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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 6, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
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STANADYNE AUTOMOTIVE CORP.
DSD INTERNATIONAL CORP.
PRECISION ENGINE PRODUCTS CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 3714 22-2940378
DELAWARE 3714 22-2953338
DELAWARE 3714 13-3500174
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
incorporation or Classification Code Number) Number)
organization)
92 DEERFIELD ROAD
WINDSOR, CT 06095
TELEPHONE: (860) 525-0821
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
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MICHAEL H. BOYER
92 DEERFIELD ROAD
WINDSOR, CT 06095
TELEPHONE: (860) 525-0821
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copy to:
JACK M. FEDER
KIRKLAND & ELLIS
655 FIFTEENTH STREET, N.W., SUITE 1200
WASHINGTON, D.C. 20005
TELEPHONE: (202) 879-5000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS
PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [X]
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
OF SECURITIES TO BE REGISTERED REGISTERED PER UNIT(1) OFFERING PRICE(1) FEE
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Series B 10 1/4% Senior Subordinated $1,000 principal
Notes due 2007........................ $100,000,000 amount $100,000,000 $29,500
Guarantees of Series B 10 1/4% Senior
Subordinated Notes due 2007........... $100,000,000 (2) (2) None
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(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(f).
(2) No further fee is payable pursuant to Rule 457(n).
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED FEBRUARY 6, 1998
PROSPECTUS
STANADYNE AUTOMOTIVE CORP.
[STANADYNE AUTOMOTIVE LOGO]
OFFER TO EXCHANGE ITS SERIES B 10 1/4% SENIOR SUBORDINATED NOTES DUE 2007
FOR ANY AND ALL OF ITS OUTSTANDING 10 1/4% SENIOR SUBORDINATED NOTES DUE 2007
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON ,
1998, UNLESS EXTENDED.
Stanadyne Automotive Corp., a Delaware corporation ("Stanadyne" or the
"Company"), hereby offers (the "Exchange Offer"), upon the terms and conditions
set forth in this Prospectus (the "Prospectus") and the accompanying Letter of
Transmittal (the "Letter of Transmittal"), to exchange $1,000 principal amount
of its Series B 10 1/4% Senior Subordinated Notes due 2007 (the "Exchange
Notes"), which will have been registered under the Securities Act of 1933, as
amended (the "Securities Act") pursuant to a Registration Statement of which
this prospectus is a part, for each $1,000 principal amount of its outstanding
10 1/4% Senior Subordinated Notes due 2007 (the "Notes"), of which $100,000,000
principal amount is outstanding. The form and terms of the Exchange Notes are
the same as the form and term of the Notes (which they replace) except that the
Exchange Notes will bear a Series B designation and will have been registered
under the Securities Act and, therefore, will not bear legends restricting their
transfer and will not contain certain provisions relating to an increase in the
interest rate which were included in the terms of the Notes in certain
circumstances relating to the timing of the Exchange Offer. The Exchange Notes
will evidence the same debt as the Notes (which they replace) and will be issued
under and be entitled to the benefits of the Indenture (the "Indenture") dated
December 11, 1997 between Stanadyne (as Issuer), DSD International Corp. and
Precision Engine Products Corp. (as Guarantors), and United States Trust Company
of New York (the "Trustee") governing the Notes. See "The Exchange Offer" and
"Description of Exchange Notes."
Interest on the Exchange Notes will be payable semi-annually in arrears on June
15 and December 15 of each year, commencing on June 15, 1998. The Exchange Notes
will mature on December 15, 2007. The Exchange Notes will be redeemable at the
option of the Company, in whole or in part, on or after December 15, 2002 at the
redemption prices set forth herein, plus accrued and unpaid interest, and
Liquidated Damages (as defined herein), if any, thereon to the applicable date
of redemption. In addition, at any time, prior to December 15, 2000, the Company
may, at its option, on any one or more occasions, redeem up to 35% of the
aggregate principal amount of the Exchange Notes originally issued at a
redemption price equal to 110.250% of the aggregate principal amount thereof,
plus accrued and unpaid interest, and Liquidated Damages, if any, thereon to the
redemption date, with the Net Cash Proceeds (as defined herein) received by the
Company of one or more Equity Offerings (as defined herein); provided that, in
each case, at least 65% of the aggregate principal amount of the Exchange Notes
will remain outstanding immediately following each such redemption. Upon the
occurrence of a Change of Control (as defined herein), each holder of the
Exchange Notes will have the right to require the Company to repurchase such
holder's Exchange Notes at 101% of the aggregate principal amount thereof, plus
accrued and unpaid interest, and Liquidated Damages, if any, to the date of
repurchase. See "Description of Exchange Notes -- Optional Redemption."
The Exchange Notes will be senior subordinated, unsecured, general obligations
of the Company, will rank subordinate in right of payment to all existing and
future Senior Indebtedness (as defined herein) of the Company and will rank
senior or pari passu in right of payment to all existing and future subordinated
indebtedness of the Company. On the Issue Date (as defined herein), the Exchange
Notes will be guaranteed pursuant to the Guarantee (as defined herein) and any
future subsidiary guarantees (the "Subsidiary Guarantees") on a senior
subordinated basis by each of the Company's domestic subsidiaries (each a
"Guarantor" and collectively the "Guarantors"). Each Subsidiary Guarantee will
be a general unsecured obligation of the Guarantor subordinated in rights of
payment to all Senior Indebtedness of such Guarantor. As of September 30, 1997,
on a pro forma basis after giving effect to the Acquisition Transactions (as
defined herein), the Company and its subsidiaries would have had approximately
$62.2 million of Senior Indebtedness and Guarantor Senior Indebtedness (as
defined herein), including approximately $1.8 million of indebtedness of Foreign
Subsidiaries, all of which would effectively rank senior in right of payment to
the Exchange Notes and the Subsidiary Guarantees. The Indenture permits the
Company to incur additional indebtedness, including Senior Indebtedness subject
to certain limitations. See "Description of Exchange Notes -- Certain
Covenants."
Stanadyne will accept for exchange any and all Notes validly tendered and not
withdrawn prior to 5:00 p.m., New York City time, on , 1998, unless
extended by Stanadyne in its sole discretion (the "Expiration Date").
Notwithstanding the foregoing, Stanadyne will not extend the Expiration Date
beyond , 1998. Tenders of Notes may be withdrawn at any time prior to
5:00 p.m. on the Expiration Date. The Exchange Offer is subject to certain
customary conditions. The Notes were sold by Stanadyne on December 11, 1997 to
the Initial Purchaser (as defined herein) in a transaction not registered under
the Securities Act in reliance upon an exemption under the Securities Act. The
Initial Purchaser subsequently placed the Notes with qualified institutional
buyers in reliance upon Rule 144A under the Securities Act and with a limited
number of institutional accredited investors that agreed to comply with certain
transfer restrictions and other conditions. Accordingly, the Notes may not be
reoffered, resold or otherwise transferred in the United States unless
registered under the Securities Act or unless an applicable exemption from the
registration requirements of the Securities Act is available. The Exchange Notes
are being offered hereunder in order to satisfy the obligations of Stanadyne
under the Registration Rights Agreement entered into by Stanadyne in connection
with the offering of the Notes. See "The Exchange Offer."
Based on no-action letters issued by the staff of the Securities and Exchange
Commission (the "Commission") to third parties, Stanadyne believes the Exchange
Notes issued pursuant to the Exchange Offer may be offered for resale, resold
and otherwise transferred by any holder thereof (other than any such holder that
is an "affiliate" of Stanadyne within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such Exchange Notes are acquired
in the ordinary course of such holder's business and such holder has no
arrangement or understanding with any person to participate in the distribution
of such Exchange Notes. See "The Exchange Offer -- Purpose and Effect of the
Exchange Offer" and "The Exchange Offer -- Resale of the Exchange Notes." Each
broker-dealer (a "Participating Broker-Dealer") that receives Exchange Notes for
its own account pursuant to the Exchange Offer must acknowledge that it will
deliver a prospectus in connection with any resale of such Exchange Notes. The
Letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a participating Broker-Dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. This Prospectus, as
it may be amended or supplemented from time to time, may be used by a
Participating Broker-Dealer in connection with resales of Exchange Notes
received in exchange for Notes where such Notes were acquired by such
Participating Broker-Dealer as a result of market-making activities or other
trading activities. Stanadyne has agreed that, for a period of 180 days after
the Expiration Date, it will make this Prospectus available to any participating
Broker-Dealer for use in connection with any such resale. See "Plan of
Distribution."
Holders of Notes not tendered and accepted in the Exchange Offer will continue
to hold such Notes and will be entitled to all the rights and benefits and will
be subject to the limitations applicable thereto under the Indenture and with
respect to transfer under the Securities Act. Stanadyne will pay all the
expenses incurred by it incident to the Exchange Offer. See "The Exchange
Offer."
SEE "RISK FACTORS" ON PAGE [15] FOR A DESCRIPTION OF CERTAIN RISKS TO BE
CONSIDERED BY HOLDERS WHO TENDER THEIR NOTES IN THE EXCHANGE OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE 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 , 1998
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There has not previously been any public market for the Notes or the
Exchange Notes. Stanadyne does not intend to list the Exchange Notes on any
securities exchange or to seek approval for quotation through any automated
quotation system. There can be no assurance that an active market for the
Exchange Notes will develop, which could adversely affect the value of the
Exchange Notes. See "Risk Factors -- Lack of a Public Market." Moreover, to the
extent that Notes are tendered and accepted in the Exchange Offer, the trading
market for untendered and tendered but unaccepted Notes could be adversely
affected.
The Exchange Notes will be available initially only in book-entry form.
Stanadyne expects that the Exchange Notes issued pursuant to this Exchange Offer
will be issued in the form of a Global Note (as defined herein), which will be
deposited with the Trustee (herein also referred to as the "Exchange Agent"), on
behalf of, The Depository Trust Company ("DTC") and registered in its name or in
the name of Cede & Co., its nominee. Beneficial interests in the Global Note
representing the Exchange Notes will be shown on, and transfers thereof to
qualified institutional buyers will be effected through, records maintained by
the Exchange Agent and its participants. After the initial issuance of the
Global Note, Exchange Notes in certificated form will be issued in exchange for
the Global Note only on the terms set forth in the Indenture. See "Description
of Exchange Notes -- Book-Entry; Delivery and Form."
AVAILABLE INFORMATION
Stanadyne has filed with the Commission a Registration Statement on Form
S-4 (the "Exchange Offer Registration Statement," which term shall encompass all
amendments, exhibits, annexes and schedules thereto) pursuant to the Securities
Act, and the rules and regulations promulgated thereunder, covering the Exchange
Notes being offered hereby. This Prospectus does not contain all the information
set forth in the Exchange Offer Registration Statement. For further information
with respect to Stanadyne and the Exchange Offer, reference is made to the
Exchange Offer Registration Statement. Statements made in this Prospectus as to
the contents of any contract, agreement or other document referred to are not
necessarily complete. With respect to each such contract, agreement or other
document filed as an exhibit to the Exchange Offer Registration Statement,
reference is made to the exhibit for a more complete description of the document
or matter involved, and each such statement shall be deemed qualified in its
entirety by such reference. The Exchange Offer Registration Statement, including
the exhibits thereto, can be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at the Regional Offices of the Commission at 75 Park
Place, New York, New York 10007 and at Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials
can be obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. Additionally, the
Commission maintains a web site (http://www.sec.gov) that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission.
As a result of the filing of the Exchange Offer Registration Statement with
the Commission, Stanadyne will become subject to the informational requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith is required to file periodic reports and other information
with the Commission. The obligation of Stanadyne to file periodic reports and
other information with the Commission will be suspended if the Exchange Notes
are held of record by fewer than 300 holders as of the beginning of any fiscal
year of Stanadyne other than the fiscal year in which the Exchange Offer
Registration Statement is declared effective. Stanadyne will nevertheless be
required to continue to file reports with the Commission if the Exchange Notes
are listed on a national securities exchange. In the event Stanadyne ceases to
be subject to the informational requirements of the Exchange Act, Stanadyne is
required under the Indenture to continue to file with the Commission the annual
and quarterly reports, information, documents, or other reports, including,
without limitation, reports on Forms 10-K, 10-Q and 8-K, which would be required
pursuant to the informational requirements of the Exchange Act. Under the
Indenture, Stanadyne will also furnish to the holders of both Notes and Exchange
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 (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. Stanadyne shall file with the
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Trustee annual, quarterly and other reports within fifteen days after it files
such reports with the Commission. Annual reports delivered to the Trustee and
the holders of Exchange Notes will contain financial information that has been
examined and reported upon, with an opinion expressed by an independent public
or certified public accountant. Stanadyne will also furnish such other reports
as may be required by law.
FORWARD LOOKING STATEMENTS
THE PROSPECTUS CONTAINS CERTAIN FORWARD LOOKING STATEMENTS WITHIN THE
MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 WITH RESPECT TO
THE FINANCIAL CONDITION, RESULTS OF OPERATIONS AND BUSINESS OF THE COMPANY,
INCLUDING STATEMENTS UNDER THE CAPTIONS "SUMMARY," "UNAUDITED PRO FORMA
FINANCIAL INFORMATION," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS." ALL OF THESE FORWARD
LOOKING STATEMENTS ARE BASED ON ESTIMATES AND ASSUMPTIONS MADE BY THE MANAGEMENT
OF THE COMPANY WHICH, ALTHOUGH BELIEVED TO BE REASONABLE, ARE INHERENTLY
UNCERTAIN. THEREFORE, UNDUE RELIANCE SHOULD NOT BE PLACED UPON SUCH ESTIMATES
AND STATEMENTS. NO ASSURANCE CAN BE GIVEN THAT ANY OF SUCH ESTIMATES WILL BE
REALIZED AND IT IS LIKELY THAT ACTUAL RESULTS WILL DIFFER MATERIALLY FROM THOSE
CONTEMPLATED BY SUCH FORWARD LOOKING STATEMENTS. FACTORS THAT MAY CAUSE SUCH
DIFFERENCES INCLUDE: (1) INCREASED COMPETITION; (2) INCREASED COSTS; (3) LOSS OR
RETIREMENT OF KEY MEMBERS OF MANAGEMENT; (4) INCREASES IN THE COMPANY'S COST OF
BORROWING OR INABILITY OR UNAVAILABILITY OF ADDITIONAL DEBT OR EQUITY CAPITAL;
(5) ADVERSE STATE OR FEDERAL LEGISLATION OR REGULATION OR ADVERSE DETERMINATIONS
IN PENDING LITIGATION; AND (6) CHANGES IN GENERAL ECONOMIC CONDITIONS AND/OR IN
THE MARKETS IN WHICH THE COMPANY MAY, FROM TIME TO TIME, COMPETE. MANY OF SUCH
FACTORS ARE BEYOND THE CONTROL OF THE COMPANY AND ITS MANAGEMENT. FOR FURTHER
INFORMATION OR OTHER FACTORS WHICH COULD AFFECT THE FINANCIAL RESULTS OF THE
COMPANY AND SUCH FORWARD LOOKING STATEMENTS, SEE "RISK FACTORS."
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SUMMARY
The following is a summary of certain information contained herein and is
qualified in its entirety by, and should be read in conjunction with, the more
detailed information and consolidated financial statements, including the notes
thereto, contained elsewhere in this Prospectus and incorporated herein by
reference. Unless the context indicates otherwise, all references to the
"Company" or "Stanadyne" shall mean Stanadyne Automotive Corp. and its
consolidated subsidiaries after giving effect to the Acquisition Transactions.
THE COMPANY
The Company is a leading designer and manufacturer of highly engineered,
precision manufactured engine components, including fuel injection equipment for
diesel engines and hydraulic lash compensating devices (commonly known as
"hydraulic valve lifters") for gasoline engines. The Company's products serve to
improve engine performance by incorporating technologies that are key to
achieving emissions compliance, noise reduction and fuel economy. The Company
sells engine components to engine original equipment manufacturers ("OEMs") for
use in a variety of applications, including automobiles, light duty trucks,
agricultural and construction vehicles and equipment, industrial products and
marine equipment. The Company also sells replacement units and parts through its
extensive aftermarket distribution network. Due in part to its proven
technological capabilities and its reputation for innovative, high quality
products, the Company has become the sole source supplier of certain engine
components on a number of engine platforms characterized by long-term, high
volume production runs. The Company conducts its business through two principal
operating groups: the Diesel Group, which accounted for 73% of the Company's
1996 net sales, and Precision Engine, which accounted for 27% of the Company's
1996 net sales. For the latest twelve month period ended September 30, 1997, the
Company had pro forma net sales and EBITDA (as defined herein) of $267.0 and
$31.9 million, respectively.
Together with its predecessors, the Company has long-standing relationships
with important OEMs including Chrysler Corporation (50+ years), Ford Motor
Company (50+ years), Deere & Company (40 years), Caterpillar Inc. (27 years),
General Motors Corporation (20 years), Cummins Engine Co. Inc. (16 years) and
Perkins Engines (10 years). The Company's engineering staff works closely with
its OEM customers, generally for periods of two to five years prior to
introduction of the Company's products on an engine platform, to develop or
adapt application specific engine components to satisfy its customers' engine
requirements. The Company typically supplies these components on a sole source
basis pursuant to long-term arrangements with OEMs. Due to the expense and long
lead times necessary to develop application specific engine components, it is
rare for a competitor to replace an incumbent component supplier such as
Stanadyne during the production term of an engine platform. Accordingly, the
Company generally continues supplying components to an OEM throughout the
manufacturing term of a specific engine platform, which typically ranges from
7-15 years for automobile and light duty truck engines and 15-20 years for
agricultural and industrial equipment engines. As evidence of its commitment to
quality, the Company is in the process of registering for QS9000 certification
(which is expected to be completed during the first quarter of 1998), and its
operating groups have received numerous OEM quality awards, including Ford's
"Q-1" award and Chrysler's "Pentastar Award." OEM sales comprised 68% of the
Company's 1996 net sales, with the remaining 32% constituting replacement sales.
The Diesel Group is the largest independent (non-captive) manufacturer of
diesel fuel injection equipment in the United States, and one of only five
independent worldwide manufacturers selling to the geographic areas in which the
Company competes. The Diesel Group produces fuel injection equipment for diesel
engines of up to 250 horsepower, the engine range comprising approximately 90%
of all diesel engines produced worldwide. Fuel pumps and injectors, the Diesel
Group's primary products, are the most highly engineered, precision manufactured
components on a diesel engine and comprise the core components of a diesel
engine's fuel system. Unlike gasoline engines, which ignite pre-mixed air and
fuel with a timed spark, diesel engines rely on high pressure fuel injection
pumps to control combustion timing, engine power and speed. Because fuel system
components are so elemental to the proper functioning and optimum performance of
a diesel engine, they are essentially custom engineered for a specific engine
platform. The Diesel Group also
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manufactures diesel fuel filters, fuel heaters and water separators and
distributes diesel fuel conditioners and stabilizers and diesel engine
diagnostic equipment.
Diesel engines have been an important power source for nearly 100 years,
with the worldwide market for diesel engines experiencing consistent growth in
recent years. According to MotoData, global diesel engine production has grown
from 13.3 million engines manufactured in 1991 to 16.2 million in 1995, and is
expected to grow to 18.6 million engines by the year 2000. Growth in diesel
engine production has been fueled by the competitive advantages associated with
diesel, which typically include substantially greater fuel efficiency, improved
engine durability and favorable emissions compliance when compared to similar
gasoline engines. These advantages associated with diesel engines are expected
to become more prominent as world-wide environmental regulations continue to
become more stringent. The projected growth in the number of diesel engines
produced is due in part to continued penetration of diesel engines in passenger
cars and light trucks worldwide.
Precision Engine is a leading independent domestic manufacturer of
hydraulic valve lifters, including aluminum roller rocker arm assemblies and
lash adjusters, for gasoline engines. These products convert the rotary motion
of a camshaft into a reciprocating motion and allow for the adjustment of lash
(clearance) as valves are opened and closed in the cylinder head of an engine.
Hydraulic valve lifters began to replace mechanical valve lifters in domestic
on-highway vehicles in the 1950s since hydraulic valve lifters are more
efficient in reducing valve train noise, minimizing maintenance requirements and
assisting in improved fuel economy and decreased emissions. The Company believes
that Precision Engine's share of the North American market for hydraulic valve
lifters for the gasoline powered, automobile and light duty truck market is
approximately 20%. Precision Engine has developed an especially important
relationship with Chrysler, to which it currently supplies approximately 50% of
Chrysler's overall domestic hydraulic valve lifter requirements. Specifically,
Precision Engine is the sole source supplier of roller rocker arm assemblies for
Chrysler's 3.5/3.2L and 2.0L engines pursuant to long-term exclusive
arrangements extending for the life of these engines. These engines appear in
Chrysler's "LH" Series (Chrysler LHS and Concorde, Dodge Intrepid and Eagle
Vision) and the Dodge and Plymouth Neon vehicles. Precision Engine's net sales
have grown from $30.2 million in 1991 to $73.2 million in 1996, representing a
compound annual growth rate of 19.4%.
The Company believes that the worldwide market for valve lifters (which
includes both hydraulic as well as mechanical valve lifters) is in excess of $1
billion, with hydraulic valve lifters representing 79% of total production and
mechanical valve lifters representing the remaining 21%. North America
represents approximately 36% of worldwide production (consisting of
substantially all hydraulic valve lifters). The Company believes that several
industry trends will benefit hydraulic valve lifter manufacturers such as
Stanadyne. First, relative stability in overall fuel prices has created a
renewed interest in six and eight cylinder engines, which correspondingly
require greater numbers of valve lifters. In addition, engines with four or more
valves per cylinder, requiring more valve lifters than typical two valve per
cylinder engines, have grown in popularity in recent years due to their reduced
emissions and greater fuel economy. Finally, in order to meet increasingly
stringent emissions regulations and fuel efficiency standards, European engine
manufacturers are continuing to convert from mechanical to hydraulic valve
lifters, presenting Precision Engine with significant opportunities to develop
supply relationships with such manufacturers.
BUSINESS STRATEGY
The Company's strategic objective is to continue to increase its sales and
improve its profitability by capitalizing on its position as a leading
manufacturer of highly engineered, precision manufactured engine components. The
Company intends to capitalize on favorable industry trends by pursuing numerous
opportunities that it believes are available to continue to design and develop
application specific engine components for OEMs worldwide. To execute this
strategy, the Company benefits from a skilled management team with an average of
approximately 25 years of industry experience. Specifically, the Company's
business strategy centers upon the following:
Expand and Grow OEM Relationships. The Company believes that engine OEMs
will continue to rely on independent specialized engine component suppliers such
as Stanadyne in response to technological
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challenges presented by stricter worldwide environmental regulations, as well as
competitive pressures to improve quality and reduce production costs. The
Company has established and intends to continue to develop relationships with
OEM customers worldwide in order to work closely with such customers during the
early stages of engine development to design and manufacture
application-specific products. The Company is currently conducting a number of
joint development and application programs in conjunction with certain engine
manufacturers in an attempt to create new long-term supply relationships with
such OEMs. In addition, the Company intends to further develop its strong
relationships with OEM customers by continuing to expand its product offerings
through internal product development and through strategic acquisitions.
Capitalize on New Platform Wins. As testimony to its strong relationships
with its OEM customer base, the Company has recently been awarded firm orders to
produce engine components on several new or existing engine platforms with
expected significant volume beginning in 1998. For example, the Diesel Group was
recently awarded a long-term contract to be the sole supplier of rotary diesel
fuel injection pumps for Deere's 320-350 series engines, a supply arrangement
which had previously been shared (approximately 50-50) with another diesel
engine component supplier. Through the development of its innovative RSN
injector, the Diesel Group was recently named the sole supplier of RSN injectors
for Ford UK's 2.5L engine as well as a supplier of RSN injectors for two
Volkswagen direct injection engine platforms. The Company's Fuel Manager
filtration system has been selected by Ford as the sole source filtration system
for the next generation Transit Van, with production commencing in 2000.
Moreover, Precision Engine was recently awarded a long-term contract renewal as
the sole supplier of roller rocker arms for Chrysler's 3.5/3.2L and 2.0L
engines. Finally, Precision Engine has recently been selected as the sole
supplier of roller rocker arm assemblies for the 1.6L engine to be jointly
produced by BMW and Chrysler in Brazil starting in 2000. The Company believes
that such new platform wins (or renewals) will enhance its future sales and
profitability.
Capitalize on Proven Technological Capabilities. The Company believes that
its proven technological capabilities and reputation for innovative engine
component solutions are a distinct competitive advantage. The Company believes
that increasingly stringent worldwide environmental regulations create
opportunities for the Company to sell technologically advanced engine components
to OEMs trying to produce engines that satisfy emission standards and which have
improved fuel economy and engine performance. The Company has attained a
reputation for unique technical solutions through continued investment in
research and development programs, which have led to several patented products,
including the DS Electronic Pump (a state-of-the-art, electronically controlled
distributor pump), the RSN injector (an innovative injector designed to improve
emissions and reduce engine noise) and the Fuel Manager (a fuel filter system
featuring interchangeable modular components and a design for easy maintenance
and repair). The Company has extensive engineering and product development
facilities (including a modern 80,000 sq. ft. diesel engineering center in
Windsor, CT) and full service product management capability (which OEMs require
of key suppliers), which enable it to develop proprietary technology and support
design and development activities for the Company's products.
Emphasize Replacement Sales. The Company sells replacement units to OEMs
for distribution through their service organizations and sells replacement units
and parts through the Company's own extensive aftermarket distribution network.
Replacement sales tend to be "counter-cyclical" to the general economic cycle
and, with respect to diesel engine products, generally afford higher margins
than original equipment sales. The Company believes that its diesel aftermarket
distribution network is an important competitive advantage because OEMs select a
supplier, in part, based on the strength of the supplier's aftermarket service
and distribution capability. The Company's diesel aftermarket network consists
of 17 central distributors, who support over 563 authorized service dealers in
North America, and 66 central distributors and 566 service dealers outside of
North America, including 22 central distributors and 323 service dealers in
Europe. All of the Company's central distributors and service dealers are
trained and certified in accordance with Company policies. Precision Engine
sells replacement components directly to a variety of aftermarket customers,
including Dana, which resells the Company's products through an independent
network as well as through the NAPA parts organization. With a large and growing
in-service equipment population, the Company believes that it is well positioned
to further increase replacement sales.
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8
Expand European Presence. The Company believes that significant
opportunities exist to expand its sales in Western Europe, which currently
produces approximately 30% of the world's diesel engines. Since the initiation
of programs targeting European OEMs, the Company's European sales have grown
from $22.8 million in 1991 to $74.9 million in 1996, representing a compound
annual growth rate of 26.9%. To better serve the needs of its European OEM
customers, the Company acquired injector manufacturing operations in Brescia and
Bari, Italy to complement its established marketing, engineering and services
support facilities in Trappes, France and Huntingdon, England. In addition, the
Company believes that Precision Engine is well positioned to capitalize on the
continuing trend among Western European engine manufacturers to convert from
mechanical to hydraulic valve lifters in on-highway engines. In 1995, Precision
Engine began supplying lash adjusters for two Fiat engine platforms, and in
1996, Precision Engine was named one of Fiat's top 25 suppliers for its
exemplary quality and support. The Company believes that its reputation as a
high quality provider of engine components and its established European service
network and manufacturing operations will enable it to develop new OEM
relationships, as well as to expand its current OEM relationships in Western
Europe.
THE ACQUISITION TRANSACTIONS
The "Acquisition Transactions" refer collectively to the Notes Offering,
the Acquisition, Merger I, Merger II, the AIP Common Equity Contribution, the
execution of, and initial borrowings under, the New Credit Agreement and the
cancellation of the Intercompany Note (each as defined herein). See "The
Acquisition Transactions."
THE OFFERING
NOTES...................... The Notes were sold by the Company on December 11,
1997 to Donaldson, Lufkin & Jenrette Securities
Corporation (the "Initial Purchaser") pursuant to a
Purchase Agreement dated December 4, 1997 (the
"Purchase Agreement"). The Initial Purchaser
subsequently resold the Notes to qualified
institutional buyers pursuant to Rule 144A under
the Securities Act and to a limited number of
institutional accredited investors that agreed to
comply with certain transfer restrictions and other
conditions.
REGISTRATION RIGHTS
AGREEMENT.................. Pursuant to the Purchase Agreement, the Company and
the Initial Purchaser entered into a Registration
Rights Agreement dated December 11, 1997, which
granted the holders of the Notes certain exchange
and registration rights. The Exchange Offer is
intended to satisfy such exchange rights which
terminate upon the consummation of the Exchange
Offer.
THE EXCHANGE OFFER
SECURITIES OFFERED......... $100,000,000 aggregate principal amount of Series B
10 1/4% Senior Subordinated Notes due 2007 (the
Exchange Notes).
THE EXCHANGE OFFER......... $1,000 principal amount of the Exchange Notes in
exchange for each $1,000 principal amount of Notes.
As of the date hereof, $100,000,000 aggregate
principal amount of Notes are outstanding. The
Company will issue the Exchange Notes to holders on
or promptly after the Expiration Date.
Based on an interpretation by the staff of the
Commission set forth in no-action letters issued to
third parties, the Company believes that Exchange
Notes issued pursuant to the Exchange Offer in
exchange for
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9
Notes may be offered for resale, resold and
otherwise transferred by any holder thereof (other
than any such holder which is an "affiliate" of the
Company within the meaning of Rule 405 under the
Securities Act) without compliance with the
registration and prospectus delivery provisions of
the Securities Act, provided that such Exchange
Notes are acquired in the ordinary course of such
holder's business and that such holder does not
intend to participate and has no arrangement or
understanding with any person to participate in the
distribution of such Exchange Notes.
Each Participating Broker-Dealer that receives
Exchange Notes for its own account pursuant to the
Exchange Offer must acknowledge that it will
deliver a prospectus in connection with any resale
of such Exchange Notes. The Letter of Transmittal
states that by so acknowledging and by delivering a
prospectus, a Participating Broker-Dealer will not
be deemed to admit that it is an "underwriter"
within the meaning of the Securities Act. This
Prospectus, as it may be amended or supplemented
from time to time, may be used by a Participating
Broker-Dealer in connection with resales of
Exchange Notes received in exchange for Notes where
such Notes were acquired by such Participating
Broker-Dealer as a result of market-making
activities or other trading activities. The Company
has agreed that, for a period of 180 days after the
Expiration Date, it will make this Prospectus
available to any Participating Broker-Dealer for
use in connection with any such resale. See "Plan
of Distribution."
Any holder who tenders in the Exchange Offer with
the intention to participate, or for the purpose of
participating, in a distribution of the Exchange
Notes could not rely on the position of the staff
of the Commission enunciated in no-action letters
and, in the absence of an exemption therefrom, must
comply with the registration and prospectus
delivery requirements of the Securities Act in
connection with any resale transaction. Failure to
comply with such requirements in such instance may
result in such holder incurring liability under the
Securities Act for which the holder is not
indemnified by the Company.
EXPIRATION DATE............ 5:00 p.m., New York City time, on , 1998
unless the Exchange Offer is extended, in which
case the term "Expiration Date" means the latest
date and time to which the Exchange Offer is
extended.
ACCRUED INTEREST ON THE
EXCHANGE NOTES AND
THE NOTES................ Each Exchange Note will bear interest from its
issuance date. Holders of Notes that are accepted
for exchange will receive, in cash, accrued
interest thereon to, but not including, the
issuance date of the Exchange Notes. Such interest
will be paid with the first interest payment on the
Exchange Notes. Interest on the Notes accepted for
exchange will cease to accrue upon issuance of the
Exchange Notes.
CONDITIONS TO THE EXCHANGE
OFFER.................... The Exchange Offer is subject to certain customary
conditions, which may be waived by the Company. See
"The Exchange Offer -- Conditions."
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PROCEDURES FOR
TENDERING NOTES.......... Each holder of Notes wishing to accept the Exchange
Offer must complete, sign and date the accompanying
Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein
and therein, and mail or otherwise deliver such
Letter of Transmittal, or such facsimile, together
with the Notes and any other required documentation
to the Exchange Agent (as defined herein) at the
address set forth herein. By executing the Letter
of Transmittal, each holder will represent to the
Company that, among other things, the Exchange
Notes acquired pursuant to the Exchange Offer are
being obtained in the ordinary course of business
of the person receiving such Exchange Notes,
whether or not such person is the holder, that
neither the holder nor any such other person has
any arrangement or understanding with any person to
participate in the distribution of such Exchange
Notes and that neither the holder nor any such
other person is an "affiliate," as defined under
Rule 405 of the Securities Act, of the Company. See
"The Exchange Offer -- Purpose and Effect of the
Exchange Offer" and "-- Procedures for Tendering."
UNTENDERED NOTES........... Following the consummation of the Exchange Offer,
holders of Notes eligible to participate but who do
not tender their Notes will not have any further
exchange rights and such Notes will continue to be
subject to certain restrictions on transfer.
Accordingly, the liquidity of the market for such
Notes could be adversely affected.
CONSEQUENCES OF FAILURE TO
EXCHANGE................. The Notes that are not exchanged pursuant to the
Exchange Offer will remain restricted securities.
Accordingly, such Notes may be resold only (i) to
the Company, (ii) pursuant to Rule 144A or Rule 144
under the Securities Act or pursuant to some other
exemption under the Securities Act, (iii) outside
the United States to a foreign person pursuant to
the requirements of Rule 904 under the Securities
Act, or (iv) pursuant to an effective registration
statement under the Securities Act. See "The
Exchange Offer -- Consequences of Failure to
Exchange."
SHELF REGISTRATION
STATEMENT.................. If any holder of the Notes (other than any such
holder which is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities
Act) is not eligible under applicable securities
laws to participate in the Exchange Offer, and such
holder has provided information regarding such
holder and the distribution of such holder's Notes
to the Company for use therein, the Company has
agreed to register the Notes on a shelf
registration statement (the "Shelf Registration
Statement") and use its best efforts to cause it to
be declared effective by the Commission as promptly
as practical on or after the consummation of the
Exchange Offer. The Company has agreed to maintain
the effectiveness of the Shelf Registration
Statement for, under certain circumstances, a
maximum of two years, to cover resales of the Notes
held by any such holders.
SPECIAL PROCEDURES FOR
BENEFICIAL OWNERS........ Any beneficial owner whose Notes are registered in
the name of a broker, dealer, commercial bank,
trust company or other nominee and who wishes to
tender should contact such registered holder
promptly and instruct such registered holder to
tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such owner's
own
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behalf, such owner must, prior to completing and
executing the Letter of Transmittal and delivering
its Notes, either make appropriate arrangements to
register ownership of the Notes in such owner's
name or obtain a properly completed bond power from
the registered holder. The transfer of registered
ownership may take considerable time. The Company
will keep the Exchange Offer open for not less than
20 days in order to provide for the transfer of
registered ownership.
GUARANTEED DELIVERY
PROCEDURES............... Holders of Notes who wish to tender their Notes and
whose Notes are not immediately available or who
cannot deliver their Notes, the Letter of
Transmittal or any other documents required by the
Letter of Transmittal to the Exchange Agent (or
comply with the procedures for book-entry transfer)
prior to the Expiration Date must tender their
Notes according to the guaranteed delivery
procedures set forth in "The Exchange
Offer -- Guaranteed Delivery Procedures."
WITHDRAWAL RIGHTS.......... Tenders may be withdrawn at any time prior to 5:00
p.m., New York City time, on the Expiration Date.
ACCEPTANCE OF NOTES AND
DELIVERY OF EXCHANGE
NOTES.................... The Company will accept for exchange any and all
Notes which are properly tendered in the Exchange
Offer prior to 5:00 p.m., New York City time, on
the Expiration Date. The Exchange Notes issued
pursuant to the Exchange Offer will be delivered
promptly following the Expiration Date. See "The
Exchange Offer -- Terms of the Exchange Offer."
FEDERAL INCOME TAX
CONSEQUENCES............. The exchange pursuant to the Exchange Offer should
not be a taxable event for Federal income tax
purposes. See "Certain Federal Income Tax
Consequences."
USE OF PROCEEDS............ There will be no cash proceeds to the Company from
the exchange pursuant to the Exchange Offer.
EXCHANGE AGENT............. United States Trust Company of New York.
THE EXCHANGE NOTES
GENERAL.................... The form and terms of the Exchange Notes are the
same as the form and terms of the Notes (which they
replace) except that (i) the Exchange Notes bear a
Series B designation, (ii) the Exchange Notes have
been registered under the Securities Act and,
therefore, will not bear legends restricting the
transfer thereof, and (iii) the holders of Exchange
Notes will not be entitled to certain rights under
the Registration Rights Agreement, including the
provisions providing for an increase in the
interest rate on the Notes in certain circumstances
relating to the timing of the Exchange Offer, which
rights will terminate when the Exchange Offer is
consummated. See "The Exchange Offer -- Purpose and
Effect of the Exchange Offer." The Exchange Notes
will evidence the same debt as the Notes and will
be entitled to the benefits of the Indenture. See
"Description of Exchange Notes." The Notes and the
Exchange Notes are referred to herein collectively
as the "Senior Subordinated Notes."
SECURITIES OFFERED......... $100,000,000 aggregate principal amount of Series B
10 1/4% Senior Subordinated Notes due 2007 of the
Company.
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MATURITY DATE.............. December 15, 2007.
INTEREST PAYMENT DATES..... Semi-annually in arrears on June 15 and December 15
of each year, commencing June 15, 1998.
SUBORDINATION.............. The Exchange Notes will constitute senior
subordinated, unsecured, general obligations of the
Company, rank subordinate in right of payment to
all existing and future Senior Indebtedness and
rank senior or pari passu in right of payment to
all existing and future subordinated indebtedness
of the Company. On the Issue Date, the Exchange
Notes will be guaranteed on a senior subordinated
basis pursuant to the Guarantee by the Guarantors.
Each Subsidiary Guarantee will be a general,
unsecured obligation of the Guarantor, subordinate
in right of payment to all Senior Indebtedness of
such Guarantor. As of September 30, 1997, on a pro
forma basis after giving effect to the Acquisition
Transactions, the Exchange Notes and the Subsidiary
Guarantees would have been subordinated to $62.2
million of Senior Indebtedness and Guarantor Senior
Indebtedness, including $1.8 million of
indebtedness of non-guarantor Foreign Subsidiaries.
See "Risk Factors -- Subordination."
OPTIONAL REDEMPTION........ The Exchange Notes will be redeemable at the option
of the Company, in whole or in part, at any time on
or after December 15, 2002, at the redemption
prices set forth herein, plus accrued and unpaid
interest and Liquidated Damages, if any, thereon to
the applicable date of redemption. In addition, at
any time prior to December 15, 2000, the Company
may, on any one or more occasions, redeem up to 35%
of the aggregate principal amount of Exchange Notes
originally issued at a redemption price equal to
110.250% of the principal amount thereof, plus
accrued and unpaid interest and Liquidated Damages,
if any, thereon to the date of redemption with the
Net Cash Proceeds received by the Company of one or
more Equity Offerings; provided that, in each case,
at least 65% of the aggregate principal amount of
Exchange Notes originally issued remains
outstanding immediately following each such
redemption. See "Description of Exchange
Notes -- Optional Redemption."
CHANGE OF CONTROL.......... Upon the occurrence of a Change of Control, each
holder of Exchange Notes will have the right to
require the Company to repurchase all or any part
of such holder's Exchange Notes at an offer price
in cash equal to 101% of the aggregate principal
amount thereof, plus accrued and unpaid interest
and Liquidated Damages, if any, thereon to the date
of repurchase. See "Description of Exchange
Notes -- Repurchase at the Option of
Holders -- Change of Control." There can be no
assurance that, in the event of a Change of
Control, the Company would have sufficient funds to
repurchase all Exchange Notes tendered. See "Risk
Factors -- Possible Inability to Repurchase
Exchange Notes Upon Change of Control."
NOTE GUARANTEES............ The Exchange Notes will be guaranteed on a senior
subordinated basis by all Guarantors of the
Company. The Subsidiary Guarantees will be general
unsecured obligations of the Guarantors,
subordinated in right of payment to all Senior
Indebtedness of such Guarantors.
CERTAIN COVENANTS.......... The Indenture contains certain covenants that
limit, among other things, the ability of the
Company and the Subsidiary Guarantors to (i) pay
dividends, redeem capital stock or make certain
other restricted pay-
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ments or investments; (ii) incur additional
indebtedness or issue certain preferred equity
interests; (iii) merge, consolidate or sell all or
substantially all of its assets; (iv) create liens
on assets and (v) enter into certain transactions
with affiliates or related persons. See
"Description of Exchange Notes -- Certain
Covenants."
For additional information regarding the Exchange Notes, see "Description
of Exchange Notes."
RISK FACTORS
Holders of the Exchange Notes should carefully consider all of the
information set forth in this Prospectus and, in particular, should evaluate the
specific factors under "Risk Factors" as well as the other information and data
included in this Prospectus prior to tendering their Notes in the Exchange
Offer.
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SUMMARY CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table sets forth summary consolidated historical and pro
forma financial, operating and other data of the Company and its subsidiaries.
The summary consolidated financial data for each of the three fiscal years ended
December 31, 1996 has been derived from the Consolidated Financial Statements of
the Company and the related notes thereto included elsewhere herein, which have
been audited by KPMG Peat Marwick LLP, independent auditors. The summary
financial data for the two years ended December 31, 1992 and December 31, 1993
has been derived from the Consolidated Financial Statements of Old Holdings (as
defined herein), which have also been audited by KPMG Peat Marwick LLP,
independent auditors, and are not contained elsewhere herein. The summary
financial data for the nine month periods ended September 30, 1996 and September
30, 1997 have been derived from the Unaudited Consolidated Financial Statements
of the Company, and include, in the opinion of management, all adjustments
necessary to present fairly the data for such periods. The results for the nine
month period ended September 30, 1997 are not necessarily indicative of the
results to be expected for the year ended December 31, 1997 or for any future
period. The summary pro forma data for the latest twelve months ("LTM") ended
September 30, 1997 give effect to the Acquisition Transactions as if they
occurred on January 1, 1996. The summary consolidated pro forma balance sheet
data give effect to the Acquisition Transactions as if they had occurred as of
September 30, 1997. The data presented below should be read in conjunction with
the Consolidated Financial Statements and the related notes thereto included
elsewhere herein, the other financial information included elsewhere herein and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
OPERATING DATA:
Net sales..................................... $217,962 $264,346 $286,964 $272,145 $275,639 $209,679 $201,034
Gross profit(a)............................... 38,646 50,312 42,657 36,500 40,883 32,400 32,030
Selling, general and administrative
expenses(b)................................. 27,975 43,630 35,075 31,740 30,976 24,024 19,409
Operating income.............................. 10,671 6,682 7,582 4,760 9,907 8,376 12,621
Net income (loss)(c)(d)(e).................... 730 (5,042) (504) (4,946) 5,602 5,536 4,602
AS OF
SEPTEMBER 30,
1997
---------------------
PRO
HISTORICAL FORMA
---------- --------
BALANCE SHEET DATA:
Fixed assets, net of accumulated depreciation and amortization.............................. 93,170 124,432
Total assets................................................................................ 190,715 300,071
Long-term debt (including current portion).................................................. 82,695 162,160
Stockholders' equity........................................................................ 12,118 54,218
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
OTHER DATA:
Adjusted EBITDA(f)............................ $ 32,308 $ 39,090 $ 28,335 $ 23,516 $ 27,545 $ 21,908 $ 25,665
Capital expenditures.......................... 13,165 12,728 9,934 6,667 8,827 6,361 10,359
Depreciation.................................. 18,469 18,241 15,166 15,700 16,113 12,157 12,036
Amortization.................................. 2,430 3,633 3,541 2,401 873 794 512
Net working capital(g)........................ $ 30,971 $ 34,469
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LTM ENDED
SEPTEMBER 30,
1997
-------------
PRO FORMA DATA:
Net sales......................................................................................... $ 266,994
Adjusted EBITDA(f)................................................................................ 31,902
Operating income.................................................................................. 5,224
Cash interest expense............................................................................. 15,801
Ratio of net debt to Adjusted EBITDA.............................................................. 5.1
Ratio of Adjusted EBITDA to cash interest expense................................................. 2.0
- ---------------
(a) Includes approximately $14.8 million of warranty expense in 1994 relating to
the voluntary non-safety recall by General Motors of vehicles carrying a
General Motors 6.5L engine, which contained the Company's DS Electronic
Pump.
(b) Approximately $10.0 million and $1.5 million are included in selling,
general and administrative expense for 1993 and 1994, respectively, that
represent loss on disposal and writedown of assets. For all remaining
periods presented the loss on disposal and write-down of assets is also
included in selling, general and administrative expenses but is not
material. In addition, in 1994 selling, general and administrative expenses
include a $1.3 million write-off of deferred debt issuance costs.
(c) Net income for 1993 includes the cumulative effect of changes in accounting
principles for adoption of certain accounting pronouncements: (i) a loss of
$3.0 million, net of income taxes, for the adoption of SFAS No. 106
"Employers' Accounting for Post-retirement Benefits Other Than Pensions,"
(ii) a loss of $0.4 million, net of income taxes, for the adoption of SFAS
112, "Employers' Accounting for Post-employment Benefits," and (iii) a
benefit of $0.04 million, net of income taxes, for the adoption of SFAS 109
"Accounting for Income Taxes."
(d) Net income for the nine months ended September 30, 1996 and for fiscal 1996
includes a gain of $4.3 million, net of income taxes, for the cumulative
effect of a change in accounting principle for post-retirement benefits to
amortize unrecognized gains and losses exceeding 10% of the accumulated
post-retirement benefit obligation over twelve months. Previously, these
gains and losses were amortized over the average remaining service period
of the plan participants.
(e) Net income for 1995 includes an extraordinary loss of $1.7 million, net of
income taxes, for the early extinguishment of debt.
(f) Adjusted EBITDA represents net income (loss) before extraordinary items and
cumulative effect of accounting changes, interest expense, interest income,
income taxes, depreciation and amortization (including amortization of
purchase accounting adjustments), management fees and gains (losses) on
disposals and write-downs of assets. Adjusted EBITDA is not intended to
represent cash flow from operations as defined by generally accepted
accounting principles and should not be used as an alternative to net
income as an indicator or operating performance or to cash flows as a
measure of liquidity. Adjusted EBITDA is included in the Prospectus as it
is a basis upon which the Company assesses its financial performance, and
certain covenants in the Company's borrowing arrangements will be tied to
similar measures. Adjusted EBITDA, as presented, represents useful measures
of assessing the Company's ongoing operating activities without the impact
of financing activity and non-recurring charges. While EBITDA is frequently
used as a measure of operations and the ability to meet debt service
requirements, it is not necessarily comparable to other similarly titled
captions of other companies due to potential inconsistencies in the method
of calculation.
(g) Net working capital as defined in the Stock Purchase Agreement equals
current assets excluding cash less current liabilities excluding the
current portion of capital lease obligations and the current portion of
long-term debt.
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RISK FACTORS
In addition to the other information contained in this Prospectus, holders
of Notes should consider carefully the following factors in addition to the
other information set forth in this Prospectus prior to tendering their Notes in
the Exchange Offer.
SUBSTANTIAL LEVERAGE; LIQUIDITY
The Company has operated with substantial leverage in the past and, as a
result of the consummation of the Acquisition Transactions, the Company has a
significant amount of indebtedness. As of September 30, 1997 on a pro forma
basis after giving effect to the Acquisition Transactions, the Company would
have had $162.2 million of indebtedness. In addition, subject to the
restrictions in the New Credit Agreement and the Indenture, the Company may
incur additional senior or other indebtedness from time to time to finance
acquisitions or capital expenditures or for other general corporate purposes.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources," "Description of Exchange Notes"
and "Description of New Credit Agreement."
The level of the Company's indebtedness could have important consequences
to the holders of the Exchange Notes, including, but not limited to, the
following: (i) the Company's ability to obtain additional financing in the
future for working capital, capital expenditures, acquisitions, product
development, general corporate purposes or other purposes may be materially
limited or impaired; (ii) a significant portion of the Company's cash flow from
operations must be dedicated to the payment of principal and interest on its
indebtedness, thereby reducing the funds available to the Company for its
operations and future business opportunities; (iii) significant amounts of the
Company's borrowings will bear interest at variable rates, which could result in
higher interest expense in the event of increases in interest rates; (iv) the
Indenture and the New Credit Agreement contain financial and restrictive
covenants, the failure to comply with which may result in an event of default
which, if not cured or waived, could have a material adverse effect on the
Company; (v) the indebtedness outstanding under the New Credit Agreement is
secured and matures prior to the maturity of the Exchange Notes; (vi) the
Company may be substantially more leveraged than certain of its competitors,
which may place the Company at a competitive disadvantage and (vii) the
Company's substantial degree of leverage may limit its flexibility to adjust to
changing market conditions, reduce its ability to withstand competitive
pressures and make it more vulnerable to a downturn in general economic
conditions or in its business or be unable to carry out capital spending that is
important to its growth and productivity improvement programs. See "Description
of Exchange Notes" and "Description of New Credit Agreement."
