PROSPECTUS FILED PURSUANT TO RULE 424(b)(4)
REGISTRATION NO. 333-43523
ELGIN NATIONAL INDUSTRIES, INC.
OFFER TO EXCHANGE 11% SERIES B SENIOR NOTES DUE 2007
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, FOR ANY AND ALL OF ITS OUTSTANDING
11% SERIES A SENIOR NOTES DUE 2007
-------------------
Elgin National Industries, Inc., a Delaware corporation (the "Company"),
hereby offers, upon the terms and subject to the conditions set forth in this
Prospectus and in the accompanying Letter of Transmittal (the "Letter of
Transmittal") (which together with this Prospectus constitutes the "Exchange
Offer"), to exchange up to $85 million aggregate principal amount of 11%
Series B Senior Notes due 2007 (the "New Notes") of the Company for a like
principal amount of the Company's issued and outstanding 11% Series A Senior
Notes due 2007 (the "Old Notes" and, together with the New Notes, the "Notes")
with the holders (each holder of Old Notes a "Holder") thereof. The terms of
the New Notes are substantially identical to the terms of the Old Notes that
are to be exchanged therefor. See "Description of the New Notes." The Company
used the net proceeds of the offering of the Old Notes to finance the
Recapitalization Transactions (as defined).
Interest on the New Notes is payable semi-annually in arrears on May 1 and
November 1 of each year, commencing on May 1, 1998. The New Notes will mature
on November 1, 2007, unless previously redeemed, and the Company will not be
required to make any mandatory redemption or sinking fund payments prior to
maturity. The New Notes may be redeemed, in whole or in part, at any time on
or after November 1, 2002 at the option of the Company, at the redemption
prices set forth herein, plus, in each case, accrued and unpaid interest and
premium to the date of redemption. In addition, at any time prior to November
1, 2000, the Company may, at its option, redeem up to $25.0 million in
aggregate principal amount of the New Notes at a redemption price of 111.0% of
the principal amount thereof, plus accrued and unpaid interest to the date of
redemption, with the net cash proceeds of one or more public offerings of the
Company's common stock, provided that not less than $60.0 million aggregate
principal amount of the New Notes remains outstanding immediately after the
occurrence of any such redemption. See "Description of New Notes--Optional
Redemption."
The New Notes will be general unsecured obligations of the Company and will
rank senior in right of payment to all existing and future subordinated
Indebtedness (as defined) of the Company and will rank pari passu in right of
payment with all other current and future unsubordinated Indebtedness of the
Company. The New Notes will be jointly, severally, fully and unconditionally
guaranteed on a senior basis (the "Guarantees") by each of the Company's
material domestic Subsidiaries (as defined) (the "Guarantors"). The Guarantees
will be senior unsecured obligations and will rank senior in right of payment
to all existing and future Indebtedness of the Guarantors that is subordinated
to such Guarantees and will rank pari passu in right of payment with all other
current and future unsubordinated obligations of the Guarantors. The Company
is the borrower under the Senior Credit Facility (as defined), which is
guaranteed by its material domestic Subsidiaries. Such borrowings and
guarantees will be secured by the inventory and accounts receivable of the
Company and the respective Guarantors and a pledge of the capital stock of the
Company's material Subsidiaries, and may also be secured by the property,
plant and equipment of the Company and the Guarantors. Accordingly, the New
Notes and the Guarantees will be effectively
(continued on page 2)
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK
CITY TIME, ON MAY 5, 1998, UNLESS EXTENDED, PROVIDED, HOWEVER, THAT NO
EXTENSION WILL BE PERMITTED BEYOND MAY 18, 1998.
-------------------
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION
WITH AN INVESTMENT IN THE NEW NOTES, INCLUDING BY HOLDERS OF OLD NOTES WHO
TENDER THEIR OLD NOTES IN THE EXCHANGE OFFER, SEE "RISK FACTORS" BEGINNING ON
PAGE 13 OF THIS PROSPECTUS.
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is April 3, 1998
(continued from preceding page)
subordinated to all obligations under the Senior Credit Facility and the
guarantees of such obligations to the extent of the value of the assets
securing such loans and guarantees. The Company has $20.0 million of credit
available under the Senior Credit Facility. At December 31, 1997, the Company
had approximately $0.8 million of pari passu Indebtedness outstanding
(excluding $4.0 million in outstanding letters of credit and excluding payment
and performance bonds). There is currently no amount of the Company's
indebtedness that effectively ranks senior to the New Notes. The terms of the
Indenture (as defined) will permit the Company and its Restricted Subsidiaries
to incur additional indebtedness, subject to certain limitations. See
"Description of Notes."
In the event of a Change of Control (as defined), each holder of the New
Notes will have the right to require the Company to make an offer to purchase
such holder's Notes, in whole or in part, at a price equal to 101% of the
aggregate principal amount thereof, plus accrued and unpaid interest and
Liquidated Damages, if any, to the date of purchase. There can be no assurance
that sufficient funds will be available at the time of any Change of Control
to make any required purchases of the Notes tendered. See "Risk Factors--
Potential Inability to Fund a Change in Control Offer," and "Description of
Notes--Repurchase at the Option of Holders--Change of Control."
Prior to the Exchange Offer, there has been no established trading market
for the New Notes. The Company does not intend to apply for listing or
quotation of the New Notes on any securities exchange or stock market.
Therefore, there can be no assurance as to the existence or liquidity of any
trading market for the New Notes or that an active public market for the new
Notes will develop. Any Old Notes not tendered and accepted in the Exchange
Offer will remain outstanding. To the extent that Old Notes are tendered and
accepted in the Exchange Offer, a Holder's ability to sell untendered, or
tendered or unaccepted, Old Notes could be adversely affected. Following the
consummation of the Exchange Offer, the Holders of Old Notes will continue to
be subject to the existing restrictions on transfer thereof and the Company
will have no further obligations to such Holders to provide for the
registration of the Old Notes under the Securities Act. See "Exchange Offer--
Consequences of not Exchanging Old Notes." Broker-dealers selling the New
Notes may be deemed to be "underwriters" under the Securities Act (as defined
herein).
The Company accepts for exchange any and all Old Notes that are validly
tendered and not withdrawn on or prior to 5:00 p.m., New York City time, on
May 5, 1998, or such later time and date to which the Exchange Offer is
extended (the "Expiration Date"). Tenders of Old Notes may be withdrawn at any
time prior to 5:00 p.m., New York City time on the Expiration Date. The
Exchange Offer is not conditioned upon any minimum principal amount of Old
Notes being tendered for exchange. However, the Exchange Offer is subject to
certain customary conditions which may be waived by the Company. The Company
has agreed to pay the expenses of the Exchange Offer. There will be no cash
proceeds to the Company from the Exchange Offer. See "Use of Proceeds."
The Old Notes were issued and sold (the "Old Notes Offering") on November 5,
1997 (the "Closing Date") in a transaction that was not registered under the
Securities Act of 1933, as amended (the "Securities Act"), in reliance upon
the exemption provided in Section 4(2) of the Securities Act. Accordingly, the
Old Notes may not be reoffered, resold or otherwise pledged, hypothecated or
transferred in the United States unless so registered or unless an applicable
exemption from the registration requirements of the Securities Act is
available. The New Notes are being offered for exchange in order to satisfy
certain obligations of the Company under the Registration Rights Agreement (as
defined herein) between the Company and the Initial Purchasers (as defined
herein). The New Notes will be obligations of the Company evidencing the same
indebtedness as the Old Notes and will be entitled to the benefits of the same
Indenture which governs both the Old Notes and the New Notes. The form and
terms (including principal amount, interest rate, maturity and ranking) of the
New Notes are the same as the form and terms of the Old Notes except that the
New Notes (i) have been registered under
(continued on page 3)
(continued from preceding page)
the Securities Act and therefore are not subject to certain restrictions on
transfer applicable to the Old Notes; (ii) will not be entitled to
registration rights; and (iii) will not provide for Liquidated Damages (as
defined herein). See "The Exchange Offer--Registration Rights Agreement."
The Company is making the Exchange Offer pursuant to the registration
statement of which this Prospectus is a part in reliance upon the position of
the staff of the Securities and Exchange Commission (the "Commission") set
forth in certain no-action letters addressed to other parties in other
transactions. However, the Company has not sought its own no-action letter and
there can be no assurance that the staff of the Commission would make a
similar determination with respect to the Exchange Offer. Based on these
interpretations by the staff of the Commission, the Company believes that the
New Notes issued pursuant to the Exchange Offer may be offered for resale,
resold and otherwise transferred by holders thereof (other than (i) any such
holder that is an "affiliate" of the Issuers within the meaning of Rule 405
under the Securities Act; (ii) an Initial Purchaser or holder who acquired the
Old Notes directly from the Issuers solely in order to resell pursuant to Rule
144A under the Securities Act or any other available exemption under the
Securities Act; or (iii) a broker-dealer who acquired the Old Notes as a
result of market-making or other trading activities) 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 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.
Each broker-dealer that receives New Notes for its own account pursuant to the
Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The Letter of Transmittal states
that by so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of New
Notes received in exchange for Old Notes where such Old Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities. The Company has agreed that, for a period of one year after the
date on which the Exchange Offer is consummated, it will make this Prospectus
available to any broker-dealer for use in connection with any such resale. See
"Plan of Distribution."
AVAILABLE INFORMATION
The Company has filed with the Commission a registration statement on Form
S-4 (the "Registration Statement") pursuant to the Securities Act, and the
rules and regulations promulgated thereunder, covering the New Notes being
offered hereby. This Prospectus does not contain all the information set forth
in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. For further
information with respect to the Company and the New Notes, reference is hereby
made to the Registration Statement. Statements made in this prospectus as to
the contents of any contract, agreement or other document referred to in the
Registration Statement are not necessarily complete. With respect to each such
contract, agreement or other document filed as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description of
the matter involved, and each such statement shall be deemed qualified in its
entirety by such reference.
The Registration Statement, such reports and other information that have
been filed with the Commission can be inspected and copied at the offices of
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, as well as the following regional offices of the Commission: Seven
World Trade Center, Suite 1300, New York, New York 10048; and Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such material can be obtained from the Public Reference Section of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. Such material also may be accessed electronically by means of the
Commission's home page on the Internet (http://www.sec.gov).
SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Unless the context indicates or otherwise
requires, references in this Prospectus to the "Company" are to Elgin National
Industries, Inc. and its subsidiaries on a consolidated basis. Unless otherwise
indicated, pro forma information in this Prospectus gives effect to the Old
Notes Offering, the application of the net proceeds therefrom and the
consummation of the Recapitalization Transactions.
THE COMPANY
Elgin owns and operates a diversified group of middle-market industrial
manufacturing and engineering services businesses. The Company focuses on
operating businesses with leading positions in niche markets, consistent
operating profitability, diverse customer bases, efficient production
capabilities and broad product lines serving stable industries. The Company is
comprised of ten business units that are organized into two operating groups.
Through its Manufactured Products Group, Elgin is a leading manufacturer and
supplier of custom-designed, highly engineered products used by a wide variety
of customers in the industrial equipment, durable goods, mining, mineral
processing and electric utility industries. Through its Engineering Services
Group, Elgin provides design, engineering, procurement and construction
management services for mineral processing and bulk materials handling systems
used in the mining, mineral processing, electric utility and the rail and
marine transportation industries.
Elgin's business strategy is to increase the sales and profitability of its
businesses by building upon its competitive strengths. Key elements of this
strategy include: (i) the application of existing product and design
capabilities to new markets; (ii) increased focus on international markets;
(iii) facilities expansion and manufacturing cost improvements; and (iv) the
acquisition, consolidation and integration of related businesses. Elgin
believes that the diversified nature of its products and the increasingly
diversified nature of the end markets served by its businesses reduce the
effect of operating performance fluctuations in any single operating unit and
cyclical downturns within individual industries and end markets. The Company's
total net sales for the year ended December 31, 1997 was $139.6 million, EBITDA
(as defined herein) was $16.4 million for the same period and net income was
$4.5 million. The value of EBITDA as a measure of comparison may be limited
since no uniform standards exist regarding its calculation.
MANUFACTURED PRODUCTS GROUP
The Manufactured Products Group is comprised of eight operating businesses
which manufacture and market products used in the industrial equipment, durable
goods, mining, mineral processing and electric utility industries. Elgin is a
leading U.S. manufacturer of cold-headed, long-length, small-diameter threaded
fasteners instrumental in the manufacture of fractional horsepower electric
motors and a leading producer of centrifuges and vibrating screens used in coal
preparation plants. In addition, Elgin manufactures cold-headed precision
components used by manufacturers of diesel truck engines and transmissions,
high and low voltage transformers, switch gear equipment and custom steel
products. Cold-headed components are produced by forcing steel rods into a die,
rather than through a hot forging process. Elgin also provides after-market
replacement parts and service for many of its products. The Manufactured
Products Group is comprised of businesses which have provided products and
services for an average of over 36 years. The Group's products were sold to
more than 1,900 customers in 1997, with no single customer accounting for more
than 4% of the Group's net sales. End-users of the Manufactured Products
Group's products include Consolidation Coal, Detroit Diesel, Emerson Electric,
General Electric, General Motors, Mack Truck, Peabody Coal and Toyota. For the
year ended December 31, 1997, the Manufactured Products Group generated net
sales and EBITDA, excluding unallocated corporate overhead, of $78.6 million
and $17.2 million, respectively.
1
ENGINEERING SERVICES GROUP
The Engineering Services Group is comprised of two operating units which
provide design, engineering, procurement and construction management services
to the mining, mineral processing, electric utility and rail and marine
transportation industries. The Engineering Services Group is known domestically
and internationally for its expertise in the areas of mineral processing and
bulk materials handling. The Group is the U.S. leader in the design and
construction of coal preparation plants. The Company believes that it is well
positioned to take advantage of the expanding international demand for
engineering services, driven by increased regional economic growth, increased
construction of electric utilities and modern mining and processing facilities,
and expanding environmental regulation. Representative customers of the
Engineering Services Group include Bechtel Power, Consolidation Coal, Katowice
Holding (Poland), KHD Humboldt Wedag (Thailand), Tennessee Valley Authority,
Vulcan Materials and Zeigler Coal. For the year ended December 31, 1997, the
Engineering Services Group generated net sales and EBITDA, excluding
unallocated corporate overhead, of $61.0 million and $4.2 million,
respectively.
PRINCIPAL OPERATING COMPANIES
Set forth below is a brief description of Elgin's principal operating
companies:
MANUFACTURED PRODUCTS GROUP
Ohio Rod Products Company ("Ohio Rod"), a division of Elgin, is a leading
U.S. manufacturer of cold-headed, long-length, small-diameter threaded
fasteners used in a wide variety of applications including fractional
horsepower electric motors, skate-wheel conveyor systems, cable reels and
roofing systems. In existence for 50 years, Ohio Rod has established a
reputation for producing high quality fastener products in each of its
principal markets, serving a broad customer base that includes over 600 active
accounts. Management believes that Ohio Rod has a broader product line than any
of its competitors. Ohio Rod had net sales of $23.4 million for the year ended
December 31, 1997.
Tabor Machine Company ("Tabor") and Norris Screen and Manufacturing Inc.
("Norris"), each a wholly owned subsidiary of Elgin, manufacture and supply
vibrating screens and replacement parts used in the coal, aggregates (sand,
gravel and crushed rock) and mining industries. Tabor is a leading supplier of
vibrating screens and replacement parts to the eastern U.S. coal industry,
which it has served for over 35 years. Norris manufactures stainless steel
profile wire and polyurethane screen surfaces for stationary and vibrating
screens and sieve bends sold to distributors and directly to end users,
primarily in the eastern U.S. coal industry. Tabor and Norris had combined net
sales of $14.9 million (of which approximately $12.7 million was derived from
the sale of service and replacement parts) for the year ended December 31,
1997.
Centrifugal and Mechanical Industries ("CMI"), a division of Elgin, and
Centrifugal Services, Inc. ("CSI"), a wholly owned subsidiary of Elgin, are
leading designers and manufacturers of centrifuges and replacement parts used
in the coal industry to separate liquids and solids. For over 50 years, CMI has
served the U.S. coal processing industry and has, more recently, developed new
applications for its products in the minerals, chemical and metal recycling
industries. CMI is the leading original equipment manufacturer ("OEM") of
centrifuges used in the U.S. coal industry and, together with CSI, which was
acquired in 1995, is the leading U.S. provider of replacement parts and repair
services for coal centrifuges. CMI and CSI had combined net sales of $13.7
million (of which approximately $11.4 million was derived from the sale of
service and replacement parts) for the year ended December 31, 1997.
Mining Controls, Inc. ("Mining Controls"), a wholly owned subsidiary of
Elgin, manufactures specialty high and low voltage transformers and switch gear
equipment and certain standard electrical products for use in underground
mining and tunneling operations. For over 20 years, Mining Controls' products
have been used in the mining industry. Through two acquisitions, Mining
Controls has expanded its product line to include specialized electrical power
control equipment and power factor correction and harmonic control equipment
sold to a variety of industrial customers. Mining Controls had net sales of
$12.4 million for the year ended December 31, 1997.
2
Chandler Products ("Chandler"), a division of Elgin, manufactures cold-headed
precision threaded components used in heavy duty diesel engines and
transmissions, hand tools and other specialty applications. For over 66 years,
Chandler has specialized in the manufacture of custom designed, precision
engineered, complex shaped, close tolerance products. Chandler had net sales of
$8.0 million for the year ended December 31, 1997.
Clinch River Corporation ("Clinch River"), a wholly owned subsidiary of
Elgin, is a full-service steel fabricator utilizing design, engineering and
fabrication capabilities to meet specific customer requirements. Clinch River
has served the coal mining and utility industries in the southeastern United
States for over 27 years. Clinch River had net sales of $6.2 million for the
year ended December 31, 1997.
ENGINEERING SERVICES GROUP
Roberts & Schaefer Company ("R&S") and Soros Associates, Inc. ("Soros"), each
a wholly owned subsidiary of Elgin, provide design, engineering, procurement
and construction management services principally to the mining, mineral
processing, electric utility and rail and marine transportation industries. R&S
provides services ranging from small engineering-only studies to turnkey
project development. R&S, founded in 1903, is the U.S. leader in the design and
construction of coal preparation plants, and its reputation has led to
increased activity in other mineral projects and increased international
business. R&S focuses on projects that are less than $25 million in size, where
management believes R&S can best utilize its design, engineering and
construction management capabilities as a competitive advantage while reducing
its risk. Soros is a leading design and consulting firm specializing in port
and marine facilities. Elgin acquired Soros in 1994 to strengthen the Company's
capabilities in the design of port and marine facilities. R&S and Soros had
combined net sales of $61.0 million for the year ended December 31, 1997.
COMPETITIVE STRENGTHS
Elgin believes that it has the following competitive strengths:
Strong Market Positions. The Company's reputation for high quality products,
strong engineering capabilities and customer service has allowed it to
establish significant market shares in many of the markets it serves. Ohio Rod
is a leading U.S. manufacturer of cold-headed, long-length, small-diameter
threaded fasteners; CMI is, in the Company's estimation, the leading
manufacturer of coal centrifuges used in the United States and, together with
CSI, is the leading supplier of replacement parts for such centrifuges; Tabor,
together with Norris, is a leading manufacturer of vibrating screens and
provider of replacement parts sold to the eastern U.S. coal industry; and R&S
is the leading U.S. firm for the design and construction management of coal
preparation plants.
Focus on Niche Markets. Elgin focuses on niche markets within mature industry
groups to allow it to achieve strong market positions and generate consistent
operating profitability. Management believes that the Company's efficient and
flexible production processes and consistent capital investment over the years,
together with its advanced design and engineering capabilities, have created
significant barriers to entry in its markets and have allowed it to establish
and maintain a high degree of customer loyalty.
Replacement Part Sales for Installed Equipment Base. Approximately 30% of the
Manufactured Products Group's net sales for the year ended December 31, 1997
were from replacement parts and services. Replacement part sales have been more
stable and predictable than OEM equipment sales and typically generate higher
profit margins. Replacement parts and service sales accounted for over 80% of
CMI and CSI combined sales and over 80% of the combined sales of Tabor and
Norris during the year ended December 31, 1997. CMI's installed base of over
1,800 centrifuges in the U.S. results in significant ongoing replacement part
sales. In addition, the Company's 1995 acquisition of CSI, a leading after-
market supplier of centrifuge parts, expanded its after-market parts and
service capabilities. Components sold by Tabor, Norris, CMI and CSI are
regularly replaced in connection with the ongoing maintenance of mining and
processing facilities.
3
Stability Through Diversification. Elgin manufactures and provides a broad
range of goods and services both domestically and internationally to stable and
mature industries, including industrial equipment, durable goods, coal, other
mining and mineral processing, electric utility and rail and marine
transportation industries. The Company believes that its increasing
diversification reduces the effects of individual industry business cycles and
economic trends that may adversely affect the demand for individual products.
Established Businesses; Long-Term Customer Relationships. Elgin's businesses
have long and established operating histories. The Company's businesses have
been operating for an average of over 42 years and enjoy stable and long-term
relationships with their customers. In excess of 50% of the Company's sales
during the year ending December 31, 1997 were to companies that have been
customers of the Company for at least five years.
Experienced, Stable and Committed Management. The Company's businesses are
run by operating managers who have an average tenure with the Company of over
16 years. The Company's Chief Executive Officer, Chief Operating Officer and
Chief Financial Officer (collectively, "Senior Management") beneficially own
and control 100% of the capital stock of Elgin. Members of Senior Management
successfully led the Company through leveraged recapitalizations in 1988 and
1993, significantly reducing the Company's leverage following each such
transaction.
BUSINESS STRATEGY
The Company's business strategy is to increase the sales, cash flow and
profitability of each business unit as follows:
Expand Product Offerings and Applications of Existing Product Capabilities.
Elgin seeks to build on its core strengths by entering new markets with its
products and services. For example, in the Manufactured Products Group, CMI is
applying its centrifugal dryer expertise, originally developed for the coal
industry, to other industrial applications in the minerals, chemical and metal
recycling industries. Similarly, in the Engineering Services Group, R&S is
applying its expertise in the design and construction management of processing
and bulk materials handling systems, originally developed for the coal mining
industry, to the aggregates, electric utility, cement, metals, industrial
minerals and other industries.
Increase International Sales. The Company has been active in international
markets for over 20 years, primarily through R&S. Since the early 1990s, the
Company has expanded the scope of its international marketing efforts. The
Company seeks to leverage its U.S. reputation for providing high quality design
and engineering services, and OEM products and related parts and services. The
Company also seeks to take advantage of expanding international demand for
expertise in the design and engineering of coal mining, mineral processing and
other bulk material handling systems. As a result of the Company's increased
focus on international markets, the Company's international sales increased to
approximately 17% of total net sales in 1997, compared to 15% and 7%,
respectively, in 1996 and 1995. The majority of the Company's foreign sales and
costs are denominated in U.S. Dollars. With respect to transactions denominated
in foreign currencies, the Company attempts to mitigate foreign exchange risk
by contractually shifting the burden of such risk to the other party to the
transaction.
Maintain Cost-Efficient Equipment and Production Facilities. The Company has
maintained, upgraded and expanded its equipment and production facilities, and
plans to continue its strategy of focused capital investment to maximize
operating efficiency while meeting specific customer demands. Elgin has
identified certain of its facilities where production cost reductions or sales
increases can be achieved through equipment modernization and plant expansion.
Pursue Strategic Acquisitions. The Company believes that its position within
the industries it serves provides it with attractive opportunities to acquire
complementary businesses and product lines. Elgin believes that its five small
strategic acquisitions since 1989 have been made at attractive purchase prices
and have demonstrated the Company's ability to successfully integrate new
businesses into its existing operations. Elgin will consider acquisitions that
(i) add complementary products or technical capabilities, (ii) give it access
to new customers or (iii) allow it to further penetrate its existing customer
base.
4
THE RECAPITALIZATION TRANSACTIONS
On November 5, 1997, pursuant to a Repurchase Agreement dated October 15,
1997 among the Company (then known as ENI Holding Corp. ("ENI")), its
subsidiary, Elgin National Industries, Inc., and all of the shareholders of ENI
(the "Repurchase Agreement"): (i) ENI and its subsidiary, Elgin National
Industries, Inc., using part of the proceeds of the Old Notes Offering,
repurchased all common stock, preferred stock and common stock warrants of ENI
not owned by Senior Management; (ii) the subsidiary, Elgin National Industries,
Inc., using part of the proceeds of the Old Notes Offering, repaid all senior
subordinated indebtedness, including the payment of prepayment fees; (iii) the
subsidiary, Elgin National Industries, Inc. merged into ENI with ENI remaining
as the surviving entity; (iv) following such merger, ENI changed its name to
Elgin National Industries, Inc.; and (v) the Company and the Guarantors entered
into an amended senior credit facility (the "Senior Credit Facility"). As a
result of these transactions (collectively, the "Recapitalization
Transactions"), Senior Management beneficially owns all of the outstanding
capital stock of the Company. A description of the sources and uses of funds
associated with the Recapitalization Transactions is presented under "Use of
Proceeds."
* * *
The Company is a Delaware corporation with its executive offices located at
2001 Butterfield Road, Suite 1020, Downers Grove, Illinois 60515-1050, and its
telephone number is (630) 434-7243.
THE EXCHANGE OFFER
Securities Offered.......... $85,000,000 principal amount of 11% Series B
Senior Notes due 2007. The terms of the New Notes
and the Old Notes are identical in all material
respects, except for certain transfer
restrictions and registration rights relating to
the Old Notes and except for certain Liquidated
Damages provisions relating to the Old Notes
described below under "--Summary Description of
the New Notes."
Issuance of Old Notes;
Registration Rights........
On November 5, 1997, the Old Notes were issued to
BancAmerica Robertson Stephens and CIBC
Oppenheimer Corp. (formerly known as CIBC Wood
Gundy Securities Corp.) (collectively, the
"Initial Purchasers"). The Old Notes were placed
with "qualified institutional buyers" (as such
term is defined in Rule 144A promulgated under
the Securities Act) and institutional "accredited
investors" (as such term is defined in Rule
501(A)(1), (2), (3) or (7) under the Securities
Act). In connection therewith, the Company
executed and delivered for the benefit of the
holders of Old Notes a registration rights
agreement (the "Registration Rights Agreement"),
pursuant to which the Company agreed (i) to file
a registration statement (the "Registration
Statement") on or prior to January 4, 1998 with
respect to the Exchange Offer and (ii) to use its
best efforts to cause the Registration Statement
to be declared effective by the Commission on or
prior to April 4, 1998. In certain circumstances,
the Company will be required to provide a shelf
registration statement (the "Shelf Registration
Statement") to cover resales of the Old Notes by
the holders thereof. If the Company does not
comply with its obligations under the
Registration Rights Agreement, it will be
required to pay Liquidated Damages to holders of
the Old Notes under certain circumstances. See
"The Exchange Offer--Registration Rights
Agreement."
5
The Exchange Offer.......... The New Notes are being offered in exchange for a
like principal amount of Old Notes. The issuance
of the New Notes is intended to satisfy the
obligations of the Company contained in the
Registration Rights Agreement. Based upon the
position of the staff of the Commission set forth
in no-action letters issued to third parties in
other transactions substantially similar to the
Exchange Offer (Exxon Capital Holdings
Corporation (available April 13, 1988), Morgan
Stanley & Co., Inc. (available June 5, 1991) and
Shearman and Sterling (available July 2, 1993)),
the Company believes that the New Notes issued
pursuant to the Exchange Offer may be offered for
resale, resold and otherwise transferred by
holders thereof (other than (i) any such holder
that is an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act;
(ii) an Initial Purchaser who acquired the Old
Notes directly from the Company solely in order
to resell pursuant to Rule 144A of the Securities
Act or any other available exemption under the
Securities Act; or (iii) a broker-dealer who
acquired the Old Notes as a result of market
making or other trading activities) 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 such holder is not participating and
has no arrangement with any person to participate
in a distribution (within the meaning of the
Securities Act) of the New Notes. Each broker-
dealer that receives New Notes for its own
account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus
meeting the requirements of the Securities Act in
connection with any resale for the New Notes.
Although there has been no indication of any
change in the staff's position, there can be no
assurance that the staff of the Commission would
make a similar determination with respect to the
resale of the New Notes. See "Risk Factors."
Procedures for Tendering.... Tendering holders of Old Notes must complete and
sign the Letter of Transmittal in accordance with
the instructions contained therein and forward
the same by mail, facsimile or hand delivery,
together with any other required documents, to
the Exchange Agent (as defined herein), either
with the Old Notes to be tendered or in
compliance with the specified procedures for
guaranteed delivery of Old Notes. Holders of the
Old Notes desiring to tender such Old Notes in
exchange for New Notes should allow sufficient
time to ensure timely delivery. Certain brokers,
dealers, commercial banks, trust companies and
other nominees may also effect tenders by book-
entry transfer. Holders of Old Notes registered
in the name of a broker, dealer, commercial bank,
trust company or other nominee are urged to
contact such person promptly if they wish to
tender Old Notes pursuant to the Exchange Offer.
Letters of Transmittal and certificates
representing Old Notes should not be sent to the
Company. Such documents should only be sent to
the Exchange Agent. Questions regarding how to
tender and requests for information should be
directed to the Exchange Agent. See "The Exchange
Offer--Procedures for Tendering Old Notes."
6
Tenders; Expiration Date;
Withdrawal................. The Exchange Offer will expire on 5:00 p.m., New
York City time, on May 5, 1998, or such later
date and time to which the Exchange Offer is
extended (the "Expiration Date"). The tender of
Old Notes pursuant to the Exchange Offer may be
withdrawn at any time prior to the Expiration
Date. Certificates representing Old Notes not
accepted for exchange for any reason will be
returned without expense to the tendering holder
thereof as promptly as practicable after the
expiration or termination of the Exchange Offer.
See "The Exchange Offer Terms of the Exchange
Offer; Period for Tendering Old Notes" and "--
Withdrawal Rights."
Certain Conditions to the
Exchange Offer.............
The Exchange Offer is subject to certain
customary conditions, all of which may be waived
by the Company, including the absence of (i)
threatened or pending proceedings seeking to
restrain the Exchange Offer or resulting in a
material delay to the Exchange Offer; (ii) a
general suspension of trading on any national
securities exchange or in the over-the-counter
market; (iii) a banking moratorium; (iv) a
commencement of war, armed hostilities or other
similar international calamity directly or
indirectly involving the United States; and (v)
change or threatened change in the business,
properties, assets, liabilities, financial
condition, operations, results of operations or
prospects of the Company and its subsidiaries
taken as a whole that, in the reasonable judgment
of the Company, is or may be adverse to the
Company. The Company shall not be required to
accept for exchange, or to issue New Notes in
exchange for, any Old Notes, if at any time
before the acceptance of such Old Notes for
exchange or the exchange of the New Notes for
such Old Notes, any of the foregoing events
occurs which, in the sole judgment of the
Company, make it inadvisable to proceed with the
Exchange Offer and/or with such acceptance for
exchange or with such exchange. If the Company
fails to consummate the Exchange Offer because
the Exchange Offer is not permitted by applicable
law or Commission policy, it will file with the
Commission a Shelf Registration Statement to
cover resales of the Transfer Restricted
Securities (as defined herein) by the holders
thereof who satisfy certain conditions. If the
Company fails to consummate the Exchange Offer or
file a Shelf Registration Statement in accordance
with the Registration Rights Agreements, the
Company will pay Liquidated Damages (as defined
herein) to each holder of Transfer Restricted
Securities until the cure of all Registration
Defaults (as defined herein). The Exchange Offer
is not conditioned upon any minimum aggregate
principal amount of Old Notes being tendered for
exchange. See "The Exchange Offer--Registration
Rights; Liquidated Damages" and "--Certain
Conditions to the Exchange Offer."
Federal Income Tax For Federal income tax purposes, the exchange
Consequences............... pursuant to the Exchange Offer will not result in
any income, gain or loss to the Holders or the
Company. See "Certain Federal Income Tax
Considerations."
7
Use of Proceeds............. There will be no proceeds to the Company from the
exchange pursuant to the Exchange Offer.
Exchange Agent.............. Norwest Bank Minnesota, National Association, is
serving as Exchange Agent in connection with the
Notes in the Exchange Offer.
CONSEQUENCES OF NOT EXCHANGING THE OLD NOTES
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon as a
consequence of the issuance of the Old Notes pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Securities
Act and applicable state securities laws. In general, the Old Notes may not be
offered or sold, unless registered under the Securities Act, except pursuant to
an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. The Company does not currently anticipate
that it will register the Old Notes under the Securities Act. See "Risk
Factors--Consequences of Exchange and Failure to Exchange" and "The Exchange
Offer--Consequences of Not Exchanging Old Notes."
THE NEW NOTES
Issuer...................... Elgin National Industries, Inc.
Securities Offered.......... $85,000,000 principal amount of 11% Series B
Senior Notes due 2007.
Maturity Date............... November 1, 2007.
Interest Payment Dates...... May 1 and November 1, commencing May 1, 1998.
Mandatory Sinking Fund or
Redemption.................
None.
Optional Redemption......... The New Notes may be redeemed, in whole or in
part, at any time on or after November 1, 2002 at
the option of the Company, at the redemption
prices set forth herein, plus, in each case,
accrued and unpaid interest, and Liquidated
Damages, if any, to the date of redemption. In
addition, at any time prior to November 1, 2000
the Company may, at its option, redeem up to
$25.0 million in aggregate principal amount of
the New Notes at a redemption price of 111.0% of
the principal amount thereof, plus accrued and
unpaid interest thereon and Liquidated Damages,
if any, to the date of redemption, with the net
cash proceeds of one or more public offerings of
the Company's common stock, provided that not
less than $60.0 million aggregate principal
amount of the New Notes remains outstanding
immediately after the occurrence of any such
redemption.
Change of Control........... In the event of a Change of Control, each holder
of the New Notes will have the right to require
the Company to make an offer to purchase such
holder's New Notes, in whole or in part, at a
price equal to 101% of the aggregate principal
amount thereof, plus accrued and unpaid interest,
and Liquidated Damages, if any, to the date of
purchase. There can be no assurance that
sufficient funds will be available at the time of
any Change of Control to make any required
purchases of the Notes tendered. See "Risk
Factors--Potential Inability to Fund a Change in
Control Offer."
8
Ranking..................... The New Notes will be general unsecured
obligations of the Company and will rank senior
in right of payment to all existing and future
subordinated indebtedness of the Company and will
rank pari passu in right of payment with all
other current and future unsubordinated
indebtedness of the Company.
Guarantees.................. The New Notes will be unconditionally guaranteed
(the "Guarantees") by each of the Company's
material domestic Restricted Subsidiaries,
consisting of Tabor Machine Company, Norris
Screen and Manufacturing Inc., TranService, Inc.,
Centrifugal Services, Inc., Mining Controls,
Inc., Clinch River Corporation, Roberts &
Schaefer Company and Soros Associates, Inc.
(collectively, the "Guarantors"). The Guarantees
will be senior unsecured obligations and will
rank senior in right of payment to all existing
and future indebtedness of the Guarantors that is
subordinated to such Guarantees and will rank
pari passu in right of payment with all other
current and future unsubordinated obligations of
each Guarantor.
Effective Subordination.....
The Company will be the borrower and the
Guarantors are guarantors under the Senior Credit
Facility. Such borrowings and guarantees will be
secured by the inventory and accounts receivable
of the Company and the respective Guarantors and
may be secured by property, plant and equipment
of the Company and the Guarantors if there is a
default or event of default under the Senior
Credit Facility. Accordingly, the New Notes and
the Guarantees will be effectively subordinated
to all obligations under the Senior Credit
Facility and the guarantees of such obligations
to the extent of the value of the assets securing
such loans and guarantees. The Company has $20
million of credit available under the Senior
Credit Facility. At December 31, 1997, there was
$0.8 million of aggregate senior Indebtedness
outstanding in addition to the Notes, excluding
$4.0 million in outstanding letters of credit and
excluding payment and performance bonds. As of
such date, there would have been no other pari
passu Indebtedness and no subordinated
Indebtedness of the Company or any Guarantor
outstanding. There is currently no amount of the
Company's indebtedness that effectively ranks
senior to the New Notes. The terms of the
Indenture will permit the Company and its
Restricted Subsidiaries to incur additional
Indebtedness, subject to certain limitations.
Certain Covenants........... The Indenture will, among other things, limit the
ability of the Company and its Restricted
Subsidiaries to: incur additional Indebtedness;
make certain restricted payments; make certain
investments; grant liens on assets; sell assets;
enter into transactions with Affiliates; and
merge, consolidate or transfer substantially all
of their assets.
Registration Rights The Company and the Guarantors have agreed to
Agreement.................. file within 60 days after the Issue Date, and to
cause to become effective within 150 days of the
Issue Date, a registration statement under the
Securities
9
Act with respect to an offer to Holders to
exchange the Old Notes (and the related
Guarantees) for the New Notes (and related
Guarantees). In the event that the Exchange Offer
is not consummated within 180 days of the Issue
Date or, under certain circumstances, if the
Initial Purchasers so request, the Company and
the Guarantors will cause to become effective
under the Securities Act a Shelf Registration
Statement with respect to the resale of the Notes
and keep such Shelf Registration Statement
effective until two years after the effective
date thereof. In the event the foregoing
registration requirements are not met, a
Registration Default shall be deemed to have
occurred and specified Liquidated Damages will
become payable with respect to the Old Notes
until such Registration Default has been cured.
Use of Proceeds............. The Company will receive no proceeds from the
Exchange Offer. The gross proceeds to the Company
from the Old Notes Offering was $85.0 million.
The Company used such proceeds to effect the
Recapitalization Transactions, for general
corporate purposes and to pay related fees and
expenses. See "Use of Proceeds."
Risk Factors................ See "Risk Factors" beginning on page 13 for a
discussion of certain factors that should be
considered by prospective purchasers of the New
Notes (including holders of the Old Notes
participating in the Exchange Offer), including
factors affecting forward-looking statements.
A description of the terms and conditions of the New Notes, including
definitions of terms which are capitalized above, is set forth herein under
"Description of New Notes."
10
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
The following table presents summary historical and pro forma financial
information of the Company. The summary historical financial data as of the
dates and for the periods indicated were derived from the audited consolidated
financial statements of the Company. The summary financial information should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Selected Historical and Pro Forma
Consolidated Financial Data" and the Company's audited consolidated financial
statements and notes thereto, which are included in this Offering Memorandum.
The pro forma financial data for the twelve months ended December 31, 1997 is
derived from the audited consolidated financial statements of the Company and
is pro forma for the Old Notes Offering and the Recapitalization Transactions.
FISCAL YEAR ENDED DECEMBER 31,
------------------------------------------------
1993 1994 1995 (A) 1996 1997
-------- -------- -------- -------- --------
(IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Net sales............................ $143,655 $197,284 $126,839 $135,651 $139,615
Cost of sales........................ 116,784 167,170 102,654 100,119 102,744
-------- -------- -------- -------- --------
Gross profit........................ 26,871 30,114 24,185 35,532 36,871
Selling, general and administrative
expenses............................ 19,884 19,356 19,891 21,226 21,840
Amortization expense................. 877 3,050 3,052 3,085 3,447
-------- -------- -------- -------- --------
Operating income.................... 6,110 7,708 1,242 11,221 11,584
Other expenses (income):
Interest expense, net............... 2,771 6,270 4,807 3,340 3,471
Gain on the sale of product line.... -- -- (2,520) -- --
-------- -------- -------- -------- --------
Income (loss) from continuing
operations before income taxes...... 3,339 1,438 (1,045) 7,881 8,113
Provision for income taxes........... 1,285 668 124 3,191 3,187
-------- -------- -------- -------- --------
Income (loss) from continuing
operations.......................... 2,054 770 (1,169) 4,690 4,926
Income from discontinued
operations, net of income taxes (b). 2,426 889 876 174 122
-------- -------- -------- -------- --------
Income (loss) before extraordinary
item................................ 4,480 1,659 (293) 4,864 5,048
Extraordinary loss on early
extinguishment of debt, net of
income tax (c)...................... -- -- -- -- (582)
-------- -------- -------- -------- --------
Net income (loss).................... $ 4,480 $ 1,659 $ (293) $ 4,864 $ 4,466
======== ======== ======== ======== ========
OTHER FINANCIAL DATA:
Gross margin %....................... 18.7% 15.3% 19.1% 26.2% 26.4%
EBITDA (d)........................... $ 10,493 $ 13,712 $ 5,964 $ 15,850 $ 16,396
EBITDA margin %...................... 7.3% 7.0% 4.7% 11.7% 11.7%
Depreciation and amortization (e).... $ 3,278 $ 5,776 $ 5,497 $ 5,382 $ 5,569
Capital expenditures (e)............. $ 2,521 $ 1,506 $ 1,501 $ 1,739 $ 1,974
Ratio of earnings to fixed charges
(f)................................. 1.9x 1.2x 0.8x 2.6x 2.5x
Net cash provided by operating
activities.......................... 4,941 8,037 142 17,506 1,008
Net cash (used in) provided by
investing activities................ (64,545) 722 24,478 1,935 (1,948)
Net cash provided by (used in)
financing activities................ 59,704 (11,481) (22,285) (10,785) (714)
OPERATING UNIT DATA:
Net Sales:
Manufactured Products Group......... $ 66,211 $ 75,698 $ 74,859 $ 78,952 $ 78,592
Engineering Services Group.......... 77,444 121,586 51,980 56,699 61,023
-------- -------- -------- -------- --------
Total Net Sales................... $143,655 $197,284 $126,839 $135,651 $139,615
======== ======== ======== ======== ========
EBITDA:
Manufactured Products Group......... $ 12,398 $ 16,304 $ 15,566 $ 16,412 $ 17,166
Engineering Services Group.......... 2,256 1,011 (5,724) 3,860 4,201
-------- -------- -------- -------- --------
Total operating unit EBITDA....... 14,654 17,315 9,842 20,272 21,367
Corporate overhead.................. (4,161) (3,603) (3,878) (4,422) (4,971)
-------- -------- -------- -------- --------
Total EBITDA...................... $ 10,493 $ 13,712 $ 5,964 $ 15,850 $ 16,396
======== ======== ======== ======== ========
PRO FORMA FINANCIAL DATA:
Ratio of EBITDA to cash interest expense................................ 1.7x
Ratio of net debt to EBITDA (g)......................................... 4.7x
Ratio of earnings to fixed charges...................................... 1.3x
Net cash used in operating activities................................... (2,812)
Net cash used by investing activities................................... (1,948)
Net cash used in financing activities................................... (293)
DECEMBER 31, 1997
-----------------
Balance Sheet Data:
Cash and cash equivalents.................................... $ 9,337
Working capital less cash and cash equivalents............... 13,898
Property, plant and equipment, net........................... 13,582
Total assets................................................. 102,879
Total debt................................................... 85,751
Redeemable preferred stock and redeemable preferred stock
units....................................................... 13,226
Stockholder's deficit........................................ (31,860)
11
- -------
(a) The Company's 1995 performance was adversely affected by a loss of
approximately $7.8 million on a single turnkey project of the Engineering
Services Group that was completed in that year, and which resulted in
significant operating and control changes in that Group. See "Management's
Discussion and Financial Condition and Results of Operations--Results of
Operations" and "Business--Engineering Services Group--Roberts & Schaefer
Company."
(b) Income from discontinued operations is comprised of earnings of GC
Thorsen, Inc. (sold in 1995), American Fastener Corporation (sold in
1996), along with the associated gain on the sale of those businesses, and
an investment in a limited partnership (disposed of in 1993) plus
management fees (paid in 1993), net of income taxes.
(c) The loss on the early extinguishment of debt resulted from the retirement
of subordinated debt from proceeds of the Senior Notes and included
amortization of the remaining financing costs and a prepayment penalty.
(d) EBITDA is income (loss) from continuing operations before income taxes
plus interest expense, depreciation, amortization and other non-cash
income and expense. In the periods presented, the following non-cash items
were included in income from continuing operations but excluded from
EBITDA: (i) allocated income from pension overfunding resulting from the
Company's overfunded pension plan; (ii) inventory revaluation expense
related to the market valuation of inventory in conjunction with the 1993
purchase of the Company pursuant to Accounting Principles Board Opinion
No. 16; and (iii) gain on sale of product line resulting from the 1995
sale of Ohio Rod's spoke and nipple product line.
FISCAL YEAR ENDED DECEMBER 31,
------------------------------------
1993 1994 1995 1996 1997
------ ----- ------- ----- -----
(IN THOUSANDS)
Allocated income from
pension overfunding........ $ (526) $(578) $ (775) $(753) $(757)
Inventory revaluation
expense.................... 1,631 806 -- -- --
Gain on sale of product
line....................... -- -- (2,520) -- --
------ ----- ------- ----- -----
Total non-cash (income)
expense.................... $1,105 $ 228 $(3,295) $(753) $(757)
====== ===== ======= ===== =====
EBITDA is not intended as a substitute for measurements of cash flows under
generally accepted accounting principles, nor has it been presented as an
alternative to earnings from operations as an indicator of operating
performance or as a measure of liquidity. EBITDA should not be considered in
isolation or as substitute for measures of performance prepared in
accordance with generally accepted accounting principles. While EBITDA is
frequently used as a measure of the ability to meet debt service
requirements, it should not be construed as an alternative to operating
income, net income or cash flows from operating activities and should not be
construed as an indication of the Company's operating performance or as a
measure of liquidity, it is not necessarily comparable to other similarly
titled captions of other companies due to potential inconsistencies in the
method of calculation. Not all funds depicted by EBITDA are available for
discretionary use by the Company due to legal and functional requirements to
conserve funds for capital replacement and expansion, debt service and other
commitments and uncertainties.
