Registration No. 333-44969
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
AMENDMENT NO. 1
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
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification No.)
incorporation Classificatio Code
or organization) Number)
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)
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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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<TABLE>
<CAPTION>
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 RegistrationFee
<S> <C> <C> <C> <C>
97/8% 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>
<TABLE>
<CAPTION>
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
(502) 781-9600
</TABLE>
<PAGE>
SUBJECT TO COMPLETION, DATED APRIL 30, 1998
OFFER TO EXCHANGE
all outstanding
97/8% SENIOR SUBORDINATED NOTES DUE 2007
($130,000,000 principal amount outstanding)
for
97/8% 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 97/8% 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 97/8% 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 22 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."
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 November 29, 1997, the
Company had outstanding consolidated indebtedness of $262.9 million,
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<PAGE>
including $132.9 million outstanding under the New Credit Facility (excluding
letters of credit in the aggregate amount of $0.9 million). See
"Capitalization." In addition, subject to the limitations set forth in the
Indenture, the Company and its subsidiaries may incur up to $38.5 million
additional indebtedness (including Senior Indebtedness), including up to $42.1
million under the New Credit 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 November 29, 1997, Holdings
had outstanding indebtedness of $262.9 million. In addition, subject to the
limitations set forth in the Indenture, Holdings may incur up to $38.5 million
in 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
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
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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.
4
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TABLE OF CONTENTS
Page
Available Information................................................. 5
Prospectus Summary.................................................... 6
Risk Factors.......................................................... 22
The Exchange Offer.................................................... 27
Capitalization of the Company......................................... 34
Pro Forma Condensed Consolidated Financial Data of Holdings........... 35
Selected Financial Data............................................... 42
Management's Discussion and Analysis of
Financial Condition and Results of Operations......................... 45
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 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.
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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 and (v)
electric chain saws. In fiscal 1997, approximately 90% of the Company's sales
were generated in the United States and 10% 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
$83.0 million in fiscal 1992 to $209.1 million in fiscal 1997, representing a
compound annual growth rate ("CAGR") of 20%. The Company's EBITDA increased from
$10.6 million, or 12.8% of sales, in fiscal 1992, to $37.5 million, or 17.9% of
sales, in fiscal 1997, representing a CAGR of 29%. In addition, the Company's
operating profit and cash flows provided by (used in) operating, financing and
investing activities increased from $8,175, $6,518, ($2,513) and ($3,791),
respectively, in 1992 to $32,958, $18,398, $10,599 and $2,882, respectively, in
1997. For the twelve months ended November 29, 1997, the Company had sales of
$228.9 million and EBITDA of $39.2 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 56% of the
Company's sales growth over that time period.
Zone Heating Products (80% of Fiscal 1997 Domestic Gross 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 27% with gross revenues increasing from $46.2 million in fiscal 1992 to
$155.1 million in fiscal 1997. 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 (40% of Fiscal 1997
Domestic Gross 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 (40% of Fiscal 1997 Domestic Gross 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).
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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.
Specialty Products (20% of Fiscal 1997 Domestic Gross Sales)
DESA's domestic specialty products business has experienced a CAGR of
11% with gross revenues increasing from $23.0 million in fiscal 1992 to $38.8
million in fiscal 1997. 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 and portable
generators. These products are marketed under well-known brand names such as
Remington(R), Master(R) and Powerfast(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 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.
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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 33.6% in fiscal 1992 to 37.4% in fiscal 1997.
The Company has been able to achieve its sales growth while efficiently
managing working capital and maintaining low capital expenditures generating
$127.7 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 10% of
DESA's total sales in fiscal 1997.
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 9% 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.
8
<PAGE>
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 "Revolving Credit 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.
9
<PAGE>
Sources and Uses of Funds
The following table sets forth the sources and uses of funds in connection
with the Recapitalization:
(dollars in
thousands)
Sources of Funds:
Cash Sources:
New Credit Facility:
Revolving Credit 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 Revolving Credit Facility provides for borrowing of up to $75.0
million. Giving effect to the Recapitalization, average outstanding
borrowings under the Revolving Credit Facility would have been $10.7
million during the twelve months ended November 29, 1997. 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 $0.9 million as of November 29, 1997.
(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.
10
<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.
11
<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 97/8% 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 The Exchange Offer is not conditioned upon any
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
Certain Rights Pursuant to the Registration Rights Agreement and 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."
