Registration No. 333-44969
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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DESA INTERNATIONAL, INC.
AND OTHER REGISTRANTS
(See Table of Other Registrants Below)
(Exact name of registrant as specified in its charter)
--------------------
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DELAWARE 3433 22-2940760
<S> <C> <C>
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)
</TABLE>
2701 INDUSTRIAL DRIVE, BOWLING GREEN, KENTUCKY 42102
(502) 781-9600
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
--------------------
ROBERT H. ELMAN
DESA INTERNATIONAL, INC.
2701 Industrial Drive
Bowling Green, Kentucky 42102
(502) 781-9600
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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Copies to:
MICHAEL A. MATZKA, ESQ.
SULLIVAN & WORCESTER LLP
One Post Office Square
Boston, MA 02109
(617) 338-2800
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Approximate date of commencement of proposed sale to the public: As
soon as practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. |_|
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) of the Securities Act of 1933, as amended, check the
following box and list the Securities Act registration number of the earlier
registration statement for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule
462(b) of the Securities Act, check the following box and list the Securities
Act registration number of the earlier registration statement for the same
offering. |_|
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CALCULATION OF REGISTRATION FEE
Title of Each Class of Amount to be Proposed Maximum Offering Proposed Maximum Amount of
Securities to be Registered Registered Price Per Unit Aggregate Offering Price Registration Fee
<S> <C> <C> <C> <C>
9 7/8% Senior Subordinated Notes Due 2007 $130,000,000 100%(1) $130,000,000(1) $38,350(3)
Guarantees of the 97/8% Senior Subordinated $130,000,000 None(2) None(2) ---
Notes Due 2007
<FN>
(1) Pursuant to Rule 457(f)(2) under the Securities Act of 1933, the registration fee has been based on the book value of the
securities to be received by the Registrant in exchange for the securities to be issued hereunder in the Exchange Offer
described herein.
(2) Pursuant to Rule 457(n) under the Securities Act of 1933, no separate fee is payable for the Guarantees.
(3) Paid with original filing.
</FN>
</TABLE>
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant will
file a further amendment which specifically states that this Registration
Statement will thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, or until this Registration Statement will become
effective on such date as the Securities and Exchange Commission, acting
pursuant to Section 8(a), may determine.
<PAGE>
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TABLE OF OTHER REGISTRANTS
Standard Address, Including Zip Code, and
Industry IRS Employer Telephone Number, Including Area
Jurisdiction of Classification Identification Code, of the Principal Executive
Name of Corporation Incorporation Code Number Offices
<S> <C> <C> <C> <C>
DESA Holdings Corporation Delaware 3433 61-1251518 2701 Industrial Drive, Bowling
Green, Kentucky 42102
</TABLE>
<PAGE>
SUBJECT TO COMPLETION, DATED JUNE 5, 1998
OFFER TO EXCHANGE
all outstanding
9 7/8% SENIOR SUBORDINATED NOTES DUE 2007
($130,000,000 principal amount outstanding)
for
9 7/8% SENIOR SUBORDINATED NOTES DUE 2007
of
DESA INTERNATIONAL, INC.
---------------
The Exchange Offer will expire at 5:00 p.m., New York City time on
____________, 1998, unless extended
---------------
DESA International, Inc. a Delaware corporation ("DESA" or the "Company"),
hereby offers, upon the terms and subject to the conditions set forth in this
Prospectus and the accompanying Letter of Transmittal (the "Letter of
Transmittal"), to exchange its 9 7/8% Senior Subordinated Notes Due 2007 (the
"New Notes"), in an offering which has been registered under the Securities Act
of 1933, as amended (the "Securities Act"), pursuant to a Registration Statement
of which this Prospectus constitutes a part, for an equal principal amount of
its outstanding 9 7/8% Senior Subordinated Notes Due 2007 (the "Old Notes"), of
which an aggregate of $130,000,000 in principal amount is outstanding as of the
date hereof (the "Exchange Offer"). The New Notes and the Old Notes are
sometimes referred to herein collectively as the "Notes." The form and terms of
the New Notes will be the same as the form and terms of the Old Notes except
that the New Notes will not bear legends restricting the transfer thereof. The
New Notes will be obligations of the Company entitled to the benefits of the
Indenture, dated as of November 26, 1997 (the "Indenture"), by and among the
Company, DESA Holdings Corporation, a Delaware corporation and the parent of the
Company ("Holdings"), and Marine Midland Bank as trustee (the "Trustee"),
relating to the Notes. See "Description of the New Notes." Following the
completion of the Exchange Offer, none of the New Notes will be entitled to any
rights under the Registration Rights Agreement, dated as of November 26, 1997
(the "Registration Rights Agreement"), by and among the Company, Holdings and
the Initial Purchasers named therein. The Company's payment obligations under
the Old Notes is, and under the New Notes will be, fully and unconditionally
guaranteed on a senior subordinated basis by Holdings.
See "Risk Factors" beginning on page 23 for a discussion of certain factors
that should be considered in evaluating an investment in the New Notes.
---------------
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 ON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
---------------
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDIC-
TION IN WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF
WOULD NOT BE IN COMPLIANCE WITH THE SECURITIES OR
BLUE SKY LAWS OF SUCH JURISDICTION.
The date of this Prospectus is __________, 1998.
<PAGE>
The Old Notes were issued in a transaction (the "Prior Offering") pursuant
to which the Company issued an aggregate of $130,000,000 principal amount of the
Old Notes to the Initial Purchasers on November 26, 1997 (the "Closing Date")
pursuant to a Purchase Agreement, dated November 26, 1997 (the "Purchase
Agreement") among the Company and the Initial Purchasers. The Initial Purchasers
subsequently resold the Old Notes in reliance on Rule 144A under the Securities
Act. The Company, Holdings and the Initial Purchasers also entered into the
Registration Rights Agreement, dated November 26, 1997, pursuant to which the
Company granted certain registration rights for the benefit for the holders of
the Old Notes. The Exchange Offer is intended to satisfy certain of the
Company's obligations under the Registration Rights Agreement with respect to
the Old Notes. See "The Exchange Offer-Purchase and Effect."
The Old Notes were, and the New Notes will be, issued under the Indenture,
dated as of November 26, 1997 (the "Indenture"), among the Company, Holdings and
Marine Midland Bank, as trustee (the "Trustee"), and the New Notes and the Old
Notes will constitute a single series of debt securities under the Indenture.
The terms of the New Notes are identical in all material respects to the terms
of the Old Notes except that (i) the New Notes will have been registered under
the Securities Act and thus will not bear restrictive legends restricting their
transfer pursuant to the Securities Act and will not be entitled to registration
rights, (ii) holders of New Notes will not be entitled to liquidated damages for
the Company's failure to register the Old Notes or New Notes under the
Registration Rights Agreement, and (iii) holders of New Notes will not be, and
upon the consummation of the Exchange Offer, holders of Old Notes will no longer
be, entitled to certain rights under the Registration Rights Agreement intended
for the holders of unregistered securities. The Exchange Offer shall be deemed
consummated upon the occurrence of the delivery by the Company to Marine Midland
Bank, as registrar of the Old Notes (in such capacity, the "Registrar") under
the Indenture, of New Notes in the same aggregate principal amount as the
aggregate principal amount of Old Notes that are validly tendered by holders
thereof pursuant to the Exchange Offer. See "The Exchange Offer-Termination of
Certain Rights," "-Procedures for Tendering Old Notes" and "Description of
Notes." In the event that the Exchange Offer is consummated, any Old Notes which
remain outstanding after consummation of the Exchange Offer and the New Notes
issued in the Exchange Offer will vote together as a single class for purposes
of determining whether holders of the requisite percentage in outstanding
principal amount of Notes have taken certain actions or exercised certain rights
under the Indenture.
The New Notes will bear interest at a rate of 97/8% per annum. Interest on
the New Notes is payable semiannually, commencing June 15, 1998, on June 15 and
December 15 of each year (each, an "Interest Payment Date") and shall accrue
from November 26, 1997 or from the most recent Interest Payment Date with
respect to the Old Notes to which interest was paid or duly provided for. The
New Notes will mature on December 15, 2007. See "Description of Notes."
The New Notes will not be redeemable at the Company's option prior to
December 15, 2002. Thereafter, the New Notes will be redeemable by the Company
at the redemption prices and subject to the conditions set forth in "Description
of Notes-Optional Redemption." Notwithstanding the foregoing, at any time on or
before December 15, 2000, the Company may, at its option, redeem up to 35% of
the original aggregate principal amount of Notes with the net proceeds from one
or more Public Equity Offerings (as defined) at the redemption price set forth
herein, plus accrued and unpaid interest, if any, through the redemption date;
provided, however, that at least 65% of the original aggregate principal amount
of Notes remain outstanding following such redemption. See "Description of
Notes-Redemption-Optional Redemption." Upon a Change of Control (as defined
herein), the Company (i) will be required to make an offer to repurchase all
outstanding Notes at 101% of the principal amount thereof plus accrued and
unpaid interest thereon and Liquidated Damages, if any, to the date of
repurchase and (ii) prior to December 15, 2002 will have the option to redeem
the Notes, in whole or in part, at a redemption price equal to the principal
amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any,
to the redemption date plus the Applicable Premium (as defined herein). There
can be no assurance that sufficient funds will be available to the Company at
the time of any Change of Control to make any required repurchases of Notes. See
"Risk Factors -- Potential Inability to Fund Change of Control Offer,"
"Description of Notes -- Repurchase at the Option of Holders -- Change of
Control" and "-- Optional Redemption upon Change of Control." Depending upon the
circumstances prevailing at the time of such a Change of Control, there is a
risk that the Company may be unable to satisfy such obligations. See "Risk
Factors-Potential Inability to Fund Change of Control Offer."
2
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The Notes will be general unsecured obligations of the Company, will be
subordinated in right of payment to all existing and future Senior Indebtedness
(as defined in the Indenture), including all obligations of the Company under
the New Credit Facility, and will be pari passu in right of payment with any
senior subordinated indebtedness of the Company. As of February 28, 1998, the
Company had outstanding consolidated indebtedness of $266.4 million, including
$136.4 million outstanding under the New Credit Facility (excluding letters of
credit in the aggregate amount of $2.3 million). See "Capitalization." In
addition, subject to the limitations set forth in the Indenture, the Company and
its subsidiaries may incur additional indebtedness (including Senior
Indebtedness), including up to $26.0 million under the Working Capital Facility.
Indebtedness under the New Credit Facility is secured by (i) substantially all
of the assets of Holdings, the Company and their domestic subsidiaries, (ii)
100% of the outstanding capital stock of each of the Company and the domestic
subsidiaries of Holdings and the Company and (iii) 65% of the outstanding
capital stock of any foreign subsidiary of the Company or Holdings. The Company
conducts certain operations through subsidiaries and, accordingly, the Notes
will be effectively subordinated to indebtedness and other liabilities of such
subsidiaries. See "Description of Notes-General." See also "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources."
The Company's obligations under the Notes will be jointly and severally
guaranteed (the "Guarantees") on a senior subordinated basis by the Company's
parent, DESA Holdings Corporation ("Holdings") and each subsidiary of Holdings
that guarantees any indebtedness of the Company or any other obligor under the
Notes (the "Guarantors"). Other than a small amount of goodwill, Holdings
presently has no assets or operations independent of the Company. The Guarantees
will be general unsecured obligations of the Guarantors, will be subordinated in
right of payment to all existing and future Senior Indebtedness of the
Guarantors, including all obligations of the Guarantors under the New Credit
Facility and will rank pari passu in right of payment with any senior
subordinated indebtedness of the Guarantors. As of February 28, 1998, Holdings
had outstanding indebtedness of $266.4 million. In addition, subject to the
limitations set forth in the Indenture, Holdings may incur additional
indebtedness (including Senior Indebtedness). Indebtedness under the New Credit
Facility is secured by (i) substantially all of the assets of Holdings, the
Company and their domestic subsidiaries, (ii) 100% of the outstanding capital
stock of each of the Company and the domestic subsidiaries of Holdings and the
Company and (iii) 65% of the outstanding capital stock of any foreign subsidiary
of the Company or Holdings.
Based on existing interpretations of the Securities Act by the staff of the
Securities and Exchange Commission (the "Commission") set forth in "no-action"
letters issued to third parties in other transactions, the Company believes that
New Notes issued pursuant to the Exchange Offer to any holder of Old Notes in
exchange for Old Notes may be offered for resale, resold and otherwise
transferred by such holder (other than a broker-dealer who purchased Old Notes
directly from the Company for resale pursuant to Rule 144A under the Securities
Act or any other available exemption under the Securities Act) without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that such holder is not an affiliate of the Company, is
acquiring the New Notes in the ordinary course of business and is not
participating, and has no arrangement or understanding with any person to
participate, in the distribution of the New Notes. Holders wishing to accept the
Exchange Offer must represent to the Company, as required by the Registration
Rights Agreement, that such conditions have been met. In addition, if such
holder is not a broker-dealer, it must represent that it is not engaged in, and
does not intend to engage in, a distribution of the New Notes. Each
broker-dealer that receives New Notes 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 Notes. See "The Exchange Offer-Resales of
the New Notes." For a period of 180 days from the date of expiration of the
Exchange Offer, as set forth in the Letter of Transmittal (the "Expiration
Date"), the Company will make this Prospectus, as amended or supplement
available to any broker-dealer for use in connection with any such resale. See
"Plan of Distribution."
There has previously been only a limited secondary market, and no public
market, for the Old Notes. The Old Notes are eligible for trading in the Private
Offering, Resales and Trading through Automatic Linkages ("PORTAL") market. In
addition, each Initial Purchaser has advised the Company that it currently
intends to make a market in the New Notes; however, the Initial Purchasers are
not obligated to do so and any market making activities may be discontinued by
the Initial Purchasers at any time. Therefore, there can be no assurance that an
active market for the New Notes will develop. If such a trading market develops
for the New Notes, future trading prices will depend on
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many factors, including, among other things, prevailing interest rates, the
Company's results of operations and the market for similar securities. Depending
on such factors, the New Notes may trade at a discount from their face value.
See "Risk Factors-Lack of Public Market."
The Old Notes were issued originally in global form (the "Global Old
Note"). The Global Old Note was deposited with, or on behalf of, The Depository
Trust Company (the "Depositary") and registered in the name of Cede & Co., as
nominee of the Depositary (such nominee being referred to herein as the "Global
Note Holder"). The use of the Global Old Note to represent certain of the Old
Notes permits the Depositary's participants, and anyone holding a beneficial
interest in an Old Note registered in the name of such a participant, to
transfer interests in the Old Notes electronically in accordance with the
Depositary's established procedures without the need to transfer a physical
certificate. New Notes issued in exchange for the Global Old Note will also be
issued initially as a note in global form (the "Global New Note" and, together
with the Global Old Note, the "Global Notes") and deposited with, or on behalf
of, the Depositary. After the initial issuance of the Global New Note, New Notes
in certificated form will be issued in exchange for a holder's proportionate
interest in the Global New Note only as set forth in the Indenture.
Any Old Notes not tendered and accepted in the Exchange Offer will remain
outstanding and will be entitled to all the same rights and will be subject to
the same limitations applicable thereto under the Indenture (except for those
rights which terminate upon consummation of the Exchange Offer). Following
consummation of the Exchange Offer, the Holders of Old Notes will continue to be
subject to the existing restrictions upon transfer thereof and the Company will
have no further obligation to such Holders (other than to certain Holders under
certain limited circumstances) to provide for registration under the Securities
Act of the Old Notes held by them. To the extent that Old Notes are tendered and
accepted in the Exchange Offer, a Holder's ability to sell untendered Old Notes
could be adversely affected. See "Risk Factors- Consequences of a Failure to
Exchange."
This Prospectus, together with the Letter of Transmittal is being sent to
all registered Holders of Old Notes as of __________, 1998.
The Company will not receive any proceeds from this Exchange Offer.
Pursuant to the Registration Rights Agreement, the Company will bear certain
registration expenses.
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TABLE OF CONTENTS
Page
Available Information.................................................. 5
Prospectus Summary..................................................... 7
Risk Factors........................................................... 23
The Exchange Offer..................................................... 28
Capitalization of the Company.......................................... 35
Pro Forma Condensed Consolidated Financial Data of Holdings............ 36
Selected Financial Data................................................ 43
Management's Discussion and Analysis of
Financial Condition and Results of Operations.......................... 46
Business............................................................... 52
Management............................................................. 66
Security Ownership of Certain Beneficial Owners and Management......... 69
Certain Transactions................................................... 70
Description of Notes................................................... 71
Description of New Credit Facility..................................... 101
Description of Holding Preferred Stock................................. 103
Legal Matters.......................................................... 114
Experts................................................................ 114
Index to Financial Statements.......................................... F-1
AVAILABLE INFORMATION
The Company has filed a registration statement on Form S-4 (together with
any amendments thereto, the "Registration Statement") with the Commission under
the Securities Act with respect to the New Notes. This Prospectus, which
constitutes a part of the Registration Statement, omits certain information
contained in the Registration Statement and reference is made to the
Registration Statement and the exhibits and schedules thereto for further
information with respect to the Company and the New Notes offered hereby. This
Prospectus contains summaries of the material terms and provisions of certain
documents and in each instance reference is made to the copy of such document
filed as an exhibit to the Registration Statement. Each such summary is
qualified in its entirety by such reference.
Upon the effectiveness of the Registration Statement filed with the
Commission, the Company will be subject to the reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and in
accordance therewith, will be required to file reports and other information
with the Commission. In addition, upon registration of the guarantees of the New
Notes in connection with the Exchange Offer, each Subsidiary Guarantor will also
become subject to the reporting requirements of the Exchange Act, subject to
obtaining exemptive relief from the Commission or no-action advise from the
Commission staff.
The Registration Statement (including the exhibits and schedules thereto)
and the periodic reports and other information filed by the Company with the
Commission may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the regional offices of the Commission located at 7 World
Trade Center, 13th Floor, New York, New York 10048, and Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such
materials may be obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, and its public reference
facilities in New York, New York and Chicago, Illinois, at prescribed rates.
Such information may also be
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accessed electronically by means of the Commission's homepage on the Internet at
http://www.sec.gov., which contains reports, proxy and information statements
and other information regarding registrants, including the Company, that file
electronically with the Commission.
6
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PROSPECTUS SUMMARY
The following summary information is qualified in its entirety by, and
should be read in conjunction with, the more detailed information and financial
data, including the Financial Statements and related notes thereto, appearing
elsewhere in this Prospectus. As used herein, references to "DESA" or the
"Company" are to DESA International, Inc. and its subsidiaries. References to
"fiscal year" are to the Company's fiscal year which ends on the Saturday
closest to February 28 in each year.
The Company
DESA is a leading manufacturer and marketer of zone heating/home comfort
products and specialty products in the United States. Through its ability to
consistently offer consumers quality products with innovative features at
attractive price points, the Company has developed leading market positions in
(i) vent-free indoor heaters, (ii) vent-free hearth products, (iii) outdoor
heaters, (iv) consumer powder-actuated fastening systems , (v) electric chain
saws, and (vi) home security products. In fiscal 1998, approximately 91% of the
Company's sales were generated in the United States and 9% were generated in
international markets. Over 85% of the domestic sales were in product categories
where DESA is the market leader. The Company has grown rapidly with sales
increasing from $98.7 million in fiscal 1993 to $224.2 million in fiscal 1998,
representing a compound annual growth rate ("CAGR") of 18%. The Company's EBITDA
increased from $11.8 million, or 11.9% of sales, in fiscal 1993, to $33.2
million, or 14.8% of sales, in fiscal 1998, representing a CAGR of 23%. In
addition, the Company's operating profit and cash flows provided by (used in)
operating, financing and investing activities increased from $9,490, $4,365,
($2,116) and ($2,170), respectively, in 1993 to $28,492, $1,146, $40,590 and
($45,980), respectively, in 1998.
The Company sells its products through multiple consumer and commercial
channels of distribution including the leading home centers, mass merchants,
warehouse clubs, hardware cooperatives, specialty heating distributors,
construction and industrial equipment dealers, farm supply outlets and natural
gas utilities under brand names well-recognized by its customers. The Company's
strategy is to aggressively target the fastest growing retailers/distributors in
each channel and service these customers through a multi-brand approach to
capture the largest possible share of a given product market. In addition, the
Company has an established record of success in new product development and
product line extensions. Over the last five years, DESA has introduced over 100
new products and line extensions which generated approximately 72% of the
Company's sales growth over that time period.
Zone Heating Products (77% of Fiscal 1998 Net Sales)
The zone heating market is comprised of indoor gas heaters, hearth products
(gas logs, fireplaces and stoves) and outdoor heaters. DESA is a leading
manufacturer of vent-free indoor and outdoor zone heating products in the United
States. DESA's domestic zone heating business has experienced a CAGR of over 22%
with net revenues increasing from $64.0 million in fiscal 1993 to $173.8 million
in fiscal 1998. DESA markets its zone heating products under well-known brand
names such as Reddy(R), Vanguard(R) and Comfort Glow(R). The Company's zone
heating business is organized into two primary product categories:
o Indoor vent-free heating appliances and hearth products (43% of Fiscal
1998 Net Sales): Indoor heating appliances include vent-free liquid
propane and natural gas space heaters which provide economical
supplemental heat to a specific area as distinguished from central
heating systems which are used to heat entire buildings. Vent-free
hearth products such as gas logs, fireplaces and stoves are utilized
for both decorative and economic heating. Vent-free products utilize a
more efficient burner system which avoids the need for outside venting,
whereas vented products require a discharging of emissions outside of
the building.
o Outdoor heating appliances (34% of Fiscal 1998 Net Sales): Outdoor
heating products consist of portable units which generate heat by
either using a fan to discharge heated air to a specific area (forced
air heaters) or emitting heat throughout the surrounding area without
the assistance of a fan (convection heaters). Forced air
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heaters are fueled by either kerosene, propane or natural gas, while
convection heaters are fueled only with propane or natural gas. Outdoor
heaters are used in both residential and commercial applications.
Residential applications include heating otherwise unheated garages and
workshops. Commercial applications include heating factories,
warehouses, construction sites and agricultural areas.
Specialty Products (23% of Fiscal 1998 Net Sales)
DESA's domestic specialty products business has experienced a CAGR of 8%
with net sales increasing from $34.7 million in fiscal 1993 to $50.4 million in
fiscal 1998. Specialty products include powder actuated fastening systems (tools
and accessories) used to fasten wood to concrete or steel, stapling/rivet tools
and electrical products such as chain saws , portable generators and home
security products. These products are marketed under well-known brand names such
as Remington(R), Master(R), Powerfast(R) and Zenith(R).
Competitive Strengths
Leading Market Positions in High Growth Segments. DESA is the domestic
market leader in outdoor heating appliances (70% market share), vent-free indoor
gas heating (59% market share), vent-free hearth products (31% market share),
powder actuated fastening systems (86% share of the consumer market, which
constitutes 26% of the total domestic market) and electric chain saws (36%
market share). By leveraging its strong market positions and customer
relationships in established product lines, DESA has increased sales by
introducing related products or line extensions of existing products such as
vent-free gas logs (introduced in fiscal 1993), vent-free fireplaces (introduced
in fiscal 1995) and fireboxes (introduced in fiscal 1997).
DESA's targeted market segments in the zone heating market have exhibited
strong historical growth. Vent-free indoor gas heater and hearth products, the
most rapidly growing segments in the $1.1 billion zone heating market, have
grown at a CAGR of approximately 44% over the last four years driven primarily
by the increasing consumer trend towards heating with natural gas and liquid
propane. The outdoor heater market has achieved a CAGR of 22% over the same
period.
Strong Relationships with a Diversified Distribution and Customer Base.
DESA has organized its sales and marketing organizations by channels of
distribution. The Company has built strong, long-term relationships with some of
the most rapidly growing retailers, including Home Depot, Lowe's, Sears,
Wal-Mart, W.W. Grainger, Ace Hardware and TruServ. The Company's products are
designed to appeal to a variety of end-users, ranging from do-it-yourself
("DIY") consumers to professional home builders. By building strong
relationships with the leading retailers and distributors within each of the
Company's channels, DESA is well-positioned to participate in the continued
growth of these key customers.
Broad Portfolio of Products with Well-Recognized Brand Names. DESA provides
a broad offering of quality products under numerous brand names which are
well-recognized by its customers. The Company's key brands include Reddy(R),
Remington(R), Vanguard(R) and Comfort Glow(R) for zone heating products and
Remington(R) for powder actuated fastening systems and electric chain saws. The
Company also manufactures products on a private label basis for W.W. Grainger,
Sears, John Deere and Homelite. DESA leverages its brand equity with its DIY
consumers, professionals and specialty dealers by continually providing its
customers new product offerings and product line extensions under its
established brand names.
New Product Development Process. DESA has a proven ability to consistently
offer consumers products with innovative features at attractive price points.
The quality and breadth of DESA's customer relationships provide the Company
with valuable market data that serves as the foundation for the Company's new
product development and product line extension process. For example, the
Company's line of hearth products was initially introduced as the result of
shifting consumer preferences away from (i) wood-burning hearth products to gas
technology and (ii) vented gas
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products to vent-free units. Over the last five years, new product introductions
and product line extensions have accounted for approximately 56% of the
Company's sales growth.
Effective Cost Reduction Program and Strong Cash Flow. A core component of
the Company's strong financial performance over the last five years has been a
focused program to enhance margins through cost reduction.
The Company has exceeded its annual cost reduction goal of 3% of cost of sales
in each of the last three years. This cost reduction program has contributed to
an increase in gross profit margin from 32.2% in fiscal 1993 to 35.1% in fiscal
1998.
The Company has been able to achieve its sales growth while efficiently
managing working capital and maintaining low capital expenditures generating
$145.3 million in free cash flow (EBITDA less capital expenditures) for the last
five years.
Strong Management Team. DESA was founded in 1969 by a group including
Robert H. Elman, DESA's current Chairman and CEO. The top three executives of
the Company have worked together as a team for the last 13 years. These
individuals have served as the catalyst for instilling a spirit of "continuous
improvements" and achievement as a cultural standard within the Company. Senior
management is well-complemented by a broad team of experienced managers who have
been with DESA since 1985.
Business Strategy
DESA's objective is to continue to leverage its competitive strengths to
increase revenues and EBITDA. In addition, the Company believes there are
significant additional opportunities to enhance its overall market and
competitive position as follows:
Continue Aggressive Growth through DESA's Primary Channels and Customers.
DESA's distribution strategy is twofold: (i) establish breadth across
distribution channels; and (ii) achieve depth within each channel by fostering
and enhancing relationships with some of the most rapidly growing retailers in
such channel (such as Home Depot and Lowe's in the home center channel and
Wal-Mart and Sears in the mass merchant channel). While DESA has managed to gain
access to multiple channels of distribution, significant opportunities remain to
sell the Company's full product line through each of these customers.
Penetrate New Distribution Channels. Although DESA currently sells its
products through a broad distribution network, the Company believes there are
opportunities to increase the penetration in some of the Company's newer
channels such as plumbing supply stores, building supply chains and fireplace
specialty stores. Management believes that these newer channels represent
attractive markets across the United States.
Capitalize on Favorable Trends for Vent-Free Gas Products. Recent housing
construction data reveals that over two-thirds of new homes today use gas as the
primary heating source compared to one-third of new homes ten years ago. The
American Gas Association estimates that approximately 60 million homes currently
use gas and the number of homes utilizing gas will grow to 80 million by the
year 2010. This growing preference for gas represents a significant growth
opportunity for DESA as all of its indoor heating products are fueled by natural
or propane gas. Additionally, by focusing on vent-free gas products, which have
lower installation costs and provide increased fuel efficiency compared to
vented products, the Company is well-positioned to benefit from the fastest
growing segments of the zone heating market.
Increase Penetration of International Markets. Similar to the trend in the
United States, the global DIY markets are experiencing attractive growth rates.
Five of the ten largest home improvement retailers in the world are based
outside of the United States. However, international sales comprised only 9% of
DESA's total sales in fiscal 1998.
9
<PAGE>
Make Selected Acquisitions. The Company intends to seek selective
acquisitions where it can expand its existing product portfolio, utilize its
diversified distribution channels and achieve operational synergies. Over the
last five years, only 8% of the Company's sales growth has come through
acquisitions. Management believes that the markets in which it operates are
highly fragmented and there are numerous manufacturers of complementary products
which would make attractive acquisition candidates.
The principal executive offices for the Company and Holdings are located at
2701 Industrial Drive, Bowling Green, Kentucky 42102, telephone: (502) 781-9600.
The Recapitalization
Holdings, its stockholders at the time (the "Existing Stockholders") and
J.W. Childs Equity Partners, L.P. ("Childs") entered into a Recapitalization
Agreement dated as of October 8, 1997 (the "Recapitalization Agreement") which
provided for the recapitalization of Holdings. Pursuant to the Recapitalization
Agreement, on November 26, 1997, Holdings purchased from the Existing
Shareholders all outstanding shares of Holdings' capital stock.
Financing requirements for the Recapitalization, the retirement of existing
debt of the Company and the payment of fees and expenses, were $365.5 million
(including $27.3 million in seasonal borrowings) and were satisfied through the
purchase by Childs and certain other investors, including UBS Capital LLC (the
"Equity Investors"), and the Existing Stockholders of an aggregate $100.0
million in Holdings' equity securities and an aggregate $265.5 million in
borrowings as follows: (i) the purchase by Childs, and the other Equity
Investors of shares of Holdings' Common Stock (representing 89.6% of the
outstanding shares) for $73.8 million (the "Holdings Common Equity
Contribution"); (ii) the purchase by Childs and the other Equity Investors of
$14.6 million for cumulative exchangeable redeemable preferred stock issued by
Holdings (the "Holdings Preferred Stock"); (iii) the purchase by Existing
Stockholders of the Holdings Common Stock (representing 10.4% of the outstanding
shares) for $8.6 million; (iv) the issuance of 463,232 Warrants (with an
allocated fair value of $3.0 million) to purchase Holdings' non-voting common
stock at an exercise price of $.01 per share to Childs and the other Equity
Investors; (v) $130.0 million from the proceeds of the Prior Offering; (vi)
$100.0 million of borrowings under a senior secured term loan facility among the
Company, Holdings, the several lenders from time to time parties thereto
(collectively, the "Banks"), and NationsBank, N.A., as administrative agent
("NationsBank"), and Union Bank of Switzerland, New York Branch, as co-agent
(the "Term Loan Facility"); and (vii) $35.5 million of borrowings under a $75.0
million senior secured revolving credit facility among the Company, Holdings,
the Banks, and NationsBank (the " Working Capital Facility" and, together with
the Term Loan Facility and certain other facilities, the "New Credit Facility").
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources," "Description of the Notes,"
"Description of New Credit Facility" and "Description of Holdings Preferred
Stock."
The purchase of shares from the Existing Stockholders, the retirement of
existing debt of the Company, the issuance and sale by Holdings of the Holdings
Common Equity Contribution and of the Holdings Preferred Stock, the borrowing by
the Company of funds under the New Credit Facility, the Prior Offering and the
payment of related fees and expenses are referred to herein collectively as the
"Recapitalization." The Company has treated the Recapitalization as a
recapitalization transaction for accounting purposes.
10
<PAGE>
Sources and Uses of Funds
The following table sets forth the sources and uses of funds in connection
with the Recapitalization:
(dollars in
bthousands)
Sources of Funds:
Cash Sources:
New Credit Facility:
Working Capital Facility(1) $ 35,500
Term Loan Facility 100,000
Issuance of Notes 130,000
Equity investment:
Issuance of Holdings Preferred Stock(2) 14,598
Issuance of Holdings Warrants 3,002
Issuance of Holdings Common Stock 73,815
Holdings Common Stock purchased by Existing Stockholders 8,585
--------
365,500
========
Uses of Funds:
Recapitalization consideration(3) $165,022
Repayment of existing debt 183,095
Payment of accrued interest on existing debt 255
Fees and expenses 16,772
Working capital 356
--------
365,500
========
- ---------
(1) The Working Capital Facility provides for borrowing of up to $75.0
million. Giving effect to the Recapitalization, average outstanding
borrowings under the Working Capital Facility would have been $13.5
million during the twelve months ended February 28, 1998. This amount
excludes letters of credit issued to replace outstanding letters of
credit established to facilitate merchandise purchases, which had an
aggregate outstanding balance of $2.3 million as of February 28, 1998.
(2) Holdings may issue junior subordinated notes (the "Exchange Notes") in
exchange for the outstanding Holdings Preferred Stock under certain
circumstances. The Exchange Notes have substantially the same terms as
the Holdings Preferred Stock. See "Description of Holdings Preferred
Stock" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources -- After
the Recapitalization."
(3) Net of $150,000 paid by Existing Shareholders for the exercise of stock
options at the time of the Recapitalization.
11
<PAGE>
The Equity Investors
Childs
J.W. Childs Equity Partners, L.P., is a $463 million institutional equity
fund managed by J.W. Childs Associates, L.P. ("JWCA"), a Boston-based private
investment firm. Childs acquires equity positions primarily in established small
and middle-market growth companies through friendly, management-led acquisitions
and recapitalizations. Childs' investment strategy is to leverage on the
operating and financial experience of its partners and to invest, along with
management, in growing companies with a history of profitable operations. In
addition to four partners with financial backgrounds, JWCA has three "operating"
partners who have each had prior experience as the chief executive officer of a
successful leveraged buyout. Childs invests in a wide variety of industries, but
places particular focus on those in which the partners with operation
backgrounds have had direct managerial experience: branded and non- branded
consumer products, specialty retailing, energy and light manufacturing.
UBS Capital
UBS Capital LLC ("UBS Capital") is a merchant banking affiliate of the
Union Bank of Switzerland. Headquartered in New York, New York, UBS Capital
engages in a wide range of private equity transactions including management
buyouts, growth equity investments and recapitalizations. UBS Capital and its
merchant banking affiliates have investments in over 40 portfolio companies and
manage a proprietary capital allocation from the Union Bank of Switzerland of
over $1.2 billion. UBS Capital and its affiliates have invested in a wide
variety of industries, including branded consumer products, specialty paper,
industrial products, sporting goods, telecommunications, retailing and software.
12
<PAGE>
THE PRIOR OFFERING
The outstanding $130.0 million principal amount of Old Notes were sold by
the Company to the Initial Purchasers on the Closing Date pursuant to the
Purchase Agreement among the Company and the Initial Purchasers. The Initial
Purchasers subsequently resold the Old Notes in reliance on Rule 144A under the
Securities Act. The Company, the Subsidiary Guarantors and the Initial
Purchasers also entered into the Registration Rights Agreement pursuant to which
the Company granted certain registration rights for the benefit of the holders
of the Old Notes. The Exchange Offer is intended to satisfy certain of the
Company's obligations under the Registration Rights Agreement with respect to
the Old Notes. See "The Exchange Offer--Purpose and Effect."
THE EXCHANGE OFFER
The Exchange Offer The Company is offering upon the terms and subject
to the conditions set forth herein and in the
accompanying letter of transmittal (the "Letter of
Transmittal"), to exchange $1,000 in principal
amount of its 9 7/8% Senior Subordinated Notes due
2007 (the "New Notes," with the Old Notes and the
New Notes collectively referred to herein as the
"Notes") for each $1,000 in principal amount of
the outstanding Old Notes (the"Exchange Offer").
As of the date of this Prospectus, $130.0 million
in aggregate principal amount of the Old Notes is
outstanding. See "The Exchange Offer--Terms of the
Exchange Offer."
Expiration Date 5:00 p.m., New York City time, on ___________,
1998 as the same may be extended. See "The
Exchange Offer--Expiration Date; Extensions;
Amendments."
Conditions of The Exchange Offer is not conditioned upon any
the Exchange Offer minimum principal amount of Old Notes being
tendered for exchange. The only condition to the
Exchange Offer is the declaration by the
Commission of the effectiveness of the
Registration Statement of which this Prospectus
constitutes a part. See "The Exchange
Offer--Conditions of the Exchange Offer."
Termination of Pursuant to the Registration Rights Agreement and
Certain Rights the Old Notes, holders of Old Notes (i) have
rights to receive Liquidated Damages and (ii) have
certain rights intended for the holders of
unregistered securities. "Liquidated Damages"
means damages of $0.05 per week per $1,000
principal amount of Old Notes (up to a maximum of
$0.50 per week per $1,000 principal amount) during
the period in which a Registration Default is
continuing pursuant to the terms of the
Registration Rights Agreement. Holders of New
Notes will not be and, upon consummation of the
Exchange Offer, holders of Old Notes will no
longer be, entitled to (i) the right to receive
the Liquidated Damages or (ii) certain other
rights under the Registration Rights Agreement
intended for holders of unregistered securities.
See "The Exchange Offer--Termination of Certain
Rights" and "--Procedures for Tendering Old
Notes."
13
<PAGE>
Accrued Interest The New Notes will bear interest at a rate equal
to 9 7/8% per annum. Interest shall accrue from
_____________ or from the most recent Interest
Payment Date with respect to the Old Notes to
which interest was paid or duly provided for. See
"Description of Notes--Principal, Maturity and
Interest."
Procedures for Unless a tender of Old Notes is effected pursuant
Tendering Old Notes to the procedures for book-entry transfer as
provided herein, each holder desiring to accept
the Exchange Offer must complete and sign the
Letter of Transmittal, have the signature thereon
guaranteed if required by the Letter of
Transmittal, and mail or deliver the Letter of
Transmittal, together with the Old Notes or a
Notice of Guaranteed Delivery and any other
required documents (such as evidence of authority
to act, if the Letter of Transmittal is signed by
someone acting in a fiduciary or representative
capacity), to the Exchange Agent (as defined) at
the address set forth on the back cover page of
this Prospectus prior to 5:00 p.m., New York City
time, on the Expiration Date. Any Beneficial Owner
(as defined) of the Old Notes whose Old Notes are
registered in the name of a nominee, such as a
broker, dealer, commercial bank or trust company
and who wishes to tender Old Notes in the Exchange
Offer, should instruct such entity or person to
promptly tender on such Beneficial Owner's behalf.
See "The Exchange Offer--Procedures for Tendering
Old Notes."
Guaranteed Holders of Old Notes who wish to tender their Old
Delivery Procedures Notes and (i) whose Old Notes are not immediately
available or (ii) who cannot deliver their Old
Notes or any other documents required by the
Letter of Transmittal to the Exchange Agent prior
to the Expiration Date (or complete the procedure
for book-entry transfer on a timely basis), may
tender their Old Notes according to the guaranteed
delivery procedures set forth in the Letter of
Transmittal. See "The Exchange Offer--Guaranteed
Delivery Procedures."
Acceptance of Old Upon effectiveness of the Registration Statement
Notes and Delivery of which this Prospectus constitutes a part and
of New Notes consummation of the Exchange Offer, the Company
will accept any and all Old Notes that are
properly tendered in the Exchange Offer prior to
5:00 p.m., New York City time, on the Expiration
Date. The New Notes issued pursuant to the
Exchange Offer will be delivered promptly after
acceptance of the Old Notes. See "The Exchange
Offer--Acceptance of Old Notes for Exchange;
Delivery of New Notes."
Withdrawal Rights Tenders of Old Notes may be withdrawn at any time
prior to 5:00 p.m., New York City time, on the
Expiration Date. See "The Exchange
Offer--Withdrawal Rights."
The Exchange Agent Marine Midland Bank is the exchange agent (in such
capacity, the "Exchange Agent"). The address and
telephone number of the Exchange Agent are set
forth in "The Exchange Offer--The Exchange Agent;
Assistance."
14
<PAGE>
Fees and Expenses All expenses incident to the Company's
consummation of the Exchange Offer and compliance
with the Registration Rights Agreement will be
borne by the Company. The Company will also pay
certain transfer taxes applicable to the Exchange
Offer. See "The Exchange Offer--Fees and
Expenses."
Resales of Based on existing interpretations by the staff of
the New Notes the Commission set forth in no-action letters
issued to third parties, the Company believes that
New Notes issued pursuant to the Exchange Offer to
a holder in exchange for Old Notes may be offered
for resale, resold and otherwise transferred by a
holder (other than (i) a broker-dealer who
purchased the Old Notes directly from the Company
for resale pursuant to Rule 144A under the
Securities Act or any other available exemption
under the Securities Act or (ii) a person that is
an affiliate of the Company within the meaning of
Rule 405 under the Securities Act), without
compliance with the registration and prospectus
delivery provisions of the Securities Act,
provided that such holder is acquiring the New
Notes in the ordinary course of business and is
not participating, and has no arrangement or
understanding with any person to participate, in a
distribution of the New Notes. Each broker-dealer
that receives New Notes in exchange for Old Notes,
where such Old Notes were acquired by such broker
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 Notes. See "The Exchange Offer--Resales of the
New Notes" and "Plan of Distribution."
Effect of Not Old Notes that are not tendered or that are not
Tendering Old Notes properly tendered will, following the expiration
for Exchange of the Exchange Offer, continue to be subject to
the existing restrictions upon transfer thereof.
The Company will have no further obligations to
provide for the registration under the Securities
Act of such Old Notes and such Old Notes will,
following the expiration of the Exchange Offer,
bear interest at the same rate as the New Notes.
15
<PAGE>
Description of New Notes
The form and terms of the New Notes will be identical in all material
respects to the form and terms of the Old Notes, except that (i) the New Notes
have been registered under the Securities Act and, therefore, will not bear
legends restricting the transfer thereof, (ii) holders of the New Notes will not
be entitled to Liquidated Damages and (iii) holders of the New Notes will not
be, and upon consummation of the Exchange Offer, holders of the Old Notes will
no longer be, entitled to certain rights under the Registration Rights Agreement
intended for the holders of unregistered securities, except in limited
circumstances. See "Exchange Offer--Termination of Certain Rights." The Exchange
Offer shall be deemed consummated upon the occurrence of the delivery by the
Company to the Registrar under the Indenture of the New Notes in the same
aggregate principal amount as the aggregate principal amount of Old Notes that
are tendered by holders thereof pursuant to the Exchange Offer. See "The
Exchange Offer--Termination of Certain Rights" and "Procedures for Tendering Old
Note;" and "Description of Notes."
Securities Offered......... $130.0 million in aggregate principal amount of
9 7/8% Senior Subordinated Notes due 2007 (the
"Notes").
Maturity................... December 15, 2007
Interest................... The Notes will bear interest at the rate of 97/8%
per annum, payable semiannually on June 15 and
December 15, commencing June 15, 1998.
Optional Redemption........ The Notes may be redeemed at the option of the
Company, in whole or in part, on or after December
15, 2002 at a premium declining to par in 2005,
plus accrued and unpaid interest and Liquidated
Damages, if any, through the redemption date.
On or before December 15, 2000, the Company may, at
its option, redeem up to 35% of the original
aggregate principal amount of Notes with the net
proceeds from one or more Public Equity Offerings
(as defined) at the redemption price set forth
herein, plus accrued and unpaid interest, if any,
through the redemption date; provided, however,
that at least 65% of the original aggregate
principal amount of Notes remain outstanding
following such redemption.
Change of Control.......... Upon a Change of Control (as defined herein), the
Company (i) will be required to make an offer to
repurchase all outstanding Notes at 101% of the
principal amount thereof plus accrued and unpaid
interest thereon and Liquidated Damages, if any,
to the date of repurchase and (ii) prior to
December 15, 2002 will have the option to redeem
the Notes, in whole or in part, at a redemption
price equal to the principal amount thereof, plus
accrued and unpaid interest and Liquidated
Damages, if any, to the redemption date plus the
Applicable Premium (as defined herein). There can
be no assurance that sufficient funds will be
available to the Company at the time of any Change
of Control to make any required repurchases of
Notes. See "Risk Factors-- Potential Inability to
Fund Change of Control Offer," "Description of
Notes-- Repurchase at the Option of Holders--
Change of Control" and "--Optional Redemption upon
Change of Control."
16
<PAGE>
Ranking.................... The Notes will be general unsecured obligations of
the Company, will be subordinated in right of
payment to all existing and future Senior
Indebtedness (as defined in the Indenture),
including all obligations of the Company under the
New Credit Facility, and will be pari passu in
right of payment with any senior subordinated
indebtedness of the Company. The Company conducts
certain operations through its foreign
subsidiaries and, accordingly, the Notes will be
effectively subordinated to indebtedness and other
liabilities of such foreign subsidiaries. At
November 29, 1997, the aggregate principal amount
of Senior Indebtedness of the Company would have
been approximately $132.9 million, all of which
would have been Indebtedness secured by
substantially all of the assets of Holdings and
the Company pursuant to the New Credit Facility,
and the Company's foreign subsidiaries would have
had aggregate liabilities of $2.7 million.
Guarantees................. The Company's obligations under the Notes will be
jointly and severally guaranteed (the
"Guarantees") on a senior subordinated basis by
Holdings and each subsidiary of Holdings that
guarantees any indebtedness of the Company or any
other obligor under the Notes (the "Guarantors").
The Guarantees will be general unsecured
obligations of the Guarantors, will be
subordinated in right of payment to all existing
and future Senior Indebtedness of the Guarantors,
including all obligations of the Guarantors under
the New Credit Facility and will rank pari passu
in right of payment with any senior subordinated
indebtedness of the Guarantors. On the date the
Notes are issued, none of the Company's
subsidiaries will guarantee the Notes.
Covenants.................. The indenture pursuant to which the Notes will be
issued (the "Indenture") contains certain
covenants that, among other things, limit the
ability of the Company, Holdings and their
subsidiaries to incur additional Indebtedness and
issue preferred stock, pay dividends or make other
distributions, create certain liens, enter into
certain transactions with affiliates, sell assets
of the Company, Holdings or their subsidiaries,
issue or sell Equity Interests of the Company's or
Holdings' subsidiaries or enter into certain
mergers and consolidations. In addition, under
certain circumstances, the Company and Holdings
will be required to offer to purchase Notes at a
price equal to 100% of the principal amount
thereof, plus accrued and unpaid interest, if any,
to the date of purchase, with the proceeds of
certain Asset Sales (as defined). See "Description
of Notes."
Risk Factors
See "Risk Factors" for a discussion of certain factors that should be
considered in evaluating an investment in the Notes.
17
<PAGE>
Summary Unaudited Pro Forma Consolidated Financial Data of Holdings
The following sets forth summary unaudited pro forma consolidated financial
data of Holdings derived from the unaudited pro forma consolidated financial
data contained elsewhere herein. Certain management assumptions and adjustments
relating to the Recapitalization are set forth in the notes accompanying such
unaudited pro forma consolidated financial data. The following unaudited pro
forma consolidated Statement of Operating Data for the year ended February 28,
1998 gives effect to the Recapitalization and the acquisitions of the
Heath/Zenith business and Fireplace Manufacturers, Inc. ("FMI") as if they had
occurred on March 2, 1997 (see "Recent Developments" included elsewhere herein).
Holdings' historical consolidated Balance Sheet Data at February 28, 1998
already reflects the Recapitalization and the acquisition of the Heath/Zenith
business. The historical information utilized for Heath/Zenith is based upon its
financial statements for the twelve months ended December 31, 1997. This
historical financial information for FMI is based upon financial information for
the twelve months ended December 31, 1997. This pro forma information is not
necessarily indicative of the results that would have occurred had the
Recapitalization been completed on the dates indicated or the Company's actual
or future results or financial position. Holdings is a holding company which
does not carry on operations and the principal asset of which is 100% of the
capital stock of the Company. The summary pro forma consolidated financial data
should be read in conjunction with the information contained in the consolidated
financial statements and notes thereto, "Pro Forma Condensed Consolidated
Financial Data," "Selected Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
herein.
Pro Forma
Fiscal Year Ended
February 28, 1998(2)
-------------------------
(in thousands, except ratios)
Statement of Operating Data:
Net sales (1) $ 306,210
Cost of sales 209,415
---------
Gross profit 96,795
Selling and administrative expenses 61,968
---------
Operating profit 34,827
Less dividends on preferred stock 2,112
---------
Operating profit available for common stockholders $ 32,715
=========
Other Data:
EBITDA (3) $ 40,078
EBITDA margin(4) 13.1%
Capital expenditures $ 5,772
Depreciation 2,995
Amortization 2,256
Cash interest expense (5) 26,323
Ratio of EBITDA to cash interest expense 1.5x
Ratio of EBITDA less capital expenditures to cash
interest expenses 1.3x
Ratio of earnings to fixed charges (6) 1.3x
Balance Sheet Data at February 28, 1998:
Working capital (7) 28,162
Total assets 184,804
Long-term debt (less current portion) 276,960
Stockholders' equity (deficit) (152,645)
18
<PAGE>
- ----------
(1) Net sales constitute gross sales net of accruals for returns and allowances
and cash discounts.
(2) The consolidated Statement of Operating Data excludes an extraordinary
charge of $2,308,000, net of an income tax benefit of $1,495,000,
attributable to the write-off of unamortized deferred financing costs
related to the 1996 Recapitalization. See "Pro Forma Condensed Consolidated
Financial Data of Holdings."
(3) EBITDA is defined as income before income taxes plus interest expense and
depreciation, as well as amortization of intangibles and deferred charges.
EBITDA is presented because it is a widely accepted financial indicator of
a company's ability to service indebtedness and because management believes
that EBITDA is a relevant measure of the Company's ability to generate cash
without regard to the Company's capital structure or working capital needs.
However, EBITDA should not be considered as an alternative to net income as
a measure of a company's operating results or to cash flows from operating
activities as a measure of liquidity. EBITDA as presented may not be
comparable to similarly titled measures used by other companies, depending
upon the non-cash charges included. When evaluating EBITDA, investors
should also consider other factors which may influence operating and
investing activities, such as changes in operating assets and liabilities
and purchases of property and equipment.
(4) EBITDA margin is defined as EBITDA divided by net sales.
(5) Pro forma cash interest expense includes interest expense on the Notes,
borrowings under the Term Loan Facility and average borrowings under the
Revolving Credit Facility for the applicable period and excludes
amortization of debt issuance costs. See note 2 to "Unaudited Pro Forma
Condensed Consolidated Statement of Income Data."
(6) For purposes of computing this ratio, earnings consist of income before
income taxes plus fixed charges. Fixed charges consist of interest expense,
amortization of deferred financing cost and 33% of the rent expense from
operating leases which the Company believes is a reasonable approximation
of the interest factor included in the rent.
(7) The Company's business is subject to a pattern of seasonal fluctuation. As
such, the Company's needs for working capital tend to peak in the second
and third fiscal quarters.
19
<PAGE>
Summary Financial Data
Set forth below are selected historical consolidated financial data and
other historical consolidated operating data of Holdings. The summary historical
consolidated Statements of Operating Data and Balance Sheet Data below for each
of the years in the three year period ended February 28, 1998 and as of March 1,
1997 and February 28, 1998 have been derived from the audited consolidated
financial statements of Holdings which have been audited by Ernst & Young LLP,
independent auditors, and are included elsewhere in this Prospectus. The summary
historical consolidated Statement of Operating Data and Balance Sheet Data at
and for the year ended February 25, 1995 have been derived from the audited
Consolidated Financial Statements of Holdings which have also been audited by
Ernst & Young LLP, but which are not included elsewhere herein. The summary
historical consolidated Statement of Operating Data below for the year ended
February 26, 1994 is presented as the consolidated income statement data of
Holdings from its date of incorporation, December 1, 1993, through February 26,
1994 and the income statement data of the Company from February 28, 1993 through
November 30, 1993, which statements for the three and nine month periods, have
also been audited by Ernst & Young LLP, but which are not included elsewhere
herein. The summary historical consolidated Balance Sheet Data at February 26,
1994 has been derived from the audited consolidated balance sheet of Holdings
which has also been audited by Ernst & Young LLP, but which is not included
elsewhere herein. The information presented below is qualified in its entirety
by, and should be read in conjunction with "Capitalization," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and notes thereto included elsewhere in
this Prospectus.
20
<PAGE>
<TABLE>
<CAPTION>
Predecessor | Successor
------------- | ----------------------------------------------------
|
| Fiscal Year
| ----------------------------------------
| Three
Nine Months | Months
Ended | Ended
November 30, | February 26,
1993 (1) | 1994(1) 1995 1996(1)(2) 1997 1998(1)(9)
------------ | ---------- ------- ---------- -------- -----------
(in thousands, except ratios)
Statement of Operating Data: |
<S> <C> <C> <C> <C> <C> <C>
Net sales(3) $ 93,349 | $ 29,428 $ 172,501 $ 186,324 $ 209,105 $ 224,169
Cost of sales 60,860 | 19,584 107,484 116,217 130,890 145,486
--------- | -------- -------- -------- -------- --------
Gross profit 32,489 | 9,844 65,017 70,107 78,215 78,683
Selling and administrative |
expenses 19,301 | 7,582 35,975 37,828 45,257 50,191
--------- | -------- -------- -------- -------- --------
Operating profit 13,188 | 2,262 29,042 32,279 32,958 28,492
Interest expense 2,893 | 1,455 5,777 7,073 14,509 17,327
--------- | -------- -------- -------- -------- --------
Income before income taxes 10,295 | 807 23,265 25,206 18,449 11,165
Income taxes 4,356 | 346 10,064 10,703 7,733 5,545
--------- | -------- -------- -------- -------- --------
Income before extraordinary |
item 5,939 | 461 13,201 14,503 10,716 5,620
Extraordinary item(4) 4,150 | 238 -- 2,638 -- 2,308
--------- | -------- -------- -------- -------- --------
Net income 1,789 | 223 13,201 11,865 10,716 3,312
Less dividends on preferred |
stock 211 | -- 900 853 -- 544
--------- | -------- -------- -------- -------- --------
Net income available for |
common stockholders $ 1,578 | $ 223 $ 12,301 $ 11,012 $ 10,716 $ 2,768
========= | ======== ======== ======== ======== =========
Ratio of earnings to fixed |
charges(5) 4.2x| 1.5x 4.4x 4.0x 2.2x 1.6x
Other Data: |
EBITDA (6) $ 14,998 | $ 3,176 $ 33,156 $ 36,574 $ 37,494 $ 33,204
EBITDA margin(7) 16.1%| 10.8% 19.2% 19.6% 17.9% 14.8%
Capital expenditures $ 964 | $ 456 $ 1,499 $ 2,122 $ 2,770 $ 5,475
Net cash provided by (used |
in) operating activites (4,258)| 16,150 18,337 19,375 18,398 1,146
Net cash (used |
in) investing activites (964)| (456) (2,176) (2,060) (2,882) (45,980)
Net cash provided by (used |
in) financing activities 5,320 | (14,186) (1,651) (17,989) (10,599) 40,590
Depreciation 1,548 | 391 2,148 2,332 2,432 2,456
Amortization 262 | 523 1,966 1,963 2,104 2,256
Balance Sheet Data (at period) |
end): |
Cash and cash equivalents | $ 1,597 $ 16,170 $ 145 $ 5,058 $ 794
Working capital (deficit)(8) | 6,680 9,738 (1,194) (8,566) 27,095
Total assets | 84,055 107,259 85,545 91,984 155,636
Long-term debt (less current |
portion) | 62,000 49,700 149,709 130,600 261,105
Stockholders' equity (deficit) | 2,279 16,194 (95,402) (84,754) (162,407)
<FN>
- ----------
(1) Holdings was party to recapitalizations in November 1993, January 1996 and November 1997 which impacted interest expense,
stockholders' equity (deficit) and long-term debt.
