Fairfield Manufacturing Co Inc – ‘424B3’ on 6/16/97

As of:  Monday, 6/16/97   ·   Accession #:  889812-97-1368   ·   File #:  333-24823

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Prospectus   —   Rule 424(b)(3)
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Document/Exhibit                   Description                      Pages   Size 

 1: 424B3       Definitive Prospectus                                112    734K 

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                    Rule 424(b)(3)
                                          Registration Statement No. 333-24823
PROSPECTUS                                                                      
[LOGO]  

OFFER TO EXCHANGE SHARES OF 
ITS 11 1/4% SERIES A CUMULATIVE EXCHANGEABLE PREFERRED STOCK
FOR ANY AND ALL OUTSTANDING SHARES OF ITS 
EXISTING PREFERRED STOCK (AS DEFINED BELOW) 

------------------------

    THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON JULY 16,
1997, UNLESS EXTENDED.                                                          

Fairfield Manufacturing Company, Inc., a Delaware corporation (the      
'Company'), hereby offers (the 'Exchange Offer'), upon the terms and subject to 
the conditions set forth in this Prospectus (this 'Prospectus') and the         
accompanying Letter of Transmittal (the 'Letter of Transmittal') to exchange one
share of its 11 1/4% Series A Cumulative Exchangeable Preferred Stock, par value
$.01 per share, liquidation preference $1,000.00 per share (the 'New Preferred  
Stock'), which have been registered under the Securities Act of 1933, as amended
(the 'Securities Act'), for each issued and outstanding share of its 11 1/4%    
Cumulative Exchangeable Preferred Stock, par value $.01 per share, liquidation  
preference $1,000.00 per share (the 'Existing Preferred Stock'), of which 50,000
shares are outstanding. The Existing Preferred Stock and the New Preferred Stock
are sometimes collectively referred to herein as the 'Preferred Stock'. The     
terms of the New Preferred Stock are identical in all material respects to the  
terms of the Existing Preferred Stock for which they may be exchanged pursuant  
to the Exchange Offer except that (i) the shares of New Preferred Stock will    
have been registered under the Securities Act, and thus will not bear           
restrictive legends restricting their transfer pursuant to the Securities Act   
and (ii) holders of New Preferred Stock will not be entitled to registration    
rights that holders of the Existing Preferred Stock have under the Registration 
Agreement (as defined) except under limited circumstances.                      

   Dividends on the New Preferred Stock will accumulate from the last dividend
payment date on which dividends were paid on the shares of Existing Preferred   
Stock surrendered in exchange therefor or, if no dividends have been paid, from 
the original date of issuance of the Existing Preferred Stock, and will be      
payable semi-annually commencing September 15, 1997, at a rate per annum of     
11 1/4% of the liquidation preference per share. Dividends may be paid, at the  
Company's option, on any dividend payment date occurring on or prior to March   
15, 2002 either in cash or by the issuance of additional shares of New Preferred
Stock (including fractional shares) having an aggregate liquidation preference  
equal to the amount of such dividends (but not less than $1.00). The liquidation
preference of the New Preferred Stock will be $1,000 per share. The New         
Preferred Stock will be redeemable at the Company's option, in whole or in part,
at any time on or after March 15, 2002, at the redemption prices set forth      
herein, plus, without duplication, accumulated and unpaid dividends to the date 
of redemption. The Company will be required, subject to certain conditions, to  
redeem all of the New Preferred Stock outstanding on March 15, 2009, at a       
redemption price equal to 100% of the liquidation preference thereof, plus,     

without duplication, accumulated and unpaid dividends to the redemption date.   
Upon the occurrence of a Change of Control (as defined) occurring on or after   
July 2, 2001, the Company will, only if and only to the extent permitted by any 
Indebtedness (as defined) of the Company then outstanding, offer to redeem the  
outstanding shares of New Preferred Stock at a redemption price equal to 101% of
the liquidation preference thereof, plus, without duplication, accumulated and  
unpaid dividends to the redemption date. In addition, upon the occurrence of a  
Change of Control occurring prior to July 2, 2001, the Company will have the    
option to offer to redeem the New Preferred Stock, in whole but not in part, at 
a redemption price equal to 101% of the liquidation preference thereof, plus,   
without duplication, accumulated and unpaid dividends to the redemption date. If
the Company does not make a Change of Control Offer (as defined) upon a Change  
of Control occurring prior to July 2, 2001, the annual dividend rate on the New 
Preferred Stock will increase by 4.0% over the then-applicable annual dividend  
rate.                                                                           

The New Preferred Stock is exchangeable at the option of the Company, in
whole but not in part, for the Company's Subordinated Exchange Debentures due   
2009 (including any such securities paid in lieu of cash interest, as described 
herein, the 'Exchange Debentures') on any dividend payment date occurring after 
the earlier of (i) July 2, 2001 and (ii) the date on which all of the Existing  
Notes (as defined) are redeemed, subject to the satisfaction of certain         
conditions and provided that such exchange is permitted pursuant to the terms of
the Company's Indebtedness then outstanding. Interest on the Exchange Debentures
will be payable at a rate of 11 1/4% per annum and will accrue from the date of 
issuance thereof. Interest on the Exchange Debentures will be payable           
semi-annually in cash or, at the option of the Company, on or prior to March 15,
2002 in additional Exchange Debentures, in arrears on each March 15 and         
September 15, commencing on the first such date after the exchange of the       
Exchange Debentures for the New Preferred Stock. The Exchange Debentures will   
mature on March 15, 2009 and will be redeemable, at the option of the Company,  
in whole or in part, on or after March 15, 2002, at the redemption prices set   
forth herein, plus accrued and unpaid interest to the date of redemption.       

The New Preferred Stock will rank junior in right of payment upon       
liquidation to all existing and future Indebtedness of the Company, including,  
without limitation, Indebtedness under the Credit Agreement (as defined) and    
Indebtedness in respect of the Existing Notes (as defined). The New Preferred   
Stock will rank senior in right of payment (with respect to dividend rights and 
upon liquidation), to the common stock of the Company and will, subject to the  
terms described herein, rank senior to, on parity with, or junior to, other     
classes of preferred stock issued by the Company from time to time. The Exchange
Debentures will be subordinated to all existing and future Senior Debt (as      
defined) of the Company and will rank pari passu with or senior to all future   
Indebtedness of the Company that expressly provides that it ranks pari passu    
with or junior to the Exchange Debentures, as the case may be. As of December   
31, 1996, there would have been $118.0 million of Indebtedness of the Company   
ranking senior to the New Preferred Stock and the Exchange Debentures.          

    The Exchange Offer is not conditioned upon any minimum aggregate liquidation
preference of Existing Preferred Stock being tendered or accepted for exchange. 
The Exchange Offer will expire at 5:00 p.m., New York City time, on July 16,    
1997, unless extended by the Company (such date as it may be so extended, the   
'Expiration Date'). The date of acceptance for exchange of properly tendered    

shares of Existing Preferred Stock (the 'Exchange Date') will be the first      
business day following the Expiration Date. Shares of Existing Preferred Stock  
tendered pursuant to the Exchange Offer may be withdrawn at any time prior to   
5:00 p.m., New York City time, on the Expiration Date; otherwise such tenders   
are irrevocable. Shares of New Preferred Stock will be issued in exchange for   
properly tendered shares of Existing Preferred Stock will be delivered through  
the facilities of The Depository Trust Company by the Exchange Agent (as        
defined) promptly after acceptance thereof.                                     

                                                        (Continued on next page)

------------------------

   SEE 'RISK FACTORS' BEGINNING ON PAGE 12 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PURCHASERS OF THE NEW PREFERRED STOCK.             

------------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND  
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES   
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE  
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE  
CONTRARY IS A CRIMINAL OFFENSE.   

------------------------

THE DATE OF THIS PROSPECTUS IS JUNE 13, 1997. 

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CUSTOM GEAR 

[In this place appears a picture of the Company's custom gear products.]  

Fairfield's custom gear products are used in a variety of applications,         
including those pictured below.                                                 

[In this place appears    [In this place appears    [In this place appears    
a picture of                 a picture of           a picture of    
certain applications       certain applications      certain applications   
of the                       of the                   of the          
Company's custom          Company's custom           Company's custom     
gear products.]             gear products.]            gear products.]    

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(cover page continued)                                                          

  The Existing Preferred Stock was originally issued and sold on March 12,
1997 in a transaction exempt from registration under the Securities Act and     
resold to certain qualified institutional buyers in reliance on, and subject to 
the restrictions imposed pursuant to, Rule 144A under the Securities Act (the   
'Initial Offering'). Based on interpretations by the Staff of the Securities and
Exchange Commission (the 'Commission') as set forth in no-action letters issued 
to third parties (including Exxon Capital Holding Corp. (available May 13,      
1988), Morgan Stanley & Co. Incorporated (available June 5, 1991) and K-III     
Communications Corporation (available May 14, 1993), the Company believes that  
New Preferred Stock issued pursuant to the Exchange Offer in exchange for       
Existing Preferred Stock may be offered to resale, resold and otherwise         
transferred by holders thereof (other than any such holder that is a            
broker-dealer or an 'affiliate' of the Company within the meaning of Rule 405   
under the Securities Act) without compliance with the registration and          
prospectus delivery provisions of the Securities Act, provided that (a) such New
Preferred Stock is acquired in the ordinary course of such holder's business,   
(b) at the time of the commencement of the Exchange Offer such holder has no    
arrangement with any person to participate in a distribution of the New         
Preferred Stock and (c) such holder is not engaged in, and does not intend to   
engage in, a distribution of the New Preferred Stock. Holders of the Existing   
Preferred Stock which, at the time of the commencement of the Exchange Offer,   
are engaged in, intend to engage in, or have an arrangement to engage in, a     
distribution of the New Preferred Stock may not rely on the applicable          
interpretations of the Staff of the Commission and must comply with the         
registration and prospectus delivery requirements of the Securities Act in      
connection with any secondary resale transaction. In addition, since the        
Commission has not considered the Exchange Offer in the context of a no-action  
letter, there can be no assurance that the Staff of the Commission would make a 
similar determination with respect to the Exchange Offer as in such other       
circumstances. Each holder of Existing Preferred Stock that desires to          
participate in the Exchange Offer will be required to make certain              
representations described in 'The Exchange Offer--Terms of the Exchange Offer.' 

Each broker-dealer that receives Exchange Notes for its own account   
pursuant to the Exchange Offer must acknowledge that it will deliver a          
prospectus in connection with any resale of such Exchange Notes. The Letter of  
Transmittal states that by so acknowledging and by delivering a prospectus, a   
broker-dealer will not be deemed to admit that it is an 'underwriter' within the
meaning of the Securities Act. This Prospectus, as it may be amended or         
supplemented from time to time, may be used by a broker-dealer in connection    
with resales of New Preferred Stock received in exchange for Existing Preferred 
Stock where such Existing Preferred Stock was acquired by such broker-dealer as 
a result of market-making activities or other trading activities. The Company   
has agreed that, for a period of 180 days after the date that the Registration  
Statement relating to the Exchange Offer has been declared effective by the     
Commission, it will make this Prospectus available to any broker-dealer for use 
in connection with any such resale. Any holder that cannot rely upon such       
interpretations must comply with the registration and prospectus delivery       
requirements of the Securities Act in connection with a secondary resale        
transaction. See 'The Exchange Offer' and 'Plan of Distribution.'               

The New Preferred Stock will be represented by one or more Global     
Securities registered in the name of a nominee of The Depository Trust Company, 
as Depositary. Beneficial interest in the Global Securities will be shown on,   
and transfers will be effected only through, records maintained by the          
Depositary and its participants. See 'Description of New Preferred Stock and    
Exchange Debentures--Book-Entry, Delivery and Form.'                            

     There has not previously been any public market for the New Preferred Stock
or the Exchange Debentures. The Company does not intend to list the New         
Preferred Stock or the Exchange Debentures on any securities exchange or to seek
approval for quotation through any automated quotation system. There can be no  
assurance that an active market for the New Preferred Stock or the Exchange     
Debentures will develop. See 'Risk Factors--Lack of Established Market for the  
New Preferred Stock and the Exchange Debentures.' Moreover, to the extent that  
shares of Existing Preferred Stock are tendered and accepted in the Exchange    
Offer, a holder's ability to sell untendered, and tendered but unaccepted,      
shares of Existing Preferred Stock could be adversely affected. Following       
consummation of the Exchange Offer, the holders of the Existing Preferred Stock 
will continue to be subject to the existing restrictions or transfer thereof and
the Company will have no further obligation to such holders to provide for the  
registration under the Securities Act of the Existing Preferred Stock except    
under certain limited circumstances. See 'Exchange Offer--Consequences of       
Failure to Exchange.'                                                           

The Company will not receive any proceeds from the Exchange Offer. The
Company has agreed to pay the expenses of the Exchange Offer, other than certain
commissions, if any, relating to a holder's disposition of its shares of        
Existing Preferred Stock in connection with the Exchange Offer. No dealer       
manager is being utilized in connection with the Exchange Offer.                

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     THE EXCHANGE OFFER IS NOT BEING MADE, NOR WILL THE COMPANY ACCEPT SURRENDER
FOR EXCHANGE FROM, HOLDERS OF SHARES OF EXISTING PREFERRED STOCK IN ANY         
JURISDICTION IN WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE 
IN COMPLIANCE WITH THE SECURITIES AND BLUE SKY LAWS OF SUCH JURISDICTION.       

------------------------

FOR NEW HAMPSHIRE RESIDENTS ONLY

NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A
LICENSE HAS BEEN FILED UNDER CHAPTER 421-B WITH THE STATE OF NEW HAMPSHIRE NOR  
THE FACT THAT A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN   
THE STATE OF NEW HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE THAT 
ANY DOCUMENT FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER
ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A    
SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY   
WAY UPON THE MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO,  
ANY PERSON, SECURITY OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE     
MADE, TO ANY PROSPECTIVE PURCHASER, CUSTOMER OR CLIENT ANY REPRESENTATION       
INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH.                             

AVAILABLE INFORMATION 
    The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the 'Exchange Act'), and, in accordance       
therewith, files reports and other information with the Commission. Such reports
and other information can be inspected and copied at the principal office of the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,   
D.C. 20549 and at the following regional offices of the Commission: Citicorp    
Center, Suite 1400, 500 West Madison Street, Chicago, Illinois 60661-2511; and  
Seven World Trade Center, 13th Floor, New York, New York 10048. Copies of such  
material can be obtained by mail from the Public Reference Section of the       
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,   
D.C. 20549, at prescribed rates and such material is contained on the worldwide 
web site maintained by the Commission at http://www.sec.gov.                    
  The Company has filed with the Commission a Registration Statement under
the Securities Act, with respect to the New Preferred Stock offered hereby. As  
permitted by the rules and regulations of the Commission, this Prospectus does  
not contain all of the information included or incorporated by reference in the 
Registration Statement and the exhibits and schedules thereto. Statements       
contained in this Prospectus or in any document incorporated herein or therein  
as to the contents of any contract or other document referred to herein or      
therein and filed as an exhibit to, or incorporated by reference in, the        
Registration Statement are not necessarily complete and, in each instance,      
reference is made to the copy of such contract or other document filed as an    
exhibit to, or incorporated by reference in, the Registration Statement, each   
such statement being qualified in all respects by such reference. For further   
information with respect to the Company and the New Preferred Stock, reference  
is hereby made to the Registration Statement and the exhibits and schedules     
thereto.                                                                        

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE 
     The Company's Annual Report on Form 10-K for its fiscal year ended December
31, 1996 and the Company's Quarterly Report on Form 10-Q for its fiscal quarter 
ended March 31, 1997, which were previously filed with the Commission pursuant  
to the Exchange Act (File No.33-62598), are incorporated herein by reference.   
    All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the Exchange Offer shall be deemed to be incorporated by     
reference into this Prospectus and to be a part hereof from the date of filing  
such documents. Any statement contained herein or in a document incorporated or 
deemed to be incorporated by reference herein shall be deemed to be modified or 
superseded for purposes of this Prospectus to the extent that a statement       
contained herein or in any other subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes such       
statement. Any statement so modified or superseded shall not be deemed, except  
as so modified or superseded, to constitute a part of this Prospectus.          
     THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS (NOT INCLUDING EXHIBITS TO SUCH   
DOCUMENTS, UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE IN   
SUCH DOCUMENTS), ARE AVAILABLE WITHOUT CHARGE UPON WRITTEN OR ORAL REQUEST      
DIRECTED TO: VICE PRESIDENT-FINANCE, FAIRFIELD MANUFACTURING COMPANY, INC., U.S.
ROUTE 52 SOUTH, LAFAYETTE, INDIANA 47905 (TELEPHONE: (765) 474-3474).           

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TABLE OF CONTENTS 

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                                                                                                            PAGE
                                                                                                            NO. 
                                                                                                            ----
                                                                                                                
Available Information......................................................................................  ii 
Incorporation of Certain Documents by Reference............................................................  ii 
Prospectus Summary.........................................................................................   1 
  The Company..............................................................................................   1 
  Use of Proceeds..........................................................................................   2 
  The Exchange Offer.......................................................................................   3 
  Summary of Terms of New Preferred Stock..................................................................   6 
Risk Factors...............................................................................................  12 
  Leverage.................................................................................................  12 
  Limitation on Ability to Pay Dividends...................................................................  12 
  Ranking of the New Preferred Stock; Subordination of Exchange Debentures.................................  13 
  Restrictions Imposed by Terms of Indebtedness............................................................  13 
  Controlling Stockholders.................................................................................  14 
  Fraudulent Conveyance....................................................................................  14 
  Change of Control........................................................................................  14 
  Lack of Established Market for the New Preferred Stock and the Exchange Debentures.......................  15 
  Proposed Tax Law Changes.................................................................................  15 
  Susceptibility to General Economic Conditions............................................................  15 
  Labor Relations..........................................................................................  15 
  Competition..............................................................................................  16 
  Environmental Regulation.................................................................................  16 
  Certain Tax Considerations...............................................................................  16 
Use of Proceeds............................................................................................  17 
Capitalization.............................................................................................  17 
Selected Historical and Pro Forma Combined Financial Data..................................................  18 
Management's Discussion and Analysis of Financial Condition and Results of Operations......................  20 
Business...................................................................................................  24 
Management.................................................................................................  29 
Ownership of Capital Stock.................................................................................  33 
Related Transactions.......................................................................................  34 
Description of Existing Indebtedness.......................................................................  35 
Description of Capital Stock...............................................................................  39 
The Exchange Offer.........................................................................................  40 
Description of New Preferred Stock and Exchange Debentures.................................................  46 
Certain Federal Income Tax Considerations..................................................................  79 
Plan of Distribution.......................................................................................  85 
Legal Matters..............................................................................................  86 
Experts....................................................................................................  86 
Index to Consolidated Financial Statements................................................................. F-1 

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PROSPECTUS SUMMARY

   The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements,    
including the related notes, appearing elsewhere in this Prospectus.            

THE COMPANY 

     The Company believes that it is the leading independent manufacturer (based
on sales) of high precision custom gears and planetary gear systems in North    
America, with an estimated market share in each of the custom gear and planetary
gear system markets of more than two times that of its nearest competitors. The 
majority of the Company's custom gears and planetary gear systems are used by   
original equipment manufacturers ('OEMs') as components in various kinds of     
heavy mobile equipment. The Company's customers include such industry leaders as
General Electric, John Deere, Caterpillar and General Motors. For the year ended
December 31, 1996, the Company had net sales and EBITDA of $195.2 million and   
$32.0 million, respectively.                                                    

Custom gears, which accounted for $112.3 million, or 57.5%, of the    
Company's 1996 net sales, are components of larger systems such as axles, drive 
differentials and transmission units. The Company's custom gear customers       
consist principally of OEMs of rail (such as locomotives), mining, agricultural 
(such as tractors and specialty harvesting equipment), industrial, construction 
and materials-handling equipment, for many of whom the Company is the sole      
independent supplier of selected gear products.                                 

     Planetary gear systems, which accounted for $82.9 million, or 42.5%, of the
Company's 1996 net sales, are integrated, self-contained power transmission and 
torque conversion systems that provide propulsion, swing and/or rotation to     
wheels, axles and other components in applications where the use of axles would 
otherwise present design difficulties. The Company markets its planetary gear   
systems under its Torque-Hub(Registered) name. The Company believes that, as a  
result of the performance history and reputation for quality of the Company's   
Torque-Hub(Registered) products, the Torque-Hub(Registered) name has become     
closely identified with planetary gear systems. Customers for the Company's     
Torque-Hub(Registered) products include OEMs of access platform (such as        
aerial-lift), road rehabilitation (such as pavers and road rollers),            
construction (such as excavators), forestry and agricultural (such as crop      
sprayers) equipment.                                                            

    The Company has been certified as a 'preferred supplier' (based on systems
compliance and on-site inspections) by all of its major customers that have     
certification procedures, including General Motors, General Electric, John      
Deere, Caterpillar and Ingersoll-Rand. The Company has also been certified as   
meeting 'ISO-9001' standards, which are increasingly being used by OEMs in lieu 
of individual certification procedures. In addition, the Company expects to     
receive 'QS-9000' certification by the end of 1997, which is the level of       
certification expected to be required by automotive OEMs beginning in 1998. The 
Company believes that certification provides it with a competitive advantage    
because a number of OEMs require certification as a condition to doing business.

     The Company believes that its strong market position in the custom gear and
planetary gear systems markets is the result of its (i) breadth and quality of  
product offerings, (ii) longstanding relationships (in many cases of 20 years or
more) with its major custom gear and planetary gear system customers, (iii)     
state-of-the-art engineering and manufacturing technology, including its        
in-house heat treating facilities, computer-aided design and manufacturing      
systems and computer numerically-controlled machine tools and gear grinders,    
(iv) ability to deliver products within short lead times, (v) cost              
competitiveness, (vi) experienced engineering staff, which, together with the   
Company's sales force, works closely with customers in designing and developing 
products to meet customers' needs and (vii) stable, knowledgeable sales force,  
many of whose members have engineering degrees and have worked with the same    
customers for many years. In addition, the Company believes that its management 
team, which has an average of over 25 years of experience in general            
manufacturing, will be instrumental in further strengthening the Company's      
market position.                                                                

     The Company's principal executive office is located at U.S. Route 52 South,
Lafayette, Indiana 47905 (Telephone: (765) 474-3474).                           

BUSINESS STRATEGY                                                               

Management intends to strengthen the Company's position as the leading
independent supplier of custom gears and planetary gear systems by implementing 
a business strategy based on the following elements:                            

o  Taking Advantage of Industry Trends.  The Company seeks to increase its      
  revenues and market share by taking advantage of industry trends, including:
(i) the trend among captive gear manufacturers (OEMs who                  

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produce gears in-house for use in their own products) to 'outsource,' or  
 purchase portions of their gear requirements from independent manufacturers
   such as the Company, rather than manufacture such products in-house; (ii) the
trend among OEMs to develop sourcing relationships with their suppliers,  
whereby an OEM purchases all of its supply requirements within selected   
product lines from a single manufacturer like the Company; and (iii) the  
  trend among OEMs to purchase complete gear assemblies or systems rather than
 individual gear products. The Company believes that these trends are driven
by OEMs' desire to reduce their production and supply costs and focus on  
their core competencies.                                                  

The Company has taken advantage of these industry trends to date. For     
example, the Company receives orders from a number of captive gear        
manufacturers, such as those of General Motors, General Electric and John 
Deere, with respect to certain gear products that such OEMs previously    
produced in-house. In addition, the Company has established sole sourcing 
  relationships with many of its major customers with respect to selected gear
products. The Company has also experienced growth in its sales of complete
gear assemblies and systems, particularly to manufacturers of agricultural
  and heavy-duty equipment. The Company believes that it is well-positioned to

  continue to take advantage of these industry trends as a result of its broad
  product offerings, large manufacturing capacity, sophisticated manufacturing
   and design capabilities and established reputation for producing high quality
custom gear and planetary gear system products.                           

o  Reducing Lead Times.  The Company believes that reducing lead times has been,
 and will continue to be, a key competitive factor in the gear manufacturing
 industry. The Company has reduced average manufacturing cycle times through
   the manufacturing process from 50 days in 1995 to 32 days at the end of 1996.
Work-in-process inventory has also been reduced by 26.5% during this same 
period. These reductions are the result of manufacturing improvements and 
inventory controls implemented by management, including reduction in lot  
 sizes and the installation of new, more efficient machinery. The Company is
seeking to reduce lead times further by installing an enhanced computer   
program designed to improve customer order scheduling and inventory       
management.                                                               

o  Continuing Cost Control Efforts.  The Company will continue to be dedicated  
 to remaining price competitive and minimizing production costs. The Company
believes that it has already significantly lowered its operating costs by 
  reorganizing the physical layout of its manufacturing work space, installing
 new, more efficient machinery and improving its employee training programs.
The Company is seeking to reduce costs further through various purchasing 
   initiatives (including worldwide sourcing, consolidation of the supplier base
and long-term supply agreements) and by reducing set-up times and scrap.  

o  Improving Manufacturing Capabilities.  The Company believes that its         
broad-based, integrated manufacturing capabilities, including its         
state-of-the-art heat treating facilities, computer-aided design and      
manufacturing systems and computer numerically machine tools and gear     
grinders, provide it with a distinct competitive advantage. Over the past 
three years, the Company invested $34.2 million in capital equipment, of  
which $23.7 million was used to purchase new equipment and maintain and   
upgrade existing equipment. The Company believes that its manufacturing   
capacity is substantially larger than that of its independent competitors,
enabling it to accommodate large orders. The Company plans to continue to 
selectively make capital investments which will improve its manufacturing 
processes.                                                                

o  Introducing New Products and Applications.  The Company is currently in the  
   process of developing, testing and marketing a number of new products and new
applications for existing products in an effort to increase revenues,     
operating margins and market share. Historically, the Company's planetary 
   gear system business has generated most of the Company's new products and new
   product applications. New products and new product applications accounted for
   22.3% of the Company's planetary gear system business in 1996, as compared to
5.7% in 1992. The Company intends to broaden its new custom gear product  
applications and is currently developing a number of such applications    
including: differentials for off-highway trucks and on-highway automotive,
industrial and commercial vehicles; transmissions; and aerospace gearing. 

USE OF PROCEEDS 

    The Company will not receive any proceeds from the Exchange Offer. The net

proceeds of the Initial Offering (approximately $47.7 million) were used to fund
a dividend to Lancer Industries Inc. ('Lancer'), the Company's parent and the   
owner of 100% of the common stock of the Company. The proceeds received by      
Lancer in the form of the dividend were used to redeem approximately $47.7      
million aggregate liquidation preference of Lancer's Series C Preferred Stock   
(the 'Lancer Preferred Stock'). At December 31, 1996, the aggregate liquidation 
preference of the Lancer Preferred Stock was approximately $53 million. See 'Use
of Proceeds' and 'Related Transactions.'                                        

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THE EXCHANGE OFFER

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Registration Agreement.................... The Existing Preferred Stock was issued on March 12, 1997 (the 'Issue
                                           Date') to the initial purchaser (the 'Initial Purchaser') of the     
                                           Existing Preferred Stock. The Initial Purchaser resold the Existing  
                                           Preferred Stock to certain qualified institutional buyers in reliance
                                           on, and subject to the restrictions imposed pursuant to, Rule 144A of
                                           the Securities Act. In connection therewith, the Company and the     
                                           Initial Purchaser entered into the Share Registration Rights         
                                           Agreement, dated as of March 12, 1997 (the 'Registration Agreement'),
                                           providing for, among other things, the Exchange Offer. See 'The      
                                           Exchange Offer.'                                                     

The Exchange Offer........................ New Preferred Stock is being offered in exchange for an equal        
                                           liquidation preference of Existing Preferred Stock accepted in the   
                                           Exchange Offer. As of the date hereof, $50,000,000 aggregate         
                                           liquidation preference of Existing Preferred Stock is outstanding.   
                                           Existing Preferred Stock may be tendered only in integral multiples  
                                           of $1,000.                                                           

Resale of New Preferred Stock............. Based on interpretations by the Staff of the Commission as set forth 
                                           in no-action letters issued to third parties (including Exxon Capital
                                           Holding Corp. (available May 13, 1988), Morgan Stanley & Co.         
                                           Incorporated (available June 5, 1991) and K-III Communications       
                                           Corporation (available May 14, 1993), the Company believes that the  
                                           New Preferred Stock issued pursuant to the Exchange Offer may be     
                                           offered for resale, resold or otherwise transferred by any holder    
                                           thereof (other than any such holder that is a broker-dealer or an    
                                           'affiliate' of the Company within the meaning of Rule 405 under the  
                                           Securities Act) without compliance with the registration and         
                                           prospectus delivery provisions of the Securities Act, provided that  
                                           (i) such New Preferred Stock is acquired in the ordinary course of   
                                           such holder's business, (ii) at the time of the commencement of the  
                                           Exchange Offer such holder has no arrangement with any person to     
                                           participate in a distribution of the New Preferred Stock and (iii)   
                                           such holder is not engaged in, and does not intend to engage, in a   
                                           distribution of the New Preferred Stock. By tendering Existing       
                                           Preferred Stock in exchange for New Preferred Stock, each holder will
                                           represent to the Company that: (i) it is not such an affiliate of the
                                           Company, (ii) any New Preferred Stock to be received by it will be   
                                           acquired in the ordinary course of such holder's business and (iii)  
                                           at the time of the commencement of the Exchange Offer it had no      
                                           arrangement with any person to participate in a distribution of the  
                                           New Preferred Stock and, if such holder is not a broker-dealer, it is
                                           not engaged in, and does not intend to engage in, a distribution of  
                                           New Preferred Stock. If a holder of Existing Preferred Stock is      
                                           unable to make the foregoing representations (i.e., if a holder of   
                                           the Existing Preferred Stock, at the time of the commencement of the 
                                           Exchange Offer, is engaged in, intends to engage in, or has an       
                                           arrangement to engage in, a distribution of the New Preferred Stock),

                                           such holder may not rely on the applicable interpretations of the    
                                           Staff of the Commission and must comply with the registration and    
                                           prospectus delivery requirements of the Securities Act in connection 
                                           with any secondary resale transaction.                               

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                                           Each broker-dealer that receives New Preferred Stock for its own     
                                           account pursuant to the Exchange Offer must acknowledge that it will 
                                           deliver a prospectus in connection with any resale of such New       
                                           Preferred Stock. The Letter of Transmittal states that by so         
                                           acknowledging and by delivering a prospectus, a broker-dealer will   
                                           not be deemed to admit that it is an 'underwriter' within the meaning
                                           of the Securities Act. This Prospectus, as it may be amended or      
                                           supplemented from time to time, may be used by a broker-dealer in    
                                           connection with resales of New Preferred Stock where such Existing   
                                           Preferred Stock was acquired by such broker-dealer as a result of    
                                           market-making activities or other trading activities. The Company has
                                           agreed that, starting on the Expiration Date and ending on the close 
                                           of business 180 days after the date the Registration Statement       
                                           relating to the Exchange Offer has become effective (the 'Effective  
                                           Date'), it will make this Prospectus available to any participating  
                                           broker-dealer for use in connection with any such resale. See 'Plan  
                                           of Distribution.'                                                    

                                           To comply with the securities laws of certain jurisdictions, it may  
                                           be necessary to qualify for sale or register the New Preferred Stock 
                                           prior to offering or selling such New Preferred Stock. The Company   
                                           has agreed, pursuant to the Registration Agreement and subject to    
                                           certain specified limitations therein, to register or qualify the New
                                           Preferred Stock for offer or sale under the securities or 'blue sky' 
                                           laws of such jurisdictions as may be necessary to permit the holders 
                                           of New Preferred Stock to trade the New Preferred Stock without any  
                                           material restrictions or limitations under the securities laws of the
                                           several states of the United States.                                 

Consequences of Failure to                                                                                      
  Exchange Existing Preferred Stock....... Upon consummation of the Exchange Offer, subject to certain limited  
                                           exceptions, holders of Existing Preferred Stock who do not exchange  
                                           their Existing Preferred Stock for New Preferred Stock in the        
                                           Exchange Offer will no longer be entitled to registration rights     
                                           under the Registration Agreement and will not be able to offer or    
                                           sell their Existing Preferred Stock, unless such Existing Preferred  
                                           Stock is subsequently registered under the Securities Act (which,    
                                           subject to certain limited exceptions, the Company will have no      
                                           obligation to do), except pursuant to an exemption from, or in a     
                                           transaction not subject to, the Securities Act and applicable state  
                                           securities laws. See 'The Exchange Offer--Terms of the Exchange      

                                           Offer' and '--Consequences of Failure to Exchange.'                  

Expiration Date........................... 5:00 p.m., New York City time, on July 16, 1997 (30 calendar days    
                                           following the commencement of the Exchange Offer), unless the        
                                           Exchange Offer is extended, in which case the term 'Expiration Date' 
                                           means the latest date and time to which the Exchange Offer is        
                                           extended.                                                            

Dividends on the New Preferred Stock...... The New Preferred Stock will accumulate dividends at a rate of       
                                           11 1/4% per annum from the last dividend payment date on which       
                                           dividends were paid on the shares of Existing Preferred Stock        
                                           surrendered in exchange therefor or, if no dividends have been paid, 
                                           from the Issue Date. Dividends on the New Preferred Stock are payable
                                           on March 15 and September 15 of each year, commencing on September   
                                           15, 1997.                                                            

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Conditions to the Exchange Offer           The Exchange Offer is not conditioned upon any minimum principal     
                                           amount of Existing Preferred Stock being tendered for exchange.      
                                           However, the Exchange Offer is subject to certain customary          
                                           conditions, which may be waived by the Company. See 'The Exchange    
                                           Offer--Conditions.' Except for the requirements of applicable federal
                                           and state securities laws, there are no federal or state regulatory  
                                           requirements to be complied with or obtained by the Company in       
                                           connection with the Exchange Offer.                                  

Procedures for Tendering Existing                                                                               
  Preferred Stock......................... Each holder of Existing Preferred Stock wishing to accept the        
                                           Exchange Offer must complete, sign and date the Letter of            
                                           Transmittal, or a facsimile thereof, in accordance with the          
                                           instructions contained herein and therein, and mail or otherwise     
                                           deliver such Letter of Transmittal, or such facsimile, together with 
                                           any other required documentation to the Exchange Agent (as defined   
                                           herein) at the address set forth herein and effect a tender of       
                                           Existing Preferred Stock pursuant to the procedures for book-entry   
                                           transfer as provided for herein. See 'The Exchange Offer--Procedures 
                                           for Tendering' and '--Book Entry Transfer.'                          

Guaranteed Delivery Procedures............ Holders of Existing Preferred Stock who wish to tender their Existing
                                           Preferred Stock and who cannot deliver their Existing Preferred Stock
                                           and a properly completed Letter of Transmittal or any other documents
                                           required by the Letter of Transmittal to the Exchange Agent prior to 
                                           the Expiration Date may tender their Existing Preferred Stock        
                                           according to the guaranteed delivery procedures set forth in 'The    
                                           Exchange Offer--Guaranteed Delivery Procedures.'                     

Withdrawal Rights......................... Tenders of Existing Preferred Stock may be withdrawn at any time     

                                           prior to 5:00 p.m., New York City time, on the Expiration Date. To   
                                           withdraw a tender of Existing Preferred Stock, a written or facsimile
                                           transmission notice of withdrawal must be received by the Exchange   
                                           Agent at its address set forth herein under 'The Exchange Offer--    
                                           Exchange Agent' prior to 5:00 p.m., New York City time, on the       
                                           Expiration Date.                                                     

Acceptance of Existing Preferred Stock                                                                          
  and Delivery of New Preferred                                                                                 
  Stock................................... Subject to certain conditions, any and all shares of Existing        
                                           Preferred Stock that are properly tendered in the Exchange Offer     
                                           prior to 5:00 p.m., New York City time, on the Expiration Date will  
                                           be accepted for exchange. The New Preferred Stock issued pursuant to 
                                           the Exchange Offer will be delivered promptly following the          
                                           Expiration Date. See 'The Exchange Offer--Terms of the Exchange      
                                           Offer.'                                                              

Certain U.S. Tax Consequences............. The exchange of Existing Preferred Stock for New Preferred Stock     
                                           should not constitute a taxable exchange for U.S. federal income tax 
                                           purposes. See 'Certain Federal Income Tax Considerations.'           

Exchange Agent............................ United States Trust Company of New York is serving as exchange agent 
                                           (the 'Exchange Agent') in connection with the Exchange Offer.        

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Fees and Expenses......................... All expenses incident to the Company's consummation of the Exchange  
                                           Offer and compliance with the Registration Agreement will be borne by
                                           the Company, other than certain commissions, if any, relating to a   
                                           holder's disposition of its shares of Existing Preferred Stock in    
                                           connection with the Exchange Offer. See 'The Exchange Offer--Fees and
                                           Expenses.'                                                           

Use of Proceeds........................... There will be no cash proceeds payable to the Company from the       
                                           issuance of the New Preferred Stock pursuant to the Exchange Offer.  
                                           The proceeds from the sale of the Existing Preferred Stock were used 
                                           to fund a dividend to Lancer, which dividend was in turn used by     
                                           Lancer to redeem approximately $47.7 aggregate liquidation preference
                                           of the Lancer Preferred Stock. See 'Use of Proceeds' and 'Related    
                                           Transactions.'                                                       

SUMMARY OF TERMS OF NEW PREFERRED STOCK 

   The Exchange Offer relates to the exchange of up to $50,000,000 aggregate
liquidation preference of Existing Preferred Stock for an equal aggregate       
liquidation preference of New Preferred Stock. Shares of New Preferred Stock    
will be entitled to the benefits of a Certificate of Designation, the form and  
terms of which are identical in all material respects to the form and terms of  

the Certificate of Designation governing the Existing Preferred Stock, except   
that (i) the shares of New Preferred Stock will have been registered under the  
Securities Act, and thus will not bear restrictive legends restricting their    
transfer pursuant to the Securities Act and (ii) holders of New Preferred Stock 
will not be entitled to registration rights that holders of the Existing        
Preferred Stock have under the Registration Agreement except under limited      
circumstances. See 'Description of New Preferred Stock and Exchange Debentures.'

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Liquidation Preference.................... $1,000 per share, plus accumulated and unpaid dividends.             

Optional Redemption....................... The New Preferred Stock is redeemable, at the option of the Company, 
                                           in whole or in part, at any time on or after March 15, 2002, at the  
                                           redemption prices set forth herein, plus, without duplication,       
                                           accumulated and unpaid dividends to the date of redemption.          

Mandatory Redemption...................... The Company is required, subject to certain conditions, to redeem all
                                           of the New Preferred Stock outstanding on March 15, 2009, at a       
                                           redemption price equal to 100% of the liquidation preference thereof,
                                           plus, without duplication, accumulated and unpaid dividends to the   
                                           date of redemption.                                                  

Dividends................................. The New Preferred Stock will pay dividends at a rate equal to 11 1/4%
                                           per annum of the liquidation preference per share, payable semi-     
                                           annually beginning September 15, 1997 and accumulating from the last 
                                           dividend payment date on which dividends were paid on the shares of  
                                           Existing Preferred Stock surrendered in exchange therefor or, if no  
                                           dividends have been paid, from the Issue Date. The Company may, at   
                                           its option, pay dividends on any dividend payment date occurring on  
                                           or before March 15, 2002 either in cash or by the issuance of        
                                           additional shares of New Preferred Stock (including fractional       
                                           shares) having an aggregate liquidation preference equal to the      
                                           amount of such dividends (but not less than $1.00). See 'Risk        
                                           Factors--Certain Tax Considerations' and 'Certain Federal Income Tax 
                                           Considerations--Distributions on the New Preferred Stock.'           

Dividend Payment Dates.................... March 15 and September 15, commencing September 15, 1997.            

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Voting.................................... The New Preferred Stock will be non-voting, except as otherwise      
                                           required by law and except in certain circumstances described herein,
                                           including (i) amending certain rights of the holders of the New      
                                           Preferred Stock and (ii) the issuance of any class of equity         
                                           securities that ranks on a parity with or senior to the New Preferred
                                           Stock. In addition, if the Company fails (i) to pay dividends after  

                                           March 15, 2002, in respect of three or more semi-annual dividend     
                                           periods (whether or not consecutive), (ii) to make a mandatory       
                                           redemption or a Change of Control Offer in the event of a Change of  
                                           Control occurring on or after July 2, 2001, or (iii) to comply with  
                                           certain covenants or fails to make certain payments on its           
                                           Indebtedness, holders of a majority of the outstanding shares of New 
                                           Preferred Stock, voting as a class, will be entitled to elect the    
                                           lesser of two directors or that number of directors constituting at  
                                           least 25% of the Company's board of directors (the 'Board of         
                                           Directors'). See 'Description of New Preferred Stock and Exchange    
                                           Debentures--The New Preferred Stock--Voting Rights.'                 

Exchange Provisions....................... The New Preferred Stock will be exchangeable at the option of the    
                                           Company, in whole but not in part, for the Exchange Debentures on any
                                           scheduled dividend payment date occurring after the earlier of (i)   
                                           July 2, 2001 and (ii) the date on which all of the Existing Notes are
                                           redeemed, subject to the satisfaction of certain conditions and      
                                           provided that such exchange is permitted pursuant to the terms of the
                                           Company's Indebtedness then outstanding.                             

Ranking................................... The New Preferred Stock will rank senior in right of payment (with   
                                           respect to dividend rights and upon liquidation) to the common stock 
                                           of the Company and will, subject to the terms described herein, rank 
                                           senior to, on parity with, or junior to, other classes of preferred  
                                           stock issued by the Company from time to time. The New Preferred     
                                           Stock will rank junior in right of payment upon liquidation to all   
                                           existing and future Indebtedness of the Company, including, without  
                                           limitation, Indebtedness under the Credit Agreement and Indebtedness 
                                           in respect of the Existing Notes. As of December 31, 1996 and March  
                                           31, 1997, there would have been $118.0 million and approximately     
                                           $114.3 million, respectively of Indebtedness of the Company ranking  
                                           senior to the New Preferred Stock.                                   

Change of Control......................... In the event of a Change of Control occurring on or after July 2,    
                                           2001, only if and only to the extent permitted by any other          
                                           Indebtedness of the Company then outstanding, the Company will offer 
                                           to redeem the outstanding shares of New Preferred Stock at a         
                                           redemption price equal to 101% of the liquidation preference thereof,
                                           plus, without duplication, accumulated and unpaid dividends to the   
                                           date of purchase. In addition, upon the occurrence of a Change of    
                                           Control occurring prior to July 2, 2001, the Company will have the   
                                           option to offer to redeem the New Preferred Stock, in whole but not  
                                           in part, at a redemption price equal to 101% of the liquidation      
                                           preference thereof, plus, without duplication, accumulated and unpaid
                                           dividends to the date of purchase. If a Change of Control occurs     
                                           prior to July 2, 2001 and the Company fails to make an offer to      
                                           redeem the New Preferred Stock, the annual dividend rate on the New  
                                           Preferred Stock will increase by 4.0% over the then-applicable annual
                                           dividend rate. There can be no assurance                             

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                                           that the Company would be permitted to purchase the New Preferred    
                                           Stock upon a Change of Control, that the Company would have          
                                           sufficient funds for any such purchase or that the Company would be  
                                           able to obtain financing for any such purchase on favorable terms, if
                                           at all. See 'Risk Factors--Change of Control' and 'Description of New
                                           Preferred Stock and Exchange Debentures--The New Preferred           
                                           Stock--Change of Control.'                                           

Certain Restrictive Provisions............ The Certificate of Designation governing the New Preferred Stock will
                                           contain restrictive provisions that, among other things, limit the   
                                           ability of the Company and its subsidiaries to incur additional      
                                           Indebtedness, pay dividends or make certain other restricted         
                                           payments, enter into transactions with affiliates, merge or          
                                           consolidate with or sell all or substantially all of their assets to 
                                           any other person or issue additional preferred stock that ranks on a 
                                           parity with or senior to the New Preferred Stock. See 'Description of
                                           New Preferred Stock and Exchange Debentures--The New Preferred       
                                           Stock--Certain Covenants.' These restrictive provisions have a number
                                           of important exceptions, including with respect to the New Equity    
                                           Incentive Plan (as defined) for senior management. See               
                                           'Management--New Equity Incentive Plan.'                             

THE EXCHANGE DEBENTURES                                                                                         

Issue..................................... 11 1/4% Subordinated Exchange Debentures due 2009 issuable in        
                                           exchange for the New Preferred Stock in an aggregate principal amount
                                           equal to the liquidation preference of the New Preferred Stock, plus,
                                           without duplication, accumulated and unpaid dividends to the date    
                                           fixed for the exchange thereof (the 'Exchange Date'), plus any       
                                           additional Exchange Debentures issued from time to time in lieu of   
                                           cash interest.                                                       

Maturity.................................. March 15, 2009.                                                      

Interest Rate and Payment Dates........... The Exchange Debentures will bear interest at a rate of 11 1/4% per  
                                           annum. Interest will accrue from the most recent interest payment    
                                           date to which interest has been paid or provided for or, if no       
                                           interest has been paid or provided for, from the Exchange Date.      
                                           Interest will be payable semi-annually in cash (or, at the option of 
                                           the Company, on or prior to March 15, 2002, in additional Exchange   
                                           Debentures in an aggregate principal amount equal to the amount at   
                                           such interest payment (including, in the case of interest payments or
                                           portions thereof of less than $1,000.00 but greater than $1.00, by   
                                           issuing Exchange Debentures of less than $1,000.00) in arrears on    
                                           each March 15 and September 15, commencing with the first such date  
                                           after the Exchange Date. See 'Risk Factors--Certain Tax              
                                           Considerations' and 'Certain Federal Income Tax Considerations--     
                                           Taxation of Stated Interest and Original Issue Discount on Exchange  
                                           Debentures.'                                                         

Optional Redemption....................... The Exchange Debentures are redeemable, at the option of the Company,
                                           in whole or in part, at any time on or after March 15, 2002 at the   
                                           redemption prices set forth herein, plus accrued and unpaid interest 
                                           to the date of redemption.                                           

Ranking................................... The Exchange Debentures will be unsecured subordinated obligations of
                                           the Company, subordinated to all existing and future Senior Debt of  

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                                           the Company, including, without limitation, Indebtedness under the   
                                           Credit Agreement. In addition, the Exchange Debentures will be       
                                           effectively subordinated to all existing and future Indebtedness of  
                                           the Company's subsidiaries. The Exchange Debentures will rank pari   
                                           passu or senior to any class or series of Indebtedness that expressly
                                           provides that it ranks pari passu or subordinate to the Exchange     
                                           Debentures, as the case may be. As of December 31, 1996, there would 
                                           have been $118.0 million of Indebtedness of the Company ranking      
                                           senior to the Exchange Debentures.                                   

Change of Control......................... In the event of a Change of Control occurring on or after July 2,    
                                           2001, only if and to the extent permitted by any Senior Debt of the  
                                           Company then outstanding, the Company will offer to redeem all       
                                           outstanding Exchange Debentures at a redemption price equal to 101%  
                                           of the principal amount thereof, plus accrued and unpaid interest to 
                                           the date of purchase. In addition, upon the occurrence of a Change of
                                           Control occurring prior to July 2, 2001, the Company will have the   
                                           option to offer to redeem the Exchange Debentures, in whole but not  
                                           in part, at a redemption price equal to 101% of the principal amount 
                                           thereof, plus, without duplication, accrued and unpaid interest to   
                                           the date of purchase. If a Change of Control occurs prior to July 2, 
                                           2001 and the Company fails to make an offer to redeem the Exchange   
                                           Debentures in accordance with the terms of the Indenture governing   
                                           the Exchange Debentures (the 'Exchange Indenture'), the annual       
                                           interest rate on the Exchange Debentures will increase by 4.0% over  
                                           the then-applicable interest rate. There can be no assurance that the
                                           Company would be permitted to purchase the Exchange Debentures upon a
                                           Change of Control, that the Company would have sufficient funds for  
                                           any such purchase or that the Company would be able to obtain        
                                           financing for any such purchase on favorable terms, if at all. See   
                                           'Risk Factors--Change of Control' and 'Description of New Preferred  
                                           Stock and Exchange Debentures--The Exchange Debentures--Change of    
                                           Control.'                                                            

Certain Covenants......................... The Exchange Indenture will contain certain covenants that, among    
                                           other things, limit the ability of the Company and its subsidiaries  
                                           to incur additional Indebtedness, pay dividends or make certain other
                                           restricted payments, sell assets, enter into certain transactions    

                                           with affiliates, merge or consolidate with or sell all or            
                                           substantially all of their assets to any other person or, in the case
                                           of the Company's subsidiaries, to issue preferred stock or become    
                                           guarantors. See 'Description of New Preferred Stock and Exchange     
                                           Debentures--The Exchange Debentures--Certain Covenants.' These       
                                           covenants have a number of important exceptions, including with      
                                           respect to the New Equity Incentive Plan for senior management. See  
                                           'Management--New Equity Incentive Plan.'                             