The Company's ability to make scheduled payments or to refinance its debt
obligations will depend upon its future financial and operating performance,
which will be affected by prevailing economic conditions and financial, business
and other factors, certain of which are beyond its control, including interest
rates, unscheduled plant shutdowns, increased operating costs, regulatory
developments and the ability of the Company to repatriate cash generated outside
of the United States without incurring a substantial tax liability. There can be
no assurance that the Company's operating results, cash flow and capital
resources will be sufficient for payment of its indebtedness in the future. In
the absence of such operating results and capital resources, the Company could
face substantial liquidity problems, may be forced to reduce or delay capital
expenditures, and might be required to dispose of material assets or operations
to meet its debt service and other obligations, and there can be no assurance as
to the timing of such sales or the proceeds that the Company could realize
therefrom. If the Company is unable to service its indebtedness, it may take
actions such as reducing or delaying planned expansion and capital expenditures,
selling assets, restructuring or refinancing its indebtedness or seeking
additional equity capital. There can be no assurance that any of these actions
could be effected on satisfactory terms, if at all.
RESTRICTIVE DEBT COVENANTS
The Indenture and the New Credit Agreement contain a number of significant
covenants that, among other things, restrict the ability of the Company and its
subsidiaries to dispose of assets, incur additional
15
17
indebtedness, prepay other indebtedness (including the Exchange Notes), amend
certain debt instruments (including the Indenture), pay dividends, create liens
on assets, enter into sale and leaseback transactions, make investments, loans
or advances, make acquisitions, engage in mergers or consolidations, make
capital expenditures, change the business conducted by the Company or its
subsidiaries, or engage in certain transactions with affiliates and otherwise
restrict certain corporate activities. In addition, under the New Credit
Agreement, the Company is required to maintain specified financial ratios and
tests, including leverage ratio tests below a specified maximum, minimum net
worth levels, minimum fixed charge coverage levels and minimum levels of EBITDA.
See "Description of Exchange Notes" and "Description of New Credit Agreement."
The Company's ability to comply with such agreements may be affected by
events beyond its control, including prevailing economic, financial and industry
conditions. The breach of any of such covenants or restrictions could result in
a default under the New Credit Agreement and/or the Indenture, which would
permit the senior lenders, or the holders of the Exchange Notes, or both, as the
case may be, to declare all amounts borrowed thereunder to be due and payable,
together with accrued and unpaid interest, and the commitments of the senior
lenders to make further extensions of credit under the New Credit Agreement
could be terminated. If the Company were unable to repay its indebtedness to its
senior lenders, such lenders could proceed against the collateral securing such
indebtedness as described under "Description of New Credit Agreement."
SUBORDINATION
The Exchange Notes will be unsecured and subordinated to the prior payment
in full of all Senior Indebtedness of the Company, whether existing upon the
consummation of the Offering or thereafter incurred, including borrowings under
the New Credit Agreement. The Exchange Notes will also be effectively
subordinated to all secured indebtedness of either the Company or any of its
subsidiaries to the extent of the assets securing such indebtedness. As of
September 30, 1997, on a pro forma basis and after giving effect to the
Acquisition Transactions, the aggregate outstanding principal amount of all
Senior Indebtedness would have been approximately $62.2 million. By reason of
such subordination, in the event of a bankruptcy, liquidation or reorganization
of the Company, the assets of the Company will be available to pay obligations
on the Exchange Notes only after all Senior Indebtedness has been paid in full,
and there may not be sufficient assets remaining to pay amounts due on any or
all of the Exchange Notes. In addition, the Company may not pay principal or
premium, or Liquidated Damages, if any, or interest on the Exchange Notes if any
Senior Indebtedness is not paid when due or any other default on any Senior
Indebtedness occurs and the maturity of such Senior Indebtedness is accelerated
in accordance with its terms, unless, in either case, such amount has been paid
in full or the default has been cured or waived and such acceleration has been
rescinded. Moreover, if any default occurs with respect to certain Senior
Indebtedness and certain other conditions are satisfied, the Company may not
make any payments on the Exchange Notes for a designated period of time. In
addition, if any judicial proceeding is pending with respect to any such default
in payment on any Senior Indebtedness, or other default with respect to certain
Senior Indebtedness, or if the maturity of the Exchange Notes is accelerated
because of a default under the Indenture and such default constitutes a default
with respect to any Senior Indebtedness, the Company may not make any payment on
the Exchange Notes.
POSSIBLE INABILITY TO REPURCHASE EXCHANGE NOTES UPON CHANGE OF CONTROL
The New Credit Agreement generally prohibits the Company from purchasing
any of the Exchange Notes, including upon the occurrence of a Change of Control,
and also provides that certain change of control events with respect to the
Company constitutes a default thereunder. Any future credit agreements or other
agreements relating to Senior Indebtedness to which the Company becomes a party
may contain similar restrictions and provisions. In the event a Change of
Control occurs at a time when the Company is prohibited from purchasing the
Exchange Notes, the Company could seek the consent of its lenders to the
purchase of the Exchange Notes or could attempt to refinance the borrowings that
contain such prohibition. If the Company does not obtain such consent or repay
such borrowings, the Company will remain prohibited from purchasing the Exchange
Notes by the terms of the relevant Senior Indebtedness. In such case, the
16
18
Company's failure to purchase the tendered Exchange Notes would constitute an
event of default under the Indenture which would, in turn, constitute a default
under the New Credit Agreement and could constitute a default under other Senior
Indebtedness. In such circumstances, the subordination provisions in the
Indenture would restrict payments to the holders of the Exchange Notes.
Furthermore, no assurance can be given that the Company will have sufficient
resources to satisfy its repurchase obligation with respect to the Exchange
Notes following a Change of Control. See "Description of Exchange Notes" and
"Description of New Credit Agreement."
FRAUDULENT TRANSFER CONSIDERATIONS
The Company's obligations under the Exchange Notes may be subject to review
under state or federal fraudulent transfer laws in the event of the bankruptcy
or other financial difficulty of the Company.
Under those laws, if a court, in a lawsuit by an unpaid creditor or
representative of creditors of the Company, such as a trustee in bankruptcy or
the Company as a Chapter 11 debtor in possession, were to find that when the
Company issued the Exchange Notes, it (a) received less than fair consideration
or reasonably equivalent value therefor and (b) either (i) was or was rendered
insolvent, (ii) was engaged in a business or transaction for which its remaining
unencumbered assets constituted unreasonably small capital or (iii) intended to
incur or believed (or reasonably should have believed) that it would incur debts
beyond its ability to pay as such debts matured, the court could avoid the
Exchange Notes and the Company's obligations thereunder, or subordinate the
Exchange Notes to all of the Company's other obligations, and in either case
direct the return of any amounts paid thereunder to the Company or to a fund for
the benefit of its creditors. It should be noted that a court could avoid the
Exchange Notes and the Company's obligations thereunder without regard to
factors (a) and (b) above if it found that the Company issued the Exchange Notes
with actual intent to hinder, delay, or defraud its creditors.
A court will likely find that the Company did not receive fair
consideration or reasonably equivalent value for its obligation under the
Exchange Notes to the extent that the Exchange Notes' proceeds are used to pay
the purchase price to the Sellers for the common equity of Holdings or otherwise
do not directly benefit the Company.
Similarly, a Subsidiary Guarantee may be subject to review in the event of
the bankruptcy or financial difficulty of any Guarantor. In that event, if a
court found that when a Guarantor issued its guarantee (or, in some
jurisdictions, when it became liable to make payments thereunder), factors (a)
and (b) above applied to the Guarantor (or if the court found that the Guarantor
had issued its guarantee with actual intent to hinder, delay, or defraud its
creditors), then the court could avoid the respective Subsidiary Guarantee and
direct the repayment of any amounts paid thereunder. A court will likely find
that a Guarantor did not receive fair consideration or reasonably equivalent
value for its guarantee to the extent that its liability thereunder exceeds any
direct benefit it received from the issuance of the Exchange Notes.
The Indenture limits the liability of each Guarantor under its guarantee to
the maximum amount that it could pay without the guarantee being deemed a
fraudulent transfer. See "Description of Exchange Notes." There can be no
assurance that (if this limitation is effective) the limited amount so
guaranteed will suffice to pay amounts owed under the Exchange Notes in full.
The measure of insolvency for purposes of the foregoing will vary depending
on the law of the jurisdiction being applied. Generally, however, an entity
would be considered insolvent if the sum of its debts (including contingent or
unliquidated debts) is greater than all of its property at a fair valuation or
if the present fair salable value of its assets is less than the amount that
will be required to pay its probable liability on its existing debts as they
become absolute and matured.
DEPENDENCE ON SIGNIFICANT CUSTOMERS
The Company's five largest customers, Chrysler Corporation, General Motors
Corporation, Deere & Company, Ford Motor Company and Perkins Engines, accounted
for approximately $169.9 million of the Company's 1996 net sales, or
approximately 61.7% of the Company's 1996 net sales. No other customer
17
19
accounted for more than 2% of the Company's 1996 net sales. None of Chrysler,
General Motors, Deere, Ford and Perkins is obligated to continue to produce the
engines which require the Company's products, renew its contracts with the
Company when they expire or enter into new agreements with the Company for
future engine platforms. A substantial decrease in orders from Chrysler, General
Motors, Deere, Ford or Perkins would have a material adverse effect on the
Company.
CYCLICAL NATURE OF INDUSTRY AND ENGINE PLATFORM SALES
The principal operations of the Company have been, and will continue to be,
directly dependent upon domestic and foreign production of automobiles, light
duty vehicles and off-highway equipment. Historically, the North American and
European automotive industries have experienced periodic, cyclical downturns.
Industry sales and production can be affected by the strength of the economy
generally, or in specific regions such as North America or Europe, by prevailing
interest rates and by other factors that may have an effect on the level of the
Company's sales. The Company believes that the generally counter-cyclical nature
of replacement sales reduces some of this risk.
Demand for the Company's products is directly dependent upon demand for the
engine platforms on which the Company's products are incorporated. There is no
assurance that the demand for such engine platforms will continue. A substantial
decrease in demand for such engine platforms would have a material adverse
effect on the Company.
RISKS OF SIGNIFICANT OPERATIONS IN FOREIGN COUNTRIES
Approximately 30.2% of the Company's 1996 net sales were derived from
products sold outside of the United States. The Company's worldwide operations
are subject to the risks normally associated with foreign operations, including,
but not limited to, the disruption of markets, changes in export or import laws,
labor unrest, political instability, restrictions on transfers of funds,
unexpected changes in regulatory environments, difficulty in obtaining
distribution and support and potentially adverse tax consequences. In addition,
even though the Company generally matches, to the extent possible, related costs
and revenues in a single currency, and generally includes exchange rate
protections in its sales contracts, the U.S. dollar value of the Company's
foreign sales varies with currency exchange rate fluctuations. There can be no
assurance that any of the foregoing factors will not have a material adverse
effect on the Company and its ability to meet interest and principal obligations
of the Exchange Notes.
COMPETITION
The market for engine components is highly competitive. Several actual
competitors exist, including the captive component operations of certain engine
manufacturers as well as other independent suppliers, some of which are larger
and have greater financial and other resources available to them than the
Company. There can be no assurance that the Company's products will continue to
compete successfully with the products of other companies, or that engine
manufacturers will continue to purchase engine components from outside
suppliers. See "Business -- Competition."
ENVIRONMENTAL MATTERS
The Company's facilities are subject to federal, state and local
environmental requirements, including those governing discharges to the air and
water, the handling and disposal of solid and hazardous wastes, and the
remediation of contamination associated with releases of hazardous substances.
The Company's manufacturing operations involve the use of hazardous substances
and, as is the case with manufacturers in general, if a release of hazardous
substances occurs or has occurred on or from the Company's facilities, the
Company may be held liable and may be required to pay the cost of remedying the
condition. The amount of any such liability could be material. The Company is
conducting remediation of soil and groundwater contamination at its Windsor, CT
and Jacksonville, NC facilities. Although the Sellers have indemnified the
Company with respect to these matters and certain other environmental matters,
there can be no assurance that the Sellers will have the ability to fully
indemnify the Company for such matters. If the Sellers are unable to fulfill
their
18
20
indemnification obligations, the Company will be responsible for such matters
and the cost could be material. See "Business -- Environmental Matters."
LACK OF A PUBLIC MARKET FOR THE EXCHANGE NOTES
Prior to the Exchange Offer, there has not been any public market for the
Notes. The Notes have not been registered under the Securities Act and will be
subject to restrictions on transferability to the extent that they are not
exchanged for Exchange Notes by holders who are entitled to participate in this
Exchange Offer. The holders of Notes (other than any such holder that is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) who are not eligible to participate in the Exchange Offer are entitled to
certain registration rights, and the Company is required to file a Shelf
Registration Statement with respect to such Notes.
There is no existing trading market for the Exchange Notes. Although the
Initial Purchaser has advised the Company that it currently intends to make a
market in the Exchange Notes, it is not obligated to do so and may discontinue
such market-making at any time without notice. Although the Exchange Notes are
expected to be eligible for trading by qualified buyers in the Private
Offerings, Resale and Trading through Automated Linkages (PORTAL) market, there
can be no assurance as to the development of any market or the liquidity of any
market that may develop for the Exchange Notes. The Company does not intend to
apply to list the Exchange Notes on any securities exchange or for quotation
through the National Association of Securities Dealers, Inc. Automated Quotation
System.
The Exchange Notes generally will be permitted to be resold or otherwise
transferred (subject to the restrictions described under "Registration Rights
Agreement" and "Certain Covenants") by each holder without the requirement of
further registration. The Exchange Notes, however, will also constitute a new
issue of securities with no established trading market. The Exchange Offer will
not be conditioned upon any minimum or maximum aggregate principal amount of
Notes being tendered for exchange. No assurance can be given as to the liquidity
of the trading market for the Exchange Notes, or, in the case of non-exchanging
holders of Notes, the trading market for the Notes following the Exchange Offer.
The liquidity of, and trading market for, the Notes or the Exchange Notes
also may be adversely affected by general declines in the market for similar
securities, regardless of the Company's financial performance or prospects.
EXCHANGE OFFER PROCEDURES
Issuance of the Exchange Notes in exchange for the Notes pursuant to the
Exchange Offer will be made only after a timely receipt by the Company of such
Notes, a properly completed and duly executed Letter of Transmittal and all
other required documents. Therefore, holders of the Notes desiring to tender
such Notes in exchange for Exchange 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 the tenders of Notes for exchange. Notes that are
not tendered or are tendered but not accepted will, following the consummation
of the Exchange Offer, continue to be subject to the existing restrictions upon
transfer thereof and, upon consummation of the Exchange Offer, certain
registration rights under the Registration Rights Agreement will terminate. In
addition, any holder of Notes who tenders in the Exchange Offer for the purpose
of participating in a distribution of the Exchange Notes may be deemed to have
received restricted securities and, if so, will be required to comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transactions. Each Participating Broker-Dealer that
receives Exchange Notes for its own account in exchange for Notes, where such
Notes were acquired by such Participating Broker-Dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such Exchange Notes.
See "Plan of Distribution." To the extent that Notes are tendered and accepted
in the Exchange Offer, the trading market for untendered and tendered but
unaccepted Notes could be adversely affected. See "The Exchange Offer."
19
21
THE ACQUISITION TRANSACTIONS
Pursuant to a stock purchase agreement dated November 7, 1997, as amended
by Amendment No. 1 to Stock Purchase Agreement dated December 8, 1997 (the
"Stock Purchase Agreement"), SAC Inc. ("Holdings"), a corporation formed by
American Industrial Partners Capital Fund II, L.P. ("AIP") purchased (the
"Acquisition") all the issued and outstanding capital stock of Stanadyne
Automotive Holding Corp. ("Old Holdings"), the parent of the Company, from
Metromedia Company and certain other stockholders (collectively, the "Sellers")
for an aggregate purchase price (including the repayment of outstanding
indebtedness of Old Holdings) of approximately $210.0 million, less net debt
assumed of approximately $4.2 million, subject to post-closing adjustments.
Immediately after the consummation of the Acquisition, (i) Old Holdings merged
with and into its wholly owned subsidiary, the Company, with the Company as the
surviving corporation ("Merger I"), and (ii) SAC Automotive, Inc. ("SAC
Automotive"), a wholly owned subsidiary of Holdings, merged with and into the
Company, with the Company as the surviving corporation ("Merger II").
Subsequently, Holdings changed its name to Stanadyne Automotive Holding Corp.
In order to finance the Acquisition, (i) AIP, its related investors and
certain members of management contributed $60.0 million in exchange for common
equity of Holdings (the "AIP Common Equity Contribution"), (ii) the Company (as
successor by merger to SAC Automotive) entered into a syndicated senior secured
loan facility (the "New Credit Agreement") providing for term loan borrowings in
the aggregate principal amounts of $30.0 million (the Term A Loan Facility, as
defined herein) and $25.0 million (the Term B Loan Facility, as defined herein)
and revolving loan borrowings of up to $30.0 million (the Revolving Credit
Facility, as defined herein), and borrowed all term loans available and
approximately $11.5 million of revolving loans, reduced to approximately $2.1
million within five business days, under the Revolving Credit Facility, plus
approximately $4.5 million in the form of letters of credit, (iii) the Company
(as successor by merger to SAC Automotive) issued and sold $100.0 million
aggregate principal amount of Notes (the "Notes Offering") and (iv) the Company
loaned $67.5 million of the net proceeds to it from the Notes Offering, together
with the proceeds of the borrowings pursuant to the New Credit Agreement, to
Holdings pursuant to an intercompany note (the "Intercompany Note"), to pay part
of the purchase price payable in the Acquisition. The Acquisition, Merger I,
Merger II, the Notes Offering, the AIP Common Equity Contribution, the execution
of, and initial borrowings under, the New Credit Agreement and the cancellation
of the Intercompany Note are referred to herein collectively as the "Acquisition
Transactions." Upon consummation of Merger II, the Company succeeded to the
obligations of SAC Automotive with respect to the New Credit Agreement. After
the consummation of the Acquisition Transactions, the Company canceled the
Intercompany Note. Consummation of each of the Acquisition Transactions was
conditioned upon the substantially simultaneous consummation of all other
Acquisition Transactions.
AIP is a private investment fund based in San Francisco and New York which,
together with its affiliates, has committed capital of approximately $800
million. AIP does not seek to play a role in daily management; rather, AIP seeks
to provide its portfolio companies with access to the management expertise of
its operating partners, all of whom are former Chief Executive Officers of
Fortune 500 corporations, through active board-level participation as well as
on-call advice when desired. Following consummation of the Acquisition, Robert
Cizik, an operating partner of AIP and former Chairman and Chief Executive
Officer of Cooper Industries, Inc., became the Company's Chairman of the Board.
Although no specific arrangements are in place, the Company expects to issue
options to members of management pursuant to an option plan to be established by
its board of directors.
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22
USE OF PROCEEDS
The Exchange Offer is intended to satisfy certain of the Company's
obligations under the Registration Rights Agreement. The Company will not
receive any cash proceeds from the issuance of the Exchange Notes in the
Exchange Offer. The proceeds of $100 million to the Company from the Notes
Offering, together with the borrowings under the New Credit Agreement and the
AIP Common Equity Contribution were used to finance the Acquisition Transactions
and the expenses and fees incurred in connection therewith. See "The Acquisition
Transactions."
The following table sets forth the approximate cash sources and uses of
funds as if the Acquisition Transactions, including the application of the
proceeds therefrom, had occurred and were completed on September 30, 1997:
(DOLLARS IN THOUSANDS)
----------------------
TOTAL SOURCES:
Borrowings under New Credit Agreement(a).................................. $ 57,840
Senior Subordinated Notes offered in Notes Offering....................... 100,000
AIP Common Equity Contribution............................................ 60,000
--------
Total Sources........................................................ $217,840
========
TOTAL USES:
Purchase Price of Acquisition(b).......................................... $205,840
Estimated transaction fees and expenses................................... 12,000
--------
Total Uses........................................................... $217,840
========
- ---------------
(a) The New Credit Agreement provides for a $30 million Revolving Credit
Facility, of which approximately $11.5 million was drawn at closing. That
amount was reduced to $2.1 million within five business days. The Revolving
Credit Facility is expected to be used to finance working capital and
capital expenditures and will be subject to a borrowing base limitation. See
"Description of New Credit Agreement."
(b) Estimate of amounts payable to the Sellers under the Stock Purchase
Agreement plus approximately $78.4 million used to repay outstanding
indebtedness of the Company (excluding net debt assumed of approximately
$4.2 million).
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23
CAPITALIZATION
The following table sets forth as of September 30, 1997 (i) the actual
unaudited consolidated capitalization of the Company and (ii) the unaudited
consolidated capitalization of the Company, as adjusted to give effect to the
Acquisition Transactions, including the sale of the Notes pursuant to the
Offering. The following table should be read in conjunction with the "Unaudited
Pro Forma Condensed Consolidated Financial Data" and the related notes thereto
included elsewhere herein and the "Selected Consolidated Historical Financial
Data" and the related notes thereto included elsewhere herein.
AS OF SEPTEMBER 30,
1997
-----------------------
ACTUAL AS ADJUSTED
------- -----------
(DOLLARS IN THOUSANDS)
Cash and short-term cash investments................................... $ 160 $ 160
======= ===========
Debt:
Existing credit facility............................................. 78,375 --
New Revolving Credit Facility(a)..................................... -- 2,840
Term A Loan Facility................................................. -- 30,000
Term B Loan Facility................................................. -- 25,000
Senior Subordinated Notes............................................ -- 100,000
Other indebtedness................................................... 4,320 4,320
------- -----------
Total debt........................................................ 82,695 162,160
Shareholders' equity................................................... 12,118 54,218
------- -----------
Total capitalization.............................................. $94,813 $ 216,378
======= ===========
- ---------------
(a) The Revolving Credit Facility provides for up to $30 million of borrowing
availability, subject to a borrowing base limitation. See "Description of
New Credit Agreement."
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The following Unaudited Pro Forma Condensed Consolidated Financial Data
have been derived by the application of pro forma adjustments to the Company's
historical financial data included elsewhere herein. The pro forma consolidated
statements of operations for the periods presented give effect to the
Acquisition Transactions as if such Acquisition Transactions were consummated as
of January 1, 1996. The pro forma consolidated balance sheet gives effect to the
Acquisition Transactions as if such Acquisition Transactions had occurred as of
September 30, 1997. The adjustments are described in the accompanying notes. The
Unaudited Pro Forma Condensed Consolidated Financial Data do not purport to
represent what the Company's results of operations or financial position
actually would have been if the Acquisition Transactions had been consummated on
the date indicated, or what such results will be as of any future date or for
any future period. The Unaudited Pro Forma Condensed Consolidated Financial Data
should be read in conjunction with the "Selected Consolidated Historical
Financial Data" and the related notes thereto included elsewhere herein.
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24
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
LAST TWELVE MONTHS ENDED SEPTEMBER 30, 1997
PRO FORMA PRO
HISTORICAL ADJUSTMENTS FORMA
-------- ----------- --------
(DOLLARS IN THOUSANDS)
Net sales.................................................. $266,994 $ -- $266,994
Cost of goods sold......................................... 226,481 7,063(a) 233,544
-------- -------- ---------
Gross profit............................................. 40,513 (7,063) 33,450
Selling, general and administrative expenses............... 26,361 1,865(a) 28,226
-------- -------- ---------
Operating income......................................... 14,152 (8,928) 5,224
Other income (expense):
Interest income.......................................... 30 -- 30
Interest expense......................................... (7,291) (8,510)(b) (15,801)
-------- -------- ---------
Income (loss) before income taxes..................... 6,891 (17,438) (10,547)
Income tax expense (benefit)............................... 2,223 (6,653)(c) (4,430)
-------- -------- ---------
Net income (loss).......................................... $ 4,668 $ (10,785) $ (6,117)
======== ======== =========
Adjusted EBITDA(d)......................................... $ 31,302 $ 31,902
======== =========
YEAR ENDED DECEMBER 31, 1996
PRO FORMA PRO
HISTORICAL ADJUSTMENTS FORMA
-------- ----------- --------
(DOLLARS IN THOUSANDS)
Net sales.................................................. $275,639 $ -- $275,639
Cost of goods sold......................................... 234,756 6,780(a) 241,536
-------- -------- ---------
Gross profit............................................. 40,883 (6,780) 34,103
Selling, general and administrative expenses............... 30,976 1,865(a) 32,841
-------- -------- ---------
Operating income......................................... 9,907 (8,645) 1,262
Other income (expense):
Interest income.......................................... 52 -- 52
Interest expense......................................... (8,311) (7,710)(b) (16,021)
-------- -------- ---------
Income (loss) before income taxes and cumulative
effect of change in accounting principle............ 1,648 (16,355) (14,707)
Income tax expense (benefit)............................... 376 (6,553)(c) (6,177)
-------- -------- ---------
Net income (loss) before income taxes and cumulative effect
of change in accounting principle........................ $ 1,272 $ (9,802) $ (8,530)
======== ======== =========
Adjusted EBITDA(d)......................................... $ 27,545 $ 28,145
======== =========
See accompanying notes to the unaudited pro forma statements of operations.
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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997
PRO FORMA PRO
HISTORICAL ADJUSTMENTS FORMA
-------- ----------- --------
(DOLLARS IN THOUSANDS)
Net sales.................................................. $201,034 $ -- $201,034
Cost of goods sold......................................... 169,004 5,229(a) 174,233
-------- -------- ---------
Gross profit............................................. 32,030 (5,229) 26,801
Selling, general and administrative expenses............... 19,409 1,962(a) 21,371
-------- -------- ---------
Operating income......................................... 12,621 (7,191) 5,430
Other income (expense):
Interest income.......................................... 18 -- 18
Interest expense......................................... (5,356) (6,452)(b) (11,808)
-------- -------- ---------
Income (loss) before income taxes..................... 7,283 (13,643) (6,360)
Income tax expense (benefit)............................... 2,681 (5,352)(c) (2,671)
-------- -------- ---------
Net income (loss).......................................... $ 4,602 $ (8,291) $ (3,689)
======== ======== =========
Adjusted EBITDA(d)......................................... $ 25,665 $ 25,552
======== =========
NINE MONTHS ENDED SEPTEMBER 30, 1996
PRO FORMA PRO
HISTORICAL ADJUSTMENTS FORMA
-------- ----------- --------
(DOLLARS IN THOUSANDS)
Net sales.................................................. $209,679 $ -- $209,679
Cost of goods sold......................................... 177,279 4,946(a) 182,225
-------- -------- ---------
Gross profit............................................. 32,400 (4,946) 27,454
Selling, general and administrative expenses............... 24,024 1,962(a) 25,986
-------- -------- ---------
Operating income......................................... 8,376 (6,908) 1,468
Other income (expense):
Interest income.......................................... 40 -- 40
Interest expense......................................... (6,376) (5,652)(b) (12,028)
-------- -------- ---------
Income (loss) before income taxes and cumulative
effect of change in accounting principle............ 2,040 (12,560) (10,520)
Income tax expense (benefit)............................... 834 (5,252)(c) (4,418)
-------- -------- ---------
Net income (loss) before income taxes and cumulative effect
of change in accounting principle........................ $ 1,206 $ (7,308) $ (6,102)
======== ======== =========
Adjusted EBITDA(d)......................................... $ 21,908 $ 21,795
======== =========
See accompanying notes to the unaudited pro forma statements of operations.
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26
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
(a) The following table summarizes the pro forma adjustments to operating
income.
NINE MONTHS NINE MONTHS LTM
YEAR ENDED ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1996 1996 1997 1997
------------ ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
Cost of goods sold:(i)
Increase in depreciation for step-up of
property, plant and equipment(ii)....... $4,830 $ 3,623 $ 3,623 $ 4,830
Increase in amortization for step-up of
intangible assets(ii)................... 1,950 1,323 1,606 2,233
----------- ------- ----- ------- ----- ------- -----
$6,780 $ 4,946 $ 5,229 $ 7,063
=========== ============ ============ ============
Selling, general and administrative:(iii)
Directors fees............................. $ 150 $ 113 $ 113 $ 150
Difference in management fees(iv).......... 600 450 450 600
Elimination of debt reduction bonus(v)..... (750) -- -- (750)
Change in amortization of debt issuance
costs................................... 169 127 127 169
Goodwill amortization(vi).................. 1,696 1,272 1,272 1,696
----------- ------- ----- ------- ----- ------- -----
$1,865 $ 1,962 $ 1,962 $ 1,865
=========== ============ ============ ============
- ---------------
(i) Cost of goods sold does not include a one-time, non-cash charge for the
effect of the step-up in inventory under purchase accounting of $6.03
million.
(ii) Assumes average life of seven years for patents and intellectual property.
(iii) The pro forma financial statements do not include a nonrecurring expense
and deemed capital contribution of approximately $2.3 million recognized
concurrently with closing of the Acquisition Transactions, relating to
compensation provided by Metromedia to certain current and former
management employees of the Company.
(iv) Represents the difference between the new management fee and the historical
management fee.
(v) Represents the elimination of a bonus plan incenting reduced debt levels.
(vi) Assumes goodwill is amortized over forty years.
(b) To reflect the pro forma adjustments to interest expense:
NINE MONTHS NINE MONTHS LTM
YEAR ENDED ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1996 1996 1997 1997
------------ ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
Historical interest expense.................. $ 8,311 $ 6,376 $ 5,356 $ 7,291
Less: amounts in historical statement of
operation for refinanced debt.............. 7,404 5,684 4,884 6,604
Add: New Credit Agreement and Senior
Subordinated Notes......................... 15,114 11,336 11,336 15,114
----------- -------- ---- -------- ---- -------- ----
Pro forma interest expense................... $ 16,021 $12,028 $11,808 $15,801
=========== ============ ============ ============
(c) To adjust the income tax provision to result in a pro forma total of 42% for
an effective income tax rate.
(d) Adjusted EBITDA represents net income (loss) before extraordinary items and
cumulative effect of accounting change, interest expense, interest income,
income taxes, depreciation and amortization
25
27
(including amortization of purchase accounting adjustments), management
fees and gains (losses) on disposals of assets. Adjusted EBITDA is not
intended to represent cash flow from operations as defined by generally
accepted accounting principles and should not be used as an alternative to
net income as an indicator or operating performance or to cash flows as a
measure of liquidity. Adjusted EBITDA is included in the Prospectus as it
is a basis upon which the Company assesses its financial performance, and
certain covenants in the Company's borrowing arrangements will be tied to
similar measures. Adjusted EBITDA, as presented, represents useful measures
of assessing the Company's ongoing operating activities without the impact
of financing activity and non-recurring charges. While EBITDA is frequently
used as a measure of operations and the ability to meet debt service
requirements, it is not necessarily comparable to other similarly titled
captions of other companies due to potential inconsistencies in the method
of calculation.
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28
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
-------- ----------- ---------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents............................... $ 160 $ -- $ 160
Accounts receivable, net................................ 41,291 -- 41,291
Inventories............................................. 31,068 6,030(a) 37,098
Prepaid expenses and other assets....................... 300 -- 300
Deferred income taxes................................... 6,863 (2,532)(a) 4,331
-------- -------- ---------
Total current assets................................. 79,682 3,498 83,180
Property, plant and equipment, net........................ 93,170 31,262(a) 124,432
Intangible and other assets, net.......................... 3,313 89,146(a) 92,459
Deferred income taxes..................................... 14,550 (14,550)(a) --
-------- -------- ---------
Total assets....................................... $190,715 $ 109,356 $300,071
======== ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................ $ 20,642 $ -- $ 20,642
Accrued liabilities..................................... 27,909 -- 27,909
Current maturities of long-term debt.................... 11,672 (10,250)(b) 1,422
Current portion of capital lease obligations............ 1,709 -- 1,709
-------- -------- ---------
Total current liabilities............................ 61,932 (10,250) 51,682
Long-term debt, excluding current maturities.............. 68,125 89,715(b) 157,840
Capital lease obligations, excluding current portion...... 1,189 -- 1,189
Deferred taxes............................................ -- 495(a) 495
Other non-current liabilities............................. 47,351 (12,704)(a) 34,647
-------- -------- ---------
Total liabilities.................................... 178,597 67,256 245,853
-------- -------- ---------
Total stockholders' equity........................... 12,118 42,100(c) 54,218
-------- -------- ---------
Total liabilities and stockholders' equity......... $190,715 $ 109,356 $300,071
======== ======== =========
See accompanying notes to the unaudited pro forma balance sheet.
27
29
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(a) The acquisition was accounted for as a purchase, applying the
provisions of Accounting Principles Board Opinion No. ("APB") 16. The purchase
cost was allocated to the acquired assets and liabilities based on their
relative fair values at the closing date, based on valuations and other studies
which are not yet complete. Furthermore, the aggregate purchase price is subject
to adjustment as set forth in the Stock Purchase Agreement. Accordingly, the
excess of the purchase cost over the book value of the net assets acquired has
not yet been allocated to individual assets and liabilities. The Company does
not expect the final allocation to differ significantly from amounts reflected
in the pro forma presentation.
The purchase cost and preliminary allocation of the excess of cost over the
net book value of assets acquired is as follows (dollars in thousands):
Purchase cost pursuant to the Stock Purchase Agreement:
Enterprise value........................................................ $210,000
Less: assumed capital lease obligations and overdraft facilities........ (4,320)
Less: existing indebtedness to be refinanced............................ (78,375)
Add: cash............................................................... 160
--------
Purchase of stock of Holdings............................................. 127,465
Transaction fees and expenses............................................. 12,000
--------
Total purchase cost....................................................... 139,465
Book value of net assets acquired....................................... (12,118)
--------
Excess of purchase cost over the net book value of assets acquired...... $127,347
========
Allocated to:
Increase in value of property, plant and equipment...................... $ 31,262
Increase in value of inventory.......................................... 6,030
Adjust accrued pension cost to the projected benefit obligation......... 1,866
Adjust accrued post-retirement benefit cost to the projected
post-retirement benefit obligation................................... 9,838
Increase in value of intangible assets.................................. 17,262
Adjust environmental cost recoverable from Seller....................... 1,000
Adjustment of deferred taxes for step-up in asset bases................. (17,577)
Deferred debt issuance costs............................................ 4,850
Adjustment to equity for carryover stockholder basis.................... 4,976
Remaining excess purchase cost over the net book value of assets
acquired............................................................. 67,840
--------
Total allocation.......................................................... $127,347
========
Adjustments to intangibles include:
Excess of purchase cost over the net book value of assets acquired...... $ 67,840
Adjustment to increase value of intangibles............................. 17,262
Deferred debt issuance costs............................................ 4,850
Less: Deferred debt issuance costs written-off.......................... (806)
--------
$ 89,146
========
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30
(b) The net effect on cash and cash equivalents reflects the following
(dollars in thousands):
TOTAL SOURCES:
New Credit Agreement proceeds............................................. $ 57,840
Senior Subordinated Notes................................................. 100,000
AIP Common Equity Contribution............................................ 60,000
--------
$217,840
========
TOTAL USES:
Total assets acquired..................................................... $127,465
Repayment of existing debt................................................ 78,375
Estimated transaction fees and expenses................................... 12,000
--------
$217,840
========
(c) Represents the net change in stockholders' equity as a result of the
Acquisition, including the acquisition financing and the application of the
proceeds thereof (dollars in thousands):
AIP equity contribution................................................... $ 60,000
Adjustment to equity for carryover stockholder basis...................... (4,976)
Write-off of deferred debt issuance costs................................. (806)
--------
Pro forma stockholders' equity............................................ 54,218
Net book value of assets acquired......................................... (12,118)
--------
Pro forma adjustments to stockholders' equity............................. $ 42,100
========
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31
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
The following table sets forth selected consolidated historical and
consolidated pro forma financial, operating, other and balance sheet data of the
Company for each of the three years ended December 31, 1996, which has been
derived from the Consolidated Financial Statements of the Company and the
related notes thereto included elsewhere herein, which have been audited by KPMG
Peat Marwick LLP, independent auditors. The summary financial data for the two
years ended December 31, 1992 and December 31, 1993 has been derived from the
Consolidated Financial Statements of Old Holdings, which have also been audited
by KPMG Peat Marwick LLP, independent auditors, and are not contained elsewhere
herein. The selected consolidated financial data for the nine month periods
ended September 30, 1996 and September 30, 1997 have been derived from the
Unaudited Consolidated Financial Statements of the Company, and include, in the
opinion of management, all adjustments necessary to present fairly the data for
such periods. The results for the nine months ended September 30, 1997 are not
necessarily indicative of the results to be expected for the fiscal year ended
December 31, 1997 or for any future period. The data presented below should be
read in conjunction with the Consolidated Financial Statements and the related
notes thereto included elsewhere herein, the other financial information
included elsewhere herein and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Net sales..................................... $217,962 $264,346 $286,964 $272,145 $275,639 $209,679 $201,034
Cost of goods sold............................ 179,316 214,034 244,307 235,645 234,756 177,279 169,004
-------- -------- -------- -------- -------- -------- --------
Gross profit(a)............................... 38,646 50,312 42,657 36,500 40,883 32,400 32,030
Selling, general and administrative
expenses(b)................................. 27,975 43,630 35,075 31,740 30,976 24,024 19,409
-------- -------- -------- -------- -------- -------- --------
Operating income.............................. 10,671 6,682 7,582 4,760 9,907 8,376 12,621
Interest expense, net......................... (8,159) (9,188) (9,050) (9,292) (8,259) (6,336) (5,338)
-------- -------- -------- -------- -------- -------- --------
Income (loss) before taxes, extraordinary item
and cumulative effect of change in
accounting 2,512 (2,506) (1,468) (4,532) 1,648 2,040 7,283
Income tax expense (benefit).................. 1,782 (801) (964) (1,297) 376 834 2,681
-------- -------- -------- -------- -------- -------- --------
Income (loss) before extraordinary item and
cumulative effect of change in accounting... 730 (1,705) (504) (3,235) 1,272 1,206 4,602
Extraordinary item(e)......................... -- -- -- (1,711) -- -- --
Effect of change in accounting(c)(d).......... -- (3,337) -- -- 4,330 4,330 --
-------- -------- -------- -------- -------- -------- --------
Net income (loss)............................. 730 (5,042) (504) (4,946) 5,602 5,536 4,602
Preferred dividend requirement................ (600) (600) (600) (600) (600) (450) (450)
-------- -------- -------- -------- -------- -------- --------
Net income (loss) applicable to common
shareholders.............................. $ 130 $ (5,642) $ (1,104) $ (5,546) $ 5,002 $ 5,086 $ 4,152
======== ======== ======== ======== ======== ======== ========
BALANCE SHEET DATA (AT PERIOD END):
Fixed assets, net of accumulated depreciation
and amortization............................ $113,720 $113,797 $110,336 $103,202 $ 96,116 $ 97,608 $ 93,170
Total assets.................................. 202,726 219,449 214,255 219,417 194,917 204,414 190,715
Long-term debt (including current portion).... 117,458 105,361 94,331 112,199 85,912 92,855 82,695
Stockholders' equity.......................... 19,114 11,467 11,621 3,116 8,879 7,504 12,118
CASH FLOW DATA:
Net cash provided by (used in) operations..... $ 15,908 $ 27,710 $ 22,401 $ (5,063) $ 37,773 $ 25,803 $ 10,450
Net cash used in investing activities......... (13,165) (12,303) (8,288) (6,584) (8,615) (6,361) (10,359)
Net cash (used in) provided by financing
activities.................................. (2,550) (15,924) (14,337) 12,209 (27,235) (20,028) (3,230)
OTHER DATA:
Adjusted EBITDA(f)............................ $ 32,308 $ 39,090 $ 28,335 $ 23,516 $ 27,545 $ 21,908 $ 25,665
Net working capital(h)........................ 29,482 38,320 31,647 47,513 26,431 37,709 30,971
Depreciation and amortization................. 20,899 21,874 18,707 18,101 16,986 12,951 12,548
Capital expenditures.......................... 13,165 12,728 9,934 6,667 8,827 6,361 10,359
Ratio of earnings to fixed charges(g)......... 1.3 -- -- -- 1.2 1.3 2.1
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32
- ---------------
(a) Includes approximately $14.8 million of warranty expense in 1994 relating to
the voluntary non-safety recall by General Motors of vehicles carrying a
General Motors 6.5L engine, which contained the Company's DS Electronic
Pump.
(b) Approximately $10.0 million and $1.5 million are included in selling,
general and administrative expense for 1993 and 1994, respectively, that
represent loss on disposal and write-down of assets. For all remaining
periods presented the loss on disposal and write-down of asset is also
included in selling, general and administrative expense but is not
material. In addition, in 1994 selling, general and administrative expenses
include a $1.3 million write-off of deferred debt issuance costs.
(c) Net income for 1993 includes the cumulative effect of changes in accounting
principles for adoption of certain accounting pronouncements: (i) a loss of
$3.0 million, net of income taxes, for the adoption of SFAS No. 106
"Employers' Accounting for Post-retirement Benefits Other Than Pensions,"
(ii) a loss of $0.4 million, net of income taxes, for the adoption of SFAS
112, "Employers' Accounting for Post-employment Benefits," and (iii) a
benefit of $0.04 million, net of income taxes, for the adoption of SFAS 109
"Accounting for Income Taxes."
(d) Net income for the nine months ended September 30, 1996 and for fiscal 1996
includes a gain of $4.3 million, net of income taxes for the cumulative
effect of a change in accounting principle for post-retirement benefits to
amortize unrecognized gains and losses exceeding 10% of the accumulated
post-retirement benefit obligation over twelve months. Previously, these
gains and losses were amortized over the average remaining service period
of the plan participants.
(e) Net income for 1995 includes an extraordinary loss of $1.7 million, net of
income taxes, for the early extinguishment of debt.
(f) Adjusted EBITDA represents net income (loss) before extraordinary items and
cumulative effect of accounting changes, interest expense, interest income,
income taxes, depreciation and amortization (including amortization of
purchase accounting adjustments), management fees and gains (losses) on
disposals and write-downs of assets. Adjusted EBITDA is not intended to
represent cash flow from operations as defined by generally accepted
accounting principles and should not be used as an alternative to net
income as an indicator or operating performance or to cash flows as a
measure of liquidity. Adjusted EBITDA is included in the Prospectus as it
is a basis upon which the Company assesses its financial performance, and
certain covenants in the Company's borrowing arrangements will be tied to
similar measures. Adjusted EBITDA, as presented, represents useful measures
of assessing the Company's ongoing operating activities without the impact
of financing activity and non-recurring charges. While EBITDA is frequently
used as a measure of operations and the ability to meet debt service
requirements, it is not necessarily comparable to other similarly titled
captions of other companies due to potential inconsistencies in the method
of calculation.
(g) For purposes of this computation, fixed charges consist of interest expense,
amortization of deferred financing fees and one-third of rental expenses,
representing an approximation of that portion of rental expenses
attributable to interest. Earnings consist of income before income taxes
and extraordinary items and cumulative effect of changes in accounting
principles, plus fixed charges. Earnings were inadequate to cover fixed
charges by $2.5 million, $1.5 million and $4.5 million during the years
ended December 31, 1993, December 31, 1994 and December 31, 1995,
respectively.
(h) Net working capital as defined in the Stock Purchase Agreement equals
current assets excluding cash less current liabilities excluding the
current portion of capital lease obligations and the current portion of
long-term debt.
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33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Historical Financial Data" and the Consolidated Financial
Statements and the related notes thereto included elsewhere herein.
GENERAL
The Company is a leading designer and manufacturer of highly-engineered,
precision manufactured engine components, including fuel injection equipment for
diesel engines and hydraulic valve lifters for gasoline engines. The Company
sells application-specific engine components to OEMs and sells replacement units
and parts through its extensive aftermarket distribution network. The Company's
technical and engineering staff work closely with an OEM, generally for periods
of two to five years, prior to the introduction of the Company's products on an
engine platform, to develop or adapt application specific products to satisfy
the OEM's requirements. During the pre-production period, the Company will incur
R&D expenses, some of which may be reimbursed by the OEM. In addition, the
Company also incurs some R&D expenses in support of improvements to products on
existing engine platforms. The Company incurred R&D expenses (net of customer
reimbursements) of $10.6 million, $13.1 million and $10.6 million in fiscal
years 1994, 1995 and 1996, respectively. Once the OEM commits to procure a new
component from the Company, usually one to three years into the development
process, the Company may need to allocate capital for the machining, equipment,
tooling and other costs necessary for the engine program ramp-up. In addition,
with the launch of a new engine component or ramp-up in production of an
existing component, the Company may incur some start-up costs such as employee
training and equipment re-tooling. As a result of the long lead times necessary
to develop application-specific engine components and the financial commitment
made by both the Company and the OEM to design and incorporate the engine
component into the engine platform, the Company will typically serve as the sole
source supplier for the life of an engine platform.
During the period from 1994 to 1996, the Company's net sales declined 4%
from $287.0 million to $275.6 million. The Company's sales were affected during
this period by the planned phase-out of its supply arrangement with Navistar,
which had been announced in 1987, but did not begin to take effect until 1993.
Partially offsetting the effect of the Navistar phase-out were the introductions
of the DS Electronic Pump on General Motors' 6.5L diesel engine, the roller
rocker arm on Chrysler's 2.0L engine and the Company's patented Fuel Manager
diesel fuel filtration system. While the launch of these products offset to a
large degree the Navistar phase-out, the Company's gross margins and operating
income (as a percentage of sales) declined in contrast to the pre-1994 period.
This is attributable in large part to the start-up costs associated with these
new products, as well as the higher percentage of purchased parts that these
products contain. In addition, following the launch of the new electronically
controlled 6.5L engine by General Motors in 1993, reliability issues surfaced
with respect to both the Company's DS Electronic Pump and General Motors'
vehicle electronic system. The reliability issue on the DS Electronic Pump was
caused primarily by a purchased electronic component, which impacted the
operation and performance of the fuel injection system, among other things. In
addition, there were problems with other engine components and with the
performance of the GM electronics, all of which negatively affected the
reliability and performance of vehicles which utilized the 6.5L engine. As a
result, in 1994 GM announced a non safety recall on all vehicles carrying the
6.5L engine. These conditions had a major impact on the Company's warranty
expenses during fiscal years 1994-1996, as the Company incurred warranty
expenses related to the DS Electronic Pump of $14.8 million, $2.4 million, and
$4.5 million in 1994, 1995 and 1996, respectively. For the nine months ended
September 30, 1997, the Company's warranty expenses related to the DS Electronic
Pump declined to $1.2 million. The Company believes that the problems associated
with the 6.5L engine and the DS Electronic Pump have been resolved and that
future warranty expenses will be significantly lower than in the previous fiscal
years.
As testimony to its strong relationships with its OEM customer base, the
Company has recently been awarded firm orders to produce engine components on
several new or existing engine platforms with expected significant volume
beginning in 1998. For example, the Diesel Group was recently awarded a
long-term contract to be the sole supplier of rotary diesel fuel injection pumps
for Deere's 320-350 series engines, a
32
34
supply arrangement which had previously been shared (approximately 50-50) with
another diesel engine component supplier. Through the development of its
innovative RSN injector, the Diesel Group was recently named the sole supplier
of RSN injectors for Ford UK's 2.5L engine as well as a supplier of RSN
injectors for two Volkswagen direct injection engine platforms. The Company's
Fuel Manager filtration system has been selected by Ford as the sole source
filtration system for the next generation Transit Van, with production
commencing in 2000. Moreover, Precision Engine was recently awarded a long-term
contract renewal as the sole supplier of roller rocker arms for Chrysler's
3.5/3.2L and 2.0L engines. Finally, Precision Engine has recently been selected
as the sole supplier of roller rocker arm assemblies for the 1.6L engine to be
jointly produced by BMW and Chrysler in Brazil starting in 2000. The Company
believes that such new platform wins (or renewals) will enhance its future sales
and profitability.
Since 1991, the Company, most notably the Diesel Group, has been targeting
European OEMs since approximately 30% of the world's diesel engine production
occurs in Europe. Europe has experienced significant growth in diesel on-highway
production in recent years. The following table details the Company's sales by
geographic region:
NET SALES BY REGION
YEAR ENDED DECEMBER 31,
----------------------------------------
MARKET 1992 1993 1994 1995 1996
- -------------------------------------------------------- ---- ---- ---- ---- ----
North America........................................... 85.3% 86.9% 81.4% 73.7% 71.3%
Europe.................................................. 13.5 12.1 17.8 25.6 27.2
Other................................................... 1.2 1.0 0.8 0.7 1.5
---- ---- ---- ---- ----
- - - - -
100% 100% 100% 100% 100%
===== ===== ===== ===== =====
BASIS OF PRESENTATION
The following table sets forth, for the periods shown, net sales, cost of
goods sold, gross profit, selling, general and administrative expense ("SG&A")
and operating income in millions of dollars and as a percentage of net sales:
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------- --------------------------------
1994 1995 1996 1996 1997
-------------- -------------- -------------- -------------- --------------
$ % $ % $ % $ % $ %
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Net sales......... $287.0 100.0% $272.1 100.0% $275.6 100.0% $209.7 100.0% $201.0 100.0%
Cost of goods
sold............ 244.3 85.1 235.6 86.6 234.7 85.2 177.3 84.5 169.0 84.1
Gross profit...... 42.7 14.9 36.5 13.4 40.9 14.8 32.4 15.5 32.0 15.9
SG&A.............. 35.1 12.2 31.7 11.7 31.0 11.2 24.0 11.4 19.4 9.7
Operating
income.......... 7.6 2.6 4.8 1.8 9.9 3.6 8.4 4.0 12.6 6.3
COMPARISON OF RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996
Net Sales. Net sales decreased to $201.0 million for the nine months ended
September 30, 1997, from $209.7 million for the nine months ended September 30,
1996, a decrease of $8.7 million or 4.1%. This decrease was attributable to
Precision Engine, where net sales declined $11.0 million or 19.6%, due in part
to lower sales of roller rocker arm assemblies to Chrysler, as Chrysler
experienced lower sales of the Dodge and Plymouth Neon vehicles and retooled its
engine plants in anticipation of the planned gradual launch of the 3.2L engine
to replace the 3.5L used in Chrysler's new LH series vehicles. This decrease was
partially offset by a $2.3 million or 1.5% increase in Diesel Group sales, due
to strong demand from agricultural and industrial OEM customers.