(2) 53 week fiscal year.
(3) Net sales constitute gross sales net of accruals for returns and allowances and cash discounts.
21
<PAGE>
(4) Extraordinary items relate to the write-off of unamortized deferred financing costs at the time the Company refinanced its
existing debt obligations and other expenditures related to the recapitalization transactions in fiscal years 1994 , 1996 and
1998.
(5) For purposes of computing this ratio, earnings consist of income before income taxes plus fixed charges. Fixed charges consist
of interest expense and amortization of deferred financing cost and 33% of the rent expense from operating leases which the
Company believes is a reasonable approximation of the interest factor included in the rent.
(6) EBITDA is defined as income before taxes plus interest expense and depreciation, as well as amortization of intangibles and
deferred charges. EBITDA is presented because it is a widely accepted financial indicator of a company's ability to service
indebtedness and because management believes that EBITDA is a relevant measure of the Company's ability to generate cash
without regard to the Company's capital structure or working capital needs. However, EBITDA should not be considered as an
alternative to net income as a measure of a company's operating results or to cash flows from operating activities as a measure
of liquidity. EBITDA as presented may not be comparable to similarly titled measures used by other companies, depending upon
the non-cash charges included. When evaluating EBITDA, investors should also consider other factors which may influence
operating and investing activities, such as changes in operating assets and liabilities and purchases of property and
equipment.
(7) EBITDA margin is defined as EBITDA divided by net sales.
(8) The Company's business is subject to a pattern of seasonal fluctuation. As such, the Company's needs for working capital tend
to peak in the second and third fiscal quarters.
(9) Includes Heath/Zenith data for the period from February 4, 1998 (date of acquisition) to February 28, 1998.
</FN>
</TABLE>
22
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus, holders
of the Notes should consider the specific factors set forth below.
Significant Leverage and Debt Service
The Company and its subsidiaries have significant outstanding indebtedness
and are significantly leveraged. As of February 28, 1998 the Company had
outstanding consolidated indebtedness of $266.4 million (excluding letters of
credit in the aggregate amount of $2.3 million). See "Capitalization." In
addition, subject to the limitations set forth in the Indenture, the Company and
its subsidiaries may incur additional indebtedness (including Senior
Indebtedness), including up to $26.0 million under the Working Capital Facility.
In addition, the Indenture permits Holdings, under certain circumstances, to
exchange all outstanding Holdings Preferred Stock for Exchange Notes in an
aggregate principal amount equal to the aggregate liquidation preference of the
Holdings Preferred Stock so exchanged. The Exchange Notes will require Holdings
to make semi-annual interest payments thereon at a rate of 12% per annum.
Subject to compliance with the debt agreements of Holdings and the Company, such
payments must be made in cash. The Indenture restricts, but does not prohibit,
Holdings from making such cash interest payments. Under the Exchange Notes,
Holdings may defer the payment of interest payable on or before November 30,
2002, with any such deferred interest bearing interest at 12% per annum,
compounded semi-annually. Holdings will be required to make a catch-up payment
immediately prior to the first interest payment date after the fifth anniversary
of the date of issuance to the extent the aggregate amount of such deferred
interest exceeds an amount equal to one year's interest on the originally issued
Exchange Notes. The Indenture restricts the ability of Holdings to make such
catch-up payment. See "Description of the Notes -- Certain Covenants --
Restricted Payments" and "Description of Holdings Preferred Stock -- Exchange
Notes".
The degree to which the Company is leveraged could have important
consequences to the holders of the Notes, including (i) the Company's
vulnerability to adverse general economic and industry conditions, (ii) the
Company's ability to obtain additional financing for future capital
expenditures, general corporate or other purposes and (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.
The Company's ability to make scheduled payments on the principal of, or
interest or Liquidated Damages (if any) on, or to refinance, its indebtedness
will depend on its future operating performance and cash flow, which are subject
to prevailing economic conditions, prevailing interest rate levels, and
financial, competitive, business and other factors, many of which are beyond its
control, as well as the availability of borrowings under the New Credit Facility
or successor facilities. However, based upon the current and anticipated level
of operations, the Company believes that its cash flow from operations, together
with amounts available under the New Credit Facility and its other sources of
liquidity, will be adequate to meet its anticipated cash requirements for the
foreseeable future for working capital, capital expenditures, interest payments
and principal payments. There can be no assurance, however, that the Company's
business will continue to generate cash flow at or above current levels. If the
Company is unable to generate sufficient cash flow from operations in the future
to service its indebtedness, it may be required to refinance all or a portion of
its existing indebtedness, including the Notes, or to obtain additional
financing. There can be no assurance that any such refinancing would be possible
or that any additional financing could be obtained. The inability to obtain
additional financing could have a material adverse effect on the Company.
Finally, in order to pay the principal balance of the Notes due at maturity, the
Company may have to obtain alternative financing.
Subordination of Notes
The Notes will be general unsecured obligations of the Company,
subordinated in right of payment to all existing and future Senior Indebtedness
of the Company, including borrowings under the New Credit Facility. In addition,
the Company conducts certain operations through its foreign subsidiaries, and
accordingly, the Notes will be effectively subordinated to indebtedness and
other liabilities of its foreign subsidiaries. In the event of bankruptcy,
liquidation or reorganization of the Company, the assets of the Company will be
available to pay obligations on the Notes only after
23
<PAGE>
all Senior Indebtedness has been paid in full, and there may not be sufficient
assets remaining to pay amounts due on any or all of the Notes then outstanding.
In addition, under certain circumstances the Company will not be able to make
payment of its obligations under the Notes in the event of a default under
certain Senior Indebtedness. The aggregate principal amount of Senior
Indebtedness of the Company, as of February 28, 1998, is $136.4 million.
Additional Senior Indebtedness may be incurred by the Company from time to time,
subject to certain restrictions. See "Description of Notes -- Subordination."
Future Acquisitions
The Company expects to pursue strategic acquisitions. On February 4, 1998,
the Company acquired Heath Company and its Heath/Zenith business from Heath
Holding Corp. The Company has also entered into agreements to acquire Fireplace
Manufacturers, Incorporated ("FMI") and to form a strategic alliance with
Universal Heating, Inc. ("UHI"). No assurance may be given that such
transactions will ultimately be consummated. See "Business--Recent
Developments."
Except for the acquisition of FMI and the strategic alliance with UHI, the
Company has no present understandings, commitments or agreements with respect to
any such acquisitions. The Company continually evaluates potential acquisition
opportunities. The Company is unable to predict whether any of these
opportunities will result in acquisitions. Acquisitions by the Company could
result in the incurrence of additional indebtedness, which could materially
adversely affect the Company's business, financial condition and results of
operations. Acquisitions involve numerous risks, including difficulties in the
assimilation of the operations, technologies, services and products of the
acquired companies and the diversion of management's attention from other
business concerns. In the event that any such acquisition were to occur, there
can be no assurance that the Company's business, financial condition and results
of operations would not be materially adversely affected. See "Business --
Business Strategy."
Dependence on Brand Names
In fiscal 1998, the majority of the Company's net sales are sales of
products bearing the Company's principal proprietary names of Reddy(R),
Remington(R), Vanguard(R), Comfort Glow(R), Master(R), and Powerfast(R).
Accordingly, the Company's future success may depend in part upon the goodwill
associated with the Company's principal brand names. Most of the Company's brand
names are registered in the United States and certain foreign countries. The
Company owns the rights to all of the registrations with the exception of
Remington, (used in connection with approximately 15% of sales), which is used
pursuant to a perpetual, royalty-free license. In addition, Heath Company uses
the name Zenith(R) in its Heath/Zenith business pursuant to a perpetual,
royalty-free license from Zenith Electronics Corporation. See "Business--Recent
Developments."
No assurance can be given that the Company will be able to develop or
acquire licenses to use other popular trademarks in the future. Further, there
can be no assurance that the steps taken by the Company or any licensor to
protect the proprietary rights in such brand names will be adequate to prevent
the misappropriation thereof in the United States or abroad. In addition, the
laws of some foreign countries do not protect proprietary rights in brand names
to the same extent as do the laws of the United States.
Risk of Loss of Material Customers
In fiscal year 1998, sales to Home Depot and Lowe's accounted for 17% and
13% of the Company's net sales, respectively. In fiscal year 1998, sales to the
Company's top ten customers accounted for 55% of the Company's total sales.
Consistent with industry practices, the Company does not operate under
long-term written supply contracts with any of its customers. The business,
financial condition, and results of operations of the Company could be
materially adversely affected by loss of Home Depot or Lowe's as continuing
major customers of the Company.
24
<PAGE>
Seasonality of Business
The Company's business is subject to seasonal fluctuation. In fiscal 1998,
sales and operating income during the second and third quarters of the year
averaged approximately 75% and 114% respectively, of the annual totals. The
Company's needs for working capital and the corresponding debt levels tend to
peak in the second and third fiscal quarters. The amount of the Company's sales
generated during the second and third fiscal quarters generally depends upon a
number of factors, including the level of retail sales for heating products
during the fall and winter, weather conditions affecting the level of sales of
heating products, general economic conditions and other factors beyond the
Company's control.
Dependence on Key Personnel
The Company's business is managed by a number of key personnel, the loss of
which could have a material adverse effect on the Company. In addition, as the
Company's business develops and expands, the Company believes that its future
success will depend greatly on its continued ability to attract and retain
highly skilled and qualified personnel. The Company has entered into employment
agreements with Robert H. Elman (Chairman, Chief Executive Officer and
Director), Terry G. Scariot (President, Director) and John M. Kelly (Executive
Vice President) in conjunction with the Recapitalization. See "Management --
Employment Agreements with Executive Officers." However, there can be no
assurance that key personnel will continue to be employed by the Company after
the expiration of such amended employment agreements or that the Company will be
able to attract and retain qualified personnel in the future. Failure by the
Company to retain or attract such personnel could have a material adverse effect
on the Company.
Control by Investors
The Company is controlled by Childs, which beneficially owns shares
representing approximately 67.5% of the common equity in Holdings. Accordingly,
Childs and affiliates have the power to elect the Company's board of directors
(which, in turn, elects the Company's board of directors), appoint new
management and cause the approval of any action requiring the approval of the
holders of the Company's Common Stock, including adopting amendments to the
Company's Articles of Incorporation and approving mergers or sales of
substantially all of the Company's assets. The directors caused to be elected by
Childs have the authority to make decisions affecting the capital structure of
the Company, including the issuance of additional indebtedness and the
declaration of dividends.
Restrictive Covenants
The New Credit Facility and the Indenture contain restrictive covenants,
which limit the discretion of the management of the Company with respect to
certain business matters. These covenants place certain restrictions on, among
other things, the ability of the Company to incur additional indebtedness, to
create liens or other encumbrances, to pay dividends or make other restricted
payments, to make investments, loans and guarantees and to sell or otherwise
dispose of a substantial portion of assets to, or merge or consolidate with,
another entity. The New Credit Facility also contains a number of financial
covenants that require the Company to meet certain financial ratios and tests
and provide that a "change of control" would constitute an event of default. See
"Description of Notes -- Certain Covenants" and "Description of New Credit
Facility." A failure to comply with the obligations contained in the New Credit
Facility or the Indenture, if not cured or waived, could permit acceleration of
the related indebtedness and acceleration of indebtedness under other
instruments that contain cross-acceleration or cross-default provisions. In the
case of an event of default under the New Credit Facility, the lenders under the
New Credit Facility would be entitled to exercise the remedies available to a
secured lender under applicable law. If the Company were obligated to repay all
or a significant portion of its indebtedness, there can be no assurance that the
Company would have sufficient cash to do so or that the Company could
successfully refinance such indebtedness. Other indebtedness of the Company that
may be incurred in the future may contain financial or other covenants more
restrictive than those applicable to the New Credit Facility or the Notes.
25
<PAGE>
Potential Inability to Fund Change of Control Offer
Upon a Change in Control (as defined in the Indenture), each holder will
have the right to require the Company to repurchase all or any part of such
holder's Notes at 101% of the principal amount thereof, plus accrued and unpaid
interest and Liquidated Damages, if any, thereon to the date of repurchase. See
"Description of Notes -- Repurchase at the Option of Holders -- Change of
Control." However, there can be no assurance that sufficient funds will be
available to the Company at the time of the Change of Control to make any
required repurchases of Notes tendered. Moreover, restrictions in the New Credit
Facility may prohibit the Company from making such required purchases;
therefore, any such repurchases would constitute an event of default under the
New Credit Facility absent a waiver. Notwithstanding these provisions, the
Company could enter into certain transactions, including certain
recapitalizations, that would not constitute a Change of Control but would
increase the amount of debt outstanding at such time.
Fraudulent Conveyance and Preference Considerations
Under applicable provisions of federal bankruptcy law or comparable
provisions of state fraudulent conveyance law, if, among other things, the
Company or any of the Guarantors, at the time it incurred the indebtedness
evidenced by the Notes or its Guarantees, as the case may be, (i)(a) was or is
insolvent or rendered insolvent by reason of such occurrence or (b) was or is
engaged in a business or transaction of which the assets remaining with the
Company or such Guarantor were unreasonably small or constitute unreasonably
small capital or (c) intended or intends to incur, or believed, believes or
should have believed that it would incur, debts beyond its ability to repay such
debts as they mature and (ii) the Company or such Guarantor received or receives
less than the reasonably equivalent value or fair consideration for the
incurrence of such indebtedness, the Notes and the Guarantees could be
invalidated or subordinated to all other debts of the Company or such
Guarantors, as the case may be. The Notes or Guarantees could also be
invalidated or subordinated if it were found that the Company or the Guarantor
party thereto, as the case may be, incurred indebtedness in connection with the
Notes or its Guarantees with the intent of hindering, delaying or defrauding
current or future creditors of the Company or such Guarantor, as the case may
be. In addition, the payment of interest and principal by the Company pursuant
to a Guarantee could be voided and required to be returned to the person making
such payment, or to a fund for the benefit of the creditors of the Company, as
the case may be.
The measures of insolvency for purposes of the foregoing considerations
will vary depending upon the law applied in any proceeding with respect to the
foregoing. Generally, however, the Company or a Guarantor would be considered
insolvent if (i) the sum of its debts, including contingent liabilities, were
greater than the sum of all of its assets at a fair valuation or if the present
fair saleable value of its assets were less than the amount that would be
required to pay its probable liability on its existing debt, including
contingent liabilities, as they become absolute and mature or (ii) it could not
pay its debts as they become due.
Additionally, under federal bankruptcy or applicable state insolvency law,
if certain bankruptcy or insolvency proceedings were initiated by or against the
Company or any Guarantor with respect to the Notes or a Guarantees,
respectively, or after the issuance of a Guarantees, or if the Company or such
Guarantor anticipated becoming insolvent at the time of such payment or
issuance, all or a portion of such payment or such Guarantees could be avoided
as a preferential transfer, and the receipt of any such payment could be
required to return such payment.
To the extent any Guarantees were voided as a fraudulent conveyance or held
unenforceable for any other reason, holders of Notes would cease to have any
claim in respect of such Guarantor and would be creditors solely of the Company
and any Guarantor whose Guarantees was not avoided or held unenforceable. In
such event, the claims of holders of Notes against the issuer of an invalid
Guarantees would be subject to the prior payment of all liabilities and
preferred stock claims of such Guarantor. There can be no assurance that, after
providing for all prior claims and preferred stock interests, if any, there
would be sufficient assets to satisfy the claims of holders of Notes relating to
any voided portions of any Guarantees. The Company currently has no significant
subsidiaries.
On the basis of its historical financial information, recent operating
history and projected financial data, the Company believes that, after giving
effect to the indebtedness incurred in connection with the Recapitalization, it
is not insolvent, does not have unreasonably small assets or capital for the
businesses in which it is engaged and does not have
26
<PAGE>
debts beyond its ability to pay such debts as they mature. There can be no
assurance, however, as to what standard a court would apply in making such
determinations.
27
<PAGE>
THE EXCHANGE OFFER
General
In connection with the sale of the Old Notes, the Company, Holdings and the
Initial Purchasers entered into the Registration Rights Agreement, which
requires the Company to file with the Commission a registration statement under
the Securities Act with respect to an issue of senior subordinated notes of the
Company with terms identical to the Old Notes (except with respect to
restrictions on transfer) and to use their best efforts to cause such
registration statement to become effective under the Securities Act by no later
than March 26, 1998 and, upon the effectiveness of such registration statement,
to offer to the holders of the Old Notes the opportunity, for a period of 30
business days (or longer if required by applicable law) from the date the notice
of the Exchange Offer is mailed to holders of the Old Notes, to exchange their
Old Notes for a like principal amount of New Notes. The Exchange Offer is being
made pursuant to the Registration Rights Agreement to satisfy the Company's
obligations thereunder.
Under existing interpretations of the staff of the Commission enunciated in
no-action letters issued to third parties, the New Notes would, in general, be
freely transferable after the Exchange Offer without further registration under
the Securities Act by holders thereof (other than (i) a broker-dealer who
acquires such New Notes directly from the Company to resell pursuant to Rule
144A or any other available exemption under the Securities Act or (ii) a person
that is an affiliate of the Company within the meaning of Rule 405 under the
Securities Act), without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that such New Notes are
acquired in the ordinary course of such holders' business and such holders have
no arrangements with any person to participate in the distribution of such New
Notes. Eligible holders wishing to accept the Exchange Offer must represent to
the Company that such conditions have been met. Each broker-dealer that receives
New Notes for its own account pursuant to the Exchange Offer must acknowledge
that it will deliver a prospectus in connection with any resale of such New
Notes.
Terms of the Exchange Offer
Each holder of Old Notes who wishes to exchange Old Notes for New Notes in
the Exchange Offer will be required to make certain representations, including
that (i) it is neither an affiliate of the Company nor a broker-dealer tendering
Old Notes acquired directly from the Company for its own account, (ii) any New
Notes to be received by it were acquired in the ordinary course of its business
and (iii) at the time of commencement of the Exchange Offer, it has no
arrangement with any person to participate in the distribution (within the
meaning of the Securities Act) of the New Notes. In addition, in connection with
any resales of New Notes, any broker-dealer (a "Participating Broker-Dealer")
who acquired Old Notes for its own account as a result of market-making
activities or other trading activities must deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of the New
Notes. The Commission has taken the position, in no-action letters issued to
third parties, that Participating Broker-Dealers may fulfill their prospectus
delivery requirements with respect to the New Notes (other than a resale of an
unsold allotment from the original sales of Old Notes) with the prospectus
contained in the Registration Statement. Under the Registration Rights
Agreement, the Company and the Guarantors are required to allow Participating
Broker-Dealers (and other persons, if any, subject to similar prospectus
delivery requirements) to use the prospectus contained in the Registration
Statement in connection with the resale of such New Notes, provided, however,
they shall not be required to amend or supplement such prospectus for a period
exceeding 180 days after the consummation of the Exchange Offer.
If (a) the Company and the Guarantors fail to file any of the Registration
Statements required by the Registration Rights Agreement on or before the date
specified for such filing, (b) any of such Registration Statements is not
declared effective by the Commission on or prior to the date specified for such
effectiveness (the "Effectiveness Target Date"), (c) the Company and the
Guarantors fail to Consummate the Exchange Offer within 30 business days of the
Effectiveness Target Date with respect to the Exchange Offer Registration
Statement, or (d) the Shelf Registration Statement or the Exchange Offer
Registration Statement is declared effective but thereafter ceases to be
effective or usable in connection with resales of Transfer Restricted Securities
during the periods specified in the Registration Rights Agreement (each such
event referred to in clauses (a) through (d) above a "Registration Default"),
then the Company and the Guarantors will pay Liquidated Damages to each Holder
of Transfer Restricted Securities, with respect to the
28
<PAGE>
first 90-day period immediately following the occurrence of such Registration
Default in an amount equal to $.05 per week per $1,000 principal amount of Notes
constituting Transfer Restricted Securities held by such Holder. The amount of
the Liquidated Damages will increase by an additional $.05 per week per $1,000
principal amount constituting Transfer Restricted Securities with respect to
each subsequent 90-day period until all Registration Defaults have been cured,
up to a maximum amount of Liquidated Damages of $.50 per week per $1,000
principal amount of Notes constituting Transfer Restricted Securities.
Liquidated Damages accrued as of any interest payment date will be payable on
such date. Following the cure of all Registration Defaults, the accrual of
Liquidated Damages will cease.
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal, the Company will accept all Old
Notes validly tendered prior to 5:00 p.m., New York City time, on the Expiration
Date. The Company will issue $1,000 in principal amount of New Notes (and
integral multiples in excess thereof) in exchange for an equal principal amount
of outstanding Old Notes tendered and accepted in the Exchange Offer. Holders
may tender some or all of their Old Notes pursuant to the Exchange Offer in any
denomination of $1,000 or in integral multiples in excess thereof.
Based on no-action letters issued by the staff of the Commission to third
parties, the Company believes that the New Notes issued pursuant to the Exchange
Offer in exchange for Old Notes may be offered for resale, resold and otherwise
transferred by holders thereof (other than any such holder that is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery
requirements of the Securities Act, provided that such New Notes are acquired in
the ordinary course of such holders' business and such holders have no
arrangement with any person to participate in the distribution of such New
Notes. Any holder of Old Notes who tenders in the Exchange Offer for the purpose
of participating in a distribution of the New Notes cannot rely on such
interpretation by the staff of the Commission and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. Each broker-dealer that receives New
Notes for its own account in exchange for Old Notes, where such Old Notes were
acquired by such broker-dealer as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes.
The form and terms of the New Notes will be the same as the form and terms
of the Old Notes except that the New Notes will not bear legends restricting the
transfer thereof. The New Notes will evidence the same debt as the Old Notes.
The New Notes will be issued under and entitled to the benefits of the
Indenture.
As of the date of this Prospectus, $130,000,000 million aggregate principal
amount of the Old Notes are outstanding and CEDE & Co., the nominee of DTC, is
the only registered holder thereof. In connection with the issuance of the Old
Notes, the Company arranged for the Old Notes to be eligible for trading in the
PORTAL Market, the National Association of Securities Dealers' screen based,
automated market trading of securities eligible for resale under Rule 144A, and
to be issued and transferable in book-entry form through the facilities of DTC.
The New Notes will also be issuable and transferable in book-entry form through
DTC.
This Prospectus, together with the accompanying Letter of Transmittal, is
being sent to all registered holders as of __________, 1998 (the "Record Date").
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. See "Exchange Agent." The Exchange Agent will act as agent for
the tendering holders of Old Notes for the purpose of receiving New Notes from
the Company and delivering New Notes to such holders.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender or the occurrence of certain other events set forth herein,
certificates for any such unaccepted Old Notes will be returned, without
expense, to the tendering holder thereof as promptly as practicable after the
Expiration Date.
29
<PAGE>
Holders of Old Notes who tender in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than certain applicable taxes, in connection with the Exchange Offer. See
"Fees and Expenses."
Holders of Old Notes do not have any appraisal or dissenters' rights under
the Delaware General Corporation Law or the Indenture in connection with the
Exchange Offer. The Company intends to conduct the Exchange Offer in accordance
with the provisions of the Registration Rights Agreement and the applicable
requirements of the Exchange Act and the rules and regulations of the Commission
thereunder. Old Notes that are not tendered for exchange in the Exchange Offer
will remain outstanding and continue to accrue interest, but will not be
entitled to any rights or benefits under the Registration Rights Agreement.
Expiration Date; Extensions; Amendments
The term "Expiration Date" shall mean 5:00 p.m. New York City time, on
___________, 1998, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date to which the Exchange Offer is extended.
In order to extend the Expiration Date, the Company will notify the
Exchange Agent of any extension by oral or written notice and will mail to the
record holders of Old Notes an announcement thereof, each prior to 9:00 a.m.,
New York City time, on the next business day after the previously scheduled
Expiration Date. 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 Old Notes, to
extend the Exchange Offer or to terminate the Exchange Offer and to refuse to
accept Old Notes not previously accepted, if any of the conditions set forth
herein under "Termination" shall have occurred and shall not have been waived by
the Company (if permitted to be waived by the Company), by giving oral or
written notice of such delay, extension or termination to the Exchange Agent,
and (ii) to amend the terms of the Exchange Offer in any manner ,deemed by it to
be advantageous to the holders of the Old Notes. Any such delay in acceptance,
extension, termination or amendment will be followed as promptly as practicable
by oral or written notice thereof. If the Exchange Offer is amended in a manner
determined by the Company to constitute a material change, the Company will
promptly disclose such amendment in a manner reasonably calculated to inform the
holders of the Old Notes of such amendment.
Without limiting the manner in which the Company may choose to make public
announcements of any delay in acceptance, extension, termination or amendment of
the Exchange Offer, the Company shall have no obligation to publish, advertise,
or otherwise communicate any such public announcement, other than by making a
timely release to the Dow Jones News Service.
Interest on the New Notes
The New Notes will bear interest from the last Interest Payment Date on
which interest was paid on the Old Notes, or if interest has not yet been paid
on the Old Notes, from November 26, 1997. Such interest will be paid with the
first interest payment on the New Notes. Interest on the Old Notes accepted for
exchange will cease to accrue upon issuance of the New Notes.
The New Notes will bear interest at a rate of 9 7/8% per annum. Interest on
the New Notes will be payable semi-annually, in arrears on each Interest Payment
Date following the consummation of the Exchange Offer. Untendered Old Notes that
are not exchanged for New Notes pursuant to the Exchange Offer will bear
interest at a rate of 9 7/8% per annum after the Expiration Date.
30
<PAGE>
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 the Old
Notes (unless the book-entry transfer procedures described below are used) and
any other required documents, to the Exchange Agent for receipt prior to 5:00
p.m., New York City time, on the Expiration Date.
Any financial institution that is a participant in DTC's Book-Entry
Transfer Facility system may make book entry delivery of the Old Notes by
causing DTC to transfer such Old Notes into the Exchange Agent's account and
deliver an Agent's Message (as defined below) on or prior to the Expiration Date
in accordance with DTC's procedure for such transfer and delivery. If delivery
of Old Notes may be effected through book-entry transfer into the Exchange
Agent's account at DTC and an Agent's Message is not delivered, the Letter of
Transmittal (or facsimile thereof), with any required signature guarantees and
any other required documents, must, in any case, be transmitted to and received
or confirmed by the Exchange Agent at its addresses set forth in this Prospectus
prior to 5:00 p.m., New York City time, on the Expiration Date. DELIVERY OF
DOCUMENTS TO DTC IN ACCORDANCE WITH ITS PROCEDURES DOES NOT CONSTITUTE DELIVERY
TO THE EXCHANGE AGENT.
The term "Agent's Message" means a message, transmitted by DTC to and
received by the Exchange Agent and forming a part of a Book-Entry Confirmation
(as defined below), which states that DTC has received an express acknowledgment
from the tendering participant, which acknowledgment states that the participant
has received and agrees to be bound by, and makes the representations and
warranties contained in, the Letter of Transmittal and that the Company may
enforce the Letter of Transmittal against such participant. Holders of Old Notes
whose certificates are not immediately available, or who are unable to deliver
their certificates or confirmation of the book-entry tender of their Old Notes
into the Exchange Agent's account at DTC (the "Book-Entry Confirmation") and all
other documents required by the Letter of Transmittal to the Exchange Agent on
or prior to the Expiration Date, must tender their Old Notes according to the
guaranteed delivery procedures set forth below.
The tender (as set forth above) by a holder of Old Notes will constitute an
agreement between such holder and the Company in accordance with the terms and
subject to the conditions set forth herein and in the Letter of Transmittal.
Delivery of all documents must be made to the Exchange Agent at its address
set forth herein. Holders may also request that their respective brokers,
dealers, commercial banks, trust companies or nominees effect such tender for
such holders.
The method of delivery of Old Notes and the Letter of Transmittal and all
other required documents to the Exchange Agent is at the election and risk of
the holders. Instead of delivery by mail, it is recommended that holders use an
overnight or hand delivery service. In all cases, sufficient time should be
allowed to assure timely delivery. No Letter of Transmittal or Old Notes should
be sent to the Company.
Only a holder of Old Notes may tender such Old Notes in the Exchange Offer.
The term "holder" with respect to the Exchange Offer means any person in whose
name Old Notes are registered on the books of the Company or any other person
who has obtained a properly completed bond power from the registered holder or
any person whose Old Notes are held of record by DTC who desires to deliver such
Old Notes by book-entry Transfer at DTC.
Any beneficial holder whose Old Notes are registered in the name of his
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. If such beneficial holder wishes to
tender on his own behalf, such beneficial holder must, prior to completing and
executing the Letter of Transmittal and delivering his Old Notes, either make
appropriate arrangements to register ownership of the Old Notes in such holder's
name or obtain a properly completed bond power from the registered holder. The
transfer of record ownership may take considerable time.
31
<PAGE>
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by a 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 (an "Eligible Institution") that is a participant
in a recognized medallion signature guarantee program unless the Old Notes
tendered pursuant thereto are tendered (i) by a registered holder who has not
completed the box entitled "Special Issuance Instructions" or "Special Delivery
Instructions" on the Letter of Transmittal or (ii) for the account of an
Eligible Institution.
If the Letter of Transmittal is signed by a person other than the
registered holder of any Old Notes listed therein, such Old Notes must be
endorsed or accompanied by appropriate bond powers which authorize such person
to tender the Old Notes on behalf of the registered holder, in either case
signed as the name of the registered holder or holders appears on the Old Notes.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
submit evidence satisfactory to the Company of their authority to so act with
the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of the tendered Old Notes will be determined
by the Company in its sole discretion, which determination will be final and
binding. The Company reserves the absolute right to reject any and all Old Notes
not properly tendered or any Old Notes the Company's acceptance of which would,
in the opinion of counsel for the Company, be unlawful. The Company also
reserves the absolute right to waive any irregularities or conditions of tender
as to particular Old Notes. The Company's interpretation of the terms and
conditions of the Exchange Offer (including the instructions in the Letter of
Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Old Notes must be cured
within such time as the Company shall determine. Neither the Company, the
Exchange Agent nor any other person shall be under any duty to give notification
of defects or irregularities with respect to tenders of Old Notes nor shall any
of them incur any liability for failure to give such notification. Tenders of
Old Notes will not be deemed to have been made until such irregularities have
been cured or waived. Any Old Notes received by the Exchange Agent that are not
properly tendered and as to which the defects or irregularities have not been
cured or waived will be returned without cost by the Exchange Agent to the
tendering holder of such Old Notes 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 to (a)
purchase or make offers for any Old Notes that remain outstanding subsequent to
the Expiration Date, or, as set forth under "Termination," to terminate the
Exchange Offer and (b) to the extent permitted by applicable law, purchase Old
Notes in the open market, in privately negotiated transactions or otherwise. The
terms of any such purchases or offers may differ from the terms of the Exchange
Offer.
Guaranteed Delivery Procedures
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available, or (ii) who cannot deliver their Old Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent prior to the
Expiration Date, or if such holder cannot complete the procedure for book-entry
transfer on a timely basis, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of Guaranteed
Delivery (by facsimile transmission, mail or hand delivery) setting forth the
name and address of the holder of the Old Notes, the certificate number or
numbers of such Old Notes and the principal amount of Old Notes tendered,
stating that the tender is being made thereby, and guaranteeing that, within
three business
32
<PAGE>
days after the Expiration Date, the Letter of Transmittal (or facsimile
thereof), together with the certificate(s) representing the Old Notes (unless
the book-entry transfer procedures are to be used) to be tendered in proper form
for transfer and any other documents required by the Letter of Transmittal, will
be deposited by the Eligible Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof), together with the certificate(s) representing all tendered
Old Notes in proper form for transfer (or confirmation of a book-entry transfer
into the Exchange Agent's account at DTC of Old Notes delivered electronically)
and all other documents required by the Letter of Transmittal are received by
the Exchange Agent within three business days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Old Notes according to the guaranteed
delivery procedures set forth above.
Withdrawal of Tenders
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date.
To withdraw a tender of Old Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to 5:00 p.m., New York City time, on
the Expiration Date. Any such notice of withdrawal must (i) specify the name of
the person having deposited the Old Notes to be withdrawn (the "Depositor"),
(ii) identify the Old Notes to be withdrawn (including the certificate number or
numbers and principal amount of such Old Notes), (iii) be signed by the
Depositor in the same manner as the original signature on the Letter of
Transmittal by which such Old Notes were tendered (including any required
signature guarantees) or be accompanied by documents of transfer sufficient to
permit the Trustee with respect to the Old Notes to register the transfer of
such Old Notes into the name of the Depositor withdrawing the tender and (iv)
specify the name in which any such Old Notes are to be registered, if different
from that of the Depositor. All questions as to the validity, form and
eligibility (including time of receipt) of such withdrawal notices will be
determined by the Company, whose determination shall be final and binding on all
parties. Any Old Notes so withdrawn will be deemed not to have been validly
tendered for purposes of the Exchange Offer, and no New Notes will be issued
with respect thereto unless the Old Notes so withdrawn are validly retendered.
Any Old Notes that have been tendered but which are not accepted for exchange
will be returned to the holder thereof without cost to such holder as soon as
practicable after withdrawal, rejection of tender or termination of the Exchange
Offer. Properly withdrawn Old Notes may be retendered by following one of the
procedures described above under "Procedures for Tendering" at any time prior to
the Expiration Date.
Termination
Notwithstanding any other term of the Exchange Offer, the Company will not
be required to accept for exchange, or exchange New Notes for any Old Notes not
theretofore accepted for exchange, and may terminate or amend the Exchange Offer
as provided herein before the acceptance of such Old Notes if: (i) any action or
proceeding is instituted or threatened in any court or by or before any
governmental agency with respect to the Exchange Offer, which, in the Company's
judgment, might materially impair the Company's ability to proceed with the
exchange Offer or (ii) any law, statute, rule or regulation is proposed, adopted
or enacted, or any existing law, statute, rule or regulation is interpreted by
the staff of the Commission in a manner, which, in the Company's judgment, might
materially impair the Company's ability to proceed with the Exchange Offer.
If the Company determines that it may terminate the Exchange Offer, as set
forth above, the Company may (i) refuse to accept any Old Notes and return any
Old Notes that have been tendered to the holders thereof, (ii) extend the
Exchange Offer and retain all Old Notes tendered prior to the expiration of the
Exchange Offer, subject to the rights of such holders of tendered Old Notes to
withdraw their tendered Old Notes, or (iii) waive such termination event with
respect to the Exchange Offer and accept all properly tendered Old Notes that
have not been withdrawn. If such waiver constitutes a material change in the
Exchange Offer, the Company will disclose such change by means of a supplement
33
<PAGE>
to this Prospectus that will be distributed to each registered holder of Old
Notes, and the Company will extend the Exchange Offer for a period of five to
ten business days, depending upon the significance of the waiver and the manner
of disclosure to the registered holders of the Old Notes, if the Exchange Offer
would otherwise expire during such period.
Exchange Agent
The Marine Midland Bank has been appointed as Exchange Agent for the
Exchange Offer. Questions and requests for assistance and requests for
additional copies of this Prospectus or of the Letter of Transmittal should be
directed to the Exchange Agent addressed as follows:
By Mail, By Overnight Courier By Facsimile:
or By Hand: (For Eligible Institutions Only)
Marine Midland Bank (212) 658-2292
140 Broadway, Level A
New York, New York 10005-1180 Confirm by Telephone:
Attention: Corporate Trust Operations (212) 658-5931
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. Additional solicitations may be made by
officers and regular employees of the Company and its affiliates in person, by
telegraph or by telephone.
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 this Prospectus, Letters of Transmittal and related
documents to the beneficial owners of the Old Notes and in handling or
forwarding tenders for exchange.
The expenses to be incurred in connection with the Exchange Offer,
including fees and expenses of the Exchange Agent and Trustee and accounting and
legal fees, will be paid by the Company.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, certificates
representing New Notes or Old Notes not tendered or accepted for exchange are to
be delivered to, or are to be registered or issued in the name of, any person
other than the registered holder of the Old Notes tendered, or if tendered Old
Notes are registered in the name of any person other than the person signing the
Letter of Transmittal, or if a transfer tax is imposed for any reason other than
the exchange of Old Notes pursuant to the Exchange Offer, then the amount of any
such transfer taxes (whether imposed on the registered holder or any other
persons) will be payable by the tendering holder. If satisfactory evidence of
payment of such taxes or exemption therefrom is not submitted with the Letter of
Transmittal, the amount of such transfer taxes will be billed directly to such
tendering holder.
Accounting Treatment
The New Notes will be recorded at the same carrying value as the Old Notes,
which is face value, as reflected in the Company's accounting records on the
date of the exchange. Accordingly, no gain or loss for accounting purposes will
be recognized by the Company upon the consummation of the Exchange Offer. The
expenses of the Exchange Offer will be amortized by the Company over the term of
the New Notes under generally accepted accounting principles.
34
<PAGE>
CAPITALIZATION OF THE COMPANY
The following table sets forth, as of February 28, 1998, the consolidated
capitalization of the Company. This table should be read in conjunction with
"Description of the Notes," "Description of New Credit Facility," "Description
of Holdings Preferred Stock" and the Consolidated Financial Statements and the
notes thereto appearing elsewhere in this Prospectus.
(dollars in
thousands)
-----------
New Credit Facility
Working Capital Facility(1) $ 15,480
Term Loan Facility 98,875
Acquisition Loan 20,000
Senior Subordinated Notes 130,000
Note Payable 2,000
--------
Total Long-Term Debt 266,355
Stockholders' equity (deficit)(2) (26,490)
--------
Total Capitalization $ 239,865
========
(1) The Working Capital Facility provides for borrowing of up to $75.0
million. Giving effect to the Recapitalization, average outstanding
borrowings under the Working Capital Facility would have been $13.5
million during the twelve months ended February 28, 1998. This amount
excludes letters of credit issued to replace outstanding letters of
credit established to facilitate merchandise purchase, which had an
aggregate outstanding balance of $2.3 million as of February 28, 1998.
(2) The following are the components to reconcile the Company's
Stockholders' Equity (Deficit) to historical Holdings' Stockholders'
Equity (Deficit):
February 28, 1998
---------------------------------------------
DESA DESA DESA Holdings
International Holdings Consolidated
------------- ------------ ---------------
(dollars in thousands)
Common Stock $ 10 $ 138 $ 138
Capital in Excess of Par 31,890 85,926 85,926
Carryover Predecessor Adjustment (32,030) (279) (32,309)
Retained Earnings (Deficit) (25,796) (189,802)(3) (215,598)
Cumulative Transaction Adjustment (564) -- (564)
--------- --------- ----------
Stockholders' Equity (Deficit) $ (26,490) $(104,017) $(162,407)
========= ========= ==========
(3) Includes cumulative amortization of goodwill of $138,000 and
organization costs of $891,000 plus dividends of $115,663,000 and
recapitalization consideration of $73,110,000.
35
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA OF HOLDINGS
The following Unaudited Pro Forma Condensed Consolidated Financial Data are
based on the historical audited consolidated financial statements of Holdings
included elsewhere in this Prospectus, adjusted to give effect to the pro forma
adjustments described in the notes thereto. The Unaudited Pro Forma Condensed
Consolidated Statement of Income Data of Holdings for the year ended February
28, 1998 gives effect to the Recapitalization , the acquisition of the
Heath/Zenith business and the acquisition of FMI as if they had occurred on
March 2, 1997. The Unaudited Pro Forma Condensed Consolidated Statements of
Income Data exclude an extraordinary charge of $2,308,000, net of an income tax
benefit of $1,495,000, attributable to the write-off of unamortized deferred
financing costs related to the 1996 Recapitalization . The historical
information utilized for Heath/Zenith is based upon its financial statements for
the twelve months ended December 31, 1997. The historical information utilized
for FMI is based upon financial information for the twelve months ended December
31, 1997.
The pro forma adjustments are based upon available data and certain
assumptions that Holdings believes are reasonable. The Unaudited Pro Forma
Condensed Consolidated Financial Data are not necessarily indicative of
Holdings' financial position or results of operations that might have occurred
had the Recapitalization or the Heath/Zenith acquisition been completed as of
the dates indicated above and do not purport to represent what Holdings'
consolidated financial position or results of operations might be for any future
period or date. The Unaudited Pro Forma Condensed Consolidated Financial Data
should be read in conjunction with the Consolidated Financial Statements of
Holdings and the information contained in "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere in this
Prospectus.
The Recapitalization was accounted for as a recapitalization.
36
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF INCOME DATA
Year Ended February 28, 1998
(in thousands)
Less: Pro Forma
Heath/Zenith Pro Forma Adjustments for
DESA Heath/Zenith February Adjustments for Heath/Zenith
Historical Historical 1998 Recapitalization Acquisition
----------- -------------- ------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Net sales....................................... $ 224,169 $ 58,316 $ 4,818 $ -- $ --
Cost of sales................................... 145,486 45,200 3,110 -- --
---------- ---------- -------- ---------- --------
Gross profit.................................... 78,683 13,116 1,708 -- --
Selling, general, and administrative............ 50,191 8,467 1,138 (700)(1) 694 (8)
(35)(3) (346)(9)
30 (4) (767)(10)
(28)(11)
---------- ---------- -------- ---------- --------
Operating income................................ 28,492 4,649 570 705 447
Interest expense................................ 17,327 794 -- 5,348 (2) 1,490 (7)
---------- ---------- -------- ---------- --------
Income before provision for income taxes........ 11,165 3,855 570 (4,643) (1,043)
Provision for income taxes...................... 5,545 1,000 201 (1,811)(5) (407)(12)
---------- ---------- -------- ---------- --------
Income before extraordinary item................ 5,620 2,855 369 (2,832) (636)
Extraordinary item.............................. 2,308 -- -- -- --
---------- ---------- -------- ---------- --------
Net income...................................... 3,312 2,855 369 (2,832) (636)
Less dividends on preferred stock............... 544 -- -- 1,568 (6) --
---------- ---------- -------- ---------- --------
Income available for common stockholders........ $ 2,768 $ 2,855 $ 369 $ (4,400) $ (636)
========== ========== ======== ========== ========
<CAPTION>
Subtotal Pro Forma Total
Pro Forma Adjustments for Pro Forma
Consolidated FMI FMI Consolidated
Fiscal 1998 Historical Acquisition Fiscal 1998
------------ -------------- --------------- --------------
<S> <C> <C> <C> <C>
Net sales....................................... $ 277,667 $ 28,543 $ -- $ 306,210
Cost of sales................................... 187,576 21,839 -- 209,415
----------- ---------- -------- ----------
Gross profit.................................... 90,091 6,704 -- 96,795
Selling, general, and administrative............ 56,368 5,228 (992)(13) 61,968
(284)(14)
1,083 (16)
84 (17)
481 (18)
----------- ---------- -------- ----------
Operating income................................ 33,723 1,476 (372) 34,827
Interest expense................................ 24,959 34 1,330 (15) 26,323
----------- ---------- -------- ----------
Income before provision for income taxes........ 8,764 1,442 (1,702) 8,504
Provision for income taxes...................... 4,126 300 (664)(19) 3,762
----------- ---------- -------- ----------
Income before extraordinary item................ 4,638 1,142 (1,038) 4,742
Extraordinary item.............................. 2,308 -- -- 2,308
----------- ---------- -------- ----------
Net income...................................... 2,330 1,142 (1,038) 2,434
Less dividends on preferred stock............... 2,112 -- -- 2,112
----------- ---------- -------- ----------
Income available for common stockholders........ $ 218 $ 1,142 $ (1,038) $ 322
=========== ========== ======== ==========
See Notes to Unaudited Pro Forma Condensed Consolidated Statement of Income Data
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF INCOME DATA
(In thousands)
Fiscal Year
Ended February
28, 1998
--------------
<S> <C>
Pro Forma Adjustments:
Recapitalization
(1) To eliminate historical payments made under existing management
bonus plan and to reflect payments under the management bonus plan
adopted in connection with the Recapitalization, as follows: $ 500
Management incentive compensation plan adopted by the Company
Less: Existing management incentive compensation plan (1,200)
--------
Pro forma adjustment (700)
(2) The pro forma adjustment to interest expense for the
Recapitalization reflects the following:
Interest expense related to new debt:
Working Capital Facility 526
New Term Loans 6,226
New Senior Subordinated Notes 9,627
Commitment Fee: Line of Credit 180
Other interest and bank charges 110
--------
Subtotal 16,669
Less: Interest expense relating to existing credit facility (11,321)
--------
Pro forma adjustment 5,348
(3) To eliminate historical management fees and related expenses and
to reflect management fees to be paid subsequent to the
Recapitalization, as follows:
Management fee subsequent to the Recapitalization 180
Less: Historical management fee (215)
--------
Pro forma adjustment (35)
(4) To eliminate amortization of historical deferred financing costs and
to reflect amortization of deferred financing costs incurred in
connection with the Recapitalization:
Amortization of deferred financing costs incurred in connection
with the Recapitalization 762
Less: Amortization of historical deferred financing costs (732)
--------
Pro forma adjustment 30
38
<PAGE>
<CAPTION>
Fiscal Year
Ended February
28, 1998
--------------
<S> <C>
(5) To record the income tax benefit related to pro forma adjustments
computed using an effective tax rate of 39% for the
Recapitalization. (1,811)
(6) To record preferred dividend on Series C Redeemable Preferred
Stock 2,112
Less historical dividend recorded (544)
--------
Pro forma adjustment 1,568
--------
Total pro forma adjustments for Recapitalization $ 4,400
========
Heath/Zenith Acquisition
(7) The pro forma adjustment to interest expense reflects the following:
Interest related to new debt
Working capital advance $ 676
Acquisition advance 1,696
Note payable 150
--------
Subtotal 2,522
Less: Interest expense related to Heath/Zenith debt (794)
--------
Pro forma adjustment 1,728
Less: Interest included in fiscal 1998 balance (238)
--------
Pro forma adjustment 1,490
(8) To eliminate amortization of historical goodwill and to reflect
amortization over 40 years of goodwill incurred in connection with
the Heath/Zenith acquisition:
Amortization of goodwill incurred in connection with the
acquisition 594
Less: amortization of historical negative goodwill 149
--------
743
Less: amortization of goodwill incurred in connection with
acquisition included in fiscal 1998 balance (49)
--------
Pro forma adjustment 694
(9) To eliminate historical management fees and related expenses and
to reflect management fees to be paid subsequent to the
Heath/Zenith acquisition, as follows:
Management fee subsequent to acquisition --
Less: Historical management fee (346)
--------
Pro forma adjustment (346)
39
<PAGE>
<CAPTION>
Fiscal Year
Ended February
28, 1998
--------------
<S> <C>
(10) To reflect savings from reduction of salaries and fringe benefits
of Heath/Zenith employees who did not become employees of (767)
(11) To eliminate depreciation recorded in SG&A expenses related to
real estate not acquired in the Heath/Zenith acquisition (28)
(12) Tax effect of pro forma adjustments for Heath/Zenith at 39% (407)
--------
Total pro forma adjustments for Heath/Zenith acquisition $ 636
========
FMI Acquisition
(13) To reflect savings associated with the change to the profit sharing
plan and elimination of expenses associated with a material patent
litigation in which a summary judgment in FMI's favor was obtained
prior to the Company's agreement to acquire FMI
Profit sharing reduction $ (542)
Litigation expense (450)
--------
(992)
(14) To eliminate historical FMI expenses that will not be incurred in
the future
Former officers' life insurance premium (14)
Expense of being a separate public company (50)
Salaries and fringe benefits of officers (220)
--------
Pro forma adjustment (284)
(15) Adjustment to interest expense for the acquisition of FMI
Acquisition B Facility 1,696
Less: Interest expense related to partial repayment of Working
Capital Facility (332)
Less: Interest expense related to FMI debt (34)
--------
Pro forma adjustment 1,330
(16) Amortization of non-compete agreements 1,083
(17) Amortization of Acquisition B Facility loan acquisition fees 84
(18) Amortization of goodwill 481
(19) Tax effect of pro forma adjustments for FMI at 39% (664)
--------
Total pro forma adjustments for FMI acquisition $1,038
========
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED BALANCE SHEET
(in thousands)
As of February 28, 1998
-----------------------------------------------------------------
DESA FMI Pro Forma Pro Forma
Historical(a) Historical(b) Adjustments Holdings
------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents............... $ 794 $ 336 $ (62)(5) $ 1,068
Accounts receivable (net)............... 20,838 1,850 (100)(1) 22,588
Inventories............................. 40,356 1,893 (100)(1) 42,149
Other current assets.................... 5,170 520 -- 5,690
---------- -------- --------- ------------
Total current assets...................... 67,158 4,599 (262) 71,495
Fixed assets (net)........................ 13,559 1,501 -- 15,060
Goodwill.................................. 63,430 -- 19,236(3) 82,666
Other assets.............................. 11,489 202 200(1) 15,583
442(2)
3,250(3)
---------- -------- --------- ------------
Total assets.............................. $ 155,636 $ 6,302 $ 22,866 $ 184,804
========== ======== ========= ============
Liabilities and stockholders' equity (deficit)
Current liabilities:
Accounts payable........................ $ 15,035 $ 1,414 $ -- $ 16,449
Accrued liabilities..................... 19,729 1,556 300 (1) 21,585
Income taxes payable.................... 49 -- -- 49
Current portion of long-term debt....... 5,250 25 (25)(5) 5,250
---------- -------- --------- ------------
Total current liabilities................. 40,063 2,995 275 43,333
Long-term debt............................ 261,105 37 20,000 (2) 276,960
(4,145)(2)
(37)(5)
Deferred tax liabilities.................. 1,781 281 -- 2,062
Other liabilities......................... 433 -- -- 433
---------- -------- --------- ------------
Total liabilities......................... 303,382 3,313 16,093 322,788
Preferred stock........................... 14,661 14,661
Stockholders' equity (deficit)............ (162,407) 2,989 (300)(1) (152,645)
9,762 (2)
(2,689)(4)
---------- -------- --------- ------------
Total liabilities and stockholders' equity
(deficit)............................... $ 155,636 $ 6,302 $ 22,866 $ 184,804
========== ======== ========= ============
<FN>
(a) Represents DESA Holdings at February 28, 1998
(b) Represents FMI at December 31, 1997
</FN>
</TABLE>
See Notes to Unaudited Pro Forma Condensed Consolidated Balance Sheet
41
<PAGE>
<TABLE>
<CAPTION>
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED BALANCE SHEET
<S> <C>
Pro Forma Adjustments:
(1) To record additional balance sheet reserves
Accounts receivable $ (100)
Inventory (10)
Accrued liabilities (30)
Tax effect at 39% 200
---------
Pro forma adjustment $ (300)
=========
(2) To reflect the sources and uses of cash and cash equivalents used to
finance the FMI acquisition, as follows:
Sources:
New Credit Facility - Portion of Acquisition B Facility
allocated to FMI acquisition $ 20,000
Sale of equity securities 9,762
---------
$ 29,762
=========
Uses:
Purchase of FMI $ 25,113
Partial repayment of Working Capital Facility 4,145
Financing costs 442
Repayment of FMI long-term debt 62
---------
$ 29,762
=========
(3) To record adjustments to historical FMI amounts
Goodwill $ 19,236
Non-compete agreements 3,250
(4) To eliminate historical FMI stockholders' equity $ (2,689)
(5) To record the repayment of FMI debt not to be assumed by the
Company
Cash $ (62)
Current portion of long-term debt 25
Long-term debt 37
---------
Pro forma adjustment $ --
=========
</TABLE>
42
<PAGE>
SELECTED FINANCIAL DATA
Set forth below are selected historical consolidated financial data and
other historical consolidated operating data of Holdings. The summary historical
consolidated Statements of Operating Data and Balance Sheet Data below for each
of the years in the three year period ended February 28, 1998 and as of March 1,
1997 and February 28, 1998 have been derived from the audited consolidated
financial statements of Holdings which have been audited by Ernst & Young LLP,
independent auditors, and are included elsewhere in this Prospectus. The summary
historical consolidated Statement of Operating Data and Balance Sheet Data at
and for the year ended February 25, 1995 have been derived from the audited
consolidated financial statements of Holdings which have also been audited by
Ernst & Young LLP, but which are not included elsewhere herein. The summary
historical consolidated Statement of Operating Data below for the year ended
February 26, 1994 is presented as the consolidated income statement data of
Holdings from its date of incorporation, December 1, 1993, through February 26,
1994 and the income statement data of the Company from February 28, 1993 through
November 30, 1993, which statements for the three and nine month periods have
also been audited by Ernst & Young LLP but which are not included elsewhere
herein. The summary historical consolidated Balance Sheet Data at February 26,
1994 has been derived from the audited consolidated balance sheet of Holdings
which has also been audited by Ernst & Young LLP, but which is not included
elsewhere herein. The information presented below is qualified in its entirety
by, and should be read in conjunction with "Capitalization," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and notes thereto included elsewhere in
this Prospectus.
