cost of such
property or assets and shall not be secured by any property or assets of
the Company or any Restricted Subsidiary of the Company other than the
property and assets so acquired or constructed and (B) the Lien securing
such Indebtedness shall be created within 180 days of such acquisition or
construction or, in the case of a refinancing of any Purchase Money
Indebtedness, within 180 days of such refinancing;
(xiii) Liens securing Indebtedness under Currency Agreements; and
(xiv) Liens securing Acquired Indebtedness incurred in accordance with
the "Limitation on Incurrence of Additional Indebtedness" covenant;
provided that (A) such Liens secured such Acquired Indebtedness at the time
of and prior to the incurrence of such Acquired Indebtedness by the Company
or a Restricted Subsidiary of the Company and were not granted in
connection with, or in anticipation of, the incurrence of such Acquired
Indebtedness by the Company or a Restricted Subsidiary of the Company and
(B) such Liens do not extend to or cover any property or assets of the
Company or of any of its Restricted Subsidiaries other than the property or
assets that secured the Acquired Indebtedness prior to the time such
Indebtedness became Acquired Indebtedness of the Company or a Restricted
Subsidiary of the Company and are no more favorable to the lienholders than
those securing the
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Acquired Indebtedness prior to the incurrence of such Acquired Indebtedness
by the Company or a Restricted Subsidiary of the Company.
"Permitted Tax Distributions" has the meaning given such term in the
"Limitation on Restricted Payments" covenant.
"Person" means an individual, partnership, corporation, unincorporated
organization, trust or joint venture, or a governmental agency or political
subdivision thereof.
"Preferred Stock" of any Person means any Capital Stock of such Person that
has preferential rights to any other Capital Stock of such Person with respect
to dividends or redemptions or upon liquidation.
"Purchase Money Indebtedness" means Indebtedness of the Company and its
Restricted Subsidiaries incurred in the normal course of business for the
purpose of financing all or any part of the purchase price, or the cost of
installation, construction or improvement, of property or equipment.
"Qualified Capital Stock" means any Capital Stock that is not Disqualified
Capital Stock.
"Refinance" means, in respect of any security or Indebtedness, to
refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or
to issue a security or Indebtedness in exchange or replacement for, such
security or Indebtedness in whole or in part. "Refinanced" and "Refinancing"
shall have correlative meanings.
"Refinancing Indebtedness" means any Refinancing by the Company or any
Restricted Subsidiary of the Company of Indebtedness incurred in accordance with
the "Limitation on Incurrence of Additional Indebtedness" covenant or permitted
under the definition of "Permitted Indebtedness" (other than pursuant to clause
(ii), (iv), (v), (vi), (vii), (viii), (ix), (x), (xii) or (xiii) of the
definition of Permitted Indebtedness), in each case that does not (1) result in
an increase in the aggregate principal amount of Indebtedness of such Person as
of the date of such proposed Refinancing (plus the amount of any premium
required to be paid under the terms of the instrument governing such
Indebtedness and the amount of reasonable expenses incurred by the Company in
connection with such Refinancing) or (2) create Indebtedness with (A) a Weighted
Average Life to Maturity that is less than the Weighted Average Life to Maturity
of the Indebtedness being Refinanced or (B) a final maturity earlier than the
final maturity of the Indebtedness being Refinanced; provided that (x) if such
Indebtedness being Refinanced is Indebtedness of the Company, then such
Refinancing Indebtedness shall be Indebtedness solely of the Company and (y) if
such Indebtedness being Refinanced is subordinate or junior to the Senior
Subordinated Notes, then such Refinancing Indebtedness shall be subordinate to
the Senior Subordinated Notes at least to the same extent and in the same manner
as the Indebtedness being Refinanced.
"Representative" means the indenture trustee or other trustee, agent or
representative in respect of any Designated Senior Debt; provided that if, and
for so long as, any Designated Senior Debt lacks such a representative, then the
Representative for such Designated Senior Debt shall at all times constitute the
holders of a majority in outstanding principal amount of such Designated Senior
Debt in respect of any Designated Senior Debt.
"Restricted Subsidiary" of any Person means any Subsidiary of such Person
which at the time of determination is not an Unrestricted Subsidiary.
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"Sale and Leaseback Transaction" means any direct or indirect arrangement
with any Person or to which any such Person is a party, providing for the
leasing to the Company or a Restricted Subsidiary of any property, whether owned
by the Company or any Restricted Subsidiary at the Issue Date or later acquired,
which has been or is to be sold or transferred by the Company or such Restricted
Subsidiary to such Person or to any other Person from whom funds have been or
are to be advanced by such Person on the security of such Property.
"Senior Debt" means the principal of, premium, if any, and interest
(including any interest accruing subsequent to the filing of a petition of
bankruptcy at the rate provided for in the documentation with respect thereto,
whether or not such interest is an allowed claim under applicable law) on any
Indebtedness of the Company, whether outstanding on the Issue Date or thereafter
created, incurred or assumed, unless, in the case of any particular
Indebtedness, the instrument creating or evidencing the same or pursuant to
which the same is outstanding expressly provides that such Indebtedness shall
not be senior in right of payment to the Notes. Without limiting the generality
of the foregoing, "Senior Debt" shall also include the principal of, premium, if
any, interest (including any interest accruing subsequent to the filing of a
petition of bankruptcy at the rate provided for in the documentation with
respect thereto, whether or not such interest is an allowed claim under
applicable law) on, and all other amounts owing in respect of, (x) all monetary
obligations of every nature of the Company under the Credit Agreement,
including, without limitation, obligations to pay principal and interest,
reimbursement obligations under letters of credit, fees, expenses and
indemnities; (y) all Interest Swap Obligations; and (z) all obligations under
Currency Agreements, in each case whether outstanding on the Issue Date or
thereafter incurred. Notwithstanding the foregoing, "Senior Debt" shall not
include (i) any Indebtedness of the Company to a Subsidiary of the Company or
any Affiliate of the Company or any of such Affiliate's Subsidiaries; (ii)
Indebtedness to, or guaranteed on behalf of, any shareholder, director, officer
or employee of the Company or any Subsidiary of the Company (including, without
limitation, amounts owed for compensation); (iii) Indebtedness to trade
creditors and other amounts incurred in connection with obtaining goods,
materials or services; (iv) Indebtedness represented by Disqualified Capital
Stock; (v) any liability for federal, state, local or other taxes owed or owing
by the Company; (vi) Indebtedness incurred in violation of the Indenture
provisions set forth under "Limitation on Incurrence of Additional Indebtedness"
(but, as to any such Indebtedness, no such violation shall be deemed to exist
for purposes of this clause (vi) if the holder(s) of such obligation or their
representative shall have received an officers' certificate of the Company to
the effect that the incurrence of such Indebtedness (or, in the case of
revolving credit Indebtedness, that the entire committed amount thereof at the
date on which the initial borrowing thereunder is made would not violate such
provisions of the Indenture); (vii) Indebtedness which, when incurred and
without respect to any election under Section 1111(b) of Title 11, United States
Code, is without recourse to the Company; (viii) Indebtedness represented by
Capitalized Lease Obligations existing on the Issue Date; and (ix) any
Indebtedness which is, by its express terms, subordinated in right of payment to
any other Indebtedness of the Company.
"Significant Subsidiary", with respect to any Person, means any Restricted
Subsidiary of such Person that satisfies the criteria for a "significant
subsidiary" set forth in Rule 1.02(w) of Regulation S-X under the Securities
Act.
"Subsidiary", with respect to any Person, means (i) any corporation of
which the outstanding Capital Stock having at least a majority of the votes
entitled to be cast in the
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election of directors under ordinary circumstances shall at the time be owned,
directly or indirectly, by such Person or (ii) any other Person of which at
least a majority of the voting interest under ordinary circumstances is at the
time, directly or indirectly, owned by such Person.
"Unrestricted Subsidiary" of any Person means (i) any Subsidiary of such
Person that at the time of determination shall be or continue to be designated
an Unrestricted Subsidiary by the Board of Directors of such Person in the
manner provided below and (ii) any Subsidiary of an Unrestricted Subsidiary. The
Board of Directors may designate any Subsidiary (including any newly acquired or
newly formed Subsidiary) to be an Unrestricted Subsidiary unless such Subsidiary
owns any Capital Stock of, or owns or holds any Lien on any property of, the
Company or any other Subsidiary of the Company that is not a Subsidiary of the
Subsidiary to be so designated; provided that (x) the Company certifies to the
Trustee that such designation complies with the "Limitation on Restricted
Payments" covenant and (y) each Subsidiary to be so designated and each of its
Subsidiaries has not at the time of designation, and does not thereafter,
create, incur, issue, assume, guarantee or otherwise become directly or
indirectly liable with respect to any Indebtedness pursuant to which the lender
has recourse to any of the assets of the Company or any of its Restricted
Subsidiaries. The Board of Directors may designate any Unrestricted Subsidiary
to be a Restricted Subsidiary only if (x) immediately after giving effect to
such designation, the Company is able to incur at least $1.00 of additional
Indebtedness (other than Permitted Indebtedness) in compliance with the
"Limitation on Incurrence of Additional Indebtedness" covenant and (y)
immediately before and immediately after giving effect to such designation, no
Default or Event of Default shall have occurred and be continuing. Any such
designation by the Board of Directors shall be evidenced to the Trustee by
promptly filing with the Trustee a copy of the Board Resolution giving effect to
such designation and an officers' certificate certifying that such designation
complied with the foregoing provisions.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the then outstanding
aggregate principal amount of such Indebtedness into (b) the sum of the total of
the products obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required payment of
principal, including payment at final maturity, in respect thereof, by (ii) the
number of years (calculated to the nearest one-twelfth) which will elapse
between such date and the making of such payment.
"Wholly Owned Restricted Subsidiary" of any Person means any Restricted
Subsidiary of such Person of which all the outstanding voting securities (other
than in the case of a foreign Restricted Subsidiary, directors' qualifying
shares or an immaterial amount of shares required to be owned by other Persons
pursuant to applicable law) are owned by such Person or any Wholly Owned
Restricted Subsidiary of such Person.
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DESCRIPTION OF THE OLD NOTES
The form and terms of the Old Notes are identical in all material respects
to the forms and terms of the New Notes, except that (i) the Old Notes have not
been registered under the Securities Act, are subject to certain restrictions on
transfer and are entitled to certain rights under the Registration Rights
Agreement (which rights will terminate upon consummation of the Exchange Offer,
except under limited circumstances) and (ii) the Old Notes will not provide for
any increase in the interest rate thereon. The Old Notes provide that, in the
event that if a registration statement relating to the Exchange Offer has not
been filed on or by February 4, 1999 and declared effective by April 5, 1999,
then interest will accrue (in addition to the stated interest rate on the Old
Notes) at the rate of 0.50% per annum on the principal amount of the Notes for
the period from the occurrence of such event until such time as the Exchange
Offer is consummated or any required Shelf Registration Statement is effective.
The New Notes are not, and upon consummation of the Exchange Offer the Old Notes
will not be, entitled to any such additional interest. Accordingly, holders of
Old Notes should review the information set forth under "Risk Factors -- Certain
Consequences of a Failure to Exchange Old Notes" and "Description of the New
Notes."
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OLD NOTES REGISTRATION RIGHTS AGREEMENT
The summary set forth below of certain provisions of the Registration
Rights Agreement does not purport to be complete and is qualified in its
entirety by reference to all the provisions of the Registration Rights
Agreement, which is filed as an exhibit to the Registration Statement of which
this Prospectus is a part.
The Issuers and the Initial Purchaser entered into a registration rights
agreement (the "Registration Rights Agreement") on July 2, 1998 pursuant to
which the Issuers agreed, for the benefit of holders of the Old Notes, that they
would, at their expense, use their reasonable best efforts to (i) within 210
days after the Issue Date, file a registration statement on an appropriate
registration form (the "Registration Statement") with the SEC with respect to
the Exchange Offer to exchange the Old Notes for the New Notes and (ii) cause
the Registration Statement to be declared effective under the Securities Act
within 270 days after the Issue Date. Upon the Registration Statement being
declared effective, the Issuers will offer to all holders of the Old Notes an
opportunity to exchange their securities for a like principal amount of the New
Notes. The Issuers will keep the Exchange Offer open for acceptance for not less
than 20 business days (or longer if required by applicable law) after the date
on which notice of the Exchange Offer is mailed to the holders. For each Old
Note surrendered for exchange pursuant to the Exchange Offer, the holder of such
Old Note will receive a New Note having a principal amount equal to that of the
surrendered Old Note. Interest on each New Note will accrue (A) from the later
of (i) the last interest payment date on which interest was paid on the Old Note
surrendered in exchange therefor or (ii) if the Old Note is surrendered for
exchange on a date in a period which includes the record date for an interest
payment date to occur on or after the date of such exchange and as to which
interest will be paid, the date of such interest payment date or (B) if no
interest has been paid on such Old Note, from the Issue Date.