33
35
Gross Profit. Gross profit decreased to $32.0 million for the nine months
ended September 30, 1997, from $32.4 million for the nine months ended September
30, 1996, a decrease of $0.4 million or 1.2%. As a percentage of net sales,
gross profit increased to 15.9% from 15.5%. This margin increase was due
primarily to the increase in sales at the Diesel Group (whose products generally
carry higher margins than those of Precision Engine), reduced warranty expenses,
as well as cost savings resulting from improved purchasing of raw materials and
component parts in 1997, partially offset by start-up costs associated with the
launch of the Diesel Group's RSN injector and increased production rates for
mechanical pumps.
Selling, General and Administrative Expenses. SG&A expenses decreased to
$19.4 million for the nine months ended September 30, 1997, from $24.0 million
for the nine months ended September 30, 1996, a decrease of $4.6 million or
19.2%. As a percentage of net sales, SG&A decreased to 9.7% from 11.4%. This
decrease was a result of the conclusion of a product development program which
the Company chose no longer to pursue and reductions in post-retirement benefit
costs.
Operating Income. Operating income increased to $12.6 million for the nine
months ended September 30, 1997, from $8.4 million for the nine months ended
September 30, 1996, an increase of $4.2 million or 50.0%. As a percentage of net
sales, operating income increased to 6.3% from 4.0%, primarily as a result of
the improved gross margins and lower SG&A as a percentage of sales.
1996 COMPARED TO 1995
Net Sales. Net sales increased to $275.6 million in 1996 from $272.1
million in 1995, an increase of $3.5 million or 1.3%. The increase was
attributable to net sales growth at Precision Engine of $7.9 million or 12.2%,
partially offset by a $4.4 million or 2.1% decrease in net sales at the Diesel
Group. Precision Engine's sales increase was due to a greater demand by Chrysler
for the roller rocker arm assemblies, and the Diesel Group's sales decline
resulted from lower demand by General Motors for the DS Pump. Since the Company
is the sole source supplier of both engine platforms, the resulting increase and
decrease of sales was the result of the increase and decrease, as applicable, of
demand for the vehicles on which such parts are incorporated.
Gross Profit. Gross profit increased to $40.9 million in 1996 from $36.5
million in 1995, an increase of $4.4 million or 12.1%. As a percentage of net
sales, gross profit increased to 14.8% from 13.4%. Both the Diesel Group and
Precision Engine improved their gross profit margins in 1996 from 1995. In
particular, the Diesel Group's gross profit margins were positively impacted by
price increases as well as factory overhead savings due to reductions in
indirect labor, which were implemented during late 1995 and early 1996 offset by
higher warranty expenses.
Selling, General and Administrative Expenses. SG&A expenses decreased to
$31.0 million in 1996 from $31.7 million in 1995, a decrease of $0.7 million or
2.2%. As a percentage of net sales, SG&A decreased to 11.2% from 11.7%.
Operating Income. Operating income increased to $9.9 million in 1996 from
$4.8 million in 1995, an increase of $5.1 million or 106.3%, primarily as a
result of the increase in net sales, as well as the improvement in gross profit
margin and reduction in SG&A expenses as a percentage of sales. As a percentage
of net sales, operating income increased to 3.6% from 1.8%.
1995 COMPARED TO 1994
Net Sales. Net sales decreased to $272.1 million in 1995 from $287.0
million in 1994, a decrease of $14.9 million or 5.2%. The decrease in net sales
was attributable to a decline in the net sales of Precision Engine of $6.0
million or 8.4%, and a decline in the net sales of the Diesel Group of $8.8
million or 4.1%. Precision Engine's net sales were impacted by lower demand from
Chrysler and Ford for the Company's roller rocker arm assemblies and roller
lifters, respectively, as a result of lower vehicle sales. Diesel Group's net
sales were negatively impacted by the final phase-out of its supply arrangement
with Navistar, which had been planned since 1987. This was significantly offset
by the introduction of the DS Electronic Pump on GM's 6.5L diesel engine, as
well as strong demand from agricultural and industrial equipment manufacturers.
34
36
Gross Profit. Gross profit decreased to $36.5 million in 1995 from $42.7
million in 1994, a decrease of $6.2 million or 14.5%. As a percentage of net
sales, gross profit decreased to 13.4% from 14.9%. This decrease is due both to
the lower sales volume and the final phase out of the Navistar arrangement which
had previously been a highly profitable supply arrangement, offsetting the
benefit of the lower warranty expenses.
Selling, General and Administrative Expenses. SG&A expenses decreased to
$31.7 million in 1995 from $35.1 million in 1994, a decrease of $3.4 million or
9.7%. As a percentage of sales, SG&A expenses decreased to 11.7% from 12.2%. The
decline is the result of an increase in 1995 in product development costs offset
by lower post employment benefit costs, as the Company recorded $1.7 million of
expense in 1994 associated with the initial liability valuation required
pursuant to FAS 112. In addition, in 1994 the Company incurred a charge in
connection with the write off of certain deferred debt issuance costs.
Operating Income. Operating income decreased from $7.6 million in 1994 to
$4.8 million in 1995, primarily as a result of the decrease in net sales and
gross profit margin. As a percentage of net sales, operating income decreased to
1.8% from 2.6% due to the lower sales and gross profit margins, partially offset
by lower SG&A expenses.
LIQUIDITY AND CAPITAL RESOURCES
HISTORICAL
The Company's principal sources of liquidity have been cash flow from
operations supplemented by borrowings under a revolving credit facility. In
addition, the Company, from time to time, has utilized capital leases and, for
its Italian subsidiary, Stanadyne Automotive S.p.A., has had an overdraft
facility with local financial institutions.
Net cash flows provided by operating activities was $10.5 million for the
nine months ended September 30, 1997, versus $25.8 million for the nine months
ended September 30, 1996. The reduction in cash flow provided by operations was
due to increased working capital requirements associated with the expansion of
the Diesel Group's pump and injector operations. Net cash flow provided (used)
by operating activities was $22.4 million, ($5.1) million and $37.8 million in
1994, 1995 and 1996, respectively. The improvement in cash flow from operations
in 1996 was attributable to higher gross margins, aggressive working capital
reduction efforts primarily in the areas of accounts receivable and inventory
management, and receipt of $2.5 million in state and federal refunds of taxes
paid in prior years. Cash flow from operations in 1995 was negatively impacted
by the Company's net sales decline, refinancing penalties, new debt issuance
expenses and $5.7 million of temporary increases in accounts receivable and
reimbursable tooling accounts necessary to expand and support the DS Electronic
Pump program with General Motors. Cash flow operations in 1994 was positively
impacted by working capital reduction efforts, but was partially offset by $14.8
million in product recall program costs associated with General Motors.
Capital expenditures were $9.9 million, $6.7 million and $8.8 million in
1994, 1995 and 1996, respectively. These amounts primarily reflect cash outlays
for the purchase of machinery and equipment and the maintenance of existing
facilities. Management estimates that the Company has historically spent, and
will continue to spend, approximately $3.0 million annually on maintenance of
plant and equipment. The remaining non-maintenance capital expenditures
represent cash outlays for equipment, machinery or plant expansion in order to
support new engine platforms on which the Company intends to supply engine
components or to increase capacity to support increased production volumes on
existing engine platforms. Non-maintenance capital expenditures generally are
not incurred until the Company is awarded orders to supply components on new
engine platforms or agrees with its OEM customers to increase capacity on
existing engine platforms. The Company has budgeted capital expenditures of
$14.2 million for 1997, which includes amounts relating to capacity expansion in
connection with the Diesel Group's award of 100% of Deere's rotary pump
purchases for its 320 and 350 series engines, the machinery and equipment for
production of the RSN injector and equipment necessary to machine in-house the
aluminum castings for the production of roller rocker arm assemblies for sales
to Chrysler. The Company believes that the in-house machining of the roller
rocker arm assemblies will further improve the gross profit margin on sales of
this product.
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POST-ACQUISITION TRANSACTIONS
Following the Acquisition Transactions, the Company's principal sources of
liquidity will be cash flow from operations supplemented by borrowings under the
Revolving Credit Facility. In addition, the Company intends to retain its
Italian overdraft facility and its capital leases.
In connection with the Acquisition Transactions, the Company issued the
Notes for $100.0 million in gross proceeds, and entered into the Term A Loan
Facility and Term B Loan Facility (as defined herein) and the Revolving Credit
Facility (as defined herein) under the New Credit Agreement. The Term A Loan
Facility is a single tranche term facility in the aggregate principal amount of
$30.0 million. The Term B Loan Facility is a single tranche term facility in the
aggregate principal amount of $25.0 million. The Revolving Credit Facility
provides revolving loans in an aggregate amount of up to $30.0 million, subject
to a borrowing base limitation. Upon closing of the Acquisition Transactions,
the Company borrowed the full amount available under the Term A Loan Facility
and Term B Loan Facility and approximately $11.5 million of revolving loans,
reduced to $2.1 million within five business days, under the Revolving Credit
Facility, plus approximately $4.5 million in the form of letters of credit.
Proceeds to the Company from the issuance of the Notes and from initial
borrowings under the New Credit Agreement were distributed to Holdings to
finance, in part, the Acquisition and the fees and expenses in connection
therewith. To provide additional financing to fund the Acquisition, Holdings
raised $60.0 million through an equity contribution by AIP and its related
investors, including certain members of management.
Borrowings under the New Credit Agreement bear interest at a rate per annum
equal (at the Company's option) to a margin over either a base rate or LIBOR (as
defined herein). The Term A Loan Facility and Revolving Credit Facility will
mature in six years, and the Term B Loan Facility will mature in seven years.
The Company's obligations under the New Credit Agreement are guaranteed by
Holdings and each of Holdings' direct and indirect domestic subsidiaries and, to
the extent no adverse tax consequences would result, Foreign Subsidiaries. The
New Credit Agreement and the guarantees thereof are secured by a perfected first
priority security interest in substantially all assets of Holdings and its
direct and indirect domestic subsidiaries and, to the extent no adverse tax
consequences would result, Foreign Subsidiaries. The New Credit Agreement
contains customary covenants and events of default, including substantial
restrictions on the Company's ability to make dividends or distributions to
Holdings. See "Description of New Credit Agreement."
The Exchange Notes will be issued by the Company, will be guaranteed by
each Guarantor of the Company, and will not be guaranteed by Holdings. The
Exchange Notes will mature on December 15, 2007. Interest on the Exchange Notes
will be payable semi-annually in cash. The Exchange Notes will contain customary
covenants and events of default, including covenants that limit the ability of
the Company and its subsidiaries to incur debt, pay dividends and make certain
investments. See "Description of Exchange Notes."
Management believes that, upon completion of the Acquisition Transactions,
cash flow from operations and availability under the Revolving Credit Facility
will provide adequate funds for the Company's foreseeable working capital needs,
planned capital expenditures and debt service obligations. The Company's ability
to fund its operations and make planned capital expenditures, to make scheduled
debt payments, to refinance indebtedness and to remain in compliance with all of
the financial covenants under its debt agreements depends on its future
operating performance and cash flow, which in turn, are subject to prevailing
economic conditions and to financial, business and other factors, some of which
are beyond its control. See "Risk Factors."
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BUSINESS
GENERAL
The Company is a leading designer and manufacturer of highly engineered,
precision manufactured engine components, including fuel injection equipment for
diesel engines and hydraulic lash compensating devices (commonly known as
"hydraulic valve lifters") for gasoline engines. The Company's products serve to
improve engine performance by incorporating technologies that are key to
achieving emissions compliance, noise reduction and fuel economy. The Company
sells engine components to engine OEMs for use in a variety of applications,
including automobiles, light duty trucks, agricultural and construction vehicles
and equipment, industrial products and marine equipment. The Company also sells
replacement units and parts through its extensive aftermarket distribution
network. Due in part to its proven technological capabilities and its reputation
for innovative, high quality products, the Company has become the sole source
supplier of certain engine components on a number of engine platforms
characterized by long-term, high volume production runs. The Company conducts
its business through two principal operating groups: the Diesel Group, which
accounted for 73% of the Company's 1996 net sales, and Precision Engine, which
accounted for 27% of the Company's 1996 net sales. For the latest twelve month
period ended September 30, 1997, the Company had pro forma net sales and EBITDA
of $267.0 and $31.9 million, respectively.
Together with its predecessors, the Company has long-standing relationships
with important OEMs including Chrysler Corporation (50+ years), Ford Motor
Company (50+ years), Deere & Company (40 years), Caterpillar Inc. (27 years),
General Motors Corporation (20 years), Cummins Engine Co. Inc. (16 years) and
Perkins Engines (10 years). The Company's engineering staff works closely with
its OEM customers, generally for periods of two to five years prior to
introduction of the Company's products on an engine platform, to develop or
adapt application specific engine components to satisfy its customers' engine
requirements. The Company typically supplies these components on a sole source
basis pursuant to long-term arrangements with OEMs. Due to the expense and long
lead times necessary to develop application specific engine components, it is
rare for a competitor to replace an incumbent component supplier such as
Stanadyne during the production term of an engine platform. Accordingly, the
Company generally continues supplying components to an OEM throughout the
manufacturing term of a specific engine platform, which typically ranges from
7-15 years for automobile and light duty truck engines and 15-20 years for
agricultural and industrial equipment engines. As evidence of its commitment to
quality, the Company is in the process of registering for QS9000 certification
(which is expected to be completed during the first quarter of 1998), and its
operating groups have received numerous OEM quality awards, including Ford's
"Q-1" award and Chrysler's "Pentastar Award." OEM sales comprised 68% of the
Company's 1996 net sales, with the remaining 32% constituting replacement sales.
The Diesel Group is the largest independent (non-captive) manufacturer of
diesel fuel injection equipment in the United States, and one of only five
independent worldwide manufacturers selling to the geographic areas in which the
Company competes. The Diesel Group produces fuel injection equipment for diesel
engines of up to 250 horsepower, the engine range comprising approximately 90%
of all diesel engines produced worldwide. Fuel pumps and injectors, the Diesel
Group's primary products, are the most highly engineered, precision manufactured
components on a diesel engine and comprise the core components of a diesel
engine's fuel system. Unlike gasoline engines, which ignite pre-mixed air and
fuel with a timed spark, diesel engines rely on high pressure fuel injection
pumps to control combustion timing, engine power and speed. Because fuel system
components are so elemental to the proper functioning and optimum performance of
a diesel engine, they are essentially custom engineered for a specific engine
platform. The Diesel Group also manufactures diesel fuel filters, fuel heaters
and water separators and distributes diesel fuel conditioners and stabilizers
and diesel engine diagnostic equipment.
Precision Engine is a leading independent domestic manufacturer of
hydraulic valve lifters, including aluminum roller rocker arm assemblies and
lash adjusters, for gasoline engines. These products convert the rotary motion
of a camshaft into a reciprocating motion and allow for the adjustment of lash
(clearance) as valves are opened and closed in the cylinder head of an engine.
Hydraulic valve lifters began to replace mechanical valve lifters in domestic
on-highway vehicles in the 1950s since hydraulic valve lifters are more
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efficient in reducing valve train noise, minimizing maintenance requirements and
assisting in improved fuel economy and decreased emissions. The Company believes
that Precision Engine's share of the North American market for hydraulic valve
lifters for the gasoline powered, automobile and light duty truck market is
approximately 20%. Precision Engine has developed an especially important
relationship with Chrysler, to which it currently supplies approximately 50% of
Chrysler's overall domestic hydraulic valve lifter requirements. Specifically,
Precision Engine is the sole source supplier of roller rocker arm assemblies for
Chrysler's 3.5/3.2L and 2.0L engines pursuant to long-term exclusive
arrangements extending for the life of these engines. These engines appear in
Chrysler's "LH" Series (Chrysler LHS and Concorde, Dodge Intrepid and Eagle
Vision) and the Dodge and Plymouth Neon vehicles. Precision Engine's net sales
have grown from $30.2 million in 1991 to $73.2 million in 1996, representing a
compound annual growth rate of 19.4%.
BUSINESS STRATEGY
The Company's strategic objective is to continue to increase its sales and
improve its profitability by capitalizing on its position as a leading
manufacturer of highly engineered, precision manufactured engine components. The
Company intends to capitalize on favorable industry trends by pursuing numerous
opportunities that it believes are available to continue to design and develop
application specific engine components for OEMs worldwide. To execute this
strategy, the Company benefits from a skilled management team with an average of
approximately 25 years of industry experience. Specifically, the Company's
business strategy centers upon the following:
Expand and Grow OEM Relationships. The Company believes that engine OEMs
will continue to rely on independent specialized engine component suppliers such
as Stanadyne in response to technological challenges presented by stricter
worldwide environmental regulations, as well as competitive pressures to improve
quality and reduce production costs. The Company has established and intends to
continue to develop relationships with OEM customers worldwide in order to work
closely with such customers during the early stages of engine development to
design and manufacture application-specific products. The Company is currently
conducting a number of joint development and application programs in conjunction
with certain engine manufacturers in an attempt to create new long-term supply
relationships with such OEMs. In addition, the Company intends to further
develop its strong relationships with OEM customers by continuing to expand its
product offerings through internal product development and through strategic
acquisitions.
Capitalize on New Platform Wins. As testimony to its strong relationships
with its OEM customer base, the Company has recently been awarded firm orders to
produce engine components on several new or existing engine platforms with
expected significant volume beginning in 1998. For example, the Diesel Group was
recently awarded a long-term contract to be the sole supplier of rotary diesel
fuel injection pumps for Deere's 320-350 series engines, a supply arrangement
which had previously been shared (approximately 50-50) with another diesel
engine component supplier. Through the development of its innovative RSN
injector, the Diesel Group was recently named the sole supplier of RSN injectors
for Ford UK's 2.5L engine as well as a supplier of RSN injectors for two
Volkswagen direct injection engine platforms. The Company's Fuel Manager
filtration system has been selected by Ford as the sole source filtration system
for the next generation Transit Van, with production commencing in 2000.
Moreover, Precision Engine was recently awarded a long-term contract renewal as
the sole supplier of roller rocker arms for Chrysler's 3.5/3.2L and 2.0L
engines. Finally, Precision Engine has recently been selected as the sole
supplier of roller rocker arm assemblies for the 1.6L engine to be jointly
produced by BMW and Chrysler in Brazil starting in 2000. The Company believes
that such new platform wins (or renewals) will enhance its future sales and
profitability.
Capitalize on Proven Technological Capabilities. The Company believes that
its proven technological capabilities and reputation for innovative engine
component solutions are a distinct competitive advantage. The Company believes
that increasingly stringent worldwide environmental regulations create
opportunities for the Company to sell technologically advanced engine components
to OEMs trying to produce engines that satisfy emission standards and which have
improved fuel economy and engine performance. The Company has attained a
reputation for unique technical solutions through continued investment in
research and development programs, which have led to several patented products,
including the DS Electronic Pump (a state-of-the-art, electronically controlled
distributor pump), the RSN injector (an innovative injector
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designed to improve emissions and reduce engine noise) and the Fuel Manager (a
fuel filter system featuring interchangeable modular components and a design for
easy maintenance and repair). The Company has extensive engineering and product
development facilities (including a modern 80,000 sq. ft. diesel engineering
center in Windsor, CT) and full service product management capability (which
OEMs require of key suppliers), which enable it to develop proprietary
technology and support design and development activities for the Company's
products.
Emphasize Replacement Sales. The Company sells replacement units to OEMs
for distribution through their service organizations and sells replacement units
and parts through the Company's own extensive aftermarket distribution network.
Replacement sales tend to be "counter-cyclical" to the general economic cycle
and, with respect to diesel engine products, generally afford higher margins
than original equipment sales. The Company believes that its diesel aftermarket
distribution network is an important competitive advantage because OEMs select a
supplier, in part, based on the strength of the supplier's aftermarket service
and distribution capability. The Company's diesel aftermarket network consists
of 17 central distributors, who support over 563 authorized service dealers in
North America, and 66 central distributors and 566 service dealers outside of
North America, including 22 central distributors and 323 service dealers in
Europe. All of the Company's central distributors and service dealers are
trained and certified in accordance with Company policies. Precision Engine
sells replacement components directly to a variety of aftermarket customers,
including Dana, which resells the Company's products through an independent
network as well as through the NAPA parts organization. With a large and growing
in-service equipment population, the Company believes that it is well positioned
to further increase replacement sales.
Expand European Presence. The Company believes that significant
opportunities exist to expand its sales in Western Europe, which currently
produces approximately 30% of the world's diesel engines. Since the initiation
of programs targeting European OEMs, the Company's European sales have grown
from $22.8 million in 1991 to $74.9 million in 1996, representing a compound
annual growth rate of 26.9%. To better serve the needs of its European OEM
customers, the Company acquired injector manufacturing operations in Brescia and
Bari, Italy to complement its established marketing, engineering and services
support facilities in Trappes, France and Huntingdon, England. In addition, the
Company believes that Precision Engine is well positioned to capitalize on the
continuing trend among Western European engine manufacturers to convert from
mechanical to hydraulic valve lifters in on-highway engines. In 1995, Precision
Engine began supplying lash adjusters for two Fiat engine platforms, and in
1996, Precision Engine was named one of Fiat's top 25 suppliers for its
exemplary quality and support. The Company believes that its reputation as a
high quality provider of engine components and its established European service
network and manufacturing operations will enable it to develop new OEM
relationships, as well as to expand its current OEM relationships in Western
Europe.
INDUSTRY OVERVIEW
Since the late 1970's, North American and European governments have adopted
more stringent emissions regulations. Stricter worldwide emissions requirements
and the continuing goals of improved fuel economy and engine performance present
technical challenges for engine manufacturers. Due to the technical expertise,
lower cost structures and responsiveness of outside suppliers from both a
development and manufacturing perspective in developing engine components that
assist in optimizing combustion and hence lowering emissions, the Company
believes that OEMs will continue to rely on outside suppliers such as Stanadyne.
By relying on outside manufacturers to produce these critical components, OEMs
are able to focus on overall design, assembly and consumer marketing issues.
The Diesel Group and Precision Engine each competes with a relatively small
number of other suppliers. The awarding of business to an engine supplier such
as Stanadyne generally begins with a selection process in which an OEM
approaches one or more suppliers for an intended engine component. Based upon
initial design and engineering evaluations, as well as the ability of a
potential supplier to fulfill the OEM's requirements, the OEM generally chooses
a single supplier to manufacture a given component. This selection process
usually occurs two to five years in advance of production. Once selected, the
Company's technical and engineering staff continues to work closely with the
OEM's design and production teams to develop application specific
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products to meet the OEM's engine requirements. Generally, the supplier will
manufacture components for the entire production cycle for the engine platform
and will continue manufacturing components as long as there is a viable
aftermarket. The production run of an engine platform ranges on average from
7-15 years for automobile and light duty truck engines (diesel and gasoline) and
15-20 years for diesel agricultural and industrial equipment engines.
THE DIESEL GROUP
PRODUCTS
Unlike gasoline engines, which ignite pre-mixed air and fuel with a timed
spark, diesel engines rely on fuel injection equipment, including high-pressure
fuel injection pumps and injectors, to control combustion timing, engine power
and speed. High compression ratios (typically double those of gasoline engines),
unthrottled air inlet and high-pressure atomization of fuel injected directly
into the combustion chamber just before the start of combustion result in the
diesel engine's relative superior emissions compliance and substantial fuel
economy advantage over gasoline engines. Achieving these characteristics
requires fuel system components of greater complexity, and machined to closer
tolerances, than are found in the typical gasoline engine.
The Diesel Group's diesel fuel injection components are developed in
response to the needs of its OEM customer base and in anticipation of evolving
market requirements. These products are specifically engineered for each engine
application in order to optimize the performance of the fuel delivery system on
the engine to achieve the desired power, economy and emissions characteristics.
The Diesel Group's primary products, including fuel pumps and injectors, are the
most highly-engineered, precision manufactured components on a diesel engine and
comprise the core components of a diesel engine's fuel system. Together with the
Diesel Group's other product offerings, which include diesel fuel filtration
equipment, fuel heaters, water separators, diesel fuel conditioners and
stabilizers and diesel engine diagnostic equipment, the Company offers a
comprehensive line of fuel system management products.
The following chart shows the Diesel Group's product offerings as a
percentage of the Diesel Group's total sales:
YEAR ENDED DECEMBER 31,
---------------------------------------------
PRODUCT 1992 1993 1994 1995 1996
- ------------------------------------------------- ----- ----- ----- ----- -----
Pumps............................................ 54.9% 60.1% 55.8% 55.1% 52.8%
Injectors........................................ 31.4 25.7 29.2 29.2 28.7
Filters.......................................... 11.4 11.2 12.0 13.3 15.8
Other............................................ 2.3 3.0 3.0 2.4 2.7
----- ----- ----- ----- -----
Total....................................... 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
The Diesel Group's products are primarily targeted for diesel engines of up
to 250 horsepower, the engine range comprising approximately 90% of all diesel
engines produced worldwide. Applications for which the Company's diesel engine
components are used include sport utility vehicles, pick-up trucks, vans,
tractors, bulldozers, combines, logging equipment, generator sets, compressors
and water pumps.
PUMPS. In general, diesel fuel pumps pressurize the fuel and deliver exact
quantities to each cylinder at precisely the correct timing. The Diesel Group
produces a broad line of diesel fuel pumps, including electronic, mechanical and
submerged pumps, with varying prices depending upon performance characteristics.
Electronic and mechanical fuel pumps range in price from $250 to $550 per pump,
with submerged pumps being less expensive. Below is a summary of the Diesel
Group's main pump product lines:
- DS Electronic Pump. The DS Electronic Pump is a state-of-the-art
electronically controlled distributor pump. This pump was initially
designed for emission sensitive, on-highway applications and offers
superior, precision electronic control of fuel quantity, combustion
timing and high injection pressure. Electronic sensors mounted on both
the engine and the vehicle provide information on
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engine operating characteristics to an electronic control module, which
instructs the pump on the timing and amount of fuel delivery. The Company
believes that significant opportunities exist to apply the technologies
developed in the DS program to produce electronic pumps for certain
emissions sensitive off-highway applications.
- DB2 and DB4 Mechanical Distributor Pumps. Mechanical distributor pumps
are less expensive than electronic pumps and are primarily used in
agricultural, construction and industrial equipment, which are currently
subject to less stringent emissions regulations than on-highway vehicles.
The DB2 Mechanical Pump is generally used in diesel engines with up to
125 horsepower and the DB4 Mechanical Pump is generally used in diesel
engines with between 125 and 250 horsepower. The Diesel Group also
produces advanced versions of its mechanical pumps for certain emissions
sensitive applications where the cost associated with a more expensive
electronic pump is not warranted.
- Submerged Pumps. The submerged type diesel fuel injection pumps are
utilized for engines with one-, two- and three-cylinder configurations
with less than 50 horsepower. The submerged pump performs the same
function as a rotary pump, but the submerged pump is mounted inside the
engine and the pumping elements are driven by the camshaft of the engine.
Fuel Injectors. The fuel injector is an assembly comprised of a nozzle and
a nozzle holder through which a measured amount of fuel, determined by the fuel
pump, is injected under high pressure into the combustion chamber through a hole
or holes in the nozzle. A smaller diameter nozzle provides the engine designer
more flexibility for the location of the injector in the cylinder head,
assisting in cleaner combustion and accordingly reduced emissions, increased
power and improved fuel economy. Since the 1940s, the Diesel Group has developed
a range of different sized and shaped fuel injectors to meet varying OEM
requirements. The Diesel Group's nozzle offerings are as follows:
- Conventional (17 or 21 mm) Injectors. Injectors of this size are used
today in most high-volume on and off-highway diesel engine applications.
The Company manufactures injectors of this size range at its operations
in Italy.
- Pencil Nozzle. Over 25 years ago, the Company developed the Pencil
Nozzle as an alternative to conventionally sized injectors. The Pencil
Nozzle's compact 9.5 mm diameter allows more flexibility for positioning
the injector in the cylinder head and combustion chamber, and the simple
one-bolt design of the Pencil Nozzle facilitates clamping and allows for
a simplified cylinder head design.
- Slim Tip Pencil Nozzle. The Company's patented Slim Tip Pencil Nozzle
is a continued miniaturization of the Pencil Nozzle, intended to further
increase the engine designer's flexibility in locating the injector.
- RSN Injector. The Company has recently introduced the RSN injector, an
innovative rate shaping nozzle. By varying the rate at which the fuel is
injected into the combustion chamber and the amount of fuel injected,
this patented design produces lower combustion noise and improves
light-load/low speed emissions. The appeal of the RSN is that it
accomplishes the necessary fuel flow regulation for injection rate
control through a greatly simplified and more compact design than other
methods currently in use. The RSN design can be used in both conventional
and pencil-type injectors.
Filters. The Diesel Group manufactures a full line of fuel filters. Fuel
filters remove dirt and debris from the fuel to protect the fuel injection
system from damage and wear. The Company's primary filter product is its
patented Fuel Manager, which features interchangeable modular components which
allow it to be adapted for nearly all diesel equipment fuel management
functions. The Fuel Manager is designed to provide filtration on a broad range
of engines and also includes various options such as chassis- or engine-mounting
as well as the ability to add on components such as water separators, sensors,
fuel heaters, and fuel primers. In 1997, a modular fuel lift pump option was
introduced as another Fuel Manager optional feature, which assists in the
reliability of the fuel system performance on emissions sensitive engines. For
ease of maintenance, no tools are needed to change the modular options or
replace filter elements. The design of the system provides numerous
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mounting options, which are especially helpful in situations where there is
minimal engine space and maintenance access is restricted.
CUSTOMERS
Since the mid-1950's, the Diesel Group has developed strong relationships
with its global OEM customers, currently supplying 22 different diesel engine
manufacturers worldwide. Its primary OEM customers include Deere, Caterpillar,
General Motors, Cummins, Perkins, Ford, Volkswagen, SISU and IVECO (a subsidiary
of Fiat). The Diesel Group's growth has been driven by increasing sales of fuel
injection equipment to its long-term OEM customer base and by successfully
adding new customers. Since 1988, the Company has added 18 new customers, with
15 of these non-U.S. headquartered. Specifically, the Diesel Group has targeted
customers in Western Europe, the largest diesel engine market, producing
approximately 30% of the world's diesel engines. Through its acquisitions of
injector manufacturing operations in Brescia and Bari, Italy to complement its
established marketing, engineering and service support facilities in Trappes,
France and Huntingdon, England, the Diesel Group has the infrastructure and
manufacturing operations to efficiently supply European customers.
The following table sets forth information about the Diesel Group's primary
OEM customers:
LENGTH OF
CURRENT CUSTOMER
ENGINE SUPPLY
QEM CUSTOMER COMPONENT APPLICATION(S) CURRENT EQUIPMENT APPLICATION(S) RELATIONSHIP
- --------------- -------------------- ------------- -------------------------------- ------------
Deere.......... Pumps, Injectors and 300, 320 and Agricultural and Industrial 40 years
Filters 350 Series Equipment, Generator Sets and
Engines Marine Equipment
Caterpillar.... Injectors 3208 Heavy Duty Trucks and Marine 27 years
Equipment
General Pumps and Filters 6.5L Pickups, Blazers, Suburbans, 20 years
Motors......... Vans and HUMMVs
Cummins........ Oil Pumps Northstar B Seville and Aurora 16 years
Pumps and Injectors Series Generator Sets
Generator
Drive Engines
Perkins........ Pumps, Injectors and 3.152, 4.236 Agricultural and Industrial 10 years
Filters and 900 and Equipment, Generator Sets and
1000 Series Marine Equipment
Engines
Ford........... Injectors 2.5L Vans 10 years
SISU........... Pumps, Injectors and Agricultural Agricultural Tractors 8 years
Filters Engines
IVECO.......... Injectors 8200 Heavy Duty Trucks and Industrial 6 years
Equipment
Volkswagen..... Injectors 4- and Polo and Golf 4 years
5-Cylinder
Direct
Injection
The Diesel Group also sells replacement units to OEMs for distribution
through their respective service organizations and sells replacement units and
parts through the Company's own extensive aftermarket distribution network.
Replacement sales represent a stable and recurring source of revenue for the
Company, even during recessionary economic periods. In addition, sales of
replacement units and parts are typically higher margin than sales of original
components to OEMs. Since the working life of an individual fuel injection
component is generally less than the working life of the individual engine, the
Company has multiple
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opportunities throughout the life of the engine to service its products via
either repair or replacement. With a large and growing in-service equipment
population, the Company believes that it is well positioned to further increase
replacement sales.
MARKET
Diesel engines have been an important power source for nearly 100 years,
with the worldwide market for diesel engines experiencing consistent growth in
recent years. According to MotoData, global diesel engine production has grown
from 13.3 million engines manufactured in 1991 to 16.2 million in 1995, and is
expected to grow to 18.6 million engines by the year 2000. Growth in diesel
engine production has been fueled by the competitive advantages associated with
diesel, which typically include substantially greater fuel efficiency, improved
engine durability and favorable emissions compliance when compared to similar
gasoline engines. These advantages associated with diesel engines are expected
to become more prominent as world-wide environmental regulations continue to
become more stringent. The projected growth in the number of diesel engines
produced is due in part to continued penetration of diesel engines in passenger
cars and light trucks worldwide.
global production chart
Source: The Engine Review published by MotoData
Western Europe is the leading producer of diesel engines worldwide,
representing approximately 30% of global diesel engine production. The demand
for diesel engines in Western Europe is driven primarily by the Western European
automobile market. Demand for diesel powered passenger cars in Western Europe is
attributable to the fact that in several European countries, tax rates and
license fees imposed on gasoline powered passenger cars, when combined with the
typical consumer advantages associated with diesel such as improved fuel economy
and lower maintenance costs, make owning and operating a diesel automobile less
than half the cost of owning and operating a comparable gasoline powered
vehicle. In terms of off-highway diesel engines, the demand for diesel engines
is expected to be driven by emerging and underdeveloped regions, where
industrial, construction and agricultural equipment will be utilized in building
modernized infrastructures.
PRECISION ENGINE
PRODUCTS
Precision Engine produces hydraulic valve lifters for gasoline engines.
These products convert the rotary motion of a camshaft into a reciprocating
motion and allow for the adjustment of lash (clearance) as valves are opened and
closed in the cylinder head of an engine. Hydraulic valve lifters began to
replace mechanical valve lifters in domestic on-highway vehicles in the 1950s
since hydraulic valve lifters are more efficient in reducing valve train noise,
minimizing maintenance requirements, and assisting in improved fuel economy and
decreased emissions. Recognizing these advantages of hydraulic valve lifters,
European OEMs are continuing
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to convert from mechanical to hydraulic valve lifters. The Company believes that
significant future opportunities exist for further penetration with European
OEMs as this conversion continues.
Precision Engine designs and manufacturers four basic types of hydraulic
valve lifters, all of which have similar functions but are designed for use in
different engine platforms:
- Roller Rocker Arms. The aluminum roller rocker arm assembly, which is
designed for center-pivot engines, is currently Precision Engine's
largest selling product line comprising approximately 65% of Precision
Engine's 1996 net sales. Precision Engine began production of the roller
rocker arm in 1992 after an extensive design and development program with
Chrysler. In 1997, Precision Engine began its own in-house machining of
aluminum castings for the roller rocker arm assembly, a process that had
previously been outsourced. The Company believes that this in-house
machining will result in significant cost savings to the Company and
Chrysler.
- Lash Adjusters. The lash adjuster, which is designed for end-pivot
engines, accounted for 8% of Precision Engine's 1996 net sales. Precision
Engine sells the lash adjuster to certain European OEMs producing the
end-pivot engine.
- Roller Valve Lifters. The roller valve lifter, which is designed for
cam-in-head engines, accounted for 14% of Precision Engine's 1996 net
sales. It is sold primarily to Ford for use in its 2.0L engine.
- Slipper Valve Lifters. The slipper valve lifter was originally
engineered in the 1950s for the classic push rod engine. Precision Engine
manufactures and purchases for resale over 25 styles of slipper valve
lifters, targeting older domestic cars and light trucks. Currently all of
Precision Engine's slipper valve lifter sales are to non-OEM customers.
Slipper valve lifter sales accounted for 13% of Precision Engine's 1996
net sales.
CUSTOMERS
Precision Engine supplies hydraulic valve lifters to a variety of worldwide
OEMs, including Chrysler, Ford, Fiat and First Auto Works (China's third largest
automobile manufacturer). Precision Engine has developed an especially important
relationship with Chrysler, to which it currently supplies 50% of Chrysler's
overall domestic hydraulic valve lifter requirements. Specifically, Precision
Engine is the sole source supplier of roller rocker arm assemblies for
Chrysler's 3.5/3.2L and 2.0L engines pursuant to long-term exclusive
arrangements for the life of these engines. These engines are used in Chrysler's
"LH" Series (Chrysler LHS and Concorde, Dodge Intrepid and Eagle Vision) and the
Dodge and Plymouth Neon vehicles. Precision Engine has received several awards
from its customers for exemplary quality and support, including Chrysler's
"Quality Excellence Award," Chrysler's "Pentastar Award" and Ford's "Q-1"
awards, and Precision Engine has been named one of Fiat's top 25 suppliers.
The following table sets forth information about Precision Engine's primary
OEM customers:
LENGTH OF
CURRENT CUSTOMER
ENGINE CURRENT EQUIPMENT SUPPLY
OEM CUSTOMER COMPONENT APPLICATION(S) APPLICATION(S) RELATIONSHIP
- ------------------- --------------------- --------------- ----------------------------- ------------
Chrysler........... Roller Rocker Arm 3.5/3.2L Intrepid, Vision, Concorde 50+ years
and LHS
Roller Rocker Arm 2.0L Neon
Ford............... Roller Valve Lifter 2.0L Escort and Tracer 50+ years
First Auto Works... Lash Adjuster 2.2/2.5L Light Duty Trucks, Passenger 10 years
Cars
SAM-Piaggio........ Lash Adjuster 898 CincoCento 3 years
Fiat............... Lash Adjuster 1370 Tipo, Bravo and Brava 2 years
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Precision Engine has developed strong relationships with its aftermarket
customers. Precision Engine supplies replacement components to OEMs, as well as
to a number of manufacturing repackagers such as Muskegon, Pioneer, Repco and
Dana, with whom the Company has a 20+ year supply relationship. In addition,
Precision Engine sells to Jasper Engine and Transmission Exchange, an engine
rebuilder. Precision Engine has been recognized by both Dana and Jasper for
exemplary quality and service and has received Dana's "Partner in Excellence"
award.
MARKET
The market for Precision Engine's products is driven in part by global
gasoline engine production, which according to MotoData grew from 78.1 million
engines manufactured in 1991 to an estimated 96.3 million engines manufactured
in 1996. The Company believes that this growth was due in part to the global
economic recovery and the expansion of markets in developing countries. The
market is projected to continue growing with gasoline engine production
estimated to reach 102.5 million engines by the year 2000. Demand from third
world countries will largely fuel the growth, but it is expected that North
America will remain the dominant region of engine production with an estimated
35% of total production.
The Company believes that the worldwide market for valve lifters (which
includes both hydraulic as well as mechanical valve lifters) is in excess of $1
billion, with hydraulic valve lifters representing 79% of total production and
mechanical valve lifters representing the remaining 21%. North America
represents approximately 36% of worldwide production (consisting of
substantially all hydraulic valve lifters). The Company believes that several
industry trends will benefit hydraulic valve lifter manufacturers such as
Stanadyne. First, relative stability in overall fuel prices has created a
renewed interest in six and eight cylinder engines, which correspondingly
require greater numbers of valve lifters. In addition, engines with four or more
valves per cylinder, requiring more valve lifters than typical two valve per
cylinder engines, have grown in popularity in recent years due to their reduced
emissions and greater fuel economy. Finally, in order to meet increasingly
stringent emissions regulations and fuel efficiency standards, European engine
manufacturers are continuing to convert from mechanical to hydraulic valve
lifters, presenting Precision Engine with significant opportunities to develop
supply relationships with such manufacturers.
SALES, MARKETING AND DISTRIBUTION
The Company believes that its long standing relationships with its OEM
customers and its reputation for innovative engine component solutions
facilitate its marketing and sales efforts. The Company's sales, engineering and
quality representatives meet regularly with the purchasing, engineering and
quality personnel of OEM customers to develop or adapt products to meet each
OEM's engine requirements. In order to demonstrate its commitment to quality,
the Company is in the process of registering for QS9000 certification. It is
expected that such registration will be completed during the first quarter of
1998.
The Company's diesel aftermarket distribution and service network consists
of 83 central distributors and 1,129 service dealers, all of whom are trained
and certified in accordance with Company policies. The Company believes that its
North American service network is the most extensive and capable in the
industry.
The following table sets forth information on the Company's service
network.
CENTRAL SERVICE
MARKET DISTRIBUTORS DEALERS
--------------------------------------------------- ------------ -------
North America...................................... 17 563
Europe............................................. 22 323
Other.............................................. 44 243
--
----
Total......................................... 83 1,129
== ====
In addition to its sales to its OEM customers, Precision Engine sells
replacement components directly to its manufacturing repackager and engine
rebuilder customers.
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RAW MATERIALS AND COMPONENT PARTS
The Company's products are made largely of specially designed metal parts,
most of which are designed, purchased, cast or stamped, and machined by the
Company to its own technical specifications. Metallic raw materials such as
steel, aluminum, copper and brass are commodity items readily available from a
number of suppliers. Certain parts, such as electronic components or fasteners,
are purchased by the Company from outside suppliers as standardized parts or are
made to the Company's specifications. Although from time to time the Company has
experienced temporary supply shortages due to localized conditions, no such
shortage has materially adversely affected the Company.
COMPETITION
Because of the technical expertise required to design and manufacture the
Company's products to the specifications and tolerances required, the existence
of longstanding supply relationships in the engine component business and the
significant capital expenditures and lead time required to enter the business,
there are a limited number of manufacturers selling to the global markets in
which the Company competes. Several competitors exist, including the internal
component operations of a few OEMs, as well as independent suppliers, many of
which are larger and have financial resources exceeding those of the Company.
For the Company's principal products, competition is a factor early in the
design process. In particular, when an OEM develops a new engine line, the
Company competes on the basis of technological innovation, product quality,
processing and manufacturing capabilities, service support and price. The main
competitors with the Diesel Group are Robert Bosch GmbH (the leading supplier of
fuel injection equipment in Europe), Lucas Varity (formerly Lucas C.A.V.,
another large European supplier) and Zexel and Nippondenso (licensees of Bosch
with few sales outside of Japan). The main competitors of Precision Engine are
INA Walzlager Schaeffler KG, Eaton Corporation and WA Thomas (formerly the
Hylift division of SPX Corporation).
ENGINEERING AND DESIGN; INTELLECTUAL PROPERTY
Through 50 years of supplying engine components, the Company has developed
significant know-how and experience in the areas of product design and precision
manufacturing. The Company's engineers utilize advanced computer aided design
and testing software in the areas of hydraulics, stress analysis, film thickness
and geometric analysis to design products and components and develop
manufacturing processes. The Company is continuously engaged in creating and
developing new fuel injection and valve train products, applications for
existing products to meet the needs of the marketplace and manufacturing
processes. Factory floor operations for products such as the DS Electronic Pump
and the aluminum roller rocker arm assembly utilize computer controlled
equipment and gauges requiring advanced skills by manufacturing teams and their
leaders.
The Company relies upon patent, trademark and copyright protection, as well
as upon unpatented proprietary know-how and other trade secrets, for certain of
its products, components, processes and applications. The Company considers its
proprietary information important, especially in the maintenance of its
competitive position in the aftermarket and replacement parts business, and
takes actions to protect its intellectual property rights. However, the Company
cannot assure that any of its patents will not be challenged, invalidated,
circumvented or rendered unenforceable or that meaningful protection or adequate
remedies will be available in respect of its other intellectual property. The
Company's operations are not dependent upon any single or related group of
patents, copyrights or trademarks.
PROPERTIES
The Company's executive offices are located in Windsor, Connecticut. The
Company believes that substantially all of its properties and equipment are in
good condition, and that it has sufficient capacity to meet its current and
projected manufacturing and distribution needs. The Company's 80,000 sq. ft.
diesel engineering center in Windsor, Connecticut contains fifteen dynamometer
test cells, a vehicle emission test site, 188 development and durability test
strands, five vehicle test bays, microprocessor, instrumentation, vibration and
filtration research laboratories and environmental chambers for cold test,
hot/cold cycle and salt exposure testing.
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Below is a summary of the existing facilities:
SQUARE TYPE OF
LOCATION FOOTAGE INTEREST DESCRIPTION OF USE
- ------------------------- ------- -------- --------------------------------------------------
DIESEL GROUP:
Windsor, CT.............. 571,000 Owned Corporate Offices, Diesel Group Headquarters,
Sales and Marketing, Engineering Center,
Manufacturing
Jacksonville, NC......... 110,000 Owned Manufacturing, Distribution
Washington, NC........... 177,000 Owned Manufacturing
Trappes, France.......... 23,000 Leased Engineering, Sales
Huntingdon, England...... 3,000 Leased Engineering, Sales
Brescia, Italy........... 175,000 Owned Stanadyne Automotive S.p.A. Headquarters,
Engineering, Sales, Manufacturing
Bari, Italy.............. 117,000 Leased Manufacturing
PRECISION ENGINE:
Windsor, CT.............. 119,000 Owned Manufacturing
Tallahassee, FL.......... 125,000 Owned Precision Engine Headquarters; Manufacturing,
Engineering
Elmhurst, IL............. 1,100 Leased Sales
ENVIRONMENTAL MATTERS
The Company's facilities in the United States are subject to federal, state
and local environmental requirements, including those governing discharges to
the air and water, the handling and disposal of solid and hazardous wastes, and
the remediation of contamination associated with releases of hazardous
substances. The Company's Italian facilities are subject to Italian and local
environmental requirements, as well as the environmental requirements
promulgated by the European Community.
Based on a review conducted by independent environmental consultants in
connection with the Acquisition, the Company believes that it is currently in
material compliance with environmental requirements. Nevertheless, the Company's
manufacturing operations involve the use of hazardous substances and, as is the
case with manufacturers in general, if a release of hazardous substances occurs
or has occurred on or from the Company's facilities, the Company may be held
liable and may be required to pay the cost of remedying the condition. The
amount of any such liability could be material.
The Company has made, and will continue to make, expenditures to comply
with current and future environmental requirements. Because environmental
requirements are becoming increasingly stringent, the Company's expenditures for
environmental compliance may increase in the future. The Company does not
anticipate material capital expenditures for environmental controls in 1998 or
1999.
In 1995, the Company entered into a consent order with the Connecticut
Department of Environmental Protection ("DEP") to correct certain hazardous
waste management regulatory compliance matters and to investigate and address
soil and groundwater contamination at its Windsor, CT facility. The Company has
corrected the hazardous waste management matters, and is continuing to
investigate areas of contamination. The investigation has identified solvent
compounds in soil and groundwater at the southeast portion of the property and
other less significant areas of contamination. The solvent contamination extends
beyond the property boundary and the Company has entered into agreements with
the adjacent property owners that obligate the Company to address the
contamination to the extent required by DEP. The Company expects that a
groundwater treatment system will be installed to address the contamination.
In early 1996, an oil sump at the Company's Jacksonville, NC facility was
found to be leaking. The Company began an approved interim remediation in March
1996. In August 1997, the Company submitted a Corrective Action Plan to the
North Carolina Department of Health and Natural Resources to address the
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soil and groundwater contamination that resulted from the leak. The Plan was
approved in December 1997 and is being implemented.
Under the federal Superfund law, also known as the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA"), persons who
may be liable for the costs of investigation and cleanup of sites from which
there have been releases of hazardous substances include current and former
owners and operators of such sites, persons who arranged for the disposal of
hazardous substances at such sites, and persons who transported hazardous
substances to such sites. Liability under CERCLA is generally strict, joint and
several, although as a practical matter, a potentially responsible party's
liability at a Superfund site will be allocated among all financially viable
responsible parties based on a variety of equitable factors, including, but not
limited to, degree of culpability, relative amount of waste sent to the site,
and toxicity of the waste sent to the site. The Company is involved as a
potentially responsible party with regard to waste disposal at four Superfund
cleanup sites. The Company does not expect its liability at these sites to be
material. The Company has settled its liability at three other waste cleanup
sites, subject to the standard "reopener" provisions found in Superfund
settlements.