43
<PAGE>
<TABLE>
<CAPTION>
Predecessor | Successor
------------- | ----------------------------------------------------
| Fiscal Year
| ----------------------------------------
| Three
Nine Months | Months
Ended | Ended
November 30, | February 26,
1993 (1) | 1994(1) 1995 1996(1)(2) 1997 1998(1)(9)
------------ | ---------- ------- ---------- -------- -----------
(in thousands, except ratios)
Statement of Operating Data: |
<S> <C> <C> <C> <C> <C> <C>
Net sales(3) $ 93,349 | $ 29,428 $ 172,501 $ 186,324 $ 209,105 $ 224,169
Cost of sales 60,860 | 19,584 107,484 116,217 130,890 145,486
--------- | -------- -------- -------- -------- --------
Gross profit 32,489 | 9,844 65,017 70,107 78,215 78,683
Selling and administrative |
expenses 19,301 | 7,582 35,975 37,828 45,257 50,191
--------- | -------- -------- -------- -------- --------
Operating profit 13,188 | 2,262 29,042 32,279 32,958 28,492
Interest expense 2,893 | 1,455 5,777 7,073 14,509 17,327
--------- | -------- -------- -------- -------- --------
Income before income taxes 10,295 | 807 23,265 25,206 18,449 11,165
Income taxes 4,356 | 346 10,064 10,703 7,733 5,545
--------- | -------- -------- -------- -------- --------
Income before extraordinary |
item 5,939 | 461 13,201 14,503 10,716 5,620
Extraordinary item(4) 4,150 | 238 -- 2,638 -- 2,308
--------- | -------- -------- -------- -------- --------
Net income 1,789 | 223 13,201 11,865 10,716 3,312
Less dividends on preferred |
stock 211 | -- 900 853 -- 544
--------- | -------- -------- -------- -------- --------
Net income available for |
common stockholders $ 1,578 | $ 223 $ 12,301 $ 11,012 $ 10,716 $ 2,768
========= | ======== ======== ======== ======== =========
Ratio of earnings to fixed |
charges(5) 4.2x| 1.5x 4.4x 4.0x 2.2x 1.6x
Other Data: |
EBITDA (6) $ 14,998 | $ 3,176 $ 33,156 $ 36,574 $ 37,494 $ 33,204
EBITDA margin(7) 16.1%| 10.8% 19.2% 19.6% 17.9% 14.8%
Capital expenditures $ 964 | $ 456 $ 1,499 $ 2,122 $ 2,770 $ 5,475
Depreciation 1,548 | 391 2,148 2,332 2,432 2,456
Amortization 262 | 523 1,966 1,963 2,104 2,256
Net cash provided by (used |
in) operating activites (4,258)| 16,150 18,337 19,375 18,398 1,146
Net cash (used |
in) investing activites (964)| (456) (2,176) (2,060) (2,882) (45,980)
Net cash provided by (used |
in) financing activities 5,320 | (14,186) (1,651) (17,989) (10,599) 40,590
Balance Sheet Data (at period end): |
Cash and cash equivalents | $ 1,597 $ 16,170 $ 145 $ 5,058 $ 794
Working capital (deficit)(8) | 6,680 9,738 (1,194) (8,566) 27,095
Total assets | 84,055 107,259 85,545 91,984 155,636
Long-term debt (less current |
portion) | 62,000 49,700 149,709 130,600 261,105
Stockholders' equity (deficit) | 2,279 16,194 (95,402) (84,754) (162,407)
<FN>
- ----------
(1) Holdings was party to recapitalizations in November 1993, January 1996 and November 1997 which impacted interest expense,
stockholders' equity (deficit) and long term debt.
(2) 53-week fiscal year.
(3) Net sales constitute gross sales net of an accrual for returns and allowances and cash discounts.
(4) Extraordinary items relate to the write-off of unamortized deferred financing costs at the time the Company refinanced its
existing debt obligations and other expenditures related to the recapitalization transactions in fiscal year 1994, 1996 and
1998.
(5) For purposes of computing this ratio, earnings consist of income before income taxes plus fixed charges. Fixed charges consist
of interest expense, amortization of deferred financing cost and 33% of rent expense from operating leases which the Company
believes is a reasonable approximation of the interest factor included in the rent.
44
<PAGE>
(6) EBITDA is defined as income before taxes plus interest expense and depreciation as well as amortization of intangibles and
deferred charges. EBITDA is presented because it is a widely accepted financial indicator of a leveraged company's ability to
service and/or incur indebtedness and because management believes that EBITDA is a relevant measure of the Company's ability to
generate cash without regard to the Company's capital structure or working capital needs. However, EBITDA should not be
considered as an alternative to net income as a measure of a company's operating results or to cash flows from operating
activities as a measure of liquidity. EBITDA as presented may not be comparable to similarly titled measures used by other
companies, depending upon the non-cash charges included. When evaluating EBITDA, investors should also consider other factors
which may influence operating and investing activities, such as changes in operating assets and liabilities and purchases of
property and equipment.
(7) EBITDA margin is defined as EBITDA divided by net sales.
(8) The Company's business is subject to a pattern of seasonal fluctuation. As such, the Company's needs for working capital tend
to peak in the second and third fiscal quarters.
(9) Includes Heath/Zenith data for the period from February 4, 1998 (date of acquisition) to February 28, 1998.
</FN>
</TABLE>
45
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
The following discussion should be read in conjunction with "Selected
Financial Data" and the audited Consolidated Financial Statements of Holdings
and the notes thereto included elsewhere in this Prospectus.
The Company is organized into two primary product categories: (a) Zone
Heating Products (77% of fiscal 1998 net sales), which includes indoor room
heaters, hearth products and outdoor heaters, and (b) Specialty Products (23% of
fiscal 1998 net sales), which includes powder actuated fastening systems (tools
and accessories) , electrical products and home security products. The Company
records sales upon shipment of products to its customers. Net sales constitute
gross sales net of an accrual for returns and allowances and cash discounts.
The Company has experienced strong historical growth, with net sales and
EBITDA increasing at CAGRs of 18% and 23%, respectively, from fiscal 1993 to
fiscal 1998. In addition, the Company's operating profit and cash flows provided
by (used in) operating, financing and investing activities increased from
$9,490, $4,365, ($2,116) and ($2,170), respectively, in 1993 to $28,492, $1,146,
$40,590, ($45,980), respectively, in 1998. The Company's growth has been driven
by strong performance across all product categories from both new product
introductions and internally generated growth. The Company has made three
acquisitions from fiscal 1993 to fiscal 1998. Since fiscal 1993, new product
introductions have generated approximately 72% of the Company's sales growth.
The Company focuses on its new product development efforts on products that (i)
are complementary to its current product offerings or that utilize the Company's
established technologies, and (ii) can be sold through the Company's
well-established distribution channels. The Company's strategy is to introduce
its new hearth products in the specialty heating channel (i.e., liquid propane
distributors and natural gas utilities) and then expand the distribution to the
consumer channel (i.e., home centers and mass merchandisers). As part of this
strategy, the Company began selling its line of vent-free fireplace products,
introduced to the specialty heating channel in fiscal 1995, to Lowe's in fiscal
1997 and to Home Depot in fiscal 1998.
Zone heating product revenues have been driven by factors such as (i) the
effectiveness of zone heating products for area heating, (ii) the increased
availability of these products as a result of the growth in home improvement
retailers, (iii) the cost efficiency of natural gas and propane as heating
fuels, (iv) favorable regulatory trends and (v) seasonal weather conditions.
Specialty tools revenues have been driven by demand of DIY consumers and
commercial contractors.
In fiscal 1998, approximately $20.8 million or 9% of DESA's net sales were
generated outside the U.S. DESA adapts its domestic product line to accommodate
local requirements, government regulations and user preferences in each
international market.
Principally due to sales of zone heating products, DESA's business is
seasonal, as depicted by the following table which sets forth certain operating
results of DESA for each of the four consecutive fiscal quarters in the periods
ending February 28, 1998 and March 1, 1997 (dollars in thousands):
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ----
Fiscal 1998
Total Net Sales $ 24,754 $ 65,635 $ 103,015 $ 30,765 $ 224,169
Operating Profit 72 12,157 20,375 (4,112) 28,492
Fiscal 1997
Total Net Sales $ 24,267 $ 60,021 $ 89,299 $ 35,518 $ 209,105
Operating Profit 319 12,220 18,546 1,873 32,958
46
<PAGE>
Approximately 75% of annual sales occur in the second and third fiscal
quarters (June-November) as the Company's zone heating customers place early
booking orders for shipment in anticipation of the winter selling season.
Approximately 60% of the Company's annual sales volume are booked in the
five-month period of March through July.
DESA has not historically been capital intensive. The Company has focused
on investing in programs which either reduce operating costs or facilitate new
product development. The Company has a long-standing cost reduction program and
has exceeded its annual cost reduction goal of 3% of cost of sales in each of
the last three fiscal years. Historically, the Company's cost reduction efforts
have been focused on indoor vent-free heaters and outdoor heaters. In fiscal
1998, the Company's cost reduction efforts are focused on some of its newer
products, such as vent-free hearth products.
<TABLE>
<CAPTION>
Historical Capital Expenditures
(dollars in thousands)
Fiscal Year
-------------------------------------------------------------------------
1993 1994 1995 1996 1997 1998
---------- ---------- -------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Replacement Expenditures, Cost Reduction Programs,
New Products and Capacity...................... $ 1,132 $ 1,420 $ 1,499 $ 2,122 $ 2,770 $ 4,402
Acquisitions/Buildings/Other..................... 523(1) -- 664(2) -- -- 1,073(3)
---------- ---------- ---------- ---------- -------- ---------
Total Capital Expenditures....................... $ 1,655 $ 1,420 $ 2,163 $ 2,122 $ 2,770 $ 5,475
========== ========== ========= ========== ======== =========
- ----------
<FN>
(1) Bowling Green, Kentucky office building expansion to replace leased offices
(2) Acquisition of an outdoor heater product line
(3) Bowling Green, Kentucky engineering lab/office building.
</FN>
</TABLE>
Results of Operations
The following table sets forth certain income statement information for
Holdings for the fiscal years ended March 2, 1996 and March 1, 1997 and February
28, 1998.
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------------------------------------------------
Percentage Percentage Percentage
of of of
1996 Net Sales 1997 Net Sales 1998 Net Sales
--------- --------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net sales........................... $186,324 100.0% $209,105 100.0% $224,169 100.0%
Cost of sales....................... 116,217 62.4% 130,890 62.6% 145,486 64.9%
-------- -------- -------- -------- -------- ---------
Gross profit........................ 70,107 37.6% 78,215 37.4% 78,683 35.1%
Selling and administrative expenses 37,828 20.3% 45,257 21.6% 50,191 22.4%
-------- -------- -------- -------- -------- ---------
Operating profit.................... 32,279 17.3% 32,958 15.8% 28,492 12.7%
Interest expense.................... 7,073 3.8% 14,509 6.9% 17,327 7.7%
-------- -------- -------- -------- -------- ---------
Income before provision for taxes... 25,206 13.5% 18,449 8.9% 11,165 5.0%
Provision for income taxes.......... 10,703 5.7% 7,733 3.7% 5,545 2.5%
-------- -------- -------- -------- -------- ---------
Income before extraordinary item.... 14,503 7.8% 10,716 5.2% 5,620 2.5%
Extraordinary item.................. 2,638 1.4% -- 0.0% 2,308 1.0%
-------- -------- -------- -------- -------- ---------
Net income.......................... $ 11,865 6.4% $ 10,716 5.2% $ 3,312 1.5%
======== ======== ======== ======== ======== =========
</TABLE>
47
<PAGE>
Year Ended February 28, 1998 Compared to the Year Ended March 1, 1997.
Net Sales. Net sales increased 7.2% from $209.1 million for the year ended
March 1, 1997 to $224.2 million for the year ended February 28, 1998. Indoor
heating and hearth product sales increased 26.4% from $76.3 million to $96.5
million as a result of higher hearth product sales due to increased market
penetration and the introduction of new products including the Compact
Fireplace, Logmate and Fireplace Stove. Outdoor heating product sales decreased
by 18% from $91.3 million to $77.3 million due to the extremely warm 1997/1998
winter. Specialty product sales increased 21.5% from $41.5 million to $50.4
million due primarily to the acquisition of the Heath/Zenith business and the
continued growth in the consumer channel for powder actuated tools and electric
chain saws.
Cost of Sales. Cost of sales increased 11.2% from $130.9 million in fiscal
year 1997 to $145.5 million in fiscal year 1998. The increase was driven
primarily by sales growth of 7.2% for the same period. Gross profit margin, as a
percentage of sales, declined from 37.4% to 35.1%. Gross margins were negatively
affected by a shift in product mix , competitive pricing pressures, and less
favorable manufacturing variances partially offset by cost reductions and margin
improvements resulting from sales growth.
Selling and Administrative Expenses. Selling and administrative expenses
increased 10.9% from $45.3 million in fiscal year 1997 to $50.2 million in
fiscal year 1998. The increase is primarily a result of sales growth of 7.2%.
Selling and administrative expenses increased as a percentage of sales from
21.6% in fiscal 1997 to 22.4% in fiscal 1998 due to key account volume rebates
and increased freight expenses to improve customer services levels.
Operating Profit. Operating profit decreased by 13.6% from $33.0 million in
fiscal 1997 to $28.5 million in fiscal 1998 due to the factors mentioned above.
Interest Expense. Interest expense increased 19.4% from $14.5 million in
fiscal 1997 to $17.3 million in fiscal 1998. The higher interest expense relates
to the increased borrowings associated with the Recapitalization in November
1997.
Income Taxes. Income taxes decreased by 28.3% from $7.7 million in fiscal
1997 to $5.5 million in fiscal 1998, primarily as the result of the decrease in
operating profit and the increase in interest expense discussed above. The
overall effective income tax rate increased from 42% in fiscal 1997 to 50% in
fiscal 1998, primarily due to the mix of domestic and foreign income and higher
state taxes.
Net Income. Net income decreased 69.1% from $10.7 million in fiscal 1997 to
$3.3 million in fiscal 1998. The reduction reflects the extraordinary item
associated with the Recapitalization in November, 1997.
Year Ended March 1, 1997 (52 weeks) Compared to the Year Ended March 2, 1996 (53
weeks)
Net sales. Net sales increased 12.2% from $186.3 million for the year ended
March 2, 1996 to $209.1 million for the year ended March 1, 1997. Indoor heating
and hearth product sales increased 10.1% from $69.3 million to $76.3 million
driven by higher hearth product sales due primarily to increased penetration of
the consumer channel. Outdoor heating product sales increased 16.3% from $78.5
million to $91.3 million due to an increase in promotion, expansion in the
hardware/home center channel and higher sales resulting from the colder
1996/1997 winter weather in Europe. Specialty product sales increased 7.7% from
$38.5 million to $41.5 million due primarily to continued growth in the consumer
channel for powder actuated tools and related accessories and the expansion of
one of the Company's chain saw models to a major customer which replaced a
competitive product.
Cost of Sales. Cost of sales increased 12.7% from $116.2 million in fiscal
year 1996 to $130.9 million in fiscal year 1997. The increase was primarily due
to sales growth of 12.2% for the same period. As a percentage of sales, gross
profit margin decreased slightly from 37.6% to 37.4%. Gross margins were
negatively affected by a shift in product mix which was partially offset by cost
reductions and margin improvements realized as a result of increased production
volume resulting from sales growth.
48
<PAGE>
Selling and Administrative Expenses. Selling and administrative expenses
increased 19.6% from $37.8 million in fiscal year 1996 to $45.3 million in
fiscal year 1997 due primarily to the sales growth of 12.2% for the same period.
Selling and administrative expenses increased as a percentage of sales from
20.3% in fiscal 1996 to 21.6% in fiscal 1997 due to a consumer advertising
program, key account volume rebate program, warranty expense and executive
recruiting expenses.
Operating Profit. Operating profit increased 2.1% from $32.3 million in
fiscal 1996 to $33.0 million in fiscal 1997 due to the factors mentioned above.
Interest Expense. Interest expense increased 104.2% from $7.1 million in
fiscal year 1996 to $14.5 million in fiscal year 1997. The higher interest
expense relates to the increased borrowings associated with the recapitalization
of Holdings in January 1996.
Income Taxes. Income taxes (exclusive of extraordinary item) decreased by
28.0% from $10.7 million in fiscal 1996 to $7.7 million in fiscal year 1997. The
overall effective income tax rate is 42% for both periods.
Net Income. Net income decreased 10.1% from $11.9 million in fiscal year
1996 to $10.7 million in fiscal year 1997. This reduction reflected the higher
interest expense incurred during fiscal 1997. Fiscal 1996 performance was
adversely affected by the write-off of unamortized balance of deferred financing
costs of existing debt in connection with the recapitalization of Holdings in
January 1996.
Liquidity and Capital Resources
The Company's primary cash needs have been for working capital, capital
expenditures and debt service requirements. The Company's sources of liquidity
have been cash flows from operations and borrowings under its credit facilities.
The Company's business is subject to a pattern of seasonal fluctuation. The
Company's needs for working capital and the corresponding debt levels tend to
peak in the second and third fiscal quarters. The amount of sales generated
during the second and third fiscal quarters generally depends upon a number of
factors, including the level of retail sales for heating products during the
fall and winter, weather conditions affecting the level of sales of heating
products, general economic conditions, and other factors beyond the Company's
control.
Cash provided by operating activities for fiscal 1998 was $1.1 million
compared to $18.4 million for fiscal 1997, a decrease of $17.3 million.
Inventories as of February 28, 1998 were $24.6 million higher than the amount at
March 1, 1997, to support higher sales and production activities. The increase
in accounts receivable from $13.1 million at March 1, 1997 to $20.8 million at
February 28, 1998 is attributable to receivables acquired in the Heath/Zenith
acquisition. Net cash provided by operating activities was $1.1 million, $18.4
million and $19.4 million for fiscal years 1998, 1997 and 1996, respectively.
Net cash used in investing activities increased from $2.9 million for
fiscal 1997 to $46.0 million for fiscal 1998. These expenditures consisted
primarily of $40.3 million for the acquisition of Heath/Zenith, $1.7 million for
a new paint system and fabrication equipment at the Company's Shelbyville,
Tennessee plant to support growth of hearth products and $1.1 million to expand
the engineering lab and offices at the Company's main facilities in Bowling
Green, Kentucky.
Net cash (used in) provided by financing activities increased 483% from
$10.6 million used in fiscal 1997 to $40.6 million provided in fiscal 1998 due
primarily to the refinancing and recapitalization in November 1997. Net cash
used in financing activities totaled $33.3 million and $18.0 million in fiscal
years 1997 and 1996, respectively.
Concurrently with the Recapitalization, the Company issued the Old Notes
for $130.0 million in gross proceeds, and entered into the Term Loan Facility
and the Working Capital Facility. The Term Loan Facility is comprised of two
tranches, each in the aggregate principal amount of $50.0 million. The Working
Capital Facility provides revolving loans in an aggregate amount of up to $75.0
million. Upon closing of the Recapitalization, the Company borrowed the
49
<PAGE>
full amount available under the Term Loan Facility and $35.5 million under the
Working Capital Facility. Borrowings under the Working Capital Facility were
used partially to refinance seasonal borrowings outstanding under the Company's
existing credit facility. The amount remaining available under the Working
Capital Facility is available to fund the working capital requirements of the
Company. Proceeds to the Company from the issuance of the Old Notes and from
initial borrowings under the New Credit Facility, less the repayment of the
existing credit facility and other indebtedness, and transaction expenses, were
remitted to Holdings to partially finance the Recapitalization and the fees and
expenses of Holdings incurred in connection therewith. To provide additional
financing to fund the Recapitalization, Holdings raised (i) $73.8 million
through the sale to Childs and the other Equity Investors of Holdings Common
Stock (representing 89.6% of the outstanding shares upon completion of the
Recapitalization), (ii) $14.6 million through the issuance to Childs and the
other Equity Investors of the Holdings Preferred Stock, (iii) $3.0 million
through the issuance of 463,232 Warrants to purchase Holdings Nonvoting Common
Stock at an exercise price of $.01 per share and (iv) $8.6 million through the
sale to Existing Stockholders of Holdings Common Stock (representing 10.4% of
the outstanding shares upon completion of the Recapitalization).
The proceeds of the Old Notes, the Holdings Preferred Stock, the Holdings
Warrant, the Holdings Common Stock and the initial borrowings under the New
Credit Facility were used to finance the purchase of all previously outstanding
shares of Holdings' capital stock, to refinance outstanding indebtedness of the
Company and to pay fees and expenses incurred in connection with the
Recapitalization.
Borrowings under the New Credit Facility bear interest at a rate per annum
equal (at the Company's option) to a margin over either a base rate or LIBOR.
The Working Capital Facility will mature six years after the closing date. The
two tranches of the Term Loan Facility will be amortized over a six-year and a
seven-year period, respectively. The Company's obligations under the New Credit
Facility are guaranteed by Holdings and each of the Company's direct and
indirect domestic subsidiaries. The New Credit Facility and the guarantees
thereof are secured by substantially all assets of Holdings (including the
capital stock of the Company) and its direct and indirect domestic subsidiaries
and a pledge of the capital stock of all the Company's direct and indirect
subsidiaries, subject to certain limitations with respect to foreign
subsidiaries. The New Credit Facility contains customary covenants and events of
default, including substantial restrictions on the Company's ability to make
dividends or distributions to Holdings. See "Description of New Credit
Facility." Based on the Company's capital and loan structure upon completion of
the Recapitalization, the Company's average monthly revolver balance will be
approximately $15 million, with peak borrowings of approximately $40.0 to $45.0
million from August through October. As of February 28, 1998, letters of credit
of $2.3 million are outstanding under the Working Capital Facility.
The Holdings Preferred Stock bears cumulative dividends at the rate of 12%
per annum (payable semi-annually). Dividends will compound to the extent not
paid. Subject to restrictions imposed by the Indenture, the New Credit Facility
and other documents relating to Holdings' or the Company's indebtedness,
Holdings may exchange the Holdings Preferred Stock for Exchange Notes having
substantially the same terms as the Holdings Preferred Stock. The Indenture
permits Holdings, under certain circumstances, to exchange all outstanding
Holdings Preferred Stock for Exchange Notes in an aggregate principal amount
equal to the aggregate liquidation preference of the Holdings Preferred Stock so
exchanged. The Exchange Notes will require Holdings to make semi-annual interest
payments thereon at a rate of 12% per annum. Subject to compliance with the debt
agreements of Holdings and the Company, such payments must be in cash. The
Indenture restricts, but does not prohibit, the Company from making such cash
interest payments. Under the Exchange Notes, Holdings may defer the payment of
interest payable on or before November 30, 2001, with any such deferred interest
bearing interest at 12% per annum, compounded semi-annually. Holdings will be
required to make a catch-up payment immediately prior to the first interest
payment date after the fifth anniversary of the date of issuance to the extent
the aggregate amount of such deferred interest exceeds an amount equal to one
year's interest on the originally issued Exchange Notes. The Indenture
restricts, but does not prohibit, the ability of Holdings to make such catch-up
payment. See "Description of the Notes -- Certain Covenants -- Restricted
Payments" and "Description of Holdings Preferred Stock -- Exchange Notes". See
"Description of Holdings Preferred Stock."
The acquisition of Heath/Zenith, consummated in February 1998, was financed
with the proceeds of the $20 million Acquisition Facility included in the New
Credit Facility and with $7.0 million in additional equity contributed to the
50
<PAGE>
Company by Holdings. The Company has entered into agreements to acquire FMI and
UHI. The Company expects to finance these acquisitions with the proceeds of the
$30 million Acquisition B Facility which has been added to the New Credit
Facility and additional equity to be contributed to the Company by Holdings. See
"Description of New Credit Facility."
Management believes that cash flow from operations and availability under
the Revolving Credit Facility will provide adequate funds for the Company's
foreseeable working capital needs, planned capital expenditures and debt service
obligations. The Company's ability to fund its operations and make planned
capital expenditures, to make scheduled debt payments, to refinance indebtedness
and to remain in compliance with all of the financial covenants under its debt
agreements depends on its future operating performance and cash flow, which in
turn, are subject to prevailing economic conditions and to financial, business
and other factors, some of which are beyond its control. See "Risk Factors."
51
<PAGE>
BUSINESS
DESA is a leading manufacturer and marketer of zone heating/home comfort
products and specialty products in the United States. Through its ability to
consistently offer consumers quality products with innovative features at
attractive price points, the Company has developed leading market positions in
(i) vent-free indoor heaters, (ii) vent-free hearth products, (iii) outdoor
heaters, (iv) consumer powder-actuated fastening systems and (v) electric chain
saws. In fiscal 1998, approximately 91% of the Company's sales were generated in
the United States and 9% were generated in international markets. Over 85% of
the domestic sales were in product categories where DESA is the market leader.
The Company has grown rapidly with sales increasing from $98.7 million in fiscal
1993 to $224.2 million in fiscal 1998, representing a CAGR of 18%. The Company's
EBITDA increased from $11.8 million, or 11.9% of sales, in fiscal 1993, to $33.2
million, or 14.8% of sales, in fiscal 1998, representing a CAGR of 23%. In
addition, the Company's operating profit and cash flows provided by (used in)
operating, financing and investing activities increased from $9,490, $4,365,
($2,116) and ($2,170), respectively, in 1993 to $28,492, $1,146, $40,590 and
($45,980), respectively, in 1998. For the twelve months ended February 28, 1998,
the Company had sales of $224.2 million and EBITDA of $33.2 million.
The Company sells its products through multiple consumer and commercial
channels of distribution including the leading home centers, mass merchants,
warehouse clubs, hardware cooperatives, specialty heating distributors,
construction and industrial equipment dealers, farm supply outlets and natural
gas utilities under brand names well recognized by its customers. The Company's
strategy is to aggressively target the fastest growing retailers/distributors in
each channel and service these customers through a multi-brand approach to
capture the largest possible share of a given product market. In addition, the
Company has an established record of success in new product development and
product line extensions. Over the last five years, DESA has introduced over 100
new products and line extensions which generated approximately 72% of the
Company's sales growth over that time period.
Zone Heating Products (77% of Fiscal 1998 Net Sales)
The zone heating market is comprised of indoor gas heaters, hearth products
(gas logs, fireplaces and stoves) and outdoor heaters. DESA is a leading
manufacturer of vent-free indoor and outdoor zone heating products in the United
States. DESA's domestic zone heating business has experienced a CAGR of over 22%
with gross revenues increasing from $64.0 million in fiscal 1993 to $173.8
million in fiscal 1998. DESA markets its zone heating products under well-known
brand names such as Reddy(R), Vanguard(R) and Comfort Glow(R). The Company's
zone heating business is organized into two primary product categories:
o Indoor vent-free heating appliances and hearth products (43% of Fiscal 1998
Net Sales): Indoor heating appliances include vent-free liquid propane and
natural gas space heaters which provide economical supplemental heat to a
specific area as distinguished from central heating systems which are used to
heat entire buildings. Vent-free hearth products such as gas logs, fireplaces
and stoves are utilized for both decorative and economic heating. Vent- free
products utilize a more efficient burner system which avoids the need for
outside venting, whereas vented products require a discharging of emissions
outside of the building.
o Outdoor heating appliances (34% of Fiscal 1998 Net Sales): Outdoor heating
products consist of portable units which generate heat by either using a fan
to discharge heated air to a specific area (forced air heaters) or emitting
heat throughout the surrounding area without the assistance of a fan
(convection heaters). Forced air heaters are fueled by kerosene, propane or
natural gas, while convection heaters are fueled only with propane or natural
gas. Outdoor heaters are used in both residential and commercial
applications. Residential applications include heating otherwise unheated
garages and workshops. Commercial applications include heating factories,
warehouses, construction sites and agricultural areas.
Specialty Products (23% of Fiscal 1998 Net Sales)
DESA's domestic specialty products business has experienced a CAGR of 8%
with gross revenues increasing from $34.7 million in fiscal 1993 to $50.4
million in fiscal 1998. Specialty products include powder actuated fastening
52
<PAGE>
systems (tools and accessories) used to fasten wood to concrete or steel,
stapling/rivet tools and electrical products such as chain saws , portable
generators and home security products. These products are marketed under
well-known brand names such as Remington(R), Master(R), Powerfast(R) and
Zenith(R).
Competitive Strengths
Leading Market Positions in High Growth Segments. DESA is the domestic
market leader in outdoor heating appliances (70% market share), vent-free indoor
gas heating (59% market share), vent-free hearth products (31% market share),
powder actuated fastening systems (86% share of the consumer market, which
constitutes 26% of the total domestic market) and electric chain saws (36%
market share). By leveraging its strong market positions and customer
relationships in established product lines, DESA has increased sales by
introducing related products or line extensions of existing products such as
vent-free gas logs (introduced in fiscal 1993), vent-free fireplaces (introduced
in fiscal 1995) and fireboxes (introduced in fiscal 1997).
DESA's targeted market segments in the zone heating market have exhibited
strong historical growth. Vent-free indoor gas heater and hearth products, the
most rapidly growing segments in the $1.1 billion zone heating market, have
grown at a CAGR of approximately 44% over the last four years driven primarily
by the increasing consumer trend towards heating with natural gas and liquid
propane. The outdoor heater market has achieved a CAGR of 22% over the same
period.
Strong Relationships with a Diversified Distribution and Customer Base.
DESA has organized its sales and marketing organizations by channels of
distribution. The Company has built strong, long-term relationships with some of
the most rapidly growing retailers, including Home Depot, Lowe's, Sears,
Wal-Mart, W.W. Grainger, Ace Hardware and TruServ. The Company's products are
designed to appeal to a variety of end-users, ranging from DIY consumers to
professional home builders. By building strong relationships with the leading
retailers and distributors within each of the Company's channels, DESA is
well-positioned to participate in the continued growth of these key customers.
Broad Portfolio of Products with Well-Recognized Brand Names. DESA provides
a broad offering of quality products under numerous brand names which are
well-recognized by its customers. The Company's key brands include: Reddy(R),
Remington(R), Vanguard(R) and Comfort Glow(R) for zone heating products and
Remington(R) for powder actuated fastening systems and electric chain saws. The
Company also manufactures products on a private label basis for W.W. Grainger,
Sears, John Deere and Homelite. DESA leverages its brand equity with its DIY
consumers, professionals and specialty dealers by continually providing its
customers new product offerings and product line extensions under its
established brand names.
New Product Development Process. DESA has a proven ability to consistently
offer consumers products with innovative features at attractive price points.
The quality and breadth of DESA's customer relationships provide the Company
with valuable market data that serves as the foundation for the Company's new
product development and product line extension process. For example, the
Company's line of hearth products was initially introduced as the result of
shifting consumer preferences away from (i) wood-burning hearth products to gas
technology and (ii) vented gas products to vent-free units. Over the last five
years, new product introductions and product line extensions have accounted for
approximately 56% of the Company's sales growth.
Effective Cost Reduction Program and Strong Cash Flow. A core component of
the Company's strong financial performance over the last five years has been a
focused program to enhance margins through cost reduction. The Company has
exceeded its annual cost reduction goal of 3% of cost of sales in each of the
last three years. This cost reduction program has contributed to an increase in
gross profit margin from 32.2% in fiscal 1993 to 35.1% in fiscal 1998.
The Company has been able to achieve its sales growth with efficient use of
working capital and low capital expenditures generating $145.3 million in free
cash flow (EBITDA less capital expenditures) for the last five years.
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<PAGE>
Strong Management Team. DESA was founded in 1969 by a group including
Robert H. Elman, DESA's current Chairman and CEO. The top three executives of
the Company have worked together as a team for the last 13 years. These
individuals have served as the catalyst for instilling a spirit of "continuous
improvements" and achievement as a cultural standard within the Company. Senior
management is well-complemented by a broad team of experienced managers who have
been with DESA since 1985.
Business Strategy
DESA's objective is to continue to leverage its competitive strengths to
increase revenues and EBITDA. In addition, the Company believes there are
significant additional opportunities to enhance its overall market and
competitive position as follows:
Continue Aggressive Growth through DESA's Primary Channels and Customers.
DESA's distribution strategy is twofold: (i) establish breadth across
distribution channels; and (ii) achieve depth within each channel by fostering
and enhancing relationships with some of the most rapidly growing retailers in
such channel (such as Home Depot and Lowe's in the home center channel and
Wal-Mart and Sears in the mass merchant channel). While DESA has managed to gain
access to multiple channels of distribution, significant opportunities remain to
sell the Company's full product line through each of these customers.
Penetrate New Distribution Channels. Although DESA currently sells its
products through a broad distribution network, the Company believes there are
opportunities to increase the penetration in some of the Company's newer
channels such as plumbing supply stores, building supply chains and fireplace
specialty stores. Management believes that these newer channels represent
attractive markets across the United States.
Capitalize on Favorable Trends for Vent-Free Gas Products. Recent housing
construction data reveals that over two-thirds of new homes today use gas as the
primary heating source compared to one-third of new homes ten years ago. The
American Gas Association estimates that approximately 60 million homes currently
use gas and the number of homes utilizing gas will grow to 80 million by the
year 2010. This growing preference for gas represents a significant growth
opportunity for DESA as all of its indoor heating products are fueled by natural
or propane gas. Additionally, by focusing on vent-free gas products, which have
lower installation costs and provide increased fuel efficiency compared to
vented products, the Company is well positioned to benefit from the fastest
growing segments of the zone heating market.
Increase Penetration of International Markets. Similar to the trend in the
United States, the global DIY markets are experiencing attractive growth rates.
Five of the ten largest home improvement retailers in the world are based
outside of the United States. However, international sales comprised only 9% of
DESA's total sales in fiscal 1998.
Make Selected Acquisitions. The Company intends to seek selective
acquisitions where it can expand its existing product portfolio, utilize its
diversified distribution channels and achieve operational synergies. Over the
last five years, only 8% of the Company's sales growth has come through
acquisitions. Management believes that the markets in which it operates are
highly fragmented and there are numerous manufacturers of complementary products
which would make attractive acquisition candidates.
Products and Markets
DESA is the leader in a number of markets where its quality manufacturing
and innovative product design have resulted in a strong competitive position.
The Company's products are sold for both consumer and commercial use utilizing
multiple distribution channels and a variety of brand names. The Company
currently serves markets for zone heating products and specialty products.
Approximately 91% of the Company's 1998 sales were domestic and 9% of sales were
international.
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Zone Heating Market
Market Overview. The zone heating market includes a broad range of products
that are used to heat limited areas as distinguished from central heating
systems which are used to heat entire buildings. The zone heating market is
currently estimated to be approximately $1.1 billion in size, with hearth
products (i.e., vented gas hearth, vent-free gas hearth, wood fireplaces, wood
stoves/inserts, pellet stoves/inserts) accounting for $628 million or over 55%
of the total market; indoor gas heaters comprising $145 million; outdoor heaters
accounting for $110 million and accessories comprising $250 million.
Calendar Year 1996 Zone Heating Products Market
Market Size = $1.1 Billion
[PIE CHART SHOWING THE FOLLOWING SEGMENTS:
Gas Heaters $145.0
Gas Hearth $430.8
Non-Gas Hearth $196.7
Outdoor Heaters (a) $110.0
Accessories (b) $250.0]
(In millions)
- ----------
Source: Hearth Products Association and GAMA Statistical Release.
(a) Does not include electrical products and installed units.
(b) Midpoint management estimate of $200 to $300 million includes vent pipes,
connectors, glass fireplace doors, screens, mantles and decorative trim.
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<TABLE>
<CAPTION>
Zone Heating Market Size and Growth
Calendar Year
----------------- DESA's
% of CAGR Market
1992 1996 Market '92-'96 Share
-------- -------- -------- ----------- ------------
($ in Millions)
<S> <C> <C> <C> <C> <C>
Indoor Heaters and Hearth Products
Vent-Free Gas Heaters $ 35.3 $ 71.9 6.4% 19.5% 59%
Vented Gas Heaters 61.8 73.1 6.4 4.3 NM
-------- ------- ----- -----
Total Gas Heaters 97.1 145.0 12.8 10.5
Vent-Free Gas Hearth 9.0 116.1 10.3 89.5 31%
Vented Gas Hearth 137.4 314.7 27.8 23.0 NA
-------- ------- ----- -----
Total Gas Hearth 146.4 430.8 38.1 31.0
Wood Fireplaces 67.3 83.0 7.3 5.4 NA
Wood Stoves/Inserts 91.0 74.9 6.6 (4.7) NA
Pellet Stoves/Inserts 36.8 38.8 3.4 1.3 NA
-------- ------- ----- -----
Total Non-gas Hearth 195.1 196.7 17.3 0.2
Total Indoor Heaters and Hearth
Products 438.6 772.5 68.2 15.2
Outdoor Heaters 50.0 110.0 9.7 21.8 70%(b)
Accessories NA 250.0(a) 22.1 NA NM
-------- ------- -----
Total Zone Heating Market $ 488.6 $ 1,132.5 100.0% NA
<FN>
Source: Hearth Products Association and GAMA Statistical Release
(a) Midpoint of management's estimate of $200 to $300 million. Includes vent
pipes, connectors, glass fireplace doors, screens, mantels and decorative
trim.
(b) Management estimate.
</FN>
</TABLE>
Market Outlook. DESA's strong market position in the vent-free segment
provides a solid foundation for further growth of the Company's business and
expansion into other categories (e.g. vented gas hearth) as a result of the
following factors:
Benefits of low-cost zone heating. Over the past decade, zone heating
products have become increasingly popular because: (i) propane and natural gas
are 50% to 70% cheaper on a BTU basis than electricity, (ii) consumers have
become aware of the cost advantage of zone heating versus central heating and
(iii) fireplaces are being used as both heating sources and decorative
furnishing.
This growing preference for gas represents a growth opportunity for DESA as
all of its indoor heating products are fueled by natural or propane gas. The
market is still under-penetrated with only 4 million vent-free indoor heating
units having been sold over the last 10 years in North America compared to over
60 million homes using gas in 1996. Gas hearth shipments have been growing at a
rate in excess of 30% per year for the past five years. Over 27 million homes
have been plumbed for gas and have a fireplace, providing an opportunity for gas
log sales. In addition, 36 million homes are plumbed for gas but do not have a
fireplace, representing a significant opportunity for the installation of vent-
free fireplaces and logs.
Increased home center/hardware channel participation. Consumer awareness of
gas logs and gas fireplaces is currently only 67% and 20%, respectively.
Awareness of zone heating and hearth products is expected to increase as these
products gain wider distribution in home centers and hardware stores. The
potential for home improvement sales, through retrofitting or adding a new
fireplace, represents a meaningful market opportunity for hearth products. DESA,
with its strong home center and hardware co-op channel relationships and
portfolio of zone heating products, is well-positioned to capitalize on this
trend.
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<PAGE>
Favorable Regulatory Development. A positive development for vent-free
indoor heating products (heaters, gas logs, fireplaces, stoves) involves the
easing of state restrictions regarding the sale and use of these products. As of
last year, 42 of the 50 states in the United States permitted the sale and use
of vent-free indoor heating products. In the past year, California and New York
enacted legislation to allow the sale and use of vent-free indoor heating
products, subject to rules and guidelines being established by agencies in each
state. These two large population states along with the six remaining states
(including Massachusetts) represent approximately one-third of the homes that
use natural gas in the United States. DESA's Vice President -- Sales and Vice
President -- Engineering, who represent the industry trade association (Gas
Appliance Manufacturer's Association, GAMA-Vent-Free Alliance), are actively
working with state agencies in California and New York which could provide for
sale of vent-free products as early as 1998.
Indoor Heating Products
DESA's indoor zone heating products consist primarily of two product
categories: (i) vent-free natural gas and propane-fueled residential space
heaters; and (ii) a line of hearth products, including vent-free gas fireplaces
and logs. Indoor heating products comprised 43% of the Company's fiscal 1998
sales. Sales of these products have increased at a CAGR of 11% from fiscal 1993
to fiscal 1998.
Indoor Vent-Free Heaters
The Company's space heaters are generally wall-mounted and provide heat to
the surrounding area. Residential space heaters come in either vented or
vent-free versions. Vented heaters require a discharging of emissions outside of
the dwelling, while vent-free heaters utilize a more efficient burner system
which avoids the need for outside venting. Vent-free heaters are generally
smaller and more physically attractive than their vented counterparts. DESA has
been the market leader in vent-free gas heaters since 1983. Historically, DESA
has focused on vent-free models. Only 2.2% of the Company's indoor heating sales
in fiscal 1998 are vented units.
The Company offers seven sizes and forty-six models of vent-free gas
heaters ranging in output from 5,000 to 30,000 BTU/hour for use with natural gas
or liquified propane. Key applications of these products include use in family
rooms, dens, kitchens and commercial offices. DESA's indoor vent-free heaters
are sold at retail prices, ranging from $149 to $349, which are significantly
lower than vented gas heaters.
Heaters are classified into two different types: infrared and blue flame.
Infrared models employ ceramic plaque burners which glow red-orange while in use
and they produce radiant heat that warms people or objects in the room. Blue
flame models have a stainless steel burner hidden behind a darkened glass front.
When burning, a line of blue flame is visible across the width of the heater.
These models produce convection heat that warms the air and distributes the heat
throughout the room. Both infrared and blue flame models are available with
either manual or thermostatic control and with piezo ignition.
The Company has developed patented technology for its line of thermostatic
infrared models, known as Infra-Stat, which provides superior features versus
competitors' offerings. DESA's heaters incorporate a proprietary feature of two
separate controls to regulate both the heat output and the thermostatic
operation. Enhanced blue-flame models are available for heavy-duty garage and
workshop applications. Optional accessories such as floor bases and fan
accessories are also available.
Vent-Free Hearth Products
In 1993, DESA pioneered the introduction of vent-free gas technology to
hearth products with the introduction of a heat efficient vent-free decorative
gas log. Vent-free gas logs have provided DESA with a new product growth
opportunity. Vent-free represents an advancement in decorative gas log
technology and, more importantly, has allowed the Company to establish a
presence in the fast-growing hearth products market.
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<PAGE>
Vent-free gas logs, which retail for $200 to $300, are aesthetically
attractive and an economical source of heat since none of the heat generated is
lost through an open vent. Historically, decorative gas logs have required
venting (i.e., an open chimney damper) and were used primarily by individuals
who enjoyed the ambiance of a fireplace but wanted to avoid the trouble and
inconvenience associated with burning wood. DESA's vent-free logs utilize an
efficient burner system similar to vent-free heaters, and are thus less
expensive to install and operate than their vented counterparts.
In 1994, DESA combined the technology of blue flame heaters and gas logs to
create an aesthetically pleasing Mini- Hearth gas heater which retails for $499.
The Mini-Hearth utilizes a blue flame heater cabinet and burner to which a
decorative fibrous ceramic log has been added. A wooden mantle is placed around
the heater to create a fireplace effect. While the Mini-Hearth was designed to
be used as a zone heater rather than as a replacement for a formal fireplace,
the improved appearance has generated sales to customers who might not have
otherwise purchased a gas zone heater.
In 1995, DESA introduced a vent-free free-standing gas fireplace with logs
and a full sized mantle which is marketed as a traditional fireplace at a retail
price of approximately $1,000. DESA's vent-free fireplace does not require
venting and may be placed against any wall without structural renovations.
Traditional fireplace boxes must be mounted into an outside wall to facilitate
venting, requiring significant structural modifications to an existing home.
Furthermore, vent-free fireplace installation costs are highly attractive
relative to wood fireplaces (masonry and manufactured), which cost an average of
two to three times the cost of a vent-free fireplace, including installation.
The Company's vent-free gas logs are offered in three sizes and thirty-six
models while vent-free gas fireplaces are offered in ten models and mini-hearth
products in six models.
Outdoor Heating Products
Outdoor heating products represent approximately 34% of the Company's
fiscal 1998 sales. Sales of these products have increased at a CAGR of 19% from
fiscal 1993 to fiscal 1998.
DESA's line of outdoor heating products consists of portable units which
generate heat by either using a fan to discharge heated air to a specific area
(forced air heaters) or emitting heat throughout the surrounding area without
the assistance of a fan (convection heaters). Forced air heaters are fueled by
either kerosene, propane or natural gas, while convection heaters are fueled
only with propane or natural gas. Outdoor heaters are used in both residential
and commercial applications. Residential applications include heating otherwise
unheated garages and workshops. Commercial applications include heating
factories, warehouses, construction sites and agricultural areas.
Annual sales increased from $33.1 million to $77.3 million from 1993
through 1998, reflecting the introduction of new outdoor heater products and
expanded sales of these products through the home center and mass merchant
channels. The Company also acquired an outdoor oil heater product line in April
1994, which added approximately $3.5 million in net sales in fiscal 1998. DESA
sells kerosene heaters in eight sizes with retail prices ranging from $139 to
approximately $2,000.
Specialty Products
DESA's specialty products category consists of (i) specialty fastening
systems (i.e., powder actuated tools and staple guns) , (ii) electrical`
products (i.e., chain saws , electric generators and home security products)
which are sold to both DIY and commercial customers, and (iii) home security
products. The specialty product category represents 23% of the Company's sales
which have grown at an 8% CAGR from fiscal 1993 to fiscal 1998.
Specialty Fastening Systems Products
Powder actuated tools utilize a powder load to drive nails for fastening
wood to concrete or steel. The charge is activated using either a trigger on the
tool or by striking the tool with a hammer. The energy discharged propels a
piston inside the tool which in turn drives the nail. DESA sells two powder
actuated tools targeted at the DIY market and six
58
<PAGE>
tools targeted at the
commercial market. The two consumer models retail for $19 to $79 and the six
commercial models retail for $129 to $199. Sales of powder loads and nail
accessories account for over 50% of this product category's revenues.
Market Overview. The total domestic powder actuated tool market in which
DESA competes is approximately $80 million, consisting of $60 million in the
commercial market and $20 million in the DIY market. In fiscal 1998, DESA had a
market share of 86% in the DIY segment. The staple gun and related accessories
market size is approximately $110 million of which DESA has a modest market
share.
Electrical Products
DESA assembles and markets a line of electric chain saws and electric
generators. Electric chain saws are used primarily by homeowners for light-duty
pruning and trimming. The Company offers models retailing from $39 to $69. DESA
also maintains a modest presence in the portable electric generator market.
Nearly 75% of the Company's generator sales are made to W.W. Grainger who offers
this product line to end-users through its equipment catalog and industrial
supply outlets.
Market Overview. The domestic electric chain saw market is approximately
$20 million in size, and DESA is the market leader with a 36% share. In the
important home center segment of the market, DESA maintains a 52% share. The
electric chain saw market is mature and industry volume has been reasonably
stable over the past five years.
International
In fiscal 1998, $20.8 million or 9.1% of DESA's net sales were generated in
international markets such as Canada, Europe and the Far East. This segment has
grown at a CAGR of 7.5% from fiscal 1993 through fiscal 1998. Although the
global markets have not traditionally been an area of DESA's focus, the Company
believes that the international category represents a significant opportunity
for increased sales in the future. International markets have the potential to
far surpass the home improvement market in the United States.
DESA's strategy for the international markets has been to export customized
versions of its products to accommodate local electrical requirements,
government regulation and user preferences for its exported products. DESA
utilizes local distributors in each country to sell its products, typically
relying on more than one distributor in each country.
In 1990, DESA increased its presence in the foreign markets with the
purchase of Jennen B.V., its Dutch distributor of outdoor forced air heaters.
Located in Rotterdam, it was subsequently renamed as DESA Europe B.V. and
currently serves as the Company's European headquarters.
Sales, Marketing and Distribution
Sales. DESA has organized its domestic sales force by channels of
distribution and product categories in order to optimize the effectiveness of
its selling efforts. DESA management believes that such a structure enhances the
Company's relationships with key channel participants by: (i) enabling the sales
force to develop specific customer insights regarding specialized needs and (ii)
creating a sense of partnership through customized attention and focus.
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<PAGE>
<TABLE>
<CAPTION>
Approximate Number
DESA Sales Channel of of Sales
Organization Distribution Products Marketed Representatives
- --------------------------- ------------------------ --------------------- --------------------
<S> <C> <C> <C>
General Consumer........... Mass Merchants Indoor Heating 120
Hardware Co-ops Hearth Products
Home Centers Outdoor Heating
Warehouse Stores
Catalog Showrooms
Agricultural Supply
Specialty Heating.......... Utilities Indoor Heating 40-50
Propane Marketers Hearth Products
Specialty Distributors
Appliance Distributors
Construction............... Equipment Distributors Outdoor Heating 40-50
Equipment Renters Generators
Specialty Products......... Mass Merchants Specialty Fastening Systems 100
Hardware Co-ops Electrical Products
Home Centers
Warehouse Stores
Catalog Showrooms
Agricultural Supply
</TABLE>
The sales representative organizations report to DESA's regional managers
who, in turn, report to that channel's Sales Director who report to the
Executive Vice President -- Sales & Marketing.
Marketing. The Company's marketing staff utilizes a variety of traditional
and innovative programs to increase consumer awareness and augment sales. DESA
uses limited national advertising and relies instead on local customer
advertising through newspapers and circular flyers. DESA has also created a
broad national network of independent, factory-trained service centers to
provide local support to customers and end-users.
Distribution. The Company's significant customers include all of the major
home center accounts. The Company's consumer channels, which include home
centers, mass merchants, warehouse clubs and hardware co-ops, are the most
important channel for DESA's products and were responsible for 65% of its fiscal
1998 domestic sales. Other channels, including specialty heating, farm,
construction and industrial, contributed 38% of domestic sales in fiscal 1998.
Key customers include Home Depot and Lowe's, two of the major home centers
in the country; Ace and TruServ, leaders in the hardware co-op market; Sears and
Wal-Mart/Sam's, major mass merchandisers, and W.W. Grainger, a major industrial
supply company. Consistent with industry practices, the Company does not operate
under a long-term written supply contract with any of its customers. See "Risk
Factors -- Risk of Loss of Material Customers."
Competition
Each of the industries in which the Company manufactures and sells products
is highly competitive. Although competitive factors vary by product line,
competition in all product lines is based primarily on product quality, product
innovation, customer service and price. The Company also believes that a
manufacturer's relationship with its distributors and principal customers is a
key factor in the industries in which the Company competes.
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<PAGE>
The Company competes with a number of manufacturers in the heating products
industry. Within this industry, there are several manufacturers of gas heaters
and numerous producers of gas logs, pre-engineered fireplaces and solid fuel
heaters. The Company also competes with a number of manufacturers in the
specialty tool industry. The Company believes that it is a market leader in the
outdoor heating appliance, vent-free indoor gas heating and hearth and DIY
powder actuated fastener and electric chain saw markets and believes that its
experience, well-recognized brand names, comprehensive product offerings and
strong customer relationships give it a competitive advantage with respect to
these products.
The Company's competitors offer a number of products which directly compete
with or can be utilized as substitutes for the products manufactured by the
Company. No assurance can be given that the future sales of such competitive
products will not adversely affect the market for the Company's products. In
addition, certain of the Company's competitors, particularly in the specialty
tool industry, are larger and better capitalized than the Company.
Management Information Systems
DESA maintains an advanced MIS utilizing customized software for its
manufacturing and engineering design. The Company also has established Customer
Electronic Data Interchange for order entry by major accounts. These systems
provide "real-time" information in regards to work-in-process inventory and
provides detailed labor reporting to enable the Company to identify potential
labor cost savings. For product development and engineering, employees utilize a
state-of-the-art three dimensional CAD/CAM system.
Many existing computer programs use only two digits to identify a year
included in date information. These programs may have been designed and
developed without considering the impact of a change in the century to which the
date information relates. If not corrected, many of these computer applications
could fail or create erroneous results by or at the Year 2000 (the so-called
"Year 2000 Problem"). The Company has conducted an analysis of its computer
systems to determine the actions which may be necessary to address the Year 2000
Problem. The Company presently expects that corrective action for its internal
systems will be completed by the fall of 1998 and that the cost of such
corrections will not be material. The Company expects that the third party
systems used in its business will have releases which address any Year 2000
Problems prior to the end of 1998.
Manufacturing
Indoor and Outdoor Heating Products. DESA's manufacturing processes include
metal fabrication, painting, assembly and product testing. In general, DESA
cuts, forms and coats the product housing, assembles the various components such
as motors, fans, electrical parts and burners, packages the final product and
ships it to customers. Punch presses, welding, powder coated painting and
assembly systems are mechanized with state-of-the-art equipment utilizing
robotics to permit high volume output with minimum labor content.
Specialty Fastening Systems. DESA manufactures and packages the nails
(pins) for sale with its powder actuated tool product line. Powder actuated
tools are sourced from a manufacturing joint venture with Continental/Midland,
Inc. and loads are purchased from a third party. Powerfast(R) stapling products
are sourced from Asian manufacturers.
Electrical Tools. DESA assembles electric chain saws from components made
to its specifications by third-party suppliers. Electric generators are
assembled on a chassis by connecting gasoline engines purchased from Honda and
Briggs & Stratton with an alternator purchased from a European supplier.
Trademarks, Patents and Licenses
The success of the Company's various businesses depends in part on the
Company's ability to exploit certain proprietary designs, trademarks and brand
names on an exclusive basis in reliance upon the protections afforded by
applicable copyright, patent and trademark laws and regulations. The loss of
certain of the Company's rights to such
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<PAGE>
designs, trademarks and brand names or the inability of the Company to protect
effectively or enforce such rights could adversely affect the Company. See "Risk
Factors -- Dependence On Brand Names."
Backlog and Warranty
The Company's backlog consists of cancelable orders and is dependent upon
trends in consumer demand throughout the year. Customer order patterns vary from
year to year, largely because of annual differences in consumer end-product
demand, marketing strategies, overall economic and weather conditions. Orders
for the Company's products are generally subject to cancellation until shipment.
As a result, comparison of backlog as of any date in a given year with the
backlog at the same date in a prior year is not necessarily indicative of sales
trends. Moreover, the Company does not believe that backlog is necessarily
indicative of the Company's future results of operations or prospects.
The Company's warranty policy is to accept returns of products with defects
in materials or workmanship. The Company will also accept returns of incorrectly
shipped goods where the Company has been notified on a timely basis and, in
certain cases, to maintain customer good will. During fiscal 1998, warranty
costs amounted to approximately 1.6% of sales.