Under existing interpretations of the SEC contained in several no-action
letters to third parties, the New Notes will be freely transferable by holders
thereof (other than affiliates of the Issuers) after the Exchange Offer without
further registration under the Securities Act; provided, however, that each
holder that wishes to exchange its Old Notes for New Notes will be required to
represent (i) that any New Notes to be received by it will be acquired in the
ordinary course of its business; (ii) that at the time of the commencement of
the Exchange Offer, it has no arrangement or understanding with any person to
participate in the distribution (within the meaning of Securities Act) of the
New Notes in violation of the Securities Act; (iii) that it is not an
"affiliate" (as defined in Rule 405 promulgated under the Securities Act) of the
Issuers; (iv) if such holder is not a broker-dealer, that it is not engaged in,
and does not intend to engage in, the distribution of New Notes; and (v) if such
holder is a broker-dealer (a "Participating Broker-Dealer") that will receive
New Notes for its own account in exchange for Old Notes that were acquired as a
result of market-making or other trading activities, that it will deliver a
prospectus in connection with any resale of such New Notes. The SEC has taken
the position that Participating Broker-Dealers may fulfill their prospectus
delivery requirements with respect to the New Notes (other than a resale of an
unsold allotment from the original sale of the Old Notes) with the prospectus
contained in the Registration Statement. The Issuers will agree to make
available, for a period of 180 days after the consummation of the Exchange
Offer, a prospectus meeting the requirements of the Securities Act for use by
Participating Broker-Dealers and other persons, if any, with similar prospectus
delivery requirements for use in connection with any resale of New Notes.
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If, (i) because of any change in law or in currently prevailing
interpretations of the staff of the SEC, the Issuers are not permitted to effect
an Exchange Offer; (ii) the Exchange Offer is not consummated within 300 days of
the Issue Date; or (iii) in the case of any holder that participates in the
Exchange Offer, such holder does not receive New Notes on the date of the
exchange that may be sold without restriction under state and federal securities
laws (other than due solely to the status of such holder as an affiliate of the
Issuers within the meaning of the Securities Act), then in each case, the
Issuers will (x) promptly deliver to the holders and the applicable Trustee
written notice thereof and (y) at their sole expense, (a) as promptly as
practicable, file a shelf registration statement covering resales of the Old
Notes (the "Shelf Registration Statement"); (b) use their reasonable best
efforts to cause the Shelf Registration Statement to be declared effective under
the Securities Act; and (c) use their reasonable best efforts to keep effective
the Shelf Registration Statement until the earlier of two years after the Issue
Date or such time as all of the applicable Old Notes have been sold thereunder.
The Issuers will, in the event that a Shelf Registration Statement is filed,
provide to each holder copies of the prospectus that is a part of the Shelf
Registration Statement, notify each such holder when the Shelf Registration
Statement for the Old Notes has become effective and take certain other actions
as are required to permit unrestricted resales of the Old Notes. A holder that
sells Old Notes pursuant to the Shelf Registration Statement will be required to
be named as a selling securityholder in the related prospectus and to deliver a
prospectus to purchasers, will be subject to certain of the civil liability
provisions under the Securities Act in connection with such sales and will be
bound by the provisions of the Registration Rights Agreement that are applicable
to such holder (including certain indemnification rights and obligations).
If the Issuers fail to comply with the above provisions or if the
Registration Statement or the Shelf Registration Statement fails to become
effective, then, as liquidated damages, additional interest (the "Additional
Interest") shall become payable in respect of the Old Notes as follows:
(i) if (A) the Registration Statement is not filed with the SEC within 210
days following the Issue Date or (B) notwithstanding that the Issuers have
consummated or will consummate an Exchange Offer, the Issuers are required to
file a Shelf Registration Statement and such Shelf Registration Statement is not
filed on or prior to the 60th day following the date on which the obligation to
file such Shelf Registration Statement arises, then commencing on the day after
either such required filing date, Additional Interest shall accrue on the
principal amount of the Old Notes at a rate of .50% per annum for the first 90
days immediately following each such filing date, such Additional Interest rate
increasing by an additional .50% per annum at the beginning of each subsequent
90-day period; or
(ii) if (A) the Registration Statement is not declared effective by the SEC
within 270 days following the Issue Date or (B) notwithstanding that the Issuers
have consummated or will consummate an Exchange Offer, the Issuers are required
to file a Shelf Registration Statement and such Shelf Registration Statement is
not declared effective by the SEC on or prior to the 270th day following the
date on which the obligation to file such Shelf Registration Statement arises,
then, commencing on the day after either such required effective date,
Additional Interest shall accrue on the principal amount of the Old Notes at a
rate of .50% per annum for the first 90 days immediately following such date,
such Additional Interest rate increasing by an additional .50% per annum at the
beginning of each subsequent 90-day period; or
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(iii) if (A) the Issuers have not exchanged New Notes for all Old Notes
validly tendered in accordance with the terms of the Exchange Offer on or prior
to the later of the 45th day after the date on which the Registration Statement
was declared effective or the 300th day after the Issue Date or (B) if
applicable, the Shelf Registration Statement has been declared effective and
such Shelf Registration Statement ceases to be effective at any time prior to
the second anniversary of the Issue Date (other than after such time as all Old
Notes have been disposed of thereunder), then Additional Interest shall accrue
on the principal amount of the Old Notes at a rate of .50% per annum for the
first 90 days commencing on (x) the 46th or 301st, as the case may be, day after
such effective date, in the case of (A) above, or (y) the day such Shelf
Registration Statement ceases to be effective in the case of (B) above, such
Additional Interest rate increasing by an additional .50% per annum at the
beginning of each subsequent 90-day period;
provided, however, that the Additional Interest rate on the Old Notes may not
exceed in the aggregate 1.00% per annum; provided, further, however, that (1)
upon the filing of the Registration Statement or a Shelf Registration Statement
(in the case of clause (i) above); (2) upon the effectiveness of the
Registration Statement or a Shelf Registration Statement (in the case of clause
(ii) above); or (3) upon the exchange of New Notes for all Old Notes tendered
(in the case of clause (iii) (A) above), or upon the effectiveness of the Shelf
Registration Statement which had ceased to remain effective (in the case of
clause (iii) (B) above), Additional Interest on the Old Notes as a result of
such clause (or the relevant subclause thereof), as the case may be, shall cease
to accrue.
Any amounts of Additional Interest due pursuant to clause (i), (ii) or
(iii) above will be payable in cash on the same original interest payment dates
as provided in the terms of the Old Notes.
BOOK-ENTRY; DELIVERY AND FORM
The certificates representing the Notes will be issued in fully registered
form without interest coupons.
Except as set forth below, the New Notes will be represented by one or more
permanent global Notes in fully registered form without interest coupons (each a
"Global Note") and will be deposited with the Trustee as custodian for DTC and
registered in the name of a nominee of such depositary.
THE GLOBAL NOTES
The Issuers expect that pursuant to procedures established by DTC (i) upon
the issuance of the Global Notes, DTC or its custodian will credit, on its
internal system, the principal amount at maturity of the individual beneficial
interests represented by such Global Notes to the respective accounts of persons
who have accounts with such depositary and (ii) ownership of beneficial
interests in the Global Notes will be shown on, and the transfer of such
ownership will be effected only through, records maintained by DTC or its
nominee (with respect to interests of participants) and the records of
participants (with respect to interests of persons other than participants).
So long as DTC, or its nominee, is the registered owner or holder of the
Notes, DTC or such nominee, as the case may be, will be considered the sole
owner or holder of the Notes represented by such Global Notes for all purposes
under the Indenture. No beneficial owner of an interest in the Global Notes will
be able to transfer that interest
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except in accordance with DTC's procedures, in addition to those provided for
under the Indenture.
Payments of the principal of, premium (if any), and interest on, the Global
Notes will be made to DTC or its nominee, as the case may be, as the registered
owner thereof. None of the Issuers, the Trustee or any paying agent will have
any responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the Global Notes
or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
The Issuers expect that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, or interest on the Global Notes, will credit
participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount at maturity of the
Global Notes as shown on the records of DTC or its nominee. The Issuers also
expect that payments by participants to owners of beneficial interests in the
Global Notes held through such participants will be governed by standing
instructions and customary practice, as is now the case with securities held for
the accounts of customers registered in the names of nominees for such
customers. Such payments will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
through DTC's same-day funds system in accordance with DTC rules and will be
settled in same day funds. If a holder requires physical delivery of a
Certificated Security for any reason, including to sell Notes to persons in
states that require physical delivery of the Notes, or to pledge such
securities, such holder must transfer its interest in the Global Notes, in
accordance with the normal procedures of DTC and with the procedures set forth
in the applicable Indenture.
DTC has advised the Issuers that it will take any action permitted to be
taken by a holder of Notes (including the presentation of Notes for exchange as
described below) only at the direction of one or more participants to whose
accounts the DTC interests in the Global Notes are credited and only in respect
of such portion of the aggregate principal amount at maturity of Notes as to
which such participant or participants has or have given such direction.
However, if there is an Event of Default under the Indenture, DTC will exchange
the Global Notes for Certificated Securities, which it will distribute to its
participants.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Notes among participants of DTC, it is
under no obligation to perform such procedures and such procedures may be
discontinued at any time. Neither the Issuers nor the Trustee for the Notes will
have any responsibility for the performance by DTC or its participants or
indirect participants of their respective obligations under the rules and
procedures governing their operations.
CERTIFICATED SECURITIES
Certificated Securities shall be issued in exchange for beneficial
interests in the Global Notes (i) if requested by a holder of such interests or
(ii) if DTC is at any time unwilling or unable to continue as a depositary for
the Global Notes and a successor depositary is not appointed by the Issuers
within 90 days.
101
105
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
King & Spalding, counsel to the Company, has advised the Company that the
following discussion expresses its opinion as to certain United States federal
income tax consequences of the exchange, holding and disposition of the New
Notes. This discussion is based on the Internal Revenue Code, Treasury
Regulations (including proposed regulations) promulgated thereunder,
administrative pronouncements and judicial decisions each as now in effect, all
of which are subject to change, possibly with retroactive effect. This
discussion does not purport to deal with all aspects of United States federal
income taxation that may be relevant to holders of New Notes in light of such
holders' personal circumstances. This summary deals only with United States
persons that will acquire New Notes pursuant to the terms of the Exchange Offer
and will hold New Notes as capital assets and does not address tax
considerations applicable to investors that may be subject to special tax rules,
such as financial institutions, S corporations, tax-exempt organizations,
insurance companies, dealers in securities or currencies, persons other than
United States persons or persons that will hold New Notes as a position in a
"straddle," as part of a hedging transaction for tax purposes, as part of a
"synthetic debt instrument" or other integrated investment (including a
"conversion transaction") or holders that have a "functional currency" other
than the United States dollar. No ruling on any of the issues discussed below
will be sought from the United States Internal Revenue Services (the "IRS").
EXCHANGE OF NEW NOTES
The exchange of Old Notes for the New Notes pursuant to the Exchange Offer
will not be treated as an "exchange" for federal income tax purposes, because
the New Notes do not differ materially in kind or extent from the Old Notes.
Rather, the New Notes received by a holder will be treated as a continuation of
the Old Notes in the hands of such holder. As a result, no gain or loss will be
recognized on the exchange of Old Notes for New Notes pursuant to the Exchange
Offer.
INTEREST ON NEW NOTES
A holder of a New Note generally will be required to report as ordinary
interest income for federal income tax purposes interest earned on the New Note
in accordance with the holder's method of tax accounting.