In connection with the Acquisition, Sellers have indemnified the Company
with respect to the Windsor, CT soil and groundwater contamination matter, the
Jacksonville, NC oil contamination matter, and the Company's involvement at the
aforementioned Superfund cleanup sites. Sellers have also indemnified the
Company with respect to certain other matters identified during SAC, Inc.'s
environmental due diligence of the Company. These indemnities are not subject to
time or dollar limitations. In addition to these specific indemnities, Sellers
have agreed, subject to certain time and dollar limitations, to indemnify the
Company for "unknown" environmental liabilities associated with past operation
of the Company.
There can be no assurances that Sellers will have the ability to indemnify
the Company for all the aforementioned environmental conditions when requested
by the Company. If Sellers are unable to fulfill their indemnification
obligations, the Company will be responsible for such matters and the cost of
addressing such matters could be material. As of December 31, 1996, the Company
had recorded accruals of $2.2 million to reflect future costs associated with
the aforementioned contamination matters at the Windsor, CT and Jacksonville, NC
facilities. Because of the uncertainties associated with environmental
remediation, no assurance can be given that the total costs to be incurred with
respect to these matters will not exceed the recorded accrual.
EMPLOYEE AND EMPLOYEE RELATIONS
As of September 30, 1997, the Company employed approximately 2,000 people
in the United States and approximately 500 people in Europe. The Company
believes its employee and labor relations are good. None of the U.S. employees
are unionized.
LEGAL PROCEEDINGS
From time to time, the Company is involved in various legal proceedings
arising in the ordinary course of business. Management believes that none of
these matters in which the Company is currently involved, either individually or
in the aggregate, is expected to have a material adverse effect on the Company's
business or financial condition. See "-- Environmental Matters."
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the name, age as of September 30, 1997 and
position with the Company of each person who is a member of the Board of
Directors or an executive officer of Stanadyne following the Acquisition. All
directors serve for the term for which they are elected or until their
successors are duly elected and qualified or until death, retirement,
resignation or removal.
NAME AGE POSITION
- ----------------------------------- --- ----------------------------------------------------
William D. Gurley.................. 49 President, Chief Executive Officer and Director
Michael H. Boyer................... 47 Vice President, Chief Financial Officer, Stanadyne
Robert A. Massa.................... 60 Vice President, Human Resources, Stanadyne
Arthur S. Caruso................... 56 Vice President and General Manager, Precision Engine
William W. Kelly................... 45 Vice President, Engineering & Marketing,
Diesel Systems Division
Don Buonomo........................ 58 Vice President, Quality and Reliability, Stanadyne
Lee Janik.......................... 54 Vice President, Power Products Division
Bryan M. Wysong.................... 54 Vice President, European Operations,
Managing Director, Stanadyne Automotive S.p.A.
W. Richard Bingham................. 61 Director
Robert Cizik....................... 66 Director and Chairman of the Board
Kenneth J. Diekroeger.............. 35 Director
Theodore C. Rogers................. 63 Director
Lawrence W. Ward, Jr............... 45 Director
WILLIAM D. GURLEY
President, Chief Executive Officer and Director
Mr. Gurley came to Stanadyne's Diesel Systems Division in 1984 as Vice
President of Marketing and Planning and was promoted in 1987 to the position of
Vice President, Marketing and Product Engineering. With the formation of
Holdings in 1989, Mr. Gurley was promoted to the position of Executive Vice
President, Marketing, Engineering and Operations. At that time, he was elected
as a director of Stanadyne Automotive Corp. In 1995, he was promoted to his
current position. Prior to joining Stanadyne, he worked for the Garrett
Corporation's Automotive Products Company (now a division of Allied-Signal) in a
series of sales-management positions. Mr. Gurley eventually became the President
and General Manager of its Japanese subsidiary. Before Garrett Corporation, he
worked at the Packard Electric Division General Motors in engineering,
manufacturing and sales positions. Mr. Gurley holds a B.S. in mechanical
engineering from Rose Hulman Institute of Technology and an M.B.A. degree from
Pepperdine University.
MICHAEL H. BOYER
Vice President, Chief Financial Officer, Stanadyne
Mr. Boyer joined Stanadyne in July 1978 and held progressively more
responsible positions in accounting until being named Controller of the Diesel
System Division in 1985. When Holdings was formed in 1989, Mr. Boyer was
promoted to his current position. Prior to Stanadyne, he worked for the Dexter
Corporation. Mr. Boyer holds a B.B.A. degree in accounting from the University
of Massachusetts and an M.B.A. from Western New England College.
ROBERT A. MASSA
Vice President, Human Resources, Stanadyne
Mr. Massa joined Stanadyne in October 1990 as Vice President, Human
Resources. Prior to joining Stanadyne, he worked in the Hartford area for
Veeder-Root for 13 years in a variety of managerial positions in
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Employee Relations and finally as Vice President, Industrial and Community
Relations. Mr. Massa holds a B.S. degree from the University of Hartford and is
a graduate of the Management Development Program conducted by The Hartford
Graduate Center.
ARTHUR S. CARUSO
Vice President and General Manager, Precision Engine
Mr. Caruso joined Stanadyne's Precision Products Division (the predecessor
entity to Precision Engine) in 1965 and has held progressively more responsible
positions in finance and manufacturing since that time. He was designated
Manager at Precision Engine's manufacturing plant in Tallahassee in 1986, having
served previously as the Factory Manager at the Bellwood Plant, and was promoted
to his present position in late 1988. Mr. Caruso holds a B.S. degree in
accounting/finance from Elmhurst College and an M.B.A. from the University of
Chicago.
WILLIAM W. KELLY
Vice President, Engineering & Marketing, Diesel Systems Division
Mr. Kelly joined Stanadyne in May 1982 as Assistant Chief Engineer for
Advanced Engineering and was promoted to Director of Product Engineering in
October 1997. Effective with the formation of Stanadyne Automotive Corp., Mr.
Kelly was appointed to his current position, Vice President of Engineering and
Marketing for Diesel Systems Division. Previously, he worked for Eaton
Corporation for one year in new product development, preceded by eight years
with Chrysler Corporation in various areas of vehicle and engine systems
engineering. Mr. Kelly holds an M.S. degree from Wayne State University
(Michigan) and a B.S. Engineering degree from Oakland University (Michigan).
DON BUONOMO
Vice President, Quality and Reliability, Stanadyne
Mr. Buonomo joined Stanadyne in May 1997 as Vice President, Quality and
Reliability. Prior to joining Stanadyne, he served as Vice President, Corporate
Quality with C. Cowles & Company and Vice President, Quality & Reliability with
Veeder-Root Company. Mr. Buonomo holds a M.S. in Management from the Hartford
Graduate Center and a B.A. from Dowling Center.
LEE JANIK
Vice President, Power Products Division
Mr. Janik joined Stanadyne in March 1970 as a development engineer and was
promoted to positions of increasing responsibility in Product Engineering,
Reliability and Quality Assurance, Manufacturing and Manufacturing Engineering
before becoming Director of the Power Products Business Unit in 1987. Effective
with the formation of Stanadyne Automotive Corp. in 1989, Mr. Janik was
appointed to his current position, Vice President, Power Products Division.
Prior to joining Stanadyne, Mr. Janik worked for four years with the Hamilton
Standard Division of United Technologies Corp. in the Quality Assurance
Department. Mr. Janik holds a B.S.M.E. degree from Marquette University and a
Masters in Business Management from the Hartford Graduate Center.
BRYAN M. WYSONG
Vice President, European Operations, Managing Director, Stanadyne Automotive
S.p.A.
Mr. Wysong joined Stanadyne in October 1969 as a Development Engineer and
was promoted to increasingly more responsible positions in Engineering, Service,
Sales and Management before becoming Director of Engineering in 1984. Effective
with the formation of Stanadyne Automotive Corp. in 1989, Mr. Wysong was
appointed to his current position as Director, European Operations. Before
becoming part of the Stanadyne team, he served in the U.S. Navy as a
Commissioned Officer, last serving as Executive Officer aboard the USS Gallop
PG-85. Mr. Wysong holds a B.S.M.E. degree from the University of Illinois and an
M.B.A. from the University of Hartford.
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W. RICHARD BINGHAM
Director
Mr. Bingham is a Director, the President, the Treasurer and the Assistant
Secretary of American Industrial Partners Corporation. He co-founded AIP
Management Co. and has been a director and officer of AIP Management Co. since
1989. He was elected to the Board of Directors for Stanadyne Automotive Corp. in
1997. Mr. Bingham is also a director of Bucyrus International, Inc., Day
International Group, Inc., Easco Corporation, RBX Corporation and Sweetheart
Holdings, Inc. He formerly served on the boards of Avis, Inc., ITT Life
Insurance Corporation and Valero Energy Corporation.
ROBERT CIZIK
Director and Chairman of the Board
Mr. Cizik is a Director and a Managing Director of American Industrial
Partners Corporation. He was elected to the Board of Directors for Stanadyne
Automotive Corp. in 1997. Mr. Cizik served as Chairman and Chief Executive
Officer of Cooper Industries, Inc., a diversified international manufacturing
company, from 1975 to 1996. Mr. Cizik is Chairman of the Board of Easco
Corporation and a director of Air Products and Chemicals, Inc., Harris
Corporation and Temple-Inland, Inc.
KENNETH J. DIEKROEGER
Director
Mr. Diekroeger joined the San Francisco office of AIP in 1996 from The
Shansby Group, a private equity investment firm, where he had been employed
since before January 1, 1992, and where he sourced, executed and served as a
director for several middle-market investments and buyouts. He was elected to
the Board of Directors for Stanadyne Automotive Corp. in 1997.
THEODORE C. ROGERS
Director
Mr. Rogers is a Director, the Chairman of the Board and the Secretary of
American Industrial Partners Corporation. He co-founded AIP Management Co. and
has been a director and officer of AIP Management Co. since 1989. Mr. Rogers is
currently a director of Bucyrus International, Inc., Day International Group,
Inc., Derby International, Easco Corporation, RBX Corporation and Sweetheart
Holdings, Inc. He was elected to the Board of Directors for Stanadyne Automotive
Corp. in 1997.
LAWRENCE W. WARD, JR.
Director
Mr. Ward has been an employee of AIP since 1992. From 1989 to 1992, he was
Vice President and Chief Financial Officer of Plantronics, Inc., a
telecommunications equipment company. Mr. Ward is currently a director of
Bucyrus International, Inc., Day International Group, Inc., Easco Corporation
and RBX Corporation. He was elected to the Board of Directors for Stanadyne
Automotive Corp. in 1997.
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
COMPENSATION OF DIRECTORS
Directors are not expected to receive compensation for their services as
directors, with the exception of the Chairman of the Board, who will receive
$150,000 per year. Directors of the Company will be entitled to reimbursement of
their reasonable out-of-pocket expenses in connection with their travel to and
attendance at meetings of the board of directors or committees thereof.
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COMPENSATION OF EXECUTIVE OFFICERS
The compensation of executive officers of the Company is determined by the
Board of the Directors of the Company. The following table sets forth
information concerning compensation received by the five most highly compensated
officers of the Company for services rendered in fiscal 1997.
SUMMARY COMPENSATION TABLE
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL LOCATION YEAR SALARY BONUS COMPENSATION(1) COMPENSATION(2)
- -------------------------------------- ---- -------- -------- --------------- ---------------
William D. Gurley..................... 1997 $300,000 $ 58,013 33,334 $ 916,626
(President, Chief Executive Officer
and Director)
Michael H. Boyer...................... 1997 190,000 39,504 23,381 565,028
(Vice President, Chief Financial
Officer)
Arthur S. Caruso...................... 1997 160,000 114,405 28,579 248,870
(Vice President and General Manager)
Lee Janik............................. 1997 140,000 4,821 21,041 294,054
(Vice President)
William W. Kelly...................... 1997 200,000 7,173 20,986 567,602
(Vice President, Engineering &
Marketing)
- ---------------
(1) Other Annual Compensation is received in the form of taxable and nontaxable
fringe benefits, which include, among other things, club allowances,
personal umbrella insurance, executive life and disability insurance, and
automobile leases.
(2) Other compensation was paid in 1997 in connection with the Acquisition
Transactions. Prior to the Acquisition Transactions, Stanadyne Automotive
Corp. maintained two incentive plans for top level executives: the Debt
Reduction Agreement ("DRA") and the Equity Participation Promotion
Agreement ("EPP"). The DRA was an incentive plan where cash was awarded to
plan members if certain performance objectives were achieved. The EPP was a
stock incentive plan pursuant to which restricted stock granted to plan
members in 1989 would vest upon achieving certain pre-designated
performance benchmarks. Immediately prior to the Acquisition Transactions,
the DRA was paid in full and all stock issued pursuant to the EPP was
accelerated. The EPP and DRA were terminated and all stock owned by
management was sold in connection with the Acquisition Transactions.
EMPLOYMENT AGREEMENTS
William D. Gurley is the Company's President and Chief Executive Officer.
For the fiscal year ended December 31, 1997, the Company paid Mr. Gurley an
annual salary of $300,000 and a bonus of $58,013 and the Company paid $33,334
for various expenses incurred by Mr. Gurley, which represents additional
compensation. The Company has entered into an employment agreement with Mr.
Gurley, the terms of which provide for Mr. Gurley to serve as the Company's
Chief Executive Officer with an annual base compensation of $320,000, subject to
an annual increase, an annual bonus plan administered at the discretion of the
Company's board of directors, and a stock option plan. See "-- Stock Option
Plan." The Company currently compensates Mr. Gurley in accordance with such
terms.
Michael H. Boyer is the Company's Chief Financial Officer. For the fiscal
year ended December 31, 1997, the Company paid Mr. Boyer an annual salary of
$190,000 and a bonus of $39,504 and the Company paid $23,381 for various
expenses incurred by Mr. Boyer, which represents additional compensation. The
Company has entered into an employment agreement with Mr. Boyer the terms of
which provide for Mr. Boyer to serve as the Company's Chief Financial Officer
with an annual base compensation of $202,000, subject to an annual increase, an
annual bonus plan administered at the discretion of the Company's board of
directors, and a stock option plan. See "-- Stock Option Plan." The Company
currently compensates Mr. Boyer in accordance with such terms.
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Arthur S. Caruso is the Company's Vice President and General Manager of
Precision Engine Products Corp. For the fiscal year ended December 31, 1997, the
Company paid Mr. Caruso an annual salary of $160,000 and a bonus of $114,405 and
the Company paid $28,579 for various expenses incurred by Mr. Caruso, which
represents additional compensation. The Company has entered into an employment
agreement with Mr. Caruso, the terms of which provide for Mr. Caruso to serve as
Vice President and General Manager of Precision Engine Products Corp. with an
annual base compensation of $185,000, subject to an annual increase, an annual
bonus plan administered at the discretion of the Company's board of directors,
and a stock option plan. See "-- Stock Option Plan." The Company currently
compensates Mr. Caruso in accordance with such terms.
Lee Janik is the Company's Vice President of the Power Products Division.
For the fiscal year ended December 31, 1997, the Company paid Mr. Janik an
annual salary of $140,000 and a bonus of $4,821 and the Company paid $21,041 for
various expenses incurred by Mr. Janik, which represents additional
compensation. Mr. Janik is an at-will employee with an annual base compensation
of $185,000, subject to an annual increase, an annual bonus plan administered at
the discretion of the Company's board of directors, and a stock option plan. See
"-- Stock Option Plan." The Company currently compensates Mr. Janik in
accordance with such terms.
William W. Kelly is the Company's Vice President of Engineering and
Marketing for the Diesel Systems Division. For the fiscal year ended December
31, 1997, the Company paid Mr. Kelly an annual salary of $200,000 and a bonus of
$7,173 and the Company paid $20,986 for various expenses incurred by Mr. Kelly,
which represents additional compensation. The Company has entered into an
employment agreement with Mr. Kelly, the terms of which provide for Mr. Kelly to
serve as the Company's Vice President of Engineering and Marketing for the
Diesel Systems Division with an annual base compensation of $210,000, subject to
an annual increase, an annual bonus plan administered at the discretion of the
Company's board of directors, and a stock option plan. See "-- Stock Option
Plan." The Company currently compensates Mr. Kelly in accordance with such
terms.
STOCK OPTION PLAN
The Board of Directors will adopt a stock plan (the "Stock Plan"), which
provides for the grant to certain key employees and/or directors of the Company
of stock options that are non-qualified options for federal income tax purposes.
The Board of Directors will have the exclusive authority under the Stock Plan
(except as otherwise provided in the Stock Plan) to determine (i) who will
receive awards, (ii) the type, size and terms of awards, (iii) the time when
awards will be granted, and (iv) vesting criteria, if any, of the awards.
EMPLOYEE BENEFIT PLANS
401(k) PLAN
The Company sponsors two savings plans which are intended to be qualified
under Sections 401(a) and 401(k) of the Internal Revenue Code. All regular
employees, including salaried and hourly employees, of the Company and its
subsidiary, Precision Engine Products Corp., who are employed at the Windsor
Plant, Jacksonville Plant and Washington Plant and salaried employees employed
at the Tallahassee Plant and Melrose Park Plant are eligible to participate in
the Stanadyne Automotive Corp. Savings Plus Plan (the "SAC Savings Plan") and
beginning in January 1, 1998, hourly employees at the Tallahassee Plant are
eligible to participate in the Precision Engine Products Corp. Retirement Fund
(the "PEPC 401(k) Plan"). For each employee who elects to participate in the SAC
Savings Plan and makes a contribution thereto, the Company makes a matching
contribution. The maximum matching contribution for any participant, excluding
the participants in the PEPC 401(k) Plan, for any year is 50% of such
participant's contributions up to a maximum amount of $300.00. The participants
in the PEPC 401(k) Plan receive a Company contribution of $300.00 per year plus
a maximum matching contribution of $100.00.
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PENSION PLAN TABLE(1)(2)
YEARS OF SERVICE
-----------------------------------------------
15 20 25 30 35
------- ------- ------- ------- -------
125,000.......................................... 27,848 37,131 46,414 55,696 61,946
150,000.......................................... 34,223 45,631 57,039 68,446 75,946
175,000.......................................... 40,598 54,131 67,664 81,196 89,946
200,000.......................................... 46,973 62,631 78,289 93,946 103,946
225,000.......................................... 53,348 71,131 88,914 106,696 117,946
250,000.......................................... 59,723 79,631 99,539 119,446 131,946
300,000.......................................... 72,473 96,631 120,789 144,946 159,946
400,000.......................................... 97,973 130,631 163,289 195,946 215,946
450,000.......................................... 110,723 147,631 184,539 221,446 243,946
500,000.......................................... 123,473 164,631 205,789 246,946 271,946
- ---------------
Note:
(1) Amounts shown above represent the annual benefit from the SAC Pension Plan
(as defined herein) plus the benefit from the SERP (as defined herein).
(2) For this illustration, the annual social security benefit was assumed to be
$16,104 for the calculation of the Social Security offset.
The Company formerly maintained a noncontributory defined benefit pension
plan entitled the "Precision Engine Products Corp. Tallahassee Hourly Pension
Plan." This plan was terminated as of December 31, 1997. The Company now
maintains only one noncontributory defined benefit pension plan entitled the
"Stanadyne Automotive Corp. Pension Plan" (the "SAC Pension Plan").
The SAC Pension Plan. The SAC Pension Plan provides benefits for all
non-collectively bargained, salaried employees of the Company and hourly
employees of the Company employed at the Hartford, Washington and Jacksonville
facilities. Salaried employees who participate in the SAC Pension Plan are
provided benefits calculated under one of two different formulas. Salaried
participants are entitled to the greater of the two benefit amounts. Under
Formula One, benefits are based upon (i) a percentage of the monthly average
compensation received by a participant during the five consecutive calendar
years of employment that would produce the highest such average (the "Final
Average Compensation"), (ii) the years of service of the participant with the
Company and certain related or predecessor employers ("Years of Credited
Service"), and (iii) a percentage of the Final Average Compensation that is in
excess of the Social Security taxable wage base (the "Excess Compensation").
Specifically, the accrued benefit payable under Formula One of the SAC Pension
Plan is equal to (w) + (x) = (y) = (z), where
(w) = 1.7% of Final Average Compensation times Years of Credited Service (not in excess
of 30)
(x) = 1% of Final Average Compensation times Years of Credited Service in excess of 30
(y) = 1.66% of primary Social Security times Years of Credited Service (not in excess of
30)
(z) = Annuity for employees actively employed prior to July 2, 1988 (where applicable)
Formula Two under the SAC Pension Plan provides salaried participants with
an accrued benefit equal to $18.00 times Years of Credited Service less an
Annuity for employees actively employed prior to July 2, 1988 (where
applicable).
Benefits provided under the SAC Pension Plan for hourly employees are based
upon (i) a fixed amount per month and (ii) the years of service of the
participant with the Company and certain related or predecessor employers
("Years of Credited Service"). Specifically, the accrued benefit ordinarily
payable under the SAC Pension Plan for hourly employees employed at the
Washington and Jacksonville locations is equal to: $11.00 multiplied by the
participant's Years of Credited Service. Hourly employees employed at the
Hartford facility receive a monthly benefit of $18.00 multiplied by Years of
Credited Service.
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For purposes of the SAC Pension Plan, compensation used in the
determination of Final Average Compensation includes total earnings received for
personal services to the Company. For the 1995 and 1996 calendar years, the
total compensation that can be considered for any purpose under the SAC Pension
Plan is limited to $150,000, and for 1997, the limit is $160,000, pursuant to
requirements imposed by the Internal Revenue Code of 1986, as amended (the
"Code"). The Code also places certain other limitations on the annual benefits
that may be paid under the Plan.
The Company has also adopted two nonqualified plans entitled the "Stanadyne
Automotive Corp. Benefit Equalization Plan" and the "Stanadyne Automotive Corp.
Supplemental Retirement Plan" (together, the "SERP"), which are designed to
supplement the benefits payable under the SAC Pension Plan for designated
employees. The annual benefit payable under the SERP is equal to the difference
between the benefit the designated employee would have received under the SAC
Pension Plan if certain Code limitations did not apply and the designated
employee's SAC Pension Plan benefit.
Benefits may be paid under the SAC Pension Plan and the SERP in the form of
(i) a straight-life annuity for the life of the participant; (ii) a 50% joint
and survivor annuity for the lives of the participant and spouse; (iii) a 75% or
100% joint and survivor annuity whereby the participant receives a reduced
monthly benefit for life and the spouse receives 75% or 100% of such reduced
monthly benefit for life; and (iv) for participants with an accrued benefit of
$3,500.00 or less, a lump sum.
The Years of Credited Service under the SAC Pension Plan at December 31,
1997, were 13.75, 20.0, 32.414, 27.793 and 16.0 for Messrs. Gurley, Boyer,
Caruso, Janik and Kelly, respectively. The estimated annual benefits payable
under the Plan and the SERP are illustrated as follows:
ESTIMATED ACCRUED
PENSION BENEFIT AS OF 12/31/97
--------------------------------
THE SAC
PENSION PLAN THE SERP TOTAL
------------ -------- ------
Boyer........................................................... 40,773 13,203 53,977
Caruso.......................................................... 47,848 31,616 79,464
Gurley.......................................................... 34,505 24,482 58,986
Kelly........................................................... 32,408 10,963 43,371
Janik........................................................... 33,944 847 34,791
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SECURITY OWNERSHIP
The Company is authorized by its Certificate of Incorporation to issue
10,000 shares of Common Stock, par value $.01 per share ("Company Common
Stock"). Holdings owns all of the outstanding and issued shares of Company
Common Stock. Holdings is authorized by its Certificate of Incorporation to
issue 1000 shares of Common Stock, par value $.01 per share ("Holdings Common
Stock"). AIP and management will own approximately all of Holdings Common Stock.
All of the capital stock of the Guarantors is owned by the Company and is
pledged to secure borrowings under the New Credit Agreement. After the
consummation of the Acquisition Transactions, the Company plans to adopt the
Stock Plan, which shall provide for the grant to certain key employees and/or
directors of the Company of stock options that are non-qualified options for
federal income tax purposes.
The following table sets forth certain information with respect to the
common and preferred equity interests of Holdings. See "The Acquisition
Transactions."
PERCENTAGE
OF
OUTSTANDING
NAME AND ADDRESS OF BENEFICIAL OWNER COMMON STOCK
----------------------------------------------------------------------- ------------
AIP.................................................................... 95.22%
Management Investors................................................... 4.78%
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CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS
ACQUISITION ARRANGEMENTS
In connection with the Acquisition Transactions, Holdings, AIP and other
stockholders of Holdings entered into a stockholders agreement (as subsequently
amended, the "Stockholders Agreement") pursuant to which such persons will be
granted certain registration rights and participation rights. Pursuant to the
Stockholders Agreement, AIP shall have the right to elect the directors of
Holdings. It is expected that the directors of the Company shall be the same as
the directors of Holdings.
In connection with the Acquisition Transactions, Holdings and certain
Sellers who are also members of the management of the Company entered into
securities purchase agreements (as subsequently amended, the "Securities
Purchase Agreements") pursuant to which each such Seller could put their
Holdings Common Stock to Holdings on or before February 2, 1998 if Holdings and
such Seller were unable to agree to an amendment to the Stockholders Agreement.
At the close of the Acquisition Transactions, AIP was paid a fee of $4.0
million and was reimbursed for out-of-pocket expenses in connection with the
negotiation of the Acquisition Transactions and for providing certain investment
banking services to the Company, including the arrangement and negotiation of
the terms of the New Credit Agreement and the arrangement and negotiation of the
terms of the Notes, and for other financial advisory and management consulting
services.
MANAGEMENT SERVICES AGREEMENT
Pursuant to a management services agreement, AIP expects to provide
substantial ongoing financial and management services to the Company utilizing
the extensive operating and financial experience of AIP's principals. AIP will
receive an annual fee of $1.1 million for providing general management,
financial and other corporate advisory services to the Company, payable
semiannually 45 days after the scheduled interest payment date for the Exchange
Notes, and will be reimbursed for out-of-pocket expenses. The fees will be paid
to AIP pursuant to a management services agreement among AIP and the Company and
will be subordinated in right of payment to the Exchange Notes.
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DESCRIPTION OF EXCHANGE NOTES
GENERAL
The Exchange Notes will be issued pursuant to an Indenture (the
"Indenture") between Stanadyne Automotive Corp. (the "Company") and United
States Trust Company of New York, as trustee (the "Trustee"). The terms of the
Exchange 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 Exchange Notes are subject to all such terms, and holders of Exchange
Notes are referred to the Indenture and the Trust Indenture Act for a statement
thereof. The following summary of certain 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. A copy
of the proposed form of Indenture and Registration Rights Agreement is available
as set forth under "-- Additional Information." The definitions of certain terms
used in the following summary are set forth below under "-- Certain
Definitions."
The Notes are and the Exchange Notes will be senior subordinated,
unsecured, general obligations of the Company, limited in aggregate principal
amount to $125.0 million (of which $100.0 million was issued in the Notes
Offering). The Notes and the Exchange Notes (together the "Senior Subordinated
Notes") will be jointly and severally irrevocably and unconditionally guaranteed
on a senior subordinated basis by each of the Company's present and future
Subsidiaries (the "Guarantors") other than Subsidiaries that are not guarantors.
The obligations of each Guarantor under its guarantee, however, will be limited
in a manner intended to avoid it being deemed a fraudulent conveyance under
applicable law. See "-- Certain Bankruptcy Limitations" below. The term
"Subsidiaries" as used herein, however, does not include Unrestricted
Subsidiaries.
The Indenture provides, in addition to the Notes issued on December 11,
1997 and the Exchange Notes being issued on the Issue Date, for the issuance of
additional Notes having identical terms and conditions to the Notes offered
hereby (the "Additional Notes"), subject to compliance with the covenants
contained in the Indenture. Any Additional Notes will be part of the same issue
as the Exchange Notes offered hereby and will vote on all matters with the
Exchange Notes offered hereby. The aggregate principal amount of Senior
Subordinated Notes and Additional Notes will be limited to up to $125.0 million
at any one time outstanding. For purposes of this "Description of Exchange
Notes", reference to the Senior Subordinated Notes does not include the
Additional Notes.
As of the date of the Indenture, none of the Company's Subsidiaries were
Unrestricted Subsidiaries. However, under certain circumstances, the Company
will be able to designate current or future Subsidiaries as Unrestricted
Subsidiaries. Unrestricted Subsidiaries generally will not be subject to the
restrictive covenants set forth in the Indenture and will not be Guarantors.
Notwithstanding anything herein to the contrary, the provisions of the Indenture
do not prevent or restrict consummation of the Exchange Offer contemplated
herein.
PRINCIPAL, MATURITY AND INTEREST
The Senior Subordinated Notes are limited in aggregate principal amount to
$125.0 million (of which $100.0 million were issued on December 11, 1997 in the
Notes Offering) and will mature on December 15, 2007. Interest on the Senior
Subordinated Notes will accrue at the rate of 10 1/4% per annum and will be
payable semi-annually in arrears on June 15 and December 15, commencing on June
15, 1998, to holders of record on the immediately preceding June 1 and December
1. Interest on the Senior Subordinated 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 Senior Subordinated 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, any payment of
interest and Liquidated Damages, if any, may be made by check mailed to the
holders of the Senior Subordinated Notes at their respective addresses set forth
in the register of holders of Senior Subordinated Notes; provided that all
payments with respect to Global Notes and Certificated Notes, the holders of
whom have given wire transfer instructions to the
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Company, will be required to be made by wire transfer of immediately available
funds to the 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 Exchange Notes will
be issued in denominations of $1,000 and integral multiples thereof.
SUBORDINATION
The payment of principal of premium, if any, and interest on the Senior
Subordinated Notes, and Liquidated Damages, if any, is subordinated in right of
payment, as set forth in the Indenture, to the prior payment in full in cash or
Cash Equivalents of all Senior Indebtedness, whether outstanding on the date of
the Indenture or thereafter incurred. In addition, as set forth in "Subsidiary
Guarantees" below, the Subsidiary Guarantee will be a general unsecured
obligation of the Guarantors subordinated in right of payment to the Guarantor
Senior Indebtedness. The Senior Subordinated Notes and Subsidiary Guarantees are
effectively subordinated to the indebtedness of certain Foreign Subsidiaries. As
of September 30, 1997, on a pro forma basis after giving effect to the
Acquisition Transactions, the Company and its subsidiaries would have had
approximately $62.2 million of Senior Indebtedness and Senior Guarantor
Indebtedness, including approximately $1.8 million of indebtedness of Foreign
Subsidiaries all of which would effectively rank senior in right of payment to
the Senior Subordinated Notes and Subsidiary Guarantees.
Upon any distribution to creditors of the Company or a Guarantor in a
liquidation or dissolution of the Company or a Guarantor or in a bankruptcy,
reorganization, insolvency, receivership or similar proceeding relating to the
Company or a Guarantor or its property, whether voluntary or involuntary, an
assignment for the benefit of creditors or any marshaling of the Company's or
Guarantors assets and liabilities, the holders of Senior Indebtedness or the
applicable Guarantor Senior Indebtedness, as applicable, will be entitled to
receive payment in full in cash or Cash Equivalents of all Obligations due in
respect of such Senior Indebtedness or the applicable Guarantor Senior
Indebtedness, as applicable (including interest after the commencement of any
such proceeding at the rate specified in the applicable Senior Indebtedness, or
the applicable Guarantor Senior Indebtedness, as applicable, whether or not
allowable as a claim in any such proceeding), before the holders of Senior
Subordinated Notes or the applicable Guarantees, will be entitled to receive any
payment with respect to the Senior Subordinated Notes, or the applicable
Guarantees, and until all Obligations with respect to the applicable Senior
Indebtedness or the applicable Guarantor Senior Indebtedness, as applicable, are
paid in full in cash or Cash Equivalents, any distribution to which the holders
of Senior Subordinated Notes or the applicable Guarantees would be entitled
shall be made to the holders of the applicable Senior Indebtedness or the
applicable Guarantor Senior Indebtedness, as applicable (except that holders of
Senior Subordinated Notes or the applicable Guarantees, may receive securities
that are subordinated at least to the same extent as the Senior Subordinated
Notes or the applicable Guarantees to Senior Indebtedness or the applicable
Guarantor Senior Indebtedness, as applicable, and any securities issued in
exchange for the applicable Senior Indebtedness or the applicable Guarantor
Senior Indebtedness, as applicable, and that have a final maturity date and
Weighted Average Life to Maturity (as defined herein) that is the same as or
greater than the Senior Subordinated Notes or the applicable Guarantees, and
that are not secured by any collateral and payments made from the trust
described under "-- Legal Defeasance and Covenant Defeasance").
The Company and the Guarantors also may not make any payment upon or in
respect of the Senior Subordinated Notes or the applicable Guarantees (except in
such subordinated securities or from the trust described under "-- Legal
Defeasance and Covenant Defeasance") if (i) a default in the payment of the
principal of, premium, if any, or interest on Designated Senior Indebtedness
occurs and is continuing beyond any applicable period of grace (a "Payment
Default") or (ii) any other default occurs and is continuing with respect to
Designated Senior Indebtedness that permits holders of the Designated Senior
Indebtedness as to which such default relates to accelerate its maturity (a
"Nonpayment Default") and the Trustee receives a notice of such default (a
"Payment Blockage Notice") from the Company or the representative of the holders
of any Designated Senior Indebtedness. Payments on the Senior Subordinated Notes
may and shall be resumed (a) in the case of a Payment Default, upon the date on
which such default is cured or waived and (b) in case of a Nonpayment Default,
the earlier of the date on which such Nonpayment Default is cured or waived or
179 days after the date on which the applicable Payment Blockage Notice is
received, unless the
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maturity of any Designated Senior Indebtedness has been accelerated. No new
period of payment blockage may be commenced unless and until 360 days have
elapsed since the commencement of the immediately prior Payment Blockage Notice.
No Nonpayment Default that existed or was continuing on the date of delivery of
any Payment Blockage Notice to the Trustee shall be, or be made, the basis for a
subsequent Payment Blockage Notice (it being acknowledged that any subsequent
action, or any breach of any financial covenant for a period ending after the
expiration of such Payment Blockage Period that, in either case, would give rise
to a new event of default, even though it is a breach pursuant to any provision
under which a prior event of default previously existed, shall constitute a new
event of default for this purpose).
The Indenture further requires that the Company promptly notify holders of
Senior Indebtedness if payment of the Senior Subordinated Notes is accelerated
because of an Event of Default.
As a result of the subordination provisions described above, in the event
of a liquidation or insolvency, holders of Senior Subordinated Notes may recover
less ratably than creditors of the Company who are holders of Senior
Indebtedness. See "Risk Factors -- Subordination." On a pro forma basis, after
giving effect to issuance of the Senior Subordinated Notes and the application
of the proceeds therefrom in the Acquisition Transactions, the principal amount
of Senior Indebtedness outstanding at September 30, 1997 would have been
approximately $60.4 million. The Indenture limits, subject to certain financial
tests, the amount of additional Indebtedness, including Senior Indebtedness,
that the Company and its subsidiaries can incur. See "-- Certain
Covenants-Incurrence of Indebtedness and Issuance of Preferred Stock."
No provision contained in the Indenture or the Senior Subordinated Notes
affects the obligation of the Company and the Guarantors, which is absolute and
unconditional, to pay, when due, principal of, premium, if any, and interest on
the Senior Subordinated Notes. The subordination provisions of the Indenture and
the Senior Subordinated Notes do not prevent the occurrence of any Default or
Event of Default under the Indenture or limit the rights of the Trustee or any
holder to pursue any other rights or remedies with respect to the Senior
Subordinated Notes.
SUBSIDIARY GUARANTEES
The Company's payment obligations under the Senior Subordinated Notes are
guaranteed pursuant to the Guarantee and any future subsidiary guarantees
(collectively, the "Subsidiary Guarantees") on a senior subordinated basis by
the present Guarantors and any other Subsidiaries that become guarantors
(collectively, the "Guarantors") under the covenant entitled "Additional
Subsidiary Guarantees." The Subsidiary Guarantees of the Guarantors are
subordinated to the prior payment in full of all Guarantor Senior Indebtedness,
of which there would be none as of September 30, 1997 on a pro forma basis, and
the amounts for which the Guarantors will be liable under the guarantees issued
from time to time with respect to Senior Indebtedness. The obligations of each
Guarantor under its Subsidiary Guarantee are limited in a manner intended to not
constitute a fraudulent conveyance under applicable law. See, however, "Risk
Factors -- Fraudulent Transfer Considerations," and "-- Certain Bankruptcy
Limitations" below.
The Indenture provides that no Guarantor (other than as provided in the
immediately following paragraph) 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 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
Indenture; (ii) immediately after giving effect to such transaction no Default
or Event of Default exists; and (iii) such Guarantor, or any Person formed by or
surviving any such consolidation or merger, would be permitted by virtue of the
Company's pro forma Fixed Charge Coverage Ratio to incur, immediately after
giving effect to such transaction, at least $1.00 of additional Indebtedness
pursuant to the Fixed Charge Coverage Ratio test set forth in the covenant
described under the caption "-- Incurrence of Indebtedness and Issuance of
Preferred Stock"; provided, however, that the foregoing may not apply to the
merger of two or more Guarantors with and into each other.
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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, by way of merger, consolidation or otherwise, then such Guarantor (in
the event of a sale or other disposition 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."
CERTAIN BANKRUPTCY LIMITATIONS
The Company conducts certain of its business through Guarantors, which have
guaranteed the Company's Obligations with respect to the Senior Subordinated
Notes and Unrestricted Subsidiaries and Foreign Subsidiaries, which Unrestricted
Subsidiaries and Foreign Subsidiaries do not guarantee the Senior Subordinated
Notes. See "Risk Factors." Holders of the Senior Subordinated Notes will be
direct creditors of each Guarantor by virtue of its guarantee. Nonetheless, in
the event of the bankruptcy or financial difficulty of a Guarantor, such
Guarantor's obligations under its guarantee may be subject to review and
avoidance under state and federal fraudulent transfer laws. Among other things,
such obligations may be avoided if a court concludes that such obligations were
incurred for less than reasonably equivalent value or fair consideration at a
time when the Guarantor was insolvent, was rendered insolvent, or was left with
inadequate capital to conduct its business. A court would likely conclude that a
Guarantor did not receive reasonably equivalent value or fair consideration to
the extent that the aggregate amount of its liability on its guarantee exceeds
the economic benefits it receives in the Exchange Offer. The obligations of each
Guarantor under its guarantee will be limited in a manner intended to cause it
not to be a fraudulent conveyance under applicable law, although no assurance
can be given that a court would give the holder the benefit of such provision.
See "Risk Factors -- Fraudulent Transfer Considerations."
If the obligations of a Guarantor under its guarantee were avoided, holders
of Senior Subordinated Notes would have to look to the assets of any remaining
Guarantors for payment. There can be no assurance in that event that such assets
would suffice to pay the outstanding principal and interest on the Senior
Subordinated Notes.
OPTIONAL REDEMPTION
The Senior Subordinated Notes will not be redeemable at the Company's
option prior to December 15, 2002 except as provided below. Thereafter, the
Senior Subordinated Notes will be subject to redemption 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, if any,
thereon to the applicable redemption date if redeemed during the twelve-month
period beginning on December 15 of the years indicated below:
YEAR PERCENTAGE
-------------------------------------------------------------- ----------
2002.......................................................... 105.125%
2003.......................................................... 103.417%
2004.......................................................... 101.708%
2005 and thereafter........................................... 100.000%
Notwithstanding the foregoing, at any time on or prior to December 15,
2000, the Company may (but shall not have the obligation to) redeem up to 35% of
the original aggregate principal amount of the Senior Subordinated Notes at a
redemption price of 110.250% of the principal amount thereof, in each case plus
accrued and unpaid interest and Liquidated Damages, if any, thereon to the
redemption date, with the Net Cash Proceeds received by the Company from one or
more Equity Offerings; provided that, in each case at least 65% of the aggregate
principal amount of Senior Subordinated Notes originally issued remain
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outstanding immediately after the occurrence of such redemption; and provided
further, that such redemption shall occur within 60 days of the date of the
closing of such Equity Offering.
If less than all of the Senior Subordinated Notes are to be redeemed at any
time, selection of Senior Subordinated Notes for redemption will be made by the
Trustee in compliance with the requirements of the principal national securities
exchange, if any, on which the Senior Subordinated Notes are listed, or, if the
Senior Subordinated Notes are not so listed, on a pro rata basis, by lot or by
such method as the Trustee shall deem fair and appropriate; provided that no
Senior Subordinated Notes of $1,000 or less shall be redeemed in part. 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 Senior Subordinated Notes
to be redeemed at its registered address. If any Senior Subordinated Note is to
be redeemed in part only, the notice of redemption that relates to such Senior
Subordinated Note shall state the portion of the principal amount thereof to be
redeemed. A new Senior Subordinated Note in principal amount equal to the
unredeemed portion thereof will be issued in the name of the holder thereof upon
cancellation of the original Senior Subordinated Note. On and after the
redemption date, interest ceases to accrue on the Senior Subordinated Notes or
portions of them called for redemption unless the Company defaults in such
payments due on the redemption date.
MANDATORY REDEMPTION
The Company is not required to make mandatory redemption or sinking fund
payments with respect to the Senior Subordinated Notes.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of Senior
Subordinated 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
Senior Subordinated 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, if any, thereon to the date of purchase (the "Change of Control
Payment") on a date (the "Change of Control Payment Date") no later than 60
Business Days after the occurrence of the Change of Control. Within 35 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 Senior Subordinated Notes pursuant to the procedures
required by the Indenture and described in such notice, which offer shall remain
open for at least 20 Business Days following its commencement, but in any event
no longer than 30 Business Days. 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 Senior Subordinated Notes as a result of a
Change of Control. To the extent that the provisions of any such securities laws
or regulations conflict with the provisions of this paragraph, compliance by the
Company or any of the Guarantors with such laws and regulations shall not in and
of itself cause a breach of its obligations under such covenant.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (1) accept for payment all Senior Subordinated 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
Senior Subordinated Notes or portions thereof so tendered and (3) deliver or
cause to be delivered to the Trustee the Senior Subordinated Notes so accepted
together with an Officers' Certificate stating the aggregate principal amount of
Senior Subordinated Notes or portions thereof being purchased by the Company.
The Paying Agent will promptly mail to each holder of Senior Subordinated Notes
so tendered the Change of Control Payment for such Senior Subordinated Notes,
and the Trustee will promptly authenticate and mail (or cause to be transferred
by book entry) to each holder a new Senior Subordinated Note equal in principal
amount to any unpurchased portion of the Senior Subordinated Notes surrendered,
if any; provided that each such new Senior Subordinated Note will be in a
principal amount of $1,000 or an integral multiple thereof. The
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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 Indenture provides that, prior to complying with the provisions of this
covenant, but in any event within 30 days following a Change of Control, the
Company will either repay all outstanding Designated Senior Indebtedness or
obtain the requisite consents, if any, under all agreements governing
outstanding Designated Senior Indebtedness to permit the repurchase of Senior
Subordinated Notes required by this covenant. The Company will not be required
to purchase any Senior Subordinated Notes until it has complied with the
preceding sentence, but the Company's failure to make a Change of Control Offer
when required or to purchase tendered Senior Subordinated Notes when tendered
would constitute an Event of Default. See "Risk Factors."
Except as described above with respect to a Change of Control, the
Indenture does not contain provisions that permit the holders of the Senior
Subordinated Notes to require that the Company repurchase or redeem the Senior
Subordinated Notes in the event of a takeover, recapitalization or similar
restructuring.
The Change of Control purchase feature of the Senior Subordinated Notes may
make more difficult or discourage a takeover of the Company, and, thus, the
removal of incumbent management.
The phrase "all or substantially all" of the assets of the Company will
likely be interpreted under applicable state law and will be dependent upon
particular facts and circumstances. As a result, there may be a degree of
uncertainty in ascertaining whether a sale or transfer of "all or substantially
all" of the assets of the Company has occurred. In addition, no assurances can
be given that the Company will be able to acquire Senior Subordinated Notes
tendered upon the occurrence of a Change of Control.
If the Change of Control Payment Date hereunder is on or after an interest
payment Record Date and on or before the associated Interest Payment Date, any
accrued and unpaid interest (and Liquidated Damages, if any) due on such
Interest Payment Date will be paid to the person in whose name a Note is
registered at the close of business on such Record Date, and such interest (and
Liquidated Damages, if applicable) will not be payable to holders who tender the
Senior Subordinated Notes pursuant to the Change of Control Offer.
The Credit Agreement provides that certain change of control events with
respect to the Company constitutes a default thereunder. Any future credit
agreements or other agreements relating to Senior Indebtedness to which the
Company becomes a party may contain similar restrictions and provisions. In the
event a Change of Control occurs at a time when the Company is prohibited from
purchasing Senior Subordinated Notes, the Company could seek the consent of its
lenders to the purchase of Senior Subordinated Notes or could attempt to
refinance the borrowings that contain such prohibition. If the Company does not
obtain such a consent or repay such borrowings, the Company will remain
prohibited from purchasing Senior Subordinated Notes. In such case, the
Company's failure to purchase tendered Senior Subordinated Notes would
constitute an Event of Default under the Indenture which would, in turn,
constitute as default under the Credit Agreement. In such circumstances, the
subordination provisions in the Indenture restricts payments to the holders of
Senior Subordinated Notes.
ASSET SALES
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, engage in an Asset Sale in excess of $1.0 million unless
(i) the Company (or the Subsidiary, as the case may be) receives consideration
at the time of such Asset Sale at least equal to the fair market value of the
assets or Equity Interests sold or otherwise disposed of and, in the case of a
lease of assets, a lease providing for rent and other conditions which are no
less favorable to the Company (or the Subsidiary, as the case may be) in any
material respect than the then prevailing market conditions (evidenced in each
case by a resolution of the Board of Directors of such entity set forth in an
Officers' Certificate delivered to the Trustee) and (ii) at least 75% (100% in
the case of lease payments) of the consideration therefor received by the
Company or such 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
Subsidiary's most recent balance sheet or in the notes thereto, but excluding
contingent liabilities and trade payables) of the Company or any Subsidiary
(other than liabilities that are by
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their terms subordinated to the Senior Subordinated Notes or any Guarantee
thereof) that are assumed by the transferee of any such assets and (y) any
notes, securities or other obligations received by the Company or any such
Subsidiaries from such transferee that are promptly, but in no event more than
30 days after receipt, converted by the Company or such Subsidiary into cash
shall (to the extent of the cash received) be deemed to be cash for purposes of
this provision and the receipt of such cash shall be treated as cash received
from the Asset Sale for which such Senior Subordinated Notes or obligations were
received.
The Company or any of its Subsidiaries may apply the Net Proceeds from each
Asset Sale, at its option, within 360 days after the consummation of such Asset
Sale, (a) to permanently reduce any Senior Indebtedness (and in the case of any
senior revolving indebtedness to correspondingly permanently reduce commitments
with respect thereto), (b) for the acquisition of another business or the
acquisition of other long-term assets, in each case, in the same or a Related
Business, or (c) to reimburse the Company or its Subsidiaries for expenditures
made, and costs incurred, to repair, rebuild, replace or restore property
subject to loss, damage or taking to the extent that the Net Proceeds consist of
insurance proceeds received on account of such loss, damage or taking. Pending
the final application of any such Net Proceeds, the Company may temporarily
reduce Senior Revolving Debt 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 $5.0 million, the Company will be required to make an
offer to all holders of Senior Subordinated Notes (an "Asset Sale Offer") and to
holders of other Indebtedness of the Company outstanding ranking on a parity
with the Senior Subordinated Notes with similar provisions requiring the Company
to make a similar offer with proceeds from asset sales, pro rata in proportion
to the respective principal amounts (or accreted values in the case of
Indebtedness issued with an original issue discount) of the Senior Subordinated
Notes and such other Indebtedness then outstanding, to purchase the maximum
principal amount (or accreted value, as applicable) of Senior Subordinated Notes
and such other Indebtedness, if any, 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 (or accreted value, as applicable) thereof plus accrued and unpaid
interest and Liquidated Damages, if any, thereon to the date of purchase, in
accordance with the procedures set forth in the Indenture. If the aggregate
principal amount (or accreted value, as applicable) of Senior Subordinated Notes
and such Indebtedness surrendered by holders thereof exceeds the amount of
Excess Proceeds, the Trustee shall select the Senior Subordinated Notes and such
Indebtedness 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.
Any Asset Sale Offer shall remain open for at least 20 Business Days, in
any event no longer than 30 Business Days, and shall be made in compliance with
all applicable laws, rules, and regulations, including, if applicable,
Regulation 14E of the Exchange Act and the rules and regulations thereunder and
all other applicable Federal and state securities laws. To the extent that the
provisions of any securities laws or regulations conflict with the provisions of
this paragraph, compliance by the Company or any of its subsidiaries with such
laws and regulations shall not in and of itself cause a breach of its
obligations under such covenant.
If the payment date in connection with an Asset Sale Offer hereunder is on
or after an interest payment Record Date and on or before the associated
Interest Payment Date, any accrued and unpaid interest (and Liquidated Damages,
if any, due on such Interest Payment Date) will be paid to the person in whose
name a Senior Subordinated Note is registered at the close of business on such
Record Date, and such interest (or Liquidated Damages, if applicable) will not
be payable to holders who tender Senior Subordinated Notes pursuant to such
Asset Sale Offer.