RISK FACTORS

     Prospective purchasers of the New Preferred Stock should carefully consider
all of the information set forth in this Prospectus and, in particular, should  
evaluate the specific factors under 'Risk Factors' for risks involved with an   
investment in the New Preferred Stock.                                          

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SUMMARY HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA

    The following summary historical financial information for the Company for
the five years ended December 31, 1996 has been derived from the audited        
consolidated financial information for the Company for such periods. The        
information for the three-month periods ended March 31, 1996 and March 31, 1997 
is unaudited, but in the opinion of the Company reflects all adjustments        
necessary for a fair presentation of such data. The results of operations for   
the three-month period ended March 31, 1997 are not necessarily indicative of   
results of operations for the 1997 fiscal year. The following summary financial 
data should be read in conjunction with 'Management's Discussion and Analysis of
Financial Condition and Results of Operations' and the Consolidated Financial   
Statements and the notes thereto of the Company which are contained elsewhere in
this Prospectus.                                                                

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                                                                                               THREE MONTHS ENDED  
                                                     YEAR ENDED DECEMBER 31,                        MARCH 31,      
                                      ------------------------------------------------------   ------------------- 
                                        1992       1993       1994       1995        1996        1996       1997   
                                      --------   --------   --------   ---------   ---------   --------   -------- 
                                                      (DOLLARS IN THOUSANDS)                                       
                                                                                                                   
INCOME STATEMENT DATA:                                                                                             
Net sales............................ $108,613   $124,779   $150,689   $ 192,111   $ 195,205   $ 51,340   $ 49,235 
Cost of sales........................   90,583    103,603    123,092     151,890     158,668     41,675     39,852 
Selling, general and administrative                                                                                
  expenses...........................   12,451     12,323     15,924      14,759      16,868      4,038      4,218 
                                      --------   --------   --------   ---------   ---------   --------   -------- 
Operating income.....................    5,579      8,853     11,673      25,462      19,669      5,627      5,165 
Interest expense, net................   11,493     11,345     12,377      12,905      11,930      3,070      3,231 
Other expense, net...................      136        227        199         127          90         21         20 
                                      --------   --------   --------   ---------   ---------   --------   -------- 
Income (loss) before income taxes,                                                                                 
  extraordinary item and cumulative                                                                                
  effect of change in accounting                                                                                   
  principle..........................   (6,050)    (2,719)      (903)     12,430       7,649      2,536      1,914 
Provision (benefit) for income                                                                                     
  taxes..............................   (1,898)      (935)      (164)      5,520       3,730        983        940 
                                      --------   --------   --------   ---------   ---------   --------   -------- 
Income (loss) before extraordinary                                                                                 
  item and cumulative effect of                                                                                    
  change in accounting principle.....   (4,152)    (1,784)      (739)      6,910       3,919      1,553        974 
Extraordinary loss on early                                                                                        
  extinguishment of debt,                                                                                          
  net of tax(1)......................       --     (4,455)        --          --          --         --         -- 
Cumulative effect of change in                                                                                     
  accounting principle, net of                                                                                     
  tax(2).............................       --     (4,625)    (1,554)         --          --         --         -- 
                                      --------   --------   --------   ---------   ---------   --------   -------- 
Net income (loss).................... $ (4,152)  $(10,864)  $ (2,293)  $   6,910   $   3,919   $  1,553   $    974 

                                      --------   --------   --------   ---------   ---------   --------   -------- 
                                      --------   --------   --------   ---------   ---------   --------   -------- 
OTHER DATA:                                                                                                        
EBITDA(3)............................ $ 17,774   $ 19,475   $ 22,621   $  36,971   $  32,016   $  8,769   $  8,349 
Depreciation.........................   10,724      9,242      9,540      10,027      10,830      2,763      2,803 
Amortization(4)......................    3,037      2,604      2,310       2,245       2,277        400        401 
Cash interest expense, net(5)........   10,063     10,348     11,674      12,269      11,260      2,915      3,060 
Capital expenditures.................    3,151      4,145      9,164      15,090       9,986      2,984      2,081 
CASH FLOW FROM:                                                                                                    
Operations........................... $  8,324   $  1,611   $  9,590   $  13,856   $  23,174   $  7,330   $   (299)
Investing............................   (3,151)    (4,073)    (9,164)    (11,645)     (7,720)    (2,681)      (486)
Financing............................   (3,939)     4,615     (5,434)        663     (13,593)    (8,871)    (3,686)

                                                        [Enlarge/Download Table]

                                                            PRO FORMA(6)              
                                               ---------------------------------------
                                                  YEAR ENDED        THREE MONTHS ENDED
                                               DECEMBER 31, 1996      MARCH 31, 1997  
                                               -----------------    ------------------
                                                                                      
EBITDA.......................................       $32,016               $8,349      
Preferred stock dividends(7).................         5,625                1,406      
Ratio of EBITDA to cash interest expense,                                             
  net(8).....................................           2.8x                 2.7x     
Ratio of EBITDA to cash interest expense, net                                         
  and preferred stock dividends(9)...........           1.9x                 1.9x     

                                                        [Enlarge/Download Table]

                                                                  AS OF DECEMBER 31, 1996                            
                                                                  ------------------------                           
                                                                   ACTUAL     ADJUSTED(10)     AS OF MARCH 31, 1997  
                                                                  --------    ------------    -----------------------
                                                                                                                     
BALANCE SHEET DATA:                                                                                                  
Working capital.................................................. $ 12,123      $ 12,080             $   9,530       
Total assets.....................................................  176,370       176,327               173,808       
Long-term debt (including current maturities)....................  118,000       118,000               114,250       
Redeemable preferred stock.......................................       --        47,700                47,707       
Stockholder's equity (deficit)...................................   (4,570)      (52,313)              (51,230)      

                                                                                (see footnotes on the following page)

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NOTES TO SUMMARY HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA 

(1) During 1993, the Company recorded an extraordinary loss of $4.5 million,  

   net of tax, relating to the early extinguishment, and refinancing of, the
outstanding debt at June 30, 1993.                                    

(2) During 1993, the Company recorded a one-time non-cash charge of $4.6      
million, net of tax, relating to the cumulative effect of adopting    
   Statement of Financial Accounting Standard No. 106, 'Employers Accounting
    for Postretirement Benefits Other Than Pensions.' During 1994, the Company
   recorded a one-time non-cash charge of $1.6 million, net of tax, relating
to the cumulative effect of adopting Statement of Financial Accounting
Standard No. 112, 'Employers Accounting for Postemployment Benefits.' 

 (3) EBITDA represents income (loss) before income taxes, extraordinary item and
  cumulative effect of a change in accounting principle, interest expense,
 net, depreciation and amortization. Although EBITDA is not a measure of
     performance under generally accepted accounting principles, the Company has
   presented EBITDA because it is commonly used by investors and analysts to
    analyze and compare companies on the basis of operating performance and to
    determine a company's ability to service debt. Nevertheless, EBITDA should
not be considered in isolation or as a substitute for income from     
  operations, net income, cash flow from operating activities or any other
    measure under generally accepted accounting principles for determining the
Company's operating performance, financial position and cash flows. In
addition, since companies and analysts may measure EBITDA in different
ways, the Company's EBITDA figures may not be comparable to           
similarly-titled measures employed by other companies and analysts.   

(4) Includes the amortization of deferred financing costs and the amortization
of the excess of investment over net assets acquired.                 

(5) Cash interest expense, net includes interest income, but excludes         
   amortization of deferred financing costs of $1.4 million for fiscal 1992,
  $1.0 million for fiscal 1993, $0.7 million for fiscal 1994, $0.6 million
  for fiscal 1995, $0.2 million for the three months ended March 31, 1996,
  $0.7 million for fiscal 1996 and $0.2 million for the three months ended
March 31, 1997.                                                       

(6) Pro forma giving effect to the Initial Offering as if such event had      
occurred on January 1, 1996.                                          

(7) Dividends on the New Preferred Stock based on a dividend rate of 11 1/4%  
per annum, payable semi-annually.                                     

 (8) The Company has presented the ratio of the Company's EBITDA to its net cash
interest expense because this ratio is commonly used by investors and 
    analysts to analyze and compare companies on the basis of their ability to
     meet their debt service obligations. This ratio should not be considered in
   isolation or as a substitute for income from operations, net income, cash
flow from operating activities or any other measures under generally  
 accepted accounting principles for determining the Company's ability to
meet its debt service obligations. In addition, since companies and   
    analysts may measure this ratio in different ways, the Company's ratio may
    not be comparable to similarly-titled measures employed by other companies
and analysts.                                                         

 (9) The Company has presented the ratio of the Company's EBITDA to its net cash
interest expense and preferred stock dividends because this ratio is  
     commonly used by investors and analysts to analyze and compare companies on
   the basis of their ability to meet their debt service and preferred stock
   dividend obligations. This ratio should not be considered in isolation or
as a substitute for income from operations, net income, cash flow from
operating activities or any other measures under generally accepted   
 accounting principles for determining the Company's ability to meet its
   debt service and preferred stock dividend obligations. In addition, since
companies and analysts may measure this ratio in different ways, the  
     Company's ratio may not be comparable to similarly-titled measures employed
by other companies and analysts.                                      

(10) Adjusted to give effect to the Initial Offering as if such event had       
occurred on December 31, 1996.                                        

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RISK FACTORS

   In addition to the other information contained in this Prospectus, before
tendering their Existing Preferred Stock for the New Preferred Stock, holders of
Existing Preferred Stock should consider carefully the following factors, which 
are generally applicable to the Existing Preferred Stock and the New Preferred  
Stock.                                                                          

LEVERAGE                                                                        

     The Company currently has a significant amount of outstanding indebtedness.
As of December 31, 1996 and March 31, 1997, the Company had total outstanding   
indebtedness of $118.0 million and approximately $114.3 million, respectively,  
ranking senior to the New Preferred Stock. See 'Capitalization.' The Company's  
ability to make scheduled payments of principal or interest on, or to refinance,
its indebtedness depends on its future operating performance, which is subject  
to economic, financial, competitive and other factors beyond its control.       

The degree to which the Company is leveraged could have important     
consequences to holders of New Preferred Stock, including: (i) the Company's    
increased vulnerability to adverse general economic and industry conditions;    
(ii) the Company's impaired ability to obtain additional financing for future   
working capital, capital expenditures, acquisitions, general corporate purposes 
or other purposes; (iii) the dedication of a substantial portion of the         
Company's cash flow from operations to the payment of principal and interest on 
indebtedness, thereby reducing the funds available for operations and future    
business opportunities; (iv) all of the Company's borrowings under the Credit   
Agreement are at variable rates of interest, which could cause the Company to be
vulnerable to increases in interest rates (a one percentage point increase in   
the interest rate under the Credit Agreement would increase the Company's annual
interest expense thereunder by approximately $0.3 million, based on outstanding 
indebtedness of $33.0 million); and (v) all of the indebtedness incurred in     
connection with the Credit Agreement and the Company's 11 3/8% Senior           
Subordinated Notes due July 1, 2001 (the 'Existing Notes') would become due     

prior to the Company's ability to pay cash dividends on, and satisfy its        
redemption obligations in respect of, the New Preferred Stock. In addition, the 
Credit Agreement and the indenture governing the Existing Notes (the 'Existing  
Indenture') contain certain covenants which could limit the Company's operating 
and financial flexibility. See 'Description of Existing Indebtedness--GE Credit 
Agreement' and 'Description of Existing Indebtedness--Senior Subordinated       
Notes.'                                                                         

    The Company's ability to pay cash dividends on, and satisfy its redemption
obligations in respect of, the New Preferred Stock will depend upon its future  
operating performance, which will be affected by prevailing economic conditions 
and financial, business and other factors, many of which are beyond its control.
The Company expects that its operating cash flow will be sufficient to meet its 
operating expenses and to service its debt requirements as they become due. If  
the Company is unable to service its indebtedness, whether upon acceleration of 
such indebtedness or in the ordinary course of business, it will be forced to   
adopt an alternative strategy that may include actions such as reducing or      
delaying capital expenditures, selling assets, restructuring or refinancing its 
indebtedness or seeking additional equity capital. There can be no assurance    
that any of these strategies could be effected on satisfactory terms, if at all,
and the implementation of any of these alternative strategies could have a      
negative impact on the value of the New Preferred Stock. In the event of a      
liquidation of the Company, the New Preferred Stock would be subordinated in    
right of payment to the Company's indebtedness then outstanding and any         
preferred stock ranking senior to the New Preferred Stock then outstanding which
was issued in accordance with the terms of the Certificate of Designation. See  
'Management's Discussion and Analysis of Financial Condition and Results of     
Operations--Liquidity and Capital Resources.'                                   

LIMITATIONS ON ABILITY TO PAY DIVIDENDS                                         

   The Credit Agreement and the Existing Indenture limit the payment of cash
dividends on the New Preferred Stock. For all dividend payment dates through and
including March 15, 2002, the Company may, at its option, pay dividends either  
in cash or by the issuance of additional shares of New Preferred Stock          
(including fractional shares) having an aggregate liquidation preference equal  
to the amount of such dividends (but not less than $1.00). If after March 15,   
2002, the Company is in arrears in the payment of cash dividends for three or   
more                                                                            

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semi-annual dividend periods, the holders of the New Preferred Stock will be    
permitted to elect the lesser of two directors or that number of directors      
constituting 25% of the Board of Directors of the Company.                      

   In addition to the limitations imposed on the payment of dividends by the
Credit Agreement and the Existing Indenture, under Delaware law the Company is  
permitted to pay dividends on its capital stock, including the New Preferred    
Stock, only out of its surplus or, in the event that it has no surplus, out of  
its net profits for the year in which a dividend is declared or for the         
immediately preceding fiscal year. Surplus is defined as the excess of a        

company's total assets over the sum of its total liabilities plus the par value 
of its outstanding capital stock. In order to pay dividends in cash, the Company
must have surplus or net profits equal to the full amount of the cash dividend  
at the time such dividend is declared.                                          

     In determining the Company's ability to pay dividends, Delaware law permits
the Board of Directors of the Company to revalue the Company's assets and       
liabilities from time to time to their fair market values in order to create    
surplus. The Company cannot predict what the value of its assets or the amount  
of its liabilities will be in the future and, accordingly, there can be no      
assurance that the Company will be able to pay cash dividends on the New        
Preferred Stock.                                                                

RANKING OF THE NEW PREFERRED STOCK; SUBORDINATION OF EXCHANGE DEBENTURES        

The New Preferred Stock will rank junior in right of payment upon     
liquidation to all existing and future Indebtedness of the Company, including,  
without limitation, Indebtedness under the Credit Agreement and Indebtedness in 
respect of the Existing Notes. The New Preferred Stock will rank senior in right
of payment upon liquidation to the common stock of the Company, the only other  
class of equity security of the Company which will be outstanding upon          
consummation of the Offering. The payment of principal, premium, if any, and    
interest on, and any other amounts owing in respect of, the Exchange Debentures,
if issued, will be subordinated to the prior payment in full of all existing and
future Senior Debt of the Company. In addition, the Exchange Debentures will be 
effectively subordinated to all existing and future Indebtedness of the         
Company's subsidiaries. As of December 31, 1996 and March 31, 1997, $118.0      
million and approximately $114.3 million, respectively, of Senior Debt was      
outstanding (represented by Indebtedness under the Credit Agreement and the     
Existing Notes) and $20.0 million would have been available for borrowing under 
the Credit Agreement as of such dates. In the event of the bankruptcy,          
liquidation, dissolution, reorganization or other winding up of the Company, the
assets of the Company will be available to pay obligations on the Exchange      
Debentures only after all Senior Debt has been paid in full, and there may not  
be sufficient assets remaining to pay amounts due on any or all of the Exchange 
Debentures. In addition, under certain circumstances, the Company may not pay   
principal of, premium, if any, or interest on, or any other amounts owing in    
respect of, the Exchange Debentures, or purchase, redeem or otherwise retire the
Exchange Debentures, if a payment default or a non-payment default exists with  
respect to certain Senior Debt. See 'Description of the New Preferred Stock and 
Exchange Debentures--The Exchange Debentures--Subordination.'                   

RESTRICTIONS IMPOSED BY TERMS OF INDEBTEDNESS                                   

The Credit Agreement and the Existing Indenture each contain certain  
covenants that restrict, among other things, the Company's ability to incur     
additional indebtedness, incur liens, make investments, pay dividends or make   
certain other restricted payments, consummate certain asset sales, consolidate  
with any other person or sell, assign, transfer, lease, convey or otherwise     
dispose of all or substantially all of the assets of the Company. The Credit    
Agreement also requires the Company to maintain certain financial ratios. The   
Company's ability to meet these financial ratios may be affected by events      
beyond its control, and there can be no assurance that they will be met. A      
breach of any of these covenants could result in an event of default under the  

Credit Agreement or the Existing Indenture. In addition, (i) the Company's      
failure to pay when due, upon acceleration or otherwise, $3 million or more of  
indebtedness (including indebtedness under the Existing Indenture) will result  
in an event of default under the Credit Agreement and (ii) the Company's failure
to pay when due, upon acceleration or otherwise, $5 million or more of other    
indebtedness (including indebtedness under the Credit Agreement) will result in 
an event of default under the Existing Indenture. Upon the occurrence of an     
event of default under the Credit Agreement or the Existing Indenture, the      
lenders or holders thereunder could elect to declare all amounts outstanding    
thereunder, together with accrued interest, to be immediately due and payable.  
In the event that indebtedness under the Credit Agreement or the Existing       
Indenture were to be accelerated, it is unlikely the                            

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Company would have sufficient funds available to repay such indebtedness and any
other borrowed money indebtedness of the Company which became due and payable.  
In the case of the Credit Agreement, if the Company were unable to repay those  
amounts, the lenders thereunder could proceed against the collateral granted to 
them to secure that indebtedness. If the Credit Agreement indebtedness were to  
be accelerated, there can be no assurance that the assets of the Company would  
be sufficient to repay in full that indebtedness and the other indebtedness of  
the Company. Substantially all of the assets of the Company have been pledged as
security under the Credit Agreement. See 'Description of Existing               
Indebtedness--GE Credit Agreement .'                                            

CONTROLLING STOCKHOLDERS                                                        

   All of the outstanding shares of common stock of the Company are owned by
Lancer. A majority of Lancer's voting stock is owned by the Lancer Employee     
Stock Ownership Plan (the 'ESOP'). Two participants in the ESOP, Messrs. Peter  
A. Joseph and Paul S. Levy, collectively have the power to direct the voting of 
approximately 46.8% of Lancer's common stock. In addition, each of Messrs.      
Joseph and Levy have the right to purchase an aggregate of approximately 3.0% of
Lancer's common stock. As a result, these two individuals have the ability to   
exercise control over the current and future business and affairs of the        
Company, including the ability to cause or prevent a change of control of the   
Company, through their ability to elect the Company's Board of Directors and    
their voting power with respect to actions requiring stockholder approval. See  
'Ownership of Capital Stock.'                                                   

FRAUDULENT CONVEYANCE                                                           

    Various fraudulent conveyance laws have been enacted for the protection of
creditors and may be utilized by a court to subordinate or avoid the Exchange   
Debentures, if issued, in favor of other existing or future creditors of the    
Company. If a court, in a lawsuit on behalf of any unpaid creditor of the       
Company or a representative of the Company's creditors, were to find that, at   
the time the Company issued the Exchange Debentures, the Company (x) intended to
hinder, delay or defraud any existing or future creditor or contemplated        
insolvency with a design to prefer one or more creditors to the exclusion in    
whole or in part of others or (y) did not receive fair consideration or         

reasonably equivalent value for issuing such Exchange Debentures and the Company
(i) was insolvent, (ii) was rendered insolvent by reason of such issuance, (iii)
was engaged or about to engage in a business or transaction for which its       
remaining assets constituted unreasonably small capital to carry on its business
or (iv) intended to incur, or believed that it would incur, debts beyond its    
ability to pay such debts as they matured, such court could void the Company's  
obligations under the Exchange Debentures and void such transactions.           
Alternatively, in such event, claims of the holders of such Exchange Debentures 
could be subordinated to claims of the other creditors of the Company.          

CHANGE OF CONTROL                                                               

    The Company is not required to make a Change of Control Offer with respect
to the New Preferred Stock to the extent a Change of Control occurs prior to    
July 2, 2001. However, in the event that a Change of Control occurs prior to    
July 2, 2001, the Company will have the option to offer to redeem the New       
Preferred Stock, in whole but not in part, at a redemption price equal to 101%  
of the liquidation preference thereof, plus, without duplication, accumulated   
and unpaid dividends to the date of purchase. If a Change of Control occurs     
prior to July 2, 2001 and the Company fails to make an offer to redeem the New  
Preferred Stock, the annual dividend rate on the New Preferred Stock will       
increase by 4.0% over the then-applicable annual dividend rate. Any offer to    
redeem the New Preferred Stock upon a Change of Control will be subject to the  
terms of the Credit Agreement (which prohibits the Company from repurchasing    
shares of New Preferred Stock) and the Existing Indenture (which limits the     
amount (if any) of New Preferred Stock that may be purchased by the Company).   
Future debt instruments of the Company are likely to contain similar            
prohibitions or restrictions. Accordingly, there can be no assurance that the   
Company would be permitted to make an optional offer to purchase shares of New  
Preferred Stock upon a Change of Control.                                       

   A 'change of control' (as defined in the Credit Agreement) constitutes an
event of default under the Credit Agreement. Upon the occurrence of a 'change of
control' (as defined in the Existing Indenture), the Company will be required,  
subject to certain conditions, to make an offer to purchase all outstanding     
Existing Notes at a price equal to 101% of the principal amount thereof plus    
accrued and unpaid interest to the date of purchase. See                        

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'Description of Existing Indebtedness--Senior Subordinated Notes.' An event     
constituting a Change of Control will also constitute a 'change of control' for 
purposes of the Credit Agreement and the Existing Indenture. There can be no    
assurance that in the event of any such change of control, the Company will have
sufficient funds to repay its Indebtedness under the Credit Agreement and pay   
the required purchase price for all Existing Notes tendered by holders thereof  
and, if the Company were to elect to make an offer to redeem shares of the New  
Preferred Stock, all shares of the New Preferred Stock tendered by holders      
thereof, or that the Company would be able to obtain financing for such purpose 
on favorable terms, if at all.                                                  

LACK OF ESTABLISHED MARKET FOR THE NEW PREFERRED STOCK AND THE EXCHANGE         

DEBENTURES                                                                      

     There has not previously been any public market for the New Preferred Stock
or the Exchange Debentures. The Company does not intend to list such securities 
on any securities exchange or to seek approval for quotation through any        
automated quotation system. Accordingly, no assurance can be given as to (i) the
likelihood that an active market for such securities will develop, (ii) the     
liquidity of any such market, (iii) the ability of holders to sell such         
securities or (iv) the prices that they may obtain for such securities upon any 
sale. Future trading prices for such securities will depend upon many factors,  
including, among others, the Company's operating results, the market for similar
securities and fluctuating interest rates.                                      

PROPOSED TAX LAW CHANGES                                                        

     The Clinton Administration's Budget Proposal for fiscal year 1998, released
February 6, 1997, proposed certain tax law changes that would, among other      
things, (i) reduce the dividends received deduction available to corporate U.S. 
Holders (as defined) from 70% to 50% of dividends received with respect to      
dividends paid or accrued more than 30 days after the date of enactment of      
legislation, (ii) require a corporate U.S. Holder to satisfy the holding period 
required by section 246(c) of the Internal Revenue Code of 1986, as amended (the
'Code'), immediately before or immediately after the U.S. Holder becomes        
entitled to receive any dividend with respect to dividends paid or accrued more 
than 30 days after the date of enactment of legislation and (iii) require       
immediate recognition or gain under section 1059 of the Code to the extent a    
corporate U.S. Holder's tax basis with respect to which any extraordinary       
dividend is received is reduced below zero with respect to distributions after  
September 13, 1995. On June 9, 1997, the Chairman of the House Committee on     
Ways and Means introduced a legislative proposal which included the proposed    
tax law changes described in (ii) and (iii) above. It is not clear whether any  
such proposals will be enacted or, if enacted, whether they will be enacted in  
the form proposed. See 'Certain Federal Income Tax Considerations.'             

SUSCEPTIBILITY TO GENERAL ECONOMIC CONDITIONS                                   

The Company's revenues and results of operations will be subject to   
fluctuations based upon general economic conditions. If there were to be a      
general economic downturn or a recession in the United States or certain other  
markets, the Company believes that certain of its customers may reduce or delay 
their demand for the Company's products which may have a negative effect on the 
Company's revenues. Most of the factors that might influence customers and      
prospective customers to reduce their capital budgets under these circumstances 
are beyond the Company's control. During prior recessionary periods, the        
Company's operating performance has been negatively affected, and there can be  
no assurance that any future economic downturn would not materially and         
adversely affect the Company's business, financial condition and operating      
results. In addition, there can be no assurance that growth in the markets for  
the Company's products will occur or that such growth will result in increased  
demand for the Company's products.                                              

LABOR RELATIONS                                                                 

    Approximately 83% of the Company's employees are unionized. The collective

bargaining agreement between the Company and UAW-Local 2317 was ratified in     
October 1995 and will expire in October 1998. Although the Company believes its 
relations with its employees are satisfactory, a dispute between the Company and
its employees could have a material adverse effect on the Company's business,   
financial condition and operating results.                                      

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COMPETITION                                                                     

The industry in which the Company operates is highly competitive. The 
Company's custom gear business competes primarily with major domestic           
manufacturers, regional domestic manufacturers, foreign producers and captive   
gear manufacturers. The Company's planetary gear business competes primarily    
with several large competitors and a large number of relatively small suppliers.
There can be no assurance that the Company's products will compete successfully 
with those of its competitors or that the Company would be able to maintain its 
operating margins if the competitive environment changes.                       

ENVIRONMENTAL REGULATION                                                        

    The operations and properties of the Company are subject to a wide variety
of federal, state and local laws and regulations, including those governing the 
use, storage, handling, generation, treatment, emission, release, discharge and 
disposal of certain materials, substances and wastes, the remediation of        
contaminated soil and groundwater, and the health and safety of employees       
(collectively, the 'Environmental Laws'). Because Environmental Laws frequently 
are revised and supplemented, with a trend towards greater stringency,          
expenditures for compliance responsibilities are difficult to estimate and may  
exceed anticipated costs. The Company believes that compliance with existing and
publicly proposed Environmental Laws and the resolution of known environmental  
liabilities associated with waste disposal and releases will not have a material
adverse effect on its business, financial condition or operating results.       
However, future events, such as changes in existing Environmental Laws or their 
interpretation and more rigorous enforcement policies of regulatory agencies,   
may give rise to additional expenditures or liabilities that could be material. 
See 'Business--Environmental Matters.'                                          

CERTAIN TAX CONSIDERATIONS                                                      

    Distributions on the New Preferred Stock made out of the Company's current
or accumulated earnings and profits, as determined under U.S. federal income tax
principles, will be taxable as ordinary dividend income whether paid in cash or 
in additional shares of New Preferred Stock. In addition, holders may be        
required to treat a portion of the difference between the redemption price and  
issue price of the New Preferred Stock ('Preferred Stock Discount') as          
constructive distributions that are includible in income on an economic accrual 
basis. If shares of New Preferred Stock (including additional shares of New     
Preferred Stock distributed by the Company in lieu of cash dividend payments)   
bear Preferred Stock Discount, such shares generally will have different tax    
characteristics than other shares of New Preferred Stock and might trade        
separately, which might adversely affect the liquidity of such shares. See      

'Certain Federal Income Tax Considerations--Preferred Stock Discount.'          

Holders should also note that if shares of New Preferred Stock are    
exchanged for Exchange Debentures and the stated redemption price at maturity of
such Exchange Debentures exceeds their issue price by more than a de minimis    
amount, the Exchange Debentures will be treated as having original issue        
discount equal to the entire amount of such excess. Exchange Debentures issued  
on or before March 15, 2002, when the Company has the option to pay interest on 
the Exchange Debentures in additional Exchange Debentures, will have original   
issue discount. Each holder of Exchange Debentures with original issue discount 
will be required to include in gross income an amount equal to the sum of the   
'daily portions' of the original issue discount for all days during the taxable 
year in which such holder holds the Exchange Debentures, regardless of the      
holder's regular method of accounting and regardless of whether interest is paid
by the Company in cash or in additional Exchange Debentures. See 'Certain       
Federal Income Tax Considerations--Original Issue Discount' and 'Certain Federal
Income Tax Considerations--Taxation of Stated Interest and Original Issue       
Discount on Exchange Debentures.'                                               

For a discussion of these and other relevant tax issues, see 'Certain 
Federal Income Tax Considerations.'                                             

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USE OF PROCEEDS 

    There will be no cash proceeds payable to the Company from the issuance of
the New Preferred Stock pursuant to the Exchange Offer. The net proceeds to the 
Company from the sale of the Existing Preferred Stock were used to fund a       
dividend to Lancer, which dividend was used by Lancer to redeem approximately   
$47.7 million of Lancer Preferred Stock.                                        

CAPITALIZATION

    The following table sets forth the actual capitalization of the Company as
of March 31, 1997. The table should be read in conjunction with the Consolidated
Financial Statements and the notes thereto and 'Management's Discussion and     
Analysis of Financial Condition and Results of Operations' included elsewhere in
this Memorandum.                                                                

                                                        [Enlarge/Download Table]

                                                                          AS OF MARCH 31, 1997
                                                                          --------------------
                                                                                              
Total long-term debt, including current portion:                                              
  Credit Facilities(1)...................................................       $ 29,250      
  Existing Notes.........................................................         85,000      
                                                                             -----------      
     Total long-term debt................................................        114,250      

New Preferred Stock(2)...................................................         47,707      

Stockholder's equity (deficit):                                                               
  Common stock, par value $.01 per share (10,000,000 shares authorized,                       
     7,857,000 shares issued and outstanding)............................             79      
  Additional paid-in capital.............................................         37,196      
  Accumulated deficit....................................................        (88,505)     
                                                                             -----------      
     Total common stockholder's equity (deficit).........................        (51,230)     
                                                                             -----------      
     Total capitalization................................................       $110,727      
                                                                             -----------      
                                                                             -----------      

------------------                                                              
(1) As of March 31, 1997, the Credit Facilities (as defined) consisted of $29.3 
million in term loans and a $20.0 million revolving credit facility.    
  Advances under the revolving credit facility are subject to borrowing base
availability. As of March 31, 1997, total borrowings under the Credit   
   Facilities were approximately $29.3 million, comprising approximately $29.3
    million in term loans and no borrowings under the revolving credit facility.
See 'Description of Indebtedness--GE Credit Agreement.'                 

(2) Represents net proceeds to the Company from the Initial Offering after      
deduction for approximately $2.3 million in estimated costs and expenses
relating to the Initial Offering.                                       

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SELECTED HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA 

   The following selected historical and pro forma financial information for
the Company for the five years ended December 31, 1996 has been derived from the
audited consolidated financial information for the Company for such periods. The
information for the three-month periods ended March 31, 1996 and March 31, 1997 
is unaudited, but in the opinion of the Company reflects all adjustments        
necessary for a fair presentation of such data. The results of operations for   
the three-month period ended March 31, 1997 are not necessarily indicative of   
results of operations for the 1997 fiscal year. The following selected financial
data should be read in conjunction with 'Management's Discussion and Analysis of
Financial Condition and Results of Operations' and the Consolidated Financial   
Statements and the notes thereto of the Company which are contained elsewhere in
this Prospectus.                                                                

                                                        [Enlarge/Download Table]

                                                                                                          THREE MONTHS ENDED MARCH 
                                                            YEAR ENDED DECEMBER 31,                                 31,            
                                        ---------------------------------------------------------------   ------------------------ 
                                           1992         1993         1994         1995         1996          1996          1997    
                                        ----------   ----------   ----------   ----------   -----------   ----------    ---------- 
                                                              (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)                        

                                                                                                                                   
INCOME STATEMENT DATA:                                                                                                             
Net sales.............................  $  108,613   $  124,779   $  150,689   $  192,111   $  195,205    $   51,340    $   49,235 
Cost of sales.........................      90,583      103,603      123,092      151,890      158,668        41,675        39,852 
Selling, general and administrative                                                                                                
  expenses............................      12,451       12,323       15,924       14,759       16,868         4,038         4,218 
                                        ----------   ----------   ----------   ----------   -----------   ----------    ---------- 
Operating income......................       5,579        8,853       11,673       25,462       19,669         5,627         5,165 
Interest expense, net.................      11,493       11,345       12,377       12,905       11,930         3,070         3,231 
Other expense, net....................         136          227          199          127           90            21            20 
                                        ----------   ----------   ----------   ----------   -----------   ----------    ---------- 
Income (loss) before income taxes,                                                                                                 
  extraordinary item and cumulative                                                                                                
  effect of change in accounting                                                                                                   
  principle...........................      (6,050)      (2,719)        (903)      12,430        7,649         2,536         1,914 
Provision (benefit) for income                                                                                                     
  taxes...............................      (1,898)        (935)        (164)       5,520        3,730           983           940 
                                        ----------   ----------   ----------   ----------   -----------   ----------    ---------- 
Income (loss) before extraordinary                                                                                                 
  item and cumulative effect of change                                                                                             
  in accounting principle.............      (4,152)      (1,784)        (739)       6,910        3,919         1,553           974 
Extraordinary loss on early                                                                                                        
  extinguishment of debt, net of                                                                                                   
  tax(1)..............................          --       (4,455)          --           --           --            --            -- 
Cumulative effect of change in                                                                                                     
  accounting principle, net of                                                                                                     
  tax(2)..............................          --       (4,625)      (1,554)          --           --            --            -- 
                                        ----------   ----------   ----------   ----------   -----------   ----------    ---------- 
Net income (loss).....................  $   (4,152)  $  (10,864)  $   (2,293)  $    6,910   $    3,919    $    1,553    $      974 
                                        ----------   ----------   ----------   ----------   -----------   ----------    ---------- 
                                        ----------   ----------   ----------   ----------   -----------   ----------    ---------- 
Net income (loss) per common share....  $    (2.01)  $    (3.65)  $    (0.77)  $     1.15   $     0.51    $     0.20    $     0.09 
Dividend declared per common share....          --         0.67           --           --         2.19            --          6.50 
Weighted average common shares                                                                                                     
  outstanding.........................   2,064,303    2,976,471    2,976,471    6,018,072    7,726,557     7,676,275     7,805,604 

OTHER DATA:                                                                                                                        
EBITDA(3).............................  $   17,774   $   19,475   $   22,621   $   36,971   $   32,016    $    8,769    $    8,349 
Depreciation..........................      10,724        9,242        9,540       10,027       10,830         2,763         2,803 
Amortization(4).......................       3,037        2,604        2,310        2,245        2,277           400           401 
Cash interest expense, net(5).........      10,063       10,348       11,674       12,269       11,260         2,915         3,060 
Capital expenditures..................       3,151        4,145        9,164       15,090        9,986         2,984         2,081 
Ratio of earnings to combined fixed                                                                                                
  charges(6)..........................          --           --           --          2.0x         1.6 x         1.8x          1.6x

CASH FLOW FROM:                                                                                                                    
Operations............................       8,324        1,611        9,590       13,856       23,174         7,330          (299)
Investing.............................      (3,151)      (4,073)      (9,164)     (11,645)      (7,720)       (2,681)         (486)
Financing.............................      (3,939)       4,615       (5,434)         663      (13,593)       (8,871)       (3,686)

                                                        [Enlarge/Download Table]

                                                                                          PRO FORMA(7)             

                                                                             --------------------------------------
                                                                                YEAR ENDED       THREE MONTHS ENDED
                                                                             DECEMBER 31, 1996     MARCH 31, 1997  
                                                                             -----------------   ------------------
                                                                                                                   
EBITDA......................................................................    $    32,016          $    8,349    
Pro forma preferred stock dividends(8)......................................          5,625               1,406    
Ratio of EBITDA to cash interest expense, net(8)............................            2.8x                2.7x   
Ratio of EBITDA to cash interest expense, net and preferred stock                                                  
  dividends(9)..............................................................            1.9x                1.9x   

                                                        [Enlarge/Download Table]

                                                                                  AS OF DECEMBER 31, 1996    AS OF MARCH 31, 1997
                                                                                ---------------------------  --------------------
                                                                                   ACTUAL      ADJUSTED(10)                      
                                                                                ------------   ------------                      
                                                                                                                                 
BALANCE SHEET DATA:                                                                                                              
Working capital................................................................  $   12,123     $   12.080        $    9,530     
Total assets...................................................................     176,370        176,327           173,808     
Long-term debt (including current maturities)..................................     118,000        118,000           114,250     
Redeemable preferred stock.....................................................          --         47,700            47,707     
Stockholder's equity (deficit).................................................      (4,570)       (52,313)          (51,230)    

                                           (see footnotes on the following page)

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NOTES TO SELECTED HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA

(1) During 1993, the Company recorded an extraordinary loss of $4.5 million, net
of tax, relating to the early extinguishment, and refinancing of, the   
outstanding debt at June 30, 1993.                                      

(2) During 1993, the Company recorded a one-time non-cash charge of $4.6        
    million, net of tax, relating to the cumulative effect of adopting Statement
of Financial Accounting Standard No. 106, 'Employers Accounting for     
Postretirement Benefits Other Than Pensions.' During 1994, the Company  
    recorded a one-time non-cash charge of $1.6 million, net of tax, relating to
    the cumulative effect of adopting Statement of Financial Accounting Standard
No. 112, 'Employers Accounting for Postemployment Benefits.'            

(3) EBITDA represents income (loss) before income taxes, extraordinary item and 
cumulative effect of a change in accounting principle, interest expense,
net, depreciation and amortization. Although EBITDA is not a measure of 
   performance under generally accepted accounting principles, the Company has
 presented EBITDA because it is commonly used by investors and analysts to
  analyze and compare companies on the basis of operating performance and to
  determine a Company's ability to service debt. Nevertheless, EBITDA should

not be considered in isolation or as a substitute for income from       
operations, net income, cash flow from operating activities or any other
  measure under generally accepted accounting principles for determining the
Company's operating performance, financial position and cash flows. In  
    addition, since companies and analysts may measure EBITDA in different ways,
the Company's EBITDA figures may not be comparable to similarly-titled  
measures employed by other companies and analysts.                      

(4) Includes the amortization of deferred financing costs and the amortization  
of the excess of investment over net assets acquired.                   

(5) Cash interest expense, net includes interest income, but excludes           
 amortization of deferred financing costs of $1.4 million for fiscal 1992,
    $1.0 million for fiscal 1993, $0.7 million for fiscal 1994, $0.6 million for
 fiscal 1995, $0.2 million for the three months ended March 31, 1996, $0.7
  million for fiscal 1996, and $0.2 million for the three months ended March
31, 1997.                                                               

(6) For purposes of this calculation, earnings are defined as income (loss)     
   before income taxes, extraordinary items, the cumulative effect of a change
    in accounting principle and fixed charges. Fixed charges consist of interest
expense and amortization of deferred financing costs. Earnings were     
    insufficient to cover fixed charges by $6.1 million in 1992, $2.7 million in
1993 and $0.9 million in 1994.                                          

(7) Pro forma giving effect to the Initial Offering as if such event had        
occurred on January 1, 1996.                                            

(8) Dividends on the New Preferred Stock based on a dividend rate of 11 1/4% per
annum, payable semi-annually.                                           

(9) The Company has presented the ratio of the Company's EBITDA to its net cash 
interest expense because this ratio is commonly used by investors and   
  analysts to analyze and compare companies on the basis of their ability to
   meet their debt service obligations. This ratio should not be considered in
 isolation or as a substitute for income from operations, net income, cash
flow from operating activities or any other measures under generally    
    accepted accounting principles for determining the Company's ability to meet
   its debt service obligations. In addition, since companies and analysts may
measure this ratio in different ways, the Company's ratio may not be    
comparable to similarly-titled measures employed by other companies and 
analysts.                                                               

(10) The Company has presented the ratio of the Company's EBITDA to its net cash
interest expense and preferred stock dividends because this ratio is  
     commonly used by investors and analysts to analyze and compare companies on
   the basis of their ability to meet their debt service and preferred stock
   dividend obligations. This ratio should not be considered in isolation or
as a substitute for income from operations, net income, cash flow from
operating activities or any other measures under generally accepted   
 accounting principles for determining the Company's ability to meet its
   debt service and preferred stock dividend obligations. In addition, since
companies and analysts may measure this ratio in different ways, the  
     Company's ratio may not be comparable to similarly-titled measures employed

by other companies and analysts.                                      

(11) Adjusted to give effect to the Initial Offering as if such event had       
occurred on December 31, 1996.                                                  

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 

GENERAL                                                                         

   The Company experienced significant growth during the period from 1992 to
1996, as net sales increased from $108.6 million in 1992 to $195.2 million in   
1996, representing a compound annual growth rate of 15.8%. This increase in net 
sales was primarily as a result of (i) increased demand for the Company's       
products, (ii) new product introductions and (iii) the Company's growth in      
market share. This sales increase was also accompanied by a substantial shift in
the Company's product mix.  Sales of the Company's planetary gear systems       
increased as a percentage of net sales from 29.4% in 1992 to 42.5% in 1996.     
Conversely, sales of the Company's custom gear products as a percentage of net  
sales decreased from 70.6% to 57.5% during the same period. The Company's net   
sales growth in 1996 was 1.6% (compared to 27.5% in 1995, 20.7% in 1994 and     
14.9% in 1993). The Company believes that net sales growth slowed in 1996       
because customer demand outpaced the Company's manufacturing processes in 1995, 
resulting in the loss of certain customers in late 1995 and 1996. The Company   
believes that it has made appropriate investments in its infrastructure and     
personnel to recapture this business.                                           

   The Company's operating expenses increased during the period from 1994 to
1996, primarily as a result of the Company's investment in personnel.           
Investments in personnel during 1995 were driven by internal factors, primarily 
the need to increase manufacturing capacity. For example, in 1995 the Company   
(i) added approximately 200 manufacturing personnel in order to meet increased  
customer demand for the Company's products, (ii) invested additional amounts to 
upgrade the technical skill level of a portion of the Company's manufacturing   
employees because of a shortage of trained workers in the available labor market
and (iii) added human resources personnel to oversee the implementation of the  
collective bargaining agreement resulting from the unionization of the Company's
manufacturing employees in 1994. Investments in 1996 were made in response to   
external factors, namely the changing needs of the marketplace. In 1996, the    
Company increased the size of its marketing and sales and design engineering    
staffs in an effort to increase the Company's sales by means of continued growth
in market share and new product introductions.                                  

   Cost of sales increased from 1994 to 1995 primarily as a result of volume
growth, a change in the Company's product mix and the investments in            
manufacturing personnel detailed above. From 1995 to 1996, the increase of cost 
of sales was influenced by a number of factors including (i) sales of the       
Company's planetary gear systems, which have a higher material cost component   
compared to custom gear products, increased by $8.8 million in 1996, while sales
of custom gear products decreased by $5.7 million and (ii) the Company's 1996   

investment in new processes to improve manufacturing cycle times which resulted 
in a reduction in inventory. The impact from 1995 to 1996 of these activities,  
as measured by reduced labor and overhead in inventory, was $4.2 million.       
Without the effect of these new processes and the related inventory reduction,  
the Company's 1996 EBITDA would have been $36.2 million.                        

 The improvement in manufacturing cycle times from 50 days in 1995 to 32
days at the end of 1996 resulted in the following benefits: (i) improved on-time
delivery (a 65% improvement in 1996 versus 1995); (ii) increased inventory turns
(eight times in 1996 versus five times in 1995); (iii) reduced inventory        
investment ($18.9 million in 1996 versus $24.9 million in 1995); and (iv) a     
substantial increase in cashflow from operations ($23.2 million in 1996 and     
$13.9 million in 1995). The Company believes that its improved manufacturing    
cycle times have provided it with a competitive advantage.                      

RESULTS OF OPERATIONS                                                           

Three Months Ended March 31, 1997 Compared with Three Months Ended March 31,
1996                                                                        

Net sales for the three months ended March 31, 1997 decreased by $2.1 
million, or 4.1%, to $49.2 million compared to $51.3 million for the three      
months ended March 31, 1996. Sales for three months ended March 31, 1996        
included $3.9 million of orders which were past due at December 31, 1995.       

   Cost of sales for the three months ended March 31, 1997 decreased by $1.8
million, or 4.4%, to $39.9 million, or 80.9% of net sales, compared to $41.7    
million, or 81.2% of net sales for the three months ended March 31, 1996. The   
decrease resulted primarily from the decrease in sales volume.                  

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   Selling, general and administrative expenses was $4.2 million, or 8.6% of
net sales, for the three months ended March 31, 1997, compared to $4.0 million, 
or 7.9% of net sales, for the three months ended March 31, 1996. The $0.2       
million increase in selling, general and administrative expenses from 1996      
resulted principally from investments in marketing and sales and design         
engineering.                                                                    

 Earnings from operations for the three months ended March 31, 1997 were
$5.2 million, or 10.5% of net sales compared to $5.6 million, or 11.0% of net   
sales for the three months ended March 31, 1996.                                

Interest expense for the first three months of 1997 and 1996 was $3.2 
million and $3.1 million, respectively. Interest expense increased due to a     
higher average debt balance during the first three months of 1997 compared to   
the first three months of 1996.                                                 

 The Company's income before income taxes was $1.9 million for the first
three months of 1997, compared to $2.5 million for the first three months of    
1996.                                                                           

 The Company's net income was $1.0 million for the first three months of
1997 as compared to $1.6 million for the first three months of 1996.            

Fiscal Year 1996 Compared with Fiscal Year 1995                             

  Net sales for 1996 increased by $3.1 million, or 1.6%, to $195.2 million
compared to $192.1 million in 1995. This increase was primarily due to (i) an   
increase in planetary gear sales of $8.8 million, partially offset by a decrease
in custom gear sales of $5.7 million and (ii) minor increases in prices.        

Cost of sales for 1996 increased by $6.8 million, or 4.5%, to $158.7  
million, or 81.3% of net sales, compared to $151.9 million, or 79.1% of net     
sales in 1995. This increase primarily resulted from the increased sales of     
planetary gear systems, which have a higher material cost component compared to 
custom gear products, as well as increased costs associated with the Company's  
investment in new processes that reduced manufacturing cycle times from 50 days 
in 1995 to 32 days at the end of 1996 and resulted in a reduction in inventory. 
The Company does not expect cost of sales, as a percentage of net sales, to     
increase in 1997 as compared to 1996 (although there can be no assurance that   
this will be the case).                                                         

Selling, general and administrative expenses, including goodwill      
amortization, increased to $16.9 million in 1996, compared to $14.8 million in  
1995. This increase resulted primarily from investments in marketing, sales and 
design engineering and the write-off of a $0.5 million receivable due to a      
customer's bankruptcy. The Company expects selling, general and administrative  
expenses to increase in 1997, but at a reduced rate compared to the 1996        
increase.                                                                       

    Earnings from operations for 1996 decreased $5.8 million to $19.7 million,
compared to $25.5 million in 1995, primarily due to the factors mentioned above.

   Interest expense, including amortization of deferred financing costs, was
$11.9 million for 1996, compared to $12.9 million for 1995. The principal reason
for the decrease was lower average outstanding debt levels due to improvements  
in working capital management and the reduction in inventory described above.   

  Income before income taxes, was $7.6 million for 1996, compared to $12.4
million for 1995.                                                               

The effective tax rates for 1996 and 1995 were 48.8% and 44.4%,       
respectively. See the Notes to the Consolidated Financial Statements for a      
further discussion of income taxes.                                             

The Company's net income was $3.9 million for 1996, compared to $6.9  
million for 1995.                                                               

Fiscal Year 1995 Compared with Fiscal Year 1994                             

     Net sales for 1995 increased by $41.4 million, or 27.5%, to $192.1 million,
compared to $150.7 million in 1994. Net sales increased in 1995 because of      
increased sales volume. Increased sales volumes of the Company's products were  
the result of a variety of factors including additional outsourcing by captive  
gear manufacturers, continued growth in sales of products and applications      

developed over the last few years, improvements in manufacturing capabilities,  
and improvements in the markets served by the Company's customers.              

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Cost of sales for 1995 increased by $28.8 million, or 23.4%, to $151.9
million, or 79.1% of net sales, compared to $123.1 million, or 81.7% of net     
sales, in 1994. This increase primarily resulted from volume growth, a change in
the Company's product mix and investments in manufacturing personnel.           

Selling, general and administrative expenses, including goodwill      
amortization, decreased to $14.8 million, or 7.7% of net sales, in 1995,        
compared to $15.9 million, or 10.6% of net sales, in 1994. This decrease        
resulted primarily from one-time re-engineering and consulting fees incurred in 
1994.                                                                           

  Earnings from operations for 1995 increased $13.8 million, or 118.1%, to
$25.5 million, or 13.3% of net sales, compared to $11.7 million, or 7.7% of net 
sales, in 1994.                                                                 

   Interest expense, including amortization of deferred financing costs, for
1995 was $12.9 million, compared to $12.4 million for 1994. Despite declining   
interest rates in 1995 and a $2.0 million decrease in outstanding debt from     
December 31, 1994, the average outstanding debt during 1995 exceeded 1994,      
resulting in higher interest costs for the year.                                

 Income before income taxes, extraordinary item and cumulative effect of
change in accounting principle was $12.4 million for 1995, compared to a loss of
$0.9 million for 1994.                                                          

The effective tax rates for 1995 and 1994 were 44.4% and (18.2)%,     
respectively. The provision for income taxes for 1995 is primarily the result of
current year income. The benefit for income taxes for 1994 is principally the   
result of the reversal of previously recorded deferred tax liabilities. See the 
Notes to the Consolidated Financial Statements for a further discussion of      
income taxes.                                                                   

   On January 1, 1994, the Company adopted Statement of Financial Accounting
Standards No. 112, 'Employers Accounting for Postemployment Benefits' ('SFAS No.
112'). SFAS No. 112 requires employers to account for postemployment benefits   
under the accrual, rather than the pay-as-you-go, method of accounting, such    
that the expected benefits to be paid in future years are recorded during the   
period in which the employee renders the service necessary to qualify for these 
benefits. The Company implemented SFAS No. 112 by recognizing the total prior   
service obligation immediately. As a result of the adoption of SFAS No. 112, the
Company recorded a one-time non-cash charge of $1.6 million ($1.9 million less a
deferred tax benefit of $0.3 million) for the cumulative effect of the change in
accounting principle.                                                           

  The Company's net income was $6.9 million for 1995, compared to the $2.3
million net loss for 1994. The increase in the net income is primarily due to   
the higher sales volume and productivity improvements in 1995, combined with the

cumulative effect of the change in accounting principle adjustment in 1994.     

LIQUIDITY AND CAPITAL RESOURCES                                                 

    On July 7, 1993, the Company completed the sale of $85.0 million aggregate
principal amount of Existing Notes. The Existing Notes mature on July 1, 2001   
and are redeemable at the option of the Company, in whole or in part, on or     
after July 1, 1998, at certain specified redemption prices. Concurrent with the 
issuance of the Existing Notes, the Company entered into a loan agreement with a
senior lending institution which provides for a revolving credit facility and a 
term loan. The loan agreement was amended in December 1996 to, among other      
things, increase the term loan to $33.0 million (with quarterly amortization of 
$0.75 million per quarter in 1997, $1.0 million per quarter in 1998, $1.75      
million per quarter in 1999, $2.25 million per quarter in 2000 and a final      
payment of $7.0 million in December 2000 (after giving effect to a $3.0 million 
prepayment in March 1997)) and, subject to certain conditions, provide for a    
$5.0 million increase in the revolving credit facility commitment at the option 
of the Company (from $20.0 million to $25.0 million). The revolving credit      
facility matures on July 2001. See 'Description of Existing Indebtedness--GE    
Credit Agreement.'                                                              

   Net cash used by operations for the three months ended March 31, 1997 was
$0.3 million, a decrease of $7.6 million compared with net cash provided by     
operations of $7.3 million for the three months ended March 31, 1996 period. The
decrease in cash from operations in comparison to the prior year period was due 
primarily to an increase in inventory at March 31, 1997.                        

Net cash provided by operating activities was $23.2 million in 1996   
compared to $13.9 million in 1995 and $9.6 million in 1994. The increase in cash
flow from operating activities in 1996 was principally due to the impact of     
improved manufacturing cycle times reducing inventory.                          