DISPOSITION OF NEW NOTES
A holder's tax basis for a New Note will be the holder's tax basis for the
Old Note immediately before the exchange. A holder's tax basis for the Old Note
immediately before the exchange generally will equal the cost of the Old Note to
the holder, reduced by any amortized bond premium (as described below) and any
payments other than interest made on the Old Note and increased by any market
discount (as described below) included in the holder's income. Upon the sale,
exchange or retirement of a New Note, a holder generally will recognize gain or
loss equal to the difference between the amount realized on the sale, exchange
or retirement (less the amount attributable to any accrued but unpaid interest
on the New Note, which amount will be taxable as interest if it has not been
included in income under such holder's method of accounting) and the holder's
tax basis in the New Note. Except as discussed below with respect to gain
attributable to market discount, gain or loss will be long-term capital gain or
loss if, on the date of the sale, a holder has a holding period for the New Note
(which would include the holding
102
106
period of the Old Note) of more than one year. Otherwise, except as discussed
below with respect to gain attributable to market discount, the gain or loss
will be short-term capital gain or loss.
AMORTIZABLE BOND PREMIUM AND MARKET DISCOUNT
A Note acquired with an adjusted basis (for purposes of determining loss on
a sale or exchange) in excess of the outstanding principal amount of the Note at
the time of acquisition will be considered to have amortizable bond premium. A
holder of a Note acquired with such premium generally may elect to amortize such
premium as an offset to interest income, using a constant yield method, over the
remaining term of the Note. Corresponding adjustments are made to such holder's
basis in the Note. This election would apply to all taxable debt instruments
held by such holder at the beginning of the taxable year in which the election
applies and to all taxable debt instruments thereafter acquired.
A Note acquired with an adjusted basis that is less than its outstanding
principal amount at the time of acquisition by more than a de minimis amount
will be considered to have "market discount" in the hands of the acquiring
holder. Under the de minimis exception, there is no market discount if the
excess of the outstanding principal amount of the Note over the holder's tax
basis in the Note is less than .25% of the principal amount multiplied by the
number of complete years after the acquisition date to the maturity date of the
Note. Market discount generally accrues ratably during the period immediately
after the date of acquisition up to (and including) the maturity date of the
Note, unless the holder elects to accrue such discount on the basis of the
constant interest method.
The holder of a Note acquired at a market discount will be required to
treat all or a portion of the gain, if any, realized upon the sale or other
disposition of the Note as ordinary income to the extent of accrued market
discount. If a holder's interest expense deductions for a taxable year
attributable to indebtedness treated as incurred or continued to purchase or
carry a Note acquired at a market discount exceed interest and market discount
included in income with respect to the Note for such taxable year, a holder may
be required to defer all or a portion of such excess. The rules described above
with respect to the recharacterization of gain realized on a disposition of a
Note and deferral of interest expense will not apply if the holder elects to
include market discount in income currently as it accrues. Such election, if
made, applies with respect to all market discount bonds acquired by the holder
on or after the first day of the first taxable year to which the election
applies and is irrevocable without the consent of the IRS.
Holders who were subject to the bond premium and market discount provisions
discussed above with respect to the Old Notes will continue to be subject to
those provisions with respect to the New Notes received in exchange for Old
Notes under the Exchange Offer. Holders should consult their own tax advisors
regarding the specific application of those provisions to the Notes acquired at
a premium or at a discount.
BACKUP WITHHOLDING AND INFORMATION REPORTING
A 31% "backup" withholding and information reporting requirements apply to
certain holders with respect to certain payments of principal, interest and
premium on a debt instrument and proceeds from the sale, redemption, or
retirement of a debt instrument. A holder of a New Note may be subject to backup
withholding at the rate of 31% with respect to interest paid on the New Note and
proceeds from the sale, exchange, redemption or retirement of the New Note,
unless such holder (a) is a corporation or
103
107
comes within certain other exempt categories and , when required, demonstrates
that fact or (b) provides a correct taxpayer identification number, certifies as
to exemption from backup withholding and otherwise complies with applicable
requirements of the backup withholding rules. A holder of a New Note who does
not provide the Issuers with his correct taxpayer identification number may be
subject to penalties imposed by the IRS. Any amount paid as backup withholding
will be creditable against the holder's federal income tax liability provided
that the required information is furnished to the IRS.
EACH HOLDER SHOULD BE AWARE THAT THE FOREGOING DISCUSSION DOES NOT ADDRESS
ALL ASPECTS OF UNITED STATES FEDERAL INCOME TAXATION THAT MAY BE RELEVANT TO A
PARTICULAR HOLDER IN LIGHT OF SUCH HOLDER'S PARTICULAR CIRCUMSTANCES. EACH
HOLDER SHOULD CONSULT SUCH HOLDER'S OWN TAX ADVISOR AS TO THE SPECIFIC FEDERAL,
STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF THE OWNERSHIP AND
DISPOSITION OF THE NEW NOTES.
PLAN OF DISTRIBUTION
Each broker-deal that receives New Notes for its own account in connection
with the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by Participating
Broker-Dealers during the period referred to below in connection with resales of
New Notes received in exchange for Old Notes if such Old Notes were acquired by
such Participating Broker-Dealers for their own accounts as a result of
market-making activities or other trading activities. The Issuers have agreed
that this Prospectus, as it may be amended or supplemented from time to time,
may be used by a Participating Broker-Dealer in connection with resales of such
New Notes for a period ending 90 days (subject to extension under certain
limited circumstances described herein) after the Expiration Date or, if
earlier, when all such New Notes have been disposed of by such Participating
Broker-Dealer. However, a Participating Broker-Dealer who intends to use this
Prospectus in connection with the resale of New Notes received in exchange for
Old Notes pursuant to the Exchange Offer must notify the Issuers, or cause the
Issuers to be notified, on or prior to the Expiration Date, that it is a
Participating Broker-Dealer. Such notice may be given in the space provided for
that purpose in the Letter of Transmittal or may be delivered to the Exchange
Agent at one of the addresses set forth herein under "The Exchange
Offer -- Exchange Agent." See "The Exchange Offer -- Resales of New Notes."
The Company will not receive any cash or other proceeds from the issuance
of the New Notes offered hereby. New Notes received by broker-dealers for their
own accounts in connection with 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 at 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 in connection with 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
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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.
EXPERTS
The financial statements of Generac Portable Products, Inc. as of July 9,
1998 and December 31, 1998 and for the period July 10, 1998 through 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.
The financial statements of the Portable Products Division, a Business Unit
of Generac Corporation, as of and for each of the two years in the period ended
December 31, 1997 and for the period January 1, 1998 through July 9, 1998
included in this Prospectus and the related financial statement schedule
included elsewhere in the Registration Statement have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their reports appearing herein
and elsewhere in the registration statement and have been so included in
reliance upon the reports of such firm given upon their authority as experts in
accounting and auditing.
VALIDITY OF NOTES
Certain matters of Delaware law relating to the validity of the New Notes
and certain matters relating to United States federal income tax considerations
will be passed upon for the Issuers by King & Spalding, New York, New York.
105
109
INDEX TO FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS OF GENERAC PORTABLE
PRODUCTS, INC. PAGE
----
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets as of December 31, 1998 and July
9, 1998................................................... F-3
Consolidated Statement of Income for the period July 10,
1998 through December 31, 1998............................ F-4
Consolidated Statement of Changes in Stockholders' Equity
for the period July 10, 1998 through December 31, 1998.... F-5
Consolidated Statement of Cash Flows for the period July 10,
1998 through December 31, 1998............................ F-6
Notes to Consolidated Financial Statements.................. F-7
FINANCIAL STATEMENTS OF THE PORTABLE PRODUCTS DIVISION,
A BUSINESS UNIT OF GENERAC CORPORATION PAGE
----
Report of Independent Auditors.............................. F-19
Balance Sheets as of July 9, 1998, December 31, 1997 and
1996...................................................... F-20
Statements of Income for the Six Months and Nine Days Ended
July 9, 1998 and the Years Ended December 31, 1997 and
1996...................................................... F-21
Statements of Cash Flows for the Six Months and Nine Days
Ended July 9, 1998 and the Years Ended December 31, 1997
and 1996.................................................. F-22
Notes to Financial Statements............................... F-23
F-1
110
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Generac Portable Products, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, of changes in stockholders' equity
and of cash flows present fairly, in all material respects, the financial
position of Generac Portable Products, Inc. and its subsidiaries at December 31,
1998 and July 9, 1998, and the results of their operations and their cash flows
for the period July 10, 1998 through December 31, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
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 audit provides a
reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Milwaukee, Wisconsin
February 22, 1999
F-2
111
GENERAC PORTABLE PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, JULY 9,
1998 1998
------------ --------
($ IN 000'S)
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 1,528 $ 599
Accounts receivable (less allowances of $242 and $225,
respectively).......................................... 44,695 51,028
Inventories............................................... 46,651 42,663
Deferred income taxes..................................... 139 --
Prepaid expenses and other current assets................. 898 429
-------- --------
Total current assets................................... 93,911 94,719
Property, plant and equipment, net.......................... 19,437 16,633
Intangible assets, net...................................... 211,407 213,938
Deferred financing costs.................................... 6,985 7,309
Other....................................................... 262 --
-------- --------
Total assets........................................... $332,002 $332,599
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt......................... $ 7,922 $ 3,372
Trade accounts payable.................................... 12,839 14,904
Accrued employee compensation, benefits and payroll
withholdings........................................... 1,185 1,063
Other accrued liabilities................................. 14,424 8,070
-------- --------
Total current liabilities.............................. 36,370 27,409
Long-term debt obligations.................................. 189,861 205,853
Other long-term obligations................................. 999 995
Deferred income taxes....................................... 1,505 --
Commitments and contingencies (Note 13)
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 12,000 shares authorized;
8,500 shares issued and outstanding.................... 1 1
Additional paid-in capital................................ 109,999 109,999
Retained earnings......................................... 4,202 --
Accumulated other comprehensive income.................... 723 --
Excess of purchase price over book value of net assets
acquired from entities partially under common
control................................................ (11,658) (11,658)
-------- --------
Total stockholders' equity............................. 103,267 98,342
-------- --------
Total liabilities and stockholders' equity............. $332,002 $332,599
======== ========
The accompanying notes are an integral part of these financial statements.
F-3
112
GENERAC PORTABLE PRODUCTS, INC.
CONSOLIDATED STATEMENT OF INCOME
FOR THE PERIOD
JULY 10, 1998
THROUGH
DECEMBER 31,
1998
--------------
($ IN 000'S)
Net sales................................................... $136,862
Cost of sales............................................... 98,245
--------
Gross profit........................................... 38,617
Operating expenses:
Selling and service....................................... 16,935
General and administrative................................ 2,865
Intangible asset amortization............................. 2,531
--------
Income from operations................................. 16,286
Other expense (income):
Interest expense.......................................... 9,674
Deferred financing cost amortization...................... 401
Other income, net......................................... (171)
--------
Income before income taxes............................. 6,382
Provision for income taxes.................................. 2,180
--------
Net income............................................. $ 4,202
========
The accompanying notes are an integral part of these financial statements.
F-4
113
GENERAC PORTABLE PRODUCTS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD JULY 10, 1998 THROUGH DECEMBER 31, 1998
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
--------------- PAID-IN RETAINED COMPREHENSIVE
SHARES AMOUNT CAPITAL EARNINGS INCOME OTHER(A) TOTAL
------ ------ ---------- -------- ------------- -------- --------
($ IN 000'S)
Balance at July 9,
1998............... 8,500 $1 $109,999 $ -- $ -- $(11,658) $ 98,342
Comprehensive income:
Net income......... -- -- -- 4,202 -- -- 4,202
Translation
adjustments..... -- -- -- -- 723 -- 723
----- -- -------- ------ ---- -------- --------
Total comprehensive
income............. -- -- -- 4,202 723 -- 4,925
----- -- -------- ------ ---- -------- --------
Balance at December
31,
1998............... 8,500 $1 $109,999 $4,202 $723 $(11,658) $103,267
===== == ======== ====== ==== ======== ========
- -------------------------
(A) Amount represents the excess of the purchase price paid in connection with
the Acquisition over the book value of net assets acquired not recognized as
a result of certain continuing shareholder interests.
The accompanying notes are an integral part of these financial statements.