CERTAIN COVENANTS
RESTRICTED PAYMENTS
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to directly or indirectly: (i) declare or pay any dividend
or make any distribution on account of the Company or any of its Subsidiaries'
or direct or indirect parent's Equity Interests (including, without limitation,
any payment in connection with any merger or consolidation involving the
Company) (other than dividends or distributions
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payable in Equity Interests (other than Disqualified Stock) of the Company or
dividends or distributions payable to the Company or any Subsidiary of the
Company that is a Guarantor); (ii) purchase, redeem or otherwise acquire or
retire for value any Equity Interests of the Company or any direct or indirect
Parent of the Company or other Affiliate or Subsidiary of the Company (other
than any such Equity Interests owned by the Company or any Wholly Owned
Subsidiary of the Company that is a Guarantor); (iii) make any principal payment
on or purchase, redeem, defease or otherwise acquire or retire for value any
Indebtedness that is subordinated to or pari passu (unless, in the case of pari
passu Indebtedness only, such purchase, redemption, defeasance, acquisition, or
retirement is made, or offered (if applicable), pro rata with the Senior
Subordinated Notes or the Guarantees, if applicable) with the Senior
Subordinated Notes or any of the Guarantees, as applicable (and other than
Senior Subordinated Notes or the Guarantees, as applicable), except for any
scheduled repayment or at the final maturity thereof; or (iv) make any
Restricted Investment (all such payments and other actions set forth in clauses
(i) through (iv) 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 below under the caption "-- Incurrence of
Indebtedness and Issuance of Preferred Stock"; and
(c) such Restricted Payment, together with the aggregate of all other
Restricted Payments made by the Company and its Subsidiaries after the
Issue Date (including Restricted Payments permitted by clauses (i), (vi),
(vii), (viii) and (ix), but excluding Restricted Payments permitted by
clauses (ii), (iii), (iv), (v) and (x) of the next succeeding paragraph),
is less than the sum of (i) $7.5 million, plus (ii) 50% of the Consolidated
Net Income (adjusted to exclude any amounts that are otherwise included in
this clause (c) to the extent there would be, and to avoid, any duplication
in the crediting of any such amounts) of the Company for the period (taken
as one accounting period) from the beginning of the first fiscal quarter
commencing after the Issue Date 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 (iii) 100%
of the aggregate Net Proceeds received by the Company after the Issue Date
from a Capital Contribution or from the issue or sale of Equity Interests
of the Company or of debt securities of the Company that have been
converted into such Equity Interests (other than Equity Interests (or
convertible debt securities) sold to a Subsidiary or an Unrestricted
Subsidiary of the Company and other than Disqualified Stock or debt
securities that have been converted into Disqualified Stock), plus (iv)
100% of any cash dividends received by the Company or a Wholly Owned
Subsidiary that is a Guarantor after the Issue Date from an Unrestricted
Subsidiary of the Company, plus (v) 100% of the Net Proceeds realized by
the Company or a Guarantor upon the sale of any Unrestricted Subsidiary
(less the amount of any reserve established for purchase price adjustments
and less the maximum amount of any indemnification or similar contingent
obligation for the benefit of the purchaser, any of its Affiliates or any
other third party in such sale, in each case as adjusted for any permanent
reduction in any such amount on or after the date of such sale, other than
by virtue of a payment made to such person) following the Issue Date, plus
(vi) to the extent that any Restricted Investment that was made after the
Issue Date is sold for cash or otherwise liquidated or repaid for cash, the
amount of Net Proceeds received by the Company or a Guarantor with respect
to such Restricted Investment.
The foregoing provisions do 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) if no Default or Event of Default shall have occurred and be
continuing (and shall not have been waived) or shall occur as a consequence
thereof, the payment by the Company (either directly or indirectly, e.g.,
through the Parent) of a management fee to AIP in an amount not to exceed $1.1
million in any year and the reimbursement by the Company of AIP's reasonable
out-of-pocket expenses incurred in
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connection with the rendering of management services to or on behalf of the
Company; provided, however, that the obligation of the Company to pay such
management fee and expenses will be subordinated to the payment of all
Obligations with respect to the Senior Subordinated Notes (and any Subsidiary
Guarantee thereof); (iii) the making of any Restricted Investment in exchange
for, or out of the Net Cash Proceeds of, the substantially concurrent sale
(other than to a Subsidiary of the Company) of Equity Interests of the Company
(other than Disqualified Stock); provided, that any Net Cash Proceeds that are
utilized for any such Restricted Investment, and any Net Income resulting
therefrom, shall be excluded from clauses (c)(ii) and (c)(iii) of the preceding
paragraph; (iv) the redemption, repurchase, retirement or other acquisition of
any Equity Interests of the Company in exchange for, or out of the proceeds of,
the substantially concurrent sale (other than to a Subsidiary of the Company) of
other Equity Interests of the Company (other than any Disqualified Stock);
provided that any Net Cash Proceeds that are utilized for any such redemption,
repurchase, retirement or other acquisition, and any Net Income resulting
therefrom, shall be excluded from clauses (c)(ii) and (c)(iii) of the preceding
paragraph; (v) the defeasance, redemption, repurchase, acquisition or other
retirement of pari passu or subordinated Indebtedness with the Net Cash Proceeds
from an incurrence of Permitted Refinancing Indebtedness or, in exchange for, or
out of the Net Cash Proceeds of, the substantially concurrent sale (other than
to a Subsidiary of the Company) of Equity Interests of the Company (other than
Disqualified Stock); provided, that any Net Cash Proceeds that are utilized for
any such defeasance, redemption, repurchase, and any Net Income resulting
therefrom, shall be excluded from clauses (c)(ii) and (c)(iii) of the preceding
paragraph; (vi) the repurchase, redemption, or other acquisition or retirement
for value of any Equity Interests of the Company, the Parent or any Subsidiary
of the Company held by any member of the Company's (or the Parent's or any
Subsidiaries') management pursuant to any management agreement or stock option
agreement; provided that the aggregate price paid for all such repurchased,
redeemed, acquired or retired Equity Interests shall not exceed $5.0 million in
the aggregate (net of the Net Cash Proceeds received by the Company from
subsequent reissuances of such Equity Interests to new members of management),
and no Default or Event of Default shall have occurred and be continuing
immediately after such transaction; (vii) the acquisition by a Receivables
Subsidiary in connection with a Qualified Receivables Transaction of Equity
Interests of a trust or other person established by such Receivables Subsidiary
to effect such Qualified Receivables Transaction; (viii) pro rata dividends and
other distributions on the Capital Stock of any Subsidiary of the Company by
such Subsidiary; (ix) payments in lieu of fractional shares in an amount not to
exceed $250,000 in the aggregate; and (x) Permitted Payments to Parent.
The Board of Directors may designate any 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 will reduce the amount available for Restricted Payments under
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 Subsidiary otherwise meets the definition of an
Unrestricted Subsidiary.
The amount of all Restricted Payments (other than cash) shall be the fair
market value (evidenced by a resolution of the Board of Directors set forth in
an Officers' Certificate delivered to the Trustee) on the date of the Restricted
Payment of the asset(s) proposed to be transferred by the Company or such
Subsidiary, as the case may be, pursuant to the Restricted Payment. Not later
than the date of making any Restricted Payment, the Company shall deliver to the
Trustee an Officers' Certificate stating that such Restricted Payment is
permitted and setting forth the basis upon which the calculations required by
the covenant "-- Restricted Payments" were computed, which calculations may be
based upon the Company's latest available financial statements.
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INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, directly or indirectly, create, incur, issue, assume,
guaranty or otherwise become directly or indirectly liable, contingently or
otherwise, with respect to (collectively, "incur") any Indebtedness (including
Acquired Indebtedness) and that the Company will not issue any Disqualified
Stock and will not permit any of its Subsidiaries to issue any shares of
preferred stock; provided, however, that the Company may incur Indebtedness
(including Acquired Indebtedness) or issue shares of Disqualified Stock and the
Company's Subsidiaries that are Guarantors may incur Indebtedness and issue
preferred stock if: (i) 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 or preferred stock is issued
would have been at least 2 to 1, 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 or preferred stock had
been issued, as the case may be at the beginning of such four-quarter period;
and (ii) no Default or Event of Default shall have occurred and be continuing or
would occur as a consequence thereof; provided, that no Guarantee may be
incurred pursuant to this paragraph, unless the guaranteed Indebtedness is
incurred by the Company or a Guarantor pursuant to this paragraph. The foregoing
provisions do not apply to:
(i) the incurrence of Indebtedness by the Company or the Guarantors
under the Credit Agreement (and Guarantees thereof by Subsidiaries that are
Guarantors) in an aggregate principal amount at any time outstanding (with
letters of credit being deemed to have a principal amount equal to the
maximum potential liability of the Company and its Subsidiaries thereunder)
not to exceed an amount (including any Indebtedness incurred to refinance,
retire, renew, defease, refund or otherwise replace any such Indebtedness)
equal to the greater of (a) $85.0 million, less the aggregate amount of all
Net Proceeds of Asset Sales applied to permanently reduce the outstanding
amount or, as applicable, the commitments with respect to such Indebtedness
pursuant to the covenant described above under the caption " -- Asset
Sales," and (b) an amount equal to the sum of 80% of the book value of the
consolidated accounts receivable of the Company and its Subsidiaries that
are Guarantors and 50% of the book value of the consolidated inventory of
the Company and its Subsidiaries that are Guarantors;
(ii) the Existing Indebtedness;
(iii) the incurrence by the Company of Indebtedness represented by the
Senior Subordinated Notes (up to an aggregate principal amount of $100
million) and by the Subsidiaries of Indebtedness represented by the
Subsidiary Guarantees of such Senior Subordinated Notes;
(iv) the incurrence by the Company or any of its 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 used in the business of the Company or such
Subsidiary, in an aggregate principal amount not to exceed $10.0 million at
any time outstanding (including any Indebtedness incurred to refinance,
retire, renew, defease, refund or otherwise replace any such Indebtedness);
(v) the incurrence by the Company or any of its Subsidiaries of
Permitted Refinancing Indebtedness in exchange for, or the net proceeds of
which are used to extend, refinance, renew, replace, defease or refund,
Indebtedness that was permitted by the Indenture to be incurred or was
outstanding on the Issue Date, after giving effect to the Acquisition
Transactions;
(vi) the incurrence by the Company or any of its Subsidiaries of
intercompany Indebtedness between or among the Company and any of its
Wholly Owned Subsidiaries or between or among any Wholly Owned
Subsidiaries; provided, however, that (i) any subsequent issuance or
transfer of Equity Interests that results in any such Indebtedness being
held by a Person other than a Wholly Owned Subsidiary and (ii) any sale or
other transfer of any such Indebtedness to a Person that is not either the
Company or a Wholly Owned Subsidiary shall be deemed, in each case, to
constitute an incurrence of such Indebtedness by the Company or such
Subsidiary, as the case may be;
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(vii) the incurrence by the Company or any of its Subsidiaries of
Hedging Obligations that are incurred for the purpose of fixing or hedging
interest rate risk with respect to any floating rate Indebtedness that is
permitted by the Indenture to be incurred;
(viii) the incurrence by the Company or any of its Subsidiaries that
is a Guarantor of Indebtedness in an aggregate principal amount at any time
outstanding (including any Indebtedness incurred to refinance, retire,
renew, defease, refund or otherwise replace any such Indebtedness) not to
exceed $15.0 million;
(ix) the incurrence by Foreign Subsidiaries of Indebtedness in an
aggregate amount not to exceed $7.0 million at any time outstanding
(including any Indebtedness incurred to refinance, retire, renew, defease,
refund or otherwise replace any such Indebtedness);
(x) the incurrence by the Company or any Subsidiary of Indebtedness in
respect of judgment, appeal, surety, performance and other like bonds,
bankers acceptance and letters of credit provided by the Company and its
Subsidiaries in the ordinary course of business in an aggregate amount
outstanding (including any indebtedness incurred to refinance, retire,
renew, defease, refund or otherwise replace any such indebtedness) at any
time of not more than $500,000;
(xi) Indebtedness incurred by the Company or any of its Subsidiaries
arising from agreements providing for indemnification, adjustment of
purchase price or similar obligations, or from guarantees of letters of
credit, surety bonds or performance bonds securing the performance of the
Company or any of its Subsidiaries to any person acquiring all or a portion
of such business or assets of a Subsidiary of the Company for the purpose
of financing such acquisition, in a principal amount not to exceed 25% of
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 of the Company in good faith) actually received by the Company or
any of its Subsidiaries in connection with such disposition; and
(xii) the incurrence by a Receivables Subsidiary of Indebtedness in a
Qualified Receivables Transaction that is without recourse to the Company
or to any Subsidiary of the Company or their assets (other than such
Receivables Subsidiary and its assets), and is not guaranteed by any such
person.
Notwithstanding any other provision of this covenant, a Guarantee by a
Guarantor of Indebtedness of the Company or another Guarantor permitted by the
terms of the Indenture at the time such Indebtedness was incurred will not
constitute a separate incurrence of Indebtedness.
Indebtedness or Disqualified Stock of any person which is outstanding at
the time such Person becomes a Subsidiary of the Company (including upon
designation of any subsidiary or other person as a Subsidiary) or is merged with
or into or consolidated with the Company or a Subsidiary of the Company shall be
deemed to have been incurred at the time such Person becomes such a Subsidiary
of the Company or is merged with or into or consolidated with the Company or a
Subsidiary of the Company, as applicable.
LIENS
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to directly or indirectly, create, incur, assume or suffer
to exist 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, unless the Senior Subordinated Notes are secured by such
Lien on an equal and ratable basis.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
The Indenture provides that the Company will not, and will not permit any
of its 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 Subsidiary to (i)(a) pay dividends or make any other
distributions to the Company or any of its 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
Subsidiaries, (ii) make loans or advances to the Company or any of its
Subsidiaries or (iii) transfer any of its properties or
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assets to the Company or any of its Subsidiaries, except for such encumbrances
or restrictions existing under or by reason of (a) Existing Indebtedness as in
effect on the date of the Indenture, (b) the Credit Agreement 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 with respect to such dividend and other payment restrictions than
the most restrictive of those contained in the Credit Agreement as in effect on
the date of the Indenture, (c) the Indenture and the Senior Subordinated Notes
or Indebtedness permitted to be incurred pursuant to the Indenture and ranking
pari passu with the Senior Subordinated Notes or the Guarantees, as applicable,
to the extent such restrictions are no more restrictive than those of the
Indenture, (d) applicable law, (e) any instrument governing Acquired
Indebtedness or Capital Stock of a Person acquired by the Company or any of its
Subsidiaries as in effect at the time of such acquisition (except to the extent
such Acquired Indebtedness was incurred in connection with 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, (f) by reason of customary
non-assignment provisions in leases and licenses entered into in the ordinary
course of business and consistent with past practices, (g) Purchase Money
Obligations, Capital Lease Obligations or Mortgage Financings 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)
agreements relating to the financing of the acquisition of real or tangible
personal property acquired after the date of the Indenture, provided, that such
encumbrance or restriction relates only to the property which is acquired and in
the case of any encumbrance or restriction that constitutes a Lien, such Lien
constitutes a Permitted Lien as set forth in clause (xi) of the definition of
"Permitted Lien," (i) Indebtedness or other contractual requirements of a
Receivables Subsidiary in connection with a Qualified Receivables Transaction,
provided that such restrictions apply only to such Receivables Subsidiary, (j)
any restriction or encumbrance contained in contracts for sale of assets
permitted by this Indenture in respect of the assets being sold pursuant to such
contract, (k) Senior Indebtedness or Guarantor Senior Indebtedness permitted to
be incurred under the Indenture and incurred on or after the date of the
Indenture; provided, that such encumbrances or restrictions in such Indebtedness
are no more onerous than the most restrictive of those contained in the Credit
Agreement on the date of the Indenture, (l) Indebtedness of Foreign Subsidiaries
incurred under clause (ix) of the covenant entitled "Incurrence of Indebtedness
and Issuance of Preferred Stock" or (m) Permitted Refinancing Indebtedness,
provided that the restrictions contained in the agreements governing such
Permitted Refinancing Indebtedness are no more restrictive than those contained
in the agreements governing the Indebtedness being refinanced.
LIMITATION ON LAYERING DEBT
The Indenture provides that (i) the Company will not incur, create, issue,
assume, guarantee or otherwise become liable for any Indebtedness that by its
terms or the terms of any document or instrument relating thereto is subordinate
or junior in right of payment to any Senior Indebtedness and senior in any
respect in right of payment to the Senior Subordinated Notes, and (ii) no
Guarantor will incur, create, issue, assume, guarantee or otherwise become
liable for any Indebtedness that by its terms or the terms of any document or
instrument relating thereto is subordinate or junior in right of payment to any
Guarantor Senior Indebtedness and senior in any respect in right of payment to
any Subsidiary Guarantees.
MERGER, CONSOLIDATION, OR SALE OF ASSETS
The Indenture provides that the Company will not in a single transaction or
series of related transactions consolidate or merge with or into (whether or not
the Company is the surviving corporation), or directly or indirectly, 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, as the case
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may be, under the Senior Subordinated Notes, the Guarantee and the Indenture
pursuant to a supplemental indenture in a form reasonably satisfactory to the
Trustee; (iii) immediately after such transaction no Default or Event of Default
exists; and (iv) 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 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." Notwithstanding the foregoing,
Merger I and Merger II and the related transactions comprising the Acquisition
Transactions were expressly permitted under the Indenture and did not require
the execution and delivery of a supplemental indenture.
Upon any consolidation or merger or any transfer of all or substantially
all of the assets of the Company in accordance with the foregoing, the successor
corporation formed by such consolidation or into which the Company is merged or
to which such transfer is made shall succeed to and (except in the case of a
lease) be substituted for, and may exercise every right and power of, the
Company under the Indenture with the same effect as if such successor
corporation had been named therein as the Company, and (except in the case of a
lease) the Company shall be released from the obligations under the Senior
Subordinated Notes and the Indenture except with respect to any obligations that
arise from, or are related to, such transaction.
For the purposes of the foregoing, the transfer (by lease, assignment, sale
or otherwise) of all or substantially all of the properties and assets of one or
more Subsidiaries of the Company, the Company's interest in which constitutes
all or substantially all of the properties and assets of the Company shall be
deemed to be the transfer of all or substantially all of the properties and
assets of the Company.
TRANSACTIONS WITH AFFILIATES
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, 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 any 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 Subsidiary than those that would
have been obtained in a comparable transaction by the Company or such Subsidiary
with an unrelated Person and (ii) the Company delivers to the Trustee (a) with
respect to any Affiliate Transaction or series of related Affiliate Transactions
entered into after the date of the Indenture involving aggregate consideration
in excess of $5.0 million, a resolution of the Board of Directors set forth in
an Officers' Certificate certifying that such Affiliate Transactions comply with
clause (i) above and that such Affiliate Transactions have been approved by a
majority of the disinterested members of the Board of Directors and (b) with
respect to any Affiliate Transactions or series of related Affiliate
Transactions involving aggregate consideration in excess of $10.0 million, a
favorable written opinion as to the fairness to the Company or such Subsidiary
of such Affiliate Transactions from a financial point of view issued by an
investment banking firm of national standing in the United States, or in the
event such transaction is a type that investment bankers do not generally render
fairness opinions, a valuation or appraisal firm of national standing; provided
that the following shall not be deemed to be Affiliate Transactions: (w) the
provision of administrative or management services by the Company or any of its
officers to any of its Subsidiaries in the ordinary course of business
consistent with past practice, (x) any employment agreement entered into by the
Company or any of its Subsidiaries in the ordinary course of business and
consistent with the past practice of the Company or such Subsidiary, (y)
transactions between or among the Company and/or its Wholly Owned Subsidiaries
or Guarantors or transactions between a Receivables Subsidiary and any Person in
which the Receivables Subsidiary has an Investment and (z) transactions
permitted by the provisions of the Indenture described above under the caption
"Restricted Payments." In addition, none of the Acquisition Transactions are
deemed to be Affiliate Transactions.
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ADDITIONAL SUBSIDIARY GUARANTEES
The Indenture provides that all Subsidiaries of the Company (other than
Receivables Subsidiaries and the Foreign Subsidiaries) substantially all of
whose assets are located in the United States or that conduct substantially all
of their business in the United States shall be Guarantors. In addition, the
Company will not, and will not permit any of the Guarantors to, make any
Investment in any Subsidiary that is not a Guarantor, unless either (i) such
Investment is permitted by the covenant entitled "Restricted Payments" or (ii)
such Subsidiary executes a Subsidiary Guarantee and delivers an opinion of
counsel in accordance with the provisions of the Indenture. Notwithstanding
anything herein or in the Indenture to the contrary, if any Subsidiary of the
Company that is not a Guarantor guarantees any other Indebtedness of the Company
or any Subsidiary of the Company that is a Guarantor, or the Company or a
Subsidiary of the Company pledges more than 65% of the capital stock of such
Subsidiary to a United States lender, then such Subsidiary must become a
Guarantor.
LINE OF BUSINESS
The Indenture provides that neither the Company nor any of its Subsidiaries
shall directly or indirectly engage to any substantial extent in any line or
lines of business activity other than that which, in the reasonable good faith
judgment of the Board of Directors of the Company, is a Related Business.
REPORTS
The Indenture provides that, whether or not required by the rules and
regulations of the Commission so long as any Exchange Notes are outstanding, the
Company will furnish to the holders of Exchange 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, including a "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and, with respect to the annual information
and 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. In addition, whether
or not required by the rules and regulations of the Commission, at any time
after the effectiveness of a registration statement with respect to the Exchange
Offer, the Company will file a copy of all such information and reports with the
Commission for public availability (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 Subsidiary
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 Senior Subordinated Notes
(whether or not prohibited by the subordination provisions of the Indenture);
(ii) default in payment when due of the principal of or premium, if any, on the
Senior Subordinated Notes (whether or not prohibited by the subordination
provisions of the Indenture); (iii) failure by the Company to comply with the
provisions described under the captions "Repurchase at the Option of Holders --
Change of Control, -- Asset Sales"; (iv) failure by the Company for 60 days
after notice to comply with any of its other agreements in the Indenture or the
Senior Subordinated Notes; (v) default under any mortgage, indenture or
instrument under which there may be issued or by which there may be secured or
evidenced any Indebtedness for money borrowed by the Company or any of its
Subsidiaries (other than a Receivables Subsidiary) (or the payment which is
guaranteed by the Company or any of its 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 on such
Indebtedness when due (after giving effect to any applicable grace period
provided in such Indebtedness) 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
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such Indebtedness under which there has been such a payment default or the
maturity of which has been so accelerated, aggregates $7.5 million or more; (vi)
failure by the Company or any of its Significant Subsidiaries to pay
nonappealable final judgments (not fully covered insurance) aggregating in
excess of $7.5 million, which judgments are not paid, bonded, discharged or
stayed within a period of 60 days; (vii) except as permitted by the Indenture,
any Subsidiary Guarantee shall be held in a judicial proceeding to be
unenforceable or invalid or shall cease for any reason to be in full force and
effect or any Guarantor, or any Person acting on behalf of any Guarantor, shall
deny or disaffirm its obligations under its Subsidiary Guarantee; and (viii)
certain events of bankruptcy or insolvency with respect to the Company or any of
its Significant Subsidiaries.
If any Event of Default occurs and is continuing, the Trustee or the
holders of at least 25% in aggregate principal amount of the then outstanding
Senior Subordinated Notes may declare all the Senior Subordinated Notes to be
due and payable immediately by notice in writing to the Company (and to the
Trustee if given by the holders) and the representative of holders of
Indebtedness under the Credit Agreement, if any amounts are outstanding
thereunder (an "Acceleration Notice"). 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 Senior Subordinated Notes will (i) become due and payable
without further action or notice or (ii) if there are any amounts outstanding
under the Credit Agreement, become due and immediately payable upon the first to
occur of an acceleration under the Credit Agreement or five Business Days after
receipt by the Company and the representative of the holders of the Indebtedness
under the Credit Agreement of the Acceleration Notice, but only if an Event of
Default is then continuing. Holders of the Senior Subordinated Notes may not
enforce the Indenture or the Senior Subordinated Notes except as provided in the
Indenture. Subject to certain limitations, holders of a majority in aggregate
principal amount of the then outstanding Senior Subordinated Notes may direct
the Trustee in its exercise of any trust or power. The Trustee may withhold from
holders of the Senior Subordinated 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.
The holders of a majority in aggregate principal amount of the Senior
Subordinated Notes then outstanding by notice to the Trustee may on behalf of
the holders of all of the Senior Subordinated 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 Senior Subordinated Notes.
The Company is required to deliver to the Trustee quarterly 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 under the
Senior Subordinated Notes, the Indenture or for any claim based on, in respect
of, or by reason of, such obligations or their creation. Each holder of Senior
Subordinated Notes by accepting a Senior Subordinated Note waives and releases
all such liability. The waiver and release are part of the consideration for
issuance of the Senior Subordinated Notes. Such waiver may not be effective to
waive liabilities under the federal securities laws and it is the view of the
Commission that such 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 Senior Subordinated Notes
("Legal Defeasance") except for (i) the rights of holders of outstanding Senior
Subordinated Notes to receive payments in respect of the principal of, premium,
if any, and interest and Liquidated Damages on such Senior Subordinated Notes
when such payments are due from the trust referred to below, (ii) the Company's
obligations with respect to the Senior Subordinated Notes
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concerning issuing temporary Senior Subordinated Notes, registration of Senior
Subordinated Notes, mutilated, destroyed, lost or stolen Senior Subordinated
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 Senior Subordinated Notes. In the event Covenant Defeasance occurs,
certain events (not including nonpayment, bankruptcy, receivership,
rehabilitation and insolvency events) described under "Events of Default" will
no longer constitute an Event of Default with respect to the Senior Subordinated
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 Senior Subordinated Notes, cash in U.S. 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,
interest and Liquidated Damages on the outstanding Senior Subordinated Notes on
the stated maturity or on the applicable redemption date, as the case may be,
and the Company must specify whether the Senior Subordinated Notes are being
defeased to maturity or to a particular redemption date; (ii) in the case of
Legal Defeasance, the Company shall deliver 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 Senior Subordinated 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 of the United States reasonably
acceptable to the Trustee confirming that the holders of the outstanding Senior
Subordinated 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 same times as
would have been the case if such Covenant Defeasance had not occurred; (iv) no
Event of Default or Default shall have occurred and be continuing on the date of
such deposit (other than an Event of Default or Default resulting from the
borrowing of funds to be applied to such deposit); (v) such Legal Defeasance or
Covenant Defeasance will not result in a breach or violation of, or constitute a
default under the Senior Bank Debt or any other 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 Senior
Subordinated 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 conditions precedent provided for,
in the case of the Officers' Certificate, (i) through (vii) and, in the case of
the opinion of counsel, clauses (i) (with respect to the validity and perfection
of the security interest), (ii), (iii) and (v) of this paragraph relating to the
Legal Defeasance or the Covenant Defeasance, as applicable, have been complied
with.
TRANSFER AND EXCHANGE
A holder may transfer or exchange Senior Subordinated 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
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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 Senior Subordinated Note for a period of 15 days before a
selection of Senior Subordinated Notes to be redeemed.
The registered holder of a Senior Subordinated 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 Senior Subordinated Notes may be amended or supplemented with the consent of
the holders of a majority in aggregate principal amount of the Senior
Subordinated Notes then outstanding (including consents obtained in connection
with a tender offer or exchange offer for Senior Subordinated Notes), any
existing default or compliance with any provision of the Indenture or the Senior
Subordinated Notes may be waived with the consent of the holders of a majority
in aggregate principal amount of the then outstanding Senior Subordinated Notes
(including consents obtained in connection with a tender offer or exchange offer
for Senior Subordinated Notes).
Without the consent of each holder affected, an amendment or waiver may not
(with respect to any Senior Subordinated Notes held by a non-consenting holder):
(i) reduce the aggregate principal amount of Senior Subordinated Notes whose
holders must consent to an amendment, supplement or waiver, (ii) reduce the
principal of or change the fixed maturity of any Senior Subordinated Note or
alter the provisions with respect to the redemption of the Senior Subordinated
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 Senior Subordinated Note, (iv)
waive a Default or Event of Default in the payment of principal of or premium,
if any, or interest on the Senior Subordinated Notes (except a rescission of
acceleration of the Senior Subordinated Notes by the holders of a majority in
aggregate principal amount of the Senior Subordinated Notes and a waiver of the
payment default that resulted from such acceleration), (v) make any Senior
Subordinated Note payable in money other than that stated in the Senior
Subordinated Notes, (vi) make any change in the provisions of the Indenture
relating to waivers of past Defaults or the rights of holders of Senior
Subordinated Notes to receive payments of principal of or premium, if any, or
interest on the Senior Subordinated Notes, (vii) waive a redemption payment with
respect to any Senior Subordinated 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. In addition, any amendment to the subordination provisions of the
Indenture will require the consent of the holders of Designated Senior
Indebtedness if the amendment would adversely affect the holders of Designated
Senior Indebtedness.
Notwithstanding the foregoing, without the consent of any holder of Senior
Subordinated Notes, the Company and the Trustee may amend or supplement the
Indenture or the Senior Subordinated Notes to cure any ambiguity, defect or
inconsistency, to provide for uncertificated Senior Subordinated Notes in
addition to or in place of Certificated Senior Subordinated Notes, to provide
for the assumption of the Company's obligations to holders of Senior
Subordinated 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 Senior
Subordinated Notes (including the addition of any Subsidiary Guarantors) 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.
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.
The holders of a majority in aggregate principal amount of the then
outstanding Senior Subordinated Notes will have the right to direct the time,
method and place of conducting any proceeding for exercising any
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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 man in the conduct of his 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 Senior
Subordinated 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 Prospectus may obtain a copy of the Indenture and
Registration Rights Agreement without charge by writing to the Company at 92
Deerfield Road, Windsor, CT 06095-4209, Attention: Chief Financial Officer.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Acquired Indebtedness" 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 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
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. Notwithstanding the foregoing, (a) the limited partners
in AIP shall not be deemed to be Affiliates of AIP solely by reason of their
investment in such funds and (b) no Person (other than the Company or any
Subsidiary of the Company) in whom a Receivables Subsidiary makes an Investment
in connection with a Qualified Receivables Transaction shall be deemed to be an
Affiliate of the Company or any of its Subsidiaries solely by reason of such
Investment.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition
that does not constitute a Restricted Payment or an Investment by such person of
any of its non-cash assets (including, without limitation, by way of a sale and
leaseback and including the issuance, sale or other transfer of any of the
capital stock of any Subsidiary of such person but excluding Cash Equivalents
liquidated in the ordinary course of business) other than to the Company or to
any of its Wholly Owned Subsidiaries that is a Guarantor (including the receipt
of proceeds of insurance paid on account of the loss of or damage to any asset
and awards of compensation for any asset taken by condemnation, eminent domain
or similar proceeding, and including the receipt of proceeds of business
interruption insurance); and (ii) the issuance of Equity Interests in any
Subsidiaries or the sale of any Equity Interests in any Subsidiaries, in each
case, in one or a series of related transactions, provided, that notwithstanding
the foregoing, the term "Asset Sale" shall not include: (a) the sale, lease,
conveyance, disposition or other transfer of all or substantially all of the
assets of the Company, as permitted pursuant to the covenant entitled "Merger,
Consolidation or Sale of Assets," (b) the sale or lease of equipment, inventory,
accounts receivable or other assets in the ordinary course of business
consistent with past practice, (c) the sale or disposal of damaged, worn out or
other obsolete personal property in the ordinary course of business so long as
such property is no longer necessary for the proper conduct of the business of
the Company or such Subsidiary, as applicable; (d) a transfer of assets by the
Company to a Wholly Owned Subsidiary that is a Guarantor or by a Wholly Owned
Subsidiary to the Company or to another Wholly Owned Subsidiary that is a
Guarantor or by a Wholly Owned Subsidiary that is not a Guarantor to
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another Wholly Owned Subsidiary that is not a Guarantor, (e) an issuance of
Equity Interests by a Wholly Owned Subsidiary to the Company or to another
Wholly Owned Subsidiary that is a Guarantor, or by a Wholly Owned Subsidiary
that is not a Guarantor to another Wholly Owned Subsidiary that is not a
Guarantor, (f) the surrender or waiver of contract rights or the settlement,
release or surrender of contract, tort or other claims of any kind, (g) the
grant in the ordinary course of business of any non-exclusive license of
patents, trademarks, registrations therefor and other similar intellectual
property, (h) sales of accounts receivable and related assets of the type
specified in the definition of "Qualified Receivables Transaction" to a
Receivables Subsidiary for the fair market value thereof, including cash in an
amount at least equal to 75% of the book value thereof as determined in
accordance with GAAP, (i) Permitted Investments, or (j) transfers of accounts
receivable and related assets of the type specified in the definition of
"Qualified Receivables Transaction" (or a fractional undivided interest therein)
by a Receivables Subsidiary in a Qualified Receivables Transaction. For the
purposes of clauses (h) and (j), notes received in exchange for the transfer of
accounts receivable and related assets shall be deemed cash if the Receivables
Subsidiary or other payor is required to repay said notes as soon as practicable
from available cash collections less amounts required to be established as
reserves pursuant to contractual agreements with entities that are not
Affiliates of the Company entered into as part of a Qualified Receivables
Transaction.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in New York are authorized or
obligated by law or executive order to close.
"Capital Contribution" means any contribution to the equity of the Company
for which no consideration is given other than common stock with no redemption
rights and no special privileges, preferences, or special voting rights.
"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, partnership 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.
"Cash Equivalents" means (a) securities issued or directly and fully
guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States is pledged in support thereof) having maturities not more than twelve
months from the date of acquisition, (b) U.S. dollar denominated (or foreign
currency fully hedged) time deposits, certificates of deposit, Eurodollar time
deposits or Eurodollar certificates of deposit of (i) any domestic commercial
bank of recognized standing having capital and surplus in excess of $100 million
or (ii) any bank whose short-term commercial paper rating from S&P is at least
A-1 or the equivalent thereof or from Moody's is at least P-1 or the equivalent
thereof (any such bank being an "Approved Lender"), in each case with maturities
of not more than twelve months from the date of acquisition, (c) commercial
paper and variable or fixed rate notes issued by any Approved Lender (or by the
parent company thereof) or any variable rate notes issued by, or guaranteed by,
any domestic corporation rated A-2 (or the equivalent thereof) or better by S&P
or P-2 (or the equivalent thereof) or better by Moody's and maturing within
twelve months of the date of acquisition, (d) repurchase agreements with a bank
or trust company or recognized securities dealer having capital and surplus in
excess of $100 million for direct obligations issued by or fully guaranteed by
the United States of America in which the Company shall have a perfected first
priority security interest (subject to no other Liens) and having, on the date
of purchase thereof, a fair market value of at least 100% of the amount of
repurchase obligations, and (e) interests in money market mutual funds which
invest solely in assets or securities of the type described in subparagraphs
(a), (b), (c) or (d) hereof.
"Change of Control" means such time as (i) prior to the initial public
offering by the Company of any shares of its common stock (other than a public
offering pursuant to a registration statement on Form S-8), AIP, its Affiliates
and Management Investors (collectively, the "Initial Investors") cease to be,
directly or
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indirectly, the beneficial owners, in the aggregate of at least 51% of the
voting power of the voting common stock of the Company or (ii) after the initial
public offering by the Company of any shares of its common stock (other than a
public offering pursuant to a registration statement on Form S-8), (A) any
Schedule 13D, Form 13F or Schedule 13G under the Exchange Act, or any amendment
to such Schedule or Form, is received by the Company which indicates that, or
the Company otherwise becomes aware that, a "person" or "group" (within the
meaning of Sections 13(d) and 14(d)(2) of the Exchange Act) (except, in the case
of the Company, the Parent) has become, directly or indirectly, the "beneficial
owner", by way of merger, consolidation or otherwise, of 35% or more of the
voting power of the voting capital stock of the Company and (B) any such person
or group has become, directly or indirectly, the beneficial owner of a greater
percentage of the voting capital stock of the Company than beneficially owned by
the Initial Investors, or (iii) the sale, lease or transfer of all or
substantially all of the assets of the Company to any person or group (other
than the Initial Investors or their Related Parties (as defined below)), or (iv)
during any period of two consecutive calendar years, individuals who at the
beginning of such period constituted the Board of Directors of the Company
(together with any Continuing Directors) ceases for any reason to constitute a
majority of the directors of the Company, then in office. "Related Party" with
respect to any Initial Investor means (A) any controlling stockholder, 80% (or
more) owned Subsidiary, or spouse, or immediate family member (in the case of
any individual) of such Initial Investor 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 Initial Investor and/or such other persons referred to in the
immediately preceding clause (A).
"Consolidated EBITDA" means, with respect to the Company and its
Subsidiaries for any period, the sum of, without duplication, (i) the
Consolidated Net Income for such period, plus (ii) the Fixed Charges for such
period, plus (iii) provision for taxes based on income or profits for such
period (to the extent such income or profits were included in computing
Consolidated Net Income for such period), plus (iv) consolidated depreciation,
amortization and other non-cash charges of the Company and its Subsidiaries
required to be reflected as expenses on the books and records of the Company,
minus (v) cash payments with respect to any non-recurring, non-cash charges
previously added back pursuant to clause (iv), and (vi) excluding the impact of
foreign currency translations. Notwithstanding the foregoing, the provision for
taxes based on the income or profits of, and the depreciation and amortization
and other non-cash charges of, a Subsidiary of a Person shall be added to
Consolidated Net Income to compute Consolidated EBITDA only to the extent (and
in the same proportion) that the Net Income of such Subsidiary was included in
calculating the Consolidated Net Income of such Person and only if a
corresponding amount would be permitted at the date of determination to be paid
as a dividend to the Company by such Subsidiary without prior approval (that has
not been obtained), pursuant to the terms of its charter and all agreements,
instruments, judgments, decrees, orders, statutes, rules and governmental
regulations applicable to that Subsidiary or its stockholders.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its 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 that is a Guarantor, (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 (which 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 Net Income of, or any
dividends or other distributions from, any Unrestricted Subsidiary, to the
extent otherwise included, shall be excluded, whether or not distributed to the
Company or one of its Subsidiaries, and (vi) all other extraordinary gains and
extraordinary losses shall be excluded.
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"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 Issue Date, (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 of Directors at the time of such nomination or
election or (iii) was appointed by AIP pursuant to the Shareholders Agreement.
"Credit Agreement" means that certain Credit Agreement, also referred to as
the "New Credit Agreement", dated as of December 11, 1997, by and among the
Company and The First National Bank of Chicago, as administrative agent, and DLJ
Capital Funding, Inc., as syndication agent and the lenders parties thereto,
including any related notes, guarantees, collateral documents, instruments and
agreements executed in connection therewith, and in each case as amended,
modified, renewed, refunded, replaced, extended, restated or refinanced from
time to time, including any agreement restructuring or adding Subsidiaries of
the Company as additional borrowers or guarantors thereunder and whether by the
same or any other agent, lender or group of lenders; provided that the total
amount of Senior Indebtedness is not thereby increased beyond the amount that
may then be incurred at such time pursuant to the covenant described under the
caption "-- 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.
"Designated Senior Indebtedness" means (i) so long as the Senior Bank Debt
is outstanding, the Senior Bank Debt and (ii) thereafter, any other Senior
Indebtedness permitted under the Indenture the principal amount of which is
$25.0 million or more and that has been designated by the Company as "Designated
Senior Indebtedness."
"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
on which the Senior Subordinated Notes mature.
"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).
"Equity Offering" means an underwritten public offering of Equity Interests
of the Company, or the Parent, other than Disqualified Stock, pursuant to a
registration statement filed with the Commission in accordance with the
Securities Act.
"Existing Indebtedness" means the Indebtedness of the Company and its
Subsidiaries (other than Indebtedness under the Credit Agreement) in existence
on the date of the Indenture, December 11, 1997, 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, amortization of original issue discount, amortization of deferred
financing fees, non-cash interest payments, the interest component of any
deferred payment obligations, the interest component of all payments associated
with Capital Lease Obligations, commissions, discounts and other fees and
charges incurred in respect to letter of credit or bankers' acceptance
financings, and net payments (if any) pursuant to Hedging Obligations), (ii) the
consolidated interest expense of such Person and its Subsidiaries that was
capitalized during such period, (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
cash dividend payments (and non cash dividend payments in the case of a Person
that is a Subsidiary) on any series of preferred stock of such Person payable to
a party other than the Company or a Wholly Owned Subsidiary, 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, on a consolidated basis and in accordance
with GAAP.
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"Fixed Charge Coverage Ratio" means, with respect to any Person for any
period, the ratio of the Consolidated EBITDA of such Person and its Subsidiaries
for such period to the Fixed Charges of such Person and its Subsidiaries for
such period. In the event that the Company or any of its Subsidiaries incurs,
assumes, retires, Guarantees or redeems any Indebtedness (other than revolving
credit borrowings) or issues preferred stock subsequent to the commencement of
the four-quarter reference period for which the Fixed Charge Coverage Ratio is
being calculated but on or 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, retirement, 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.
For purposes of making the computation referred to above, (i) acquisitions that
have been made by the Company or any of its Subsidiaries, including through
mergers or consolidations and including any related financing and refinancing
transactions, during the four-quarter reference period subsequent to such
reference period and on or prior to the Calculation Date shall be deemed to have
occurred on the first day of the four-quarter reference period, and (ii) the
Consolidated EBITDA attributable to discontinued operations, as determined in
accordance with GAAP, and operations or businesses disposed of on or 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 on or 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 Intercompany Indebtedness" means any Indebtedness of one Foreign
Subsidiary to another Foreign Subsidiary.
"Foreign Subsidiary" means any Wholly Owned Subsidiary organized and
incorporated in a jurisdiction outside of the United States that is not a
Guarantor.
"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 on the date of the Indenture. All ratios and
computations based on GAAP contained in the Indenture shall be computed in
conformity with GAAP applied on a consistent basis, except that calculations
made for purposes of determining compliance with the terms of the covenants and
with other provisions of the Indenture shall be made without giving effect to
depreciation, amortization or other expenses recorded as a result of the
application of purchase accounting in accordance with Accounting Principles
Board Opinion Nos. 16 and 17.
"Guarantee" means a guarantee or other credit support (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.
"Guarantor Senior Indebtedness" means (i) any Guarantees by any Guarantor
of the Senior Bank Debt and (ii) any other Indebtedness permitted to be incurred
by any Guarantor under the terms of the Indenture, unless the instrument under
which such Indebtedness is incurred expressly provides that it is on a parity
with or subordinated in right of payment to the Subsidiary Guarantees.
Notwithstanding anything to the contrary in the foregoing, Guarantor Senior
Indebtedness will not include (w) any liability for federal, state, local, or
other taxes owed or owing by any Guarantor, (x) any Indebtedness of any
Guarantor to any of its Subsidiaries or other Affiliates, (y) any trade payables
or (z) any Indebtedness that is incurred in violation of the Indenture.
"Guarantors" means each Subsidiary of the Company that executes a
Subsidiary Guarantee guaranteeing the Senior Subordinated Notes in accordance
with the provisions of the Indenture, and their respective successors and
assigns.
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"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) currency exchange or 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 or currency exchange rates.
"Indebtedness" means, with respect to any Person, any (i) 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
incurred in the ordinary course of business, but other than with respect to,
letters of credit and Hedging Obligations only, if and to the extent any of the
foregoing indebtedness would appear as a liability upon a consolidated balance
sheet of such Person prepared in accordance with GAAP, (ii) 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, (iii) to the extent not otherwise
included, the Guarantee by such Person of any indebtedness of any other Person.
"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, but
excluding guarantees of Indebtedness of the Company or any Wholly Owned
Guarantor to the extent such guarantee is permitted by the covenant "Incurrence
of Indebtedness and Issuance of Preferred Stock"), advances or capital
contributions (excluding commission, travel and similar advances to officers and
employees made in the ordinary course of business), transfers of assets outside
the ordinary course of business other than Asset Sales, purchases or other
acquisitions for consideration of Indebtedness, Equity Interests or other
securities and all other items that are or would be classified as investments on
a balance sheet prepared in accordance with GAAP; provided that an acquisition
of assets, Equity Interests or other securities by the Company for consideration
consisting of common equity securities of the Company shall not be deemed to be
an Investment.
"Issue Date" means the date of first issuance of the Exchange Notes under
the Indenture.
"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, except in connection with a Qualified Receivables Transaction,
any filing of or agreement to give any financing statement under the Uniform
Commercial Code (or equivalent statutes) of any jurisdiction).
"Management Investors" means William D. Gurley, Michael H. Boyer, Robert A.
Massa, Arthur S. Caruso, William W. Kelly, Don Buonomo, Lee Janik, Bryan M.
Wysong and any of their respective affiliates.
"Net Cash Proceeds" means the aggregate amount of cash or Cash Equivalents
received by the Company in the case of a sale or equity contribution in respect
of Qualified Capital Stock plus, in the case of an issuance of Qualified Capital
Stock upon any exercise, exchange or conversion of securities (including
options, warrants, rights and convertible or exchangeable debt) of the Company
that were issued for cash after the Issue Date, the amount of cash originally
received by the Company upon the issuance of such securities (including options,
warrants, rights and convertible or exchangeable debt) less, the sum of all
payments, fees, commissions, and customary and reasonable expenses (including,
without limitation, the fees and expenses of legal counsel and investment
banking fees and expenses) incurred in connection with such sale or equity
contribution in respect of Qualified Capital Stock.
"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
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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 and Cash Equivalents received by
the Company or any of its Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other deposition of any
non-cash consideration received in any Asset Sale) and, with respect to the
covenant "Restricted Payments," by the Company or any Guarantor in respect of
the sale of an Unrestricted Subsidiary and the sale, liquidation or repayment
for cash of a Restricted Investment, in each case, net of the direct costs
relating thereto (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), and any reserve for adjustment in respect of the sale price of
such asset or assets established in accordance with GAAP.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damage and other liabilities payable under the
documentation governing any Indebtedness.
"Parent" means Stanadyne Automotive Holding Corp. (formerly known as SAC,
Inc.) or its successor.
"Permitted Investments" means (a) any Investments in the Company or in a
Wholly Owned Subsidiary of the Company that is a Guarantor and that is engaged
in one or more Related Businesses, (b) any Investment by the Company or a Wholly
Owned Subsidiary of the Company in a Receivables Subsidiary or any Investment by
a Receivables Subsidiary in any other Person in connection with a Qualified
Receivables Transaction; provided, that the foregoing Investment is in the form
of a note that the Receivables Subsidiary or other Person is required to repay
as soon as practicable from available cash collections less amounts required to
be established as reserves pursuant to contractual agreements with entities that
are not Affiliates of the Company entered into as part of a Qualified
Receivables Transaction; (c) any Investments in Cash Equivalents; (d)
Investments by the Company or any Subsidiary of the Company in a Person if as a
result of such Investment (i) such Person becomes a Wholly Owned Subsidiary of
the Company and a Guarantor that is engaged in one or more Related Businesses 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 Subsidiary of the Company that is a Guarantor and
that is engaged in one or more Related Businesses; (e) Investments 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"; (f)
Investments outstanding as of the date of the Indenture including but not
limited to the Intercompany Note from the Company to the Parent in the amount of
$67.5 million; (g) Investments in the form of promissory notes of members of the
Company's management in consideration of the purchase by such members of Equity
Interests (other than Disqualified Stock) in the Company; (h) Investments by the
Company or a Wholly Owned Subsidiary of the Company that is a Guarantor in a
Foreign Subsidiary if 100% of the proceeds thereof are concurrently used by such
Foreign Subsidiary to purchase the outstanding Equity Interests of another
Foreign Subsidiary from the Company or a Wholly Owned Subsidiary of the Company
that is a Guarantor and the resulting Investment by such first Foreign
Subsidiary in such second Foreign Subsidiary; (i) Investments which constitute
Existing Indebtedness of the Company of any of its Subsidiaries; (j) Investments
constituting Foreign Intercompany Indebtedness; (k) accounts receivable,
endorsements for collection or deposits arising in the ordinary course of
business; (l) other Investments in any Person or Persons that do not in the
aggregate exceed $10.0 million at any time outstanding; and (m) Investments in
Foreign Subsidiaries that do not in the aggregate exceed $5.0 million at any
time outstanding, provided however, that to the extent there would be, and to
avoid, any duplication in determining the amounts of investments outstanding
under these clauses (l), and (m) any amounts which were credited under clause
(c) of the covenant "Restricted Payments" shall reduce the amounts outstanding
under these clauses (l) and (m).