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Capital expenditures for various machine tools, equipment and building
improvement items totaled $2.1 million and $3.0 million during the first three  
months of 1997 and 1996, respectively. Of the $2.1 million as of March 31, 1997,
$1.6 million has been funded by an increase in accounts payable in the balance  
sheet versus $0.3 million of the $3.0 million of capital expenditures in 1996.  
The capital expenditures for both 1997 and 1996 were principally targeted at    
increasing capacity and productivity to meet increased customer demand.         

    Capital expenditures totaled $10.0 million, $15.1 million and $9.1 million
in 1996, 1995 and 1994, respectively. The level of capital spending during 1994 
to 1996 was primarily a result of increased manufacturing requirements due to   
increased sales volume. The Company expects that capital expenditures will be   
approximately $10.0 million for fiscal 1997 (including $0.7 million relating to 
the addition of in-line dual frequency induction hardening equipment).          

Net cash from financing activities was a net usage of $13.6 million in
1996, a net source of $0.7 million in 1995, and a net usage of $5.4 million in  
1994. The 1996 net usage funded a portion of the $17.0 million dividend paid to 

Lancer and the $3.0 million advance made to Lancer in December 1996.            

Under the Tax Sharing Agreement (as defined), Lancer made capital     
contributions to the Company of $1.6 million, $2.5 million, and $1.1 million in 
1996, 1995 and 1994, respectively. See Notes to the Consolidated Financial      
Statements for a further discussion of capital contributions made pursuant to   
the Tax Sharing Agreement.                                                      

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BUSINESS

     The Company believes that it is the leading independent manufacturer (based
on sales) of high precision custom gears and planetary gear systems in North    
America, with an estimated market share in each of the custom gear and planetary
gear system markets of more than two times that of its nearest competitors. The 
majority of Fairfield's custom gears and planetary gear systems are used by OEMs
as components in various kinds of heavy mobile equipment. The Company's         
customers include such industry leaders as General Electric, John Deere,        
Caterpillar and General Motors. For the year ended December 31, 1996, the       
Company had net sales and EBITDA of $195.2 million and $32.0 million,           
respectively.                                                                   

Custom gears, which accounted for $112.3 million, or 57.5%, of the    
Company's 1996 net sales, are components of larger systems such as axles, drive 
differentials and transmission units. The Company's custom gear customers       
consist principally of OEMs of rail (such as locomotives), mining, agricultural 
(such as tractors and specialty harvestry equipment), industrial, construction  
and materials-handling equipment, for many of whom the Company is the sole      
independent supplier of selected gear products.                                 

     Planetary gear systems, which accounted for $82.9 million, or 42.5%, of the
Company's 1996 net sales, are integrated, self-contained power transmission and 
torque conversion systems that provide propulsion, swing and/or rotation to     
wheels, axles and other components in applications where the use of axles would 
otherwise present design difficulties. The Company markets its planetary gear   
systems under its Torque-Hub(Registered) name. The Company believes that, as a  
result of the performance history and reputation for quality of the Company's   
Torque-Hub(Registered) products, the Torque-Hub(Registered) name has become     
closely identified with planetary gear systems. Customers for the Company's     
Torque-Hub(Registered) products include OEMs of access platform (such as        
aerial-lift), road rehabilitation (such as pavers and road rollers),            
construction (such as excavators), forestry and agricultural (such as crop      
sprayers) equipment.                                                            

    The Company has been certified as a 'preferred supplier' (based on systems
compliance and on-site inspections) by all of its major customers that have     
certification procedures, including General Motors, General Electric, John      
Deere, Caterpillar and Ingersoll-Rand. The Company has also been certified as   
meeting 'ISO-9001' standards, which is increasingly being used by OEMs in lieu  
of individual certification procedures. In addition, the Company expects to     
receive 'QS-9000' certification by the end of 1997, which is the level of       
certification expected to be required by automotive OEMs beginning in 1998. The 
Company believes that certification provides it with a competitive advantage    
because a number of OEMs require certification as a condition to doing business.

     The Company believes that its strong market position in the custom gear and
planetary gear systems markets is the result of its (i) breadth and quality of  
product offerings, (ii) longstanding relationships (in many cases of 20 years or
more) with its major custom gear and planetary gear system customers, (iii)     
state-of-the-art engineering and manufacturing technology, including its        
in-house heat treating facilities, computer-aided design and manufacturing      

systems and computer numerically-controlled machine tools and gear grinders,    
(iv) ability to deliver products within short lead times, (v) cost              
competitiveness, (vi) experienced engineering staff, which, together with the   
Company's sales force, works closely with customers in designing and developing 
products to meet customers' needs and (vii) stable, knowledgeable sales force,  
many of whose members have engineering degrees and have worked with the same    
customers for many years. In addition, the Company believes that its management 
team, which has an average of over 25 years of experience in general            
manufacturing, will be instrumental in further strengthening the Company's      
market position.                                                                

   The Company was founded in 1919 as a manufacturer of custom gear products
and was family-owned until 1977. At that time, the Company was purchased by     
Rexnord Corporation, which subsequently sold the Company in 1987 to Neoax Inc.  
Lancer purchased the Company in 1989. The Company's principal executive offices 
are located at U.S. 52 South, Lafayette, Indiana 47905. The Company's telephone 
number is (765) 474-3474.                                                       

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BUSINESS STRATEGY                                                               

    The Company's management team intends to strengthen the Company's position
as the leading independent supplier of custom gears and planetary gear systems  
by implementing a business strategy based on the following elements:            

o Taking Advantage of Industry Trends. The Company seeks to increase its        
revenues and market share by taking advantage of industry trends, including:
(i) the trend among captive gear manufacturers (OEMs who produce gears      
in-house for use in their own products) to 'outsource,' or purchase portions
  of their gear requirements from independent manufacturers such as the Company,
rather than manufacture such products in-house; (ii) the trend among OEMs to
 develop sourcing relationships with their suppliers, whereby an OEM purchases
all of its supply requirements within selected product lines from a single  
manufacturer like the Company; and (iii) the trend among OEMs to purchase   
 complete gear assemblies or systems rather than individual gear products. The
 Company believes that these trends are driven by OEMs' desire to reduce their
production and supply costs and focus on their core competencies.           

   The Company has taken advantage of these industry trends to date. For
example, the Company receives orders from a number of captive gear          
manufacturers, such as those of General Motors, General Electric and John   
Deere, with respect to certain gear products that they previously produced  
  in-house. In addition, the Company has established sole sourcing relationships
with many of its major customers with respect to selected gear products. The
Company has also experienced growth in its sales of complete gear assemblies
and systems, particularly to manufacturers of agricultural and heavy-duty   
  equipment. The Company believes that it is well-positioned to continue to take
  advantage of these industry trends as a result of its broad product offerings,
large manufacturing capacity, sophisticated manufacturing and design        
  capabilities and established reputation for producing high quality custom gear
and planetary gear system products.                                         

o Reducing Lead Times. The Company believes that reducing lead times has been,  
and will continue to be, a key competitive factor in the gear manufacturing 
industry. The Company has reduced average manufacturing cycle times through 
 the manufacturing process from 50 days in 1995 to 32 days at the end of 1996.
Work-in-process inventory has also been reduced by 26.5% during this same   
period. These reductions are the result of manufacturing and inventory      
controls implemented by management, including reduction in lot sizes and the
installation of new, more efficient machinery. The Company is seeking to    
 reduce lead times further by installing an enhanced computer program designed
to improve inventory management.                                            

o Continuing Cost Control Efforts. The Company will continue to be dedicated to 
remaining price competitive and minimizing production costs. The Company    
believes that it has already significantly lowered its operating costs by   
reorganizing the physical layout of its manufacturing work space, installing
new, more efficient machinery and improving its employee training programs. 
The Company is seeking to reduce costs further through various purchasing   
 initiatives (including worldwide sourcing, consolidation of the supplier base
and long-term supply agreements) and by reducing set-up times and scrap.    

o Improving Manufacturing Capabilities. The Company believes that its           
broad-based, integrated manufacturing capabilities, including its           
state-of-the-art heat treating facilities, computer-aided design and        
manufacturing systems and computer numerically machine tools and gear       
grinders, provide it with a distinct competitive advantage. Over the past   
three years, the Company has invested $34.2 million in capital equipment, of
which $23.7 million was used to purchase new equipment and maintain and     
upgrade existing equipment. The Company believes that its manufacturing     
capacity is substantially larger than that of its independent competitors,  
enabling it to accommodate large orders. The Company plans to continue to   
selectively make capital investments which will improve its manufacturing   
processes.                                                                  

o Introducing New Products and Applications. The Company is currently in the    
 process of developing, testing and marketing a number of new products and new
applications for existing products in an effort to increase revenues,       
  operating margins and market share. Historically, the Company's planetary gear
system business has generated most of the Company's new products and new    
 product applications. New products and new product applications accounted for
22.3% of the Company's planetary gear system business in 1996, compared to  
approximately 5.7% in 1992. The Company intends to broaden its new product  
applications in the custom gear                                             

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area and is currently developing a number of such applications including:   
  differentials for off-highway trucks and on-highway automotive, industrial and
commercial vehicles; transmissions; and aerospace gearing.                  

PRODUCTS                                                                        

   Custom Gears. Custom gears accounted for $112.3 million, or 57.5%, of the
Company's net sales in 1996. The Company manufactures a wide variety of custom  
gears, ranging in type (e.g., helical, spiral bevel, spur and                   
HYPOID(Registered)) and size (from one inch to five feet), and has manufacturing
capabilities which the Company believes are the broadest in the custom gear     
business. The Company's custom gears are manufactured according to customers'   
specifications, sometimes developed by or with the assistance of the Company,   
for use as component parts in various types of heavy mobile equipment. Custom   
gears are engineering-intensive and, although such products represent a         
relatively small portion of the cost of the equipment in which they are used,   
are critical to the operation of such equipment.                                

 Historically, the Company has focused on high margin custom gears. Such
products, which are design- and engineering-intensive, are used in rail, mining,
agricultural, industrial, construction and materials-handling and other         
equipment demanding a high degree of product quality and reliability. Many      
customers in these markets do not have the necessary engineering and/or         
manufacturing facilities, and/or personnel to design and manufacture their gear 
requirements in-house. In addition, there is a trend among OEMs to focus on     
their core competencies rather than produce gears in-house.                     

    Torque-Hub(Registered) Products. Torque-Hub(Registered) products accounted
for $82.9 million, or 42.5%, of the Company's net sales in 1996. The Company    
believes that the Torque-Hub(Registered) name has become closely identified with
planetary gear systems, which provide drive, swing, and/or rotation to the      
equipment in which they are used and are primarily employed in cases where the  
use of axles present design difficulties. The Company produces a broad line of  
planetary gear systems under its Torque-Hub(Registered) trade name, including   
wheel drives (used to propel off-highway equipment), shaft outputs (used to     
power remote in-plant machinery like mixers as well as mobile aerial lifts and  
cranes) and spindle outputs (used to power the drive wheels of vehicles with    
small diameter wheels such as small lift trucks and mowers).                    

    The Company has introduced a number of new Torque-Hub(Registered) products
in recent years, including two-speed drives (Torque II series) and compact      
drives (CW and CT series) for wheeled or tracked vehicles. The Company believes 
that the two-speed drive is ideal for machinery requiring low- and high-speed   
settings, such as road paving equipment. The compact drive incorporates the     
brakes and hydraulic drive systems into a single compact unit, which the Company
believes allows for better flexibility and is well-suited for a variety of      
applications. These recently-introduced products are used in a wide range of    
industrial and construction equipment, including excavators, crawler dozers and 
loaders, rubber-tired pavers and multi-speed winches.                           

MARKETING AND DISTRIBUTION                                                      

The Company's customers are OEMs and include such industry leaders as 
General Electric, John Deere, Caterpillar and General Motors. The Company has   
had relationships of 20 years or more with each of the above-mentioned          
customers, as well as with many of its other major customers. No single customer
accounted for more than 10% of the Company's 1996 net sales.                    

     The Company has been certified as a 'preferred supplier' by each of General
Motors, General Electric, John Deere, Caterpillar and Ingersoll-Rand as well as 

by all of its other major customers that have certification procedures. The     
Company has also been certified as meeting 'ISO-9001' standards, which are      
increasingly being used by OEMs in lieu of individual certification procedures. 
In addition, the Company expects to receive 'QS-9000' certification by the end  
of 1997, which is the level of certification expected to be required by         
automotive OEMs beginning in 1998. The Company believes that certification      
provides it with a competitive advantage because a number of OEMs require       
certification as a condition of doing business.                                 

The Company believes its stable, experienced sales force is a primary 
reason for the Company's success in maintaining customer loyalty and building   
new customer relationships. The Company's sales department is organized         
geographically and consists of 14 sales engineers, who have an average of over  
15 years of service and most of whom have worked with the same customers for    
many years. In addition, each sales engineer has                                

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substantial expertise concerning the Company's products and product             
applications. Application engineers work closely with the Company's sales       
department and provide customers with guidance concerning product applications  
and specific design problems. By becoming a part of the customer's purchasing   
and design decisions, the Company has developed close working relationships with
many of its customers. Customer loyalty to the Company is further enhanced by   
the development, tooling and production costs associated with changing gear     
sources, as such costs are typically borne by the customer.                     

All of the Company's custom gear products and approximately 70% of its
Torque-Hub(Registered) products are sold directly to OEMs. Since                
Torque-Hub(Registered) products can be sold to more than one customer, the      
Company uses distributors to increase its penetration of the planetary gear     
systems market. The Company sells approximately 30% of its                      
Torque-Hub(Registered) line through a network of approximately 40 distributors  
located in the United States and abroad. International sales accounted for      
approximately $11 million, or approximately 6%, of the Company's 1996 net sales.

DESIGN AND MANUFACTURING                                                        

   The Company believes that its state-of-the-art technology and experienced
engineering staff provide it with a competitive advantage and are major factors 
behind the Company's strong market position.                                    

Technology. The Company has selectively invested in state-of-the-art  
manufacturing technology in recent years to improve product quality and price   
competitiveness, and to reduce lead time. The Company's manufacturing technology
includes the latest computer-aided design and manufacturing (CAD/CAM) systems,  
and over one hundred computer numerically controlled (CNC) machine tools and    
gear grinders.                                                                  

     The Company's CAD/CAM systems, which enable hundreds of design solutions to
be visualized quickly and easily, facilitate product design and manufacturing.  
The Company's computer systems are capable of finite element analysis and       

simulation which allows many aspects of a design to be evaluated prior to       
production, resulting in lower tooling costs, reduced testing requirements and  
quicker time to market. In addition, the Company's CNC gear cutting machines    
allow for many different styles and sizes of gears to be run quickly in small   
lot sizes with a high degree of accuracy. The Company is in the process of      
installing an enhanced computer program designed to improve customer order      
scheduling and inventory management.                                            

The Company has its own comprehensive heat treating facilities. These 
in-house facilities allow the Company to control the annealing and carburizing  
processes that determine the load-carrying capacity of the final product. The   
Company's heat treating operations help ensure proper development and           
maintenance of gear tooth characteristics. As a result, the Company believes    
that it is able to provide its customers with improved quality and reduced lead 
times in filling orders. In-line dual frequency induction hardening equipment   
will be added in 1997, continuing the Company's practice of selectively adding  
advanced technology in its manufacturing processes.                             

Engineering Staff. The Company's engineering department consists of   
approximately 70 engineers and technicians, including specialists in product,   
tool, manufacturing and industrial engineering. In addition, the Company has a  
metallurgy laboratory which determines the appropriate metallurgy for a specific
gear application. These engineering groups, with their distinct specialties,    
work together as a team to develop solutions to specific customer requirements. 
These capabilities enable the Company to service clients who demand high        
quality, creative solutions to their product needs.                             

MATERIALS AND SUPPLY ARRANGEMENTS                                               

The Company generally manufactures its custom gear and                
Torque-Hub(Registered) products to its customers' specifications and, as a      
result, does not generally contract for or maintain substantial inventory in raw
materials or components. The Company purchases its three principal raw materials
(steel forgings, steel bars and castings) on a spot basis based on specific     
customer orders. No single supplier accounted for more than 10% of the Company's
raw material purchases in 1996. In addition, alternative sources are available  
to fulfill each of the Company's major raw material requirements. The Company   
has never experienced a delay in production as a result of a supply shortage of 
a major raw material.                                                           

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COMPETITION                                                                     

The North American custom gear business is highly competitive but very
fragmented. Competition can be broken down into four principal groups: major    
domestic manufacturers, regional domestic manufacturers, foreign producers and  
captive gear manufacturers. Although captive gear manufacturers supply all or a 
portion of their internal gear requirements and constitute a significant portion
of the custom gear market, the Company believes there is a trend among such     
manufacturers to outsource, or purchase their gears from independent            
manufacturers such as the Company. The North American planetary gear system     

market is also highly competitive and is concentrated among several large       
competitors, with the remaining market divided among a large number of          
relatively small suppliers. The Company competes with other manufacturers based 
on a number of factors, including delivery capability, quality and price. The   
Company believes that its breadth of manufacturing, engineering and             
technological capabilities provide it with a competitive advantage.             

PROPERTIES                                                                      

The Company owns and operates a single facility in Lafayette, Indiana 
consisting of 39 acres of land, approximately 520,000 square feet of            
manufacturing space and approximately 60,000 square feet of office space. The   
Lafayette facility is well maintained and is in good condition.                 

EMPLOYEES                                                                       

  At December 31, 1996, the Company had 1,195 permanent employees, of whom
approximately 83% were employed in manufacturing, approximately 6% were         
engineers employed in the engineering department, and the remainder were office 
and managerial employees. The Company's production and maintenance employees    
became members of the United Auto Workers (UAW) union in October 1994 and the   
Company entered into a labor contract with the union in October 1995, which is  
scheduled to expire in October 1998. The Company considers its relations with   
its employees to be satisfactory.                                               

BACKLOG                                                                         

    As of December 31, 1996 and December 31, 1995, the Company had total order
backlog of approximately $77.0 million and $85.0 million, respectively, for     
shipments due to be delivered by the Company for the six-month period following 
such dates. This reduction was attributable to the Company's ongoing business   
strategy of reducing lead times for its products.                               

INTELLECTUAL PROPERTY                                                           

The trade name Torque-Hub(Registered) is a registered trademark. The  
Company's planetary gear systems are sold under the Torque-Hub(Registered) trade
name. The Company, directly and through its wholly owned subsidiary, T-H        
Licensing, Inc. ('T-H Licensing') owns numerous patents worldwide. None of such 
patents is considered material to the Company's business.                       

LEGAL PROCEEDINGS                                                               

   The Company is a party to routine litigation incidental to the conduct of
its business, much of which is covered by insurance and none of which is        
expected to have a material adverse effect on the Company.                      

ENVIRONMENTAL MATTERS                                                           

  The Company's operations and properties are subject to a wide variety of
increasingly complex and stringent Environmental Laws. As such, the nature of   
the Company's operations exposes it to the risk of claims with respect to such  
matters and there can be no assurance that material costs or liabilities will   
not be incurred in connection with such claims. The Company believes its        

operations and properties are in substantial compliance with Environmental Laws.
Based upon its experience to date, the Company believes that the future cost of 
compliance with existing Environmental Laws, and liablility for known           
environmental claims pursuant to such Environmental Laws, will not have a       
material adverse effect on the Company's business, financial condition or       
operating results. However, future events, such as changes in existing          
Environmental Laws or their interpretation and more vigorous enforcement        
policies of regulatory agencies, may give rise to additional expenditures or    
liabilities that could be material.                                             

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MANAGEMENT

The following table sets forth certain information with respect to the
directors and executive officers of the Company as of December 31, 1996:        

                                                        [Enlarge/Download Table]

NAME                                        AGE  POSITION                                             
------------------------------------------  ---  -----------------------------------------------------
                                                                                                      
W.B. Lechman..............................  64   Director, Chairman of the Board                      
Kenneth A. Burns..........................  44   President, and Chief Operating Officer               
Peter A. Joseph...........................  44   Director, Vice President and Secretary               
Paul S. Levy..............................  49   Director, Vice President and Assistant Secretary     
Richard A. Bush...........................  39   Vice President Finance                               
James R. Dammon...........................  53   Vice President Engineering                           
Michael M. Manty..........................  53   Vice President Human Resources                       
Frederick G. Sharp........................  42   Vice President Marketing and Sales                   
Jess C. Ball..............................  55   Director                                             

 Mr. Lechman was appointed Chairman of the Board effective October 1994.
Prior to his appointment, Mr. Lechman had been President of the Company from    
1983 to October 1994 and was Chief Executive Officer from 1989 to October 1994. 
Mr. Lechman has been a Director of the Company since 1989. Mr. Lechman serves on
the Board of Directors of Bank One Lafayette, Lafayette Life Insurance Co.,     
Lafayette Community Foundation, Lafayette Junior Achievement, The Salvation Army
and Lafayette Chamber of Commerce and is President Emeritus of the American Gear
Manufacturers Association.                                                      

  Mr. Burns was named President and Chief Executive Officer of the Company
effective April 1997. Prior to his appointment, Mr. Burns had served as         
President and Chief Operating Officer from May 1996 to April 1997 and as Vice   
President Operations from January 1996 to May 1996. From 1987 through July 1995,
Mr. Burns served as an executive officer of Abex/NWL Aerospace and its          
predecessors, including Executive Vice President.                               

Mr. Joseph has been Vice President and Secretary and a Director of the
Company since 1989. Mr. Joseph has been a General Partner of Joseph Littlejohn &
Levy since its inception in 1988. Mr. Joseph has served as President of Lancer  

since April 1992 and as Secretary and Director of Lancer since July 1989. Mr.   
Joseph is also on the Board of Directors of Freedom Chemical Company, Foodbrands
America, Inc., Hayes Wheels International, Inc., Peregrine, Inc., and Tenet     
Healthcare Corporation.                                                         

    Mr. Levy has been Vice President and Assistant Secretary and a Director of
the Company since 1989. Mr. Levy has been a General Partner of Joseph Littlejohn
& Levy since its inception in 1988. Mr. Levy has served as Chief Executive      
Officer and Chairman of the Board of Directors of Lancer since July 1989. Mr.   
Levy is also on the Board of Directors of Freedom Chemical Company, Foodbrands  
America, Inc., Hayes Wheels International, Inc., Peregrine, Inc., and Tenet     
Healthcare Corporation.                                                         

Mr. Bush has been Vice President Finance of the Company since November
1994. From 1990 to 1994, Mr. Bush was Controller for two different aerospace    
units of Abex Inc. From 1980 to 1990, Mr. Bush was with Arthur Andersen & Co. in
the audit and financial consulting practice.                                    

 Mr. Dammon has been Vice President Engineering since 1987. Prior to his
present position, Mr. Dammon was Director of Engineering, Manager of New Product
Development, Manager of Customer Engineering Service and Gear Design Engineer.  
Mr. Dammon has been with the Company for over 30 years.                         

Mr. Manty has been Vice President Human Resources of the Company since
February 1995 and Vice President Total Quality and Human Resources since January
1997. From 1990 to 1995, Mr. Manty was Director of Human Resources for Allied   
Signal Aerospace. Prior to 1990, Mr. Manty performed labor relations consulting 
work with Modern Management, Inc. and held senior level human resource positions
with Pneumo Corporation and Chrysler Corporation.                               

 Mr. Sharp has been Vice President of Marketing and Sales of the Company
since August, 1996. From 1991 to July 1996, Mr. Sharp served as Director of     
Program Management for United Defense L.P. and its predecessor                  

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BMY Combat Systems Division. Prior to 1991, Mr. Sharp held senior level         
positions with General Electric and NWL Control Systems.                        

Mr. Ball was President and Chief Executive Officer of the Company from
October 1994 to May 1996. Mr. Ball has been a Director of the Company since     
1991. From February 1991 through November 1991, Mr. Ball served as President and
Chief Executive Officer of Alford Industries (a company which filed for         
bankruptcy protection and has been liquidated). From December 1991 through      
September 1994, Mr. Ball was President and Chief Executive Officer of Golding   
Industries, Inc. From January 1988 through January 1991, Mr. Ball served as     
President and Chief Executive Officer of DelCorp.                               

COMPENSATION OF DIRECTORS                                                       

   Except for the period October 1994 to December 1996, Mr. Ball receives an
annual fee of $30,000 per year for services as a director. No other director    

receives any additional compensation for services as a director or for serving  
on committees of the Board of Directors of the Company or for attending         
meetings.                                                                       

EXECUTIVE COMPENSATION                                                          

     The following table sets forth for each of the fiscal years ending December
31, 1996, 1995 and 1994, the compensation paid to or accrued by (i) Chairman of 
the Board (the 'Chairman') of the Company and (ii) each of the four most highly 
compensated executive officers other than the Chairman.                         

SUMMARY COMPENSATION TABLE

                                                        [Enlarge/Download Table]

                                                                    ANNUAL COMPENSATION                       
                                                               ------------------------------     ALL OTHER   
NAME AND PRINCIPAL POSITION                                    YEAR     SALARY       BONUS(1)  COMPENSATION(2)
-------------------------------------------------------------  ----    --------      --------  ---------------
                                                                                                              
W.B. Lechman ................................................  1996    $256,668      $ 50,000     $ 135,720   
  Chairman of the Board                                        1995     253,891            --       131,363   
                                                               1994     253,860        50,803       130,250   

Kenneth A. Burns ............................................  1996    $185,279      $100,000     $   3,325   
  President and Chief Operating Officer                                                                       

James R. Dammon .............................................  1996    $114,437      $ 57,000     $   4,988   
  Vice President Engineering                                   1995     110,431        65,467         5,524   
                                                               1994     104,268        21,992         6,364   

Richard A. Bush .............................................  1996    $103,537      $ 52,000     $   5,950   
  Vice President Finance                                       1995     100,031        59,300         4,399   

Michael M. Manty ............................................  1996    $102,257      $ 52,000     $  24,981   
  Vice President Human Resources                               1995      93,495        94,154         5,234   

------------------                                                              

(1) Amounts shown were earned under the Fairfield Manufacturing Company         
Management Incentive Compensation Plan.                                 

(2) Amounts shown include contributions by the Company to The Savings Plan For  
 Employees of Fairfield Manufacturing Company, Inc. for the benefit of the
   named executives, imputed income on life insurance provided by the Company,
reimbursement of relocation expenses for Mr. Manty, imputed income on an
automobile for Mr. Lechman, and contributions to an insurance company of
    $110,000 for each of the years shown above to fund a supplemental retirement
annuity policy for Mr. Lechman.                                         

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FY-END SAR VALUES 

                                                        [Enlarge/Download Table]

                                                              NO. OF UNEXERCISED SARS AT  VALUE OF UNEXERCISED SARS
                                                                 FY-END EXERCISABLE/              AT FY-END        
NAME                                                               UNEXERCISABLE(1)       EXERCISABLE/UNEXERCISABLE
------------------------------------------------------------  --------------------------  -------------------------
                                                                                                                   
W.B. Lechman................................................           0/63,000                     $ 0/0          
James R. Dammon.............................................           0/10,800                       0/0          

------------------                                                              

(1) Equity Participation Rights (the 'Rights') issued to participants in the    
    Fairfield Manufacturing Company, Inc. Equity Participation Plan (the 'Equity
Participation Plan'). Mr. Lechman and Mr. Dammon hold 63,000 and 10,800 
   Rights, respectively, under the Equity Participation Plan, all of which are
fully vested. Each Right entitles Mr. Lechman and Mr. Dammon to receive,
upon the occurrence of a Trigger Event (as defined in the Equity        
  Participation Plan), an amount in cash equal to the difference between the
Fair Market Value of a Right (as of the Trigger Event) and $16.67, the  
initial value assigned to each Right.                                   

PENSION PLAN TABLE

The Company maintains the Retirement Plan for Employees of Fairfield  
Manufacturing Company, Inc., a defined benefit pension plan intended to be      
qualified under the Internal Revenue Code (the 'Pension Plan').                 

                                                        [Enlarge/Download Table]

                                                                  YEARS OF SERVICE(2)                           
                                       -------------------------------------------------------------------------
REMUNERATION(1)                           5         10         15         20         25         30         35   
-------------------------------------  -------    -------    -------    -------    -------    -------    -------
                                                                                                                
$100,000.............................  $ 6,796    $13,593    $20,389    $27,186    $33,982    $40,778    $42,028
$125,000.............................    8,609     17,218     25,827     34,436     43,044     51,653     53,216
$150,000 and over....................   10,421     20,843     31,264     41,686     52,107     62,528     64,403

------------------                                                              

(1) The preceding table illustrates the aggregate pension benefits provided by  
 the Pension Plan calculated on a straight life annuity basis. The amounts
set forth in the table are subject to reduction for any Social Security 
 offset. Average annual compensation covered under the Pension Plan is the
   highest average annual total compensation received from the Company for any
60 month period during the 120 months immediately preceding the         
    participant's separation from service. Annual total compensation for Pension
Plan purposes includes all compensation disclosed in the Summary        

Compensation Table.                                                     

(2) At December 31, 1996, Messrs. Lechman, Burns, Dammon, Bush, and Manty had   
13, 1, 31, 2 and 2 whole years of credited service, respectively, for   
purposes of calculating their benefits under the Pension Plan.          

EMPLOYMENT AGREEMENTS                                                           

 The Company entered into an employment agreement with Kenneth A. Burns,
effective June 1, 1996.                                                         

  Mr. Burns' employment agreement provides that he will serve as President
and Chief Operating Officer of the Company. The agreement is for a term that    
expires on June 1, 1998. The agreement provides for Mr. Burns to receive a base 
salary of $200,000 or such greater amount as may be determined by the Board of  
Directors of the Company. In addition, Mr. Burns is eligible to participate in  
any benefit plan that the Company provides to its executives from time to time. 

    Mr. Burns' employment agreement contains restrictions on disclosure by him
of confidential information and generally restricts his right to compete with   
the Company during the term of his employment and for two years thereafter. Mr. 
Burns' employment pursuant to the agreement is terminable upon his death or     
disability or by the Company or Mr. Burns for cause (as defined therein) or     
without cause. Upon Mr. Burns' death or disability prior to June 1, 1998, he or 
his estate will receive any salary accrued through the termination date. If,    
prior to June 1, 1998, Mr. Burns' employment is terminated by the Company for   
cause, or he terminates his employment other than for cause, he will receive his
salary accrued through the termination date. In the event                       

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Mr. Burns terminates his employment for cause or the Company terminates his     
employment without cause prior to June 1, 1998, he will be entitled to his base 
salary through June 1, 1998.                                                    

NEW EQUITY INCENTIVE PLAN                                                       

  The Company intends to establish a long-term incentive compensation plan
covering the Company's executives and selected other key management employees   
(the 'New Equity Incentive Plan'). Pursuant to the proposed New Equity Incentive
Plan, a participant is expected to be granted incentive compensation awards     
entitling the participant to a long-term incentive bonus if the Company and the 
participant achieve certain performance objectives during the performance period
specified in the New Equity Incentive Plan.                                     

Non-cash accruals and cash expenses made pursuant to the New Equity   
Incentive Plan will reduce the Company's Consolidated Net Income in the year    
such accruals and expenses are incurred. Pursuant to the terms of the           
Certificate of Designation and the Exchange Indenture, non-cash accruals and    
cash expenses made pursuant to the New Equity Incentive Plan will be added back 
(without duplication and to the extent such accruals or expenses reduce net     
income) to the Company's Consolidated Net Income (as defined) and Consolidated  

EBITDA (as defined) in the manner described herein, thereby increasing the      
Company's capacity to incur Indebtedness and make Restricted Payments (as       
defined). See 'Description of New Preferred Stock and Exchange Debentures.'     

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OWNERSHIP OF CAPITAL STOCK

The following table sets forth information regarding the beneficial   
ownership of the common stock of the Company by (i) each director of the        
Company, (ii) the executive officers of the Company listed under the caption    
'Management' and (iii) each person known by the Company to beneficially own in  
excess of 5% of the outstanding shares of the Company's common stock as of      
December 31, 1996. The number of authorized shares of the Company's capital     
stock as of December 31, 1996 was 10,150,000, consisting of 10,000,000 shares of
common stock and 150,000 shares of preferred stock.                             

                                                        [Enlarge/Download Table]

                                                                                          NUMBER OF  PERCENT OF
                                                               NUMBER OF     PERCENT OF     FULLY      FULLY   
                                                                SHARES         SHARES      DILUTED    DILUTED  
NAME                                                             OWNED       OUTSTANDING   SHARES      SHARES  
-------------------------------------------------------------  ---------     -----------  ---------  ----------
                                                                                                               
Lancer Industries Inc.(1) ...................................  7,805,000         100%     7,805,000      100%  
  450 Lexington Avenue, Suite 3350                                                                             
  New York, New York 10017                                                                                     

Chase Manhattan Bank, .......................................         --(2)       --             --       --   
  as Trustee of the Lancer Industries Inc. Employee Stock                                                      
  Ownership Plan                                                                                               
  1 Chase Manhattan Plaza                                                                                      
  New York, New York 10005                                                                                     

Peter A. Joseph .............................................         --(2)       --             --       --   

Paul S. Levy ................................................         --(2)       --             --       --   

W.B. Lechman ................................................         --          --             --       --   

Jess C. Ball ................................................         --          --             --       --   

Kenneth A. Burns ............................................         --          --             --       --   

Richard A. Bush .............................................         --          --             --       --   

James R. Dammon .............................................         --          --             --       --   

Michael M. Manty ............................................         --          --             --       --   

Frederick G. Sharp ..........................................         --          --             --       --   

All directors and executive officers ........................         --          --             --       --   
  as a group (9 persons)                                                                                       

------------------                                                              
(1) 100% of the common stock of the Company is directly owned by Lancer. Lancer 
has pledged such shares to the lender under the GE Credit Agreement (as 
defined) as security for the Company's obligations thereunder.          

(2) Lancer, which is currently the owner of 100% of the capital stock of the    
Company, has one class of common stock, Class B Common Stock, with a par
value of $478.44 per share. 10.05 shares, or approximately 57.1%, of the
Class B Common Stock, are held by the ESOP. Messrs. Joseph and Levy are 
  participants in the ESOP. Each of Messrs. Joseph and Levy have sole voting
   power with respect to approximately 4.12 shares of the Class B Common Stock
   held by the ESOP; and other participants in the ESOP have sole voting power
   with respect to approximately 1.81 shares of such stock. Messrs. Joseph and
   Levy, and in limited circumstances the ESOP trustee, have shared investment
 power with respect to 10.05 shares of such stock. Messrs. Joseph and Levy
have been allocated an aggregate of approximately 8.24 shares, or       
approximately 82.0%, of the Class B Common Stock held by the ESOP       
    (representing 46.8% of the Lancer Class B Common Stock outstanding). Each of
    Messrs. Joseph and Levy disclaim beneficial ownership of any shares of Class
  B Common Stock held by the ESOP that have been allocated to other parties.
In addition, each of Messrs. Joseph and Levy have the right to purchase 
   approximately 0.26 shares of Class B Common Stock, or approximately 3.0% of
the Class B Common Stock in the aggregate. In addition, certain funds   
  affiliated with Mutual Series Fund Inc. beneficially own the remaining 40%
of the Lancer Class B Common Stock.                                     

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RELATED TRANSACTIONS

CONTROLLING STOCKHOLDERS                                                        

    The Company is a wholly-owned subsidiary of Lancer. A majority of Lancer's
voting stock is owned by the ESOP. Two participants in the ESOP, Messrs. Peter  
A. Joseph and Paul S. Levy, collectively have the power to direct the voting of 
approximately 46.8% of Lancer's common stock. In addition, each of Messrs.      
Joseph and Levy have the right to purchase an aggregate of approximately 3.0% of
Lancer's common stock. As a result, these two participants in the ESOP have the 
ability to exercise control over the current and future business and affairs of 
the Company, including the ability to cause or prevent a change of control of   
the Company, through their ability to elect the Company's Board of Directors and
their voting power with respect to actions requiring stockholder approval.      

TAX SHARING AGREEMENT                                                           

The Company is included in the affiliated group of which Lancer is the
common parent, and the Company's federal taxable income and loss will be        

included in such group's consolidated tax return filed by Lancer. The Company   
and Lancer have entered into the Tax Sharing Agreement pursuant to which the    
Company has agreed to pay to Lancer amounts equal to the taxes that the Company 
would otherwise have to pay if it were to file separate federal, state or local 
tax returns (including amounts determined to be due as a result of a            
redetermination of the tax liability of Lancer). In addition, pursuant to the   
Tax Sharing Agreement, to the extent that the Company's separate return         
liability is absorbed by net operating losses or other credits and deductions of
Lancer or its subsidiaries (other than the Company and its subsidiaries), Lancer
will make a capital contribution to the Company in an amount equal to 50% of    
such separate return liability. Under certain circumstances, however, such as   
the Company ceasing to be a member of the Lancer consolidated group or the      
disallowance by the IRS of the use of Lancer's net operating losses, Lancer no  
longer would be required to make capital contributions under the Tax Sharing    
Agreement.                                                                      

OTHER ARRANGEMENTS WITH LANCER                                                  

    From time to time, Lancer incurs legal, accounting and miscellaneous other
expenses on behalf of the Company. In fiscal 1996, 1995 and 1994, the Company   
made aggregate payments to Lancer in respect of such expenses incurred by Lancer
on the Company's behalf in the amounts of approximately $0.6 million, $0.6      
million and $0.5 million, respectively.                                         

     On December 5, 1996, the Company declared and paid a $17.0 million dividend
to Lancer (the '1996 Dividend') and made a $3.0 million advance to Lancer (the  
'1996 Advance'). On February 10, 1997, the Company declared and paid a dividend 
to Lancer of approximately $3.1 million, the proceeds of which dividend were    
used by Lancer to repay in full the principal amount of the 1996 Advance,       
together with all interest accrued thereon through the repayment date.          

    The proceeds of the 1996 Dividend and the 1996 Advance were used by Lancer
to redeem $20.0 million aggregate liquidation preference of the Lancer Preferred
Stock. As of December 31, 1996 (after giving effect to the $20.0 million        
redemption made in December 1996), there was approximately $53 million aggregate
liquidation preference of Lancer Preferred Stock outstanding. On March 12, 1997,
Lancer redeemed approximately $47.7 million aggregate liquidation preference of 
the Lancer Preferred Stock from the proceeds of the dividend paid by the Company
from the net proceeds of the Initial Offering. Lancer expects that all remaining
shares of Lancer Preferred Stock will be redeemed from Lancer's available cash. 

FIRST COLONY FARMS MERGER                                                       

 On March 27, 1997, First Colony Farms, Inc., a Delaware corporation and
wholly-owned subsidiary of Lancer ('First Colony'), merged with and into the    
Company, with the Company being the surviving corporation of the merger.        
Immediately prior to the merger, First Colony had (i) no known liabilities      
(including contingent liabilities) and (ii) assets consisting of approximately  
$10,000 in cash and certain net operating loss carry forwards. The merger       
complied with the requirements of the Existing Indenture and the Certificate of 
Designation governing the Existing Preferred Stock. In addition, the agent and  
lender under the Credit Agreement consented to the merger. Following the merger,
the Company will continue to make payments to Lancer under the Tax Sharing      
Agreement in accordance with its past practice.                                 

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DESCRIPTION OF EXISTING INDEBTEDNESS

GE CREDIT AGREEMENT                                                             

    The Company, T-H Licensing and General Electric Capital Corporation ('GE')
are party to the Credit Agreement, dated as of July 7, 1993, as amended (the 'GE
Credit Agreement'). The Credit Agreement provides for (i) $33.0 million in term 
loans (the 'Term Loans') and (ii) a $20.0 million revolving credit facility (the
'Revolving Credit Facility' and, together with the Term Loans, the 'Credit      
Facilities'), including up to $1.0 million under a letter of credit subfacility,
subject to borrowing base availability. At the Company's option, the Revolving  
Credit Facility commitment may be increased by up to $5.0 million, subject to   
the satisfaction of certain conditions. As of December 31, 1996 and March 31,   
1997, total borrowings under the Credit Facilities were $33.0 million and       
approximately $29.3 million, respectively, comprising $33.0 million and         
approximately $29.3 million in Term Loans, respectively, and no borrowings under
the Revolving Credit Facility as of such dates. The following description of the
Credit Facilities does not purport to be complete and is qualified in its       
entirety by reference to the GE Credit Agreement, a copy of which is available  
from the Company upon request.                                                  

The Term Loans mature on December 31, 2000 and commitments under the  
Revolving Credit Facility terminate on July 1, 2001. The Term Loans are payable 
quarterly on February 15, May 15, August 15 and November 15 of each year        
beginning in 1997 as follows: $3.0 million in 1997, $4.0 million in 1998, $7.0  
million in 1999 and $9.0 million in 2000. The balance of the Term Loans, in the 
amount of $7.0 million (after giving effect to a $3.0 million prepayment in     
March 1997) is payable on December 31, 2000.                                    

     Interest under the Credit Facilities is payable at one of the two specified
rates, as selected by the Company, as follows: (i) 0.75% per annum over the     
higher of (x) the highest prime rate announced by any of the five largest member
banks of the New York Clearing Association or (y) the published rate for        
ninety-day dealer commercial paper or (ii) 2.25% per annum over a rate          
calculated based on the one, two, three or six month eurodollar rate. Overdue   
amounts under the Credit Facilities bear interest at the applicable interest    
rate plus 2.00%. On or after January 1, 1998, the applicable margin on          
eurodollar rate loans will vary from 1.75% per annum to 2.25% per annum (in the 
case of the Term Loans) and from 1.50% per annum to 2.00% per annum (in the case
of advances under the Revolving Credit Facility) based on the ratio of the      
Company's Consolidated EBITDA to Consolidated Net Interest Expense for the      
preceding fiscal quarter.                                                       

    The Company has agreed to pay certain customary fees and commissions to GE
under the Credit Agreement, including (i) an unused facility fee based on the   
average unused daily balance of the Revolving Credit Facility, (ii) an annual   
administrative fee and (iii) letter of credit fees based on the outstanding face
amount of letters of credit arranged for under the Credit Agreement, together   
with all fees paid by GE to any issuing bank in respect of the letter of credit 

subfacility.                                                                    

  The GE Credit Agreement permits the Company to make optional prepayments
under the Credit Facilities upon, in certain cases, payment of certain premiums,
costs and expenses. In addition, the Credit Agreement requires the Company to   
make annual prepayments on the Term Loans in an amount equal to 50% of the      
Company's Consolidated Excess Cash Flow (as defined in the Credit Agreement)    
applied in the inverse order of maturity of the remaining installments due on   
the Term Loans. In addition, the Company is required to make prepayments on the 
Term Loans in an amount equal to the net proceeds received from (i) permitted   
dispositions of assets out of the ordinary course of business by the Company or 
its subsidiaries, (ii) 50% of net proceeds from permitted equity offerings by   
the Company or its subsidiaries (excluding the net proceeds from this Offering) 
and (iii) pension plan reversions, all applied in inverse order of maturity of  
the remaining installments due on the Term Loans.                               

    Borrowings under the Credit Facilities are guaranteed by T-H Licensing and
any future subsidiaries of the Company. Indebtedness under the Credit Facilities
is secured by a pledge of the Company's common stock owned by Lancer and a lien 
on, and security interest in, substantially all of the Company's assets,        
including, without limitation, all capital stock of subsidiaries, real estate,  
equipment, inventory, accounts receivable and cash. The guarantee by T-H        
Licensing and any other subsidiary guarantor is secured by substantially all    
personal property of such guarantor.                                            

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    The GE Credit Agreement contains certain restrictive covenants that, among
other things, impose limitations (subject to certain exceptions) on the Company 
(and in certain cases the Company's subsidiaries) with respect to: (i) certain  
dispositions of property; (ii) restrictions on certain fundamental changes,     
including, among other things, mergers, consolidations, liquidations, wind-ups  
or dissolutions, transfers of all or substantially all of the assets of the     
Company or its subsidiaries, and certain acquisitions; (iii) dividend payments  
and other distributions with respect to the Company's capital stock, payments   
with respect to subordinated indebtedness and purchases or redemptions of       
warrants or securities; (iv) restrictions on certain amendments to the Existing 
Indenture and, following the Offering, the Certificate of Designation; (v) the  
creation or incurrence of certain liens; (vi) the incurrence of indebtedness;   
(vii) transactions with affiliates; (viii) sale and leaseback transactions; (ix)
investments, loans, advances or capital contributions by the Company; (x) the   
maintenance of bank accounts; (xi) the cancellation of any material claim; (xii)
the taking, or the failure to take, certain actions with respect to the Tax     
Sharing Agreement; (xiii) capital expenditures exceeding certain specified      
amounts; and (xiv) operating leases. The GE Credit Agreement also requires that 
(i) the ratio of consolidated current assets to consolidated current            
liabilities, (ii) the ratio of Consolidated Cash Flow to Consolidated Fixed     
Charges and (iii) the ratio of Consolidated EBITDA to Consolidated Net Interest 
Expense not be less than certain specified amounts.                             

 The GE Credit Agreement also contains (i) certain customary affirmative
covenants (including a covenant requiring the Company to deposit amounts        

collected in respect of inventory and accounts receivable on a daily basis into 
certain lockbox accounts), (ii) certain customary events of default (including  
events of default upon the occurrence of any material breach by the Company     
under the Tax Sharing Agreement, any Change of Control (as defined below) and   
the Company's failure to pay when due, upon acceleration or otherwise, $3       
million or more of indebtedness, including indebtedness in respect of the       
Existing Notes) and (iii) certain customary representations and warranties.     

  In February 1997, the Company and GE entered into an amendment to the GE
Credit Agreement to, among other things, permit the Initial Offering and the    
Exchange Offer and the payment of cash dividends on the Preferred Stock.        

CERTAIN DEFINITIONS                                                         

The following definitions are used in the GE Credit Agreement:        

'Change of Control' means (a) the sale, in one or a series of related 
transactions, of all or substantially all of the Company's assets as an entirety
to any person or related group of persons, (b) except as permitted under the GE 
Credit Agreement, the merger or consolidation of the Company with or into       
another person or the consolidation or merger of any other person with or into  
the Company, (c) the failure of Lancer at any time (i) to maintain in the       
aggregate a direct or indirect beneficial interest in the Company at least equal
to 50% of the entire beneficial equity interest held by all persons in the      
Company or (ii) to own beneficially, directly or indirectly, capital stock      
representing voting control of the Company or (d) a 'Change of Control' as      
defined in the Existing Indenture or any other indenture or governing instrument
with respect to any subordinated indebtedness.                                  

   'Consolidated Cash Flow'  means, for any period, without duplication, the
sum of: (a) Consolidated EBITDA for such period, plus (b) all payments made by  
the Company and its subsidiaries pursuant to operating leases during such       
period, less (c) capital expenditures made by the Company and its subsidiaries  
during such period, plus (d) all tax capital contributions made to the Company  
during such period and all other capital contributions made to the Company      
during such period by any of its affiliates, in each case determined on a       
consolidated basis in accordance with generally accepted accounting principles. 

   'Consolidated EBITDA'  means, for any period, the sum of (a) Consolidated
Net Income for such period, plus (b) Consolidated Net Interest Expense for such 
period, plus (c) all taxes computed on a stand-alone basis for the Company and  
its subsidiaries accrued for such period on or measured by income, to the extent
treated as expense in the determination of Consolidated Net Income for such     
period, plus (d) all depreciation and amortization of fees or intangibles of any
kind for such period, to the extent treated as expense in the determination of  
Consolidated Net Income for such period, in each case determined on a           
consolidated basis in accordance with generally accepted accounting principles. 

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  'Consolidated Excess Cash Flow'  means, for any period, (a) Consolidated
Cash Flow for such period, plus (b) any decrease in Consolidated Working Capital

of the Company and its subsidiaries during such period, plus (c) the cash       
portion of extraordinary gains during such period, less (d) any increase in     
Consolidated Working Capital of the Company and its subsidiaries during such    
period, less (e) consolidated Fixed Charges (exclusive of Consolidated Net      
Interest Expense) for such period, less (f) net cash interest expense for such  
periods, less (g) the Cash portion of extraordinary losses for such period, less
(h) Permitted Dividends (as defined in the GE Credit Agreement) declared and    
paid during such period.                                                        

   'Consolidated Fixed Charges'  means, for any period, without duplication,
the sum of (a) Consolidated Net Interest Expense for such period (including,    
without limitation, under capital leases), plus (b) scheduled amortization      
during such period of the principal balance of the Term Loan, plus (c) all      
payments made by the Company and its subsidiaries pursuant to operating leases  
during such period, plus (d) all taxes payable by the Company and its           
subsidiaries during such period, including all amounts paid or payable to Lancer
under the Tax Sharing Agreement during such period (without giving effect to any
corresponding capital contribution or other reduction therein provided for in   
the Tax Sharing Agreement), plus (e) all payments made by the Company in cash   
during such period as permitted under the restricted payments provisions of the 
GE Credit Agreement (to the extent not added or subtracted in calculating       
Consolidated Cash Flow), in each case determined on a consolidated basis in     
accordance with generally accepted accounting principles.                       

    'Consolidated Net Income'  means, for any period, the net income (or loss)
after taxes of the Company and its subsidiaries for such period, determined on a
consolidated basis in accordance with generally accepted accounting principles, 
but without giving effect to extraordinary losses or gains for such period or to
non-operating or non-cash items of income or expense (or expenses relating to   
LIFO reserves) during such period, and excluding net income (or loss) of any    
person other than the Company and its subsidiaries that is included in the      
determination of such net income (or loss) except to the extent of dividends or 
distributions paid to the Company or its subsidiaries.                          

'Consolidated Net Interest Expense'  means, for any period, the gross 
interest expense of the Company and its subsidiaries for such period, plus (a)  
the portion of the upfront costs and expenses for interest rate contracts (to   
the extent not included in gross interest expense) fairly allocated to such     
interest rate contracts as expenses for such period, less interest income (to   
the extent not deducted from gross interest expense), interest rate contracts   
payments received and amortized debt discount and deferred financing fees (to   
the extent not deducted from gross interest expense) of the Company and its     
subsidiaries for such period, in each case determined on a consolidated basis in
accordance with generally accepted accounting principles.                       

 'Consolidated Working Capital'  means consolidated current assets minus
consolidated current liabilities.                                               

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EXISTING NOTES                                                                  

The following summary of certain terms of the Existing Notes and the  
Existing Indenture does not purport to be complete and is subject to, and       
qualified in its entirety by, reference to the provisions of the Existing       
Indenture, including the definitions of certain terms contained therein and     
those terms made part of the Existing Indenture by reference to the Trust       
Indenture Act of 1939, as amended. Copies of the Existing Indenture are         
available from the Company upon request.                                        

   As of December 31, 1996, the aggregate principal amount of Existing Notes
outstanding was $85.0 million. The Existing Notes are general unsecured         
obligations of the Company, subordinated in right of payment to all existing and
future 'senior indebtedness' (as defined in the Existing Indenture), including  
borrowings under the Credit Agreement. The Existing Notes will mature on July 1,
2001. The Existing Notes bear interest at a rate of 11.375% per annum, payable  
semiannually in arrears on January 1 and July 1 of each year.                   