Environmental Liability
The Company is subject to various evolving federal, state and local
environmental laws and regulations governing, among other things, emissions to
air, discharge to waters and the generation, handling, storage, transportation,
treatment and disposal of hazardous and non-hazardous substances and wastes.
These laws and regulations provide for substantial fees and sanctions for
violations and, in many cases could require the Company to remediate a site to
meet applicable legal requirements. A Phase I environmental audit of the
Company's manufacturing facilities was completed on August 9, 1997 and did not
identify any material matters. The Company believes, although there can be no
assurance, that liabilities relating to environmental matters will not have a
material adverse effect on its future financial position or results of
operations.
Employees
DESA's zone heating products operation is seasonal. As a result, the number
of workers employed by the Company at any particular point in time varies. The
work force is accustomed to seasonal layoffs of two to four months. In 1998,
total employment averaged 879 with a low of 481 employees in February and a peak
of 1229 employees in August.
The hourly labor force in Bowling Green is represented by the Sheet Metal
Workers International Association (AFL-CIO) under a three-year contract expiring
in June 1998. The Manchester and Shelbyville, Tennessee facilities are non-union
plants.
The hourly labor force in Bowling Green is covered by a defined benefit
pension plan. All other employees are covered by a defined contribution plan
(401K). All workers are covered by self-insured medical plans.
Legal Proceedings
DESA is a party to various litigation in the normal course of its business
activities, none of which is expected to have a material adverse effect on the
Company. Although the Company has not experienced significant product liability
claims to date, the Company carries occurrence-based product liability insurance
coverage with a $101 million limit, $250,000 self insured retention ("SIR") and
an aggregate annual capped SIR exposure to DESA of $1 million.
Properties
The Company's Bowling Green, Kentucky facility serves as the corporate
headquarters as well as the manufacturing site for DESA's zone heating products,
both indoor and outdoor. The principal executive offices for the Company and
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Holdings are located at 2701 Industrial Drive, Bowling Green, Kentucky 42102,
telephone: (502) 781-9600. The Company also leases warehouse space in Bowling
Green as needed. The facility in Shelbyville, Tennessee is the manufacturing
headquarters for the production of hearth products and outdoor heaters. The
manufacturing facility in Manchester, Tennessee produces the specialty tools
sold by DESA. In addition to these manufacturing facilities, the Company leases
sales offices and warehouse locations in Toronto, Canada and Rotterdam, Holland.
<TABLE>
<CAPTION>
Location Square Footage Ownership Function
-------- -------------- --------- --------
<S> <C> <C> <C>
Bowling Green, Kentucky.................. 225,000 Owned Corporate Headquarters
28 acres Manufacturing, Engineering, Distribution
Shelbyville, Tennessee................... 70,000 Leased Manufacturing
7 acres
Manchester, Tennessee.................... 57,400 Leased Manufacturing, Distribution
11 acres
Toronto, Canada.......................... 9,400 Leased Sales offices, Distribution
Rotterdam, Holland....................... 5,200 Leased Sales offices, Distribution
</TABLE>
Management believes its facilities are in good condition and that the
facilities are adequate for its operating needs for the foreseeable future
without significant modifications or capital investment.
Recent Developments
Pending Acquisitions
On May 13, 1998, DESA entered into an agreement to acquire 92.1% of the
issued and outstanding common stock of Fireplace Manufacturers, Inc. ("FMI") for
an aggregate purchase price of approximately $25.5 million. As of such date,
DESA already owned the remaining 7.9% of FMI's issued and outstanding common
stock. In connection with the acquisition of FMI, DESA will enter into
non-compete agreements with three officers of FMI, each with a term of three
years. Upon execution of such agreements, DESA will pay such officers an
aggregate of $3.5 million, included in the aggregate purchase price. FMI, a
manufacturer of gas and wood fireplaces and related accessories, had net sales
and net income of $31.9 million and $1.0 million, respectively, for its fiscal
year ended March 31, 1997. Also, in April 1998, the Company entered into a
letter of intent with Universal Heating, Inc. ("UHI") to acquire the worldwide
rights (except in China) to distribute Universal's indoor and outdoor heating
products and to form a joint venture to manufacture various products in China
that will be marketed by the Company. The total purchase price for these
transactions is approximately $15 million. UHI, a privately held manufacturer of
gas heating products, had net sales and net income of approximately $21.2
million and $1.6 million, respectively, for its year ended December 31, 1997.
The two proposed acquisitions will be financed through a combination of
indebtedness under the Company's New Credit Facility as well as additional
equity contributions from the Company's principal stockholders.
Heath/Zenith
On February 4, 1998, the Company acquired Heath Holding Company and its
Heath/Zenith business from Heath Holding Corp. Heath/Zenith, headquartered in
Benton Harbor, Michigan, is a leading North American manufacturer and marketer
of residential motion sensor "security" lighting products sold primarily to DIY
retail home centers. Heath/Zenith is also a leading manufacturer and marketer of
residential motion sensor "decorative" lighting products and wireless home
control devices, including wireless doorbells and light switches. Since its
inception in 1987, Heath/Zenith has consistently expanded its market positions
and today commands either the number one or number two market position in each
of its primary product categories.
Demand for Heath/Zenith's products has increased in recent years due to
consumers' heightened interest in products that provide effective home security
and innovative, reliable convenience features. Heath/Zenith has also benefited
from the rapid growth and consolidation in its primary DIY retail home centers
distribution channel. Due to its products and
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capabilities, Heath/Zenith has been selected as the core supplier to the leading
participants in the DIY retail industry including, Home Depot. In addition,
Heath/Zenith has secured core supplier status with many of the nation's top mass
merchandisers, warehouse clubs, and hardware buying groups.
Similar to DESA, Heath/Zenith has achieved leading market positions and
strong operating performance as a result of (i) the strength of the
Heath/Zenith's relationships with its rapidly-expanding customer base, (ii)
innovative product design and development, (iii) broad and differentiated
product lines supported by strong brand names, (iv) consistent new product
introductions, (v) implementing effective sales and marketing programs designed
to increase customer awareness and expand distribution channels, and (vi)
achieving low-cost manufacturing and distribution expertise.
In the Motion Sensor Security and Decorative Lighting segments,
Heath/Zenith competes against Intelectron Incorporated, a privately held company
headquartered in Hayward, California, and Regent Lighting Corporation, a
privately held company headquartered in Burlington, North Carolina. Within the
Wireless Doorbell segment, Heath/Zenith competes against Dimango Products, Co.,
based in Brighton, Michigan, and Trine Products, Co., a privately held company
based in Bronx, New York.
On a pro forma basis, Heath/Zenith will account for approximately 33% and
22% of sales and EBITDA, respectively, of the combined company. Heath/Zenith's
business is comprised of three primary segments: Motion Sensor Security
Lighting, Motion Sensor Decorative Lighting, and Wireless Doorbells.
Motion Sensor Security Lighting
Within its motion sensor security lighting product line, which accounted
for 61% of 1996 revenues, Heath/Zenith offers 58 stock keeping units ("SKUs")
representing a variety of security lighting products which appeal to various
segments of the DIY market. The Heath/Zenith's standard motion sensor security
lighting products retail from $9.95 for promotional items up to $34.95 for a
full-feature security light. The Heath/Zenith's primary focus is to de-emphasize
promotional products and to emphasize its high quality, high margin products
that are made with metal fixtures and hoods, and which contain such value-added
features as Pulse Count, Dual BriteTM, and 270(degree) activation capability.
Market Overview. The $200 million North American residential outdoor
security lighting industry market is segmented into three categories: (i) motion
sensor security lighting, (ii) photocell (darkness activated) security lighting,
and (iii) standard (switch activated) security lighting. The motion sensor
security lighting segment has been the primary growth segment in the industry,
growing at a compounded annual growth rate of almost 6% over the last five
years. Since the introduction of motion sensor security lighting, the product
has established itself as an easy to install, reliable, low-cost security
product. As a result, motion sensor products have steadily captured market share
from standard and photocell lighting as those traditional products are less
effective crime deterrents and more expensive and less convenient to operate.
Motion Sensor Decorative Lighting
With 38 SKUs, motion sensor decorative lighting products represent
approximately 15% of the Heath/Zenith's 1996 total revenue. The Heath/Zenith's
motion sensor decorative lighting products, which sell for retail prices ranging
from $24.95 to $79.95, were introduced in 1992 as part of management's strategy
to move consumer to higher price point products. Included in this product line
are coach lanterns, cast aluminum lanterns, brass lanterns and post lanterns.
Market Overview. The $400 million North American residential outdoor
decorative lighting industry is driven primarily by the home improvement and
remodeling industry. As a result, the overall retail outdoor decorative lighting
industry has benefited from the expansion in the home improvement industry and
DIY retail channel. Historically, the decorative lighting market was dominated
by standard (switch activated) lighting products. However, as customers become
more aware of the benefits of motion sensor lighting products such as energy
efficiency, crime deterrence, and convenience, they are requiring motion sensor
capabilities in all of their outdoor lighting products.
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<PAGE>
Wireless Doorbells
Wireless doorbell products, introduced in 1991, represent approximately 15%
of 1996 total revenue. This product line, which retails for between $9.95 and
$49.95, represents the Heath/Zenith's successful entry into a new market by
leveraging a high-quality product with the Heath/Zenith brand name. The
Heath/Zenith's wireless doorbell products are positioned to take advantage of an
underserved market with relatively few solutions. Wireless doorbells present the
most viable and cost effective solution to the problem. Heath/Zenith has become
the market leader in the wireless doorbell industry by offering a diverse line
of products and, most importantly, by differentiating its product with a
proprietary sound chip.
Market Overview. Approximately 17% of Heath/Zenith's 1996 revenues were
generated by sales in the wireless controls systems industry, primarily in the
wireless doorbell segment. The wireless control systems industry is a diverse
industry that includes products ranging from home automation systems to garage
door openers to wireless doorbells. Heath/Zenith currently competes primarily in
the wireless doorbell segment of the residential wireless control systems
industry.
Customers
Heath/Zenith targets the rapidly-expanding DIY home center retail market
and, to a lesser extent, mass merchandisers, warehouse clubs, and cooperative.
In 1996, sales to home improvement retailers and hardware cooperatives accounted
for 90% of revenues and sales to mass merchandisers, warehouse clubs and other
retailers accounted for 10% of sales.
Manufacturing and Assembly
Heath/Zenith designs and manufactures its products through its Hong Kong
based subsidiary, Heath Ltd., which provides purchasing, engineering, contract
manufacturing, administration and assembly. Heath/Zenith uses three
subcontractors in China who assemble products according to predetermined
specifications and ship assembled products to Heath Ltd. Heath/Zenith owns all
the tooling utilized in the production of its products. Finished products are
shipped to a public warehouse in Reno, Nevada and distributed throughout North
America directly to customers.
Employees
Heath/Zenith has approximately 78 employees, 42 at its Benton Harbor
headquarters and 36 at Heath Ltd.
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MANAGEMENT
Directors and Officers
The following table sets forth the name, age and position of each of the
Company's directors who will continue in office following the Recapitalization,
directors designate, executive officers and other significant employees. All of
the Company's officers are elected annually and serve at the discretion of the
Board of Directors.
Name Age Positions
Robert H. Elman...... 59 Chairman, Chief Executive Officer, Director
John W. Childs....... 55 Director
Raymond B. Rudy...... 65 Director
Adam L. Suttin....... 30 Director
Michael Greene....... 35 Director
Terry G. Scariot..... 49 President, Director
John M. Kelly........ 48 Executive Vice President
Edward G. Patrick.... 51 Vice President of Finance, Treasurer
Scott M. Nehm........ 48 Vice President, Controller
Robert H. Elman joined DESA Industries, at its inception, in 1969 as Vice
President and member of the Board of the Directors and as President of its Power
Products Division. He planned and directed the division's growth from sales of
$11 million in 1969 to $35 million in 1975, with operating income increasing
significantly during the same period. Mr. Elman remained with AMCA International
when it acquired DESA Industries in 1975 and became Senior Group Vice President
responsible for the Consumer, Automotive Products, Aerospace, and Food Packaging
Divisions until March 1985. Since March 1985, when Mr. Elman and his fellow
managers formed DESA International, Inc. and participated in the leveraged
buyout of AMCA's Consumer Products Division, Mr. Elman has been Chairman and
Chief Executive Officer of the Company. Prior to DESA, he worked with ITT and
Singer in various management positions in the United States and Europe. Mr.
Elman serves as the non-employee Chairman of the Board of Directors of Hedstrom
Holdings, Inc. He received his Bachelor's Degree in Mechanical Engineering from
Rensselaer Polytechnic Institute and his MBA from Harvard Business School.
John W. Childs has been President of JWCA since July 1995. Prior to that
time, he was an executive at Thomas H. Lee Company from May 1987, most recently
holding the position of Senior Managing Director. Prior to that, Mr. Childs was
with the Prudential Insurance Company of America where he held various executive
positions in the investment area ultimately serving as Senior Managing Director
in charge of the Capital Markets Group. He is a director of Big V Supermarkets,
Inc., Central Tractor Farm & Country, Inc., Chevys Holdings, Inc., Cinnabon,
Inc., The Edison Project, Inc., Select Beverages, Inc. and Playtex Products,
Inc.
Raymond B. Rudy has been a Managing Director of JWCA since July 1995. Prior
to that time, he was Deputy Chairman and Director of Snapple Beverage
Corporation from 1992 until the company was sold in 1994. From 1987 to 1989, Mr.
Rudy was President of Best Foods Subsidiaries of CPC International. From 1984 to
1986, Mr. Rudy was Chairman, President and CEO of Arnold Foods Company, Inc. He
is chairman of Empire Kosher Poultry, Inc.
Adam L. Suttin has been a Vice President of JWCA since July 1995. Prior to
that time, he was an executive at Thomas H. Lee Company from August 1989, most
recently holding the position of Associate. He is a director of Central Tractor
Farm & Country, Inc. and Empire Kosher Poultry, Inc.
Michael Greene is a Managing Director of UBS Capital, which is the private
equity subsidiary of the Union Bank of Switzerland. Mr. Greene has worked in
Union Bank of Switzerland's private equity and leveraged finance business
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<PAGE>
since he joined Union Bank of Switzerland in 1990. Mr. Greene serves on the
board of directors of CBP Resources, Inc. and Metrocall, Inc.
Terry G. Scariot joined AMCA's Consumer and Automotive Products Division as
Vice President -- Finance in early 1984 and became Chief Financial Officer of
DESA International, Inc. in March 1985. He was appointed President of DESA
International, Inc. in March 1996 and joined the Board of Directors in December
1996. Prior to joining AMCA International, Mr. Scariot held positions of
increasing responsibility in financial and manufacturing management at Monsanto
Industrial Chemicals Company, Rockwell International's Automotive Products
Group, and Gulf and Western's Bonney Forge Division. In October 1979, Mr.
Scariot served as a member of the Board of Directors and Chief Financial Officer
for The Massillon Steel Casting Company. Mr. Scariot received his Bachelor of
Science degree in finance and MBA from the University of Missouri.
John M. Kelly joined DESA Industries in Canada in 1972. After successful
management assignments in sales, manufacturing services, and administration, he
was appointed General Sales Manager in 1976 and General Manager in 1977. In
1983, Mr. Kelly was promoted to Vice President -- North American Sales for
AMCA's Consumer Products Division. In 1984, his responsibilities were expanded
to include the entire marketing function. He became DESA's senior sales and
marketing Executive Vice President in North America in March 1985. Mr. Kelly
assumed the role of Executive Vice President in March 1996, responsible for
worldwide sales and marketing and engineering. He majored in Economics at the
University of Toronto.
Edward G. Patrick has been associated with DESA International, Inc. and its
predecessor company since January 1985, joining the company as Director of
Credit and Accounts Receivable. In May of 1991, he was appointed Treasurer and
in January 1995 appointed Vice President of Finance. Prior to joining DESA, Mr.
Patrick held financial positions with Benchmark Tool Company, a Subsidiary of
Shopsmith Inc. (1981-1985), McGraw Edison Company (1975-1981), and General
Motors Corp. (1972-1975). Mr. Patrick received his Bachelor's Degree from
Northeast Missouri State University.
Scott M. Nehm has been with DESA and the predecessor operation since 1982.
In January 1995, he was appointed Vice President, Controller. Prior to DESA, Mr.
Nehm has held positions of increasing responsibility in financial management at
Modine Manufacturing Company (1971-1973), Koehring Company (1974-1979), and
Allied Products Inc. (1980-1981). Mr. Nehm has a CPA Certificate, BBA and MBA
degrees from the University of Wisconsin in Accounting, Finance and Marketing.
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Executive Compensation
***
The following table sets forth compensation earned for all services
rendered to the Company during fiscal 1996, fiscal 1997 and fiscal 1998, as
applicable, by the Company's chief executive officer and the four most highly
compensated executive officers other than the Company's chief executive officer
(collectively, the "Named Executives").
<TABLE>
<CAPTION>
Long-Term
Compensation
Awards
--------
Number of
Annual Compensation Securities All Other
Name and Principal Fiscal Salary Bonus(1) Underlying Compensation
Position at February 28, 1998 Year ($) ($) Options(2) ($)
------ ------- ------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Robert H. Elman.......................... 1998 612,115 630,000 -- 106,808
Chairman, Chief 1997 565,385 820,000 -- 112,233
Executive Officer 1996 516,162 535,000 -- 100,255
Terry G. Scariot...................... 1998 274,946 240,000 -- 26,856
President 1997 249,400 120,000 -- 16,203
1996 195,769 102,000 -- 28,829
John M. Kelly......................... 1998 274,946 240,000 -- 37,788
Executive Vice President 1997 249,400 120,000 -- 29,203
1996 195,769 102,000 -- 33,039
Edward G. Patrick..................... 1998 78,555 25,000 -- 11,809
Vice President of 1997 74,822 17,500 4,000 8,111
Finance, Treasurer 1996 68,631 15,000 -- 5,697
Scott M. Nehm......................... 1998 78,555 25,000 -- 10,578
Vice President, 1997 74,822 17,500 4,000 10,766
Controller 1996 71,383 15,000 -- 8,044
- ----------
<FN>
(1) Annual bonuses are indicated for the year in which they were earned and accrued. Annual bonuses for any year are generally paid
in the following fiscal year.
(2) All of the options were redeemed in connection with the Recapitalization.
</FN>
</TABLE>
Employment Arrangements with Executive Officers
Mr. Elman is currently employed as Chairman and Chief Executive Officer
pursuant to an employment agreement which carries a three-year term. Under this
agreement, Mr. Elman currently receives a salary of $600,000. Mr. Scariot is
currently employed as President pursuant to an employment agreement which
carries a three-year term. Under this agreement, Mr. Scariot currently receives
a salary of $270,000. Mr. Kelly is currently employed as Executive Vice
President pursuant to an employment agreement which carries a three-year term.
Under this agreement, Mr. Kelly currently receives a salary of $270,000.
Pursuant to these employment agreements, the salary of each of Messrs. Elman,
Scariot and Kelly will be subject to annual increases at the discretion of the
Board of Directors of the Company. Messrs. Elman, Scariot and Kelly will be
eligible to participate in an executive bonus plan which will be instituted for
fiscal 1999, 2000, 2001, 2002 and 2003. Messrs. Elman, Scariot and Kelly will
also participate in an option plan which will allow management to earn up to
12.5% of the fully diluted equity of Holdings upon achievement of pre-determined
performance targets. In the event of a Change of Control of the Company after
which the employment of Messrs. Elman, Scariot and Kelly with the Company is not
continued, Messrs. Elman, Scariot and Kelly will be entitled to Change of
Control benefits unless the equity investment of each of Messrs. Elman, Scariot
and Kelly in Holdings of each shall have tripled in value.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of the Common Stock of Holdings by each person known to the Company to
be the beneficial owner of more than five percent of the common stock of
Holdings, each director of the Company, each Named Executive and all directors
and executive officers of the Company as a group. Except as otherwise indicated,
the beneficial owners of the voting stock listed below, based on information
furnished by such owners, have sole investment and voting power with respect to
such shares. The business address for each executive officer of the Company is
in care of the Company.
Shares
Beneficially
Name and Address Owned Percent
---------------- ----- -------
J.W. Childs Equity Partners, L.P.(1)
One Federal Street
Boston, Massachusetts............................. 9,408,761 66.5%
UBS Capital LLC(1)
299 Park Avenue
New York, New York................................ 2,742,526 19.8
Robert H. Elman(2).................................. 377,602 2.7
John W. Childs(1)(3)
One Federal Street
Boston, Massachusetts............................. 9,787,594 69.2
Raymond B. Rudy(1)(3)
One Federal Street
Boston, Massachusetts............................. 9,433,275 66.7
Adam L. Suttin(1)(3)
One Federal Street
Boston, Massachusetts............................. 9,443,188 66.8
Michael Greene(4)
299 Park Avenue
New York, New York................................ 2,742,526 19.8
Terry G. Scariot.................................... 100,054 *
John M. Kelly....................................... 100,054 *
Edward G. Patrick................................... 30,409 *
Scott M. Nehm....................................... 30,409 *
All Directors and executive officers as a group (9
persons)(1)(2)(3)(4).............................. 13,182,470 92.6
- ----------
* Less than 1.0%
(1) Includes 363,968 shares beneficially owned by Childs and 99,264 shares
beneficially owned by UBS Capital pursuant to warrants issued in connection
with their respective purchases of Holdings Preferred Stock.
(2) Includes 177,494 shares owned by Mr. Elman's family.
(3) Includes shares beneficially owned by Childs, as to which Messrs. Childs,
Rudy and Suttin may be deemed also to be beneficial owners.
(4) Includes shares beneficially owned by UBS Capital, as to which Mr. Greene
may also be deemed to be a beneficial owner.
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<PAGE>
CERTAIN TRANSACTIONS
At the closing of the Recapitalization, the Company and Holdings entered
into a management agreement with JWCA providing for payment by the Company to
JWCA of (i) a $2.55 million advisory and financing fee in consideration of
JWCA's services regarding the planning, structuring and negotiation of the
Recapitalization and related financing and (ii) an annual management fee of
$189,000 in consideration of JWCA's ongoing provision of certain consulting and
management advisory services. Payments under this management agreement may be
made only to the extent permitted by the New Credit Facility and the Indenture.
The management agreement is for a five-year term, automatically renewable for
successive extension terms of one year, unless JWCA or Holdings shall give
notice of termination.
At the closing of the Recapitalization, the Company and Holdings entered
into a management agreement with UBS Capital providing for payment by the
Company to UBS Capital of (i) a $0.7 million advisory and financing fee in
consideration of UBS Capital's services regarding the planning, structuring and
negotiation of the Recapitalization and related financing and (ii) an annual
management fee of $51,000 in consideration of UBS Capital's ongoing provision of
certain consulting and management advisory services. Payments under this
management agreement may be made only to the extent permitted by the New Credit
Facility and the Indenture. The management agreement is for a five-year term,
automatically renewable for successive extension terms of one year, unless UBS
Capital or Holdings shall give notice of termination.
Pursuant to the Recapitalization Agreement, concurrently with the closing
of the Recapitalization, Holdings, the Equity Investors and the Existing
Stockholders (the "Stockholders") entered into a Stockholders Agreement (the
"Stockholders Agreement"). Subject to certain exceptions, the Stockholders
Agreement restricts the right of the Stockholders to transfer any Holdings
Common Stock or Warrants or other vested rights to acquire Holdings Common Stock
(collectively, the "Subject Securities") without the consent of the holders of a
majority of the Subject Securities at the time held by Childs and its affiliates
and associates (the "JWC Holders"). Holdings and the JWC Holders have certain
rights of first refusal with respect to Subject Securities. In addition, the
Stockholder Agreement provides for certain so-called "tag-along", "drag-along"
and "piggyback registration" rights. In addition, the Stockholder Agreement
provides each Stockholder with certain preemptive rights. The Stockholder
Agreement also obligates Holdings and the Stockholders to take all necessary
actions to include certain nominees of the JWC Holders (who could constitute a
majority of the board of directors) and one nominee of UBS Capital LLP on
Holdings' board of directors and to ensure that certain representatives of the
other Stockholders may attend meetings. The Stockholders Agreement also
restricts Holdings' right to enter into agreements with JWC Holders without the
consent of the other Stockholders.
Holdings and its subsidiaries expect to enter into a tax sharing agreement
providing (among other things) that each of the subsidiaries will reimburse
Holdings for its share of income taxes determined as if such subsidiary had
filed its tax returns separately from Holdings.
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DESCRIPTION OF NOTES
General
The Notes were issued pursuant to an Indenture (the "Indenture") between
the Company, Holdings (as guarantor) and Marine Midland Bank, as trustee (the
"Trustee"). The terms of the Notes include those stated in the Indenture and
those made part of the Indenture by reference to the Trust Indenture Act of 1939
(the "Trust Indenture Act"). The Notes are subject to all such terms, and
Holders of Notes are referred to the Indenture and the Trust Indenture Act for a
statement thereof. The following summary of the material provisions of the
Indenture does not purport to be complete and is qualified in its entirety by
reference to the Indenture, including the definitions therein of certain terms
used below. A copy of the proposed form of Indenture and Registration Rights
Agreement is available as set forth under "Available Information". The
definitions of certain terms used in the following summary are set forth below
under "-- Certain Definitions."
The Notes are general unsecured obligations of the Company, subordinated in
right of payment to all existing and future Senior Indebtedness of the Company,
including the New Credit Facility, and rank pari passu in right of payment with
any existing and future senior subordinated indebtedness of the Company. The
Company's payment obligations under the Notes are fully and unconditionally
guaranteed (the "Holdings Guarantee") on a senior subordinated basis by
Holdings. In addition, all borrowings under the New Credit Facility are secured
by a Lien on substantially all of the assets of the Company, Holdings and their
domestic Subsidiaries.
In addition, the Company conducts certain operations through its foreign
subsidiaries and the Notes are effectively subordinated to all indebtedness and
other liabilities and commitments (including trade payables and lease
obligations) of such foreign subsidiaries. Any right of the Company to receive
assets of any of its Subsidiaries upon the latter's liquidation or
reorganization (and the consequent right of the Holders of the Notes to
participate in those assets) is effectively subordinated to the claims of that
Subsidiary's creditors, except to the extent that the Company is itself
recognized as a creditor of such Subsidiary, in which case the claims of the
Company are subordinate to any security in the assets of such Subsidiary and any
indebtedness of such Subsidiary senior to that held by the Company. As of the
date of the Indenture, all of the Company's Subsidiaries are Restricted
Subsidiaries. However, under certain circumstances, the Company will be able to
designate current or future Subsidiaries as Unrestricted Subsidiaries.
Unrestricted Subsidiaries will not be subject to many of the restrictive
covenants set forth in the Indenture.
Principal, Maturity and Interest
The Notes are limited in aggregate principal amount to $130.0 million and
mature on December 15, 2007. The Indenture provides for the issuance of up to
$75.0 million aggregate principal amount of additional Notes having identical
terms and conditions to the Notes offered hereby (the "Additional Notes"),
subject to compliance with the covenants contained in the Indenture. Any
Additional Notes will be part of the same issue as the Notes offered hereby and
will vote on all matters with the Notes offered hereby. For purposes of this
"Description of Notes," references to the Notes do not include Additional Notes.
Interest on the Notes accrues from the most recent date to which interest has
been paid or, if no interest has been paid, from the date of original issuance.
Interest is computed on the basis of a 360-day year comprised of twelve 30-day
months. Principal, premium, if any, and interest and Liquidated Damages, if any,
on the Notes is be payable at the office or agency of the Company maintained for
such purpose within the City and State of New York or, at the option of the
Company, payment of interest and Liquidated Damages, if any, may be made by
check mailed to the Holders of the Notes at their respective addresses set forth
in the register of Holders of Notes; provided that all payments with respect to
Notes the Holders of which have given wire transfer instructions to the Company
are required to be made by wire transfer of immediately available funds to the
accounts specified by the Holders thereof. Until otherwise designated by the
Company, the Company's office or agency in New York is the office of the Trustee
maintained for such purpose. The Notes have been issued in denominations of
$1,000 and integral multiples thereof.
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Subordination
The payment of all Obligations on the Notes are subordinated in right of
payment, as set forth in the Indenture, to the prior payment in full in cash of
all Senior Indebtedness, whether outstanding on the date of the Indenture or
thereafter incurred.
Upon any distribution to creditors of the Company or Holdings in a
liquidation or dissolution of the Company or Holdings, as the case may be, or in
a bankruptcy, reorganization, insolvency, receivership or similar proceeding
relating to the Company or Holdings or their respective property, an assignment
for the benefit of creditors or any marshalling of the Company's or Holdings'
assets and liabilities, the holders of Senior Indebtedness are entitled to
receive payment in full in cash of all Obligations due in respect of such Senior
Indebtedness (including interest after the commencement of any such proceeding
at the rate specified in the applicable Senior Indebtedness) before the Holders
of Notes are entitled to receive any payment with respect to the Notes or the
Holdings Guarantee, and until all Obligations with respect to Senior
Indebtedness are paid in full, any distribution to which the Holders of Notes
would be entitled shall be made to the holders of Senior Indebtedness (except
that Holders of Notes may receive securities that are subordinated at least to
the same extent as the Notes to Senior Indebtedness and any securities issued in
exchange for Senior Indebtedness and payments made from the trust described
under "-- Legal Defeasance and Covenant Defeasance"). Senior Indebtedness shall
not be deemed to have been paid in full until the termination of all commitments
or other Obligations under the New Credit Facility, and the payment in full in
cash thereof.
The Company and Holdings also may not make any payment or distribution upon
or in respect of the Notes or the Holdings Guarantee (except in such
subordinated securities or from the trust described under "-- Legal Defeasance
and Covenant Defeasance") if (i) a default in the payment of any Obligation on
Designated Senior Indebtedness occurs and is continuing beyond any applicable
period of grace or (ii) any other default occurs and is continuing with respect
to Designated Senior Indebtedness that permits holders of the Designated Senior
Indebtedness as to which such default relates to accelerate its maturity and the
Trustee receives a notice of such default (a "Payment Blockage Notice") from the
Company, Holdings, the agent under the New Credit Facility or the holders of any
other Designated Senior Indebtedness. Payments on the Notes or the Holdings
Guarantee may and shall be resumed (a) in the case of a payment default, upon
the date on which such default is cured or waived and (b) in case of a
nonpayment default, the earlier of the date on which such nonpayment default is
cured or waived or 179 days after the date on which the applicable Payment
Blockage Notice is received, unless the maturity of any Designated Senior
Indebtedness has been accelerated. No new period of payment blockage pursuant to
a Payment Blockage Notice may be commenced unless and until (i) 360 days have
elapsed since the effectiveness of the immediately prior Payment Blockage Notice
and (ii) all scheduled payments of principal, premium, if any, and interest on
the Notes that have come due have been paid in full in cash. No nonpayment
default that existed or was continuing on the date of delivery of any Payment
Blockage Notice to the Trustee shall be, or be made, the basis for a subsequent
Payment Blockage Notice.
The Indenture further requires that the Company promptly notify holders of
Senior Indebtedness if payment of the Notes is accelerated because of an Event
of Default.
As a result of the subordination provisions described above, in the event
of a liquidation or insolvency, Holders of Notes may recover less ratably than
creditors of the Company or Holdings who are holders of Senior Indebtedness. At
November 29, 1997, the aggregate principal amount of Senior Indebtedness of the
Company was approximately $135.5 million. The Indenture limits, subject to
certain financial tests, the amount of additional Indebtedness, including Senior
Indebtedness, that the Company, Holdings and their respective subsidiaries can
incur. See "-- Certain Covenants -- Incurrence of Indebtedness and Issuance of
Preferred Stock."
Holdings Guarantee
The payment of principal of, premium, if any, and interest and Liquidated
Damages, if any, on the Notes is fully and unconditionally guaranteed on an
unsecured basis by Holdings. The Holdings Guarantee is, or will be, joint and
several with any other guarantor. The Holdings Guarantee is subordinated to the
amounts for which Holdings will be
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liable under the guarantees issued from time to time with respect to Senior
Indebtedness to the same extent as the Notes are subordinated to such Senior
Indebtedness. The obligation of Holdings under the Holdings Guarantee are
limited so as not to constitute a fraudulent conveyance under applicable law.
See, however, "Risk Factors -- Fraudulent Conveyance and Preference
Considerations."
The Indenture provides that Holdings may not consolidate with or merge with
or into (whether or not Holdings is the surviving Person), another corporation,
Person or entity whether or not affiliated with Holdings unless (i) subject to
the provisions of the following paragraph, the Person formed by or surviving any
such consolidation or merger (if other than Holdings) assumes all the
obligations of Holdings pursuant to a supplemental indenture in form and
substance reasonably satisfactory to the Trustee, under the Notes and the
Indenture; (ii) immediately after giving effect to such transaction, no Default
or Event of Default exists; (iii) Holdings, or any Person formed by or surviving
any such consolidation or merger, would have Consolidated Net Worth (immediately
after giving effect to such transaction), equal to or greater than the
Consolidated Net Worth of Holdings immediately preceding the transaction; and
(iv) Holdings would be permitted, immediately after giving effect to such
transaction, to incur at least $1.00 of additional Indebtedness pursuant to the
Fixed Charge Coverage Ratio test set forth in the covenant described below under
the caption "-- Incurrence of Indebtedness and Issuance of Preferred Stock."
Optional Redemption
The Notes are not redeemable at the Company's option prior to December 15,
2002. Thereafter, the Notes will be subject to redemption at the option of the
Company, in whole or in part, upon not less than 30 nor more than 60 days'
notice, at the redemption prices (expressed as percentages of principal amount)
set forth below plus accrued and unpaid interest and Liquidated Damages, if any,
thereon to the applicable redemption date, if redeemed during the twelve-month
period beginning on December 15 of the years indicated below:
Year Percentage
---- ----------
2002....................................................... 104.9375%
2003....................................................... 103.2917%
2004....................................................... 101.6458%
thereafter................................................. 100.0000%
Notwithstanding the foregoing, at any time on or before December 15, 2000,
the Company may (but shall not have the obligation to) redeem up to 35% of the
original aggregate principal amount of Notes (including any Additional Notes) at
a redemption price of 109.875% of the principal amount thereof plus accrued and
unpaid interest and Liquidated Damages thereon to the redemption date, with the
net cash proceeds of one or more Public Equity Offerings; provided that at least
65% of the aggregate principal amount of Notes (including any Additional Notes)
remain outstanding immediately after the occurrence of such redemption; and
provided, further, that such redemption shall occur within 60 days of the date
of the closing of such Public Equity Offering.
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee on a pro rata basis; provided
that no Notes of $1,000 or less shall be redeemed in part. Notices of redemption
shall be mailed by first class mail at least 30 but not more than 60 days before
the redemption date to each Holder of Notes to be redeemed at its registered
address. If any Note is to be redeemed in part only, the notice of redemption
that relates to such Note shall state the portion of the principal amount
thereof to be redeemed. A new Note in principal amount equal to the unredeemed
portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Note. On and after the redemption date, interest
ceases to accrue on Notes or portions of them called for redemption.
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Optional Redemption Upon Change Of Control
Upon the occurrence of a Change of Control prior to December 15, 2002, the
Notes will be redeemable, in whole or in part, at the option of the Company,
upon not less than 30 nor more than 60 days prior notice to each Holder of Notes
to be redeemed, at a redemption price equal to the sum of (i) the then
outstanding principal amount thereof plus (ii) accrued and unpaid interest
thereon and Liquidated Damages, if any, to the redemption date plus (iii) the
Applicable Premium. The following definitions are used to determine the
Applicable Premium:
"Applicable Premium" is defined, with respect to a Note, as the greater of
(i) 4.9375% of the then outstanding principal amount of such Note or (ii) the
excess of (A) the present value of the remaining required interest and principal
payments due on such Note (exclusive of accrued and unpaid interest and
Liquidated Damages, if any), computed using a discount rate equal to the
Treasury Rate plus 50 basis points, over (B) the then outstanding principal
amount of such Note.
"Treasury Rate" is defined as the yield to maturity at the time of
computation of United States Treasury securities with a constant maturity (as
compiled and published in the most recent Federal Reserve Statistical Release
H.15 (519) which has become publicly available at least two Business Days prior
to the date fixed for prepayment (or, if such Statistical Release is no longer
published, any publicly available source of similar market data)) most nearly
equal to the then remaining Average Life to Stated Maturity of the Notes;
provided, however, that if the Average Life to Stated Maturity of the Notes is
not equal to the constant maturity of a United States Treasury security for
which a weekly average yield is given, the Treasury Rate shall be obtained by
linear interpolation (calculated to the nearest one-twelfth of a year) from the
weekly average yields of United States Treasury securities for which such yields
are given, except that if the Average Life to Stated Maturity of the Notes is
less than one year, the weekly average yield on actually traded United States
Treasury securities adjusted to a constant maturity of one year shall be used.
Mandatory Redemption
Except as set forth below under "Repurchase at the Option of Holders," the
Company is not required to make mandatory redemption or sinking fund payments
with respect to the Notes.
Repurchase at the Option of Holders
Change of Control
Upon the occurrence of a Change of Control, each Holder of Notes will have
the right to require the Company to repurchase all or any part (equal to $1,000
or an integral multiple thereof) of such Holder's Notes pursuant to the offer
described below (the "Change of Control Offer") at an offer price in cash equal
to 101% of the aggregate principal amount thereof plus accrued and unpaid
interest and Liquidated Damages thereon, if any, to the date of repurchase (the
"Change of Control Payment"). Within fifteen days following any Change of
Control, the Company will mail a notice to each Holder describing the
transaction or transactions that constitute the Change of Control and offering
to repurchase Notes on the date specified in such notice, which date shall be no
earlier than 30 days and no later than 60 days from the date such notice is
mailed (the "Change of Control Payment Date"), pursuant to the procedures
required by the Indenture and described in such notice. The Company will comply
with the requirements of Rule 14e-1 under the Exchange Act and any other
securities laws and regulations thereunder to the extent such laws and
regulations are applicable in connection with the repurchase of the Notes as a
result of a Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (1) accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (2) deposit with the Paying Agent an
amount equal to the Change of Control Payment in respect of all Notes or
portions thereof so tendered and (3) deliver or cause to be delivered to the
Trustee the Notes so accepted together with an Officers' Certificate stating the
aggregate principal amount of Notes or portions thereof being purchased by the
Company. The Paying Agent will promptly mail to each Holder of Notes so tendered
the Change of Control Payment for such Notes, and the Trustee will promptly
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authenticate and mail (or cause to be transferred by book entry) to each Holder
a new Note equal in principal amount to any unpurchased portion of the Notes
surrendered, if any; provided that each such new Note will be in a principal
amount of $1,000 or an integral multiple thereof. The Indenture will provide
that, prior to complying with the provisions of this covenant, but in any event
within 75 days following a Change of Control, the Company will either repay all
outstanding Senior Indebtedness or obtain the requisite consents, if any, under
all agreements governing outstanding Senior Indebtedness to permit the
repurchase of Notes required by this covenant. The Company will publicly
announce the results of the Change of Control Offer on or as soon as practicable
after the Change of Control Payment Date.
The Change of Control provisions described above will take precedence over
other provisions of the Indenture which may be applicable. Except as described
above with respect to a Change of Control, the Indenture does not contain
provisions that permit the Holders of the Notes to require that the Company
repurchase or redeem the Notes in the event of a takeover, recapitalization or
similar transaction.
The New Credit Facility currently prohibits the Company from purchasing any
Notes, and also provides that certain events constituting a change of control
with respect to the Company would constitute a default thereunder. Any future
credit agreements or other agreements relating to Senior Indebtedness to which
the Company becomes a party may contain similar restrictions and provisions. In
the event a Change of Control occurs at a time when the Company is prohibited
from purchasing Notes, the Company could seek the consent of its lenders to the
purchase of Notes or could attempt to refinance the borrowings that contain such
prohibition. If the Company does not obtain such a consent or repay such
borrowings, the Company will remain prohibited from purchasing Notes. In such
case, the Company's failure to purchase tendered Notes would constitute an Event
of Default under the Indenture which would, in turn, constitute a default under
the New Credit Facility. In such circumstances, the subordination provisions in
the Indenture would likely restrict payments to the Holders of Notes.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture, applicable to a Change of Control Offer made by the Company
and purchases all Notes validly tendered and not withdrawn under such Change of
Control Offer.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company and its Subsidiaries taken as a whole. Although
there is a developing body of case law interpreting the phrase "substantially
all," there is no precise established definition of the phrase under applicable
law. Accordingly, the ability of a Holder of Notes to require the Company to
repurchase such Notes as a result of a sale, lease, transfer, conveyance or
other disposition of less than all of the assets of the Company and its
Subsidiaries taken as a whole to another Person or group may be uncertain.
Asset Sales
The Indenture provides that the Company and Holdings will not, and will not
permit any of their respective Restricted Subsidiaries to, consummate an Asset
Sale unless (i) the Company, Holdings or the Restricted Subsidiary, as the case
may be, receives consideration at the time of such Asset Sale at least equal to
the fair market value (evidenced by a resolution of the Board of Directors set
forth in an Officers' Certificate delivered to the Trustee) of the assets or
Equity Interests issued or sold or otherwise disposed of and (ii) at least 75%
of the consideration therefor received by the Company, Holdings or such
Restricted Subsidiary is in the form of cash or Cash Equivalents; provided that
the amount of (x) any liabilities (as shown on the Company's, Holdings' or such
Restricted Subsidiary's most recent balance sheet) of the Company, Holdings or
any Restricted Subsidiary (other than contingent liabilities and liabilities
that are by their terms subordinated to the Notes, the Holdings Guarantee or any
Subsidiary Guarantee) that are assumed by the transferee of any such assets
pursuant to a customary novation agreement that releases the Company, Holdings
or such Restricted Subsidiary from further liability and (y) any notes or other
obligations received by the Company, Holdings or any such Restricted Subsidiary
from such transferee that are immediately converted by the Company, Holdings or
such Restricted Subsidiary into cash (to the extent of the cash received), shall
be deemed to be cash for purposes of this provision.
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Within 360 days after the receipt of any Net Proceeds from an Asset Sale,
the Company or Holdings, as the case may be, may apply such Net Proceeds, at its
option, (a) to permanently reduce outstanding Senior Indebtedness (and
correspondingly reduce commitments thereunder) or (b) to acquire a controlling
interest in another business, the making of a capital expenditure or the
acquisition of other long-term assets, in each case, in the same or a similar
line of business as the Company was engaged in on the date of the Indenture.
Pending the final application of any such Net Proceeds, the Company or Holdings,
as the case may be, may temporarily reduce revolving credit Indebtedness or
otherwise invest such Net Proceeds in any manner that is not prohibited by the
Indenture. Any Net Proceeds from Asset Sales that are not applied or invested as
provided in the first sentence of this paragraph will be deemed to constitute
"Excess Proceeds." When the aggregate amount of Excess Proceeds exceeds $5.0
million, the Company and Holdings will be required to make an offer to all
Holders of Notes and Additional Notes (an "Asset Sale Offer") to purchase the
maximum principal amount of Notes and Additional Notes that may be purchased out
of the Excess Proceeds, at an offer price in cash in an amount equal to 100% of
the principal amount thereof plus accrued and unpaid interest and Liquidated
Damages, if any, thereon to the date of purchase, in accordance with the
procedures set forth in the Indenture. To the extent that the aggregate amount
of Notes and Additional Notes tendered pursuant to an Asset Sale Offer is less
than the Excess Proceeds, the Company or Holdings, as the case may be, may use
any remaining Excess Proceeds for general corporate purposes. If the aggregate
principal amount of Notes and Additional Notes surrendered by Holders thereof
exceeds the amount of Excess Proceeds, the Trustee shall select the Notes and
Additional Notes to be purchased on a pro rata basis. Upon completion of such
offer to purchase, the amount of Excess Proceeds shall be reset at zero.
Certain Covenants
Restricted Payments
The Indenture provides that the Company and Holdings will not, and will not
permit any of the Restricted Subsidiaries to, directly or indirectly: (i)
declare or pay any dividend or make any other payment or distribution on account
of the Company's, Holdings' or any of the Restricted Subsidiaries' Equity
Interests (including, without limitation, any payment in connection with any
merger or consolidation involving the Company or Holdings) or to the direct or
indirect holders of the Company's, Holdings' or any Restricted Subsidiaries'
Equity Interests in their capacity as such (other than dividends or
distributions payable in Equity Interests (other than Disqualified Stock) of
Holdings); (ii) purchase, redeem or otherwise acquire or retire for value
(including without limitation, in connection with any merger or consolidation
involving the Company or Holdings) any Equity Interests of the Company,
Holdings, any Restricted Subsidiary of the Company or Holdings, or any Affiliate
of the Company or Holdings (other than any such Equity Interests owned by the
Company or any Wholly Owned Restricted Subsidiary of the Company); (iii) make
any payment on, or purchase, redeem, defease or otherwise acquire or retire for
value any Indebtedness that is subordinated to the Notes (other than Notes),
except a payment of interest or principal of Indebtedness (other than interest
payments on any Exchange Notes or Qualified Subordinated Indebtedness) at Stated
Maturity or (iv) make any Restricted Investment (all such payments and other
actions set forth in clauses (i) through (iv) above being collectively referred
to as "Restricted Payments"), unless, at the time of and after giving effect to
such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be continuing or
would occur as a consequence thereof;
(b) the Company (in the case of a Restricted Payment by the Company or any
of its Restricted Subsidiaries) or Holdings (in all other cases) would, at the
time of such Restricted Payment and after giving pro forma effect thereto as if
such Restricted Payment had been made at the beginning of the applicable
four-quarter period, have a Fixed Charge Coverage Ratio of at least 2.0 to 1
pursuant to the Fixed Charge Coverage Ratio test set forth in the first
paragraph of the covenant described below under caption "-- Incurrence of
Indebtedness and Issuance of Preferred Stock;"
(c) in the case of a Restricted Payment of the Company or a Restricted
Subsidiary of the Company, such Restricted Payment, together with the aggregate
of all other Restricted Payments made by the Company and its Restricted
Subsidiaries after the date of the Indenture (excluding Restricted Payments
permitted by clause (ii) of the second succeeding paragraph), is less than the
sum of (i) 50% of the Consolidated Net Income of the Company for the period
(taken as one accounting period) from the beginning of the first fiscal quarter
commencing after the date of the Indenture
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to the end of the Company's most recently ended fiscal quarter for which
internal financial statements are available at the time of such Restricted
Payment (or, if such Consolidated Net Income for such period is a deficit, less
100% of such deficit), plus (ii) 100% of the aggregate net cash proceeds
received by the Company from the issue or sale since the date of the Indenture
of Equity Interests of the Company (other than Disqualified Stock) or of
Disqualified Stock or debt securities of the Company that have been converted
into such Equity Interests (other than Equity Interests (or Disqualified Stock
or convertible debt securities) sold to a Subsidiary of the Company and other
than Disqualified Stock or convertible debt securities that have been converted
into Disqualified Stock), plus (iii) to the extent that any Restricted
Investment that was made after the date of the Indenture is sold for cash or
otherwise liquidated or repaid for cash, the lesser of (A) the cash return of
capital with respect to such Restricted Investment (less the cost of
disposition, if any) and (B) the initial amount of such Restricted Investment
plus (iv) the amount resulting from redesignations of Unrestricted Subsidiaries
as Restricted Subsidiaries (in each case, such amount to be valued as provided
in the second succeeding paragraph) not to exceed the amount of Investments
previously made by the Company or any Restricted Subsidiary in such Unrestricted
Subsidiary and which was treated as a Restricted Payment under the Indenture;
and
(d) in the case of a Restricted Payment by Holdings or a Restricted
Subsidiary of Holdings (other than the Company or a Restricted Subsidiary of the
Company), such Restricted Payment, together with the aggregate of all other
Restricted Payments made by Holdings, the Company and their Restricted
Subsidiaries after the date of the Indenture (excluding Restricted Payments
permitted by clause (ii) of the next succeeding paragraph), is less than the sum
of (i) 50% of the Consolidated Net Income of Holdings for the period (taken as
one accounting period) from the beginning of the first fiscal quarter commencing
after the date of the Indenture to the end of Holdings' most recently ended
fiscal quarter for which internal financial statements are available at the time
of such Restricted Payment (or, if such Consolidated Net Income for such period
is a deficit, less 100% of such deficit), plus (ii) 100% of the aggregate net
cash proceeds received by Holdings from the issue or sale since the date of the
Indenture of Equity Interests of Holdings (other than Disqualified Stock) or of
Disqualified Stock or debt securities of Holdings that have been converted into
such Equity Interests (other than Equity Interests (or Disqualified Stock or
convertible debt securities) sold to a Subsidiary of Holdings and other than
Disqualified Stock or convertible debt securities that have been converted into
Disqualified Stock), plus (iii) to the extent that any Restricted Investment
that was made after the date of the Indenture is sold for cash or otherwise
liquidated or repaid for cash, the lesser of (A) the cash return of capital with
respect to such Restricted Investment (less the cost of disposition, if any) and
(B) the initial amount of such Restricted Investment plus (iv) the amount
resulting from redesignations of Unrestricted Subsidiaries as Restricted
Subsidiaries (in each case, such amount to be valued as provided in the second
succeeding paragraph) not to exceed the amount of Investments previously made by
Holdings in such Unrestricted Subsidiary and which was treated as a Restricted
Payment under the Indenture.
The foregoing provisions do not prohibit: (i) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the
Indenture; (ii) the redemption, repurchase, retirement, defeasance or other
acquisition of any subordinated Indebtedness or Equity Interests of the Company
in exchange for, or out of the net cash proceeds of, the substantially
concurrent sale (other than to a Restricted Subsidiary of the Company) of other
Equity Interests of the Company (other than any Disqualified Stock); provided
that the amount of any such net cash proceeds that are utilized for any such
redemption, repurchase, retirement, defeasance or other acquisition shall be
excluded from clause (c)(ii) of paragraph (c) above; (iii) the redemption,
repurchase, retirement, defeasance or other acquisition of any subordinated
Indebtedness or Equity Interests of Holdings in exchange for, or out of the net
cash proceeds of, the substantially concurrent sale (other than to the Company
or a Restricted Subsidiary of Holdings) of other Equity Interests of Holdings
(other than any Disqualified Stock); provided that the amount of any such net
cash proceeds that are utilized for any such redemption, repurchase, retirement,
defeasance or other acquisition shall be excluded from clause (d)(ii) of
paragraph (d) above; (iv) the defeasance, redemption, repurchase or other
acquisition of subordinated Indebtedness with the net cash proceeds from an
incurrence of Permitted Refinancing Indebtedness; (v) the making of any
Restricted Payment by Holdings utilizing the proceeds of a Restricted Payment
made by the Company to Holdings in accordance with the Indenture; (vi) the
payment of any dividend by a Restricted Subsidiary of the Company or Holdings
(other than the Company) to the holders of its common Equity Interests on a pro
rata basis; (vii) so long as no Default or Event of Default shall have occurred
and is continuing, the repurchase, redemption or other retirement for value of
any Equity Interests of the Company, Holdings or a Restricted Subsidiary, or
dividends or other distributions by the Company to Holdings the
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proceeds of which are utilized by Holdings to repurchase, redeem or otherwise
acquire or retire for value any Equity Interests of Holdings, in each case, held
by any member of the management, employees or consultants of the Company, a
Restricted Subsidiary or Holdings pursuant to any management, employee or
consultant equity subscription agreement or stock option agreement; provided
that the aggregate price paid for all such repurchased, redeemed, acquired or
retired Equity Interests shall not exceed the sum of (x) $500,000 in any
twelve-month period and (y) the aggregate cash proceeds received by the Company
or Holdings from any reissuance of Equity Interests by Holdings or the Company
to members of management of the Company or Holdings (provided that the cash
proceeds referred to in this clause (y) shall be excluded from clause (c)(ii) of
paragraph (c) above); (viii) dividends or other payments to Holdings sufficient
to enable Holdings to pay (x) accounting, legal, corporate reporting and
administrative expenses of Holdings incurred in the ordinary course of business,
(y) required fees and expenses, and any adjustments to the purchase price under
the Stock Purchase Agreement, in each case in connection with the
Recapitalization, and (z) the registration fees and expenses under applicable
laws and regulations of its debt or equity securities; and (ix) payments to
Holdings pursuant to the Tax Sharing Agreement. In addition, the Indenture will
provide that the Company may make a distribution to Holdings to consummate the
Recapitalization.
The Board of Directors of the Company or Holdings, as the case may be, may
designate any Restricted Subsidiary to be an Unrestricted Subsidiary if such
designation would not cause a Default. For purposes of making such
determination, all outstanding Investments by the Company, Holdings and the
Restricted Subsidiaries (except to the extent repaid in cash) in the Subsidiary
so designated will be deemed to be Restricted Payments at the time of such
designation and will reduce the amount available for Restricted Payments under
the first paragraph of this covenant. All such outstanding Investments will be
deemed to constitute Investments in an amount equal to the greater of (x) the
net book value of such Investments at the time of such designation and (y) the
fair market value of such Investments at the time of such designation. Such
designation will only be permitted if such Restricted Payment would be permitted
at such time and if such Restricted Subsidiary otherwise meets the definition of
an Unrestricted Subsidiary.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued by the Company, Holdings or such
Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair
market value of any non-cash Restricted Payment shall be determined by the Board
of Directors of the Company or Holdings, as the case may be, whose resolution
with respect thereto shall be delivered to the Trustee, such determination to be
based upon an opinion or appraisal issued by an accounting, appraisal or
investment banking firm of national standing if such fair market value exceeds
$5.0 million. Not later than the date of making any Restricted Payment, the
Company shall deliver to the Trustee an Officers' Certificate stating that such
Restricted Payment is permitted and setting forth the basis upon which the
calculations required by the covenant "Restricted Payments" were computed,
together with a copy of any fairness opinion or appraisal required by the
Indenture, which calculations may be based upon Holdings' latest available
financial statements.