F-5
114
GENERAC PORTABLE PRODUCTS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD
JULY 10, 1998
THROUGH
DECEMBER 31,
1998
--------------
($ IN 000'S)
Operating activities:
Net income................................................ $ 4,202
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation........................................... 1,022
Amortization........................................... 2,932
Deferred income taxes.................................. 1,366
Increase (decrease) in cash due to changes in:
Accounts receivable.................................. 6,696
Inventories.......................................... (3,627)
Other assets......................................... (726)
Trade accounts payable............................... (2,106)
Accrued liabilities.................................. 6,454
--------
Net cash provided by operating activities............ 16,213
--------
Investing activities:
Capital expenditures...................................... (3,814)
Proceeds from sale of property, plant and equipment....... 34
--------
Net cash used for investing activities................. (3,780)
--------
Financing activities:
Net payments under revolving loan facility................ (11,008)
Payments on other long-term debt obligations.............. (434)
Payment of deferred financing costs....................... (77)
--------
Net cash used for financing activities................. (11,519)
--------
Effect of exchange rate changes on cash..................... 15
--------
Net increase in cash and cash equivalents................... 929
Cash and cash equivalents:
Beginning of period....................................... 599
--------
End of period............................................. $ 1,528
========
Supplemental cash flow information:
Cash paid for interest.................................... $ 2,260
========
The accompanying notes are an integral part of these financial statements.
F-6
115
GENERAC PORTABLE PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS UNLESS INDICATED)
1. FORMATION OF THE COMPANY AND NATURE OF BUSINESS
Generac Portable Products, Inc. (the "Company"), a Delaware corporation,
was formed on April 29, 1998 by an investor group organized by The Beacon Group
III -- Focus Value Fund L.P. ("Beacon") for the purpose of acquiring, through
its indirect wholly-owned limited liability company, Generac Portable Products,
L.L.C., net assets of the Portable Products Division of Generac Corporation. The
primary business activity of the Company consists of its indirect ownership of
100% of the limited liability company interests in Generac Portable Products,
L.L.C., a Delaware limited liability company (the "Operating Company"), through
two wholly-owned subsidiaries: GPPW, Inc. a Wisconsin corporation ("GPPW"), and
GPPD, Inc. a Delaware corporation ("GPPD"). GPPW and GPPD hold, respectively, 5%
and 95% limited liability company interests in the Operating Company. The
Company had no operations during the period April 29, 1998 through July 8, 1998;
its only business activity involved the issuance of $110 million of common stock
to finance a portion of the purchase price discussed below.
On July 9, 1998, the Company caused the Operating Company to purchase
substantially all of the assets, and assume certain of the liabilities, of the
Portable Products Division (the "Predecessor") of Generac Corporation (the
"Acquisition"). The aggregate consideration paid for the net assets of the
Predecessor was approximately $330 million, which includes cash acquired of $.6
million, direct acquisition costs of $1.4 million and assumed liabilities of
$23.9 million. The purchase price paid for the Predecessor was subject to a
post-closing adjustment based on net working capital at July 9, 1998, as
defined. The Company has recorded a receivable of $1.0 million at December 31,
1998 relating to this adjustment.
The Acquisition has been accounted for using the purchase method of
accounting and accordingly, the purchase price has been allocated to
identifiable assets acquired and liabilities assumed based upon their estimated
fair values, subject to certain limitations (see Note 2), with the excess
purchase price recorded as goodwill. Goodwill of approximately $214 million has
been recorded as a result of the Acquisition.
The following table sets forth the pro forma information for the Company as
if the Acquisition had occurred on January 1, 1998. This information is
unaudited and does not purport to represent actual sales or net income had the
Acquisition actually occurred on January 1, 1998.
PRO FORMA INFORMATION
(UNAUDITED) FOR THE YEAR
ENDED DECEMBER 31, 1998
------------------------
Net sales................................ $276,413
Net income............................... 5,835
In addition to the issuance of common stock by the Company, the purchase
price was financed through the issuance of senior subordinated notes of $110
million and borrowings of $96.6 million under a $115 million bank credit
facility (see Note 7).
The Company, with domestic operations located in Jefferson, Wisconsin and
branch operations in the United Kingdom and Germany, is a leader in the design,
manufacture
F-7
116
GENERAC PORTABLE PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and sale of portable generators and pressure washers for use in both industrial
and residential applications.
2. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES: The Company prepares its financial statements in
conformity with generally accepted accounting principles, which require
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosures of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
PRINCIPLES OF CONSOLIDATION: The Company's consolidated financial
statements include the accounts of its wholly-owned subsidiaries. All
significant intercompany transactions and balances have been eliminated.
BASIS OF ACCOUNTING: Pursuant to the Financial Accounting Standards
Board's Emerging Issues Task Force Issue No. 88-16, "Basis in Leveraged Buyout
Transactions," the Company has limited its accounting basis resulting from the
Acquisition as a result of certain shareholders which also owned an interest in
the Predecessor. Such limitation was based upon the lesser of each continuing
shareholder's interest in the Company or the Predecessor, and the Predecessor's
historical book value at July 9, 1998. The difference between the continuing
shareholders' basis in the Predecessor and their proportionate equity in the
book value of the Predecessor was not material. The difference between the total
consideration paid in connection with the Acquisition and the accounting basis
recognized is reported as a separate component of stockholders' equity.
CASH AND CASH EQUIVALENTS: The Company considers all investments with a
maturity of three months or less at the date of purchase to be cash equivalents.
INVENTORIES: Inventories are stated at the lower of cost (first-in,
first-out method) or market (replacement cost or estimated net realizable
value).
RESEARCH AND DEVELOPMENT COSTS: The Company has an ongoing program of new
product development and existing product enhancement through redesign of
existing products and the addition of new models. Costs related to these
programs are expensed as incurred and totaled $1,011 for the period ended
December 31, 1998. Costs related to manufacturing start-up activities for new
products are included in cost of sales as incurred.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment is recorded
at cost and includes equipment under leases which have been capitalized.
Maintenance and repair costs are charged to expense as incurred. Gains and
losses on disposition of property, plant and equipment are reflected in income.
Depreciation of property, plant and equipment are
F-8
117
GENERAC PORTABLE PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
recorded using principally the straight-line method for financial reporting
purposes over the estimated useful lives of the assets or terms of related
leases as follows:
YEARS
-----
Land improvements..................................... 20
Buildings............................................. 40
Machinery and equipment............................... 7-10
Dies and tools........................................ 3-5
Office equipment...................................... 5-10
Vehicles.............................................. 3-4
INTANGIBLE ASSETS: Goodwill, representing the recognized portion of the
cost of the Acquisition in excess of the fair values assigned to identifiable
net assets acquired, is being amortized on a straight-line basis over 40 years.
The non-compete agreement and patents and trademarks are being amortized on a
straight-line basis over 10 years. The Company assesses the carrying value of
goodwill and other intangibles at each balance sheet date. Consistent with
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of", such assessments include, as appropriate, a comparison of (a) the estimated
future nondiscounted cash flows anticipated to be generated during the remaining
amortization period to (b) the net carrying value of the asset. The Company
recognizes diminution in value, if any, on a current basis. Impairment
assessments of goodwill made in accordance with SFAS No. 121 are made in
connection with an analysis of related long-lived assets acquired in the
Acquisition.
DEFERRED FINANCING COSTS: Expenses associated with the issuance of debt
instruments are capitalized and are being amortized over the terms of the
respective financing arrangement using the effective interest rate and
straight-line methods over periods ranging from 5 to 8 years.
INTEREST RATE SWAPS: To limit the effect of increases in interest rates,
the Company has entered into an interest rate swap arrangement. The differential
between the contract floating and fixed rates is accrued each period and
recorded as an adjustment of interest expense.
PRODUCT WARRANTIES: The Company provides that warranted products are
merchantable and free of defects in workmanship and material generally for a
period of one year. Warranty reserves are provided as charges to operations
under selling and service expense for estimated normal warranty costs and, if
applicable, for any significant problems known to exist on products sold.
Warranty expense totaled $1,989 for the period ended December 31, 1998.
INCOME TAXES: Deferred income tax assets and liabilities are determined
based upon the difference between the financial statement and tax bases of
assets and liabilities, as measured by enacted tax rates which will be in effect
when these differences are expected to reverse. Deferred income tax expense is
the result of changes in the deferred tax assets and liabilities. A valuation
allowance is provided when it is considered more likely than not that some
portion or all of recorded deferred income tax assets will not be realized.
F-9
118
GENERAC PORTABLE PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying amounts reported in the
consolidated balance sheets for cash and cash equivalents, accounts receivable,
accounts payable, and short-term borrowings approximate fair value due to the
short-term maturity of these financial instruments. The amounts reported for
borrowings under the bank credit facility approximate fair value since the
underlying instruments bear interest at a variable rate that reprices
frequently. The fair value of the Company's senior subordinated notes at
December 31, 1998 is estimated based upon the average yield on similar debt
instruments as of such date. The fair value of the interest rate swap
arrangement is the amount at which it could be settled, based on a quote
obtained from the respective financial institution (see Note 7).
REVENUE RECOGNITION: Net sales and costs of sales are recognized as the
related products are shipped. Provisions for estimated sales returns and sales
incentives are recorded in the period in which the sales are recognized.
FOREIGN CURRENCY TRANSLATION: The translation of the assets and
liabilities of the Company's international branch operations into U.S. dollars
is performed for balance sheet accounts using current exchange rates in effect
at the balance sheet date and for revenue and expense accounts using an average
exchange rate during the period. The gains or (losses) resulting from such
translation are reflected as translation adjustments in accumulated other
comprehensive income.
FUTURE ACCOUNTING CHANGES: The Financial Accounting Standards Board has
issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities" which is effective for periods beginning after June 15, 1999. Due to
the Company's current limited use of derivative instruments, the adoption of
this statement is not expected to have a material effect on the Company's
financial condition or results of operations.
3. INVENTORIES
Inventories consist of the following:
DECEMBER 31, JULY 9,
1998 1998
------------ -------
Raw materials and sub-assemblies................ $27,721 $26,423
Finished goods.................................. 18,930 16,240
------- -------
$46,651 $42,663
======= =======
Work-in-process is not a significant separate component of inventories and
is included in the raw materials and sub-assemblies component.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
DECEMBER 31, JULY 9,
1998 1998
------------ -------
Land and land improvements...................... $ 980 $ 972
Buildings....................................... 5,940 5,781
F-10
119
GENERAC PORTABLE PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, JULY 9,
1998 1998
------------ -------
Machinery and equipment......................... 8,056 7,179
Dies and tools.................................. 2,742 2,266
Office equipment................................ 1,357 377
Vehicles........................................ 56 58
------- -------
19,131 16,633
Accumulated depreciation........................ (1,023) --
------- -------
18,108 16,633
Construction in progress........................ 1,329 --
------- -------
$19,437 $16,633
======= =======
5. INTANGIBLE ASSETS
Intangible assets consist of the following:
DECEMBER 31, JULY 9,
1998 1998
------------ --------
Goodwill....................................... $213,738 $213,738
Trademarks and patents......................... 100 100
Noncompete agreement........................... 100 100
-------- --------
213,938 213,938
Accumulated amortization....................... (2,531) --
-------- --------
$211,407 $213,938
======== ========
6. OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
DECEMBER 31, JULY 9,
1998 1998
------------ -------
Sales incentives................................. $ 4,430 $6,236
Product warranty................................. 1,229 1,020
Accrued interest................................. 7,414 --
Other............................................ 1,351 814
------- ------
$14,424 $8,070
======= ======
F-11
120
GENERAC PORTABLE PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. LONG-TERM DEBT OBLIGATIONS
Long-term debt consists of the following:
DECEMBER 31, JULY 9,
1998 1998
------------ --------
Bank credit facility........................... $ 85,400 $ 96,608
Senior subordinated notes...................... 110,000 110,000
Capital lease obligations...................... 2,383 2,617
-------- --------
197,783 209,225
Less: current portion.......................... (7,922) (3,372)
-------- --------
$189,861 $205,853
======== ========
In connection with the Acquisition, the Company entered into a $115 million
bank credit facility (the "Senior Secured Credit Facility"). The Senior Secured
Credit Facility provides for maximum borrowings under two term loans of $45
million ("A Term Loan") and $40 million ("B Term Loan"), respectively, with
balances outstanding at December 31, 1998 of $45 million and $39.8 million,
respectively. The Senior Secured Credit Facility also provides for maximum
borrowings of $30 million, less the amount outstanding under letters of credit,
under revolving loan arrangements due December 31, 2003, with a balance
outstanding at December 31, 1998 of $600. The A Term Loan Facility will mature 5
1/2 years from July 9, 1998. The B Term Loan Facility will mature seven years
from July 9, 1998. The A Term Loan Facility will provide for amortization of
$2.5 million in the first year, $6.25 million in the second year, $7.5 million
in the third year, $10.0 million in the fourth year, $12.5 million in the fifth
year and $6.25 million in the sixth year. The B Term Loan Facility will provide
for nominal annual amortization in the first five years and amortization of $19
million in each of the sixth and seventh years. Additionally, the Company is
also required to make an annual principal payment equal to its excess cash flow,
as defined. The required excess cash flow payment for the period ended December
31, 1998 is approximately $2.1 million and will be applied to reduce the
scheduled repayments under both the A and B Term Loan Facilities described
above, on a pro rata basis. The interest rates under the A Term Loan Facility
and the revolving loan portion of the facility will be based, at the option of
the Operating Company, on either a Eurodollar rate plus 2.25% per annum or a
base rate plus 1.25% per annum, subject to a pricing grid that will provide for
reductions in the applicable interest rate margins based on the Company's
consolidated debt to earnings before interest, income taxes, depreciation and
amortization ("EBITDA") ratio. The interest rate under the B Term Loan Facility
is based, at the option of the Operating Company, on a Eurodollar rate plus
2.75% or a base rate plus 1.75%, subject to a pricing grid that will provide for
reductions in the applicable interest rate margins based on the Company's
consolidated debt to EBITDA ratio. The weighted average interest rate for the
term loans as of December 31, 1998 was 7.84%. Borrowings under the revolving
loans bear interest at the Prime Rate plus 1.25% (9% at December 31, 1998). A
commitment fee of 0.50% per annum will be charged on the unused revolving loan
portion of the Senior Secured Credit Facility, subject to a pricing grid that
will provide for reductions in the applicable commitment fee margin based on the
F-12
121
GENERAC PORTABLE PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company's consolidated debt to EBITDA ratio. Substantially all of the Company's
assets are pledged as collateral under the Senior Secured Credit Facility.