(e) Excludes depreciation, amortization and capital expenditures related to
discontinued operations and extraordinary loss.
(f) For purposes of determining the ratio of earnings to fixed charges,
earnings are defined as income from continuing operations before income
taxes plus fixed charges. Fixed Charges consist of interest expense, plus
amortization of deferred debt issuance costs.
(g) Net debt equals total debt less cash and cash equivalents.
12
RISK FACTORS
Holders of the Old Notes should consider carefully the following risk
factors, in addition to the other information set forth in this Prospectus,
before tendering their Old Notes in the Exchange Offer. This Prospectus
contains certain forward-looking statements, including statements containing
the words "believes," "anticipates," "expects" and words of similar import.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors which may cause the actual results, performance or
achievements of the Company, or industry results, to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among others, the
following: adverse changes in national or local economic conditions, increased
competition, changes in availability, cost and terms of financing, changes in
operating expenses and other factors referenced in this Prospectus. Certain of
these factors are discussed in more detail elsewhere in this Prospectus,
including without limitation, under the captions "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business."
Given these uncertainties, prospective investors are cautioned not to place
undue reliance on such forward-looking statements. The Company disclaims any
obligation to update any such factors or to publicly announce the results of
any revisions to any of the forward-looking statements contained in this
Prospectus to reflect future events or developments. The risk factors set
forth below (other than "Consequences of Exchange and Failure to Exchange")
are generally applicable to the Old Notes as well as the New Notes.
LEVERAGE AND DEBT SERVICE REQUIREMENTS
The Company is highly leveraged and has significant debt service
obligations. On a pro forma basis, in addition to the Notes, at December 31,
1997 the Company had $0.8 million of pari passu Indebtedness (excluding $4.0
million of outstanding letters of credit and excluding payment and performance
bonds), preferred equity of $13.2 million and a common stockholders' deficit
of $34.3 million. The $0.8 of pari passu indebtedness includes $0.5 million of
total indebtedness of the Guarantors. The Company's pro forma ratio of
earnings to fixed charges for 1997 would have been 1.3 to 1, and pro forma
ratio of debt to total capitalization would have been 1.3 to 1. The Indenture
permits the Company and its subsidiaries to incur additional Indebtedness
under one or more Credit Facilities (as defined), including the Company's
Senior Credit Facility, and to incur other additional indebtedness (subject to
certain limitations). The Company currently has no debt outstanding under the
Senior Credit Facility. Any borrowing under the Senior Credit Facility would
be at a variable rate selected by the Company, consisting of (a) the greater
of the Federal Funds Rate plus 0.5% or the bank's reference rate, or (b) LIBOR
plus 1.5% (effectively 7.2%, 7.0% and 8.5%, respectively, at December 31,
1997). Fluctuations in the interest rate selected by the Company could have a
material adverse effect on the Company's results of operations and liquidity.
The Company's high degree of leverage could have important consequences for
the holders of the Notes including, without limitation, the following: (i) a
substantial portion of the Company's cash provided from operations,
approximately $9.4 million annually, will be required for the payment of debt
service and will not be available to the Company for other purposes; (ii) the
Company's ability to obtain additional financing in the future for working
capital, capital expenditures or acquisitions may be limited; and (iii) the
Company's levels of indebtedness may limit the Company's flexibility in
reacting to changes in its operating environment and in economic conditions
generally. See "Description of Senior Credit Facility" and "Description of New
Notes."
The Company's ability to pay principal and interest on the Notes and to
satisfy its other debt service obligations will depend upon the future
operating performance of its businesses, which will be affected by prevailing
economic conditions in the markets it serves and financial, business and other
factors, certain of which are beyond the Company's control. The Company's
Senior Credit Facility and the Indenture contain certain restrictive
covenants. Restrictive covenants under the Senior Credit Facility and the
Indenture could significantly limit the Company's ability to withstand
competitive pressures or adverse economic conditions, make acquisitions, or
take advantage of business opportunities that may arise. If the Company is
unable to service its indebtedness it will be forced to adopt an alternative
strategy that may include reducing or delaying capital expenditures, selling
assets, restructuring or refinancing its indebtedness, or seeking additional
equity capital.
13
There can be no assurance that any such strategy could be effected on
satisfactory terms, if at all. The Senior Credit Facility will expire in
November, 2000. The Company expects to extend or replace the Senior Credit
Facility at such time. There can be no assurance, however, that the Senior
Credit Facility will be extended or replaced upon expiration thereof, or that
any such refinancing would be possible, that any additional financing could be
obtained or that any refinancing or additional financing would be on terms
that are favorable to the Company. The inability to obtain financing or
refinancing of the Senior Credit Facility on favorable terms could have a
material adverse effect on the Company's business, financial condition,
results of operations and debt service capability.
UNSECURED NATURE OF THE NOTES; EFFECTIVE SUBORDINATION
The Old Notes are, and the New Notes will be, unsecured obligations of the
Company and the Guarantees are and will be unsecured obligations of the
Guarantors. Persons seeking enforcement of the Notes or the Guarantees will
have only the rights of a general unsecured creditor and, as a result, the
benefits that might be realized in connection with the enforcement of such
obligations may be limited. The Company has the ability to borrow up to $20.0
million under Credit Facilities, subject to borrowing base limitations, or
more if supported by a borrowing base calculation. The Senior Credit Facility
(including borrowings and outstanding letters of credit) and guarantees
thereof by the Company and the Guarantors are secured by liens on inventory
and receivables of the Company and the Guarantors and a pledge of the capital
stock of the Company's material Subsidiaries, and other Credit Facilities are
also permitted to be secured by inventory and accounts receivable, subject to
certain limitations. In addition, the Senior Credit Facility may be secured by
the property, plant and equipment of the Company and the Guarantors if there
is a default or event of default thereunder or if a lien on such assets is
granted to any other party. Accordingly, the lenders under the Senior Credit
Facility and any other Credit Facility will have claims with respect to the
assets constituting collateral for any indebtedness (including outstanding
letters of credit thereunder) that will be satisfied prior to the unsecured
claims of holders of the Notes. The Notes and the Guarantees will be
effectively subordinated to the Credit Facilities to the extent of such
security interests. In the event of a default on the Notes or a bankruptcy,
liquidation or reorganization of the Company or any Guarantor, the assets
subject to such security interests will be available to satisfy obligations of
the secured debt before any payment could be made on the Notes or the
Guarantees. Accordingly, there may only be a limited amount of assets
available to satisfy any claims of the holders of Notes upon an acceleration
of the Notes. To the extent that the value of such collateral is insufficient
to satisfy such secured indebtedness, amounts remaining outstanding on such
secured indebtedness would be entitled to share pari passu with the Notes and
other unsecured, unsubordinated claimants (including trade creditors) with
respect to any other assets of the Company and the Guarantors. In addition,
Foreign Subsidiaries (as defined) are not required to become Guarantors of the
Notes unless they become guarantors of another Credit Facility of the Company.
As a result, any borrowings by a Foreign Subsidiary under a Credit Facility
are likely to be satisfied out of such Foreign Subsidiaries' assets prior to
any assets of such Foreign Subsidiaries being available for distribution to
the Company and repayment of the Notes.
DEPENDENCE ON A SINGLE INDUSTRY: SIGNIFICANCE OF COAL MINING INDUSTRY TO THE
COMPANY
Approximately 40% of the Company's consolidated net sales in 1997 were
derived from customers operating primarily in the coal mining industry. A
significant portion of the business of the Manufactured Products Group is the
manufacture and sale of screening systems, centrifuges, support equipment and
related components and replacement parts to companies engaged in underground
and surface mining of coal, primarily in the eastern United States.
Additionally, the Engineering Services Group provides design, engineering,
procurement and construction management services for the mining and mineral
processing industries, with the coal mining industry constituting its largest
end use market. Accordingly, the business, results of operations, financial
condition and the debt service capability of the Company may be materially and
adversely affected by adverse developments in the domestic or international
coal mining industry, including the risks and hazards that are inherent in
such industry.
14
A significant portion of worldwide coal production is utilized by electric
utilities and thus the demand for coal is highly dependent upon the demand for
electricity, which in turn depends to a large extent upon the level of
economic activity. The demand by electric utilities for coal also is related
to the availability and cost in any given location of alternative sources of
energy, such as natural gas, oil or nuclear power. Other factors that may
cause coal production levels to fluctuate (therefore affecting demand for a
significant portion of the Company's products and services) include
operational and geological factors related to available mine reserves and the
ease or difficulty of mining such reserves, severe weather, mechanical
equipment performance, effects of compliance with environmental, occupational
safety, mining safety and other applicable regulations, as well as labor
relations between the U.S. coal industry and its labor force, particularly the
United Mine Workers of America. Labor stoppages can have a particularly
significant and broad-based effect upon the coal industry, and in turn to
suppliers to the coal industry such as the Company by causing a decrease in
demand for goods and services. The last significant labor stoppage in the
United States coal industry occurred in 1993, lasting nine months. Such labor
stoppage materially and adversely affected the results of operations of the
Company, and had a negative impact on cash flow. The current national union
contract will expire on December 31, 2002. There can be no assurance that
conditions in the coal industry, including any future labor stoppages, would
not have a material adverse effect on the Company's business, financial
condition, results of operation and debt service capability.
DESIGN AND CONSTRUCTION ENGINEERING; FIXED PRICE CONTRACTING; ERRORS AND
OMISSIONS CLAIMS
In 1997, approximately 36% of the Engineering Services Group's net sales
were from fixed price turnkey projects. In such projects, the Company's
compensation is fixed regardless of the actual cost necessary to complete the
project. Consequently, in executing such projects, the Company is subject to
the risk of cost overruns caused by factors beyond its control, such as
adverse weather conditions, unexpected site conditions and non-performance or
delayed performance by subcontractors or suppliers. The Company's performance
is also subject to the impact of inaccurate estimations by the Company. Each
of these factors, as well as other unforeseeable factors (such as equipment
breakdown, loss of key personnel, property damage or personal injury), could
materially and adversely affect the Company's profit on the project in
question and even result in a loss. The Company has experienced losses on
certain Engineering Services Group contracts in prior years and experienced a
material loss on a project in 1995 (see "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Results of Operations"),
which resulted in significant operating and control changes in the Engineering
Services Group. See "Business--Engineering Services Group--Roberts & Schaefer
Company." There can be no assurance that losses will not recur, and, depending
on the magnitude or frequency of such losses, such projects could materially
and adversely affect the Company's business, financial condition, results of
operation and debt service capability. Additionally, receipt of fees for such
projects is generally tied to completion benchmarks. Therefore, the Company's
receipt of fees could be delayed due to factors beyond its control that
preclude achievement of the benchmarks, which could in turn adversely affect
the Company's cash flow and results of operations.
Design and construction engineering also necessarily subjects the service
provider to the risks of substantial claims should errors or omissions occur
in the course of executing a project. While the Company has generally not
experienced substantial errors and omissions claims, there can be no assurance
that such claims would not be asserted against the Company in the future. If
the Company's insurance coverage were insufficient to pay such claims, the
Company's business, financial condition, results of operation and debt service
capability could be materially and adversely affected.
COMPETITION
The Company's products and services are sold in competitive markets. The
Company believes that the principal points of competition in its markets are
product and service quality, price, design and engineering capabilities,
product development, conformity to customer specifications, quality of post-
sale support and timeliness of delivery. Maintaining and improving the
Company's competitive position will require continued investment by the
Company in manufacturing, quality standards, marketing and customer service
and support.
15
There can be no assurance that the Company will have sufficient resources to
continue to make such investment or that it will be successful in maintaining
its competitive position. The Company's competitors may develop products that
are superior to the Company's products, or may develop methods of more
efficiently and effectively providing services or may adapt more quickly than
the Company to new technologies or evolving customer requirements. Certain of
the Company's competitors may have greater financial, marketing and research
and development resources than the Company. There can be no assurance that the
Company will be able to compete successfully with its existing competitors or
with new competitors. Failure to continue competing successfully could
adversely affect the Company's business, financial condition, results of
operation and debt service capability.
VARIABILITY OF REVENUES AND CASH FLOWS
The Company's net sales and operating results have been, and are, subject to
significant fluctuations from period to period, due to the nature of the
project base of the Engineering Services Group. The Engineering Services
Group's project base is typically comprised of over 100 projects in process
each year. At any given time, this project base includes a substantial
majority of small projects (which the Company defines as producing less than
$1.0 million in annual sales) as well as a number of larger projects (which
the Company defines as producing $1.0 million or more in annual sales). The
Company's revenues from these larger projects tend to fluctuate from year to
year depending on the number of such projects in process and the respective
status of each project. In addition, these larger projects often extend over
more than one year, causing potential fluctuations in revenues and cash flows.
In some contracts, the customers provide full or partial advance cash payments
prior to performance by the Company. In other contracts, receipts follow
disbursements in varying degrees. As a result, reported operating income of
the Engineering Services Group for any period is not necessarily indicative of
cash flow for that period. See "Management Discussion and Analysis of
Financial Condition and Results of Operations".
INTERNATIONAL BUSINESS
In 1997, approximately 17% of the Company's net sales was attributable to
products sold or services provided outside of the United States. Foreign
sales, particularly construction management projects undertaken at foreign
locations, are subject to various risks, including exposure to currency
fluctuations, political, religious and economic instability, local labor
market conditions, the imposition of foreign tariffs and other trade barriers,
and changes in governmental policies. While the Company historically has not
experienced material adverse effects due to its foreign sales, the Company's
foreign sales may incur increased costs and experience delays or disruptions
in product or service deliveries that could cause loss of revenue and damage
to customer relationships. A portion of the Company's net sales and cost of
sales is derived from international operations which are conducted in foreign
currencies. Changes in the value of these foreign currencies relative to the
U.S. dollar could adversely affect the Company's business, financial
condition, results of operation and debt service capability. For example,
recent instability in the financial markets in Asia may adversely affect the
Company's business prospects in that region. There can be no assurance that
the Company's foreign operations, or expansion thereof, would not have a
material adverse effect on the Company's business, financial condition,
results of operations and debt service capability. The countries from which
foreign sales are generated vary from year to year due to the nature of work
in process. In 1996 the majority of the Company's foreign sales were from
Indonesia, Poland and Thailand whereas in 1997 the majority of the Company's
foreign sales were from Poland, China, Mexico, Trinidad and Indonesia. The
majority of the Company's foreign sales and costs are denominated in U.S.
dollars. With respect to transactions denominated in foreign currencies, the
Company attempts to mitigate foreign exchange risk by contractually shifting
the burden of the risk of currency fluctuations to the other party to the
transactions. All foreign sales not denominated in U.S. Dollars are subject to
an agreement whereby the Company is indemnified against or otherwise protected
from exchange risk. It has been the Company's historic practice to conduct
international sales in accordance with the foregoing. There can be no
assurance that the Company's strategies will ensure that the Company will be
fully protected from foreign exchange risk.
CONTROL BY SENIOR MANAGEMENT
Senior Management beneficially owns 100% of the Company's outstanding shares
of capital stock and is able to control the business and affairs of the
Company, including the election of the Company's Board of
16
Directors, and to determine the outcome of any action that requires
shareholder approval, including the adoption of amendments to the Company's
certificate of incorporation, and certain mergers, sales of assets and other
business acquisitions or dispositions. Each member of Senior Management has a
1/3 vote with respect to any matter requiring stockholder approval. Senior
Management owns the common stock through SHC Investment Partnership and the
preferred stock individually. Senior Management constitute the only members of
SHC Investment Partnership. Through its control of the Board of Directors,
Senior Management also controls any decision made by the Board, including the
terms of material transactions to which the Company or any subsidiary is a
party, and the terms of employment of the Company's executives, including
members of Senior Management (subject to limitations on salary and bonuses as
set forth under "Description of Notes--Certain Covenants--Restricted
Payments"). There can be no assurance that the effect of any such action would
not be adverse to the holders of the Notes. See "Principal Stockholders".
DEPENDENCE UPON MANAGEMENT PERSONNEL
The Company's success depends upon the efforts, abilities and expertise of
its executive officers and other key employees, particularly its Senior
Management. Although the Company has entered into employment and non-
competition agreements with Senior Management, the loss of the services of
Senior Management could have a material adverse effect on the Company's
operations.
RESTRICTIVE DEBT COVENANTS
The Senior Credit Facility and the Indenture restrict the ability of the
Company and its subsidiaries to, among other things, incur additional
indebtedness, incur liens or make certain restricted payments or investments,
consummate certain asset sales, enter into certain transactions with
affiliates, impose restrictions on the ability of a subsidiary to pay
dividends or make certain payments to the Company, merge or consolidate with
any other person or sell, assign, transfer, lease, convey or otherwise dispose
of all or substantially all of its assets. The Senior Credit Facility requires
the Company, on a consolidated basis, to maintain specified financial ratios
and satisfy certain financial tests. The Company's ability to meet such
financial ratios and tests may be affected by events beyond its control. There
can be no assurance that the Company will meet such ratios and tests. A breach
of any of these covenants could result in an event of default under the Senior
Credit Facility. If such an event of default occurs, the lenders thereunder
could elect to declare all amounts borrowed under the Senior Credit Facility,
together with accrued interest, to be immediately due and payable and to
terminate all commitments under the Senior Credit Facility. If the Company was
unable to repay all amounts declared due and payable, the lenders could
proceed against the collateral granted to them to satisfy the indebtedness and
other obligations due and payable. If indebtedness under the Senior Credit
Facility was to be accelerated, such acceleration would likely result in a
default under the Indenture and there can be no assurance that the assets of
the Company and its subsidiaries would be sufficient to repay in full such
indebtedness and the other indebtedness of the Company, including the Notes.
POTENTIAL INABILITY TO FUND A CHANGE IN CONTROL OFFER
Upon the occurrence of a Change of Control, the holders of the Notes would
be entitled to require the Company to repurchase the Notes at a purchase price
equal to 101% of the principal amount of such Notes, plus accrued and unpaid
interest, if any, to the date of purchase. The source of funds for any such
repurchase would be the Company's available cash or cash generated from
operations or other sources, including borrowings, sales of equity or funds
provided by a new controlling person. However, there can be no assurance that
sufficient funds will be available at the time of any Change of Control to
make any required purchases of the Notes tendered. The Company's failure to
make such repayments in such instances would result in a default under both
the Notes and the Senior Credit Facility. Future indebtedness of the Company
may also contain restrictions or repayment requirements with respect to
certain events or transactions that would constitute a Change of Control. In
the event of a Change of Control, there can be no assurance that the Company
would have sufficient assets to satisfy all of its obligations under the Notes
or the Senior Credit Facility. See "Description of Notes--Change of Control"
and "Description of Senior Credit Facility."
17
ENVIRONMENTAL COMPLIANCE; STATUS AS A POTENTIALLY RESPONSIBLE PARTY
The Company is subject to a variety of foreign, federal, state and local
governmental regulations related to the storage, use, discharge and disposal
of toxic, volatile or otherwise hazardous materials used in its manufacturing
processes. The Company has not historically incurred any material adverse
effect on its business, financial condition, results of operations or cash
flow as a result of the Company's compliance with U.S. federal, state,
provincial, local or foreign environmental laws or regulations or remediation
costs. Some risk of environmental liability and other costs is inherent,
however, in the nature of the businesses conducted by the Manufactured
Products Group, which have been in operation for an average of over 36 years
and have performed little invasive testing at their sites. In addition,
businesses previously operated by the Company have been sold in the past.
There can be no assurance that future identification of contamination at its
current or former sites or at third party-owned sites where waste generated by
the Company has been disposed of would not have a material adverse effect on
the Company's business, results of operations, financial condition or debt
service capability. Any failure by the Company to obtain required permits for,
or adequately restrict the discharge of, hazardous substances under present or
future regulations could subject the Company to substantial liability. Such
liability could have a material adverse effect on the Company's business,
financial condition, results of operations and debt service capability.
The Company has been named as a potentially responsible party by the New
York Department of Environmental Conservation for clean-up costs at the
Company's former manufacturing facility in Orangeburg, New York. The Company
has obtained the agreement of its former ultimate parent entity to indemnify
it against losses, damages and costs arising out of such action. Although the
Company believes that the indemnitor has performed its obligations on this
site to date, there can be no assurance that it will continue to do so or that
the Company would successfully recover on the indemnity. In such a case, the
Company would bear the cost of any remediation, which costs could be
significant and materially and adversely affect the Company's business,
financial condition, results of operations and debt service capability.
ACQUISITION STRATEGY
As part of its overall business strategy, the Company intends to continue to
acquire businesses and product lines through strategic acquisitions. The
Company's ability to continue to expand through acquisitions, however, will
depend upon the availability of suitable acquisition candidates, the Company's
ability to consummate such transactions, and the availability of financing on
terms acceptable to the Company, within the limits imposed by the Indenture,
the Senior Credit Facility and any other indebtedness. There can be no
assurance that the Company will be effective in making acquisitions or in
obtaining necessary financing. Such transactions involve numerous risks. In
carrying out its acquisition strategy, the Company attempts to minimize the
risk of unexpected liabilities and contingencies, but such liabilities may
nevertheless arise in a manner that could materially and adversely affect the
Company's business, financial condition, results of operation or debt service
capability. While the Company regularly evaluates potential acquisition
candidates in the ordinary course of its business, there are currently no
binding commitments or agreements with respect to any acquisition. There can
be no assurance that additional acquisitions will be completed or that any
acquired business will be able to operate profitably.
The success of any acquisition will depend in large part on the Company's
ability to effectively integrate the acquired assets into its existing
business. Integrating acquired businesses may, for example, result in a loss
of customers of the acquired businesses and, if the acquired company has
significant losses when purchased, may materially and adversely impact the
Company's results of operations and cash flow. The process of consolidating
acquired businesses requires significant management attention, may place
significant demands on the Company's operations, information systems and
financial resources, and may also result in costs that may materially and
adversely affect the Company's results of operations and cash flow. The
failure to effectively integrate acquired businesses with the Company's
operations could materially and adversely affect the Company's business,
financial condition, results of operations and debt service capability.
18
FRAUDULENT TRANSFER CONSIDERATIONS
Under federal or state fraudulent transfer laws, if a court were to find
that, at the time the Notes and Guarantees were issued, the Company or a
Guarantor, as the case may be, (i) issued the Notes or a Guarantee with the
intent of hindering, delaying or defrauding current or future creditors or
(ii) (A) received less than fair consideration or reasonably equivalent value
for incurring the indebtedness represented by the Notes or a Guarantee, and
(B) (1) was insolvent or was rendered insolvent by reason of the issuance of
the Notes or such Guarantee or any transaction related thereto, (2) was
engaged, or about to engage, in a business or transaction for which its assets
were unreasonably small or (3) intended to incur, or believed (or should have
believed) it would incur, debts beyond its ability to pay as such debts mature
(as all of the foregoing terms as defined in or interpreted under such
fraudulent transfer statutes), such court could avoid all or a portion of the
Company's or a Guarantor's obligations to the holders of Notes, subordinate
the Company's or a Guarantor's obligations to the holders of the Notes to
other existing and future indebtedness of the Company or such Guarantor, as
the case may be, the effect of which would be to entitle such other creditors
to be paid in full before any payment could be made on the Notes, and take
other action detrimental to the holders of the Notes, including, in certain
circumstances, invalidating the Notes. In that event, there would be no
assurance that any repayment on the Notes would ever be recovered by the
holders of the Notes.
The definition of insolvency for purposes of the foregoing considerations
varies among jurisdictions depending upon the federal or state law that is
being applied in any such proceeding. However, the Company or a Guarantor
generally would be considered insolvent at the time it incurs the indebtedness
constituting the Notes or a Guarantee, as the case may be, if (i) the fair
market value (or fair saleable value) of its assets is less than the amount
required to pay its total existing debts and liabilities (including the
probable liability on contingent liabilities) as they become absolute or
matured, after giving effect to the use of the proceeds from the Notes to
redeem equity securities as contemplated in the Recapitalization Transactions,
or (ii) it is incurring debts beyond its ability to pay as such debts mature.
There can be no assurance as to what standard a court would apply in order to
determine whether the Company or a Guarantor was "insolvent" as of the date
the Notes and Guarantees were issued, or that, regardless of the method of
valuation, a court would not determine that the Company or a Guarantor was
insolvent on that date. Nor can there be any assurance that a court would not
determine, regardless of whether the Company or a Guarantor was insolvent on
the date the Notes and Guarantees were issued, that the payments constituted
fraudulent transfers on another ground. To the extent that proceeds from the
sale of the Notes are used to make a distribution to a stockholder on account
of the ownership of capital stock, such as the use of the proceeds from the
Notes to redeem equity securities as contemplated in the Recapitalization
Transactions, a court may find that the Company or a Guarantor did not receive
fair consideration or reasonably equivalent value for the incurrence of the
indebtedness represented by the Notes or a Guarantee, as the case may be.
PRODUCT LIABILITY
The Company's businesses expose it to potential product liability risks that
are inherent in the design, manufacture and sale of its products. While the
Company currently maintains what it believes to be suitable product liability
insurance, there can be no assurance that it will be able to maintain such
insurance on acceptable terms or that any such insurance will provide adequate
protection against potential liabilities. In the event of a claim against the
Company, a lack of sufficient insurance coverage could have a material adverse
effect on the Company and its business, financial condition, results of
operation and debt service capability. Moreover, even if the Company maintains
adequate insurance, any successful claim could materially and adversely affect
the reputation of the Company and its business, financial condition, results
of operations and debt service capability. See "Business--Legal Proceedings."
ABSENCE OF PUBLIC MARKET
The Notes are a new issue of securities for which there is currently no
active trading market. If the Notes are traded after their initial issuance,
they may trade at a discount from their initial offering price, depending
19
upon prevailing interest rates, the market for similar securities and other
factors, including general economic conditions and the financial condition of,
performance of and prospects for the Company. Although the Company does not
intend to list the Notes on any securities exchange or to seek approval for
quotation of the Notes through any automated quotation system, the Company has
made application to have the Old Notes designated for trading in the Private
Offerings, Resales and Tradings through Automated Linkages ("PORTAL") System
of the National Association of Securities Dealers. There can be no assurance
that an active trading market for the Notes will develop.
CONSEQUENCES OF EXCHANGE AND FAILURE TO EXCHANGE
Issuance of the New Notes in exchange for the Old Notes pursuant to the
Exchange Offer will be made only after timely receipt by the applicable
Exchange Agent of such Old Notes and a properly completed and duly executed
Letter of Transmittal and all other required documents. Therefore, holders of
the Old Notes desiring to tender such Old Notes in exchange for New Notes
should allow sufficient time to ensure timely delivery. The Company is under
no duty to give notification of defects or irregularities with respect to
tenders of Old Notes for exchange. Holders of Old Notes who do not exchange
their Old Notes for New Notes pursuant to the Exchange Offer will continue to
be subject to the restrictions on transfer of such Old Notes as set forth in
the legend thereon. In general, the Old Notes may not be offered or sold,
unless registered under the Securities Act, except pursuant to an exemption
from, or in a transaction not subject to, the Securities Act and applicable
state securities laws. The Company does not currently anticipate that it will
register the Old Notes under the Securities Act. In addition, upon the
consummation of the Exchange Offer holders of Old Notes which remain
outstanding will not be entitled to any rights to have such Old Notes
registered under the Securities Act or to any rights under the Registration
Rights Agreements. To the extent that Old Notes are tendered and accepted in
the Exchange Offer, a holder's ability to sell untendered, or tendered but
unaccepted, Old Notes could be adversely affected. See "The Exchange Offer--
Consequences of Not Exchanging Old Notes."
Based on interpretations by the staff of the Commission, the Company
believes that the New Notes issued pursuant to the Exchange Offer in exchange
for Old Notes may be offered for resale, resold and otherwise transferred by a
holder thereof (other than (i) an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act; (ii) an Initial Purchaser who
acquired the Old Notes directly from the Company solely in order to resell
pursuant to Rule 144A of the Securities Act or any other available exemption
under the Securities Act; or (iii) a broker-dealer who acquired the Old Notes
as a result of market-making or other trading activities) 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. The
Company has not, however, sought its own no-action letter from the staff of
the Commission. Although there has been no indication of any change in the
staff's position, there can be no assurance that the staff of the Commission
would make a similar determination with respect to the resale of the New
Notes. Any holder that cannot rely upon such prior staff interpretations must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with a secondary resale transaction, unless such
sale is made pursuant to an exemption from such requirements. See "The
Exchange Offer--Purpose of the Exchange Offer."
WAIVER OF DEFAULTS; AMENDMENT OF INDENTURE AND NOTES
Under the Indenture, holders of a majority in aggregate principal amount of
the Notes may, by notice to the Trustee, waive events of default under the
Indenture, except for defaults in the payment of principal, Liquidated
Damages, if any, and interest on the Notes. Similarly, the Company and the
Trustee may, with the consent of holders of not less than a majority in
aggregate principal amount of the Notes, amend or supplement the Indenture or
modify the rights of holders of the Notes except for certain fundamental
modifications such as subordination of the Notes and changes to the maturity
and certain payment provisions, in which case the consent of each holder is
required. See "Description of New Notes--Events of Default and Remedies" and
"--Amendment, Supplement and Waiver." Consequently, the risk exists that
certain defaults will be waived, or certain amendments effected, against the
wishes of a minority of the holders of the Notes.
20
THE RECAPITALIZATION TRANSACTIONS
On October 15, 1997, the Company (then known as ENI Holding Corp.), Elgin
National Industries, Inc. (a subsidiary of the Company) and all of the
stockholders of the Company entered into the Repurchase Agreement pursuant to
and in connection with which the following occurred on the Closing Date: (i)
the repurchase by the Company of all common stock, preferred stock and common
stock warrants of the Company owned by holders (the "Selling Stockholders")
other than Senior Management, representing approximately 68% of the total
equity of the Company, for an aggregate purchase price of approximately $56.2
million, (ii) the redemption by Elgin National Industries, Inc. (a subsidiary
of the Company) on the Closing Date of all $20.0 million aggregate principal
amount of its outstanding senior subordinated debt, together with accrued and
unpaid interest to the Closing Date and prepayment fees, (iii) the merger on
the Closing Date, effective immediately after such repurchase and redemption,
of Elgin National Industries, Inc. (a subsidiary of the Company) into the
Company, with the Company being the surviving corporation, (iv) the amendment
of the Certificate of Incorporation and by-laws of the Company to, among other
things, change its name to Elgin National Industries, Inc. and (v) the entry
into the Senior Credit Facility by the Company and the Guarantors.
As a result of the Recapitalization Transactions, Senior Management
beneficially owns all of the outstanding capital stock of the Company. Senior
Management holds the common stock of the Company through a general partnership
in which each member of Senior Management owns and controls a one-third
interest. Senior Management also continue to hold, in the aggregate, $12.8
million of preferred stock and preferred stock units (collectively, "Preferred
Stock") of the Company. See "Capitalization." Holders of the Preferred Stock
will be entitled, when, as and if declared by the Board of Directors, to
receive dividends (or dividend equivalents, in the case of preferred stock
units) on each outstanding share of the Preferred Stock at an annual rate of
10% of the then effective liquidation preference per share of Preferred Stock,
subject to the restrictions contained in the Indenture and the Senior Credit
Facility. The Company will be prohibited from redeeming the Preferred Stock
until after the maturity date or earlier redemption of the Notes and until the
Notes have been repaid in full, except as otherwise permitted by the
Restricted Payments covenant in the Indenture. See "Description of Notes--
Certain Covenants--Restricted Payments" and "Description of the Capital
Stock."
The principal amount of the Company's unsecured notes receivable from Senior
Management is $3.6 million. See "Related Transactions."
The Selling Stockholders will be entitled to receive an additional payment
from the Company if, within 18 months after the Closing Date, the Company
merges or consolidates with another entity, sells more than 25% of its
consolidated assets or effects a public offering of capital stock, or if more
than 25% of the Company's outstanding stock is transferred or sold. The
payment due to the Selling Stockholders would equal the excess, if any, of the
value to the Selling Stockholders of such merger, consolidation, sale, public
offering or stock transfer had the Selling Stockholders remained stockholders
of the Company, over the payment made to the Selling Stockholders in the
Recapitalization Transactions. The payment would be made simultaneously with
the consummation of the event giving rise to the payment obligation.
21
USE OF PROCEEDS
The gross proceeds from the sale of the Notes offered hereby were used to
fund the Recapitalization Transactions, for general corporate purposes and to
pay related fees and expenses. The following table sets forth the sources and
uses of funds:
AMOUNTS
--------------
(IN THOUSANDS)
SOURCES OF FUNDS:
Old Notes Offering............................................. $85,000
-------
Total........................................................ $85,000
=======
USES OF FUNDS:
Repurchase of common stock, preferred stock and warrants ...... $56,208
Repayment of 13% senior subordinated notes due 2001............ 20,777
General corporate purposes..................................... 4,015
Fees and expenses.............................................. 4,000
-------
Total........................................................ $85,000
=======
22
CAPITALIZATION
The following table sets forth the actual consolidated capitalization of the
Company as of December 31, 1997. This table should be read in conjunction with
the "Selected Consolidated Financial Data" and the related notes thereto, and
the Company's audited consolidated financial statements, including the related
notes thereto, included elsewhere in this Prospectus.
DECEMBER 31,
1997
--------------
(IN THOUSANDS)
Cash and Cash Equivalents........................................ $ 9,337
========
Long-term debt (including current portion):
Senior credit facility (a)..................................... $ --
Other notes payable............................................ 751
Old Notes Offering............................................. 85,000
--------
Total long-term debt......................................... 85,751
--------
Preferred stock units (b)........................................ 10,379
Preferred stock (c).............................................. 2,847
Total common stockholders' deficit (d)........................... (31,860)
--------
Total capitalization......................................... $ 67,117
========
- --------
(a) The Senior Credit Facility provides for revolving loans of up to $20.0
million, subject to a borrowing base and certain other conditions. See
"Description of Senior Credit Facility."
(b) The preferred stock units represent (i) $7.3 million of units issued in
connection with the 1993 leveraged buyout in lieu of accumulated deferred
compensation which Senior Management agreed to capitalize as preferred
stock units and (ii) $3.1 million of dividend equivalents accrued at 10%
per annum since 1993. The preferred stock units have maturity and
redemption dates and dividend provisions equivalent to the preferred
stock.
(c) Preferred stock of $2.0 million matures and is subject to redemption on
December 31, 2007 and accrues cumulative preferred dividends at 10% per
annum. Balance includes $0.8 million in cumulative dividends since 1993.
The preferred stock may not be redeemed until after the maturity date of
the Notes or until the Notes have been repaid in full except as otherwise
permitted by the Restricted Payments covenant in the Indenture. See
"Description of Capital Stock" and "Description of Notes--Certain
Covenants--Restricted Payments."
(d) Stockholder's deficit reflects (i) repurchase of common stock and
warrants, (ii) a non-cash write-off of unamortized financing fees of a
previous senior credit facility and fees and deferred debt issuance costs,
net of income tax benefit, associated with the senior subordinated notes
and the Senior Credit Facility and (iii) a prepayment fee, net of income
tax benefit, on the senior subordinated notes.
23
SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
The following table presents selected historical and pro forma financial
information of the Company, as of the dates and for the periods indicated. The
historical financial data as of December 31, 1994, 1995, 1996 and 1997 was
derived from the consolidated financial statements of the Company audited by
Coopers & Lybrand L.L.P. The historical financial data as of December 31, 1993
was derived from the consolidated financial statements of the Company as of
and for the four months ended December 31, 1993, audited by Coopers & Lybrand
L.L.P. and from the unaudited consolidated financial statements of the Company
for the twelve months ended December 31, 1993. The pro forma financial data
for the twelve months ended December 31, 1997 is derived from the audited
consolidated financial statements of the Company and is pro forma for the Old
Notes Offering and the Recapitalization Transactions. The selected financial
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
audited consolidated financial statements and notes thereto, which are
included in this Prospectus.
FISCAL YEAR ENDED DECEMBER 31,
------------------------------------------------
1993 1994 1995 (A) 1996 1997
-------- -------- -------- -------- --------
(IN THOUSANDS)
STATEMENT OF OPERATIONS
DATA:
Net sales............... $143,655 $197,284 $126,839 $135,651 $139,615
Cost of sales........... 116,784 167,170 102,654 100,119 102,744
-------- -------- -------- -------- --------
Gross profit........... 26,871 30,114 24,185 35,532 36,871
Selling, general and
administrative
expenses............... 19,884 19,356 19,891 21,226 21,840
Amortization expense.... 877 3,050 3,052 3,085 3,447
-------- -------- -------- -------- --------
Operating income....... 6,110 7,708 1,242 11,221 11,584
Other expenses (income):
Interest expense, net.. 2,771 6,270 4,807 3,340 3,471
Gain on the sale of
product line.......... -- -- (2,520) -- --
-------- -------- -------- -------- --------
Income (loss) from
continuing operations
before income taxes.... 3,339 1,438 (1,045) 7,881 8,113
Provision for income
taxes.................. 1,285 668 124 3,191 3,187
-------- -------- -------- -------- --------
Income (loss) from
continuing operations.. 2,054 770 (1,169) 4,690 4,926
Income from discontinued
operations, net of
income taxes (b)....... 2,426 889 876 174 122
-------- -------- -------- -------- --------
Income (loss) before
extraordinary items.... 4,480 1,659 (293) 4,864 5,048
Extraordinary loss on
early extinguishment of
debt, net of income tax
(c).................... -- -- -- -- (582)
-------- -------- -------- -------- --------
Net income (loss)....... $ 4,480 $ 1,659 $ (293) $ 4,864 $ 4,466
======== ======== ======== ======== ========
OTHER FINANCIAL DATA:
Gross margin %.......... 18.7% 15.3% 19.1% 26.2% 26.4%
EBITDA (d).............. $ 10,493 $ 13,712 $ 5,964 $ 15,850 $ 16,396
EBITDA margin %......... 7.3% 7.0% 4.7% 11.7% 11.7%
Depreciation and
amortization (e)....... $ 3,278 $ 5,776 $ 5,497 $ 5,382 $ 5,569
Capital expenditures
(e).................... $ 2,521 $ 1,506 $ 1,501 $ 1,739 $ 1,974
Ratio of earnings to
fixed charges (f)...... 1.9x 1.2x 0.8x 2.6x 2.5x
Net cash provided by
operating activities... 4,941 8,037 142 17,506 1,008
Net cash (used in)
provided by investing
activities............. (64,545) 722 24,478 1,935 (1,948)
Net cash provided by
(used in) financing
activities............. 59,704 (11,481) (22,285) (10,785) (714)
OPERATING UNIT DATA:
Net Sales:
Manufactured Products
Group................. $ 66,211 $ 75,698 $ 74,859 $ 78,952 $ 78,592
Engineering Services
Group................. 77,444 121,586 51,980 56,699 61,023
-------- -------- -------- -------- --------
Total Net Sales...... $143,655 $197,284 $126,839 $135,651 $139,615
======== ======== ======== ======== ========
EBITDA:
Manufactured Products
Group................. $ 12,398 $ 16,304 $ 15,566 $ 16,412 $ 17,166
Engineering Services
Group................. 2,256 1,011 (5,724) 3,860 4,201
-------- -------- -------- -------- --------
Total operating unit
EBITDA.............. 14,654 17,315 9,842 20,272 21,367
Corporate overhead..... (4,161) (3,603) (3,878) (4,422) (4,971)
-------- -------- -------- -------- --------
Total EBITDA......... $ 10,493 $ 13,712 $ 5,964 $ 15,850 $ 16,396
======== ======== ======== ======== ========
BALANCE SHEET DATA (g):
Cash and cash
equivalents............ $ 2,722 -- $ 2,335 $ 10,991 $ 9,337
Working capital less
cash and cash
equivalents............ 32,006 28,772 16,515 5,129 13,898
Property, plant and
equipment, net......... 24,999 23,213 14,707 13,741 13,582
Total assets............ 148,831 139,082 95,294 95,914 102,879
Total debt.............. 71,785 58,567 37,676 26,891 85,751
Redeemable preferred
stock and redeemable
preferred stock units.. 27,374 30,048 32,714 35,380 13,226
Stockholder's deficit... (496) (1,511) (4,470) (2,272) (31,860)
1997
------
PRO FORMA FINANCIAL DATA:
Ratio of EBITDA to cash interest expense................................ 1.7x
Ratio of net debt to EBITDA (h)......................................... 4.7x
Ratio of earnings to fixed charges...................................... 1.3x
Net cash used in operating activities................................... (2,812)
Net cash used by investing activities................................... (1,918)
Net cash used in financing activities................................... (293)
24
- -------
(a) The Company's 1995 performance was adversely affected by a loss of
approximately $7.8 million on a single turnkey project of the Engineering
Services Group that was completed in that year, and which resulted in
significant operating and control changes in that Group. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Results of Operations" and "Business--Engineering Services Group--Roberts
& Schaefer Company."
(b) Income from discontinued operations is comprised of earnings of GC
Thorsen, Inc. (sold in 1995), American Fastener Corporation (sold in
1996), along with the associated gain on the sale of those businesses, and
an investment in a limited partnership (disposed of in 1993) plus
management fees (paid in 1993), net of income taxes.
(c) The loss on the early extinguishment of debt resulted from the retirement
of subordinated debt from proceeds of the Senior Notes and included
amortization of the remaining financing costs and a prepayment penalty.
(d) EBITDA is income (loss) from continuing operations before income taxes
plus interest expense, depreciation, amortization and other non-cash
income and expense. In the periods presented, the following non-cash items
were included in income from continuing operations but excluded from
EBITDA: (i) allocated income from pension overfunding resulting from the
Company's overfunded pension plan; (ii) inventory revaluation expense
related to the market valuation of inventory in conjunction with the 1993
purchase of the Company pursuant to Accounting Principles Board Opinion
No. 16; (iii) gain on the sale of product line resulting from the 1995
sale of Ohio Rod's spoke and nipple product line.
FISCAL YEAR ENDED DECEMBER 31,
------------------------------------
1993 1994 1995 1996 1997
------ ----- ------- ----- -----
(IN THOUSANDS)
Allocated income from pension
overfunding............................ $ (526) $(578) $ (775) $(753) $(757)
Inventory revaluation expense........... 1,631 806 -- -- --
Gain on the sale of product line........ -- -- (2,520) -- --
------ ----- ------- ----- -----
Total non-cash (income) expense......... $1,105 $ 228 $(3,295) $(753) $(757)
====== ===== ======= ===== =====
EBITDA is not intended as a substitute for measurements of cash flows under
generally accepted accounting principles, nor has it been presented as an
alternative to earnings from operations as an indicator of operating
performance or as a measure of liquidity. EBITDA should not be considered in
isolation or as substitute for measures of performance prepared in
accordance with generally accepted accounting principles. While EBITDA is
frequently used as a measure of the ability to meet debt service
requirements, it should not be construed as an alternative to operating
income, net income or cash flows from operating activities and should not be
construed as an indication of the Company's operating performance or as a
measure of liquidity. It is not necessarily comparable to other similarly
titled captions of other companies due to potential inconsistencies in the
method of calculation. Not all funds depicted by EBITDA are available for
discretionary use by the Company due to legal and functional requirements to
conserve funds for capital replacement and expansion, debt service and other
commitments and uncertainties.
(e) Excludes depreciation, amortization and capital expenditures related to
discontinued operations and extraordinary loss.
(f) For purposes of determining the ratio of earnings to fixed charges,
earnings are defined as income from continuing operations before income
taxes plus fixed charges, and fixed charges consist of interest expense,
plus amortization of deferred debt issuance costs.
(g) Includes the balance sheet data of discontinued operations.
(h) Net debt equals total debt less cash and cash equivalents.
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
consolidated financial statements of the Company and the notes thereto and the
other financial information included in this Prospectus.
OVERVIEW
Elgin was a publicly traded company listed on the NYSE until it was taken
private in 1988, through the leveraged acquisition of Elgin's stock by The
Jupiter Corporation ("Jupiter"), a private diversified holding company.
Members of Senior Management participated in the 1988 transaction and were
instrumental in reducing Elgin's leverage following the acquisition. In 1993,
an investor group led by institutional investors and Senior Management formed
ENI, and purchased Elgin from Jupiter in a leveraged buyout. Following the
1993 buyout, Senior Management was instrumental in reducing Elgin's leverage.
Since 1988, the Company has made three major divestitures and has focused on
strengthening its businesses, and reducing its leverage. Proceeds from these
divestitures were used to retire debt and finance several small, strategic
acquisitions.
Elgin owns and operates a diversified group of middle-market industrial
manufacturing and engineering services businesses. The Company focuses on
operating businesses with leading positions in niche markets, consistent
profitability, diverse customer bases, efficient production capabilities and
broad product lines serving stable industries. The Company is comprised of ten
business units that are organized into two operating groups. Through its
Manufactured Products Group, Elgin is a leading manufacturer and supplier of
custom-designed, highly engineered products used by a wide variety of
customers in the industrial equipment, durable goods, mining, mineral
processing and electric utility industries. Through its Engineering Services
Group, Elgin provides design, engineering, procurement and construction
management services for mineral processing and bulk materials handling systems
used in the mining, mineral processing, electric utility and the rail and
marine transportation industries.