Incurrence of Indebtedness and Issuance of Preferred Stock
The Indenture provides that the Company and Holdings will not, and will not
permit any of their respective Subsidiaries to, directly or indirectly, create,
incur, issue, assume, guarantee or otherwise become directly or indirectly
liable, contingently or otherwise, with respect to (collectively, "incur") any
Indebtedness (including Acquired Debt), will not issue any Disqualified Stock
and will not permit any of their respective Subsidiaries to issue any shares of
preferred stock; provided, however, that (i) the Company may incur Indebtedness
(including Acquired Debt) or issue shares of Disqualified Stock if the Fixed
Charge Coverage Ratio of the Company for the Company's most recently ended four
full fiscal quarters for which internal financial statements are available
immediately preceding the date on which such additional Indebtedness is incurred
or such Disqualified Stock is issued would have been at least 1.75 to 1, if such
incurrence or issuance is on or prior to December 15, 1999, or 2.0 to 1, if such
incurrence or issuance is after December 15, 1999, in each case, determined on a
pro forma basis (including a pro forma application of the net proceeds
therefrom), as if the additional Indebtedness had been incurred, or the
Disqualified Stock had been issued, as the case may be, at the beginning of such
four-quarter period and (ii) Holdings may incur Indebtedness (including Acquired
Debt) or issue shares of Disqualified Stock if the Fixed Charge Coverage Ratio
of Holdings for Holdings' most recently
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ended four full fiscal quarters for which internal financial statements are
available immediately preceding the date on which such additional Indebtedness
is incurred or such Disqualified Stock is issued would have been at least 1.75
to 1, if such incurrence or issuance is on or prior to December 15, 1999, or 2.0
to 1, if such incurrence or issuance is after December 15, 1999, in each case,
determined on a pro forma basis (including a pro forma application of the net
proceeds therefrom), as if the additional Indebtedness had been incurred, or the
Disqualified Stock had been issued, as the case may be, at the beginning of such
four-quarter period.
The provisions of the first paragraph of this covenant will not apply to
the incurrence of any of the following (collectively, "Permitted Debt"), each of
which shall be given independent effect:
(i) the incurrence by the Company, Holdings and their respective
Subsidiaries of Indebtedness (including letters of credit), or guarantees of
such Indebtedness, pursuant to the term loan portion of the New Credit Facility;
provided that, after giving pro forma effect to any such incurrence and the
application of the proceeds therefrom, the aggregate principal amount of all
Indebtedness of the Company, Holdings and their Subsidiaries outstanding under
the term loan portion of the New Credit Facility does not exceed $100.0 million
less the aggregate amount of all Net Proceeds of Asset Sales applied to
permanently repay any such Indebtedness pursuant to the covenant described above
under the caption "Repurchase at the Option of Holders -- Asset Sales;"
(ii) the incurrence by the Company, Holdings and their respective
Subsidiaries of Indebtedness (including letters of credit), or guarantees of
such Indebtedness, pursuant to the revolving loan portion of the New Credit
Facility (with letters of credit being deemed to have a principal amount equal
to the maximum potential liability of the Company, Holdings and their
Subsidiaries thereunder); provided that, after giving pro forma effect to any
such incurrence and the application of the proceeds therefrom, the aggregate
principal amount of all Indebtedness (including letters of credit) of the
Company, Holdings and their Subsidiaries outstanding under the revolving loan
portion of the New Credit Facility does not exceed the greater of (x) $75.0
million less the aggregate amount of all Net Proceeds of Asset Sales applied to
permanently repay any such Indebtedness pursuant to the covenant described above
under the caption "Repurchase at the Option of Holders -- Asset Sales" or (y)
the amount of the Borrowing Base as of any date of incurrence;
(iii) the incurrence by the Company of Indebtedness represented by the
Notes (other than any Additional Notes), the incurrence by Holdings of the
Holdings Guarantee or the incurrence by any Restricted Subsidiary of Subsidiary
Guarantees;
(iv) the incurrence by the Company, Holdings or any of their Subsidiaries
of Indebtedness represented by Capital Lease Obligations, mortgage financings or
purchase money obligations, in each case incurred for the purpose of financing
all or any part of the purchase price or cost of construction or improvement of
property, plant or equipment used in the business of the Company, Holdings or
such Subsidiary, in an aggregate principal amount not to exceed $5.0 million at
any time outstanding;
(v) the incurrence by any corporation that becomes a Subsidiary of the
Company after the Issue Date of Acquired Debt, which Indebtedness is existing at
the time such corporation becomes a Subsidiary; provided, however, that (A)
either (x) the principal amount (or accreted value, as applicable) of such
Acquired Debt, together with any other outstanding Indebtedness incurred
pursuant to this clause (iv), does not exceed $5.0 million since the Issue Date
or (y) immediately after giving effect to such corporation becoming a
Subsidiary, Holdings could incur at least $1.00 of additional Indebtedness
(other than Permitted Debt) in accordance with the Indenture, (B) such
Indebtedness is without recourse to the Company, Holdings or to any of their
respective Subsidiaries or to any of their respective properties or assets other
than Person becoming a Subsidiary or its properties and assets and (C) such
Indebtedness was not incurred as a result of or in connection with or in
contemplation of such entity becoming a Subsidiary;
(vi) the incurrence by the Company, Holdings or any of their Subsidiaries
of Permitted Refinancing Indebtedness in exchange for, or the net proceeds of
which are used to extend, refinance, renew, replace, defease or refund,
Indebtedness that was permitted by the Indenture to be incurred;
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(vii) the incurrence of intercompany Indebtedness between or among the
Company, Holdings and any of their respective Wholly Owned Restricted
Subsidiaries; provided, however, that (i) if the Company or Holdings is the
obligor on such Indebtedness, such Indebtedness is expressly subordinate to the
prior payment in full in cash of all Obligations with respect to the Notes and
(ii)(A) any subsequent issuance or transfer of Equity Interests that results in
any such Indebtedness being held by a Person other than the Company, Holdings or
a Wholly Owned Restricted Subsidiary and (B) any sale or other transfer of any
such Indebtedness to a Person that is not either the Company, Holdings or a
Wholly Owned Restricted Subsidiary shall be deemed, in each case, to constitute
an incurrence of such Indebtedness by the Company, Holdings or such Subsidiary,
as the case may be;
(viii) Indebtedness of an Unrestricted Subsidiary owed to and held by the
Company, Holdings or a Restricted Subsidiary, provided that the Company,
Holdings or such Restricted Subsidiary is permitted to make an investment in
such Unrestricted Subsidiary under the Indenture at the time such Indebtedness
is incurred in an amount equal to the principal amount of such Indebtedness;
(ix) the incurrence by the Company or Holdings of Hedging Obligations that
are incurred for the purpose of fixing or hedging currency risk or interest rate
risk with respect to any floating rate Indebtedness that is permitted by the
terms of this Indenture to be outstanding;
(x) the incurrence by Unrestricted Subsidiaries of Non-Recourse Debt,
provided, however, that if any such Indebtedness ceases to be Non-Recourse Debt
of an Unrestricted Subsidiary, such event shall be deemed to constitute an
incurrence of Indebtedness by a Restricted Subsidiary;
(xi) Indebtedness incurred in respect of performance, surety and similar
bonds provided by the Company, Holdings and the Restricted Subsidiaries in the
ordinary course of business, and refinancings thereof;
(xii) Indebtedness for letters of credit relating to workers' compensation
claims and self-insurance or similar requirements in the ordinary course of
business;
(xiii) Indebtedness arising from guarantees of Indebtedness of the Company,
Holdings or any Subsidiary or other agreements of the Company, Holdings or a
Subsidiary providing for indemnification, adjustment of purchase price or
similar obligations, in each case, incurred or assumed in connection with the
disposition of any business, assets or Subsidiary, other than guarantees of
Indebtedness incurred by any person acquiring all or any portion of such
business, assets or Subsidiary for the purpose of financing such acquisition,
provided that the maximum aggregate liability in respect of all such
Indebtedness shall at no time exceed the gross proceeds actually received by the
Company, Holdings and their Subsidiaries in connection with such disposition;
(xiv) the issuance by Holdings, on the Issue Date, of shares of Holdings
Preferred Stock, with an aggregate liquidation value of up to $17.6 million and
the issuance of additional shares of Holdings Preferred Stock as dividends on
outstanding shares of Holdings Preferred Stock subsequent to the Issue Date in
accordance with the terms of the Holdings Preferred Stock;
(xv) the incurrence of Exchange Notes issued (a) in exchange for all, but
not less than all, of the outstanding Holdings Preferred Stock in accordance
with the terms of the Holdings Preferred Stock as in effect on the Issue Date,
if immediately prior to giving effect to the incurrence of such Exchange Notes,
the Fixed Charge Coverage Ratio of Holdings would have been at least 2.0 to 1
pursuant to the Fixed Charge Ratio test set forth in clause (ii) of the proviso
of the first paragraph of this covenant; provided that in calculating such Fixed
Charge Coverage Ratio of Holdings, no effect shall be given to clause (ii) of
the definition of "Consolidated Net Income" set forth under "-- Certain
Definitions" below) and (b) as interest on Exchange Notes in accordance with the
terms thereof;
(xvi) the incurrence by Holdings of Qualified Subordinated Indebtedness in
an aggregate principal amount not to exceed $5.0 million at any time
outstanding; and
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(xvii) the incurrence by the Company, Holdings or any of their Subsidiaries
of additional Indebtedness (in addition to Indebtedness permitted by any other
clause of this paragraph) in an aggregate principal amount (or accreted value,
as applicable) at any time outstanding not to exceed $20.0 million.
For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (i) through (xvii) above or is
entitled to be incurred pursuant to the first paragraph of this covenant, the
Company shall, in its sole discretion, classify such item of Indebtedness in any
manner that complies with this covenant and such item of Indebtedness will be
treated as having been incurred pursuant to only one of such clauses or pursuant
to the first paragraph hereof. Accrual of interest and the accretion of accreted
value will not be deemed to be an incurrence of Indebtedness for purposes of
this covenant.
Liens
The Indenture provides that the Company and Holdings will not, and will not
permit any of their respective Subsidiaries to, directly or indirectly, create,
incur, assume or suffer to exist any Lien on any asset now owned or hereafter
acquired, or any income or profits therefrom or assign or convey any right to
receive income therefrom, except Permitted Liens.
Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries
The Indenture provides that the Company and Holdings will not, and will not
permit any Restricted Subsidiaries to, directly or indirectly, create or
otherwise cause or suffer to exist or become effective any encumbrance or
restriction on the ability of any Restricted Subsidiary to (i)(a) pay dividends
or make any other distributions to the Company, Holdings or any of the
Restricted Subsidiaries (1) on its Capital Stock or (2) with respect to any
other interest or participation in, or measured by, its profits, or (b) pay any
Indebtedness owed to the Company, Holdings or any of the Restricted
Subsidiaries, (ii) make loans or advances to the Company, Holdings or any of the
Restricted Subsidiaries or (iii) transfer any of its properties or assets to the
Company, Holdings or any of the Restricted Subsidiaries, except for such
encumbrances or restrictions existing under or by reason of (a) applicable law,
(b) any instrument governing Indebtedness or Capital Stock of a Person acquired
by the Company, Holdings or any of the Restricted Subsidiaries as in effect at
the time of such acquisition (except to the extent such Indebtedness was
incurred in connection with or in contemplation of such acquisition), which
encumbrance or restriction is not applicable to any Person, or the properties or
assets of any Person, other than the Person, or the property or assets of the
Person, so acquired, provided that, in the case of Indebtedness, such
Indebtedness was permitted by the terms of the Indenture to be incurred, (c) by
reason of customary non-assignment provisions in leases, licenses, encumbrances,
contracts or similar assets entered into or acquired in the ordinary course of
business and consistent with past practices, (d) purchase money obligations for
property acquired in the ordinary course of business that impose restrictions of
the nature described in clause (iii) above on the property so acquired, (e)
existing by virtue of any transfer of, agreement to transfer, option or right
with respect to, or Lien on, any property or assets of the Company, Holdings or
any Restricted Subsidiary not otherwise prohibited by the Indenture, (f) with
respect to a Restricted Subsidiary and imposed pursuant to an agreement that has
been entered into for the sale or disposition of all or substantially all of the
Capital Stock of, or property and assets of, such Restricted Subsidiary, (g)
Indebtedness of the Company and its Restricted Subsidiaries containing
restrictions on dividends, distributions and other payments to Holdings and its
Restricted Subsidiaries (other than the Company and its Restricted
Subsidiaries), (h) the New Credit Facility, provided that such restrictions are
no more restrictive than those contained in the New Credit Facility as in effect
on the Issue Date or such Permitted Refinancing Indebtedness is no more
restrictive than those contained in the agreements governing the Indebtedness
being refinanced.
Merger, Consolidation or Sale of Assets
The Indenture provides that the Company may not consolidate or merge with
or into (whether or not the Company is the surviving corporation), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially all
of its properties or assets in one or more related transactions, to another
corporation, Person or entity unless (i) either (a) the Company is the surviving
corporation or (b) the entity or the Person formed by or surviving any such
consolidation or
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merger (if other than the Company) or to which such sale, assignment, transfer,
lease, conveyance or other disposition shall have been made is a corporation
organized or existing under the laws of the United States, any state thereof or
the District of Columbia; (ii) the entity or Person formed by or surviving any
such consolidation or merger (if other than the Company) or the entity or Person
to which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made assumes all the obligations of the Company under the Notes
and the Indenture, pursuant to a supplemental indenture in a form reasonably
satisfactory to the Trustee; (iii) immediately after such transaction no Default
or Event of Default exists; (iv) except in the case of a merger of the Company
with or into a Wholly Owned Restricted Subsidiary, the Company or the entity or
Person formed by or surviving any such consolidation or merger (if other than
the Company), or to which such sale, assignment, transfer, lease, conveyance or
other disposition shall have been made (A) will have Consolidated Net Worth
immediately after the transaction equal to or greater than the Consolidated Net
Worth of the Company immediately preceding the transaction and (B) will, at the
time of such transaction and after giving pro forma effect thereto as if such
transaction had occurred at the beginning of the applicable four-quarter period,
be permitted to incur at least $1.00 of additional Indebtedness pursuant to the
Fixed Charge Coverage Ratio test set forth in the first paragraph of the
covenant described above under the caption "-- Incurrence of Indebtedness and
Issuance of Preferred Stock;" and (v) the Company has delivered to the Trustee
an Officers' Certificate and an Opinion of Counsel, each stating that such
consolidation, merger, sale, assignment, transfer, lease, conveyance or other
disposition and such supplemental indenture complies with the Indenture and that
all conditions precedent provided for in the Indenture relating to such
transaction have been complied with.
Transactions with Affiliates
The Indenture provides that the Company and Holdings will not, and will not
permit any Restricted Subsidiaries to, make any payment to, or sell, lease,
transfer or otherwise dispose of any of their respective properties or assets
to, or purchase any property or assets from, or enter into or make or amend any
transaction, contract, agreement, understanding, loan, advance or guarantee
with, or for the benefit of, any Affiliate (each of the foregoing, an "Affiliate
Transaction"), unless (i) such Affiliate Transaction is on terms that are no
less favorable to the Company, Holdings or the relevant Restricted Subsidiary,
as the case may be, than those that would have been obtained in a comparable
transaction by the Company, Holdings or such Restricted Subsidiary, as the case
may be, with an unrelated Person and (ii) the Company or Holdings delivers to
the Trustee (a) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of
$1,000,000, a resolution of the Board of Directors approving such Affiliate
Transaction and an Officers' Certificate certifying that such Affiliate
Transaction complies with clause (i) above and that such Affiliate Transaction
has been approved by a majority of the disinterested members of the Board of
Directors and (b) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of $5.0
million, an opinion as to the fairness to the Holders of such Affiliate
Transaction from a financial point of view issued by an accounting, appraisal or
investment banking firm of national standing; provided that (t) any employment
agreement entered into by the Company, Holdings or any of their Subsidiaries in
the ordinary course of business and consistent with the past practice of the
Company, Holdings or such Subsidiary, (u) transactions between or among (A) the
Company and/or its Restricted Subsidiaries and (B) Holdings and its Restricted
Subsidiaries (other than the Company and its Restricted Subsidiaries), (v)
Restricted Payments (other than Restricted Investments) that are permitted by
the provisions of the Indenture described above under the caption "-- Restricted
Payments," (w) investment banking and management fees in an aggregate amount no
greater than $240,000 in the aggregate in any calendar year (plus reimbursement
of expenses) to be paid by the Company and/or Holdings to the Principals or any
Related Party, (x) an aggregate cash fee of $3.25 million payable by the Company
and/or Holdings to the Principals or any Related Party or UBS Capital LLC on or
about the Issue Date and (y) any loans made to the Company under the New Credit
Facility by any Affiliate of the Union Bank of Switzerland and fees and
reimbursement of expenses in respect thereof and (z) discounts and commissions
payable to UBS Securities LLC in the Offering of the Notes, in each case, shall
not be deemed Affiliate Transactions.
Sale and Leaseback Transactions
The Indenture provides that the Company and Holdings will not, and will not
permit any Restricted Subsidiaries to, enter into any sale and leaseback
transaction (other than, (x) among the Company and Wholly Owned Restricted
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Subsidiaries of the Company or (y) among Wholly Owned Restricted Subsidiaries of
the Company); provided that the Company or Holdings may enter into a sale and
leaseback transaction if (i) the Company or Holdings, as the case may be, could
have (a) incurred Indebtedness in an amount equal to the Attributable Debt
relating to such sale and leaseback transaction pursuant to the covenant
described above under the caption "-- Incurrence of Additional Indebtedness and
Issuance of Preferred Stock" and (b) incurred a Lien to secure such Indebtedness
pursuant to the covenant described above under the caption "-- Liens," (ii) the
gross cash proceeds of such sale and leaseback transaction are at least equal to
the fair market value (as determined in good faith by the Board of Directors of
the Company or Holdings, as applicable, and set forth in an Officers'
Certificate delivered to the Trustee) of the property that is the subject of
such sale and leaseback transaction and (iii) the transfer of assets in such
sale and leaseback transaction is permitted by, and the Company or Holdings, as
the case may be, applies the proceeds of such transaction in compliance with,
the covenant described above under the caption "-- Asset Sales."
Limitation on Issuances and Sales of Capital Stock of Wholly Owned Subsidiaries
The Indenture provides that the Company (i) will not, and will not permit
any Wholly Owned Restricted Subsidiary of the Company to, transfer, convey,
sell, lease or otherwise dispose of any Capital Stock of any such Wholly Owned
Restricted Subsidiary to any Person (other than the Company or a Wholly Owned
Restricted Subsidiary of the Company), unless (a) such transfer, conveyance,
sale, lease or other disposition is of all the Capital Stock of such Wholly
Owned Restricted Subsidiary and (b) the cash Net Proceeds from such transfer,
conveyance, sale, lease or other disposition are applied in accordance with the
covenant described above under the caption "-- Asset Sales," and (ii) will not
permit any Wholly Owned Restricted Subsidiary of the Company to issue any of its
Equity Interests (other than, if necessary, shares of its Capital Stock
constituting directors' qualifying shares) to any Person other than to the
Company or a Wholly Owned Restricted Subsidiary of the Company.
The Indenture provides that Holdings (i) will not, and will not permit any
Wholly Owned Restricted Subsidiary of Holdings to, transfer, convey, sell, lease
or otherwise dispose of any Capital Stock of any such Wholly Owned Restricted
Subsidiary to any Person (other than Holdings or a Wholly Owned Restricted
Subsidiary of Holdings), unless (a) such transfer, conveyance, sale, lease or
other disposition is of all the Capital Stock of such Wholly Owned Restricted
Subsidiary and (b) the cash Net Proceeds from such transfer, conveyance, sale,
lease or other disposition are applied in accordance with the covenant described
above under the caption "-- Asset Sales," and (ii) will not permit any Wholly
Owned Restricted Subsidiary of Holdings to issue any of its Equity Interests
(other than, if necessary, shares of its Capital Stock constituting directors'
qualifying shares) to any Person other than to Holdings or a Wholly Owned
Restricted Subsidiary of Holdings.
Limitations on Issuances of Guarantees of Indebtedness
The Indenture provides that the Company and Holdings will not permit any
Restricted Subsidiary to guarantee the payment of any Indebtedness of the
Company, Holdings or any other Restricted Subsidiary, (in each case, the
"Guaranteed Debt"), unless (i) if such Restricted Subsidiary is not a Guarantor,
such Restricted Subsidiary simultaneously executes and delivers a supplemental
indenture to the Indenture providing for a Subsidiary Guarantee of payment of
the Notes by such Restricted Subsidiary, (ii) if the Notes or the Subsidiary
Guarantee (if any) of such Restricted Subsidiary are subordinated in right of
payment to the Guaranteed Debt, the Subsidiary Guarantee under the supplemental
indenture shall be subordinated to such Restricted Subsidiary's guarantee with
respect to the Guaranteed Debt substantially to the same extent as the Notes or
the Subsidiary Guarantee are subordinated to the Guaranteed Debt under the
Indenture, (iii) if the Guaranteed Debt is by its express terms subordinated in
right of payment to the Notes or the Subsidiary Guarantee (if any) of such
Restricted Subsidiary, any such guarantee of such Restricted Subsidiary with
respect to the Guaranteed Debt shall be subordinated in right of payment to such
Restricted Subsidiary's Subsidiary Guarantee with respect to the Notes
substantially to the same extent as the Guaranteed Debt is subordinated to the
Notes or the Subsidiary Guarantee (if any) of such Restricted Subsidiary, (iv)
such Restricted Subsidiary subordinates rights of reimbursement, indemnity or
subrogation or any other rights against the Company or any other Restricted
Subsidiary as a result of any payment by such Restricted Subsidiary under its
Subsidiary Guarantee to its obligation under its Subsidiary Guarantee, and (v)
such Restricted Subsidiary shall deliver to the Trustee an opinion of counsel to
the effect
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that (A) such Subsidiary Guarantee has been duly authorized, executed
and delivered, and (B) such Subsidiary Guarantee constitutes a valid, binding
and enforceable obligation of such Restricted Subsidiary, except insofar as
enforcement thereof may be limited by bankruptcy, insolvency or similar laws
(including, without limitation, all laws relating to fraudulent transfers) and
except insofar as enforcement thereof is subject to general principles of
equity.
The Indenture provides that no Guarantor may consolidate with or merge with
or into (whether or not such Guarantor is the surviving Person), another
corporation, person or entity whether or not affiliated with such Guarantor
unless (i) subject to the provisions of the following paragraph, the Person
formed by or surviving any such consolidation or merger (if other than such
Guarantor) assumes all the obligations of such Guarantor pursuant to a
supplemental indenture in form and substance reasonably satisfactory to the
Trustee, under the Notes, the Indenture and Subsidiary Guarantee and (ii)
immediately after giving effect to such transaction, no Default or Event of
Default exists.
The Indenture provides that in the event of a sale or other disposition of
all of the assets of any Guarantor, by way of merger, consolidation or
otherwise, or a sale or other disposition of all of the capital stock of any
Guarantor, then such Guarantor (in the event of a sale or other disposition, by
way of such a merger, consolidation or otherwise, of all of the capital stock of
such Guarantor) or the corporation acquiring the property (in the event of a
sale or other disposition of all of the assets of such Guarantor) will be
released and relieved of any obligations under its Note Guarantee; provided that
the Net Proceeds of such sale or other disposition are applied in accordance
with the applicable provisions of the Indenture. See "Repurchase at Option of
Holders -- Asset Sales." The Indenture will also provide that in the event that
a Guarantor is designated by the Company to be an Unrestricted Subsidiary in
accordance with the terms of the Indenture, such Guarantor will be released and
of any obligations under its Subsidiary Guarantee. See "Certain Covenants --
Restricted Payments."
No Senior Subordinated Debt
The Indenture provides that (i) the Company will not incur, create, issue,
assume, guarantee or otherwise become liable for any Indebtedness that is
subordinate or junior in right of payment to any Senior Indebtedness and senior
in any respect in right of payment to the Notes and (ii) no Guarantor will
incur, create, issue, assume, guarantee or otherwise become liable for any
Indebtedness that is subordinate or junior in right of payment to any Senior
Indebtedness of such Guarantor, and senior in any respect in right of payment to
such Guarantor's guarantees of the Notes.
Payments for Consent
The Indenture provides that neither the Company, nor Holdings nor any of
their respective Subsidiaries will, directly or indirectly, pay or cause to be
paid any consideration, whether by way of interest, fee or otherwise, to any
Holder of any Notes for or as an inducement to any consent, waiver or amendment
of any of the terms or provisions of the Indenture or the Notes unless such
consideration is offered to be paid or is paid to all Holders of the Notes that
consent, waive or agree to amend in the time frame set forth in the solicitation
documents relating to such consent, waiver or agreement.
Reports
The Indenture provides that, whether or not required by the rules and
regulations of the Securities and Exchange Commission (the "Commission"), so
long as any Notes are outstanding, the Company and Holdings will furnish to the
Holders of Notes (i) all quarterly and annual financial information that would
be required to be contained in a filing with the Commission on Forms 10-Q and
10-K if Holdings were required to file such Forms, including a "Management's
Discussion and Analysis of Financial Condition and Results of Operations" that
describes the financial condition and results of operations of Holdings and its
consolidated Subsidiaries (showing in reasonable detail, either on the face of
the financial statements or in the footnotes thereto and in Management's
Discussion and Analysis of Financial Condition and Results of Operations, the
financial condition and results of operations of the Company and the Restricted
Subsidiaries separate from the financial condition and results of operations of
the Unrestricted Subsidiaries), but
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excluding exhibits, and, with respect to the
annual information only, a report thereon by the Company's certified independent
accountants and (ii) all current reports that would be required to be filed with
the Commission on Form 8-K if Holdings were required to file such reports. In
addition, whether or not required by the rules and regulations of the
Commission, Holdings will file a copy of all such information and reports with
the Commission for public availability (unless the Commission will not accept
such a filing) and make such information available to securities analysts and
prospective investors upon request. In addition, the Company and Holdings have
agreed that, for so long as any Notes remain outstanding, they will furnish to
the Holders and to securities analysts and prospective investors, upon their
request, the information required to be delivered pursuant to Rule 144A(d)(4)
under the Securities Act.
Events of Default and Remedies
The Indenture provides that each of the following constitutes an Event of
Default: (i) default for 30 days in the payment when due of interest on, or
Liquidated Damages with respect to, the Notes (whether or not prohibited by the
subordination provisions of the Indenture); (ii) default in the payment when due
of principal of or premium, if any, on the Notes (whether or not prohibited by
the subordination provisions of the Indenture); (iii) failure by the Company or
Holdings to comply with the provisions described under the captions "Repurchase
at the Option of the Holders -- Change of Control" or "-- Asset Sales" "Certain
Covenants -- Restricted Payments" or "-- Incurrence of Indebtedness and Issuance
of Preferred Stock;" (iv) failure by the Company or Holdings for 60 days after
notice from the Trustee or holders of at least 25% in aggregate principal amount
of the outstanding Notes to comply with any of its other agreements in the
Indenture, the Notes or any Guarantee; (v) default under any mortgage, indenture
or instrument under which there may be issued or by which there may be secured
or evidenced any Indebtedness for money borrowed by the Company, Holdings or any
of the Restricted Subsidiaries (or the payment of which is guaranteed by the
Company, Holdings or any of the Restricted Subsidiaries) whether such
Indebtedness or guarantee now exists, or is created after the date of the
Indenture, which default (a) is caused by a failure to pay principal of or
premium, if any, or interest on the final maturity date of such Indebtedness (a
"Payment Default") or (b) results in the acceleration of such Indebtedness prior
to its express maturity and, in each case, the principal amount of any such
Indebtedness, together with the principal amount of any other such Indebtedness
under which there has been a Payment Default or the maturity of which has been
so accelerated, aggregates $5.0 million or more; (vi) failure by the Company,
Holdings or any of the Restricted Subsidiaries to pay final judgments
aggregating in excess of $5.0 million, which judgments are not paid, discharged
or stayed for a period of 60 days; (vii) except as permitted by the Indenture or
any Guarantee that is given by a Guarantor, any Guarantee of a Significant
Restricted Subsidiary shall be held in any judicial proceeding to be
unenforceable or invalid or shall cease for any reason to be in full force and
effect; and (viii) certain events of bankruptcy or insolvency with respect to
the Company, Holdings or any of their Significant Restricted Subsidiaries.
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding Notes may
declare all the Notes to be due and payable immediately; provided, however, that
such declaration will not become effective until the earlier to occur of (i) the
acceleration of the maturity of any Indebtedness under the New Credit Facility
or (ii) five business days following notice of such declaration to the agent
under the New Credit Facility. Notwithstanding the foregoing, in the case of an
Event of Default arising from certain events of bankruptcy or insolvency, with
respect to the Company, Holdings, any Significant Restricted Subsidiary, all
outstanding Notes will become due and payable without further action or notice.
Holders of the Notes may not enforce the Indenture or the Notes except as
provided in the Indenture. Subject to certain limitations, Holders of a majority
in aggregate principal amount of the then outstanding Notes may direct the
Trustee in its exercise of any trust or power. The Trustee may withhold from
Holders of the Notes notice of any continuing Default or Event of Default
(except a Default or Event of Default relating to the payment of principal or
interest) if it determines that withholding notice is in their interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have had
to pay if the Company then had elected to redeem the Notes pursuant to the
optional redemption provisions of the Indenture, an equivalent premium shall
also become and be immediately due and payable, to the extent permitted by law,
upon the acceleration of the Notes. If an Event of Default occurs prior to
December 15, 2002, by reason of any willful action (or inaction) taken (or not
taken) by or on behalf of the Company with the intention of avoiding the
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prohibition on redemption of the Notes prior to December 15, 2002, then the
premium specified in the Indenture shall also become immediately due and payable
to the extent permitted by law upon the acceleration of the Notes.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of the
Notes waive any existing Default or Event of Default and its consequences under
the Indenture except a continuing Default or Event of Default in the payment of
interest on, or the principal of, the Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
No Personal Liability of Directors, Officers, Employees and Stockholders
No past, present or future director, officer, employee, incorporator or
stockholder of the Company or Holdings, as such, shall have any liability for
any obligations of the Company, Holdings or any Subsidiary under the Notes, the
Indenture, the Guarantees or for any claim based on, in respect of, or by reason
of, such obligations or their creation. Each Holder of Notes by accepting a Note
waives and releases all such liability. The waiver and release are part of the
consideration for issuance of the Notes. Such waiver may not be effective to
waive liabilities under the federal securities laws and it is the view of the
Commission that such a waiver is against public policy.
Legal Defeasance and Covenant Defeasance
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance") except for (i) the rights of Holders of outstanding Notes to
receive payments in respect of the principal of, premium, if any, and interest
and Liquidated Damages, if any, on such Notes when such payments are due from
the trust referred to below, (ii) the Company's obligations with respect to the
Notes concerning issuing temporary Notes, registration of Notes, mutilated,
destroyed, lost or stolen Notes and the maintenance of an office or agency for
payment and money for security payments held in trust, (iii) the rights, powers,
trusts, duties and immunities of the Trustee, and the Company's obligations in
connection therewith and (iv) the Legal Defeasance provisions of the Indenture.
In addition, the Company may, at its option and at any time, elect to have the
obligations of the Company released with respect to certain covenants that are
described in the Indenture ("Covenant Defeasance") and thereafter any omission
to comply with such obligations shall not constitute a Default or Event of
Default with respect to the Notes. In the event Covenant Defeasance occurs,
certain events (not including non-payment, bankruptcy, receivership,
rehabilitation and insolvency events) described under "Events of Default" will
no longer constitute an Event of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Notes, cash in U.S. dollars, non-callable Government
Securities, or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay the principal of, premium, if any, and interest and Liquidated Damages,
if any, on the outstanding Notes on the stated maturity or on the applicable
redemption date, as the case may be, and the Company must specify whether the
Notes are being defeased to maturity or to a particular redemption date; (ii) in
the case of Legal Defeasance, the Company shall have delivered to the Trustee an
opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that (A) the Company has received from, or there has been published
by, the Internal Revenue Service a ruling or (B) since the date of the
Indenture, there has been a change in the applicable federal income tax law, in
either case to the effect that, and based thereon such opinion of counsel shall
confirm that, the Holders of the outstanding Notes will not recognize income,
gain or loss for federal income tax purposes as a result of such Legal
Defeasance and will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such Legal
Defeasance had not occurred; (iii) in the case of Covenant Defeasance, the
Company shall have delivered to the Trustee an opinion of counsel in the United
States reasonably acceptable to the Trustee confirming that the Holders of the
outstanding Notes will not recognize income, gain or loss
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for federal income tax purposes as a result of such Covenant Defeasance and will
be subject to federal income tax on the same amounts, in the same manner and at
the same times as would have been the case if such Covenant Defeasance had not
occurred; (iv) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit (other than a Default or Event of Default
resulting from the borrowing of funds to be applied to such deposit) or insofar
as Events of Default from bankruptcy or insolvency events are concerned, at any
time in the period ending on the 91st day after the date of deposit; (v) such
Legal Defeasance or Covenant Defeasance will not result in a breach or violation
of, or constitute a default under any material agreement or instrument (other
than the Indenture) to which the Company, Holdings or any of their Subsidiaries
is a party or by which the Company, Holdings or any of their Subsidiaries is
bound; (vi) the Company must have delivered to the Trustee an opinion of counsel
to the effect that after the 91st day following the deposit, the trust funds
will not be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally; (vii) the
Company must deliver to the Trustee an Officers' Certificate stating that the
deposit was not made by the Company with the intent of preferring the Holders of
Notes over the other creditors of the Company with the intent of defeating,
hindering, delaying or defrauding creditors of the Company or others; and (viii)
the Company must deliver to the Trustee an Officers' Certificate and an opinion
of counsel, each stating that all conditions precedent provided for relating to
the Legal Defeasance or the Covenant Defeasance have been complied with.
Transfer and Exchange
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note selected
for redemption. Also, the Company is not required to transfer or exchange any
Note for a period of 15 days before a selection of Notes to be redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
Amendment, Supplement and Waiver
Except as provided in the next two succeeding paragraphs, the Indenture,
the Guarantees or the Notes may be amended or supplemented with the consent of
the Holders of at least a majority in principal amount of the Notes then
outstanding (including, without limitation, consents obtained in connection with
a purchase of, or tender offer or exchange offer for, Notes), and any existing
default or compliance with any provision of the Indenture, the Guarantees or the
Notes may be waived with the consent of the Holders of a majority in principal
amount of the then outstanding Notes (including consents obtained in connection
with a tender offer or exchange offer for Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a nonconsenting Holder): (i) reduce the
principal amount of Notes whose Holders must consent to an amendment, supplement
or waiver, (ii) reduce the principal of or change the fixed maturity of any Note
or alter the provisions with respect to the redemption of the Notes (other than
provisions relating to the covenants described above under the caption "--
Repurchase at the Option of Holders"), (iii) reduce the rate of or change the
time for payment of interest on any Note, (iv) waive a Default or Event of
Default in the payment of principal of or premium, if any, or interest on the
Notes (except a rescission of acceleration of the Notes by the Holders of at
least a majority in aggregate principal amount of the Notes and a waiver of the
payment default that resulted from such acceleration), (v) make any Note payable
in money other than that stated in the Notes, (vi) make any change in the
provisions of the Indenture relating to waivers of past Defaults or the rights
of Holders of Notes to receive payments of principal of or premium, if any, or
interest on the Notes, (vii) waive a redemption payment with respect to any Note
(other than a payment required by one of the covenants described above under the
caption "-- Repurchase at the Option of Holders"), (viii) release any Guarantor
from any of its obligations under its Guarantee or the Indenture, except in
accordance with the terms of the Indenture or (ix) make any change in the
foregoing amendment and waiver provisions. In addition, any amendment to the
provisions of Article 10 of the Indenture (which relate to subordination) will
require the consent of the Holders of at
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least 75% in aggregate principal amount
of the Notes then outstanding if such amendment would adversely affect the
rights of Holders of Notes.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Company, the Guarantors and the Trustee may amend or supplement the
Indenture, the Notes or any Guarantee to cure any ambiguity, defect or
inconsistency, to provide for uncertificated Notes in addition to or in place of
certificated Notes, to provide for the assumption of the Company's or any
Guarantor's obligations to Holders of Notes in the case of a merger or
consolidation, to provide for the issuance of a Subsidiary Guarantee by a
Subsidiary of the Company or Holdings, to provide for the issuance of Additional
Notes in accordance with the limitations set forth in the Indenture on the Issue
Date, to make any change that would provide any additional rights or benefits to
the Holders of Notes or that does not adversely affect the legal rights under
the Indenture of any such Holder, or to comply with requirements of the
Commission in order to effect or maintain the qualification of the Indenture
under the Trust Indenture Act.
Concerning the Trustee
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the Commission for permission to continue
or resign.
The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the conduct
of his own affairs. Subject to such provisions, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request of any Holder of Notes, unless such Holder shall have offered to the
Trustee security and indemnity satisfactory to it against any loss, liability or
expense.
Additional Information
Anyone who receives this Prospectus may obtain a copy of the Indenture and
Registration Rights Agreement without charge by writing to DESA International,
Inc., 2701 Industrial Drive, P.O. Box 90004, Bowling Green, Kentucky, 42102,
Attention: Ed Patrick.
Book-Entry, Delivery and Form
Except as set forth in the next paragraph, the Notes offered hereby will
initially be issued in the form of one Global Note (the "Global Note"). The
Global Note will be deposited on the date of the closing of the sale of the
Notes offered hereby (the "Closing Date") with, or on behalf of, the Depositary
and registered in the name of Cede & Co., as nominee of the Depositary (such
nominee being referred to herein as the "Global Note Holder").
Notes that were (i) originally issued to or transferred to "institutional
accredited investors" who are not "qualified institutional buyers" (as such
terms are defined under "Notice to Investors" elsewhere herein) (the "Non-
Global Purchasers") or (ii) issued as described below under "Certificated
Securities," will be issued in the form of registered definitive certificates
(the "Certificated Securities"). Upon the transfer to a qualified institutional
buyer of Certificated Securities initially issued to a Non-Global Purchaser,
such Certificated Securities may, unless the Global Note has previously been
exchanged for Certificated Securities, be exchanged for an interest in the
Global Note representing the principal amount of Notes being transferred.
The Depositary is a limited-purpose trust company that was created to hold
securities for its participating organizations (collectively, the "Participants"
or the "Depositary's Participants") and to facilitate the clearance and
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settlement of transactions in such securities between Participants through
electronic book-entry changes in accounts of its Participants. The Depositary's
Participants include securities brokers and dealers (including the Initial
Purchasers), banks and trust companies, clearing corporations and certain other
organizations. Access to the Depositary's system is also available to other
entities such as banks, brokers, dealers and trust companies (collectively, the
"Indirect Participants" or the "Depositary's Indirect Participants") that clear
through or maintain a custodial relationship with a Participant, either directly
or indirectly. Persons who are not Participants may beneficially own securities
held by or on behalf of the Depositary only through the Depositary's
Participants or the Depositary's Indirect Participants.
The Company expects that pursuant to procedures established by the
Depositary (i) upon deposit of the Global Note, the Depositary will credit the
accounts of Participants designated by the Initial Purchasers with portions of
the principal amount of the Global Note and (ii) ownership of the Notes
evidenced by the Global Note will be shown on, and the transfer of ownership
thereof will be effected only through, records maintained by the Depositary
(with respect to the interests of the Depositary's Participants), the
Depositary's Participants and the Depositary's Indirect Participants.
Prospective purchasers are advised that the laws of some states require that
certain persons take physical delivery in definitive form of securities that
they own. Consequently, the ability to transfer Notes evidenced by the Global
Note will be limited to such extent. For certain other restrictions on the
transferability of the Notes, see "Notice to Investors."
So long as the Global Note Holder is the registered owner of any Notes, the
Global Note Holder will be considered the sole Holder under the Indenture of any
Notes evidenced by the Global Note. Beneficial owners of Notes evidenced by the
Global Note will not be considered the owners or Holders thereof under the
Indenture for any purpose, including with respect to the giving of any
directions, instructions or approvals to the Trustee thereunder. Neither the
Company nor the Trustee will have any responsibility or liability for any aspect
of the records of the Depositary or for maintaining, supervising or reviewing
any records of the Depositary relating to the Notes.
Payments in respect of the principal of, premium, if any, interest and
Liquidated Damages, if any, on any Notes registered in the name of the Global
Note Holder on the applicable record date will be payable by the Trustee to or
at the direction of the Global Note Holder in its capacity as the registered
Holder under the Indenture. Under the terms of the Indenture, the Company and
the Trustee may treat the persons in whose names the Notes, including the Global
Note, are registered as the owners thereof for the purpose of receiving such
payments. Consequently, neither the Company nor the Trustee has or will have any
responsibility or liability for the payment of such amounts to beneficial owners
of Notes (including principal, premium, if any, interest and Liquidated Damages,
if any). The Company believes, however, that it is currently the policy of the
Depositary to immediately credit the accounts of the relevant Participants with
such payments, in amounts proportionate to their respective holdings of
beneficial interests in the relevant security as shown on the records of the
Depositary. Payments by the Depositary's Participants and the Depositary's
Indirect Participants to the beneficial owners of Notes will be governed by
standing instructions and customary practice and will be the responsibility of
the Depositary's Participants or the Depositary's Indirect Participants.
Certificated Securities
Subject to certain conditions, any person having a beneficial interest in
the Global Note may, upon request to the Trustee, exchange such beneficial
interest for Notes in the form of Certificated Securities. Upon any such
issuance, the Trustee is required to register such Certificated Securities in
the name of, and cause the same to be delivered to, such person or persons (or
the nominee of any thereof). All such certificated Notes would be subject to the
legend requirements described herein under "Notice to Investors." In addition,
if (i) the Company notifies the Trustee in writing that the Depositary is no
longer willing or able to act as a depositary and the Company is unable to
locate a qualified successor within 90 days or (ii) the Company, at its option,
notifies the Trustee in writing that it elects to cause the issuance of Notes in
the form of Certificated Securities under the Indenture, then, upon surrender by
the Global Note Holder of its Global Note, Notes in such form will be issued to
each person that the Global Note Holder and the Depositary identify as being the
beneficial owner of the related Notes.
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Neither the Company nor the Trustee will be liable for any delay by the
Global Note Holder or the Depositary in identifying the beneficial owners of
Notes and the Company and the Trustee may conclusively rely on, and will be
protected in relying on, instructions from the Global Note Holder or the
Depositary for all purposes.
Same-Day Settlement and Payment
The Indenture requires that payments in respect of the Notes represented by
the Global Note (including principal, premium, if any, interest and Liquidated
Damages, if any) be made in immediately available funds. With respect to
Certificated Securities, however, the Company will make all payments of
principal, premium, if any, interest and Liquidated Damages, if any, by mailing
a check to each Holder's registered address. Secondary trading in long-term
notes and debentures of corporate issuers is generally settled in clearing-house
or next day funds. In contrast, the Notes represented by the Global Note are
expected to be eligible to trade in the PORTAL Market and to trade in the
Depositary's Same-Day Funds Settlement System, and any permitted secondary
market trading activity in such Notes will, therefore, be required by the
Depositary to be settled in immediately available funds. The Company expects
that secondary trading in the Certificated Securities will also be settled in
immediately available funds.
Certain Definitions
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets or rights (including, without limitation, by way of a sale and
leaseback) other than sales of inventory or other current assets in the ordinary
course of business or obsolete equipment (provided that the sale, lease,
conveyance or other disposition of all or substantially all of the assets of (x)
the Company and its Restricted Subsidiaries taken as a whole or (y) Holdings and
its Restricted Subsidiaries as a whole, will be governed by the provisions of
the Indenture described above under the caption "Repurchase at the Option of
Holders -- Change of Control" and/or the provisions described above under the
caption "Certain Covenants -- Merger, Consolidation or Sale of Assets" and not
by the provisions of the Asset Sale covenant), and (ii) the issue or sale by the
Company, Holdings or any of their respective Subsidiaries of Equity Interests of
any of the Company's or Holdings' Subsidiaries, in the case of either clause (i)
or (ii), whether in a single transaction or a series of related transactions
that have a fair market value (as determined in good faith by the Board of
Directors of the Company) in excess of $1.0 million. Notwithstanding the
foregoing: (i) a transfer of assets by the Company to a Wholly Owned Restricted
Subsidiary of the Company or by a Subsidiary to the Company or to a Wholly Owned
Restricted Subsidiary of the Company, (ii) a transfer of assets by Holdings to a
Wholly Owned Restricted Subsidiary of Holdings or by a Subsidiary (other than
the Company or a Subsidiary of the Company) to Holdings or to a Wholly Owned
Restricted Subsidiary of Holdings, (iii) an issuance of Equity Interests by a
Wholly Owned Restricted Subsidiary of the Company to the Company or to another
Wholly Owned Restricted Subsidiary of the Company, (iv) an issuance of Equity
Interests by a Wholly Owned Restricted Subsidiary of Holdings (other than the
Company or any of its
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Subsidiaries) to Holdings or to another Wholly Owned Restricted Subsidiary of
Holdings, and (v) a Restricted Payment that is permitted by the covenant
described above under the caption "Certain Covenants -- Restricted Payments"
will not be deemed to be Asset Sales.
"Attributable Debt" in respect of a sale and leaseback transaction means,
at the time of determination, the present value (discounted at the rate of
interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining term
of the lease included in such sale and leaseback transaction (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended).
"Average Life to Stated Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one- twelfth) that will elapse
between such date and the making of such payment, by (ii) the then outstanding
principal amount of such Indebtedness.
"Borrowing Base" means, as of any date, an amount equal to the sum of 85%
of accounts receivable of the Company, Holdings and the Restricted Subsidiaries
as of such date that are not more than 90 days past due, plus 65% of the book
value of all inventory owned by the Company, Holdings and the Restricted
Subsidiaries as of such date, in each case calculated on a consolidated basis
and in accordance with GAAP. To the extent that information is not available as
to the amount of accounts receivable or inventory as of a specific date, the
Company and Holdings may utilize the most recent available information for
purposes of calculating the Borrowing Base.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of, the
issuing Person.
"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof having maturities of not more than one
year from the date of acquisition, (iii) certificates of deposit and Eurodollar
time deposits with maturities of one year or less from the date of acquisition,
bankers' acceptances with maturities not exceeding six months and overnight bank
deposits, in each case with any lender party to the New Credit Facility or with
any domestic commercial bank having capital and surplus in excess of $500.0
million and a Keefe Bank Watch Rating of "B" or better, (iv) repurchase
obligations with a term of not more than seven days for underlying securities of
the types described in clauses (ii) and (iii) above entered into with any
financial institution meeting the qualifications specified in clause (iii)
above, (v) commercial paper of a domestic issuer having a rating of at least A-1
by Standard and Poor's Ratings Services or P-1 by Moody's Investors Service,
Inc. maturing within twelve months after the date of acquisition and (vi) any
mutual fund which invests solely in investments of the types described in
clauses (i) through (v) above.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of either (x) Holdings and its Restricted
Subsidiaries taken as a whole or (y) the Company and its Restricted Subsidiaries
taken as a whole, in each case, to any "person" (as such term is used in Section
13(d)(3) of the Exchange Act) other than the Principals or their Related
Parties, (ii) the adoption of a plan relating to the liquidation or dissolution
of the Company or Holdings, (iii) the consummation of any transaction
(including, without limitation, any merger or consolidation) (a) prior to the
initial underwritten public offering by the Company or Holdings
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of its Common Stock pursuant to an effective registration statement under the
Securities Act (the "IPO") the result of which is that either (A) the Principals
and their Related Parties become the "beneficial owner" (as such term is defined
in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except that for purposes of
calculating the beneficial ownership of any person, such person shall be deemed
to have "beneficial ownership" of all securities that such person has the right
to acquire, whether such right is currently exercisable or is exercisable only
upon the occurrence of a subsequent condition) of less than 40% of the Voting
Stock of the Company or Holdings (measured by voting power rather than number of
shares) or (B) any person (as defined above), other than the Principals and
their Related Parties, becomes the beneficial owner (as defined above), directly
or indirectly, of 40% or more of the Voting Stock of the Company or Holdings and
such person is or becomes, directly or indirectly, the beneficial owner of a
greater percentage of the voting power of the Voting Stock of the Company or
Holdings, calculated on a fully diluted basis, than the percentage beneficially
owned by the Principals and their Related Parties, or (b) after the IPO, any
person (as defined above), other than the Principals and their Related Parties,
becomes the beneficial owner (as defined above), directly or indirectly, of 35%
or more of the Voting Stock of the Company or Holdings and such person is or
becomes, directly or indirectly, the beneficial owner of a greater percentage of
the voting power of the Voting Stock of the Company or Holdings, calculated on a
fully diluted basis, than the percentage beneficially owned by the Principals
and their Related Parties, (iv) the first day on which a majority of the members
of the Board of Directors of the Company or Holdings are not Continuing
Directors, (v) the first day on which Holdings ceases to own 100% of the
outstanding Equity Interests of the Company, or (vi) the Company or Holdings
consolidates with, or merges with or into, any Person or sells, assigns,
conveys, transfers, leases or otherwise disposes of all or substantially all of
its assets to any Person, or any Person consolidates with, or merges with or
into, the Company or Holdings, in any such event pursuant to a transaction in
which any of the outstanding Voting Stock of the Company or Holdings is
converted into or exchanged for cash, securities or other property, other than
any such transaction where the Voting Stock of the Company or Holdings
outstanding immediately prior to such transaction is converted into or exchanged
for Voting Stock (other than Disqualified Stock) of the surviving or transferee
Person constituting a majority of the outstanding shares of such Voting Stock of
such surviving or transferee Person (immediately after giving effect to such
issuance). For purposes of this definition, any transfer of an equity interest
of an entity that was formed for the purpose of acquiring Voting Stock of the
Company or Holdings will be deemed to be a transfer of such portion of such
Voting Stock as corresponds to the portion of the equity of such entity that has
been so transferred.
"Consolidated Cash Flow" means, with respect to the Company or Holdings for
any period, the Consolidated Net Income of such Person for such period plus,
without duplication, (i) an amount equal to any extraordinary loss plus any net
loss realized in connection with an Asset Sale (to the extent such losses were
deducted in computing such Consolidated Net Income), plus (ii) provision for
taxes based on income or profits of such Person and its Subsidiaries for such
period, to the extent that such provision for taxes was included in computing
such Consolidated Net Income, plus (iii) consolidated interest expense of such
Person and its Subsidiaries for such period, whether paid or accrued and whether
or not capitalized (including, without limitation, amortization of debt issuance
costs and original issue discount, noncash interest payments, the interest
component of any deferred payment obligations, the interest component of all
payments associated with Capital Lease Obligations, imputed interest with
respect to Attributable Debt, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance financings, and
net payments (if any) pursuant to Hedging Obligations), to the extent that any
such expense was deducted in computing such Consolidated Net Income, plus (iv)
depreciation, amortization (including amortization of goodwill and other
intangibles but excluding amortization of prepaid cash expenses that were paid
in a prior period) and other non-cash expenses (excluding any such non-cash
expense to the extent that it represents an accrual of or reserve for cash
expenses in any future period or amortization of a prepaid cash expense that was
paid in a prior period) of such Person and its Subsidiaries for such period to
the extent that such depreciation, amortization and other non-cash expenses were
deducted in computing such Consolidated Net Income, minus (v) non-cash items
increasing such Consolidated Net Income for such period, in each case, on a
consolidated basis and determined in accordance with GAAP. Notwithstanding the
foregoing, the provision for taxes based on the income or profits of, and the
depreciation and amortization and other non-cash charges of, a Subsidiary of a
Person shall be added to Consolidated Net Income to compute Consolidated Cash
Flow only to the extent (and in the same proportion) that the Net Income of such
Subsidiary was included in calculating the Consolidated Net Income of such
Person and only if a corresponding amount would be permitted at the date of
determination to be dividended to the Company or Holdings, as the case may be,
by such
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Subsidiary without prior approval (that has not been obtained), pursuant to the
terms of its charter and all agreements, instruments, judgments, decrees,
orders, statutes, rules and governmental regulations applicable to that
Subsidiary or its stockholders.
"Consolidated Net Income" means, with respect to the Company or Holdings
for any period, the aggregate of the Net Income of such Person and its
Restricted Subsidiaries for such period, on a consolidated basis, determined in
accordance with GAAP; provided that (i) the Net Income (but not loss) of any
Person that is not a Restricted Subsidiary or that is accounted for by the
equity method of accounting shall be included only to the extent of the amount
of dividends or distributions paid in cash to the referent Person or a
Restricted Subsidiary thereof, (ii) the Net Income of any Restricted Subsidiary
shall be excluded to the extent that the declaration or payment of dividends or
similar distributions by that Restricted Subsidiary of that Net Income is not at
the date of determination permitted without any prior governmental approval
(that has not been obtained) or, directly or indirectly, by operation of the
terms of its charter or any agreement, instrument, judgment, decree, order,
statute, rule or governmental regulation applicable to that Restricted
Subsidiary or its stockholders, (iii) the Net Income of any Person acquired in a
pooling of interests transaction for any period prior to the date of such
acquisition shall be excluded, (iv) the cumulative effect of a change in
accounting principles shall be excluded and (v) the Net Income of any
Unrestricted Subsidiary shall be excluded, whether or not distributed to the
Company, Holdings or one of their Subsidiaries.
"Consolidated Net Worth" means, with respect to the Company or Holdings as
of any date, the sum of (i) the consolidated equity of the common stockholders
of such Person and its consolidated Subsidiaries as of such date, plus (ii) the
respective amounts reported on such Person's balance sheet as of such date with
respect to any series of preferred stock (other than Disqualified Stock) that by
its terms is not entitled to the payment of dividends unless such dividends may
be declared and paid only out of net earnings in respect of the year of such
declaration and payment, but only to the extent of any cash received by such
Person upon issuance of such preferred stock, less (x) all write-ups (other than
write-ups resulting from foreign currency translations and write-ups of tangible
assets of a going concern business made within 12 months after the acquisition
of such business) subsequent to the date of the Indenture in the book value of
any asset owned by such Person or a consolidated Subsidiary of such Person, (y)
all investments as of such date in unconsolidated Subsidiaries and in Persons
that are not Subsidiaries (except, in each case, Permitted Investments), and (z)
all unamortized debt discount and expense and unamortized deferred charges as of
such date, all of the foregoing determined in accordance with GAAP.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of the Company or Holdings who (i) was a member of
such Board of Directors on the date of the Indenture or (ii) was nominated for
election or elected to such Board of Directors with the approval of a majority
of the Continuing Directors who were members of such Board at the time of such
nomination or election.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Designated Senior Indebtedness" means (i) so long as any Senior
Indebtedness under the New Credit Facility is outstanding, such Senior
Indebtedness and (ii) thereafter, any other Senior Indebtedness permitted under
the Indenture the principal amount of which is $50 million or more and that has
been designated by the Company as "Designated Senior Indebtedness."