"Permitted Liens" means (i) Liens securing Senior Indebtedness or Guarantor
Senior Indebtedness in an aggregate principal amount at any time outstanding not
to exceed amounts permitted under the covenant
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entitled "Incurrence of Indebtedness and Issuance of Preferred Stock"; (ii)
Liens in favor of the Company; (iii) Liens on property of a Person existing at
the time such Person is merged into or consolidated with the Company or any
Subsidiary of the Company including any permitted Refinancings thereof; 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 Subsidiary of the Company,
provided that such Liens were in existence prior to the contemplation of such
acquisition; (v) Liens to secure the performance of statutory obligations,
surety or appeal bonds, performance bonds or other obligations of a like nature
incurred in the ordinary course of business; (vi) Liens existing on the date of
the Indenture; (vii) 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; (viii) Liens incurred in the
ordinary course of business of the Company or any Subsidiary of the Company with
respect to obligations that do not exceed in the aggregate $5.0 million 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 Subsidiary; (ix)
Liens incurred or deposits made in the ordinary course of business in connection
with workers' compensation, unemployment insurance and other types of social
security; (x) easements, rights-of-way, restrictions, minor defects or
irregularities in title and other similar charges or encumbrances not
interfering in any material respect with the business of the Company or any of
its Subsidiaries, (xi) Purchase Money Liens (including extensions and renewals
thereof), (xii) Liens securing reimbursement obligations with respect to letters
of credit which encumber only documents and other property relating to such
letters of credit and the products and proceeds thereof; (xiii) judgment and
attachment Liens not giving rise to an Event of Default; (xiv) Liens encumbering
deposits made to secure obligations arising from statutory, regulatory,
contractual or warranty requirements; (xv) Liens arising out of consignment or
similar arrangements for the sale of goods; (xvi) any interest or title of a
lessor in property subject to any capital lease obligation or operating lease;
(xvii) Liens arising from filing Uniform Commercial Code financing statements
regarding leases; (xviii) Liens on assets of Subsidiaries with respect to
Acquired Indebtedness (including Permitted Refinancings thereof) provided such
Liens are only on assets or property acquired with such Acquired Indebtedness
and that such Liens were not created in contemplation of or in connection with
such Acquisition; (xix) Liens on the assets of a Receivables Subsidiary incurred
in connection with a Qualified Receivables Transaction and (xx) Liens securing
indebtedness of any Foreign Subsidiary.
"Permitted Payments to Parent" means without duplication, (a) payments to
Parent in an amount sufficient to permit Parent to pay reasonable and necessary
operating expenses and other general corporate expenses to the extent such
expenses relate or are fairly allocable to the Company and its Subsidiaries
including any reasonable professional fees and expenses, but excluding all
expenses payable to or to be paid to or on behalf of AIP, its other Affiliates
and its Related Parties not in excess of $300,000 in any fiscal year; and (b)
payments to Parent to enable Parent to pay foreign, federal, state or local tax
liabilities ("Tax Payment"), not to exceed the amount of any tax liabilities
that would be otherwise payable by the Company and its Subsidiaries and
Unrestricted Subsidiaries to the appropriate taxing authorities if they filed
separate tax returns to the extent that Parent has an obligation to pay such tax
liabilities relating to the operations, assets or capital of the Company or its
Subsidiaries and Unrestricted Subsidiaries provided, however, that (i),
notwithstanding the foregoing, in the case of determining the amount of a Tax
Payment that is permitted to be paid by Company and any of its United States
subsidiaries in respect of their Federal income tax liability, such payment
shall be determined on the basis of assuming that Company is the parent company
of an affiliated group (the "Company Affiliated Group") filing a consolidated
Federal income tax return and that Parent and each such United States subsidiary
is a member of the Company Affiliated Group and (ii) any Tax Payments shall
either be used by Parent to pay such tax liabilities within 90 days of Parent's
receipt of such payment or refunded to the payee.
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"Permitted Refinancing Debt" means any Indebtedness of the Company or any
of its 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 Subsidiaries; provided that: (a) the principal
amount of such Permitted Refinancing Indebtedness does not exceed (after
deduction of reasonable and customary fees and expenses incurred in connection
with the Refinancing and the amount of any premium or prepayment penalty paid in
connection with such Refinancing Transaction to the extent in accordance with
the terms of the document governing such Indebtedness (except for any
modification to any such document made in connection with or in contemplation of
such refinancing) the lesser of (i) the principal amount of the Indebtedness so
extended refinanced, renewed, replaced, defeased or refunded; and (ii) if such
Indebtedness being Refinanced was issued with an original issue discount, the
accreted value thereof (as determined in accordance with GAAP) at the time of
such Refinancing, plus, in each case accrued interest on such Indebtedness being
Refinanced; (b) such Permitted Refinancing Indebtedness 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; (c) if the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded is subordinated in right of payment to the Senior
Subordinated 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 Senior Subordinated Notes on terms at least as favorable to the
holders of Senior Subordinated Notes as those contained the documentation
governing the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded; and (d) such Indebtedness is incurred either by the
Company or by the Subsidiary who is the obligor on the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded.
"Purchase Money Lien" means a Lien granted on an asset or property to
secure a Purchase Money Obligation permitted to be incurred under the Indenture
and incurred solely to finance the acquisition, including, in the case of a
Capital Lease, the lease, of such asset or property; provided, however, that
such Lien encumbers only such asset or property and is granted within 180 days
of such acquisition.
"Purchase Money Obligations" of any person means any obligations of such
person to any seller or another person incurred or assumed to finance solely the
acquisition, including, in the case of a Capital Lease, the lease, of real or
personal property to be used in the business of such person or any of its
Subsidiaries in an amount that is not more than 100% of the cost of such
property, and incurred within 180 days after the date of such acquisition
(excluding accounts payable to trade creditors incurred in the ordinary course
of business).
"Qualified Capital Stock" means any Capital Stock of the Company, or, if
expressly applicable, the Parent, that is not Disqualified Stock.
"Qualified Receivables Transaction" means any transaction or series of
transactions that may be entered into by the Company or any of its Subsidiaries
pursuant to which the Company or any of its Subsidiaries may sell, convey or
otherwise transfer to (a) a Receivables Subsidiary (in the case of a transfer by
the Company or any of its Subsidiaries) and (ii) any other person (in the case
of a transfer by a Receivable Subsidiary), or may grant a security interest in,
any accounts receivable (whether now existing or arising in the future) which
arise in the ordinary course of business of the Company or any of its
Subsidiaries, and any assets related thereto including, without limitation, all
collateral securing such accounts receivable, all contracts and all guarantees
or other obligations in respect of such accounts receivable, proceeds of such
accounts receivable and other assets which are customarily transferred or in
respect of which security interests are customarily granted in connection with
asset securitization transactions involving accounts receivable.
"Receivables Subsidiary" means a Wholly Owned Subsidiary of the Company
which engages in activities other than in connection with the financing of
accounts receivable and which is designated by the Board of Directors of the
Company (as provided below) as a Receivables Subsidiary (a) no portion of the
Indebtedness or any other Obligations (contingent or otherwise) of which (i) is
guaranteed by the Company or any Subsidiary of the Company (excluding guarantees
of Obligations (other than the principal of, and interest on, Indebtedness)
pursuant to representations, warranties, covenants and indemnities excluding any
representations, warranties, covenants or indemnities relating to the payment of
principal or interest on, any Indebtedness entered into in the ordinary course
of business in connection with a Qualified Receivables Transaction),
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(ii) is recourse to or obligates the Company or any Subsidiary of the Company in
any way other than pursuant to representations, warranties, covenants or
indemnities excluding any representations, warranties, covenants or indemnities
relating to the payment of principal or interest on, any Indebtedness entered
into in the ordinary course of business in connection with a Qualified
Receivables Transaction or (iii) subjects any property or asset of the Company
or any Subsidiary of the Company, directly or indirectly, contingently or
otherwise, to the satisfaction thereof, other than pursuant to representations,
warranties, covenants or indemnities excluding any representations, warranties,
covenants or indemnities relating to the payment of principal of, or interest
on, any Indebtedness entered into in the ordinary course of business in
connection with a Qualified Receivables Transaction, (b) with which neither the
Company nor any Subsidiary of the Company has any material contract, agreement,
arrangement or understanding other than on terms no less favorable to the
Company or such Subsidiary than those that might be obtained at the time from
persons who are not Affiliates of the Company, other than fees payable in the
ordinary course of business in connection with servicing accounts receivable and
(c) with which neither the Company nor any Subsidiary of the Company has any
obligation to maintain or preserve such Subsidiary's financial condition or
cause such Subsidiary to achieve certain levels of operating results. Any such
designation by the Board of Directors of the Company shall be evidenced to the
Trustee by filing with the Trustee a certified copy of the resolution of the
Board of Directors of the Company giving effect to such designation and an
Officers' Certificate certifying that such designation complied with the
foregoing conditions.
"Related Business" means the business conducted (or proposed to be
conducted) by the Company and its Subsidiaries as of the Issue Date and any and
all businesses that in the good faith judgment of the Board of Directors of the
Company are materially related businesses, including reasonable extensions or
expansions thereof.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Senior Bank Debt" means the Indebtedness (including, without limitation,
interest accruing after filing of a petition in bankruptcy, whether or not such
interest is an allowable claim in such proceeding) outstanding under the Credit
Agreement and guarantees thereof as such agreements may be restated, further
amended, supplemented or otherwise modified or replaced from time to time
hereafter, together with any refunding or replacement of such Indebtedness.
"Senior Indebtedness" means (i) the Senior Bank Debt and (ii) any other
Indebtedness permitted to be incurred by the Company under the terms of the
Indenture, unless the instrument under which such Indebtedness is incurred
expressly provides that it is on a parity with or subordinated in right of
payment to the Senior Subordinated Notes. Notwithstanding anything to the
contrary in the foregoing, Senior Indebtedness will not include (w) any
liability for federal, state, local or other taxes owed or owing by the Company,
(x) any Indebtedness of the Company to any of its Subsidiaries or other
Affiliates, (y) any trade payables or (z) any Indebtedness that is incurred in
violation of the Indenture.
"Senior Revolving Debt" means revolving credit borrowings and letters of
credit under the Credit Agreement and/or any successor facility or facilities.
"Senior Term Debt" means term loans under the Credit Agreement and/or any
successor facility or facilities.
"Shareholders Agreement" means the shareholders agreement by and between
Holdings and certain of its shareholders.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article l, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Exchange Act, as such Regulation is in effect on the date
hereof.
"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
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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 Subsidiaries shall not be included in the definition of Subsidiary
for any purposes of the Indenture (except, as the context may otherwise require,
for purposes of the definition of "Unrestricted Subsidiary").
"Subsidiary Guarantor" means, a Subsidiary which has guaranteed the Senior
Subordinated Notes in accordance with the Indenture.
"Unrestricted Subsidiary" means (i) any Subsidiary (other than Guarantors
or any successors) that is designated by the Board of Directors as an
Unrestricted Subsidiary pursuant to a Board 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 Subsidiary of the Company unless the terms of any such agreement,
contract, arrangement or understanding are no less favorable to the Company or
such 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 the Subsidiaries has any direct or indirect obligation to
subscribe for additional Equity Interests or maintain or preserve such Person's
financial condition or to cause such Person to achieve any specified level 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 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 Resolutions 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 Subsidiary of the Company as of such date (and, if such Indebtedness is not
permitted nor 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 subsidiary provided that such designation shall be deemed to
be an incurrence of Indebtedness by a 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," and (ii) no Default or Event of Default would be
in existence following such designation.
"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 the 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-twentieth that will elapse
between such date and the making of such payment, by (ii) the then outstanding
principal amount of such Indebtedness.
"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. Unrestricted
Subsidiaries shall not be included in the definition of Wholly Owned Subsidiary
for any purposes of the Indenture (except, as the context may otherwise require,
for purposes of the definition of "Unrestricted Subsidiary.")
BOOK-ENTRY; DELIVERY AND FORM
The Senior Subordinated Notes sold to Qualified Institutional Buyers
initially will be in the form of one or more registered global notes without
interest coupons (collectively, the "U.S. Global Notes"). Upon
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issuance, the U.S. Global Notes will be deposited with the Trustee, (also
referred to as the Exchange Agent), as custodian for The Depositary Trust
Company ("DTC"), in New York, New York, and registered in the name of DTC or its
nominee, in each case for credit to the accounts of DTC's Direct and Indirect
Participants (as defined below). The Senior Subordinated Notes being offered and
sold in offshore transactions in reliance on Regulation S, if any, initially
will be in the form of one or more temporary, registered, global book-entry
notes without interest coupons (the "Reg S Temporary Global Notes"). The Reg S
Temporary Global Notes will be deposited with the Trustee, as custodian for the
DTC, in New York, New York, and registered in the name of a nominee of DTC (a
"Nominee") for credit to the accounts of Indirect Participants at the Euroclear
System ("Euroclear") and Cedel Bank, societe anonyme ("CEDEL"). During the
40-day period commencing on the day after the later of the Offering and the
original Issue Date (as defined) of the Senior Subordinated Notes (the "40-Day
Restricted Period"), beneficial interests in the Reg S Temporary Global Note may
be held only through Euroclear or CEDEL, and, pursuant to DTC's procedures,
Indirect Participants that hold a beneficial interest in the Reg S Temporary
Global Note will not be able to transfer such interest to a person that takes
delivery thereof in the form of an interest in the U.S. Global Notes. Within a
reasonable time after the expiration of the 40-Day Restricted Period, the Reg S
Temporary Global Notes will be exchanged for one or more permanent global notes
(the "Reg S Permanent Global Notes"; collectively with the Reg S Temporary
Global Notes, the "Reg S Global Notes") upon delivery to DTC of certification of
compliance with the transfer restrictions applicable to the Notes and pursuant
to Regulation S as provided in the Indenture. After the 40-Day Restricted
Period, (i) beneficial interests in the Reg S Permanent Global Notes may be
transferred to a person that takes delivery in the form of an interest in the
U.S. Global Notes and (ii) beneficial interests in the U.S. Global Notes may be
transferred to a person that takes delivery in the form of an interest in the
Reg S Permanent Global Notes, provided, in each case, that the certification
requirements described below are complied with. See "-- Transfers of Interests
in One Global Note for Interests in Another Global Note." All registered global
notes are referred to herein collectively "Global Notes."
Beneficial interests in all Global Notes and all Certificated Notes (as
defined herein), if any, 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.
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 in certain
limited circumstances. Beneficial interests in the Global Notes may be exchanged
for Senior Subordinated Notes in certificated form in certain limited
circumstances. See "-- Transfers of Interests in Global Notes for Certificated
Notes."
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
DTC has advised the Company that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Direct Participants") and to facilitate the clearance and settlement of
transactions in those securities between Direct Participants through electronic
book-entry changes in accounts of Participants. The Direct Participants include
securities brokers and dealers (including the Initial Purchaser), banks, trust
companies, clearing corporations and certain other organizations, including
Euroclear and CEDEL. Access to DTC's system is also available to other entities
that clear through or maintain a direct or indirect, custodial relationship with
a Direct Participant (collectively, the "Indirect Participants"). DTC may hold
securities beneficially owned by other persons only through the Direct
Participants or Indirect Participants and such other persons' ownership interest
and transfer of ownership interest will be recorded only on the records of the
Direct Participant and/or Indirect Participant, and not on the records
maintained by DTC.
DTC has also advised the Company that, pursuant to DTC's procedures, (i)
upon deposit of the Global Notes, DTC will credit the accounts of the Direct
Participants designated by the Initial Purchaser with portions of the principal
amount of the Global Notes allocated by the Initial Purchaser to such Direct
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Participants, and (ii) DTC will maintain records of the ownership interests of
such Direct Participants in the Global Notes and the transfer of ownership
interests by and between Direct Participants. DTC will not maintain records of
the ownership interests of, or the transfer of ownership interests by and
between, Indirect Participants or other owners of beneficial interests in the
Global Notes. Direct Participants and Indirect Participants must maintain their
own records of the ownership interests of, and the transfer of ownership
interests by and between, Indirect Participants and other owners of beneficial
interests in the Global Notes.
Investors in the U.S. Global Notes may hold their interests therein
directly through DTC if they are Direct Participants in DTC or indirectly
through organizations that are Direct Participants in DTC. Investors in the Reg
S Temporary Global Notes may hold their interests therein directly through
Euroclear or CEDEL or indirectly through organizations that are participants in
Euroclear or CEDEL. After the expiration of the 40-Day Restricted Period (but
not earlier), investors may also hold interests in the Reg S Permanent Global
Notes through organizations other than Euroclear and CEDEL that are Direct
Participants in the DTC system. Morgan Guaranty Trust Company of New York,
Brussels office, is the operator and depository of Euroclear and Citibank, N.A.
is the operator and depository of CEDEL (each a "Nominee" of Euroclear and
CEDEL, respectively). Therefore, they will each be recorded on DTC's records as
the holders of all ownership interests held by them on behalf of Euroclear and
CEDEL, respectively. Euroclear and CEDEL will maintain on their records the
ownership interests, and transfers of ownership interests by and between, their
own customer's securities accounts. DTC will not maintain records of the
ownership interests of, or the transfer of ownership interests by and between,
customers of Euroclear or CEDEL. All ownership interests in any Global Notes,
including those of customers' securities accounts held through Euroclear or
CEDEL, may be subject to the procedures and requirements of DTC.
The laws of some states require that certain persons take physical delivery
in definitive, certificated form of securities that they own. This may limit or
curtail the ability to transfer beneficial interests in a Global Note to such
persons. Because DTC can act only on behalf of Direct Participants, which in
turn act on behalf of Indirect Participants and others, the ability of a person
having a beneficial interest in a Global Note to pledge such interest to persons
or entities that are not Direct Participants in DTC, or to otherwise take
actions in respect of such interests, may be affected by the lack of physical
certificates evidencing such interests. For certain other restrictions on the
transferability of the Senior Subordinated Notes see "-- Reg S Temporary and Reg
S Permanent Global Notes" and "-- Transfers of Interests in Global Notes for
Certificated Notes."
EXCEPT AS DESCRIBED IN "-- TRANSFERS OF INTERESTS IN GLOBAL NOTES FOR
CERTIFICATED NOTES", OWNERS OF BENEFICIAL INTERESTS IN THE GLOBAL NOTES WILL NOT
HAVE SENIOR SUBORDINATED NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE
PHYSICAL DELIVERY OF SENIOR SUBORDINATED NOTES IN CERTIFICATED FORM AND WILL NOT
BE CONSIDERED THE REGISTERED OWNERS OR HOLDERS THEREOF UNDER THE INDENTURE FOR
ANY PURPOSE.
Under the terms of the Indenture, the Company and the Trustee will treat
the persons in whose names the Senior Subordinated Notes are registered
(including Senior Subordinated Notes represented by Global Notes) as the owners
thereof for the purpose of receiving payments and for any and all other purposes
whatsoever. Payments in respect of the principal, premium, Liquidated Damages,
if any, and interest on Global Notes registered in the name of DTC or its
nominee will be payable by the Trustee to DTC or its nominee as the registered
holder under the Indenture. 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 Direct Participant's or
Indirect Participant's records relating to or payments made on account of
beneficial ownership interests in the Global Notes or for maintaining,
supervising or reviewing any of DTC's records or any Direct Participant's or
Indirect Participant's records relating to the beneficial ownership interests in
any Global Note or (ii) any other matter relating to the actions and practices
of DTC or any of its Direct Participants or Indirect Participants.
DTC has advised the Company that its current payment practice (for payments
of principal, interest and the like) with respect to securities such as the
Senior Subordinated Notes is to credit the accounts of the relevant Direct
Participants with such payment on the payment date in amounts proportionate to
such Direct Participant's respective ownership interests in the Global Notes as
shown on DTC's records. Payments by Direct Participants and Indirect
Participants to the beneficial owners of the Senior Subordinated Notes will be
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governed by standing instructions and customary practices between them 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 its Direct
Participants or Indirect Participants in identifying the beneficial owners of
the Senior Subordinated Notes, and the Company and the Trustee may conclusively
rely on and will be protected in relying on instructions from DTC or its nominee
as the registered owner of the Senior Subordinated Notes for all purposes.
The Global Notes will trade in DTC's Same-Day Funds Settlement System and,
therefore, transfers between Direct Participants in DTC will be effected in
accordance with DTC's procedures, and will be settled in immediately available
funds. Transfers between Indirect Participants (other than Indirect Participants
who hold an interest in the Senior Subordinated Notes through Euroclear or
CEDEL) who hold an interest through a Direct Participant will be effected in
accordance with the procedures of such Direct Participant but generally will
settle in immediately available funds. Transfers between and among Indirect
Participants who hold interests in the Senior Subordinated Notes through
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
Senior Subordinated Notes described herein, cross-market transfers between
Direct Participants in DTC, on the one hand, and Indirect Participants who hold
interests in the Senior Subordinated Notes through Euroclear or CEDEL, on the
other hand, will be effected by Euroclear or CEDEL's respective Nominee through
DTC in accordance with DTC's rules on behalf of Euroclear or CEDEL; however,
delivery of instructions relating to crossmarket transactions must be made
directly to Euroclear or CEDEL, as the case may be, by the counterparty in
accordance with the rules and procedures of Euroclear or CEDEL and within their
established deadlines (Brussels time for Euroclear and United Kingdom time for
CEDEL). Indirect Participants who hold interest in the Senior Subordinated Notes
through Euroclear and CEDEL may not deliver instructions directly to Euroclear's
or CEDEL's Nominee. Euroclear or CEDEL will, if the transaction meets its
settlement requirements, deliver instructions to its respective Nominee to
deliver or receive interests on Euroclear's or CEDEL's behalf in the relevant
Global Note in DTC, and make or receive payment in accordance with normal
procedures for same-day fund settlement applicable to DTC.
Because of time zone differences, the securities accounts of an Indirect
Participant who holds an interest in the Senior Subordinated Notes through
Euroclear or CEDEL purchasing an interest in a Global Note from a Direct
Participant in DTC will be credited, and any such crediting will be reported to
Euroclear or CEDEL, during the European business day immediately following the
settlement date of DTC in New York. Although recorded in DTC's accounting
records as of DTC's settlement date in New York, Euroclear and CEDEL customers
will not have access to the cash amount credited to their accounts as a result
of a sale of an interest in a Reg S Permanent Global Note to a DTC Participant
until the European business day for Euroclear or CEDEL immediately following
DTC's settlement date.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Senior Subordinated Notes only at the direction of one or
more Direct Participants to whose account interests in the Global Notes are
credited and only in respect of such portion of the aggregate principal amount
of the Notes as to which such Direct Participant or Direct Participants has or
have given direction. However, if there is an Event of Default under the Senior
Subordinated Notes, DTC reserves the right to exchange Global Notes (without the
direction of one or more of its Direct Participants) for legended Notes and
Exchange Notes in certificated form, and to distribute such certificated forms
of Senior Subordinated Notes to its Direct Participants. See "-- Transfers of
Interests in Global Notes for Certificated Notes."
Although DTC, Euroclear and CEDEL have agreed to the foregoing procedures
to facilitate transfers of interests in the Reg S Permanent Global Notes and in
the U.S. Global Notes among Direct Participants, 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. None of the Company, the
Initial Purchaser or the Trustee will have any responsibility for the
performance by DTC, Euroclear or CEDEL or their respective Direct and Indirect
Participants of their respective obligations under the rules and procedures
governing any of their operations.
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The information in this section concerning DTC, Euroclear and CEDEL and
their book-entry systems has been obtained from sources that the Company
believes to be reliable, but the Company takes no responsibility for the
accuracy thereof.
REG S TEMPORARY AND REG S PERMANENT GLOBAL NOTES
An Indirect Participant who holds an interest in the Reg S Temporary Global
Notes through Euroclear or CEDEL must provide Euroclear or CEDEL, as the case
may be, with a certificate in the form required by the Indenture certifying that
such Indirect Participant is either not a U.S. Person (as defined below) or has
purchased such interests in a transaction that is exempt from the registration
requirements under the Securities Act, and Euroclear or CEDEL, as the case may
be, must provide to the Trustee (or the Paying Agent, if other than the Trustee)
a certificate in the form required by the Indenture prior to (i) the payment of
interest or principal with respect to such Indirect Participant's beneficial
interests in such Reg S Temporary Global Notes or (ii) any exchange of such
beneficial interests for beneficial interests in Reg S Permanent Global Notes.
"U.S. Person" means (i) any individual resident in the United States, (ii)
any partnership or corporation organized or incorporated under the laws of the
United States, (iii) any estate of which an executor or administrator is a U.S.
Person (other than an estate governed by foreign law and of which at least one
executor or administrator is a non-U.S. Person who has sole or shared investment
discretion with respect to its assets), (iv) any trust of which any trustee is a
U.S. Person (other than a trust of which at least one trustee is a non-U.S.
Person who has sole or shared investment discretion with respect to its assets
and no beneficiary of the trust (and no settler, if the trust is revocable) is a
U.S. Person), (v) any agency or branch of a foreign entity located in the United
States, (vi) any non-discretionary or similar account (other than an estate or
trust) held by a dealer or other fiduciary for the benefit or account of a U.S.
Person, (vii) any discretionary or similar account (other than an estate or
trust) held by a dealer or other fiduciary organized, incorporated or (if an
individual) resident in the United States (other than such an account held for
the benefit or account of a non-U.S. Person), (viii) any partnership or
corporation organized or incorporated under the laws of a foreign jurisdiction
and formed by a U.S. Person principally for the purpose of investing in
securities not registered under the Securities Act (unless it is organized or
incorporated and owned, by "accredited investors" within the meaning of Rule
501(a) under the Securities Act who are not natural persons, estates or trusts);
provided however that the term "U.S. Person" shall not include (A) a branch or
agency of a U.S. Person that is located and operating outside the United States
for valid business purposes as a locally regulated branch or agency engaged in
the banking or insurance business, (B) any employee benefit plan established and
administered in accordance with the law, customary practices and documentation
of a foreign country and (C) the international organizations set forth in
Section 902(o)(vii) of Regulation S under the Securities Act and any other
similar international organizations, and their agencies, affiliates and pension
plans.
TRANSFERS OF INTERESTS IN ONE GLOBAL NOTE FOR INTERESTS IN ANOTHER GLOBAL NOTE
Prior to the expiration of the 40-Day Restricted Period, an Indirect
Participant who holds an interest in the Reg S Temporary Global Note through
Euroclear or CEDEL will not be permitted to transfer its interest to a U.S.
Person who takes delivery in the form of an interest in U.S. Global Notes. After
the expiration of the 40-Day Restricted Period, an Indirect Participant who
holds an interest in Reg S Permanent Global Notes will be permitted to transfer
its interest to a U.S. Person who takes delivery in the form of an interest in
U.S. Global Notes.
Prior to the expiration of the 40-Day Restricted Period, a Direct or
Indirect Participant who holds an interest in the U.S. Global Note will not be
permitted to transfer its interests to any person that takes delivery thereof in
the form of an interest in the Reg S Temporary Global Notes. After the
expiration of the 40-Day Restricted Period, a Direct or Indirect Participant who
holds an interest in U.S. Global Notes may transfer its interests to a person
who takes delivery in the form of an interest in Reg S Permanent Global Notes
only upon receipt by the Trustee of a written certification from the transferor
to the effect that such transfer is being made in accordance with Rule 904 of
Regulation S.
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Transfers involving an exchange of a beneficial interest in Reg S Global
Notes for a beneficial interest in U.S. Global Notes or vice versa will be
effected by DTC by means of an instruction originated by the Trustee through
DTC/Deposit Withdraw at Custodian (DWAC) system. Accordingly, in connection with
such transfer, appropriate adjustments will be made to reflect a decrease in the
principal amount of the one Global Note and a corresponding increase in the
principal amount of the other Global Note, as applicable. Any beneficial
interest in the one Global Note that is transferred to a person who takes
delivery in the form of the other Global Note will, upon transfer, cease to be
an interest in such first Global Note and become an interest in such 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 as long as it remains such an interest.
TRANSFERS OF INTERESTS IN GLOBAL NOTES FOR CERTIFICATED NOTES
An entire Global Note may be exchanged for definitive Senior Subordinated
Notes in registered, certificated form without interest coupons ("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 within 90 days 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 an Event of Default with respect to the Senior Subordinated Notes. In
any such case, the Company will notify the Trustee in writing that, upon
surrender by the Direct and Indirect Participants of their interest in such
Global Note, Certificated Notes will be issued to each person that such Direct
or Indirect Participants and the DTC identify as being the beneficial owner of
the related Senior Subordinated Notes.
Beneficial interests in Global Notes held by any Direct or Indirect
Participant may be exchanged for Certificated Notes upon request to DTC, by such
Direct Participant (for itself or on behalf of an Indirect Participant), to the
Trustee in accordance with customary DTC procedures. Certificated Notes
delivered in exchange for any beneficial interest in any Global Note will be
registered in the names, and issued in any approved denominations, requested by
DTC on behalf of such Direct or Indirect Participants (in accordance with DTC's
customary procedures).
Neither the Company, nor the Trustee will be liable for any delay by the
holder of the Global Notes or the DTC in identifying the beneficial owners of
Senior Subordinated Notes, and the Company and the Trustee may conclusively rely
on, and will be protected in relying on, instructions from the holder of the
Global Note or the DTC for all purposes.
SAME DAY SETTLEMENT AND PAYMENT
The Indenture requires that payments in respect of the Senior Subordinated
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 same day funds to the accounts specified by the holder of interests in
such Global Note. With respect to Certificated Notes, the Company will make all
payments of principal, premium, if any, interest and Liquidated Damages, if any,
by wire transfer of immediately available same day 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 Company expects that
secondary trading in the Certificated Notes will also be settled in immediately
available funds.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Notes were originally sold in the Notes Offering by the Company on
December 11, 1997 to the Initial Purchaser pursuant to the Purchase Agreement.
The Initial Purchaser subsequently resold the Notes to qualified institutional
buyers in reliance on Rule 144A under the Securities Act and to a limited number
of institutional accredited investors that agreed to comply with certain
transfer restrictions and other conditions. As a condition to the Purchase
Agreement, the Company entered into the Registration Rights Agreement with the
Initial Purchaser pursuant to which the Company agreed to: file an Exchange
Offer Registration Statement with the Commission within 60 days of the Closing
Date, and use its best efforts to have it declared effective within 150 days of
the Closing Date. The Company also agreed to use its best efforts to cause the
Exchange Offer Registration Statement to be effective continuously, to keep the
Exchange Offer open for a period of not less than 20 business days and cause the
Exchange Offer to be consummated no later than the 30th business day after it is
declared effective by the Commission. For each Note surrendered to the Company
pursuant to the Exchange Offer, the holder of such Note will receive an Exchange
Note having a principal amount equal to that of the surrendered Note. Interest
on each Exchange Note will accrue from the date of its original issue.
Under existing interpretations of the staff of the Commission contained in
several no-action letters to third parties, the Exchange Notes would in general
be freely tradeable after the Exchange Offer without further registration under
the Securities Act. However, any purchaser of Notes who is an Affiliate of the
Company or who intends to participate in the Exchange Offer for the purpose of
distributing the Exchange Notes (i) will not be able to rely on the
interpretation of the staff of the Commission, (ii) will not be able to tender
its Notes in the Exchange Offer and (iii) must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
sale or transfer of the Notes, unless such sale or transfer is made pursuant to
an exemption from such requirements.
If (i) the Exchange Offer is not permitted by applicable law or Commission
policy or (ii) for any other reason the Exchange Offer is not consummated within
180 days after the original issue date of the Notes, or (iii) if any holder of
Notes which are Transfer Restricted Securities notifies the Company prior to the
20th business day following the consummation of the Exchange Offer that (a) it
is prohibited by law or Commission policy from participating in the Exchange
Offer, (b) it may not resell the Exchange 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 by it, or (c) it is a broker-dealer and holds the
Notes acquired directly from the Company or any of the Company's affiliates, the
Company will file with the Commission a Shelf Registration Statement to register
for public resale the Transfer Restricted Securities held by any such holder who
provides the Company with certain information for inclusion in the Shelf
Registration Statement.
For the purposes of the Registration Rights Agreement, "Transfer Restricted
Securities" means each Note until the earliest of the date of which (i) such
Note is exchanged in the Exchange Offering and entitled to be resold to the
public by the holder thereof without complying with the prospectus delivery
requirements of the Securities Act, (ii) such Note has been disposed of in
accordance with the Shelf Registration Statement, (iii) such Note is disposed of
by a Broker-Dealer pursuant to the "Plan of Distribution" contemplated by the
Exchange Offer Registration Statement (including delivery of the Prospectus
contained therein) or (iv) such Note is distributed to the public pursuant to
Rule 144 under the Securities Act.
The Registration Rights Agreement provides that (i) if the Company fails to
file an Exchange Offer Registration Statement with the Commission on or prior to
the 60th day after the Closing Date, (ii) if the Exchange Offer Registration
Statement is not declared effective by the Commission on or prior to the 150th
day after the Closing Date, (iii) if the Exchange Offer is not consummated on or
before the 30th business day after the Exchange Offer Registration Statement is
declared effective (iv) if obligated to file the Shelf Registration Statement
and the Company fails to file the Shelf Registration Statement with the
Commission on or prior to the 30th business day after such filing obligation
arises, (v) if obligated to file a
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Shelf Registration Statement and the Shelf Registration Statement is not
declared effective on or prior to the 90th day after the obligation to file a
Shelf Registration Statement arises, or (vi) if the Exchange Offer Registration
Statement or the Shelf Registration Statement, as the case may be, is declared
effective but thereafter ceases to be effective or usable in connection with
resales of the Transfer Restricted Securities, such time of non-effectiveness or
non-usability (each, a "Registration Default"), the Company agrees to pay to
each holder of Transfer Restricted Securities affected thereby liquidated
damages ("Liquidated Damages") in an amount equal to $0.05 per week per $1,000
in principal amount of Transfer Restricted Securities held by such holder for
each week or portion thereof that the Registration Default continues for the
first 90 day period immediately following the occurrence of such Registration
Default. The amount of the Liquidated Damages shall increase by an additional
$0.05 per week per $1,000 in principal amount of Transfer Restricted Securities
with respect to each subsequent 90 day period until all Registration Defaults
have been cured, up to a maximum amount of Liquidated Damages of $0.50 per week,
per $1,000 in principal amount of Transfer Restricted Securities. The Company
shall not be required to pay liquidated damages for more than one Registration
Default at any given time. Following the cure of all Registration Defaults, the
accrual of Liquidated Damages will cease.
All accrued Liquidated Damages shall be paid by the Company to holders
entitled thereto in the same manner as interest payments on the Notes on
semi-annual damages payment dates which correspond to interest payment dates for
the Notes.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Notes
validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on
the Expiration Date. The Company will issue $1,000 principal amount of Exchange
Notes in exchange for each $1,000 principal amount of outstanding Notes accepted
in the Exchange Offer. Holders may tender some or all of their Notes pursuant to
the Exchange Offer. However, Notes may be tendered only in integral multiples of
$1,000.
The form and terms of the Exchange Notes are the same as the form and terms
of the Notes except that (i) the Exchange Notes bear a Series B designation and
a different CUSIP Number from the Notes, (ii) the Exchange Notes have been
registered under the Securities Act and hence will not bear legends restricting
the transfer thereof and (iii) the holders of the Exchange Notes will not be
entitled to certain rights under the Registration Rights Agreement, including
the provisions providing for an increase in the interest rate on the Notes in
certain circumstances relating to the timing of the Exchange Offer, all of which
rights will terminate when the Exchange Offer is terminated. The Exchange Notes
will evidence the same debt as the Notes and will be entitled to the benefits of
the Indenture.
As of the date of this Prospectus, $100,000,000 of the aggregate principal
amount of Notes were outstanding. The Company has fixed the close of business on
, 1998 as the record date for the Exchange Offer for purposes of
determining the persons to whom this Prospectus and the Letter of Transmittal
will be mailed initially.
Holders of Notes do not have any appraisal or dissenters' rights under the
General Corporation Law of Delaware or the Indenture in connection with the
Exchange Offer. The Company intends to conduct the Exchange Offer in accordance
with the applicable requirements of the Exchange Act and the rules and
regulations of the Commission thereunder.
The Company shall be deemed to have accepted validly tendered Notes when,
as and if the Company has given oral or written notice thereof to the Exchange
Agent. The Exchange Agent will act as agent for the tendering holders for the
purpose of receiving the Exchange Notes from the Company.
If any tendered Notes are not accepted for exchange because of an invalid
tender, the occurrence of certain other events set forth herein or otherwise,
the certificates for any such unaccepted Notes will be returned, without
expense, to the tendering holder thereof as promptly as practicable after the
Expiration Date.
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Holders who tender Notes in the Exchange Offer will not be required to pay
brokerage commissions or fees or, subject to the instructions in the Letter of
Transmittal, transfer taxes with respect to the exchange of Notes pursuant to
the Exchange Offer. The Company will pay all charges and expenses, other than
transfer taxes in certain circumstances, in connection with the Exchange Offer.
See "-- Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
, 1998, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended. Notwithstanding the
foregoing, the Company will not extend the Expiration Date beyond ,
1998.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will mail to the registered
holders an announcement thereof, each prior to 9:00 a.m., New York City time, on
the next business day after the previously scheduled Expiration Date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Notes, to extend the Exchange Offer or to terminate the Exchange
Offer if any of the conditions set forth below under "-- Conditions" shall not
have been satisfied, by giving oral or written notice of such delay, extension
or termination to the Exchange Agent or (ii) to amend the terms of the Exchange
Offer in any manner. Any such delay in acceptance, extension, termination or
amendment will be followed as promptly as practicable by oral or written notice
thereof to the registered holders.
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will bear interest from their date of issuance. Holders
of Notes that are accepted for exchange will receive, in cash, accrued interest
thereon to, but not including, the date of issuance of the Exchange Notes. Such
interest will be paid with the first interest payment on the Exchange Notes on
June 15, 1998. Interest on the Notes accepted for exchange will cease to accrue
upon issuance of the Exchange Notes.
Interest on the Exchange Notes is payable semi-annually on each June 15 and
December 15, commencing on June 15, 1998.
PROCEDURES FOR TENDERING
Only a holder of Notes may tender such Notes in the Exchange Offer. To
tender in the Exchange Offer, a holder must complete, sign and date the Letter
of Transmittal, or a facsimile thereof, have the signatures thereon guaranteed
if required by the Letter of Transmittal, and mail or otherwise deliver such
Letter of Transmittal or such facsimile, together with the Notes and any other
required documents, to the Exchange Agent prior to 5:00 p.m., New York City
time, on the Expiration Date. To be tendered effectively, the Notes, Letter of
Transmittal and other required documents must be completed and received by the
Exchange Agent at the address set forth below under "Exchange Agent" prior to
5:00 p.m., New York City time, on the Expiration Date. Delivery of the Notes may
be made by book-entry transfer in accordance with the procedures described
below. Confirmation of such book-entry transfer must be received by the Exchange
Agent prior to the Expiration Date.
By executing the Letter of Transmittal, each holder will make to the
Company the representations set forth above in the third paragraph under the
heading "-- Purpose and Effect of the Exchange Offer."
The tender by a holder and the acceptance thereof by the Company will
constitute agreement between such holder and the Company in accordance with the
terms and subject to the conditions set forth herein and in the Letter of
Transmittal.
THE METHOD OF DELIVERY OF NOTES AND THE LETTER OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND SOLE RISK OF THE
HOLDER. AS AN ALTERNATIVE TO DELIVERY BY MAIL, HOLDERS MAY WISH TO CONSIDER
OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL
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CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE
AGENT BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR NOTES SHOULD BE
SENT TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS,
COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS
FOR SUCH HOLDERS.
Any beneficial owner whose Notes are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee and who wishes to tender
should contact the registered holder promptly and instruct such registered
holder to tender on such beneficial owner's behalf. See "Instruction to
Registered Holder and/or Book-Entry Transfer Facility Participant from Owner"
included with the Letter of Transmittal.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Notes tendered pursuant thereto are tendered (i) by a registered
holder who has not completed the box entitled "Special Registration
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or
(ii) for the account of an Eligible Institution. In the event that signatures on
a Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantee must be by a member firm of the
Medallion System (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the
registered holder of any Notes listed therein, such Notes must be endorsed or
accompanied by a properly completed bond power, signed by such registered holder
as such registered holder's name appears on such Notes with the signature
thereon guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, offices of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and evidence satisfactory to the
Company of their authority to so act must be submitted with the Letter of
Transmittal.
The Company understands that the Exchange Agent will make a request
promptly after the date of this Prospectus to establish accounts with respect to
the Notes at the book-entry transfer facility, DTC (the "Book-Entry Transfer
Facility"), for the purpose of facilitating the Exchange Offer, and subject to
the establishment thereof, any financial institution that is a participant in
the Book-Entry Transfer Facility's system may make book-entry delivery of Notes
by causing such Book-Entry Transfer Facility to transfer such Notes into the
Exchange Agent's account with respect to the Notes in accordance with the
Book-Entry Transfer Facility's procedures for such transfer. Although delivery
of the Notes may be effected through book-entry transfer into the Exchange
Agent's account at the Book-Entry Transfer Facility, an appropriate Letter of
Transmittal properly completed and duly executed with any required signature
guarantee and all other required documents must in each case be transmitted to
and received or confirmed by the Exchange Agent at its address set forth below
on or prior to the Expiration Date, or, if the guaranteed delivery procedures
described below are complied with, within the time period provided under such
procedures. Delivery of documents to the Book-Entry Transfer Facility does not
constitute delivery to the Exchange Agent.
The Exchange Agent and DTC have confirmed that the Exchange Offer is
eligible for the DTC Automated Tender Offer Program ("ATOP"). Accordingly, DTC
participants may electronically transmit their acceptance of the Exchange Offer
by causing DTC to transfer Notes to The Exchange Agent in accordance with DTC's
ATOP procedures for transfer. DTC will then send an Agent's Message to the
Exchange Agent.
The term "Agent's Message" means a message transmitted by DTC, received by
the Exchange Agent and forming part of the confirmation of a book-entry
transfer, which states that DTC has received an express acknowledgment from the
participant in DTC tendering Notes which are the subject of such book-entry
confirmation, that such participant has received and agrees to be bound by the
terms of the Letter of Transmittal and that the Company may enforce such
agreement against such participant. In the case of an Agent's Message relating
to guaranteed delivery, the term means a message transmitted by DTC and received
by the Exchange Agent, which states that DTC has received an express
acknowledgment from the participant
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in DTC tendering Notes that such participant has received and agrees to be bound
by the Notice of Guaranteed Delivery.
Notwithstanding the foregoing, in order to validly tender in the Exchange
Offer with respect to Securities transferred pursuant to ATOP, a DTC participant
using ATOP must also properly complete and duly execute the applicable Letter of
Transmittal and deliver it to the the Exchange Agent. Pursuant to authority
granted by DTC, any DTC participant which has Notes credited to its DTC account
at any time (and thereby held of record by DTC's nominee) may directly provide a
tender as though it were the registered holder by so completing, executing and
delivering the applicable Letter of Transmittal to the Depositary. DELIVERY OF
DOCUMENTS TO DTC DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Notes and withdrawal of tendered Notes will be
determined by the Company in its sole discretion, which determination will be
final and binding. The Company reserves the absolute right to reject any and all
Notes not properly tendered or any Notes the Company's acceptance of which
would, in the opinion of counsel for the Company, be unlawful. The Company also
reserves the right in its sole discretion to waive any defects, irregularities
or conditions of tender as to particular Notes. The Company's interpretation of
the terms and conditions of the Exchange Offer (including the instructions in
the Letter of Transmittal) will be final and binding on all parties. Unless
waived, any defects or irregularities in connection with tenders of Notes must
be cured within such time as the Company shall determine. Although the Company
intends, to notify holders of defects or irregularities with respect to tenders
of Notes, neither the Company, the Exchange Agent nor any other person shall
incur any liability for failure to give such notification. Tenders of Notes will
not be deemed to have been made until such defects or irregularities have been
cured or waived. Any Notes received by the Exchange Agent that are not properly
tendered and as to which the defects or irregularities have not been cured or
waived will be returned by the Exchange Agent to the tendering holders, unless
otherwise provided in the Letter of Transmittal, as soon as practicable
following the Expiration Date.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Notes and (i) whose Notes are not
immediately available, (ii) who cannot deliver their Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent or (iii) who
cannot complete the procedures for book-entry transfer, prior to the Expiration
Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder, the certificate number(s)
of such Notes and the principal amount of Notes tendered, stating that the
tender is being made thereby and guaranteeing that, within five New York
Stock Exchange trading days after the Expiration Date, the Letter of
Transmittal (or facsimile thereof) together with the certificate(s)
representing the Notes (or a confirmation of book-entry transfer of such
Notes into the Exchange Agent's account at the Book-Entry Transfer
Facility), and any other documents required by the Letter of Transmittal
will be deposited by the Eligible Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (of
facsimile thereof), as well as the certificate(s) representing all tendered
Notes in proper form for transfer (or a confirmation of book-entry transfer
of such Notes into the Exchange Agent's account at the Book-Entry Transfer
Facility), and all other documents required by the Letter of Transmittal
are received by the Exchange Agent upon five New York Stock Exchange
trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Notes according to the guaranteed
delivery procedures set forth above.
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WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Notes may be withdrawn at
any time prior to 5:00 p.m., New York City time, on the Expiration Date.
To withdraw a tender of Notes in the Exchange Offer, a telegram, telex,
letter or facsimile transmission notice of withdrawal must be received by the
Exchange Agent at its address set forth herein prior to 5:00 p.m., New York City
time, on the Expiration Date. Any such notice of withdrawal must (i) specify the
name of the person having deposited the Notes to be withdrawn (the "Depositor"),
(ii) identify the Notes to be withdrawn (including the certificate number(s) and
principal amount of such Notes, or, in the case of Notes transferred by
book-entry transfer, the name and number of the account at the Book-Entry
Transfer Facility to be credited), (iii) be signed by the holder in the same
manner as the original signature on the Letter of Transmittal by which such
Notes were tendered (including any required signature guarantees) or be
accompanied by documents of transfer sufficient to have the Trustee with respect
to the Notes register the transfer of such Notes into the name of the person
withdrawing the tender and (iv) specify the name in which any such Notes are to
be registered, if different from that of the Depositor. All questions as to the
validity, form and eligibility (including time of receipt) of such notices will
be determined by the Company, whose determination shall be final and binding on
all parties. Any Notes so withdrawn will be deemed not to have been validly
tendered for purposes of the Exchange Offer and no Exchange Notes will be issued
with respect thereto unless the Notes so withdrawn are validly retendered. Any
Notes which have been tendered but which are not accepted for exchange will be
returned to the holder thereof without cost to such holder as soon as
practicable after withdrawal, rejection of tender or termination of the Exchange
Offer. Properly withdrawn Notes may be retendered by following one of the
procedures described above under "-- Procedures for Tendering" at any time prior
to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or Exchange Notes for, any Notes, and may
terminate or amend the Exchange Offer as provided herein before the acceptance
of such Notes, if:
(a) any action or proceeding is instituted or threatened in any court
or by or before any governmental agency with respect to the Exchange Offer
which, in the sole judgment of the Company, might materially impair the
ability of the Company to proceed with the Exchange Offer or any material
adverse development has occurred in any existing action or proceeding with
respect to the Company or any of its subsidiaries; or
(b) any law, statute, rule, regulation or interpretation by the staff
of the Commission is proposed, adopted or enacted, which, in the sole
judgment of the Company, might materially impair the ability of the Company
to proceed with the Exchange Offer or materially impair the contemplated
benefits of the Exchange Offer to the Company; or
(c) any governmental approval has not been obtained, which approval
the Company shall, in its sole discretion, deem necessary for the
consummation of the Exchange Offer as contemplated hereby.
If the Company determines in its sole discretion that any of the conditions
are not satisfied, the Company may (i) refuse to accept any Notes and return all
tendered Notes to the tendering holders, (ii) extend the Exchange Offer and
retain all Notes tendered prior to the expiration of the Exchange Offer,
subject, however, to the rights of holders to withdraw such Notes (see "--
Withdrawal of Tenders") or (iii) waive such unsatisfied conditions with respect
to the Exchange Offer and accept all properly tendered Notes which have not been
withdrawn.
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EXCHANGE AGENT
United States Trust Company of New York has been appointed as Exchange
Agent for the Exchange Offer. Questions and requests for assistance, requests
for additional copies of this Prospectus or of the Letter of Transmittal and
requests for Notice of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
United States Trust Company of New York
114 West 47th Street
New York, New York 10036-1532
Delivery to an address other than as set forth above will not constitute a
valid delivery.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telecopy, telephone or in person by officers and
regular employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers, or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company. Such expenses include fees and expenses of the Exchange
Agent and Trustee, accounting and legal fees and printing costs, among others.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying value as the
Notes, which is face value, as reflected in the Company's accounting records on
the date of exchange. Accordingly, no gain or loss for accounting purposes will
be recognized by the Company. The expenses of the Exchange Offer will be
expensed over the term of the Exchange Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
The Notes that are not exchanged for Exchange Notes pursuant to the
Exchange Offer will remain restricted securities. Accordingly, such Notes may be
resold only (i) to the Company (upon redemption thereof or otherwise), (ii) so
long as the Notes are eligible for resale pursuant to Rule 144A, to a person
inside the United States whom the seller reasonably believes is a qualified
institutional buyer within the meaning of Rule 144A under the Securities Act in
a transaction meeting the requirements of Rule 144A, in accordance with Rule 144
under the Securities Act, or pursuant to another exemption from the registration
requirements of the Securities Act (and based upon an opinion of counsel
reasonably acceptable to the Company), (iii) outside the United States to a
foreign person in a transaction meeting the requirements of Rule 904 under the
Securities Act, or (iv) pursuant to an effective registration statement under
the Securities Act, in each case in accordance with any applicable securities
laws of any state of the United States.