VARIABILITY OF REVENUES AND CASH FLOWS
The Engineering Services Group's project base is typically comprised of over
100 projects in process each year. At any given time, this project base
includes a substantial majority of small projects (which the Company defines
as producing less than $1.0 million in annual sales) as well as a number of
larger projects (which the Company defines as producing $1.0 million or more
in annual sales). The Company's revenues from these larger projects tend to
fluctuate from year to year depending on the number of such projects in
process and the respective status of each project. In addition, these larger
projects often extend over more than one year, causing potential fluctuations
in revenues and cash flows. The Company uses the percentage of completion
method of accounting for its engineering services contracts. Under this method
of accounting, the degree of completion of each contract is generally
determined by comparing the costs incurred to date to the total costs
anticipated for the entire contract, taking into account the current estimates
of cost to complete the contract. Revenue is recognized on each contract as a
percentage of the total contract revenue in proportion to the degree of the
project's completion. Management routinely reviews total estimated costs to
complete each contract and revises the estimated gross margin on the contract
accordingly. Losses are recognized in full in the period in which they are
determined. Cash flows can vary significantly from period to period, depending
on the terms of the larger contracts then in force. In some contracts, the
customers provide full or partial advance cash payments prior to performance
by the Company. In other contracts, receipts follow disbursements in varying
degrees. As a result, reported operating income of the Engineering Services
Group for any period is not necessarily indicative of cash flow for that
period.
26
RESULTS OF OPERATIONS
The following tables set forth, for the periods indicated, amounts derived
from the Company's consolidated statements of operations and related
percentages of net sales. There can be no assurance that the trends in
operating results will continue in the future.
COMPANY CONSOLIDATED
(IN MILLIONS)
FOR THE FISCAL
YEAR ENDED DECEMBER 31,
------------------------------------------
1995 1996 1997
------------- ------------ -------------
Net sales........................ $126.9 100.0% $135.6 100.0% $139.6 100.0%
Cost of sales.................... 102.7 80.9 100.1 73.8 102.7 73.6
Gross profit..................... 24.2 19.1 35.5 26.2 36.9 26.4
Selling, general & administrative
expenses........................ 19.9 15.7 21.2 15.6 21.8 15.6
Amortization expense............. 3.1 2.4 3.1 2.3 3.4 2.4
Operating income................. 1.2 1.0 11.2 8.3 11.7 8.4
Interest expense, net............ 4.8 3.8 3.3 2.4 3.5 2.5
Gain on sale of product line..... 2.5 2.0 -- -- -- --
Income (loss) from continuing
operations before income taxes.. (1.1) (0.8) 7.9 5.9 8.2 5.9
Provision for income taxes....... 0.1 0.1 3.2 2.4 3.2 2.3
Income (loss) from continuing
operations...................... (1.2) (0.9) 4.7 3.5 5.0 3.6
Income from discontinued
operations, net of income taxes. 0.9 0.7 0.2 0.1 0.1 0.1
Income (loss) before
extraordinary item.............. (0.3) (0.2) 4.9 3.6 5.1 3.7
Extraordinary item, net of income
taxes........................... -- -- -- -- (0.6) (0.5)
Net income (loss).................. (0.3) (0.2) 4.9 3.6 4.5 3.2
MANUFACTURED PRODUCTS GROUP
(IN MILLIONS)
FOR THE FISCAL
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1996 1997
----------- ----------- -----------
Net sales................................ $74.9 100.0% $78.9 100.0% $78.6 100.0%
Cost of sales............................ 50.6 67.6 52.8 66.9 51.5 65.5
Gross profit............................. 24.3 32.4 26.1 33.1 27.1 34.5
ENGINEERING SERVICES GROUP
(IN MILLIONS)
FOR THE FISCAL
YEAR ENDED DECEMBER 31,
-------------------------------------------
1995 1996 1997
------------ ----------- -----------
Net sales........................... $52.0 100.0% $56.7 100.0% $61.0 100.0%
Cost of sales....................... 52.1 100.2 47.3 83.5 51.3 84.0
Gross profit........................ (0.1) (0.2) 9.4 16.5 9.7 16.0
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Net Sales: Net sales for the Manufactured Products Group for the year ended
December 31, 1997 decreased $0.3 million, or 0.4%, to $78.6 million from $78.9
million for the corresponding period in 1996. Decreased screen and parts sales
to the aggregates market at Tabor and decreased starter sales at Mining
Controls were partially offset by increased high voltage distribution
equipment sales at Mining Controls, increased specialty fastener and reel bolt
sales at Ohio Rod, increased OEM and distributor sales at Chandler and
increased centrifuge sales at CMI.
27
Net sales for the Engineering Services Group for the year ended December 31,
1997 increased $4.3 million, or 7.6%, to $61.0 million from $56.7 million for
the corresponding period in 1996 due primarily to increased sales from larger
projects in process (including the completion of a domestic gold processing
facility that generated sales of $8.7 million during the period). For the year
ended December 31, 1997, sales of $42.0 million were reported on sixteen
larger projects, exceeding sales of $33.1 million reported on ten larger
projects for the corresponding period in 1996.
Cost of Sales: Cost of sales for the Manufacturing Products Group for the
year ended December 31, 1997 decreased $1.3 million, or 2.5%, to $51.5 million
from $52.8 million for the corresponding period in 1996 primarily due to
increased sales of lower cost replacement parts at CMI and Tabor, and to
improved operating efficiencies at Chandler and Ohio Rod due to increased
sales level. The slight decrease in the Manufacturing Group's sales also
contributed to the lower cost of sales. The Manufactured Products Group's cost
of sales as a percentage of net sales decreased to 65.5% for the year ended
December 31, 1997 from 66.9% for the corresponding period in 1996.
Cost of sales for the Engineering Services Group for the year ended December
31, 1997 increased $4.0 million, or 8.4%, to $51.3 million from $47.3 million
for the corresponding period in 1996 primarily due to the increased sales
level. As a percentage of net sales, the Engineering Services Group's cost of
sales increased to 84.0% for the year ended December 31, 1997 from 83.5% for
the corresponding period in 1996 due to increased sales of projects having
higher procurement and construction management costs.
Gross Profit: Gross profit for the Manufactured Products Group for the year
ended December 31, 1997 increased $1.0 million, or 3.8%, to $27.1 million from
$26.1 million for the corresponding period in 1996 due to the increase in
gross profit as a percentage of sales. The Manufactured Products Group's gross
profit as a percentage of net sales increased to 34.5% for the year ended
December 31, 1997 from 33.1% for the corresponding period in 1996. The
increase in the gross profit was primarily due to increased sales of higher
margin replacement parts at CMI and Tabor, and to the higher sales levels at
Mining Controls, Chandler and Ohio Rod.
Gross profit of the Engineering Services Group for the year ended December
31, 1997 increased $0.3 million, or 3.2%, to $9.7 million from $9.4 million
for the corresponding period in 1996 primarily due to increased project
activity. As a percentage of net sales, the Engineering Services Group's gross
profit decreased to 16.0% for the year ended December 31, 1997 from 16.5% for
the corresponding period in 1996 primarily due to the inclusion of larger
projects involving procurement and construction management services, which
typically earn a lower profit margin than smaller projects.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses of the Company for the year ended December 31, 1997
increased slightly in comparison to the corresponding period in 1996. Selling,
general and administrative expenses as a percentage of net sales remained
constant at 15.6% for the year ended December 31, 1997 and for the
corresponding period in 1996 due to increased net sales. Lower selling cost
reported by the Engineering Services Group were partially offset by increased
selling costs within the Manufactured Products Group and increased corporate
costs.
Amortization Expense: Amortization expense of the Company for the year ended
December 31, 1997 increased $0.3 million, or 9.7%, to $3.4 million from $3.1
million for the corresponding period in 1996. The increase in amortization
expense resulted from the accelerated amortization of an acquisition
intangible arising in the 1993 leveraged buy-out. The acceleration of the
amortization was due to the completion of the Recapitalization Transactions.
Operating Income: Operating income of the Company for the year ended
December 31, 1997 increased $0.5 million, or 4.5% to $11.7 million from $11.2
million for the corresponding period in 1996 for the reasons discussed above.
Operating income as a percentage of net sales increased to 8.4% for the year
ended December 31, 1997 from 8.3% for the corresponding period in 1996.
28
Interest Expense, Net: Interest expense of the Company for the year ended
December 31, 1997 increased $0.2 million, or 5.7%, from the prior year to $3.5
million. The increased interest expense was due to the issuance of the $85.0
million 11% Senior Notes in November, 1997. The increased interest expense was
partially offset by a reduction in the interest rate due to the repayment of
$20.0 million senior subordinated notes in November, 1997 as well as an
additional debt reduction throughout the 1997 calendar year totalling $6.3
million.
Income from Continuing Operations Before Income Taxes: Income from
continuing operations before income taxes for the year ended December 31, 1997
increased $0.3 million, or 3.8%, to $8.2 million from $7.9 million for the
corresponding period in 1996 for the reasons discussed above. Income from
continuing operations, before income taxes, as a percentage of net sales
increased to 5.9% for the year ended December 31, 1997 from 5.8% for the year
ended 1996.
Provision for Income Taxes: Provision for income taxes was $3.2 million for
both the years ended December 31, 1997 and 1996. Although income before taxes
was slightly higher in 1997, the Company's effective tax rate decreased from
40% in 1996 to 39% in 1997 offsetting the tax effect of the slightly higher
earnings level.
Income from Continuing Operations: Income from continuing operations of the
Company for the year ended December 31, 1997 increased $0.3 million, or 6.4%,
to $5.0 million from $4.7 million for the corresponding period in 1996 for the
reasons discussed above. Income from continuing operations as a percentage of
net sales increased to 3.6% for the year ended December 31, 1997 from 3.5% for
the corresponding period in 1996.
Income from Discontinued Operations, Net of Income Taxes: Income from
discontinued operations, net of income taxes, for the year ended December 31,
1997 decreased $0.1 million, or 50.0%, to $0.1 million from $0.2 million for
the corresponding period in 1996. In 1996 $0.2 million of earnings related to
American Fastener Corporation, which was sold on December 31, 1996, and
included an estimated gain. In 1997, the final purchase price adjustment for
the sale of American Fastener resulted in an addition of $0.1 million gain.
Income Before Extraordinary Item: The Company's income before extraordinary
item for the year ended December 31, 1997 increased $0.2 million, or 4.1%, to
$5.1 million from $4.9 million for the corresponding period in 1996 for the
reasons discussed above. Income before extraordinary item, net of income
taxes, as a percentage of net sales increased to 3.7% for the year ended
December 31, 1997 from 3.6% for the corresponding period in 1996.
Extraordinary Item, Net of Income Taxes: The extraordinary item of $0.6
million for the year ended December 31, 1997 was the loss on the early
extinguishment of debt that resulted from retirement of subordinated debt from
proceeds of the Senior Note and included amortization of the remaining
financing costs and a prepayment penalty.
Net Income: The net income for the Company for the year ended December 31,
1997 decreased $0.4 million, or 8.2%, to $4.5 million from $4.9 million for
the year ended December 31, 1996 for the reasons discussed above. Net income
as a percentage of net sales decreased to 3.2% for the year ended December 31,
1997 from 3.6% for the corresponding year ended 1996.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net Sales: Net sales for the Manufactured Products Group for the year ended
December 31, 1996 increased $4.0 million, or 5.5%, to $78.9 million from $74.9
million in 1995 due primarily to modest increases in a number of businesses,
including increased high voltage distribution equipment sales at Mining
Controls and increased centrifuge sales at CMI, along with increased sales of
spare parts to the coal industry and increased screen sales to the aggregates
industry at Tabor. In addition, a full year of CSI's sales were included in
1996 compared to only six months of sales included in 1995.
29
Net sales for the Engineering Services Group for the year ended December 31,
1996 increased $4.7 million, or 9.1%, to $56.7 million from $52.0 million in
1995 due primarily to increased revenues from the larger projects in process.
Although ten larger projects were in process during the year ended December
31, 1996 as compared to twelve larger projects during 1995, due to the nature
of the projects, net sales were $33.1 million in 1996 compared to $32.4
million in 1995. The Engineering Services Group had approximately 250 projects
in process during both years.
Cost of Sales: Cost of sales for the Manufactured Products Group for the
year ended December 31, 1996 increased $2.2 million, or 4.3%, to $52.8 million
from $50.6 million for the corresponding period in 1995 primarily due to
increased sales at CMI, Tabor, CSI and Mining Controls. The Manufactured
Products Group's cost of sales as a percentage of net sales decreased to 66.9%
for the year ended December 31, 1996 from 67.6% for the corresponding period
in 1995 due to increased sales of lower cost replacement parts at CMI and CSI
and increased operating efficiencies at Ohio Rod.
Cost of sales for the Engineering Services Group for the year ended December
31, 1996 decreased $4.8 million, or 9.2%, from $52.1 million to $47.3 million
for the corresponding period in 1995. Included in the 1995 cost of sales were
additional costs resulting from an approximate $7.8 million loss on a large
turnkey project. See "Business--Engineering Services Group--Roberts & Schaefer
Company".
Gross Profit: Gross profit for the Manufactured Products Group for the year
ended December 31, 1996 increased $1.8 million, or 7.8%, to $26.1 million from
$24.3 million in 1995 due to increased sales at CMI, Tabor, CSI and Mining
Controls. The Manufactured Products Group's gross profit as a percentage of
net sales increased to 33.1% for the year ended December 31, 1996 from 32.4%
in 1995 due to increased sales of higher margin replacement parts products at
CMI and CSI (including the successful introduction by CMI of its patented Long
Life Parts Package(TM)), increased sales volume at Mining Controls and
increased operating efficiencies at Ohio Rod.
Gross profit of the Engineering Services Group for the year ended December
31, 1996 increased to $9.4 million from a $0.1 million loss for the
corresponding period in 1995. The increased gross profit was primarily due to
an approximately $7.8 million loss on a large turnkey project that was
completed in 1995. See "Business--Engineering Services Group--Roberts &
Schaefer Company." The increased gross profit earned in 1996 was also due to
the increase in net sales.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses of the Company for the year ended December 31, 1996
increased $1.3 million, or 6.7%, to $21.2 million from $19.9 million in 1995
due to higher selling expenses related to increased net sales, increased
executive incentive compensation and costs from a full year of operations at
CSI. Selling, general and administrative expenses reported by the Engineering
Services Group for 1996 approximated the 1995 level. Due to the increased net
sales level, selling, general and administrative expenses as a percentage of
net sales was 15.6% for the year ended December 31, 1996 compared to 15.7% in
1995.
Amortization Expense: Amortization expense was $3.1 million for both the
years ended December 31, 1996 and 1995. There were no intangible assets added,
or fully amortized in either year, resulting in the consistency of the
expense.
Operating Income: Operating income of the Company for the year ended
December 31, 1996 increased $10.0 million to $11.2 million from $1.2 million
in 1995 for the reasons discussed above. Operating income as a percentage of
net sales increased to 8.3% for the year ended December 31, 1996 from 1.0% in
1995.
Interest Expense, Net: Net interest expense of the Company decreased $1.5
million to $3.3 million for the year ended December 31, 1996 from $4.8 million
for the year ended 1995. This decrease was due to a decrease in debt
outstanding. The Company's outstanding debt decreased to $26.9 million as of
December 31, 1996 from $37.7 million as of December 31, 1995.
30
Gain on Sale of Product Line: In 1995 the Company sold its spoke and nipple
product line of its Ohio Rod division. This sale netted a $2.5 million gain
recognized in the year ended December 31, 1995. There were no product line
sales in 1996.
Income (loss) from Continuing Operations before Income Taxes: Income (loss)
from continuing operations before income taxes of the Company for the year
ended December 31, 1996 increased $9.0 million to income of $7.9 million in
1996 from a loss of $1.1 million in 1995 for the reasons discussed above.
Income (loss) from continuing operations before income taxes as a percentage
of net sales was 5.9% in 1996 and a negative 0.8% in 1995.
Provision for Income Taxes: The provision for income taxes of the Company
was $3.2 million for the year ended December 31, 1996 compared to $0.1 million
for the year ended December 31, 1995. The $3.1 million increase was primarily
due to a higher income before income taxes, partially offset with a lower
effective tax rate.
Income (loss) from Continuing Operations: The income (loss) from continuing
operations for the year ended December 31, 1996 increased $5.9 million to $4.7
million from a loss from continuing operations of $1.2 million in 1995 for the
reasons discussed above. Income (loss) from continuing operations as a
percentage of net sales increased to 3.5% from a negative 0.9% in 1995.
Income from Discontinued Operations, Net of Taxes: The income from
discontinued operations of the Company for the year ended December 31, 1996
decreased $0.7 million to $0.2 million from $0.9 million for the year ended
December 31, 1995. In 1996 the Company sold its subsidiary American Fastener
Corporation. Earnings from this subsidiary plus the gain on the sale of the
subsidiary totalled $0.2 million in that year. In 1995 the Company sold its
subsidiary GC Thorsen, Inc. Earnings from this subsidiary plus the gain on the
sale of the subsidiary totalled $0.8 million in 1995. Also included in 1995
income from discontinued operations was $0.1 million in earnings from the
American Fastener Corporation subsidiary.
Net Income (loss): Net income of the Company for the year ended December 31,
1996 increased $5.2 million to $4.9 million from a net loss of $0.3 million in
1995 for the reasons discussed above. Net income (loss) a percentage of net
sales increased to 3.6% for the year ended December 31, 1996 from a negative
0.2% in 1995.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the year ended December 31,
1997 was $1.0 million, due primarily to $10.2 million generated from net
income and non-cash charges partially offset by a net increase in operating
assets and liabilities of $9.2 million. Cash generated by operating activities
for the year ended December 31, 1996 was $17.5 million primarily comprised of
net income, non-cash charges, deferred income taxes and increases in trade
accounts payable and contract billings in excess of related costs. As
evidenced by these results, cash flows from operations for any specific period
are often materially affected by the timing and amounts of payments on
contracts of the Engineering Services Group, and the timing of payments by
such Group for products and services. See "--Variability of Revenues and Cash
Flows."
Cash used in investing activities for the year ended December 31, 1997
consisted of $2.0 million for capital expenditures resulting from the
Company's regular practice of upgrading and maintaining its equipment base and
facilities. The Company generated $1.9 million in 1996 from investing
activities due to the sale of the Company's American Fastener Corporation
subsidiary being partially offset by capital expenditures.
Cash used in financing activities for 1997 was $0.7 million, and included
$85.0 million from the issue of Senior Notes less associated financing costs
and funds used to repurchase common stock, preferred stock, and warrants, and
to retire subordinated debt. Cash used in financing activities in 1996 was
$10.0 million, primarily to reduce amounts outstanding under the Company's
credit facility, consistent with Senior Management's goal of reducing the
leverage from the 1993 buyout.
31
The Company's liquidity requirements, both long term (over one year) and
short term, are for working capital, capital expenditures and debt service.
The primary source for meeting these needs has been funds provided by
operations. Based on current and planned operations the Company believes that
funds provided from operations, along with cash on hand, will be adequate to
meet its anticipated debt service requirements, working capital needs and
capital expenditures. In connection with the Old Notes Offering, the Company
amended its credit facility to provide a $20.0 million revolving line of
credit, subject to borrowing base limitations. The amended term is for a
three-year period. At December 31, 1997, there were no borrowings under the
Senior Credit Facility (excluding $4.0 million in outstanding letters of
credit and excluding payment and performance bonds) nor were any borrowings
drawn upon closing of the Old Notes Offering. See "Description of the Senior
Credit Facility."
Upon consummation of the Old Notes Offering and Recapitalization
Transactions, the senior subordinated notes were retired, along with the
related warrants and the Company's total outstanding senior indebtedness, in
addition to the Notes in the total principal amount of $85 million, was
approximately $0.8 million (excluding $4.0 million in outstanding letters of
credit and excluding payment and performance bonds). The Company will incur
$9.4 million in interest expense annually with respect to the Notes. The
Company expects to meet its debt service requirements from funds provided from
operations. Based on current and planned operations, the Company believes that
funds provided from operations, along with cash on hand, will be adequate to
meet its anticipated debt service requirements. The Company does not expect
these debt service requirements to adversely affect its financial condition,
results of operation, capital expenditures, acquisitions and anticipated
operations.
BACKLOG
The Company's backlog consists primarily of that portion of contracts for
the Engineering Services Group that have been awarded but not performed and
also includes open orders for the Manufactured Products Group. Backlog at
December 31, 1997 increased $36.9 million, or 74.7%, to $86.3 million from
$49.4 million at December 31, 1996. Approximately $8.2 million and $9.0
million, respectively, for each period relates to the Manufactured Products
Group, with the remainder relating to the Engineering Services Group. Within
the Engineering Services Group's backlog at December 31, 1997, $18.0 million
relates to a coal handling facility, $9.2 million relates to the engineering
and procurement of coal processing equipment, $20.4 million relates to the
engineering and procurement of equipment for two material handling system
projects, approximately $22.9 million relates to nine projects with individual
backlogs in excess of $1.0 million, and the remaining backlog of $7.6 million
results from approximately 90 additional projects with individual backlogs of
less than $1.0 million. A substantial majority of current backlog is expected
to be realized in the next twelve months.
YEAR 2000
The Company has conducted a review of its computer systems to identify the
systems that could be affected by the "Year 2000" problem, being the inability
of many computer systems to incorporate in the date field the upcoming change
in millenium, thus creating the risk of erroneous results or complete system
failure by the year 2000. The Company is developing an implementation plan to
eliminate the potential problem. The Company presently believes that, with
modifications to existing software and converting to new software, the Year
2000 problem will not pose significant operational problems for the Company's
computer systems as so modified and converted. The Company believes that
addressing its Year 2000 issues will not result in a material cost. If such
modifications and modifications and conversions are not completed timely, the
year 2000 Problem may have a material impact on the operations of the Company.
INFLATION
Historically, general inflation has had only a minor affect on the
operations of the Company and its internal and external sources for liquidity
and working capital, and the Company has generally been able to increase
prices to reflect cost increases.
32
BUSINESS
THE COMPANY
Elgin owns and operates a diversified group of middle-market industrial
manufacturing and engineering services businesses. The Company focuses on
operating businesses with leading positions in niche markets, consistent
operating profitability, diverse customer bases, efficient production
capabilities and broad product lines serving stable industries. The Company is
comprised of ten business units that are organized into two operating groups.
Through its Manufactured Products Group, Elgin is a leading manufacturer and
supplier of custom-designed, highly engineered products used by a wide variety
of customers in the industrial equipment, durable goods, mining, mineral
processing and electric utility industries. Through its Engineering Services
Group, Elgin provides design, engineering, procurement and construction
management services for mineral processing and bulk materials handling systems
used in the mining, mineral processing, electric utility and the rail and
marine transportation industries.
In 1993, an investor group led by institutional investors and Senior
Management formed ENI and purchased Elgin from The Jupiter Corporation in a
leveraged buyout. In 1994, the Company acquired K&M Inc. in order to broaden
Mining Controls' customer base into the heavy industrial and electric utility
markets. Later that same year, the Company acquired Soros Associates, Inc. to
strengthen the Engineering Services Groups technical expertise in the
development of marine port facilities. In 1995, the Company sold the assets
constituting Ohio Rod's bicycle spoke and nipple product line and the stock of
GC Thorsen, Inc. At the end of 1996, the Company sold the stock of American
Fastener Corporation. The foregoing acquisitions and divestitures have
assisted the Company in reducing leverage and, Management believes, focusing
on strengthening its businesses.
Elgin's business strategy is to increase the sales and profitability of its
businesses by building upon its competitive strengths. Key elements of this
strategy include: (i) the application of existing product and design
capabilities to new markets; (ii) increased focus on international markets;
(iii) facilities expansion and manufacturing cost improvements; and (iv) the
acquisition, consolidation and integration of related businesses. Elgin
believes that the diversified nature of its products and the increasingly
diversified nature of the end markets served by its businesses reduce the
effect of operating performance fluctuations in any single operating unit and
cyclical downturns within individual industries and end markets. The Company's
total net sales for the year ended December 31, 1997 were $139.6 million,
EBITDA (as defined herein) was $16.4 million for the same period and net
income was $4.5 million. The value of EBITDA as a measure of comparison may be
limited since no uniform standards exist regarding its calculation.
COMPETITIVE STRENGTHS
Elgin believes that it has the following competitive strengths:
Strong Market Positions. The Company's reputation for high quality products,
strong engineering capabilities and customer service has allowed it to
establish significant market shares in many of the markets it serves. Ohio Rod
is a leading U.S. manufacturer of cold-headed, long-length, small-diameter
threaded fasteners; CMI is the leading manufacturer of coal centrifuges used
in the United States and, together with CSI, is the leading supplier of
replacement parts for such centrifuges; Tabor, together with Norris, is a
leading manufacturer of vibrating screens and provider of replacement parts
sold to the eastern U.S. coal industry; and R&S is the leading U.S. firm for
the design and construction management of coal preparation plants.
Focus on Niche Markets. Elgin focuses on niche markets within mature
industry groups to allow it to achieve strong market positions and generate
consistent operating profitability. Management believes that the Company's
efficient and flexible production processes and consistent capital investment
over the years, together with its advanced design and engineering
capabilities, have created significant barriers to entry in its markets and
have allowed it to establish and maintain a high degree of customer loyalty.
33
Replacement Part Sales for Installed Equipment Base. Approximately 30% of
the Manufactured Products Group's net sales for the year ended December 31,
1997 were from replacement parts and services. Replacement part sales have
been more stable and predictable than OEM equipment sales and typically
generate higher profit margins. Replacement parts and service sales accounted
for over 80% of CMI and CSI combined sales and over 80% of the combined sales
of Tabor and Norris during the year ended December 31, 1997. CMI's installed
base of over 1,800 centrifuges in the U.S. results in significant ongoing
replacement part sales. In addition, the Company's 1995 acquisition of CSI, a
leading after-market supplier of centrifuge parts, expanded its after-market
parts and service capabilities. Components sold by Tabor, Norris, CMI and CSI
are regularly replaced in connection with the ongoing maintenance of mining
and processing facilities.
Stability Through Diversification. Elgin manufactures and provides a broad
range of goods and services both domestically and internationally to stable
and mature industries, including industrial equipment, durable goods, coal,
other mining and mineral processing, electric utility and rail and marine
transportation industries. The Company believes that its increasing
diversification reduces the effects of individual industry business cycles and
economic trends that may adversely affect the demand for individual products.
Established Businesses; Long-Term Customer Relationships. Elgin's businesses
have long and established operating histories. The Company's businesses have
been operating for an average of over 42 years and enjoy stable and long-term
relationships with their customers. In excess of 50% of the Company's sales
during the year ending December 31, 1997 were to companies that have been
customers of the Company for at least five years.
Experienced, Stable and Committed Management. The Company's businesses are
run by operating managers who have an average tenure with the Company of over
16 years. The Company's Chief Executive Officer, Chief Operating Officer and
Chief Financial Officer (collectively, "Senior Management") beneficially own
and control 100% of the capital stock of Elgin. Members of Senior Management
successfully led the Company through leveraged recapitalizations in 1988 and
1993, significantly reducing the Company's leverage following each such
transaction.
BUSINESS STRATEGY
The Company's business strategy is to increase the sales, cash flow and
profitability of each business unit as follows:
Expand Product Offerings and Applications of Existing Product Capabilities.
Elgin seeks to build on its core strengths by entering new markets with its
products and services. For example, in the Manufactured Products Group, CMI is
applying its centrifugal dryer expertise, originally developed for the coal
industry, to other industrial applications in the minerals, chemical and metal
recycling industries. Similarly, in the Engineering Services Group, R&S is
applying its expertise in the design and construction management of processing
and bulk materials handling systems, originally developed for the coal mining
industry, to the aggregates, electric utility, cement, metals, industrial
minerals and other industries.
Increase International Sales. The Company has been active in international
markets for over 20 years, primarily through R&S. Since the early 1990s, the
Company has expanded the scope of its international marketing efforts. The
Company seeks to leverage its U.S. reputation for providing high quality
design and engineering services, and OEM products and related parts and
services. The Company also seeks to take advantage of expanding international
demand for expertise in the design and engineering of coal mining, mineral
processing and other bulk material handling systems. As a result of the
Company's increased focus on international markets, the Company's
international sales increased to approximately 17% of total net sales in 1997,
compared to 15% and 7%, respectively, in 1996 and 1995.
Maintain Cost-Efficient Equipment and Production Facilities. The Company has
maintained, upgraded and expanded its equipment and production facilities, and
plans to continue its strategy of focused capital investment
34
to maximize operating efficiency while meeting specific customer demands.
Elgin has identified certain of its facilities where production cost
reductions or sales increases can be achieved through equipment modernization
and plant expansion.
Pursue Strategic Acquisitions. The Company believes that its position within
the industries it serves provides it with attractive opportunities to acquire
complementary businesses and product lines. Elgin believes that its five small
strategic acquisitions since 1989 have been made at attractive purchase prices
and have demonstrated the Company's ability to successfully integrate new
businesses into its existing operations. Elgin will consider acquisitions that
(i) add complementary products or technical capabilities, (ii) give it access
to new customers or (iii) allow it to further penetrate its existing customer
base.
OPERATING BUSINESSES
The Company conducts its business through two operating groups, the
Manufactured Products Group and the Engineering Services Group, containing a
total of ten business units. Four of the businesses (Tabor and Norris; CMI and
CSI) are paired for presentation purposes in the table below, which is
followed by a discussion of the businesses conducted by each of the business
units.
NET SALES BY BUSINESS UNIT
(IN MILLIONS)
FOR THE YEAR
ENDED DECEMBER 31, 1997
------------------------
MANUFACTURED PRODUCTS GROUP
Ohio Rod....................................... $23.4
Tabor and Norris............................... 14.9
CMI and CSI.................................... 13.7
Mining Controls................................ 12.4
Chandler....................................... 8.0
Clinch River................................... 6.2
-----
Total Net Sales for Group.................... $78.6
=====
ENGINEERING SERVICES GROUP
R&S............................................ $58.4
Soros.......................................... 2.6
-----
Total Net Sales for Group.................... $61.0
=====
MANUFACTURED PRODUCTS GROUP
The Manufactured Products Group, through its eight business units,
manufactures and markets products used primarily in the industrial equipment,
durable goods, mining, mineral processing and electric utility industries. The
businesses within the Manufactured Products Group consist of original
equipment manufacturers, suppliers of after-market parts and services
(including for the Company's OEM products) and manufacturers of components
used by other original equipment manufacturers. These businesses have supplied
their customers with quality products and services for an average of over 36
years. Under the strategic direction of Elgin's Senior Management, each of
these businesses operates on a decentralized basis, with its own management
team, independent market identity and dedicated manufacturing facilities.
Representative end-users of the products of the Manufactured Products Group
include Consolidation Coal, Detroit Diesel, Emerson Electric, General
Electric, General Motors, Mack Truck, Peabody Coal and Toyota. The
Manufactured Products Group has a broad and diverse customer base, with sales
to over 1,900 customers worldwide in 1997, with no single customer accounting
for more than 4% of the Group's sales for that year.
Net sales and EBITDA, excluding unallocated corporate overhead, for the
Manufactured Products Group for the year ended December 31, 1997, were $78.6
million and $17.2 million, respectively. Each of the business units of the
Manufactured Products Group is described below.
35
Ohio Rod Products Company
Ohio Rod, a division of Elgin, founded in 1947 and acquired by the Company
in 1986, is a leading U.S. manufacturer of cold-headed, long-length (up to
589), small diameter (.079 to .509) fasteners and threaded products. Cold-
headed products are produced by forcing steel rods into a die, rather than
through a hot forging process. Ohio Rod has a large installed base of highly
specialized cold-forging equipment, built in Europe to Ohio Rod's
specifications. The equipment is complex, with machinists generally requiring
one to three years of training before acquiring the necessary skills to
operate it in full production. The equipment efficiently combines the heading
and threading processes into a single step procedure and allows Ohio Rod's
skilled machinists to minimize set-up times for lower costs and faster
turnaround. This gives Ohio Rod the flexibility to complete production runs of
customized fasteners in almost any volume, including short production runs.
Ohio Rod's manufacturing processes have given it an important competitive
advantage and, together with its broad product line and emphasis on customer
service, have combined to generate strong customer loyalty and consistent
profit margins. Ohio Rod also maintains a continuous program of machine
rebuild, acquisition and technology improvement to improve productivity and
product features. Ohio Rod has a broad, diverse and stable customer base that
includes over 600 active accounts. Ohio Rod had net sales of $23.4 million for
the year ended December 31, 1997.
Products. Ohio Rod is the leading supplier of thru-bolts to manufacturers of
fractional horsepower electric motors. "Thru-bolts" are headed and threaded
bolts of varying lengths that are basic components of the housing used to hold
together fractional horsepower electric motors. Fractional horsepower electric
motors are small specialized motors that are rated at increments of less than
a full horsepower. These motors are widely used in the housing, appliance,
power tool and automotive industries. For example, they power a broad range of
appliances such as refrigerators, air-conditioners, furnaces, humidifiers,
washers and dryers, sump pumps, garbage disposals, dishwashers, ceiling fans
and garage door openers. An industry source has estimated that over 30 motors
of this type could be found in the average newly constructed home. Fractional
horsepower electric motors are also widely used in industrial equipment, such
as power presses, lathes, drills and electric fork lifts, and in automotive
applications such as power windows, seats and trunks, windshield wipers and
starter motors. The variety of sizes and applications for electric motors
produces a corresponding need for thru-bolts with a wide variety of lengths
and diameters. The Company believes that Ohio Rod's ability to meet customer
specifications with timely delivery of a variety of quality thru-bolts has
been critical to Ohio Rod's success. Sales of thru-bolts used by manufacturers
of fractional horsepower electric motors comprised approximately 48% of Ohio
Rod's 1997 sales. In addition to motor assembly, thru-bolts are used in a
number of other fastening applications that are also important to Ohio Rod's
business.
Ohio Rod is also the leading supplier of reel bolts used to secure the ends
of cable reels. Cable reels are used to spool and store cable, wire, rope,
rubber hoses and similar products. Primary users of these reels are
manufacturers of cable, rope and hoses, whose products are then sold
principally to end users such as utilities, construction companies and heavy
manufacturers.
Ohio Rod's fastener products also constitute critical components in a
variety of other household and industrial products, including as reinforcement
bolts for steps on wooden ladders, axle rods for skate-wheel conveyor systems,
threaded studs to secure handles on equipment, construction bolts used in roof
repair and the assembly of pre-fabricated homes and bolts used as door hinges
and handle hinges on automobiles.
Markets and Customers. In 1997, Ohio Rod sold its products to over 600
customers, with no single customer accounting for over 10% of its sales. Ohio
Rod has grown by incrementally adding customers while successfully retaining a
high percentage of current customers, with approximately 75% of 1997 sales to
companies who have been customers of Ohio Rod for at least five years. The
1990 strategic acquisition of Demby Rod & Fastener Mfg. Co, which has been
integrated with Ohio Rod's operations, further strengthened its customer base.
In response to the just-in-time delivery requirements, Ohio Rod has
implemented stocking programs for certain customers. These programs have
allowed for better customer service, improved efficiencies and, in certain
cases, enhanced operating margins. Certain key customers of Ohio Rod have
entered into exclusive supply contracts with Ohio Rod. The term of these
contracts are generally one to two years.
36
Sales and Marketing. Ohio Rod's products are sold through a network of five
manufacturer representatives supported by a sales manager and six company
sales personnel, and are marketed on the basis of product quality, production
time and price. Ohio Rod sells products to its customers primarily on a direct
basis.
Competition. Ohio Rod competes primarily with small independent suppliers.
Management believes that Ohio Rod's consistent investment in specialized
equipment, high product quality, quick response times and ability to run short
or irregular sized orders have given it a significant competitive advantage.
In addition, management believes that the small production runs and low dollar
volume orders discourage new competitors from making the sizeable capital
investment in specialized heading and threading equipment that is necessary to
produce small production runs profitably.
Tabor Machine Company and Norris Screen and Manufacturing Inc.
Tabor, a wholly owned subsidiary of the Company founded in 1961 and acquired
by the Company in 1975, is a leading designer and custom manufacturer of
vibrating screen systems. A vibrating screen system employs a self-contained
drive mechanism that uses one, two or three moving screens of various
textures, materials and grades to sort, size and dewater coal, aggregates
(sand, gravel and crushed rock) and other minerals. Tabor is an industry
leader in the supply of vibrating screen systems to the eastern U.S. coal
mining industry. Norris, a wholly owned subsidiary of the Company founded in
1977 and acquired by the Company in 1982, manufactures stainless steel screen
cloths and polyurethane screening surfaces that are used to separate the
material being screened according to size. Tabor and Norris had combined net
sales of $14.9 million (of which $12.7 million was from the sale of service
and replacement parts) for the year ended December 31, 1997.
Products. Tabor designs and manufactures incline and horizontal vibrating
screen systems of varying sizes and capacities to customer specifications and
needs. Tabor's screens vary in size with widths of up to 10 feet and lengths
of up to 24 feet. Tabor's screen systems are used for the processing of coal,
crushed stone, sand and gravel and minerals, to remove water or size the
material (i.e. separate large and coarse materials from those of desired size
and consistency). Tabor is committed to refine its screening machines to
better serve its customer base and respond to competition. Recently, in part
to respond to design improvements by competitors, Tabor introduced a multiple
slope vibrating screen system, otherwise known in the industry as the "banana
screen" (due to its sloping banana shaped angle). The banana screen can
accommodate a higher tonnage of materials for processing and represents a
further improvement in Tabor's processing screen system technology.
Norris manufactures screening surfaces from stainless steel, polyurethane
and other materials to suit various screening requirements. Norris has
developed the patented Tabor-Thane(TM) Modular Screening System, which employs
a screening system of polyurethane panels that provides a longer life than
conventional screens. For customers requiring screens with more exact grading,
Norris manufactures stainless steel screen cloths. Norris' screen surfaces are
used by Tabor as well as other manufacturers of vibrating screen systems.
Both Tabor and Norris derive a substantial part of their revenue from
supplying after-market replacement parts and services. Each company maintains
a 24-hour parts and service team to respond to customer needs.
Markets and Customers. Tabor and Norris sell primarily to eastern U.S. coal
producers, and Tabor has expanded its markets for its vibrating screen systems
to non-coal applications. The non-coal sector of the vibrating screen market
is significantly larger than the coal sector and management believes that it
offers considerable expansion opportunities. The initial thrust of this
program has been the aggregates industry (sand, gravel and crushed rock) which
has screening and dewatering requirements similar to coal. Management also
believes increased international opportunities are available for Tabor's
products and plans to pursue them in conjunction with the activities of CMI
and R&S. Tabor now has sales representatives in Canada, Mexico and China, and
has sold products in each of these countries. Recently, Tabor has increased
sales in Poland, and, in 1996, sold its first vibrating screen system in
Russia.
37
Sales and Marketing. Tabor markets and sells its products through five
internal salespeople supported by an in-house engineer and technical services
group that provide 24-hour service. Norris has a small sales force but
primarily markets its products jointly with Tabor to the coal and mineral
processing industries. The sales effort is managed at both businesses by a
sales manager with 35 years of service in the screening industry.
Competition. The principal competitors of Tabor and Norris are Allis
Minerals, WS Tyler, Conn-Weld Industries and UOP Johnson. Principal after-
market competitors are small regional job shops. Competition is on the basis
of after-market product support, product quality and price.
Centrifugal and Mechanical Industries and Centrifugal Services, Inc.
CMI, a division of Elgin, founded in 1938 and acquired by the Company in
1973, is, by the Company's estimation, the leading U.S. designer and
manufacturer of coal processing centrifuges. A centrifuge utilizes centrifugal
force to separate liquids from solids. Centrifuges are used in the coal
industry to dry coal after it has been treated with water and other fluids in
the coal cleaning and preparation process. CMI has a current installed base of
over 1,800 centrifuges in the United States. In 1996, CMI manufactured and
sold over 90% of what it believes to be all centrifuges purchased by U.S. coal
companies. CMI has long-standing relationships with most U.S. coal producers
and management views the quality of its machines and the responsiveness of its
field service personnel as marketing strengths. CSI, a wholly owned subsidiary
of the Company founded in 1987 and acquired by the Company in 1995, provides
after-market parts and services to the centrifuge market. CMI and CSI had
combined net sales of $13.7 million (of which $11.4 million was from the sale
of service and replacement parts) for the year ended December 31, 1997.
Products and Services. CMI currently offers three types of centrifuges: the
vibratory vertical centrifuge, the screen-scroll vertical centrifuge and the
horizontal "chip-wringer" centrifuge. In addition, CMI is now introducing the
"Sidewinder," a horizontal vibratory centrifuge.
CMI's vibratory vertical centrifuge, used for coarse particle applications,
dries coal through centrifugal force and vibratory motion. The vibratory
centrifuge is built in two sizes ranging from 12,000 lbs. to 24,000 lbs. with
capacities to dry up to 300 tons of coal per hour. Each vibratory centrifuge
features large feed inlets, heavy duty motors, rugged bearing and shaft
housing and continuous lubrication, all of which accommodate a coarser grade
of materials.
The screen-scroll vertical centrifuge, used for small and fine particle
applications, dries coal by centrifugal force. CMI builds the screen-scroll
centrifuge in five models, ranging in size from 10,000 lbs. to 16,000 lbs.
with capacities to dry up to 120 tons of coal per hour.
The "chip-wringer" centrifuge is used for non-coal applications. This small,
horizontal centrifuge, built in two models ranging in size from 1,000 lbs. to
3,600 lbs., is used in auto plants, other manufacturing facilities and machine
shops to separate oil, coolants and other impurities from tool and machine
metal cuttings for the purposes of reclaiming the liquids and allowing proper
disposal of the metal chips.
The Sidewinder features a streamlined servicing and maintenance design and a
wide variety of speed capabilities for use with a range of particle sizes.
Preliminary field tests of the Sidewinder have produced favorable results, and
indicate higher product recovery performance than screen scroll machines.
Management believes that the Sidewinder's design may offer significant
marketing advantages, particularly in international markets where horizontal
configurations are more compatible with common coal preparation plant designs.
The centrifugal drying of coal is an extremely abrasive process, requiring
machine component parts and ongoing service to maintain performance and safe
operation. Over 80% of the combined net sales of CMI and CSI for 1997 were
after-market parts and services. CMI and CSI maintain an inventory of
replacement parts, rebuilt drive assemblies and complete machines for
customers. Rebuilt drive units are kept in stock, whenever possible, to be
offered on an exchange basis so the customer can minimize down time. CMI and
CSI provide the majority of replacement parts and service to the domestic coal
centrifuge after-market. Dedicated, specialized field service personnel, based
near the eastern coal fields are on call 24 hours a day, seven days a week to
respond to customer needs. This service force is instrumental in promoting the
sale of replacement parts. The acquisition of CSI has allowed the Company to
sell parts and services to smaller customers more effectively.
38
A recent innovation has improved CMI's after-market competitive position.
Introduced in 1995, CMI's "Long Life Parts Package(TM)" is a patented,
integrated system of components developed to reduce operating costs in screen-
scroll centrifuges. CMI believes that the design of the Long Life Parts
Package(TM) results in a more efficient drying process and is less stressful
on component parts, thereby reducing operating costs. Management believes the
performance advantages that have propelled the initial sales of the Long Life
Parts Package(TM), together with customers' significant up-front investment
and the unavailability of alternative products of like quality, provide CMI
with the opportunity for meaningful incremental sales that should more than
offset any reduced sales of less durable screening products to these
customers. This package has been favorably received by customers that have
installed it to date.
Markets and Customers. CMI and CSI primarily serve the U.S. eastern coal
mining industry. In recent years, CMI has developed new markets for its
products in order to diversify its revenue sources and provide additional
growth opportunities. CMI has sold its centrifuges to the automotive and
machining, aggregates, steel and environmental remediation industries. The
chip-wringer is an example of this diversification. While seeking
diversification, CMI continues to refine and innovate its core product, the
coal centrifuge. Examples of this diversification include CMI's introduction
of its patented Long Life Parts Package(TM) and the Sidewinder horizontal
centrifuge.
CMI has sold centrifuges to seven countries since 1992. Management has
focused special attention on expanding international sales, including the
recent introduction of the Sidewinder. Additionally, CMI engages in joint
efforts with the Engineering Services Group to identify and market to foreign
coal preparation plant projects that may include the use of centrifuges. CMI
is in the process of establishing a marketing, sales and service joint venture
to serve central and eastern Europe. Particular focus is now being directed to
the coal industry in Poland.
Sales and Marketing. CMI markets to the U.S. coal industry through its sales
force of ten, whose activities are coordinated by regional sales managers. CMI
has also added an in-house sales representative responsible for increasing
sales of centrifuges for non-coal applications. CMI parts are distributed from
different locations in the eastern U.S. coal fields, and equipment and parts
are also available through distributors in Canada and England. CSI has its own
sales and service force of three employees.
Competition. CMI currently has no significant competitors in the domestic
OEM market. Management believes that CMI's product quality and service
quality, and the start up costs necessary to design and build centrifuges,
represent significant barriers to entry for any additional competitor.
Management believes that CMI's existing strong relationships with its
customers, established market presence and extensive network of sales and
service personnel create a further disincentive for any potential OEM
competitor to enter CMI's niche market. CMI and CSI compete with small
independent providers in the sale of after-market replacement parts and
services. Management believes that CMI and CSI differentiate themselves in
this market by their extensive expertise and support capabilities in servicing
centrifuges, as well as by offering an inventory of regularly replaced parts
and rebuilt centrifuges.
Mining Controls, Inc.
Mining Controls, a wholly owned subsidiary of the Company established by the
Company in 1977, had net sales of $12.4 million for the year ended December
31, 1997.