     The Existing Notes are redeemable at the option of the Company, in whole or
in part, at any time on or after July 1, 1998 at a redemption price equal to    
104.250% of the principal amount thereof during the twelve-month period         
beginning on July 1, 1998, 102.125% of the principal amount thereof during the  
twelve-month period beginning on July 1, 1999 and 100% of the principal amount  
thereof after July 1, 2000, together with accrued and unpaid interest to the    
redemption date.                                                                

 Under the Existing Indenture, in the event of a 'change of control' (as
defined below) the Company will be required to make an offer to purchase all    
outstanding Existing Notes at a price equal to 101% of the principal amount     
thereof plus accrued and unpaid interest to the date of purchase. The Existing  
Indenture provides that a 'change of control' will occur in the event that any  
one or more of the following events occurs: (a) any 'person' or 'group' (as such
terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of    
1934, as amended (the 'Exchange Act'), excluding Permitted Holders, is or       
becomes the 'beneficial owner' (as defined in Rules 13d-3 and 13d-5 under the   
Exchange Act, except that a person shall be deemed to have 'beneficial          
ownership' of all securities that such person has the right to acquire, whether 
such right is exercisable immediately or only after the passage of time),       
directly or indirectly, of more than 50% of the total Voting Stock of the       
Company; (b) the Company consolidates with, or merges with or into, another     
person or sells, assigns, conveys, transfers, leases or otherwise disposes of   
all or substantially all of its assets to any person, or any person consolidates
with, or merges with or into, the Company, in any such event pursuant to a      
transaction in which the outstanding Voting Stock of the Company is converted   
into or exchanged for cash, securities or other property, other than any such   
transaction where (i) the outstanding Voting Stock of the Company is converted  
into or exchanged for (1) Voting Stock (other than Redeemable Capital Stock) of 
the surviving or transferee corporation or (2) cash, securities and other       
property in an amount which could be paid by the Company as a restricted payment
under the Existing Indenture and (ii) immediately after such transaction no     
'person' or 'group' (as such terms are used in Sections 13(d) and 14(d) of the  
Exchange Act), excluding Permitted Holders, is the 'beneficial owner' (as       
defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a person   
shall be deemed to have 'beneficial ownership' of all securities that such      
person has the right to acquire, whether such right is exercisable immediately  
or only after the passage of time), directly or indirectly, of more than 50% of 

the total Voting Stock of the surviving or transferee corporation; or (c) during
any consecutive two-year period, individuals who at the beginning of such period
constituted the Board of Directors of the Company (together with any new        
directors whose election by such Board of Directors or whose nomination for     
election by the stockholders of the Company was approved by a vote of 66 2/3% of
the directors then still in office who were either directors at the beginning of
such period or persons whose election as directors or nomination for election   
was previously so approved) cease for any reason to constitute a majority of the
Board of Directors of the Company then in office. 'Redeemable Capital Stock'    
means any class or series of Capital Stock that, whether by its terms, by the   
terms of any security into which it is convertible or exchangeable or by contact
or otherwise, is, or upon the happening of an event or passage of time would be,
required to be redeemed prior to any Stated Maturity (as defined) of the        
Existing Notes or is redeemable at the option of the holder thereof at any time 
prior to any Stated Maturity of the Existing Notes, or, at the option of the    
holder thereof, is convertible into or exchangeable for debt securities at any  
time prior to any Stated Maturity of the Existing Notes. 'Stated Maturity'      
means, when used with respect to any Existing Note or any installment of        
interest thereon, the date specified in such Existing Note as the fixed date on 
which any principal of such Existing Note or such installment of interest is due
and payable, and when used with respect to any other Indebtedness or            

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any installments of interest thereon, means any date specified in the instrument
governing such Indebtedness as the fixed date on which the principal of such    
Indebtedness, or such installment of interest thereon, is due and payable.      

    The Existing Indenture contains certain covenants that, among other things
(and subject to certain exceptions), restrict the incurrence of additional      
Indebtedness, the payment of dividends on, and redemptions of capital stock and 
subordinated indebtedness, the making of investments, transactions with         
affiliates, the sale of certain assets, the issue and sale of preferred stock of
Restricted Subsidiaries, the incurrence of liens, the incurrence of restrictions
on the ability of Restricted Subsidiaries to pay dividends or other payments,   
the making of certain guarantees by Restricted Subsidiaries, the incurrence of  
other senior subordinated indebtedness, the issuance and sale of preferred stock
by Restricted Subsidiaries, and the ability of the Company to engage in certain 
mergers or consolidations or to transfer all or substantially all of its assets 
to another person. In addition, the Existing Indenture contains certain         
customary events of default (including upon the Company's failure to pay when   
due, upon acceleration or otherwise, $5 million or more of indebtedness,        
including indebtedness under the Credit Agreement).                             

DESCRIPTION OF CAPITAL STOCK

  Immediately prior to the Exchange Offer, the authorized capital stock of
the Company will consist of (i) 10,000,000 shares of common stock, par value    
$.01 per share, of which 7,805,000 shares were issued and outstanding and owned 
of record and beneficially by Lancer and (ii) 250,000 shares of preferred stock,
consisting of (a) 50,000 shares of Existing Preferred Stock issued and          
outstanding, (b) 75,000 shares of Existing Preferred Stock reserved for issuance

pursuant to the terms of the Certificate of Designation governing the Existing  
Preferred Stock and (c) 125,000 shares of New Preferred Stock reserved for      
issuance in connection with the Exchange Offer and pursuant to the terms of the 
Certificate of Designation governing the New Preferred Stock.                   

     100% of the issued and outstanding shares of the Company's common stock are
owned by Lancer. The Company issues common stock to Lancer from time to time in 
connection with capital contributions made by Lancer under the Tax Sharing      
Agreement. Upon liquidation, dissolution or winding up of the Company, the      
holders of the Company's common stock are entitled to ratably share in all      
assets available for distribution after payment in full of creditors and holders
of the New Preferred Stock. Lancer has pledged the shares of the Company's      
common stock that it owns to GE as security for the Company's obligations under 
the GE Credit Agreement. Subject to the terms of the Company's existing debt    
agreements and the terms of the Certificate of Designation, the Company may pay 
dividends on its common stock if, when and as declared by the Board of Directors
from legally available funds.                                                   

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THE EXCHANGE OFFER

     The summary herein of certain provisions of the Registration Agreement does
not purport to be complete and reference is made to the provisions of the       
Registration Agreement, which has been filed as an exhibit to the Registration  
Statement and a copy of which is available as set forth under the heading       
'Available Information.'                                                        

TERMS OF THE EXCHANGE OFFER                                                     

General                                                                         

     In connection with the issuance of the Existing Preferred Stock pursuant to
a Securities Purchase Agreement, dated as of March 7, 1997, between the Company 
and the Initial Purchaser, the Initial Purchaser and their respective assignees 
became entitled to the benefits of the Registration Agreement.                  

 Under the Registration Agreement, the Company has agreed (i) to use its
best efforts to file with the Commission within 30 days of the Issue Date, the  
Registration Statement of which this Prospectus is a part with respect to a     
registered offer to exchange the Existing Preferred Stock for the New Preferred 
Stock, (ii) to use its best efforts to cause the Registration Statement to be   
declared effective under the Securities Act within 150 days after the Issue Date
and (iii) to use its best efforts to consummate the Exchange Offer within 180   
calendar days after the Issue Date. The Company will keep the Exchange Offer    
open for not less than 30 days after the date notice of the Exchange Offer is   
mailed to holders of the Existing Preferred Stock. The Exchange Offer being made
hereby, if commenced and consummated within the time periods described in this  
paragraph, will satisfy those requirements under the Registration Agreement.    

   Upon the terms and subject to the conditions set forth in this Prospectus

and in the Letter of Transmittal, all Existing Preferred Stock validly tendered 
and not withdrawn prior to 5:00 p.m., New York City time, on the Expiration Date
will be accepted for exchange. New Preferred Stock will be issued in exchange   
for an equal liquidation preference of outstanding Existing Preferred Stock     
accepted in the Exchange Offer. Existing Preferred Stock may be tendered only in
integral multiples of $1,000. This Prospectus, together with the Letter of      
Transmittal, is being sent to all registered holders as of June 11, 1997. The   
Exchange Offer is not conditioned upon any minimum principal amount of Existing 
Preferred Stock being tendered for exchange. However, the obligation to accept  
Existing Preferred Stock for exchange pursuant to the Exchange Offer is subject 
to certain conditions as set forth herein under '--Conditions.'                 

   Existing Preferred Stock shall be deemed to have been accepted as validly
tendered when, as and if the Company has given oral or written notice thereof to
the Exchange Agent. The Exchange Agent will act as agent for the tendering      
holders of Existing Preferred Stock for the purposes of receiving the New       
Preferred Stock and delivering New Preferred Stock to such holders.             

 Based on interpretations by the Staff of the Commission as set forth in
no-action letters issued to third parties (including Exxon Capital Holding Corp.
(available May 13, 1988), Morgan Stanley & Co. Incorporated (available June 5,  
1991) and K-III Communications Corporation (available May 14, 1993) the Company 
believes that the New Preferred Stock issued pursuant to the Exchange Offer may 
be offered for resale, resold and otherwise transferred by any holder thereof   
(other than any such holder that is a broker-dealer or an 'affiliate' of the    
Company within the meaning of Rule 405 under the Securities Act) without        
compliance with the registration and prospectus delivery provisions of the      
Securities Act, provided that (i) such New Preferred Stock is acquired in the   
ordinary course of such holder's business, (ii) at the time of the commencement 
of the Exchange Offer such holder has no arrangement with any person to         
participate in a distribution of such New Preferred Stock and (iii) such holder 
is not engaged in, and does not intend to engage in, a distribution of such New 
Preferred Stock. The Company has not sought, and does not intend to seek, a     
no-action letter from the Commission with respect to the effects of the Exchange
Offer, and there can be no assurance that the Staff would make a similar        
determination with respect to the New Preferred Stock as it has in such         
no-action letters.                                                              

   By tendering Existing Preferred Stock in exchange for New Preferred Stock
and executing the Letter of Transmittal, each holder will represent to the      
Company that: (i) it is not an affiliate of the Company, (ii) any New Preferred 
Stock to be received by it will be acquired in the ordinary course of such      
holder's business and (iii) at the time of the commencement of the Exchange     
Offer it had no arrangement with any person to participate in a distribution of 
the New Preferred Stock and, if such holder is not a broker-dealer, it is not   
engaged in, and does                                                            

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not intend to engage in, a distribution of New Preferred Stock. If a holder of  
Existing Preferred Stock is unable to make the foregoing representations, such  

holder may not rely on the applicable interpretations of the Staff of the       
Commission and must comply with the registration and prospectus delivery        
requirements of the Securities Act in connection with any secondary resale      
transaction unless such sale is made pursuant to an exemption from such         
requirements.                                                                   

     Each broker-dealer that receives New Preferred Stock for its own account in
exchange for Existing Preferred Stock where such Existing Preferred Stock was   
acquired by such broker-dealer as a result of market-making or other trading    
activities, must acknowledge that it will deliver a prospectus in connection    
with any resale of such New Preferred Stock. See 'Plan of Distribution.'        

Upon consummation of the Exchange Offer, subject to certain limited   
exceptions, holders of Existing Preferred Stock who do not exchange their       
Existing Preferred Stock for New Preferred Stock in the Exchange Offer will no  
longer be entitled to registration rights under the Registration Agreement and  
will not be able to offer or sell their Existing Preferred Stock, unless such   
Existing Preferred Stock is subsequently registered under the Securities Act    
(which, subject to certain limited exceptions, the Company will have no         
obligation to do), except pursuant to an exemption from, or in a transaction not
subject to, the Securities Act and applicable state securities laws.            

Expiration Date; Extensions; Amendments; Termination                            

The term 'Expiration Date' shall mean July 16, 1997 (30 calendar days 
following the commencement of the Exchange Offer), unless the Company, in its   
sole discretion, extends the Exchange Offer, in which case the term 'Expiration 
Date' shall mean the latest date to which the Exchange Offer is extended.       
Notwithstanding any extension of the Exchange Offer, if the Exchange Offer is   
not consummated within 180 days after the Issue Date, the interest rate borne by
the Existing Preferred Stock will increase as provided in the Certificate of    
Designation governing the Existing Preferred Stock.                             

   To extend the Expiration Date, the Company will notify the Exchange Agent
of any extension by oral or written notice and will notify the holders of the   
Existing Preferred Stock by means of a press release or other public            
announcement prior to 9:00 A.M., New York City time, on the next business day   
after the previously scheduled Expiration Date. Such announcement may state that
the Company is extending the Exchange Offer for a specified period of time.     

The Company reserves the right (i) to delay acceptance of any Existing
Preferred Stock, to extend the Exchange Offer or to terminate the Exchange Offer
and not permit acceptance of Existing Preferred Stock not previously accepted if
any of the conditions set forth herein under '--Conditions' shall have occurred 
and shall not have been waived by the Company, by giving oral or written notice 
of such delay, extension or termination to the Exchange Agent, or (ii) to amend 
the terms of the Exchange Offer in any manner deemed by it to be advantageous to
the holders of the Existing Preferred Stock. Any such delay in acceptance,      
extension, termination or amendment will be followed as promptly as practicable 
by oral or written notice thereof to the Exchange Agent. If the Exchange Offer  
is amended in a manner determined by the Company to constitute a material       
change, the Company will promptly disclose such amendment in a manner reasonably

calculated to inform the holders of the Existing Preferred Stock of such        
amendment.                                                                      

    Without limiting the manner in which the Company may choose to make public
announcement of any delay, extension, amendment or termination of the Exchange  
Offer, the Company shall have no obligations to publish, advertise, or otherwise
communicate any such public announcement, other than by making a timely release 
to an appropriate news agency.                                                  

DIVIDENDS ON THE NEW PREFERRED STOCK                                            

  The New Preferred Stock will accumulate dividends at the rate of 11 1/4%
per annum from the last dividend payment date on which dividends were paid on   
the shares of Existing Preferred Stock surrendered in exchange therefor or, if  
no dividends have been paid, from the Issue Date of the Existing Preferred      
Stock. Dividends on the New Preferred Stock are payable on March 15 and         
September 15 of each year, commencing September 15, 1997.                       

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PROCEDURES FOR TENDERING                                                        

    To tender in the Exchange Offer, a holder must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, have the signatures thereon      
guaranteed if required by the Letter of Transmittal, and mail or otherwise      
deliver such Letter of Transmittal or such facsimile, together with any other   
required documents, to the Exchange Agent prior to 5:00 p.m., New York City     
time, on the Expiration Date. In addition, either (i) a timely confirmation of a
book-entry transfer (a 'Book-Entry Confirmation') of such Existing Preferred    
Stock into the Exchange Agent's account at The Depository Trust Company (the    
'Book-Entry Transfer Facility') pursuant to the procedure for book-entry        
transfer described below, must be received by the Exchange Agent prior to the   
Expiration Date or (ii) the holder must comply with the guaranteed delivery     
procedures described below. Holders can execute the tender through the DTC      
Automated Tender Offer Program ("ATOP") for which the transaction will be       
eligible.  DTC participants should transmit their acceptance to DTC which will  
verify the acceptance, execute a book-entry delivery to the Exchange Agent's    
account at DTC and send an Agent's Message (as defined herein) to the Exchange  
Agent for its acceptance.  See "--Book-Entry Transfer." THE METHOD OF DELIVERY  
OF LETTERS OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS, INCLUDING DELIVERY  
THROUGH DTC AND ANY ACCEPTANCE OF AGENT'S MESSAGES TRANSMITTED THROUGH ATOP,    
IS AT THE ELECTION AND RISK OF THE HOLDERS. IF SUCH DELIVERY IS BY MAIL, IT IS  
RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT         
REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE   
TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR OTHER REQUIRED DOCUMENTS SHOULD BE
SENT TO THE COMPANY. Delivery of all documents must be made to the Exchange     
Agent at its address set forth below. Holders may also request their respective 
brokers, dealers, commercial banks, trust companies or nominees to effect such  
tender for such holders.                                                        

The tender by a holder of Existing Preferred Stock will constitute an 
agreement between such holder and the Company in accordance with the terms and  

subject to the conditions set forth herein and in the Letter of Transmittal. Any
beneficial owner whose Existing Preferred Stock is registered in the name of a  
broker, dealer, commercial bank, trust company or other nominee and who wishes  
to tender should contact such registered holder promptly and instruct such      
registered holder to tender on his behalf.                                      

 Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by any member firm of a registered national     
securities exchange or of the National Association of Securities Dealers, Inc., 
a commercial bank or trust company having an office or correspondent in the     
United States or an 'eligible guarantor' institution within the meaning of Rule 
17Ad-15 under the Exchange Act (each an 'Eligible Institution') unless the      
Existing Preferred Stock tendered pursuant thereto is tendered for the account  
of an Eligible Institution.                                                     

If the Letter of Transmittal is signed by trustees, executors,        
administrators, guardians, attorneys-in-fact, officers of corporations or others
acting in a fiduciary or representative capacity, such person should so indicate
when signing, and unless waived by the Company, evidence satisfactory to the    
Company of their authority to so act must be submitted with the Letter of       
Transmittal.                                                                    

All questions as to the validity, form, eligibility (including time of
receipt) and withdrawal of the tendered Existing Preferred Stock will be        
determined by the Company in its sole discretion, which determination will be   
final and binding. The Company reserves the absolute right to reject any and all
Existing Preferred Stock not properly tendered or any Existing Preferred Stock  
which, if accepted, would, in the opinion of counsel for the Company, be        
unlawful. The Company also reserves the absolute right to waive any             
irregularities or conditions of tender as to particular Existing Preferred      
Stock. The Company's interpretation of the terms and conditions of the Exchange 
Offer (including the instructions in the Letter of Transmittal) will be final   
and binding on all parties. Unless waived, any defects or irregularities in     
connection with tenders of Existing Preferred Stock must be cured within such   
time as the Company shall determine. Neither the Company, the Exchange Agent nor
any other person shall be under any duty to give notification of defects or     
irregularities with respect to tenders of Existing Preferred Stock, nor shall   
any of them incur any liability for failure to give such notification. Tenders  
of Existing Preferred Stock will not be deemed to have been made until such     
irregularities have been cured or waived. Any Existing Preferred Stock received 
by the Exchange Agent that is not properly tendered and as to which the defects 
or irregularities have not been cured or waived will be returned without cost to
such holder by the Exchange Agent, unless otherwise provided in the Letter of   
Transmittal, as soon as practicable following the Expiration Date.              

     In addition, the Company reserves the right in its sole discretion, subject
to the provisions of the respective Certificates of Designation governing the   
Preferred Stock, to (i) purchase or make offers for any Existing Preferred Stock
that remains outstanding subsequent to the Expiration Date or, as set forth     
under                                                                           

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'--Conditions', to terminate the Exchange Offer in accordance with the terms of 
the Registration Agreement, (ii) to redeem Existing Preferred Stock as a whole  
or in part at any time and from time to time, as set forth under 'Description of
New Preferred Stock and Exchange Debentures--Optional Redemption' and (iii) to  
the extent permitted by applicable law, purchase Existing Preferred Stock in the
open market, in privately negotiated transactions or otherwise. The terms of any
such purchases or offers could differ from the terms of the Exchange Offer.     

ACCEPTANCE OF EXISTING PREFERRED STOCK FOR EXCHANGE; DELIVERY OF NEW PREFERRED  
STOCK                                                                           

     Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
all shares of Existing Preferred Stock properly tendered will be accepted on the
first business day after the Expiration Date, and the New Preferred Stock will  
be issued promptly after acceptance of the Existing Preferred Stock. See        
'--Conditions.' For purposes of the Exchange Offer, Existing Preferred Stock    
shall be deemed to have been accepted as validly tendered for exchange when, as 
and if the Company has given oral or written notice thereof to the Exchange     
Agent.                                                                          

In all cases, issuance of shares of New Preferred Stock for shares of 
Existing Preferred Stock that is accepted for exchange pursuant to the Exchange 
Offer will be made only after timely receipt by the Exchange Agent of a         
Book-Entry Confirmation of such Existing Preferred Stock into the Exchange      
Agent's account at the Book-Entry Transfer Facility, a properly completed and   
duly executed Letter of Transmittal and all other required documents. If any    
tendered Existing Preferred Stock is not accepted for any reason set forth in   
the terms and conditions of the Exchange Offer, such unaccepted or such         
nonexchanged Existing Preferred Stock will be credited to an account maintained 
with such Book-Entry Transfer Facility as promptly as practicable after the     
expiration or termination of the Exchange Offer.                                

BOOK-ENTRY TRANSFER                                                             

     The Exchange Agent will make a request to establish an account with respect
to the Existing Preferred Stock at the Book-Entry Transfer Facility for purposes
of the Exchange Offer within two business days after the date of this           
Prospectus. Any financial institution that is a participant in the Book-Entry   
Transfer Facility's systems may make book-entry delivery of Existing Preferred  
Stock by causing the Book-Entry Transfer Facility to transfer such Existing     
Preferred Stock into the Exchange Agent's account at the Book-Entry Transfer    
Facility in accordance with such Book-Entry Transfer Facility's procedures for  
transfer. However, the Letter of Transmittal or facsimile thereof with any      
required signature guarantees or an Agent's Message and any other required      
documents must, in any case, be transmitted to and received by the Exchange     
Agent at one of the addresses set forth below under '--Exchange Agent' on or    
prior to the  Expiration Date or the guaranteed delivery procedures described   
below must be  complied with. Delivery of documents to DTC does not constitute  
delivery to the Exchange Agent.  The term "Agent's Message" means a message     
transmitted to DTC to, and received by, the Exchange Agent and forming a part of
the Book-Entry Confirmation, which states that DTC has received an express      
acknowledgment from the participant in DTC tendering the Existing Preferred     

Stock that such participant has received and agrees to be bound by the terms of 
the Letter of Transmittal, and that the Company may enforce such agreement      
against such participant.                                                       

GUARANTEED DELIVERY PROCEDURES                                                  

   If the procedures for book-entry transfer cannot be completed on a timely
basis, a tender may be effected if (i) the tender is made through an Eligible   
Institution, (ii) prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Letter of      
Transmittal (or a facsimile thereof) and Notice of Guaranteed Delivery,         
substantially in the form provided by the Company (by facsimile transmission,   
mail or hand delivery), or an Agent's Message with respect to guaranteed        
delivery that is accepted by the Company, setting forth the name and address of 
the holder of Existing Preferred Stock and the amount of Existing Preferred     
Stock tendered, stating that the tender is being made thereby and guaranteeing  
that within three New York Stock Exchange ('NYSE') trading days after the date  
of execution of the Notice of Guaranteed Delivery, a Book-Entry Confirmation and
any other documents required by the Letter of Transmittal will be deposited by  
the Eligible Institution with the Exchange Agent and (iii) a Book-Entry         
Confirmation and all other documents required by the Letter of Transmittal are  
received by the Exchange Agent within three NYSE trading days after the date of 
execution of the Notice of Guaranteed Delivery.                                 

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WITHDRAWAL OF TENDERS                                                           

   Tenders of Existing Preferred Stock may be withdrawn at any time prior to
5:00 p.m., New York City time on the Expiration Date.                           

  For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent prior to 5:00 p.m., New York City time on the    
Expiration Date at one of the addresses set forth below under                   
'--Exchange Agent.' Any such notice of withdrawal must specify the name and     
number of the account at the Book-Entry Transfer Facility from which the        
Existing Preferred Stock was tendered, identify the principal amount of the     
Existing Preferred Stock to be withdrawn, and specify the name and number of the
account at the Book-Entry Transfer Facility to be credited with the withdrawn   
Existing Preferred Stock and otherwise comply with the procedures of such       
facility. All questions as to the validity, form and eligibility (including time
of receipt) of such notice will be determined by the Company, whose             
determination shall be final and binding on all parties. Any Existing Preferred 
Stock so withdrawn will be deemed not be have been validly tendered for exchange
for purposes of the Exchange Offer. Any Existing Preferred Stock which has been 
tendered for exchange but which is not exchanged for any reason will be credited
to an account maintained with such Book-Entry Transfer Facility for the Existing
Preferred Stock as soon as practicable after withdrawal, rejection of tender or 
termination of the Exchange Offer. Properly withdrawn Existing Preferred Stock  

may be retendered by following one of the procedures described under            
'--Procedures for Tendering' and '--Book-Entry Transfer' above at any time on or
prior to the Expiration Date.                                                   

CONDITIONS                                                                      

The Company has no obligation to consummate the Exchange Offer if the 
Company or the holders of a majority in aggregate liquidation preference of the 
Existing Preferred Stock reasonably determines in good faith (after conferring  
with counsel) that (i) the New Preferred Stock to be received by such holder or 
holders of Existing Preferred Stock in the Exchange Offer, upon receipt, will   
not be tradable by such holder without restriction under the Securities Act and 
the Exchange Act and without material restrictions under the 'blue sky' or      
securities laws of the several states of the United States, (ii) the interests  
of the holder of the Existing Preferred Stock would be materially adversely     
affected by consumation of the Exchange Offer or (iii) the Commission is        
unlikely to permit the consumation of the Exchange Offer within 180 days of the 
Issue Date. In the event that the Company is not obligated to consumate the     
Exchange Offer as a result of the occurence of one of the foregoing events, then
the Company shall be obligated to file a shelf registration statement with      
respect to the Existing Preferred Stock and keep such shelf registration        
statement continuously effective for three years.                               

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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 and requests
for additional copies of this Prospectus or of the Letter of Transmittal should 
be directed to the Exchange Agent addressed as follows:                         

                                                                [Download Table]

            By Mail:                    By Hand to 4:30 p.m.:      
                                                                   
  United States Trust Company        United States Trust Company   
          of New York                        of New York           
          P.O. Box 843                       111 Broadway          
         Cooper Station                   New York, New York       
    New York, New York 10006                    10006              
 Attn: Corporate Trust Services   Attn: Lower Level Corporate Trust
                                                Window             
By Overnight Courier and By Hand                                   
        after 4:30 p.m.:                    By Facsimile:          
                                            (212) 420-6152         
  United States Trust Company      (For Eligible Institutions Only)
          of New York                       By Telephone:          
    770 Broadway, 13th floor                (800)548-6565          
    New York, New York 10003                                       
Attn: Corporate Trust Redemption                                   
              Unit                                                 


FEES AND EXPENSES                                                               

   The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by the Company. The principal solicitation for tenders pursuant to the    
Exchange Offer is being made by mail; however, additional solicitations may be  
made by telegraph, telephone, telecopy or in person by officers and regular     
employees of the Company.                                                       

     The Company will not make any payments to brokers, dealers or other persons
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
the Exchange Agent for its reasonable out-of-pocket expenses in connection      
therewith. The Company may also pay brokerage houses and other custodians,      
nominees and fiduciaries the reasonable out-of-pocket expenses incurred by them 
in forwarding copies of the Prospectus and related documents to the beneficial  
owners of the Existing Preferred Stock, and in handling or forwarding tenders   
for exchange.                                                                   

   The expenses to be incurred in connection with the Exchange Offer will be
paid by the Company, including fees and expenses of the Exchange Agent and      
accounting, legal, printing and related fees and expenses but excluding certain 
commissions, if any, relating to a holder's disposition of its shares of        
Existing Preferred Stock in connection with the Exchange Offer.                 

CONSEQUENCES OF FAILURE TO EXCHANGE                                             

Holders of Existing Preferred Stock who do not exchange their Existing
Preferred Stock for New Preferred Stock pursuant to the Exchange Offer will     
continue to be subject to the restrictions on transfer of such Existing         
Preferred Stock as set forth in the legend thereon as a consequence of the      
issuance of the Existing Preferred Stock pursuant to exemptions from, or in     
transactions not subject to, the registration requirements of the Securities Act
and applicable state securities laws. In general, the Existing Preferred Stock  
may not be offered or sold, unless registered under the Securities Act, except  
pursuant to an exemption from, or in a transaction not subject to, the          
Securities Act and applicable state securities laws. The Company does not       
currently anticipate that it will register the Existing Preferred Stock under   
the Securities Act. To the extent that Existing Preferred Stock is tendered and 
accepted in the Exchange Offer, the trading market for untendered and tendered  
but unaccepted Existing Preferred Stock could be adversely affected.            

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DESCRIPTION OF NEW PREFERRED STOCK AND EXCHANGE DEBENTURES

THE NEW PREFERRED STOCK 

 The summary contained herein of certain provisions of the New Preferred
Stock to be issued by the Company in connection with the Exchange Offer does not
purport to be complete and is subject to, and is qualified in its entirety by   

reference to, all of the provisions of the Certificate of Designation relating  
thereto. A copy of the form of Certificate of Designation for the New Preferred 
Stock is filed as an exhibit to the Registration Statement of which this is     
part. The definitions of certain capitalized terms used in the following summary
are set forth under '--Certain Definitions' below. Other capitalized terms used 
herein and not otherwise defined under '--Certain Definitions' below are defined
in the Certificate of Designation.                                              

GENERAL                                                                         

   The Company is authorized to issue 250,000 shares of preferred stock, par
value $.01 per share. The Board of Directors has adopted resolutions designating
125,000 of such shares of preferred stock as Existing Preferred Stock and has   
filed a Certificate of Designation with respect thereto with the Secretary of   
State of the State of Delaware as required by Delaware law. On or prior to the  
exchange of the New Preferred Stock for the Existing Preferred Stock, the Board 
of Directors will adopt resolutions designating 125,000 of such shares of       
preferred stock as New Preferred Stock and will file a Certificate of           
Designation with respect thereto with the Secretary of State of Delaware as     
required by Delaware law. The shares of New Preferred Stock so designated will  
be issued in connection with the Exchange Offer or will be reserved for issuance
as dividends in the event the Company elects (in accordance with the terms of   
the Certificate of Designation governing the New Preferred Stock) to pay        
dividends on the New Preferred Stock by issuing additional shares (including    
fractional shares) of such stock (but not less than $1.00). See '--Dividends'   
below. Other than untendered or tendered but unaccepted shares of Existing      
Preferred Stock, no other shares of preferred stock of the Company will be      
outstanding upon consummation of the Exchange Offer. Subject to certain         
conditions, if and only to the extent permitted by any Indebtedness of the      
Company then outstanding, the New Preferred Stock is exchangeable for Exchange  
Debentures at the option of the Company on any Dividend Payment Date on or after
July 2, 2001. The New Preferred Stock, when issued and paid for by the Initial  
Purchaser in accordance with the terms of the purchase agreement, will be fully 
paid and non-assessable and holders thereof will not have any subscription or   
preemptive rights in connection therewith.                                      

RANKING                                                                         

     The New Preferred Stock will, with respect to dividend rights and rights on
liquidation, winding-up and dissolution, rank (i) senior to all classes of      
Common Stock of the Company and to each other class of Capital Stock or series  
of Preferred Capital Stock established after the Offering by the Board of       
Directors of the Company the terms of which do not expressly provide that it    
ranks senior to, or on a parity with, the New Preferred Stock as to dividend    
rights and rights on liquidation, winding-up and dissolution of the Company     
(collectively referred to, together with all classes of common stock of the     
Company, as 'Junior Stock'); (ii) subject to certain conditions, on a parity    
with each other class of Capital Stock or series of Preferred Capital Stock     
issued by the Company established after the Offering by the Board of Directors  
of the Company the terms of which expressly provide that such class or series   
will rank on a parity with the New Preferred Stock as to dividend rights and    
rights on liquidation, winding-up and dissolution (collectively referred to as  
'Parity Stock'); and (iii) subject to certain conditions, junior to each class  
of Capital Stock or series of Preferred Capital Stock established after the date

hereof by the Board of Directors of the Company the terms of which expressly    
provide that such class or series will rank senior to the New Preferred Stock as
to dividend rights and rights upon liquidation, winding-up and dissolution of   
the Company (collectively referred to as the 'Senior Stock'). The New Preferred 
Stock will be subject to the issuance of series of Junior Stock, Parity Stock   
and Senior Stock; provided, that the Company may not issue any new class of     
Parity Stock or Senior Stock (or amend the provisions of any existing class of  
capital stock to make such class of stock Parity Stock or Senior Stock) without 
the approval of the holders of at least a majority of the shares of New         
Preferred Stock then outstanding, voting or consenting, as the case may be,     
together as one class.                                                          

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DIVIDENDS                                                                       

     Holders of New Preferred Stock will be entitled to receive, when, as and if
declared by the Board of Directors of the Company, out of funds legally         
available therefor, cash dividends on the New Preferred Stock at a rate per     
annum equal to 11 1/4% of the then effective liquidation preference per share of
the New Preferred Stock, payable semi-annually. In the event that dividends on  
the New Preferred Stock are in arrears and unpaid for more than three           
semi-annual dividend periods occurring after March 15, 2002 (whether or not     
consecutive), holders of New Preferred Stock will be entitled to certain voting 
rights. See '--Voting Rights.' All dividends will be cumulative, whether or not 
earned or declared, on a daily basis from the last dividend payment date on     
which dividends were paid on the shares of Existing Preferred Stock surrendered 
in exchange thereafter or, if no dividends have been paid, from the Issue Date  
and will be payable semi-annually in arrears on March 15 and September 15 of    
each year, commencing on September 15, 1997 to holders of record on the March 1 
and September 1, immediately preceding the relevant Dividend Payment Date. The  
Credit Agreement and the Existing Indenture limit the Company's ability to pay  
cash dividends on its Capital Stock, including the New Preferred Stock. See     
'Description of Existing Indebtedness.' The Company may, at its option, pay     
dividends on any Dividend Payment Date occurring on or before March 15, 2002    
either in cash or by the issuance of additional shares of New Preferred Stock   
(including fractional shares) having an aggregate liquidation preference equal  
to the amount of such dividends (but not less than $1.00). In the event that on 
or prior to March 15, 2002 dividends are declared and paid through the issuance 
of additional shares of New Preferred Stock, as provided in the previous        
sentence, such dividends will be deemed paid in full and will not accumulate.   

No full dividends may be declared or paid or funds set apart for the  
payment of dividends on any Parity Stock for any period unless full cumulative  
dividends shall have been or contemporaneously are declared and paid in full or 
declared and, if payable in cash, a sum in cash set apart for such payment on   
the New Preferred Stock. If full dividends are not so paid, the New Preferred   
Stock will share dividends pro rata with the Parity Stock. No dividends may be  
paid or set apart for such payment on Junior Stock (except dividends on Junior  
Stock in additional shares of Junior Stock) and no Junior Stock or Parity Stock 
may be repurchased, redeemed or otherwise retired nor may funds be set apart for
payment with respect thereto, if full cumulative dividends have not been paid on

the New Preferred Stock. Unpaid dividends accruing after March 15, 2002 on the  
New Preferred Stock for any past dividend period and dividends in connection    
with any optional redemption may be declared and paid at any time, without      
reference to any regular Divided Payment Date, to holders of record on such     
date, not more than forty-five (45) days prior to the payment thereof, as may be
fixed by the Board of Directors of the Company. So long as any shares of the New
Preferred Stock are outstanding, the Company shall not make any payment on      
account of, or set apart money for a sinking fund or other similar fund for, the
purchase, redemption or other retirement of, any of the Parity Stock or Junior  
Stock or any warrants, rights, calls or options exercisable for or convertible  
into any of the Parity Stock or Junior Stock, and shall not permit any          
corporation or other entity directly or indirectly controlled by the Company to 
purchase or redeem any of the Parity Stock or Junior Stock or any such warrants,
rights, calls or options unless full cumulative dividends determined in         
accordance herewith on the New Preferred Stock have been paid in full.          

OPTIONAL REDEMPTION                                                             

   The New Preferred Stock may be redeemed (subject to contractual and other
restrictions with respect thereto and to the legal availability of funds        
therefor) at any time on or after March 15, 2002, in whole or in part, at the   
option of the Company, at the redemption prices (expressed in percentages of the
then effective liquidation preference thereof) set forth below, plus, without   
duplication, an amount in cash equal to all accumulated and unpaid dividends    
(including an amount in cash equal to a prorated dividend for the period from   
the Dividend                                                                    

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Payment Date immediately prior to the redemption date to the redemption date),  
if redeemed during the 12-month period beginning March 15 of each of the years  
set forth below:                                                                

                                                                [Download Table]

YEAR                                                            PERCENTAGE
-----------------------------------------------------------     ----------
                                                                          
2002.......................................................       105.625%
2003.......................................................       104.219%
2004.......................................................       102.813%
2005.......................................................       101.406%
2006 and thereafter........................................       100.000%

   In the event of partial redemption of the New Preferred Stock, the shares
to be redeemed shall be determined pro rata, except that the Company may redeem 
all shares held by holders of fewer than ten shares (or shares held by holders  
who would hold less than ten shares as a result of such redemption), as may be  
determined by the Company.                                                      

    No optional redemption may be authorized or made unless prior thereto full

unpaid cumulative dividends shall have been paid or a sum set apart for such    
payment on the New Preferred Stock.                                             

MANDATORY REDEMPTION                                                            

The New Preferred Stock will also be subject to mandatory redemption  
(subject to contractual and other restrictions with respect thereto and to the  
legal availability of funds therefor) in whole on March 15, 2009, at a price    
equal to 100% of the liquidation preference thereof, plus, without duplication, 
all accumulated and unpaid dividends to the redemption date. Future debt        
agreements or certificates of designation with respect to Senior Stock or Parity
Stock may prohibit or restrict the Company's ability to redeem the New Preferred
Stock.                                                                          

PROCEDURE FOR REDEMPTION                                                        

On and after the redemption date, unless the Company defaults in the  
payment of the applicable redemption price, dividends will cease to accrue on   
shares of New Preferred Stock called for redemption and all rights of holders of
such shares will terminate except for the right to receive the redemption price,
without interest. If a notice of redemption shall have been given as provided in
the succeeding sentence and the funds necessary for redemption (including an    
amount in respect of all dividends that will accrue to the redemption date)     
shall have been segregated and irrevocably set apart by the Company, in trust   
for the benefit of the holders of the shares called for redemption, then        
dividends shall cease to accumulate on the redemption date on the shares to be  
redeemed and, at the close of business on the day when such funds are segregated
and set apart, the holders of the shares to be redeemed shall cease to be       
stockholders of the Company and shall be entitled only to the redemption price  
for such shares. The Company will send a written notice of redemption by first  
class mail to each holder of record of shares of New Preferred Stock, not fewer 
than 30 days nor more than 60 days prior to the date fixed for such redemption  
at its registered address. Shares of New Preferred Stock issued and reacquired  
will, upon compliance with the applicable requirements of Delaware law, have the
status of authorized but unissued shares of preferred stock of the Company      
undesignated as to series and may, with any and all other authorized but        
unissued shares of preferred stock of the Company, be designated or redesignated
and issued or reissued, as the case may be, as part of any series of preferred  
stock of the Company, except that any issuance or reissuance of shares of New   
Preferred Stock must be in compliance with the Certificate of Designation.      

EXCHANGE                                                                        

  The New Preferred Stock is exchangeable at the option of the Company, in
whole but not in part, for the Exchange Debentures on any scheduled dividend    
payment date occurring after the earlier of (i) July 2, 2001 and (ii) the date  
on which all of the Existing Notes are redeemed, only if and only to the extent 
such exchange is permitted pursuant to the terms of the Company's Indebtedness  
then outstanding; provided that (i) on the date of such exchange there are no   
accumulated and unpaid dividends on the New Preferred Stock (including the      
dividend payable on such date) or other contractual impediment to such exchange;
(ii) there shall be legally available funds sufficient therefor; and (iii)      
immediately after giving effect to such exchange, no Default or Event           

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of Default (each as defined in the Exchange Indenture) would exist under the    
Exchange Indenture and no default or event of default would exist under the     
Credit Agreement.                                                               

     The Company intends to comply with the provisions of Rule 13e-4 promulgated
pursuant to the Exchange Act in connection with the exchange, to the extent     
applicable. The exchange of the New Preferred Stock into Exchange Debentures    
will be prohibited by covenants contained in the Credit Agreement, relating,    
among other things, to the incurrence of indebtedness.                          

Upon any exchange pursuant to the preceding paragraph, holders of     
outstanding shares of New Preferred Stock will be entitled to receive, subject  
to the second succeeding sentence, $1.00 principal amount of Exchange Debentures
for each $1.00 liquidation preference of New Preferred Stock held by them. The  
Exchange Debentures will be issued in registered form, without coupons. Exchange
Debentures issued in exchange for New Preferred Stock will be issued in         
principal amounts of $1,000 and integral multiples thereof to the extent        
possible, and will also be issued in principal amounts less than $1,000 so that 
each holder of New Preferred Stock will receive certificates representing the   
entire amount of Exchange Debentures to which such holder's shares of New       
Preferred Stock entitle such holder; provided that the Company may pay cash in  
lieu of issuing an Exchange Debenture in a principal amount less than $1,000.   
The Company will send a written notice of exchange by mail to each holder of    
record of shares of New Preferred Stock no less than 30 days nor more than 60   
days before the date fixed for such exchange. On and after date of exchange,    
dividends will cease to accrue on the outstanding shares of New Preferred Stock,
and all rights of the holders of New Preferred Stock (except the right to       
receive the Exchange Debentures, an amount in cash, to the extent applicable,   
equal to the accumulated and unpaid dividends to the date of exchange and, if   
the Company so elects, cash in lieu of any Exchange Debenture which is in an    
amount that is not an integral multiple of $1,000) will terminate. The person   
entitled to receive the Exchange Debentures issuable upon such exchange will be 
treated for all purposes as the registered holder of such Exchange Debentures.  
See '--The Exchange Debentures.'                                                

LIQUIDATION PREFERENCE                                                          

     Upon any voluntary or involuntary liquidation, dissolution or winding-up of
the Company, holders of New Preferred Stock will be entitled to be paid, out of 
the assets of the Company available for distribution, $1,000 per share, plus an 
amount in cash equal to accumulated and unpaid dividends thereon to the date    
fixed for liquidation, dissolution or winding-up (including an amount equal to a
prorated dividend for the period from the last dividend payment date to the date
fixed for liquidation, dissolution or winding-up), before any distribution is   
made on any Junior Stock, including, without limitation, common stock of the    
Company. If, upon any voluntary or involuntary liquidation, dissolution or      
winding-up of the Company, the amounts payable with respect to the New Preferred
Stock and all other Parity Stock are not paid in full, the holders of the New   
Preferred Stock and the Parity Stock will share equally and ratable in any      
distribution of assets of the Company in proportion to the full liquidation     

preference to which each is entitled. After payment of the full amount of the   
liquidation preference and accumulated and unpaid dividends to which they are   
entitled, the holders of shares of New Preferred Stock will not be entitled to  
any further participation in any distribution of assets of the Company. However,
neither the sale, conveyance, exchange or transfer (for cash, shares of stock,  
securities or other consideration) of all or substantially all of the property  
or assets of the Company nor the consolidation or merger of the Company with one
or more corporations shall be deemed to be a liquidation, dissolution or        
winding-up of the Company.                                                      

     The Certificate of Designation for the New Preferred Stock will not contain
any provision requiring funds to be set aside to protect the liquidation        
preference of the New Preferred Stock, although such liquidation preference will
be substantially in excess of the par value of such shares of New Preferred     
Stock. In addition, the Company is not aware of any provision of Delaware law or
any controlling decision of the courts of the State of Delaware (the state of   
incorporation of the Company) that requires a restriction upon the surplus of   
the Company solely because the liquidation preference of the New Preferred Stock
will exceed its par value. Consequently, there will be no restriction upon the  
surplus of the Company solely because the liquidation preference of the New     
Preferred Stock will exceed its par value and there will be no remedies         
available to holders of the New Preferred Stock before or after the payment of  
any dividend, other than in connection with the liquidation of the Company,     
solely by reason of the fact that such dividend would reduce the surplus of the 
Company to an amount less than the difference between the liquidation preference
of the New Preferred Stock and its par value.                                   

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VOTING RIGHTS                                                                   

    Holders of the New Preferred Stock will have no voting rights with respect
to general corporate matters except as provided by law or as set forth in the   
Certificate of Designation. The Certificate of Designation will provide that if 
(i) after March 15, 2002, cash dividends on the New Preferred Stock are in      
arrears and unpaid for three semi-annual periods (whether or not consecutive);  
(ii) the Company fails to redeem the New Preferred Stock on or before March 15, 
2009 or fails to discharge any redemption obligation with respect to the New    
Preferred Stock; (iii) the Company fails to make a Change of Control Offer in   
the event of a Change of Control occurring on or after July 2, 2001 or fails to 
purchase shares of the New Preferred Stock from holders who elect to have such  
shares purchased pursuant to the Change of Control Offer; (iv) a breach or      
violation of any of the provisions described under the caption '--Certain       
Covenants' below occurs and the breach or violation continues for a period of 30
days or more after the Company receives notice thereof specifying the default   
from the holders of at least 25% of the shares of the New Preferred Stock then  
outstanding; or (v) the failure to pay at the final stated maturity (giving     
effect to any extensions thereof and applicable grace periods) the principal    
amount of any Indebtedness of the Company or any Subsidiary of the Company, or  
the acceleration of the final stated maturity of any such Indebtedness, if the  
aggregate principal amount of such Indebtedness, together with the aggregate    
principal amount of any other such Indebtedness in default for failure to pay   

principal at the final stated maturity (giving effect to any extensions thereof 
and applicable grace periods) or which has been accelerated, aggregates $5.0    
million or more at any time, in each case, after a 10-day period during which   
such default shall not have been cured or such acceleration rescinded, then the 
number of directors constituting the Board of Directors will be adjusted to     
permit the holders of the majority of the then outstanding New Preferred Stock, 
voting separately as a class, to elect the lesser of two directors or that      
number of directors constituting at least 25% of the Board of Directors of the  
Company; provided, that, in the event more than one of the above defaults       
occurs, at the same or at different times, the maximum number of directors that 
such holders shall be entitled to elect is the lesser of two directors and that 
number constituting at least 25% of the Board of Directors of the Company. Such 
voting rights will continue until such time as, in the case of a dividend       
default, all accumulated and unpaid dividends on the New Preferred Stock are    
paid in full in cash and, in all other cases, any failure, breach or default    
giving rise to such voting right is remedied, at which time the term of any     
directors elected pursuant to the provisions of this paragraph shall terminate. 
Each such event described in clauses (i) through (v) above is referred to herein
as a 'Voting Rights Triggering Event.'                                          

 The Certificate of Designation will also provide that, except as stated
above under '--Ranking', the Company will not authorize any additional shares of
New Preferred Stock or any class of Senior Stock or Parity Stock (other than the
Exchange Preferred Stock) without the affirmative vote or consent of holders of 
at least a majority of the shares of New Preferred Stock then outstanding which 
are entitled to vote thereon, voting or consenting, as the case may be, together
as one class. In addition, the Certificate of Designation will provide that the 
Company may not amend the Certificate of Designation so as to effect adversely  
the specified rights, preferences, privileges or voting rights of holders of    
shares of New Preferred Stock or authorize the issuance of any additional shares
of New Preferred Stock (other than shares of New Preferred Stock issued as a    
dividend on shares of New Preferred Stock), without the affirmative vote or     
consent of the holders of at least a majority of the then outstanding shares of 
New Preferred Stock which are entitled to vote thereon, voting or consenting, as
the case may be, together as one class. The Certificate of Designation will also
provide that, except as set forth above, (a) the creation, authorization or     
issuance of any shares of Junior Stock, Parity Stock or Senior Stock, including 
the designation of a series thereof within the existing class of New Preferred  
Stock, or (b) the increase or decrease in the amount of authorized Capital Stock
of any class, including any Preferred Capital Stock, shall not require the      
consent of the holders of New Preferred Stock and shall not be deemed to affect 
adversely the rights, preferences, privileges or voting rights of shares of New 
Preferred Stock. In addition, the Certificate of Designation will provide that, 
in the event that shares of either Private Exchange Preferred Stock or Existing 
Preferred Stock are outstanding following the consummation of the Exchange      
Offer, the holders of such Existing Preferred Stock and Private Exchange        
Preferred Stock will vote as one class with the holders of the New Preferred    
Stock then outstanding for all purposes (except for purposes of certain         
amendments to the Certificate of Designation and the certificate of designation 
for the Existing Preferred Stock) under this '--Voting Rights' as if the holders
of such Existing Preferred Stock and Private Exchange Preferred Stock were      
holders of New Preferred Stock.                                                 

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    Under Delaware law, holders of the New Preferred Stock will be entitled to
vote as a class upon a proposed amendment to the certificate of incorporation,  
whether or not entitled to vote thereon by the certificate of incorporation, if 
the amendment would increase or decrease the par value of the shares of such    
class, or alter or change the powers, preferences or special rights of the      
shares or such class so as to affect them adversely.                            

CHANGE OF CONTROL                                                               

  Upon the occurrence of a Change of Control occurring on or after July 2,
2001, the Company will, only if and only to the extent permitted by any         
Indebtedness of the Company then outstanding, offer to redeem all or a portion  
of the outstanding shares of New Preferred Stock at a redemption price equal to 
101% of the liquidation preference thereof, plus, without duplication,          
accumulated and unpaid dividends (including an amount in cash equal to a        
prorated dividend for the period from the Dividend Payment Date immediately     
prior to the Change of Control Payment Date (as defined) to the Change of       
Control Payment Date) to the Change of Control Payment Date. In addition, upon  
the occurrence of a Change of Control occurring prior to July 2, 2001, the      
Company will have the option to offer to redeem the New Preferred Stock, in     
whole but not in part, at a redemption price equal to 101% of the liquidation   
preference thereof, plus, without duplication, accumulated and unpaid dividends 
to the Change of Control Payment Date. If the Company does not make an offer to 
redeem all of the outstanding New Preferred Stock upon a Change of Control      
occurring prior to July 2, 2001, the annual dividend rate on the New Preferred  
Stock will increase by 4.0% over the then-applicable annual dividend rate. Any  
offer to redeem the New Preferred Stock upon a Change of Control as provided    
above will be referred to herein as a 'Change of Control Offer.'                

Prior to the mailing of the notice referred to below, but in any event
within 30 days following the date on which a Change of Control occurs, the      
Company covenants that if the redemption of the New Preferred Stock would       
violate or constitute a default or be otherwise prohibited under any            
Indebtedness of the Company then outstanding, then the Company shall either (i) 
repay in full all such Indebtedness (and terminate all commitments thereunder)  
or after to repay in full all such Indebtedness (and terminate all such         
commitments) or (ii) obtain the requisite consents, if any, under such          
Indebtedness required to permit the redemption of the New Preferred Stock as    
provided below. The Company will first comply with the covenant in the preceding
sentence before it will be required to redeem, or prior to any optional offer to
redeem, the New Preferred Stock pursuant to the provisions described below.     