Effective October 15, 1998, the Company entered into an interest rate swap
agreement with a major financial institution to reduce the impact of changes in
interest rates on its floating rate long-term debt. The notional amount of this
agreement was $40 million at December 31, 1998. Interest expense has been
adjusted for the net amount payable under this agreement. The effect of this
agreement on the Company's interest expense for the period ended December 31,
1998 was not significant. The fair value of the interest rate swap agreement was
$903 at December 31, 1998, which is the amount the Company would have paid to
settle the instrument at such date. The Company is exposed to credit loss in the
event of non-performance by the financial institution, however, management does
not anticipate such non-performance.
Also on July 9, 1998, the Company issued $110 million of 11.25% Senior
Subordinated Notes due June 30, 2006, (the "Notes") to BT Alex. Brown,
Incorporated (the "Initial Purchaser"). The Initial Purchaser subsequently
resold the Notes to qualified institutional buyers pursuant to Rule 144A of the
Securities Exchange Act and to a limited number of institutional accredited
investors that agreed to comply with certain transfer restrictions and other
conditions. The estimated fair value of the Notes at December 31, 1998
approximates par.
The Notes are redeemable, at the Company's option, in whole at any time or
in part from time to time, on and after July 1, 2002, upon not less than 30 nor
more than 60 days' notice, at the following redemption prices (expressed as
percentages of the principal amount thereof) if redeemed during the twelve-month
period commencing on July 1 of the year set forth below, plus, in each case,
accrued and unpaid interest thereon, if any, to the date of redemption:
YEAR PERCENTAGE
- ---- ----------
2002........................................ 107.625%
2003........................................ 104.750%
2004........................................ 102.875%
2005 and thereafter......................... 100.000%
At any time, or from time to time, on or prior to July 1, 2001, the Company
may, at its option, use the net cash proceeds of one or more Public Equity
Offerings, as defined, to redeem the Notes at a redemption price equal to
111.25% of the principal amount thereof plus accrued and unpaid interest
thereon, if any, to the date of redemption; provided that at least 65% of the
principal amount of Notes originally issued remains outstanding immediately
after any such redemption.
The Senior Secured Credit Facility and the indenture governing the Notes
contain a number of covenants that, among other things, restrict the ability of
the Company to dispose of assets, repay other indebtedness, incur additional
indebtedness, pay dividends, prepay subordinated indebtedness (including, in the
case of the Senior Secured Credit Facility, the Notes), incur liens, make
capital expenditures and make certain investments or acquisitions, engage in
mergers or consolidations, engage in certain transactions with
F-13
122
GENERAC PORTABLE PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
affiliates and otherwise restrict the activities of the Company. In addition,
under the Senior Secured Credit Facility, the Operating Company will be required
to satisfy specified financial ratios and tests, including a minimum level of
earnings before interest, income taxes, depreciation and amortization.
Capital lease obligations relate to the Company's obligations on leases for
industrial equipment. These obligations are due in monthly installments
including principal and interest at a rate of 8.6% and mature November 30, 2002.
The aggregate scheduled maturities of long-term debt and capital lease
obligations in subsequent years are as follows:
1999......................................... $ 7,922
2000......................................... 8,228
2001......................................... 8,275
2002......................................... 13,358
2003......................................... 22,231
Thereafter................................... 137,769
--------
$197,783
========
8. EMPLOYEE RETIREMENT AND SAVINGS PLANS
In connection with the Acquisition, the Company established noncontributory
defined benefit pension plans (salaried and hourly) covering substantially all
of its employees. The unfunded benefit obligation assumed as of the Acquisition
date totaled $678. Benefits under the salaried plan are based upon years of
service and the participants' defined final average monthly compensation.
Benefits under the hourly plan are based on a unit amount at the date of
termination multiplied by the participants' credited service. The plans provide
for a continuation of participants' years of service as credited with Generac
Corporation. The Company's funding policy is to contribute amounts that equal or
exceed the minimum requirements of the Employee Retirement Income Security Act
of 1974 (ERISA). As of December 31, 1998 and July 9, 1998, no assets have been
contributed to the plans. Net pension expense for the period ended December 31,
1998 is comprised of the following components:
Service cost............................................. $48
Interest cost on projected benefit obligation............ 24
---
$72
===
F-14
123
GENERAC PORTABLE PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes those items comprising the change in the
benefit obligation for the period ended December 31, 1998:
Unfunded benefit obligation assumed as of July 9,
1998.................................................. $678
Service cost............................................ 48
Interest cost........................................... 24
----
Benefit obligation as of December 31, 1998.............. $750
====
The assumptions used in developing the pension information as of December
31, 1998 and July 9, 1998 were as follows:
Discount rate............................................ 7.00%
Return on plan assets.................................... 8.00%
Rate of compensation increase............................ 4.50%
In connection with the Acquisition, the Company established deferred
compensation plans for certain key employees and at December 31, 1998 and July
9, 1998, approximately $340 and $317, respectively, was included in other
long-term obligations related to such plans. Deferred compensation expense
charged to operations was $23 for the period ended December 31, 1998.
In connection with the Acquisition, the Company established a qualified
401(k) profit sharing plan covering substantially all full-time employees. No
contributions were made to the plan for the period ended December 31, 1998.
9. INCOME TAXES
The provision for income taxes for the period ended December 31, 1998
consists of the following:
Current:
Federal.............................................. $ 781
State................................................ 33
------
Total current..................................... 814
Deferred:
Federal and state.................................... 1,366
------
Total provision for income taxes.................. $2,180
======
The following reconciles the U.S. federal statutory income tax rate with
the Company's effective tax rate for the period ended December 31, 1998:
U.S. federal statutory income tax rate................... 34.0%
State income taxes, net of federal benefit............... 1.0
Nondeductible expenses and other......................... (.8)
----
34.2%
====
F-15
124
GENERAC PORTABLE PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes reflected in the balance sheet consist of the
following:
DECEMBER 31,
1998
------------
Deferred tax assets:
Inventories and receivables..................... $ 267
Accrued warranty................................ 76
-------
343
-------
Deferred tax liabilities:
Intangible assets............................... (1,512)
Sales incentives................................ (161)
Other........................................... (36)
-------
(1,709)
-------
Total net deferred tax liability.................. $(1,366)
=======
10. STOCKHOLDERS' EQUITY
In connection with the initial capitalization of the Company, The Beacon
Group III -- Focus Value Fund, L.P. ("Beacon"), management of the Company and
certain other investors purchased an aggregate of $110 million of common stock,
par value of $.01 per share, constituting 100% of the Company's outstanding
common stock. Upon consummation of the Acquisition, Beacon and the other
stockholders of the Company, and the Company, entered into a Stockholders'
Agreement which includes certain transfer restrictions, voting agreements and
registration rights. Employees who own stock of the Company are also subject to
agreements that restrict their right to transfer their stock and, under certain
conditions, require them to sell a pro rata portion of their stock in a
transaction in which Beacon is selling its stock.
Effective July 9, 1998, the Company's board of directors approved the
Generac Portable Products, Inc. Stock Option Plan which provides for the
granting of stock options as an incentive to certain key employees. Under this
Plan, stock options to acquire up to 1,619 shares of common stock, in the
aggregate, may be granted under a time-vesting formula at an exercise price
equal to the fair market value of the common stock at the date of grant. The
options become exercisable in equal increments beginning on the first
anniversary of the grant date over a five-year period and expire ten years
subsequent to the grant date. On July 9, 1998, 1,063 options were granted at an
exercise price of $12,941.00 per share to certain members of management and the
Company's board of directors. The options have a remaining contractual life of
9.5 years. No options were granted or forfeited subsequent to the initial grant.
The fair value of the options at the date of grant was $4,335.00 per option. The
fair value was estimated using the minimum value method in accordance with SFAS
No. 123, "Accounting for Stock-Based Compensation", assuming an expected option
life of 7 years and a risk-free interest rate of 6%.
The Company applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its stock option plan. Accordingly, no
compensation
F-16
125
GENERAC PORTABLE PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
expense has been recognized in the statement of income. If compensation cost had
been determined in accordance with SFAS No. 123, net income would have decreased
approximately $283 during the period ended December 31, 1998.
11. LEASES
The Company leases certain manufacturing equipment, computer equipment and
vehicles under operating leases with lease terms ranging up to 3 years.
Additionally, in connection with the Acquisition, the Company entered into a
capital lease arrangement with Generac Corporation for certain manufacturing
equipment. Property, plant and equipment at December 31, 1998 includes $2,451
for equipment under capital leases, which is net of $165 in accumulated
depreciation. Following is a summary of future minimum payments under
capitalized leases and operating leases that have initial or remaining
non-cancelable lease terms in excess of one year at December 31, 1998:
OPERATING CAPITAL
LEASES LEASES
--------- -------
1999........................................ $348 $ 673
2000........................................ 208 673
2001........................................ 147 673
2002........................................ -- 830
---- ------
$703 2,849
====
Less amount representing interest........... (466)
------
Present value of minimum lease payments..... $2,383
======
Total rent expense recognized by the Company for the period ended December
31, 1998 is $142.
12. SEGMENT INFORMATION
The Company is a leader in the design, manufacture and sale of portable
generators and pressure washers. Engineering, manufacturing, marketing and
administrative resources are generally not product specific and the Company
evaluates operating performance based upon the combined results of these product
lines.
Information regarding the Company's geographic areas is summarized below:
UNITED
STATES EUROPE CONSOLIDATED
-------- ------- ------------
Net sales to unaffiliated
customers.......................... $126,740 $10,122 $136,862
Long-lived assets.................... 235,341 2,574 237,915
The Company sells primarily to large home center retailers. Three customers
accounted for approximately 74% of net sales for the period ended December 31,
1998. All three customers individually comprise more than 10% of the Company's
net sales. Included
F-17
126
GENERAC PORTABLE PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
in accounts receivable at December 31, 1998 and July 9, 1998 are amounts due
from these three customers aggregating $29,862 and $34,998, respectively.
13. COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS
In the normal course of business the Company is involved in certain legal
actions and claims. It is the opinion of management that such litigation and
claims are either covered by insurance or will be resolved without material
adverse effect on the Company's financial position, results of operations or
cash flows.