Products. Mining Controls designs and manufactures specialty high and low
voltage electrical power distribution equipment, electrical switch gear
equipment, power factor control and harmonic correction equipment and
underground lighting and electrical connectors. High and low voltage
distribution and switch gear equipment is sold to the coal, mineral and metals
mining industries and the underground tunneling industry. This equipment
regulates, controls and distributes electrical power for a variety of
requirements, depending on the customer's needs. Power factor control and
harmonic correction equipment is comprised of large, complex, customized
systems, generally selling for $50,000 to $750,000 each, and which control the
quality and
39
characteristics of electrical power being transmitted into and from industrial
facilities with high levels of power consumption. Mining Controls sells
electrical products (lighting and connectors) and programmable control
equipment used by portable power centers, which provide lighting and electric
power for underground mining and tunneling equipment in a variety of
inaccessible locations. Mining Controls also sells replacement parts and
rebuilt equipment. The Company's acquisition of Gilbert Electrical in 1989 and
K&M Inc. in 1994 broadened Mining Controls' customer base into the heavy
industrial and electric utility markets that requires custom designed systems
for non-standard applications. Today, the Gilbert Division (which includes
K&M) accounts for approximately 35% of Mining Controls' total sales, as the
Company continues its focus on diversifying its end use markets.
Markets and Customers. Mining Controls historically served primarily the
eastern U.S. coal mining industry, and continues to do so. Through the
integration of Gilbert and K&M, Inc., Mining Controls is able to provide
specialized and customized electrical power distribution systems, power factor
correction equipment and harmonic control equipment to heavy manufacturing,
utility and governmental facilities.
Sales and Marketing. Mining Controls sells its products through a ten-person
technical sales staff supported by a twelve-person engineering staff, working
closely with its customers' engineering representatives. Mining Controls also
has key relationships with specialized distributors for the marketing, sale
and distribution of its lighting and electrical products.
Competition. Mining Controls' primary competitors are Line Power
Manufacturing Co., American Switchgear Company and Pemco Corporation.
Competition is generally on the basis of price and the expertise of in-house
engineering and design staff. Mining Controls seeks to differentiate itself
from its competitors through its design and engineering expertise and by
responding more quickly and effectively to customer support requests.
Chandler Products
Chandler, a division of Elgin, founded in 1930 and acquired by the Company
in 1986, produces cold-formed, close tolerance, custom designed, precision-
threaded fasteners. Chandler's manufacturing facility has achieved ISO 9002
certification and has a fully functional quality lab accredited by the
American Association of Laboratory Accreditation. Chandler's manufacturing
techniques and quality control procedures have led to numerous customer
awards, including the General Motors Medallions of Excellence. In addition,
the President of Ohio Rod now has operating responsibility for Chandler and,
along with Chandler's experienced management team, is implementing several of
Ohio Rod's proven programs in marketing and operations. Chandler had net sales
of $8.0 million for the year ended December 31, 1997.
Products. Chandler's fastener products, produced to close tolerance from
customer specifications, are used in diesel engines to secure the engine
cylinder head and as accessory bolts to secure the starter motor, carburetor
and other diesel engine components. These fastener products are manufactured
in a range of sizes to the customer's specifications. Chandler fasteners are
also used to secure and join various components of commercial heavy duty
transmissions. These transmissions are used in dump trucks, freight trucks,
tanks and cement trucks. Hand tool OEMs use Chandler products to secure tool
housings and various components. Chandler also sells to industrial
distributors for resale to industrial customers.
Markets and Customers. Chandler's primary customers are manufacturers of
component assemblies in the heavy duty vehicle manufacturing industry,
representing a majority of Chandler's 1997 sales. Chandler also sells its
products for use in various industrial applications such as hand tools and the
truck and auto after-markets.
Sales and Marketing. Chandler markets its products through a combination of
independent sales representatives and a two person in-house sales force
supported by design and tool engineers and production and quality technicians.
40
Competition. Chandler faces competition from larger fastener manufacturers,
generally serving the automobile industry, particularly during periods of
excess capacity at their production facilities. Chandler seeks to
differentiate itself from its competition through its ability and willingness
to complete short specialized production runs, product quality and overall
customer service. Management believes that Chandler's ability to complete
short specialized production runs profitably constitutes a particular
advantage over larger manufacturers, which usually require longer uniform
runs.
Clinch River Corporation
Clinch River, a wholly owned subsidiary of the Company founded in 1970 and
acquired by the Company in 1979, had net sales of $6.2 million for the year
ended December 31, 1997.
Products. Clinch River is a full-service custom fabrication facility
specializing in the manufacture and repair of various types of preparation
plant and underground coal mining equipment and small parts used for power
plants and other industrial applications. Clinch River also manufactures a
proprietary curved dewatering screen under the trademark RADII-VIB(R). Clinch
River offers fabrication and repair services using a variety of metals,
including stainless steel, to fabricate a wide range of products engineered to
the customer's specifications. Clinch River is also an authorized distributor
and service center for Roots-Dresser industrial vacuum pumps and blowers.
Sales and Marketing. Clinch River markets its services and products through
a sales force of five, and serves primarily the coal and electric utility
industries in the southeastern United States.
Competition. Clinch River competes with other small, regional fabrication
firms on the basis of price, engineering expertise and customer service.
ENGINEERING SERVICES GROUP
The Engineering Services Group, comprised of R&S and Soros, provides design,
engineering, procurement and construction management services principally to
the mining, mineral processing, electric utility and rail and marine
transportation industries. Depending upon the needs of the client, these
services are provided on either an unbundled (i.e. task-specific) basis or a
full project turnkey basis. Historically, the Engineering Services Group
provided its services primarily to the United States coal mining industry.
Over the past ten years, the Engineering Services Group has diversified into
markets which include aggregates, industrial minerals, base metals and
precious metals. Today, this Group has a broad, well-balanced customer base
within these industries and derived approximately 75% of its net sales from
customers outside the coal mining industry during 1997.
Historically, the Group executed international work opportunistically,
relying on its strong reputation in the United States to attract international
projects. Beginning in the early 1990s, the Engineering Services Group adopted
a strategy to systematically pursue international projects. The Company
believes that the Engineering Services Group is well-positioned to continue
expanding internationally while maintaining its strong presence and large
market share within the mature and stable domestic mining, mineral processing,
electric utility and marine and rail transportation industries.
Net sales and EBITDA, excluding unallocated corporate overhead, for the
Engineering Services Group for the year ended December 31, 1997 were $61.0
million and $4.2 million, respectively. The two business units comprising the
Engineering Services Group are described below.
Roberts & Schaefer Company
R&S, a wholly owned subsidiary of the Company founded in 1903 and acquired
by the Company in 1969, has for over 90 years provided design, engineering,
procurement and construction management services ranging from small
engineering-only services to turnkey projects. R&S had net sales of $58.4
million for the year ended December 31, 1997.
41
Services. R&S provides engineering services including evaluating the
feasibility of the customer's proposal (from both a cost and engineering
standpoint), translating the customer's concept to a workable design, or
providing bankable feasibility studies and detailed and extensive engineering
support in effecting the realization of a design. In turnkey projects, R&S
performs all service activities necessary for project completion, including
design, subcontracting, equipment procurement, construction management and
startup. R&S also provides equipment procurement on behalf of its customers,
involving the designation and sourcing of equipment to meet the customer's
requirements.
Typical mineral processing facilities designed and built by R&S include coal
preparation plants, gold processing plants, copper processing plants and
aggregate and crushed rock processing plants. After mining, coal is often
prepared for shipment in a preparation plant. This facility crushes the coal
and cleans it by washing it in a liquid solution, separates it into higher and
lower grades, and removes non-coal materials. Cleaning upgrades the quality
and heating value of the coal by removing or reducing pyritic sulfur content,
rock, clay and other ash-producing impurities. Coal blending or mixing of
various sulfur types is often performed at the preparation plant in order to
meet the specific combustion and environmental needs of customers.
Mineral processing facilities generally are comprised of a conveying system
that transports mined raw material from a mine; a processing plant for size
reduction, sorting (often by use of screens of the type manufactured by Tabor
and Norris), and upgrading through chemical or mechanical means (often
involving use of centrifuges manufactured by CMI); a conveying system to move
the processed material to a storage area; and a loading facility for shipment
of the processed material to its final destination. Similar processes are
often required by transporters and end-users of the products, and R&S also
designs bulk materials handling systems for coal-fired electric power plants
and for handling multiple commodities at rail terminals, storage facilities,
marine terminals and ports. These systems consist of loading and unloading
equipment to remove the material from or place it into the transportation
vehicle (trucks, trains, ships or barges) and multiple conveying systems to
move material to or from stockpiles.
In 1995, R&S incurred a loss of approximately $7.8 million on a $51.5
million fixed cost turnkey project that was awarded in 1992. This loss
accelerated an ongoing operational restructuring, directed by Elgin's Senior
Management, that involved personnel changes and the implementation of a
comprehensive and detailed set of project procurement, execution and
completion guidelines. These guidelines include requirements that Elgin
management review and approve all proposals in excess of $3.0 million; regular
meetings between Elgin management and R&S management; project specific
organizational teams and benchmarks; increased use of CAD equipment and design
software; more frequent projection, reporting, and monitoring of scheduling
and costs; and a shift of emphasis away from larger turnkey projects toward
the smaller and mid-sized projects that are consistent with the Company's
niche strategy. These guidelines have been fully implemented and, along with
the renewed focus on smaller and mid-size jobs, have resulted in nine
profitable quarters at R&S since the completion of this turnkey project during
the third quarter of 1995.
Markets and Customers. R&S provides its services, ranging from engineering-
only services to turnkey project completion, primarily to the mining, mineral
processing, electric utility and rail and marine transportation industries,
with a diversified customer base including a number of leading domestic and
international mining companies, electric utility companies and transportation
companies. Engineering-only services range in size from under $10,000 to
several hundred thousand dollars. R&S' turnkey services include full project
responsibility for the design and construction of mineral processing and bulk
material handling facilities. R&S focuses on turnkey projects of less than $25
million, with most such projects significantly smaller, as indicated below.
42
In 1997, approximately 36% of R&S' net sales were derived from fixed cost
turnkey projects. A profile of the larger projects that are currently in
progress or recently completed is set forth below; project value represents
the total project value including net sales recognized to date and backlog of
remaining amounts to be earned on such projects. Total backlog for the listed
projects was $58.2 million at December 31, 1997 out of overall Engineering
Services Group backlog of $78.0 million at that date.
TOTAL
CUSTOMER LOCATION JOB DESCRIPTION PROJECT VALUE
-------- -------- --------------- -------------
(IN MILLIONS)
Zeigler Coal Gillete, WY New coal handling system at $16.1
existing mine, includes coal
unloading, crushing,
conveying, slot storage,
reclaiming and train loadout
system.
LGZ Steel Trinidad, V.I. DRI (direct reduced iron) 13.7
Partners materials handling system
involving barge unloading,
stacking, reclaiming and
ship loading.
Tennessee Chattanooga, TN Barge unloading facility: 13.4
Valley conveying and crushing coal,
Authority transporting to existing
power plant.
Mineral Ridge Silver Park, NV New gold processing in 12.0
Resources Southern Nevada, including
screens, crushers, process
plant to extract gold.
Piast Mine Bierun, Poland Engineering and equipment 9.2
procurement for a coal
preparation plant
United Puerto Ordaz, Venezuela Engineering and equipment 8.1
Engineers procurement of a material
International handling system at the
Posven HBI plant.
Katowice Coal Katowice, Poland Modernization of existing 7.3
Handling coal preparation plant to US
technology.
Central Newburgh, NY Convey coal from self 6.0
Hudson Gas & unloading ship, storage,
Electric reclaiming, and conveying to
power plant.
Tennessee Paducah, KY Upgrade of a material 5.7
Valley handling system at the
Authority Shawnee Fossil Plant
Raytheon Cumberland, MD Coal handling system 4.8
including unloading,
storage, conveying, crushing
and transporting to power
plant.
Black & Veach Thailand Engineering and procurement 4.1
of a limestone preparation
system.
City Springfield, MO Expansion of existing coal 3.2
Utilities of storage and reclamation
Springfield facility by providing hopper
and conveyor system to power
station.
Genwal Huntington, UT Upgrade coal handling 2.9
Resources facility.
Lehigh College Park, GA Materials handling for 2.7
Portland cement distribution
Cement terminal.
Carlota Globe, AZ Copper crushing and 2.7
Copper processing plant.
Industrial Coahuila, Mexico New coal preparation plant 2.5
Minera for Plant Pasta de Conchos
Mexico Mine.
Williamette Hawesville, KY Wood chip handling conveyor 1.8
Industries system for expanding paper
mill.
Humboldt Thailand Design approximately 85 1.6
Wedag conveyors and associated
dust collection systems for
cement plants in Thailand.
U.S. Borax Born, CA Engineering and procurement 1.1
services to facilitate
reclaiming and reprocessing
borate ore from tailings
ponds.
43
In addition, as of December 31, 1997, R&S was undertaking approximately 90
other projects with annual net sales of less than $1.0 million.
Management believes that targeting projects in the range of $1 million to
$25 million gives R&S two strategic advantages. First, this is a niche of the
mineral processing and material handling markets that generally does not
attract larger firms, permitting R&S to compete with smaller, local and
regional contractors that may lack R&S' experience and capabilities. Second,
by maintaining a larger portfolio of smaller projects, R&S is better able to
manage the risk inherent in its business.
Traditionally, R&S provided its services primarily to the coal industry,
having designed and constructed 8 of the estimated 14 coal preparation plants
built in the United States during the ten years prior to November, 1997. Due
to R&S's strong position and reputation as a designer and builder of coal
preparation plants, it has often been requested to execute coal projects
internationally. R&S did undertake international projects when the
opportunities were presented, principally in the area of coal preparation.
From the mid-1970's through the mid-1980's, R&S had built plants in nine
countries. Beginning in the early 1990's, R&S initiated a program to broaden
its market to include all types of domestic mineral and metal processing
facilities and bulk materials handling systems. As a result of this program,
R&S no longer depends to the same extent on the U.S. coal mining industry, and
now has a broad and diversified customer base, having executed projects in the
aggregates, industrial minerals and base metal industries over the last ten
years. This program has also been successful in further diversifying the
markets of R&S to include international work. During 1997, approximately 30%
of the net sales of R&S were from international projects.
Sales and Marketing. R&S markets its services through internal marketing and
sales groups located in Chicago and Salt Lake City. R&S management and
engineering staff participate in the process to adequately price and
successfully bid on projects. R&S also secures projects through partnering or
joint bidding arrangements with larger engineering and construction firms or
architectural engineers, particularly in the case of international projects.
In such arrangements, R&S will assume specific responsibility for a particular
component of a larger project. In this regard, R&S has executed projects with
and has ongoing client relationships with Raytheon, Black & Veatch and Bechtel
Power, including occasional joint venture relationships. For example, the
Genwal Resources project in the table set forth above was a joint bid with The
Industrial Company, which provided the construction services to complement the
work of R&S.
Competition. Primary competitors of R&S include Dearborn Midwest Conveyor
(coal and limestone handling), Kilbourn International, Inc. (mining), Mincorp
Engineers and Constructors (precious and base metals), Industrial Resources,
Inc. (coal processing and material handling) and McNally Wellman Co. (coal and
limestone handling). Generally, R&S competes with a large number of specialty
engineering firms on the basis of quality of work performed, strength of
reputation, responsiveness to customer needs, price and ability to meet
deadlines, and R&S seeks to differentiate itself from its competitors with
respect to each of these factors.
Soros Associates, Inc.
Soros, founded in 1955 and acquired by the Company in 1994, specializes in
designing and providing consulting engineering services with respect to marine
bulk and liquid material handling systems. The acquisition of Soros
strengthened the Engineering Services Group's technical expertise in the
development of marine port facilities, and has enabled Soros to begin to
expand its business from its traditional project base of design and consulting
engineering. Soros has designed more than 200 bulk, liquid and general cargo
port facilities, 14 of which were greenfield projects (i.e. start-ups at
unimproved sites). Since 1955, Soros has completed over 640 projects in 70
countries and has received over 20 citations and awards for its engineering
excellence. Soros had net sales of $2.6 million for the year ended December
31, 1997.
Soros offers a special expertise in offshore terminals, involving bulk
loading and unloading at open sea. Soros has more successful offshore terminal
installations around the world than any other firm, including the first open
sea loading berth at Port Latta, Tasmania; the first multiple oriented loading
berth at Punta Colorada,
44
Argentina and the first open sea continuous unloading berth at Hsinta, Taiwan.
Soros has extensive experience in the engineering of all types of conveyers,
shiploaders, unloaders, railroad yards, railroad and truck loading and
unloading, stackers, reclaimers, tunnels, covered and silo storage, crushing,
screening, drying, bagging, weighing, sampling and computerized control and
data management systems.
Soros' customer base consists of coal companies, port authorities (both
private and municipal) and municipalities. Competition for customers is on the
basis of reputation and perceived value added through the firm's expertise, as
well as price. Soros obtains its projects through reputation, requests for
proposals and local sales agents that build industry contacts. Soros has also
obtained project referrals from R&S.
THE COAL INDUSTRY
Approximately 40% of the Company's consolidated net sales in 1997 were
derived from customers operating primarily in the coal mining industry. The
Engineering Services Group provides the industry with design and construction
management services, Mining Control and Clinch River supply equipment used in
the mining process, and CMI, CSI, Tabor and Norris supply equipment and
component parts used in processing coal.
The United States is the largest coal producer and consumer in the world.
According to preliminary data compiled by the United States Department of
Energy's Energy Information Administration (the "EIA"), United States coal
production totaled approximately 1.1 billion tons in 1996, a 7.6% increase
from the 1.0 billion tons produced in 1995 and a record high. Coal production
levels in 1996 were driven by an unusually large increase in coal consumption
for electricity generation resulting from the combination of increased natural
gas prices, negligible growth in nuclear-powered generation, colder-than-
normal weather, and strong economic growth.
Coal consumption in the United States has experienced generally steady
annual growth over the last ten years attributable to similar growth in the
demand from the electric utility industry, which consumes in excess of 85% of
domestic coal. For 1996, total U.S. coal consumption increased 4.1% over 1995,
totaling approximately 1.0 billion tons for the year. Coal continued to
represent the principal energy source for U.S. utilities through 1996, with
coal accounting for 56.4% of total utility power generation, up from 55.2% in
1995. Over the last three years through 1996, coal prices have generally
remained steady, except for seasonal variations. Given coal's status as a
relatively inexpensive and abundant resource for the production of
electricity, domestically produced coal is expected to continue to play a
significant role in the production of electricity in the future.
Total domestic recoverable coal reserves are estimated at 263 billion tons,
or 23% of the world's total recoverable reserves. Total world recoverable
reserves are estimated at 1,145 billion tons, sufficient to last another 230
years at current production rates. Although coal deposits are widely
distributed, 57% of the world's reserves are located in three regions: the
countries of the former Soviet Union (23%), the United States (23%) and China
(11%). Another four countries, Australia, Germany, India and South Africa,
account for an additional 28%. In 1993, these seven regions accounted for
approximately 80% of total world coal production.
Productivity gains, environmental legislation and a shift in the relative
importance of utility consumption compared to metallurgical and industrial
usage have worked together to exert pressures on the fundamental structure of
the coal industry. According to statistics compiled by the federal government,
the number of operating mines has declined 47% over the last ten years even
though production has increased 31%. During this period, work practice and
technological improvements, as well as the rapid expansion of surface mining
in Wyoming, have allowed production per man day to increase by 95% while
industry employment declined 42%. These productivity gains and resulting
excess productive capacity in most segments of the industry have contributed
to the stability of coal prices in recent years at levels lower than the
1970's and early 1980's. The reduction in the number of mines has partially
offset the impact of the growing production and technology upgrades on
suppliers to the coal industry such as the Company. Clean air concerns and
legislation have increased consumption of low sulfur products mined in
Appalachia and the western United States, and the Company expects this trend
to continue.
45
SUPPLIES
The Company acquires substantially all of its raw materials from outside
sources. The basic raw materials primarily used in the Manufactured Products
Group are flat sheet metal, coiled wire or rod and various forms of stainless
steel materials. Additionally, the Manufactured Products Group acquires
circuit breakers, components, transformer cores, motors and drive units from
outside sources. The Company subcontracts certain fabrication work to other
suppliers. The Company is dependent on the ability of such fabrication
suppliers for timely delivery, performance and quality specifications. The
Engineering Services Group sources many different types of components in the
construction of plant facilities, which in certain cases are sold directly to
the Company's customer by the selected supplier. These include equipment such
as vibrating screens, centrifuge dryers, flotation units and other finished
products. The Company believes there are numerous sources of supply for the
different materials used in its operations.
FACILITIES
The Company and its businesses conduct operations from the following primary
facilities:
APPROXIMATE
BUSINESS LOCATION PRINCIPAL FUNCTION OWNED/LEASED SQUARE FOOTAGE
-------- -------- ------------------ ------------ --------------
Elgin Downers Grove, IL Headquarters leased 6,470
Ohio Rod Versailles, IN Manufacturing owned 93,350
Chandler Euclid, OH Manufacturing owned 88,000
Products
Mining Con- Beckley, WV Manufacturing owned 28,825
trols
CMI St. Louis, MO Manufacturing owned 63,295
CSI Raleigh, IL Manufacturing owned 16,166
leased 18,245
Tabor Bluefield, WV Manufacturing owned 44,000
Norris Princeton, WV Manufacturing owned 12,700
Clinch River Tazewell, VA Manufacturing owned 25,400
leased 7,200
R&S Chicago, IL and Office leased 16,200
Salt Lake City, UT Office leased 25,267
Soros Chicago, IL Office leased 5,800
EMPLOYEES
As of February 28, 1998, the Company had approximately 673 employees.
Approximately 28 employees of the Company at CMI's St. Louis, Missouri
facility are represented by District 9 of the International Association of
Machinists and Aerospace Workers ("IAM") and are covered by a contract between
CMI and the IAM effective from March 1, 1998 through February 28, 2003.
Approximately eight employees of TranService, Inc., a wholly owned subsidiary
of the Company, are represented by the United Mine Workers of America ("UMWA")
and are covered by the National Bituminous Coal Wage Agreement expiring on
December 31, 2002, as modified by that certain memorandum of understanding
dated April 27, 1995 between the UMWA and TranService. The Company believes
that its relations with its employees are generally good.
REGULATORY MATTERS
The Company is subject to a variety of environmental standards imposed by
federal, state, local, and foreign environmental laws and regulations. The
Company also is subject to the federal Occupational Health and Safety Act and
similar foreign and state laws. Stringent and extensive safety and health
standards are imposed by federal law and regulation on the mining industry,
including the equipment used in mining operations (such as that manufactured
by the Manufactured Products Group). The Mine Safety and Health Administration
monitors compliance with these federal laws and regulations. In addition, most
of the states in which the Company sells
46
products or provides services impose regulations for mine safety and health.
The Company periodically reviews its procedures and policies for compliance
with environmental, health and safety and mining laws and regulations and
believes that it is in substantial compliance with all such material laws and
regulations applicable to its operations. Historically, the costs of
compliance with environmental, health and safety requirements have not been
material to the Company's divisions or subsidiaries.
LEGAL PROCEEDINGS
The Company and its subsidiaries are involved in legal proceedings from time
to time in the ordinary course of its business. As of the date of this
Prospectus, neither the Company nor any of its subsidiaries are a party to any
lawsuit or proceeding which, individually or in the aggregate, in the opinion
of management, is reasonably likely to have a material adverse effect on the
financial condition, results of operation or cash flow of the Company.
In connection with the 1993 leveraged buyout of the Company, Jupiter agreed
to indemnify the Company against various claims and ongoing litigation and
assumed the defense of such litigation. The litigation includes a wrongful
death product liability claim against R&S in connection with an accident at a
work site. Although the Company believes that Jupiter and its insurance
carrier are performing on the indemnity obligations, there can be no assurance
that they will continue to do so or that the Company would successfully
recover on the indemnity in the event of an adverse judgment against R&S or
adverse outcomes in any other proceeding. In any such case, the Company would
bear the cost of defense and any adverse judgment. One or more such adverse
judgments could materially and adversely affect the Company's business,
financial condition, results of operations and debt service capability.
47
MANAGEMENT
The following table sets forth information regarding the directors and
executive officers of the Company:
NAME AGE POSITION WITH THE COMPANY DIRECTOR SINCE
---- --- ------------------------- --------------
Fred C. Schulte...... 51 Chairman of the Board, Chief 1988
Executive Officer and Director
Charles D. Hall...... 59 President, Chief Operating 1993
Officer and Director
Wayne J. Conner...... 45 Vice President, Treasurer, Chief 1993
Financial Officer and Director
Lynn C. Batory....... 39 Vice President, Controller and
Secretary
David Hall........... 38 Vice President of Manufacturing
Mort Maurer.......... 80 Director 1998
A brief description of the employment history of the directors and executive
officers of the Company listed above are set forth below:
Fred C. Schulte is Chairman of the Board, Chief Executive Officer and a
Director of the Company. Mr. Schulte joined the Company as President and CEO
in 1988 in connection with the acquisition of the Company by The Jupiter
Corporation. Mr. Schulte had joined The Jupiter Corporation earlier that same
year. From 1986 to 1988, Mr. Schulte served as Vice President-Executive
Department for Santa Fe Southern Pacific at its headquarters in Chicago. From
1976 to 1986, Mr. Schulte was employed with SF Mineral Company (a Santa Fe
Southern Pacific Company) in Albuquerque, New Mexico. From 1974 to 1976, Mr.
Schulte was employed by Kerr McGee Corporation where he held a number of
engineering, operating and management positions in the company's Hard-Minerals
Division. Prior to 1974, Mr. Schulte served for five years in the United
States Air Force as a pilot and operations officer. Mr. Schulte received an
Engineer of Mines degree from the Colorado School of Mines and a Master of
Business Administration degree from Oklahoma City University. Mr. Schulte also
serves on the board of directors of Pegasus Gold, Inc.
Charles D. Hall is President, Chief Operating Officer and a Director of the
Company. Mr. Hall joined the corporate staff of the Company in 1988, serving
as Vice President of Operations prior to being named President in 1997. From
1975 to 1988, Mr. Hall was employed by Ohio Rod, initially as Controller and
Chief Financial Officer and then, in late 1975, as President, a position he
held until 1988. Prior to joining Ohio Rod, Mr. Hall was employed by Walker
China in Bedford Heights, Ohio from 1971 to 1974. Mr. Hall is the father of
David Hall, the Company's Vice President of Manufacturing.
Wayne J. Conner is Vice President, Chief Financial Officer, Treasurer and a
Director of the Company. Mr. Conner joined the Company in 1989 as Vice
President and Chief Financial Officer. From 1985 to 1989, Mr. Conner was
employed by AluChem, Inc. of Cincinnati, Ohio as the Corporate Controller and
Chief Financial Officer. From 1984 to 1985, Mr. Conner served as the Vice
President of Finance and Administration for a start-up computer manual writing
company, Comware, Incorporated. From 1976 to 1984, Mr. Conner was employed by
Ohio Rod as the Controller and Chief Financial Officer. Mr. Conner began his
career at the public accounting firm of Haskins and Sells. Mr. Conner is a
graduate of the University of Cincinnati, College of Business Administration
and is a Certified Public Accountant.
Lynn C. Batory is Vice President, Controller and Secretary of the Company.
Ms. Batory joined the Company in 1983 as an internal auditor performing
operational audits and special projects. Since then, Ms. Batory has
48
held positions of increasing responsibility including Accounting Manager,
Assistant Controller and her current position of Controller which she attained
1988. In 1993, Ms. Batory was also named Vice President and Secretary. Prior
to joining the Company, Ms. Batory was employed by NICOR, Inc. of Naperville,
Illinois from 1981 to 1983 as a staff accountant providing financial support
for ten mining companies and five marine transportation companies. Ms. Batory
holds a Bachelor of Science degree in Accounting from the University of
Houston.
David Hall is Vice President of Manufacturing. Mr. Hall joined the Company
in 1995, and is currently responsible for the operations of the Manufactured
Products Group. From 1984 to 1995, Mr. Hall was employed by Consolidated
Industries of Lafayette, Indiana where he served in various positions of
increasing responsibility including Assistant Controller, Controller, Vice
President of Finance and Administration and, beginning in 1994, General
Manager. Mr. Hall has a Bachelor of Science degree in Accounting from Butler
University. David Hall is the son of Charles D. Hall, President, Chief
Operating Officer and a director of the Company.
Mort Maurer was elected in January, 1998 to serve as a director of the
Company. Mr. Maurer has over 30 years executive managerial experience at large
manufacturing companies, including Northrop Corporation and RCA. From 1983 to
1987, Mr. Maurer served as Vice President of Monogram Industries. Mr. Maurer
currently serves as Chairman of the Board of Spaulding Composites, Inc. and
since 1987, Mr. Maurer has been retained as a consultant by Nortek, Inc. Mr.
Maurer holds a Master of Business Administration degree from Pepperdine
University and also holds a Bachelor of Science degree in Mechanical
Engineering.
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning compensation
of the Company's Chief Executive Officer and for the four other most highly
compensated officers of the Company having total annual salary and bonus in
excess of $100,000.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
---------------------------------------
ALL OTHER ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION
--------------------------- ---- -------- -------- ----------------
Fred C. Schulte........................ 1997 $303,876 $244,414 $31,252(1)
Chairman and Chief Executive Officer 1996 289,406 195,500 41,255(1)
1995 275,625 100,000 41,280(1)
Charles D. Hall........................ 1997 $273,489 $244,414 $28,699(1)
President and Chief Operating Officer 1996 260,466 195,500 37,397(1)
1995 248,063 100,000 35,956(1)
Wayne J. Conner........................ 1997 $158,016 $244,414 $16,180(1)
Vice President, Treasurer and Chief 1996 150,491 195,500 26,948(1)
Financial Officer 1995 143,325 100,000 24,268(1)
Lynn C. Batory......................... 1997 $101,875 $105,000 $10,569(2)
Vice President, Controller and 1996 96,875 60,000 10,062(2)
Secretary 1995 91,250 31,750 9,554(2)
David Hall............................. 1997 $102,500 $ 75,000 $10,569(2)
Vice President of Manufacturing 1996 97,500 35,000 10,000(3)
1995 46,731 15,000 22.00(3)
- --------
(1) Reflects employer contributions to the Company's Profit Sharing Plan (as
defined) and Supplemental Employee Retirement Plan (as defined) and the
value of term life insurance premiums.
(2) Includes employer contributions to the Company's Profit Sharing Plan and
the value of life insurance premiums.
(3) For 1996, reflects employer contributions to the Company's Profit Sharing
Plan; for 1995, reflects the value of life insurance premiums.
49
Profit Sharing Plan
The Company maintains the Elgin National Industries, Inc. Master Savings &
Profit Sharing Plan (the "Profit Sharing Plan"). Generally, all non-union
employees of the Company who have completed one year of service are eligible
to participate in the Profit Sharing Plan. For any plan year, the Company may
make a discretionary contribution to the Profit Sharing Plan, which is
allocated to participants have completed 1,000 hours of service during the
year and who are employed on the last day of the year based on their
compensation for that year. Participants vest in their account balances
ratably over five years (in 20 percent increments). Generally, distributions
from the Profit Sharing Plan are made following termination of employment.
Supplemental Employee Retirement Plan
The Company maintains the Elgin National Industries, Inc. Supplemental
Retirement Plan (the "Supplemental Employee Retirement Plan"). Employees are
eligible for participation in this plan if they participate in the Profit
Sharing Plan or the ENI Pension Plan for Employees of Elgin National
Industries, Inc. and Participating Affiliates (the "Pension Plan") and have
been approved for participation by the Board of Directors. The Supplemental
Employee Retirement Plan provides benefits to participants whose full benefits
under the Profit Sharing Plan or the Pension Plan have been limited by certain
provisions of the Internal Revenue Code. Benefits under the Supplemental Plan
are generally payable upon termination of employment.
PENSION PLAN TABLE (A)
REMUNERATION (B) YEARS OF SERVICE
---------------- -----------------------------------------
15 20 25 30 35
------- ------- ------- -------- --------
$200,000......................... $20,852 $27,802 $34,753 $ 41,703 $ 48,654
$225,000......................... 23,664 31,552 39,440 47,328 55,216
$250,000......................... 26,477 35,302 44,128 52,953 61,779
$300,000......................... 32,102 42,802 53,503 64,203 74,904
$350,000......................... 37,727 50,302 62,878 75,453 88,029
$400,000......................... 43,352 57,802 72,253 86,703 101,154
$450,000......................... 48,977 65,302 81,628 97,953 114,279
$500,000......................... 54,602 72,802 91,003 109,203 127,404
$550,000......................... 60,227 80,302 100,378 120,453 140,529
$600,000......................... 65,852 87,802 109,753 131,703 153,654
- --------
(a) The above table illustrates the estimated annual retirement benefits
payable to Pension Plan and Supplemental Employee Retirement Plan
participants commencing at age 65 in the form of a single life annuity,
not subject to deduction for social security or other offsets. The above
information is based on the current pension formula for various levels of
compensation and years of service.
(b) A participant's pension benefit is generally based on a percentage of his
salary and bonus for the highest five years of his employment and his
years of credited service. The compensation taken into account under the
Pension Plan for 1997 was limited to $160,000 in accordance with Internal
Revenue Code rules and such limitation may be adjusted periodically in the
future in accordance with Section 401(a)(17) of the Code. Remuneration in
the above table is represented as the highest consecutive five year
average salary. The above table does not reflect the current compensation
limitation under Code Section 401(a)(17) for qualified pension plans,
because the Supplemental Employee Retirement Plan provides benefits for
compensation above the limitation. Credited service under the Pension Plan
as of January 1, 1997 for the named executive officers is as follows: Mr.
Schulte, 8 years; Mr. C. Hall, 23 years; Mr. Conner, 15 years; Ms. Batory,
14 years; and Mr. D. Hall, 1 year.
Employment and Non-Competition Agreements
The Company and each of Messrs. Schulte, C. Hall and Conner entered into
employment and non-competition agreements, with an initial term beginning on
November 5, 1997, and ending on the fifth anniversary thereof (the "Employment
Agreements"). The terms of the new employment contracts relating to base
salary and related increases and annual bonuses are substantially similar to
the terms of the employment agreements negotiated between Senior Management
and the Selling Stockholders that were in effect prior to the Recapitalization
Transactions. The term of the Employment Agreements is subject to annual
renewal after the initial term unless one party gives written notice of non-
renewal to the other party at least 180 days prior to the then current
expiration date. Under the terms of the Employment Agreements, Mr. Schulte
serves as the Chief Executive Officer and received a base salary of $303,876
for 1997, and will receive annual increases beginning in 1998 equal to the
greater of the change in the applicable consumer price index or 5% per annum;
Mr. C. Hall
50
serves as the President and Chief Operating Officer and received a base salary
of $273,489 for 1997, and will receive annual increases beginning in 1998
equal to the greater of the change in the applicable consumer price index or
5% per annum; and Mr. Conner serves as the Chief Financial Officer and
received a base salary of $158,016 for 1997, and will receive annual increases
beginning in 1998 equal to the greater of the change in the applicable
consumer price index or 5% per annum. Each of the executive officers is
entitled to an annual bonus for 1997 and later years of 1.5% of the Company's
consolidated earnings before interest, taxes, amortization and the employment
agreement bonuses described in this paragraph, subject to certain adjustments.
Each such executive officer is also entitled to employee benefits and
perquisites under various programs, plans and arrangements maintained by the
Company from time to time. The Employment Agreements contain a confidentiality
covenant and a non-competition covenant that generally applies during the term
of employment and for a period of 3 years thereafter.
Each such Employment Agreement will terminate prior to the scheduled
expiration date in the event of the death or disability of the named executive
officer or upon the sale by such named executive officer of his stock in the
Company. In addition, the Company may terminate the employment of any of the
named executive officers for cause (as defined in the agreements, generally
commission of certain felonies, material breaches of duty or breaches of the
non-competition restriction) and any named executive officer may terminate
employment in the event the Company materially breaches the provisions of the
Employment Agreement. Upon such a termination by an executive officer or
termination by the Company without cause, the terminated executive officer
will be entitled to continued payments and benefits for the remainder of the
then current term. Upon the expiration and non-renewal of the Employment
Agreement, the executive officer will receive severance payments for one year
thereafter equal to the executive's base salary, subject to the executive's
continued compliance with the non-competition provisions. Under each of the
Employment Agreements, the Company has the obligation to maintain life
insurance covering each of the named executive officers, with the proceeds
thereof to be used to honor any put rights exercised by the estate of an
executive officer, as set forth below under "Principal Stockholders--
Partnership Agreement."
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the capital stock of the Company after consummation of the
Recapitalization Transactions by (i) each stockholder who beneficially owns
more than 5% of the outstanding capital stock of the Company and (ii) each
director or executive officer of the Company and all directors and executive
officers as a group.
SHARES OF COMMON STOCK SHARES OF PREFERRED STOCK
BENEFICIALLY OWNED BENEFICIALLY OWNED (B)
---------------------- -----------------------------
NAME NUMBER PERCENT NUMBER PERCENT
- ---- ---------- ----------- --------------- -------------
SHC Investment Partnership
(a)...................... 6,408.3 100% -- --
Fred C. Schulte (a)....... 2,136.1 33 1/3% 11,621.7 58%
Charles D. Hall........... 2,136.1 33 1/3% 4,165.0 21%
Wayne J. Conner........... 2,136.1 33 1/3% 4,165.0 21%
Lynn C. Batory............ -- -- -- --
David Hall................ -- -- -- --
Mort Maurer............... -- -- -- --
Directors and executive
officers as a group
(6 persons).............. 6,408.3 100% 19,951.7 100%
- --------
(a) SHC Investment Partnership is a Delaware general partnership (the
"Partnership") in which Messrs. Schulte (through Fern Limited
Partnership), Hall and Conner each have a one-third voting interest.
Company common stock held by the Partnership is to be voted as directed by
holders of two-thirds of the Partnership interests. Mr. Schulte's interest
in the Partnership is held through Fern Limited Partnership, a Delaware
limited partnership controlled by Mr. Schulte. In addition to his one-
third voting interest, Mr. Schulte (also through Fern Limited Partnership)
also has a preferred interest in the Partnership, as discussed below.
(b) Does not include preferred stock units. See "Capitalization."
51
Partnership Agreement. The issued and outstanding common stock of the
Company is owned by SHC Investment Partnership, a Delaware general partnership
(the "Partnership"). Each of Fern Limited Partnership (a Delaware limited
partnership controlled by Fred C. Schulte), Charles D. Hall and Wayne J.
Conner holds a 33.33% voting interest in the Partnership. The management of
the Partnership is governed by a partnership agreement (the "Partnership
Agreement") among Fern, Hall and Conner. The Partnership Agreement requires
that partners holding 66.66% of the voting interest in the Partnership must
consent to any vote cast by the Partnership in its capacity as the sole common
stockholder of the Company. Pursuant to the Partnership Agreement, each
partner agrees to cause the Partnership to vote in favor of the election of
Schulte, Hall and Conner as directors of the Company. Because of the greater
number of common shares originally contributed to the Partnership by Fern,
Fern will also hold a non-voting preferred equity interest in the Partnership.
This preferred equity interest is entitled to a preference in any
distributions until the agreed value of the preferred interest, and all
accrued interest thereon, is paid. Generally, the partners are not permitted
to transfer their interests in the Partnership, although the Partnership
Agreement does permit a partner to transfer to family members the right to
receive revenues due on the Partnership interest. In connection with the
Partnership Agreement, each of Fern, Hall and Conner have agreed to grant each
other a right of first refusal with respect to their respective shares of
preferred stock in the Company. The outstanding preferred stock in the Company
will continue to be held by Fern, Hall and Conner individually and will not be
held by the Partnership.
RELATED TRANSACTIONS
Members of Senior Management are indebted to the Company in the aggregate
net amount of $3,633,000, described below.
Fred C. Schulte through his affiliate Fern Limited Partnership, a Delaware
limited partnership controlled by Mr. Schulte, is indebted to the Company in
the amount of $1,000,000 evidenced by a promissory note originally dated
September 24, 1993 from Fern Limited Partnership, and payable to the Company,
bearing interest at 5.35% per annum and maturing in December, 2007, subject to
certain mandatory prepayment requirements. Fern Limited Partnership is also
the obligor on another promissory note dated September 24, 1993 and payable to
the Company in the amount of $1,603,000, bearing interest at 5.35% per annum
and maturing in December, 2007. This obligation is offset by two promissory
notes from the Company payable to Mr. Schulte in the aggregate amount of
$1,603,000 and bearing the same 5.35% percent interest rate and December, 2007
maturity date. On the Issue Date, the maturity date of each of these notes was
extended until after the maturity date of the Notes.
Charles D. Hall is indebted to the Company in the amount of $516,500
evidenced by a promissory note, dated September 24, 1993, bearing interest at
6.42% per annum and maturing in December, 2007, subject to certain mandatory
prepayment requirements. On the Issue Date, the maturity date of such note was
extended until after the maturity date of the Notes.
Wayne J. Conner is indebted to the Company in the amount of $516,500
evidenced by a promissory note dated September 24, 1993 bearing interest at
6.42% per annum and maturing in December, 2007, subject to certain mandatory
prepayment requirements. On the Issue Date, the maturity date of such note was
extended until after the maturity date of the Notes.
In late December, 1997, the Company loaned members of Senior Management an
aggregate of $1,600,000, to be repaid pursuant to ten year promissory notes
bearing interest at the rate of 6.31% per annum, with principal and accrued
interest due at maturity.
52
DESCRIPTION OF SENIOR CREDIT FACILITY
Bank of America National Trust and Savings Association ("Bank of America")
has provided the Company with a three-year Senior Credit Facility. The
following is a discussion of all material terms of the Senior Credit Facility.
The Senior Credit Facility provides for borrowings of up to $20.0 million in
aggregate principal amount, which amount includes a letter of credit
subfacility of up to $7.0 million. The maximum amount available under the
Senior Credit Facility, however, is further subject to a monthly borrowing
base limitation of 85% of eligible accounts receivable of the Manufactured
Products Group and 50% of eligible accounts receivable of the Engineering
Services Group and 60% of eligible inventory. The Company's borrowing
availability is also reduced by outstanding letters of credit. At December 31,
1997, the borrowing base was approximately $16.0 million. The Company plans to
use the Senior Credit Facility for working capital, capital expenditures and
letters of credit.
Interest is payable on borrowings at one or more variable rates selected by
the Company, consisting of (a) the greater of the Federal Funds Rate plus 0.5%
or the bank's reference rate, or (b) LIBOR plus 1.5% (effectively 7.2%, 7.0%
and 8.5%, respectively, at December 31, 1997). The Company pays a fee equal to
0.30% per annum on the unused amount of the Senior Credit Facility. For
letters of credit, the Company pays an issuance fee of 0.25% of the amount of
each letter of credit plus a fee in an amount equal to 1.50% per annum times
the daily average of the amount of outstanding letters of credit.
The Senior Credit Facility contains certain covenants limiting, among other
things, the Company's and each Subsidiary's ability to pay cash dividends or
make other distributions, change its business, merge, consolidate or dispose
of assets, incur liens, agree to negative pledges, make loans and investments,
incur indebtedness, make capital expenditures, make certain amendments to the
Indenture and engage in certain transactions with affiliates. The Senior
Credit Facility also contains financial covenants that require the Company to
meet, on a quarterly basis, a maximum funded debt to cash flow ratio (6:1 for
fiscal years 1997 and 1998, 5.5:1 for fiscal year 1999 and 5.25:1 for fiscal
year 2000), minimum interest coverage ratio (1.5:1 for fiscal years 1997 and
1998 and 1.75:1 for fiscal years 1999 and 2000), an underbillings ratio (no
greater than 5%) and a minimum fixed charge coverage ratio (1.1:1 for fiscal
year 1997, 1:15:1 for fiscal year 1998, 1.2:1 for fiscal year 1999 and 1.25:1
for fiscal year 2000).
The Senior Credit Facility contains events of default customary for
facilities of its type, including without limitation, the Company's failure to
pay principal, interest, fees or other amounts when due; the Company's breach
of any covenants, representations or warranties; cross-default and cross
acceleration; bankruptcy, insolvency or similar events involving the Company
or the Subsidiaries; the unenforceability of any of the agreements or liens
securing payment of the obligations under the Senior Credit Facility; and the
occurrence or existence of any event or circumstance which has a material
adverse effect upon the Company.
Loans and letters of credit, if any, under the Company's Senior Credit
Facility are guaranteed by its current and future material domestic
Subsidiaries, which loans, letters of credit and guarantees are secured by a
first perfected security interest in the inventory and accounts receivable of
the Company and its current and future material domestic Subsidiaries, as well
as by a pledge of the capital stock of the material Subsidiaries (limited to
65% of the capital stock of foreign Subsidiaries). Upon the occurrence and
continuation of a default under the Senior Credit Facility, the Company has
also agreed to pledge the property, plant and equipment of the Company and its
current and future Subsidiaries.
53
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 23,678 shares of
class A voting common stock, $.01 par value, of which 6,408.3 shares are
issued and outstanding, and 550,000 shares of preferred stock, $1.00 par
value, of which 19,951.7 shares are issued and outstanding.
Each holder of shares of common stock is entitled to one vote per share on
all matters to be voted on by stockholders. The holders of common stock are
entitled to dividends and other distributions if, as and when declared by the
Board of Directors out of assets legally available therefor, subject to
restrictions, if any, imposed by indebtedness outstanding from time to time.
Upon the liquidation, dissolution or winding up of the Company, the holders of
shares of common stock would be entitled to share ratably in the distribution
of the Company's assets.
Holders of preferred stock have the following dividend, redemption, voting
and liquidation rights:
Dividends on the preferred stock accrue cumulatively during each fiscal
quarter at the rate of 10% per annum on the liquidation value ($100 per
share). Dividends are payable as and when declared by the Board of Directors.