     To effect a Change of Control Offer, within 30 days following the date upon
which a Change of Control occurs, the Company will send, by first class mail, a 
notice to each holder of New Preferred Stock, which notice shall govern the     
terms of the Change of Control Offer. Such notice shall state, among other      
things, the redemption date, which must be no earlier than 30 days nor later    
than 60 days from the date such notice is mailed, other than as may be required 
by law (the 'Change of Control Payment Date'). Holders electing to have any     
shares of New Preferred Stock redeemed pursuant to a Change of Control Offer    
will be required to surrender such shares of New Preferred Stock, properly      

endorsed for transfer, together with such other customary documents as the      
Company may reasonably request, to the transfer agent and registrar for the New 
Preferred Stock at the address specified in the notice prior to the close of    
business on the business day prior to the Change of Control Payment Date.       

The Company will comply with the requirements of Rule 14e-1 under the 
Exchange Act and any other securities laws and regulations thereunder to the    
extent such laws and regulations are applicable in connection with the          
redemption of shares of New Preferred Stock pursuant to a Change of Control     
Offer.                                                                          

This '--Change of Control' covenant will not apply in the event of (a)
changes in a majority of the Board of Directors of the Company in certain       
instances as contemplated by the definition of 'Change of Control' and (b)      
certain transactions with, or among Permitted Holders. In addition, this        
covenant is not intended to afford holders of shares of New Preferred Stock     
protection in the event of certain highly leveraged transactions,               
reorganizations, restructurings, mergers and other similar transactions that    
might adversely affect the holders of shares of New Preferred Stock, but would  
not constitute a Change of Control. The Company could, in the future, enter in  
to certain transactions including certain recapitalizations of the Company, that
would not constitute a Change of Control, but would increase the amount of      
Indebtedness outstanding at such time. However, the Certificate of Designation  
will contain limitations on the ability of the Company to incur additional      
Indebtedness                                                                    

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and to engage in certain mergers, consolidations and sales of assets, whether or
not a Change of Control is involved. See '--Certain Covenants--Limitation on    
Incurrence of Additional Indebtedness' and '--Certain Covenants--Merger,        
Consolidation and Sale of Assets.'                                              

  If a Change of Control were to occur, there can be no assurance that the
Company would have sufficient funds to pay the redemption price for all shares  
of New Preferred Stock or the Existing Notes that the Company might be required 
to purchase. Moreover, as of the date hereof, after giving effect to the        
Offering and the application of the proceeds therefrom and the Company's        
outstanding Senior Debt, the Company would not have sufficient funds available  
to redeem all of the outstanding shares of New Preferred Stock pursuant to a    
Change of Control Offer. In the event that the Company were to redeem           
outstanding shares of New Preferred Stock pursuant to a Change of Control Offer,
the Company expects that it would need to seek third-party financing to the     
extent it does not have available funds to meet its redemption obligations.     
However, there can be no assurance that the Company would be able to obtain such
financing on favorable terms, if at all.                                        

     With respect to the sale of 'all or substantially all' of the assets of the
Company, which would constitute a Change of Control for purposes of the         
Certificate of Designation, the meaning of the phrase 'all or substantially all'
varies according to the facts and circumstances of the subject transaction, has 
no clearly established meaning under relevant law and is subject to judicial    

interpretation. Accordingly, in certain circumstances there may be a degree of  
uncertainty in ascertaining whether a particular transaction would involve a    
disposition of 'all or substantially all' of the assets of a Person and         
therefore it may be unclear whether a Change of Control has occurred and whether
the New Preferred Stock is subject to a Change of Control Offer.                

None of the provisions in the Certificate of Designation relating to a
purchase of New Preferred Stock upon a Change of Control are waivable by the    
Board of Directors of the Company. Without the consent of each holder of New    
Preferred Stock affected thereby, after the mailing of the notice of a Change of
Control Offer, no amendment to the Certificate of Designation may, directly or  
indirectly, affect the Company's obligation to purchase the outstanding New     
Preferred Stock or amend, modify or change the obligation of the Company to     
consummate a Change of Control Offer or waive any default in the performance    
thereof or modify any of the provisions of the definitions with respect to any  
such offer.                                                                     

CERTAIN COVENANTS                                                               

     Limitation on Incurrence of Additional Indebtedness.  The Company will not,
and will not permit any Restricted Subsidiary of the Company to, directly or    
indirectly, incur any Indebtedness (including Acquired Indebtedness) other than 
Permitted Indebtedness. Notwithstanding the foregoing limitation, the Company   
and its Restricted Subsidiaries may incur Indebtedness if on the date of the    
incurrence of such Indebtedness, after giving effect to the incurrence of such  
Indebtedness, the Consolidated Fixed Charge Coverage Ratio of the Company and   
its Restricted Subsidiaries is at least equal to 2.0 to 1.0.                    

    Limitation on Restricted Payments.  (a) The Company will not, and will not
permit any of its Restricted Subsidiaries to, directly or indirectly, make any  
Restricted Payment if at the time of such Restricted Payment and immediately    
after giving effect thereto:                                                    

     (i) any Voting Rights Triggering Event shall have occurred and be
continuing; or                                                        

     (ii) the Company could not incur $1.00 of additional Indebtedness
     (other than Permitted Indebtedness) in compliance with the '--Limitation on
Incurrence of Additional Indebtedness' covenant; or                   

        (iii) the aggregate amount of Restricted Payments made subsequent to
 the Issue Date (the amount expended for such purposes, if other than in
 cash, being the fair market value of such property as determined by the
     Board of Directors of the Company, whose determination shall be conclusive)
    exceeds the sum of (a) 50% of the aggregate Consolidated Net Income of the
 Company accrued on a cumulative basis during the period (treated as one
accounting period) beginning on the last day of the fiscal quarter    
immediately preceding the Issue Date and ending on the last day of the
fiscal quarter of the Company immediately preceding the date of such  
    proposed Restricted Payment (or, if such aggregate cumulative Consolidated
     Net Income of the Company for such period shall be a deficit, minus 100% of
   such deficit) plus (b) the aggregate net proceeds received by the Company
  either (1) as capital contributions to the Company after the Issue Date,
   excluding any capital contributions pursuant to the Tax Sharing Agreement

or (2) from the                                                       

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  issuance or sale of Qualified Capital Stock (including Qualified Capital
   Stock issued upon the conversion of convertible Indebtedness, in exchange
   for outstanding Indebtedness or from the exercise of options, warrants or
  rights to purchase Qualified Capital Stock) of the Company to any person
     (other than to a Restricted Subsidiary of the Company) after the Issue Date
plus (c) in the case of the disposition or repayment of any Investment
    constituting a Restricted Payment made after the Issue Date (excluding any
Investment made pursuant to clause (4) of the following paragraph), an
  amount equal to the lesser of the return of capital with respect to such
   Investment and the cost of such Investment, in either case, less the cost
  of the disposition of such Investment minus (d) 20% of all cash payments
made pursuant to the New Equity Incentive Plan. For purposes of the   
preceding clause (iii)(b)(2), the value of the aggregate net proceeds 
     received by the Company upon the issuance of Qualified Capital Stock either
upon the conversion of convertible Indebtedness or in exchange for    
outstanding Indebtedness or upon the exercise of options, warrants or 
 rights will be the net cash proceeds received upon the issuance of such
Indebtedness, options, warrants or rights plus the incremental amount 
    received by the Company upon the conversion, exchange or exercise thereof.

    (b) Notwithstanding the foregoing, these provisions will not prohibit: (1)
the payment of any dividend or the making of any distribution within 60 days    
after the date of its declaration if such dividend or distribution would have   
been permitted on the date of declaration; (2) the purchase, redemption or other
acquisition or retirement of any Capital Stock of the Company or any warrants,  
options or other rights to acquire shares of any class of such Capital Stock (x)
solely in exchange for shares of Qualified Capital Stock (including any such    
exchange pursuant to a conversion right or privilege in connection with which   
cash paid in lieu of fractional shares or scrip), (y) through the application of
the net cash proceeds of a substantially concurrent sale (other than to a       
Restricted Subsidiary of the Company) of shares of Qualified Capital Stock or   
warrants, options or other rights to acquire Qualified Capital Stock or (z) in  
the case of Disqualified Capital Stock, solely in exchange for, or through the  
application of the net cash proceeds of a substantially concurrent sale (other  
than to a Restricted Subsidiary of the Company) of, Disqualified Capital Stock  
that has a redemption date no earlier than, is issued by the Company or the same
Person as and requires the payment of current dividends or distributions in cash
no earlier than, in each case, the Disqualified Capital Stock being purchased,  
redeemed or otherwise acquired or retired and which Disqualified Capital Stock  
does not prohibit cash dividends on the New Preferred Stock or the exchange     
thereof for Exchange Debentures; (3) payments by the Company to Lancer pursuant 
to the Tax Sharing Agreement; (4) Investments constituting Restricted Payments  
made as a result of the receipt of non-cash consideration from any Asset Sale;  
and (5) guarantees in respect of Indebtedness incurred by officers or employees 
of the Company or any Restricted Subsidiary in the ordinary course of business  
and payments in discharge thereof in an amount not to exceed $500,000 in any    
fiscal year.                                                                    

 Limitations on Transactions with Affiliates.  The Company will not, and
will not cause or permit any of its Restricted Subsidiaries to, directly or     
indirectly, enter into or suffer to exist any transaction or series of related  
transactions (including, without limitation, the sale, purchase, exchange or    
lease of assets, property or services) with any Affiliate or holder of 10% or   
more of the Company's Common Stock (an 'Affiliate Transaction') or extend,      
renew, waive or otherwise modify the terms of any Affiliate Transaction entered 
into prior to the Issue Date unless (i) such Affiliate Transaction is between or
among the Company and its Wholly-Owned Restricted Subsidiaries; or (ii) the     
terms of such Affiliate Transaction are fair and reasonable to the Company or   
such Restricted Subsidiary, as the case may be, and the terms of such Affiliate 
Transaction are at least as favorable as the terms which could be obtained by   
the Company or such Restricted Subsidiary, as the case may be, in a comparable  
transaction made on an arm's-length basis between unaffiliated parties. Any     
Affiliate Transaction involving an amount or having a value in excess of $1.0   
million which is not permitted under clause (i) above shall have been approved  
by a majority of the Company's Board of Directors. In transactions with a value 
in excess of $5.0 million which are not permitted under clause (i) above, the   
Company must obtain a written opinion as to the fairness of such a transaction  
from an independent investment banking firm.                                    

    The foregoing provisions will not apply to (i) any Restricted Payment that
is not prohibited by the provisions described under '--Limitation on Restricted 
Payments' contained herein, (ii) payments to Lancer under the Tax Sharing       
Agreement, (iii) payments to participants in the Equity Participation Plan in an
amount not exceeding $1.32 million in any fiscal year and $5.28 million in the  
aggregate, (iv) reasonable and customary regular fees to directors of the       
Company who are not employees of the Company, (v) loans or advances to officers 
of the                                                                          

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Company and its Restricted Subsidiaries for bona fide business purposes of the  
Company in the ordinary course of business, (vi) royalty payments by the Company
to T-H Licensing pursuant to that certain letter agreement dated as of December 
29, 1989 between the Company and T-H Licensing (as such agreement may be amended
from time to time pursuant to its terms), provided that any such payment (less  
any amounts permitted to be retained by T-H Licensing pursuant to the Credit    
Agreement) is returned to the Company as a loan within sixty days after receipt 
of such payment by T-H Licensing, (vii) payments or distributions to            
participants in the New Equity Incentive Plan pursuant to the terms thereof,    
(viii) payments of the Company's allocated portion of the Lancer consolidated   
group's corporate expenses and fees to Lancer or any Affiliate of Lancer        
incurred in connection with Lancer's or any Affiliate of Lancer's performance of
management consulting, monitoring and financial advisory services with respect  
to the Company and any Restricted Subsidiary in an amount not to exceed $2.0    
million in any fiscal year (excluding amounts paid prior to the date hereof);   
provided, however, that notwithstanding anything to the contrary contained in   
the Certificate of Designation, the Company shall not be permitted to pay to    
Lancer or any Affiliate of Lancer any amount for such services in excess of the 
amount set forth in this clause (viii).                                         

    Merger, Consolidation and Sale of Assets.  Without the affirmative vote of
the holders of a majority of the issued and outstanding shares of New Preferred 
Stock, voting or consenting, as the case may be, as a separate class, the       
Company will not, in a single transaction or a series of related transactions,  
consolidate with or merge with or into, or sell, assign, transfer, lease, convey
or otherwise dispose of all or substantially all of its assets to, another      
Person or adopt a plan of liquidation unless (i) either (1) the Company is the  
surviving or continuing Person or (2) the Person (if other than the Company)    
formed by such consolidation or into which the Company is merged or the Person  
that acquires by conveyance, transfer or lease the properties and assets of the 
Company substantially as an entirety or, in the case of a plan of liquidation,  
the Person to which assets of the Company have been transferred shall be a      
corporation, partnership or trust organized and existing under the laws of the  
United States or any State thereof or the District of Columbia; (ii) if the     
Company is not the surviving or continuing Person, the New Preferred Stock shall
be converted into or exchanged for and shall become shares of such successor,   
transferee or resulting Person, having in respect of such successor, transferee 
or resulting Person the same powers, preferences and relative participating,    
optional or other special rights and the qualifications, limitations or         
restrictions thereon, that the New Preferred Stock had immediately prior to such
transaction; (iii) immediately after giving effect to such transaction and the  
use of the proceeds therefrom (on a pro forma basis, including giving effect to 
any Indebtedness incurred or anticipated to be incurred in connection with such 
transaction), the Company (in the case of clause (1) of the foregoing clause    
(i)) or such Person (in the case of clause (2) of the foregoing clause (i))     
shall be able to incur $1.00 of additional Indebtedness (other than Permitted   
Indebtedness) in compliance with the '--Limitation on Incurrence of Additional  
Indebtedness' covenant; (iv) immediately after giving effect to such            
transactions, no Voting Rights Triggering Event shall have occurred or be       
continuing; and (v) such surviving Person shall have delivered to the transfer  
agent for the New Preferred Stock prior to the consummation of the proposed     
transaction an officers' certificate and an opinion of counsel, each stating    
that such consolidation, merger or transfer complies with the Certificate of    
Designation and that all conditions precedent in the Certificate of Designation 
relating to such transaction have been satisfied. For purposes of the foregoing,
the transfer (by lease, assignment, sale or otherwise, in a single transaction  
or series of related transactions) of all or substantially all of the properties
and assets of one or more Subsidiaries, the Capital Stock of which constitutes  
all or substantially all of the properties or assets of the Company, will be    
deemed to be the transfer of all or substantially all of the properties and     
assets of the Company.                                                          

Limitation on Preferred Capital Stock of Restricted Subsidiaries.  The
Company will not permit any Restricted Subsidiary to issue any Preferred Capital
Stock (except to the Company or to a Restricted Subsidiary) or permit any Person
(other than the Company or a Restricted Subsidiary) to hold any such Preferred  
Capital Stock unless the Company or such Restricted Subsidiary would be entitled
to incur or assume Indebtedness in compliance with the '--Limitation on         
Incurrence of Additional Indebtedness' covenant in an aggregate principal amount
equal to the aggregate liquidation value of the Preferred Capital Stock to be   
issued.                                                                         

   Reports.  The Company will provide to the holders of New Preferred Stock,
within 15 days after it files them with the Commission, copies of the annual    

reports and of the information, documents and other reports (or copies of such  
portions of any of the foregoing as the Commission may by rules and regulations 
prescribe) which the Company files with the Commission pursuant to Section 13 or
15(d) of the Exchange Act. In the event that                                    

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the Company is no longer required to furnish such reports to its securityholders
pursuant to the Exchange Act, the Company will cause its consolidated financial 
statements, comparable to those which would have been required to appear in     
annual or quarterly reports, to be delivered to the holders of New Preferred    
Stock.                                                                          

TRANSFER AGENT AND REGISTRAR                                                    

United States Trust Company of New York will be the transfer agent and
registrar (the 'Transfer Agent') for the New Preferred Stock.                   

THE EXCHANGE DEBENTURES 

The Exchange Debentures, if issued, will be issued under the Exchange 
Indenture, dated as of March 12, 1997, by and between the Company and United    
States Trust Company of New York, as Trustee (the 'Trustee'). The terms of the  
Exchange Debentures include those stated in the Exchange Indenture and those    
made part of the Exchange Indenture by reference to the Trust Indenture Act of  
1939, as amended (the 'Trust Indenture Act') as in effect on the date of the    
Exchange Indenture. The Exchange Debentures are subject to all such terms, and  
holders of the Exchange Debentures are referred to the Exchange Indenture and   
the Trust Indenture Act for a statement of them. The following is a summary of  
the material terms and provisions of the Exchange Debentures. This summary does 
not purport to be a complete description of the Exchange Debentures and is      
subject to the detailed provisions of, and qualified in its entirety by         
reference to, the Exchange Debentures and the Exchange Indenture (including the 
definitions contained therein). A copy of the Exchange Indenture is filed as an 
exhibit to the Registration Statement of which this is part. Definitions        
relating to certain capitalized terms are set forth under '--Certain            
Definitions' and throughout this description. Capitalized terms that are used   
but not otherwise defined herein have the meanings assigned to them in the      
Exchange Indenture and such definitions are incorporated herein by reference.   

GENERAL                                                                         

    The Exchange Debentures will be general unsecured subordinated obligations
of the Company and will be limited in aggregate principal amount to the         
liquidation preference of the New Preferred Stock, plus accrued and unpaid      
dividends, on the date of exchange of the New Preferred Stock into Exchange     
Debentures (plus any additional Exchange Debentures issued in lieu of cash      
interest as described herein). The Exchange Debentures will be issued in fully  
registered form only in denominations of $1,000 and integral multiples thereof  
(other than as described in '--The New Preferred Stock--Exchange' or with       
respect to additional Exchange Debentures issued in lieu of cash interest as    
described herein). The Exchange Debentures will be subordinated to all existing 

and future Senior Debt of the Company.                                          

The Exchange Debentures will mature on March 15, 2009. Each Exchange  
Debenture will bear interest at the rate of 11 1/4% per annum from the Exchange 
Date or from the most recent interest payment date to which interest has been   
paid or provided for or, if no interest has been paid or provided for, from the 
Exchange Date. Interest will be payable semi-annually in cash (or, at the option
of the Company, on or prior to March 15, 2002, in additional Exchange Debentures
in an aggregate principal amount equal to the amount of such interest payment   
(including, in the case of interest payments or portions thereof of less than   
$1,000.00 but greater than $1.00, by issuing Exchange Debentures in             
denominations of less than $1,000.00)) in arrears on each March 15 and September
15 commencing with the first such date after the Exchange Date. Interest on the 
Exchange Debentures will be computed on the basis of a 360-day year comprised of
twelve 30-day months and the actual number days elapsed.                        

MATURITY, INTEREST AND PRINCIPAL                                                

    Principal of, and premium, if any, and interest on the Exchange Debentures
will be payable, and the Exchanged Debentures may be presented for registration 
of transfer or exchange, at the office of the Paying Agent and Registrar. At the
Company's option, interest, to the extent paid in cash, may be paid by check    
mailed to the registered address of holders of the Exchange Debentures as shown 
on the register for the Exchange Debentures. The Trustee will initially act as  
Paying Agent and Registrar. The Company may change any Paying                   

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Agent and Registrar without prior notice to holders of the Exchange Debentures. 
Holders of the Exchange Debentures must surrender Exchange Debentures to the    
Paying Agent to collect principal payments.                                     

OPTIONAL REDEMPTION                                                             

 The Exchange Debentures will be redeemable, at the Company's option, in
whole at any time or in part from time to time, on and after March 15, 2002, at 
the redemption prices (expressed as percentages of the principal amount         
thereof), together, in each case, with accrued and unpaid interest to the       
redemption date set forth below if redeemed during the 12-month period beginning
on March 15 of each of the years set forth below:                               

                                                                [Download Table]

YEAR                                                            PERCENTAGE
-----------------------------------------------------------     ----------
                                                                          
2002.......................................................       105.625%
2003.......................................................       104.219%
2004.......................................................       102.813%
2005.......................................................       101.406%
2006 and thereafter........................................       100.000%

  In the event of redemption of fewer than all of the Exchange Debentures,
the Trustee shall select by lot or in such other manner as it shall deem fair   
and equitable the Exchange Debentures to be redeemed. The Exchange Debentures   
will be redeemable in whole or in part upon not less than 30 or more than 60    
days' prior written notice, mailed by first class mail to a holder's last       
address as it shall appear on the register maintained by the Registrar of the   
Exchange Debentures. On and after any redemption date, interest will cease to   
accrue on the Exchange Debentures or portions thereof called for redemption     
unless the Company shall fail to redeem any such Exchange Debentures.           

CHANGE OF CONTROL                                                               

  Upon the occurrence of a Change of Control occurring on or after July 2,
2001, the Company will, only if and to the extent permitted by any Senior Debt  
of the Company then outstanding, offer to redeem all outstanding Exchange       
Debentures at a redemption price equal to 101% of the principal amount thereof, 
plus accrued and unpaid interest to the Change of Control Payment Date (as      
defined). In addition, upon the occurrence of a Change of Control occurring     
prior to July 2, 2001, the Company will have the option to offer to redeem the  
Exchange Debentures, in whole but not in part, at a redemption price equal to   
101% of the principal amount thereof, plus, without duplication, accrued and    
unpaid interest to the Change of Control Payment Date. If a Change of Control   
occurs prior to July 2, 2001 and the Company fails to make an offer to redeem   
the Exchange Debentures in accordance with the terms of the Exchange Indenture, 
the annual interest rate on the Exchange Debentures will increase by 4.0% over  
the then-applicable interest rate. Any offer to redeem the Exchange Debentures  
upon a Change of Control as provided above will be referred to herein as a      
'Change of Control Offer.'                                                      

The Exchange Indenture will provide that, prior to the mailing of the 
notice referred to below, but in any event within 30 days following the date on 
which a Change of Control occurs, the Company covenants that if the purchase of 
the Exchange Debentures would violate or constitute a default under any         
outstanding Senior Debt, then the Company will, to the extent needed to permit  
the purchase of Exchange Debentures, either (i) repay in full all Indebtedness  
such Senior Debt (and terminate all commitments thereunder) or offer to repay in
full all such Senior Debt (and terminate all such commitments) or (ii) obtain   
the requisite consents under the instrument governing such Senior Debt to permit
the repurchase of the Exchange Debentures as provided below. The Company will   
first comply with the covenant in the preceding sentence before it will be      
required to repurchase Exchange Debentures pursuant to the provisions described 
below; provided that the Company's failure to comply with the covenant described
in the preceding sentence shall constitute an Event of Default described under  
clause (iii) under '--Events of Default' below.                                 

     To effect a Change of Control, within 30 days following the date upon which
a Change of Control occurs, the Company will send, by first class mail, a notice
to each holder of record of the Exchange Debentures, with a copy to the Trustee,
which notice shall govern the terms of the Change of Control Offer. Such notice 
will state, among other things, the purchase date, which must be no earlier than
30 days nor later than 60 days from the date such notice is mailed, other than  
as may be required by law (the 'Change of Control Payment Date'). Holders       

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electing to have an Exchange Debenture purchased pursuant to a Change of Control
Offer will be required to surrender the Exchange Debenture, properly endorsed   
for transfer together with such other customary documents as the Company may    
reasonably request, to the paying agent at the address specified in the notice  
prior to the close of business on the business day prior to the Change of       
Control Payment Date.                                                           

The Company will comply with the requirements of Rule 14e-1 under the 
Exchange Act and any other securities laws and regulations thereunder to the    
extent such laws and regulations are applicable in connection with the purchase 
of Exchange Debentures pursuant to a Change of Control Offer.                   

This '--Change of Control' covenant will not apply in the event of (a)
certain changes in composition of the Board of Directors of the Company and (b) 
certain transactions with, or among, Permitted Holders. In addition, this       
covenant is not intended to afford holders of the Exchange Debentures protection
in the event of certain highly leveraged transactions, reorganizations,         
restructurings, mergers and other similar transactions that might adversely     
affect the holders of Exchange Debentures but would not constitute a Change of  
Control. The Company could, in the future, enter into certain transactions,     
including certain recapitalizations of the Company, that would not constitute a 
Change of Control, but would increase the amount of Indebtedness outstanding at 
such time. However, the Exchange Indenture will contain limitations on the      
ability of the Company to incur additional Indebtedness and to engage in certain
mergers, consolidations and sales of assets, whether or not a Change of Control 
is involved. See '--Limitation on Incurrence of Additional Indebtedness,'       
'--Limitation on Asset Sales' and '--Merger, Consolidation and Sale of Assets.' 

  If a Change of Control were to occur, there can be no assurance that the
Company would have sufficient funds to pay the purchase price for all Exchange  
Debentures that the Company might be required to purchase. Moreover, as of the  
date hereof, after giving effect to the Offering and the application of the     
proceeds and the Change of Control provisions on the Company's outstanding      
Senior Debt therefrom, the Company would not have sufficient funds available to 
purchase all the outstanding Exchange Debentures, assuming they had been issued,
pursuant to a Change of Control Offer. In the event that the Company were       
required to purchase Exchange Debentures pursuant to a Change of Control Offer, 
the Company expects that it would need to seek third-party financing to the     
extent it does not have available funds to meet its purchase obligations.       
However, there can be no assurance that the Company would be able to obtain such
financing on favorable terms, if at all. See 'Description of Existing           
Indebtedness.'                                                                  

     With respect to the sale of 'all or substantially all' of the assets of the
Company, which would constitute a Change of Control for purposes of the Exchange
Indenture, the meaning of the phrase 'all or substantially all' as used in the  
Exchange Indenture varies according to the facts and circumstances of the       
subject transaction, has no clearly established meaning under relevant law and  
is subject to judicial interpretation. Accordingly, in certain circumstances    
there may be a degree of uncertainty in ascertaining whether a particular       

transaction would involve a disposition of 'all or substantially all' of the    
assets of a person and therefore it may be unclear whether a Change of Control  
has occurred and whether the Exchange Debentures are subject to a Change of     
Control Offer.                                                                  

     None of the provisions relating to a purchase of Exchange Debentures upon a
Change of Control are waivable by the Board of Directors of the Company. Without
the consent of each holder of the Exchange Debentures affected thereby, after   
the mailing of the notice of the Change of Control Offer, no amendment to the   
Exchange Indenture may, directly or indirectly, affect the Company's obligation 
to purchase the Exchange Debentures or amend, modify or change the obligation of
the Company to consummate a Change of Control Offer or waive any default in the 
performance thereof or modify any of the provisions or definitions with respect 
to any such offer. In addition, the Trustee may not waive the right of any      
holder of the Exchange Debentures to require the repurchase of its Exchange     
Debentures upon a Change of Control.                                            

SUBORDINATION                                                                   

   The Obligations represented by the Exchange Debentures are, to the extent
and in the manner provided in the Exchange Indenture, subordinated in right of  
payment to the prior indefeasible payment and satisfaction in full in cash of   
all existing and future Senior Debt of the Company. As of December 31, 1996, the
principal amount of outstanding Senior Debt of the Company, on a consolidated   
basis, would have been $118.0 million.                                          

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 In the event of any insolvency or bankruptcy case or proceeding, or any
receivership, liquidation, arrangement, reorganization or other similar case or 
proceeding in connection therewith, relative to the Company or to its creditors,
as such, or to its assets, whether voluntary or involuntary, or any liquidation,
dissolution or other winding-up of the Company, whether voluntary or involuntary
and whether or not involving insolvency or bankruptcy, or any general assignment
for the benefit of creditors or other marshaling of assets or liabilities of the
Company (except in connection with the merger or consolidation of the Company or
its liquidation or dissolution following the transfer of substantially all of   
its assets, upon the terms and conditions permitted under the circumstances     
described under '--Mergers, Consolidation and Sale of Assets') (all of the      
foregoing referred to herein individually as a 'Bankruptcy Proceeding' and      
collectively as 'Bankruptcy Proceedings'), the holders of Senior Debt of the    
Company will be entitled to receive payment and satisfaction in full in cash of 
all amounts due on or in respect of all Senior Debt of the Company before the   
holders of the Exchange Debentures are entitled to receive or retain any payment
or distribution of any kind on account of the Exchange Debentures. In the event 
that, notwithstanding the foregoing, the Trustee or any holder of Exchange      
Debentures receives any payment or distribution of assets of the Company of any 
kind, whether in cash, property or securities, including, without limitation, by
way of set-off or otherwise, in respect of the Exchange Debentures before all   
Senior Debt of the Company is paid and satisfied in full in cash, then such     
payment or distribution will be held by the recipient in trust for the benefit  
of holders of Senior Debt and will be immediately paid over or delivered to the 

holders of Senior Debt or their representative or representatives to the extent 
necessary to make payment in full of all Senior Debt remaining unpaid, after    
giving effect to any concurrent payment or distribution, or provision therefor, 
to or for the holders of Senior Debt. By reason of such subordination, in the   
event of liquidation or insolvency, creditors of the Company who are holders of 
Senior Debt may recover more, ratably, than other creditors of the Company, and 
creditors of the Company who are not holders of Senior Debt or of the Exchange  
Debentures may recover more, ratably, than the holders of the Exchange          
Debentures.                                                                     

  No payment or distribution of any assets or securities of the Company or
any Restricted Subsidiary of any kind or character (including, without          
limitation, cash, property and any payment or distribution which may be payable 
or deliverable by reason of the payment of any other Indebtedness of the Company
being subordinated to the payment of the Exchange Debentures by the Company) may
be made by or on behalf of the Company or any Restricted Subsidiary, including, 
without limitation, by way of set-off or otherwise, for or on account of the    
Exchange Debentures, or for or on account of the purchase, redemption or other  
acquisition of the Exchange Debentures, and neither the Trustee nor any holder  
or owner of any Exchange Debentures shall take or receive from the Company or   
any Restricted Subsidiary, directly or indirectly in any manner, payment in     
respect of all or any portion of Exchange Debentures following the delivery by  
the representative of the holders of Designated Senior Debt (the                
'Representative') to the Trustee of written notice of the occurrence of a       
Payment Default, and in any such event, such prohibition shall continue until   
such Payment Default is cured, waived in writing or ceases to exist. At such    
time as the prohibition set forth in the preceding sentence shall no longer be  
in effect, subject to the provisions of the following paragraph, the Company    
shall resume making any and all required payments in respect of the Exchange    
Debentures, including any missed payments.                                      

    Upon the occurrence of a Non-Payment Event of Default on Designated Senior
Debt, no payment or distribution of any assets of the Company of any kind may be
made by the Company, including, without limitation, by way of set-off or        
otherwise, on account of the Exchange Debentures, or on account of the purchase 
or redemption or other acquisition of Exchange Debentures, for a period (a      
'Payment Blockage Period') commencing on the date of receipt by the Trustee of  
written notice from the Representative of such Non-Payment Event of Default     
unless and until (subject to any blockage of payments that may then be in effect
under the preceding paragraph) the earliest of (x) more than 179 days shall have
elapsed since receipt of such written notice by the Trustee, (y) such           
Non-Payment Event of Default shall have been cured or waived in writing or shall
have ceased to exist or such Designated Senior Debt shall have been paid in full
or (z) such Payment Blockage Period shall have been terminated by written notice
to the Company or the Trustee from such Representative, after which, in the case
of clause (x), (y) or (z), the Company shall resume making any and all required 
payments in respect of the Exchange Debentures, including any missed payments.  
Notwithstanding any other provision of the Exchange Indenture, in no event shall
a Payment Blockage Period commenced in accordance with the provisions of the    
Exchange Indenture described in this paragraph extend beyond 179 days from the  
date of the receipt by the Trustee of the notice referred to above (such period,
an 'Initial Blockage Period'). Any number of additional Payment Blockage Periods
may be commenced during the Initial Blockage Period; provided, however, that no 

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such additional Payment Blockage Period shall extend beyond the Initial Blockage
Period. After the expiration of the Initial Blockage Period, no Payment Blockage
Period may be commenced until at least 180 consecutive days have elapsed from   
the last day of the Initial Blockage Period. Notwithstanding any other provision
of the Exchange Indenture, no Non-Payment Event of Default with respect to      
Designated Senior Debt which existed or was continuing on the date of the       
commencement of any Payment Blockage Period initiated by the Representative     
shall be, or be made, the basis for the commencement of a second Payment        
Blockage Period initiated by the Representative, whether or not within the      
Initial Blockage Period, unless such Non-Payment Event of Default shall have    
been waived for a period of not less than 90 consecutive days.                  

   If the Company or any Guarantor fails to make any payment on the Exchange
Debentures or any Guarantee, as the case may be, when due or within any         
applicable grace period, whether or not on account of payment blockage          
provisions, such failure would constitute an Event of Default under the Exchange
Indenture and would enable the holders of the Exchange Debentures to accelerate 
the maturity thereof. See '--Events of Default.'                                

  A holder of Exchange Debentures by his acceptance of Exchange Debentures
agrees to be bound by such provisions and authorizes and expressly directs the  
Trustee, on his behalf, to take such action as may be necessary or appropriate  
to effectuate the subordination provided for in the Exchange Indenture and      
appoints the Trustee his attorney-in-fact for such purpose.                     

CERTAIN COVENANTS                                                               

     The Exchange Indenture will contain, among others, the following covenants:

    Limitation on Incurrence of Additional Indebtedness.  The Company will not
and will not cause or permit any of its Restricted Subsidiaries to, directly or 
indirectly incur (as defined) any Indebtedness (including Acquired Indebtedness)
other than Permitted Indebtedness. Notwithstanding the foregoing limitations,   
the Company and its Restricted Subsidiaries may incur Indebtedness if after     
giving effect to the incurrence of such Indebtedness, the Consolidated Fixed    
Charge Coverage Ratio of the Company and its Restricted Subsidiaries is at least
equal to 2.0 to 1.0.                                                            

   Limitation on Restricted Payments.  (a) The Company will not and will not
cause or permit any of its Restricted Subsidiaries to, directly or indirectly,  
make any Restricted Payment if at the time of such Restricted Payment and       
immediately after giving effect thereto:                                        

  (i) any Default or Event of Default shall have occurred and be
continuing; or                                                        

          (ii) the Company is not able to incur $1.00 of additional Indebtedness
     (other than Permitted Indebtedness) in compliance with the '--Limitation on
Incurrence of Additional Indebtedness' covenant; or                   

        (iii) the aggregate amount of Restricted Payments made subsequent to
 the Issue Date (the amount expended for such purposes, if other than in
 cash, being the fair market value of such property as determined by the
     Board of Directors of the Company, whose determination shall be conclusive)
    exceeds the sum of (a) 50% of the aggregate Consolidated Net Income of the
 Company accrued on a cumulative basis during the period (treated as one
accounting period) beginning on the last day of the fiscal quarter    
immediately preceding the Issue Date and ending on the last day of the
fiscal quarter of the Company immediately preceding the date of such  
    proposed Restricted Payment (or, if such aggregate cumulative Consolidated
     Net Income of the Company for such period shall be a deficit, minus 100% of
   such deficit) plus (b) the aggregate net proceeds received by the Company
  either (1) as capital contributions to the Company after the Issue Date,
   excluding any capital contributions pursuant to the Tax Sharing Agreement
or (2) from the issuance or sale of Qualified Capital Stock (including
Qualified Capital Stock issued upon the conversion of convertible     
     Indebtedness, in exchange for outstanding Indebtedness or from the exercise
    of options, warrants or rights to purchase Qualified Capital Stock) of the
Company to any person (other than to a Restricted Subsidiary of the   
  Company) after the Issue Date plus (c) in the case of the disposition or
  repayment of any Investment constituting a Restricted Payment made after
     the Issue Date (excluding any Investment made pursuant to clause (4) of the
following paragraph), an amount equal to the lesser of the return of  
     capital with respect to such Investment and the cost of such Investment, in
    either case, less the cost of the disposition of such Investment minus (d)
  20% of all cash payments made pursuant to the New Equity Incentive Plan.
For                                                                   

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  purposes of the preceding clause (iii)(b)(2), the value of the aggregate
     net proceeds received by the Company upon the issuance of Qualified Capital
     Stock either upon the conversion of convertible Indebtedness or in exchange
   for outstanding Indebtedness or upon the exercise of options, warrants or
 rights will be the net cash proceeds received upon the issuance of such
Indebtedness, options, warrants or rights plus the incremental amount 
    received by the Company upon the conversion, exchange or exercise thereof.

    (b) Notwithstanding the foregoing, these provisions will not prohibit: (1)
the payment of any dividend or the making of any distribution within 60 days    
after the date of its declaration if such dividend or distribution would have   
been permitted on the date of declaration; (2) the purchase, redemption or other
acquisition or retirement of any Capital Stock of the Company or any warrants,  
options or other rights to acquire shares of any class of such Capital Stock    
either (x) solely in exchange for shares of Qualified Capital Stock (including  
any such exchange pursuant to a conversion right or privilege in connection with
which cash paid in lieu of fractional shares or scrip), or (y) through the      
application of the net cash proceeds of a substantially concurrent sale (other  
than to a Subsidiary of the Company) of shares of Qualified Capital Stock or    
warrants, options or other rights to acquire Qualified Capital Stock; (3) the   
acquisition of Indebtedness of the Company that is subordinate or junior in     
right of payment to the Exchange Debentures either (x) solely in exchange for   

shares of Qualified Capital Stock (or warrants, options or other rights to      
acquire Qualified Capital Stock) or for Indebtedness of the Company that is     
subordinate or junior in right of payment to the Exchange Debentures, at least  
to the extent that the Indebtedness being acquired is subordinated to the       
Exchange Debentures and has a Weighted Average Life to Maturity no less than    
that of the Indebtedness being acquired or (y) through the application of the   
net cash proceeds of a substantially concurrent sale for cash (other than to a  
Subsidiary of the Company) of shares of Qualified Capital Stock (or warrants,   
options or other rights to acquire Qualified Capital Stock) or Indebtedness of  
the Company which is subordinate or junior in right of payment to the Exchange  
Debentures, at least to the extent that the Indebtedness being acquired is      
subordinated to the Exchange Debentures and has a Weighted Average Life to      
Maturity no less than that of the Indebtedness being refinanced; (4) payments by
the Company to Lancer pursuant to the Tax Sharing Agreement; (5) Investments    
constituting Restricted Payments made as a result of the receipt of non-cash    
consideration from any Asset Sale; and (6) guarantees in respect of Indebtedness
incurred by officers or employees of the Company or any Restricted Subsidiary in
the ordinary course of business and payments in discharge thereof in an amount  
not to exceed $500,000 in any fiscal year.                                      

 Limitations on Transactions with Affiliates.  The Company will not, and
will not cause or permit any of its Restricted Subsidiaries to, directly or     
indirectly, enter into or suffer to exist any transaction or series of related  
transactions (including, without limitation, the sale, purchase, exchange or    
lease of assets, property or services) with any Affiliate or holder of 10% or   
more of the Company's Common Stock (an 'Affiliate Transaction') or extend,      
renew, waive or otherwise modify the terms of any Affiliate Transaction entered 
into prior to the Issue Date unless (i) such Affiliate Transaction is between or
among the Company and its Wholly-Owned Restricted Subsidiaries; or (ii) the     
terms of such Affiliate Transaction is fair and reasonable to the Company or    
such Restricted Subsidiaries, as the case may be, and the terms of such         
Affiliate Transaction are at least as favorable as the terms which could be     
obtained by the Company or such Restricted Subsidiary, as the case may be, in a 
comparable transaction made on an arm's-length basis between unaffiliated       
parties. Any Affiliate Transaction involving an amount or having a value in     
excess of $1.0 million which is not permitted under clause (i) above shall have 
been approved by a majority of the Company's Board of Directors. In transactions
with a value in excess of $5.0 million which are not permitted under clause (i) 
above, the Company must obtain a written opinion as to the fairness of such a   
transaction from an independent investment banking firm.                        

    The foregoing provisions will not apply to (i) any Restricted Payment that
is not prohibited by the provisions described under '--Limitation on Restricted 
Payments' contained herein, (ii) payments to Lancer under the Tax Sharing       
Agreement, (iii) payments to participants in the Equity Participation Plan in an
amount not exceeding $1.32 million in any fiscal year and $5.28 million in the  
aggregate, (iv) reasonable and customary regular fees to directors of the       
Company who are not employees of the Company, (v) loans or advances to officers 
of the Company and its Restricted Subsidiaries for bona fide business purposes  
of the Company in the ordinary course of business, and (vi) royalty payments by 
the Company to T-H Licensing pursuant to that certain letter agreement dated as 
of December 29, 1989 between the Company and T-H Licensing (as such agreement   
may be amended from time to time pursuant to its terms), provided that any such 
payment (less any amounts permitted to be retained by T-H Licensing pursuant to 

the Credit Agreement) is returned to the Company as a loan within sixty         

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days after receipt of such payment by T-H Licensing, (vii) payments or          
distributions to participants in the New Equity Incentive Plan pursuant to the  
terms thereof, and (viii) payments of the Company's allocated portion of the    
Lancer consolidated group's corporate expenses and fees to Lancer or any        
Affiliate of Lancer incurred in connection with Lancer's or any Affiliate of    
Lancer's performance of management consulting, monitoring and financial advisory
services with respect to the Company and any Restricted Subsidiary in an amount 
not to exceed $2.0 million in any fiscal year (excluding amounts paid prior to  
the Issue Date); provided, however, that notwithstanding anything to the        
contrary contained in the Exchange Indenture, the Company shall not be permitted
to pay to Lancer or any Affiliate of Lancer any amount for such services in     
excess of the amount set forth in this clause (viii).                           

 Limitation on Asset Sales.  The Company will not, and will not cause or
permit any of its Restricted Subsidiaries to, consummate an Asset Sale unless   
(i) the Company or such Restricted Subsidiary, as the case may be, receives     
consideration at the time of such sale or other disposition at least equal to   
the fair market value thereof (as determined in good faith by the Company's     
Board of Directors, and evidenced by a board resolution); (ii) not less than 75%
of the consideration received by the Company or its Subsidiaries, as the case   
may be, is in the form of cash or Cash Equivalents; and (iii) the Net Cash      
Proceeds received by the Company or such Restricted Subsidiary are applied (a)  
first, to the extent the Company elects, or is required, to prepay, repay, make 
an offer to redeem or purchase Indebtedness under any then existing Senior Debt 
of the Company or any Restricted Subsidiary; provided, that any such repayment  
shall result in a permanent reduction of the commitments thereunder in an amount
equal to the principal amount so repaid; (b) second, to the extent of the       
balance of Net Cash Proceeds after application as described above, to the extent
the Company elects, to an Investment in assets (including Capital Stock or other
securities purchased in connection with the acquisition of Capital Stock or     
property of another Person) used or useful in businesses similar or ancillary to
the business of the Company or Restricted Subsidiary as conducted at the time of
such Asset Sale ('Replacement Assets'), provided that such Investment occurs    
within 360 days following the receipt of such Net Cash Proceeds, so long as the 
Company or such Restricted Subsidiary has notified the Trustee in writing on or 
prior to the 270th day following such Asset Sale (the 'Reinvestment Date') that 
it has determined to apply the Net Cash Proceeds from such Asset Sale to an     
investment in such Replacement Assets; (c) third, to make an offer to redeem or 
purchase the Existing Notes or Indebtedness under any other then existing Senior
Debt of the Company or any Restricted Subsidiary in accordance with the terms of
the Existing Indenture or the document governing such other Senior Debt, as the 
case may be; (d) fourth, if any Net Cash Proceeds from any Asset Sale are not   
applied as provided in the preceding clauses (a) through (d) within 420 days of 
such Asset Sale, the Company shall apply an amount equal to the Net Cash        
Proceeds not so applied (the 'Available Net Cash Proceeds') to an offer to      
repurchase the Exchange Debentures, at a purchase price in cash equal to 100% of
the principal amount thereof plus accrued and unpaid interest, if any, to the   
date of repurchase (an 'Excess Proceeds Offer'). If an Excess Proceeds Offer is 

not fully subscribed, the Company may retain the portion of the Available Net   
Cash Proceeds not required to repurchase Exchange Debentures.                   

  If the Company is required to make an Excess Proceeds Offer, the Company
shall mail, within 30 days following the Reinvestment Date, a notice to the     
holders of the Exchange Debentures stating, among other things: (1) that such   
holders have the right to require the Company to apply the Available Net Cash   
Proceeds to repurchase such Exchange Debentures at a purchase price in cash     
equal to 100% of the principal amount thereof plus accrued and unpaid interest, 
if any, to the date of purchase; (2) the purchase date, which shall be no       
earlier than 30 days and not later than 60 days from the date such notice is    
mailed; (3) the instructions, determined by the Company, that each such holder  
must follow in order to have such Exchange Debentures repurchased; and (4) the  
calculations used in determining the amount of Available Net Cash Proceeds to be
applied to the repurchase of such Exchange Debentures.                          

Limitation on Dividends and Other Payment Restrictions Affecting      
Subsidiaries.  The Company will not, and will not permit any of its Restricted  
Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to 
exist or become effective any encumbrance or restriction on the ability of any  
Restricted Subsidiary of the Company to (a) pay dividends, in cash or otherwise,
or make any other distributions on or in respect of its Capital Stock or any    
other interest or participation in, or measured by, its profits, (b) pay any    
Indebtedness owed to the Company or any other Restricted Subsidiary of the      
Company, (c) make loans or advances to the Company or any other Restricted      
Subsidiary of the Company, (d) transfer any of its properties or assets to the  
Company or any                                                                  

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other Restricted Subsidiary of the Company (other than any customary restriction
on transfers of property subject to a Permitted Lien (other than a Lien on cash 
not constituting proceeds of non-cash property subject to a Permitted Lien)     
which could not materially adversely affect the Company's ability to satisfy its
obligations hereunder), or (e) guarantee any Indebtedness of the Company or any 
other Restricted Subsidiary of the Company, except for such encumbrances or     
restrictions existing under or by reason of (i) applicable law, (ii) any        
agreement or other instrument of a person acquired by the Company or any        
Restricted Subsidiary of the Company in existence at the time of such           
acquisition (but not created in contemplation thereof), which encumbrance or    
restriction is not applicable to any person, or the properties or assets of any 
person, other than the person, or the property or assets of the person, so      
acquired, (iii) any encumbrance or restriction in any agreement existing on the 
Issue Date to the extent and in the manner such encumbrance or restriction is in
effect on the Issue Date and (iv) any encumbrance or restriction pursuant to any
agreement that extends, refinances, renews or replaces any agreement described  
in clause (ii) above, which is not materially more restrictive or less favorable
to the holders of Exchange Debentures than those existing under the agreement   
being extended, refinanced, renewed.                                            

Limitation on Preferred Capital Stock of Restricted Subsidiaries.  The
Company will not permit any of its Restricted Subsidiaries to issue any         

Preferred Capital Stock (other than to the Company or to a Wholly-Owned         
Restricted Subsidiary) or permit any Person (other than the Company or a        
Wholly-Owned Restricted Subsidiary) to own any Preferred Capital Stock of any   
Restricted Subsidiary unless the Company or such Restricted Subsidiary would be 
entitled to incur or assume Indebtedness in compliance with the '--Limitation on
Incurrence of Additional Indebtedness' covenant in an aggregate principal amount
equal to the aggregate liquidation value of the Preferred Capital Stock to be   
issued.                                                                         

    Limitation on Guarantees by Restricted Subsidiaries.  The Company will not
permit any Restricted Subsidiary, directly or indirectly, to assume, guarantee  
or in any other manner become liable with respect to any Indebtedness of the    
Company or any Guarantor, unless such Restricted Subsidiary is a Guarantor or   
simultaneously executes and delivers a supplemental indenture providing for the 
guarantee of payment of the Exchange Debentures by such Restricted Subsidiary;  
provided, however, that a Restricted Subsidiary may guarantee the Company's     
obligations under the Credit Agreement without executing and delivering such    
supplemental indenture or guaranteeing the Exchange Debentures; provided,       
further, that in the case of any guarantee of any Guarantor with respect to     
Senior Debt, the guarantee of the payment of the Exchange Debentures by such    
Guarantor to be provided in accordance herewith shall be subordinated to the    
guarantee with respect to such Senior Debt in the same manner and to the same   
extent as the Exchange Debentures are subordinated to such Senior Debt. Each    
guarantee created pursuant to the provisions described above is referred to as a
'Guarantee' and the issuer of each such Guarantee, so long as the Guarantee     
remains outstanding, is referred to as a 'Guarantor.'                           

  Notwithstanding the foregoing, in the event that a Guarantor is released
from all obligations which pursuant to the first sentence of the preceding      
paragraph obligate it to become a Guarantor, such Guarantor shall be released   
from all obligations under its Guarantee (provided that the provisions of the   
first sentence of the preceding paragraph shall apply anew in the event that    
such Guarantor subsequent to being released incurs any obligations that pursuant
to such sentence obligate it to become a Guarantor). In addition, upon any sale 
or disposition (by merger or otherwise) of any Guarantor by the Company or a    
Restricted Subsidiary of the Company to any person that is not an Affiliate of  
the Company or any of its Restricted Subsidiaries which is otherwise in         
compliance with the terms of the Exchange Indenture, such Guarantor will be     
deemed to be released from all obligations under its Guarantee; provided,       
however, that each such Guarantor is sold or disposed of in accordance with the 
'--Limitation on Asset Sales' covenant above; provided, further, that the       
foregoing proviso shall not apply to the sale or disposition of a Guarantor in a
foreclosure to the extent that such proviso would be inconsistent with the      
requirements of the Uniform Commercial Code.                                    

  Merger, Consolidation and Sale of Assets.  The Company will not and will
not cause or permit any Guarantor to, in a single transaction or series of      
related transactions, consolidate with or merge with or into, or sell, assign,  
transfer, lease, convey or otherwise dispose of all or substantially all of its 
assets to, another Person or adopt a plan of liquidation unless (i) either (1)  
the Company or the Guarantor, as the case may be, is the survivor of such merger
or consolidation or (2) the surviving or transferee Person is a corporation,    
partnership or trust organized and existing under the laws of the United States,
any state thereof or the District of Columbia and such surviving or transferee  

Person expressly assumes by supplemental indenture all the obligations of the   

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Company or the Guarantor, as the case may be, under the Exchange Debentures and 
the Exchange Indenture; (ii) immediately after giving effect to such transaction
and the use of proceeds therefrom (on a pro forma basis, including any          
Indebtedness incurred or anticipated to be incurred in connection with such     
transaction), the Company or the surviving or transferee Person is able to incur
$1.00 of additional Indebtedness (other than Permitted Indebtedness) in         
compliance with the '--Limitation on Incurrence of Additional Indebtedness'     
covenant; (iii) immediately after giving effect to such transaction (including  
any Indebtedness incurred or anticipated to be incurred in connection with the  
transaction) no Default or Event of Default has occurred and is continuing; and 
(iv) the Company has delivered to the Trustee an officers' certificate and      
opinion of counsel, each stating that such consolidation, merger or transfer    
complies with the Exchange Indenture, that the surviving Person agrees by       
supplemental indenture to be bound thereby, and that all conditions precedent in
the Exchange Indenture relating to such transaction have been satisfied. For    
purposes of the foregoing, the transfer (by lease, assignment, sale or          
otherwise, in a single transaction or series of related transactions) of all or 
substantially all of the properties and assets of one or more Subsidiaries the  
Capital Stock of which constitutes all or substantially all of the properties   
and assets of the Company will be deemed to be the transfer of all or           
substantially all of the properties and assets of the Company.                  