In connection with the Acquisition, the Company entered into an OEM engine
supply agreement with Generac Corporation, to supply it with the engine used in
certain of the Company's pressure washers and consumer portable generators. The
engine supply agreement allows for the Company to make minimum purchases of
engines from Generac Corporation in each of the next nine years and gives the
Company the right to increase the amount purchased based upon forecasted
requirements. This agreement is an exclusive arrangement related to such
products subject to the minimum purchase requirements. As the Company maintains
relationships with other major engine suppliers, management believes that the
minimum purchase quantities and unit prices under this agreement will not have
an adverse effect on the Company. Management also considers the provisions of
the engine supply agreement to reflect arms-length terms. For the period ended
December 31, 1998, the Company purchased product approximating $14.4 million
under this agreement. In addition, the Company also purchased other components
from Generac Corporation approximating $6.5 million for the period ended
December 31, 1998. Included in accounts payable are amounts due to Generac
Corporation of approximately $4.7 million at December 31, 1998.
14. SEPARATE FINANCIAL INFORMATION OF CO-ISSUERS AND GUARANTOR
In connection with the Acquisition, the Operating Company and GPPW
co-issued the Notes, and while the Operating Company and GPPW are jointly and
severally liable for the obligations under the Notes, GPPW does not conduct any
operations, or have any assets of any kind other than its investment in the
Operating Company. The Company has provided a full and unconditional guarantee
of the Notes. However, because the Company has no operating activities
independent of the Operating Company, the Company's consolidated financial
statements are essentially the same as those of the Operating Company.
Accordingly, no separate financial information of the Company, or the co-issuers
of the Notes is presented herein as management does not believe such information
would be meaningful to investors.
F-18
127
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Generac Corporation:
We have audited the accompanying balance sheets of the Portable Products
Division, a Business Unit ("Business Unit") of Generac Corporation ("Company"),
as of July 9, 1998, December 31, 1997 and 1996, and the related statements of
income and cash flows for the six months and nine days ended July 9, 1998 and
the years ended December 31, 1997 and 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The accompanying financial statements have been prepared from the separate
records maintained by the Business Unit and may not necessarily be indicative of
the conditions that would have existed or the results of operations if the
Business Unit had been operated as an unaffiliated company. Portions of certain
income and expenses represent allocations made from Generac Corporation of items
applicable to the Company as a whole.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Portable Products Division, a Business
Unit of Generac Corporation, at July 9, 1998, December 31, 1997 and 1996, and
the results of its operations and its cash flows for the six months and nine
days ended July 9, 1998 and the years ended December 31, 1997 and 1996 in
conformity with generally accepted accounting principles.
January 29, 1999
F-19
128
PORTABLE PRODUCTS DIVISION, A BUSINESS UNIT
OF GENERAC CORPORATION
BALANCE SHEETS
DECEMBER 31,
JULY 9, ------------------
1998 1997 1996
-------- ------- -------
($ IN 000'S)
ASSETS
Current Assets:
Cash and cash equivalents..................... $ 599 $ 1,065 $ 1,122
Accounts receivable........................... 48,528 18,766 14,263
Inventories................................... 42,839 33,023 24,707
Prepaid expenses.............................. 429 206 630
-------- ------- -------
Total current assets....................... 92,395 53,060 40,722
Property, Plant and Equipment:
At cost:
Land and land improvements................. 972 943 942
Building................................... 5,781 5,210 5,226
Machinery and equipment.................... 6,708 5,511 5,295
Dies and tools............................. 4,552 4,404 3,375
Vehicles................................... 265 227 215
Office equipment........................... 668 536 449
-------- ------- -------
18,946 16,831 15,502
Less accumulated depreciation................... 5,577 4,591 3,145
-------- ------- -------
13,369 12,240 12,357
-------- ------- -------
Total...................................... $105,764 $65,300 $53,079
======== ======= =======
LIABILITIES AND BUSINESS UNIT INVESTMENT
Current Liabilities:
Trade accounts payable........................ $ 14,904 $ 6,998 $ 6,961
Accrued employee compensation, benefits and
payroll withholdings....................... 1,245 1,020 427
Other accrued liabilities..................... 7,705 4,519 4,055
-------- ------- -------
Total current liabilities.................. 23,854 12,537 11,443
Commitments and contingencies (Notes 9 and 12)
Business Unit Investment........................ 81,910 52,763 41,636
-------- ------- -------
Total...................................... $105,764 $65,300 $53,079
======== ======= =======
See notes to financial statements.
F-20
129
PORTABLE PRODUCTS DIVISION, A BUSINESS UNIT
OF GENERAC CORPORATION
STATEMENTS OF INCOME
FOR THE YEAR ENDED
FOR THE SIX MONTHS DECEMBER 31,
AND NINE DAYS ENDED --------------------
JULY 9, 1998 1997 1996
------------------- -------- --------
($ IN 000'S)
Net sales............................ $139,551 $178,014 $122,550
Cost of sales........................ 104,537 131,095 95,246
-------- -------- --------
Gross profit.................... 35,014 46,919 27,304
-------- -------- --------
Expenses
Selling and service................ 16,624 21,729 13,860
General and administrative......... 2,380 4,161 4,435
-------- -------- --------
Total expenses.................. 19,004 25,890 18,295
-------- -------- --------
Income from operations............... 16,010 21,029 9,009
Other expenses
Interest expense................... 1,409 2,100 2,237
Foreign currency................... 108 186 15
-------- -------- --------
Total other expense............. 1,517 2,286 2,252
-------- -------- --------
Net income........................... $ 14,493 $ 18,743 $ 6,757
======== ======== ========
See notes to financial statements.
F-21
130
PORTABLE PRODUCTS DIVISION, A BUSINESS UNIT
OF GENERAC CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED
FOR THE SIX MONTHS DECEMBER 31,
AND NINE DAYS ENDED -------------------
JULY 9, 1998 1997 1996
------------------- ------- --------
($ IN 000'S)
Operating activities:
Net income.......................... $ 14,493 $18,743 $ 6,757
Adjustments to reconcile net income
to net cash (used in) provided by
operating activities:
Depreciation........................ 796 1,466 1,498
(Increase) decrease in assets:
Accounts receivable.............. (29,943) (4,753) (2,533)
Inventories...................... (10,054) (8,696) 9,661
Prepaid expenses................. (224) 276 (533)
Increase in liabilities:
Accounts payable................. 7,936 95 866
Accrued liabilities.............. 3,428 1,084 1,581
-------- ------- --------
Net cash (used in) provided by
operating activities........ (13,568) 8,215 17,297
Investing activities -- Capital
expenditures........................ (1,553) (1,413) (2,272)
Financing activities -- Increase
(decrease) in business unit
investment, net..................... 14,787 (6,784) (14,157)
Effect of exchange rate changes on
cash................................ (132) (75) 11
-------- ------- --------
Net increase (decrease) in cash and
cash equivalents.................... (466) (57) 879
Cash and cash equivalents:
Beginning of Period................. 1,065 1,122 243
-------- ------- --------
End of Period....................... $ 599 $ 1,065 $ 1,122
======== ======= ========
See notes to financial statements.
F-22
131
PORTABLE PRODUCTS DIVISION, A BUSINESS UNIT
OF GENERAC CORPORATION
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS AND NINE DAYS ENDED JULY 9, 1998
AND YEARS ENDED DECEMBER 31, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements include the accounts of the Portable
Products Division located in Jefferson, Wisconsin and its branches in the United
Kingdom and Germany, a Business Unit ("Business Unit") of Generac Corporation
("Generac"). The Business Unit designs and manufactures portable generator sets,
pressure washers and other engine-powered tools for the world market.
CASH EQUIVALENTS -- The Business Unit considers all investments purchased
with a maturity of three months or less to be cash equivalents.
INVENTORIES -- Inventories are stated at the lower of cost (first-in,
first-out method) or market (replacement cost or estimated net realizable
value).
REVENUE RECOGNITION -- Net sales and costs of sales are recognized as the
related products are shipped. A provision for estimated sales returns is
recorded in the period in which the sales are recognized.
RESEARCH AND DEVELOPMENT COSTS -- The Business Unit has an ongoing program
of new product development and existing product enhancement through redesign of
existing products and the addition of new models. Costs related to these
programs are expensed as incurred and totalled the following amounts for the
respective periods shown:
($ IN 000'S)
------------
For the six months and nine days ended July 9,
1998........................................... $ 925
For the years ended December 31,
1997........................................... 1,743
1996........................................... 2,494
DEPRECIATION -- Costs of property, plant and equipment are depreciated
using the straight-line method over the estimated useful lives of the assets as
follows:
YEARS
-------
Land improvements................................... 20
Buildings........................................... 40
Machinery and equipment............................. 10
Dies and tools...................................... 3 to 5
Vehicles............................................ 4
Office equipment.................................... 5 to 10
PRODUCT WARRANTIES -- The Business Unit provides that warranted products
are merchantable and free of defects in workmanship and material generally for a
period of one year. Warranty reserves are provided as charges to operations
under selling and service expense for estimated normal warranty costs and, if
applicable, for any significant problems
F-23
132
PORTABLE PRODUCTS DIVISION, A BUSINESS UNIT
OF GENERAC CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
known to exist on products sold. Warranty expense totalled the following amounts
for the respective periods shown:
($ IN 000'S)
------------
For the six months and nine days ended July 9,
1998........................................... $1,848
For the years ended December 31,
1997........................................... 5,305
1996........................................... 1,941
FOREIGN CURRENCY TRANSLATION -- The translation of the branch accounts into
U. S. dollars is performed for balance sheet accounts using current exchange
rates in effect at the balance sheet date and for revenue and expense accounts
using an average exchange rate during the period. The gains or (losses)
resulting from such translation are reflected as "cumulative translation
adjustments" in business unit investment. Such adjustments amounted to
$(703,000) through July 9, 1998.
FAIR VALUE OF FINANCIAL INSTRUMENTS -- The Business Unit believes the
carrying amount of its financial instruments (cash and cash equivalents,
accounts receivable and accounts payable) is a reasonable estimate of the fair
value of these instruments.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
2. INTERCOMPANY TRANSACTIONS
The Business Unit is an operating unit of Generac. The Business Unit
investment balance reflects opening net assets, accumulated earnings for the six
months and nine days ended July 9, 1998 ("1998") and for the years ended
December 31, 1997 ("1997") and 1996 ("1996"), and various activities between the
Business Unit and Generac. Domestic cash management is centralized at Generac
and, as such, the Business Unit's cash funding requirements are met by Generac.
The financial statements for 1996 present the results of operations and
cash flows of the carved out Portable Products operations of Generac.
Receivables, inventories, property, plant and equipment, accounts payable,
accrued liabilities, net sales, cost of sales, and selling expenses were
specifically identified for each operation. Liabilities related to employee
compensation were allocated to each operation based upon either employee head
count or payroll. Other expenses relating to service, research and development,
and general and administrative were allocated to each operation based upon
either specific activities or sales levels. Management believes the allocations
are reasonable. Beginning in 1997, the Business Unit operated as a division of
Generac with separate financial reporting.
The financial statements for 1998 and 1997 include allocations by Generac
for certain operating and employee benefit costs incurred on behalf of the
Business Unit. These costs
F-24
133
PORTABLE PRODUCTS DIVISION, A BUSINESS UNIT
OF GENERAC CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
are allocated based on estimates of time and services provided, specifically
identifiable charges, or relevant criteria that establish the Business Unit's
pro rata charge of costs common to all Generac operating units. Allocated
support costs from Generac to the Business Unit during 1998 and 1997 included
manufacturing support of $125,000 and $587,000, service support of $11,000 and
$789,000, research and development support of $21,000 and $410,000, general and
administrative support of $152,000 and $280,000, and human resource and employee
benefits support of $76,000 and $228,000, respectively.
Research and development expenses totaling $131,000, $246,000 and $235,000
were incurred by the Business Unit's United Kingdom branch during 1998, 1997 and
1996, respectively, on behalf of Generac and charged to Generac.
The Business Unit and Generac supply each other with certain inventories.
Total inventories transferred during 1998, 1997 and 1996 were $7,855,000,
$9,541,000 and $11,374,000, respectively, from Generac to the Business Unit and
$350,000, $1,330,000 and $0, respectively, from the Business Unit to Generac.