The preferred stock is mandatorily redeemable on December 31, 2007, provided
that no redemption shall be permitted during any period that the Notes remain
outstanding. The redemption price equals the liquidation value ($100 per
share) plus all accrued and unpaid dividends thereon. Additionally, the
Company at its option may, but is not required to, redeem all or any portion
of the preferred stock then outstanding at the foregoing redemption price. No
redemption shall be permitted during any period that the Notes remain
outstanding.
Holders of the preferred stock have no voting rights with respect to general
corporate matters except as provided by law and as follows. The Company can
not amend, alter or repeal any of the preferences, special rights or other
powers of the preferred stock which would affect adversely the preferred stock
without the written consent or affirmative vote of the holders of at least
two-thirds of the then outstanding shares of preferred stock.
Holders of preferred stock are entitled to a preference over of holders of
common stock on liquidation in the amount of $100 per share plus all accrued
and unpaid dividends thereon.
The preferred stock units are not capital stock but have substantially the
same contractual rights and preferences as the preferred stock. See Note 12 of
Notes to Consolidated Financial Statements.
54
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The Exchange Offer is being made by the Company to satisfy its obligations
pursuant to the Registration Rights Agreement. See "--Registration Rights
Agreement."
The Company is making the Exchange Offer in reliance upon the position of
the staff of the Commission set forth in certain no-action letters addressed
to other parties in other transactions. However, the Company has not sought
its own no-action letter and there can be no assurance that the staff of the
Commission would make a similar determination with respect to the Exchange
Offer as in such other circumstances. Based on these interpretations by the
staff of the Commission, the New Notes issued pursuant to the Exchange Offer
may be offered for resale, resold and otherwise transferred by holders thereof
(other than (i) any such holder that is an "affiliate" of the Company within
the meaning of Rule 405 under the Securities Act; (ii) an Initial Purchaser
who acquired the Old Notes directly from the Company solely in order to resell
pursuant to Rule 144A of the Securities Act or any other available exemption
under the Securities Act; or (iii) a broker-dealer who acquired the Old Notes
as a result of market making or other trading activities) without 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 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. Any Holder who tenders Old
Notes in the Exchange Offer for the purpose of participating in a distribution
of the New Notes could not rely on such interpretations by the staff of the
Commission and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction, unless such sale is made pursuant to an exemption from such
requirements.
Holders of Old Notes not tendered will not have any further registration
rights and the Old Notes not exchanged will continue to be subject to certain
restrictions on transfer. Accordingly, the liquidity of the markets for the
Old Notes could be adversely affected.
NEITHER THE BOARD OF DIRECTORS OF THE COMPANY NOR THE COMPANY MAKES ANY
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 THEIR ADVISERS, IF ANY, BASED ON THEIR OWN
FINANCIAL POSITION AND REQUIREMENTS.
REGISTRATION RIGHTS AGREEMENT
In connection with the issuance of the Old Notes, the Company entered into
the Registration Rights Agreement with the Initial Purchasers of the Old
Notes.
The Company, the Guarantors and the Initial Purchasers entered into the
Registration Rights Agreement on the Closing Date. Pursuant to the
Registration Rights Agreement, the Company agreed to file with the Commission
the Exchange Offer Registration Statement on the appropriate form under the
Securities Act with respect to the New Notes. Upon the effectiveness of the
Exchange Offer Registration Statement, the Company will offer to the Holders
of Transfer Restricted Securities pursuant to the Exchange Offer who are able
to make certain representations the opportunity to exchange their Transfer
Restricted Securities for New Notes. Representations to be made by the Holders
include (i) absence of affiliation with the Company, (ii) no intention to
participate in a distribution of the New Notes, and (iii) the New Notes will
be acquired in the ordinary course of business.
55
If (i) the Company is not required to file the Exchange Offer Registration
Statement or permitted to consummate the Exchange Offer because the Exchange
Offer is not permitted by applicable law or Commission policy or (ii) any
holder of Transfer Restricted Securities notifies the Company in writing prior
to the 20th day following consummation of the Exchange Offer that (A) it is
prohibited by law or Commission policy from participating in the Exchange
Offer or (B) it may not resell the New Notes acquired by it in the Exchange
Offer to the public without delivering a prospectus and the prospectus
contained in the Exchange Offer Registration Statement is not appropriate or
available for such resales or (C) that it is a broker-dealer and owns Old
Notes acquired directly from the Company or an affiliate of the Company, the
Company will file with the Commission a Shelf Registration Statement to cover
resales of the New Notes by the Holders thereof who satisfy certain conditions
relating to the provision of information in connection with the Shelf
Registration Statement. The Company will use its reasonable best efforts to
cause the applicable registration statement to be declared effective as
promptly as practicable by the Commission. For purposes of the foregoing,
"Transfer Restricted Securities" means each Old Note until (i) the date on
which such Note has been exchanged by a person other than a broker-dealer for
an Exchange Note in the Exchange Offer, (ii) following the exchange by a
broker-dealer in the Exchange Offer of an Old Note for a New Note, the date on
which such Exchange Note is sold to a purchaser who receives from such broker-
dealer on or prior to the date of such sale a copy of the prospectus contained
in the Exchange Offer Registration Statement, (iii) the date on which such New
Note has been effectively registered under the Securities Act and disposed of
in accordance with the Shelf Registration Statement or (iv) the date on which
such Note is distributed to the public pursuant to Rule 144 under the
Securities Act.
The Registration Rights Agreement provides that (i) the Company will file an
Exchange Offer Registration Statement with the Commission on or prior to 60
days after the Closing Date, (ii) the Company will use its reasonable best
efforts to have the Exchange Offer Registration Statement declared effective
by the Commission on or prior to 150 days after the Closing Date, (iii) unless
the Exchange Offer would not be permitted by applicable law or Commission
policy, the Company will commence the Exchange Offer and use its best efforts
to issue on or prior to 30 business days after the date on which the Exchange
Offer Registration Statement was declared effective by the Commission, New
Notes in exchange for all Old Notes tendered prior thereto in the Exchange
Offer and (iv) if obligated to file the Shelf Registration Statement, the
Company will use its reasonable best efforts to file the Shelf Registration
Statement with the Commission on or prior to 30 days after such filing
obligation arises and to cause the Shelf Registration Statement to be declared
effective by the Commission on or prior to 90 days after such obligation
arises. During any consecutive 365-day period, the Company will have the
ability to suspend the availability of the Shelf Registration Statement for up
to two periods of up to 45 consecutive days, but no more than an aggregate of
60 days during any 365-day period. If (a) the Company fails to file any of the
Registration Statements required by the Registration Rights Agreement on or
before the latest date specified for such filing, (b) any of such Registration
Statements is not declared effective by the Commission on or prior to the
latest date specified for such effectiveness (the "Effectiveness Target
Date"), (c) the Company fails to consummate the Exchange Offer within 30
business days after the Effectiveness Target Date with respect to the Exchange
Offer Registration Statement or (d) the Shelf Registration Statement or the
Exchange Offer Registration Statement is declared effective but thereafter
ceases to be effective in connection with resales of Transfer Restricted
Securities during the periods specified in the Registration Rights Agreement
(each such event referred to in clauses (a) through (d) above, a "Registration
Default"), then the Company will pay Liquidated Damages to each Holder of
Notes, with respect to the first 90-day period immediately following the
occurrence of the first Registration Default in an amount equal to $.05 per
week per $1,000 principal amount of Notes held by such Holder. The amount of
the Liquidated Damages will increase by an additional $.05 per week per $1,000
principal amount of Notes with respect to each subsequent 90-day period until
all Registration Defaults have been cured, up to a maximum amount of
Liquidated Damages of $.25 per week per $1,000 principal amount of Notes. All
accrued Liquidated Damages will be paid by the Company on each Damages Payment
Date (as defined in the Indenture) to the Global Note Holder by wire transfer
of immediately available funds or by federal funds check and to holders of
Certificated Securities by wire transfer to the accounts specified by them or
by mailing checks to their registered addresses if no such accounts have been
specified. Following the cure of all Registration Defaults, the accrual of
Liquidated Damages will cease.
56
Holders of Notes will be required to make certain representations to the
Company (as described in the Registration Rights Agreement) in order to
participate in the Exchange Offer and will be required to deliver information
to be used in connection with any Shelf Registration Statement and to provide
comments on, and be named in, the Shelf Registration Statement within the time
periods set forth in the Registration Rights Agreement in order to have their
Notes included in any Shelf Registration Statement and benefit from the
provisions regarding Liquidated Damages set forth above.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified
in its entirety by reference to, all the provisions of the Registration Rights
Agreement, copies of which are filed as exhibits to the Registration Statement
of which this Prospectus constitutes a part.
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING OLD NOTES
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal, which together constitute the
Exchange Offer, the Company will accept for exchange Old Notes which are
properly tendered on or prior to the Expiration Date and not withdrawn as
permitted below. As used herein, the term "Expiration Date" means 5:00 p.m.,
New York City time, on May 5, 1998; provided, however, that if the Company, in
its sole discretion, has extended the period of time for which the Exchange
Offer is open, the term "Expiration Date" means the latest time and date to
which the Exchange Offer is extended. The Company may extend the Exchange
Offer at any time and from time to time by giving oral or written notice to
the Exchange Agent and by timely public announcement. Without limiting the
manner in which the Company may choose to make any public announcement and
subject to applicable law, the Company 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. During any extension of the
Exchange Offer, all Old Notes previously tendered pursuant to the Exchange
Offer will remain subject to the Exchange Offer.
As of the date of this Prospectus, $85,000,000 aggregate principal amount of
Old Notes is outstanding. This Prospectus, together with the Letter of
Transmittal, is first being sent on or about April 3, 1998, to all Holders of
Old Notes known to the Company. The Company's obligation to accept Old Notes
for exchange pursuant to the Exchange Offer is subject to certain conditions
as set forth below under "--Certain Conditions to the Exchange Offer."
The terms of the New Notes and the Old Notes are identical in all material
respects, except for certain transfer restrictions and registration rights
relating to the Old Notes and rights to receive Liquidated Damages. See "--
Registration Rights Agreement." The Old Notes were, and the New Notes will be,
issued under the Indenture and all such Notes are entitled to the benefits of
the Indenture.
Old Notes tendered in the Exchange Offer must be in denominations of
principal amount of $1,000 and any integral multiple thereof. Any Old Notes
not accepted for exchange for any reason will be returned without expense to
the tendering Holder thereof as promptly as practicable after the expiration
or termination of the Exchange Offer.
The Company expressly reserves the right to amend or terminate the Exchange
Offer, and not to accept for exchange any Old Notes not theretofore accepted
for exchange, upon the occurrence of any of the conditions of the Exchange
Offer specified below under "--Certain Conditions to the Exchange Offer." The
Company will give oral or written notice of any amendment, nonacceptance or
termination to the Holders of the Old Notes as promptly as practicable. Any
amendment to the Exchange Offer will not limit the right of Holders to
withdraw tendered Old Notes prior to the Expiration Date. See "--Withdrawal
Rights."
57
PROCEDURES FOR TENDERING OLD NOTES
The tender to the Company of Old Notes by a Holder thereof as set forth
below and the acceptance thereof by the Company will constitute a binding
agreement between the tendering Holder and the Company upon the terms and
subject to the conditions set forth in this Prospectus and in the accompanying
Letter of Transmittal. Except as set forth below, a Holder who wishes to
tender Old Notes for exchange pursuant to the Exchange Offer must transmit a
properly completed and duly executed Letter of Transmittal, including all
other documents required by such Letter of Transmittal, to the Exchange Agent
at the proper address set forth below under "--Exchange Agent" on or prior to
the Expiration Date. In addition, either (i) certificates for such Old Notes
must be received by the Exchange Agent along with the Letter of Transmittal;
or (ii) a timely confirmation of a book-entry transfer (a "Book-Entry
Confirmation") of such Old Notes, if such procedure is available, into the
Exchange Agent's account at The Depository Trust Company (the "Book-Entry
Transfer Facility") pursuant to the procedure for book-entry transfer
described below, must be received by the Exchange Agent prior to the
Expiration Date; or (iii) the Holder must comply with the guaranteed delivery
procedures described below. THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF
TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF
THE HOLDERS. IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED
MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, BE USED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY. NO LETTERS OF
TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed unless the Old Notes surrendered for exchange
pursuant thereto are tendered (i) by a registered Holder of the Old Notes who
has not completed the box entitled "Special Issuance Instructions" or "Special
Delivery Instructions" on the Letter of Transmittal; or (ii) for the account
of an Eligible Institution (as defined below). In the event that signatures on
a Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantees must be by a firm which is a member
of a registered national securities exchange or a member of the National
Association of Securities Dealers, Inc. or by a commercial bank or trust
company having an office or correspondent in the United States (collectively,
"Eligible Institutions"). If Old Notes are registered in the name of a person
other than the signer of the Letter of Transmittal, the Old Notes surrendered
for exchange must be endorsed by, or be accompanied by, a written instrument
or instruments of transfer or exchange, in satisfactory form as determined by
the Company in its sole discretion, duly executed by the registered Holder
with the signature thereon guaranteed by an Eligible Institution.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Old Notes tendered for exchange will be determined
by the Company in its sole discretion, which determination shall be final and
binding. The Company reserves the absolute right to reject any and all tenders
of any particular Old Notes not properly tendered or to not accept any
particular Old Notes which acceptance might, in the judgment of the Company or
its counsel, be unlawful. The Company also reserves the absolute right to
waive any defects or irregularities or conditions of the Exchange Offer as to
any particular Old Notes either before or after the Expiration Date (including
the right to waive the ineligibility of any Holder who seeks to tender Old
Notes in the Exchange Offer). The interpretation of the terms and conditions
of the Exchange Offer as to any particular Old Notes either before or after
the Expiration Date (including the Letter of Transmittal and the instructions
thereto) by the Company shall be final and binding on all parties. Unless
waived, all defects or irregularities in connection with tenders of Old Notes
for exchange must be cured within such reasonable period of time as the
Company shall determine. None of the Company, either Exchange Agent nor any
other person shall be under any duty to give notification of any defect or
irregularity with respect to any tender of Old Notes for exchange, nor shall
any of them incur any liability for failure to give such notification.
If the Letter of Transmittal is signed by a person or persons other than the
registered Holder or Holders of Old Notes, such Old Notes must be endorsed or
accompanied by appropriate powers of attorney, in either case signed exactly
as the name or names of the registered Holder or Holders that appear on the
Old Notes.
If the Letter of Transmittal or any Old Notes or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of a corporation or others acting in a fiduciary or
58
representative capacity, such persons should so indicate when signing, and,
unless waived by the Company, proper evidence satisfactory to the Company of
their authority to so act must be submitted.
By tendering, each Holder will represent to the Company that, among other
things, the New Notes acquired pursuant to the Exchange Offer are being
obtained in the ordinary course of business of the person receiving such New
Notes, whether or not such person is the Holder, and such person has no
arrangement with any person to participate in the distribution of the New
Notes. If any Holder or any such other person is an "affiliate," as defined
under Rule 405 of the Securities Act, of the Company, is engaged in or intends
to engage in or has an arrangement or understanding with any person to
participate in a distribution of such New Notes to be acquired pursuant to the
Exchange Offer, or acquired the Old Notes as a result of market making or
other trading activities, such Holder or any such other person (i) could not
rely on the applicable interpretations of the staff of the Commission; and
(ii) must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with any resale transaction. Each broker-
dealer that receives New Notes for its own account pursuant to the Exchange
Offer must acknowledge 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 deemed to admit that it
is an "underwriter" within the meaning of the Securities Act.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Company will accept, promptly after the Expiration Date, all Old Notes
properly tendered and will issue the New Notes promptly after acceptance of
the Old Notes. See "--Certain Conditions to the Exchange Offer." For purposes
of the Exchange Offer, the Company shall be deemed to have accepted properly
tendered Old Notes for exchange when, as and if the Company has given oral or
written notice thereof to the Exchange Agent, with written confirmation of any
oral notice to be given promptly thereafter.
For each Old Note accepted for exchange, the Holder of such Old Note will
receive a New Note having a principal amount equal to that of the surrendered
Old Note. Accordingly, registered Holders of New Notes on the relevant record
date for the first interest payment date or dividend payment date following
the consummation of the Exchange Offer will receive interest accruing from the
most recent date to which interest has been paid on the Old Notes, or, if no
interest has been paid on the Old Notes, from November 5, 1997. Old Notes
accepted for exchange will cease to accrue interest from and after the date of
consummation of the Exchange Offer. Holders of Old Notes whose Old Notes are
accepted for exchange will not receive any payment in respect of accrued
interest on such Old Notes otherwise payable on any interest payment date
which occurs on or after consummation of the Exchange Offer.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of (i) certificates for such Old Notes or a timely Book-
Entry Confirmation of such Old Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility; (ii) a properly completed and duly executed
Letter of Transmittal; and (iii) all other required documents. If any tendered
Old Notes are not accepted for any reason set forth in the terms and
conditions of the Exchange Offer, or if Old Notes are submitted for a greater
amount than the Holder desires to exchange, such unaccepted or nonexchanged
Old Notes will be returned without expense to the tendering Holder thereof
(or, in the case of Old Notes tendered by book-entry transfer into the
applicable Exchange Agent's account at the Book-Entry Transfer Facility
pursuant to the book-entry procedures described below, such nonexchanged Old
Notes will be credited to an account maintained with such Book-Entry Transfer
Facility) designated by the tendering Holder as promptly as practicable after
the expiration or termination of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make requests to establish accounts with respect to
the Old Notes at the Book-Entry Transfer Facility for purposes of the Exchange
Offer within two business days after the date of this
59
Prospectus, and any financial institution that is a participant in the Book-
Entry Transfer Facility's systems may make book-entry delivery of Old Notes by
causing the Book-Entry Transfer Facility to transfer such Old Notes into the
applicable Exchange Agent's account at the Book-Entry Transfer Facility in
accordance with such Book-Entry Transfer Facility's procedures for transfer.
However, although delivery of Old Notes may be effected through book-entry
transfer at the Book-Entry Transfer Facility, the Letter of Transmittal or
facsimile thereof, with any required signature guarantees and any other
required documents, must, in any case, be transmitted to and received by the
applicable Exchange Agent at the address set forth below under "--Exchange
Agent" on or prior to the Expiration Date or the guaranteed delivery
procedures described below must be complied with.
GUARANTEED DELIVERY PROCEDURES
If a registered Holder of the Old Notes desires to tender such Old Notes and
the Old Notes are not immediately available, or time will not permit such
Holder's Old Notes or other required documents to reach the Exchange Agent
before the Expiration Date, or the procedure for book-entry transfer cannot be
completed on a timely basis, a tender may be effected if (i) the tender is
made through an Eligible Institution; (ii) prior to the Expiration Date, the
Exchange Agent has received from such Eligible Institution a properly
completed and duly executed Letter of Transmittal (or a facsimile thereof) and
Notice of Guaranteed Delivery, substantially in the form of the corresponding
exhibit to the Registration Statement of which this Prospectus constitutes a
part (by telegram, telex, facsimile transmission, mail or hand delivery),
setting forth the name and address of the Holder of Old Notes and the amount
of Old Notes tendered, stating that the tender is being made thereby and
guaranteeing that within three New York Stock Exchange ("NYSE") trading days
after the date of execution of the Notice of Guaranteed Delivery, the
certificates for all physically tendered Old Notes, in proper form for
transfer, or a Book-Entry Confirmation, as the case may be, and any other
documents required by the Letter of Transmittal will be deposited by the
Eligible Institution with the Exchange Agent; and (iii) the certificates for
all physically tendered Old Notes, in proper form for transfer, or a Book-
Entry Confirmation, as the case may be, and all other documents required by
the Letter of Transmittal, are received by the Exchange Agent within three
NYSE trading days after the date of execution of the Notice of Guaranteed
Delivery.
WITHDRAWAL RIGHTS
Tenders of Old Notes may be withdrawn at any time prior to the Expiration
Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent at the proper address set forth below under "--
Exchange Agent." Any such notice of withdrawal must specify the name of the
person having tendered the Old Notes to be withdrawn, identify the Old Notes
to be withdrawn (including the amount of such Old Notes), and (where
certificates for Old Notes have been transmitted) specify the name in which
such Old Notes are registered, if different from that of the withdrawing
Holder. If certificates for Old Notes have been delivered or otherwise
identified to the Exchange Agent, then, prior to the release of such
certificates the withdrawing Holder must also submit the serial numbers of the
particular certificates to be withdrawn and a signed notice of withdrawal with
signatures guaranteed by an Eligible Institution unless such Holder is an
Eligible Institution. If Old Notes have been tendered pursuant to the
procedure for book-entry transfer described above, any notice of withdrawal
must specify the name and number of the account at the Book-Entry Transfer
Facility to be credited with the withdrawn Old Notes and otherwise comply with
the procedures of such facility. All questions as to the validity, form and
eligibility (including time of receipt) of such notices will be determined by
the Company, whose determination shall be final and binding on all parties.
Any Old Notes so withdrawn will be deemed not to have been validly tendered
for exchange for purposes of the Exchange Offer. Any Old Notes which have been
tendered for exchange but which are not exchanged for any reason will be
returned to the Holder thereof without cost to such Holder (or, in the case of
Old Notes tendered by book-entry transfer into the Exchange Agent's account at
the Book-Entry Transfer Facility pursuant to the book-entry transfer
procedures described above, such Old Notes will be credited to an account with
such Book-Entry Transfer Facility specified by the Holder) as soon as
practicable after withdrawal, rejection of tender or termination of the
Exchange Offer. Properly withdrawn Old Notes may be retendered by following
one of the procedures described above under "--Procedures for Tendering Old
Notes" at any time on or prior to the Expiration Date.
60
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, the Company shall
not be required to accept for exchange, or to issue New Notes in exchange for,
any Old Notes and may terminate or amend the Exchange Offer, if at any time
before the acceptance of such Old Notes for exchange or the exchange of the
New Notes for such Old Notes, any of the following events shall occur:
(a) there shall be threatened, instituted or pending any action or
proceeding before, or any injunction, order or decree shall have been
issued by, any court or governmental agency or other governmental
regulatory or administrative agency or commission, (i) seeking to restrain
or prohibit the making or consummation of the Exchange Offer or any other
transaction contemplated by the Exchange Offer, or assessing or seeking any
damages as a result thereof; or (ii) resulting in a material delay in the
ability of the Company to accept for exchange or exchange some or all of
the Old Notes pursuant to the Exchange Offer; or any statute, rule,
regulation, order or injunction shall be sought, proposed, introduced,
enacted, promulgated or deemed applicable to the Exchange Offer or any of
the transactions contemplated by the Exchange Offer by any government or
governmental authority, domestic or foreign, or any action shall have been
taken, proposed or threatened, by any government, governmental authority,
agency or court, domestic or foreign, that in the sole judgment of the
Company might directly or indirectly result in any of the consequences
referred to in clauses (i) or (ii) above or, in the sole judgment of the
Company, might result in the holders of New Notes having obligations with
respect to resales and transfers of New Notes which are greater than those
described in the interpretation of the Commission referred to on the cover
page of this Prospectus, or would otherwise make it inadvisable to proceed
with the Exchange Offer; or
(b) there shall have occurred (i) any general suspension of or general
limitation on prices for, or trading in, securities on any national
securities exchange or in the over-the-counter market; (ii) any limitation
by any governmental agency or authority which may adversely affect the
ability of the Company to complete the transactions contemplated by the
Exchange Offer; (iii) a declaration of a banking moratorium or any
suspension of payments in respect of banks in the United States or any
limitation by any governmental agency or authority which adversely affects
the extension of credit; or (iv) a commencement of a war, armed hostilities
or other similar international calamity directly or indirectly involving
the United States, or, in the case of any of the foregoing existing at the
time of the commencement of the Exchange Offer, a material acceleration or
worsening thereof; or
(c) any change (or any development involving a prospective change) shall
have occurred or be threatened in the business, properties, assets,
liabilities, financial condition, operations, results of operations or
prospects of the Company and its subsidiaries taken as a whole that, in the
reasonable judgment of the Company, is or may be adverse to the Company, or
the Company shall have become aware of facts that, in the sole judgment of
the Company, have or may have an adverse effect on the value of the Old
Notes or the New Notes.
Holders of Old Notes will have registration rights and the right to
Liquidated Damages as described above under "--Registration Rights; Liquidated
Damages" if the Company fails to consummate the Exchange Offer.
To the Company's knowledge as of the date of this Prospectus, none of the
above events has occurred.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any
such condition or may be waived by the Company in whole or in part at any time
and from time to time in its reasonable discretion. The failure by the Company
at any time to exercise any of the foregoing rights shall not be deemed a
waiver of any such right and each such right shall be deemed an ongoing right
which may be asserted at any time and from time to time.
In addition, the Company will not accept for exchange any Old Notes
tendered, and no New Notes will be issued in exchange for any such Old Notes,
if at such time any stop order shall be threatened or in effect with respect
to the Registration Statement of which this Prospectus constitutes a part or
the qualification of the Indentures under the Trust Indenture Act (as defined
herein).
61
EXCHANGE AGENT
Norwest Bank Minnesota, National Association has been appointed as the
Exchange Agent for the Notes for the Exchange Offer. All executed Letters of
Transmittal and Notices of Guaranteed Delivery should be directed to the
Exchange Agent at the addresses set forth below. Questions and requests for
assistance, requests for additional copies of this Prospectus or of the Letter
of Transmittal and requests for Notices of Guaranteed Delivery should be
directed to the Exchange Agent addressed as follows:
Deliver to: Norwest Bank Minnesota, National Association, Exchange Agent:
By Registered or Certified Mail: By Hand Delivery:
Norwest Bank Minnesota, National Norwest Bank Minnesota, National
Association Association
P.O. Box 1517 Northstar East 12th Floor
Minneapolis, Minnesota 55480-1517 608 2nd Avenue
Attention: Corporate Trust Operations Minneapolis, Minnesota 55479-0113
Attention: Corporate Trust Operations
By Overnight Delivery: By Facsimile:
Norwest Bank Minnesota, National (612) 667-4927
Association Confirm by Telephone:
Norwest Center (612) 667-9764
6th and Marquette Avenue
Minneapolis, Minnesota 55479-0113
Attention: Corporate Trust Operations
DELIVERY OF A LETTER OF TRANSMITTAL FOR NOTES TO AN ADDRESS OTHER THAN AS
SET FORTH ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS
SET FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY OF SUCH LETTER OF
TRANSMITTAL.
FEES AND EXPENSES
The Company will not make any payment to brokers, dealers or others
soliciting acceptances of the Exchange Offer.
The Company will, however, pay the Exchange Agent reasonable and customary
fees for its services and will reimburse it for reasonable out-of-pocket
expenses in connection therewith. The Company 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 tenders for
their customers. The expenses to be incurred in connection with the Exchange
Offer, including the fees and expenses of the Exchange Agent and printing,
accounting, registration, and legal fees, will be paid by the Company.
TRANSFER TAXES
Holders who tender their Old Notes for exchange will not be obligated to pay
any transfer taxes in connection therewith, except that holders who instruct
the Company to register New Notes in the name of, or request that Old Notes
not tendered or not accepted in the Exchange Offer be returned to, a person
other than the registered tendering holder will be responsible for the payment
of any applicable transfer tax thereon.
CONSEQUENCES OF NOT EXCHANGING OLD NOTES
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon as a
consequence of the issuance of the Old Notes pursuant to exemptions from, or
in transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws. In general, the Old Notes
may not be offered or sold, unless registered under the Securities Act, except
pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. The Company does not
currently anticipate that it will register the Old Notes under the Securities
Act. Based upon no-action letters issued by the
62
staff of the Commission to third parties, the Company believes the New Notes
issued pursuant to the Exchange Offer in exchange for the Old Notes may be
offered for resale, resold or otherwise transferred by a Holder thereof (other
than any (i) Holder which is an "affiliate" of the Company within the meaning
of Rule 405 under the Securities Act); (ii) an Initial Purchaser who acquired
the Old Notes directly from the Company solely in order to resell pursuant to
Rule 144A of the Securities Act or any other available exemption under the
Securities Act; or (iii) a broker-dealer who acquired the Old Notes as a
result of market making or other trading activities) without 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 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, the Company has not
sought its own no-action letter and there can be no assurance that the staff
of the Commission would make a similar determination with respect to the
Exchange Offer as in such other circumstances. Each Holder, other than a
broker-dealer, must acknowledge that it is not engaged in, and does not intend
to engage in, a distribution of New Notes, and has no arrangement or
understanding to participate in a distribution of New Notes. If any Holder is
an affiliate of the Company, is engaged in or intends to engage in or has any
arrangement or understanding with respect to the distribution of the New Notes
to be acquired pursuant to the Exchange Offer, or acquired the Old Notes as a
result of market-making or other trading activities, such Holder (i) could not
rely on the relevant determinations of the staff of the Commission; and (ii)
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any secondary resale transaction. Each
broker-dealer that receives New Notes for its own account in exchange for Old
Notes must acknowledge that such Old Notes were acquired by such broker-dealer
as a result of market-making activities or other trading activities and that
it will deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of such New Notes. See "Plan of Distribution." In
addition, to comply with the securities laws of certain jurisdictions, if
applicable, the New Notes may not be offered or sold unless they have been
registered or qualified for sale in such jurisdiction or an exemption from
registration or qualification is available and is complied with. The Company
has agreed to register or qualify the sale of the New Notes in such
jurisdictions only in limited circumstances and subject to certain conditions.
ACCOUNTING TREATMENT
The exchange of the New Notes for the Old Notes will have no impact on the
Company's accounting records on the date of the exchange. Accordingly, no gain
or loss for accounting purposes will be recognized. Expenses of the Exchange
Offer and expenses related to the Old Notes will be amortized, pro rata, over
the term of the New Notes.
DESCRIPTION OF NEW NOTES
GENERAL
The Old Notes were, and the New Notes will be, issued pursuant to an
Indenture dated November 5, 1997 (the "Indenture") by and among the Company,
the Guarantors and Norwest Bank Minnesota, National Association, as trustee
(the "Trustee"). The terms of the Notes include those stated in the Indenture
and those made part of the Indenture by reference to the Trust Indenture Act
of 1939 (the "Trust Indenture Act"). The Notes are subject to all such terms,
and holders of Notes are referred to the Indenture and the Trust Indenture Act
for a statement thereof. The following summary of the material provisions of
the Indenture does not purport to be complete and is qualified in its entirety
by reference to the Indenture, including the definitions therein of certain
terms used below. Copies of the proposed form of Indenture and Registration
Rights Agreement are available as set forth below under "Available
Information." The definitions of certain terms used in the following summary
are set forth below under "--Certain Definitions." For purposes of this
summary, the term "Company" refers only to Elgin National Industries, Inc. and
not to any of its Subsidiaries.
The New Notes will be senior unsecured obligations of the Company and will
rank pari passu in right of payment with all current and future unsecured and
unsubordinated Indebtedness of the Company and senior to
63
all subordinated Indebtedness of the Company issued in the future, if any. The
Company and its domestic Subsidiaries are parties to the Senior Credit
Facility, and all borrowings under the Senior Credit Facility are secured by a
first priority Lien on the accounts receivable and inventory of the Company
and its Subsidiaries and capital stock of its Subsidiaries. At December 31,
1997, no Indebtedness was outstanding under the Senior Credit Facility (except
$4.0 million of letters of credit reimbursement obligations). The Indenture
will permit additional borrowings under the Senior Credit Facility in the
future. See "Risk Factors--Unsecured Nature of the Notes--Effective
Subordination."
The operations of the Company are conducted in substantial part through its
Subsidiaries and, therefore, the Company is dependent in substantial part upon
the cash flow of its Subsidiaries to meet its obligations, including its
obligations under the Notes.
As of the date of the Indenture, all of the Company's Subsidiaries were
Restricted Subsidiaries. However, under certain circumstances, the Company
will be able to designate current or future Subsidiaries as Unrestricted
Subsidiaries. Unrestricted Subsidiaries will not be subject to many of the
restrictive covenants set forth in the Indenture.
PRINCIPAL, MATURITY AND INTEREST
The New Notes will be issued in an aggregate principal amount of $85.0
million and will mature on November 1, 2007. Except as set forth below under
"--Repurchase at the Option of Holders," the Company is not required to make
mandatory redemption or sinking fund payments with respect to the New Notes.
Interest on the New Notes will accrue at the rate of 11% per annum and will be
payable semi-annually in arrears on May 1 and November 1 of each year,
commencing on May 1, 1998, to holders of record on the immediately preceding
April 15 and October 15. Interest on the Notes will accrue from the most
recent date to which interest has been paid or, if no interest has been paid,
from the date of original issuance. Interest will be computed on the basis of
a 360-day year comprised of twelve 30-day months. Principal, premium, if any,
and interest and Liquidated Damages, if any, on the New Notes will be payable
at the office or agency of the Company maintained for such purpose within the
City and State of New York or, at the option of the Company, payment of
interest and Liquidated Damages, if any, may be made by check mailed to the
holders of the New Notes at their respective addresses set forth in the
register of holders of Notes; provided that all payments of principal,
premium, if any, interest and Liquidated Damages, if any, with respect to
Global Notes (as defined under "--Book-Entry, Delivery and Form," below) or
New Notes the holders of which have given written wire transfer instructions
to the Company will be required to be made by wire transfer of immediately
available funds to the Depositary or to accounts specified by the holders
thereof. Until otherwise designated by the Company, the Company's office or
agency in New York will be the office of the Trustee maintained for such
purpose. The Notes will be issued in denominations of $1,000 and integral
multiples thereof.
SUBSIDIARY GUARANTEES
The Company's payment obligations under the New Notes will be jointly and
severally guaranteed on a senior basis (the "Subsidiary Guarantees") by the
Guarantors. The obligations of each Guarantor under its Subsidiary Guarantee
are unsecured, and will be limited so as not to constitute a fraudulent
conveyance under applicable law. See "Risk Factors--Fraudulent Transfer
Considerations." The Subsidiary Guarantees will rank pari passu in right of
payment with all current and future unsecured senior Indebtedness of the
Guarantors, and senior in right of payment to all future subordinated
Indebtedness of the Guarantors. The Subsidiary Guarantees are effectively
subordinated to the obligations of the Company under the Senior Credit
Facility and the guarantees thereof by the Guarantors, by reason of the first
priority Liens granted for the benefit of the lenders thereunder.
The Indenture will provide that no Guarantor may consolidate with or merge
with or into (whether or not such Guarantor is the surviving Person), another
corporation, Person or entity whether or not affiliated with such
64
Guarantor unless (i) subject to the provisions of the following paragraph, the
Person formed by or surviving any such consolidation or merger (if other than
such Guarantor) assumes all the obligations of such Guarantor pursuant to a
supplemental indenture in form and substance reasonably satisfactory to the
Trustee, under the Notes and the Indenture; (ii) immediately after giving
effect to such transaction, no Default or Event of Default exists; (iii)
except for a merger between Guarantors or between the Company and any
Guarantor, such Guarantor, or any Person formed by or surviving any such
consolidation or merger, would have Consolidated Net Worth (immediately after
giving effect to such transaction) equal to or greater than the Consolidated
Net Worth of such Guarantor immediately preceding the transaction; and (iv)
except for a merger between Guarantors or between the Company and any
Guarantor, the Company would be permitted by virtue of the Company's pro forma
Fixed Charge Coverage Ratio, immediately after giving effect to such
transaction, to incur at least $1.00 of additional Indebtedness pursuant to
the Fixed Charge Coverage Ratio test set forth in the covenant described below
under the caption "--Certain Covenants--Incurrence of Indebtedness and
Issuance of Preferred Stock."
The Indenture provides that in the event of a sale or other disposition of
all of the assets of any Guarantor, by way of merger, consolidation or
otherwise, or a sale or other disposition of all of the capital stock of any
Guarantor, then such Guarantor (in the event of a sale or other disposition,
by way of such a merger, consolidation or otherwise, of all of the capital
stock of such Guarantor) or the corporation acquiring the property (in the
event of a sale or other disposition of all of the assets of such Guarantor)
will be released and relieved of any obligations under its Subsidiary
Guarantee; provided that the Net Proceeds of such sale or other disposition
are applied in accordance with the applicable provisions of the Indenture. See
"--Repurchase at the Option of Holders--Asset Sales."
OPTIONAL REDEMPTION
The New Notes will not be redeemable at the Company's option prior to
November 1, 2002. Thereafter, the New Notes will be subject to redemption at
any time at the option of the Company, in whole or in part, upon not less than
30 nor more than 60 days' notice, at the redemption prices (expressed as
percentages of principal amount) set forth below plus accrued and unpaid
interest and Liquidated Damages thereon, if any, to the applicable redemption
date, if redeemed during the twelve-month period beginning on November 1 of
the years indicated below:
YEAR PERCENTAGE
---- ----------
2002.......................... 105.500%
2003.......................... 103.667%
2004.......................... 101.833%
2005 and thereafter........... 100.000%
Notwithstanding the foregoing, at any time prior to November 1, 2000, the
Company may redeem up to an aggregate of $25.0 million in aggregate principal
amount of New Notes, at a redemption price of 111.0% of the principal amount
thereof, plus accrued and unpaid interest and Liquidated Damages thereon, if
any, to the redemption date, with the net cash proceeds of one or more public
offerings of common stock of the Company; provided that at least $60.0 million
in aggregate principal amount of New Notes remains outstanding immediately
after the occurrence of such redemption; and provided, further, that such
redemption shall occur within 45 days of the date of the closing of each such
public offering.
SELECTION AND NOTICE
If less than all of the New Notes are to be redeemed at any time, selection
of New Notes for redemption will be made by the Trustee on a pro rata basis,
by lot or by such other method as the Trustee shall deem fair and appropriate.
Notices 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 New Notes to be
redeemed at its registered address. Notices of redemption may not be
conditional. 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
65
principal amount equal to the unredeemed portion thereof will be issued in the
name of the holder thereof upon cancellation of the original Note. New Notes
called for redemption become due on the date fixed for redemption. On and
after the redemption date, interest ceases to accrue on New Notes or portions
of them called for redemption.
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
Upon the occurrence of a Change of Control, each holder of New Notes will
have the right to require the Company to repurchase all or any part (equal to
$1,000 or an integral multiple thereof) of such holder's New Notes pursuant to
the offer described below (the "Change of Control Offer") at an offer price in
cash equal to 101% of the aggregate principal amount thereof plus accrued and
unpaid interest and Liquidated Damages thereon, if any, to the date of
purchase (the "Change of Control Payment"). Within 20 days following any
Change of Control, the Company will mail a notice to each holder describing
the transaction or transactions that constitute the Change of Control and
offering to repurchase New Notes on the date specified in such notice, which
date shall be no earlier than 30 days and no later than 60 days from the date
such notice is mailed (the "Change of Control Payment Date"), pursuant to the
procedures required by the Indenture and described in such notice. The Company
will comply with the requirements of Rule 14e-1 under the Exchange Act and any
other securities laws and regulations thereunder to the extent such laws and
regulations are applicable in connection with the repurchase of the New Notes
as a result of a Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (1) accept for payment all New Notes or portions thereof properly
tendered pursuant to the Change of Control Offer, (2) deposit with the Paying
Agent an amount equal to the Change of Control Payment in respect of all New
Notes or portions thereof so tendered and (3) deliver or cause to be delivered
to the Trustee the New Notes so accepted together with an Officers'
Certificate stating the aggregate principal amount of New Notes or portions
thereof being purchased by the Company. The Paying Agent will promptly mail to
each holder of New Notes so tendered the Change of Control Payment for such
New Notes, and the Trustee will promptly authenticate and mail (or cause to be
transferred by book entry) to each holder a new Note equal in principal amount
to any unpurchased portion of the New Notes surrendered, if any; provided that
each such new Note will be in a principal amount of $1,000 or an integral
multiple thereof. The Company will publicly announce the results of the Change
of Control Offer on or as soon as practicable after the Change of Control
Payment Date.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. Except as
described above with respect to a Change of Control, the Indenture does not
contain provisions that permit the holders of the New Notes to require that
the Company repurchase or redeem the New Notes in the event of a takeover,
recapitalization or similar transaction.
The Senior Credit Facility contains, and instruments governing the Company's
future senior indebtedness may contain, prohibitions of certain events that
would constitute a Change of Control. In addition, the exercise by holders of
Notes of their right to require the Company to repurchase the Notes could
cause a default under such other senior indebtedness, even if the Change of
Control itself does not, due to the financial effect of such repurchase on the
Company. Finally, the Company's ability to pay cash to the holders of Notes
upon a repurchase may be limited by the Company's then existing financial
resources. See "Risk Factors--Change of Control."
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set
forth in the Indenture applicable to a Change of Control Offer made by the
Company and purchases all Notes validly tendered and not withdrawn under such
Change of Control Offer.
Asset Sales
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the
Company (or the Restricted Subsidiary, as the case may be) receives
66
consideration at the time of such Asset Sale at least equal to the fair market
value (evidenced by a resolution of the Board of Directors set forth in an
Officers' Certificate delivered to the Trustee) of the assets or Equity
Interests issued or sold or otherwise disposed of and (ii) at least 75% of the
consideration therefor received by the Company or such Restricted Subsidiary
is 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 Notes or any Guarantee thereof) that are assumed by the
transferee of any such assets pursuant to a customary novation agreement that
releases the Company or such Restricted Subsidiary from further liability and
(y) any securities, notes or other obligations received by the Company or any
such Restricted Subsidiary from such transferee that are converted by the
Company or such Restricted Subsidiary into cash (to the extent of the cash)
received within ten business days after the consummation of such Asset Sale,
shall be deemed to be cash for purposes of this provision.
Within 365 days after the receipt of any Net Proceeds from an Asset Sale,
the Company may apply such Net Proceeds, at its option, (a) to repay
Indebtedness in respect of one or more Credit Facilities and permanently
reduce the maximum commitments thereunder (provided that such reductions shall
have no effect on the amount of Indebtedness permitted to be incurred pursuant
to clause (i)(y) of the second paragraph of the covenant described under the
caption "--Certain Covenants--Incurrence of Indebtedness and Issuance of
Preferred Stock") and/or (b) to the acquisition of a controlling interest in,
or all or substantially all of the assets of, another business or the making
of a capital expenditure in a Permitted Business. Pending the final
application of any such Net Proceeds, the Company or such Restricted
Subsidiary may temporarily reduce Indebtedness under any Credit Facility or
otherwise invest such Net Proceeds in any manner that is not prohibited by the
Indenture. Any Net Proceeds from Asset Sales that are not applied or invested
as provided in the first sentence of this paragraph will be deemed to
constitute "Excess Proceeds." When the aggregate amount of Excess Proceeds
exceeds $10.0 million, the Company will be required to make an offer (pro rata
in proportion to the principal amount (or accreted value, if applicable)
outstanding in respect of any asset sale offer required by the terms of any
pari passu Indebtedness incurred in accordance with the Indenture) to all
holders of Notes (an "Asset Sale Offer") to purchase the maximum principal
amount of Notes that may be purchased out of the Excess Proceeds, at an offer
price in cash in an amount equal to 100% of the principal amount thereof plus
accrued and unpaid interest and Liquidated Damages thereon, if any, to the
date of purchase, in accordance with the procedures set forth in the
Indenture. To the extent that the aggregate principal amount of Notes tendered
pursuant to an Asset Sale Offer is less than the Excess Proceeds (after giving
effect to any pro rata payment with respect to pari passu Indebtedness as
aforesaid), the Company may use any remaining Excess Proceeds for general
corporate purposes. If the aggregate principal amount of Notes surrendered by
Holders thereof exceeds the amount of Excess Proceeds, the Trustee shall
select the Notes to be purchased on a pro rata basis. Upon completion of such
offer to purchase, the amount of Excess Proceeds shall be reset at zero.
CERTAIN COVENANTS
Incurrence of Indebtedness and Issuance of Preferred Stock
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create, incur, issue,
assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, "incur") any
Indebtedness (including Acquired Debt), and that the Company will not issue
any Disqualified Stock and will not permit any of its Restricted Subsidiaries
to issue any shares of preferred stock; provided, however, that the Company or
any Restricted Subsidiary that is a Guarantor may incur Indebtedness
(including Acquired Debt) and the Company may issue shares of Disqualified
Stock if the Fixed Charge Coverage Ratio for the Company's most recently ended
four full fiscal quarters for which internal financial statements are
available immediately preceding the date on which such additional Indebtedness
is incurred or such Disqualified Stock is issued would have been at least 2.0
to 1.0, determined on a pro forma basis (including a pro forma application of
the net proceeds therefrom), as if the additional Indebtedness had been
incurred, or the Disqualified Stock had been issued, as the case may be, at
the beginning of such four-quarter period.