PAYMENTS FOR CONSENT                                                            

Neither the Company nor any of its Subsidiaries shall, directly or    
indirectly, pay or cause to be paid any consideration, whether by way of        
interest, fee or otherwise, to any holder of any Exchange Debentures for or as  
an inducement to any consent, waiver or amendment of any of the terms or        
provisions of the Exchange Debentures unless such consideration is offered to be
paid or agreed to be paid to all holders of the Exchange Debentures who so      
consent, waive or agree to amend in the time frame set forth in solicitation    
documents relating to such consent, waiver or agreement.                        

EVENTS OF DEFAULT                                                               

  The following events are defined in the Exchange Indenture as 'Events of
Default':                                                                       

       (i) the failure to pay interest on any Exchange Debentures when the
   same becomes due and payable and the Default continues for a period of 30
days (whether or not such payment is prohibited by the subordination  
provisions of the Exchange Indenture);                                

     (ii) the failure to pay the principal, or premium, if any, on any
Exchange Debentures, when such principal becomes due and payable, at  
maturity, upon redemption or otherwise (whether or not such payment is
prohibited by the subordination provisions of the Exchange Indenture);

          (iii) a default in the observance or performance of any other covenant
     or agreement contained in the Exchange Debentures or the Exchange Indenture
    which default continues for a period of 60 days after the Company receives
   written notice thereof specifying the default from the Trustee or holders
of at least 25% in aggregate principal amount of outstanding Exchange 
Debentures;                                                           

    (iv) default in the payment at final maturity of principal in an
   aggregate amount of $5.0 million or more with respect to any Indebtedness
     of the Company or any Restricted Subsidiary thereof which default shall not
    be cured, waived or postponed pursuant to an agreement with the holders of
    such Indebtedness within 60 days after written notice, or the acceleration
of any such Indebtedness aggregating $5.0 million or more which       
acceleration shall not be rescinded or annulled within 20 days after  
written notice as provided in the Exchange Indenture;                 

       (v) any final judgment or judgments which can no longer be appealed
for the payment of money in excess of $5.0 million shall be rendered  
    against the Company or any Restricted Subsidiary thereof, and shall not be
 discharged for any period of 60 consecutive days during which a stay of
enforcement shall not be in effect; and                               

   (vi) certain events of bankruptcy, insolvency or reorganization
affecting Company or any of its Restricted Subsidiaries.              

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     The Exchange Indenture provides that the Trustee may withhold notice to the
holders of the Exchange Debentures of any default (except in payment of         
principal or premium, if any, or interest on the Exchange Debentures) if the    
Trustee considers it to be in the best interest of the holders of the Exchange  
Debentures to do so.                                                            

Upon the happening of any Event of Default specified in the Exchange  
Indenture, the Trustee may, and the Trustee upon the request of 25% in principal
amount of the Exchange Debentures shall or the holders of at least 25% in       
aggregate principal amount of outstanding Exchange Debentures may, declare the  
principal of and accrued but unpaid interest, if any, on all the Exchange       
Debentures to be due and payable by notice in writing to the Company and the    
Trustee specifying the respective Event of Default and that it is a 'notice of  
acceleration' (the 'Acceleration Notice'), and the same (i) shall become        
immediately due and payable or (ii) if there are any amounts outstanding under  
the Credit Agreement, will become due and payable upon the first to occur of an 
acceleration under the Credit Agreement or 5 Business Days after receipt by the 
Company and the Representative under the Credit Agreement of such Acceleration  
Notice (unless all Events of Default specified in such Acceleration Notice have 
been cured or waived). If an Event of Default with respect to bankruptcy        
proceedings occurs and is continuing, then such amount will ipso facto become   
and be immediately due and payable without any declaration or other act on the  
part of the Trustee or any holder of Exchange Debentures.                       

   The Exchange Indenture will provide that, at any time after a declaration

of acceleration with respect to the Exchange Debentures as described in the     
preceding paragraph, the holders of a majority in principal amount of the       
Exchange Debentures then outstanding (by notice to the Trustee) may rescind and 
cancel such declaration and its consequences if (i) the rescission would not    
conflict with any judgment or decree of a court of competent jurisdiction, (ii) 
all existing Events of Default have been cured or waived except nonpayment of   
principal or interest on the Exchange Debentures that has become due solely by  
such declaration of acceleration, (iii) to the extent the payment of such       
interest is lawful, interest (at the same rate specified in the Exchange        
Debentures) on overdue installments of interest and overdue principal which has 
become due otherwise than by such declaration of acceleration, has been paid,   
(iv) the Company has paid the Trustee its reasonable compensation and reimbursed
the Trustee for its expenses, disbursements and advances and (v) in the event of
the cure or waiver of a Default or Event of Default of the type described in    
clause (vi) of the description above of Events of Default, the Trustee has      
received an officers' certificate and an opinion of counsel that such Default or
Event of Default has been cured or waived. The holders of a majority in         
principal amount of the Exchange Debentures may waive any existing Default or   
Event of Default under the Exchange Indenture, and its consequences, except a   
default in the payment of the principal of or interest on any Exchange          
Debentures.                                                                     

  The Company is required to deliver to the Trustee, on or before 100 days
after the end of the Company's fiscal year and on or before 50 days after the   
end of the first, second and third fiscal quarters of such years, a certificate 
indicating whether the signing officers know of any Default or Event of Default 
that occurred during the previous year or quarter, as the case may be, and      
whether the Company has complied with its obligations under the Exchange        
Indenture. In addition, the Company will be required to notify the Trustee of   
the occurrence and continuation of any Default or Event of Default within five  
business days after the Company becomes aware of the same.                      

    Subject to the provisions of the Exchange Indenture relating to the duties
of the Trustee in case an Event of Default thereunder should occur and be       
continuing, the Trustee will be under no obligation to exercise any of the      
rights or powers under the Exchange Indenture at the request or direction of any
of the holders of the Exchange Debentures unless such holders have offered to   
the Trustee reasonable indemnity or security against any loss, liability or     
expense. Subject to such provision for security or indemnification and certain  
limitations contained in the Exchange Indenture, the holders of a majority in   
principal amount of the outstanding Exchange Debentures have the right to direct
the time, method and place of conducting any proceeding for any remedy available
to the Trustee or exercising any trust or power conferred on the Trustee.       

SATISFACTION AND DISCHARGE OF EXCHANGE INDENTURE; DEFEASANCE                    

     The Exchange Indenture provides the Company may elect either (a) to defease
and be discharged from any and all obligations with respect to the Exchange     
Debentures (except for the obligations to register the transfer or exchange of  
such Exchange Debentures, to replace temporary or mutilated, destroyed, lost or 
stolen Exchange Debentures, to maintain an office or agency in respect of the   
Exchange Debentures and to hold monies for payment in trust) ('defeasance') or  
(b) to be released from their obligations with respect to the Exchange          

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Debentures under certain covenants contained in the Exchange Indenture and      
described above under '--Certain Covenants' ('covenant defeasance'), upon the   
deposit with the Trustee (or other qualifying trustee), in trust for such       
purpose, of money and/or U.S. Government Obligations which through the payment  
of principal and interest in accordance with their terms will provide money, in 
an amount sufficient to pay the principal of, premium, if any, and interest on  
the Exchange Debentures on the scheduled due dates therefor or on a selected    
date of redemption in accordance with the terms of the Exchange Indenture. Such 
a trust may only be established if, among other things, the Company had         
delivered to the Trustee an opinion of counsel (as specified in the Exchange    
Indenture) (i) to the effect that neither the trust nor the Trustee will be     
required to register as an investment company under the Investment Company Act  
of 1940, as amended, and (ii) to the effect that holders of the Exchange        
Debentures or persons in their positions will not recognize income, gain or loss
for federal income tax purposes as a result of such deposit, defeasance and     
discharge and will be subject to federal income tax on the same amount and in   
the same amount and in the same manner and at the same times, as would have been
the case if such deposit, defeasance and discharge had not occurred which, in   
the case of a defeasance only, must be based upon a private ruling concerning   
the Exchange Debentures, a published ruling of the Internal Revenue Service or a
change in applicable federal income tax law.                                    

REPORTS TO HOLDERS                                                              

The Company will file with the Trustee and provide to the holders of  
Exchange Debentures, within 15 days after it files them with the Commission,    
copies of the annual reports and of the information, documents and other reports
(or copies of such portions of any of the foregoing as the Commission may by    
rules and regulations prescribe) which the Company files with the Commission    
pursuant to Section 13 or 15(d) of the Exchange Act. In the event the Company is
no longer required to furnish such reports to its securityholders pursuant to   
Exchange Act, the Company will cause its consolidated financial statements,     
comparable to those which would have been required to appear in annual or       
quarterly reports, to be delivered to the holders of the Exchange Debentures.   

MODIFICATION OF THE EXCHANGE INDENTURE                                          

   From time to time, the Company, the Guarantors and the Trustee, together,
without the consent of the holders of the Exchange Debentures, may amend or     
supplement the Exchange Indenture for certain specified purposes, including     
curing ambiguities, defects or inconsistencies, so long as such change does not,
adversely affect the rights of any of the holders in any material respect. Other
modifications and amendments of the Exchange Indenture may be made with the     
consent of the holders of a majority in principal amount of the then outstanding
Exchange Debentures, except that, without the consent of each holder of the     
Exchange Debentures affected thereby, no amendment may directly or indirectly   
(i) reduce the amount of Exchange Debentures whose holders must consent to an   
amendment; (ii) reduce the rate of or change the time for payment of interest,  
including defaulted interest, on any Exchange Debentures; (iii) reduce the      
principal of or change the fixed maturity of any Exchange Debentures, or change 

the date on which any Exchange Debentures may be subject to redemption or       
repurchase, or reduce the redemption or repurchase price therefor; (iv) make any
Exchange Debentures payable in money other than that stated in the Exchange     
Debentures; (v) make any change in provisions of the Exchange Indenture         
protecting the right of each holder of a Exchange Debenture to receive payment  
of principal of and interest on such Exchange Debenture on or after the due date
thereof or to bring suit to enforce such payment or permitting holders of a     
majority in principal amount of a class of Exchange Debentures to waive Defaults
or Events of Default, other than ones with respect to the payment of principal  
of or interest on the Exchange Debentures, or relating to certain amendments of 
the Exchange Indenture; (vi) after the Company's obligation to purchase the     
Exchange Debentures arises under the Exchange Indenture, amend, modify or change
the obligation of the Company to make or consummate a Change of Control Offer or
any Excess Proceeds Offer, as the case may be, or waive any default in the      
performance thereof or modify any of the provisions or definitions with respect 
to any such offer; or (vii) modify the subordination provisions of the Exchange 
Indenture to adversely affect the holders of Exchange Debentures.               

THE TRUSTEE                                                                     

United States Trust Company of New York will be the Trustee under the 
Exchange Indenture. The Trustee under the Exchange Indenture will be the        
Registrar and Paying Agent with regard to the Exchange Debentures. The Exchange 
Indenture provides that, except during the continuance of an Event of Default,  
the Trustee will perform only such duties as are specifically set forth in the  
Exchange Indenture. During the existence of an Event                            

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of Default, the Trustee will exercise such rights and powers vested in it under 
the Exchange Indenture and use the same degree of care and skill in its exercise
as a prudent person would exercise under the circumstances in the conduct of    
such person's own affairs.                                                      

TRANSFER AND EXCHANGE                                                           

   Holders of the Exchange Debentures may transfer or Exchange Debentures in
accordance with the Exchange Indenture. The Registrar under such Exchange       
Indenture may require a holder, among other things, to furnish appropriate      
endorsements and transfer documents, and to pay any taxes and fees required by  
law or permitted by the Exchange Indenture. The Registrar is not required to    
transfer or exchange any Exchange Debenture selected for redemption. Also, the  
Registrar is not required to transfer or exchange any Exchange Debenture for a  
period of 15 days before selection of the Exchange Debentures to be redeemed.   

The Exchange Debentures will be issued in a transaction exempt from   
registration under the Securities Act and will be subject to the restrictions on
transfer described in 'Notice to Investors.'                                    

    The registered holder of an Exchange Debenture may be treated as the owner
of it for all purposes.                                                         

CERTAIN DEFINITIONS                                                             

  Set forth below is a summary of certain of the defined terms used in the
Certificate of Designation and the Exchange Indenture. Reference is made to the 
Certificate of Designation and the Exchange Indenture for the full definition of
all such terms, as well as any other terms used herein for which no definition  
is provided.                                                                    

'Acquired Indebtedness' means Indebtedness of a person (a) assumed in 
connection with an Asset Acquisition from such person or (b) existing at the    
time such person becomes a Subsidiary of any other person.                      

   'Affiliate' means, with respect to any specified person, any other person
directly or indirectly controlling or controlled by or under direct or indirect 
common control with such specified person.                                      

'Asset Acquisition' means (a) an Investment by the Company or any     
Subsidiary of the Company in any other person pursuant to which such person     
shall become a Restricted Subsidiary of the Company, or shall be merged with or 
into the Company or any Restricted Subsidiary of the Company, or (b) the        
acquisition by the Company or any Restricted Subsidiary of the Company of the   
assets of any person which constitute all or substantially all of the assets of 
such person or any division or line of business of such person.                 

     'Asset Sale' means any sale, issuance, conveyance, transfer, lease or other
disposition to any person other than the Company or a Wholly-Owned Restricted   
Subsidiary of the Company, in one or a series of related transactions, of: (a)  
any Capital Stock of any Restricted Subsidiary of the Company; (b) all or       
substantially all of the properties and assets of any division or line of       
business of the Company or any Restricted Subsidiary of the Company; or (c) any 
other properties or assets of the Company or a Restricted Subsidiary (including 
proprietary brand names, whether registered or otherwise) other than in the     
ordinary course of business (it being understood that the sale or lease of any  
used or obsolete equipment is in the ordinary course of business). For the      
purposes of this definition, the term 'Asset Sale' shall not include (i) any    
sale, issuance, conveyance, transfer, lease or other disposition of properties  
or assets that is governed by the provisions described under '--Merger,         
Consolidation or Sale of Assets' and (ii) any sale, issuance, conveyance,       
transfer, lease or other disposition of properties or assets, whether in one    
transaction or a series of related transactions, involving assets with a fair   
market value determined by the Company to be not in excess of $1,000,000.       

     'Capital Stock' means (i) with respect to any Person that is a corporation,
any and all shares, interests, participations or other equivalents (however     
designated) of capital stock, including each class of common stock and preferred
stock of such Person and (ii) with respect to any Person that is not a          
corporation, any and all partnership or other equity interests.                 

  'Capitalized Lease Obligation' means any obligation under a lease of (or
other agreement conveying the right to use) any property (whether real, personal
or mixed) that is required to be classified and accounted for as a capital lease
obligation under GAAP; and, for the purpose of this definition, the amount of   
such obligation at any date shall be the capitalized amount thereof at such     
date, determined in accordance with GAAP consistently applied.                  

 'Cash Equivalents' means, at any time: (i) any evidence of Indebtedness
with a maturity of 180 days or less issued or directly and fully guaranteed or  
insured by the United States of America or any agency or instrumentality thereof
(provided that the full faith and credit of the United States of America is     
pledged in support thereof); (ii) certificates of deposit, time deposits,       
Eurodollar time deposits and bankers' acceptances                               

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with a maturity of 180 days or less of any financial institution that is a      
member of the Federal Reserve System having combined capital and surplus and    
undivided profits at the time of investment of not less than $500,000,000; (iii)
commercial paper with a maturity of 180 days or less issued by a corporation    
that is not an Affiliate of the Company organized under the laws of any state of
the United States or the District of Columbia and rated at the time of          
investment at least A-1 by S&P or at least P-1 by Moody's or at least an        
equivalent rating category of another nationally recognized securities rating   
agency; and (iv) repurchase agreements and reverse repurchase agreements        
relating to marketable direct obligations issued or unconditionally guaranteed  
by the government of the United States of America or issued by any agency       
thereof and backed by the full faith and credit of the United States of America,
in each case maturing within 180 days from the date of acquisition; provided    
that the terms of such agreements comply with the guidelines set forth in the   
Federal Financial Agreements of Depository Institutions With Securities Dealers 
and Others, as adopted by the Comptroller of the Currency on October 31, 1985.  

  'Change of Control' means the occurrence of any of the following events:
(a) any 'person' or 'group' (as such terms are used in Sections 13(d) and 14(d) 
of the Exchange Act), excluding Permitted Holders, is or becomes the 'beneficial
owner' (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that 
a person shall be deemed to have 'beneficial ownership' of all securities that  
such person has the right to acquire, whether such right is exercisable         
immediately or only after the passage of time), directly or indirectly, of more 
than 50% of the total Voting Stock of the Company; (b) the Company consolidates 
with, or merges with or into, another person or sells, assigns, conveys,        
transfers, leases or otherwise disposes of all or substantially all of its      
assets to any person, or any person consolidates with, or merges with or into,  
the Company, in any such event pursuant to a transaction in which the           
outstanding Voting Stock of the Company is converted into or exchanged for cash,
securities or other property, other than any such transaction where (i) the     
outstanding Voting Stock of the Company is converted into or exchanged for (1)  
Voting Stock (other than Disqualified Capital Stock) of the surviving or        
transferee corporation or (2) cash, securities and other property in an amount  
which could be paid by the Company as a Restricted Payment under the Indenture  
and (ii) immediately after such transaction no 'person' or 'group' (as such     
terms are used in Sections 13(d) and 14(d) of the Exchange Act), excluding      
Permitted Holders, is the 'beneficial owner' (as defined in Rules 13d-3 and     
13d-5 under the Exchange Act, except that a person shall be deemed to have      
'beneficial ownership' of all securities that such person has the right to      
acquire, whether such right is exercisable immediately or only after the passage
of time), directly or indirectly, of more than 50% of the total Voting Stock of 

the surviving or transferee corporation; or (c) during any consecutive two-year 
period, individuals who at the beginning of such period constituted the Board of
Directors of the Company (together with any new directors whose election by such
Board of Directors or whose nomination for election by the stockholders of the  
Company was approved by a vote of 66 2/3% of the directors then still in office 
who were either directors at the beginning of such period or persons whose      
election as directors or nomination for election was previously so approved)    
cease for any reason to constitute a majority of the Board of Directors of the  
Company then in office.                                                         

'Common Stock' means, with respect to any person, any and all shares, 
interests or other participations in, and other equivalents (however designated 
and whether voting or nonvoting) of, such person's common stock, whether        
outstanding at the Issue Date or issued after the Issue Date, and includes,     
without limitation, all series and classes of such common stock.                

     'Consolidated EBITDA' means, with respect to any person for any period, (i)
the sum of, without duplication, the amount for such period, taken as a single  
accounting period, of (a) Consolidated Net Income, (b) Consolidated Non-cash    
Charges, (c) Consolidated Interest Expense, (d) Consolidated Income Tax Expense 
and (e) all non-cash accruals or cash expenses relating to the New Equity       
Incentive Plan (to the extent such accruals or expenses reduce net income), less
(ii) non-cash items increasing Consolidated Net Income (other than in the       
ordinary course of business); provided, however, that if, during such period,   
such person or any of its Restricted Subsidiaries shall have consummated any    
Asset Sale or Asset Acquisition, Consolidated EBITDA for such person and its    
Restricted Subsidiaries for such period shall be adjusted (in the manner set    
forth in the definition of the term 'Consolidated Fixed Charge Coverage Ratio') 
to give pro forma effect to the Consolidated EBITDA directly attributable to the
assets which are the subject of such Asset Sales or Asset Acquisitions during   
such period.                                                                    

'Consolidated Fixed Charge Coverage Ratio' means, with respect to any 
person, the ratio of the aggregate amount of Consolidated EBITDA of such person 
for the four full fiscal quarters for which financial information               

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in respect thereof is available immediately preceding the date of the           
transaction (the 'Transaction Date') giving rise to the need to calculate the   
Consolidated Fixed Charge Coverage Ratio (such four full fiscal quarter period  
being referred to herein as the 'Four Quarter Period') to the aggregate amount  
of Consolidated Fixed Charges of such person for the Four Quarter Period. In    
addition to and without limitation of the foregoing, for purposes of this       
definition 'Consolidated EBITDA' and 'Consolidated Fixed Charges' shall be      
calculated after giving effect on a pro forma basis for the period of such      
calculation to, without duplication, (a) the incurrence of any Indebtedness of  
such person or any of its Restricted Subsidiaries, or the repayment of any      
Indebtedness of such person or its Restricted Subsidiary (other than the        
incurrence and repayment of Indebtedness under a revolving credit facility)     
during the period commencing on the first day of the Four Quarter Period to and 
including the Transaction Date (the 'Reference Period'), including, without     

limitation, the incurrence of the Indebtedness giving rise to the need to make  
such calculation, as if such incurrence occurred on the first day of the        
Reference Period, and (b) any Asset Sales or Asset Acquisitions (including,     
without limitation, any Asset Acquisition giving rise to the need to make such  
calculation as a result of such person or one of its Restricted Subsidiaries    
(including any person who becomes a Subsidiary as a result of the Asset         
Acquisition) incurring, assuming or otherwise being liable for Acquired         
Indebtedness) occurring during the Reference Period, as if such Asset Sale or   
Asset Acquisition occurred on the first day of the Reference Period.            
Furthermore, in calculating 'Consolidated Fixed Charges' for purposes of        
determining the denominator (but not the numerator) of this 'Consolidated Fixed 
Charge Coverage Ratio,' (i) interest on outstanding Indebtedness determined on a
fluctuating basis as of the Transaction Date and which will continue to be so   
determined thereafter shall be deemed to have accrued at a fixed rate per annum 
equal to the rate of interest on such Indebtedness in effect on the Transaction 
Date, (ii) if interest on any Indebtedness actually incurred on the Transaction 
Date may optionally be determined at an interest rate based upon a factor of a  
prime or similar rate, a eurocurrency interbank offered rate, or other rates,   
then the interest rate in effect on the Transaction Date will be deemed to have 
been in effect during the Reference Period; (iii) notwithstanding clauses (i)   
and (ii) above, interest on Indebtedness determined on a fluctuating basis, to  
the extent such interest is covered by Interest Rate Agreements, shall be deemed
to have accrued at the rate per annum resulting after giving effect to the      
operation of such agreements and (iv) interest on any Indebtedness incurred     
pursuant to a revolving credit facility shall will be based on the average daily
principal amount outstanding under such facility during such Four Quarter       
Period. In calculating the Consolidated Fixed Charge Coverage Ratio, and giving 
pro forma effect to any incurrence of Indebtedness during a Reference Period,   
pro forma effect shall be given to the use of proceeds thereof to permanently   
repay or retire Indebtedness. If such person or any of its Restricted           
Subsidiaries directly or indirectly guaranteed Indebtedness of a third person,  
the above clauses shall give effect to the incurrence of such guaranteed        
Indebtedness as if such person or such Restricted Subsidiary had directly       
incurred or otherwise assumed such guaranteed Indebtedness.                     

'Consolidated Fixed Charges' means, with respect to any person for any
period, the sum of, without duplication, the amounts for such period of (i)     
Consolidated Interest Expense and (ii) the aggregate amount of cash dividends   
and other distributions paid or accrued during such period in respect of        
Disqualified Capital Stock of such person and its Restricted Subsidiaries on a  
consolidated basis; provided, however, that if, during such period, such person 
or any of its Restricted Subsidiaries shall have made any Asset Sales or Asset  
Acquisitions, Consolidated Fixed Charges for such person and its Restricted     
Subsidiaries for such period shall be adjusted (in the manner set forth in the  
definition of the term 'Consolidated Fixed Charge Coverage Ratio') to give pro  
forma effect to the Consolidated Fixed Charges directly attributable to the     
assets which are the subject of such Asset Sales or Asset Acquisitions during   
such period.                                                                    

     'Consolidated Income Tax Expense' means, with respect to any person for any
period, the provision for federal, state, local and foreign income taxes of such
person and its Restricted Subsidiaries for such period as determined on a       
consolidated basis in accordance with GAAP consistently applied.                

   'Consolidated Interest Expense' means, with respect to any person for any
period, without duplication, the (i) sum of (a) the interest expense of such    
person and its Restricted Subsidiaries for such period as determined on a       
consolidated basis in accordance with GAAP consistently applied, including,     
without limitation, (1) any amortization of debt discount, (2) the net cost     
under Interest Rate Agreements (including any amortization of discounts), (3)   
the interest portion of any deferred payment obligation which in accordance with
GAAP is required to be reflected on an income statement, (4) all commissions,   
discounts and other fees and charges owed with respect to letters of credit and 
bankers' acceptance financing, and (5) all accrued interest and (b) the interest
component of Capitalized Lease Obligations paid, accrued and/or scheduled to be 
paid or accrued by such person                                                  

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and its Subsidiaries during such period as determined on a consolidated basis in
accordance with GAAP consistently applied, minus, in the case of the Company,   
(ii) any non-cash interest expense of the Company in respect of Permitted       
Indebtedness incurred in connection with the New Equity Incentive Plan, minus   
(iii) any amortization of deferred financing discount costs and expenses.       

'Consolidated Net Income' means, with respect to any person, for any  
period, the consolidated net income (or loss) of such person and its Restricted 
Subsidiaries for such period as determined in accordance with GAAP consistently 
applied adjusted, (A) to the extent included in calculating such net income, by 
excluding, without duplication, (i) all extraordinary gains or losses (net of   
fees and expenses relating to the transaction giving rise thereto) and the      
non-recurring cumulative effect of accounting changes, (ii) the portion of net  
income (or loss) of such person and its Restricted Subsidiaries allocable to    
minority interests in unconsolidated persons to the extent that cash dividends  
or distributions have not actually been received by such person or one of its   
Restricted Subsidiaries, (iii) net income (or loss) of any person combined with 
such person or one of its Restricted Subsidiaries on a 'pooling of interests'   
basis attributable to any period prior to the date of combination, (iv) one time
unusual non-cash charges, (v) any gain or loss realized upon the termination of 
any employee pension benefit plan, on an after-tax basis, (vi) gains or losses  
in respect of any Asset Sales by such person or one of its Restricted           
Subsidiaries (net of fees and expenses relating to the transaction giving rise  
thereto), on an after-tax basis, (vii) the net income of any Restricted         
Subsidiary of such person to the extent that the declaration of dividends or    
similar distributions by that Restricted Subsidiary of that income is not at the
time permitted, directly or indirectly, by operation of the terms of its charter
or any agreement, instrument, judgment, decree, order, statute, rule or         
governmental regulations applicable to that Subsidiary or its stockholders and  
(viii) the amount of any Consolidated Non-cash Charges of such person           
attributable to the purchase method of accounting treatment in accordance with  
Accounting Principles Board Opinion No. 16 dated August 1970, entitled 'Business
Combinations' and (B) by adding, in the case of the Company, (i) without        
duplication, capital contributions made by Lancer to the Company pursuant to the
Tax Sharing Agreement to the extent such capital contributions represent a      
return to the Company of amounts which had been included as income taxes in     
computing the Company's Consolidated Net Income and (ii) for purposes of        

determining the Company's ability to make Restricted Payments pursuant to the   
'--Limitation on Restricted Payments' covenant, 100% (without duplication) of   
all non-cash accruals or cash expenses relating to the New Equity Incentive Plan
(to the extent such accruals or expenses reduce net income.)                    

   'Consolidated Non-cash Charges' means, with respect to any person for any
period, the aggregate depreciation, amortization and other non-cash expenses    
(including, without limitation, non-cash reserves and non-cash charges) of such 
person and its Restricted Subsidiaries reducing Consolidated Net Income of such 
person and its Restricted Subsidiaries for such period, determined on a         
consolidated basis in accordance with GAAP consistently applied.                

 'Credit Agreement' means (a) the GE Credit Agreement, together with all
amendments, documents and instruments from time to time delivered in connection 
with the GE Credit Agreement (including, without limitation, any guaranty       
agreements and security documents), as in effect on the date hereof and, subject
to the proviso to the next succeeding sentence, as the GE Credit Agreement and  
such other agreements, documents and instruments may be amended, amended and    
restated, renewed, extended, restructured, supplemented or otherwise modified   
from time to time, and (b) any credit agreement, loan agreement, note purchase  
agreement, indenture or other agreement, document or instrument refinancing,    
refunding or otherwise replacing the GE Credit Agreement or any other agreement 
deemed a Credit Agreement under clause (a) or (b) hereof, whether or not with   
the same agent, trustee, representative lenders or holders, and, subject to the 
proviso to the next succeeding sentence, irrespective of any changes in the     
terms and conditions thereof. Without limiting the generality of the foregoing, 
the term 'Credit Agreement' shall include any amendment, amendment and          
restatement, renewal, extension, restructuring, supplement or modification to   
any Credit Agreement and all refundings, refinancings and replacements of any   
Credit Agreement, including any agreement (i) extending the maturity of any     
Indebtedness incurred thereunder or contemplated thereby, (ii) adding or        
deleting borrowers or guarantors thereunder, so long as borrowers and issuers   
include one or more of the Company and its Subsidiaries and their respective    
successors and assigns, and (iii) increasing the amount of Indebtedness incurred
thereunder or available to be borrowed thereunder, provided that on the date    
thereof such Indebtedness would not be prohibited under the Exchange Indenture. 

  'Default' means any event that is, or after notice or passage of time or
both would be, an Event of Default.                                             

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'Designated Senior Debt' means (i) all Senior Debt under the Credit   
Agreement, (ii) Indebtedness in respect of the Existing Notes, and (iii) any    
other Senior Debt which (a) at the time of determination exceeds $10,000,000 in 
aggregate principal amount and (b) is specifically designated by the Company in 
the instrument evidencing such Senior Debt as 'Designated Senior Debt' by the   
Company.                                                                        

'Disqualified Capital Stock' means any Capital Stock (other than the  
Existing Preferred Stock or the Private Exchange Preferred Stock) which, by its 
terms (or by the terms of any security into which it is convertible or for which

it is exchangeable), or upon the happening of any event, matures (excluding any 
maturity as the result of an optional redemption by the issuer thereof) or is   
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or  
is redeemable at the sole option of the holder thereof, in whole or in part, on 
or prior to (i) the mandatory redemption date of the New Preferred Stock, in the
case of the New Preferred Stock or (ii) the final maturity date of the Exchange 
Debentures, in the case of the Exchange Debentures. Without limitation of the   
foregoing, Disqualified Capital Stock shall be deemed to include (i) any        
Preferred Capital Stock of a Restricted Subsidiary of the Company, (ii) any     
Preferred Capital Stock of the Company, with respect to either of which, under  
the terms of such Preferred Capital Stock, by agreement or otherwise, such      
Restricted Subsidiary or the Company is obligated to pay current dividends or   
distributions in cash during the period prior to the redemption date of the New 
Preferred Stock or the maturity date of the Exchange Debentures; and (iii) as   
long as the New Preferred Stock remains outstanding, Senior Stock and Parity    
Stock. Notwithstanding anything in this definition to the contrary, Preferred   
Capital Stock of the Company or any Restricted Subsidiary thereof that is issued
with the benefit of provision requiring a change of control offer to be made for
such Preferred Capital Stock in the event of a change of control of the Company 
or Restricted Subsidiary, which provisions have substantially the same effect as
the provisions of the Certificate of Designation and Exchange Indenture         
described under '--Change of Control,' shall not be deemed to be Disqualified   
Capital Stock solely by virtue of such provisions.                              

'Exchange Date' means the date of original issuance of the Exchange   
Debentures.                                                                     

 'Exchange Debentures' means the Company's 11 1/4% Subordinated Exchange
Debentures due 2009 issuable in exchange for the New Preferred Stock.           

 'Existing Indenture' means the indenture pursuant to which the Existing
Notes were issued.                                                              

    'Existing Notes' means the Company's 11 3/8% Senior Subordinated Notes due
2001.                                                                           

'Existing Preferred Stock' means the Company's unregistered 11 1/4%   
Cumulative Exchangeable Preferred Stock issued on or about the Issue Date.      

  'Event of Default' has the meaning set forth under '--Events of Default'
herein.                                                                         

    'GAAP' means generally accepted accounting principles in the United States
set forth in the Statements of Financial Accounting Standards and               
Interpretations, Accounting Principles Board Opinions and AICPA Accounting      
Research Bulletins which are applicable as of the Issue Date.                   

     'GE Credit Agreement' means the Credit Agreement, dated as of July 7, 1993,
as amended from time to time, among the Company, T-H Licensing, Inc., as        
guarantor, the lenders named therein and General Electric Capital Corporation,  
as agent for such lenders.                                                      

    'Guarantee' has the meaning set forth under '--Limitation on Guarantees by
Restricted Subsidiaries' herein.                                                

 'guarantee' means, as applied to any obligation, (i) a guarantee (other
than by endorsement of negotiable instruments for collection in the ordinary    
course of business), direct or indirect, in any manner, of any part or all of   
such obligation and (ii) an agreement. direct or indirect, contingent or        
otherwise, the practical effect of which is to assure in any way the payment or 
performance (or payment of damages in the event of non-performance) of all or   
any part of such obligation, including, without limiting the foregoing, the     
payment of amounts drawn down by letters of credit.                             

  'Guarantor' means the issuer at any time of a Guarantee (so long as such
Guarantee remains outstanding).                                                 

    'incur' means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (by conversion, exchange or otherwise), assume, 
guarantee or otherwise become liable in respect of such Indebtedness or other   
obligation or the recording (other than previously recorded), as required       
pursuant to GAAP or otherwise, of any such Indebtedness or other obligation on  
the balance sheet of such person (and 'incurrence,' 'incurred,' 'incurable,' and
'incurring' shall have meanings correlative to the foregoing);                  

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provided that a change in GAAP that results in an obligation of such Person that
exists at such time becoming Indebtedness shall not be deemed an incurrence of  
such Indebtedness.                                                              

    'Indebtedness' means, with respect to any person, without duplication, (a)
all liabilities of such person for borrowed money or for the deferred purchase  
price of property or services, excluding any trade payables and other accrued   
current liabilities incurred in the ordinary course of business, but including, 
without limitation, all obligations, contingent or otherwise, of such person in 
connection with any letters of credit, banker's acceptance or other similar     
credit transaction, (b) all obligations of such person evidenced by bonds,      
notes, debentures or other similar instruments, (c) all indebtedness created or 
arising under any conditional sale or other title retention agreement with      
respect to property acquired by such person (even if the rights and remedies of 
the seller or lender under such agreement in the event of default are limited to
repossession or sale of such property), but excluding trade accounts payable    
arising in the ordinary course of business, (d) all Capitalized Lease           
Obligations of such person, (e) all Indebtedness referred to in the preceding   
clauses of other persons and all dividends of other persons, the payment of     
which is secured by (or for which the holder of such Indebtedness has an        
existing right, contingent or otherwise, to be secured by) any Lien upon        
property (including, without limitation, accounts and contract rights) owned by 
such person, even though such person has not assumed or become liable for the   
payment of such Indebtedness (the amount of such obligations being deemed to be 
the lesser of the value of such property or asset or the amount of the          
obligation so secured), (f) all guarantees of Indebtedness referred to in this  
definition by such person, (g) all Disqualified Capital Stock valued at the     
greater of its voluntary or involuntary maximum fixed repurchase price plus     
accrued dividends, (h) all obligations under or in respect of currency exchange 

contracts and Interest Rate Agreements of such person and (i) any amendment,    
supplement, modification, deferral, renewal, extension or refunding of any      
liability of the types referred to in clauses (a) through (h) above. For        
purposes hereof, (x) the 'maximum fixed repurchase price' of any Disqualified   
Capital Stock which does not have a fixed repurchase price shall be calculated  
in accordance with the terms of such Disqualified Capital Stock as if such      
Disqualified Capital Stock were purchased on any date on which Indebtedness     
shall be required to be determined pursuant to the Indenture, and if such price 
is based upon, or measured by, the fair market value of such Disqualified       
Capital Stock, such fair market value shall be determined in good faith by the  
board of directors of the issuer of such Disqualified Capital Stock, and (y)    
Indebtedness is deemed to be incurred pursuant to a revolving credit facility   
each time an advance is made thereunder; provided, however, that, with respect  
to the Company, Indebtedness referred to in this definition shall exclude all   
obligations of the Company to Lancer under the Tax Sharing Agreement and any    
liability for federal, state, local or other taxes owed or owing by the Company.

   'Interest Rate Agreement' means the obligations of any person pursuant to
any arrangement with any other person whereby, directly or indirectly, such     
person is entitled to receive from time to time periodic payments calculated by 
applying either a floating or a fixed rate of interest on a stated notional     
amount in exchange for periodic payments made by such person calculated by      
applying a fixed or a floating rate of interest on the same notional amount and 
shall include, without limitation, interest rate swaps, caps, floors, collars   
and similar agreements.                                                         

     'Investment' means, with respect to any person, any direct or indirect loan
or other extension of credit, guarantee or capital contribution to (by means of 
any transfer of cash or other property to others or any payment for property or 
services for the account or use of others), or any purchase or acquisition by   
such person of any Capital Stock, bonds, notes, debentures or other securities  
or evidences of Indebtedness issued by, any other person. For the purpose of    
making any calculations under the Exchange Indenture (i) Investment shall       
include the fair market value of the net assets of any Subsidiary at the time   
that such Subsidiary is designated an Unrestricted Subsidiary and shall exclude 
the fair market value of the net assets of any Unrestricted Subsidiary that is  
designated a Restricted Subsidiary and (ii) any property transferred to or from 
an Unrestricted Subsidiary shall be valued at fair market value at the time of  
such transfer; provided that in each case, the fair market value of an asset or 
property shall be as determined by the Board of Directors of the Company in good
faith. For the purpose of the Exchange Indenture, the change in designation of a
Restricted Subsidiary to an Unrestricted Subsidiary shall be an Investment.     
'Investments' shall exclude extensions of trade credit on commercially          
reasonable terms consistent with the normal course of business of the Company   
and the Restricted Subsidiaries.                                                

    'Issue Date' means the date of original issuance of the Existing Preferred
Stock.                                                                          

'Lancer' means Lancer Industries Inc., a Delaware corporation.        

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'Lien' means any mortgage, charge, pledge, lien (statutory or other), 
security interest, hypothecation, assignment for security, claim, or preference 
or priority or other encumbrance upon or with respect to any property of any    
kind. A person shall be deemed to own subject to a Lien any property which such 
person has acquired or holds subject to the interest of a vendor or lessor under
any conditional sale agreement, capital lease or other title retention          
agreement.                                                                      

'Moody's' means Moody's Investors Services, Inc. and its successors.  

 'Net Cash Proceeds' means, with respect to any Asset Sale, the proceeds
thereof in the form of cash or Cash Equivalents including payments in respect of
deferred payment obligations when received in the form of cash or Cash          
Equivalents (except to the extent that such obligations are financed or sold    
with recourse to the Company or any Restricted Subsidiary of the Company) net of
(i) brokerage commissions and other fees and expenses (including, without       
limitation, fees and expenses of legal counsel and investment bankers) related  
to such Asset Sale, (ii) provisions for all taxes payable as a result of such   
Asset Sale, (iii) amounts required to be paid and which have been paid, or      
amounts required to be pledged and which are pledged to secure Indebtedness owed
to any person (other than the Company or any Restricted Subsidiary of the       
Company) owning a beneficial interest in the assets subject to the Asset Sale   
(which, in the case of a Lien, is being pledged to permanently reduce           
Indebtedness secured by such Lien) and (iv) appropriate amounts to be provided  
by the Company or any Restricted Subsidiary of the Company, as the case may be, 
as a reserve required in accordance with GAAP consistently applied against any  
liabilities associated with such Asset Sale and retained by the Company or any  
Restricted Subsidiary of the Company, as the case may be, after such Asset Sale,
including, without limitation, pension and other post-employment benefit        
liabilities, liabilities related to environmental matters and liabilities under 
any indemnification obligations associated with such Asset Sale, all as         
reflected in an officers' certificate delivered to the Trustee.                 

     'New Equity Incentive Plan' means any long-term incentive compensation plan
adopted by the Company covering the Company's executives and selected other key 
management employees.                                                           

'New Preferred Stock' means the Company's 11 1/4% Series A Cumulative 
Exchangeable Preferred Stock, par value $.01 per share, and as described in     
'--The New Preferred Stock.'                                                    

'Non-Payment Event of Default' means any event (other than a Payment  
Default) the occurrence of which entitles one or more Persons to accelerate the 
maturity of any Designated Senior Debt.                                         

'Obligations' means all obligations for principal, premium, interest, 
penalties, fees, indemnifications, reimbursements, damages and other liabilities
payable under the documentation governing, or otherwise relating to, any        
Indebtedness.                                                                   

     'Payment Default' means any default, whether or not any requirement for the

giving of notice, the lapse of time or both, or any other condition to such     
default becoming an event of default has occurred, in the payment of principal  
of (or premium, if any) or interest on or any other amount payable in connection
with Designated Senior Debt.                                                    

'Permitted Holders' means (i) Lancer and its Affiliates and (ii) any  
'group' (as such term is used in Sections 13(d) and 14(d) of the Exchange Act)  
comprised solely of Lancer and its Affiliates (it being understood that a       
'group' that includes any other Person shall not be a Permitted Holder).        

'Permitted Indebtedness' means each and all of the following:         

     (1) Indebtedness of the Company or any Guarantor under the Credit
   Agreement in an aggregate principal amount at any time outstanding not to
 exceed the greater of (x) $58,000,000, less the amount of any scheduled
principal payments actually made (excluding, without limitation, any  
    prepayments required to be made based upon the Company's excess cash flow)
   or the amount of any other payments which are applied or credited against
    scheduled principal payments on the date such scheduled principal payments
 would otherwise have been made (except to the extent refinanced under a
  replacement Credit Agreement at the time of the respective repayment) by
    the Company or any Guarantor in respect of any term loans under the Credit
Agreement and the amount by which the aggregate commitment under any  
   revolving credit facility under the Credit Agreement at any time has been
   permanently reduced to the extent that any repayments required to be made
  in connection with effecting such permanent reduction have been made (it
  being understood that to the extent a reduction in commitments under any
revolving credit facility under the Credit Agreement arises solely in 
   connection with a refinancing of outstanding amounts under such revolving
  credit facility with borrowings under a replacement Credit Agreement and
the commitments under                                                 

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the Credit Agreement are thereby replaced with commitments under such 
replacement Credit Agreement such a permanent reduction shall not have
  occurred); provided, however, that the Company or any Guarantor shall be
permitted to incur an additional amount of Indebtedness not to exceed 
$15,000,000 under its revolving credit facility if the borrowing base 
    requirement under such facility permits such incurrence and (y) the amount
  equal to the sum of 80% of the net book value of accounts receivable and
    60% of the net book value of inventory (determined on a first-in-first-out
 basis) of the Company and its Restricted Subsidiaries on a consolidated
basis at the time such Indebtedness is incurred, as determined in     
accordance with GAAP;                                                 

   (2) Indebtedness of the Company and its Restricted Subsidiaries
pursuant to the Existing Notes and the Existing Indenture;            

   (3) Indebtedness of the Company and its Restricted Subsidiaries
pursuant to the Exchange Debentures and the Exchange Indenture;       

  (4) Indebtedness of the Company outstanding on the date of the
Exchange Indenture;                                                   

         (5) Interest Rate Agreements of the Company or any Guarantor covering
    Indebtedness of the Company or any such Guarantor; provided, however, that
     (i) any Indebtedness to which any such Interest Rate Agreement relate bears
 interest at fluctuating interest rates and is otherwise permitted to be
incurred under this covenant and (ii) the notional amount of any such 
Interest Rate Agreement does not exceed the principal amount of the   
Indebtedness to which such Interest Rate Agreement relates;           

   (6) Indebtedness of a Wholly-Owned Restricted Subsidiary of the
Company (x) to the Company or (y) to another Wholly-Owned Restricted  
     Subsidiary of the Company; provided, however, that any such Indebtedness of
     a Wholly-Owned Restricted Subsidiary of the Company that is not a Guarantor
   is not subordinated in right of payment to any other Indebtedness of such
Restricted Subsidiary;                                                

(7) Indebtedness of the Company to a Wholly-Owned Restricted
Subsidiary of the Company which is unsecured and, unless owing to a   
     Guarantor, subordinated in right of payment from and after such time as the
Exchange Debentures shall become due and payable (whether at a Stated 
   Maturity, by acceleration or otherwise) to the payment and performance of
 the Company's obligations under the Exchange Indenture and the Exchange
    Debentures; provided, however, that any subsequent issuance or transfer of
Capital Stock that results in such Wholly-Owned Restricted Subsidiary 
    ceasing to be such, or any subsequent transfer of such Indebtedness (other
than to the Company or a Wholly-Owned Restricted Subsidiary) will be  
  deemed, in each case, to constitute the issuance of such Indebtedness by
the Company or of such Indebtedness by such Wholly-Owned Restricted   
Subsidiary;                                                           

          (8) Indebtedness of the Company to T-H Licensing arising in connection
with the loans described in clause (vi) of the '--Limitation on       
Transactions With Affiliates' covenant.                               

 (9) Indebtedness of the Company or any Guarantor representing
    Capitalized Lease Obligations so long as such Indebtedness does not exceed
6.0% of the amount of the gross property, plant and equipment of the  
     Company and its Restricted Subsidiaries determined on a consolidated basis,
as shown on the balance sheet of the Company as of the end of the most
recent fiscal quarter, in accordance with GAAP consistently applied;  

         (10) Indebtedness of the Company or any Restricted Subsidiary arising
from the honoring by a bank or other financial institution of a check,
   draft or similar instrument inadvertently (except in the case of daylight
overdrafts) drawn against insufficient funds in the ordinary course of
business; provided, that such Indebtedness is extinguished within 5   
business days of incurrence;                                          

 (11) Indebtedness of the Company or any Restricted Subsidiary
     consisting of guarantees, indemnities or obligations in respect of purchase
price adjustments in connection with the acquisition or disposition of
assets permitted under the Exchange Indenture;                        

(12) Following the Exchange Date, any Indebtedness or other 
obligations of the Company issued to participants in the New Equity   
     Incentive Plan, provided that such Indebtedness is subordinated in right of
payment to the Exchange Debentures;                                   

         (13) Indebtedness of the Company or any Guarantor in addition to that
described in clauses (1) through (12) above not to exceed $20,000,000 
outstanding at any time in the aggregate, which Indebtedness may be   
incurred under the Credit Agreement; or                               

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          (14) (i) Indebtedness of the Company or any Guarantor, the proceeds of
which are used solely to refinance (whether by amendment, renewal,    
 extension or refunding) Indebtedness of the Company (including all or a
   portion of the Exchange Debentures) or any of its Restricted Subsidiaries
and (ii) Indebtedness of any Restricted Subsidiary of the Company the 
proceeds of which are used solely to refinance (whether by amendment, 
renewal, extension or refunding) Indebtedness of such Restricted      
Subsidiary; provided, however, that (A) the principal amount of       
Indebtedness incurred pursuant to this clause (14) (or, if such       
    Indebtedness provides for an amount less than the principal amount thereof
  to be due and payable upon a declaration of acceleration of the maturity
  thereof, the original issue price of such Indebtedness) shall not exceed
   the sum of the principal amount of Indebtedness so refinanced (or, if the
   Indebtedness so refinanced provides for an amount less than the principal
    amount thereof to be due and payable upon a declaration of acceleration of
  the maturity thereof, the original issue price of such Indebtedness plus
 any accretion value attributable thereto since the original issuance of
  such Indebtedness) plus the amount of any premium required to be paid in
     connection with such refinancing pursuant to the terms of such Indebtedness
or the amount of any premium reasonably determined by the Company as  
necessary to accomplish such refinancing by means of a tender offer or
  privately negotiated purchase, plus the amount of expenses in connection
  therewith and (B) in the case of any refinancing of Indebtedness that is
not Senior Debt, (1) such new Indebtedness is made subordinated to the
   Exchange Debentures in the same manner and at least to the same extent as
the Indebtedness being refinanced and (2) such new Indebtedness has a 
  Weighted Average Life to Maturity and final Stated Maturity of principal
that exceeds the Weighted Average Life to Maturity and final Stated   
    Maturity of principal, respectively, of the Indebtedness being refinanced.