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable, at the option of the holder thereof) or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or redeemable at the option of the holder thereof, in
whole or in part, on or prior to the date that is 91 days after the date on
which the Notes mature; provided, however, that any Capital Stock that would
constitute Disqualified Stock solely because the holders thereof have the right
to require the Company to repurchase such Capital Stock upon the occurrence of a
Change of Control or an Asset Sale shall not constitute Disqualified Stock if
the terms of such Capital Stock provide that the Company may
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not repurchase or redeem any such Capital Stock pursuant to such provisions
unless such repurchase or redemption complies with the covenant described above
under the caption "-- Certain Covenants -- Restricted Payments."
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Exchange Notes" means the 12% Junior Subordinated Notes due December 31,
2009 of Holdings, issuable pursuant to the terms of the Holdings Preferred Stock
as in effect on the Issue Date.
"Existing Indebtedness" means Indebtedness of the Company, Holdings and
their Subsidiaries (other than Indebtedness under the New Credit Facility) in
existence on the date of the Indenture, until such amounts are repaid.
"Fixed Charges" means, with respect to the Company or Holdings for any
period, the sum, without duplication, of (i) the consolidated interest expense
of such Person and its Restricted Subsidiaries for such period, whether paid or
accrued (including, without limitation, original issue discount, non-cash
interest payments, the interest component of any deferred payment obligations,
the interest component of all payments associated with Capital Lease
Obligations, imputed interest with respect to Attributable Debt, commissions,
discounts and other fees and charges incurred in respect of letter of credit or
bankers' acceptance financings, and net payments (if any) pursuant to Hedging
Obligations but excluding amortization of debt issuance costs), (ii) the
consolidated interest expense of such Person and its Restricted Subsidiaries
that was capitalized during such period, (iii) any interest expense on
Indebtedness of another Person that is guaranteed by such Person or one of its
Restricted Subsidiaries or secured by a Lien on assets of such Person or one of
its Restricted Subsidiaries (whether or not such guarantee or Lien is called
upon), and (iv) the product of (a) all cash dividend payments on any series of
preferred stock of such Person or any of its Restricted Subsidiaries, other than
dividend payments on Equity Interests payable solely in Equity Interests (other
than Disqualified Stock) of the Company or Holdings, as the case may be, times
(b) a fraction, the numerator of which is one and the denominator of which is
one minus the then current combined federal, state and local statutory tax rate
of such Person and its Restricted Subsidiaries, expressed as a decimal, in each
case, on a consolidated basis and in accordance with GAAP.
"Fixed Charge Coverage Ratio" means with respect to the Company or Holdings
for any period, the ratio of the Consolidated Cash Flow of such Person and its
Restricted Subsidiaries for such period to the Fixed Charges of such Person and
its Restricted Subsidiaries for such period. In the event that the Company,
Holdings or any of the Restricted Subsidiaries incurs, assumes, guarantees or
redeems any Indebtedness (other than revolving credit borrowings) or issues or
redeems preferred stock subsequent to the commencement of the period for which
the Fixed Charge Coverage Ratio is being calculated but prior to the date on
which the event for which the calculation of the Fixed Charge Coverage Ratio is
made (the "Calculation Date"), then the Fixed Charge Coverage Ratio shall be
calculated giving pro forma effect to such incurrence, assumption, guarantee or
redemption of Indebtedness, or such issuance or redemption of preferred stock,
as if the same had occurred at the beginning of the applicable four-quarter
reference period. In addition, for purposes of making the computation referred
to above, (i) acquisitions that have been made by the Company, Holdings or any
of the Restricted Subsidiaries, including through mergers or consolidations and
including any related financing transactions, during the four-quarter reference
period or subsequent to such reference period and on or prior to the Calculation
Date shall be deemed to have occurred on the first day of the four-quarter
reference period and Consolidated Cash Flow for such reference period shall be
calculated without giving effect to clause (iii) of the proviso set forth in the
definition of Consolidated Net Income, (ii) the Consolidated Cash Flow
attributable to discontinued operations, as determined in accordance with GAAP,
and operations or businesses disposed of prior to the Calculation Date, shall be
excluded, and (iii) the Fixed Charges attributable to discontinued operations,
as determined in accordance with GAAP, and operations or businesses disposed of
prior to the Calculation Date, shall be excluded, but only to the extent that
the obligations giving rise to such Fixed Charges will not be obligations of the
referent Person or any of its Restricted Subsidiaries following the Calculation
Date.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and
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statements and pronouncements of the Financial Accounting Standards Board or in
such other statements by such other entity as have been approved by a
significant segment of the accounting profession, which are in effect from time
to time.
"guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Guarantee" means a guarantee of the Notes (including the Holdings
Guarantee and each Subsidiary Guarantee).
"Guarantor" means (i) Holdings, (ii) each Subsidiary that executes a
Subsidiary Guarantee in accordance with the provisions of the Indenture, and
(iii) their respective successors and assigns.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates or the value of foreign currencies purchased or received by the Company in
the ordinary course of business.
"Holdings" means DESA Holdings Corporation, a Delaware corporation and
parent of the Company.
"Holdings Preferred Stock" means Holdings' Series C 12% Senior Redeemable
Exchangeable Pay-In-Kind Preferred Stock, par value $.01 per share, as in effect
on the Issue Date.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of the
purchase price of any property or representing any Hedging Obligations, except
any such balance that constitutes an accrued expense or trade payable, if and to
the extent any of the foregoing indebtedness (other than letters of credit and
Hedging Obligations) would appear as a liability upon a balance sheet of such
Person prepared in accordance with GAAP, as well as all indebtedness of others
secured by a Lien on any asset of such Person (whether or not such indebtedness
is assumed by such Person) and, to the extent not otherwise included, the
guarantee by such Person of any indebtedness of any other Person. The amount of
any Indebtedness outstanding as of any date shall be (i) the accreted value
thereof, in the case of any Indebtedness that does not require current payments
of interest, and (ii) the principal amount thereof, together with any interest
thereon that is more than 30 days past due, in the case of any other
Indebtedness.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP.
If the Company, Holdings or any of their respective Subsidiaries sells or
otherwise disposes of any Equity Interests of any direct or indirect Restricted
Subsidiary of the Company or Holdings such that, after giving effect to any such
sale or disposition, such Person is no longer a Restricted Subsidiary of the
Company or Holdings, the Company and/or Holdings, as the case may be, shall be
deemed to have made an Investment on the date of any such sale or disposition
equal to the fair market value of the Equity Interests of such Restricted
Subsidiary not sold or disposed of in an amount determined as provided in the
final paragraph of the covenant described above under the caption "-- Restricted
Payments."
"Issue Date" means the first date of issuance of Notes.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including
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any conditional sale or other title retention agreement, any lease in the nature
thereof, any option or other agreement to sell or give a security interest in
and any filing of or agreement to give any financing statement under the Uniform
Commercial Code (or equivalent statutes) of any jurisdiction).
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b) the
disposition of any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Indebtedness of such Person or any of
its Restricted Subsidiaries and (ii) any extraordinary or nonrecurring gain (but
not loss), together with any related provision for taxes on such extraordinary
or nonrecurring gain (but not loss).
"Net Proceeds" means the aggregate cash proceeds received by the Company,
Holdings or any of the Restricted Subsidiaries in respect of any Asset Sale
(including, without limitation, any cash received upon the sale or other
disposition of any non-cash consideration received in any Asset Sale), net of
the direct costs relating to such Asset Sale (including, without limitation,
legal, accounting and investment banking fees, and sales commissions) and any
relocation expenses incurred as a result thereof, taxes paid or payable as a
result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements), amounts required to be applied to
the repayment of Indebtedness (other than Indebtedness under the New Credit
Facility) secured by a Lien on the asset or assets that were the subject of such
Asset Sale and any reserve for adjustment in respect of the sale price of such
asset or assets established in accordance with GAAP.
"New Credit Facility" means that certain credit facility, dated as of the
Issue Date, by and among the Company, Holdings and NationsBank, N.A., as
administrative agent, issuing bank and swing line bank and the other parties
party thereto, together with all "Loan Documents" as defined therein and all
other documents, instruments and agreements executed in connection therewith
(including, without limitation, any guarantees, security documents and Hedging
Obligations), and in each case as amended, supplemented or modified from time to
time, including any renewal, refunding, replacement, restructuring or
refinancing of all or a portion thereof from time to time whether by the same or
any other agent, lender or other party thereto.
"Non-Recourse Debt" means Indebtedness (i) as to which neither the Company,
nor Holdings nor any of the Restricted Subsidiaries (a) provides credit support
of any kind (including any undertaking, agreement or instrument that would
constitute Indebtedness), (b) is directly or indirectly liable (as a guarantor
or otherwise), or (c) constitutes the lender; and (ii) no default with respect
to which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness of the
Company, Holdings or any of the Restricted Subsidiaries to declare a default on
such other Indebtedness or cause the payment thereof to be accelerated or
payable prior to its stated maturity; and (iii) as to which the lenders have
been notified in writing that they will not have any recourse to the stock or
assets of the Company, Holdings or any of its Restricted Subsidiaries.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Permitted Investments" means (a) any Investment in the Company or in a
Wholly Owned Restricted Subsidiary of the Company; (b) any Investment by
Holdings or any of its Subsidiaries (other than the Company or a Subsidiary of
the Company) in Holdings or in a Wholly Owned Restricted Subsidiary of Holdings;
(c) any Investment in Cash Equivalents; (d) any Investment by the Company or any
of its Restricted Subsidiaries in a Person, if as a result of such Investment
(i) such Person becomes a Wholly Owned Restricted Subsidiary of the Company or
(ii) such Person is merged, consolidated or amalgamated with or into, or
transfers or conveys all or substantially all of its assets to, or is liquidated
into, the Company or a Wholly Owned Restricted Subsidiary of the Company; (e)
any Investment by Holdings or any of its Restricted Subsidiaries in a Person, if
as a result of such Investment (i) such Person becomes a Wholly Owned Restricted
Subsidiary of Holdings or (ii) such Person is merged, consolidated or
amalgamated with or
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into, or transfers or conveys all or substantially all of its assets to, or is
liquidated into, Holdings or a Wholly Owned Restricted Subsidiary of Holdings;
(f) any Restricted Investment made as a result of the receipt of non-cash
consideration from an Asset Sale that was made pursuant to and in compliance
with the covenant described above under the caption "Repurchase at the Option of
Holders -- Asset Sales;" (g) any acquisition of assets solely in exchange for
the issuance of Equity Interests (other than Disqualified Stock) of the Company
or Holdings; and (h) other Investments in any Person having an aggregate fair
market value (measured on the date each such Investment was made and without
giving effect to subsequent changes in value), when taken together with all
other Investments made pursuant to this clause (h) that are at the time
outstanding, not to exceed $5.0 million.
"Permitted Liens" means (i) Liens securing Indebtedness under the New
Credit Facility; (ii) Liens on assets of Subsidiaries of the Company in favor of
the Company; (iii) Liens on assets of Subsidiaries of Holdings (other than the
Company or any of its Subsidiaries) in favor of Holdings; (iv) Liens on property
of a Person existing at the time such Person is merged into or consolidated with
the Company, Holdings or any of their respective Restricted Subsidiaries;
provided that such Liens were in existence prior to the contemplation of such
merger or consolidation and do not extend to any assets other than those of the
Person merged into or consolidated with the Company or Holdings or such
Restricted Subsidiary, as the case may be; (v) Liens on property existing at the
time of acquisition thereof by the Company, Holdings or any of their respective
Subsidiaries, provided that such Liens were in existence prior to the
contemplation of such acquisition; (v) Liens to secure the performance of
statutory or regulatory obligations, leases, surety or appeal bonds, performance
bonds or other obligations of a like nature incurred in the ordinary course of
business; (vi) Liens to secure Indebtedness (including Capital Lease
Obligations) permitted by clause (iv) of the second paragraph of the covenant
entitled "Incurrence of Indebtedness and Issuance of Preferred Stock" covering
only the assets acquired with such Indebtedness; (vii) Liens existing on the
date of the Indenture; (viii) Liens for taxes, assessments or governmental
charges or claims that are not yet delinquent or that are being contested in
good faith by appropriate proceedings promptly instituted and diligently
concluded, provided that any reserve or other appropriate provision as shall be
required in conformity with GAAP shall have been made therefor; (ix) statutory
and common law Liens of landlords and carriers, warehousemen, mechanics,
suppliers, materialmen, repairmen or other similar Liens arising in the ordinary
course of business with respect to amounts not yet more than ninety days overdue
or being contested in good faith by appropriate legal proceedings promptly
instituted and diligently conducted and for which a reserve or other appropriate
provision, if any, as shall be required in conformity with GAAP shall have been
made; (x) Liens incurred or deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance and other types of
social security; (xi) easements, rights-of-way, municipal and zoning ordinances
and similar charges, encumbrances, title defects or other irregularities that do
not materially interfere with the ordinary course of business of the Company,
Holdings or any of the Restricted Subsidiaries; (xii) Liens encumbering property
or assets under construction arising from progress or partial payments by a
customer of the Company, Holdings or its Restricted Subsidiaries relating to
such property or assets; (xiii) any interest or title of a lessor in the
property subject to any Capitalized Lease or operating lease; (xiv) Liens
arising from filing Uniform Commercial Code financing statements regarding
leases; (xv) Liens in favor of the Company, Holdings or any Restricted
Subsidiary; (xvi) Liens arising from the rendering of a final judgment or order
against the Company, Holdings or any Restricted Subsidiary that does not give
rise to an Event of Default; (xvii) Liens in favor of customs and revenue
authorities arising as a matter of law to secure payment of customs duties in
connection with the importation of goods; (xviii) Liens encumbering customary
initial deposits and margin deposits, and other Liens that are either within the
general parameters customary in the industry and incurred in the ordinary course
of business, in each case securing Hedging Obligations; (xix) Liens arising out
of conditional sale, title retention, consignment or similar arrangements for
the sale of goods entered into by the Company, Holdings or any of the Restricted
Subsidiaries in the ordinary course of business in accordance with the past
practices of the Company, Holdings and the Restricted Subsidiaries prior to the
Issue Date; (xx) Liens incurred in the ordinary course of business of the
Company, Holdings or any of their respective Subsidiaries with respect to
obligations that do not exceed $5.0 million at any one time outstanding and that
(a) are not incurred in connection with the borrowing of money or the obtaining
of advances or credit (other than trade credit in the ordinary course of
business) and (b) do not in the aggregate materially detract from the value of
the property or materially impair the use thereof in the operation of business
by the Company, Holdings or such Subsidiary; (xxi) Liens on assets of
Unrestricted Subsidiaries that secure Non-Recourse Debt of Unrestricted
Subsidiaries; and (xxii) Liens on assets of the Company
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securing Obligations under any Senior Indebtedness of the Company and Liens on
assets of a Guarantor securing Obligations under any Senior Indebtedness of such
Guarantor.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company,
Holdings or any of their respective Subsidiaries issued in exchange for, or the
net proceeds of which are used to extend, refinance, renew, replace, defease or
refund Existing Indebtedness or other Indebtedness of the Company, Holdings or
any of the Restricted Subsidiaries incurred in accordance with the Indenture
(other than Indebtedness incurred in accordance with clauses (i), (ii), (iv),
(vii), (viii), (ix), (x), (xi), (xii), (xiii), (xiv), (xv), (xvi) and (xvii) of
the second paragraph of the covenant entitled "Incurrence of Indebtedness and
Issuance of Preferred Stock;") provided that: (i) the principal amount (or
accreted value, if applicable) of such Permitted Refinancing Indebtedness does
not exceed the principal amount of (or accreted value, if applicable), plus
accrued interest on, the Indebtedness so extended, refinanced, renewed,
replaced, defeased or refunded (plus the amount of reasonable expenses incurred
in connection therewith); (ii) such Permitted Refinancing Indebtedness has a
final maturity date at or later than the final maturity date of, and has a
Weighted Average Life to Maturity equal to or greater than the Weighted Average
Life to Maturity of, the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded; (iii) if the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded is subordinated in right of
payment to the Notes, such Permitted Refinancing Indebtedness has a final
maturity date at or later than the final maturity date of, and is subordinated
in right of payment to, the Notes on terms at least as favorable to the Holders
of Notes as those contained in the documentation governing the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded; (iv) if the
Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded
is Indebtedness of the Company or its Restricted Subsidiaries, such Indebtedness
is incurred by the Company, Holdings or the Restricted Subsidiary who is the
obligor on the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded and (v) if the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded is Indebtedness of Holdings or its
Restricted Subsidiaries (other than the Company and its Restricted
Subsidiaries), such Indebtedness is incurred by Holdings or the Restricted
Subsidiary who is the obligor of the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded.
"Principals" means (i) J.W. Childs Equity Partners, L.P., (ii) each
Affiliate of J.W. Childs Equity Partners, L.P. as of the Issue Date, and (iii)
each officer or employee (including their respective immediate family members)
of J.W. Childs Associates, L.P. as of the Issue Date.
"Public Equity Offering" means an underwritten public offering of common
stock (other than Disqualified Stock) of the Company or Holdings, pursuant to an
effective registration statement filed with the Commission in accordance with
the Securities Act; provided, however, that, in the case of a Public Equity
Offering by Holdings, Holdings contributes to the capital of the Company net
cash proceeds thereof in an amount sufficient to redeem the Notes called for
redemption in accordance with the terms of the Indenture.
"Qualified Subordinated Indebtedness" means Indebtedness of Holdings which
(i) does not require payments (other than payments made with additional
Qualified Subordinated Indebtedness) in respect of principal, premium, interest
or otherwise (pursuant to mandatory redemption, sinking fund obligation or
otherwise) prior to the date that is 91 days after the date on which the Notes
mature, (ii) does not directly or indirectly provide for any restrictive
covenants or events of default other than the covenants and events of default
which are substantially the same as those provided for in the Exchange Notes (as
in effect on the Issue Date) and (iii) is subordinated in right of payment to
the Notes at least to the same extent as the Holdings Preferred Stock is
subordinated to the Notes on the Issue Date (including with respect to the
standstill provisions provided therein).
"Related Party" with respect to any Principal means (A) any controlling
stockholder or 80% (or more) owned Subsidiary of such Principal or (B) or trust,
corporation, partnership or other entity, the beneficiaries, stockholders,
partners, owners or Persons beneficially holding an 80% or more controlling
interest of which consist of such Principal and/or such other Persons referred
to in the immediately preceding clause (A).
"Restricted Investment" means any Investment other than a Permitted
Investment.
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"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Senior Indebtedness" means (i) all "Obligations" in respect of and as
defined in the New Credit Facility (including, without limitation, interest that
accrues after the filing of a petition initiating any action or proceeding under
Bankruptcy Law or any other bankruptcy, insolvency or similar law or statute
protecting creditors in effect in any jurisdiction, whether or not such interest
accrues after the filing of such petition for purposes of Bankruptcy Law or such
other law or statute or is an allowed claim in any such action or proceeding),
whether existing on the date hereof or hereafter incurred, and (ii) any other
Indebtedness permitted to be incurred by the Company or any Guarantor under the
terms of the Indenture, unless the instrument under which such Indebtedness is
incurred expressly provides that it is on a parity with or subordinated in right
of payment to the Notes. Notwithstanding anything to the contrary in the
foregoing, Senior Indebtedness will not include (w) any liability for federal,
state, local or other taxes owed or owing by the Company or any Guarantor, (x)
any Indebtedness of the Company or any Guarantor to any of their respective
Subsidiaries or other Affiliates, except to the extent any such Indebtedness is
pledged as security under the New Credit Facility, (y) any trade payables or (z)
any Indebtedness that is incurred in violation of the Indenture.
"Significant Restricted Subsidiary" means a Restricted Subsidiary, that
would be a "significant subsidiary" as defined in Article 1, Rule 1-02 of
Regulation S-X, promulgated pursuant to the Securities Act, as such Regulation
is in effect on the date of the Indenture.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations to
repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"Stock Purchase Agreement" means that Stock Purchase Agreement, dated
October 8, 1997, among J.W. Childs Equity Partners, L.P., Holdings, and the
stockholders of Holdings named therein, as in effect on the Issue Date.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) or (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof).
"Subsidiary Guarantee" means each guarantee of the Notes issued by a
Subsidiary of Holdings or the Company pursuant to the Indenture.
"Tax Sharing Agreement" means the tax sharing agreement among Holdings, the
Company and any one or more of Holdings' subsidiaries, as amended from time to
time, so long as the method of calculating the amount of the Company's payments,
if any, to be made thereunder is not less favorable to the Company than as
provided in such agreement as in effect on the Issue Date (except to the extent
required to reflect changes in applicable federal or state tax laws), as
determined in good faith by the Board of Directors of the Company.
"Unrestricted Subsidiary" means any Subsidiary that is designated by the
Board of Directors of the Company or Holdings, as the case may be, as an
Unrestricted Subsidiary pursuant to a Board Resolution, but only to the extent
that such Subsidiary: (a) has no Indebtedness other than Non-Recourse Debt; (b)
is not party to any agreement, contract, arrangement or understanding with the
Company, Holdings or any Restricted Subsidiary unless the terms of any such
agreement, contract, arrangement or understanding are no less favorable to the
Company, Holdings or such Restricted Subsidiary than those that might be
obtained at the time from Persons who are not Affiliates of the Company or
Holdings (as determined in good faith by the Board of Directors of the Company
or Holdings, as the case may be); (c)
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is a Person with respect to which neither the Company, nor Holdings nor any of
the Restricted Subsidiaries has any direct or indirect obligation (x) to
subscribe for additional Equity Interests or (y) to maintain or preserve such
Person's financial condition or to cause such Person to achieve any specified
levels of operating results; and (d) has not guaranteed or otherwise directly or
indirectly provided credit support for any Indebtedness of the Company, Holdings
or any of the Restricted Subsidiaries. Any such designation by such Board of
Directors shall be evidenced to the Trustee by filing with the Trustee a
certified copy of the Board Resolution giving effect to such designation and an
Officers' Certificate certifying that such designation complied with the
foregoing conditions and was permitted by the covenant described above under the
caption "Certain Covenants -- Restricted Payments." If, at any time, any
Unrestricted Subsidiary would fail to meet the foregoing requirements as an
Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted
Subsidiary for purposes of the Indenture and any Indebtedness of such Subsidiary
shall be deemed to be incurred by a Restricted Subsidiary as of such date (and,
if such Indebtedness is not permitted to be incurred as of such date under the
covenant described under the caption "Incurrence of Indebtedness and Issuance of
Preferred Stock," the Company and Holdings shall be in default of such
covenant). The Board of Directors of the Company or Holdings may at any time
designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided
that such designation shall be deemed to be an incurrence of Indebtedness by a
Restricted Subsidiary of any outstanding Indebtedness of such Unrestricted
Subsidiary and such designation shall only be permitted if (i) such Indebtedness
is permitted under the covenant described under the caption "Certain Covenants
- -- Incurrence of Indebtedness and Issuance of Preferred Stock," calculated on a
pro forma basis as if such designation had occurred at the beginning of the
four-quarter reference period, and (ii) no Default or Event of Default would be
in existence following such designation.
"Voting Stock" means, with respect to any Person, the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person and one or more Wholly Owned Restricted Subsidiaries
of such Person.
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DESCRIPTION OF NEW CREDIT FACILITY
General
Concurrently with the consummation of the Recapitalization, the Company
entered into the New Credit Facility with the lenders from time to time party
thereto, NationsBank, as Administrative Agent, Union Bank of Switzerland, New
York Branch, as Documentation Agent, NationsBanc Montgomery Securities, Inc.
("NMSI"), as Syndication Agent for the lenders referred to therein, and NMSI and
UBS Securities LLC, as Co-Arrangers, providing for borrowings in an aggregate
principal amount of up to $195 million. The New Credit Facility was amended by
Amendment and Waiver No. 1 dated as of January 2, 1998, Letter Waiver No. 2
dated as of April 9, 1998 and Amendment No. 3 to the Loan Documents dated as of
May 26, 1998 and is comprised of a six-year term facility (the "New Term Loan
A") in the principal amount of $50 million, a seven-year term facility (the "New
Term Loan B") in the principal amount of $50 million, a revolving credit
facility (the " Working Capital Facility") in the principal amount of $75.0
million including a swing line facility (the "Swing Line Facility") in the
amount of $5 million , a 6-year acquisition facility (the "Acquisition
Facility") in the principal amount of $20 million, and an acquisition facility
coterminous with the Acquisition Facility (the "Acquisition B Facility") in the
principal amount of $30 million. Indebtedness under the New Credit Facility is
guaranteed by Holdings and each existing and hereafter acquired domestic
subsidiary of the Company. This information relating to the New Credit Facility
is qualified in its entirety by reference to the complete text of the documents
entered into or to be entered into in connection therewith. The following is a
description of the general terms of the New Credit Facility.
Security
Indebtedness under the New Credit Facility is secured by (i) substantially
all of the assets of Holdings, the Company and their domestic subsidiaries, (ii)
100% of the outstanding capital stock of each of the Company and the domestic
subsidiaries of Holdings and the Company and (iii) 65% of the outstanding
capital stock of any foreign subsidiary of the Company or Holdings.
Interest
Amounts outstanding under the New Term Loan A and the Working Capital
Facility bear interest at a rate equal (at the Company's election) to LIBOR plus
225 basis points or the prime rate plus 125 basis points. Amounts outstanding
under the New Term Loan B, the Acquisition Facility and the Acquisition B
Facility bear interest at a rate equal (at the Company's election) to LIBOR plus
262.5 basis points or the prime rate plus 162.5 basis points. Amounts under the
Swing Line Facility bear interest at the prime rate plus 125 basis points.
Borrowing Base
Pursuant to the terms of the New Credit Facility, advances under the
Working Capital Facility are limited to a borrowing base comprised of specified
percentages of eligible accounts receivable and eligible inventory. The Company
will be required to reduce outstanding borrowings under the Working Capital
Facility to a maximum of $15.0 million for a period of at least thirty (30) days
during each year. For fiscal 1998, the Company was required to reduce
outstanding borrowings only to $24.0 million.
Maturity
Loans made pursuant to the Working Capital Facility may be borrowed, repaid
and reborrowed from time to time until November 26, 2003 or the earlier
repayment in full of the New Term Loan A, subject to the satisfaction of certain
conditions on the date of any such borrowing.
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Fees
The Company is required to pay to the Banks in the aggregate a commitment
fee equal to 50 basis points per annum, payable in arrears on a quarterly basis,
on the committed undrawn amount of the New Credit Facility. The Agent and the
Banks shall receive such other fees as have been separately agreed upon with the
Agent, including, without limitation, in respect of letters of credit issued
under the letter of credit subfacility.
Letters of Credit Subfacility
The New Credit Facility includes a subfacility for the issuance of letters
of credit up to a maximum aggregate amount at any one time outstanding not to
exceed $10.0 million. If any letter of credit is outstanding after the
termination of the New Credit Facility, the Company would be required to post a
standby letter of credit or deposit cash collateral in an amount sufficient to
reimburse the Banks for amounts drawn under any such outstanding letter of
credit.
Covenants
The New Credit Facility contains a number of financial, affirmative and
negative covenants that regulate the operations of Holdings and its
subsidiaries, including the Company. Financial covenants require Holdings to
maintain: (i) a minimum fixed charge coverage ratio increasing from 1.00:1 for
the measurement period ending in May 1998 to 1.30:1 for measurement periods
ending in or after May 2001, (ii) a minimum interest coverage ratio increasing
from 1.30:1 for the measurement period ending in May 1998 to 2.50:1 for
measurement periods ending in or after February 2001; and (iii) a maximum
leverage ratio increasing from 7.00:1 for the measurement period ending in May
1998 to 7.25:1 for the measurement period ending in November 1998 and then
decreasing to 4.25:1 for measurement periods ending in or after February 2002.
Negative covenants restrict, among other things, the incurrence of debt, the
existence of liens, transactions with affiliates, loans, advances and
investments, payment of dividends and other distributions to shareholders,
dispositions of assets, mergers, consolidations and dissolutions, contingent
liabilities and changes in business.
Events of Default; Remedies
The New Credit Agreement contains customary events of default under the New
Credit Facility, including (i) the non-payment of principal, interest or other
amounts, (ii) violation of covenants, (iii) inaccuracy of representations and
warranties, (iv) cross-defaults to certain other indebtedness and material
agreements (including the Notes), (iv) certain events of bankruptcy and
insolvency, (v) ERISA, (vi) actual or asserted invalidity of any loan documents
or security interests, (vii) changes in control of the ownership of the Company,
(viii) bankruptcy and (ix) Holdings engaging in any business or activity other
than holding 100% of the stock of the Company. If any such event of default
occurs, the Administrative Agent will be entitled, on behalf of the Banks, to
take all actions permitted to be taken by a secured creditor under the Uniform
Commercial Code and to accelerate the amounts due under the New Credit Facility
and may require all such amounts outstanding thereunder to be immediately paid
in full.
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DESCRIPTION OF HOLDINGS PREFERRED STOCK
The following statements are brief summaries of certain provisions relating
to the shares of the Holdings Preferred Stock. The following statements are
qualified in their entirety by the provisions of Holdings' Certificate of
Incorporation and the Restated Certificate of Designation relating to the
Holdings Preferred Stock (the "Certificate of Designation") filed with the
secretary of state of Delaware, which includes the resolutions of the Board of
Directors of Holdings creating the Holdings Preferred Stock.
Dividend Rights
Holders of Holdings Preferred Stock are entitled to receive, but only when
and as declared by the Board of Directors of Holdings out of funds legally
available therefor, cumulative dividends at the annual rate of $120.00 per
share, payable semiannually on the last day of June 30 and December 31 in each
year, commencing June 30, 1998 (a "Dividend Reference Date"). Dividends are
cumulative, accrue on a daily basis, are calculated from the date of issue of
the Holdings Preferred Stock and are payable to holders of record on such record
dates as are fixed by the Board of Directors of Holdings. Dividends payable for
any period less than a full semiannual period will be computed on the basis of a
365-day year and the actual number of days elapsed.
Dividends are payable in cash, except if any dividend payable on any
Dividend Reference Date occurring before December 31, 2009 is not declared and
paid in full in cash on such Dividend Reference Date, the amount payable as a
dividend on such Dividend Reference Date that is not paid in cash shall, subject
to the terms of any Parity Securities or Senior Securities (each defined below),
be declared and paid in additional shares of Holdings Preferred Stock, with such
additional shares of Holdings Preferred Stock being valued at $1,000 per share
for such purpose.
For purposes of the Certificate of Designation:
"Equity Interests" means capital stock and all warrants, options or other
rights to acquire capital stock (but excluding any debt security that is
convertible into, or exchangeable for, capital stock).
"Junior Security" means any shares of the voting common and the non-voting
common stock of Holdings and any other class or series of stock of Holdings
which, by the terms of Holdings' Certificate of Incorporation or of the
instrument by which its Board of Directors, acting pursuant to authority granted
in Holdings' Certificate of Incorporation, shall fix the relative rights,
preferences and limitations thereof, shall be junior to the Holdings Preferred
Stock in respect of the right to receive dividends or to participate in any
distribution of assets (including but not limited to any distribution of assets
in connection with the liquidation of Holdings) other than by way of dividends.
"Parity Security" means any shares of any class or series of stock of
Holdings which, by the terms of Holdings' Certificate of Incorporation or of the
instrument by which its Board of Directors, acting pursuant to authority granted
in Holdings' certificate of incorporation, shall fix the relative rights,
preferences and limitations thereof, shall be on a parity with the Holdings
Preferred Stock in respect of the right to receive dividends and to participate
in any distribution of assets (including but not limited to any distribution of
assets in connection with the liquidation of Holdings) other than by way of
dividends.
"Senior Security" means shares of any class or series of stock of Holdings
which, by the terms of Holdings' certificate of incorporation or of the
instrument by which the Board of Directors, acting pursuant to authority granted
in Holdings' certificate of incorporation, shall fix the relative rights,
preferences and limitations thereof, shall be senior to the Holdings Preferred
Stock in respect of the right to receive dividends or to participate in any
distribution of assets (including but not limited to any distribution of assets
in connection with the liquidation of Holdings) other than by way of dividends.
No dividend (payable other than in shares of Junior Securities) whatsoever
shall be paid upon, or moneys or other property of Holdings set apart for
payment of any dividend upon, any Junior Security nor shall any Junior Security
be
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redeemed or purchased by Holdings or any subsidiary thereof (except by
conversion into or exchange for Junior Securities) nor shall any moneys or other
property be paid to or made available for a sinking fund for any such redemption
or purchase of any Junior Security, unless, in each such instance, all of the
following conditions are met: (i) all dividends on all outstanding shares of
Holdings Preferred Stock accrued through the most recent Dividend Reference Date
shall have been paid or declared and sufficient moneys (or, to the extent
permitted by the Certificate of Designation, shares of Holdings Preferred Stock)
set aside for payment thereof; (ii) all dividends on all outstanding shares of
Holdings Preferred Stock accrued through the most recent Dividend Reference Date
from the Dividend Reference Date immediately preceding such most recent Dividend
Reference Date shall have been paid in cash or declared and sufficient moneys
set aside for payment thereof; (iii) all shares of Holdings Preferred Stock
issued by Holdings after December 31, 2002 as payment-in-kind dividends shall
have been redeemed; (iv), Holdings shall have redeemed all shares of Holdings
Preferred Stock (A) for which it has received a notice of redemption from the
holders thereof pursuant to the right of holders to demand redemption described
below under the heading "Redemption on Demand by Holder" and in respect of which
Holdings' obligation to redeem such shares shall not have terminated or (B)
which are required to be redeemed pursuant to the mandatory redemption
obligation of Holdings described below under the heading "Mandatory Redemption;"
and (v) certain other limitations on the maximum amount of such dividends on or
redemptions or purchases of Junior Securities are met. The foregoing provisions
shall not prohibit (i) the payment of any dividend within sixty (60) days after
the date of declaration thereof, if at the date of such declaration such payment
would have complied with the provisions of the Certificate of Designation, or
(ii) the repurchase, redemption or other retirement for value of any Equity
Interests of Holdings held by any member of the management or employees of
Holdings or any subsidiary of Holdings pursuant to the Stockholders Agreement to
be entered into concurrently with the closing of the Recapitalization, among
Holdings and its stockholders named therein; provided that (A) the aggregate
price paid for all such repurchased, redeemed, acquired or retired Equity
Interests shall be subject to certain limitations on the maximum amount thereof,
(B) no Voting Rights Triggering Event (defined below) shall have occurred and be
continuing immediately after such transaction, and (C) Holdings shall have
redeemed all shares of Holdings Preferred Stock (I) for which it has received a
notice of redemption from the holders thereof pursuant to the right of holders
to demand redemption described below under the heading "Redemption on Demand by
Holder" and in respect of which Holdings' obligation to redeem such shares shall
not have terminated or (II) which are required to be redeemed pursuant to the
mandatory redemption obligation of Holdings described below under the heading
"Mandatory Redemption."
So long as any share of Holdings Preferred Stock remains outstanding, no
full dividend (payable other than in shares of Junior Securities) shall be paid
upon, or moneys or other property of Holdings set apart for payment of any full
dividend upon, any Parity Securities, unless all dividends on all outstanding
shares of Holdings Preferred Stock accrued through the most recent Dividend
Reference Date shall have been paid or declared and sufficient moneys (or, to
the extent required by the Certificate of Designation, shares of Holdings
Preferred Stock) set aside for payment thereof. If all such dividends are not so
paid, the Holdings Preferred Stock shall share dividends pro rata with such
Parity Securities.
Substantially all of Holdings' operations are conducted through the
Company. The ability of Holdings to pay cash dividends on the Holdings Preferred
Stock will be dependent upon the payment to it of dividends, interest or other
charges by the Company. The Company's right to make such payments is restricted
by the New Credit Facility and the Indenture.
Liquidation Preference
Upon any liquidation, dissolution or winding up of Holdings, whether
voluntary or involuntary, the holders of Holdings Preferred Stock will be
entitled to be paid out of the assets of Holdings available for distribution to
stockholders, before any distribution or payment is made upon any Junior
Securities, an amount in cash equal to the sum of $1,000 per share of Holdings
Preferred Stock plus all accrued and unpaid dividends thereon (the "Liquidation
Value"). After such payment, the holders of Holdings Preferred Stock will not be
entitled to any further payment or claim to any of the remaining assets of
Holdings. If, upon any liquidation, dissolution or winding up of Holdings, the
assets of Holdings to be distributed among holders of Holdings Preferred Stock
are insufficient to permit payment to
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holders of the aggregate Liquidation Value to which they are entitled, then the
assets of Holdings to be distributed to such holders will be distributed ratably
among such holders. Neither the consolidation or merger of Holdings into or with
any other person or entity, nor the sale or transfer by Holdings of all or any
part of its assets, nor the reduction of the capital stock of Holdings, will be
deemed to be a liquidation, dissolution or winding up of Holdings.
Redemption
Holdings has the following redemption rights and obligations with respect
to the Preferred Stock:
Optional Redemptions by Holdings. At any time within six (6) months after a
Change of Control or a Qualified Public Offering (each as defined below),
Holdings may, at its election, redeem all or any part of the outstanding shares
of Holdings Preferred Stock, out of funds legally available therefor, at the
Liquidation Value. For purposes of the Certificate of Designation:
"Change of Control" shall mean the occurrence of any of the following:
(i) The sale, lease, transfer, conveyance or other disposition (other than
by way of merger or consolidation), in one or a series of related transactions,
of all or substantially all of the assets of Holdings or the Company to any
"person" (as such term is used in Section 13(d)(3) of the Exchange Act), except
to the extent such transaction would not constitute a Change of Control under
clause (vi) of this definition;
(ii) The adoption of a plan relating to the liquidation or dissolution of
Holdings or the Company;
(iii) The consummation of any transaction (including but not limited to any
merger or consolidation, (A) prior to the initial underwritten public offering
of the common stock of Holdings pursuant to an effective registration statement
under the Securities Act (the "IPO") the result of which is that the JWC Holders
and their Related Parties become the "beneficial owner" (as such term is defined
in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except that a person shall
be deemed to have "beneficial ownership" of all securities that such person has
the right to acquire, whether such right is currently exercisable or is
exercisable only upon the occurrence of a subsequent condition) of less than 40%
of the Voting Stock of Holdings (measured by voting power rather than number of
shares) or (B) after the IPO, any person (as defined above), other than the JWC
Holders and their Related Parties, becomes the beneficial owner (as defined
above), directly or indirectly, of 35% or more of the Voting Stock of Holdings
and such person is or becomes, directly or indirectly, the beneficial owner of a
greater percentage of the voting power of the Voting Stock of Holdings,
calculated on a fully diluted basis, than the percentage beneficially owned by
the JWC Holders and their Related Parties;
(iv) The first day on which a majority of the members of the Board of
Directors of Holdings are not Continuing Directors;
(v) The first day on which Holdings shall own, directly or indirectly, less
than all of the issued and outstanding capital stock of the Company or of the
surviving or transferee Person of the Company in a transaction not constituting
a Change of Control under clause (vi) of this definition; or
(vi) Holdings or the Company consolidates with, or merges with or into, any
Person or sells, assigns, conveys, transfers, leases or otherwise disposes of
all or substantially all of its assets to any Person, or any Person consolidates
with, or merges with or into, Holdings or the Company, as the case may be, in
any such event pursuant to a transaction in which (A) any of the outstanding
Voting Stock of Holdings is converted into or exchanged for cash, securities or
other property, other than any such transaction where the Voting Stock of
Holdings outstanding immediately prior to such transaction is converted into or
exchanged for Voting Stock of the surviving or transferee Person constituting a
majority of the outstanding shares of such Voting Stock of such surviving or
transferee Person (immediately after giving effect to such issuance) or (B) any
of the outstanding Voting Stock of the Company is converted into or exchanged
for cash, securities or other property (other than payments of or the right to
receive cash in respect of fractional shares of such Voting Stock), other than
any such transaction where the Voting Stock of the Company outstanding
immediately prior
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to such transaction is converted into or exchanged for Voting Stock of the
surviving or transferee Person all of which is owned, directly or indirectly, by
Holdings (immediately after giving effect to such issuance).
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of Holdings who (i) was a member of such Board of
Directors on the date of adoption of the Certificate of Designation by the Board
of Directors of Holdings or (ii) was nominated for election or elected to such
Board of Directors with the approval of a majority of the Continuing Directors
who were members of such Board at the time of such nomination or election.
"JWC Holders" means the JWC Holders as defined in the Stockholders
Agreement to be entered into concurrently with the closing of the
Recapitalization among Holdings and the stockholders of Holdings named therein.
The Principals are included among the JWC Holders.
"Person" means any individual, partnership, corporation, limited liability
corporation, trust, estate, joint venture, association, unincorporated
organization, government or any department or agency thereof, or other entity.
"Qualified Public Offering" means one or more public sales of any capital
stock of Holdings pursuant to one or more registration statements (other than on
Form S-4 or S-8 or any other similar limited purpose form), that have become
effective under the Securities Act, yielding at least $10.0 million in aggregate
gross proceeds.
"Related Party" with respect to any JWC Holder means (i) any controlling
stockholder or 80% (or more) owned subsidiary of such JWC Holder or (ii) trust,
corporation, partnership or other entity, the beneficiaries, stockholders,
partner, owners or Persons beneficially holding an 80% or more controlling
interest of which consist of JWC Holders and/or such other Persons referred to
in the immediately preceding clause (i).
"Voting Stock" means, with respect to any Person, the capital stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
At any time and from time to time Holdings may, at its election, redeem all
or any part of the outstanding shares of Holdings Preferred Stock issued by the
Holdings as payment-in-kind dividends out of funds legally available therefor,
at the Liquidation Value.
Redemption on Demand by Holder. Within ten business days after a Change of
Control, Holdings shall, unless Holdings shall have theretofore given notice of
the optional redemption by Holdings of all of the outstanding shares of Holdings
Preferred Stock, give written notice to the holders of the Holdings Preferred
Stock of the demand redemption rights described in this paragraph. In addition,
within ten business days after each Dividend Reference Date occurring at least
six months after such Change of Control, Holdings shall give written notice to
the holders of Preferred Stock of such demand redemption rights. Upon receipt of
any such notice, each holder of shares of Holdings Preferred Stock may require
Holdings to redeem, at the Liquidation Value plus an amount equal to one percent
(1%) of such Liquidation Value at the time of redemption, up to the lesser of
(i) all of the shares of Holdings Preferred Stock held by such holder and (ii)
such number of shares of Holdings Preferred Stock held of record by such holder
as shall equal the product of (x) all of the shares of Holdings Preferred Stock
in respect of which such holder shall have exercised his demand redemption right
multiplied by (y) a ratio, the numerator of which shall be equal to the Cash
Available for Redemption and the denominator of which shall be equal to the
aggregate of the Liquidation Value plus an amount equal to one percent (1%) of
the Liquidation Value at the time of redemption for all of the shares of
Holdings Preferred Stock in respect of which holders of Holdings Preferred Stock
shall have exercised their demand redemption rights. Holdings will not be
required to pay the redemption price due in connection with the redemption of
any Holdings Preferred Stock as described in this paragraph until ninety-one
business days after the redemption of all of the Notes required to be redeemed
by the Company in connection with such Change of Control. The right of a holder
of shares of Holdings Preferred Stock to require Holdings to redeem, out of Cash
Available for Redemption, any or all of such shares (and any shares of Holdings
Preferred Stock thereafter issued as payment-in-kind dividends thereon)
following a Change of Control or any Dividend Reference Date occurring at least
six months after such Change of Control will terminate to
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the extent that such holder fails to exercise his demand redemption right in
respect of such shares within the applicable exercise period following any date
on which Holdings gives notice of such demand redemption rights.
For purposes of the Certificate of Designation, "Cash Available for
Redemption" means, as of any date, the sum of
(i) the lesser of
(A) the sum of (I) the aggregate amount of cash and cash equivalents
held by Holdings as of such date, plus (II) the maximum undrawn amount
available to Holdings (without duplication of any amount available to any
subsidiary of Holdings under any credit or loan agreements, as amended and
in effect from time to time, including but not limited to any such credit
or loan agreement in connection with which Holdings acts as a guarantor or
co-obligor of the obligations of any such subsidiary) as of such date under
any credit or loan agreements, as amended and in effect from time to time,
to which the Holdings is party, as borrower, plus
(B) the maximum amount that Holdings could, if it declared and paid a
cash dividend on its common stock on such date, declare and pay without
being in violation of or default under (with or without the lapse of time
or the giving of notice, or both) any applicable law or any note,
debenture, indenture or other agreement or instrument governing
indebtedness for borrowed money of Holdings, plus
(ii) the lesser of
(A) the sum of (I) the aggregate amount of cash and cash equivalents
held by the Company as of such date plus (II) the maximum undrawn amount
available as of such date under (x) the New Credit Facility, as amended and
in effect from time to time, or (y) any credit or loan agreements, as
amended and in effect from time to time, hereafter executed in connection
with any refinancing or replacement of the New Credit Facility, and
(B) the maximum amount that the Company could, if it declared and paid
a cash dividend on its common stock on such date, declare and pay without
being in violation of or default under (with or without the lapse of time
or the giving of notice, or both) any applicable law or any note,
debenture, indenture or other agreement or instrument governing
indebtedness for borrowed money of the Company, minus
(iii) a reasonable reserve determined by the Board of Directors of Holdings
in the good faith exercise of its business judgment.
Mandatory Redemption. On December 31, 2009, Holdings shall redeem, at the
Liquidation Value, all of the outstanding shares of Holdings Preferred Stock.
If the funds of Holdings legally available for redemption of Preferred
Stock on any redemption date are insufficient to redeem the total number of
shares of Holdings Preferred Stock to be redeemed on such date, those funds
which are legally available shall be used to redeem the maximum possible number
of shares of Holdings Preferred Stock ratably among the holders of the Holdings
Preferred Stock to be redeemed. At any time thereafter, when additional funds of
the Holdings are legally available for the redemption of Holdings Preferred
Stock, such funds shall immediately be used to redeem, without interest, the
balance of the Holdings Preferred Stock which Holdings has become obligated to
redeem on any redemption date but which it has not redeemed.
Substantially all of Holdings' operations are conducted through the
Company. The ability of Holdings to pay the redemption price due on the
redemption of any of the Holdings Preferred Stock will be dependent upon the
payment to it of dividends, interest or other charges by the Company. The
Company's right to make such payments is restricted by the New Credit Facility
and the Indenture.
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<PAGE>
Voting Rights
The outstanding shares of Holdings Preferred Stock have no voting rights
except as required by law and as follows:
(a) The affirmative vote of the holders of record of at least two thirds
(2/3) of the outstanding shares of Holdings Preferred Stock, voting together as
a separate class, is required (i) to change (A) the rate or time of payment of
any dividends on, or (B) the time or amount of any redemption of, or (C) the
amount of any payments upon liquidation of Holdings with respect to, or (D) the
priorities afforded by the provisions of the Certificate of Designation for the
benefit of shares of Holdings Preferred Stock or (ii) to amend the redemption
rights of the holders of the Holdings Preferred Stock described above under the
heading "Mandatory Redemption" or (iii) to amend the voting rights of the
holders of the Holdings Preferred Stock.
(b) The affirmative vote of the holders of at least a majority of the
outstanding shares of Holdings Preferred Stock, voting together as a separate
class, is required to: (i) increase the number of authorized shares of Holdings
Preferred Stock or (ii) authorize or issue any additional shares of Holdings
Preferred Stock (other than as dividends on outstanding shares of Holdings
Preferred Stock to the extent permitted under the Certificate of Designation) or
(iii) issue any shares of capital stock of Holdings of any class, or any
security or obligations convertible into any capital stock of Holdings of any
class, in each case ranking on a parity with or prior to the Holdings Preferred
Stock as to distribution of assets in liquidation or in right of payment of
dividends (other than shares of Holdings Preferred Stock issued as dividends on
outstanding shares of Holdings Preferred Stock to the extent permitted under the
Certificate of Designation or in connection with the exchange, for shares of
Holdings Preferred Stock, of any Exchange Notes (as defined below) issued by
Holdings).
(c) In the event that (I) (A) dividends (either in cash or through the
issuance of additional shares of Holdings Preferred Stock to the extent
permitted under the Certificate of Designation) on the Holdings Preferred Stock
are in arrears and unpaid with respect to any Dividend Reference Date or (B)
December 31, 2002, Holdings fails on three (3) or more Dividend Reference Dates
(whether or not consecutive) to declare and pay in full in cash dividends, in
the amount of all accrued and unpaid dividends on the shares of Holdings
Preferred Stock outstanding as of each such Dividend Reference Date, on the then
outstanding shares of Holdings Preferred Stock (each, a "Dividend Voting Rights
Triggering Event") or (II) Holdings fails to redeem all of the then outstanding
shares of Holdings Preferred Stock on December 31, 2009 or otherwise fails to
discharge any redemption obligation with respect to the Holdings Preferred
Stock, then the maximum authorized number of directors of Holdings will be
increased by one (1) and holders of Holdings Preferred Stock shall be entitled
to vote their shares of Holdings Preferred Stock, together with the holders of
any Parity Securities upon which like voting rights have been conferred and are
exercisable, to elect, as a class, an additional one (1) director. Each such
event described in clauses (I) and (II) is herein referred to as a "Voting
Rights Triggering Event." So long as shares of Holdings Preferred Stock shall be
outstanding, the holders of Holdings Preferred Stock shall retain the right to
vote and elect, with the holders of any such Parity Securities, voting together
as a single class, such director until such time as (A) in the event such right
arises due to a Dividend Voting Rights Trigger Event, all accumulated dividends
that are in arrears on the Holdings Preferred Stock are paid in full in cash or,
with respect to any Dividend Reference Date occurring on or before December 31,
2002, through the issuance of additional shares of Holdings Preferred Stock; and
(B) in all other cases, the failure, breach or default giving rise to such
Voting Rights Triggering Event is remedied or waived by the holders of at least
a majority of the shares of Holdings Preferred Stock then outstanding and
entitled to vote thereon. Such period is herein referred to as a "Default
Period." Immediately upon the expiration of a Default Period, the right of the
holders of Holdings Preferred Stock to elect one director shall cease, the term
of office of the director elected by the holders of Holdings Preferred Stock and
such Parity Securities as a class shall terminate, and the number of directors
shall be such number as may be provided for in the Certificate of Incorporation,
as amended, or By-Laws of Holdings.
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<PAGE>
Exchange Notes
Exchange Provisions. Holdings may, at its election, exchange all but not
less than all of the outstanding shares of Holdings Preferred Stock for 12%
Junior Subordinated Notes due December 31, 2009 of Holdings (the "Exchange
Notes") having the general terms described below. Upon the exchange of the
Holdings Preferred Stock for the Exchange Notes, each holder of Holdings
Preferred Stock will be entitled to receive, per share of Holdings Preferred
Stock so exchanged, a principal amount of Exchange Notes equal to the
Liquidation Value of such share as of the date of such exchange. Upon such
exchange, dividends on the shares of Holdings Preferred Stock so exchanged shall
cease to accrue, such shares shall no longer be deemed to be outstanding, and
all rights of the holders thereof as stockholders of Holdings with respect to
shares so exchanged (except the right to receive from Holdings the Exchange
Notes in the aggregate original principal amount to which such holder is
entitled upon such exchange) shall cease. The Indenture and the New Credit
Facility restrict the ability of Holdings to elect to issue Exchange Notes in
exchange for Holdings Preferred Stock.
General. The Exchange Notes will be issued only if and when Holdings elects
to require the exchange of the Holdings Preferred Stock for the Exchange Notes.
The Exchange Notes will be unsecured obligations of Holdings and will be
subordinated to Holdings' obligations under the New Credit Facility and the
Holdings Guarantee of the Notes. The Exchange Notes will not be obligations of
the Company and, accordingly, the rights of the holders of the Exchange Notes
will be effectively subordinated to rights of the holders of the Notes, except
to the extent that Holdings may itself be a creditor with claims against the
Company. The maximum aggregate original principal amount of the Exchange Notes
will be limited to the aggregate original principal amount of the Exchange Notes
originally issued in exchange for shares of the Holdings Preferred Stock.
Interest. (a) The Exchange Notes will bear interest from their date of
issuance at the rate of 12% per annum, which will be due and payable on the last
day of each June 30 and December 31 after the Exchange Notes are issued.
Interest on the Exchange Notes will accrue from the most recent date on which
interest has been paid, or if no interest has been paid, from the original
issuance of the Exchange Notes. Interest is payable in cash, except that
Holdings may elect to defer the payment of any interest payable on any interest
payment date occurring on or before December 31, 2002 and prior to the Catch-up
Date (as hereinafter defined). To the extent that any interest accrued on the
Exchange Notes is not paid in cash on any interest payment date, such deferred
interest bears interest at 12% per annum, compounded on each interest payment
date thereafter until paid.
(b) On the last business day occurring on or before the first interest
payment date following the fifth anniversary of the date on which the Exchange
Notes were originally issued in exchange for shares of Holdings Preferred Stock
(the "Catch-up Date"), Holdings is required to pay in cash, in respect of
interest accrued and unpaid under the Exchange Notes, in addition to any
interest payment otherwise due on such date, such additional amount as is
necessary so that the aggregate amount includible for federal income tax
purposes in gross income with respect to the Exchange Notes by the holders
thereof for all periods ending on or before such first interest payment date
does not exceed the aggregate cumulative amount of interest paid in cash under
the Exchange Notes through such first interest payment date by more than the
product of the original principal amount of the Exchange Notes multiplied by
their yield to maturity.