67
The provisions of the first paragraph of this covenant will not apply to the
incurrence of any of the following items of Indebtedness (collectively,
"Permitted Debt"):
(i) the incurrence by the Company or any Restricted Subsidiary of
Indebtedness under Credit Facilities; provided that the aggregate principal
amount of all Indebtedness (with letters of credit issued under Credit
Facilities being deemed to have a principal amount equal to the maximum
potential liability of the Company and its Restricted Subsidiaries
thereunder) outstanding under all Credit Facilities after giving effect to
such incurrence, including all Permitted Refinancing Indebtedness incurred
to refund, refinance or replace any other Indebtedness pursuant to this
clause (i), does not exceed an amount equal to the greater of (x) (A) $20.0
million of such Indebtedness plus, if and only if the amount of such
Indebtedness includes letters of credit, an additional amount equal to the
amount of such letters of credit then outstanding, up to a maximum
additional amount of $5.0 million less (B) the aggregate amount of all Net
Proceeds of Asset Sales applied to permanently reduce the commitments with
respect to Credit Facilities pursuant to the covenant described above under
the caption "--Asset Sales" and (y) the Borrowing Base;
(ii) the incurrence by the Company and its Restricted Subsidiaries of
Existing Indebtedness;
(iii) the incurrence by the Company of Indebtedness represented by the
Notes and the incurrence by the Guarantors of the Subsidiary Guarantees;
(iv) the incurrence by the Company or any of its Restricted Subsidiaries
of Indebtedness represented by Capital Lease Obligations, mortgage
financings or purchase money obligations, in each case incurred for the
purpose of financing all or any part of the purchase price or cost of
construction or improvement of property, plant or equipment used in the
business of the Company or such Restricted Subsidiary, in an aggregate
principal amount, including all Permitted Refinancing Indebtedness incurred
to refund, refinance or replace Indebtedness incurred pursuant to this
clause (iv), not to exceed $2.5 million at any time outstanding;
(v) the incurrence by the Company or any of its Restricted Subsidiaries
of Permitted Refinancing Indebtedness in exchange for, or the net proceeds
of which are used to refund, refinance or replace, Indebtedness that was
permitted by the Indenture to be incurred under the first paragraph of this
covenant or clauses (ii) and (iii) of this paragraph;
(vi) the incurrence by the Company or any of its Restricted Subsidiaries
of intercompany Indebtedness between or among the Company and any of its
Restricted Subsidiaries; provided, however, that (i) if the Company or any
Guarantor is the obligor on such Indebtedness, such Indebtedness is
expressly subordinated to the prior payment in full in cash of all
Obligations with respect to the Notes or the Subsidiary Guarantee of such
Guarantor and (ii)(A) any subsequent issuance or transfer of Equity
Interests that results in any such Indebtedness being held by a Person
other than the Company or a Restricted Subsidiary and (B) any sale or other
transfer of any such Indebtedness to a Person that is not either the
Company or a Restricted Subsidiary that is a Guarantor shall be deemed, in
each case, to constitute an incurrence of such Indebtedness by the Company
or such Restricted Subsidiary, as the case may be, that was not permitted
solely by reason of this clause (vi);
(vii) the incurrence by the Company or any of its Restricted Subsidiaries
of Hedging Obligations that are incurred in the ordinary course of business
for the purpose of fixing or hedging currency, commodity or interest rate
risk (including with respect to any floating rate Indebtedness that is
permitted by the terms of this Indenture to be outstanding) in connection
with the conduct of their respective businesses and not for speculative
purposes;
(viii) the guarantee by the Company or any of the Guarantors of
Indebtedness of the Company or a Restricted Subsidiary that was permitted
to be incurred by another provision of this covenant;
(ix) Indebtedness incurred by the Company or any Restricted Subsidiary
under payment or performance bonds, surety bonds, letter of credit
obligations to provide security for worker's compensation claims, payment
obligations in connection with self-insurance or similar requirements and
bank overdrafts incurred
68
in the ordinary course of business, in each case including Indebtedness
represented by reimbursement obligations incurred in connection therewith;
provided that any Obligations arising in connection with such bank
overdraft Indebtedness is extinguished within five business days;
(x) Indebtedness incurred by the Company or any Restricted Subsidiary
arising from Guarantees or letters of credit, surety bonds or payment or
performance bonds securing any Obligations of the Company or any Restricted
Subsidiary pursuant to agreements providing for indemnification, adjustment
of purchase price or similar obligations, in any case in connection with
the disposition of any business, assets or Subsidiary (including without
limitation an Asset Sale) other than guarantees of Indebtedness incurred by
any Person acquiring all or any portion of such business, assets or
Subsidiary (including without limitation an Asset Sale) for the purpose of
financing such acquisition, in a principal amount not to exceed the gross
proceeds (with proceeds other than cash or Cash Equivalents being valued at
the fair market value thereof as determined by the Board of Directors in
good faith) actually received by the Company or any Restricted Subsidiary
in connection with such dispositions;
(xi) the incurrence by the Company or any of the Restricted Subsidiaries
of additional Indebtedness in an aggregate principal amount (or accreted
value, as applicable) at any time outstanding, including all Permitted
Refinancing Indebtedness incurred to refund, refinance or replace any other
Indebtedness incurred pursuant to this clause (xi) and not otherwise
permitted to be incurred at the time of incurrence of any such Permitted
Refinancing Indebtedness, not to exceed $12.5 million outstanding at any
one time; and
(xii) the incurrence of Indebtedness of the Company to the estate of any
Principal, which Indebtedness is (a) subordinated in right of payment to
payment of all amounts payable with respect to the Notes, (b) matures not
earlier than 91 days after the maturity date of the Notes, (c) includes no
mandatory sinking fund or other requirement for payment of principal or
cash interest prior to the maturity date of the Notes, (d) is not subject
to redemption or prepayment at the option of the holder thereof and (e) is
in an aggregate principal amount no greater than the amount by which the
redemption price for the Equity Interests of the decedent Principal
pursuant to an agreement to which the Company is a party exceeds the
proceeds received by the Company from life insurance on the life of the
decedent Principal.
For purposes of determining compliance with this covenant, in the event that
an item of Indebtedness meets the criteria of more than one of the categories
of Permitted Debt described in clauses (i) through (xii) above or is entitled
to be incurred pursuant to the first paragraph of this covenant, the Company
shall, in its sole discretion, classify such item of Indebtedness from time to
time in any manner that complies with this covenant and such item of
Indebtedness will be treated as having been incurred pursuant to only one of
such clauses or pursuant to the first paragraph hereof at any given time.
Accrual of interest, the accretion of accreted value and the payment of
interest in the form of additional Indebtedness will not be deemed to be an
incurrence of Indebtedness for purposes of this covenant.
Restricted Payments
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly: (i) declare or
pay any dividend or make any other payment or distribution on account of the
Company's or any of its Restricted Subsidiaries' Equity Interests (including,
without limitation, any payment in connection with any merger or consolidation
involving the Company) or to the direct or indirect holders of the Company's
or any of its Restricted Subsidiaries' Equity Interests in their capacity as
such (other than dividends or distributions payable in Equity Interests (other
than Disqualified Stock) of the Company); (ii) purchase, redeem or otherwise
acquire or retire for value (including without limitation, in connection with
any merger or consolidation involving the Company) any Equity Interests of the
Company or any direct or indirect parent of the Company; (iii) make any
payment on or with respect to, or purchase, redeem, defease or otherwise
acquire or retire for value any Indebtedness that is subordinated to the Notes
or the Subsidiary Guarantees, except payments of interest and principal
payments thereon at Stated Maturity; (iv) make any payment of salary or bonus
to any Principal in excess of the amounts contemplated in the employment
agreement between such Principal and the Company (including any increases
contemplated by the terms of such employment agreement)
69
as in effect on the Issue Date, or make any payment of life insurance premiums
in respect of life insurance policies on one or more Principals in excess of
$150,000 in the aggregate in any one year, the proceeds of which policies are
or could be required to be used in whole or in part to redeem Equity Interests
of the Company or any of its Affiliates; or (v) make any Restricted Investment
(all such payments and other actions set forth in clauses (i) through (v)
above being collectively referred to as "Restricted Payments"), unless, at the
time of and after giving effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof;
(b) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made
at the beginning of the applicable four-quarter period, have been permitted
to incur at least $1.00 of additional Indebtedness pursuant to the Fixed
Charge Coverage Ratio test set forth in the first paragraph of the covenant
described above under the caption "--Incurrence of Indebtedness and
Issuance of Preferred Stock"; and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company and its Restricted
Subsidiaries after the date of the Indenture (excluding Restricted Payments
permitted by clause (ii), (iii) or (iv) of the next succeeding paragraph),
is less than the sum of (i) 50% of the Consolidated Net Income of the
Company for the period (taken as one accounting period) from the beginning
of the fiscal quarter containing the date of the Indenture to the end of
the Company's most recently ended fiscal quarter for which internal
financial statements are available at the time of such Restricted Payment
(or, if such Consolidated Net Income for such period is a deficit, less
100% of such deficit), plus (ii) 100% of the aggregate net cash proceeds
received by the Company from the issue or sale since the date of the
Indenture of Equity Interests of the Company (other than Disqualified
Stock) or of Disqualified Stock or debt securities of the Company that have
been converted into such Equity Interests (other than Equity Interests (or
Disqualified Stock or convertible debt securities) sold to a Restricted
Subsidiary of the Company and other than Disqualified Stock or convertible
debt securities that have been converted into Disqualified Stock), plus
(iii) to the extent that any Restricted Investment that was made by the
Company or any of its Restricted Subsidiaries after the date of the
Indenture is sold for cash or otherwise liquidated for or repaid in cash,
the lesser of (A) the cash return of capital with respect to such
Restricted Investment (less the cost of disposition, if any) and (B) the
initial amount of such Restricted Investment, plus (iv) $2.0 million, minus
(v) the amount of all Clawback Payments made or, without duplication, that
are required to be made as a result of any Asset Sale theretofore made, or
with respect to which a binding agreement has been entered into.
The foregoing provisions will not prohibit (i) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the
Indenture; (ii) the redemption, repurchase, retirement, defeasance or other
acquisition of any subordinated Indebtedness or Equity Interests of the
Company in exchange for, or out of the net cash proceeds of the substantially
concurrent sale (other than to a Restricted Subsidiary of the Company) of,
other Equity Interests of the Company (other than any Disqualified Stock);
provided that the amount of any such net cash proceeds that are utilized for
any such redemption, repurchase, retirement, defeasance or other acquisition
shall be excluded from clause (c)(ii) of the preceding paragraph; (iii) the
defeasance, redemption, repurchase or other acquisition of subordinated
Indebtedness with the net cash proceeds from an incurrence of Permitted
Refinancing Indebtedness; (iv) the payment of any dividend by a Restricted
Subsidiary of the Company to the holders of its common Equity Interests so
long as the Company or such Restricted Subsidiary receives at least its pro
rata share of such dividend or distribution in accordance with its Equity
Interests, or the distribution by a Permitted Joint Venture in accordance with
the terms of its governing documentation; (v) the repurchase, redemption or
other acquisition or retirement for value of any Equity Interests of the
Company or any Subsidiary of the Company held by any member of the Company's
(or any of its Subsidiaries') management pursuant to any management equity
subscription agreement or stock option agreement in effect as of the date of
the Indenture; provided that the aggregate price paid for all such
repurchased, redeemed, acquired or retired Equity Interests shall not exceed
$250,000 in any twelve-month period and no Default or Event of Default shall
have occurred and be continuing
70
immediately after such transaction; (vi) payments in respect of the
Recapitalization Transactions on the Issue Date, and Clawback Payments, if
any, made after the Issue Date; and (vii) payments in respect of the
redemption of Equity Interests out of the proceeds of life insurance policies,
which proceeds are required to be used for such redemption pursuant to any
agreement to which the Company is a party.
If the Company or any Wholly Owned Restricted Subsidiary of the Company
sells or otherwise disposes of any Equity Interests of any direct or indirect
Subsidiary of the Company such that, after giving effect to any such sale or
disposition, such Person is no longer a Wholly Owned Restricted Subsidiary of
the Company, 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
Equity Interests of such Subsidiary not sold or disposed of in an amount
determined as provided in the second succeeding paragraph below.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default. For
purposes of making such determination, all outstanding Investments by the
Company and its Restricted Subsidiaries (except to the extent repaid in cash)
in the Subsidiary so designated will be deemed to be Restricted Payments at
the time of such designation and, unless such Investments are Permitted
Investments, will reduce the amount available for Restricted Payments under
clause (c) of the first paragraph of this covenant. All such outstanding
Investments will be deemed to constitute Investments in an amount equal to the
greatest of (x) the net book value of such Investments at the time of such
designation, (y) the fair market value of such Investments at the time of such
designation and (z) the original fair market value of such Investments at the
time they were made. Such designation will only be permitted if such
Restricted Payment would be permitted at such time and if such Restricted
Subsidiary otherwise meets the definition of an Unrestricted Subsidiary.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued by the Company or such
Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment.
The fair market value of any non-cash Restricted Payment shall be determined
by the Board of Directors, whose resolution with respect thereto shall be
delivered to the Trustee, such determination to be based upon an opinion or
appraisal issued by an accounting, appraisal or investment banking firm of
national standing if such fair market value exceeds $2.0 million. Not later
than two Business Days after making any Restricted Payment in excess of $1.0
million, the Company shall deliver to the Trustee an Officers' Certificate
stating that such Restricted Payment is permitted and setting forth the basis
upon which the calculations required by the covenant "Restricted Payments"
were computed, together with a copy of any fairness opinion or appraisal
required by the Indenture.
Liens
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, create, incur,
assume or suffer to exist or become effective any Lien on any asset now owned
or hereafter acquired, or any income or profits therefrom or assign or convey
any right to receive income therefrom, except Permitted Liens.
Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, create or
otherwise cause or suffer to exist or become effective any encumbrance or
restriction on the ability of any Restricted Subsidiary to (i)(a) pay
dividends or make any other distributions to the Company or any of its
Restricted Subsidiaries (1) on its Capital Stock or (2) with respect to any
other interest or participation in, or measured by, its profits, or (b) pay
any Indebtedness owed to the Company or any of its Restricted Subsidiaries,
(ii) make loans or advances to the Company or any of its Restricted
Subsidiaries or (iii) transfer any of its properties or assets to the Company
or any of its Restricted Subsidiaries, except for such encumbrances or
restrictions existing under or by reason of (a) Existing Indebtedness as in
effect on the date of
71
the Indenture, or as amended thereafter on terms, taken as a whole, no more
restrictive and no more unfavorable to the Holders of the Notes than those
contained in the Senior Credit Facility as in effect on the date of the
Indenture, (b) the Senior Credit Facility as in effect as of the date of the
Indenture, and any amendments, modifications, restatements, renewals,
increases, supplements, refundings, replacements or refinancings thereof,
provided that such amendments, modifications, restatements, renewals,
increases, supplements, refundings, replacements or refinancings are no more
restrictive and no more unfavorable to the holders of the Notes than those
contained in the Senior Credit Facility as in effect on the date of the
Indenture, (c) the Indenture, the Subsidiary Guarantees and the Notes, (d)
applicable law, (e) any instrument governing Indebtedness or Capital Stock of
a Person acquired by the Company or any of its Restricted Subsidiaries as in
effect at the time of such acquisition (except to the extent such Indebtedness
was incurred in connection with or in contemplation of such acquisition),
which encumbrance or restriction is not applicable to any Person, or the
properties or assets of any Person, other than the Person, or the property or
assets of the Person, so acquired, and any amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements or
refinancings thereof, provided that, in the case of Indebtedness, such
Indebtedness was no more restrictive and no more unfavorable to the holders of
the Notes than those contained in the Senior Credit Facility as in effect on
the date of the Indenture, (f) customary non-assignment provisions in leases
entered into in the ordinary course of business and consistent with past
practices, (g) purchase money obligations for property acquired in the
ordinary course of business that impose restrictions of the nature described
in clause (iii) above on the property so acquired, (h) Permitted Refinancing
Indebtedness, provided that the encumbrances or restrictions contained in the
agreements governing such Permitted Refinancing Indebtedness are no more
restrictive and no more unfavorable to the holders of the Notes than those
contained in the Indebtedness being refinanced, (i) secured Indebtedness
otherwise permitted to be incurred pursuant to the provisions of the covenant
described under the caption "--Liens" that limits the right of the debtor to
dispose of the assets securing such Indebtedness, (j) customary net worth
provisions contained in leases and other agreements entered into in the
ordinary course of business, (k) customary restrictions with respect to a
Restricted Subsidiary pursuant to an agreement that has been entered into for
the sale or disposition of all or substantially all of the Capital Stock or
assets of such Restricted Subsidiary, (l) provisions with respect to the
disposition or distribution of assets or property to be sold in any Asset Sale
(or transaction which, but for its size, would be an Asset Sale) pending the
completion of such transaction in joint venture agreements or other similar
agreements, including any Permitted Joint Venture, (m) any other instrument
governing Indebtedness incurred on or after the date of the Indenture or any
refinancing thereof that is incurred in accordance with the Indenture,
provided that the encumbrance or restriction contained in any such
Indebtedness or any such refinancing thereof is no more restrictive and no
more unfavorable to the Holders of the Notes than that contained in the Senior
Credit Facility as in effect on the date of the Indenture, or, in the case of
any refinancing, the Indebtedness being refinanced, (n) restrictions on cash
or other deposits or net worth imposed by customers under contracts entered
into in the ordinary course of business or (o) restrictions imposed on any
Foreign Subsidiary by the terms of any Credit Facility under which such
Foreign Subsidiary is the borrower.
Merger, Consolidation or Sale of Assets
The Indenture will provide that the Company may not consolidate or merge
with or into (whether or not the Company is the surviving corporation), or
sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of its properties or assets in one or more related
transactions, to another corporation, Person or entity unless (i) the Company
is the surviving corporation or the entity or the Person formed by or
surviving any such consolidation or merger (if other than the Company) or to
which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made is a corporation organized or existing under the laws of
the United States, any state thereof or the District of Columbia; (ii) the
entity or Person formed by or surviving any such consolidation or merger (if
other than the Company) or the entity or Person to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made assumes all the obligations of the Company under the Notes and the
Indenture pursuant to a supplemental indenture in a form reasonably
satisfactory to the Trustee; (iii) immediately before and after such
transaction no Default or Event of Default shall have occurred and be
continuing; and (iv) except in the case of a merger of the Company with or
into a
72
Wholly Owned Restricted Subsidiary, the Company or the entity or Person formed
by or surviving any such consolidation or merger (if other than the Company),
or to which such sale, assignment, transfer, lease, conveyance or other
disposition shall have been made (x) will have Consolidated Net Worth
immediately after the transaction equal to or greater than the Consolidated
Net Worth of the Company immediately prior to the transaction, and (y) will,
at the time of such transaction and after giving pro forma effect thereto as
if such transaction had occurred at the beginning of the applicable four-
quarter period, be permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the
first paragraph of the covenant described above under the caption "--
Incurrence of Indebtedness and Issuance of Preferred Stock."
Transactions with Affiliates
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries or any Unrestricted Subsidiary or Permitted Joint
Venture in which any Permitted Investment is made pursuant to clause (f) of
"Permitted Investments" to, make any payment to, or sell, lease, transfer or
otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into or make or amend any transaction,
contract, agreement, understanding, loan, advance or Guarantee with, or for
the benefit of, any Affiliate (each of the foregoing, an "Affiliate
Transaction"), unless (i) such Affiliate Transaction is on terms that are no
less favorable to the Company or the relevant Restricted Subsidiary than those
that would have been obtained in a comparable transaction by the Company or
such Restricted Subsidiary with a non-Affiliate and (ii) the Company delivers
to the Trustee (a) with respect to any Affiliate Transaction or series of
related Affiliate Transactions involving aggregate consideration in excess of
$1.5 million, a resolution of the Board of Directors accompanied by an
Officers' Certificate certifying that such Affiliate Transaction complies with
clause (i) above and that such Affiliate Transaction has been approved by a
majority of the disinterested members of the Company's Board of Directors and
(b) with respect to any Affiliate Transaction or series of related Affiliate
Transactions involving aggregate consideration in excess of $5.0 million, an
opinion as to the fairness to the holders of the Notes of such Affiliate
Transaction from a financial point of view issued by an accounting, appraisal
or investment banking firm of national standing; provided that (v) any fees
and compensation paid to, and indemnity provided on behalf of, officers,
directors or employees of the Company or any of its Restricted Subsidiaries,
as determined in good faith by the Board of Directors of the Company or any
such Restricted Subsidiary, to the extent such fees and compensation are
reasonable and customary, (w) loans to Principals that are Permitted
Investments, (x) any employment agreement or amendment thereto entered into by
the Company or any of its Restricted Subsidiaries in the ordinary course of
business of the Company or such Restricted Subsidiary, (y) transactions
between or among the Company and/or its Restricted Subsidiaries and Permitted
Joint Ventures in which the Principals and their Related Parties beneficially
own less than 10% of the Equity Interests in the aggregate (other than
indirectly through their beneficial ownership of the Company) and (z)
Restricted Payments that are permitted by the provisions of the Indenture
described above under the caption "--Restricted Payments," in each case, shall
not be deemed Affiliate Transactions.
Sale and Leaseback Transactions
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, enter into any sale and leaseback transaction;
provided that the Company may enter into a sale and leaseback transaction if
(i) the Company could have (a) incurred Indebtedness in an amount equal to the
Attributable Debt relating to such sale and leaseback transaction pursuant to
the Fixed Charge Coverage Ratio test set forth in the first paragraph of the
covenant described above under the caption "--Incurrence of Indebtedness and
Issuance of Preferred Stock" and (b) incurred a Lien to secure such
Indebtedness pursuant to the covenant described above under the caption "--
Liens," (ii) the gross cash proceeds of such sale and leaseback transaction
are at least equal to the fair market value (as determined in good faith by
the Board of Directors and set forth in an Officers' Certificate delivered to
the Trustee) of the property that is the subject of such sale and leaseback
transaction and (iii) the transfer of assets in such sale and leaseback
transaction is permitted by, and the Company applies the proceeds of such
transaction in compliance with, the covenant described above under the caption
"--Asset Sales."
73
Additional Subsidiary Guarantees
The Indenture provides that if the Company or any of its Restricted
Subsidiaries shall acquire or create another Subsidiary after the date of the
Indenture then, unless such Subsidiary (i) is designated and remains an
Unrestricted Subsidiary in accordance with the Indenture, or (ii) does not
have at any time assets or annual revenues (or monthly revenues annualized),
determined in accordance with GAAP, of $100,000 or more or (iii) is a Foreign
Subsidiary, and, in the case of clauses (ii) and (iii), is not a guarantor
under or in respect of any Credit Facility or other Indebtedness of the
Company or any other Restricted Subsidiary, such newly acquired or created
Subsidiary (or any other Subsidiary, upon failing to satisfy the requirements
of clause (i), (ii) or (iii)) shall execute a Subsidiary Guarantee and enter
into a Supplemental Indenture, in accordance with the terms of the Indenture.
Business Activities
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, engage in any business other than a Permitted
Business, except to such extent as would not be material to the Company and
its Restricted Subsidiaries taken as a whole.
Payments for Consent
The Indenture provides that neither the Company nor any of its Restricted
Subsidiaries will, directly or indirectly, pay or cause to be paid any
consideration, whether by way of interest, fee or otherwise, to any holder of
any Notes for or as an inducement to any consent, waiver or amendment of any
of the terms or provisions of the Indenture or the Notes unless such
consideration is offered to be paid or is paid to all holders of the Notes
that consent, waive or agree to amend in the time frame set forth in the
solicitation documents relating to such consent, waiver or agreement.
Reports
The Indenture provides that, whether or not required by the rules and
regulations of the Securities and Exchange Commission (the "Commission")
beginning with respect to annual financial information for the fiscal year
ended December 31, 1997 and for so long as any Notes are outstanding, the
Company will furnish to the holders of Notes (i) all quarterly and annual
financial information that would be required to be contained in a filing with
the Commission on Forms 10-Q and 10-K if the Company were required to file
such Forms and, with respect to the annual information only, a report thereon
by the Company's certified independent accountants and (ii) all current
reports that would be required to be filed with the Commission on Form 8-K if
the Company were required to file such reports. The timely filing with the
Commission of Forms 10-Q and 10-K shall satisfy the requirements of (i) and
(ii) above. In addition, whether or not required by the rules and regulations
of the Commission, the Company will file a copy of all such information and
reports with the Commission for public availability within the time periods
specified in the Commission's rules and regulations (unless the Commission
will not accept such a filing) and make such information available to
securities analysts and prospective investors upon request. In addition, the
Company and the Guarantors have agreed that, for so long as any Notes remain
outstanding, they will furnish to the Holders and to securities analysts and
prospective investors, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default: (i) default for 30 days in the payment when due of interest on, or
Liquidated Damages, if any, with respect to, the Notes; (ii) default in
payment when due of the principal of or premium, if any, on the Notes; (iii)
failure by the Company or any Restricted Subsidiary to comply with the
provisions described under the captions "Repurchase at the Option of the
Holders--Change of Control," "Repurchase at the Option of the Holders--Asset
Sales," "Certain Covenants--Restricted Payments," "Certain Covenants--
Incurrence of Indebtedness and Issuance of Preferred Stock" or "--Merger,
Consolidation or Sale of Assets"; (iv) failure by the Company or any
Restricted Subsidiary for 60 days after notice given by the Trustee or holders
of at least 25% in principal amount of the then outstanding Notes to comply
with any of its other agreements in the Indenture or the Notes; (v) default
under any mortgage, indenture or instrument under which there may be issued or
by which there may be secured
74
or evidenced any Indebtedness for money borrowed by the Company or any of its
Restricted Subsidiaries (or the payment of which is guaranteed by the Company
or any of its Restricted Subsidiaries) whether such Indebtedness or guarantee
now exists, or is created after the date of the Indenture, which default (a)
is caused by a failure to pay principal of or premium, if any, or interest on
such Indebtedness prior to the expiration of the grace period provided in such
Indebtedness on the date of such default (a "Payment Default") or (b) results
in the acceleration of such Indebtedness prior to its express maturity and, in
each case, the principal amount of any such Indebtedness, together with the
principal amount of any other such Indebtedness under which there has been a
Payment Default or the maturity of which has been so accelerated, aggregates
$5.0 million or more; (vi) failure by the Company or any of its Restricted
Subsidiaries to pay final judgments aggregating in excess of $5.0 million
(excluding amounts covered by insurance), which judgments are not paid,
discharged or stayed, for a period of 60 days; (vii) certain events of
bankruptcy or insolvency with respect to the Company or any of its Significant
Subsidiaries; and (viii) except as permitted by the Indenture, any Guarantee
given by a Significant Subsidiary shall be finally held in any judicial
proceeding to be unenforceable or invalid or shall cease for any reason to be
in full force and effect or any such Guarantor, or any Person acting on behalf
of any such Guarantor, shall deny or disaffirm its obligations under its
Guarantee (other than by reason of the terminating of the Indenture or the
release of any such Guarantee in accordance with the Indenture).
If any Event of Default occurs and is continuing, the Trustee or the holders
of at least 25% in principal amount of the then outstanding Notes may declare
all the Notes to be due and payable immediately. Notwithstanding the
foregoing, in the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to the Company, any Significant
Subsidiary or any group of Subsidiaries that, taken together, would constitute
a Significant Subsidiary, all outstanding Notes will become due and payable
without further action or notice. Holders of the Notes may not enforce the
Indenture or the Notes except as provided in the Indenture. Subject to certain
limitations, holders of a majority in principal amount of the then outstanding
Notes may direct the Trustee in its exercise of any trust or power. The
Trustee may withhold from holders of the Notes notice of any continuing
Default or Event of Default (except a Default or Event of Default relating to
the payment of principal or interest) if it determines that withholding notice
is in their interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have
had to pay if the Company then had elected to redeem the Notes pursuant to the
optional redemption provisions of the Indenture, an equivalent premium shall
also become and be immediately due and payable to the extent permitted by law
upon the acceleration of the Notes. If an Event of Default occurs prior to
November 1, 2002 by reason of any willful action (or inaction) taken (or not
taken) by or on behalf of the Company with the intention of avoiding the
prohibition on redemption of the Notes prior to November 1, 2002, then the
premium specified in the Indenture shall also become immediately due and
payable to the extent permitted by law upon the acceleration of the Notes.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of
the Notes waive any existing Default or Event of Default and its consequences
under the Indenture except a continuing Default or Event of Default in the
payment of interest on, or the principal of, the Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company,
as such, shall have any liability for any obligations of the Company or any
Guarantor under the Notes, the Indenture or the Guarantees 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 irrevocably waives and releases all
such liability. The aforementioned waiver and release are
75
part of the consideration for issuance of the Notes and the Subsidiary
Guarantees. Such waiver may not be effective to waive liabilities under the
federal securities laws and the Company believes that it is the view of the
Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance") except for (i) the rights of holders of outstanding Notes to
receive payments in respect of the principal of, premium, if any, and interest
and Liquidated Damages, if any, on such Notes when such payments are due from
the trust referred to below, (ii) the Company's obligations with respect to
the Notes concerning issuing temporary Notes, registration of Notes,
mutilated, destroyed, lost or stolen Notes and the maintenance of an office or
agency for payment and money for security payments held in trust, (iii) the
rights, powers, trusts, duties and immunities of the Trustee, and the
Company's obligations in connection therewith and (iv) the Legal Defeasance
provisions of the Indenture. In addition, the Company may, at its option and
at any time, elect to have the obligations of the Company released with
respect to certain covenants that are 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 Notes. In the
event Covenant Defeasance occurs, certain events (not including non-payment,
bankruptcy, receivership, rehabilitation and insolvency events) described
under "Events of Default" will no longer constitute an Event of Default with
respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Notes, cash in United States dollars, non-callable
Government Securities, 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 and
Liquidated Damages, if any, on the outstanding Notes on the stated maturity
thereof or on the applicable redemption date, as the case may be, and the
Company must specify whether the Notes are being defeased to maturity or to a
particular redemption date; (ii) in the case of Legal Defeasance, the Company
shall have delivered to the Trustee an opinion of counsel in the United States
reasonably acceptable to the Trustee confirming that (A) the Company has
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 of the
outstanding Notes 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 Company shall have delivered to
the Trustee an opinion of counsel in the United States reasonably acceptable
to the Trustee confirming that the holders of the outstanding Notes 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 have occurred and be continuing on the date of such deposit
(other than a Default or Event of Default resulting from the borrowing of
funds to be applied to 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 will not result in a breach or violation of, or constitute
a default under any material agreement or instrument (other than the
Indenture) to which the Company or any of its Subsidiaries is a party or by
which the Company or any of its Subsidiaries is bound; (vi) the Company must
have delivered to the Trustee an opinion of counsel to the effect that 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; (vii) the Company must deliver to
the Trustee an Officers' Certificate stating that the deposit was not made by
the Company with the intent of preferring the holders of Notes over the other
creditors of the Company with the intent of defeating, hindering, delaying or
defrauding creditors of the Company or others; and (viii) the Company must
deliver to the Trustee an Officers' Certificate and an opinion of counsel,
each stating that all
76
conditions precedent provided for relating to the Legal Defeasance or the
Covenant Defeasance have been complied with.
TRANSFER AND EXCHANGE
A holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note
selected for redemption. Also, the Company is not required to transfer or
exchange any Note for a period of 15 days before a selection of Notes to be
redeemed.
The registered holder of a Note will be treated as the owner of it for all
purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the Notes may be amended or supplemented with the consent of the holders of at
least a majority in principal amount of the Notes then outstanding (including,
without limitation, consents obtained in connection with a purchase of, or
tender offer or exchange offer for, Notes), and any existing default or
compliance with any provision of the Indenture or the Notes may be waived with
the consent of the holders of a majority in principal amount of the then
outstanding Notes (including consents obtained in connection with a tender
offer or exchange offer for Notes).
Without the consent of each holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting holder): (i) reduce the
principal amount of Notes whose holders must consent to an amendment,
supplement or waiver, (ii) reduce the principal of or change the fixed
maturity of any Note or alter the provisions with respect to the redemption of
the Notes (other than provisions relating to the covenants described above
under the caption "--Repurchase at the Option of Holders"), (iii) reduce the
rate of or change the time for payment of interest on any Note, (iv) waive a
Default or Event of Default in the payment of principal of or premium or
Liquidated Damages, if any, or interest on the Notes (except a rescission of
acceleration of the Notes by the holders of at least a majority in aggregate
principal amount of the Notes and a waiver of the payment default that
resulted from such acceleration), (v) make any Note payable in money other
than that stated in the Notes, (vi) make any change in the provisions of the
Indenture relating to waivers of past Defaults or the rights of holders of
Notes to receive payments of principal of or premium, if any, or interest on
the Notes, (vii) waive a redemption payment with respect to any Note (other
than a payment required by one of the covenants described above under the
caption "--Repurchase at the Option of Holders") or (viii) make any change in
the foregoing amendment and waiver provisions that is adverse to the holders
of the Notes.
Notwithstanding the foregoing, without the consent of any holder of the
Notes, the Company and the Trustee may amend or supplement the Indenture or
the Notes to cure any ambiguity, defect or inconsistency, to provide for
uncertificated Notes in addition to or in place of certificated Notes, to
provide for the assumption of the Company's or any Guarantor's obligations to
holders of Notes in the case of a merger or consolidation, to make any change
that would provide any additional rights or benefits to the holders of Notes
or that does not adversely affect the legal rights under the Indenture of any
such holder, or to comply with requirements of the Commission in order to
effect or maintain the qualification of the Indenture under the Trust
Indenture Act upon or after the effectiveness of a registration of the
exchange or resale of the Notes under the Act.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee will be permitted to engage
in other transactions; however, if it acquires any conflicting interest it
must eliminate such conflict within 90 days, apply to the Commission for
permission to continue or resign.
77
The holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent person in the
conduct of his or her own affairs. Subject to such provisions, the Trustee
will be under no obligation to exercise any of its rights or powers under the
Indenture at the request of any holder of Notes, unless such holder shall have
offered to the Trustee security and indemnity satisfactory to it against any
loss, liability or expense.
ADDITIONAL INFORMATION
Anyone who receives this Offering Memorandum may obtain a copy of the
Indenture and Registration Rights Agreement without charge by writing to Elgin
National Industries, Inc., 2001 Butterfield Road, Suite 1020, Downers Grove,
Illinois 60515, Attention: Chief Financial Officer.
BOOK-ENTRY, DELIVERY AND FORM
Except as set forth below, New Notes will be issued in registered, global
form in minimum denominations of $1,000 and integral multiples of $1,000 in
excess thereof. New Notes will be issued at the closing of the Exchange Offer
(the "Closing") only against the proper tender of old Notes therefore.
The New Notes will be represented by one or more global notes in registered,
global form without interest coupons (collectively, the "Rule 144A Global
Note"). The Rule 144A Global Note initially will be deposited upon issuance
with the Trustee as custodian for the Depositary, in New York, New York, and
registered in the name of the Depositary or its nominee, in each case for
credit to an account of a direct or indirect participant as described below.
The New Notes issued in offshore transactions in reliance on Regulation S
under the Securities Act initially will be represented by one or more
temporary global notes in registered, global form without interest coupons
(collectively, the "Regulation S Temporary Global Note"). The Regulation S
Temporary Global Note will be registered in the name of a nominee of the
Depositary for credit to the subscribers' respective accounts at the Euroclear
System ("Euroclear") and Cedel Bank, S.A. ("CEDEL"). Beneficial interests in
the Regulation S Temporary Global Note may be held only through Euroclear or
CEDEL.
Within a reasonable time period after the expiration of the period of 40
days commencing on the latest of the commencement of the Offering and the
original Issue Date of the Notes (such period through and including such 40th
day, the "Restricted Period"), the Regulation S Temporary Global Note will be
exchanged for one or more permanent global notes (collectively, the
"Regulation S Permanent Global Note" and, together with the Regulation S
Temporary Global Note, the "Regulation S Global Note" (the Regulation S Global
Note and the 144A Global Note, collectively being the "Global Notes")) upon
delivery to the Depositary of certification of compliance with the transfer
restrictions applicable to the Notes pursuant to Regulation S as provided in
the Indenture. During the Restricted Period, beneficial interests in the
Regulation S Temporary Global Note may be held only through Euroclear or CEDEL
(as indirect participants in the Depositary). See "--Depositary Procedures--
Exchanges between Regulation S Notes and the Rule 144A Global Note."
Beneficial interests in the 144A Global Note may not be exchanged for
beneficial interests in the Regulation S Global Note at any time except in the
limited circumstances described below. See "--Depositary Procedures--Exchanges
between Regulation S Notes and the Rule 144A Global Note."
Except as set forth below, the Global Notes may be transferred, in whole and
not in part, only to another nominee of DTC or to a successor of DTC or its
nominee. Beneficial interests in the Global Notes may not be exchanged for
Notes in certificated form except in the limited circumstances described
below. See "--Exchange of Book-Entry Notes for Certificated Notes." Except in
the limited circumstances described below, owners of beneficial interests in
the Global Notes will not be entitled to receive physical delivery of
Certificated Notes (as defined below).
78
Rule 144A Notes (including beneficial interests in the Rule 144A Global
Notes) will be subject to certain restrictions on transfer and will bear a
restrictive legend as described under "Transfer Restrictions." Regulation S
Notes will also bear the legend as described under "Transfer Restrictions." In
addition, transfers of beneficial interests in the Global Notes will be
subject to the applicable rules and procedures of DTC and its direct or
indirect participants (including, if applicable, those of Euroclear and
Cedel), which may change from time to time.
Initially, the Trustee will act as Paying Agent and Registrar. The Notes may
be presented for registration of transfer and exchange at the offices of the
Registrar.
Depositary Procedures
The following description of the operations and procedures of DTC, Euroclear
and Cedel are provided solely as a matter of convenience. These operations and
procedures are solely within the control of the respective settlement systems
and are subject to changes by them from time to time. The Company takes no
responsibility for these operations and procedures and urges investors to
contact the system or their participants directly to discuss these matters.
DTC has advised the Company that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Participants") and to facilitate the clearance and settlement of
transactions in those securities between Participants through electronic book-
entry changes in accounts of its Participants. The Participants include
securities brokers and dealers (including the Initial Purchasers), banks,
trust companies, clearing corporations and certain other organizations. Access
to DTC's system is also available to other entities such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly (collectively,
the "Indirect Participants"). Persons who are not Participants may
beneficially own securities held by or on behalf of DTC only through the
Participants or the Indirect Participants. The ownership interests in, and
transfers of ownership interests in, each security held by or on behalf of DTC
are recorded on the records of the Participants and Indirect Participants.
DTC has also advised the Company that, pursuant to procedures established by
it, (i) upon deposit of the Global Notes, DTC will credit the accounts of
Participants designated by the Initial Purchasers with portions of the
principal amount of the Global Notes and (ii) ownership of such interests in
the Global Notes will be shown on, and the transfer of ownership thereof will
be effected only through, records maintained by DTC (with respect to the
Participants) or by the Participants and the Indirect Participants (with
respect to other owners of beneficial interests in the Global Notes).
Investors in the Rule 144A Global Notes may hold their interests therein
directly through DTC, if they are Participants in such system, or indirectly
through organizations (including Euroclear and Cedel) which are Participants
in such system. Investors in the Regulation S Global Notes must initially hold
their interests therein through Euroclear or Cedel, if they are participants
in such systems, or indirectly through organizations that are participants in
such systems. After the expiration of the Restricted Period (but not earlier),
investors may also hold interests in the Regulation S Global Notes through
Participants in the DTC system other than Euroclear and Cedel. Euroclear and
Cedel will hold interests in the Regulation S Global Notes on behalf of their
participants through customers' securities accounts in their respective names
on the books of their respective depositories, which are Morgan Guaranty Trust
Company of New York, Brussels office, as operator of Euroclear, and Citibank,
N.A., as operator of Cedel. All interests in a Global Note, including those
held through Euroclear or Cedel, may be subject to the procedures and
requirements of DTC. Those interests held through Euroclear or Cedel may also
be subject to the procedures and requirements of such systems. The laws of
some states require that certain persons take physical delivery in definitive
form of securities that they own. Consequently, the ability to transfer
beneficial interests in a Global Note to such persons will be limited to that
extent. Because DTC can act only on behalf of Participants, which in turn act
on behalf of Indirect Participants and certain banks, the ability of a person
having beneficial interests in a Global Note to pledge such interests to
persons or entities that
79
do not participate in the DTC system, or otherwise take actions in respect of
such interests, may be affected by the lack of a physical certificate
evidencing such interests.
Except as described below, owners of interests in the Global Notes will not
have Notes registered in their names, will not receive physical delivery of
Notes in certificated form and will not be considered the registered owners or
"holders" thereof under the Indenture for any purpose.
Payments in respect of the principal of, premium, if any, Liquidated
Damages, if any, and interest on a Global Note registered in the name of DTC
or its nominee will be payable to DTC in its capacity as the registered holder
thereof under the Indenture. Under the terms of the Indenture, the Company and
the Trustee will treat the persons in whose names the Notes, including the
Global Notes, are registered as the owners thereof for the purpose of
receiving such payments and for any and all other purposes whatsoever.
Consequently, neither the Company, the Trustee nor any agent of the Company or
the Trustee has or will have any responsibility or liability for (i) any
aspect of DTC's records or any Participant's or Indirect Participant's records
relating to or payments made on account of any beneficial ownership interest
in the Global Notes, or for maintaining, supervising or reviewing any of DTC's
records or any Participant's or Indirect Participant's records relating to the
beneficial ownership interests in the Global Notes or (ii) any other matter
relating to the actions and practices of DTC or any of its Participants or
Indirect Participants. DTC has advised the Company that its current practice,
upon receipt of any payment in respect of securities such as the Notes
(including principal and interest), is to credit the accounts of the relevant
Participants with the payment on the payment date, in amounts proportionate to
their respective holdings in the principal amount of beneficial interest in
the relevant security as shown on the records of DTC unless DTC has reason to
believe it will not receive payment on such payment date. Payments by the
Participants and the Indirect Participants to the beneficial owners of Notes
will be governed by standing instructions and customary practices and will be
the responsibility of the Participants or the Indirect Participants and will
not be the responsibility of DTC, the Trustee or the Company. Neither the
Company nor the Trustee will be liable for any delay by DTC or any of its
Participants in identifying the beneficial owners of the Notes, and the
Company and the Trustee may conclusively rely on and will be protected in
relying on instructions from DTC or its nominee for all purposes.
Except for trades involving only Euroclear and Cedel participants, interests
in the Global Notes are expected to be eligible to trade in DTC's Same-Day
Funds Settlement System and secondary market trading activity in such
interests will, therefore, settle in immediately available funds, subject in
all cases to the rules and procedures of DTC and its Participants. See "--Same
Day Settlement and Payment."
Subject to the transfer restrictions set forth under "Transfer
Restrictions," transfers between Participants in DTC will be effected in
accordance with DTC's procedures, and will be settled in same day funds, and
transfers between participants in Euroclear and Cedel will be effected in the
ordinary way in accordance with their respective rules and operating
procedures.
Subject to compliance with the transfer restrictions applicable to the Notes
described herein, cross-market transfers between the Participants in DTC, on
the one hand, and Euroclear or Cedel participants, on the other hand, will be
effected through DTC in accordance with DTC's rules on behalf of Euroclear or
Cedel, as the case may be, by its respective depositary; however, such cross-
market transactions will require delivery of instructions to Euroclear or
Cedel, as the case may be, by the counterparty in such system in accordance
with the rules and procedures and within the established deadlines (Brussels
time) of such system. Euroclear or Cedel, as the case may be, will, if the
transaction meets its settlement requirements, deliver instructions to its
respective depositary to take action to effect final settlement on its behalf
by delivering or receiving interests in the relevant Global Note in DTC, and
making or receiving payment in accordance with normal procedures for same-day
funds settlement applicable to DTC. Euroclear participants and Cedel
participants may not deliver instructions directly to the depositories for
Euroclear or Cedel.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Notes only at the direction of one or more Participants
to whose account DTC has credited the interests in the Global Notes
80
and only in respect of such portion of the aggregate principal amount of the
Notes as to which such Participant or Participants has or have given such
direction. However, if there is an Event of Default under the Notes, DTC
reserves the right to exchange the Global Notes for legended Notes in
certificated form, and to distribute such Notes to its Participants.
Although DTC, Euroclear and Cedel have agreed to the foregoing procedures to
facilitate transfers of interests in the Regulation S Global Notes and in the
Rule 144A Global Notes among Participants in DTC, Euroclear and Cedel, they
are under no obligation to perform or to continue to perform such procedures,
and such procedures may be discontinued at any time. Neither the Company nor
the Trustee nor any of their respective agents will have any responsibility
for the performance by DTC, Euroclear or Cedel or their respective
participants or indirect participants of their respective obligations under
the rules and procedures governing their operations.
Exchange of Book-Entry Notes for Certificated Notes
A Global Note is exchangeable for definitive Notes in registered
certificated form ("Certificated Notes") if (i) DTC (x) notifies the Company
that it is unwilling or unable to continue as depositary for the Global Notes
and the Company thereupon fails to appoint a successor depositary or (y) has
ceased to be a clearing agency registered under the Exchange Act, (ii) the
Company, at its option, notifies the Trustee in writing that it elects to
cause the issuance of Certificated Notes or (iii) there shall have occurred
and be continuing a Default or Event of Default with respect to the Notes. In
addition, beneficial interests in a Global Note may be exchanged for
Certificated Notes upon request but only upon prior written notice given to
the Trustee by or on behalf of DTC in accordance with the Indenture. In all
cases, Certificated Notes delivered in exchange for any Global Note or
beneficial interests therein will be registered in the names, and issued in
any approved denominations, requested by or on behalf of the Depositary (in
accordance with its customary procedures) and will bear the applicable
restrictive legend referred to in "Transfer Restrictions," unless the Company
determines otherwise in compliance with applicable law.
Exchange of Certificated Notes for Book-Entry Notes
Notes issued in certificated form may not be exchanged for beneficial
interests in any Global Note unless the transferor first delivers to the
Trustee a written certificate (in the form provided in the Indenture) to the
effect that such transfer will comply with the appropriate transfer
restrictions applicable to such Notes. See "Transfer Restrictions."
Exchanges Between Regulation S Notes and Rule 144A Notes
Prior to the expiration of the Restricted Period, beneficial interests in
the Regulation S Global Note may be exchanged for beneficial interests in the
Rule 144A Global Note only if such exchange occurs in connection with a
transfer of the Notes pursuant to Rule 144A and the transferor first delivers
to the Trustee a written certificate (in the form provided in the Indenture)
to the effect that the Notes are being transferred to a person who the
transferor reasonably believes to be a qualified institutional buyer within
the meaning of Rule 144A, purchasing for its own account or the account of a
qualified institutional buyer in a transaction meeting the requirements of
Rule 144A and in accordance with all applicable securities laws of the states
of the United States and other jurisdictions.