   'Permitted Investment' means any of the following: (i) Investments by the
Company or any Wholly-Owned Restricted Subsidiary of the Company in another     
person, if as a result of such Investment such other person is merged or        
consolidated with or into, or transfers or conveys all or substantially all of  
its assets to the Company or such Wholly-Owned Restricted Subsidiary; (ii)      
Investments in obligations of, or guaranteed by, the United States government or
any agency or political subdivision thereof, maturing within one year of the    
date of purchase; (iii) Investments in commercial paper issued by corporations, 
each of which shall have a consolidated net worth of at least $100,000,000      

maturing within 180 days from the date of the original issue thereof, and rated 
'P-1' or better by Moody's or 'A-1' or better by S&P or an equivalent rating or 
better by any other nationally recognized securities rating agency; (iv)        
Investments in certificates of deposit issued or acceptances accepted by or     
guaranteed by any bank or trust company organized under the laws of the United  
States of America or any state thereof or the District of Columbia, in each case
having capital, surplus and undivided profits totaling more than $100,000,000   
maturing within one year of the date of purchase; (v) Investments representing  
Capital Stock or obligations issued to the Company or any of its Restricted     
Subsidiaries in settlement claims against any other person by reason of a       
composition or readjustment of debt or a reorganization of any debtor of the    
Company or of such Restricted Subsidiary; (vi) Investments in Cash Equivalents; 
(vii) loans and advances to officers of the Company and its Restricted          
Subsidiaries made in compliance with clause (v) of the second paragraph under   
the covenant '--Limitation on Transactions with Affiliates' described above;    
(viii) Investments by the Company or a Wholly-Owned Restricted Subsidiary in the
Capital Stock of a Wholly-Owned Restricted Subsidiary; (ix) money market funds  
organized under the laws of the United States of America or any state thereof   
that invest substantially all of their assets in any of the types of investments
described in clause (ii), (iii), (iv) or (vi) above; (x) Investments in any of  
the Exchange Debentures; (xi) receivables owing to the Company of any Restricted
Subsidiary created in the ordinary course of business, (xii) Investments        
consisting of Indebtedness permitted under clause (5) of the definition of      
Permitted Indebtedness; and (xiii) Investments in the aggregate amount of       
$10,000,000 at any time outstanding.                                            

'Permitted Liens' means the following types of Liens:                 

      (a) Liens for taxes, assessments or governmental charges or claims
  either (i) not delinquent or (ii) contested in good faith by appropriate
proceedings and as to which the Company or any of its Restricted      
Subsidiaries shall have set aside on its books such reserves as may be
required pursuant to GAAP;                                            

       (b) security for the payment of workers' compensation, unemployment
insurance, other social security benefits or other insurance-related  
obligations (including, but not limited to, in respect of deductibles,
self-insured retention amounts and premiums and adjustments thereto); 

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        (c) deposits or pledges in connection with bids, tenders, leases and
contracts (other than contracts for the payment of money);            

(d) zoning restrictions, easements, licenses, reservations, 
provisions, covenants, conditions, waivers, restrictions on the use of
  property or minor irregularities of title (and with respect to leasehold
   interests, mortgages, obligations, liens and other encumbrances incurred,
   created, assumed or permitted to exist and arising by, through or under a
  landlord or owner of the leased property, with or without consent of the
     lessee), none of which interferes in any material respect with the ordinary
conduct of the business of the Company or any of its Subsidiaries or  

materially impairs the use of any parcel of property;                 

      (e) deposits or pledges to secure public or statutory obligations,
 progress payments, surety and appeal bonds or other obligations of like
nature incurred in the ordinary course of business;                   

 (f) certain surveys, exceptions, title defects, encumbrances,
     easements, reservations of, or rights of others for, rights of way, sewers,
    electric lines, telegraph or telephone lines and other similar purposes or
    zoning or other restrictions as to the use of real property not materially
  interfering with the ordinary conduct of the business of the Company and
its Subsidiaries taken as a whole; or                                 

(g) Liens arising by operation of law in favor of landlords,
mechanics, carriers, warehousemen, materialmen, laborers, employees,  
     suppliers or the like, incurred in the ordinary course of business for sums
which are not yet delinquent or are being contested in good faith by  
 negotiations or by appropriate proceedings which suspend the collection
thereof.                                                              

'Person' means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,            
unincorporated organization or government or any agency or political subdivision
thereof.                                                                        

 'Preferred Capital Stock' of any Person means any Capital Stock of such
Person that has preferential rights to any other Capital Stock of such Person   
with respect to dividends or redemption or upon liquidation.                    

'Private Exchange Preferred Stock' means a series of the Company's    
exchangeable preferred stock having terms identical in all material respects to 
the Existing Preferred Stock.                                                   

    'Qualified Capital Stock' means any Capital Stock that is not Disqualified
Capital Stock.                                                                  

   'Redeemable Dividend' means, for any dividend or distribution with regard
to Disqualified Capital Stock, the quotient of the dividend or distribution     
divided by the difference between one and the maximum statutory federal income  
tax rate (expressed as a decimal number between 1 and 0) then applicable to the 
issuer of such Disqualified Capital Stock.                                      

'Restricted Payment' means the following:                             

      (A) For purposes of the Exchange Indenture, (i) the declaration or
     payment of any dividend or the making of any other distribution (other than
     dividends or distributions payable in Qualified Capital Stock) on shares of
   the Company's Capital Stock, (ii) the purchase, redemption, retirement or
 other acquisition for value of any Capital Stock of the Company, or any
warrants, rights or options to acquire shares of Capital Stock of the 
Company, other than through the exchange of such Capital Stock or any 
    warrants, rights or options to acquire shares of any class of such Capital
     Stock for Qualified Capital Stock or warrants, rights or options to acquire
   Qualified Capital Stock, (iii) the making of any principal payment on, or

the purchase, defeasance, redemption, prepayment, decrease or other   
     acquisition or retirement for value, prior to any scheduled final maturity,
     scheduled repayment or scheduled sinking fund payment, of, any Indebtedness
    of the Company or its Subsidiaries that is subordinated or junior in right
of payment to the Exchange Debentures, and (iv) the making of any     
Investment (other than a Permitted Investment).                       

(B) For purposes of the Certificate of Designation, (i) the 
declaration or payment of any dividend or the making of any other     
  distribution (other than dividends or distributions payable in Qualified
 Capital Stock) on shares of the Company's Parity Stock or Junior Stock,
     (ii) any purchase, redemption, retirement or other acquisition for value of
     any Parity Stock or Junior Stock of the Company, or any warrants, rights or
   options to acquire shares of Parity Stock or Junior Stock of the Company,
     other than through the exchange of such Parity Stock or Junior Stock or any
   warrants, rights or options to acquire shares of any class of such Parity
  Stock or Junior Stock for Qualified Capital Stock or warrants, rights or
 options to acquire Qualified Capital Stock, and (iii) the making of any
Investment (other than a Permitted Investment).                       

  'Restricted Subsidiary' means (i) T-H Licensing, Inc. and (ii) any other
Subsidiary of the Company other than an Unrestricted Subsidiary.                

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'S&P' means Standard & Poor's Corporation and its successors.         

    'Senior Debt' means the principal of, premium, if any, and interest on any
Indebtedness of the Company, whether outstanding on the Issue Date or thereafter
created, incurred or assumed, unless, in the case of any particular             
Indebtedness, the instrument creating or evidencing the same or pursuant to     
which the same is outstanding expressly provides that such Indebtedness is pari 
passu with or subordinated in right of payment to the Exchange Debentures.      
Without limiting the generality of the foregoing, 'Senior Debt' shall also      
include (i) all obligations of the Company, whether outstanding on the Issue    
Date or thereafter created, incurred or assumed, under or in respect of the     
Credit Agreement, whether for principal, interest (including, without           
limitation, interest accruing after the filing of a petition initiating any     
proceeding under any state or federal bankruptcy law whether or not such        
interest is an allowable claim), reimbursement of amounts drawn under letters of
credit issued or arranged for pursuant thereto, guarantees in respect thereof,  
and all charges, fees, expenses (including reasonable fees and expenses of      
counsel) and other amounts in respect of the Credit Agreement incurred by or    
owing to the lenders under the Credit Agreement or their representative, agent  
or trustee, and all other obligations of the Company incurred under or in       
respect of the Credit Agreement (including, without limitation, any Interest    
Rate Agreements and in respect of premiums, indemnities or otherwise, and all   
indebtedness under the Credit Agreement which is disallowed, avoided or         
subordinated pursuant to Section 548 of Title 11, United States Code or any     
applicable state fraudulent conveyance law) and (ii) all obligations of the     
Company under or in respect of the Existing Notes and the Existing Indenture.   
Notwithstanding the foregoing, 'Senior Debt' shall not include (a) Indebtedness 

evidenced by the Exchange Debentures, (b) Indebtedness that is expressly        
subordinate or junior in right of payment to any Senior Debt of the Company, (c)
Indebtedness which, when incurred and without respect to any election under     
Section 1111(b) of Title 11, United States Code, is by its terms without        
recourse to the Company, (d) any repurchase, redemption or other obligation in  
respect of Disqualified Capital Stock, (e) to the extent it might constitute    
Indebtedness, amounts owing for goods, materials or services purchased in the   
ordinary course of business or consisting of trade payables or other current    
liabilities (other than any current liabilities owing under the Credit Agreement
or the current portion of any long-term Indebtedness which would constitute     
Senior Debt but for the operation of this clause (e) ), (f) to the extent it    
might constitute Indebtedness, amounts owed by the Company for compensation to  
employees or for services rendered to the Company, (g) to the extent it might   
constitute Indebtedness, any liability for federal, state, local or other taxes 
owed or owing by the Company, (h) Indebtedness of the Company to a Subsidiary of
the Company or any other Affiliate of the Company or any of such Affiliate's    
Subsidiaries and (i) that portion of any Indebtedness which at the time of      
issuance is issued in violation of the Exchange Indenture (but, as to any such  
Indebtedness, no such violation of the Exchange Indenture shall be deemed to    
exist for purposes of this clause (i) if the holder(s) of such Indebtedness or  
their representative or the Company shall have furnished to the Trustee an      
opinion of independent counsel, unqualified in all material respects, addressed 
to the Trustee (which legal counsel may, as to matters of fact, rely upon an    
officer's certificate of the Company) to the effect that the incurrence of such 
Indebtedness does not violate the provisions of the Exchange Indenture).        

    'Significant Subsidiary' shall have the same meaning as in Rule 1.02(v) of
Regulation S-X under the Securities Act, provided that each Guarantor shall in  
all events be deemed a Significant Subsidiary.                                  

   'Stated Maturity' means, when used with respect to any Exchange Debenture
or any installment of interest thereon, the date specified in such Exchange     
Debenture as the fixed date on which any principal of such Exchange Debenture or
such installment of interest is due and payable, and when used with respect to  
any other Indebtedness or any installments of interest thereon, means any date  
specified in the instrument governing such Indebtedness as the fixed date on    
which the principal of such Indebtedness, or such installment of interest       
thereon, is due and payable.                                                    

'Subsidiary', with respect to any Person, means (i) any corporation of
which the outstanding Capital Stock having at least a majority of the votes     
entitled to be cast in the election of directors under ordinary circumstances   
shall at the time be owned, directly or indirectly, by such Person or (ii) any  
other Person of which at least a majority of the voting interest under ordinary 
circumstances is at the time, directly or indirectly, owned by such Person.     

   'Tax Sharing Agreement' means the Tax Sharing Agreement, dated as of July
18, 1990, between the Company and Lancer, as amended from time to time.         

   'Unrestricted Subsidiary' means a Subsidiary of the Company designated as
such by the Company (a) no portion of the Indebtedness or any other obligation  
(contingent or otherwise) of which (i) is guaranteed by the                     

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Company or any other Subsidiary of the Company, (ii) is recourse to or obligates
the Company or any other Subsidiary of the Company in any way or (iii) subjects 
any property or asset of the Company or any other Subsidiary of the Company,    
directly or indirectly, contingently or otherwise, to the satisfaction thereof, 
(b) which has no Indebtedness or any other obligation that, if in default in any
respect (including a nonpayment default), would permit (upon notice, lapse of   
time or both) any holder of any other Indebtedness of the Company or any        
Restricted Subsidiary to declare a default on such other Indebtedness or cause  
the payment thereof to be accelerated or payable prior to its Stated Maturity,  
(c) with which the Company or any other Subsidiary of the Company has no        
contract, agreement, arrangement, understanding or is subject to an obligation  
of any kind, whether written or oral, other than a transaction on terms no less 
favorable to the Company or any other Subsidiary of the Company than those which
might be obtained at the time from persons who are not Affiliates of the        
Company, and (d) with which neither the Company nor any other Subsidiary of the 
Company has any obligation (other than by the terms of the Exchange Indenture)  
(i) to subscribe for additional shares of Capital Stock or other equity interest
therein or (ii) to maintain or preserve such Subsidiary's financial condition or
to cause such Subsidiary to achieve certain levels of operating results;        
provided, however, that in no event shall any Guarantor be an Unrestricted      
Subsidiary. The Company may designate an Unrestricted Subsidiary as a Restricted
Subsidiary by written notice to the Trustee under the Exchange Indenture;       
provided, however, that the Company shall not be permitted to designate any     
Unrestricted Subsidiary as a Restricted Subsidiary unless (A) after giving pro  
forma effect to such designation, the Company would be permitted to incur $1.00 
of additional Indebtedness (other than Permitted Indebtedness) under the        
Exchange Indenture and (B) any Indebtedness or Liens of such Unrestricted       
Subsidiary would be permitted to be incurred by a Restricted Subsidiary of the  
Company under the Exchange Indenture. A designation of an Unrestricted          
Subsidiary as a Restricted Subsidiary may not thereafter be rescinded.          

'Voting Stock' means any class or classes of Capital Stock pursuant to
which the holders thereof have the general voting power under ordinary          
circumstances to elect at least a majority of the board of directors, managers  
or trustees of any person (irrespective of whether or not, at the time, stock of
any other class or classes shall have, or might have, voting power by reason of 
the happening of any contingency).                                              

     'Weighted Average Life to Maturity' means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the then outstanding  
aggregate principal amount of such Indebtedness into (b) the total of the       
product obtained by multiplying (i) the amount of each then remaining           
installment, sinking fund, serial maturity or other required payment of         
principal, including payment at final maturity, in respect thereof, by (ii) the 
number of years (calculated to the nearest one-twelfth) which will elapse       
between such date and the making of such payment.                               

     'Wholly-Owned Restricted Subsidiary' means any Restricted Subsidiary of the
Company of which 100% of the outstanding Capital Stock is owned by the Company  
or another Wholly-Owned Restricted Subsidiary of the Company. For purposes of   
this definition, any directors' qualifying shares or investments by foreign     

nationals mandated by applicable law shall be disregarded in determining the    
ownership of a Restricted Subsidiary.                                           

BOOK-ENTRY, DELIVERY AND FORM                                                   

     The New Preferred Stock initially will be represented by a single permanent
global certificate in definitive, fully registered form (the 'Global            
Certificate'). The Global Certificate will be deposited with, or on behalf of,  
The Depository Trust Company, New York, New York ('DTC') and registered in the  
name of a nominee of DTC.                                                       

 The Global Certificate. The Company expects that pursuant to procedures
established by DTC (i) upon the issuance of the Global Certificate, DTC or its  
custodian will credit, on its internal system, the number of shares of New      
Preferred Stock of the individual beneficial interests represented by such      
global securities to the respective accounts of persons who have accounts with  
such depositary and (ii) ownership of beneficial interests in the Global        
Certificate will be shown on, and the transfer of such ownership will be        
effected only through, records maintained by DTC or its nominee (with respect to
interests of participants) and the records of participants (with respect to     
interests of persons other than participants).                                  

  So long as DTC, or its nominee, is the registered owner or holder of the
shares of New Preferred Stock, DTC or such nominee, as the case may be, will be 
considered the sole owner or holder of the shares of New Preferred Stock        
represented by such Global Certificate for all purposes. No beneficial owner of 
an interest in the                                                              

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Global Certificate will be able to transfer that interest except in accordance  
with DTC's procedures, in addition to those procedures provided for in the      
Certificate of Designation.                                                     

     Payments of the liquidation preference or redemption price and dividends on
(including Additional Dividends) the Global Certificate will be made to DTC or  
its nominee, as the case may be, as the registered owner thereof. Neither the   
Company nor the Transfer Agent will have any responsibility or liability for any
aspect of the records relating to or payments made on account of beneficial     
ownership interests in the Global Certificate or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interest.           

     The Company expects that DTC or its nominee, upon receipt of any payment of
the liquidation preference, redemption price or dividends (including Additional 
Dividends) in respect of the Global Certificate, will credit participants'      
accounts with payments in amounts proportionate to their respective beneficial  
interests in the principal amount of the Global Certificate as shown on the     
records of DTC or its nominee. The Company also expects that payments by        
participants to owners of beneficial interests in the Global Certificate held   
through such participants will be governed by standing instructions and         
customary practice, as is now the case with securities held for the accounts of 
customers registered in the names of nominees for such customers. Such payments 

will be the responsibility of such participants.                                

    Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in clearinghouse funds. If a   
holder requires physical delivery of a Certificated Security for any reason,    
including to sell shares of New Preferred Stock to persons in states that       
require physical delivery of the Certificate, or to pledge such securities, such
holder must transfer its interest in the Global Certificate, in accordance with 
the normal procedures of DTC and with the procedures set forth in the           
Certificate of Designation.                                                     

  DTC has advised the Company that it will take any action permitted to be
taken by a holder of New Preferred Stock (including the presentation of shares  
of New Preferred Stock for exchange as described below) only at the direction of
one or more participants to whose account the DTC interests in the Global       
Certificate are credited and only in respect of such shares of New Preferred    
Stock as to which such participant or participants has or have given such       
direction.                                                                      

DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the      
Federal Reserve System, a 'clearing corporation' within the meaning of the      
Uniform Commercial Code and a 'Clearing Agency' registered pursuant to the      
provisions of Section 17A of the Exchange Act. DTC was created to hold          
securities for its participants and facilitate the clearance and settlement of  
securities transactions between participants through electronic book-entry      
changes in accounts of its participants, thereby eliminating the need for       
physical movement of certificates. Participants include securities brokers and  
dealers, banks, trust companies and clearing corporations and certain other     
organizations. Indirect access to the DTC system is available to others such as 
banks, brokers, dealers and trust companies that clear through or maintain a    
custodial relationship with a participant, either directly or indirectly        
('indirect participants').                                                      

    Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Certificate among participants of DTC, it  
is under no obligation to perform such procedures, and such procedures may be   
discontinued at any time. Neither the Company nor the Transfer Agent will have  
any obligations under the rules and procedures governing their operations.      

Certificated Securities. If DTC is at any time unwilling or unable to 
continue as a depositary for the Global Certificate and a successor depositary  
is not appointed by the Company within 90 days, Certificated Securities will be 
issued in exchange for the Global Certificate.                                  

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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS 

The following is a general summary of certain U.S. federal income tax 
consequences of the exchange of the Existing Preferred Stock for the New        
Preferred Stock and the ownership and disposition of the New Preferred Stock and

the Exchange Debentures by U.S. Holders, as defined below, acquiring the New    
Preferred Stock offered hereby on original issue. This summary is based on the  
Code, Treasury Regulations, Internal Revenue Service ('IRS') rulings and        
pronouncements and judicial decisions now in effect, all of which are subject to
change at any time by legislative, judicial or administrative action. Any such  
changes may be applied retroactively in a manner that could adversely affect a  
U.S. Holder of the New Preferred Stock or the Exchange Debentures. This summary 
discusses only New Preferred Stock and Exchange Debentures held as capital      
assets within the meaning of section 1221 of the Code. It does not discuss all  
of the tax consequences that may be relevant to a U.S. Holder in light of such  
holder's particular circumstances or to holders subject to special rules, such  
as certain financial institutions, insurance companies, tax-exempt              
organizations, dealers in securities, non-U.S. persons and taxpayers subject to 
alternative minimum tax.                                                        

  Although the characterization of an instrument as indebtedness or equity
involves a facts and circumstances determination that cannot be predicted with  
certainty, the Company intends to treat the New Preferred Stock as equity and   
the Exchange Debentures as indebtedness for U.S. federal income tax purposes and
the balance of this summary is based on the assumption that such treatment will 
be respected. This summary is not binding on the IRS or the courts and there can
be no assurance that the IRS will not take a different position concerning the  
tax consequences of the purchase, ownership or disposition of the New Preferred 
Stock or the Exchange Debentures.                                               

    As used herein, the term 'U.S. Holder' means a beneficial owner of the New
Preferred Stock or the Exchange Debentures that is for U.S. federal income tax  
purposes (i) a citizen or resident of the United States, (ii) a corporation or  
partnership created or organized in or under the laws of the United States or   
any political subdivision thereof or (iii) an estate or trust that is not a     
foreign estate or trust.                                                        

   PROSPECTIVE HOLDERS OF THE NEW PREFERRED STOCK ARE URGED TO CONSULT THEIR
OWN TAX ADVISORS WITH REGARD TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF THE  
EXCHANGE OF THE EXISTING PREFERRED STOCK FOR THE NEW PREFERRED STOCK AND THE    
OWNERSHIP AND DISPOSITION OF THE NEW PREFERRED STOCK AND THE EXCHANGE           
DEBENTURES, INCLUDING THE APPLICABILITY OF ANY FEDERAL ESTATE OR GIFT TAX LAWS, 
THE LAWS OF ANY STATE, LOCAL OR FOREIGN JURISDICTION, ANY CHANGES IN APPLICABLE 
TAX LAWS AND ANY PENDING OR PROPOSED LEGISLATION OR REGULATIONS.                

EXCHANGE OFFER                                                                  

  The exchange of the Existing Preferred Stock for the New Preferred Stock
should not constitute a taxable exchange of the Existing Preferred Stock. As a  
result, the New Preferred Stock should have the same issue price (and adjusted  
issue price immediately after the exchange) and the same amount of Preferred    
Stock Discount (as defined below), if any, as the Existing Preferred Stock, and 
each U.S. Holder should have the same adjusted basis and holding period in the  
New Preferred Stock as it had in the Existing Preferred Stock immediately before
the exchange. The following discussion assumes that the exchange of the Existing
Preferred Stock for the New Preferred Stock pursuant to the Exchange Offer will 
not be treated as an exchange for U.S. federal income tax purposes, and that the
Existing Preferred Stock and the New Preferred Stock will be treated as the same
security for U.S. federal income tax purposes.                                  

DISTRIBUTIONS ON THE NEW PREFERRED STOCK                                        

    Distributions on the New Preferred Stock made out of the Company's current
or accumulated earnings and profits, as determined under U.S. federal income tax
principles, whether paid in cash or in additional shares of New Preferred Stock 
('Dividend Shares'), will be taxable to a U.S. Holder as ordinary dividend      
income in an amount equal to such cash or the fair market value of such Dividend
Shares on the date of distribution. The amount of the Company's earnings and    
profits at any particular time depends on past and future actions and financial 
performance of the Company and, therefore, no assurance can be given that any   
distributions on the New Preferred Stock will be treated as dividends for U.S.  
federal income tax purposes.                                                    

     To the extent, if any, that the amount of any such distribution is not made
out of the Company's current or accumulated earnings and profits, as determined 
under U.S. federal income tax principles, it will first reduce the U.S. Holder's
adjusted tax basis in the New Preferred Stock and, to the extent such           
distribution exceeds such                                                       

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adjusted tax basis, will be treated as capital gain and will be long-term       
capital gain if the U.S. Holder's holding period for such New Preferred Stock   
exceeds one year. A U.S. Holder's initial tax basis in any Dividend Shares      
distributed by the Company generally will equal the fair market value of such   
Dividend Shares on the date of their distribution. The holding period for such  
Dividend Shares will commence with their distribution and will not include the  
U.S. Holder's holding period for outstanding shares of New Preferred Stock with 
respect to which such Dividend Shares were distributed. For purposes of the     
remainder of this discussion, the term 'dividend' means a distribution made out 
of current or accumulated earnings and profits, unless the context indicates    
otherwise.                                                                      

Under current law, dividends received by corporate U.S. Holders of the
Company generally will be eligible for the 70% dividends received deduction     
under section 243 of the Code. There are, however, many exceptions and          
restrictions relating to the availability of the dividends received deduction,  
including restrictions relating to the holding period of the stock under section
246(c) of the Code and debt-financed portfolio stock under section 246A of the  
Code.                                                                           

     In addition, under section 1059 of the Code, the tax basis of any shares of
New Preferred Stock that have been held by a corporate U.S. Holder for two years
or less (ending on the earliest of the date on which the Company declares,      
announces or agrees to the payment of an actual or constructive dividend) is    
reduced (but not below zero) by the non-taxed portion of an 'extraordinary      
dividend' for which a dividends received deduction is allowed. To the extent    
that a corporate U.S. Holder's tax basis in its New Preferred Stock would have  
been reduced below zero but for the foregoing limitation, such holder must      
increase the amount of gain recognized on the ultimate sale or exchange of such 
New Preferred Stock. Generally, an 'extraordinary dividend' is a dividend that  

(i) equals or exceeds 5% of the U.S. Holder's adjusted basis in the New         
Preferred Stock (treating all dividends having ex-dividend dates within an      
85-day period as a single dividend) or (ii) exceeds 20% of the U.S. Holder's    
adjusted basis in the New Preferred Stock (treating all dividends having        
ex-dividend dates within a 365-day period as a single dividend). If an election 
is made by the U.S. Holder, under certain circumstances, the fair market value  
of the New Preferred Stock as of the day before the ex-dividend date may be     
substituted for such U.S. Holder's basis in applying these tests.               

    Special rules exist with respect to extraordinary dividends for 'qualified
preferred dividends,' which are defined in the Code as any fixed dividends      
payable with respect to any share of stock which (i) provides for fixed         
preferred dividends payable not less frequently than annually and (ii) is not in
arrears as to dividends at the time the U.S. Holder acquires such stock. A      
qualified preferred dividend does not include any dividend payable with respect 
to any share of stock if the actual rate of return of such stock for the period 
the stock has been held by the U.S. Holder receiving the dividend exceeds 15%.  

  Corporate U.S. Holders are urged to consult their tax advisors regarding
the extent, if any, to which the exceptions and restrictions and rules under    
section 1059 of the Code apply to the purchase, ownership and disposition of the
New Preferred Stock.                                                            

     The Clinton Administration's Budget Proposal for Fiscal Year 1998, released
February 6, 1997 (the 'Administration's Proposal'), proposed certain tax law    
changes that would, among other things, (i) reduce the dividends received       
deduction available to corporate U.S. Holders from 70% to 50% of dividends      
received with respect to dividends paid or accrued more than 30 days after the  
date of enactment of legislation, (ii) require a corporate U.S. Holder to       
satisfy the holding period required by section 246(c) of the Code immediately   
before or immediately after the U.S. Holder becomes entitled to receive any     
dividend with respect to dividends paid or accrued more than 30 days after the  
date of enactment of legislation and (iii) require immediate recognition of gain
under section 1059 of the Code to the extent a corporate U.S. Holder's tax basis
with respect to which any extraordinary dividend is received is reduced below   
zero with respect to distributions after September 13, 1995. On June 9, 1997,   
the Chairman of the House Committee on Ways and Means introduced a legislative  
proposal (the "Chairman's Proposal") which included the proposed tax law        
changes described in (ii) and (iii) above. It is not clear whether any such     
proposals will be enacted or, if enacted, whether they will be enacted in the   
form proposed.                                                                  

    In addition, the Administration's Proposal includes a provision that would
eliminate the dividends received deduction for dividends on limited term        
preferred stock issued more than 30 days after the date of enactment of         
legislation. For this purpose, limited term preferred stock generally includes  
any preferred stock if the issuer or a related person is required to redeem or  
purchase the stock within 20 years of the issue date. It is not clear whether   
such proposal will be enacted or, if enacted, whether it will be enacted in the 
form proposed. The Chairman's Proposal did not contain a similar provision.     
However, if the proposal to eliminate the dividends received deduction on       
limited term preferred stock is enacted in the form proposed in the             

Administration's Proposal, the dividends received deduction may be eliminated   
with respect to Dividend Shares issued more than                                

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30 days after the date of enactment of legislation. If the Administration's     
Proposal is enacted in its current form, it is possible that the IRS may assert 
that the New Preferred Stock received pursuant to the Exchange Offer would be   
considered issued at the time of the exchange for purposes of determining the   
applicability of such legislation. Prospective holders of New Preferred Stock   
are urged to consult their tax advisors with respect to the effect of proposed  
legislation.                                                                    

PREFERRED STOCK DISCOUNT                                                        

   Pursuant to section 305(c) of the Code, U.S. Holders of the New Preferred
Stock (including Dividend Shares) may be required to treat a portion of the     
difference between the redemption price and issue price of the New Preferred    
Stock as constructive distributions that are includible in income on an economic
accrual basis. For purposes of determining whether such constructive            
distribution treatment applies, the mandatory and optional redemption features  
of the New Preferred Stock are tested separately. Constructive distribution     
treatment is required if either (or both) of these tests is satisfied.          

    Section 305(c) of the Code provides that the entire amount of a redemption
premium with respect to preferred stock that may be redeemed in certain         
circumstances is treated as being distributed to the holders of such preferred  
stock on an economic accrual basis. Preferred stock is generally considered to  
have redemption premium for this purpose if its redemption price exceeds its    
issue price by more than a de minimis amount. For this purpose, such excess (the
'Preferred Stock Discount') will be treated as zero if it is less than 1/4 of 1%
of the redemption price of the preferred stock multiplied by the number of      
complete years from the date of issuance of the stock until the redemption date.
Preferred Stock Discount is taxable as a constructive distribution to the holder
(treated as a dividend to the extent made out of the Company's current or       
accumulated earnings and profits and otherwise subject to the treatment         
described above for distributions) over the term of the preferred stock using a 
constant interest rate method similar to that described below for accruing      
original issue discount ('OID'). See '--Original Issue Discount' below.         

     Preferred Stock Discount with respect to preferred stock that is subject to
mandatory redemption generally will arise if the price at which the preferred   
stock must be redeemed exceeds its issue price by more than a de minimis amount.
The Company does not expect that its obligation to redeem the New Preferred     
Stock acquired in connection with this Offering on March 15, 2009 will result in
Preferred Stock Discount.                                                       

Preferred Stock Discount with respect to preferred stock that has an  
optional redemption feature generally will arise only if, based on all of the   
facts and circumstances as of the date the preferred stock is issued, redemption
pursuant to an issuer's right to redeem is more likely than not to occur. Even  
if redemption is more likely than not to occur, however, constructive           
distribution treatment would not result if the redemption premium were solely in
the nature of a penalty for premature redemption. For this purpose, a redemption

premium is not a penalty for premature redemption unless it is a premium paid as
a result of changes in economic or market conditions over which neither the     
issuer nor the holder has legal or practical control, such as changes in        
prevailing dividend rates. In addition, pursuant to a safe harbor contained in  
Treasury Regulations, redemption pursuant to an issuer's right to redeem is not 
treated as more likely than not to occur if (i) the issuer and the holder are   
unrelated, (ii) there are no arrangements that effectively require or are       
intended to compel the issuer to redeem the stock and (iii) exercise of the     
option to redeem would not reduce the yield of the stock. The Company does not  
believe that its right to redeem of the New Preferred Stock acquired in         
connection with this Offering on or after March 15, 2002 should be treated as   
more likely than not to be exercised under these rules. Accordingly, the        
optional redemption features of the New Preferred Stock acquired in connection  
with this Offering should not result in Preferred Stock Discount.               

    Notwithstanding the above, it is not entirely clear how the rules relating
to Preferred Stock Discount apply to the Company's rights and obligations to    
redeem the New Preferred Stock in the event of a Change of Control.             

 Dividend Shares received by U.S. Holders of the New Preferred Stock may
bear Preferred Stock Discount depending upon the issue price of such Dividend   
Shares. If shares of New Preferred Stock (including Dividend Shares) bear       
Preferred Stock Discount, such shares generally will have different tax         
characteristics from other shares of New Preferred Stock and might trade        
separately, which might adversely affect the liquidity of such shares.          

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REDEMPTION, SALE OR EXCHANGE OF NEW PREFERRED STOCK                             

  A redemption of shares of New Preferred Stock for cash generally will be
treated as a sale or exchange of such shares if (i) the U.S. Holder does not    
own, actually or constructively within the meaning of section 318 of the Code,  
any stock of the Company other than the redeemed New Preferred Stock or (ii) the
redemption is 'not essentially equivalent to a dividend' with respect to such   
U.S. Holder under section 302(b)(1) of the Code. A distribution to a U.S. Holder
will be 'not essentially equivalent to a dividend' if it results in a           
'meaningful reduction' in the U.S. Holder's stock interest in the Company. For  
this purpose, a redemption of the New Preferred Stock that results in a         
reduction in the proportionate interest in the Company (taking into account any 
actual ownership of common stock of the Company and any stock constructively    
owned) of a U.S. Holder whose relative stock interest in the Company is minimal 
and who exercises no control over corporate affairs should be regarded as a     
meaningful reduction in such holder's stock interest in the Company. In other   
circumstances, a redemption of the New Preferred Stock may be treated as a      
dividend to the extent treated as made out of the Company's current and         
accumulated earnings and profits (as determined for U.S. federal income tax     
purposes).                                                                      

    If the redemption of the New Preferred Stock for cash is treated as a sale
or exchange, the U.S. Holder would recognize capital gain or loss in an amount  
equal to the difference between the amount of cash received on such redemption  

(except to the extent the redemption price of the New Preferred Stock is        
attributable to dividends declared by the Board of Directors of the Company     
prior to the redemption, which generally will be taxable as ordinary income) and
such holder's adjusted tax basis in the New Preferred Stock.                    

  Similarly, gain or loss realized by a U.S. Holder on the sale of the New
Preferred Stock (other than in a redemption or in an exchange for Exchange      
Debentures) generally will be subject to U.S. federal income tax as capital gain
or loss in an amount equal to the difference between the sum of the amount of   
cash and the fair market value of other property received and the U.S. Holder's 
adjusted basis in such New Preferred Stock.                                     

     Gain or loss realized by a U.S. Holder on the exchange of the New Preferred
Stock for the Exchange Debentures will be subject to the same general rules as a
redemption for cash, except that such holder will realize capital gain or loss  
in an amount equal to the difference between the issue price of the Exchange    
Debentures received (as determined for purposes of computing the original issue 
discount on such Exchange Debentures) and such holder's adjusted tax basis in   
the New Preferred Stock. See the discussion below under 'Original Issue         
Discount.' In addition, any such gain may be eligible for deferral under the    
installment sale method provided neither the Exchange Debentures nor the New    
Preferred Stock are readily tradable on an established securities market.       

If a redemption or exchange of New Preferred Stock is treated as a    
distribution that is taxable as a dividend, the amount of the distribution will 
be measured by the amount of cash or the issue price of the Exchange Debentures,
as the case may be, received by the U.S. Holder. The U.S. Holder's adjusted tax 
basis in the redeemed New Preferred Stock will be transferred to any remaining  
stock holdings in the Company. If the U.S. Holder does not retain any actual    
stock ownership in the Company (having only a constructive stock interest), the 
U.S. Holder may lose such basis entirely. In addition, a corporate U.S. Holder, 
under certain circumstances, may be required to reduce its basis in its         
remaining shares of stock of the Company (and possibly recognize gain upon a    
disposition of shares) under the 'extraordinary dividend' provisions of section 
1059 of the Code. The Administration's Proposal includes a provision, generally 
effective for distributions after May 3, 1995, that would require immediate     
recognition of gain under section 1059 of the Code with respect to any          
redemption treated as a dividend (in whole or in part) when the non-taxed       
portion of the dividend exceeds the basis of the shares surrendered, if the     
redemption is treated as a dividend due to options being counted as stock       
ownership. It is not clear whether such proposal will be enacted or, if enacted,
whether it will be enacted in the form proposed.                                

ORIGINAL ISSUE DISCOUNT                                                         

In the event that the New Preferred Stock is exchanged for Exchange   
Debentures and the 'stated redemption price at maturity' of the Exchange        
Debentures exceeds their 'issue price' by more than a de minimis amount, the    
Exchange Debentures will be treated as having OID equal to the entire amount of 
such excess.                                                                    

   If the Exchange Debentures are traded on an established securities market
within the sixty-day period ending thirty days after the exchange date, the     
issue price of the Exchange Debentures will be their fair market value as of    

their issue date. Subject to certain limitations described in Treasury          
Regulations, the Exchange Debentures will be deemed to be traded on an          
established securities market if, among other things, price quotations are      
readily                                                                         

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available from dealers, brokers or traders. If the New Preferred Stock, but not 
the Exchange Debentures exchanged therefor, is traded on an established         
securities market within the sixty-day period ending thirty days after the      
exchange, the issue price of each Exchange Debenture will be the fair market    
value of the New Preferred Stock exchanged therefor at the time of the exchange.
The New Preferred Stock generally will be deemed to be traded on an established 
securities market if it appears on a system of general circulation that provides
a reasonable basis to determine fair market value by disseminating either recent
price quotations or actual prices of recent sale transactions. In the event that
neither the New Preferred Stock nor the Exchange Debentures are traded on an    
established securities market within the applicable period, the issue price of  
the Exchange Debentures will be their stated principal amount unless either (i) 
the Exchange Debentures do not bear 'adequate stated interest' within the       
meaning of section 1274 of the Code, in which case the issue price of such      
Exchange Debentures generally will be the 'imputed principal amount' of the     
Exchange Debentures or (ii) the Exchange Debentures are issued in a             
so-called 'potentially abusive situation' as defined in Treasury                
Regulations under section 1274 of the Code (including a situation involving a   
recent sales transaction), in which case the issue price of such Exchange       
Debentures generally will be the fair market value of the New Preferred Stock   
surrendered in exchange therefor.                                               

     The 'stated redemption price at maturity' of the Exchange Debentures should
equal the total of all payments under the Exchange Debentures, other than       
payments of 'qualified stated interest.' 'Qualified stated interest' generally  
is stated interest that is unconditionally payable in cash or other property    
(other than Exchange Debentures) at least annually at a single fixed rate. The  
Exchange Debentures that are issued when the Company has the option to pay      
interest for certain periods in additional Exchange Debentures should be treated
as having been issued without any qualified stated interest. Accordingly, the   
sum of all interest payable pursuant to the stated interest rate on such        
Exchange Debentures over the entire term should be included (along with stated  
principal) in the stated redemption price at maturity of such Exchange          
Debentures. Stated interest on Exchange Debentures issued after the period for  
paying interest in additional Exchange Debentures has passed should qualify as  
qualified stated interest and none of such stated interest would be included in 
the stated redemption price at maturity of the Exchange Debentures.             

TAXATION OF STATED INTEREST AND ORIGINAL ISSUE DISCOUNT ON EXCHANGE DEBENTURES  

Each U.S. Holder of an Exchange Debenture with OID will be required to
include in gross income an amount equal to the sum of the 'daily portions' of   
the OID for all days during the taxable year in which such holder holds the     
Exchange Debentures, regardless of the holder's regular method of accounting.   
The daily portions of OID required to be included in a U.S. Holder's gross      

income in a taxable year will be determined under a constant yield method by    
allocating to each day during the taxable year in which the holder holds the    
Exchange Debenture a pro rata portion of the OID thereon which is attributable  
to the 'accrual period' in which such day is included. The amount of OID        
attributable to each accrual period will be the product of the 'adjusted issue  
price' of the Exchange Debenture at the beginning of such accrual period        
multiplied by the 'yield to maturity' of the Exchange Debenture (properly       
adjusted for the length of the accrual period). The adjusted issue price of an  
Exchange Debenture at the beginning of an accrual period is the sum of the issue
price of the Exchange Debenture plus the aggregate amount of OID that accrued in
all prior accrual periods, less any cash payments made on the Exchange          
Debentures (other than qualified stated interest payments). The 'yield to       
maturity' of the Exchange Debenture is the discount rate that, when used in     
computing the present value of all principal and interest payments to be made   
under the Exchange Debenture, produces an amount equal to the issue price of the
Exchange Debenture. An 'accrual period' may be of any length and may vary in    
length over the term of the debt instrument, provided that each accrual period  
is no longer than one year and each scheduled payment of principal or interest  
occurs either on the final day or the first day of an accrual period. The actual
timing of accrual of OID may vary depending on the issue price of the Exchange  
Debentures and whether interest is paid in cash or additional Exchange          
Debentures.                                                                     

An additional Exchange Debenture (a 'Secondary Debenture') issued in  
payment of interest with respect to an initially issued Exchange Debenture (an  
'Initial Debenture') will not be considered as a payment made on the Initial    
Debenture and will be aggregated with the Initial Debenture for purposes of     
computing and accruing OID on the Initial Debenture. The adjusted issue price of
the Initial Debenture would be allocated between the Initial Debenture and the  
Secondary Debenture in proportion to their respective principal amounts. That   
is, upon the issuance of a Secondary Debenture with respect to an Initial       
Debenture, the Initial Debenture and the                                        

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Secondary Debenture derived from the Initial Debenture are treated as initially 
having the same adjusted issue price and inherent amount of OID per dollar of   
principal amount. The Initial Debenture and the Secondary Debenture derived     
therefrom would be treated as having the same yield to maturity. Similar        
treatment would be applied when additional Exchange Debentures are issued on    
Secondary Debentures.                                                           

    In the event that the Exchange Debentures are not issued with OID, because
(i) they are issued after March 15, 2002, when the Company does not have the    
option to pay interest thereon in additional Exchange Debentures and (ii) the   
redemption price of the Exchange Debentures does not exceed their issue price by
more than a de minimis amount, stated interest would be included in income by a 
U.S. Holder in accordance with such U.S. Holder's method of accounting. In all  
other cases, stated interest will be treated as payments on the Exchange        
Debentures under the rules discussed above.                                     

   The Company will furnish annually to the IRS and to record holders of the

Exchange Debentures information relating to OID, if any, accruing during the    
calendar year. Such information will be based on the amount of OID that would   
have accrued to a U.S. Holder who acquired the Exchange Debenture on original   
issue.                                                                          

BOND PREMIUM ON EXCHANGE DEBENTURES                                             

  If the New Preferred Stock is exchanged for Exchange Debentures that are
not treated as having OID and the issue price of such Exchange Debentures       
exceeds the amount payable at the maturity date (or earlier call date), such    
excess will be deductible by the U.S. Holder of the Exchange Debentures as      
amortizable bond premium over the term of the Exchange Debentures (taking into  
account earlier call dates, as appropriate) under a yield-to-maturity formula,  
if an election by the U.S. Holder under section 171 of the Code is made or is   
already in effect. This election is revocable only with the consent of the IRS  
and applies to all obligations owned or acquired by the U.S. Holder on or after 
the first day of the taxable year to which the election applies. To the extent  
the excess is deducted as amortizable bond premium, the U.S. Holder's adjusted  
tax basis in the Exchange Debentures will be reduced. Except as may otherwise be
provided in future Treasury Regulations, the amortizable bond premium will be   
treated as an offset to interest income on the Exchange Debentures rather than  
as a separate deduction item.                                                   

SALE OR REDEMPTION OF EXCHANGE DEBENTURES                                       

 Gain or loss realized by a U.S. Holder on the sale, redemption or other
disposition of Exchange Debentures generally will be subject to U.S. federal    
income tax in an amount equal to the difference between the sum of the cash     
amount and the fair market value of all other property received on such sale,   
redemption or disposition (except to the extent that cash received is           
attributable to accrued, but previously untaxed, qualified stated interest,     
which would be taxed as ordinary income) and such U.S. Holder's adjusted tax    
basis in the Exchange Debentures. The adjusted tax basis of an Exchange         
Debenture received in exchange for the New Preferred Stock generally will be    
equal to the issue price of the Exchange Debenture increased by any OID with    
respect to the Exchange Debenture included in the U.S. Holder's income prior to 
sale, redemption or other disposition of the Exchange Debenture, reduced by any 
amortizable bond premium applied against the U.S. Holder's income prior to sale,
redemption or other disposition of the Exchange Debenture and by payments other 
than payments of qualified stated interest. Except to the extent that an        
intention to call the Exchange Debentures prior to their maturity existed at the
time of their original issue as an agreement or understanding between the       
Company and the original holders of a substantial amount of the Exchange        
Debentures, such gain or loss would be long-term capital gain or loss if the    
U.S. Holder's holding period for the Exchange Debentures exceeds one year.      

CERTAIN FEDERAL INCOME TAX CONSEQUENCES TO THE COMPANY AND CORPORATE HOLDERS    

  In the event the Exchange Debentures are 'applicable high yield discount
obligations' ('AHYDOs'), pursuant to sections 163(e) and 163(i) of the Code, a  
portion of the OID (if any) accruing on the Exchange Debentures may be treated  
as a dividend generally eligible for the dividends-received deduction (subject  
to the exceptions and restrictions described above) in the case of corporate    
U.S. Holders and the Company would not be entitled to deduct the 'disqualified  

portion' of the OID accruing on the Exchange Debentures and would be allowed to 
deduct the remainder of the OID only when paid in cash.                         

   The Exchange Debentures will constitute AHYDOs if they (i) have a term of
more than five years, (ii) have a yield to maturity equal to or greater than the
sum of the applicable federal rate at the time of issuance of the Exchange      
Debentures (the 'AFR') plus five percentage points, and (iii) have 'significant'
OID. A debt                                                                     

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instrument is treated as having 'significant' OID if the aggregate amount that  
would be includible in gross income with respect to such debt instrument for    
periods before the close of any accrual period ending after the date five years 
after the date of issue exceeds the sum of (i) the aggregate amount of interest 
to be paid in cash under the debt instrument before the close of such accrual   
period and (ii) the product of the initial issue price of such debt instrument  
and its yield to maturity. Because the amount of OID, if any, attributable to   
the Exchange Debentures will be determined at the time such Exchange Debentures 
are issued and the AFR at that point in time is not predictable, it is          
impossible currently to determine whether Exchange Debentures will be treated as
AHYDOs.                                                                         

 If an Exchange Debenture is treated as an AHYDO, a U.S. Holder would be
treated as receiving dividend income to the extent of the lesser of (i) the     
Company's current and accumulated earnings and profits, and (ii) the            
'disqualified portion' of the OID of such AHYDO. The 'disqualified portion' of  
the OID is equal to the lesser of (i) the amount of OID or (ii) the portion of  
the 'total return' (i.e., the excess of all payments to be made with respect to 
the Exchange Debenture over its issue price) in excess of the AFR plus six      
percentage points.                                                              

BACKUP WITHHOLDING                                                              

    A U.S. Holder may be subject to backup withholding at the rate of 31% with
respect to dividends on the New Preferred Stock, interest on the Exchange       
Debentures or proceeds of the sale or other disposition of the New Preferred    
Stock or the Exchange Debentures, unless such U.S. Holder (i) is a corporation  
or comes within certain other exempt categories and, when required, demonstrates
such exemption, or (ii) provides a correct taxpayer identification number,      
certifies as to no loss of exemption from backup withholding and otherwise      
complies with applicable requirements of the backup withholding rules.          

PLAN OF DISTRIBUTION

  Each broker-dealer that receives New Preferred Stock for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a          
prospectus in connection with any resale of such New Preferred Stock. This      
Prospectus, as it may be amended or supplemented from time to time, may be used 
by a broker-dealer in connection with resales of New Preferred Stock received in
exchange for Existing Preferred Stock where such Existing Preferred Stock was   
acquired as a result of market-making activities or other trading activities.   

The Company has agreed that, for a period of 180 days following the Effective   
Date, it will make this Prospectus, as amended or supplemented, available to any
broker-dealer for use in connection with any such resale.                       

  The Company will not receive any proceeds from any sale of New Preferred
Stock by broker-dealers. New Preferred Stock received by broker-dealers for     
their own account pursuant to the Exchange Offer may be sold from time to time  
in one or more transactions in the over-the-counter market, in negotiated       
transactions, through the writing of options on the New Preferred Stock or a    
combination of such methods of resale, at market prices prevailing at the time  
of resale, at prices related to such prevailing market prices or negotiated     
prices. Any such resale may be made directly to purchasers or to or through     
brokers or dealers who may receive compensation in the form of commissions or   
concessions from any such broker-dealer and/or the purchasers of any such New   
Preferred Stock. Any broker-dealer that resells New Preferred Stock that was    
received by it for its own account pursuant to the Exchange Offer and any broker
or dealer that participates in a distribution of such New Preferred Stock may be
deemed to be an 'underwriter' within the meaning of the Securities Act and any  
profit or any such resale of New Preferred Stock and any commissions or         
concessions received by any such persons may be deemed to be underwriting       
compensation under the Securities Act. The Letter of Transmittal states that by 
acknowledging that it will deliver and by delivering a prospectus, a            
broker-dealer will not be deemed to admit that it is an 'underwriter' within the
meaning of the Securities Act                                                   

For a period of 180 days after the Effective Date, the Company will   
promptly send additional copies of this Prospectus and any amendment or         
supplement to this Prospectus to any broker-dealer that requests such documents 
in the Letter of Transmittal. The Company has agreed to pay all expenses        
incident to the Exchange Offer, other than certain commissions, if any, relating
to a holder's depositing its shares of Existing Preferred Stock in connection   
with the Exchange Offer and will indemnify the holders of the New Preferred     
Stock (including any broker-dealers) against certain liabilities, including     
certain liabilities under the Securities Act.                                   

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LEGAL MATTERS 

     The validity of the New Preferred Stock will be passed upon for the Company
by Debevoise & Plimpton, New York, New York.                                    

EXPERTS 

    The consolidated balance sheets of the Company as of December 31, 1996 and
1995 and the consolidated statements of operations, stockholder's equity        
(deficit) and cash flows for each of the three years ended December 31, 1996 ,  
included in this Registration Statement, have been included herein in reliance  
on the report of Coopers & Lybrand L.L.P., independent accountants, given on the
authority of that firm as experts in accounting and auditing.                   

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FAIRFIELD MANUFACTURING COMPANY, INC. 
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                        [Enlarge/Download Table]

                                                                                                            PAGE
                                                                                                            ----
                                                                                                                
Report of Independent Accountants.......................................................................... F-2 
Consolidated Balance Sheets, December 31, 1996 and 1995.................................................... F-3 
Consolidated Statements of Operations for the three years ended December 31, 1996.......................... F-4 
Consolidated Statements of Stockholder's Equity (Deficit) for the three years ended                             
  December 31, 1996........................................................................................ F-5 
Consolidated Statements of Cash Flows for the three years ended December 31, 1996.......................... F-6 
Notes to Consolidated Financial Statements................................................................. F-7 
Consolidated Balance Sheets, March 31, 1997 (unaudited) and December 31, 1996.............................. F-15
Consolidated Statements of Operation for the three months ended March 31, 1997 and 1996 (unaudited)........ F-16
Consolidated Statements of Cash Flows for the three months ended March 31, 1997 and 1996 (unaudited)....... F-17
Consolidated Statements of Stockholder's Equity (Deficit) for the three months ended March 31, 1997             
  (unaudited).............................................................................................. F-18
Notes to Consolidated Financial Statements................................................................. F-19

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REPORT OF INDEPENDENT ACCOUNTANTS 

Board of Directors                                                              
Fairfield Manufacturing Company, Inc.                                           

We have audited the accompanying consolidated balance sheets of Fairfield       
Manufacturing Company, Inc. as of December 31, 1996 and 1995, and the related   
consolidated statements of operations, stockholder's equity (deficit), and cash 
flows for each of the three years in the period ended December 31, 1996. These  
financial statements are the responsibility of the Company's management. Our    
responsibility is to express an opinion on these financial statements based on  
our audits.                                                                     

We conducted our audits in accordance with generally accepted auditing          
standards. Those standards require that we plan and perform the audit to obtain 
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting 
the amounts and disclosures in the financial statements. An audit also includes 
assessing the accounting principles used and significant estimates made by      
management, as well as evaluating the overall financial statement presentation. 
We believe that our audits provide a reasonable basis for our opinion.          

In our opinion, the consolidated financial statements referred to above present 
fairly, in all material respects, the consolidated financial position of        
Fairfield Manufacturing Company, Inc. as of December 31, 1996 and 1995, and the 
consolidated results of their operations and their consolidated cash flows for  
each of the three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.                                       

                            COOPERS & LYBRAND L.L.P.