(c) Each payment of interest due on an interest payment date occurring
after the Catch-up Date is required to be in an amount sufficient so that the
total amount of accrued and unpaid interest at the close of such interest
payment date shall in no event exceed the maximum amount which may be deferred
without causing a loss or deferral of Holdings' deduction of original issue
discount on the Exchange Notes under applicable provisions of the Internal
Revenue Code of 1986, as amended.
Holdings' operations are conducted through the Company. The rights of
Holdings and its creditors, including the holders of Exchange Notes, to
participate in the assets of the Company upon any liquidation or reorganization
of the Company or otherwise will be subject to the prior claims of creditors of
the Company (including, among others, holders of the Notes), except to the
extent that Holdings may itself be a creditor with claims against the Company.
The ability of Holdings to pay principal and cash interest payments on the
Exchange Notes will be dependent upon the payment
109
<PAGE>
to it of dividends, interest or other charges by the Company. The Company's
right to make such payments is restricted by the New Credit Facility and the
Indenture.
Redemption. Holdings has the following redemption rights and obligations
with respect to the Exchange Notes:
(a) At any time within six months after a Change of Control or a Qualified
Public Offering, Holdings may redeem all or any part of the outstanding
principal amount of the Exchange Notes, without premium, but together with
accrued and unpaid interest thereon.
(b) Within ten business days after a Change of Control, Holdings shall,
unless Holdings shall have theretofore given notice of the optional redemption
by Holdings of all of the Exchange Notes, give written notice to the holders of
the Exchange Notes of the demand redemption rights described in this paragraph.
In addition, within ten business days after each interest payment date occurring
at least six months after such Change of Control, Holdings shall give written
notice to the holders of the Exchange Notes of such redemption rights. Upon
receipt of any such notice, each holder of Exchange Notes may require Holdings
to redeem, at a redemption price equal to the outstanding principal amount of
and accrued and unpaid interest on such Exchange Notes, together with a premium
thereon in an amount equal to one percent (1%) of such principal amount and
accrued and unpaid interest to be redeemed, and all accrued and unpaid interest
on such principal amount, up to the lesser of (i) all of the Exchange Notes held
by such holder and (ii) such aggregate amount of the Exchange Notes held of
record by such holder as shall equal the product of (A) the Cash Available for
Redemption multiplied by (B) a ratio, the numerator of which shall be equal to
the redemption price of all of the Exchange Notes in respect of which such
holder shall have exercised his demand redemption right and the denominator of
which shall be equal to the aggregate redemption price for all of the Exchange
Notes in respect of which the holders thereof shall have exercised their demand
redemption right. Holdings will not be obligated to pay the redemption price due
in connection with the redemption of any Exchange Notes as described in this
paragraph (b) until ten business days after the redemption of all of the Notes
required to be redeemed by the Company in connection with such Change of
Control. The right of a holder of Exchange Notes to require Holdings to redeem,
out of Cash Available for Redemption, any or all of such Exchange Notes
following a Change of Control or any interest payment date occurring at least
six months after such Change of Control will terminate to the extent that such
holder fails to exercise his demand redemption right in respect of such Exchange
Notes within the applicable exercise period following any date on which Holdings
gives notice of such demand redemption rights.
Subordination and Standstill Provisions. The payment of the principal,
premium, if any, and interest on the Exchange Notes is subordinated in right of
payment to the prior payment in full of all Senior Debt (as defined below) of
Holdings, whether outstanding on the date of issuance of the Exchange Notes or
thereafter created, incurred, assumed or guaranteed. Upon any distribution to
creditors of Holdings in a liquidation, dissolution or winding up of Holdings or
in a bankruptcy, reorganization, insolvency, receivership or similar proceeding
relating to Holdings or its property, the holders of Senior Debt will be
entitled to receive payment in full in cash before the Exchange Noteholders are
entitled to receive any payment. If any such distribution is made to the
Exchange Noteholders before all Senior Debt has been paid in full or provision
has been made for such payment, such distribution must be paid over to the
holders of the Senior Debt. No such subordination will prevent the occurrence of
an Event of Default (as defined below).
During the continuance of (i) any default in the payment of the principal,
premium, if any, or interest on Senior Debt in an aggregate principal amount of
at least $10 million, including principal or interest which has become due by
reason of acceleration, or (ii) any other default, in respect of which Holdings
shall have been notified in writing by the holder of such Senior Debt or any
trustee therefor, with respect to Senior Debt in an aggregate principal amount
of at least $10 million permitting the holders thereof to accelerate the
maturity thereof, no payment may be made on the Exchange Notes, and payments may
thereafter be resumed only if both such default or any subsequent default shall
have been cured or waived or shall cease to exist; provided that, in the event
that a Senior Debt default (other than any such Senior Debt default of a nature
described in clause (i) of this paragraph) shall have occurred and be
continuing, the restrictions set forth in this paragraph shall, unless all of
the Senior Debt in respect of which such Senior Debt default shall have occurred
and be continuing shall have been declared due and payable under any
acceleration provision applicable thereto and such declaration shall not have
been waived, rescinded or annulled, cease to apply upon the
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<PAGE>
earliest of (A) two hundred seventy (270) days after the occurrence of such
Senior Debt default or (B) the date on which all Senior Debt defaults under such
Senior Debt shall have been cured or waived; provided, further, that the
restrictions set forth in this paragraph on payments with respect to the
Exchange Notes in the event that a Senior Debt default (other than any such
Senior Debt default of a nature described in clause (i) of this paragraph) may
be invoked no more than one (1) time in any three hundred sixty-five (365) day
period, unless all of the Senior Debt in respect of which such Senior Debt
default shall have occurred and be continuing shall have been declared due and
payable under any acceleration provision applicable thereto and such declaration
shall not have been waived, rescinded or annulled. If any such payment is made
to the Exchange Noteholders before all Senior Debt has been paid in full or
provision has been made for such payment, such payment must be paid over to the
holders of the Senior Debt.
Holders of the Exchange Notes may not take any action to accelerate the
maturity of the indebtedness evidenced by the Exchange Notes unless all Senior
Debt shall have been paid in full in cash or all Senior Debt shall theretofore
have become due and payable.
Holders of the Exchange Notes may not commence any action or proceeding
against Holdings to recover all or any part of any indebtedness evidenced by the
Exchange Notes or bring or join with any creditor in bringing, unless the
holders of the Senior Debt then outstanding shall join therein, any proceeding
against Holdings under any bankruptcy, reorganization, insolvency or similar law
or statute unless and until all Senior Debt shall be paid in full in cash.
For purposes of the Exchange Notes, "Senior Debt" means
(a) All obligations and liabilities of Holdings (other than indebtedness
represented by the Exchange Notes), direct or indirect, as to principal,
interest (including post-petition interest whether or not an allowed claim),
premium or otherwise, initially incurred or issued to institutional investors,
whether outstanding on the date hereof or hereafter created or incurred, and
whether at any time assigned or otherwise transferred to any other institutional
investor or any other person, including but not limited to (i) all obligations
and liabilities in respect of money borrowed or purchase money indebtedness by
or of Holdings, (ii) all guarantees and endorsements (other than for collection
or deposit in the ordinary course of business) of any such obligations and
liabilities of others, such as but not limited to guarantees of any such
obligation or liability of a subsidiary of Holdings, (iii) all obligations and
liabilities secured by any mortgage, lien, pledge, security interest or other
encumbrance in respect of property, whether incurred in connection with money
borrowed or the acquisition of property, (iv) all obligations and liabilities in
respect of any lease of property, and (v) reimbursement obligations with respect
to letters of credit and interest rate protection agreements;
(b) All obligations and liabilities of Holdings (other than indebtedness
represented by the Exchange Notes), direct or indirect, as to principal,
interest, premium or otherwise with respect to any obligation, note, or
debenture offered by Holdings for sale to the public in an offer structured so
as to comply with applicable rules and regulations for a public offering in the
jurisdiction or jurisdictions in which such obligation, note or debenture is
offered, whether outstanding on the date hereof or hereafter created or
incurred, which are not expressly made pari passu or subordinate to the Exchange
Notes;
(c) All obligations and liabilities of Holdings (other than indebtedness
represented by the Exchange Notes) to which the Exchange Notes shall be
expressly subordinated in writing by the holders of not less than a majority in
aggregate principal amount of the Exchange Notes then outstanding;
(d) All other obligations and liabilities of Holdings (other than
indebtedness represented by the Exchange Notes); and
(e) All renewals, extensions, modifications and refundings of any such
obligation or liability;
unless in the case of either (a), (b), (c), (d) or (e), the terms of the
agreement or instrument creating the obligation or liability provide that it is
not senior to the Exchange Notes.
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<PAGE>
Events of Default and Remedies. Subject to the subordination and standstill
provisions described above under the heading "Subordination and Standstill
Provisions": (i) upon the occurrence and continuation of any Event of Default
(as defined below), then (a) in the case of any Event of Default specified in
clause (a) or (d)(i) of the definition of "Event of Default," each holder of
Exchange Note, and (b) in the case of any other Event of Default specified in
clause (b) or (c) of the definition of "Event of Default," the holder or holders
of record of at least twenty-five percent (25%) in aggregate principal amount of
the Exchange Notes then outstanding, may proceed to protect and enforce his or
their rights, as the case may be, by suit in equity, action at law and/or other
appropriate proceeding either for specific performance of any covenant or
condition, or in aid of the exercise of any power granted in the Exchange Notes,
and may by notice in writing to Holdings declare all or any part of the unpaid
balance of the Exchange Notes held by him to be forthwith due and payable, and
the holder may proceed to enforce payment of such balance or part thereof in
such manner as he may elect; and (ii) Holdings shall pay to the holder, upon
demand, the reasonable costs and expenses (including reasonable attorneys fees
and expenses) incurred by the holder in connection with the enforcement of his
rights and remedies arising upon the occurrence and continuance of an Event of
Default.
Anything in the Exchange Notes to the contrary notwithstanding, if any one
or more Events of Default specified in clause (d)(ii) or (iii) of the definition
of "Event of Default" shall occur and be continuing, then the holder or holders
of record of at least twenty-five percent (25%) in aggregate principal amount of
the Exchange Notes then outstanding may proceed to protect and enforce his or
their rights by suit in equity for specific performance and/or action at law for
damages; provided that the remedy, judgment, damages or other relief in equity
or at law of any such holder or holders shall be limited to the right to seek
specific performance of the obligation of Holdings to make payments in respect
of interest accrued on the Exchange Notes or damages, as the case may be, to,
and only to, the extent that Holdings shall have had cash available for interest
payments (defined in the Exchange Notes similarly to Cash Available for
Redemption) at the relevant date, determined in accordance with the Exchange
Notes. Such remedy (i) shall be the sole and exclusive remedy at law or in
equity of any such holder or holders of Exchange Notes in respect of any one or
more Events of Default specified in clause (d)(ii) or (iii) of the definition of
"Event of Default" and (ii) shall be subject to the subordination and standstill
provisions described above under the heading "Subordination and Standstill
Provisions."
For purposes of the Exchange Notes, "Event of Default" means the occurrence
and continuance of any of the following events:
(a) Except as otherwise provided in clause (d) below, Holdings shall have
failed, for a period of thirty days after written notice thereof, to make any
principal, interest, fee or other payment on any of the indebtedness evidenced
by the Exchange Notes (notwithstanding that such payment shall have been
suspended pursuant to the subordination provisions hereof); or
(b) Except as otherwise provided in clause (d) below, Holdings shall have
failed duly to observe or perform in any material respect any other covenant,
agreement or provision contained in the Exchange Notes other than those referred
to in subdivision (a) above, and such failure shall have continued for a period
of thirty days after written notice thereof; or
(c) Any customary bankruptcy-type event with respect to Holdings shall have
occurred and be continuing.
(d) notwithstanding the foregoing clauses (a), (b) and (c),
(i) the failure of Holdings to pay interest payable on any interest
payment date occurring after the earlier of (A) December 31, 2002 or (B)
the Catch-up Date shall constitute an Event of Default to, and only to, the
extent that Holdings shall fail to pay such interest in an amount at least
equal to the amount of cash available for interest payments, determined in
accordance with the Exchange Notes, as determined by Holdings as of a date
within ten business days prior to each such interest payment date;
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(ii) the failure of Holdings to make the interest payment described in
paragraph (b) under the heading "-- Interest" shall not constitute an Event
of Default under the Exchange Notes to, and only to, the extent that
Holdings shall fail to make such payment in an amount at least equal to the
amount of cash available for interest payments, determined in accordance
with the Exchange Notes, as determined by Holdings as of a date within ten
business days prior to the Catch-up Date; and
(iii) the failure of Holdings to make any interest payment described in
paragraph (c) under the heading "-- Interest" shall constitute an Event of
Default under the Exchange Notes to, and only to, the extent that Holdings
shall fail to make such payment in an amount at least equal to the amount
of cash available for interest payments, determined in accordance with the
Exchange Notes, as determined by Holdings as of a date within ten business
days prior to the relevant interest payment date.
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LEGAL MATTERS
Certain legal matters related to the Notes offered hereby are being passed
upon for the Company by Sullivan & Worcester LLP, Boston, Massachusetts.
EXPERTS
The consolidated financial statements and schedules of DESA Holdings
Corporation at March 1, 1997 and February 28, 1998, and for each of the three
years in the period ended February 28, 1998 included in this Prospectus have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
reports thereon appearing elsewhere herein, and are included in reliance upon
such reports given upon the authority of such firm as experts in accounting and
auditing.
The consolidated financial statements of Heath Company (a wholly-owned
subsidiary of Heath Holding Corp.) (excluding Heathkit Division) and Subsidiary
as of December 31, 1997 and 1996 and for each of the two years in the period
ended December 31, 1997 included in this Prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report appearing
herein, and are included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
114
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<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<S> <C>
DESA HOLDINGS CORPORATION
Report of Ernst & Young LLP...................................................................................F-2
Consolidated Balance Sheets as of March 1, 1997 and February 28, 1998.........................................F-3
Consolidated Statements of Income for fiscal years ended March 2, 1996, March 1, 1997 and
February 28, 1998.........................................................................................F-5
Consolidated Statements of Stockholders' Equity (Deficit) for fiscal years ended March 2, 1996, March 1, 1997
and February 28, 1998.....................................................................................F-6
Consolidated Statements of Cash Flows for fiscal years ended March 2, 1996, March 1, 1997 and February 28,
1998......................................................................................................F-7
Notes to Consolidated Financial Statements....................................................................F-8
HEATH COMPANY (EXCLUDING HEATHKIT DIVISION) AND SUBSIDIARY
Report of Deloitte & Touche LLP..............................................................................F-33
Financial Statements for the year ended December 31, 1997:
Consolidated Balance Sheets..............................................................................F-34
Consolidated Statements of Operations....................................................................F-35
Consolidated Statements of Shareholders' Equity..........................................................F-36
Consolidated Statements of Cash Flow.....................................................................F-37
Notes to Consolidated Financial Statements...............................................................F-38
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
DESA Holdings Corporation
We have audited the accompanying consolidated balance sheets of DESA
Holdings Corporation (the "Company") as of March 1, 1997 and February 28, 1998,
and the related consolidated statements of income, stockholders' equity
(deficit) and cash flows for each of the three fiscal years in the period ended
February 28, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of DESA Holdings
Corporation at March 1, 1997 and February 28, 1998, and the consolidated results
of its operations and its cash flows for each of the three fiscal years in the
period ended February 28, 1998 in conformity with generally accepted accounting
principles.
Ernst & Young LLP
New York, New York
May 27, 1998
F-2
<PAGE>
<TABLE>
<CAPTION>
DESA HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, excepts number of shares)
March 1, February 28,
1997 1998
--------------- ---------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents............................... $ 5,058 $ 794
Accounts receivable, net................................ 13,066 20,838
Inventories:
Raw materials........................................ 508 1,257
Work-in-process...................................... 4,386 8,908
Finished goods....................................... 10,853 30,191
------------- -------------
15,747 40,356
Deferred tax assets..................................... 1,206 3,730
Other current assets.................................... 555 1,440
------------- -------------
Total current assets...................................... 35,632 67,158
Property, plant and equipment:
Land.................................................... 390 390
Buildings and improvements.............................. 4,297 5,241
Machinery and equipment................................. 24,892 29,891
Furniture and fixtures.................................. 640 630
------------- -------------
30,219 36,152
Less accumulated depreciation........................... 20,137 22,593
------------- -------------
10,082 13,559
Goodwill.................................................. 40,829 63,430
Other assets.............................................. 5,441 11,489
------------- -------------
Total assets.............................................. $ 91,984 $ 155,636
============= =============
F-3
<PAGE>
<CAPTION>
DESA HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEETS - (Continued)
(In thousands, excepts number of shares)
March 1, February 28,
1997 1998
--------------- ---------------
<S> <C> <C>
Liabilities and stockholders' equity (deficit)
Current liabilities:
Accounts payable........................................ $ 17,997 $ 15,035
Accrued interest........................................ 1,288 5,725
Accrued liabilities..................................... 7,407 14,004
Income taxes payable.................................... 1,156 49
Current portion of long-term debt....................... 16,350 5,250
------------- -------------
Total current liabilities................................. 44,198 40,063
Long-term debt............................................ 130,600 261,105
Deferred tax liabilities.................................. 1,664 1,781
Other liabilities......................................... 276 433
------------- -------------
Total liabilities......................................... 176,738 303,382
Commitments
Series C redeemable preferred stock, $.01 par value;
authorized -- 40,000 shares at February 28, 1998;
issued and outstanding -- 17,600 shares at February
28, 1998 (liquidation preference -- $18,144,000 at
February 28, 1998) -- 14,661
Stockholders' equity (deficit):
Common stock, $.01 par value; authorized -- 30,000,000
shares at March 1, 1997; issued and outstanding --
23,573,876 shares at March 1, 1997 and 13,688,015
shares at February 28, 1998. ...................... 236 137
Nonvoting common stock, $.01 par value; authorized --
2,000,000 shares at March 1, 1997 and 3,000,000
shares at February 28, 1998; issued and outstanding --
1,781,557 shares at March 1, 1997 and 90,604 shares
at February 28, 1998................................. 18 1
Capital in excess of par value.......................... 26,722 85,926
Carryover predecessor basis adjustment.................. (32,309) (32,309)
Retained earnings (deficit)............................. (79,113) (215,598)
Cumulative translation adjustment....................... (308) (564)
------------- -------------
Total stockholders' equity (deficit)...................... (84,754) (162,407)
------------- -------------
Total liabilities and stockholders' equity (deficit)...... $ 91,984 $ 155,636
============= =============
</TABLE>
See accompanying notes.
F-4
<PAGE>
<TABLE>
<CAPTION>
DESA HOLDINGS CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(In thousands)
Fiscal Year Ended
----------------------------------------------------
March 2, March 1, February 28,
1996 1997 1998
---------------- ---------------- ----------------
<S> <C> <C> <C>
Net sales............................................. $ 186,324 $ 209,105 $ 224,169
Cost of sales......................................... 116,217 130,890 145,486
------------- ------------- --------------
Gross profit.......................................... 70,107 78,215 78,683
Operating Costs and expenses:
Selling............................................. 25,684 31,353 36,081
General and administrative ......................... 9,819 11,303 11,199
Other............................................... 2,325 2,601 2,911
------------- ------------- --------------
37,828 45,257 50,191
------------- ------------- --------------
Operating profit...................................... 32,279 32,958 28,492
Interest expense...................................... 7,073 14,509 17,327
------------- ------------- --------------
Income before provision for income taxes.............. 25,206 18,449 11,165
Provision for income taxes............................ 10,703 7,733 5,545
------------- ------------- --------------
Income before extraordinary item...................... 14,503 10,716 5,620
Extraordinary item, net of income tax benefit....... 2,638 -- 2,308
------------- ------------- --------------
Net income............................................ 11,865 10,716 3,312
Less dividends on preferred stock..................... 853 -- 544
------------- ------------- --------------
Income available for common stockholders.............. $ 11,012 $ 10,716 $ $2,768
============= ============= ==============
</TABLE>
See accompanying notes.
F-5
<PAGE>
<TABLE>
<CAPTION>
DESA HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Fiscal years ended March 2, 1996, March 1, 1997
and February 28, 1998
(In thousands)
Preferred Preferred Capital Carryover Total
Stock Stock Nonvoting in Predecessor Retained Cumulative Stockholders'
Series Series Common Common Excess of Basis Earnings Translation Equity
A B Stock Stock Par Value Adjustment (Deficit) Adjustment (Deficit)
-------- -------- -------- -------- -------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at February 25, 1995 $ 5,796 $ 4,715 $ 232 $ -- $ 25,441 $(32,309) $ 12,313 $ 6 $ 16,194
Net income.................. -- -- -- -- -- -- 11,865 -- 11,865
Dividends on preferred stock
(see Note 7)............ 622 231 -- -- -- -- (853) -- --
Redemption of preferred stock
(see Note 7)............ (6,418) (4,946) -- -- -- -- -- -- (11,364)
Exercise of stock options... -- -- 2 -- 200 -- -- -- 202
Exercise of BT warrant...... -- -- -- 18 873 -- -- -- 891
Dividends on common stock
and nonvoting common
stock................... -- -- -- -- -- -- (113,154) -- (113,154)
Translation adjustment...... -- -- -- -- -- -- (36) (36)
-------- -------- -------- -------- -------- -------- --------- -------- ---------
Balance at March 2, 1996.... -- -- 234 18 26,514 (32,309) (89,829) (30) (95,402)
Net income.................. -- -- -- -- -- -- 10,716 -- 10,716
Exercise of stock options... -- -- 2 -- 208 -- -- -- 210
Translation adjustments..... -- -- -- -- -- -- -- (278) (278)
-------- -------- -------- -------- -------- -------- --------- -------- ---------
Balance at March 1, 1997.... -- -- 236 18 26,722 (32,309) (79,113) (308) (84,754)
Net income ................. -- -- -- -- 82,273 -- 3,312 -- 3,312
Exercise of stock options... -- -- -- -- 5 -- -- -- 5
Exercise of stock options
simultaneously with the
1998 Recapitalization... -- -- 2 -- 148 -- -- -- 150
Tax benefit on exercise of
stock option ........... -- -- -- -- 177 -- -- -- 177
Repurchase of common stock
during the 1998
Recapitalization........ -- -- (237) (18) (26,846) -- (139,190) -- (166,291)
Issuance of common stock
during the 1998
Recapitalization ....... -- -- 126 1 82,273 -- -- -- 82,400
Expenses attributable to the
1998 Recapitalization... -- -- -- -- (6,536) -- -- -- (6,536)
Issuance of Warrants during th e
1998 Recapitalization... -- -- -- -- 3,002 -- -- -- 3,002
Issuance of common stock.... -- -- 11 -- 7,050 -- -- -- 7,061
Repurchase of common stock.. -- -- (1) (69) -- -- -- (70)
Dividends on preferred stock -- -- -- -- -- -- (544) -- (544)
Accretion of preferred stock -- -- -- -- -- -- (63) -- (63)
Translation adjustment...... -- -- -- -- -- -- -- (256) (256)
-------- -------- -------- -------- -------- -------- --------- -------- ---------
Balance at February 28, 1998 -- -- $ 137 $ 1 $ 85,926 $(32,309) $(215,598) $ (564) $(162,407)
======== ======== ======== ======== ======== ======== ========= ======== =========
</TABLE>
See accompanying notes.
F-6
<PAGE>
<TABLE>
<CAPTION>
DESA HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Fiscal years ended
---------------------------------------
March 2, March 1, February 28,
1996 1997 1998
---------- ----------- --------------
<S> <C> <C> <C>
Operating activities $ 11,865 $ 10,716 $ 3,312
Net income...........................................
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation....................................... 2,332 2,432 2,456
Amortization....................................... 1,963 2,104 2,256
Deferred income taxes.............................. 964 -- (36)
Equity in undistributed earnings of joint venture. (119) (132) (157)
Extraordinary item................................. 2,638 -- 2,308
(Increase) decrease in operating assets............
Accounts receivable, net......................... 4,431 (2,315) 131
Inventories...................................... (67) (811) (6,996)
Other current assets............................. (64) (337) (153)
Increase (decrease) in operating liabilities:
Accounts payable................................. (3,224) 7,107 (7,646)
Accrued Interest................................. (915) 798 4,437
Other accrued liabilities........................ (1,601) (1,492) 512
Income taxes payable............................. 1,380 346 565
Other liabilities................................ (208) (18) 157
---------- ----------- ----------
Net cash provided by operating activities.......... 19,375 18,398 1,146
---------- ----------- ----------
Investing activities
Capital expenditures................................. (2,122) (2,77) (5,475)
Dividends received from joint venture................ 112 132 157
Net cash paid for acquisition of Heath Holding Corp. -- -- (40,294)
Other................................................ (50) (244) (368)
---------- ----------- ----------
Net cash used in investing activities................ (2,060) (2,882) (45,980)
---------- ----------- ----------
Financing activities
Recapitalization transactions:
Proceeds from Term Loans........................... 155,000 -- 100,000
Proceeds from revolver loan........................ 9,900 -- --
Proceeds from Working Capital Loan................. -- -- 35,500
Proceeds from issuance of Senior Subordinated Notes -- -- 130,000
Proceeds from issuance of Series C Redeemable
Preferred Stock -- -- 14,598
Proceeds from issuance of warrants................. -- -- 3,002
Proceeds from exercise of BT Warrant............... 891 -- --
Proceed from issuance of common stock.............. -- -- 82,400
Exercise of stock options.......................... -- -- 150
Repurchase of common stock......................... -- -- (166,291)
Redemption of Series A Preferred Stock............. (6,418) -- --
Redemption of Series B Preferred Stock............. (4,946) -- --
Repayment of Term Loans.......................... (50,950) -- (183,095)
Dividends paid on common stock and nonvoting
common stock (113,154) -- --
Payment of expenses................................ (5,673) -- (17,670)
Increase (decrease) in revolving loan................ (7,141) (2,759) 43,000
Decrease in working capital loan .................... -- -- (20,020)
Principal payments of Term Loans................... (11,050) (8,050) (7,980)
Proceeds from Acquisition Loan..................... -- -- 20,000
Payments from repurchase of common stock........... -- -- (70)
Exercise of stock options............................ 202 210 5
Proceeds from issuance of common stock............. -- -- 7,061
---------- ----------- ----------
Net cash provided by (used in) financing activities.. (33,339) (10,599) 40,590
---------- ----------- ----------
Effect of exchange rates on cash..................... (1) (4) (20)
---------- ----------- ----------
Increase (decrease) in cash and cash equivalents
for the period (16,025) 4,913 (4,264)
Cash and cash equivalents at beginning of period..... 16,170 145 5,058
---------- ----------- ----------
Cash and cash equivalents at end of period........... $ 145 $ 5,058 $ 794
========== =========== ==========
</TABLE>
See accompanying notes.
F-7
<PAGE>
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal years ended March 2, 1996, March 1, 1997 and February 28, 1998
1. Organization and Basis of Presentation
DESA Holdings Corporation ("Holdings") was formed in 1993 by a group of
investors led by Hicks, Muse, Tate & Furst ("Hicks Muse") and certain management
shareholders. Hicks Muse owned 60% of the outstanding voting shares of Holdings
with the remaining shares owned by the management shareholders. In December
1993, Holdings acquired all of the outstanding common shares of DESA
International, Inc. ("DESA") (the "Restructuring" transaction). This
Restructuring met the criteria under the Emerging Issues Task Force Issue No.
88-16, "Basis in Leveraged Buyout Transaction". Consequently, management's
entire residual interest in Holdings was valued at its predecessor basis and is
shown as a Carryover Basis Adjustment of $32,308,744, which reduces
stockholders' equity (deficit) on the consolidated balance sheets whereas Hicks
Muse's residual interest was valued at fair value.
Holdings was refinanced on January 12, 1996 through a new credit agreement
with Bankers Trust. In conjunction with this transaction, Holdings paid a
dividend of $113,154,449 to the holders of common stock and nonvoting common
stock, repurchased all outstanding shares of its Series A and Series B preferred
stock, including payment of the accrued preferred stock dividends, and repaid
the outstanding balance of the old term loans. In addition, Holdings issued
1,781,557 shares of nonvoting common stock in conjunction with the exercise of
warrants previously issued to Bankers Trust. Since the refinancing in January
1996 did not result in a change in the controlling interest held by the
management shareholders and Hicks Muse, a change in the accounting basis under
generally accepted accounting principles to reflect the current market value was
not applied and the refinancing has been accounted for as a recapitalization
with all amounts paid to Hicks Muse, Bankers Trust, management shareholders and
other investors being recorded as reductions in stockholders' equity (deficit)
(the "1996 Recapitalization").
On November 26, 1997, J.W. Childs Equity Partners, L.P., certain other
investors and certain of Holdings' existing stockholders (collectively, the
"Investors") acquired 100% of the equity interests in Holdings. In connection
with such transaction, Holdings issued 12,606,163 shares of $.01 par value
common stock, 90,604 shares of $.01 par value nonvoting common stock, 17,600
shares of $.01 par value Series C redeemable preferred stock (the "Preferred
Stock") and warrants to purchase 463,232 shares of Holdings' nonvoting common
stock ("the Warrants") to the Investors in exchange for aggregate consideration
of $100.0 million. Holdings used such proceeds, together with a portion of the
proceeds borrowed by its wholly-owned subsidiary, DESA, under new term loans and
a working capital loan facility (the "New Credit Facility") with NationsBank,
N.A., as administrative agent, to repurchase all of its outstanding common stock
and nonvoting common stock for $166,291,000 (inclusive of a $1,119,000 post
closing purchase price adjustment). The remaining proceeds from the New Credit
Facility and the proceeds from the issuance by DESA of $130,000,000 of Senior
Subordinated Notes (the "Senior Notes") were used to repay the outstanding
amounts under Holdings existing credit agreement (See Notes 6 and 7).
The above described transactions have been accounted for as a
recapitalization (the "1998 Recapitalization") with all amounts paid to the
former shareholders recorded as reductions in stockholders' equity (deficit).
F-8
<PAGE>
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
2. Company Operations
Holdings is engaged in the manufacturing and marketing of various consumer
product lines, including zone heating products and specialty products. Two
significant customers, which operate in the hardware homecenter industry,
accounted for 10% and 11% of net sales, respectively in fiscal 1996, 13% and 11%
of net sales, respectively, in fiscal year 1997 and 17% and 13% of net sales,
respectively, in fiscal year 1998.
Other than a small amount of goodwill, Holdings has no assets, operations or
cash flows independent of DESA, and, accordingly, separate financial statements
for DESA have not been provided as management believes that such financial
statements are not material to an investor.
3. Summary of Significant Accounting Policies
Fiscal Year
Holdings' fiscal year ends on the Saturday closest to February 28. The fiscal
years for the financial statements included herein ended on March 2, 1996 (53
weeks), March 1, 1997 (52 weeks) and February 28, 1998 (52 weeks).
Consolidation
The accompanying consolidated financial statements include the accounts of DESA
Holdings Corporation and its wholly-owned subsidiary, DESA International, Inc.,
and all of its wholly- owned subsidiaries, including DESA Industries of Canada,
Inc., DESA Europe B.V. and Heath Limited. The consolidated accounts of Heath
Holding Corp. are included as of February 28, 1998 and for the period from
February 4, 1998 (date of acquisition) through February 28, 1998 (See Note 4).
All significant intercompany accounts and transactions have been eliminated.
DESA's 50% interest in a joint venture is accounted for using the equity method.
Cash Equivalents
Holdings considers all highly liquid investments with a maturity of three months
or less when purchased to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or market. The cost of all
inventories in the United States is valued using the last-in, first-out ("LIFO")
method while the cost of all foreign inventories is valued using the first-in,
first-out ("FIFO") method. At March 1, 1997 and February 28, 1998, approximately
88% and 82%, respectively, of the total inventories are priced at LIFO. The
effect of using the LIFO method in fiscal years 1996, 1997 and 1998 was to
increase pre-tax income by $95,000, $278,000 and $284,000, respectively.
If the LIFO method of valuing inventories was not used, total inventories
would have been $373,000 and $657,000 lower than reported at March 1, 1997 and
February 28, 1998, respectively.
F-9
<PAGE>
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
3. Summary of Significant Accounting Policies (continued)
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Major renewals and
betterments are capitalized whereas maintenance and repairs are expensed as
incurred. Upon disposition, the asset cost and related accumulated depreciation
are removed from the accounts, and any resulting gain or loss is included in
income.
Depreciation of plant and equipment is determined on the straight-line basis
over the following estimated useful lives:
Buildings and improvements 33 years
Machinery and equipment 5-12 years
Furniture and fixtures 5-10 years
Tooling and molds 2-3 years
Income Taxes
Holdings accounts for income taxes using the liability method as required by
Statement of Financial Accounting Standard No. 109 ("FAS 109"). Under the
provisions of FAS 109, deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes and
are determined based on tax rates expected to be in effect when the taxes are
actually paid or refunds received.
Financing Costs
Financing costs are amortized using the interest method over the life of the
related debt instrument. The amortization of these financing costs is included
in other operating expenses in the consolidated statements of income.
Goodwill
Goodwill is amortized on the straight-line basis over 40 years and is
recorded at cost less accumulated amortization. Holdings reviews the
recoverability of its goodwill by comparing the unamortized carrying value to
anticipated undiscounted future cash flows. Any impairment is charged to expense
when such determination is made. Accumulated amortization at March 1, 1997 and
February 28, 1998 was $3,660,000 and $4,828,000, respectively, and amortization
expense for fiscal years 1996, 1997 and 1998 was $1,118,000, $1,118,000, and
$1,168,000, respectively.
F-10
<PAGE>
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
3. Summary of Significant Accounting Policies (continued)
Warranty Costs
Holdings warrants its products against defects in design, materials and
workmanship generally for six months to two years, depending on the product. A
provision for estimated future costs related to warranty expense is recorded on
an accrual basis when products are shipped.
Foreign Currency Translation
All assets, liabilities and results of operations are measured in the
primary currency ("functional currency") in which each entity conducts its
business. Assets and liabilities denominated in a currency other than the
functional currency are remeasured and stated in the functional currency based
on current or historical exchange rates. Gains or losses arising therefrom are
included in net income. Adjustments resulting from translating foreign
functional currency assets and liabilities into U.S. dollars, based on current
exchange rates, are recorded as a separate component of stockholders' equity
(deficit) called "Cumulative Translation Adjustment." Revenues and expenses are
translated into U.S. dollars at average monthly exchange rates. The Canadian
dollar has been determined to be the functional currency for DESA's Canadian
subsidiary, the Netherlands Guilder for its European subsidiary and the Hong
Kong dollar for its Hong Kong subsidiary.
Derivative Financial Instruments
Gains and losses related to interest rate protection agreements used to
convert floating rate debt to a fixed rate basis are recorded over the lives of
the agreements as an adjustment to interest expense.
Holdings utilizes forward exchange foreign currency contracts to reduce
foreign exchange risks that arise from exchange rate movements between the dates
that foreign currency transactions for the purchase of inventories are entered
into and the date they are consummated. Gains and losses related to qualifying
hedges of foreign currency risk exposure are deferred and recorded as
adjustments to the carrying amounts of the related assets when the hedge
transactions occur.
Impact of Recently Issued Accounting Pronouncements
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," was issued in June 1997 and will be adopted by Holdings
in its fiscal year ending February 27, 1999, although early adoption is
permitted. The primary objective of this statement is to report and disclose a
measure of all changes in the equity of a company that result from the
transactions and other economic events of the period other than transactions
with owners. Holdings does not anticipate that this statement will have a
significant impact on its consolidated financial statements.
F-11
<PAGE>
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
3. Summary of Significant Accounting Policies (continued)
Impact of Recently Issued Accounting Pronouncements (continued)
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information," was issued in June 1997 and
will be adopted by Holdings in its fiscal year ending February 27, 1999,
although early adoption is permitted. This statement requires use of the
"management approach" model for segment reporting. The management approach model
is based on the way a company's management organizes segments within the company
for making operating decisions and assessing performance. Reportable segments
are based on products and services, geography, legal structure, management
structure, or any other manner in which management disaggregates a company.
Holdings does not anticipate that the adoption of the statement will have a
significant impact on its consolidated financial statements.
Reclassification
Certain prior year amounts have been reclassified to conform with the
current year's presentation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results can differ from those estimates.
4. Business Combination
On February 4, 1998, Holdings purchased all of the issued and outstanding
stock of Heath Holding Corp. ("Heath") for an aggregate purchase price of
$42,365,000. The purchase price consisted of $40,365,000 in cash and a
$2,000,000 junior subordinated note payable. Heath is engaged in the
manufacturing and distribution of motion-sensor lighting products and wireless
home-controlled devices, all of which are included in the Specialty Products
segment of Holdings. Holdings accounted for such acquisition using the purchase
method. The fair value of the assets acquired and liabilities assumed at
February 4, 1998 is summarized as follows (in thousands):
Current assets $ 25,757
Property, plant and equipment 458
Other assets 2,370
Goodwill 23,769
Current liabilities (9,989)
------------
$ 42,365
============
This allocation is preliminary and will be adjusted as necessary based
upon our further analysis of the acquisition of Heath.
F-12
<PAGE>
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
4. Business Combination (continued)
The acquisition of Heath was financed through the issuance by Holdings
of 1,081,852 shares of its common stock to certain of the Investors, borrowings
of $20,000,000 under the NationsBank Acquisition Loan Commitment A, the issuance
of a $2,000,000 note by H.I.G. Investment Group, L.P. and certain other note
holders, and additional borrowings under the NationsBank Working Capital Loan
Commitment. The goodwill related to the acquisition of Heath is being amortized
over 40 years.
The pro forma unaudited consolidated results of operations assuming
consummation of the acquisition of Heath as of the beginning of the respective
periods, are as follows (in thousands):
Fiscal Year
1997 1998
---------------------------------
Net sales $253,520 $277,667
Income before extraordinary item 9,353 7,409
Income available for common stockholders 9,353 4,557
The fiscal year 1997 results include a non-recurring charge of
$1,825,000 related to a litigation settlement of a patent infringement suit
related to Heath.
5. Accounts Receivable
Accounts receivable are net of an allowance for doubtful accounts of
$936,000 and $1,517,000 at March 1, 1997 and February 28, 1998, respectively.
6. Financing Arrangements
As part of the 1996 Recapitalization discussed in Note 1, Holdings
entered into a credit agreement on January 12, 1996 with Bankers Trust Co. and
various banks that consisted of a Revolving Loan Commitment ("Revolver") of up
to $65,000,000, a Tranche A Term Loan Commitment ("Tranche A Loan") of
$100,000,000 and a Tranche B Term Loan Commitment ("Tranche B Loan") of
$55,000,000 (collectively, the "BT Facility"). Holdings purchased an interest
rate protection agreement in June 1996 which limited the maximum LIBOR interest
rate payable on the term loans under the BT Facility to 8% before margins. Under
the terms of the BT Facility, Holdings was obligated to make additional
principal payments in fiscal 1998 of $3,700,000 and $2,100,000 under the Tranche
A and Tranche B Loans, respectively.
F-13
<PAGE>
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
6. Financing Arrangements (continued)
As part of the 1998 Recapitalization, discussed in Note 1, Holdings
entered into a new credit agreement on November 26, 1997 with NationsBank, N.A.,
UBS Securities LLC and Nationsbanc Montgomery Securities, Inc. which was amended
in May 1998 that consists of a Working Capital Loan Commitment of up to
$75,000,000 (which includes a Swing-Line Loan Commitment of up to $5,000,000), a
Term A Loan Commitment ("New Term A Loan") of $50,000,000, a Term B Loan
Commitment ("New Term B Loan") of $50,000,000, an Acquisition Loan Commitment of
up to $20,000,000 and an Acquisition Loan Commitment B of up to $30,000,000
(collectively, the "New Credit Facility"). Also in connection with the
Recapitalization, DESA issued $130,000,000 aggregate principal amount of Senior
Subordinated Notes ("Senior Notes") to qualified institutional buyers, as
defined in Rule 144A under the Securities Act of 1933.
The New Credit Facility requires a Clean-Up Period, as defined, under
the Working Capital Loan Commitment, for a period of 30 consecutive days
occurring between January 1 and May 30 in each calendar year commencing January
1, 1998. During the Clean-Up Period, the sum of Working Capital advances, Letter
of Credit advances and Swing Line loan advances outstanding shall not exceed
$24,000,000 in 1998 and $15,000,000 for any Clean-Up Period thereafter.
Holdings has no outstanding balance drawn against the $5,000,000
Swing-Line Loan Commitment at February 28, 1998. The Swing-Line Loan, which
accrues interest monthly at the prime rate plus 1.25% per annum, extends to the
earlier of November 26, 2003 or thirty days after the requested borrowing. After
the expiration of the Swing-Line Loan period, the $5,000,000 Commitment remains
as part of the Working Capital Loan Commitment of $75,000,000.
Commencing in fiscal 1999, the required annual payments under the New
Term A and New Term B Term Loans are increased by 50% of any excess cash flows
at the end of the fiscal year, as defined.
This credit agreement includes various restrictive covenants which,
among other things, prohibit payment of dividends to common stockholders, set
maximum limits on capitalized lease obligations and capital expenditures,
require minimum consolidated EBITDA (as defined) levels, and set consolidated
interest coverage, fixed charge coverage and leverage ratios. Substantially all
of Holdings' consolidated assets are pledged under the Credit Facility and
Senior Notes.
F-14
<PAGE>
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
6. Financing Arrangements (continued)
<TABLE>
<CAPTION>
Outstanding borrowings consist of the following (in thousands):
March 1, 1997 February 28, 1998
----------------- ------------------
<S> <C> <C>
Bankers Trust Co. and Various Banks Tranche A Term Loan (A) $ 92,500 $ -
Bankers Trust Co. and Various Banks Tranche B Term Loan (B) 54,450 -
Bankers Trust Co. and Various Banks Revolver Loan Commitment (C) - -
9 7/8% Senior Subordinated Notes Due 2007 (D) - 130,000
NationsBank and Various Banks Term A Loan (E) - 49,125
NationsBank and Various Banks Term B Loan (F) - 49,750
NationsBank and Various Banks Working Capital Loan Commitment (G) - 15,480
NationsBank and Various Banks Acquisition Loan (H) - 20,000
NationsBank and Various Banks Acquisition Loan B (I) - -
Note payable related to acquisition of Heath (J) - 2,000
----------- ----------
Total outstanding borrowings 146,950 266,355
Less current portion of long term debt: 16,350 5,250
----------- ----------
Total long- term debt $ 130,600 $ 261,105
=========== ==========
</TABLE>
F-15
<PAGE>
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
6. Financing Arrangements (continued)
(A) The Tranche A Term Loan was payable in quarterly installments and
accrued interest at the prime rate plus 1.25% or LIBOR plus 2..50% at
the option of Holdings. The weighted average interest rate was 8.24% in
1998 and 8.04% in 1997. The Tranche A Term Loan was repaid in
conjunction with the 1998 Recapitalization discussed in Note 1.
(B) The Tranche B Term Loan was payable in quarterly installments and
accrued interest at the prime rate plus 1.75% or LIBOR plus 3% at the
option of Holdings. The weighted average interest rate was 8.74% in
1998 and 8.54% in 1997. The Tranche B Term Loan was repaid in
conjunction with the 1998 Recapitalization discussed in Note 1.
(C) The Revolver was payable at anytime at the option of Holdings and
accrued interest at the prime rate plus 1.25% or LIBOR plus 2.50% at
the option of Holdings. The weighted average interest rate was 8.32% in
1998 and 8.24% in 1997. Holdings paid commitment fees of 1/2 of 1% per
annum on the daily unutilized revolving loan commitment. The
outstanding balance of the Revolver was repaid in conjunction with the
1998 Recapitalization discussed in Note 1.
(D) The Senior Notes are payable on December 15, 2007 and accrue interest
at a rate of 9.875% per annum. Interest is payable semi-annually on
June 15 and December 15, commencing on June 15, 1998. The Senior Notes
can be redeemed prior to the mandatory redemption date based upon the
occurrence of certain events, as defined.
(E) The New Term A Loan is payable in quarterly installments through
November 26, 2003 and accrues interest at the prime rate plus 1.25% or
LIBOR plus 2.25% at the option of Holdings. Interest is payable on a
quarterly basis under the prime rate option or at the end of each LIBOR
period. The weighted average interest rate was 8.16% in 1998. Once
repaid, the New Term A Loan may not be re-borrowed.
(F) The New Term B Loan is payable in quarterly installments through
November 26, 2004 and accrues interest at the prime rate plus 1.625% or
LIBOR plus 2.625% at the option of Holdings. Interest is payable on a
quarterly basis under the prime rate option or at the end of each LIBOR
period. The weighted average interest rate was 8.53% in 1998. Once
repaid, the New Term B Loan may not be re-borrowed
(G) The Working Capital Loan Commitment is payable at anytime at the option
of Holdings prior to November 26, 2003 and accrues interest at the
prime rate plus 1.25% or LIBOR plus 2.25%, at the option of Holdings.
The weighted average interest rate was 8.28% in 1998. Interest is
payable on a quarterly basis under the prime rate option or at the end
of each LIBOR period. Holdings can utilize letters of credit under the
Working Capital Loan Commitment with no limitation. As of February 28,
1998, letters of credit of $2,291,000 are outstanding under the Working
Capital Loan Commitment. Borrowings are generally limited to specific
percentages of eligible trade receivables and inventory. Holdings pays
commitment fees of1/2of 1% per annum on the daily unutilized Working
Capital Loan Commitment.
F-16
<PAGE>
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
6. Financing Arrangements (continued)
(H) The Acquisition Loan is payable in quarterly installments commencing in
February 2000 and extending through November 26, 2003 and accrues
interest, which is payable quarterly, at the prime rate plus 1.625% or
LIBOR plus 2.625% at the option of Holdings. The weighted average
interest rate was 8.25% in 1998.
Once repaid, the Acquisition Loan may not be reborrowed.
(I) The Acquisition Loan B is payable in quarterly installments commencing
in February 2000 and extending through November 26, 2003 and accrues
interest, which is payable quarterly, at the prime rate plus 1.625% or
LIBOR plus 2.625%, at the option of Holdings. Once repaid the
Acquisition Loan B may not be reborrowed.
(J) The note payable is due on December 31, 2008 and accrues interest,
which is payable semi-annually beginning June 30, 1998, at a rate of
7.5% per annum. Holdings may elect, upon written notice, to defer any
interest payments, in which event such interest payments shall
effectively convert to principal and accrue interest at a rate of 7.5%
per annum.
In accordance with the terms of the New Credit Facility, the ability of
DESA to incur additional indebtedness is limited, as defined. At February 28,
1998, DESA can incur additional indebtedness of $26.0 million.
Cash payments for interest for the years ended March 2, 1996, March 1,
1997 and February 28, 1998 were $8,186,000, $13,656,000 and $12,890,000,
respectively.
The following table shows the required future repayments under the
Company's financing arrangements (in thousands):
Fiscal years ending:
1999 $ 5,250
2000 9,625
2001 16,000
2002 16,000
2003 16,000
Thereafter 203,480
-------------
$ 266,355
=============
Holdings' management believes the book values of its financing arrangements
approximate market value. Market value is determined based on the effective
interest rate at which Holdings could borrow funds with similar remaining
maturities.
F-17
<PAGE>
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
7. Series C Redeemable Preferred Stock
Holdings is authorized to issue 2,000,000 shares of $.01 par value
Preferred Stock which have no voting rights, except under limited conditions, as
defined. Such Preferred Stock has a mandatory redemption date on November 30,
2009 at its liquidation value of $1,000 per share plus accrued and unpaid
dividends. The liquidation value is adjustable based upon the occurrence of
certain future events, as defined. The holders of Preferred Stock are entitled
to receive cumulative dividends at a rate of 12% per annum. Such dividends are
payable as and when declared by Holdings' Board of Directors in cash or via the
issuance of additional shares of Preferred Stock at a value of $1,000 per share
if a cash dividend is not declared prior to any May 31 or November 30 before its
redemption. At February 28, 1998, cumulative dividends in arrears on such
Preferred Stock were $544,000 or $30.91 per share. Such Preferred Stock was
initially recorded on the consolidated balance sheet at $14,598,000 (this amount
is net of the fair value assigned to the Warrants of $3,002,000 - See Note 9)
and will be accreted to its face value of $17,600,000 over its term. The
accretion of Preferred Stock is shown as a reduction to retained earnings
(deficit) on the consolidated statements of stockholders' equity (deficit).
8. Income Taxes
Significant components of Holdings' deferred tax liabilities and assets
are as follows (in thousands):
March 1, February 28,
1997 1998
--------------------------------------
Deferred tax liabilities:
Depreciation and amortization $ 1,792 $ 2,142
Inventory reserves, including LIFO 146 -
Other--net 35 -
--------------------------------------
Total gross deferred tax liabilities 1,973 2,142
======================================
Deferred tax assets:
Allowance for doubtful accounts 324 538
Inventory reserves, including LIFO - 38
Accrued expenses 1,028 3,154
Net operating loss carry-forward - 471
Other--net 163 128
--------------------------------------
Total gross deferred tax assets 1,515 4,329
Valuation allowance - (238)
--------------------------------------
Net deferred tax liabilities (assets) $ 458 $ (1,949)
======================================
F-18
<PAGE>
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
8. Income Taxes (continued)
Shown in consolidated balance sheets as:
Current deferred tax (asset) $ (1,206) $ (3,730)
Non-current deferred tax liability 1,664 1,781
------------ -----------
$ 458 $ (1,949)
============ ===========
Management has evaluated the need for a valuation allowance against its
deferred tax assets and has determined that all of the deductible temporary
differences, except $238,000, will be utilized as charges against reversals of
future taxable temporary differences and future taxable income. Accordingly, the
Company has recorded a $238,000 valuation allowance for a portion of the net
operating loss carry-forward acquired in the Heath acquisition which will not be
realized during the carry-forward period due to limitations imposed under the
Internal Revenue Code. If this net operating loss carry-forward is realized, the
reduction of the valuation allowance will be charged against the goodwill from
the Heath acquisition.
The Company has net operating loss carry-forwards of approximately $1,385,000
available to offset future taxable income. These net operating loss
carry-forwards expire over the next ten years and are subject to limitations
imposed by the Internal Revenue Code.
The provision for income taxes consists of the following (in thousands):
Fiscal Year
-----------------------------
1996 1997 1998
-----------------------------
Current:
Federal $ 6,191 $ 5,821 $ 2,530
State and local 1,389 1,110 648
Foreign 436 802 908
------- -------- ---------
8,016 7,733 4,086
------- -------- ---------
Deferred:
Federal 855 -- (38)
State and local 109 -- 2
-------- -------- ---------
964 -- (36)
-------- -------- ---------
$ 8,980 $ 7,733 $ 4,050
======= ======== =========
F-19
<PAGE>
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
8. Income Taxes (continued)
The income statement classification of the provision (benefit) for income taxes
is as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal Year
1996 1997 1998
-------------------------------------------
<S> <C> <C> <C>
Income Tax expense attributable to continuing
operations $ 10,703 $ 7,733 5,545
Extraordinary item (1,723) -- (1,495)
----------- ----------- ----------
$ 8,980 $ 7,733 $ 4,050
=========== =========== ==========
</TABLE>
Included in earnings before income tax expense and extraordinary item
for the years ended March 2, 1996, March 1, 1997 and February 28, 1998 are
foreign earnings of $747,000, $1,688,000 and $1,249,000, respectively.
Undistributed earnings of Holdings' foreign subsidiaries amounted to
approximately $1,672,00 at February 28, 1998. Approximately $1,280,000 of those
earnings are considered to be permanently reinvested, and, accordingly, no
provision for U.S. federal and state income taxes has been provided thereon.
Upon distribution of those earnings in the form of dividends or otherwise,
Holdings would be subject to both U.S. income taxes (net of foreign tax credits)
and withholding taxes payable to the various foreign countries. In the event
that these permanently reinvested earnings are distributed, it is estimated that
U.S. federal and state income taxes, net of foreign tax credits, of
approximately $508,000 would be due.
The effective income tax rate differs from the statutory rate as
follows (in thousands):
<TABLE>
<CAPTION>
Fiscal Year
1996 1997 1998
-------------------------------------------
<S> <C> <C> <C>
Federal income tax at statutory rate $8,822 $6,457 $3,908
State income tax, net of federal benefit 974 722 591
Foreign income taxes 436 212 471
Other--net 471 342 575
-------------------------------------------
Provision for income taxes $10,703 $7,733 $5,545
===========================================
</TABLE>
Cash payments for income taxes for the years March 2, 1996, March 1, 1997 and
February 28, 1998 were $8,174,000, $7,387,000 and $5,154,000, respectively.
F-20
<PAGE>
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
9. Stockholders' Equity (Deficit)
Series A and B Preferred Stock
Prior to the 1996 Recapitalization (discussed in Note 1), Holdings was
authorized to issue 2,000,000 shares of Preferred Stock of which 465,000 shares
were designated Series A variable rate cumulative Preferred Stock and 265,000
shares were designated Series B variable rate cumulative Preferred Stock. The
issued shares were nonvoting. The holders of Series A variable rate cumulative
Preferred Stock ("Series A") and the holders of Series B variable cumulative
Preferred Stock ("Series B") were entitled, until redemption, to receive
quarterly dividends at various rates, as defined, of the stated value per share.
Preferred dividends accrued for fiscal 1996 were $853,100 which were paid in
24,888 shares of Series A and 9,236 shares of Series B. As part of the 1996
Recapitalization transactions discussed in Note 1, Holdings repurchased and
canceled the outstanding shares of Series A and Series B, in whole, at a price
equal to the stated value per share plus the dividends which were accrued and
unpaid but not added to the stated value.
Warrants Issued with Series C Redeemable Preferred Stock
The Warrants issued in conjunction with the 1998 Recapitalization
entitle the holders to purchase 463,232 shares of Holdings nonvoting common
stock for $.01 per share and are exercisable at any time prior to their
expiration on November 30, 2009. Such Warrants have been recorded at their fair
value of $3,002,000 as an addition to capital in excess of par value and a
reduction to the carrying value of the Preferred Stock.