Beneficial interest in a Rule 144A Global Note may be transferred to a
person who takes delivery in the form of an interest in the Regulation S
Global Note, whether before or after the expiration of the Restricted Period,
only if the transferor first delivers to the Trustee a written certificate (in
the form provided in the Indenture) to the effect that such transfer is being
made in accordance with Rule 903 or 904 of Regulation S or Rule 144 (if
available) and that, if such transfer occurs prior to the expiration of the
Restricted Period, the interest transferred will be held immediately
thereafter through Euroclear or Cedel.
81
Transfers involving an exchange of a beneficial interest in the Regulation S
Global Note for a beneficial interest in a Rule 144A Global Note or vice versa
will be effected in DTC by means of an instruction originated by the Trustee
through the DTC Deposit/Withdraw at Custodian system. Accordingly, in
connection with any such transfer, appropriate adjustments will be made to
reflect a decrease in the principal amount of the Regulation S Global Note and
a corresponding increase in the principal amount of the Rule 144A Global Note
or vice versa, as applicable. Any beneficial interest in one of the Global
Notes that is transferred to a person who takes delivery in the form of an
interest in the other Global Note will, upon transfer, cease to be an interest
in such Global Note and will become an interest in the other Global Note and,
accordingly, will thereafter be subject to all transfer restrictions and other
procedures applicable to beneficial interests in such other Global Note for so
long as it remains such an interest. The policies and practices of DTC may
prohibit transfers of beneficial interests in the Regulation S Global Note
prior to the expiration of the Restricted Period.
Same Day Settlement and Payment
The Indenture will require that payments in respect of the Notes represented
by the Global Notes (including principal, premium, if any, interest and
Liquidated Damages, if any) be made by wire transfer of immediately available
funds to the accounts specified by the Global Note Holder. With respect to
Notes in certificated form, the Company will make all payments of principal,
premium, if any, interest and Liquidated Damages, if any, by wire transfer of
immediately available funds to the accounts specified by the holders thereof
or, if no such account is specified, by mailing a check to each such holder's
registered address. The Notes represented by the Global Notes are expected to
be eligible to trade in the PORTAL market and to trade in the Depositary's
Same-Day Funds Settlement System, and any permitted secondary market trading
activity in such Notes will, therefore, be required by the Depositary to be
settled in immediately available funds. The Company expects that secondary
trading in any certificated Notes will also be settled in immediately
available funds.
Because of time zone differences, the securities account of a Euroclear or
Cedel participant purchasing an interest in a Global Note from a Participant
in DTC will be credited, and any such crediting will be reported to the
relevant Euroclear or Cedel participant, during the securities settlement
processing day (which must be a business day for Euroclear and Cedel)
immediately following the settlement date of DTC. DTC has advised the Company
that cash received in Euroclear or Cedel as a result of sales of interests in
a Global Note by or through a Euroclear or Cedel participant to a Participant
in DTC will be received with value on the settlement date of DTC but will be
available in the relevant Euroclear or Cedel cash account only as of the
business day for Euroclear or Cedel following DTC's settlement date.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Restricted Subsidiary of such specified
Person, including, without limitation, Indebtedness incurred in connection
with, or in contemplation of, such other Person merging with or into or
becoming a Restricted Subsidiary of such specified Person, and (ii)
Indebtedness secured by a Lien encumbering any asset acquired by such
specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled
by" and "under common control with"), as used with respect to any Person,
shall mean the possession, directly or indirectly, of the power to direct or
cause the direction of the management or policies of such Person, whether
through the ownership of voting securities, by agreement or otherwise;
provided that beneficial ownership of 10% or more of the voting securities of
a Person shall be deemed to be control.
82
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets or rights (including, without limitation, by way of a sale and
leaseback) other than sales of inventory in the ordinary course of business
(provided that the sale, lease, conveyance or other disposition of all or
substantially all of the assets of the Company and its Restricted Subsidiaries
taken as a whole will be governed by the provisions of the Indenture described
above under the caption "Redemption at the Option of the Holders--Change of
Control" and/or the provisions described above under the caption "--Merger,
Consolidation or Sale of Assets" and not by the provisions of the Asset Sale
covenant), and (ii) the issue or sale by the Company or any of its Restricted
Subsidiaries of Equity Interests in any of the Company's Restricted
Subsidiaries, in the case of either clause (i) or (ii), whether in a single
transaction or a series of related transactions (a) that have a fair market
value in excess of $1.0 million or (b) for net proceeds in excess of $1.0
million. Notwithstanding the foregoing: (i) a transfer of assets by the
Company to a Wholly Owned Restricted Subsidiary or by a Wholly Owned
Restricted Subsidiary to the Company or to another Wholly Owned Restricted
Subsidiary, (ii) an issuance of Equity Interests by a Wholly Owned Restricted
Subsidiary to the Company or to another Wholly Owned Restricted Subsidiary and
(iii) a Restricted Payment that is permitted by the covenant described above
under the caption "Certain Covenants--Restricted Payments" will not be deemed
to be Asset Sales.
"Attributable Debt" in respect of a sale and leaseback transaction means, at
the time of determination, the present value (discounted at the rate of
interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining term
of the lease included in such sale and leaseback transaction (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended).
"Borrowing Base" means, as of any date, an amount equal to the sum of (a)
85% of the face amount of all accounts receivable owned by the Company and its
Restricted Subsidiaries as of such date that are not more than 90 days past
due, and (b) 65% of the book value of all inventory owned by the Company and
its Restricted Subsidiaries as of such date, calculated on a consolidated
basis and in accordance with GAAP. To the extent that information is not
available as to the amount of accounts receivable or inventory as of a
specific date, the Company may utilize the most recent available information
for purposes of calculating the Borrowing Base.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized on a balance sheet in
accordance with GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of,
the issuing Person. Capital Stock shall include outstanding preferred stock
units, as described in Note 13 to the Consolidated Financial Statements for
ENI Holding Corp. and Subsidiary Companies for the year ended December 31,
1997.
"Cash Equivalents" means (i) United States dollars, (ii) the local currency
of any jurisdiction in which any Subsidiary organized in a jurisdiction other
than the United States or any political subdivision thereof conducts business,
(iii) securities issued or directly and fully guaranteed or insured by the
United States government or any agency or instrumentality thereof having
maturities of not more than six months from the date of acquisition, (iv)
certificates of deposit and eurodollar time deposits with maturities of six
months or less from the date of acquisition, bankers' acceptances with
maturities not exceeding six months and overnight bank deposits, in each case
with any lender party to the Senior Credit Facility or with any domestic
commercial bank having capital and surplus in excess of $500 million and a
Keefe Bank Watch Rating of "B" or better, (v) repurchase obligations with a
term of not more than seven days for underlying securities of the types
described in clauses (iii) and (iv) above entered into with any financial
institution meeting the qualifications specified in clause (iv) above, (vi)
commercial paper having the highest rating obtainable from Moody's Investors
Service, Inc. or
83
Standard & Poor's Corporation and in each case maturing within six months
after the date of acquisition and (vii) money market funds at least 95% of the
assets of which, at the time of investment, are comprised of assets specified
in clauses (i) through (vi).
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all
or substantially all of the assets of the Company and its Subsidiaries taken
as a whole to any "person" (as such term is used in Section 13(d)(3) of the
Exchange Act) other than the Principals or their Related Parties (as defined
below), (ii) the adoption of a plan relating to the liquidation or dissolution
of the Company, (iii) the consummation of any transaction (including, without
limitation, any merger or consolidation) the result of which is that any
"person" (as defined above), other than the Principals and their Related
Parties, becomes the "beneficial owner" (as such term is defined in Rule 13d-3
and Rule 13d-5 under the Exchange Act, except that a person shall be deemed to
have "beneficial ownership" of all securities that such person has the right
to acquire, whether such right is currently exercisable or is exercisable only
upon the occurrence of a subsequent condition), directly or indirectly, of
more than 50% of the Voting Stock of the Company (measured by voting power
rather than number of shares), (iv) the first day on which a majority of the
members of the Board of Directors of the Company are not Continuing Directors
or (v) the Company consolidates with, or merges with or into, any Person or
sells, assigns, conveys, transfers, leases or otherwise disposes of all or
substantially all of its assets to any Person, or any Person consolidates
with, or merges with or into, the Company, in any such event pursuant to a
transaction in which any of the outstanding Voting Stock of the Company is
converted into or exchanged for cash, securities or other property, other than
any such transaction where the Voting Stock of the Company outstanding
immediately prior to such transaction is converted into or exchanged for
Voting Stock (other than Disqualified Stock) of the surviving or transferee
Person constituting a majority of the outstanding shares of such Voting Stock
of such surviving or transferee Person (immediately after giving effect to
such issuance). Notwithstanding the foregoing, consummation of the
Recapitalization Transactions on the Issue Date shall not constitute a Change
of Control.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company and its Subsidiaries taken as a whole. Although
there is a developing body of case law interpreting the phrase "substantially
all," there is no precise established definition of the phrase under
applicable law. Accordingly, the ability of a Holder of Notes to require the
Company to repurchase such Notes as a result of a sale, lease, transfer,
conveyance or other disposition of less than all of the assets of the Company
and its Subsidiaries taken as a whole to another Person or group may be
uncertain.
"Clawback Payment" means any payment required to be made to the former
shareholders of the Company, within the first 18 months after consummation of
the Recapitalization Transactions, out of the proceeds of any Asset Sale
pursuant to the Repurchase Agreement as in effect on the Issue Date, or as
amended in any manner that does not adversely affect the holders of the Notes.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus (i) an amount
equal to any extraordinary loss plus any net loss realized in connection with
an Asset Sale (to the extent such losses were deducted in computing such
Consolidated Net Income), plus (ii) provision for taxes based on income or
profits of such Person and its Subsidiaries for such period, to the extent
that such provision for taxes was included in computing such Consolidated Net
Income, plus (iii) consolidated interest expense of such Person and its
Subsidiaries for such period, whether paid or accrued and whether or not
capitalized (including, without limitation, original issue discount, non-cash
interest payments, the interest component of any deferred payment obligations,
the interest component of all payments associated with Capital Lease
Obligations, imputed interest with respect to Attributable Debt, commissions,
discounts and other fees and charges incurred in respect of letter of credit
or bankers' acceptance financings, and net payments (if any) pursuant to
Hedging Obligations, but excluding amortization of debt issuance costs and
excluding letter of credit fees accounted for as a cost of sales in accordance
with GAAP), to the extent that any such expense was deducted in computing such
Consolidated Net Income, plus (iv) depreciation, amortization
84
(including amortization of goodwill and other intangibles but excluding
amortization of prepaid cash expenses that were paid in a prior period) and
other non-cash expenses (excluding any such non-cash expense to the extent
that it represents an accrual of or reserve for cash expenses in any future
period or amortization of a prepaid cash expense that was paid in a prior
period) of such Person and its Subsidiaries for such period to the extent that
such depreciation, amortization and other non-cash expenses were deducted in
computing such Consolidated Net Income, minus (v) non-cash items increasing
such Consolidated Net Income for such period, in each case, on a consolidated
basis and determined in accordance with GAAP.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Subsidiaries (other
than in the case of the Company and its Subsidiaries, Unrestricted
Subsidiaries) for such period, on a consolidated basis, determined in
accordance with GAAP; provided that (i) the Net Income (but not loss) of any
Person that is not a Subsidiary or that is accounted for by the equity method
of accounting shall be included only to the extent of the amount of dividends
or distributions paid in cash to the referent Person or a Wholly Owned
Subsidiary thereof (other than in the case of the Company and its
Subsidiaries, Unrestricted Subsidiaries), (ii) the Net Income of any
Subsidiary shall be excluded to the extent that the declaration or payment of
dividends or similar distributions by that Subsidiary of that Net Income is
not at the date of determination permitted without any prior governmental
approval (that has not been obtained) or, directly or indirectly, by operation
of the terms of its charter or any agreement, instrument, judgment, decree,
order, statute, rule or governmental regulation applicable to that Subsidiary
or its stockholders, (iii) the Net Income of any Person acquired in a pooling
of interests transaction for any period prior to the date of such acquisition
shall be excluded, (iv) the cumulative effect of a change in accounting
principles shall be excluded, (v) the Consolidated Net Income of the Company
and its Subsidiaries shall include (without duplication) the Net Income of any
Unrestricted Subsidiary if, and only to the extent that, such Net Income has
been distributed in cash to the Company or any of its Restricted Subsidiaries,
and (vi) the Consolidated Net Income of the Company shall exclude any interest
paid or received by the Company or any Subsidiary of the Company with respect
to Notes owned by the Company or such Subsidiary, if any.
"Consolidated Net Worth" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such
Person and its consolidated Subsidiaries as of such date plus (ii) the
respective amounts reported on such Person's balance sheet as of such date
with respect to any series of preferred stock (other than Disqualified Stock)
that by its terms is not entitled to the payment of dividends unless such
dividends may be declared and paid only out of net earnings in respect of the
year of such declaration and payment, but only to the extent of any cash
received by such Person upon issuance of such preferred stock, less (x) all
write-ups (other than write-ups resulting from foreign currency translations
and write-ups of tangible assets of a going concern business made within 12
months after the acquisition of such business) subsequent to the date of the
Indenture in the book value of any asset owned by such Person or a
consolidated Subsidiary of such Person, (y) all investments as of such date in
unconsolidated Subsidiaries and in Persons that are not Subsidiaries (except,
in each case, Permitted Investments), and (z) all unamortized debt discount
and expense and unamortized deferred charges as of such date, all of the
foregoing determined in accordance with GAAP.
"Continuing Directors" means, as of any date of determination, any member of
the Board of Directors of the Company who (i) was a member of such Board of
Directors on the date of the Indenture or (ii) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election.
"Credit Facilities" means, with respect to the Company or any Subsidiary,
one or more debt facilities (including, without limitation, the Senior Credit
Facility) or commercial paper facilities with banks or other institutional
lenders providing for revolving credit loans, term loans, receivables
financing (including through the sale of receivables to such lenders or to
special purpose entities formed to borrow from such lenders against such
receivables) or letters of credit, in each case, as amended, restated,
modified, renewed, refunded, replaced or refinanced in whole or in part from
time to time. Indebtedness under Credit Facilities outstanding on the date on
which the Notes are first issued and authenticated under the Indenture shall
be deemed to have been incurred
85
on such date in reliance on the exception provided by clause (i) of the third
paragraph of the description of the covenant entitled "--Incurrence of
Indebtedness and Issuance of Preferred Stock."
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Disqualified Stock" means any Capital Stock that, 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 redeemable
at the option of the Holder thereof, in whole or in part, on or prior to the
date that is 91 days after the date on which the Notes mature.
"ENI" means ENI Holding Corp., a Delaware corporation.
"ENI Merger" means a merger of the Company into ENI occurring immediately
after consummation of the transactions contemplated by the Repurchase
Agreement, with ENI being the surviving entity.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock prior to any conversion
or exchange thereof).
"Existing Indebtedness" means Indebtedness of the Company and its
Subsidiaries (other than Indebtedness under the Senior Credit Facility) in
existence on the date of the Indenture, until such amounts are repaid.
"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of (i) the consolidated interest expense of such Person
and its Subsidiaries for such period, whether paid or accrued (including,
without limitation, original issue discount, non-cash interest payments, the
interest component of any deferred payment obligations, the interest component
of all payments associated with Capital Lease Obligations, imputed interest
with respect to Attributable Debt, commissions, discounts and other fees and
charges incurred in respect of letter of credit or bankers' acceptance
financings, and net payments (if any) pursuant to Hedging Obligations, but
excluding amortization of debt issuance costs and excluding letter of credit
fees accounted for as a cost of sales in accordance with GAAP) and (ii) the
consolidated interest expense of such Person and its Subsidiaries that was
capitalized during such period, and (iii) any interest expense on Indebtedness
of another Person that is Guaranteed by such Person or one of its Subsidiaries
or secured by a Lien on assets of such Person or one of its Subsidiaries
(whether or not such Guarantee or Lien is called upon) and (iv) the product of
(a) all dividend payments, whether or not in cash, on any series of preferred
stock of such Person or any of its Subsidiaries, other than dividend payments
on Equity Interests payable solely in Equity Interests of the Company, times
(b) a fraction, the numerator of which is one and the denominator of which is
one minus the then current combined federal, state and local statutory tax
rate of such Person, expressed as a decimal, in each case, on a consolidated
basis and in accordance with GAAP. Fixed Charges shall exclude interest paid
to the Company or any Subsidiary of the Company with respect to Notes owned by
the Company or such Restricted Subsidiary, if any.
"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person for such period
to the Fixed Charges of such Person for such period. In the event that the
Company or any of its Restricted Subsidiaries incurs, assumes, Guarantees or
redeems any Indebtedness (other than revolving credit borrowings) or issues
preferred stock subsequent to the commencement of the period for which the
Fixed Charge Coverage Ratio is being calculated but prior to the date on which
the event for which the calculation of the Fixed Charge Coverage Ratio is made
(the "Calculation Date"), then the Fixed Charge Coverage Ratio shall be
calculated giving pro forma effect to such incurrence, assumption, Guarantee
or redemption of Indebtedness, or such issuance or redemption of preferred
stock, as if the same had occurred at the beginning of the applicable four-
quarter reference period. In addition, for purposes of making the computation
referred to above, (i) acquisitions that have been made by the Company or any
of its Restricted Subsidiaries, including through mergers or consolidations
and including any related financing transactions, during the four-quarter
reference period or subsequent to such reference period and on or prior to the
Calculation
86
Date shall be deemed to have occurred on the first day of the four-quarter
reference period and Consolidated Cash Flow for such reference period shall be
calculated without giving effect to clause (iii) of the proviso set forth in
the definition of Consolidated Net Income, and (ii) the Consolidated Cash Flow
attributable to discontinued operations, as determined in accordance with
GAAP, and operations or businesses disposed of prior to the Calculation Date,
shall be excluded, and (iii) the Fixed Charges attributable to discontinued
operations, as determined in accordance with GAAP, and operations or
businesses disposed of prior to the Calculation Date, shall be excluded, but
only to the extent that the obligations giving rise to such Fixed Charges will
not be obligations of the referent Person or any of its Subsidiaries following
the Calculation Date.
"Foreign Subsidiary" means any Restricted Subsidiary not organized or
validly existing under the laws of the United States 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 have been approved by a significant segment of the accounting
profession, which are in effect from time to time.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Guarantors" means each of (i) Tabor Machine Company, Norris Screen and
Manufacturing, Inc., TranService, Inc., Centrifugal Services, Inc., Mining
Controls, Inc., Clinch River Corporation, Roberts & Schaefer Company and Soros
Associates, Inc. and (ii) any other Person that executes a Subsidiary
Guarantee in accordance with the provisions of the Indenture, and their
respective successors and assigns.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced
by bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of
the purchase price of any property or representing any Hedging Obligations,
except any such balance that constitutes an accrued expense or trade payable,
if and to the extent any of the foregoing indebtedness (other than letters of
credit and Hedging Obligations) would appear as a liability upon a balance
sheet of such Person prepared in accordance with GAAP, as well as all
indebtedness of others secured by a Lien on any asset of such Person (whether
or not such indebtedness is assumed by such Person) and, to the extent not
otherwise included, the Guarantee by such Person of any Indebtedness of any
other Person. The amount of any Indebtedness outstanding as of any date shall
be (i) the accreted value thereof, in the case of any Indebtedness that does
not require current payments of interest, and (ii) the principal amount
thereof, together with any interest thereon that is more than 30 days past
due, in the case of any other Indebtedness. Any amount of the Notes owned by
the Company or any of its Restricted Subsidiaries shall not be outstanding
Indebtedness for purposes of the Indenture.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including Guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP.
If the Company or any Restricted Subsidiary of the Company sells or otherwise
disposes of any Equity Interests of any direct or indirect Subsidiary of the
Company such that, after giving effect to any such sale or disposition, such
Person is no longer a Restricted Subsidiary of the Company, the Company shall
be deemed to have made an Investment on the date of any such
87
sale or disposition equal to the fair market value of the Equity Interests of
such Subsidiary not sold or disposed of in an amount determined as provided in
the final paragraph of the covenant described above under the caption "--
Restricted Payments."
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the
nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement
under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction).
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but
not loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b)
the disposition of any securities by such Person or any of its Subsidiaries or
the extinguishment of any Indebtedness of such Person or any of its
Subsidiaries and (ii) any extraordinary or nonrecurring gain (but not loss),
together with any related provision for taxes on such extraordinary or
nonrecurring gain (but not loss).
"Net Proceeds" means the aggregate cash proceeds or Cash Equivalents
received by the Company or any of its Restricted Subsidiaries in respect of
any Asset Sale (including, without limitation, any cash received upon the sale
or other disposition of any non-cash consideration received in any Asset
Sale), net of the direct costs relating to such Asset Sale (including, without
limitation, legal, accounting and investment banking fees, and sales
commissions) and any relocation expenses incurred as a result thereof, taxes
paid or payable as a result thereof (after taking into account any available
tax credits or deductions and any tax sharing arrangements), amounts required
to be applied to the repayment of Indebtedness secured by a Lien on the assets
that were the subject of such Asset Sale, any reserve for adjustment in
respect of the sale price of such asset or assets established in accordance
with GAAP, and net of any required Clawback Payment.
"Non-Recourse Debt" means Indebtedness (i) as to which neither the Company
nor any of its Restricted Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness), (b) is directly or indirectly liable (as a guarantor or
otherwise), or (c) constitutes the lender, and (ii) no default with respect to
which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness (other
than the Senior Credit Facility) of the Company or any of its Restricted
Subsidiaries to declare a default on such other Indebtedness or cause the
payment thereof to be accelerated or payable prior to its stated maturity; and
(iii) as to which the lenders have been notified in writing that they will not
have any recourse to the stock or assets of the Company or any of its
Restricted Subsidiaries.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Permitted Business" means any business (i) conducted by the Company or any
of its Subsidiaries on the date of the Indenture, (ii) primarily comprised of
manufacturing equipment, durable goods and/or components thereof, including
related repairs and services, or (iii) primarily composed of engineering
services, or (iv) any business reasonably related to any of the foregoing.
"Permitted Investments" means (a) any Investment in the Company or in a
Wholly Owned Restricted Subsidiary of the Company that is a Guarantor; (b) any
Investment in Cash Equivalents or purchases by the Company or any of its
Restricted Subsidiaries of any of the Notes; (c) any Investment by the Company
or any Restricted Subsidiary of the Company in a Person, if as a result of
such Investment (i) such Person becomes a Wholly Owned Restricted Subsidiary
of the Company and a Guarantor that is engaged in a Permitted Business, or
(ii) such Person is merged, consolidated or amalgamated with or into, or
transfers or conveys substantially all of its assets to, or is liquidated
into, the Company or a Wholly Owned Restricted Subsidiary of the Company
88
that is a Guarantor and that is engaged in a Permitted Business; (d) any
Restricted Investment made as a result of the receipt of non-cash
consideration from an Asset Sale that was made pursuant to and in compliance
with the covenant described above under the caption "--Repurchase at the
Option of Holders--Asset Sales"; (e) any acquisition of assets solely in
exchange for the issuance of Equity Interests (other than Disqualified Stock)
of the Company; (f) Investments in (i) Restricted Subsidiaries that are not
Guarantors, (ii) Unrestricted Subsidiaries (other than such Investments deemed
to be made by reason of the designation of a Restricted Subsidiary as an
Unrestricted Subsidiary), (iii) Foreign Subsidiaries and (iv) Permitted Joint
Ventures, having an aggregate fair market value (measured on the date each
such Investment was made and without giving effect to subsequent changes in
value), when taken together with all other Investments made pursuant to this
clause (f) that are at the time outstanding, not to exceed $10.0 million; (g)
other Investments in any Person having an aggregate fair market value
(measured on the date each such Investment was made and without giving effect
to subsequent changes in value), when taken together with all other
Investments made pursuant to this clause (g) that are at the time outstanding,
not to exceed $1.5 million and (h) full recourse loans to the Principals, in
an aggregate principal amount outstanding not to exceed $1.6 million, reduced
by principal payments made thereon.
"Permitted Joint Venture" means any joint venture, partnership or other
Person designated by the Board of Directors, and until designation by the
Board of Directors to the contrary, (i) at least 30% of whose Capital Stock
with voting power under ordinary circumstances to elect directors (or Persons
having similar or corresponding powers and responsibilities) is at the time
owned (beneficially or directly) by the Company and/or by one or more
Restricted Subsidiaries of the Company, (ii) all of whose Indebtedness is Non-
Recourse Indebtedness, and (iii) which is engaged in a Permitted Business. Any
such designation or designation to the contrary shall be evidenced to the
Trustee by promptly filing with the Trustee a copy of the resolution giving
effect to such designation and an Officers' Certificate certifying that such
designation complied with the foregoing provisions.
"Permitted Liens" means (i) Liens securing Obligations of the Company or any
Restricted Subsidiary under the Senior Credit Facility and Liens on accounts
receivable and inventory securing Obligations of the Company or any Restricted
Subsidiary under any other Credit Facility; (ii) Liens on the assets of the
Company or any of the Guarantors to secure Hedging Obligations with respect to
Indebtedness under any Credit Facility permitted by the Indenture to be
incurred; (iii) Liens on property of a Person existing at the time such Person
is merged into or consolidated with the Company or any Restricted Subsidiary
of the Company; provided that such Liens were in existence prior to the
contemplation of such merger or consolidation and do not extend to any assets
other than those of the Person merged into or consolidated with the Company;
(iv) Liens on property existing at the time of acquisition thereof by the
Company or any Restricted Subsidiary of the Company, provided that such Liens
were in existence prior to the contemplation of such acquisition; (v) Liens
existing on the date of the Indenture; (vi) Liens to secure any Permitted
Refinancing Indebtedness incurred to refinance any Indebtedness secured by any
Lien referred to in the foregoing clauses (i) through (v), provided that the
assets securing such Permitted Refinancing Indebtedness shall be the same
assets that secured the Indebtedness being refinanced; (vii) Liens to secure
the performance of statutory obligations, surety or appeal bonds, payment or
performance bonds, deposits to secure the performance of bids, trade
contracts, government contracts, leases or licenses or other obligations of a
like nature incurred in the ordinary course of business; (viii) Liens to
secure Indebtedness (including Capital Lease Obligations) permitted by clause
(iv) of the second paragraph of the covenant entitled "Incurrence of
Indebtedness and Issuance of Preferred Stock" covering only the assets
acquired with such Indebtedness; (ix) Liens in favor of the Company or any
Restricted Subsidiary that is a Guarantor; (x) Liens for taxes, assessments or
governmental charges or claims that are not yet delinquent or that are being
contested in good faith by appropriate proceedings promptly instituted and
diligently concluded, provided that any reserve or other appropriate provision
as shall be required in conformity with GAAP shall have been made therefor;
(xi) Liens incurred in the ordinary course of business of the Company or any
Restricted Subsidiary of the Company with respect to obligations that do not
exceed $5.0 million in the aggregate at any one time outstanding and that (a)
are not incurred in connection with the borrowing of money or the obtaining of
advances or credit (other than trade credit in the ordinary course of
business) and (b) do not in the aggregate materially detract from the value of
the property or materially impair the use thereof in the operation of business
by the Company or such Restricted Subsidiary; (xii) Liens on assets of
Unrestricted Subsidiaries that secure Non-Recourse Debt of
89
Unrestricted Subsidiaries; (xiii) carriers', warehousemen's, mechanics',
landlords' materialmen's, repairmen's or other like Liens arising in the
ordinary course of business in respect of obligations not overdue for a period
in excess of 60 days or which are being contested in good faith by appropriate
proceedings promptly instituted and diligently prosecuted; provided that any
reserve or other appropriate provision as shall be required to conform with
GAAP shall have been made therefor; (xiv) easements, rights-of-way, zoning and
similar restrictions and other similar encumbrances or title defects incurred,
or leases or subleases granted to others, in the ordinary course of business,
which do not in any case materially detract from the value of the property
subject thereto or do not interfere with or adversely affect in any material
respect the ordinary conduct of business of the Company and its Restricted
Subsidiaries taken as a whole; (xv) Liens in favor of customs and revenue
authorities to secure payment of customs duties in connection with the
importation of goods in the ordinary course of business and other similar
Liens arising in the ordinary course of business; (xvi) leases or subleases
granted to third Persons not interfering with the ordinary course of business
of the Company or any of its Restricted Subsidiaries; (xvii) Liens (other than
any Lien imposed by ERISA or any rule or regulation promulgated thereunder)
incurred or deposits made in the ordinary course of business in connection
with workers' compensation, unemployment insurance, and other types of social
security; (xviii) deposits, in an aggregate amount not to exceed $2.0 million,
made in the ordinary course of business to secure liability to insurance
carriers; (xix) Liens for purchase money obligations (including refinancings
thereof permitted under the covenant entitled "incurrence of Indebtedness and
Issuance of Preferred Stock"), provided that (A) the Indebtedness secured by
such Lien is permitted under the covenant entitled "Incurrence of Indebtedness
and Issuance of Preferred Stock" and (B) any such Lien encumbers only the
assets so purchased; (xx) any attachment or judgment Lien not constituting an
Event of Default under the section entitled "Events of Default and Remedies";
(xxi) any interest or title of a lessor or sublessor under any operating
lease; (xxii) Liens under licensing agreements for use of the Company's or any
Restricted Subsidiaries' intellectual property entered into in the ordinary
course of business; (xxiii) Liens securing industrial revenue bonds; (xxiv)
Liens in favor of the Trustee under the Indenture; (xxv) Liens securing
reimbursement obligations with respect to letters of credit which encumber
documents and other property relating to such letters of credit and the
products and proceeds thereof; (xxvi) Liens arising out of consignment or
similar arrangements for the sale of goods entered into by the Company or any
Restricted Subsidiary in the ordinary course of business in accordance with
past practices; (xxvii) any interest or title of a lessor in the property
subject to any lease, whether characterized as capitalized or operating, other
than any such interest or title resulting from or arising out of a default by
the Company or any Subsidiary of its obligations under such lease; and
(xxviii) Liens arising from filing UCC financing statements for precautionary
purposes in connection with true leases of personal property that are
otherwise permitted under the applicable indenture and under which the Company
or any Subsidiary is lessee.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any of its Restricted
Subsidiaries; provided that: (i) the principal amount (or accreted value, if
applicable) of such Permitted Refinancing Indebtedness does not exceed the
principal amount of (or accreted value, if applicable), plus accrued interest
on, the Indebtedness so extended, refinanced, renewed, replaced, defeased or
refunded (plus the amount of reasonable expenses incurred in connection
therewith); (ii) such Permitted Refinancing Indebtedness has a final maturity
date later than the final maturity date of, and has a Weighted Average Life to
Maturity equal to or greater than the Weighted Average Life to Maturity of,
the Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; (iii) if the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded is subordinated in right of payment to the
Notes, such Permitted Refinancing Indebtedness has a final maturity date later
than the final maturity date of, and is subordinated in right of payment to,
the Notes on terms at least as favorable to the Holders of Notes as those
contained in the documentation governing the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; and (iv) such
Indebtedness is incurred either by the Company or by the Restricted Subsidiary
who is the obligor on the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization or
government or other agency or political subdivision thereof.
90
"Principals" means Fred C. Schulte, Charles D. Hall and Wayne J. Conner and
SHC Investment Partnership, a Delaware general partnership, for so long as at
least 80% of the economic interests and Voting Stock therein are owned by the
other Principals or their Related Parties.
"Recapitalization Transactions" means (i) the repurchase by the Company and
ENI on the Issue Date of all common stock, preferred stock and common stock
warrants of ENI not owned by the Principals, (ii) the redemption by the
Company on the Issue Date of all outstanding senior subordinated debt of the
Company, together with accrued and unpaid interest to the Issue Date and
prepayment fees, (iii) the ENI Merger, (iv) the amendment of the certificate
of incorporation and by-laws of such surviving corporation to, among other
things, change the name of the surviving corporation to Elgin National
Industries, Inc., and (v) the entry into the Senior Credit Facility by the
Company and the Guarantors.
"Related Party" with respect to any Principal means (A) any controlling
stockholder, 80% (or more) owned Subsidiary, spouse, immediate family member
or executor (in the case of an individual) of such Principal or (B) any trust,
corporation, partnership or other entity, the beneficiaries, stockholders,
partners, owners or Persons beneficially holding an 80% or more controlling
interest of which consist of such Principal and/or such other Persons referred
to in the immediately preceding clause (A).
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Senior Credit Facility" means that certain Senior Credit Facility, to be
dated as of the Issue Date, by and among the Company, certain of the Company's
subsidiaries (as guarantors) and the lenders party thereto, providing for up
to $20.0 million of revolving credit borrowings (as such amount may be
increased as permitted under the provisions in the Indenture described in
clause (i) of the second paragraph of the covenant described under "--
Incurrence of Indebtedness and Issuance of Preferred Stock"), including any
related notes, guarantees, collateral documents, instruments and agreements
executed in connection therewith, and in each case as amended, modified,
extended, renewed, refunded, replaced or refinanced from time to time.
Indebtedness under the Senior Credit Facility outstanding on the date on which
Notes are first issued and authenticated under the Indenture shall be deemed
to have been incurred on such date in reliance on the exception provided by
clause (i) of the second paragraph of the description of the covenant entitled
"--Incurrence of Indebtedness and Issuance of Preferred Stock."
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Act, as such Regulation is in effect on the date hereof.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations
to repay, redeem or repurchase any such interest or principal prior to the
date originally scheduled for the payment thereof.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total
voting power of shares of Capital Stock entitled (without regard to the
occurrence of any contingency) to vote in the election of directors, managers
or trustees thereof is at the time owned or controlled, directly or
indirectly, by such Person or one or more of the other Subsidiaries of that
Person (or a combination thereof) and (ii) any partnership (a) the sole
general partner or the managing general partner of which is such Person or a
Subsidiary of such Person or (b) the only general partners of which are such
Person or of one or more Subsidiaries of such Person (or any combination
thereof).
"Unrestricted Subsidiary" means (i) any Subsidiary (including any newly
acquired or newly formed Subsidiary) that is designated by the Board of
Directors as an Unrestricted Subsidiary pursuant to a Board
91
Resolution; but only to the extent that such Subsidiary: (a) has no
Indebtedness other than Non-Recourse Debt; (b) is not party to any agreement,
contract, arrangement or understanding with the Company or any Restricted
Subsidiary of the Company unless the terms of any such agreement, contract,
arrangement or understanding are no less favorable to the Company or such
Restricted Subsidiary than those that might be obtained at the time from
Persons who are not Affiliates of the Company; (c) is a Person with respect to
which neither the Company nor any of its Restricted Subsidiaries has any
direct or indirect obligation (x) to subscribe for additional Equity Interests
or (y) to maintain or preserve such Person's financial condition or (z) to
cause such Person to achieve any specified levels of operating results; and
(d) has not guaranteed or otherwise directly or indirectly provided credit
support for any Indebtedness of the Company or any of its Restricted
Subsidiaries; and (e) has at least one director on its board of directors that
is not a director or executive officer of the Company or any of its Restricted
Subsidiaries. Any such designation by the Board of Directors shall be
evidenced to the Trustee by filing with the Trustee a certified copy of the
Board Resolution giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the foregoing
conditions and was permitted by the covenant described above under the caption
"Certain Covenants--Restricted Payments." If, at any time, any Unrestricted
Subsidiary would fail to meet the foregoing requirements as an Unrestricted
Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for
purposes of the Indenture and any Indebtedness of such Subsidiary shall be
deemed to be incurred by a Restricted Subsidiary of the Company as of such
date (and, if such Indebtedness is not permitted to be incurred as of such
date under the covenant described under the caption "Certain Covenants--
Incurrence of Indebtedness and Issuance of Preferred Stock," the Company shall
be in default of such covenant). The Board of Directors of the Company may at
any time designate any Unrestricted Subsidiary to be a Restricted Subsidiary;
provided that such designation shall be deemed to include an incurrence of
Indebtedness by a Restricted Subsidiary of the Company of any outstanding
Indebtedness of such Unrestricted Subsidiary and such designation shall only
be permitted if (i) such Indebtedness is permitted under the covenant
described under the caption "Certain Covenants--Incurrence of Indebtedness and
Issuance of Preferred Stock," calculated on a pro forma basis as if such
designation had occurred at the beginning of the four-quarter reference
period, and (ii) no Default or Event of Default would be in existence
following such designation.
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment, by (ii) the then outstanding
principal amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person that is a Wholly Owned Subsidiary of such Person.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person
all of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person.
92
CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES
The following discussion is a summary of the material United States federal
income tax considerations relevant to the acquisition, ownership and
disposition of the Notes acquired in the Offering, but does not purport to be
a complete analysis of all potential tax effects. The discussion is based upon
the Internal Revenue Code of 1986, as amended (the "Code"), Treasury
Regulations, Internal Revenue Service (the "Service") rulings and
pronouncements and judicial decisions all in effect as of the date hereof, all
of which are subject to change at any time, and any such change may be applied
retroactively in a manner that could adversely affect a holder of the Notes.
The discussion does not address all of the federal income tax consequences
that may be relevant to a holder in light of such holder's particular
circumstances or to holders subject to special rules, such as certain
financial institutions, insurance companies, dealers in securities and persons
holding the Notes as part of a "straddle," "hedge" or "conversion
transaction." Moreover, the effect of any applicable state, local or foreign
tax laws is not discussed. The discussion deals only with Notes held as
"capital assets" within the meaning of Section 1221 of the Code.
As used herein, the term "U.S. Holder" means a beneficial owner of a Note
who or which is for U.S. federal income tax purposes (i) a citizen or resident
of the United States, (ii) a corporation or partnership created or organized
in the United States or under the laws of the United States or of any State,
(iii) an estate the income of which is subject to U.S. federal income taxation
regardless of its source, or (iv) a "U.S. Trust." A U.S. Trust is (a) for
taxable years beginning after December 31, 1996, or if the trustee of a trust
elects to apply the following definition to an earlier taxable year ending
after August 20, 1996, any trust if, and only if, (i) a court within the
United States is able to exercise primary supervision over the administration
of the trust and (ii) one or more U.S. persons have the authority to control
all substantial decisions of the trust and (b) for all other taxable years,
any trust whose income is includible in gross income for U.S. federal income
tax purposes regardless of its source. The term U.S. Holder also includes
certain former U.S. citizens whose income and gain on the Notes will be
subject to U.S. taxation. As used herein, the term "Non-U.S. Holder" means a
beneficial owner of a Note that is not a U.S. Holder. Unless otherwise
indicated from the context, "Holder" means either a U.S. Holder or a Non-U.S.
Holder.
The Company has not sought and will not seek any rulings from the Service
with respect to any position of the Company discussed below. There can be no
assurance that the Service will not take a different position from the Company
concerning aspects of the tax consequences of the acquisition, ownership or
disposition of the Notes or that any such position would not be sustained.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH REGARD TO
THE APPLICATION OF THE TAX CONSIDERATIONS DISCUSSED BELOW TO THEIR PARTICULAR
SITUATIONS AS WELL AS THE APPLICATION OF ANY STATE, LOCAL, FOREIGN OR OTHER
TAX LAWS.
LIQUIDATED DAMAGES
The treatment of interest described below with respect to the Notes is based
in part upon the Company's determination that, as of the date of issuance of
the Notes, the possibility that Liquidated Damages would be paid to Holders of
the Notes pursuant to a Registration Default was remote. The Service may take
a different position, which could affect the timing and character of interest
income reported by Holders of the Notes. While not free from doubt, if such
Liquidated Damages are in fact paid, the Company believes the Liquidated
Damages will be taxable to a Holder as ordinary income in accordance with such
Holder's method of accounting.
U.S. HOLDERS
Interest payable on the Notes will be includible in the income of a U.S.
Holder in accordance with such Holder's regular method of accounting. If a
Note is redeemed, sold or otherwise disposed of, a U.S. Holder generally will
recognize gain or loss equal to the difference between the amount realized on
the sale or other
93
disposition of such Note (to the extent such amount does not represent accrued
but unpaid interest) and such Holder's tax basis in the Note. Such gain or
loss generally will be capital gain or loss, provided that the Holder has held
the Note as a capital asset. The recently enacted Taxpayer Relief Act of 1997
made certain changes to the Code with respect to taxation of capital gains of
taxpayers other than corporations that are U.S. Holders. In general, the
maximum tax rate for non-corporate taxpayers on long-term capital gains has
been lowered to 20% from the previous 28% rate for most capital assets
(including the Notes) held for more than 18 months. For taxpayers in the 15%
regular tax bracket, the maximum tax rate on long-term capital gains is now
10%. Capital gain on such assets having a holding period of more than one year
but not more than 18 months will be subject to a maximum tax rate of 28%.
NON-U.S. HOLDERS
On October 14, 1997, final Treasury Regulations (the "1997 Final
Regulations") were issued which affect the U.S. taxation of Non-U.S. Holders
of the Notes. The 1997 Final Regulations generally are effective for payments
made after December 31, 1998, regardless of the issue date of the Notes with
respect to which such payments are made, subject to certain transition rules.
The discussion under this heading and under "--Backup Withholding" below is
for informational purposes only and is not intended to be a complete
discussion of either the statutory and regulatory provisions that apply to
payments made on the Notes before January 1, 1999 or the provisions of the
1997 Final Regulations. Prospective Non-U.S. Holders are urged to consult
their tax advisors with respect to the possible applicability of the various
withholding provisions of the Code and the Treasury Regulations promulgated
thereunder.
Interest on the Notes. Payments of interest on the Notes by the Company or
any paying agent to a beneficial owner of a Note that is a Non-U.S. Holder
will not be subject to U.S. federal withholding tax, provided that, (i) such
holder does not own, actually or constructively, 10 percent or more of the
total combined voting power of all classes of stock of the Company entitled to
vote; (ii) such holder is not, for U.S. federal income tax purposes, a
controlled foreign corporation related, directly or indirectly, to the Company
through stock ownership; (iii) such holder is not a bank receiving interest
described in Section 881(c)(3)(A) of the Code; and (iv) certain certification
requirements (summarized below) are met (the "Portfolio Interest Exception").
If a Non-U.S. Holder of a Note is engaged in a trade or business in the United
States, and if interest on the Note is effectively connected with the conduct
of such trade or business (and, if certain tax treaties apply, is attributable
to a U.S. permanent establishment maintained by the Non-U.S. Holder), the Non-
U.S. Holder, although exempt from U.S. withholding tax, will generally be
subject to regular U.S. income tax on such interest in the same manner as if
it were a U.S. Holder. In addition, if such Non-U.S. Holder is a foreign
corporation, it may be subject to a branch profits tax equal to 30% (or such
lower rate provided by an applicable treaty) of its effectively connected
earnings and profits for the taxable year, subject to certain adjustments. For
purposes of the branch profits tax, interest on a Note will be included in the
earnings and profits of such Non-U.S. Holder if such interest is effectively
connected with the conduct by the Non-U.S. Holder of a trade or business in
the United States.
For payments of interest on the Notes made prior to January 1, 1999,
generally in order to obtain the exemption from withholding tax described in
the first sentence of the preceding paragraph, either (i) the beneficial owner
of a Note must certify on Internal Revenue Service Form W-8 or a substitute
form that is substantially similar to Form W-8, under penalties of perjury, to
the Company or a paying agent, as the case may be, that such owner is a Non-
U.S. Holder and must provide such owner's name and address or (ii) a
securities clearing organization, bank or other financial institution that
holds customers' securities in the ordinary course of its trade or business (a
"Financial Institution") and holds the Note on behalf of the beneficial owner
thereof must certify, under penalties of perjury, to the Company or paying
agent, as the case may be, that such certificate has been received from the
beneficial owner by it or by a Financial Institution between it and the
beneficial owner and must furnish the payor with a copy thereof. A certificate
described in this paragraph is effective only with respect to payments of
interest made to the certifying Non-U.S. Holder after delivery of the
certificate in the calendar year of its delivery and the two immediately
succeeding calendar years. In lieu of the certificate described in this
paragraph, a Non-U.S. Holder engaged in a trade or business in the United
States (with which interest payments on the Note are effectively connected)
must provide to the Company a properly executed Internal Revenue Service Form
4224 in order to claim an exemption from withholding tax.
94
A payment of interest on the Notes made to a foreign beneficial owner after
December 31, 1998 generally will qualify for the Portfolio Interest Exception
or, as the case may be, the exception from withholding for income effectively
connected with the conduct of a trade or business in the United States if, at
the time such payment is made, the withholding agent holds a valid Form W-8
(or an acceptable substitute form) from the beneficial owner and can reliably
associate such payment with such Form W-8. In addition, under certain
circumstances a withholding agent is allowed under the 1997 Final Regulations
to rely on Form W-8 (or an acceptable substitute form) furnished by a
financial institution or other intermediary on behalf of one or more
beneficial owners (or other intermediaries) without having to obtain copies of
the beneficial owner's Form W-8 (or substitute thereof), provided that the
financial institution or intermediary has entered into a withholding agreement
with the Service and thus is a "qualified intermediary," and may not be
required to withhold on payments made to certain other intermediaries if
certain conditions are met.