12
<PAGE>
Accrued Interest The New Notes will bear interest at a rate equal to
97/8% 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
Tendering Old Notes Unless a tender of Old Notes is effected pursuant 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
Delivery Procedures Holders of Old Notes who wish to tender their Old
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
Notes and Delivery
of New Notes Upon effectiveness of the Registration Statement of
which this Prospectus constitutes a part and
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."
13
<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
the New Notes Based on existing interpretations by the staff of 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
Tendering Old Notes
for Exchange Old Notes that are not tendered or that are not
properly tendered will, following the expiration 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.
14
<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
97/8% 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."
15
<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.
16
<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 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 financial data. The following unaudited pro forma consolidated Statement
of Operating Data for the year ended March 1, 1997 gives effect to the
Recapitalization and the acquisition of the Heath/Zenith business as if they had
occurred on March 3, 1996 (see "Recent Developments" included elsewhere herein).
The following unaudited pro forma consolidated Statement of Operating Data for
the thirty-nine weeks ended November 29, 1997 gives effect to the
Recapitalization as if it had occurred on March 2, 1997. Holdings' historical
consolidated Balance Sheet Data at November 29, 1997 already reflects the
Recapitalization. The Unaudited Pro Forma Condensed Consolidated Balance Sheet
Data of Holdings reflects the pro forma adjustments related to the Heath/Zenith
acquisition as though it had occurred on November 29, 1997. The historical
information utilized for Heath/Zenith is based upon its financial statements for
the twelve months ended December 31, 1996 and the nine months ended October 5,
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 sole
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 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.
<TABLE>
<CAPTION>
Pro Forma
-------------------------------------
Thirty-nine
Fiscal Year Weeks Ended
Ended November 29,
March 1, 1997 1997(2)
------------- ------------
(in thousands, except ratios)
Statement of Operating Data:
<S> <C> <C>
Net sales (1)................................................... $253,520 $234,555
Cost of sales................................................... 165,439 154,500
------- -------
Gross profit.................................................... 88,081 80,055
Selling and administrative expenses............................. 51,803 42,888
-------- --------
Operating profit ............................................... 36,278 37,167
Less dividends on preferred stock............................... 2,112 1,580
-------- --------
Operating profit available for common stockholders.............. $ 34,166 $ 35,587
======== ========
Other Data:
EBITDA (3).................................. $ 41,947 $ 42,048
EBITDA margin(4)............................ 16.6% 17.9%
Capital expenditures........................ $ 3,240 $ 4,074
Depreciation................................ 2,699 2,693
Amortization................................ 2,970 2,188
Cash interest expense (5)................... 23,852 19,019
Ratio of EBITDA to cash interest expense.... 1.8x 2.2x
Ratio of EBITDA less capital expenditures to cash
interest expenses......................... 1.6x 2.0x
Ratio of earnings to fixed charges (6)...... 1.5x 1.9x
Balance Sheet Data at November 29, 1997:
Working capital (7)......................... $ 38,534
Total assets................................ 210,672
Long-term debt (less current portion)....... 269,500
Stockholders' equity (deficit).............. (153,455)
17
<PAGE>
<FN>
- ----------
(1) Net sales constitute gross sales net of accruals for returns and allowances and cash discounts.
(2) The thirty-nine weeks ended November 29, 1997 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. The
fiscal year ended March 1, 1997 excludes a non-recurring charge of $2,286,000 related to a litigation settlement of a patent
infringement suit related to Heath/Zenith. 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.
</FN>
</TABLE>
18
<PAGE>
Summary Financial Data
Set forth below are selected historical financial data and other historical
operating data of Holdings. The summary historical Statements of Operating Data
and Balance Sheet Data below for each of the years in the three year period
ended March 1, 1997 and as of March 2, 1996 and March 1, 1997 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 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 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 summary historical Statement of Operating Data
and Balance Sheet Data at and for the year ended February 27, 1993 have been
derived from the audited consolidated financial statements of the Company which
have also been audited by Ernst & Young LLP, but which are not included
elsewhere herein. The summary historical Statement of Operating Data for the
thirty-nine weeks ended November 30, 1996 and November 29, 1997 and the summary
historical Balance Sheet Data at November 29, 1997 have been derived from
Holdings' unaudited consolidated financial statements for those periods included
elsewhere in the Prospectus and, in each case, include, in the opinion of
management, all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of the results for the unaudited interim
periods. Results of operations for the thirty-nine weeks ended November 29, 1997
are not necessarily indicative of the results that may be expected for the
entire year. 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.