Stock Option Plan
In March 1994, Holdings established the 1994 Stock Option Plan which
provided for the issuance of incentive stock options or nonqualified stock
options for 1,169,261 shares of common stock. The stock options were granted to
key employees or eligible nonemployees, as defined, as determined by the Option
Committee of the Board of Directors, and the term of the options could not
exceed ten years from the grant date. The exercise price of the incentive
options was equal to or greater than the fair market value of the common stock
on the date of grant, and the exercise price of the nonqualified options was
determined by the Option Committee. This plan was terminated on November 26,
1997.
F-21
<PAGE>
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
9. Stockholders' Equity (Deficit) (continued)
In fiscal 1996, 1997 and 1998, the Company issued incentive options to
purchase 75,000 shares, 215,000 shares and 49,385 shares, respectively, of
common stock, of which 51,000 incentive options, 15,000 incentive options and
49,385 incentive options, respectively, vest in three equal annual installments
commencing on the first anniversary date. The remaining 24,000 incentive options
issued in fiscal 1996 and 200,000 incentive options issued in fiscal 1997 vested
immediately upon grant. The weighted average fair value of an option granted
during the year was $0.06, $0.12 and $0.34 for the years ended March 2, 1996,
March 1, 1997 and February 28, 1998, respectively. All of the outstanding
options under the 1994 Plan were exercised in November 1997 as part of the 1998
Recapitalization.
The following is a summary of Holdings' incentive options under the
1994 Stock Option Plan:
Number of
Shares
----------------
Outstanding at February 25, 1995 164,000
Granted on June 1, 1995 at $2.99 per share 24,000
Exercised in 1996 at $1.00 per share (144,000)
Exercised in 1996 at $2.99 per share (24,000)
Forfeited in 1996 (20,000)
Granted on February 22, 1996 at $1.00 per share 51,000
------------
Outstanding at March 2, 1996 51,000
Granted on March 11, 1996 at $1.00 per share 100,000
Granted on May 21, 1996 at $1.00 per share 100,000
Granted on August 1, 1996 at $1.00 per share 15,000
Exercised in 1997 at $1.00 per share (210,000)
------------
Outstanding at March 1, 1997 56,000
Granted on April 1, 1997 at $2.00 per share 21,000
Granted on August 25, 1997 at $2.00 per share 28,385
Exercised in 1998 at $1.00 per share (56,000)
Exercised in 1998 at $2.00 per share (49,385)
------------
Outstanding at February 28, 1998 -
============
F-22
<PAGE>
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
9. Stockholders' Equity (Deficit) (continued)
In November 1997, Holdings established the 1997 Stock Option Plan which
terminates in ten years and provides for the issuance of incentive options or
non-qualified stock options for 1,462,222 shares of common stock. The stock
options may be granted to key employees or eligible non-employees, as defined,
as determined by the Compensation Committee of the Board of Directors, and the
term of the options cannot exceed ten years from the grant date, except for
employees who own stock possessing more than 10% of the combined voting power of
all classes of stock of Holdings, for whom the term of the options is five
years. The exercise price of the incentive options shall be equal to or greater
than the fair market value of the common stock on the date of grant, except for
employees who own stock possessing more than 10% of the combined voting power of
all classes of stock, for whom the exercise price cannot be less than 110% of
the fair market value of the common stock on the date of grant. The exercise
price of the non-qualified options is determined by the Compensation Committee
of the Board of Directors
In March 1998, the Compensation Committee awarded 1,346,000 incentive
stock options to certain key employees at an option price of $6.50 per share. Of
these options, 177,000 options vest as follows: 5% at the end of year one, 10%
at the end of year two, 60% at the end of year three, 80% at the end of year
four and 100% at the end of year five. The other options are performance based
and vest only upon the attainment of certain future financial performance goals.
Holdings adopted Statement of Financial Accounting Standards No. 123
("FAS 123") during fiscal 1997. FAS 123 requires Holdings to either adopt a fair
value based method of expense recognition for all stock based compensation
awards, or provide pro forma net income information as if the recognition and
measurement provisions of FAS 123 had been adopted. Holdings decided to account
for its stock based compensation awards following the provisions of Accounting
Principles Board Opinion No. 25 ("APB 25"). APB 25 requires compensation expense
to be recognized only if the market price of the underlying stock exceeds the
exercise price on the date of grant. Holdings stock based awards consist of
stock options with an exercise price equal to market price on the date of grant.
As such, Holdings has not recorded compensation expense in connection with these
awards. The fair value of the options was estimated at the date of grant using a
minimum value method and the following assumptions:
Fiscal Year
1997 1998
----------------------------------
Risk-free interest rate 5.84% 6.31%
Average life 3 years 3 years
Dividend yield 0% 0%
F-23
<PAGE>
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
9. Stockholders' Equity (Deficit) (continued)
The effect of applying the FAS 123 fair value method to Holdings' stock
based awards results in net income that is not materially different from the
amount reported.
Shares Reserved for Issuance
At March 1, 1997 and February 28, 1998, 95,385 shares and 1,462,222 shares,
respectively, of common stock were reserved for the exercise and future grant of
stock options. At March 1, 1997 and February 28, 1998, 1,781,557 shares and
90,604 shares, respectively, of common stock were reserved for issuance upon
conversion of the nonvoting common stock. At February 28, 1998, 463,232 shares
of non-voting common stock were reserved for issuance upon exercise of
outstanding warrants.
10. Pension Plans
All eligible salaried employees are covered by a defined contribution
plan ("401K"). After an employee has been employed for six months, Holdings
contributes 2% of their salary. Holdings matches an additional 50% of
participant contributions up to a maximum contribution of 1%. The cost of this
plan was $260,000, $299,000 and $325,000 for the fiscal years ended March 2,
1996, March 1, 1997 and February 28, 1998, respectively.
Holdings has a defined benefit pension plan covering substantially all
of its industrial employees. The defined benefits are based on a service
multiplier that is multiplied by years of credited service. Holdings funding
policy is consistent with the requirements of federal laws and regulations.
Assets of the 401K and deferred benefit pension plans are invested in
securities of governmental agencies, common stocks and insurance contracts.
F-24
<PAGE>
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
10. Pension Plans (continued)
A summary of Holdings' net periodic pension cost related to the defined benefit
plan for fiscal years 1996, 1997 and 1998 is as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal Year
1996 1997 1998
----------------------------------
<S> <C> <C> <C>
Service cost--benefits earned during the period $ 92 $ 85 $ 94
Interest cost on projected benefit obligation 110 136 149
Actual gain on plan assets (251) (257) (408)
Net amortization 168 141 252
----------------------------------
Net pension cost $ 119 $ 105 $ $87
========== ========= ===========
</TABLE>
The following table sets forth the funded status of Holdings' defined benefit
plan and the amount recognized in Holdings' consolidated balance sheets as of
March 1, 1997 and February 28, 1998 (in thousands):
<TABLE>
<CAPTION>
1997 1998
--------------------
Actuarial present value of accumulated benefit obligation:
<S> <C> <C>
Vested obligation $ 1,764 $ 2,118
Unvested obligation 60 99
-------- -----------
Accumulated benefit obligation 1,824 2,217
Future benefit increases 54 -
-------- -----------
Projected benefit obligation $ 1,878 $ 2,217
======== ===========
Plan assets at fair market value $ 2,081 $ 2,665
Projected benefit obligation 1,878 2,217
--------- ----------
Excess (deficiency) of plan assets over projected benefit obligation 203 448
Unrecognized net loss 122 29
Unrecognized net obligation 188 164
--------- ----------
Prepaid asset $ 513 $ 641
========= ==========
</TABLE>
F-25
<PAGE>
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
10. Pension Plans (continued)
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation was 8% and 7.5%, respectively, for
fiscal years 1997 and 1998. The expected long-term rate of return on plan assets
for fiscal years 1997 and 1998 was 9%. The impact in fiscal year 1998 of the
change in the weighted average discount rate used was to increase the projected
benefit obligation by approximately $165,000. Such change in the weighted
average discount rate used will impact the determination of the net periodic
pension cost in fiscal 1999.
11. Extraordinary Item
In connection with the 1998 Recapitalization (see Note 1), Holdings recorded an
extraordinary loss of $2,308,000, net of an income tax benefit of $1,495,000,
related to the write-off of the unamortized balance of deferred financing costs
associated with the 1996 Recapitalization.
In connection with the 1996 Recapitalization (see Note 1), Holdings recorded an
extraordinary loss of $2,638,000, net of an income tax benefit of $1,723,000,
related to the write-off of the unamortized balance of deferred financing costs
of the old term loans.
12. Foreign Exchange Contracts
At February 28, 1998, Holdings had forward exchange foreign currency contracts,
with maturities ranging from June 1998 to November 1998, to purchase
approximately $6.3 million in foreign currencies to cover future payments to
component suppliers.
F-26
<PAGE>
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
13. Lease Commitments
Holdings leases certain machinery, office and manufacturing facilities for
periods up to five years under operating lease agreements. Total rent expense
for fiscal 1996, 1997 and 1998 was approximately $1,336,000, $1,624,000 and
$2,718,000, respectively.
Future minimum lease payments under all noncancellable operating leases at
February 28, 1998 are as follows (in thousands):
Fiscal years ending:
1999 $ 2,322
2000 1,736
2001 1,342
2002 1,171
2003 822
Thereafter 1,518
--------
Total minimum lease payments $ 8,911
========
F-27
<PAGE>
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
14. Other Assets
Other assets as of March 1, 1997 and February 28, 1998 consist of the
following (in thousands):
1997 1998
-------------------
Investment in joint venture $ 550 $ 550
Deferred financing costs 4,535 10,785
Other 356 154
-------- ---------
$ 5,441 $ 11,489
======== =========
15. Other Operating Expenses
Other operating expenses includes the amortization of deferred financing costs,
amortization of goodwill and management fees.
16. Segment Information
Holdings operates in two business segments, Zone Heating Products and Specialty
Products. Zone Heating Products consist of indoor vent-free heating appliances
and hearth products, and outdoor heating appliances. Specialty Products include
specialty tools and home security products.
F-28
<PAGE>
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
16. Segment Information (continued)
Operational results and other financial data for the two business segments for
the years ended March 2, 1996, March 1,1997 and February 28, 1998 are presented
below (in thousands):
<TABLE>
<CAPTION>
Zone Heating Specialty General
Products Products Corporate Total
---------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Year ended March 2, 1996
Net sales $ 147,821 $ 38,503 $ - $ 186,324
Operating profit 33,666 3,509 (4,896) 32,279
Depreciation and amortization 3,193 257 845 4,295
Identifiable assets 58,792 19,310 7,443 85,545
Capital expenditures 2,049 63 10 2,122
Year ended March 1, 1997
Net sales 167,625 41,480 - 209,105
Operating profit 35,079 3,568 (5,689) 32,958
Depreciation and amortization 3,262 288 986 4,536
Identifiable assets 61,611 19,107 11,266 91,984
Capital expenditures 2,432 332 6 2,770
Year ended February 28, 1998
Net sales 173,753 50,416 - 224,169
Operating profit 28,428 5,435 (5,371) 28,492
Depreciation and amortization 3,143 481 1,088 4,712
Identifiable assets 68,650 71,128(1) 15,858 155,636
Capital expenditures 4,619 744 112 5,475
<FN>
(1) Reflects acquisition of home security business which was acquired on
February 4, 1998 - See Note 4
</FN>
</TABLE>
F-29
<PAGE>
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
16. Segment Information (continued)
Information on the operational results and other financial data of Holdings'
United States and foreign activities are presented below (in thousands):
<TABLE>
<CAPTION>
United States Foreign Eliminations Consolidated
----------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Fiscal year ended March 2, 1996
Sales to unaffiliated customers $ 175,164 $ 11,160 $ -- $ 186,324
Transfers between geographic areas 3,362 -- (3,362) --
------------ ------------ ----------- -----------
Total net sales $ 178,526 $ 11,160 $ (3,362) $ 186,324
============ ============ =========== ===========
Operating profit $ 36,222 $ 953 $ -- $ 37,175
General corporate expenses (4,896)
Interest expense (7,073)
-----------
Income before provision for income taxes $ 25,206
===========
Identifiable assets at March 2, 1996 $ 74,891 $ 3,211 $ -- $ 78,102
Corporate assets 7,443
-----------
Total assets at March 2, 1996 $ 85,545
===========
Fiscal year ended March 1, 1997
Sales to unaffiliated customers $ 191,917 $ 17,188 $ -- $ 209,105
Transfers between geographic areas 8,185 -- (8,185) --
------------ ------------ ----------- -----------
Total net sales $ 200,102 $ 17,188 $ (8,185) $ 209,105
============ ============ =========== ===========
Operating profit $ 36,952 $ 1,695 $ -- $ 38,647
General corporate expenses (5,689)
Interest expense (14,509)
-----------
Income before provision for income taxes $ 18,449
===========
Identifiable assets at March 1, 1997 $ 76,597 $ 4,121 $ -- $ 80,718
Corporate assets 11,266
-----------
Total assets at March 1, 1997 $ 91,984
===========
</TABLE>
F-30
<PAGE>
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
16. Segment Information (continued)
<TABLE>
<CAPTION>
United States Foreign Eliminations Consolidated
----------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Fiscal year ended February 28, 1998
Sales to unaffiliated customers $ 206,194 $ 17,975 $ - $ 224,169
Transfers between geographic areas 8,719 2,330 (11,049) -
------------ ------------ ----------- -----------
Total net sales $ 214,913 $ 20,305 $ (11,049) $ 224,169
============ ============ =========== ===========
Operating profit $ 32,474 $ 1,389 $ - $ 33,863
General corporate expenses (5,371)
Interest expense (17,327)
-----------
Income before provision for income taxes $ 11,165
===========
Identifiable assets at February 28, 1998 $ 129,886 $ 9,892 $ - $ 139,778
Corporate assets 15,858
-----------
Total assets at February 28, 1998 $ 155,636
===========
</TABLE>
Corporate expenses include corporate headquarters staff, a modest
portion of the cost of certain support functions, including accounting,
management information systems, human resources and treasury and the
amortization of deferred financing costs.
Identifiable assets are those assets of Holdings that are identified
with the operations in each geographic area. Corporate assets include primarily
cash, deferred income taxes and deferred financing costs.
F-31
<PAGE>
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
17. Related Party Transactions
Pursuant to a monitoring and oversight agreement, Holdings paid Hicks
Muse $189,000, $211,000 and $237,000 in fiscal years 1996, 1997 and 1998,
respectively, for certain financial advisory services provided to Holdings.
Pursuant to the 1998 Recapitalization, Holdings entered into management
agreements with J.W. Childs Associates L.P. and UBS Capital Management Inc. (the
"Advisors") which provide for aggregate annual management fees of $240,000 as
consideration for ongoing consulting and management advisory services. Under
these agreements, the Advisors were paid an aggregate of $81,000 in fiscal 1998.
Payments may be made to the extent permitted by the New Credit Facility and
Indenture. The agreements extend for a period of five years upon which they
shall automatically extend for successive periods of one year each, unless
terminated by Holdings or the Advisors.
18. Litigation
Holdings is subject to legal proceedings and claims which arise in the
ordinary course of its business and have not been formally adjudicated. In the
opinion of management, settlement of these actions when ultimately concluded
will not have a material adverse effect on the results of operations, cash flows
or financial condition of Holdings.
19. Subsequent Events
In March 1998, DESA entered into a letter of intent to acquire 92.1% of
the issued and outstanding common stock of Fireplace Manufacturers, Inc.
("FMI"). As of such date, DESA already owned the remaining 7.9% of FMI's issued
and outstanding common stock. The aggregate purchase price of all FMI common
stock (not currently owned by DESA) is $22.0 million. In connection with the
acquisition of FMI, DESA will enter into non-compete agreements with four
officers of FMI. Upon execution of such agreements, DESA will pay such officers
an aggregate of $3.25 million which amount is not included in the aggregate
purchase price above. FMI, a manufacturer of gas and wood fireplaces and related
accessories, had net sales and net income of $31.9 million and $1.0 million,
respectively, for its fiscal year ended March 31, 1997.
Also, in May 1998, the majority shareholder of DESA acquired from
Universal Heating, Inc. ("UHI") the worldwide rights (except in China) to
distribute Universal's indoor and outdoor heating products for $12 million. The
majority shareholder also entered into a ten year agreement with UHI for the
supply of their existing products as well as non-compete agreements with the
principals of UHI. The majority shareholder entered into a binding agreement to
sell the worldwide rights to DESA for $12 million plus accrued interest at the
date of the sale. DESA has also signed a letter of intent to form a joint
venture with the principals of UHI to manufacture various products in China that
will be marketed by the Company. The aggregate cost of the joint venture is a
maximum of $10 million. UHI, a privately held manufacturer of gas heating
products, had net sales and net income of approximately $21.2 million and $1.6
million, respectively, for its year ended December 31, 1997.
F-32
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders
Heath Company
Benton Harbor, Michigan
We have audited the accompanying balance sheet of Heath Company (a wholly-owned
subsidiary of Heath Holding Corp.) (excluding Heathkit Division) and subsidiary
as of December 31, 1997 and 1996, and the related consolidated statements of
operations, shareholders' equity, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Heath Company (excluding Heathkit Division)
and subsidiary as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
April 3, 1998
F-33
<PAGE>
<TABLE>
<CAPTION>
HEATH COMPANY (EXCLUDING HEATHKIT DIVISION) AND SUBSIDIARY (A WHOLLY-OWNED
SUBSIDIARY OF HEATH HOLDING CORP.)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- -----------------------------------------------------------------------------------------------------------------------------------
1997 1996 1997 1996
<S> <C> <C> <C> <C> <C>
ASSETS LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT ASSETS: CURRENT LIABILITIES:
Cash $ 237 $ 129
Accounts receivable: Trade accounts payable 5,950 4,716
Trade (net of allowances for doubtful accounts
and customer returns of $409 and $399) 8,808 6,105 Payable to Heathkit Division 1,493 1,426
Other 390 69 Accrued expenses:
Inventories 17,441 12,197 Warranty 1,682 1,292
Prepaid expenses 356 273 Compensation and benefits 450 394
Deferred income taxes benefit 1,475 1,937 Merchandising programs 1,421 1,261
-----------------
Total current assets 28,707 20,710 Settlements and other 452 2,370
------------------
Total accrued expenses 4,005 5,317
PROPERTY, PLANT AND EQUIPMENT - NET 1,013 1,006 Current maturities of long-term debt 320 221
------------------
Total current liabilities 11,768 11,680
DEFERRED INCOME TAXES BENEFIT 1,210 1,904 LONG-TERM DEBT, less current portion 12,136 7,628
EXCESS OF NET ASSETS ACQUIRED OVER COST,
net of amortization of $436 and $287 1,606 1,755
MINORITY INTEREST IN NET ASSETS OF
SUBSIDIARY 11 3
SHAREHOLDERS' EQUITY:
Common stock, par value $.01 per share -
voting, 2,500 shares authorized; 1,500
shares issued and outstanding, 54 shares
in treasury 15 15
Additional paid-in capital 1,485 1,485
Retained earnings 3,926 1,071
Foreign currency translation adjustment (17) (17)
------------------
Total shareholders' equity 5,409 2,554
----------------- ------------------
TOTAL LIABILITIES AND SHAREHOLDERS'
TOTAL ASSETS $30,930 $23,620 EQUITY $30,930 $23,620
================= ==================
</TABLE>
See notes to consolidated financial statements.
F-34
<PAGE>
HEATH COMPANY (EXCLUDING HEATHKIT DIVISION) AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF HEATH HOLDING CORP.)
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
- --------------------------------------------------------------------------------
1997 1996
---- ----
NET SALES $ 58,316 $ 44,415
COST OF GOODS SOLD 45,200 34,758
--------------------
GROSS PROFIT 13,116 9,657
OPERATING EXPENSES 7,878 7,837
--------------------
INCOME FROM OPERATIONS 5,238 1,820
OTHER EXPENSE - SETTLEMENTS AND OTHER - NET 1,375 2,696
--------------------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES AND
MINORITY INTEREST IN NET INCOME OF SUBSIDIARY 3,863 (876)
MINORITY INTEREST IN NET INCOME OF SUBSIDIARY 8 6
--------------------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES 3,855 (882)
PROVISION (CREDIT) FOR INCOME TAXES 1,000 (312)
--------------------
NET INCOME (LOSS) $ 2,855 $ (570)
====================
See notes to consolidated financial statements.
F-35
<PAGE>
<TABLE>
<CAPTION>
HEATH COMPANY (EXCLUDING HEATHKIT DIVISION) AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF HEATH HOLDING CORP.)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
- --------------------------------------------------------------------------------
Foreign
Additional Currency
Common Paid-In Retained Translation
Stock Capital Earnings Adjustment Total
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 $ 15 $ 1,485 $ 1,641 $ (17) $ 3,124
Net Loss -- -- (570) -- (570)
------- ------- ------- ------- -------
BALANCE, DECEMBER 31, 1996 $ 15 $ 1,485 $ 1,071 $ (17) $ 2,554
Net income -- -- 2,855 -- 2,855
------- ------- ------- ------- -------
BALANCE, DECEMBER 31, 1997 $ 15 $ 1,485 $ 3,926 $ (17) $ 5,409
======= ======= ======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-36
<PAGE>
<TABLE>
<CAPTION>
HEATH COMPANY (EXCLUDING HEATHKIT DIVISION) AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF HEATH HOLDING CORP.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
- ----------------------------------------------------------------------------------------------------------
1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (loss) $ 2,855 $ (570)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Allocation of Corporate expenses to Heathkit Division (603) (879)
Amortization of negative goodwill (149) (149)
Depreciation 414 294
Deferred income taxes 1,156 (312)
Minority interest in net income of subsidiary 8 6
Changes in operating assets and liabilities that provided (used) cash:
Accounts receivable (3,024) (1,211)
Inventories (5,244) (4,577)
Prepaid expenses (83) (19)
Trade accounts payable 1,234 2,581
Payable to Heathkit Division 670 1,173
Accrued expenses (1,312) 2,457
-----------------
Net cash used in operating activities (4,078) (1,206)
CASH FLOWS FROM INVESTING ACTIVITIES -
Purchases of equipment and tooling (421) (470)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on note payable (line-of-credit) 4,828 2,230
Payments on long-term debt (221) (221)
Payments of subordinated debt (250)
-----------------
Net cash provided by financing activities 4,607 1,759
-----------------
NET INCREASE IN CASH 108 83
CASH AT BEGINNING OF YEAR 129 46
-----------------
CASH AT END OF YEAR $ 237 $ 129
=================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -
Cash paid during the year for interest $ 781 $ 566
=================
</TABLE>
See notes to consolidated financial statements.
F-37
<PAGE>
HEATH COMPANY (EXCLUDING HEATHKIT DIVISION) AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF HEATH HOLDING CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - Heath Company (the "Company"), which is wholly
owned by Heath Holding Corp., consists of the Heath/Zenith
("Heath/Zenith") division and the Heathkit ("Heathkit") division. Heath
Company owns 99.5% of Heath Limited, a Hong Kong company, with assets
of approximately $9.3 million and $4.6 million at December 31, 1997 and
1996, respectively. The Heath/Zenith division, located in Benton
Harbor, Michigan is engaged in the distribution of motion-senor
lighting products and wireless home-control devices. Heath Limited is
engaged in the importing and exporting of electronic components, parts
and accessories, and the supervision of manufacturing of electronic
components, parts and accessories carried out by subcontractors. All of
Heath Limited's sales are to Heath/Zenith. The customers of the
Heath/Zenith division are located throughout the United States and
Canada.
Basis of Presentation - The consolidated financial statements include
the accounts of Heath Company (excluding the Heathkit Division) and
subsidiary. All significant intercompany transactions have been
eliminated.
Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Although management
believes the estimates are reasonable, actual results could differ from
those estimates.
Inventories - Inventories are carried at the lower of cost (first-in,
first-out method) or market.
Property, Plant and Equipment - Is recorded at cost. Depreciation is
computed by the straight-line method based on the estimated useful
lives of the related assets ranging from 2 to 20 years. Expenditures
for maintenance and repairs are charged to expense as incurred.
Taxes on Income - Deferred income tax assets and liabilities are
computed for differences between the financial statement and tax bases
of assets and liabilities that will result in taxable or deductible
amounts in the future. Such deferred income tax asset and liability
computations are based on enacted tax laws and rates applicable to
periods in which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred
tax assets to the amounts expected to be realized. Income tax expense
is the tax payable or refundable for the period plus or minus the
change during the period in deferred tax assets and liabilities.
Heath Company and Heath Limited are separate taxable entities.
Excess of Net Assets Acquired Over Cost - Such amounts were allocated
to the accounts of Heath/Zenith and Heath Limited based on the values
of the assets and liabilities attributable to Heath/Zenith and Heath
Limited on January 25, 1995 (date of acquisition) and is being
amortized on a straight-line basis over fifteen years.
Foreign Currency Translation - The functional currency for the
Heath/Zenith foreign operations is the Hong Kong dollar. The
translation from Hong Kong dollars is performed for balance sheet
accounts using current
F-38
<PAGE>
exchange rates in effect at the date of the balance sheet date and for
revenue and expense accounts using an average exchange rate during the
period. The gains or losses resulting from such translation are
included as a separate component of shareholder's equity. Gains or
losses from foreign currency transactions were not material during the
years ended December 31, 1997 and 1996 and are reflected in income from
operations.
Revenue Recognition - Sales are recognized at the time product is
shipped. Reserves for estimated returns are recorded when product is
shipped. Returns are netted against sales and amounted to approximately
$3,586 and $2,707 for the years ended December 31, 1997 and 1996,
respectively.
Research and Development Costs - Such costs are expensed as incurred
and are included in operating expenses in the accompanying statement of
income. Research and development costs incurred for the year ended
December 31, 1997 and 1996 were approximately $1,044 and $1,100,
respectively.
Corporate Allocations - All bank debt is currently recorded on the
accounts of Heath Company. An allocation of interest expense was made
to Heathkit based on the average receivable balance from the division
and Heath Company's borrowing rate (see Note 4). Management fees were
allocated to Heathkit based on the division's sales as a percent of
total Heath Company sales volume. General and administrative expenses,
consisting primarily of salaries for corporate support functions and
occupancy costs are allocated based on estimates of time attributable
to the division and square footage, respectively. Other administrative
expenses have been allocated based on a budget formula. A portion of
the deferred tax asset benefit attributable to Heath Company was
allocated to the accounts of Heathkit based on the differences between
the financial statement and tax bases of the assets and liabilities of
Heathkit. A portion of the provision for income taxes was allocated to
Heathkit based on the effective income tax rate of Heathkit. No benefit
related to future utilization of NOL's has been allocated to Heathkit.
Management believes that the aforementioned methods of allocation are
reasonable. Management believes that the allocated costs are not
significantly different that the costs that would have been incurred on
a stand-alone basis.
2. INVENTORY
Inventory at December 31 consisted of the following (in thousands):
1997 1996
---------------------------
Raw materials $ 502 $ 690
Work-in-process 6,765 2,944
Finished goods 10,174 8,563
------------------------
Total $17,441 $12,197
========================
F-39
<PAGE>
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31 consisted of the following
(in thousands):
1997 1996
----------------------
Buildings and improvements $ 666 $ 688
Machinery and equipment 1,735 1,194
Tooling 329 251
--------------------
2,730 2,133
Less accumulated depreciation 1,717 1,127
--------------------
Total $1,013 $1,006
====================
4. NOTE PAYABLE AND LONG TERM DEBT
Heath Company has a loan agreement (the "Agreement") with a bank which
provides a revolving line of credit. Terms of the Agreement include
certain restrictions on expenditures for property and operating leases.
The Company is also required to maintain minimum levels of working
capital and net worth, along with certain financial ratios measured
annually. Borrowings under the agreement are collateralized by
substantially all assets of the Company. The agreement has a maximum
borrowing commitment of $15 million and is subject to a borrowing
formula.
The agreement also provides for letters of credit up to $3 million.
There were no outstanding letters of credit at December 31, 1997 and
1996.
Long-tern debt consists of the following:
<TABLE>
<CAPTION>
1997 1996
-------------------------
<S> <C> <C>
Note payable to bank, interest due monthly at the bank prime rate or base
lending rate, plus 1% (9.5% at December 31, 1997) or the LIBOR rate, plus
3.00% (8.69% at December 31, 1997), at the Company's option, principal $12,136 $ 7,130
balance due January 26, 1999
Term notes payable to bank - payable in monthly installments of $12, plus
interest at 1.25% over the prime rate (9.75% at December 31, 1997) or
LIBOR rate plus 3.25% (8.94% at December 31, 1997) balance due
January 1998 320 719
------- -------
Total 12,456 7,849
Less current portion 320 221
------- -------
Total long-term debt $12,136 $7,628
======= =======
</TABLE>
5. RETIREMENT PLAN
Heath Company has a 401(k) defined contribution profit sharing plan
covering substantially all employees. The Company has the option to
make matching contributions at the discretion of management. The
Company contributed approximately $52 and $41 on behalf of Heath/Zenith
employees during the years ended December 31, 1997 and 1996.
F-40
<PAGE>
6. FEDERAL INCOME TAXES
The provision (credit) for income taxes consisted of the following:
1997 1996
----------------------
Current tax liability $ 55 $ 180
Benefit of operating loss carryforward (13) (180)
Deferred tax expense (credit) 958 (312)
------- -------
Provision (credit) for income taxes $ 1,000 $ (312)
======= =======
The effective tax rate on income differs from the federal statutory
rate primarily due to state income taxes and non-taxable amortization
of negative goodwill and debt acquisition costs. A portion of the net
operating loss carryforward was allocated to the Heathkit Division. As
a result, Heath Company's deferred tax expense was reduced.
Deferred tax assets resulting from temporary differences are as follows
at December 31:
<TABLE>
<CAPTION>
1997 1996
---------------------- ---------------------
Deferred Tax Deferred Tax
Assets Assets
---------------------- ---------------------
Non Non
Current Current Current Current
<S> <C> <C> <C> <C>
Accounts receivable $ 139 $ 136
Inventory 173 248
Settlements 34 620
Accrued warranty 538 438
Accrued promotional allowances 556 429
Accrued vacations 35 48
Property, plant and equipment - $ 977 - $ 1,056
Net operating loss - 471 - 1,063
All other - - 18 23
------- ------- -------- ----------
Subtotal 1,475 1,448 1,937 2,142
Less - valuation allowance - 238 - 238
------- ------- -------- ----------
Total $ 1,475 $ 1,210 $ 1,937 $ 1,904
======= ======= ======== ==========
</TABLE>
The Company has net operating loss carry forwards of approximately
$1,385 available to offset future taxable income. Of the total net
operating loss carryforward amount, $1,330 expires at a rate of $133
each year for the next 10 years, while the remainder expires in 15
years.
F-41
<PAGE>
7. RELATED PARTY TRANSACTIONS
The Company is required to pay $21 per month to HIG Capital Management,
Inc., a majority shareholder, for management services. During the years
ended December 31, 1997 and 1996 the Company paid approximately $226
and $217, respectively, for management services.
8. MAJOR CUSTOMER TRANSACTIONS
Sales to one customer approximated $37,600 and $21,700 for the years
ended December 31, 1997 and 1996. Accounts receivable from this
customer approximated $6,300 and $2,900 at December 31, 1997 and 1996.
9. LITIGATION
On November 18, 1997, Heath Company reached a settlement in a case
concerning alleged patent infringement. The settlement resulted in the
Company paying a net amount of $1,825, for which the parties received
certain licenses and covenant not to sue rights. Since the cases were
initiated prior to December 31, 1996 and the potential losses were
reasonably estimable at the time, the settlement was charged to expense
in the year ended December 31, 1996.
Heath Company has received notification of other possible patent
infringements, none of which is currently in litigation. The Company
believes it has no material liability for which it is alleged that
infringement of patents has occurred, however, the ultimate outcome
cannot be determined at this time.
Heath Company's insurance company has received notification of a
litigation claim involving product liability. The insurance company's
attorneys and management of the Company has evaluated the circumstances
surrounding the case and believe it has no merit. In management's
opinion, additional liability in excess of insurance coverages, if any,
will not have a material affect on the Company's results of operations,
financial position or liquidity.
10. STOCK OPTION PLAN
During 1995, the Company's Board of Directors approved the "1995 stock
option plan." The plan allows eligible employees, as selected by the
plan administrator, to receive options to purchase shares of common
stock at a price determined by the administrator, but not less than the
fair market value at date of grant. The maximum term of an option may
not exceed 10 years. There are 300 shares reserved under the plan.
Transactions under the plan are summarized as follows:
Shares Price Range
Options outstanding at January 26, 1995 191 $1.00
Options granted 5 $1.00-$1.10
------
Options outstanding at December 31, 1995 196 $1.00-$1.10
Options granted 4 $7.00
Options terminated (1) $1.00-$1.10
------
Options outstanding at December 31, 1996 199 $1.00-$7.00
Options granted 2 $1.00
Options terminated (7) $1.00
------
Options outstanding at December 31, 1997 194 $1.00-$7.00
======
F-42
<PAGE>
Subsequent to year-end, 2 of the options granted in 1996 were
terminated and the exercise price of the remaining 2 options granted in
1996 was revised to $1.00.
Statement of Financial Accounting Standards ("SFAS") No. 123 became
effective for the Company during 1996. The Company has elected to
continue to follow the "Intrinsic Value" method of Accounting
Principles Board opinion No. 25 ("APB 25") and include the required
disclosures under SFAS 123. Stock options granted did not have a
material affect on the Company's financial position or results of
operations.
11. SERIES A PREFERRED STOCK
The Company has authorized 500 shares of Series A Preferred Stock at a
par value of $1.00. The shares contain both voting and conversion
rights. Each share of Series A Preferred Stock is convertible, at any
time at the option of the holder, into shares of Common Stock.
Additionally, Series A Preferred Stock will be automatically converted
to Common Stock upon the occurrence of the closing of an underwritten
public offering or upon the conversion by the holders of eighty percent
of the then issued and outstanding shares of the Series A Preferred
Stock into shares of Common Stock. No preferred shares were outstanding
at December 31, 1997.
12. SUBSEQUENT EVENT
On February 4, 1998, the net assets of the Heathkit Division were
transferred to a new legal entity related to Heath Holding Corp. by
common ownership. Effective February 4, 1998, the shareholders of Heath
Holding Corp. entered into an agreement to sell its stock to DESA
International, Inc. for $40,443.
F-43
<PAGE>
DESA INTERNATIONAL, INC.
REGISTRATION STATEMENT ON FORM S-4
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 20. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law (the "DGCL") provides,
in effect, that in the case of a non-derivative action, any person made a party
to any action by reason of the fact that he is or was a director, officer,
employee or agent of the Company may and, in certain cases, must be indemnified
by the Company against, judgments, fines, amounts paid in settlement and
reasonable expenses (including attorney's fees), if in either type of action he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Company. In a derivative action, this
indemnification does not apply to matters as to which it is adjudged that the
director, officer, employee or agent is liable to the Company, unless upon court
order it is determined that, despite such adjudication of liability, but in view
of all the circumstances of the case, he is fairly and reasonably entitled to
indemnity for expenses.
Article Tenth of the Company's Certificate of Incorporation states that the
Company shall indemnify any person who was, is, or is threatened to be made a
party to a proceeding by reason of the fact that the or she (i) is or was a
director or officer of the Company or (ii) while a director or officer of the
Company, is or was serving at the request of the Company as a director, officer,
partner, venturer, proprietor, trustee, employee, agent, or similar functionary
or another foreign or domestic corporation, partnership, joint venture, sole
proprietorship, trust, employee benefit plan, or other enterprise, to the
fullest extent permitted under the DGCL, as the same exists or may hereafter be
amended.
Insofar as indemnification for liabilities arising under the Securities At
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be government by the final adjudication
of such issue.
Item 21. Exhibits and Financial Statement Schedules.
(a) Listed below are the exhibits which are filed as part of this
registration statement (according to the number assigned to them in Item 601 of
Regulation S-K).
<TABLE>
<CAPTION>
Exhibit No. Description of Document Exhibit File No.
- ----------- ----------------------- ----------------
<S> <C> <C>
2.1 Recapitalization Agreement, dated as of October 8, 1997, among J.W. 2.1**
Childs Equity Partners, L.P., DESA Holdings Corporation and each
Stockholder of DESA Holdings Corporation named therein
2.2 Stock Purchase Agreement, dated as of January 12, 1998, by and among 2.2**
Heath Holding Corp., its Shareholders and Optionholders and the Company
3.1 Articles of Incorporation of the Company 3.1**
3.1A Articles of Incorporation of DESA Holdings Corporation 3.1A**
II-1
<PAGE>
<CAPTION>
Exhibit No. Description of Document Exhibit File No.
- ----------- ----------------------- ----------------
<S> <C> <C>
3.2 By-laws of the Company 3.2**
3.2A By-laws of DESA Holdings Corporation 3.2A**
4.1 Indenture, dated as of November 26, 1997, by and among the Company, 4.1**
Holdings and Marine Midland Bank relating to $130,000,000 of the
Company's 97/8% Senior Subordinated Notes Due 2007
4.2 Registration Rights Agreement, dated as of November 26, 1997 by and 4.2**
among the Company, Holdings, NationsBanc Montgomery Securities, Inc.
and UBS Securities LLC
4.3 Purchase Agreement, dated as of November 21, 1997, by and among the 4.3**
Company, Holdings, NationsBanc Montgomery Securities, Inc. and UBS
Securities LLC
4.4 Global Note Payable to CEDE & Co. 4.4**
4.5 Holdings Guarantee 4.5**
5 Form of Opinion of Sullivan & Worcester LLP 5**
10.1 Credit Agreement, dated as of November 26, 1997 by and among the
Company, Holdings, NationsBank, N.A., UBS Securities LLC and
NationsBanc Montgomery Securities, Inc. 10.1**
10.2 Management Incentive Plans of the Company, dated March 1, 1997 10.2**
10.3 Sales Compensation and Incentive Plan of the Company for FY 1998 10.3**
10.4 Services Agreement between the Company and Hamilton Ryker Company 10.4**
10.5 Services Agreement between the Company and Manpower Services 10.5**
10.6 Manufacturer's Representative Agreement between the Company and Sales 10.6**
& Marketing Specialists
10.7 Manufacturer's Representative Agreement between the Company and The 10.7**
Upper Midwest Group
10.8 Manufacturer's Representative Agreement between the Company and 10.8**
Marketing Consultants, Inc.
10.9 Manufacturer's Representative Agreement between the Company and 10.9**
Belmont Enterprises, Inc.
10.10 Manufacturer's Representative Agreement between the Company and 10.10**
Kitchin & Son, Inc.
10.11 Manufacturer's Representative Agreement between the Company and 10.11**
Hurley Marketing Services
10.12 Manufacturer's Representative Agreement between the Company and 10.12**
Marketing Services Group
10.13 Manufacturer's Representative Agreement between the Company and Sales 10.13**
Managers, Inc.
10.14 Manufacturer's Representative Agreement between the Company and 10.14**
Manufacturers Products, Inc.
10.15 Intellectual Property Agreement between the Company and Worgas 10.15**
Bruciatori SRL dated December 1, 1996
10.16 Intellectual Property Agreement between the Company and Valor Limited 10.16**
dated May 21, 1996
10.17 Intellectual Property Agreement between the Company and Remington 10.17**
Arms Company dated August 29, 1969
II-2
<PAGE>
<CAPTION>
Exhibit No. Description of Document Exhibit File No.
- ----------- ----------------------- ----------------
<S> <C> <C>
10.18 Intellectual Property Agreement between the Company and Remington 10.18**
Arms Company dated January 29, 1988
10.19 Lease Agreement between the Company and Shelbyville Industrial Spec. 10.19**
Building - WRS Partnership
10.20 Agreement to produce and sell finished goods between the Company and 10.20**
Tangible/Shinn Fu
10.21 Agreement to produce and sell finished goods between the Company and 10.21**
BYSE
10.22 Agreement to produce and sell finished goods between the Company and 10.22**
NU-TEC
10.23 Agreement to produce and sell finished goods between the Company and 10.23**
International Pin
10.24 Agreement to produce and sell finished goods between the Company and 10.24**
Kingsman Industries
10.25 Agreement to produce and sell finished goods between the Company and 10.25**
Sealey
10.26 Agreement to produce and sell finished goods between the Company and 10.26**
Hudson Manufacturing
10.27 Agreement to produce and sell finished goods between the Company and 10.27**
Sengoka Works, Ltd
10.28 Employment Agreement, dated as of November 26, 1997, between the 10.28**
Company and Robert H. Elman
10.29 Employment Agreement, dated as of November 26, 1997, between the 10.29**
Company and John M. Kelly
10.30 Employment Agreement, dated as of November 26, 1997, between the 10.30**
Company and Terry G. Scariot
12 Schedule of Earnings to Fixed Charges 12
21 Subsidiaries of the Company 21**
23.1 Consent of Sullivan & Worcester LLP Contained in Exhibit 5
23.2 Consent of Ernst & Young LLP 23.2
23.3 Consent of Deloitte & Touche LLP 23.3
24 Powers of Attorney **
25 Statement of Eligibility of Marine Midland Bank as trustee under the 25**
Indenture
27 Amended Financial Data Schedule 27
99.1 Form of Letter of Transmittal to be used in connection with the Exchange 99.1**
Offer
99.2 From of Notice of Guaranteed Delivery 99.2**
- ----------
<FN>
* To be filed by amendment
** Previously filed
</FN>
</TABLE>
II-3
<PAGE>
(b) The following Financial Statement Schedules are included herein:
Page Number
Report of Ernst & Young LLP S-1
Schedule I - Condensed Financial Information of Registrant
(DESA International, Inc.) S-2
Schedule II - Valuation and Qualifying Accounts S-6
II-4
<PAGE>
Item 22. Undertakings.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the change in volume and
price represent no more than a 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(b) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(c) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment, all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-5
<PAGE>
Report of Independent Auditors
Board of Directors and Stockholders
DESA Holdings Corporation
We have audited the consolidated financial statements of DESA Holdings
Corporation (the "Company") as of March 1, 1997 and February 28, 1998, and the
related consolidated statements of income, stockholders' equity (deficit) and
cash flows for each of the three years in the period ended February 28, 1998,
and have issued our report thereon dated May 27, 1998 (included elsewhere in
this Prospectus). Our audits also included the consolidated financial statement
schedules listed in Schedule I and II attached hereto in this Prospectus. These
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these schedules based on our audits.
In our opinion, the consolidated financial statement schedules referred to
above, when considered in relation to the basic financial statements taken as a
whole, presents fairly, in all material respects, the information set forth for
the periods stated above.
Ernst & Young LLP
New York, New York
May 27, 1998
S-1
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE I - Condensed Financial Information of Registrant
DESA International, Inc.
Condensed Consolidated Balance Sheets
March 1, February
1997 28, 1998
-------------- -------------
(In Thousands)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 5,058 $ 794
Accounts receivables (including $122,520 and $121,882 due from
parent in 1997 and 1998, respectively) less allowance for doubtful
accounts of $936 and $1,517 in 1997 and 1998, respectively 135,586 142,720
Inventories 15,747 40,356
Prepaid expenses and other current assets 1,761 5,170
----------- ----------
Total current assets 158,152 189,040
Property, plant and equipment, net 10,082 13,559
Other assets (principally goodwill) 45,067 73,749
----------- -----------
$ 213,301 $ 276,348
=========== ===========
Liabilities and Stockholder's Equity
Current liabilities $ 44,198 $ 39,519
Long-term debt 130,600 261,105
Other non-current liabilities 1,940 2,214
----------- -----------
Total liabilities 176,738 302,838
Stockholder's equity:
Common stock 31,900 31,900
Other stockholder's equity 4,663 (58,390)
----------- -----------
36,563 (26,490)
----------- -----------
$ 213,301 $ 276,348
=========== ===========
</TABLE>
See Accompanying Notes
S-2
<PAGE>
Schedule I - Condensed Financial Information of Registrant (continued)
<TABLE>
<CAPTION>
DESA International, Inc.
Condensed Consolidated Statements of Income
Fiscal Year Ended
-------------------------------------------
March 2, March 1, February
1996 1997 28, 1998
---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C>
Net sales $186,324 $209,105 $224,169
Costs and expenses:
Cost of goods sold 116,217 130,890 145,486
Selling, general and administrative 37,828 45,224 50,158
-------- -------- --------
Operating Profit 32,279 32,991 28,525
Interest expense 7,073 14,509 17,327
-------- -------- --------
Income before income taxes and extraordinary item 25,206 18,482 11,198
Income taxes 10,401 7,733 5,545
-------- -------- --------
Income before extraordinary item 14,805 10,749 5,653
Extraordinary item, net of income taxes of $1,421 and $1,495 in
1996 and 1998, respectively 2,176 -- 2,308
-------- -------- --------
Net income $ 12,629 $ 10,749 $ 3,345
======== ======== ========
</TABLE>
See Accompanying Notes
S-3
<PAGE>
Schedule I - Condensed Financial Information of Registrant (continued)
<TABLE>
<CAPTION>
DESA International, Inc.
Condensed Consolidated Statements of Cash Flows
March 2, March 1, February 28,
1996 1997 199
--------------------------------------------
(In thousands)
<S> <C> <C> <C>
Net cash provided by operating activities $ 19,375 $ 18,398 $ 1,146
Investing Activities
Capital expenditures (2,122) (2,770) (5,475)
Dividends received from joint venture 112 132 157
Cash paid for acquisition of Heath Holdings Corp. -- -- (40,294)
Other (50) (244) (368)
------------------------------------
Net cash used in investing activities (2,060) (2,882) (45,980)
Financing Activities
Proceeds from Term Loans 155,000 -- 100,000
Proceeds from revolver loan 9,900 -- --
Proceeds from Working Capital Loan -- -- 35,500
Proceeds from issuance of Senior Subordinated
Notes -- -- 130,000
Proceeds from issuance of Series C Redeemable
Preferred Stock -- -- 14,598
Proceeds from issuance of warrants -- -- 3,002
Proceeds from exercise of BT Warrant 891 -- --
Proceeds from issuance of common stock -- -- 82,400
Exercise of stock options -- -- 150
Repurchase of common stock -- -- (166,291)
Redemption of Series A Preferred Stock (6,418) -- --
Redemption of Series B Preferred Stock (4,946) -- --
Repayment of Term Loans (50,950) -- (183,095)
Dividends paid on common stock and
nonvoting common stock (113,154) -- --
Payment of expenses (5,673) -- (17,670)
Increase (decrease) in revolving loan (7,141) (2,759) 43,000
Decrease in working capital loan -- -- (20,020)
Principal payments of Term Loans (11,050) (8,050) (7,980)
Proceeds from Acquisition Loan -- -- 20,000
Payments for repurchase of common stock -- -- (70)
Exercise of stock options 202 210 5
Proceeds from issuance of common stock -- -- 7,061
------------------------------------
Net cash provided by (used in) financing activities (33,339) (10,599) 40,590
Effect of exchange rates on cash (1) (4) (20)
------------------------------------
Increase (decrease) in cash and cash
equivalents (16,025) 4,913 (4,264)
Cash and cash equivalents at beginning of period 16,170 145 5,058
------------------------------------
$ 145 $ 5,058 $ 794
====================================
</TABLE>
See Accompanying Notes
S-4
<PAGE>
Schedule I - Condensed Financial Information of Registrant (continued)
DESA International, Inc.
Notes to Condensed Consolidated Financial Statements
Note 1 - Basis of Presentation
The accompanying condensed consolidated financial statements include the
accounts of DESA International, Inc. ("DESA") and its wholly owned subsidiaries:
DESA Industries of Canada, Inc. and DESA Europe B.V and Heath Limited. All
significant intercompany accounts and transactions have been eliminated. DESA's
50% interest in a joint venture is accounted for using the equity method.
The condensed consolidated financial statements have been prepared in accordance
with generally accepted accounting principles for condensed financial statements
and Article 10 of Regulation S-X. Accordingly, the financial statements do not
include all of the information and notes required by generally accepted
accounting principles for complete financial statements.
Note 2 - Dividends from Investee
Cash dividends paid to DESA from the Company's 50% interest in a joint venture
accounted for by the equity method are as follows:
March 2, March 1, February 28,
1996 1997 1998
- ---------------------------------------------------------------------------
(In Thousands)
$ 112 $ 132 $157
S-5
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II - Valuation and Qualifying
Accounts DESA International, Inc.
February 28, 1998
COL. A COL. B COL. C COL. D COL. E
Additions
-----------------------------------------
Balance at
Beginning of Charged to Costs and Charged to Other Deductions - Balance at End
Description Period Expenses Accounts-Describe Describe of Period
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year Ended March 2, 1996:
Deducted from assets accounts:
Allowance for doubtful
accounts $1,072,000 $(160,000) $ -- $(196,000)(1) $1,108,000
Year Ended March 1,1997:
Deducted from assets accounts:
Allowance for doubtful
accounts 1,108,000 (63,000) 109,000(1) 936,000
Year Ended February 28,1998:
Deducted from asset accounts:
Allowance for doubtful
accounts 936,000 (143,000) 747,000(2) 23,000(1) 1,517,000
- -------------------------------
<FN>
(1) Uncollectible accounts written off, net of recovery.
(2) Part of net assets acquired from Heath Holding Corp.
</FN>
</TABLE>
S-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this Amendment to Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Bowling Green,
State of Kentucky, on the 4th day of June, 1998.
DESA International, Inc.
By: /s/ Robert H. Elman
Name: Robert H. Elman
Title: Chairman and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to Registration Statement has been signed by the following persons in the
capacities indicated on June 4, 1998.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Robert H. Elman Chairman and Chief Executive June 4, 1998
Robert H. Elman Officer
/s/ John W. Childs Director June 3, 1998
John W. Childs
_________*_________________ Director June 3, 1998
Raymond B. Rudy
/s/ Adam L. Suttin Director June 3, 1998
Adam L. Suttin
/s/ Michael Greene Director June 4, 1998
Michael Greene
/s/ Terry G. Scariot President and Director June 4, 1998
Terry G. Scariot
/s/ Edward G. Patrick Vice President of Finance, June 4, 1998
Edward G. Patrick Treasurer
/s/ Scott M. Nehm Vice President and Controller June 4, 1998
Scott M. Nehm
* By: /s/ Adam L. Suttin
Adam L. Suttin, Attorney-in-fact
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Holdings has
duly caused this Amendment to Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Bowling Green,
State of Kentucky, on the 4th day of June, 1998.
DESA Holdings Corporation
By: /s/ Robert H. Elman
Name: Robert H. Elman
Title: Chairman and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on June 4, 1998.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Robert H. Elman Chairman and Chief Executive June 4, 1998
Robert H. Elman Officer
/s/ John W. Childs Director June 3, 1998
John W. Childs
_________*_________________ Director June 3, 1998
Raymond B. Rudy
/s/ Adam L. Suttin Director June 3, 1998
Adam L. Suttin
/s/ Michael Greene Director June 4, 1998
Michael Greene
/s/ Terry G. Scariot President and Director June 4, 1998
Terry G. Scariot
/s/ Edward G. Patrick Vice President of Finance, June 4, 1998
Edward G. Patrick Treasurer
/s/ Scott M. Nehm Vice President and Controller June 4, 1998
Scott M. Nehm
* By: /s/ Adam L. Suttin
Adam L. Suttin, Attorney-in-fact
</TABLE>
EXHIBIT 12
<TABLE>
<CAPTION>
Nov. 30 Feb. 26 Fiscal Fiscal Fiscal Fiscal
1993 1994 1995 1996 1997 1998
------- ------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Ratio of earnings to
fisxed charges
Income before income taxes 10,295 807 23,265 25,206 18,449 11,165
Plust fixed charges:
Interest expense 2,893 1,455 5,777 7,073 14,509 17,327
Interest factor included in
rent expense 50 149 286 445 541 906
Amortization of deferred
financing costs 252 206 787 893 976 1,081
------ ------ ------ ------ ------ ------
Total earnings 13,490 2,617 30,115 33,617 34,475 30,479
Fixed Charges 3,195 1,810 6,850 8,411 16,026 19,314
Ratio 4.2 1.5 4.4 4.0 2.2 1.6
</TABLE>
EXHIBIT 23.2
We consent to the reference to our firm under the capition "Experts" and to the
use of our report dated May 27, 1998, in the Registration Statement (Form S-4,
No. 333-44969) of DESA International, Inc. For registration of $130,000,000 of
97/8% Senior Subordinated Notes due 2007.
Ernst & Young LLP
New York, New York
June 4, 1998
EXHIBIT 23.3
INDEPENDENT AUDITORS CONSENT
We consent to the use in this Registration Statement of DESA International, Inc.
on Form S-4 of our report dated April 3, 1998, appearing in the Prospectus which
is part of the Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
Deloitte & Touche LLP
June 1, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of Desa Holdings Corporation at and for the period ended
February 28, 1998 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<CIK> 0001051362
<NAME> DESA HOLDINGS CORPORATION
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-START> MAR-2-1997
<PERIOD-END> FEB-28-1998
<CASH> 794,000
<SECURITIES> 0
<RECEIVABLES> 20,838,000
<ALLOWANCES> 1,517,000
<INVENTORY> 40,356,000
<CURRENT-ASSETS> 67,158,000
<PP&E> 36,152,000
<DEPRECIATION> 22,593,000
<TOTAL-ASSETS> 155,636,000
<CURRENT-LIABILITIES> 40,063,000
<BONDS> 261,105,000
14,661,000
0
<COMMON> 138,000
<OTHER-SE> (162,545,000)
<TOTAL-LIABILITY-AND-EQUITY> 155,636,000
<SALES> 224,169,000
<TOTAL-REVENUES> 224,169,000
<CGS> 145,486,000
<TOTAL-COSTS> 145,486,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,327,000
<INCOME-PRETAX> 11,165,000
<INCOME-TAX> 5,545,000
<INCOME-CONTINUING> 5,620,000
<DISCONTINUED> 0
<EXTRAORDINARY> 2,308,000
<CHANGES> 0
<NET-INCOME> 3,312,000
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