Commencing February 1, 1998, certain production was transferred from the
Business Unit to Generac. During the five months and nine days ended July 9,
1998, the Business Unit purchased $12,223,000 of inventories related to such
transferred production. At July 9, 1998, such inventory represented
approximately $2,673,000 including profit of approximately $508,000. All other
inventory is transferred at cost.
The Business Unit is also charged a portion of Generac's interest expense
based upon levels of Business Unit investment. This interest charge aggregated
$1,354,000, $1,999,000 and $2,237,000 during 1998, 1997 and 1996, respectively.
Management believes the allocations and activities between the Business
Unit and Generac are reasonable under the circumstances; however, they may not
be indicative of amounts that would be required to be incurred if the Business
Unit operated on a stand-alone basis.
3. S CORPORATION ELECTION
Generac and its Stockholders have elected for federal and certain state
income tax purposes to be treated as a S Corporation under provisions of the
Internal Revenue Code. Accordingly, Generac's taxable income is includable in
the individual tax returns of its Stockholders and no provision for income taxes
is included in the accompanying financial statements.
F-25
134
PORTABLE PRODUCTS DIVISION, A BUSINESS UNIT
OF GENERAC CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. RECEIVABLES
Accounts receivable consisted of the following at:
DECEMBER 31,
JULY 9, ------------------
1998 1997 1996
------- ------- -------
(IN 000'S)
Accounts receivable...................... $48,753 $18,938 $14,414
Allowance for doubtful accounts.......... (225) (172) (151)
------- ------- -------
$48,528 $18,766 $14,263
======= ======= =======
There are no accounts receivable having a due date more than one year after
the balance sheet date. The provision for doubtful accounts charged (credited)
to operations was as follows:
($ IN 000'S)
------------
For the six months and nine days ended July 9, 1998...... $ 67
For the years ended December 31,
1997................................................... 21
1996................................................... (155)
5. INVENTORIES
Inventories consisted of the following at:
DECEMBER 31,
JULY 9, ------------------
1998 1997 1996
------- ------- -------
($ IN 000'S)
Raw materials and sub-assemblies......... $26,599 $20,490 $15,377
Finished goods........................... 16,240 12,533 9,330
------- ------- -------
Total.................................... $42,839 $33,023 $24,707
======= ======= =======
Work-in-process is not a significant separate component of inventories and
is included in the raw materials and sub-assemblies component.
6. PROPERTY, PLANT AND EQUIPMENT
In 1994, Generac entered into an Industrial Development Revenue Bond
agreement with the City of Jefferson, Wisconsin. The proceeds from these
Industrial Development Revenue Bonds, aggregating $7,200,000, were used to
construct and equip the Business Unit's manufacturing facility in Jefferson.
Property, plant and equipment with a net carrying amount of $8,762,000 and
$8,644,000 at December 31, 1997 and 1996, respectively, were pledged as
collateral under a related letter of credit agreement which was terminated in
June 1998.
F-26
135
PORTABLE PRODUCTS DIVISION, A BUSINESS UNIT
OF GENERAC CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. OTHER ACCRUED LIABILITIES
Other accrued liabilities consisted of the following at:
DECEMBER 31,
JULY 9, ----------------
1998 1997 1996
------- ------ ------
($ IN 000'S)
Sales incentives............................ $5,936 $2,768 $2,843
Product warranty............................ 1,020 987 659
Other....................................... 749 764 553
------ ------ ------
$7,705 $4,519 $4,055
====== ====== ======
8. EMPLOYEE RETIREMENT AND SAVINGS PLANS
Generac has noncontributory pension plans (salaried and hourly) covering
substantially all of its employees including the employees of the Business Unit.
The benefits under the salaried plan are based upon years of service and the
participants' defined final average monthly compensation. The benefits under the
hourly plan are based on a unit amount at the date of termination multiplied by
the participants' credited service. Generac's funding policy for these plans is
to contribute amounts at least equal to the minimum annual amount required by
applicable regulations. Total pension expense allocated to the Business Unit for
the six months and nine days ended July 9, 1998 and the years ended December 31,
1997 and 1996 was $231,000, $293,000 and $255,000, respectively.
Generac maintains deferred compensation plans for key employees of the
Business Unit and at July 9, 1998, approximately $182,000 of deferred
compensation was included in accrued employee benefits. Deferred compensation
expense charged to operations was $18,000, $40,000 and $23,000, for the six
months and nine days ended July 9, 1998 and for the years ended December 31,
1997 and 1996, respectively.
9. LEASE COMMITMENTS
Generac leases certain manufacturing equipment, computer equipment and
vehicles used in the Business Unit under operating leases for lease terms
ranging up to five years.
The aggregate minimum rental commitments at July 9, 1998 are as follows:
Five months and 22 days
ended December 31, 1998........................ $ 389,000
Years ended:
1999........................................... 746,000
2000........................................... 701,000
2001........................................... 674,000
2002........................................... 287,000
----------
$2,797,000
==========
F-27
136
PORTABLE PRODUCTS DIVISION, A BUSINESS UNIT
OF GENERAC CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Total rent expense for the six months and nine days ended July 9, 1998 and
the years ended December 31, 1997 and 1996 was approximately $476,000, $462,000
and $100,000, respectively.
Certain manufacturing equipment with an original cost of $3,178,000 is
leased under a five-year master lease arrangement and accounts for $353,000 and
$385,000 of total rental expense for the six months and nine days ended July 9,
1998 and for the year ended December 31, 1997, respectively; $673,000 of future
annual commitments through 2001; and all of the year 2002 commitments. At the
end of the lease term, Generac has the option to purchase the equipment at a
purchase price equal to the then fair market value which shall not be less than
15% nor more than 25% of the original equipment cost.
10. MAJOR CUSTOMERS
Two customers accounted for approximately 69% of net sales for the six
months and nine days ended July 9, 1998, and included in accounts receivable at
July 9, 1998 are amounts due from these two customers aggregating $34,998,000.
Three customers accounted for approximately 74% of net sales for the year ended
December 31, 1997, and included in accounts receivable at December 31, 1997 are
amounts due from these three customers aggregating $11,076,000. Two customers
accounted for approximately 56% of net sales for the year ended December 31,
1996, and included in accounts receivable at December 31, 1996 are amounts due
from these two customers aggregating $6,608,000.
11. FOREIGN OPERATIONS
The Business Unit's European operations accounted for approximately 19%,
18% and 20% of the total Business Unit's assets as of July 9, 1998, December 31,
1997 and December 31, 1996, respectively. Sales for these European operations
accounted for approximately 8%, 8% and 10% of net sales for the six months and
nine days ended July 9, 1998 and for the years ended December 31, 1997 and 1996,
respectively.
12. CONTINGENCIES
In the normal course of business the Business Unit is involved in certain
legal actions and claims. It is the opinion of management that such litigation
and claims are either covered by insurance or will be resolved without material
effect on the Business Unit's financial position or results of operations.
13. SUBSEQUENT EVENT
On July 9, 1998, Generac completed the sale of substantially all of the
assets and the assumption of certain liabilities of the Business Unit to Generac
Portable Products, LLC (a company formed by The Beacon Group III -- Focus Value
Fund, L.P.) for a net purchase price of approximately $305 million.
F-28
137
- ---------------------------------------------------------
- ---------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE ISSUERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCE CREATE AN IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE ISSUERS SINCE THE DATE HEREOF. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO
ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
-------------------------
TABLE OF CONTENTS
PAGE
----
Where You Can Find More Information.... i
Forward-Looking Statements............. i
Summary................................ 1
Risk Factors........................... 8
The Issuers............................ 14
The Transaction........................ 15
Use of Proceeds of the New Notes....... 16
Capitalization......................... 17
The Exchange Offer..................... 18
Unaudited Pro Forma Consolidated
Financial Information................ 28
Selected Historical Financial Data..... 32
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 35
Business............................... 44
Management............................. 56
Security Ownership..................... 62
Certain Relationships and Related Party
Transactions......................... 64
Description of the Senior Secured
Credit Facility...................... 64
Description of the New Notes........... 66
Description of the Old Notes...........
Old Notes Registration Rights
Agreement............................ 98
Book-Entry; Delivery and Form.......... 100
Certain United States Federal Income
Tax Considerations................... 102
Plan of Distribution................... 104
Experts................................ 105
Validity of Notes...................... 105
Index to Financial Statements.......... F-1
- ---------------------------------------------------------
- ---------------------------------------------------------
- ---------------------------------------------------------
- ---------------------------------------------------------
GENERAC PORTABLE PRODUCTS, LLC
GPPW, INC.
LOGO
OFFER TO EXCHANGE
11 1/4% SENIOR SUBORDINATED
NOTES DUE 2006
FOR ALL OUTSTANDING
11 1/4% SENIOR SUBORDINATED
NOTES DUE 2006
-------------------------
PROSPECTUS
-------------------------
, 1998
- ---------------------------------------------------------
- ---------------------------------------------------------
138
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
In general, the Wisconsin Business Corporation Law provides that a
corporation shall indemnify directors and officers for all reasonable expenses
incurred in connection with the successful defense of actions arising in
connection with their service as directors and officers of the corporation. In
other cases, the Wisconsin Business Corporation Law provides that the
corporation shall indemnify a director or officer against liability unless the
director or officer breached or failed to perform a duty owed to the corporation
and such breach or failure meets certain specified criteria constituting, in
general, some act of misconduct. In addition, the corporation may reimburse a
director or officer for his expenses in defending against actions as they are
incurred upon the director's or officer's written request accompanied by a
written affirmation of his good faith belief that he has not breached or failed
to perform his duties to the corporation and a written undertaking to repay
amounts advanced if it is ultimately determined that indemnification is not
required under the Wisconsin Business Corporation Law. A court of law may order
that the corporation provide indemnification to a director or officer if it
finds that the director or officer is entitled thereto under the applicable
statutory provision or is fairly and reasonably entitled thereto in view of all
the relevant circumstances, whether or not such indemnification is required
under the applicable statutory provision.
The Wisconsin Business Corporation Law specifies various procedures
pursuant to which a director or officer may establish his right to
indemnification.
Provided that it is not determined by or on behalf of the corporation that
the director or officer breached or failed to perform a duty owed to the
corporation and such breach or failure meets certain specified criteria
constituting, in general, some act of misconduct, a Wisconsin corporation may
provide additional rights to indemnification under its articles of incorporation
or by-laws, by vote, by agreement or by resolution.
GPPW's Articles of Incorporation provide for indemnification and
advancement of expenses of directors and officers to the fullest extent
permitted by the Wisconsin Business Corporation Law. The indemnification
provided by GPPW's Articles of Incorporation is not deemed to be exclusive of
any other rights to which an officer or director may be entitled under any
by-law, vote of shareholders or disinterested directors or otherwise.
Section 18-108 of the Delaware Limited Liability Company Act grants a
Delaware limited liability company the power, subject to the standards and
restrictions, if any, as are set forth in its limited liability company
agreement, to indemnify any member or manager or other person from and against
any and all claims and demands whatsoever.
Pursuant to Article VIII of the Limited Liability Company Agreement of
Generac Portable Products, LLC (the "LLC Agreement"), the Operating Company will
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 Operating Company) by reason of the fact that such person is or
was a director or officer of the Operating Company, or is or was serving, at the
Operating Company's request, in a similar capacity with another enterprise. The
Operating Company will indemnify such officers and directors in an action by or
in the right of the Operating Company to procure a judgment in its favor under
the same conditions, except that no indemnification is permitted without
judicial approval if
II-1
139
the officer or director is adjudged to be liable to the Operating Company. Where
an officer or director is successful on the merits or otherwise in the defense
of any action referred to above, the Operating Company must indemnify him or her
against the expenses (including attorneys' fees) which he or she actually and
reasonably incurred in connection therewith.
The Operating Company will, in connection with his or her appearance as a
witness or other participation in a proceeding, pay the expenses actually or
reasonably incurred or anticipated by any officer or director participating in
such proceeding, provided that the director or officer undertakes to repay such
amount if it shall ultimately be determined that he or she is not entitled to be
indemnified by the Operating Company as authorized by Article VIII of the LLC
Agreement.
The indemnification provided by the LLC Agreement is not deemed to be
exclusive of any other rights to which an officer or director may be entitled
under any law, agreement, vote or otherwise.