RESALE OF THE EXCHANGE NOTES
With respect to resales of Exchange Notes, based on interpretations by the
staff of the Commission set forth in no-action letters issued to third parties,
the Company believes that a holder or other person who receives Exchange Notes,
whether or not such person is the holder (other than a person that is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) who receives Exchange Notes in exchange for Notes in the ordinary course of
business and who is not participating, does not intend to participate, and has
no arrangement or understanding with person to participate, in the distribution
of the Exchange Notes, will be allowed to resell the Exchange Notes to the
public without further registration under
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the Securities Act and without delivering to the purchasers of the Exchange
Notes a prospectus that satisfies the requirements of Section 10 of the
Securities Act. However, if any holder acquires Exchange Notes in the Exchange
Offer for the purpose of distributing or participating in a distribution of the
Exchange Notes, such holder cannot rely on the position of the staff of the
Commission enunciated in such no-action letters or any similar interpretive
letters, and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction,
unless an exemption from registration is otherwise available. Further, each
Participating Broker-Dealer that receives Exchange Notes for its own account in
exchange for Notes, where such Notes were acquired by such Participating
Broker-Dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes.
As contemplated by these no-action letters and the Registration Rights
Agreement, each holder accepting the Exchange Offer is required to represent to
the Company in the Letter of Transmittal that (i) the Exchange Notes are to be
acquired by the holder or the person receiving such Exchange Notes, whether or
not such person is the holder, in the ordinary course of business, (ii) the
holder or any such other person (other than a broker-dealer referred to in the
next sentence) is not engaging and does not intend to engage, in the
distribution of the Exchange Notes, (iii) the holder or any such other person
has no arrangement or understanding with any person to participate in the
distribution of the Exchange Notes, (iv) neither the holder nor any such other
person is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act, and (v) the holder or any such other person acknowledges that if
such holder or other person participates in the Exchange Offer for the purpose
of distributing the Exchange Notes it must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale of the Exchange Notes and cannot rely on those no-action letters. As
indicated above, each Participating Broker-Dealer that receives an Exchange Note
for its own account in exchange for Notes must acknowledge that it will deliver
a prospectus in connection with any resale of such Exchange Notes. For a
description of the procedures for such resales by Participating Broker-Dealers,
see "Plan of Distribution."
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DESCRIPTION OF NEW CREDIT AGREEMENT
On December 11, 1997, the Company entered into the New Credit Agreement
with Holdings, the several lenders from time to time parties thereto
(collectively, the "Lenders"), The First National Bank of Chicago as
administrative agent (the "Administrative Agent") and DLJ Capital Funding, Inc.
as syndication agent (collectively, the "Agents"). The following is a summary
description of the principal terms of the New Credit Agreement and the other
loan documents. The description set forth below does not purport to be complete
and is qualified in its entirety by reference to certain agreements setting
forth the principal terms and conditions of the New Credit Agreement, which are
available upon request from the Company. The Company's obligations under the New
Credit Agreement will constitute Senior Indebtedness with respect to the
Exchange Notes.
Structure. The Lenders have committed, subject to compliance with customary
conditions, to provide the Company with (i) senior secured term loan facilities
(the "Term A Loan Facility" and "Term B Loan Facility") of up to $55.0 million
and (ii) a senior secured revolving credit facility (the "Revolving Credit
Facility") of up to $30.0 million.
The full amount of Term A Loan Facility, Term B Loan Facility and
approximately $11.5 million of Revolving Credit Facility, plus approximately
$4.5 million in the form of letters of credit, was borrowed on the closing date
under the New Credit Agreement (i) to partially finance the Acquisition, (ii) to
repay certain existing outstanding indebtedness of the Company and (iii) to pay
certain fees and expenses related to the Acquisition. Borrowings under the
Revolving Credit Facility were reduced to $2.1 million within five business
days. See "Use of Proceeds." The New Credit Agreement may be utilized to fund
the Company's working capital requirements, including issuance of stand-by and
trade letters of credit, bankers' acceptances and for other general corporate
purposes.
The Term A Loan Facility is a single tranche term facility of $30.0 million
which has a maturity of six years, subject to quarterly amortization commencing
in the fifteenth month after the Closing Date, in the following aggregate annual
amounts for the fiscal years ending in: 1999-$3 million; 2000-$3 million;
2001-$6 million; 2002-$7.5 million and 2003-$10.5 million. The Term B Loan
Facility is a single tranche term facility of $25.0 million that has a maturity
of seven years and amortizes at a rate of 1% annually in years 1 through 6 with
the remaining amounts payable in the form of a balloon payment in year 7. Loans
and letters of credit under the Revolving Credit Facility available at any time
during its six-year term subject to the fulfillment of customary conditions
precedent including the absence of a default under the New Credit Agreement.
Borrowings under the Revolving Credit Facility are governed by a borrowing base
calculation based on a percentage of the Company's eligible accounts receivable
and eligible inventory.
Security; Guaranty. The Company's obligations under the New Credit
Agreement are guaranteed by Holdings and each of the Company's direct and
indirect domestic and, to the extent no adverse tax consequences result, Foreign
Subsidiaries. The New Credit Agreement and the guarantees thereof are secured by
a perfected first priority security interest in substantially all assets of the
Company and its direct and indirect domestic and, to the extent no adverse tax
consequences result, Foreign Subsidiaries including: (i) all real property; (ii)
all accounts receivable, inventory and intangibles; and (iii) all of the capital
stock of the Company and its direct and indirect domestic and, to the extent no
adverse tax consequences result, Foreign Subsidiaries.
Interest, Maturity. Borrowings under the New Credit Agreement bear interest
at a rate per annum equal (at the Company's option) to: (i) the Administrative
Agent's reserve-adjusted LIBO rate ("LIBOR") plus an applicable margin or (ii)
an alternate base rate equal to the highest of the Administrative Agent's prime
rate, plus an applicable margin. Initially, the applicable margin for the Term A
Loan Facility and the Revolving Credit Facility is 2.25% per annum for LIBOR
loans and 1.25% per annum for alternate base rate loans and after the first six
months will be tied to a grid based on the Company's leverage ratio, and the
applicable margin for the Term B Loan Facility is 2.50% per annum for LIBOR
loans and 1.50% per annum for alternate base rate loans and after the first six
months will be tied to a grid based on the Company's leverage ratio.
99
101
Fees. The Company is required to pay the Banks, on a quarterly basis, a
commitment fee on the undrawn portion of the Revolving Credit Facility at a rate
equal to .45% for the first six months and thereafter at a rate equal to .35% to
.45% per annum depending on the Company's leverage ratio. The Company is also
obligated to pay (i) a per annum letter of credit fee on the aggregate amount of
outstanding letters of credit; (ii) a fronting bank fee for the letter of credit
issuing bank; and (iii) customary agent, arrangement and other similar fees.
Covenants. The New Credit Agreement contains a number of covenants that,
among other things, restrict the ability of Holdings, the Company and its
subsidiaries to dispose of assets, incur additional indebtedness, prepay other
indebtedness or amend certain debt instruments (including the Indenture), pay
dividends, create liens on assets, enter into sale and leaseback transactions,
make investments, loans or advances, make acquisitions, engage in mergers or
consolidations, make capital expenditures, change the business conducted by the
Company or its subsidiaries or engage in certain transactions with affiliates
and otherwise restrict certain corporate activities. In addition, under the New
Credit Agreement, the Company is required to maintain specified financial ratios
and tests, including leverage ratios below a specified maximum, minimum net
worth levels, minimum fixed charge coverage levels and minimum levels of EBITDA.
See "Risk Factors -- Restrictive Debt Covenants."
Events of Default. The New Credit Agreement contains customary events of
default, including nonpayment of principal, interest or fees, material
inaccuracy of representations and warranties, violation of covenants,
cross-default and cross-acceleration to certain other indebtedness, certain
events of bankruptcy and insolvency, material judgments against the Company,
invalidity of any guarantee or security interest and a change of control of the
Company in certain circumstances as set forth therein.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion (including the opinion of special counsel
described below) is based upon current provisions of the Internal Revenue Code
of 1986, as amended, applicable Treasury regulations, judicial authority and
administrative rulings and practice. There can be no assurance that the Internal
Revenue Service (the "Service") will not take a contrary view, and no ruling
from the Service has been or will be sought. Legislative, judicial or
administrative changes or interpretations may be forthcoming that could alter or
modify the statements and conditions set forth herein. Any such changes or
interpretations may or may not be retroactive and could affect the tax
consequences to holders. Certain holders (including insurance companies,
tax-exempt organizations, financial institutions, broker-dealers, foreign
corporations and persons who are not citizens or residents of the United States)
may be subject to special rules not discussed below. The Company recommends that
each holder consult such holder's own tax advisor as to the particular tax
consequences of exchanging such holder's Notes for Exchange Notes, including the
applicability and effect of any state, local or foreign tax laws.
Kirkland & Ellis, special counsel to the Company, has advised the Company
that in its opinion, the exchange of the Notes for Exchange Notes pursuant to
the Exchange Offer will not be treated as an "exchange" for federal income tax
purposes because the Exchange Notes will not be considered to differ materially
in kind or extent from the Notes. Rather, the Exchange Notes received by a
holder will be treated as a continuation of the Notes in the hands of such
holder. As a result, there will be no federal income tax consequences to holders
exchanging Notes for Exchange Notes pursuant to the Exchange Offer.
100
102
PLAN OF DISTRIBUTION
Each Participating Broker-Dealer that receives Exchange Notes for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. This
Prospectus, as it may be amended or supplements from time to me, may be used by
a Participating Broker-Dealer in connection with resales of Exchange Notes
received in exchange for Notes where such Notes were acquired as a result of
market-making activities or other trading activities. The Company has agreed
that for a period of 180 days after the Expiration Date, it will make this
Prospectus, as amended or supplemented, available to any Participating
Broker-Dealer for use in connection with any such resale. In addition, until
, 1998, all dealers effecting transactions in the Exchange Notes may
be required to deliver a prospectus.
The Company will not receive any proceeds from any sales of the Exchange
Notes by the Participating Broker-Dealers. Exchange Notes received by
Participating Broker-Dealers for their own account pursuant to the Exchange
Offer may be sold from time to time in one or more transactions in the
over-the-counter market, in negotiated transaction, through the writing of
options on the Exchange 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 purchaser or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
Participating Broker-Dealer and/or the purchasers of any such Exchange Notes.
Any Participating Broker-Dealer that resells the Exchange 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 Exchange Notes may be
deemed to be an "underwriter" within the meaning of the Securities Act and any
profit on any such resale of Exchange Notes and any commissions or concessions
received by any such person may be deemed to be underwriting compensation under
the Securities Act. The Letter of Transmittal states that by acknowledging that
it will deliver and by delivering a prospectus, a Participating Broker-Dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act.
For a period of 180 days after the Expiration Date the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any Participating Broker-Dealer that requests
such documents in the Letter of Transmittal.
LEGAL MATTERS
The validity of the Exchange Notes offered hereby will be passed upon for
the Company by Kirkland & Ellis, New York, NY.
EXPERTS
The consolidated financial statements of the Company and subsidiaries as of
December 31, 1996 and December 31, 1995, and for the fiscal years ended December
31, 1996, December 31, 1995 and December 31, 1994, appearing in this Prospectus
have been audited by KPMG Peat Marwick LLP, independent auditors as stated in
their report appearing herein.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
The Company approved the replacement of KPMG Peat Marwick LLP (the "Former
Accountants") as the Company's independent outside accountants and the selection
of Deloitte & Touche LLP as the Company's new independent outside accountants.
The report of the Former Accountants on the financial statements of the
Company as of December 31, 1996 and 1995 and for the years ended December 31,
1996, 1995, and 1994 contained no adverse opinion or disclaimer of opinion and
was not qualified or modified as to uncertainty, audit scope or accounting
principles.
101
103
During the Company's years ended December 31, 1996, 1995 and 1994 and
through the date of this report, there were no disagreements with the Former
Accountants on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedures, which disagreements, if
not resolved to their satisfaction would have caused them to make reference
thereto in their report on the financial statements for such years.
The Company engaged Deloitte & Touche LLP as its new independent
accountants effective December 10, 1997.
102
104
STANADYNE AUTOMOTIVE HOLDING CORP. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
------
INDEPENDENT AUDITORS' REPORT........................................................... F-2
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1995 AND DECEMBER 31, 1996 AND FOR
EACH OF THE THREE FISCAL YEARS IN
THE PERIOD ENDED DECEMBER 31, 1996:
Consolidated Balance Sheets as of December 31, 1995 and December 31, 1996......... F-3
Consolidated Statements of Operations for the Years Ended December 31, 1994,
December 31, 1995 and December 31, 1996........................................... F-4
Consolidated Statements of Cash Flows for the Years Ended December 31, 1994,
December 31, 1995 and December 31, 1996........................................... F-5
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended
December 31, 1994, December 31, 1995 and December 31, 1996........................ F-6
Notes to Consolidated Financial Statements........................................ F-7
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1996 AND
SEPTEMBER 30, 1997:
Condensed Consolidated Balance Sheets as of December 31, 1996 and
September 30, 1997................................................................ F-31
Condensed Consolidated Statements of Operations for the Nine Months Ended
September 30, 1996 and September 30, 1997......................................... F-32
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1996 and September 30, 1997......................................... F-33
Notes to Unaudited Condensed Consolidated Financial Statements.................... F-34
F-1
105
INDEPENDENT AUDITORS' REPORT
The Board of Directors
STANADYNE AUTOMOTIVE HOLDING CORP.:
We have audited the accompanying consolidated balance sheets of Stanadyne
Automotive Holding Corp. and subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Stanadyne
Automotive Holding Corp. and subsidiaries as of December 31, 1996 and 1995, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1996 in conformity with generally
accepted accounting principles.
As discussed in Notes 1 and 9, in 1996 the Company changed its method of
amortizing unrecognized gains and losses for its post-retirement benefit plans.
The cumulative effect of adopting this change is reported in the consolidated
statements of operations.
KPMG Peat Marwick LLP
Hartford, Connecticut
February 7, 1997, except for the first
paragraph of Note 19, which is
as of December 11, 1997
F-2
106
STANADYNE AUTOMOTIVE HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER 31,
-------------------
1995 1996
-------- --------
ASSETS
Current assets:
Cash and cash equivalents.............................................. $ 1,507 $ 3,371
Accounts receivable, net of allowance for uncollectible accounts of
$455 in 1995 and $478 in 1996....................................... 45,473 36,957
Inventories (note 2)................................................... 35,790 31,525
Prepaid expenses and other assets...................................... 2,469 656
Deferred income taxes (note 10)........................................ 6,688 6,863
Federal and state income tax refundable................................ 2,475 --
-------- --------
Total current assets................................................ 94,402 79,372
Property, plant and equipment, net (notes 3 and 4)....................... 103,202 96,116
Intangible and other assets, net......................................... 4,510 3,651
Deferred income taxes (note 10).......................................... 17,303 15,778
-------- --------
Total assets........................................................ $219,417 $194,917
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................................... $ 19,121 $ 21,361
Accrued liabilities (note 5)........................................... 26,261 28,209
Current maturities of long-term debt (note 7).......................... 13,750 14,514
Current installments of capital lease obligations (note 4)............. 1,653 1,685
-------- --------
Total current liabilities........................................... 60,785 65,769
Long-term debt, excluding current maturities (note 7).................... 92,752 67,250
Capital lease obligations, excluding current installments (note 4)....... 4,044 2,463
Other non-current liabilities (notes 6, 8 and 9)......................... 58,720 50,556
-------- --------
Total liabilities................................................... 216,301 186,038
======== ========
Stockholders' equity: (note 11)
Cumulative convertible preferred stock, par value $.01, $600 per share
annual dividend payable quarterly. Authorized 2,000 shares, shares,
issued and outstanding 1,000 shares. Liquidation preference $5,000
per share........................................................... -- --
Class A common stock, par value $.01, authorized 16,000 shares, issued
and outstanding 6,203.5 shares in 1995 and 6,198.5 in 1996.......... -- --
Class B common stock, par value $.01, authorized 4,000 shares, issued
and outstanding 1,008.6 shares...................................... -- --
Additional paid-in capital............................................. 35,526 35,630
-------- --------
35,526 35,630
Cumulative translation adjustment...................................... (398) (23)
Additional pension liability (note 8).................................. (422) (141)
Accumulated deficit.................................................... (29,385) (24,382)
-------- --------
Treasury stock at cost; Class A common stock 160 shares................ (2,205) (2,205)
-------- --------
Total stockholders' equity.......................................... 3,116 8,879
-------- --------
Commitments and contingencies (notes 4, 11 and 15)
Total liabilities and stockholders' equity.......................... $219,417 $194,917
======== ========
See notes to consolidated financial statements.
F-3
107
STANADYNE AUTOMOTIVE HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
--------------------------------
1994 1995 1996
-------- -------- --------
Net sales (notes 14, 16 and 17).............................. $286,964 $272,145 $275,639
Cost of goods sold........................................... 229,485 235,645 234,756
Product recall program costs................................. 14,822 -- --
-------- -------- --------
Gross profit............................................ 42,657 36,500 40,883
Selling, general and administrative expenses (includes
payment to Metromedia Company of $500 in 1994, 1995 and
1996)
(notes 7 and 13)........................................... 35,075 31,740 30,976
-------- -------- --------
Operating income........................................ 7,582 4,760 9,907
Other income (expense):
Interest income............................................ 28 33 52
Interest expense........................................... (9,078) (9,325) (8,311)
-------- -------- --------
(Loss) income before income taxes, extraordinary item
and cumulative effect of change in accounting
principle............................................. (1,468) (4,532) 1,648
Income tax (benefit) expense (note 10)....................... (964) (1,297) 376
-------- -------- --------
(Loss) income before extraordinary item and cumulative
effect
of change in accounting principle..................... (504) (3,235) 1,272
Extraordinary item -- early extinguishment of debt, net of
income tax benefit of $688 (note 7)........................ -- (1,711) --
Cumulative effect of change in accounting for post-retirement
benefits, net of income tax expense of $2,609 (notes 1 and
9)......................................................... -- -- 4,330
-------- -------- --------
Net (loss) income............................................ (504) (4,946) 5,602
Preferred dividend requirement............................... (600) (600) (600)
-------- -------- --------
Net (loss) income applicable to common shareholders.......... $ (1,104) $ (5,546) $ 5,002
-------- -------- --------
Net (loss) income per share:
(Loss) income before extraordinary item and cumulative
effect
of change in accounting principle..................... $ (151) $ (536) $ 86
Extraordinary item...................................... -- (239) --
Cumulative effect of change in accounting principle..... -- -- 553
-------- -------- --------
Net (loss) income............................................ $ (151) $ (775) $ 639
-------- -------- --------
Weighted average number of common equivalent shares
outstanding................................................ 7,294.6 7,157.1 7,827.5
======== ======== ========
See notes to consolidated financial statements.
F-4
108
STANADYNE AUTOMOTIVE HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
--------------------------------
1994 1995 1996
-------- -------- --------
Cash flows from operating activities:
Net (loss) income........................................... $ (504) $ (4,946) $ 5,602
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Depreciation and amortization of property, plant and
equipment and intangibles.............................. 18,707 18,101 16,986
Management incentive plan (income) expense............... (1,123) (1,502) 104
Deferred income tax (benefit) expense.................... (2,113) (171) 1,361
Loss on disposal and write-down of property, plant and
equipment.............................................. 1,546 155 152
Changes in assets and liabilities:
Accounts receivable.................................... (2,517) (8,944) 9,028
Inventories............................................ (1,701) (380) 4,807
Prepaid expenses and other assets...................... 2,947 (2,755) 4,286
Accounts payable....................................... 3,603 (3,091) 1,993
Accrued liabilities.................................... 3,358 (889) 1,939
Other non-current liabilities.......................... 198 (641) (8,485)
-------- -------- --------
Net cash provided by (used in) operating activities...... 22,401 (5,063) 37,773
Cash flows from investing activities:
Capital expenditures........................................ (9,934) (6,667) (8,827)
Proceeds from disposal of property, plant and equipment..... 1,646 83 212
-------- -------- --------
Net cash used in investing activities.................... (8,288) (6,584) (8,615)
Cash flows from financing activities:
Proceeds from refinancing of long-term debt................. -- 92,900 --
Net payments on revolving credit notes and overdrat
facilities............................................... (4,864) (19,207) (13,993)
Payments on long-term debt.................................. (6,200) (55,585) (10,375)
Payments of capitalized deferred financing costs............ (150) (1,499) --
Payments on SpA debt........................................ (1,040) (1,084) (593)
Payments on capital lease obligations....................... (944) (1,200) (1,668)
Purchase of treasury stock.................................. (689) (1,516) --
Dividends paid.............................................. (450) (600) (606)
-------- -------- --------
Net cash (used in) provided by financing activities...... (14,337) 12,209 (27,235)
Net (decrease) increase in cash and cash equivalents.......... (224) 562 1,923
Effect of exchange rate changes on cash and cash
equivalents................................................. 14 (132) (59)
Cash and cash equivalents at beginning of year................ 1,287 1,077 1,507
-------- -------- --------
Cash and cash equivalents at end of year...................... $ 1,077 $ 1,507 $ 3,371
======== ======== ========
Supplemental disclosure of noncash financing transactions:
In 1994, 1995 and 1996, the Company entered into capital leases for new
equipment resulting in capital lease obligations of $1,758, $2,004 and $119,
respectively.
See notes to consolidated financial statements.
F-5
109
STANADYNE AUTOMOTIVE HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT NUMBER OF SHARES)
CUMULATIVE
CONVERTIBLE CLASS A CLASS B
PREFERRED STOCK COMMON STOCK COMMON STOCK ADDITIONAL
------------------ ----------------- ------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
------ ------- ------- ------- ------- ------- ----------
December 31, 1993.................... 1,000 $ -- 6,318.5 $ -- 1,008.6 $ -- $ 38,151
Net loss for 1994.................... -- -- -- -- -- -- --
Preferred dividends.................. -- -- -- -- -- -- --
Translation adjustment............... -- -- -- -- -- -- --
Decrease in additional pension
liability.......................... -- -- -- -- -- -- --
Management incentive plan income..... -- -- -- -- -- -- (1,123)
Purchase of Treasury stock........... -- -- -- -- -- --
Shares forfeited..................... (15)
------ ------- ------- ------- ------- ------- ----------
December 31, 1994.................... 1,000 -- 6,303.5 -- 1,008.6 -- 37,028
Net loss for 1995.................... -- -- -- -- -- -- --
Preferred dividends.................. -- -- -- -- -- -- --
Translation adjustment............... -- -- -- -- -- -- --
Increase in additional pension
liability.......................... -- -- -- -- -- -- --
Management incentive plan income..... -- -- -- -- -- -- (1,502)
Purchase of Treasury stock........... -- -- -- -- -- -- --
Shares forfeited..................... -- -- (100) -- -- -- --
------ ------- ------- ------- ------- ------- ----------
December 31, 1995.................... 1,000 -- 6,203.5 -- 1,008.6 -- 35,526
Net income for 1996.................. -- -- -- -- -- -- --
Preferred dividends.................. -- -- -- -- -- -- --
Translation adjustment............... -- -- -- -- -- -- --
Decrease in additional pension
liability.......................... -- -- -- -- -- -- --
Management incentive plan expense.... -- -- -- -- -- -- 104
Shares forfeited..................... -- -- (5) -- -- -- --
Rounding............................. -- -- -- -- -- -- --
------ ------- ------- ------- ------- ------- ----------
December 31, 1996.................... 1,000 $ -- 6,198.5 $ -- 1,008.6 $ -- $ 35,630
------ ------- ------- ------- ------- ------- ----------
CUMULATIVE ADDITIONAL
TRANSLATION PENSION ACCUMULATED TREASURY
ADJUSTMENT LIABILITY DEFICIT STOCK TOTAL
---------- ---------- ----------- -------- -------
December 31, 1993.................... $ (1,363) $ (2,586) $ (22,735) $ -- $11,467
Net loss for 1994.................... -- -- (504) -- (504)
Preferred dividends.................. -- -- (600) -- (600)
Translation adjustment............... 722 -- -- -- 722
Decrease in additional pension
liability.......................... -- 2,348 -- -- 2,348
Management incentive plan income..... -- -- -- -- (1,123)
Purchase of Treasury stock........... -- -- -- (689) (689)
Shares forfeited.....................
---------- ---------- ----------- -------- -------
December 31, 1994.................... (641) (238) (23,839) (689) 11,621
Net loss for 1995.................... -- -- (4,946) -- (4,946)
Preferred dividends.................. -- -- (600) -- (600)
Translation adjustment............... 243 -- -- -- 243
Increase in additional pension
liability.......................... -- (184) -- -- (184)
Management incentive plan income..... -- -- -- -- (1,502)
Purchase of Treasury stock........... -- -- -- (1,516) (1,516)
Shares forfeited..................... -- -- -- -- --
---------- ---------- ----------- -------- -------
December 31, 1995.................... (398) (422) (29,385) (2,205) 3,116
Net income for 1996.................. -- -- 5,602 -- 5,602
Preferred dividends.................. -- -- (600) -- (600)
Translation adjustment............... 375 -- -- -- 375
Decrease in additional pension
liability.......................... -- 281 -- -- 281
Management incentive plan expense.... -- -- -- -- 104
Shares forfeited..................... -- -- -- --
Rounding............................. -- -- 1 -- 1
---------- ---------- ----------- -------- -------
December 31, 1996.................... $ (23) $ (141) $ (24,382) $(2,205) $ 8,879
---------- ---------- ----------- -------- -------
See notes to consolidated financial statements.
F-6
110
STANADYNE AUTOMOTIVE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business. Stanadyne Automotive Corp. (the "Company"), a
subsidiary of Stanadyne Automotive Holding Corp., is a producer of diesel fuel
injection equipment which is sold worldwide to diesel engine manufacturers,
agricultural, industrial, and automotive manufacturers, and to the diesel
aftermarket. SAC's wholly-owned subsidiary, Precision Engine Products Corp.
("Precision Engine"), is a supplier of roller-rocker arms, hydraulic valve
lifters and lash adjusters to automotive engine manufacturers and the
independent automotive aftermarket.
A majority of the outstanding equity of Stanadyne Automotive Holding Corp.
("Holdings") is owned by Metromedia Company, a Delaware partnership.
Principles of Consolidation. The consolidated financial statements include
the accounts of Holdings, its wholly-owned subsidiary the Company, and all of
the Company's wholly-owned subsidiaries: Precision Engine, Stanadyne Automotive
SpA ("SpA"), DSD International and Stanadyne Automotive Foreign Sales Corp.
Intercompany balances have been eliminated in consolidation. The financial
statements of SpA, an Italian subsidiary, are consolidated on a fiscal year
basis ending November 30.
Cash and Cash Equivalents. Holdings considers cash on hand and short-term
investments with a maturity of three months or less to be "cash and cash
equivalents" for financial statement purposes. The carrying amount approximates
fair value because of the short maturity of these investments.
Inventories. Inventories are stated at the lower of cost or market. The
principal components of costs included in inventories are materials, labor,
subcontract cost and overhead. Holdings uses the last-in/first-out ("LIFO")
method of valuing its inventory, except for inventory located at SpA, which is
valued using the first-in/first-out ("FIFO") method.
Fair Value of Financial Instruments. Statement of Financial Accounting
Standards ("SFAS") No. 107, "Disclosures about Fair Value of Financial
Instruments", requires the disclosure of fair value information for certain
assets and liabilities, whether or not recorded in the balance sheets, for which
it is practicable to estimate that value. Holdings has the following financial
instruments: cash, receivables, accounts payable and accrued expenses and
long-term debt. Holdings considers the carrying amount of these items, excluding
long-term debt, to approximate the fair value because of the short period of
time between the origination of such instruments and their expected realization.
Refer to Note 7 for fair value disclosures of long-term debt.
Property, Plant, and Equipment. Property, plant and equipment, including
significant improvements thereto, are recorded at cost. Equipment under capital
leases is stated at the net present value of minimum lease payments.
Depreciation of plant and equipment is calculated using the straight-line method
over the estimated useful lives of the respective assets which are within the
following ranges:
Buildings and improvements.................................. 9 to 45 years
Machinery and equipment..................................... 3 to 15 years
Intangible and Other Assets. Intangible assets consist primarily of
technological know-how, trademarks, patents and deferred financing costs.
Depreciable intangible assets are being amortized using the straight line method
over their estimated useful lives of 3 to 40 years. Other assets include
pension-related costs. In 1995, $1,649 of debt financing costs were capitalized
in connection with Holdings' refinancing (see Note 6). Accumulated amortization
of intangible assets for 1994, 1995 and 1996 was $37,398, $39,824 and $40,800,
respectively.
F-7
111
STANADYNE AUTOMOTIVE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Foreign Currency Translation. Holdings' policy is to translate balance
sheet accounts at the exchange rate at the balance sheet date and income
statement accounts at the average monthly exchange rate for the month in which
the transactions are recognized. The resulting translation adjustment is
accumulated as a separate component of stockholders' equity. Worldwide foreign
currency transaction (losses) gains of $849, $274 and $(19) are included in the
consolidated statements of operations for 1994, 1995 and 1996, respectively.
Post Retirement Benefits. Holdings currently provides certain health care
and life insurance benefits for retired employees. Certain regular, full-time
employees may become eligible for those benefits when they reach retirement,
provided they have 10 or more consecutive years of service, if such programs are
still in effect.
Effective January 1, 1996, Holdings changed its accounting method of
amortizing unrecognized gains and losses for its post retirement benefits.
Previously, unrecognized gains or losses exceeding 10% of the accumulated post
retirement benefit obligation were amortized over the average remaining service
period of the plan participants. Holdings changed its policy whereby
unrecognized gains and losses exceeding 10% of the accumulated post retirement
benefit obligation are amortized over 12 months. This change was adopted because
the new amortization method allows for an accelerated recognition of economic
events that have occurred and represents an improvement in the financial
reporting of the accrued post retirement benefit obligation. As a result of the
curtailment and negative plan amendments discussed in Note 9, Holdings should
experience less volatility in the actuarial gains and losses of the plan since
certain future benefit costs have been fixed. Consequently, the new accounting
method's amortization period is expected to more closely match the benefit
period of plan participants and should not result in greater volatility of
reported earnings rising from the change in amortization method of unrecognized
gains or losses. The effect of the change was a one-time credit to income of
$6,939 before related income taxes of $2,609.
For the defined benefit pension plans, Holdings will continue to amortize
unrecognized gains and losses exceeding 10% of the accumulated benefit
obligation over the average remaining service life of plan participants as this
period approximates the benefit period.
Research and Development. Holdings charges research and development costs
through operations when incurred. Research and development costs incurred for
1994, 1995 and 1996 were $11,737, $15,217 and $12,720, respectively, of which
$1,107, $2,068 and $2,101, respectively, were reimbursed by customers. The net
expenses of $10,630, $13,149 and $10,619 in 1994, 1995 and 1996, respectively,
are included in the consolidated statements of operations.
Product Warranty. Holdings provides an accrual for the estimated future
warranty costs of its products. These estimates are based upon statistical
analyses of historical experience of product returns.
Revenue Recognition. Sales and related costs of sales are recorded when
products are shipped to customers. Holdings enters into long-term contracts with
certain customers for the purchase of parts during the contract period. Some of
these contracts have provisions which allow Holdings to negotiate with its
customers if targeted volumes, if defined in each contract, are not achieved.
Those negotiations may result in payments which are recognized as revenue when
the amount of such payment is agreed upon by Holdings and the customer and when
collection is probable.
Income Taxes. Income taxes are accounted for in accordance with the asset
and liability method. Deferred tax assets and liabilities are recognized for
future tax consequences attributable to differences between the tax basis of
assets and liabilities and their financial reporting amounts.
Net Income (Loss) per Share Applicable to Common Stockholders. Net income
(loss) per share applicable to common stockholders is based on the weighted
average number of shares outstanding for each of the periods presented using the
treasury stock method. Holdings considers convertible preferred stock and
F-8
112
STANADYNE AUTOMOTIVE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
series B warrants to be common stock equivalents for purposes of calculating
earnings per share. In 1994 and 1995, the convertible preferred stock and series
B warrants were not included in the computation of earnings per share since the
effect would be anti-dilutive.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
(2) INVENTORIES
Inventories at December 31, 1995 and 1996 consisted of:
1995 1996
------- -------
Raw materials...................................................... $ 3,353 $ 2,552
Work in process.................................................... 24,474 22,388
Finished goods..................................................... 7,963 6,585
------- -------
$35,790 $31,525
======= =======
Certain inventories at December 31, 1995 and 1996 have been reduced by
approximately $2,370 and $2,473, respectively, to state the inventory at
approximate market value which was lower than LIFO cost. The LIFO reserve at
December 31, 1995 and 1996 was $349 and $620, respectively.
(3) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment including equipment under capital leases at
December 31, 1995 and 1996 consisted of:
1995 1996
-------- --------
Land............................................................. $ 2,998 $ 2,999
Building and improvements........................................ 41,587 42,088
Machinery and equipment.......................................... 164,823 169,133
Construction in progress......................................... 2,142 5,738
-------- --------
211,550 219,958
Less accumulated depreciation.................................... 108,348 123,842
-------- --------
$103,202 $ 96,116
======== ========
Depreciation expense was $15,166, $15,700 and $16,113 for the years ended
December 31, 1994, 1995 and 1996, respectively.
F-9
113
STANADYNE AUTOMOTIVE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) LEASES
Holdings is obligated under various capital leases for certain machinery
and equipment that expire between 1996 and 2000. At December 31, 1995 and 1996,
the gross amount of machinery and equipment and related accumulated amortization
recorded for equipment remaining under capital leases were as follows:
1995 1996
------ ------
Machinery and equipment.............................................. $8,557 $8,100
Less accumulated amortization........................................ 1,191 2,044
------- -------
- -
$7,366 $6,056
======== ========
Amortization of assets acquired under capital leases is included in
depreciation expense.
Holdings is also obligated under certain noncancelable operating leases.
Rent expense for 1994, 1995 and 1996 were $1,370, $1,556 and $1,331,
respectively.
Future minimum lease payments under noncancelable operating leases with
initial or remaining lease terms in excess of one year and future minimum
capital lease payments as of December 31, 1996 were as follows:
CAPITAL OPERATING
LEASES LEASES
------- ---------
Year ending December 31:
1997......................................................... $ 2,017 $ 640
1998......................................................... 1,854 420
1999......................................................... 722 275
2000......................................................... 140 181
2001 and thereafter.......................................... -- 86
------ ------
Total minimum lease payments...................................... 4,733 $ 1,602
======
Less amount representing interest at a weighted average rate of
9.2%............................................................ 585
------
Present value of net minimum capital lease payments............... 4,148
Less current installments of obligations under capital leases..... 1,685
------
Obligations under capital leases excluding current
installments.............................................. $ 2,463
======
F-10
114
STANADYNE AUTOMOTIVE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) ACCRUED LIABILITIES
Accrued liabilities as of December 31, 1995 and 1996 consisted of:
1995 1996
------- -------
Salaries, wages and bonus......................................... $ 3,110 $ 4,010
Vacation.......................................................... 4,396 4,522
Retiree health benefits........................................... 3,880 3,109
Accrued interest payable.......................................... 1,152 479
Pensions.......................................................... 1,610 1,701
Accrued taxes..................................................... 783 1,911
Health benefits................................................... 610 557
Workers' compensation............................................. 3,193 3,581
Accrued warranty.................................................. 3,900 3,800
Other............................................................. 3,627 4,539
------- -------
$26,261 $28,209
======= =======
(6) OTHER NON-CURRENT LIABILITIES
Other non-current liabilities as of December 31, 1995 and 1996 consisted
of:
1995 1996
------- -------
Retiree health benefits........................................... $43,764 $35,567
Italian leaving indemnity......................................... 7,170 7,960
Pensions.......................................................... 5,636 5,262
Environmental..................................................... 1,524 1,379
Other post-employment benefits.................................... 626 388
------- -------
$58,720 $50,556
======= =======
(7) LONG-TERM DEBT
Long-term debt at December 31, 1995 and 1996 consisted of:
1995 1996
-------- -------
Revolving credit notes, payable June 30, 1999.................... $ 41,950 $29,000
Term loans, payable quarterly in various installments through
December 31, 2001.............................................. 60,875 50,500
Stanadyne Automotive SpA debt, payable to Italian banks through
1997, bearing interest at rates ranging from
5.0% to 12.0%.................................................. 3,677 2,264
-------- -------
106,502 81,764
Less current maturities of long-term debt........................ 13,750 14,514
-------- -------
Long-term debt, excluding current maturities................ $ 92,752 $67,250
======== =======
As of December 31, 1996, Holdings' revolving credit notes and term loans
consisted of LIBOR based loans aggregating $79,000 at rates ranging from 7.81%
to 8.56% and agent bank reference rate based loans aggregating $500 at a
year-end rate of 10.00%. Holdings has revolving credit lines aggregating $50,000
F-11
115
STANADYNE AUTOMOTIVE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
comprised of $4,820 for standby letters of credit, outstanding borrowings of
$29,000, and available borrowings of $16,180 as of December 31, 1996. The
revolving credit notes and term loans are secured by substantially all of the
assets of the Company and Precision Engine and by a pledge of substantially all
of the issued and outstanding capital stock of the Company and Precision Engine
and 65% of the capital stock of SpA.
At December 31, 1995 and 1996 the weighted average interest rate on
short-term borrowings was 8.57% and 7.89%, respectively.
During February 1995, Holdings refinanced all of the debt of its domestic
subsidiaries by obtaining a $115,000 credit facility which made available a
$45,000 four and one-half year senior secured term loan, a $20,000 seven year
senior secured term loan, and a $50,000 senior secured revolving credit loan
which includes a $15,000 letter of credit sub-facility. The revolving credit
facility terminates on June 30, 1999. The proceeds were used to retire the debt
of Holdings' domestic subsidiaries, including $35,000 of unsecured notes.
Retirement of such unsecured notes resulted in a $2,400 prepayment penalty which
has been reported net of tax benefits as an extraordinary item.
The $45,000 term loan is due in quarterly installments of $2,000 commencing
on June 30, 1995 through December 31, 1996, $2,500 through December 31, 1998,
$5,500 on March 31, 1999, and $4,272 on June 30, 1999. The $20,000 term loan is
due in semi-annual installments of $125 through December 31, 1999, three
semi-annual installments of $4,688 through June 30, 2001, and a final
installment of $3,915 on December 31, 2001. In addition, Holdings was required
to prepay $2,000 of term debt in 1997 on an excess cash flow provision as it
applied to 1996 results.
Under the revolving credit loans and $45,000 term loan, Holdings has the
option to borrow at either (i) the Alternate Base Rate ("ABR") (the bank's prime
commercial lending rate in effect for that day or the Federal Funds Effective
Rate plus .5%, whichever is greater) plus 1% or (ii) for Eurodollar based loans,
at the LIBOR rate in effect at the time of the transaction plus 2 1/4%.
Borrowing rates for the $20,000 term loan are .75% higher than those applied to
the revolving credit loans. Holdings can elect, from time to time, to convert
ABR advances to Eurodollar advances, and vice versa. In addition, Holdings pays
a quarterly commitment fee of 1/2% per annum on the average daily unused
revolving commitment amount.
Pursuant to the credit agreement, Holdings entered into an Interest Rate
Cap Agreement in 1995, covering 50% of the principal balance of the term loans
through June 30, 1998. The cost of the cap was $34 and the Interest Rate Cap
Agreement will ensure a net interest cost of not greater than 10.5% for the
principal amounts covered under the Interest Rate Cap Agreement.
The credit agreement governing the revolving credit and term loan
facilities contains covenants as to the maintenance of certain financial ratios.
The agreement also contains customary restrictions and limitations as to certain
defined fundamental changes in the business, the incurring of additional debt or
contingent obligations, payment of dividends, liens on assets, the acquisition
of treasury stock, and the acquisition or sale of assets. In addition, there are
mandatory prepayment provisions under this agreement based upon excess cash
flow, as defined, from consolidated operations of Holdings.
Included in the December 31, 1995 and 1996 SpA debt is an overdraft
facility with $2,794 and $1,945, respectively, outstanding. The overdraft
facility is payable on demand and included in current maturities of long-term
debt.
The fair value of Holdings' long-term debt is estimated based on the quoted
market prices for the same or similar issues or on the current rates offered to
Holdings for debt of the same remaining maturities. Management believes the
carrying value of the debt approximates the market value at December 31, 1995
and 1996.
F-12
116
STANADYNE AUTOMOTIVE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The aggregate maturities of long-term debt outstanding at December 31, 1996
were:
1997....................................................................... $14,514
1998....................................................................... 10,250
1999....................................................................... 39,022
2000....................................................................... 9,375
2001....................................................................... 8,603
-------
$81,764
=======
For the years ended December 31, 1994, 1995 and 1996, interest paid was
$7,842 and $9,781 and $8,986, respectively.
(8) PENSIONS
Holdings has noncontributory defined benefit pension plans which cover
substantially all of the domestic hourly and salaried employees of Holdings.
Benefits under the pension plans are based on years of service and compensation
levels during employment for salaried employees and years of service for hourly
employees. It is Holdings' policy to fund the pension plans based on the minimum
permissible contribution as determined by the plans' actuaries. Plan assets are
invested primarily in a diversified portfolio of equity securities. Holdings
also sponsors an unfunded defined benefit supplemental executive retirement
plan.
The following table sets forth the funded status of the pension plans and
amounts recognized in Holdings' consolidated financial statements as of December
31:
1995 1996
------------------- -------------------------------------------
PLANS IN WHICH PLANS IN WHICH
ACCUMULATED BENEFIT PLANS IN WHICH ASSETS ACCUMULATED BENEFIT
OBLIGATION EXCEEDS EXCEED ACCUMULATED OBLIGATION EXCEEDS
PLAN ASSETS BENEFIT OBLIGATION PLAN ASSETS
------------------- --------------------- -------------------
Actuarial present value of accumulated
benefit obligation:
Vested.................................. $ 19,929 $ 20,916 $ 738
Nonvested............................... 3,772 3,795 46
------- ------- ------
Accumulated benefit obligation....... $ 23,701 $ 24,711 $ 784
======= ======= ======
Actuarial present value of projected
benefit obligation...................... $ 28,973 $ 29,520 $ 1,000
Plan assets at fair value................. (19,973) (25,539) --
------- ------- ------
Projected benefit obligation in
excess of plan assets.............. 9,000 3,981 1,000
Unrecognized net gain (loss).............. (2,003) 2,375 (357)
Unrecognized prior service costs.......... (524) (293) (158)
Additional liability...................... 611 -- 299
------- ------- ------
Accrued pension liability............ $ 7,084 $ 6,063 $ 784
======= ======= ======
F-13
117
STANADYNE AUTOMOTIVE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the net periodic pension costs for the years ended
December 31, 1994, 1995 and 1996 were as follows:
1994 1995 1996
------ ------ ------
Service cost............................................... $1,604 $1,465 $1,769
Interest cost.............................................. 1,692 2,051 2,171
Actual return on plan assets............................... (256) (4,405) (4,030)
Net amortization and deferrals............................. (739) 3,181 2,257
------ ------ ------
Net periodic pension cost.................................. $2,301 $2,292 $2,167
====== ====== ======
An additional liability of $611 and $299 has been recorded with a $189 and
$158 intangible asset, and the remaining $422 and $141 are shown as a separate
component of stockholders' equity as of December 31, 1995 and 1996,
respectively. The additional liability is necessary so that the liability
recognized is at least equal to the unfunded accumulated benefit obligation as
actuarially determined on a plan-by-plan basis. Actuarial assumptions used in
accounting for the pension plan as of December 31, 1994, 1995 and 1996 were:
1994 1995 1996
----- ----- -----
Assumed average salary compensation increase................. 4.5% 4.0% 4.0%
Discount rate................................................ 8.5% 7.25% 7.5%
Expected long-term rate of return on assets.................. 9.0% 9.0% 9.0%
No compensation increase rate is applicable for the hourly plans as they
are flat pay for each year of service (regardless of compensation earned).
In accordance with Italian Civil Code, Holdings provides employees of SpA a
leaving indemnity payable on termination of employment. The amount of this
leaving indemnity is determined by the employee's category, length of service,
and overall remuneration earned during service. Amounts included as part of
other non-current liabilities at December 31, 1995 and 1996 are $7,170 and
$7,960, respectively. Leaving indemnity expense was $1,075, $1,202 and $1,135
for the years ended December 31, 1994, 1995 and 1996, respectively.
(9) POST-RETIREMENT HEALTH CARE AND LIFE INSURANCE
The Company and its domestic subsidiaries currently provide certain health
care and life insurance benefits for retired employees. Full-time employees of
Holdings (except non-grandfathered employees at the Tallahassee and Melrose Park
locations) may become eligible for those benefits if they reach retirement,
provided they attain age 57 with a minimum of 10 consecutive years of service
immediately preceding retirement, if such programs are still in effect.
During 1996, Holdings modified the benefits available to both existing and
future retirees. These changes resulted in both a curtailment gain and negative
plan amendments which have been reflected in the determination of the accrued
post-retirement benefit cost. Holdings recorded a $470 curtailment gain as a
result of the elimination of life insurance benefits to all employees retiring
after January 1, 1998. In addition, Holdings reduced their cost commitment
provided to existing and future retirees which resulted in negative plan
amendments of $7,569. The resulting gain from the negative plan amendment is
deferred and will be amortized over the remaining service period of the plan
participants.
Employees who retired prior to January 1, 1987 are eligible for a
Basic/Major Medical Plan and, in certain cases, prescription drug benefits for a
basic monthly contribution by the retiree. Benefit levels vary depending upon
the retiree's benefit plan eligibility. Holdings' health benefit cost commitment
for employees who retire between January 1, 1987 and December 31, 1997 is
limited to the 1997 cost level. Furthermore,
F-14
118
STANADYNE AUTOMOTIVE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Holdings' cost commitment for employees who retire after 1997 will be $0.1 per
month per eligible participant prior to becoming Medicare eligible and $0.05 per
month when Medicare eligible. Employees hired after 1996 are required to pay the
full cost of post retirement medical coverage. Employees who retire before 1998
are eligible for Holdings provided life insurance benefits. Employees who retire
after 1997 are allowed to purchase life insurance at full cost.
As discussed in Note 1, effective January 1, 1996, Holdings changed its
accounting method of amortizing unrecognized gains and losses. Unrecognized
gains and losses exceeding 10% of the accumulated post-retirement benefit
obligation are amortized over 12 months. This accounting change reduced the
unrecognized gain by $6,939.
The following table presents the plan's funded status reconciled with
amounts recognized in Holdings' consolidated balance sheets at December 31, 1995
and 1996:
1995 1996
------- -------
Accumulated post-retirement benefit obligation:
Retirees........................................................ $29,251 $23,401
Fully eligible active plan participants......................... 1,412 2,970
Other active plan participants.................................. 9,816 2,404
------ ------
40,479 28,775
Plan assets at fair value......................................... -- --
------ ------
Unfunded accumulated post-retirement benefit obligation......... 40,479 28,775
Unrecognized decrease in benefit obligation due to plan
amendment....................................................... -- 7,569
Unrecognized net gain............................................. 6,922 2,269
------ ------
Accrued post-retirement benefit cost included in accrued
liabilities and other non-current liabilities............... $47,401 $38,613
====== ======
Net periodic post-retirement benefit costs for 1994, 1995 and 1996 included
the following components:
1994 1995 1996
------ ------ ------
Service cost............................................... $ 561 $ 459 $ 475
Interest cost.............................................. 2,978 3,013 2,584
Actual return on plan assets............................... -- -- --
Amortization of unrecognized decrease in benefit obligation
due to plan amendment.................................... -- -- (303)
Amortization of unrecognized net gain...................... (182) (472) (189)
------ ------ ------
Net periodic post-retirement benefit cost................ $3,357 $3,000 $2,567
====== ====== ======
F-15
119
STANADYNE AUTOMOTIVE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For measurement purposes, the following medical and dental cost trend rates
were assumed in determining the accumulated benefit obligation at December 31,
1995 and 1996:
Medical Cost Trend Rates
-- Medical prior to age 65 (Indemnity Plan)... 12.0% in 1994, decreasing 1.5% per year
for 5 years, ultimately 4.5% in 1999 and
thereafter.
-- Medical prior to age 65 (HMO's)............ 7.5% in 1994, decreasing 1.0% per year
for 3 years, ultimately 4.5% in 1997 and
thereafter.
-- Medical age 65 & older..................... 7.5% in 1994, decreasing 1.0% per year
for 3 years, ultimately 4.5% in 1997 and
thereafter.
Dental Cost Trend Rate
-- Dental costs............................... 7.5% in 1994, decreasing 1.0% per year
for 3 years, ultimately 4.5% in 1997 and
thereafter.
A 1% increase in these trend rates would have increased the accumulated
post-retirement benefit obligation at December 31, 1996 by approximately $888
and would have increased the net periodic post retirement benefit cost by
approximately $93 for 1996. The discount rate used in determining the
accumulated post-retirement benefit obligation was 7.5% at December 31, 1996 and
7.25% at December 31, 1995.