Disposition of Notes. Under current law, a Non-U.S. Holder of a Note
generally will not be subject to U.S. federal income tax on any gain
recognized on the sale, exchange or other disposition of such Note (other than
gain attributable to accrued interest, which is subject to the rules discussed
above), unless (i) the gain is effectively connected with the conduct of a
trade or business in the United States of the Non-U.S. Holder (and, if certain
tax treaties apply, is attributable to a U.S. permanent establishment
maintained by the Non-U.S. Holder); (ii) the Non-U.S. Holder is an individual
who holds the Note as a capital asset, is present in the United States for 183
days or more in the taxable year of the disposition and either (a) such
individual has a U.S. "tax home" (as defined for U.S. federal income tax
purposes) or (b) the gain is attributable to an office or other fixed place of
business maintained in the United States by such individual; or (iii) the Non-
U.S. Holder is subject to tax pursuant to the Code provisions applicable to
certain U.S. expatriates. In the case of a Non-U.S. Holder that is described
under clause (i) above, its gain will be subject to the U.S. federal income
tax on net income that applies to U.S. persons and, in addition, if such Non-
U.S. Holder is a foreign corporation, it may be subject to the branch profits
tax as described above. An individual Non-U.S. Holder that is described under
clause (ii) above will be subject to a flat 30% tax on gain derived from the
sale, which may be offset by U.S. capital losses (notwithstanding the fact
that he or she is not considered a U.S. resident). Thus, individual Non-U.S.
Holders who have spent 183 days or more in the United States in the taxable
year in which they contemplate a sale of a Note are urged to consult their tax
advisers as to the tax consequences of such sale.
Estate Tax Consequences. A Note held by an individual who is not a U.S.
citizen or resident (as specially defined for United States federal estate tax
purposes) at the time of his death will not be subject to U.S. federal estate
tax as a result of such individual's death, provided that, at the time of such
individual's death, the individual does not own, actually or constructively,
10 percent or more of the total combined voting power of all classes of stock
of the Company entitled to vote and payments with respect to such Note would
not have been effectively connected with the conduct by such individual of a
trade or business in the United States.
BACKUP WITHHOLDING
A Holder may be subject, under certain circumstances, to backup withholding
at a 31% rate with respect to "reportable payments" on the Notes. This
withholding generally applies only if the Holder (i) fails to furnish his or
her social security or other taxpayer identification number ("TIN"); (ii)
furnishes an incorrect TIN; (iii) is notified by the Service that he or she
has failed to report properly payments of interest and dividends and the
Service has notified the Company that the Holder is subject to backup
withholding; or (iv) fails, under certain circumstances, to provide a
certified statement, signed under penalty of perjury, that the TIN provided is
his or her correct number and that he or she is not subject to backup
withholding. Any amount withheld from payment to a holder under the backup
withholding rules is allowable as a credit against such holder's federal
income tax liability, provided that the required information is furnished to
the Service. Certain Holders (including, among others, corporations and
foreign individuals who comply with certain certification requirements) are
not subject to backup withholding. Holders should consult their tax advisors
as to their qualifications for exemption from backup withholding and the
procedure for obtaining such an exemption.
95
INFORMATION REPORTING
The Company is required to furnish certain information to the Service and
will furnish annually to record holders of the Notes information with respect
to interest paid on the Notes during the calendar year.
CONSEQUENCES OF THE EXCHANGE OFFER TO EXCHANGING AND NONEXCHANGING HOLDERS
The exchange of a Note for an Exchange Note pursuant to the Exchange Offer
will not be taxable to an exchanging Holder for Federal income tax purposes.
As a result (i) an exchanging Holder will not recognize any gain or loss on
the exchange; (ii) the holding period for the Exchange Note will include the
holding period for the Note; and (iii) the basis of the Exchange Note will be
the same as the basis for the Note.
The Exchange Offer will result in no Federal income tax consequences to a
nonexchanging Holder of Notes.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account as a result
of market-making activities or other trading activities in connection with the
Exchange Offer must acknowledge that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of such New
Notes. This Prospectus, as it may be amended or supplemented from time to
time, may be used by a broker-dealer in connection with resales of New Notes
received in exchange for Old Notes where such Old Notes were acquired as a
result of market-making activities or other trading activities. The Company
has agreed that for a period of one year after the consummation of the
Exchange Offer, it will make available a prospectus meeting the requirements
of the Securities Act to any broker-dealer for use in connection with any such
resale.
The Company will receive no proceeds in connection with the Exchange Offer.
New Notes received by broker-dealers for their own account pursuant to the
Exchange Offer may be sold from time to time in one or more transactions in
the over-the-counter market, in negotiated transactions, through the writing
of options on the New Notes or a combination of such methods of resale, at
market prices prevailing at the time of resale, at prices related to such
prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such broker-
dealer or the purchasers of any such New Notes. Any broker-dealer that resells
New Notes that were received by it for its own account pursuant to the
Exchange Offer and any broker or dealer that participates in a distribution of
such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of New Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
LEGAL MATTERS
The validity of the Notes offered hereby will be passed upon for the Company
by Mayer, Brown & Platt of Chicago, Illinois.
EXPERTS
The consolidated balance sheet of the Company for the years ended December
31, 1997 and 1996 and the related consolidated statements of income (loss),
changes in stockholders' deficit and cash flows for each of the three years in
the period ended December 31, 1997 included herein have been audited by
Coopers & Lybrand, L.L.P., independent public accountants, as stated in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
96
ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Accountants......................................... F-1
Consolidated Balance Sheets as of December 31, 1997 and December 31, 1996. F-2
Consolidated Statements of Income (Loss) for the years ended December 31,
1997, 1996 and 1995...................................................... F-3
Consolidated Statements of Changes in Stockholder's Deficit for the years
ended December 31, 1997, 1996 and 1995................................... F-4
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995...................................................... F-5
Notes to Consolidated Financial Statements................................ F-6
F-i
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Elgin National Industries, Inc.
We have audited the accompanying consolidated balance sheets of Elgin
National Industries, Inc. (formerly known as ENI Holding Corp.) and Subsidiary
Companies as of December 31, 1997 and 1996 and the related consolidated
statements of income (loss), changes in stockholder's deficit and cash flows
for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Elgin
National Industries, Inc. and Subsidiary Companies as of December 31, 1997 and
1996, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
Coopers & Lybrand
Chicago, Illinois
March 6, 1998
F-1
ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS EXCEPT SHARE DATA)
ASSETS 1997 1996
------ -------- -------
Current assets:
Cash and cash equivalents................................. $ 9,337 $10,991
Accounts receivable, net.................................. 27,355 19,888
Inventories, net.......................................... 13,497 12,901
Prepaid expenses and other assets......................... 1,728 714
Deferred income tax....................................... 1,596 3,446
-------- -------
Total current assets.................................... 53,513 47,940
Property, plant and equipment, net.......................... 13,582 13,741
Other assets................................................ 23,334 21,053
Goodwill and intangibles.................................... 12,450 13,180
-------- -------
Total assets............................................ $102,879 $95,914
======== =======
LIABILITIES AND STOCKHOLDER'S DEFICIT
-------------------------------------
Current liabilities:
Current portion of long-term debt......................... $ 311 $ 3,893
Accounts payable & accrued expenses....................... 29,967 28,859
-------- -------
Total current liabilities............................... 30,278 32,752
Long-term debt less current portion......................... 85,440 22,998
Other liabilities........................................... 1,410 965
Deferred income tax......................................... 4,385 6,091
-------- -------
Total liabilities....................................... 121,513 62,806
-------- -------
Redeemable preferred stock units............................ 10,379 9,651
-------- -------
Redeemable preferred stock.................................. 2,847 25,729
-------- -------
Common stock, (redeemable) (Class A, B and C) (par value
$.01 per share; authorized 57,703 shares; 18,362 issued and
outstanding as of December 31, 1996)
Paid in capital............................................. 1,519
-------
Stockholder's deficit:
Common stock, (Class A) (par value $.01 per share;
authorized 23,678 shares; 6,408 issued and outstanding as
of December 31, 1997)
Retained deficit.......................................... (31,860) (3,791)
-------- -------
Total stockholder's deficit............................. (31,860) (3,791)
-------- -------
Total liabilities and stockholder's deficit............. $102,879 $95,914
======== =======
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
1997 1996 1995
-------- -------- --------
Sales, net........................................ $139,615 $135,651 $126,839
Cost of sales..................................... 102,744 100,119 102,654
-------- -------- --------
Gross profit.................................... 36,871 35,532 24,185
Selling, general and administrative expenses...... 21,840 21,226 19,891
Amortization expense.............................. 3,447 3,085 3,052
-------- -------- --------
Operating income................................ 11,584 11,221 1,242
Other expenses (income)
Interest expense, net........................... 3,471 3,340 4,807
Gain on sale of product line.................... (2,520)
-------- -------- --------
Income (loss) from continuing operations before
income taxes..................................... 8,113 7,881 (1,045)
Provision for income taxes........................ 3,187 3,191 124
-------- -------- --------
Income (loss) from continuing operations.......... 4,926 4,690 (1,169)
Discontinued operations
Income from discontinued operations (less
applicable income taxes of $0, $33, and $200,
respectively).................................. 51 281
Gain on sale of discontinued operations (less
applicable income taxes of $78, $77 and $375,
respectively).................................. 122 123 595
-------- -------- --------
Income (loss) before extraordinary item........... 5,048 4,864 (293)
-------- -------- --------
Extraordinary loss on early extinguishment of
debt, net of tax benefit of $366................. (582)
-------- -------- --------
Net income (loss)................................. $ 4,466 $ 4,864 $ (293)
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS EXCEPT SHARE DATA)
TOTAL
COMMON RETAINED STOCKHOLDER'S
STOCK (DEFICIT) DEFICIT
------ --------- -------------
Balance as of December 31, 1994................. $ $ (3,030) $ (3,030)
Net loss for the year ended December 31, 1995... (293) (293)
Redeemable preferred stock and redeemable
preferred stock unit dividends ($10 per share). (2,666) (2,666)
------ -------- --------
Balance as of December 31, 1995................. (5,989) (5,989)
Net income for the year ended December 31, 1996. 4,864 4,864
Redeemable preferred stock and redeemable
preferred stock unit dividends ($10 per share). (2,666) (2,666)
------ -------- --------
Balance as of December 31, 1996................. (3,791) (3,791)
------ -------- --------
Net income for the year ended December 31, 1997. 4,466 4,466
Redeemable preferred stock and redeemable
preferred stock unit dividends (173,946 shares
at $8.47 per share; 96,629 shares at $10 per
share)......................................... (2,399) (2,399)
Repurchase Class B and C common stock........... (30,136) (30,136)
------ -------- --------
Balance as of December 31, 1997................. $ $(31,860) $(31,860)
====== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
1997 1996 1995
------- ------- -------
Cash flows from operating activities:
Net income (loss)................................. $ 4,466 $ 4,864 $ (293)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization................... 6,217 5,683 6,084
Provision for deferred income taxes............. 1,716 411
Provision for doubtful accounts................. 111 187 126
Provision for inventories....................... 419 751 648
Gain on sale of American Fastener Corporation... (200) (200)
Gain on sale of product line.................... (2,520)
Gain on sale of GC Thorsen, Inc................. (970)
Income from pension overfunding................. (757) (758) (780)
(Gain) loss on the disposal of assets........... (16) (46) 82
Changes in assets and liabilities:
(Increase) decrease in accounts receivable...... (7,578) (813) 13,572
(Increase) decrease in inventories.............. (1,015) (633) 96
(Increase) decrease in prepaid expenses and
other assets................................... (2,393) 180 52
Increase (decrease) in accounts payable and
accrued expenses............................... 1,754 6,575 (16,366)
------- ------- -------
Net cash provided by operating activities..... 1,008 17,506 142
------- ------- -------
Cash flows from investing activities:
Proceeds from the sale of assets.................. 26 214 45
Purchase of property, plant and equipment......... (1,974) (2,153) (1,610)
Purchase Centrifugal Services, Inc................ (2,334)
Purchase assets of Process Equipment Company...... (798)
Proceeds from the sale of American Fastener
Corporation...................................... 3,874
Proceeds from the sale of product line............ 5,682
Proceeds from the sale of GC Thorsen, Inc......... 23,493
------- ------- -------
Net cash (used) provided by investing
activities................................... (1,948) 1,935 24,478
------- ------- -------
Cash flows from financing activities:
Repurchase redeemable preferred stock............. (24,553)
Repurchase common stock........................... (31,655)
Debt issuance costs............................... (3,366)
Borrowings on revolving debt...................... 2,500
Borrowings on long-term debt...................... 85,000
Repayments of long-term debt...................... (26,140) (10,785) (23,391)
Decrease in cash overdrafts....................... (1,394)
------- ------- -------
Net cash used in financing activities......... (714) (10,785) (22,285)
------- ------- -------
Net (decrease) increase in cash..................... (1,654) 8,656 2,335
Cash and cash equivalents at beginning of period.... 10,991 2,335
------- ------- -------
Cash and cash equivalents at end of period.......... $ 9,337 $10,991 $ 2,335
======= ======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF COMPANY
Elgin National Industries, Inc. ("the Company") owns and operates a
diversified group of middle-market industrial manufacturing and engineering
services businesses. The Company is organized into two operating groups.
Through its Manufactured Products Group, the Company manufactures and supplies
custom-designed, highly engineered products used by a wide variety of
customers in the industrial equipment, durable goods, mining, mineral
processing and electric utility industries, primarily within the United
States. Through its Engineering Services Group, the Company provides design,
engineering, procurement and construction management services for mineral
processing and bulk materials handling systems used in the mining, mineral
processing, electric utilities and the rail and marine transportation
industries, both within the United States and internationally. The Company's
distribution operation included American Fastener Corporation and GC Thorsen,
Inc. which were sold in 1996 and 1995, respectively. These operations have
been classified and shown as discontinued operations. (See Note 21.)
2. REPURCHASE OF STOCK OWNED BY OUTSIDE INSTITUTIONAL INVESTORS AND MERGER OF
ENI HOLDING CORP. WITH ELGIN NATIONAL INDUSTRIES, INC.
On November 5, 1997 the Company issued $85,000,000 of 11.0% senior notes,
part of the proceeds of which was used to repurchase or retire (a) all common
stock, preferred stock (all of which was redeemable) and common stock warrants
not owned by Senior Management, representing approximately 68% of the total
equity of the Company for the aggregate purchase price of $56,208,000 and (b)
the senior subordinated indebtedness of its subsidiary, Elgin National
Industries, Inc., by payment of $20,777,000 representing the aggregate amount
of principal outstanding on such senior subordinated debt and all accrued
interest thereon and prepayment fees. The cost of early extinguishment of the
senior subordinated debt includes amortization of the remaining financing cost
of $648,000 and prepayment penalty of $300,000 and is reflected net of taxes
as an extraordinary item on the accompanying consolidated statements of
income. Effective immediately after repurchase and redemption, Elgin National
Industries, Inc. merged into ENI Holding Corp., with ENI Holding Corp. being
the surviving corporation. ENI Holding Corp. then changed the name of the
surviving corporation to Elgin National Industries, Inc.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies of the Company are summarized below:
(a) Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany transactions and balances
have been eliminated in consolidation.
(b) 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 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.
(c) Revenues and Cost Recognition on Contracts
The length of the Company's construction contracts varies, but is typically
longer than one year. However, in accordance with industry practice, contract-
related assets and liabilities are classified as current in the accompanying
consolidated balance sheets. Revenues are recognized on the percentage-of-
completion method measured by comparing costs incurred to date with total
estimated costs on each project. Contract costs include
F-6
ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
direct material and engineering costs along with indirect costs related to
contract performance. Favorable adjustments to these cost estimates are made
and recognized in income over the remaining contract period. Unfavorable
adjustments are recorded as soon as they are apparent. Estimated losses on
uncompleted contracts are provided in full within the period in which such
losses are determinable.
(d) Inventories
Inventories are valued at the lower of cost or market. Cost is determined on
the first-in, first-out (FIFO) and the average cost bases.
(e) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is computed
principally using the straight-line and double declining-balance methods over
the estimated useful lives of the related assets which range from 3 to 30
years. Upon the sale or other disposition of an asset, the cost and related
accumulated depreciation are removed from the accounts, and the gain or loss
is included in income. Maintenance and repair costs are charged to earnings as
incurred. Costs of improvements are capitalized.
(f) Goodwill and Intangibles
The excess of cost over fair value of the net assets acquired is reflected
in the consolidated financial statements as goodwill and is being amortized
using the straight-line method over a period of twenty years.
Intangibles consist primarily of non-compete agreements and are being
amortized using the straight-line method over a period of five years.
(g) Long-Lived Assets
Effective 1996, the Company adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" (SFAS 121), which requires that long-
lived assets and certain identifiable intangibles of an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be fully recoverable. In the event that
facts and circumstances indicate that the cost of any long-lived assets may be
impaired, an evaluation of recoverability would be performed. If an evaluation
is required, the estimated future undiscounted cash flows associated with the
asset would be compared to the asset's carrying amount to determine if a
write-down to market value or discounted cash flow value is required. The
adoption did not have a material effect on the Company's financial position or
results of operation.
(h) Income Taxes
Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at December 31, 1997 and 1996 based on tax rates
applicable to the periods in which the differences are expected to affect
taxable earnings. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized.
(i) Warrants Subject to Put
Warrants were issued to the senior subordinated debt holders and are stated
at their estimated fair value. As discussed in Note 11, these warrants were
subject to a put option at a price equal to the fair value of the underlying
stock. The warrants were repurchased by the Company on November 5, 1997.
F-7
ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(j) Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents, which approximate
fair value.
(k) Accounting Principles to be Adopted
The Company will implement the provisions of Statement of Financial
Accounting Standard No. 130, "Reporting Comprehensive Income" (SFAS No. 130),
which will be effective for interim and annual financial statements issued for
periods beginning after December 15, 1997. SFAS No. 130 establishes standards
for reporting and display of comprehensive income and its components in a full
set of general purpose financial statements. Management believes that adoption
of SFAS No. 130 will not have a material effect on the Company.
The Company will implement the provisions of Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" (SFAS No. 131), which will be effective for periods
beginning after December 15, 1997. SFAS No. 131 specifies revised guidelines
of determining an entity's operating segments and the type and level of
financial information to be disclosed. The Company intends to adopt this
standard in 1998 by making the required note disclosures. The adoption of this
standard is not expected to have a material effect on the Company's financial
position or results of operations.
(l) Reclassification
Certain amounts in the 1996 and 1995 financial statements have been
reclassified to conform to 1997 presentation.
4. ACCOUNTS RECEIVABLE
Accounts receivable consist of:
DECEMBER 31,
---------------
1997 1996
------- -------
(IN THOUSANDS)
Trade accounts........................................... $ 9,183 $ 8,655
------- -------
Construction contracts:
Billed................................................. 14,009 9,551
Costs and estimated earnings in excess of billings on
contracts............................................. 2,830 436
Retainage due upon completion of contracts............. 1,697 1,558
------- -------
18,536 11,545
------- -------
Other receivables........................................ 214 241
------- -------
27,933 20,441
Less allowance for doubtful accounts..................... 578 553
------- -------
$27,355 $19,888
======= =======
Billings exceeded related costs and gross profit recognized on certain
contracts by $9,793,000 and $8,446,000 as of December 31, 1997 and 1996,
respectively. These amounts are classified as current liabilities in the
accompanying consolidated balance sheets.
It is estimated that all of the retainage due upon completion of contracts
at December 31, 1997 will be collected in 1998.
F-8
ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A significant portion of the Company's business activity is concentrated
within the coal mining industry. Accounts receivable at December 31, 1997 and
1996 from companies within the coal mining industry were $7,556,000 and
$9,601,000, respectively.
5. INVENTORIES
Inventories consist of:
DECEMBER 31,
---------------
1997 1996
------- -------
(IN THOUSANDS)
Finished goods........................................... $ 8,073 $ 7,008
Work-in-process.......................................... 1,524 1,260
Raw materials............................................ 5,501 6,029
------- -------
15,098 14,297
Less excess and obsolete reserve......................... 1,601 1,396
------- -------
$13,497 $12,901
======= =======
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, at cost, consist of:
DECEMBER 31,
---------------
1997 1996
------- -------
(IN THOUSANDS)
Land..................................................... $ 1,560 $ 1,560
Buildings and improvements............................... 4,660 4,457
Machinery and equipment.................................. 16,585 15,057
------- -------
22,805 21,074
Less accumulated depreciation............................ 9,223 7,333
------- -------
$13,582 $13,741
======= =======
Depreciation expense, including amounts related to discontinued operations,
for the years ended December 31, 1997, 1996 and 1995 was $2,122,000,
$2,479,000 and $2,737,000, respectively.
7. GOODWILL AND INTANGIBLES
The components of goodwill and intangibles are as follows:
DECEMBER 31,
---------------
1997 1996
------- -------
(IN THOUSANDS)
Goodwill................................................. $ 9,891 $ 9,891
Non-compete agreements................................... 8,934 8,934
Financing and acquisition costs.......................... 3,619 4,505
------- -------
22,444 23,330
Less accumulated amortization............................ 9,994 10,150
------- -------
$12,450 $13,180
======= =======
Amortization expense, including amounts related to discontinued operations
and the early extinguishment of debt, was $4,095,000, $3,204,000 and
$3,347,000, for the years ended December 31, 1997, 1996 and 1995,
respectively.
F-9
ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of:
DECEMBER 31,
---------------
1997 1996
------- -------
(IN THOUSANDS)
Accounts payable--trade.................................. $ 7,754 $ 8,922
Accounts payable--other.................................. 403 319
Billings on contracts in excess of costs and gross profit
recognized.............................................. 9,793 8,446
Accrued payroll and commissions.......................... 3,391 2,752
Other accruals........................................... 8,626 8,420
------- -------
$29,967 $28,859
======= =======
9. INCOME TAXES
The types of temporary differences between the tax bases of assets and
liabilities and their financial reporting amounts that give rise to a
significant portion of the deferred tax liability and deferred tax asset and
their approximate tax effect are as follows:
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------ ------------------
TEMPORARY TAX TEMPORARY TAX
DIFFERENCE EFFECT DIFFERENCE EFFECT
---------- ------- ---------- -------
(IN THOUSANDS) (IN THOUSANDS)
Accounts receivable.............. $ 553 $ 214
Inventories...................... $ 1,634 $ 631 1,998 772
Accrued expenses................. 6,390 2,468 5,765 2,227
Intangibles...................... 5,103 1,971 3,471 1,341
Net operating loss............... 448 448
------- ------- ------- -------
Total deferred tax asset..... 13,127 5,518 11,787 5,002
------- ------- ------- -------
Accounts receivable.............. (1,161) (449)
Prepaid pension.................. (18,791) (7,257) (18,032) (6,965)
Property plant & equipment....... (1,557) (601) (1,766) (682)
------- ------- ------- -------
Total deferred tax liability. (21,509) (8,307) (19,798) (7,647)
------- ------- ------- -------
Net deferred tax liability....... $(8,382) $(2,789) $(8,011) $(2,645)
======= ======= ======= =======
The components of the provision (benefit) for income taxes are:
YEARS ENDED
DECEMBER 31,
------------------
1997 1996 1995
------ ------ ----
(IN THOUSANDS)
Current
Federal............................................. $2,142 $1,167 $166
State............................................... 575 573 283
Foreign............................................. 38
Deferred
Federal............................................. 118 1,473 300
State............................................... 26 88 (50)
------ ------ ----
$2,899 $3,301 $699
====== ====== ====
F-10
ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Allocation of the provision for income taxes in the 1997, 1996 and 1995
Consolidated Statements of Income (Loss) include the following:
YEARS ENDED
DECEMBER 31,
-------------------
1997 1996 1995
------ ------ ----
(IN THOUSANDS)
Continuing operations................................ $3,187 $3,191 $124
Discontinued operations--income from discontinued
operations.......................................... 33 200
Discontinued operations--gain on sale of discontinued
operations.......................................... 78 77 375
Extraordinary loss--tax benefit...................... (366)
------ ------ ----
$2,899 $3,301 $699
====== ====== ====
The Company's effective tax rates of 39%, 40% and 172% for the years ended
December 31, 1997, 1996 and 1995, respectively, differ from the statutory
federal tax rate of 34% as follows:
YEARS ENDED
DECEMBER 31,
-------------------
1997 1996 1995
------ ------ ----
(IN THOUSANDS)
Income before income taxes........................... $7,365 $8,165 $406
====== ====== ====
Statutory federal income tax......................... 2,504 2,776 138
State taxes net of federal benefit................... 455 418 130
Foreign sales corporation income tax................. 88 54 5
Other Items.......................................... (148) 53 426
------ ------ ----
$2,899 $3,301 $699
====== ====== ====
The Company made cash payments for income taxes totalling $3,201,000,
$1,585,000 and $538,000 during the years ended December 31, 1997, 1996 and
1995, respectively.
10. LONG-TERM DEBT
Long-term debt consists of:
INTEREST RATE
AT DECEMBER 31,
DECEMBER 31, YEAR OF ---------------
TYPE OF ISSUE 1997 MATURITY 1997 1996
------------- ------------- -------- ------- -------
(IN THOUSANDS)
Fixed rate:
Senior notes................... 11.00% 2007 $85,000
Senior subordinated notes...... 2001 $19,847*
Notes payable.................. 6.00% 2000 751 1,044
Variable rate:
Revolver loan.................. 2000
Term loan...................... 1998 6,000*
------- -------
Total long-term debt............. 85,751 26,891
Less current maturities.......... 311 3,893
------- -------
Total non-current long-term debt. $85,440 $22,998
======= =======
- --------
*Loans prepaid in year ended December 31, 1997
F-11
ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Under the terms of the Bank Credit Agreement, the revolver loan has a
borrowing capacity of up to $20,000,000 (less any outstanding letters of
credit) based upon a monthly variable borrowing base. At December 31, 1997,
the Company's available borrowing base of $15,988,000 less their outstanding
letters of credit of $3,953,000 resulted in an unused portion of the revolving
credit facility of $12,035,000. The revolver interest was at either (a) the
greater of Federal Funds Rate plus 0.5% or the bank's reference rate, or (b)
LIBOR plus 1.5%. A commitment fee of 3/10% per annum on unused borrowable
money under the revolving loan and a 1.5% per annum fee for outstanding
letters of credit is payable to the bank quarterly.
The Company's accounts receivables and inventory are pledged under the terms
of the Bank Credit Agreement.
The Bank Credit Agreement contains certain restrictive covenants, which,
among other things, limit the amount of indebtedness, limit the payment of
dividends and require the maintenance of certain financial ratios.
Annual principal payments on long-term debt at December 31, 1997 were as
follows (in thousands):
SENIOR NOTES
NOTES PAYABLE TOTAL
------- ------- -------
1998.............................................. $311 $ 311
1999.............................................. 331 331
2000.............................................. 109 109
2001..............................................
2002..............................................
2003 and thereafter............................... $85,000 85,000
------- ---- -------
$85,000 $751 $85,751
======= ==== =======
Under the terms of the senior notes, the Company is required to make only
interest payments until the senior notes maturity in 2007. The senior notes
may be redeemed, in whole or in part, at any time on or after November 1, 2002
at the option of the Company, at the redemption prices as detailed below,
being equal to a percentage of the principal amount of the notes being
redeemed, plus accrued and unpaid interest and specified liquidated damages,
if any, to the date of redemption.
YEAR PERCENTAGE
---- ----------
2002.......................... 105.500%
2003.......................... 103.667%
2004.......................... 101.833%
2005 and thereafter........... 100.000%
In addition, in the event of a Change of Control, each holder of the senior
notes will have the right to require the Company to make an offer to purchase
such holder's notes, in whole or in part, at a price equal to 101% of the
aggregate principal amount thereof, plus accrued and unpaid interest and
liquidated damages, if any, to the date of purchase.
The senior notes contain certain restrictive covenants, which, among other
things, limit the ability of the Company to incur additional indebtedness and
make certain restricted payments, grant liens upon its assets, sell certain
assets, merge or consolidate.
The senior notes are unsecured obligations and are guaranteed by the
Company's material domestic subsidiaries.
F-12
ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company's interest expense for the years ended December 31, 1997, 1996
and 1995 was $4,282,000, $3,662,000 and $4,953,000, respectively. The Company
made cash payments for interest totalling $2,964,000, $3,760,000 and
$5,084,000, respectively, during 1997, 1996 and 1995.
Based upon the Company's ability to obtain financing under similar terms,
the estimated fair value of the Company's long-term debt including the current
portion was $88,938,000 at December 31, 1997 and approximated its carrying
value at December 31, 1996.
11. WARRANTS SUBJECT TO PUT
Effective November 5, 1997, the Company repurchased warrants outstanding
from its senior subordinated debt holders for the purchase of up to 1,678
shares of Class B common stock. The warrants also had a put option which,
under certain events, allowed the holders to exercise the put option at the
fair value of the underlying common stock represented by the warrants. The
estimated fair value of the warrants was $153,000 at December 31, 1996, and
was included in other accruals.
12. REDEEMABLE PREFERRED STOCK UNITS
In exchange for amounts owed to certain officers, the Company granted to
them redeemable preferred stock units redeemable on December 31, 2007 with an
aggregate principal value of $7,274,000 provided, that, the Company's
obligation to make a redemption payment at such time is subject to the
restrictions contained in the Indenture governing the 11% senior notes due
2007.
The Company had accrued dividend equivalent amounts equal to $3,105,000 and
$2,377,000 at December 31, 1997 and 1996, respectively. Principal and accrued
dividend equivalent amounts were $10,379,000 and $9,651,000 at December 31,
1997 and 1996, respectively, and will be paid in tandem with the Company's
redeemable preferred stock dividend and redemption payments.
13. REDEEMABLE PREFERRED STOCK
The Company has 550,000 shares of $1.00 par value redeemable preferred stock
authorized with 19,952 shares issued and outstanding at December 31, 1997. The
redeemable preferred stock is mandatorily redeemable at $100 per share
totalling $1,995,000 for all shares currently outstanding, plus all accrued
and unpaid dividends thereon on December 31, 2007 or upon the occurrence of a
qualified public offering or other sale of the Company.
The redeemable preferred stock has a preferential liquidation value of $100
per share and accrues cumulative preferred dividends at 10% per annum of the
liquidation value. Dividends accrue cumulatively at a rate of 10% per annum.
Redeemable preferred stock has no voting rights.
With the completion of the repurchase (see Note 2.) on November 5, 1997, the
Company repurchased all redeemable preferred stock not owned by Senior
Management.
The Company had accrued dividends of $852,000 and $6,339,000 as of December
31, 1997 and 1996, respectively.
14. COMMON STOCK
In conjunction with the repurchase of all outstanding Class B and Class C
common stock which was owned by outside institutional investors (see Note 2.),
the Company's Articles of Incorporation were amended, eliminating Class B and
Class C common stock. All associated paid in capital was eliminated in the
repurchase and redemption transaction.
F-13
ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Following are the number of shares authorized, issued and outstanding for
each of the Company's classes of capital stock as of December 31, 1997 and
1996.
1996
1997 --------------------
COMMON COMMON COMMON COMMON
CLASS CLASS CLASS CLASS
A A B C
------ ------ ------ ------
Par value.................................... $ 0.01 $ 0.01 $ 0.01 $ 0.01
Shares authorized............................ 23,678 23,678 23,678 10,347
Shares issued and outstanding................ 6,408 6,408 1,608 10,346
Class A common stock has voting rights of one vote per share.
All classes of common stock were formerly subject to a put option (by
agreement of the shareholders) available in certain circumstances whereby the
common stock could be sold back to the Company. This put option was eliminated
in connection with the repurchase of all outstanding stock owned by outside
institutional investors.
15. PENSION AND PROFIT SHARING PLANS
The Company has a noncontributory defined benefit plan which is open to all
eligible, full-time, nonunion employees and is salary related and integrated
with Social Security. The Company's funding policy for the plan is to fund the
minimum annual contribution required by applicable regulations.
Pension plan assets are primarily invested in bonds, corporate notes and
common stock.
The following table sets forth the funded status of the pension plan and
amounts recognized in the Company's consolidated financial statements at
December 31:
1997 1996
------- -------
(IN THOUSANDS)
Actuarial present value of benefit obligations--
accumulated benefit obligations, including vested
benefits, of $14,348 and $14,849 respectively......... $14,729 $15,314
======= =======
Projected benefit obligations for service rendered..... $17,134 $17,276
Plan assets at fair value.............................. 39,858 35,636
------- -------
Plan assets in excess of projected benefit obligations. 22,724 18,360
Unrecognized prior service cost........................ (170) (191)
Unrecognized (gain) loss from experience............... (3,763) (135)
------- -------
Prepaid pension cost included in other assets.......... $18,791 $18,034
======= =======
Net pension cost included the following components:
1997 1996 1995
------ ------ ------
Service cost--benefits earned during the period.. $ 745 $ 767 $ 629
Interest cost on projected benefit obligation.... 1,063 1,024 1,127
Actual return on plan assets..................... (6,174) (2,524) (5,420)
Net amortization and deferral.................... 3,609 (25) 2,884
------ ------ ------
Subtotal net periodic pension income............. 757 758 780
Recognition of GC Thorsen, Inc. settlement and
curtailment..................................... (217)
------ ------ ------
Total net periodic pension income................ $ 757 $ 758 $ 563
====== ====== ======
F-14
ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In determining the actuarial present value of the projected benefit
obligations, the settlement rate used was 6.25% and 6.5% in 1997 and 1996,
respectively. For 1997 and 1996 the rate of increase in the future
compensation level was 5.5%. The expected long-term rate of return on assets
was 8.0% in 1997 and 1996.
In addition, the Company makes contributions to a union-administered pension
plan for certain employees who do not participate in the Company's pension
plan. The Company's aggregate expense for these plans for the years ended
December 31, 1997, 1996 and 1995 was $55,000, $56,000 and $68,000,
respectively.
The Company has a combined 401(k) employee savings and a profit sharing plan
for all eligible, full-time, nonunion employees. Contributions to the plan are
based upon management's discretion. The Company's aggregate expense for these
plans for the years ended December 31, 1997, 1996 and 1995 was $1,325,000,
$1,241,000 and $1,024,000, respectively.
In 1995, the Company established a nonqualified supplemental employee
retirement plan ("SERP") for certain employees whose pension benefits were
limited by the Omnibus Budget Reconciliation Act of 1993, the Employee
Retirement Income Security Act and the Uruguay Round General Agreement on
Tariffs and Trade ("GATT").
The following table sets forth the funded status of the SERP and amounts
recognized in the Company's consolidated financial statements at December 31:
1997 1996
------ -----
(IN
THOUSANDS)
Actuarial present value of accumulated benefit obligation
including vested benefits of $664 and $245 respectively... $ 664 $ 245
====== =====
Projected benefit obligation for service rendered......... $1,069 $ 825
Plan assets at fair value.................................
------ -----
Projected benefit obligation in excess of plan assets..... (1,069) (825)
Unrecognized prior service cost........................... 362 504
Unrecognized net loss from experience..................... 227 47
------ -----
Pension liability included in other liabilities........... $ (480) $(274)
====== =====
Net SERP cost included in the following components:
1997 1996 1995
---- ---- ----
Service cost benefits earned during the period............ $ 64 $ 56 $ 44
Interest cost on projected benefit obligation............. 64 47 44
Net amortization and deferral............................. 151 41 41
---- ---- ----
Net periodic pension cost................................. $279 $144 $129
==== ==== ====
In determining the actuarial present value of the projected benefit
obligation, the settlement rate used was 6.25% and 6.50% in 1997 and 1996,
respectively. For 1997 and 1996, the rate of increase in the future
compensation level was 5.5%.
In addition, the Company established during 1995 a non-qualified profit
sharing plan for certain employees whose 401(k) benefits were also limited by
the Omnibus Budget Reconciliation Act of 1993, the Employee Retirement Income
Security Act and the Uruguay Round General Agreement on Tariffs and Trade
("GATT"). The Company's expense for this plan in 1997, 1996 and 1995 was
$77,000, $61,000 and $50,000, respectively.
F-15
ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
16. LEASES
The Company has entered into noncancellable operating leases, primarily for
office space, vehicles and equipment, that have initial or remaining terms of
more than one year.
Future minimum annual rental expenditures are as follows:
(IN THOUSANDS)
--------------
1998...................... $1,230
1999...................... 1,175
2000...................... 808
2001...................... 567
2002...................... 532
2003 and thereafter....... 1,785
------
$6,097
======
Rental expense for the twelve months ended December 31, 1997, 1996 and 1995
was $1,422,000, $1,609,000 and $1,582,000, respectively.
17. RELATED PARTY TRANSACTIONS
At December 31, 1997 and 1996, the Company had the following outstanding
notes receivables and note payable:
(I) Two notes receivable from a limited partnership owned by an officer
each with principal due in the amount of $1,000,000 due in December, 2007.
Prepayment is required if the value to be paid under the redeemable
preferred stock units at the time of payment is less than the aggregate
amount of the principal and interest outstanding. Interest accrues at 5.35%
and 6.31%, respectively, and is payable at the earlier of prepayment or
maturity. Interest earned for the years ended December 31, 1997, 1996 and
1995 was $55,000, $53,000 and $53,000, respectively.
(II) Notes receivable from certain officers in the total principal amount
of $1,033,000 and $600,000 due in December, 2007. Interest accrues at 6.42%
and 6.31%, respectively, per annum. Interest earned was $55,000, $52,000,
and $52,000, respectively, for the years ended December 31, 1997, 1996 and
1995.
The principal and related accrued interest on terms (I) and (II) are
included in other long-term assets in the accompanying balance sheet.
(III) Subject to an offset agreement, notes receivable and a note payable
in the amount of $1,603,000 with a limited partnership owned by an officer.
These notes accrue interest at 5.35% annually. All notes are due in
December, 2007.
18. CONTINGENCIES
The Company has claims against others, and there are claims by others
against it, in a variety of matters arising out of the conduct of the
Company's business. The ultimate resolution of all such claims would not, in
the opinion of management, have a material effect on the Company's financial
position, cash flows or results of operations.
In connection with the 1993 leveraged buyout of the Company, The Jupiter
Corporation ("Jupiter"), the previous owner, agreed to indemnify the Company
against various claims and ongoing litigation and assumed the defense of such
litigation. The litigation includes a wrongful death product liability claim
against one of the
F-16
ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Company's subsidiaries in connection with an accident at a work site. Although
the Company believes that Jupiter and its insurance carrier are performing on
the indemnity obligations, there can be no assurance that they will continue
to do so or that the Company would successfully recover on the indemnity in
the event of an adverse judgement against the subsidiary or adverse outcomes
in any other proceedings. In any such case, the Company would bear the cost of
defense and any adverse judgment. One or more such adverse judgements could
materially and adversely affect the Company's business, financial condition,
results of operations and debt service capability.
19. ACQUISITIONS
In 1995, the Company purchased all of the outstanding shares of Centrifugal
Services, Inc. for $2,334,000 comprised of $1,512,000 cash and $822,000 of
notes payable.
In addition, during 1995, a subsidiary of the Company purchased selected
assets of Process Equipment Company for $798,000 comprised of a note payable.
In conjunction with the acquisition of the assets, an accounts payable
liability of $52,000 was assumed.
20. SALE OF PRODUCT LINE
On March 1, 1995, the Company sold the assets related to the spoke and
nipple product line of one of its divisions. Assets with a book value of
$3,162,000 were sold resulting in a before income tax gain of $2,520,000. This
product line had sales of $1,064,000 for the two months ended February 28,
1995.
21. DISCONTINUED OPERATIONS
On April 5, 1995, the Company sold all the outstanding shares of its
subsidiary GC Thorsen, Inc. for $23,651,000 resulting in a gain of $595,000,
net of income taxes.
The results of GC Thorsen, Inc. have been reported as discontinued
operations in the Consolidated Statements of Income. Summarized results of GC
Thorsen, Inc. are as follows:
THREE MONTHS ENDED
MARCH 31, 1995
------------------
(IN THOUSANDS)
Sales, net............................................ $10,481
Cost and expenses..................................... 10,228
-------
Income before income taxes............................ 253
Provision for taxes................................... 101
-------
Income from discontinued operations................... 152
Gain on sale of GC Thorsen, Inc. (net of income taxes
of $375)............................................. 595
-------
Total earnings related to discontinued GC Thorsen,
Inc.................................................. $ 747
=======
On December 31, 1996, the Company sold all the outstanding shares of its
subsidiary American Fastener Corporation for $3,982,000 resulting in a gain of
$123,000, net of income tax.
An additional gain of $122,000, net of income tax, was recognized in 1997
upon the final purchase price adjustment.
F-17
ELGIN NATIONAL INDUSTRIES AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The results of American Fastener Corporation have been reported as
discontinued operations in the Consolidated Statements of Income. Summarized
results of American Fastener Corporation are as follows:
YEARS ENDED DECEMBER
31,
--------------------
1997 1996 1995
---- ------- -------
(IN THOUSANDS)
Sales, net........................................... $10,240 $10,639
Cost and expenses.................................... 10,156 10,411
---- ------- -------
Income before income taxes........................... 84 228
Provision for taxes.................................. 33 99
---- ------- -------
Income from discontinued operations.................. 51 129
---- ------- -------
Gain on sale of American Fastener Corporation
(net of income taxes of $78 and $77, respectively).. $122 123
---- ------- -------
Total earnings related to discontinued
American Fastener Corporation................... $122 $ 174 $ 129
==== ======= =======
22. SEGMENT INFORMATION
The Company operates predominantly within the United States, primarily in
two industries, Manufactured Products and Engineering Services. By December
31, 1996, the Company had disposed of its Distribution group which comprised
GC Thorsen, Inc. and American Fastener Corporation. Information about the
Company by industry is presented below:
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
Sales, net, to unaffiliated customers
from continuing operations:
Manufactured Products.................. $ 78,592 $ 78,952 $ 74,859
Engineering Services................... 61,023 56,699 51,980
-------- -------- --------
Total sales, net..................... $139,615 $135,651 $126,839
======== ======== ========
Operating income (loss) from continuing
operations:
Manufactured Products.................. $ 14,942 $ 14,094 $ 13,034
Engineering Services................... 3,031 2,658 (6,879)
Corporate including interest expense... (9,860) (8,871) (7,200)
-------- -------- --------
Income (loss) before taxes........... $ 8,113 $ 7,881 $ (1,045)
======== ======== ========
Depreciation & amortization:
Manufactured Products.................. $ 2,440 $ 2,532 $ 2,726
Engineering Services................... 1,485 1,545 1,536
Corporate and discontinued operations.. 2,292 1,606 1,822
-------- -------- --------
Total depreciation & amortization.... $ 6,217 $ 5,683 $ 6,084
======== ======== ========
Capital expenditures:
Manufactured Products.................. $ 1,754 $ 1,440 $ 1,306
Engineering Services................... 218 199 165
Corporate and discontinued operations.. 2 514 139
-------- -------- --------
Total capital expenditures........... $ 1,974 $ 2,153 $ 1,610
======== ======== ========
F-18
ELGIN NATIONAL INDUSTRIES AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
DECEMBER 31,
----------------
1997 1996
-------- -------
(IN THOUSANDS)
Identifiable assets:
Manufactured Products.................................. $ 34,710 $34,083
Engineering Services................................... 19,525 15,395
Corporate and other.................................... 48,644 46,436
-------- -------
Total assets......................................... $102,879 $95,914
======== =======
Corporate and other identifiable assets primarily include prepaid pension
costs and cash and cash equivalents.
23. SUBSIDIARY GUARANTORS
The Company's payment obligations under the senior notes and revolver loan
are fully and unconditionally guaranteed on a joint and several basis
(collectively, "Subsidiary Guarantees") by Tabor Machine Company, Norris
Screen and Manufacturing, Inc., TranService, Inc., Mining Controls, Inc.,
Clinch River Corporation, Centrifugal Services, Inc., Roberts & Schaefer
Company and Soros Associates, Inc., each a direct, wholly-owned subsidiary of
the Company. The following summarized combined financial data illustrates the
composition of the combined Guarantors.
DECEMBER 31,
---------------
1997 1996
------- -------
(IN THOUSANDS)
Current assets............................................ $28,893 $23,670
Noncurrent assets......................................... 11,691 15,338
------- -------
Total assets.......................................... $40,584 $39,008
======= =======
Current liabilities....................................... $20,241 $19,555
------- -------
Total liabilities..................................... $20,241 $19,555
======= =======
YEARS ENDED DECEMBER 31,
------------------------
1997 1996 1995
-------- ------- -------
(IN THOUSANDS)
Sales, net...................................... $101,014 $97,358 $97,102
Gross profit.................................... 20,334 20,220 12,816
Income (loss) from continuing operations........ 6,837 6,649 (2,645)
Net income (loss)............................... 4,307 4,673 (1,201)
The direct and non-direct, non-guarantor subsidiaries, in terms of assets,
equity, income, and cash flows, on an individual and combined basis are
inconsequential.
Separate financial statements of the Guarantors are not presented because
management has determined that these would not be material to investors.
F-19
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CON-
STITUTE AN OFFER TO SELL, OR SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN
ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEI-
THER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
---------------
TABLE OF CONTENTS
PAGE
----
Summary................................................................... 1
Risk Factors.............................................................. 13
The Recapitalization Transactions......................................... 21
Use of Proceeds........................................................... 22
Capitalization............................................................ 23
Selected Historical and Pro Forma Consolidated Financial Data............. 24
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 26
Business.................................................................. 33
Management................................................................ 48
Principal Stockholders.................................................... 51
Related Transactions...................................................... 52
Description of Senior Credit Facility..................................... 53
Description of Capital Stock.............................................. 54
The Exchange Offer........................................................ 55
Description of New Notes.................................................. 63
Certain United States Federal Tax Consequences............................ 93
Plan of Distribution...................................................... 96
Legal Matters............................................................. 96
Experts................................................................... 96
Index to Consolidated Financial Statements................................ F-1
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
LOGO
ELGIN NATIONAL INDUSTRIES, INC.
$85,000,000
11% SERIES B SENIOR NOTES
DUE 2007
-------------------
PROSPECTUS
APRIL 3, 1998
-------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------