The Operating Company may grant indemnification rights to other employees
or agents of, or other persons serving, the Operating Company. The Operating
Company is also permitted to purchase directors' and officers' liability
insurance. Article VIII of the LLC Agreement also provides that the Operating
Company will indemnify its officers and directors to the fullest extent
permitted by applicable law in effect from time to time.
The foregoing statements are subject to the detailed provisions of Article
VIII of the LLC Agreement.
II-2
140
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
3.1 -- Certificate of Incorporation of GPPC, Inc.
3.2 -- Certificate of Amendment of Certificate of Incorporation
Before Payment of Any Part of the Capital of GPPC, Inc.
3.3 -- Certificate of Amendment of Certificate of Incorporation
Before Payment of Any Part of the Capital of Generac
Portable Products, Inc.
3.4 -- By-Laws of Generac Portable Products, Inc.
3.5 -- Certificate of Formation of Generac Portable Products, LLC
3.6 -- Limited Liability Company Agreement of Generac Portable
Products, LLC
3.7 -- Articles of Incorporation of GPPW, Inc.
3.8 -- By-laws of GPPW, Inc.
4.1 -- Indenture, dated as of July 1, 1998 among Generac Portable
Products, LLC, GPPW, Inc. and Marine Midland Bank, as
trustee.
4.2 -- Registration Rights Agreement, dated as of July 2, 1998
among Generac Portable Products, LLC, GPPW, Inc. and BT
Alex. Brown Incorporated.
4.3 -- Form of Security for 11 1/4% Senior Subordinated Notes due
2006 originally issued by Generac Portable Products, LLC and
GPPW, Inc. on July 9, 1998.
4.4 -- Form of Security for 11 1/4% Senior Subordinated Notes due
2006 to be issued by Generac Portable Products, LLC and
GPPW, Inc. and registered under the Securities Act of 1933,
as amended (including the form of Guarantee).
5.1 -- Opinion of King & Spalding (including the consent of such
counsel).
12.1 -- Computation of the ratios of earnings to fixed charges.
23.1 -- Consent of Deloitte & Touche LLP.
23.2 -- Consent of PricewaterhouseCoopers LLP.
23.3 -- Consent of King & Spalding (included in Exhibit 5.1).
24.1 -- Powers of Attorney (included in the signature pages of this
Registration Statement).
25.1 -- Statement of Eligibility of Trustee.
27.1 -- Financial Data Schedule.
99.1 -- Form of Letter of Transmittal.
99.2 -- Form of Notice of Guaranteed Delivery.
99.3 -- Form of Exchange Agent Agreement.
II-3
141
(b) FINANCIAL STATEMENT SCHEDULES.
SCHEDULE
NUMBER DESCRIPTION OF SCHEDULE
- -------- -----------------------
-- Report of PricewaterhouseCoopers LLP on Financial Statement
Schedule
-- Report on Schedule of Deloitte & Touche LLP (included in
Exhibit 23.1)
I -- Generac Portable Products, Inc. Schedule of Combined
Valuation Accounts.
II -- Portable Products Division, a Business Unit of Generac
Corporation Schedule of Combined Valuation Accounts.
ITEM 22. UNDERTAKINGS
Each of the undersigned registrants (the "Registrants") hereby undertakes:
(1) That, for purposes of determining any liability under the
Securities Act of 1933, each filing of any 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.
(2) That, insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrants pursuant to the foregoing
provisions, or otherwise, the Registrants have 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 any Registrant of
expenses incurred or paid by a director, officer or controlling person of
such Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrants will,
unless in the opinion of their 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.
(3) To respond for requests for information that is incorporated by
reference into the Prospectus pursuant to Item 4, 10(b), 11 or 13 of this
Form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the Registration Statement through the date of responding
to the request.
(4) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired or involved
therein, that was not the subject of and included in the Registration
Statement when it became effective.
II-4
142
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on March 1, 1999.
GENERAC PORTABLE PRODUCTS, INC.
By: /s/ ERIC R. WILKINSON
------------------------------------
Eric R. Wilkinson
President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints ERIC R. WILKINSON, President of Generac Portable
Products, Inc., and RICHARD A. AUBE, Secretary and Treasurer of Generac Portable
Products, Inc., or either of them, and any agent for service named in this
Registration Statement and each of them, his true and lawful attorney-in-fact
and agent, with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign any registration
statements filed pursuant to Rule 462(b) under the Securities Act of 1933, as
amended and any and all amendments (including post-effective amendments) to this
Registration Statement, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agents or any of them, their or
his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities with Generac Portable Products, LLC and on the date indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ERIC R. WILKINSON President and Director, Generac March 1, 1999
- --------------------------------------------- Portable Products, Inc.
Eric R. Wilkinson
/s/ RICHARD A. AUBE Secretary and Treasurer, Generac March 1, 1999
- --------------------------------------------- Portable Products, Inc.
Richard A. Aube
/s/ R. EUGENE CARTLEDGE Chairman of the Board, Generac March 1, 1999
- --------------------------------------------- Portable Products, Inc.
R. Eugene Cartledge
II-5
143
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ROBERT D. KERN Director, Generac Portable March 1, 1999
- --------------------------------------------- Products, Inc.
Robert D. Kern
/s/ THOMAS G. MENDELL Director, Generac Portable March 1, 1999
- --------------------------------------------- Products, Inc.
Thomas G. Mendell
/s/ DORRANCE J. NOONAN, JR. Director, Generac Portable March 1, 1999
- --------------------------------------------- Products, Inc.
Dorrance J. Noonan, Jr.
/s/ R. RALPH PARKS Director, Generac Portable March 1, 1999
- --------------------------------------------- Products, Inc.
R. Ralph Parks
/s/ RICHARD A. VAN DEUREN Director, Generac Portable March 1, 1999
- --------------------------------------------- Products, Inc.
Richard A. Van Deuren
II-6
144
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Jefferson, State of
Wisconsin, on March 1, 1999.
GENERAC PORTABLE PRODUCTS, LLC
By: /s/ DORRANCE J. NOONAN, JR.
------------------------------------
Dorrance J. Noonan, Jr.
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints DORRANCE J. NOONAN, JR., President and Chief
Executive Officer of Generac Portable Products, LLC, and GARY J. LATO, Chief
Financial Officer of Generac Portable Products, LLC, or either of them, and any
agent for service named in this Registration Statement and each of them, his
true and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any registration statements filed pursuant to Rule 462(b)
under the Securities Act of 1933, as amended and any and all amendments
(including post-effective amendments) to this Registration Statement, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agents or any of them, their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities with Generac Portable Products, LLC and on the date indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ DORRANCE J. NOONAN, JR. President, Chief Executive Officer March 1, 1999
- --------------------------------------------- and Director, Generac Portable
Dorrance J. Noonan, Jr. Products, LLC
/s/ GARY J. LATO Chief Financial Officer, Generac March 1, 1999
- --------------------------------------------- Portable
Gary J. Lato Products, LLC
/s/ RICHARD A. AUBE Director, Generac Portable March 1, 1999
- --------------------------------------------- Products, LLC
Richard A. Aube
II-7
145
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on March 1, 1999.
GPPW, INC.
By: /s/ FAITH ROSENFELD
------------------------------------
Faith Rosenfeld
President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints RICHARD A. AUBE, Secretary and Treasurer of GPPW,
Inc., and any agent for service named in this Registration Statement and each of
them, his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any registration statements filed pursuant to
Rule 462(b) under the Securities Act of 1933, as amended and any and all
amendments (including post-effective amendments) to this Registration Statement,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agents or any of them, their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities with GPPW, Inc. and on the date indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ FAITH ROSENFELD President, GPPW, Inc. March 1, 1999
- ---------------------------------------------
Faith Rosenfeld
/s/ RICHARD A. AUBE Secretary, Treasurer and March 1, 1999
- --------------------------------------------- Director of GPPW, Inc.
Richard A. Aube
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146
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
of Generac Portable Products, Inc.
Our audit of the consolidated financial statements referred to in our
report dated February 22, 1999 appearing in Part I of this Registration
Statement on Form S-4 also included an audit of the accompanying Financial
Statement Schedule of Generac Portable Products, Inc. included in Part II of
this Registration Statement on Form S-4. In our opinion, this Financial
Statement Schedule presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements.
PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
February 22, 1999
S-1
147
SCHEDULE I
GENERAC PORTABLE PRODUCTS, INC.
SCHEDULE OF COMBINED VALUATION ACCOUNTS
BALANCE AT
BEGINNING CHARGES TO BALANCE AT
OF PERIOD EXPENSE DEDUCTIONS END OF PERIOD
---------- ---------- ---------- -------------
($ IN 000'S)
ACCOUNTS RECEIVABLE:
For the Period July 10, 1998 through December
31, 1998.................................... $225 $ 17 $ -- $242
BALANCE AT
BEGINNING CHARGES TO BALANCE AT
OF PERIOD EXPENSE DEDUCTIONS END OF PERIOD
---------- ---------- ---------- -------------
($ IN 000'S)
INVENTORY:
For the Period July 10, 1998 through December
31, 1998.................................... $500 $593 $319 $774
S-2
148
SCHEDULE II
PORTABLE PRODUCTS DIVISION, A BUSINESS UNIT
OF GENERAC CORPORATION
SCHEDULE OF COMBINED VALUATION ACCOUNTS
BALANCE AT
BEGINNING CHARGES TO BALANCE AT
OF PERIOD EXPENSE DEDUCTIONS END OF PERIOD
---------- ---------- ---------- -------------
($ IN 000'S)
ACCOUNTS RECEIVABLE:
Year Ended:
December 31, 1996........................... $444 $(155) $138 $151
December 31, 1997........................... 151 21 -- 172
Six Months and Nine Days Ended:
July 9, 1998................................ 172 67 14 225
BALANCE AT
BEGINNING CHARGES TO BALANCE AT
OF PERIOD EXPENSE DEDUCTIONS END OF PERIOD
---------- ---------- ---------- -------------
($ IN 000'S)
INVENTORY:
Year Ended:
December 31, 1996........................... $190 $331 $396 $125
December 31, 1997........................... 125 781 556 350
Six Months and Nine Days Ended:
July 9, 1998................................ 350 412 262 500
S-3
149
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
3.1 -- Certificate of Incorporation of GPPC, Inc.
3.2 -- Certificate of Amendment of Certificate of Incorporation
Before Payment of Any Part of the Capital of GPPC, Inc.
3.3 -- Certificate of Amendment of Certificate of Incorporation
Before Payment of Any Part of the Capital of Generac
Portable Products, Inc.
3.4 -- By-Laws of Generac Portable Products, Inc.
3.5 -- Certificate of Formation of Generac Portable Products, LLC
3.6 -- Limited Liability Company Agreement of Generac Portable
Products, LLC
3.7 -- Articles of Incorporation of GPPW, Inc.
3.8 -- By-laws of GPPW, Inc.
4.1 -- Indenture, dated as of July 1, 1998 among Generac Portable
Products, LLC, GPPW, Inc. and Marine Midland Bank, as
trustee.
4.2 -- Registration Rights Agreement, dated as of July 2, 1998
among Generac Portable Products, LLC, GPPW, Inc. and BT
Alex. Brown Incorporated.
4.3 -- Form of Security for 11 1/4% Senior Subordinated Notes due
2006 originally issued by Generac Portable Products, LLC and
GPPW, Inc. on July 9, 1998.
4.4 -- Form of Security for 11 1/4% Senior Subordinated Notes due
2006 to be issued by Generac Portable Products, LLC and
GPPW, Inc. and registered under the Securities Act of 1933,
as amended (including the form of Guarantee).
5.1 -- Opinion of King & Spalding (including the consent of such
counsel).
12.1 -- Computation of the ratios of earnings to fixed charges.
23.1 -- Consent of Deloitte & Touche LLP.
23.2 -- Consent of PricewaterhouseCoopers LLP.
23.3 -- Consent of King & Spalding (included in Exhibit 5.1).
24.1 -- Powers of Attorney (included in the signature pages of this
Registration Statement).
25.1 -- Statement of Eligibility of Trustee.
27.1 -- Financial Data Schedule.
99.1 -- Form of Letter of Transmittal.
99.2 -- Form of Notice of Guaranteed Delivery.
99.3 -- Form of Exchange Agent Agreement.