(10) INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 1994, 1995
and 1996 consisted of:
CURRENT DEFERRED TOTAL
------- -------- -------
1994:
Federal............................................... $ (49) $ (1,157) $(1,206)
State................................................. 1,126 (855) 271
Foreign............................................... 72 (101) (29)
-------- -------- --------
$ 1,149 $ (2,113) $ (964)
======== ======== ========
1995:
Federal............................................... $(1,511) $ (77) $(1,588)
State................................................. 308 (99) 209
Foreign............................................... 75 7 82
-------- -------- --------
$(1,128) $ (169) $(1,297)
======== ======== ========
1996:
Federal............................................... $ 1,390 $ (140) $ 1,250
State................................................. 233 342 575
Foreign............................................... 1 (1,450) (1,449)
-------- -------- --------
$ 1,624 $ (1,248) $ 376
======== ======== ========
F-16
120
STANADYNE AUTOMOTIVE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Total income tax expense (benefit) differed from the amounts computed by
applying the U.S. Federal Income Tax rate of 35% to income (loss) before income
taxes, extraordinary item and cumulative effect of change in accounting
principle as a result of the following:
1994 1995 1996
----- ------- -----
Computed "expected" tax expense (benefit).................. $(514) $(1,586) $ 577
Increase (reduction) in income tax resulting from:
Adjustment to deferred tax asset for change in enacted
tax rates............................................. -- 175 215
Federal NOL for which no benefit realized................ -- 766 --
State taxes, net of federal income tax effect............ 179 164 292
Federal R&D credit permanent difference.................. (470) (807) --
Rate difference on income of foreign operations.......... 155 159 285
Foreign taxes............................................ 9 -- --
Change in valuation allowance............................ (279) (317) (591)
Other, net............................................... (44) 149 (402)
----- ------- -----
$(964) $(1,297) $ 376
===== ======= =====
U.S. federal, state and foreign net income taxes paid (refunded) amounted
to $734, $266 and $(1,832) in 1994, 1995 and 1996, respectively. As a result of
losses in previous years, Holdings has unused regular federal net operating loss
carryforwards of approximately $8,393 at December 31, 1996, which, if not used
to offset future taxable income, will begin to expire in 2010.
As a result of losses in current and previous years, Holdings has unused
net operating loss carryforwards for state income tax purposes of approximately
$14,900 at December 31, 1996, which, if not used to offset future state taxable
income, will begin to expire in 1999. In addition, unused foreign net operating
losses of approximately $2,420 at December 31, 1996 exist which will begin to
expire in 1997.
Holdings has been subject to the U.S. Alternative Minimum Tax ("AMT") and,
therefore, has a cumulative AMT credit carryforward of approximately $4,884 as
of December 31, 1996. This carryforward has an unlimited life and may be used to
offset federal income taxes in excess of AMT in future periods.
Holdings has unused federal general business credit carryovers of
approximately $3,245 at December 31, 1996. The credit consists of $3,167 of
research and development credit and $78 of targeted job credit. The credit will
begin to expire in 2004. However, when the credit expires it can be used to
offset taxable income.
F-17
121
STANADYNE AUTOMOTIVE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1995 and 1996 are presented as follows:
1995 1996
------- -------
Current:
Deferred tax assets:
Post-retirement benefits..................................... $ 1,857 $ 1,237
Inventories.................................................. 685 796
Deferred compensation........................................ -- 60
Compensated absences......................................... 1,321 1,394
Workers' compensation........................................ 1,132 1,267
Health benefits.............................................. 212 209
Other........................................................ 1,481 1,900
------- -------
Net current deferred tax assets............................ $ 6,688 $ 6,863
======= =======
Non-current:
Deferred tax assets:
Post-retirement benefits..................................... $18,392 $15,723
Alternative minimum tax credit carryforwards................. 3,609 4,884
Inventories.................................................. 1,629 1,299
Federal general business credit.............................. 3,896 3,245
Deferred compensation........................................ 200 --
Net operating loss carryforwards............................. 4,559 4,407
Other........................................................ 872 676
------- -------
Deferred tax assets before valuation allowance............. 33,157 30,234
Less valuation allowance.......................................... (591) --
------- -------
Deferred tax assets........................................ 32,566 30,234
------- -------
Deferred tax liabilities:
Property, plant and equipment................................ 14,459 13,775
Other........................................................ 804 681
------- -------
Deferred tax liabilities................................... 15,263 14,456
------- -------
Net non-current deferred tax asset......................... $17,303 $15,778
======= =======
At December 31, 1996, Holdings did not established a valuation allowance to
offset any deferred tax assets. Based on projections for future taxable income
over the periods during which the deferred tax assets are deductible, and the
expectation that a significant portion of these deferred tax assets are to be
realized by offsetting them against taxable temporary items, it is management's
belief that it is more likely than not that all deferred tax assets will be
fully realized. The net change in the total valuation allowance was a decrease
of $467, $317 and $591 for the years ended December 31, 1994, 1995 and 1996,
respectively.
(11) CAPITAL STOCK
The Certificate of Incorporation of Stanadyne Automotive Holding Corp.
provides that Holdings has the authority to issue 22,000 shares of stock
consisting of 16,000 shares of Class A common stock, par value $.01; 4,000
shares of Class B common stock, par value $.01; and 2,000 shares of preferred
stock, par value $.01. The Class A and Class B common stock have equivalent
rights and preferences, except that the Class A Stock has
F-18
122
STANADYNE AUTOMOTIVE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
voting rights consisting of one vote per share. Holders of Class B common stock
do not have voting rights. The terms and conditions of the preferred stock were
designated at the time of issuance.
Holdings has designated 1,000 shares of $.01 par value preferred stock as
cumulative, convertible, nonvoting preferred stock, all of which are issued and
outstanding. The cumulative, convertible, nonvoting preferred stock is entitled
to cumulative dividends from the date of issuance at an annual rate of $0.6 per
share payable quarterly. In the event of liquidation, the holders of preferred
stock are entitled to receive at least $5 per preferred share together with
accrued and unpaid dividends prior to any distribution to common stockholders.
The holder of any share of preferred stock shall have a right, at the
shareholder's option, to convert all or a portion of such shares into fully paid
and nonassessable shares of Class A common stock of Holdings at any time at a
non-dilutive conversion rate, currently .75 shares of Class A common stock for
each share of preferred stock.
Included in the issued and outstanding Class A common stock of Holdings are
183.5 shares issued to management of Holdings' subsidiaries (the "Management
Shares") pursuant to individual subscription agreements. The vesting of shares
issued in connection with such plan is contingent upon future service of the
individual through the earlier of a change in control of Holdings or retirement,
as defined. The cumulative compensation expense related to these shares is
calculated by extending the vested number of Management Shares by a formula
share price to estimate market value. (Income) expense recorded by Holdings was
$(1,123), $(1,502) and $104 for the years ended December 31, 1994, 1995 and
1996, respectively. Further vesting is contingent upon certain future events
which presently cannot be estimated. The ultimate amount that will be expensed
could vary significantly from the cumulative expense recorded through December
31, 1996.
There are outstanding warrants to purchase 29.7 shares of Class B common
stock. The holders of the warrants also hold shares of Class B common stock. The
warrants were issued in order to ensure against the dilutive effect of the
management incentive Class A shares. Warrant holders are allowed to convert
warrants to shares of Class B common stock upon the issuance of additional
Management Shares. In addition, warrants are canceled on a pro rata basis with
the redemption by Holdings of Management Shares. Warrants may be exercised at a
price of $.01 per share. The warrant agreement expires on March 31, 2001.
During 1994 and 1995, Holdings purchased 50 shares and 110 shares of Class
A common stock from management for a total cost of $689 and $1,516,
respectively. These shares are held as treasury stock.
(12) 401(k) PLAN
Substantially all of Holdings' domestic employees are eligible to
participate in a 401(k) savings plan provided by SAC. The 401(k) savings plan
provides such employees with the opportunity to save for retirement on a tax
deferred basis. Holdings contributes 50% of the employees contribution per year
up to a limit, as defined in the plan document. Holdings made contributions of
$358, $373 and $352 for the years ended December 31, 1994, 1995 and 1996,
respectively.
(13) RELATED PARTY TRANSACTIONS
During each of the years ended December 31, 1994, 1995 and 1996, Holdings
incurred management fees of $500 to Metromedia Company for management services
provided. These charges are included in general and administrative expenses.
Holdings has accrued $150 and $144 at December 31, 1995 and 1996, respectively,
for dividends on the preferred stock which is owed primarily to Metromedia
Company.
F-19
123
STANADYNE AUTOMOTIVE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(14) SIGNIFICANT CUSTOMERS
During 1994, 1995 and 1996, sales to customers and their affiliates, which
represented approximately 10% or more of consolidated total sales, were as
follows:
1994 1995 1996
SEGMENT AMOUNT % AMOUNT % AMOUNT %
---------------- ------- ---- ------- ---- ------- ----
Customer A.. Precision Engine $44,180 15.4% $40,099 14.7% $47,957 17.4%
Customer B.. Diesel Group 41,853 14.6 56,169 20.6 41,483 15.1
Customer C.. Diesel Group 32,104 11.2 33,915 12.5 38,893 14.1
Customer D.. Precision
Engine/Diesel
Group 30,965 10.8 27,138 10.0 22,164 8.0
Accounts receivable balances with these customers and their affiliates were
$22,392 and $18,206 at December 31, 1995 and 1996, respectively.
(15) CONTINGENCIES
Holdings is involved in various legal and regulatory proceedings generally
incidental to its business. While the results of any litigation or regulatory
issue contain an element of uncertainty, management believes that the outcome of
any known, pending or threatened legal proceeding, or all of them combined, will
not have a material adverse effect on Holdings' financial position.
(16) SEGMENTS
Holdings has two reportable segments, the Diesel Systems Group (the "Diesel
Group") and the Precision Engine Products Corp. ("Precision Engine"). The Diesel
Group manufacturers diesel fuel injection equipment including fuel pumps,
injectors and filtration systems. This segment accounted for approximately 75%,
76% and 73% of Holdings' revenue for the years ended December 31, 1994, 1995 and
1996, respectively. Precision Engine manufactures roller-rocker arms, hydraulic
valve lifters and lash adjusters for gasoline engines. Revenues for Precision
Engine accounted for 25%, 24% and 27% of total revenues for the years ended
December 31, 1994, 1995 and 1996, respectively. Holdings' reportable segments
are strategic business units that offer similar products (engine parts) to
customers in related industries (agricultural, industrial and automotive engine
manufacturers). Holdings considers the Diesel Group and Precision Engine to be
two distinct segments because the operating results of each are compiled,
reviewed and managed separately. In addition, there were no intersegment sales
between the Diesel Group and Precision Engine for any of the periods presented
below.
The following summarizes key information used by Holdings in evaluating the
performance of each segment as of and for the years ended December 31, 1995 and
1996:
DECEMBER 31, 1995
-------------------------------------------------
PRECISION
DIESEL ENGINE ELIMINATIONS TOTALS
-------- --------- ------------ --------
Net sales................................. $206,903 $ 65,242 $ -- $272,145
Gross profit.............................. 27,309 9,191 -- 36,500
Operating (loss) income (1,034) 5,794 -- 4,760
Net (loss) income......................... (8,052) 3,106 -- (4,946)
Total assets.............................. 183,427 44,308 (8,318) 219,417
Total capital expenditures................ 5,025 1,642 -- 6,667
F-20
124
STANADYNE AUTOMOTIVE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
-------------------------------------------------
PRECISION
DIESEL ENGINE ELIMINATIONS TOTALS
-------- --------- ------------ --------
Net sales................................. $202,467 $ 73,172 $ -- $275,639
Gross profit.............................. 28,020 12,863 -- 40,883
Operating income.......................... 1,205 8,702 -- 9,907
Net (loss) income......................... (891) 6,493 -- 5,602
Total assets.............................. 170,043 39,686 (14,812) 194,917
Total capital expenditures................ 6,335 2,492 -- 8,827
(17) FOREIGN OPERATIONS
Holdings has manufacturing operations in the United States and Italy. The
following is a summary of information by area as of December 31, 1996 and 1995
and for the years ended December 31, 1994, 1995 and 1996:
1994 1995 1996
-------- -------- --------
Net sales:
United States...................................... $251,894 $237,228 $243,284
Italy.............................................. 35,070 34,917 32,355
-------- -------- --------
Net sales....................................... $286,964 $272,145 $275,639
======== ======== ========
Income (loss) before extraordinary item and
cumulative effect of accounting change:
United States...................................... $ (1,441) $ (3,983) $ 3,130
Italy.............................................. 937 748 (1,858)
-------- -------- --------
Income (loss) before extraordinary item and
cumulative effect of accounting change........ $ (504) $ (3,235) $ 1,272
======== ======== ========
Identifiable assets:
United States...................................... $188,856 $169,173
Italy.............................................. 30,561 25,744
-------- --------
Identifiable assets............................. $219,417 $194,917
======== ========
Long-lived assets:
United States...................................... $ 98,434 $ 91,713
Italy.............................................. 9,278 8,054
-------- --------
Long-lived assets............................... $107,712 $ 99,767
-------- --------
Deferred tax assets (liabilities):
United States...................................... $ 24,102 $ 21,290
Italy.............................................. (111) 1,351
-------- --------
Deferred tax assets............................. $ 23,991 $ 22,641
======== ========
F-21
125
STANADYNE AUTOMOTIVE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(18) VALUATION AND QUALIFYING ACCOUNTS
The components of significant valuation and qualifying accounts for the
years ended December 31, 1994, 1995 and 1996 were as follows:
RECEIVABLE OBSOLETE
ALLOWANCE FOR SLOW MOVING
ACCOUNTS RESERVE
------------- -----------
Balance January 1, 1994..................................... $ 290 $ 2,666
Charged to costs and expenses............................. 355 393
Write-offs................................................ (271) (718)
Exchange.................................................. 9 26
---- ----
Balance December 31, 1994................................... 383 2,367
Charged to costs and expenses............................. 146 2,143
Write-offs................................................ (79) (2,322)
Exchange.................................................. 5 (5)
---- ----
Balance December 31, 1995................................... 455 2,183
Charged to costs and expenses............................. 170 757
Write-offs................................................ (165) (1,164)
Exchange.................................................. 18 17
---- ----
Balance December 31, 1996................................... $ 478 $ 1,793
==== ====
(19) SUBSEQUENT EVENT AND SUPPLEMENTAL COMBINED CONDENSED FINANCIAL STATEMENTS
On December 11, 1997, in connection with an acquisition by American
Industrial Partners Capital Fund II, L.P. ("AIP"), SAC, Inc. ("New Holdings")
acquired the outstanding stock of Stanadyne Automotive Holding Corp. ("Old
Holdings"), and SAC Automotive, Inc. ("Automotive") borrowed $100 million on
10 1/4% Senior Subordinated Notes (the "Notes") and $85 million of term loans
and revolving credit ("New Credit Agreement") to partially fund the Acquisition
Transactions. Simultaneous with the acquisition, Old Holdings and Automotive
merged with and into the Company and New Holdings changed its name to Stanadyne
Automotive Holding Corp. Under the terms of the New Credit Agreement the stock
of all of the Company's domestic subsidiaries and 65% of the stock of the
wholly-owned foreign subsidiaries and all of the assets of the Company and its
subsidiaries and the capital stock of the Company will be pledged as collateral.
Under the terms of the Notes, issued by the Company, the Notes are guaranteed by
its domestic subsidiaries. Its wholly-owned foreign subsidiaries will not be
guarantors with respect to the Notes.
The following are the supplemental combining condensed balance sheets as of
December 31, 1995 and 1996 and the supplemental combining condensed statements
of operations and of cash flows for each of the three years ended December 31,
1994, 1995 and 1996. Separate complete financial statements of the non-guarantor
subsidiaries are not presented because management has determined that they are
not material to investors. The financial statements of the Company are
essentially the same as Stanadyne Automotive Holding Corp.'s financial
statements after consolidations and eliminations.
F-22
126
STANADYNE AUTOMOTIVE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995
STANADYNE
AUTOMOTIVE
HOLDING CORP.
(ISSUER AND NON
SUBSIDIARY GUARANTOR
GUARANTOR) SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------
ASSETS
Cash and cash equivalents....................... $ 1,398 $ 3 $ 106 $ 1,507
Accounts receivable, net........................ 34,895 10,578 -- 45,473
Inventories..................................... 25,458 10,637 (305) 35,790
Other current assets............................ 11,568 64 -- 11,632
-------- -------- -------- --------
Total current assets....................... 73,319 21,282 (199) 94,402
Property, plant and equipment, net.............. 94,358 8,844 -- 103,202
Other assets, net............................... 32,217 434 (10,838) 21,813
-------- -------- -------- --------
Total assets............................... $ 199,894 $ 30,560 $(11,037) $219,417
======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses......... $ 36,408 $ 8,974 $ -- $ 45,382
Other current liabilities..................... 11,658 3,745 -- 15,403
-------- -------- -------- --------
Total current liabilities.................. 48,066 12,719 -- 60,785
Long-term debt and capital lease obligations.... 95,922 874 -- 96,796
Other non-current liabilities................... 51,550 7,281 (111) 58,720
Stockholders' equity............................ 4,356 9,686 (10,926) 3,116
-------- -------- -------- --------
Total liabilities and stockholders'
equity................................... $ 199,894 $ 30,560 $(11,037) $219,417
======== ======== ======== ========
F-23
127
STANADYNE AUTOMOTIVE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
STANADYNE
AUTOMOTIVE
HOLDING
CORP.
(ISSUER AND NON
SUBSIDIARY GUARANTOR
GUARANTOR) SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ ------------
ASSETS
Cash and cash equivalents......................... $ 3,365 $ 6 $ -- $ 3,371
Accounts receivable, net.......................... 28,615 8,342 -- 36,957
Inventories....................................... 23,861 7,919 (255) 31,525
Other current assets.............................. 7,446 73 -- 7,519
-------- ------- ------- --------
Total current assets......................... 63,287 16,340 (255) 79,372
Property, plant and equipment, net................ 88,351 7,765 -- 96,116
Other assets, net................................. 26,785 1,639 (8,995) 19,429
-------- ------- ------- --------
Total assets................................. $ 178,423 $ 25,744 $ (9,250) $194,917
======== ======= ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses........... $ 42,991 $ 6,587 $ (8) $ 49,570
Other current liabilities....................... 13,680 2,519 -- 16,199
-------- ------- ------- --------
Total current liabilities.................... 56,671 9,106 (8) 65,769
Long-term debt and capital lease obligations 69,401 312 -- 69,713
Other non-current liabilities..................... 42,596 7,960 -- 50,556
Stockholders' equity.............................. 9,755 8,366 (9,242) 8,879
-------- ------- ------- --------
Total liabilities and stockholders' equity... $ 178,423 $ 25,744 $ (9,250) $194,917
======== ======= ======= ========
F-24
128
STANADYNE AUTOMOTIVE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED DECEMBER 31, 1994
STANADYNE
AUTOMOTIVE
HOLDING
CORP.
(ISSUER AND NON
SUBSIDIARY GUARANTOR
GUARANTOR) SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ ------------
Net sales......................................... $ 252,337 $ 35,070 $ (443) $286,964
Cost of goods sold................................ 213,369 31,371 (433) 244,307
-------- ------- ------ --------
Gross profit.................................... 38,968 3,699 (10) 42,657
Selling, general and administrative expenses...... 32,715 2,360 -- 35,075
-------- ------- ------ --------
Operating income................................ 6,253 1,339 (10) 7,582
Interest, net..................................... (8,609) (441) -- (9,050)
-------- ------- ------ --------
(Loss) income before income taxes............... (2,356) 898 (10) (1,468)
Income tax benefit................................ (926) (38) -- (964)
-------- ------- ------ --------
Net (loss) income............................... $ (1,430) $ 936 $ (10) $ (504)
======== ======= ====== ========
F-25
129
STANADYNE AUTOMOTIVE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED DECEMBER 31, 1995
STANADYNE
AUTOMOTIVE
HOLDING
CORP.
(ISSUER AND NON
SUBSIDIARY GUARANTOR
GUARANTOR) SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ ------------
Net sales......................................... $ 238,694 $ 34,917 $ (1,466) $272,145
Cost of goods sold................................ 205,678 31,470 (1,503) 235,645
-------- ------- ------- --------
Gross profit.................................... 33,016 3,447 37 36,500
Selling, general and administrative expenses...... 29,571 2,169 -- 31,740
-------- ------- ------- --------
Operating income................................ 3,445 1,278 37 4,760
Interest, net..................................... 8,843 449 -- 9,292
-------- ------- ------- --------
(Loss) income before income taxes and
extraordinary item........................... (5,398) 829 37 (4,532)
Income tax (benefit) expense...................... (1,378) 81 -- (1,297)
-------- ------- ------- --------
(Loss) income before extraordinary item......... (4,020) 748 37 (3,235)
Extraordinary item -- early extinguishment of
debt, net of income taxes....................... (1,711) -- -- (1,711)
-------- ------- ------- --------
Net (loss) income............................... $ (5,731) $ 748 $ 37 $ (4,946)
======== ======= ======= ========
F-26
130
STANADYNE AUTOMOTIVE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED DECEMBER 31, 1996
STANADYNE
AUTOMOTIVE
HOLDING
CORP.
(ISSUER AND NON
SUBSIDIARY GUARANTOR
GUARANTOR) SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ ------------
Net sales......................................... $ 244,438 $ 32,355 $ (1,154) $275,639
Cost of goods sold................................ 203,049 32,860 (1,153) 234,756
-------- ------- ------- --------
Gross profit.................................... 41,389 (505) (1) 40,883
Selling, general and administrative expenses...... 28,715 2,261 -- 30,976
-------- ------- ------- --------
Operating income (loss)......................... 12,674 (2,766) (1) 9,907
Interest, net..................................... 7,717 542 -- 8,259
-------- ------- ------- --------
Income (loss) before income taxes and cumulative
effect of change in accounting principle..... 4,957 (3,308) (1) 1,648
Income tax expense (benefit)...................... 1,826 (1,450) -- 376
-------- ------- ------- --------
Income (loss) before cumulative effect of change
in accounting principle...................... 3,131 (1,858) (1) 1,272
Cumulative effect of change in accounting
for post-retirement benefits, net of income
taxes........................................... 4,330 -- -- 4,330
-------- ------- ------- --------
Net income (loss)............................... $ 7,461 $ (1,858) $ (1) $ 5,602
======== ======= ======= ========
F-27
131
STANADYNE AUTOMOTIVE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED DECEMBER 31, 1994
STANADYNE
AUTOMOTIVE
HOLDING
CORP.
(ISSUER AND NON
SUBSIDIARY GUARANTOR
GUARANTOR) SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ ------------
Cash flows from operating activities:
Net (loss) income............................... $ (1,430) $ 936 $ (10) $ (504)
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Depreciation and amortization................ 16,284 2,423 -- 18,707
Other adjustments............................ (1,589) (101) -- (1,690)
Changes in operating assets and
liabilities................................ 8,312 (2,240) (184) 5,888
------- ------ ---- -------
Net cash provided by operating
activities.............................. 21,577 1,018 (194) 22,401
------- ------ ---- -------
Cash flows from investing activities:
Capital expenditures............................ (8,598) (1,336) -- (9,934)
Proceeds from disposal of property, plant and
equipment.................................... 1,646 -- -- 1,646
------- ------ ---- -------
Net cash used in investing activities...... (6,952) (1,336) -- (8,288)
------- ------ ---- -------
Cash flows from financing activities:
Net change in debt.............................. (13,519) 321 -- (13,198)
Net change in equity............................ (1,139) -- -- (1,139)
------- ------ ---- -------
Net cash (used in) provided by financing
activities.............................. (14,658) 321 -- (14,337)
------- ------ ---- -------
Net (decrease) increase in cash and cash
equivalents..................................... (33) 3 (194) (224)
Effects of exchange rate changes on cash.......... 3 -- 11 14
Cash and cash equivalents at beginning of year.... 406 1 880 1,287
------- ------ ---- -------
Cash and cash equivalents at end of year..... $ 376 $ 4 $ 697 $ 1,077
======= ====== ==== =======
F-28
132
STANADYNE AUTOMOTIVE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED DECEMBER 31, 1995
STANADYNE
AUTOMOTIVE
HOLDING
CORP.
(ISSUER AND NON
SUBSIDIARY GUARANTOR
GUARANTOR) SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ ------------
Cash flows from operating activities:
Net (loss) income............................... $ (5,731) $ 748 $ 37 $ (4,946)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................ 15,785 2,316 -- 18,101
Other adjustments............................ (1,549) 31 -- (1,518)
Changes in operating assets and
liabilities................................ (14,772) (1,450) (478) (16,700)
-------- ------- ----- --------
Net cash (used in) provided by operating
activities.............................. (6,267) 1,645 (441) (5,063)
-------- ------- ----- --------
Cash flows from investing activities:
Capital expenditures............................ (6,147) (520) -- (6,667)
Proceeds from disposal of property, plant and
equipment.................................... 83 -- -- 83
-------- ------- ----- --------
Net cash used in investing activities...... (6,064) (520) -- (6,584)
-------- ------- ----- --------
Cash flows from financing activities:
Net change in debt.............................. 15,451 (1,126) -- 14,325
-------- ------- ----- --------
Net change in equity............................ (2,116) -- -- (2,116)
-------- ------- ----- --------
Net cash provided by (used in) financing
activities.............................. 13,335 (1,126) -- 12,209
-------- ------- ----- --------
Net increase in cash and cash equivalents......... 1,004 (1) (441) 562
Effects of exchange rate changes on cash.......... 18 -- (150) (132)
Cash and cash equivalents at beginning of year.... 376 4 697 1,077
-------- ------- ----- --------
Cash and cash equivalents at end of year.......... $ 1,398 $ 3 $ 106 $ 1,507
======== ======= ===== ========
F-29
133
STANADYNE AUTOMOTIVE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED DECEMBER 31, 1996
STANADYNE
AUTOMOTIVE
HOLDING CORP.
(ISSUER AND NON
SUBSIDIARY GUARANTOR
GUARANTOR) SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------
Cash flows from operating activities:
Net income (loss)............................. $ 7,461 $ (1,858) $ (1) $ 5,602
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.............. 14,940 2,046 -- 16,986
Other adjustments.......................... 3,067 (1,450) -- 1,617
Changes in operating assets and
liabilities.............................. 10,046 3,492 30 13,568
-------- ------- ---- --------
Net cash provided by operating
activities............................ 35,514 2,230 29 37,773
-------- ------- ---- --------
Cash flows from investing activities:
Capital expenditures.......................... (8,521) (306) -- (8,827)
Proceeds from disposal of property, plant and
equipment.................................. 212 -- -- 212
-------- ------- ---- --------
Net cash used in investing activities.... (8,309) (306) -- (8,615)
-------- ------- ---- --------
Cash flows from financing activities:
Net change in debt............................ (24,616) (2,013) -- (26,629)
Net change in equity.......................... (606) 92 (92) (606)
-------- ------- ---- --------
Net cash used in financing activities.... (25,222) (1,921) (92) (27,235)
-------- ------- ---- --------
Net increase in cash and cash equivalents....... 1,983 3 (63) 1,923
Effects of exchange rate changes on cash........ (16) -- (43) (59)
Cash and cash equivalents at beginning of
year.......................................... 1,398 3 106 1,507
-------- ------- ---- --------
Cash and cash equivalents at end of year........ $ 3,365 $ 6 $ -- $ 3,371
======== ======= ==== ========
F-30
134
STANADYNE AUTOMOTIVE HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 3,371 $ 160
Accounts receivable, net of allowance for uncollectible accounts
of $478 in 1996 and $495 in 1997 (unaudited)....................... 36,957 41,291
Inventories........................................................ 31,525 31,068
Prepaid expenses and other assets.................................. 656 300
Deferred income taxes.............................................. 6,863 6,863
-------- --------
Total current assets............................................ 79,372 79,682
Property, plant and equipment, net................................... 96,116 93,170
Intangible and other assets, net..................................... 3,651 3,313
Deferred income taxes................................................ 15,778 14,550
-------- --------
Total assets.................................................... $194,917 $ 190,715
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................... $ 21,361 20,642
Accrued liabilities................................................ 28,209 27,909
Current maturities of long-term debt............................... 14,514 11,672
Current installments of capital lease obligations.................. 1,685 1,709
-------- --------
Total current liabilities....................................... 65,769 61,932
Long-term debt, excluding current maturities......................... 67,250 68,125
Capital lease obligations, excluding current installments............ 2,463 1,189
Other non-current liabilities........................................ 50,556 47,351
-------- --------
Total liabilities............................................... 186,038 178,597
-------- --------
Stockholders' equity:
Cumulative convertible preferred stock, par value $.01, $600 per
share annual dividend payable quarterly. Authorized 2,000 shares,
issued and outstanding 1,000 shares. Liquidation preference $5,000
per share.......................................................... -- --
Class A common stock, par value $.01, authorized 16,000 shares,
issued and outstanding 6,198.5 in 1996 and 6,190.5 in 1997
(unaudited)........................................................ -- --
Class B common stock, par value $.01, authorized 4,000 shares,
issued and outstanding 1,008.6 shares.............................. -- --
Additional paid-in capital......................................... 35,630 35,979
-------- --------
35,630 35,979
Cumulative translation adjustment.................................. (23) (1,285)
Additional pension liability....................................... (141) (141)
Accumulated deficit................................................ (24,382) (20,230)
Treasury stock at cost; Class A common stock 160 shares............ (2,205) (2,205)
-------- --------
Total stockholders' equity...................................... 8,879 12,118
-------- --------
Commitments and contingencies
Total liabilities and stockholders' equity...................... $194,917 $ 190,715
======== ========
See notes to consolidated financial statements.
F-31
135
STANADYNE AUTOMOTIVE HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
NINE MONTHS ENDED
SEPTEMBER 30
-------------------
1996 1997
-------- --------
(UNAUDITED)
Net sales................................................................ $209,679 $201,034
Cost of goods sold....................................................... 177,279 169,004
-------- --------
Gross profit........................................................ 32,400 32,030
Selling, general and administrative expenses (includes payment to
Metromedia of $375 in 1996 and 1997)................................... 24,024 19,409
-------- --------
Operating income.................................................... 8,376 12,621
Other income (expense):
Interest income........................................................ 40 18
Interest expense....................................................... (6,376) (5,356)
-------- --------
Income before income taxes and cumulative effect of change in
accounting principle.............................................. 2,040 7,283
Income tax expense....................................................... 834 2,681
-------- --------
Income before cumulative effect of change in accounting principle... 1,206 4,602
Cumulative effect of change in accounting for post-retirement benefits,
net of income taxes of $2,609.......................................... 4,330 --
-------- --------
Net income............................................................... 5,536 4,602
Preferred dividend requirement........................................... (450) (450)
-------- --------
Net income applicable to common shareholders............................. $ 5,086 $ 4,152
======== ========
Net income per share:
Income before cumulative effect of change in accounting principle... $ 97 $ 531
Cumulative effect of change in accounting principle................. 553 --
-------- --------
Net income........................................................ $ 650 $ 531
======== ========
Weighted average number of common equivalent shares outstanding.......... 7,826.7 7,817.3
======== ========
See notes to consolidated financial statements.
F-32
136
STANADYNE AUTOMOTIVE HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1996 1997
-------- -------
(UNAUDITED)
Cash flows from operating activities:
Net income.............................................................. $ 5,536 $ 4,602
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization of property, plant and equipment and
intangibles......................................................... 12,951 12,548
Management incentive plan (income) expense........................... -- 349
Deferred income tax expense.......................................... 3,190 1,024
Loss on disposal and write-down of property, plant and equipment..... 206 121
Changes in assets and liabilities:................................... -- --
Accounts receivable................................................ (313) (5,593)
Inventories........................................................ 3,489 (725)
Prepaid expenses and other assets.................................. 2,717 125
Accounts payable................................................... 6,625 (432)
Accrued liabilities................................................ (3,406) 532
Other non-current liabilities...................................... (5,192) (2,101)
-------- --------
Net cash provided by operating activities....................... 25,803 10,450
-------- --------
Cash flows from investing activities:
Capital expenditures.................................................... (6,361) (10,359)
-------- --------
Net cash used in investing activities........................... (6,361) (10,359)
-------- --------
Cash flows from financing activities:
Net payments on revolving credit notes and overdraft facilities......... (9,491) 8,340
Payments on long-term debt.............................................. (8,843) (9,941)
Payments of capital lease obligations................................... (1,244) (1,179)
Dividends paid.......................................................... (450) (450)
-------- --------
Net cash used in financing activities........................... (20,028) (3,230)
-------- --------
Net decrease in cash and cash equivalents................................. (586) (3,139)
Effect of exchange rate changes on cash and cash equivalents.............. (62) (72)
Cash and cash equivalents at beginning of period.......................... 1,507 3,371
-------- --------
Cash and cash equivalents at end of period................................ $ 859 $ 160
======== ========
Supplemental disclosure of noncash financing transactions:
In 1996 and 1997, the Company entered into capital leases for new
equipment resulting in capital lease obligations of $0 and $63,
respectively.
See notes to consolidated financial statements.
F-33
137
STANADYNE AUTOMOTIVE HOLDING CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Stanadyne
Automotive Holding Corp. and Subsidiaries ("Holdings") have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
and, therefore, do not include all information and footnotes necessary for
presentation of financial position, results of operations and cash flows
required by generally accepted accounting principles. The information furnished
reflects all normal recurring adjustments which are, in the opinion of
management, necessary for a fair summary of the financial position, results of
operations and cash flows. The financial statements should be read in
conjunction with the audited historical consolidated financial statements of
Holdings and notes thereto for the fiscal year ended December 31, 1996.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Earnings Per Share. In February 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standard ("SFAS") No. 128,
"Earnings Per Share", which is effective for periods ending after December 15,
1997. Earlier application is not permitted. SFAS No. 128 simplifies the
standards for computing earnings per share ("EPS") and makes them comparable to
international standards for computing EPS. When effective, this statement will
replace the presentation of primary EPS with the presentation of basic EPS and
will require a dual presentation of basic EPS and diluted EPS on the face of the
statements of operations.
Comprehensive Income. In June 1997, SFAS No. 130, "Reporting Comprehensive
Income" was issued which requires that changes in comprehensive income be shown
in a financial statement that is displayed with the same prominence as the other
financial statements. Comprehensive income is defined as "the change in equity
of a business enterprise during a period from transactions and other events and
circumstances from non-owner sources." It includes all changes in equity during
a period, except those resulting from investments by owners and distributions to
owners. This statement is effective for fiscal years beginning after December
15, 1997. The effect of SFAS 130 is that Holdings will present a statement of
comprehensive income with components including cumulative translation
adjustments and additional pension liability beginning in fiscal year ending
December 31, 1998.
Segment reporting. In June 1997, SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information" was issued. SFAS No. 131 establishes
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim reports issued
to stockholders. It also establishes related disclosures about products and
services, geographic areas and major customers. This statement is effective for
financial statements for periods beginning after December 15, 1997, however,
early application is encouraged. Holdings will disclose information about
segments in accordance with SFAS 131 beginning in fiscal year ending December
31, 1998.
(3) SUBSEQUENT EVENTS
On December 11, 1997, in connection with an acquisition by American
Industrial Partners Capital Fund II, L.P. ("AIP"), SAC, Inc. ("New Holdings")
acquired the outstanding stock of Stanadyne Automotive Holding Corp. ("Old
Holdings"), and SAC Automotive, Inc. ("Automotive") borrowed $100 million on
10 1/4% Senior Subordinated Notes (the "Notes") and $85 million of term loans
and revolving credit ("New Credit Agreement") to partially fund the Acquisition
Transactions. Simultaneous with the acquisition, Old Holdings and Automotive
merged with and into the Company and New Holdings changed its name to Stanadyne
Automotive Holding Corp. Under the terms of the New Credit Agreement the stock
of all of the Company's domestic subsidiaries and 65% of the stock of the
wholly-owned foreign subsidiaries and all of the assets of the Company and its
subsidiaries and the capital stock of the Company will be pledged as collateral.
Under the terms of the Notes, issued by the Company, the Notes are guaranteed by
its domestic subsidiaries. Its wholly-owned foreign subsidiaries will not be
guarantors with respect to the Notes.
F-34
138
- ------------------------------------------------------
------------------------------------------------------
- ------------------------------------------------------
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NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION 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 OR THE INITIAL PURCHASER. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY ANY
OF THE SECURITIES OFFERED HEREBY, TO ANY PERSON OR BY ANYONE IN ANY JURISDICTION
IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE SUCH DATE.
------------------------
TABLE OF CONTENTS
PAGE
Summary............................... 4
Risk Factors.......................... 15
The Acquisition Transactions.......... 20
Use of Proceeds....................... 21
Capitalization........................ 22
Unaudited Pro Forma Condensed
Consolidated Financial Data......... 22
Selected Consolidated Historical
Financial Data...................... 30
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 32
Business.............................. 37
Management............................ 49
Security Ownership.................... 56
Certain Relationships and Related
Transactions........................ 57
Description of Exchange Notes......... 58
The Exchange Offer.................... 91
Description of New Credit Agreement... 99
Certain Federal Income Tax
Consequences........................ 100
Plan of Distribution.................. 101
Legal Matters......................... 101
Experts............................... 101
Index to Consolidated Financial
Statements.......................... F-1
Independent Auditors' Report.......... F-2
$100,000,000
[STANADYNE AUTOMOTIVE LOGO]
STANADYNE
AUTOMOTIVE CORP.
OFFER TO EXCHANGE ITS SERIES B
10 1/4% SENIOR SUBORDINATED
NOTES DUE 2007 FOR ANY
AND ALL OF ITS
OUTSTANDING 10 1/4% SENIOR
SUBORDINATED NOTES DUE 2007
------------------------------------
PROSPECTUS
------------------------------------
, 1998
- ------------------------------------------------------
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- ------------------------------------------------------
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139
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company is incorporated under the laws of the State of Delaware.
Section 145 of the General Corporation Law of the State of Delaware, inter alia,
("Section 145") provides that a Delaware corporation may indemnify any persons
who were, are or are threatened to be made, parties to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of such corporation),
by reason of the fact that such person is or was an officer, director, employee
or agent of such corporation, or is or was serving at the request of such
corporation as a director, officer employee or agent of another corporation or
enterprise. The indemnity may include expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such person in connection with such action, suit or proceeding, provided such
person acted in good faith and in a manner he reasonably believed to be in or
not opposed to the corporation's best interests and, with respect to any
criminal action or proceeding, had no reasonable cause to believe that his
conduct was illegal. A Delaware corporation may indemnify any persons who are,
were or are threatened to be made, a party to any threatened, pending or
completed action or suit by or in the right of the corporation by reason of the
fact that such person was a director, officer, employee or agent of such
corporation, or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation or enterprise. The
indemnity may include expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection with the defense or settlement
of such action or suit, provided such person acted in good faith and in a manner
he reasonably believed to be in or not opposed to the corporation's best
interests, provided that no indemnification is permitted without judicial
approval if the officer, director, employee or agent is adjudged to be liable to
the corporation. Where an officer, director, employee or agent is successful on
the merits or otherwise in the defense of any action referred to above, the
corporation must indemnify him against the expenses which such officer or
director has actually and reasonably incurred.
The Company's Certificate of Incorporation provides for the indemnification
of directors and officers of the Company to the fullest extent permitted by the
General Corporation Law of the State of Delaware, as it currently exists or may
hereafter be amended.
Section 145 further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation or enterprise,
against any liability asserted against him and incurred by him in any such
capacity, arising out of his status as such, whether or not the corporation
would otherwise have the power to indemnify him under Section 145.
The Company maintains and has in effect insurance policies covering all of
the Company's directors and officers against certain liabilities for actions
taken in such capacities, including liabilities under the Securities Act of
1933.
II-1
140
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS.
3.1 Amended and Restated Certificate of Incorporation of Stanadyne Automotive
Corp.
3.2 Amended and Restated By-laws of Stanadyne Automotive Corp.
4.1 Indenture dated as of December 11, 1997 between Stanadyne Automotive Corp.,
DSD International Corp., Precision Engine Products Corp. and United States
Trust Company of New York
4.2 Purchase Agreement dated as of December 4, 1997 among SAC Automotive, Inc.
and Donaldson, Lufkin & Jenrette Securities Corporation
4.3 Registration Rights Agreement dated as of December 11, 1997 by and among
Stanadyne Automotive Corp. and Donaldson, Lufkin & Jenrette Securities
Corporation
5.1 Form of Opinion and Consent of Kirkland & Ellis
10.1 Credit Agreement dated as of December 11, 1997 among SAC Automotive, Inc.,
Stanadyne Automotive Corp., the Lenders listed therein, as Lenders, DLJ
Capital Funding, Inc., as Syndication Agent, and The First National Bank of
Chicago, as Administrative Agent
10.2 Stock Purchase Agreement dated November 7, 1997 for the Purchase of
Stanadyne Automotive Holding Corp. among SAC, Inc., a wholly owned
subsidiary of American Industrial Partners Capital Fund II, L.P., Stanadyne
Automotive Holding Corp., and Stanadyne Automotive Holding Corp.
Shareholders
10.3 Form of Amended and Restated Employment Agreement by and between Stanadyne
Automotive Corp. and [William Gurley] [Michael Boyer] [William Kelly]
10.4 Employment Agreement by and between Precision Engine Products Corp. and
Arthur Caruso
10.5 Stanadyne Automotive Corp. Pension Plan effective December 31, 1994
10.6 Stanadyne Automotive Corp. Savings Plus Plan restated as of January 1, 1993
10.7 Precision Engine Products Corp. Retirement Fund effective as of January 1,
1998
10.8 Stanadyne Automotive Corp. Benefit Equalization Plan effective as of January
1, 1992
10.9 Stanadyne Automotive Corp. Supplemental Retirement Plan effective January 1,
1992
10.10* Supply Agreement dated as of December 8, 1995 between Precision Engine
Products Corp. and the Ina Bearing Company
10.11* Customer Agreement dated as of November 1, 1996 between Stanadyne Automotive
Corp. and Deere & Company
10.12* Customer Agreement dated as of January 22, 1996 between Stanadyne Automotive
Corp. and General Motors Powertrain Group
10.13 Management Services Agreement dated as of December 11, 1997 between
Stanadyne Automotive Corp. and American Industrial Partners.
12.1 Statement of Computation of Ratios
21.1 Subsidiaries of Stanadyne Automotive Corp.
23.1 Consent of KPMG Peat Marwick, L.L.P.
23.2 Form of Consent of Kirkland & Ellis (included in Exhibit 5.1).
24.1 Powers of Attorney (included in signature page)
25.1 Statement of Eligibility of Trustee on Form T-1
27.1 Financial Data Schedule
99.1 Form of Letter of Transmittal
99.2 Form of Notice of Guaranteed Delivery
99.3 Form of Tender Instructions
- ---------------
* To be filed by amendment.
(b) FINANCIAL STATEMENT SCHEDULES.
Not Applicable.
II-2
141
ITEM 22. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
posteffective amendment thereof) which individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at the time shall be deemed to
be the initial bona fide offering thereof;
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering; and
(4) If the registrant is a foreign private issuer, to file a
posteffective amendment to the registration statement to include any
financial statements required by Rule 3-19 of the chapter at the start of
any delayed offering or throughout a continuous offering. Financial
statements and information otherwise required by Section 10(a)(3) of the
Act need not be furnished, provided, that the registrant includes in the
prospectus, by means of a post-effective amendment, financial statements
required pursuant to this paragraph (a)(4) and other information necessary
to ensure that all other information in the prospectus is at least as
current as the date of those financial statements. Notwithstanding the
foregoing, with respect to registration statements on Form F-3, a
post-effective amendment need not be filed to include financial statements
and information required by Section 10(a)(3) of the Act or Rule 3-19 of
this chapter if such financial statements and information are contained in
periodic reports filed with or furnished to the Commission by the
registrant pursuant to section 13 or section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the Form F-3.
(1) The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(2) The registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the registrant pursuant to the provisions described under
Item 20 or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is,
II-3
142
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
posteffective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-4
143
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Windsor, State of
Connecticut, on February 6, 1998.
STANADYNE AUTOMOTIVE CORP.
By: /s/ MICHAEL H. BOYER
------------------------------------
Name: Michael H. Boyer
Title: Chief Financial Officer, Vice
President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints any of Kenneth J. Diekroeger, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities (including
his capacity as a director and/or officer of Stanadyne Automotive Corp.), to
sign any or all amendments (including post-effective amendments) to this
registration statement and any subsequent registration statement filed pursuant
to Rule 462(b) under the Securities Act of 1933, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement and power of attorney have been signed by the following
persons in the capacities and on the dates indicated:
SIGNATURE CAPACITY DATE
- ------------------------------------- ----------------------------------- -------------------
* Chief Executive Officer, President February 6, 1998
- ------------------------------------- and Director
William D. Gurley
* Chief Financial Officer, Vice February 6, 1998
- ------------------------------------- President Stanadyne
Michael H. Boyer
* Vice President, Human Resources, February 6, 1998
- ------------------------------------- Stanadyne
Robert A. Massa
* Vice President and General Manager, February 6, 1998
- ------------------------------------- Precision Engine
Arthur S. Caruso
* Vice President, Engineering & February 6, 1998
- ------------------------------------- Marketing, Diesel Systems Division
William W. Kelly
* Vice President, Quality and February 6, 1998
- ------------------------------------- Reliability, Stanadyne
Don Buonomo
II-5
144
SIGNATURE CAPACITY DATE
- ------------------------------------- ----------------------------------- -------------------
* Vice-President, Power Products February 6, 1998
- ------------------------------------- Division
Lee Janik
* Vice President, European February 6, 1998
- ------------------------------------- Operations, Managing Director,
Bryan M. Wysong Stanadyne Automotive S.p.A.
* Director February 6, 1998
- -------------------------------------
W. Richard Bingham
* Director and Chairman of the Board February 6, 1998
- -------------------------------------
Robert Cizik
/S/ KENNETH J. DIEKROEGER Director February 6, 1998
- -------------------------------------
Kenneth J. Diekroeger
* Director February 6, 1998
- -------------------------------------
Theodore C. Rogers
* Director February 6, 1998
- -------------------------------------
Lawrence W. Ward, Jr.
*By: /s/ Kenneth J. Diekroeger
Kenneth J. Diekroeger
Attorney-in-Fact
II-6
145
EXHIBIT INDEX
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------ ----------------------------------------------------------------------- ----------
3.1 Amended and Restated Certificate of Incorporation of Stanadyne
Automotive Corp.
3.2 Amended and Restated By-laws of Stanadyne Automotive Corp.
4.1 Indenture dated as of December 11, 1997 between Stanadyne Automotive
Corp., DSD International Corp., Precision Engine Products Corp. and
United States Trust Company of New York
4.2 Purchase Agreement dated as of December 4, 1997 among SAC Automotive,
Inc. and Donaldson, Lufkin & Jenrette
4.3 Registration Rights Agreement dated as of December 11, 1997 by and
among Stanadyne Automotive Corp. and Donaldson, Lufkin & Jenrette
5.1 Form of Opinion and consent of Kirkland & Ellis
10.1 Credit Agreement dated as of December 11, 1997 among SAC Automotive,
Inc., Stanadyne Automotive Corp., the Lenders listed therein, as
Lenders, DLJ Capital Funding, Inc., as Syndication Agent, and The First
National Bank of Chicago, as Administrative Agent
10.2 Stock Purchase Agreement dated November 7, 1997 for the Purchase of
Stanadyne Automotive Holding Corp. among SAC, Inc., a wholly owned
subsidiary of American Industrial Partners Capital Fund II, L.P.,
Stanadyne Automotive Holding Corp., and Stanadyne Automotive Holding
Corp. Shareholders
10.3 Form of Amended and Restated Employment Agreement by and between
Stanadyne Automotive Corp. and [William Gurley] [Michael Boyer]
[William Kelly]
10.4 Form of Employment Agreement by and between Precision Engine Products
Corp. and Arthur Caruso
10.5 Stanadyne Automotive Corp. Pension Plan
10.6 Stanadyne Automotive Corp. Savings Plus Plan
10.7 Precision Engine Products Corp. Retirement Fund
10.8 Stanadyne Automotive Corp. Benefit Equalization Plan
10.9 Stanadyne Automotive Corp. Supplemental Retirement Plan
10.10* Supply Agreement dated as of December 8, 1995 between Precision Engine
Products Corp. and the Ina Bearing Company
10.11* Customer Agreement dated as of November 1, 1996 between Stanadyne
Automotive Corp. and Deere & Company
10.12* Customer Agreement dated as of January 22, 1996 between Stanadyne
Automotive Corp. and General Motors Powertrain Group
10.13 Management Services Agreement dated as of December 11, 1997 between
Stanadyne Automotive Corp. and American Industrial Partners.
12.1 Statement of Computation of Ratios
21.1 Subsidiaries of Stanadyne Automotive Corp.
23.1 Consent of KPMG Peat Marwick, L.L.P.
23.2 Form of Consent of Kirkland & Ellis (included in Exhibit 5.1).
24.1 Powers of Attorney (included in signature page)
25.1 Statement of Eligibility of Trustee on Form T-1
27.1 Financial Data Schedule
99.1 Form of Letter of Transmittal
99.2 Form of Notice of Guaranteed Delivery
99.3 Form of Tender Instructions
- ---------------
* To be filed by Amendment.