Indianapolis, Indiana                                                           
January 31, 1997, except                                                        
Note 11, as to which the                                                        
date is March 12, 1997                                                          

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FAIRFIELD MANUFACTURING COMPANY, INC. 
CONSOLIDATED BALANCE SHEETS 
DECEMBER 31, 1996 AND 1995
(IN THOUSANDS)

                                                        [Enlarge/Download Table]

                                                                                             1996       1995   
                                                                                           --------   -------- 
                                                                                                               
                                          ASSETS                                                               
Current assets:                                                                                                
  Cash and cash equivalents............................................................... $  6,185   $  4,324 
  Trade receivables, less allowance of $600 in 1996 and in 1995...........................   24,696     24,328 
  Inventory...............................................................................   18,918     24,912 
  Prepaid expenses........................................................................      853        897 
                                                                                           --------   -------- 
     Total current assets.................................................................   50,652     54,461 

Property, plant and equipment, net........................................................   70,211     71,056 

Other assets:                                                                                                  
  Excess of investment over net assets acquired, less accumulated amortization                                 
     of $11,868 in 1996 and $10,261 in 1995...............................................   52,491     54,098 
  Deferred financing costs, less accumulated amortization of $2,355 in 1996 and                                
     $1,685 in 1995.......................................................................    3,016      3,540 
                                                                                           --------   -------- 
     Total other assets...................................................................   55,507     57,638 
                                                                                           --------   -------- 
     Total assets......................................................................... $176,370   $183,155 
                                                                                           --------   -------- 
                                                                                           --------   -------- 
                      LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)                                           
Current liabilities:                                                                                           
  Current maturities of long-term debt.................................................... $  3,000   $  3,000 
  Accounts payable........................................................................   13,260     11,150 
  Due to parent...........................................................................      287        807 
  Accrued liabilities.....................................................................   18,182     17,524 
  Deferred income taxes...................................................................    3,800      4,700 
                                                                                           --------   -------- 
     Total current liabilities............................................................   38,529     37,181 

Accrued retirement costs..................................................................   15,423     14,758 
Deferred income taxes.....................................................................   11,988     11,258 
Long-term debt, net of current maturities.................................................  115,000    110,000 
Stockholder's equity (deficit):                                                                                
  Common stock, par value $.01 per share; 10,000,000 shares authorized; 7,805,000                              
     and 7,676,000 issued and outstanding in 1996 and 1995, respectively..................       78         77 
  Additional paid-in capital..............................................................   36,788     35,209 
  Accumulated deficit.....................................................................  (41,436)   (25,328)
                                                                                           --------   -------- 
     Total stockholder's equity (deficit).................................................   (4,570)     9,958 

                                                                                           --------   -------- 
     Total liabilities and stockholder's equity (deficit)................................. $176,370   $183,155 
                                                                                           --------   -------- 
                                                                                           --------   -------- 

The accompanying notes to consolidated financial statements 
are an integral part of these statements. 

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FAIRFIELD MANUFACTURING COMPANY, INC. 
CONSOLIDATED STATEMENTS OF OPERATIONS 
FOR THE THREE YEARS ENDED DECEMBER 31, 1996 
(IN THOUSANDS, EXCEPT PER SHARE DATA) 

                                                        [Enlarge/Download Table]

                                                                  1996        1995        1994    
                                                               ----------  ----------  ---------- 
                                                                                                  
Net sales..................................................... $  195,205  $  192,111  $  150,689 
Cost of sales.................................................    158,668     151,890     123,092 
Selling, general and administrative expenses..................     16,868      14,759      15,924 
                                                               ----------  ----------  ---------- 
  Operating income............................................     19,669      25,462      11,673 
Interest expense, net.........................................     11,930      12,905      12,377 
Other expense, net............................................         90         127         199 
                                                               ----------  ----------  ---------- 
  Income (loss) before income taxes and cumulative effect of                                      
     change in accounting principle...........................      7,649      12,430        (903)
Provision (benefit) for income taxes..........................      3,730       5,520        (164)
                                                               ----------  ----------  ---------- 
  Income (loss) before cumulative effect of change in                                             
     accounting principle.....................................      3,919       6,910        (739)
Cumulative effect of change in accounting principle, net of                                       
  benefit for income taxes of $346 in 1994....................         --          --      (1,554)
                                                               ----------  ----------  ---------- 
  Net income (loss)........................................... $    3,919  $    6,910  $   (2,293)
                                                               ----------  ----------  ---------- 
                                                               ----------  ----------  ---------- 
Income (loss) per share data:                                                                     
  Before cumulative effect of change in accounting                                                
     principle................................................ $     0.51  $     1.15  $    (0.25)
  Cumulative effect of change in accounting principle.........         --          --  $    (0.52)
                                                               ----------  ----------  ---------- 
  Net income (loss) per common share.......................... $     0.51  $     1.15  $    (0.77)
                                                               ----------  ----------  ---------- 
                                                               ----------  ----------  ---------- 
  Weighted average common shares outstanding..................  7,726,557   6,018,072   2,976,471 
                                                               ----------  ----------  ---------- 
                                                               ----------  ----------  ---------- 

The accompanying notes to consolidated financial statements 
are an integral part of these statements. 

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FAIRFIELD MANUFACTURING COMPANY, INC. 
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT) 
FOR THE THREE YEARS ENDED DECEMBER 31, 1996 
(IN THOUSANDS)

                                                        [Enlarge/Download Table]

                                                                       ADDITIONAL               STOCKHOLDER'S 
                                                               COMMON   PAID-IN    ACCUMULATED      EQUITY    
                                                               STOCK    CAPITAL      DEFICIT      (DEFICIT)   
                                                               ------  ----------  -----------  --------------

                                                                                                              
Balance, January 1, 1994......................................  $ 30    $ 31,193    $ (29,945)     $  1,278   

  Contributed capital.........................................    --       1,060           --         1,060   

  Net loss....................................................    --          --       (2,293)       (2,293)  
                                                               ------  ----------  -----------  ------------  

Balance, December 31, 1994....................................    30      32,253      (32,238)           45   

  Contributed capital.........................................    47       2,956           --         3,003   

  Net income..................................................    --          --        6,910         6,910   
                                                               ------  ----------  -----------  ------------  

Balance, December 31, 1995....................................    77      35,209      (25,328)        9,958   

  Contributed capital.........................................     1       1,579           --         1,580   

  Dividend....................................................    --          --      (17,000)      (17,000)  

  Advance to Parent...........................................    --          --       (3,027)       (3,027)  

  Net income..................................................    --          --        3,919         3,919   
                                                               ------  ----------  -----------  ------------  

Balance, December 31, 1996....................................  $ 78    $ 36,788    $ (41,436)     $ (4,570)  
                                                               ------  ----------  -----------  ------------  
                                                               ------  ----------  -----------  ------------  

The accompanying notes to consolidated financial statements 
are an integral part of these statements. 

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FAIRFIELD MANUFACTURING COMPANY, INC. 
CONSOLIDATED STATEMENTS OF CASH FLOWS 
FOR THE THREE YEARS ENDED DECEMBER 31, 1996 
(IN THOUSANDS)

                                                        [Enlarge/Download Table]

                                                                                    1996        1995      1994   
                                                                                  --------    --------   ------- 
                                                                                                                 
Operating activities:                                                                                            
  Net income (loss)............................................................   $  3,919    $  6,910   $(2,293)
  Adjustments to reconcile net income (loss) to net cash provided by operating                                   
     activities:                                                                                                 
     Cumulative effect of change in accounting principle, net..................         --          --     1,554 
     Depreciation and amortization.............................................     13,108      12,272    11,850 
     Loss on disposal of equipment.............................................         --          --       768 
     Deferred income tax benefit...............................................       (170)     (1,178)   (2,700)
     Decrease (increase) in accrued retirement costs...........................        665       2,079      (864)
(Increase) decrease in current assets:                                                                           
     Trade receivables.........................................................       (368)     (7,886)   (1,922)
     Receivable from parent....................................................         --       1,097       155 
     Inventory.................................................................      5,994         681    (2,714)
     Prepaids..................................................................         44        (434)      (42)
Increase (decrease) in current liabilities:                                                                      
     Accounts payable..........................................................       (156)     (2,418)    3,316 
     Due to parent.............................................................       (520)        807        -- 
     Accrued liabilities.......................................................        658       1,926     2,482 
                                                                                  --------    --------   ------- 
Net cash provided by operating activities......................................     23,174      13,856     9,590 
                                                                                  --------    --------   ------- 
Investing activities:                                                                                            
  Additions to plant and equipment, net........................................     (7,720)    (11,645)   (9,164)
                                                                                  --------    --------   ------- 
Net cash used by investing activities..........................................     (7,720)    (11,645)   (9,164)
                                                                                  --------    --------   ------- 
Financing activities:                                                                                            
  Proceeds from additional capital contribution................................      1,580       3,003     1,060 
  Payment of dividend..........................................................    (17,000)         --        -- 
  Advance to parent............................................................     (3,027)         --        -- 
  Proceeds of long-term debt...................................................     20,000      11,000     3,000 
  Payment of long-term debt....................................................    (15,000)    (13,000)   (9,444)
  Payment of debt issuance costs...............................................       (146)       (340)      (50)
                                                                                  --------    --------   ------- 
Net cash provided (used) by financing activities...............................    (13,593)        663    (5,434)
                                                                                  --------    --------   ------- 
Increase (decrease) in cash and cash equivalents...............................      1,861       2,874    (5,008)
Cash and cash equivalents:                                                                                       
  Beginning of year............................................................      4,324       1,450     6,458 
                                                                                  --------    --------   ------- 
  End of year..................................................................   $  6,185    $  4,324   $ 1,450 
                                                                                  --------    --------   ------- 

                                                                                  --------    --------   ------- 
Supplemental Disclosures:                                                                                        
  Cash paid for:                                                                                                 
     Interest..................................................................   $ 11,627    $ 12,387   $11,298 
     Taxes to parent...........................................................   $  2,450    $  1,650   $   904 
Non-cash activities:                                                                                             
  Additions to plant and equipment included in accounts payable at December 31, 1996 and 1995 are                
     excluded from operating activities above.                                                                   

The accompanying notes to consolidated financial statements 
are an integral part of these statements. 

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FAIRFIELD MANUFACTURING COMPANY, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA) 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES                                   

Organization                                                                

  Fairfield Manufacturing Company, Inc. ('the Company') is wholly-owned by
Lancer Industries Inc. ('Lancer'). The Company, its subsidiary and Lancer are   
Delaware corporations. The Company has one subsidiary, T-H Licensing, Inc.,     
which owns certain of the Company's intangible assets. These consolidated       
financial statements include the accounts of Fairfield Manufacturing Company,   
Inc. and its wholly-owned subsidiary. All significant intercompany accounts and 
transactions have been eliminated.                                              

 The Company manufactures high precision custom gears and planetary gear
systems at its Lafayette, Indiana facility. Customers consist of original       
equipment manufacturers serving diverse markets which include rail, industrial, 
construction, road rehabilitation, mining, materials-handling, forestry and     
agricultural.                                                                   

Concentration of Credit Risk                                                

     During 1996, no single customer accounted for more than 10% of consolidated
net sales. Net sales to one customer representing more than 10% of consolidated 
net sales were $21,109 in 1995 and $19,601 in 1994. Foreign sales are not       
material.                                                                       

Revenue Recognition                                                         

Sales are recognized at the time of shipment to the customer.         

Cash and Cash Equivalents                                                   

The Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.                      

Inventory                                                                   

Inventory is valued at the lower of last-in, first-out (LIFO) cost or 
market.                                                                         

Property, Plant and Equipment, Net                                          

 Property, plant and equipment, net are carried at cost less accumulated
depreciation. Depreciation is computed on the straight-line method over the     
estimated useful lives of the assets ranging from 3 to 30 years.                

Income Taxes                                                                

Income taxes are provided based on the liability method of accounting 

pursuant to Statement of Financial Accounting Standards No. 109 'Accounting for 
Income Taxes' ('SFAS 109'). The liability method measures the expected tax      
impact of future taxable income or deductions resulting from differences in the 
tax and financial reporting bases of assets and liabilities reflected in the    
consolidated balance sheets and the expected tax impact of carryforwards for tax
purposes.                                                                       

Excess of Investment Over Net Assets Acquired                               

Excess of investment over net assets acquired is amortized using the  
straight-line method over 40 years. At each balance sheet date management       
assesses whether there has been a permanent impairment in the value of this     
excess of investment over net assets acquired and the amount of any impairment  
by comparing anticipated undiscounted cash flows from operating activities with 
the carrying value. The factors considered by management in performing this     
assessment include current operating results, trends and prospects as well as   
the effects of obsolescence, demand, competition and other economic factors. The
Company has concluded the excess of investment over net assets acquired is not  
impaired, and that its products, markets and prospects continue to support a 40 
year life.                                                                      

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FAIRFIELD MANUFACTURING COMPANY, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 

(IN THOUSANDS, EXCEPT PER SHARE DATA) 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)                      

Deferred Financing Costs                                                    

Debt issuance costs are being amortized by the use of the effective   
interest method over the expected term of the related debt agreement.           

Computation of Net Income (Loss) Per Share                                  

     Income (loss) per share is based upon the weighted average number of shares
of common stock outstanding.                                                    

Use of Estimates                                                            

The preparation of financial statements in conformity with generally  
accepted accounting principles requires management to make estimates and        
assumptions that effect the reported amounts of assets and liabilities and      
disclosure of contingent assets and liabilities and the reported amounts of     
revenues and expenses. Actual results could differ from those estimates.        

Fair Value of Financial Instruments                                         

  The fair value of financial assets held by the Company approximate their
carrying value. The fair value of the financial liabilities which consists of   

senior and subordinated debt, also approximate their carrying value.            

Reclassifications                                                           

    Certain amounts in the 1995 and 1994 consolidated financial statements and
notes to consolidated financial statements have been reclassified to conform    
with the 1996 presentation.                                                     

2. INVENTORY                                                                    

Inventory at December 31, consists of:                                

                                                        [Enlarge/Download Table]

                                                                                    1996      1995   
                                                                                   -------   ------- 
                                                                                                     
Raw materials..................................................................... $ 4,178   $ 4,039 
Work in process...................................................................   8,070    10,978 
Finished products.................................................................   7,490    10,350 
                                                                                   -------   ------- 
                                                                                    19,738    25,367 
Less: Excess of FIFO cost over LIFO cost..........................................    (820)     (455)
                                                                                   -------   ------- 
                                                                                   $18,918   $24,912 
                                                                                   -------   ------- 
                                                                                   -------   ------- 

3. PROPERTY, PLANT AND EQUIPMENT, NET                                           

    Property, plant and equipment, net at December 31, includes the following:

                                                        [Enlarge/Download Table]

                                                                                    1996      1995   
                                                                                   -------   ------- 
                                                                                                     
Land and improvements............................................................. $ 1,312   $ 1,211 
Buildings and improvements........................................................  11,869    11,567 
Machinery and equipment........................................................... 129,747   121,819 
                                                                                   -------   ------- 
                                                                                   142,928   134,597 
Less: Accumulated depreciation.................................................... (72,717)  (63,541)
                                                                                   -------   ------- 
                                                                                   $70,211   $71,056 
                                                                                   -------   ------- 
                                                                                   -------   ------- 

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FAIRFIELD MANUFACTURING COMPANY, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 

(IN THOUSANDS, EXCEPT PER SHARE DATA) 

4. ADVANCE TO PARENT                                                            

    On December 5, 1996, the Company advanced $3,000 to Lancer and anticipates
repayment during February 1997. This advance has been classified as a component 
of stockholders' equity (deficit) at December 31, 1996, at which date the       
related accrued interest was $27.                                               

5. ACCRUED LIABILITIES                                                          

Accrued liabilities at December 31, are as follows:                   

                                                        [Enlarge/Download Table]

                                                                                    1996     1995  
                                                                                   -------  -------
                                                                                                   
Compensation and employee benefits................................................ $ 5,970  $ 6,602
Accrued retirement and postemployment costs.......................................   3,002    1,750
Interest payable..................................................................   5,021    5,187
Other.............................................................................   4,189    3,985
                                                                                   -------  -------
                                                                                   $18,182  $17,524
                                                                                   -------  -------
                                                                                   -------  -------

6. EMPLOYEE BENEFIT PLANS                                                       

     The Company has a noncontributory defined benefit pension plan which covers
substantially all of its employees. The benefits are based on years of service  
and the employee's earnings preceding retirement. The Company's funding policy  
is to contribute each year an amount at least equal to the minimum required     
contribution as defined by the Employee Retirement Income Security Act of 1974. 
Assets of the plan are principally deposit administration insurance contracts.  
The projected benefit obligation has been determined by using the projected unit
credit method.                                                                  

Net pension cost for years ended December 31, consists of:            

                                                        [Enlarge/Download Table]

                                                                             1996     1995     1994  
                                                                            ------   ------   ------ 
                                                                                                     
Service cost--benefits earned during the period............................ $1,387   $1,180   $1,427 
Interest cost..............................................................  2,862    2,626    2,440 
Actual return on plan assets............................................... (2,043)  (3,061)    (764)
Net amortization and deferral..............................................   (317)     906   (1,438)
                                                                            ------   ------   ------ 

Net pension cost........................................................... $1,889   $1,651   $1,665 
                                                                            ------   ------   ------ 
                                                                            ------   ------   ------ 

  The plan's funded status and amounts included in the December 31 balance
sheets based upon actuarial valuations at October 1, 1996 and 1995 are:         

                                                        [Enlarge/Download Table]

                                                                                    1996      1995   
                                                                                   -------   ------- 
                                                                                                     
Actuarial present value of benefit obligation:                                                       
  Vested benefits................................................................. $27,420   $25,115 
  Nonvested benefits..............................................................   1,984     1,651 
                                                                                   -------   ------- 
Accumulated benefit obligation....................................................  29,404    26,766 
Effect of projected future compensation increases.................................  13,568    12,995 
                                                                                   -------   ------- 
Projected benefit obligation......................................................  42,972    39,761 
Plan assets at fair value.........................................................  31,349    30,493 
                                                                                   -------   ------- 
Projected benefit obligation in excess of plan assets.............................  11,623     9,268 
Unrecognized gain.................................................................      33     1,084 
Unrecognized prior service cost...................................................  (1,921)   (2,111)
                                                                                   -------   ------- 
Accrued liability included in balance sheet....................................... $ 9,735   $ 8,241 
                                                                                   -------   ------- 
                                                                                   -------   ------- 
Assumed discount rate.............................................................    7.25%     7.25%
Assumed long-term return on plan assets...........................................     8.5%      8.5%

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FAIRFIELD MANUFACTURING COMPANY, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 

(IN THOUSANDS, EXCEPT PER SHARE DATA) 

6. EMPLOYEE BENEFIT PLANS--(CONTINUED)                                          

The Company has a contributory defined contribution savings plan which
covers all of its eligible employees. Eligibility in the plan is obtained the   
month following hire with no minimum age requirement. A participant may make a  
basic contribution to the plan ranging from 2% to 6% of the participant's salary
and a supplemental contribution of 2%, 4%, or 6% of the participant's salary.   
The Company matches 70% of the participant's basic contribution. Expense        
recognized each of the years ended December 31, 1996, 1995 and 1994 was $1,356, 
$1,238 and $909, respectively.                                                  

In addition to pension and savings plan benefits, the Company provides
limited health care and life insurance benefits for certain retired employees.  

   Effective January 1, 1994, the Company amended its postretirement medical
plan. The plan amendment changed the eligibility provisions to be age 60 with 15
years of service for all active employees.                                      

Net periodic postretirement benefit cost for years ended December 31, 
includes the following components:                                              

                                                        [Enlarge/Download Table]

                                                                                 1996    1995   1994 
                                                                                ------   ----   ---- 
                                                                                                     
Service cost................................................................... $  332   $257   $251 
Interest cost..................................................................    656    587    534 
Unrecognized net loss..........................................................    214     78     48 
Prior service cost.............................................................    (63)   (63)   (63)
                                                                                ------   ----   ---- 
                                                                                $1,139   $859   $770 
                                                                                ------   ----   ---- 
                                                                                ------   ----   ---- 

   The actuarial and recorded liabilities for these postretirement benefits,
none of which have been funded, are as follows at December 31:                  

                                                        [Enlarge/Download Table]

                                                                                       1996     1995  
                                                                                      ------   ------ 
                                                                                                      
Actuarial present value of postretirement benefitobligation:                                          
  Retirees and dependents............................................................ $5,817   $5,023 
  Active employees eligible to retire and receive benefits...........................    840      654 
  Active employees not yet eligible to retire and receive benefits...................  2,939    2,390 
                                                                                      ------   ------ 
Total accumulated postretirement benefit obligation..................................  9,596    8,067 
Unrecognized loss.................................................................... (3,118)  (1,941)
Unrecognized prior service cost......................................................    314      376 
                                                                                      ------   ------ 
Accrued postretirement benefit liability included in balance sheet................... $6,792   $6,502 
                                                                                      ------   ------ 
                                                                                      ------   ------ 

The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.25% for 1996 and 1995. The health care  
cost trend rate is not a factor in the calculation of the accumulated           
postretirement benefit obligation as the plan limits benefits paid to retirees  
to a lifetime maximum amount per retiree. Claims in excess of this amount are   
the responsibility of the retiree.                                              

     The Company provides postemployment benefits to certain former and inactive
employees. The Company adopted SFAS No. 112, 'Employers' Accounting for         
Postemployment Benefits' as of the beginning of fiscal 1994. This accounting    
standard requires the accrual of the cost of postemployment benefits over the   
employees' years of service rather than accounting for such costs on a cash     
basis. A one-time cumulative adjustment of $1,900 ($1,554, net of tax) was      
recognized as of the beginning of fiscal 1994.                                  

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FAIRFIELD MANUFACTURING COMPANY, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 

(IN THOUSANDS, EXCEPT PER SHARE DATA) 

6. EMPLOYEE BENEFIT PLANS--(CONTINUED)                                          

Net periodic postemployment benefit cost for years ended December 31  
included the following components:                                              

                                                        [Enlarge/Download Table]

                                                                                 1996  1995  1994
                                                                                 ----  ----  ----
                                                                                                 
Service Cost.................................................................... $115  $131  $ 75
Interest Cost...................................................................  157   349    98
                                                                                 ----  ----  ----
                                                                                 $272  $480  $173
                                                                                 ----  ----  ----
                                                                                 ----  ----  ----

   The recorded liabilities for these postemployment benefits, none of which
have been funded, are $1,894 and $1,765 at December 31, 1996 and 1995,          
respectively.                                                                   

7. INCOME TAXES                                                                 

    The Company files separate state income tax returns and is included in the
consolidated federal income tax return of its parent company, Lancer. The       
Company and Lancer have entered into a Tax Sharing Agreement under which the    
Company is required to calculate its federal income tax liability on a separate 
return basis. Accordingly, the Company has also calculated its credit/expense   
equivalent to benefit/provision for federal income taxes on a separate return   
basis.                                                                          

 The (credit)/expense equivalent to (benefit)/provision for income taxes
each of the three years in the period ended December 31, consists of:           

                                                        [Enlarge/Download Table]


                                                                             1996     1995     1994  
                                                                            ------   ------   ------ 
                                                                                                     
Current, principally federal............................................... $3,900   $6,698   $2,545 
Deferred, principally federal..............................................   (170)  (1,178)  (3,055)
                                                                            ------   ------   ------ 
                                                                            $3,730   $5,520   $ (510)
                                                                            ------   ------   ------ 
                                                                            ------   ------   ------ 

The credit equivalent to benefit for income taxes for 1994 results    
principally from the reversal of previously provided deferred taxes. The expense
equivalent to provision for income taxes for 1996 and 1995 results principally  
from current year operating results.                                            

A reconciliation of the expected (credit)/expense equivalent to       
(benefit)/provision for income taxes at the statutory federal income tax rate   
and the actual tax benefit/provision each of the three years ended December 31, 
is as follows:                                                                  

                                                        [Enlarge/Download Table]

                                                               1996             1995              1994       
                                                          --------------   ---------------   --------------- 
                                                          AMOUNT     %     AMOUNT      %     AMOUNT      %   
                                                          ------    ----   ------    -----   ------    ----- 
                                                                                                             
Expected total tax benefit/provision at statutory rate..  $2,677    35.0%  $4,351     35.0%  $(953)   (34.0)%
State taxes, net of federal.............................     231     3.0      626      5.0    (277)    (9.9) 
Non-deductible amortization on excess of investment over                                                     
  net assets acquired...................................     555     7.3      555      4.4     540     19.3  
Other, net..............................................     267     3.5      (12)    (0.0)    180      6.4  
                                                          ------    ----   ------    -----   ------    ----- 
                                                          $3,730    48.8%  $5,520     44.4%  $(510)   (18.2)%
                                                          ------    ----   ------    -----   ------    ----- 
                                                          ------    ----   ------    -----   ------    ----- 

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FAIRFIELD MANUFACTURING COMPANY, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 

(IN THOUSANDS, EXCEPT PER SHARE DATA) 

7. INCOME TAXES--(CONTINUED)                                                    

   Deferred income taxes applicable to temporary differences at December 31,
are as follows:                                                                 

                                                        [Enlarge/Download Table]


                                                                                    1996       1995   
                                                                                  --------   -------- 
                                                                                                      
Current:                                                                                              
  Inventory basis difference..................................................... $ (6,317)  $ (5,634)
  Employee benefits..............................................................    1,288      1,456 
  Other, net.....................................................................    1,229       (522)
                                                                                  --------   -------- 
  Total current deferred tax liability, net......................................   (3,800)    (4,700)
Long-term:                                                                                            
  Inventory basis difference.....................................................      626        515 
  Property, plant and equipment basis difference.................................  (18,952)   (18,547)
  Employee benefits..............................................................    7,381      6,412 
  Other, net.....................................................................   (1,043)       362 
                                                                                  --------   -------- 
  Total long-term deferred tax liability, net....................................  (11,988)   (11,258)
                                                                                  --------   -------- 
  Total deferred tax liability, net.............................................. $(15,788)  $(15,958)
                                                                                  --------   -------- 
                                                                                  --------   -------- 

     Under the Tax Sharing Agreement between the Company and Lancer, the Company
is required to pay Lancer an amount equal to the Company's current federal      
income tax liability calculated on a separate return basis. To the extent such  
tax liability is reduced by the Company's utilization of Lancer's available tax 
benefits, Lancer is required to reimburse the Company for 50% of the amount of  
such reduction by making a capital contribution to the Company. Lancer made     
capital contributions to the Company of $1,580, $2,503, and $1,060 during 1996, 
1995 and 1994, respectively.                                                    

8. LONG-TERM DEBT                                                               

Long-term debt consists of the following at December 31:              

                                                        [Enlarge/Download Table]

                                                                                   1996       1995   
                                                                                 --------   -------- 
                                                                                                     
Senior Term Credit.............................................................. $ 33,000   $ 21,000 
Senior Revolving Credit.........................................................       --      7,000 
Senior Subordinated Notes.......................................................   85,000     85,000 
                                                                                 --------   -------- 
                                                                                  118,000    113,000 
Less current maturities.........................................................   (3,000)    (3,000)
                                                                                 --------   -------- 
                                                                                 $115,000   $110,000 
                                                                                 --------   -------- 
                                                                                 --------   -------- 

The future maturities of long-term debt as of December 31, 1996 are as

follows:                                                                        

                                                                [Download Table]
                                                                                 
1997.................................................................... $  3,000
1998....................................................................    4,000
1999....................................................................    7,000
2000....................................................................   19,000
2001....................................................................   85,000
                                                                         --------
                                                                         $118,000
                                                                         --------
                                                                         --------

  The Company's Senior Subordinated Notes (the 'Notes') bear interest at a
rate of 11 3/8% and mature on July 1, 2001. The Notes are redeemable at the     
option of the Company, in whole or in part, on or after July 1998 at certain    
specified redemption prices.                                                    

    Concurrent with the issuance of the Notes, the Company entered into a loan
agreement with a senior lending institution which provides for a Revolving      
Credit Facility and a Term Loan (together, the 'Credit Facilities'). The loan   
agreement was amended during December, 1996. The amendment increased the Term   
Loan to $33,000 and is payable quarterly through December, 2000. The Revolving  
Credit Facility permits the Company to borrow                                   

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FAIRFIELD MANUFACTURING COMPANY, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 

(IN THOUSANDS, EXCEPT PER SHARE DATA) 

8. LONG-TERM DEBT--(CONTINUED)                                                  

up to $20,000 subject to borrowing base availability (as defined) and, at the   
option of the Company (subject to certain conditions) may be increased by an    
additional $2,000 at December 1996 increasing to $5,000 by December 1997. The   
Revolving Credit Facility matures on July 1, 2001. Interest under the Credit    
Facilities is payable at varying rates based on prime or Eurodollar rates. At   
December 31, 1996, the Eurodollar rate loans ranged from 7.64% to 7.91%         
resulting in a weighted average rate of 7.83%. The unused Revolving Credit      
Facility at December 31, 1996, net of $698 of outstanding letters of credit, was
$19,302.                                                                        

    Borrowings under the Credit Facilities are collateralized by substantially
all the assets of the Company, including the assignment of all leases and rents 
and a pledge of the outstanding common stock of the Company. The Credit         
Facilities and the Notes contain various restrictive covenants that, among other
restrictions, require the Company to maintain certain financial ratios. The     
December 1996 amendment provides for the payment of dividends under the same    

provisions as the Notes.                                                        

9. STOCKHOLDER'S EQUITY                                                         

Merger                                                                      

 On March 31, 1995 the Company and Holdings merged with and into Central
Alabama Grain Company, Inc. ('CAG'), a wholly-owned, non-operating subsidiary of
Lancer, with CAG continuing as the surviving corporation of the mergers. Upon   
completion of the mergers, CAG vested in all of the estate, property, rights,   
privileges, powers and franchises of the Company including T-H Licensing, Inc.  
its wholly-owned subsidiary. CAG assumed all obligations and liabilities of the 
Company. All of the Company's officers and directors became officers and        
directors of CAG. Concurrent with the merger, CAG changed its name to Fairfield 
Manufacturing Company, Inc.                                                     

Issuance of Common Stock                                                    

  The Company issued 25,000 additional shares of its common stock on March
31, 1996, 51,000 shares on June 30, 1996, 23,000 shares on September 30, 1996,  
and 30,000 shares on December 31, 1996, to Lancer in consideration of certain   
capital contributions made by Lancer to the Company pursuant to the Tax Sharing 
Agreement and other capital contributions.                                      

Dividend                                                                    

   On December 5, 1996, the Company, with the approval of its senior lender,
declared and paid a dividend of $17,000 to Lancer.                              

10. OTHER FINANCIAL DATA                                                        

Operating Leases                                                            

  The Company is obligated to make payments under noncancellable operating
leases expiring at various dates through 2000.                                  

Future minimum payments by year, and in the aggregate, under operating
leases consist of the following at December 31, 1996:                           

                                                                [Download Table]

YEAR                                                        MINIMUM RENTAL
---------------------------------------------------------   --------------
                                                                          
1997.....................................................       $  372    
1998.....................................................          355    
1999.....................................................          321    
2000.....................................................          241    
                                                               -------    
                                                                $1,289    
                                                               -------    
                                                               -------    

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FAIRFIELD MANUFACTURING COMPANY, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 

(IN THOUSANDS, EXCEPT PER SHARE DATA) 

10. OTHER FINANCIAL DATA--(CONTINUED)                                           

 Rental expense for the years ended December 31, 1996, 1995 and 1994 was
$446, $698, and $974 respectively.                                              

Equity Participation Plan                                                   

The Company maintains an Equity Participation Plan (the 'Plan') which 
provides for the award of up to an aggregate of 180,000 Equity Participation    
Rights ('Rights') to certain current and past officers and key employees. At    
December 31, 1996, all 180,000 rights were granted and have vested.             

Under the Plan, each participant is entitled to receive, upon the     
occurrence of a Trigger Event, (as defined below) and exercise of a Right, an   
amount in cash equal to the difference between the fair market value of a share 
of the Company's common stock on the date the Trigger Event occurs and the      
initial value assigned to each Right. A Trigger Event means (a) any of the      
following transactions which results in a change in control: (i) a merger or    
consolidation of the Company with or into another corporation; (ii) the sale or 
exchange for cash, securities or other consideration of all or substantially all
of the assets of the corporation; or (iii) the sale or exchange for cash,       
securities or any other consideration of all or substantially all of the        
outstanding common equity of the Company or (b) the later of the fifth          
anniversary of the date the Right was granted or the date the participant       
retires from the Company at or after age 60.                                    

     Payments under the Plan may not exceed $1,320 in any fiscal year and $5,280
in the aggregate.                                                               

During the period that a stock appreciation right (or Right) is       
outstanding, the ultimate amount of compensation inherent in the Right is       
indeterminate. APB Opinion No. 25 and FASB Interpretation No. 28 require interim
calculations of the amount of compensation inherent in the stock appreciation   
right. This amount is generally equal to the increase in the fair market value  
since date of grant or award multiplied by the total number of share or rights  
outstanding, regardless of the exercisable status of the rights.                

  At December 31, 1996, 1995 and 1994 the exercise price exceeds estimated
fair market value of the Company's common stock. Accordingly, there has been no 
compensation charged to earnings for this plan.                                 

11. SUBSEQUENT EVENT--SALE OF PREFERRED STOCK                                   

On March 12, 1997, the Company completed a private offering of 50,000 
shares of 11 1/4% Cumulative Exchangeable Preferred Stock ('Preferred Stock').  

Each share has a liquidation preference of $1,000, plus accumulated and unpaid  
dividends. The Company is required, subject to certain conditions, to redeem all
of the Preferred Stock outstanding on March 15, 2009 at a redemption price equal
to 100% of the liquidation preference. Dividends are payable semi-annually at an
annual rate of 11 1/4%, and may be paid, at the Company's option, either in cash
or in additional shares of Preferred Stock.                                     

 The net proceeds from this offering ($47.7 million) were used to fund a
dividend to Lancer, and used by Lancer to redeem $47.7 million of its Series C  
Preferred Stock. Had this transaction occurred as of December 31, 1996, the     
Company's summary balance sheet would have been as follows:                     

                                                        [Enlarge/Download Table]

                                                                        ACTUAL    PROFORMA 
                                                                       --------   -------- 
                                                                                           
Working capital....................................................... $ 12,123   $ 12,080 
Total Assets..........................................................  176,370    176,327 
Long-term debt, including current maturities..........................  118,000    118,000 
Redeemable preferred stock............................................       --     47,700 
Stockholder's equity (deficit)........................................   (4,570)   (52,313)

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FAIRFIELD MANUFACTURING COMPANY, INC. 
CONSOLIDATED BALANCE SHEETS 
(IN THOUSANDS)

                                                        [Enlarge/Download Table]

                                                                                MARCH 31, 1997  DECEMBER 31, 1996
                                                                                --------------  -----------------
                                                                                 (UNAUDITED)                     
                                                                                                                 
                                    ASSETS                                                                       
Current assets:                                                                                                  
  Cash and cash equivalents...................................................     $  1,714         $   6,185    
  Trade receivables, less allowance of $600 in 1997 and 1996..................       25,667            24,696    
  Inventory...................................................................       21,237            18,918    
  Prepaid expenses............................................................          755               853    
                                                                                --------------  -----------------
     Total current assets.....................................................       49,373            50,652    
Property, plant and equipment, net............................................       69,500            70,211    
Other Assets:                                                                                                    
  Excess of investment over net assets acquired, less accumulated amortization                                   
     of 12,269 in 1997 and 11,868 in 1996.....................................       52,090            52,491    
  Deferred financing costs, less accumulated amortization of $2,526 in 1997                                      
     and $2,355 in 1996.......................................................        2,845             3,016    
                                                                                --------------  -----------------
     Total other assets.......................................................       54,935            55,507    
                                                                                --------------  -----------------
     Total assets.............................................................     $173,808         $ 176,370    
                                                                                --------------  -----------------
                                                                                --------------  -----------------

                     LIABILITIES AND STOCKHOLDER'S EQUITY                                                        
Current liabilities:                                                                                             
  Current maturities of long-term debt........................................     $  3,250         $   3,000    
  Accounts payable............................................................       14,843            13,260    
  Due to parent...............................................................          445               287    
  Accrued liabilities.........................................................       17,505            18,182    
  Deferred income taxes.......................................................        3,800             3,800    
                                                                                --------------  -----------------
     Total current liabilities................................................       39,843            38,529    
Accrued retirement costs......................................................       14,442            15,423    
Deferred income taxes.........................................................       12,046            11,988    
Long-term debt, net of current maturities.....................................      111,000           115,000    
11 1/4% cumulative exchangeable preferred stock...............................       47,707                --    
Stockholder's equity (deficit):                                                                                  
  Common stock: par value $.01 per share, 10,000,000 shares authorized,                                          
     7,857,000 and 7,805,000 issued and outstanding in 1997 and 1996,                                            
     respectively.............................................................           79                78    
  Additional paid-in capital..................................................       37,196            36,788    
  Accumulated deficit.........................................................      (88,505)          (41,436)   
                                                                                --------------  -----------------
     Total stockholder's equity (deficit).....................................      (51,230)           (4,570)   

                                                                                --------------  -----------------
     Total liabilities and stockholder's equity (deficit).....................     $173,808         $ 176,370    
                                                                                --------------  -----------------
                                                                                --------------  -----------------

The accompanying notes to consolidated financial statements 
are an integral part of these statements. 

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FAIRFIELD MANUFACTURING COMPANY, INC. 
CONSOLIDATED STATEMENTS OF OPERATION
(IN THOUSANDS, EXCEPT PER SHARE DATA) 
(UNAUDITED) 

                                                        [Enlarge/Download Table]

                                                                                  FOR THE THREE   FOR THE THREE 
                                                                                   MONTHS ENDED    MONTHS ENDED 
                                                                                  MARCH 31, 1997  MARCH 31, 1996
                                                                                  --------------  --------------
                                                                                                                
Net sales........................................................................   $   49,235      $   51,340  
Cost of sales....................................................................       39,852          41,675  
Selling, general and administrative expenses.....................................        4,218           4,038  
                                                                                  --------------  --------------
  Operating income...............................................................        5,165           5,627  
Interest expense, net............................................................        3,231           3,070  
Other expense, net...............................................................           20              21  
                                                                                  --------------  --------------
  Income before income taxes.....................................................        1,914           2,536  
Provision for income taxes.......................................................          940             983  
                                                                                  --------------  --------------
  Net income.....................................................................   $      974      $    1,553  
                                                                                  --------------  --------------
                                                                                  --------------  --------------
Preferred stock dividends and discount accretion.................................         (300)             --  
                                                                                  --------------  --------------
  Net income available to common stockholder.....................................   $      674      $    1,553  
                                                                                  --------------  --------------
                                                                                  --------------  --------------
  Income per share data:                                                                                        
     Net income per common share.................................................   $     0.09      $     0.20  
                                                                                  --------------  --------------
                                                                                  --------------  --------------
     Weighted average common shares outstanding..................................    7,805,604       7,676,275  
                                                                                  --------------  --------------
                                                                                  --------------  --------------

The accompanying notes to consolidated financial statements 
are an integral part of these statements. 

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FAIRFIELD MANUFACTURING COMPANY, INC. 
CONSOLIDATED STATEMENTS OF CASH FLOWS 
(IN THOUSANDS)
(UNAUDITED) 

                                                        [Enlarge/Download Table]

                                                                                    FOR THE THREE     FOR THE THREE 
                                                                                     MONTHS ENDED      MONTHS ENDED 
                                                                                    MARCH 31, 1997    MARCH 31, 1996
                                                                                    --------------    --------------
                                                                                                                    
Operating activities:                                                                                               
  Net income.....................................................................      $    974          $  1,553   
  Adjustments to reconcile net income to net cash provided by operating                                             
     activities:                                                                                                    
     Depreciation and amortization...............................................         3,373             3,318   
     Deferred income tax benefit.................................................            58               (60)  
     (Decrease) increase in accrued retirement costs.............................          (981)              150   
     (Increase) decrease in current assets:                                                                         
     Trade receivables...........................................................          (971)           (1,908)  
     Inventory...................................................................        (2,319)            4,526   
     Prepaids....................................................................            98                35   
  Increase (decrease) in current liabilities:                                                                       
     Accounts payable............................................................           (12)            3,353   
     Due to parent...............................................................           158              (537)  
     Accrued liabilities.........................................................          (677)           (3,100)  
                                                                                    --------------    --------------
  Net cash (used in) provided by operating activities............................          (299)            7,330   
                                                                                    --------------    --------------
Investing activities:                                                                                               
  Additions to plant and equipment, net..........................................          (496)           (2,681)  
  Merger with First Colony Farms, Inc............................................            10                --   
                                                                                    --------------    --------------
     Net cash used by investing activities.......................................          (486)           (2,681)  
                                                                                    --------------    --------------
Financing activities:                                                                                               
  Proceeds from additional capital contribution..................................           399               379   
  Payment of dividends...........................................................       (50,770)               --   
  Advance to parent..............................................................         3,027                --   
  Proceeds of long-term debt.....................................................         4,000             5,000   
  Payment of long-term debt......................................................        (7,750)          (14,250)  
  Proceeds of preferred stock offering...........................................        50,000                --   
  Payment of preferred stock issuance costs......................................        (2,300)               --   
  Preferred stock dividend accrued...............................................          (292)               --   
                                                                                    --------------    --------------
  Net cash (used) in financing activities........................................        (3,686)           (8,871)  
                                                                                    --------------    --------------
Decrease in cash and cash equivalents............................................        (4,471)           (4,222)  
Cash and cash equivalents:                                                                                          
  Beginning of period............................................................         6,185             4,324   
                                                                                    --------------    --------------

  End of period..................................................................      $  1,714          $    102   
                                                                                    --------------    --------------
                                                                                    --------------    --------------
Supplemental Disclosures:                                                                                           
  Cash paid for:                                                                                                    
     Interest....................................................................      $  5,581          $  5,524   
     Taxes to parent.............................................................      $    300          $  1,000   
Non-cash activities:                                                                                                
  Additions to plant and equipment included in accounts payable at March 31, 1997 and 1996 of $1,595 and $303,      
     respectively, are excluded from operating activities above.                                                    

The accompanying notes to consolidated financial statements 
are an integral part of these statements. 

F-17

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FAIRFIELD MANUFACTURING COMPANY, INC. 
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT) 
AS OF MARCH 31, 1997
(IN THOUSANDS)
(UNAUDITED) 

                                                        [Enlarge/Download Table]

                                                                       ADDITIONAL               STOCKHOLDER'S 
                                                               COMMON   PAID-IN    ACCUMULATED      EQUITY    
                                                               STOCK    CAPITAL      DEFICIT      (DEFICIT)   
                                                               ------  ----------  -----------  --------------
                                                                                                              
Balance, January 1, 1997......................................  $ 78    $ 36,788    $ (41,436)     $ (4,570)  
  Issuance of common stock....................................     1          (1)          --            --   
  Capital contribution........................................    --         399           --           399   
  Common stock dividends......................................    --          --      (50,770)      (50,770)  
  Preferred stock discount accretion..........................    --          --           (7)           (7)  
  Preferred stock dividends accrued...........................    --          --         (293)         (293)  
  Advance to parent...........................................    --          --        3,027         3,027   
  Merger with First Colony Farms, Inc.........................    --          10           --            10   
  Net income..................................................    --          --          974           974   
                                                               ------  ----------  -----------  --------------

Balance, March 31, 1997.......................................  $ 79    $ 37,196    $ (88,505)     $(51,230)  
                                                               ------  ----------  -----------  --------------
                                                               ------  ----------  -----------  --------------

The accompanying notes to consolidated financial statements 
are an integral part of these statements. 

F-18

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FAIRFIELD MANUFACTURING COMPANY, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) 

1. INTERIM FINANCIAL INFORMATION                                                

  The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial  
reporting and Rule 10-01 of Regulation S-X. Accordingly, certain information and
footnote disclosures normally included in financial statements prepared under   
generally accepted accounting principles have been condensed or omitted pursuant
to such regulations. In the opinion of management, all adjustments (consisting  
of normal recurring accruals) considered necessary for a fair presentation of   
the Fairfield Manufacturing Company, Inc.'s (the 'Company') financial position, 
results of operations and cash flows have been included. The results for the    
three months ended March 31, 1997 and 1996 are not necessarily indicative of the
results to be expected for the full year or for any interim period.             

2. PARENT COMPANY OF REGISTRANT                                                 

The Company is wholly-owned by Lancer Industries Inc. ('Lancer').     

 On March 27, 1997, First Colony Farms, Inc., a Delaware corporation and
wholly-owned subsidiary of Lancer ('First Colony'), merged with and into the    
Company, with the Company being the surviving corporation of the merger.        
Immediately prior to the merger, First Colony had (i) no known liabilities      
(including contingent liabilities) and (ii) assets consisting of approximately  
$10 thousand in cash and certain net operating loss carry forwards.             

3. SALE OF PREFERRED STOCK                                                      

On March 12, 1997, the Company completed a private offering of 50,000 
shares of 11 1/4% Cumulative Exchangeable Preferred Stock ('Preferred Stock').  
Each share has a liquidation preference of $1,000, plus accumulated and unpaid  
dividends. The Company is required, subject to certain conditions, to redeem all
of the Preferred Stock outstanding on March 15, 2009 at a redemption price equal
to 100% of the liquidation preference. Dividends are payable semi-annually at an
annual rate of 11 1/4%, and may be paid, at the Company's option, on any        
dividend payment date occuring on or prior to March 15, 2002 either in cash or  
in additional shares of Preferred Stock.                                        

 The net proceeds from this offering ($47.7 million) were used to fund a
dividend to Lancer, and used by Lancer to redeem approximately $47.7 million of 
its Series C Preferred Stock.                                                   

4. INVENTORY                                                                    

Inventory consists of the following:                                  

                                                        [Enlarge/Download Table]

                                                                     MARCH 31, 1997    DECEMBER 31, 1996

                                                                     --------------    -----------------
                                                                               (IN THOUSANDS)           
                                                                     -----------------------------------
                                                                                                        
Raw materials.......................................................    $  4,449            $ 4,178     
Work in progress....................................................       8,477              8,070     
Finished goods......................................................       8,922              7,490     
                                                                     --------------    -----------------
                                                                          21,848             19,738     
Less: Excess of FIFO cost over LIFO cost............................        (611)              (820)    
                                                                     --------------    -----------------
                                                                        $ 21,237            $18,918     
                                                                     --------------    -----------------
                                                                     --------------    -----------------

5. INCOME PER COMMON SHARE                                                      

Net income per common share is based on the weighted average number of
common shares outstanding during the period, which, for the three months ended  
March 31, 1997 was 7,805,604 and for March 31, 1996 was 7,676,275. The increase 
in the weighted average common shares outstanding is due to the Company issuing 
additional shares of its common stock to Lancer in consideration of certain     
capital contributions made by Lancer to the Company primarily pursuant to the   
Tax Sharing Agreement.                                                          

6. DEBT                                                                         

 In connection with the sale of Preferred Stock, the Company amended its
loan agreement (which provides for a Revolving Credit Facility and a Term Loan) 
with a senior lending institution. The amendment allowed for the sale of the    
Preferred Stock (see Note 3) and the approximately $47.7 million dividend to    
Lancer.                                                                         

F-19

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TORQUE-HUB(REGISTERED)

                                                        [Enlarge/Download Table]
                                                                                                                         
[In this place appears a picture of the  [In this place appears a picture of the  [In this place appears a picture of the
 Company's Torque-Hub(Registered)         Company's Torque-Hub(Registered)         Company's Torque-Hub(Registered)      
     products.]                                      products.]                             products.]                   

[In this place appears a picture of      [In this place appears a picture of                                             
          the Company's                              the Company's                                                       
 Torque-Hub(Registered)  products.]       Torque-Hub(Registered) products.]                                              


Fairfield's Torque-Hub(Registered) products provide propulsion, swing and/or    
rotation to equipment primarily in cases where the use of axles presents design 
difficulties. Examples of such equipment are pictured below.                    

                                                        [Enlarge/Download Table]
                                                                                                       
[In this place appears a picture   [In this place appears a picture   [In this place appears a picture 
 of certain applications for the    of certain applications for the    of certain applications for the 
 Company's Torque-Hub(Registered)   Company's Torque-Hub(Registered)   Company's Torque-Hub(Registered)
        products.]                             products.]                    products.]                

Torque-Hub(Registered) is a registered trademark of Fairfield         
Manufacturing Company, Inc.                                                     

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------------------------------------------------------  
------------------------------------------------------  

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFER         
CONTAINED HEREIN OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS
PROSPECTUS AND THE ACCOMPANYING LETTER OF TRANSMITTAL AND, IF GIVEN OR MADE,    
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN      
AUTHORIZED BY THE COMPANY OR THE EXCHANGE AGENT. NEITHER THIS PROSPECTUS NOR THE
ACCOMPANYING LETTER OF TRANSMITTAL, OR BOTH TOGETHER, CONSTITUTE AN OFFER TO    
SELL OR THE SOLICITATION OF AN OFFER TO BUY TO ANY PERSON IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING
SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT
IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS    
PROSPECTUS, NOR THE ACCOMPANYING LETTER OF TRANSMITTAL, OR BOTH TOGETHER, NOR   
ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR 
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO   
THE DATE HEREOF OR THEREOF.                                                     

------------------------

TABLE OF CONTENTS 

                                                                [Download Table]

                                                   PAGE
                                                   ----
                                                       
Available Information...........................    ii 
Incorporation of Certain Documents by                  
  Reference.....................................    ii 
Prospectus Summary..............................     1 
Risk Factors....................................    12 
Use of Proceeds.................................    17 
Capitalization..................................    17 
Selected Historical and Pro Forma                      
  Combined Financial Data.......................    18 
Management's Discussion and Analysis of                
  Financial Condition and Results of                   
  Operations....................................    20 
Business........................................    24 
Management......................................    29 
Ownership of Capital Stock......................    33 
Related Transactions............................    34 
Description of Existing Indebtedness............    35 
Description of Capital Stock....................    39 
The Exchange Offer..............................    40 
Description of New Preferred Stock and Exchange        
  Debentures....................................    46 
Certain Federal Income Tax Considerations.......    79 
Plan of Distribution............................    85 

Legal Matters...................................    86 
Experts.........................................    86 
Index to Consolidated Financial Statements......   F-1 

------------------------------------------------------  
------------------------------------------------------  

------------------------------------------------------  
------------------------------------------------------  

[LOGO]  

FAIRFIELD MANUFACTURING 
COMPANY, INC. 

OFFER TO EXCHANGE SHARES OF 
ITS 11 1/4% SERIES A CUMULATIVE EXCHANGEABLE PREFERRED STOCK
WHICH HAVE BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED
FOR ANY AND ALL OUTSTANDING SHARES OF 
ITS 11 1/4% CUMULATIVE EXCHANGEABLE PREFERRED STOCK 

JUNE 13, 1997 

------------------------------------------------------  
------------------------------------------------------  

Dates Referenced Herein   and   Documents Incorporated by Reference

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		6/1/96		36
		3/31/96		15		110			10-Q
		1/1/96		16		24
		12/31/95		25		105
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		5/3/95		87
		3/31/95		104
		12/31/94		27		105
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