19
<PAGE>
<TABLE>
<CAPTION>
Predecessor | Successor
------------------------ | ------------------------------------------------------------
| Thirty-nine Weeks
| Fiscal Year Ended
| ---------------------------- ------------------
| Three
Nine months | months
Ended | Ended November November
Fiscal Year November 30, | February 30, 29,
1993 1993 (1) | 26, 1994 1995 1996(1)(2) 1997 1996 1997(1)
---------- ------------ | ---------- ------- ---------- -------- --------- -------
(in thousands, except ratios)
Statement of Operating Data: | (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales(3) $ 98,712 $ 93,349 | $ 29,428 $ 172,501 $ 186,324 $ 209,105 $ 173,587 $193,404
Cost of sales 66,902 60,860 | 19,584 107,484 116,217 130,890 108,587 123,243
-------- --------- | -------- -------- -------- -------- -------
Gross profit 31,810 32,489 | 9,844 65,017 70,107 78,215 65,000 70,161
Selling and administrative |
expenses 22,320 19,301 | 7,582 35,975 37,828 45,257 33,913 37,559
-------- --------- | -------- -------- -------- -------- -------- -------
Operating profit 9,490 13,188 | 2,262 29,042 32,279 32,958 31,087 32,602
Interest expense 4,186 2,893 | 1,455 5,777 7,073 14,509 11,105 11,321
-------- --------- | -------- -------- -------- -------- -------- -------
Income before income taxes 5,304 10,295 | 807 23,265 25,206 18,449 19,982 21,281
Income taxes 2,154 4,356 | 346 10,064 10,703 7,733 8,378 8,769
-------- --------- | -------- -------- -------- -------- -------- -------
Income before extraordinary |
item 3,150 5,939 | 461 13,201 14,503 10,716 11,604 12,512
Extraordinary item(4) -- 4,150 | 238 -- 2,638 -- -- 2,308
-------- --------- | -------- -------- -------- -------- -------- -------
Net income 3,150 1,789 | 223 13,201 11,865 10,716 11,604 10,204
Less dividends on preferred |
stock -- 211 | -- 900 853 -- -- 17
-------- --------- | -------- -------- -------- -------- -------- -------
Net income available for |
common stockholders $ 3,150 $ 1,578 | $ 223 $ 12,301 $ 11,012 $ 10,716 $ 11,604 $ 10,187
======== ========= | ======== ======== ======== ======== ======== =======
Ratio of earnings to fixed |
charges(5) 2.1x 4.2x| 1.5x 4.4x 4.0x 2.2x 2.6x 2.7x
Other Data: |
EBITDA (6) $ 11,752 $ 14,998 | $ 3,176 $ 33,156 $ 36,574 $ 37,494 $ 34,785 $ 36,535
EBITDA margin(7) 11.9% 16.1%| 10.8% 19.2% 19.6% 17.9% 20.0% 18.9%
Capital expenditures $ 1,655 964 | $ 456 $ 1,499 $ 2,122 $ 2,770 $ 1,570 $ 3,690
Net cash provided by (used |
in operating activites 4,365 (4,258)| 16,150 18,337 19,375 18,398 (13,439) (35,493)
Net cash provided by (used |
in investing activites (2,170) (964)| (456) (2,176) (2,060) (2,882) (1,490) (3,296)
Net cash provided by (used |
in financing activities (2,116) 5,320 | (14,186) (1,651) (17,989) (10,599) 15,186 34,086
Depreciation 1,927 1,548 | 391 2,148 2,332 2,432 2,036 2,363
Amortization 335 262 | 523 1,966 1,963 2,104 1,568 1,570
Balance Sheet Data (at period |
end): |
Cash and cash equivalents $ 462 | $ 1,597 $ 16,170 $ 145 $ 5,058 $ 393 $ 201
Working capital (deficit)(8) 5,563 | 6,680 9,738 (1,194) (8,566) 26,130 34,758
Total assets 27,867 | 84,055 107,259 85,545 91,984 137,105 157,780
Long-term debt (less current |
portion) 27,956 | 62,000 49,700 149,709 130,600 163,194 240,500
Stockholders' equity (deficit)(13,210) | 2,279 16,194 (95,402) (84,754) (83,577) (159,85)
<FN>
- ----------
(1) Holdings was party to recapitalizations in November 1993, January 1996 and November 1997 which impacted interest expense,
stockholders' equity 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.
20
<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 and 1996.
(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.
</FN>
</TABLE>
21
<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 November 29, 1997, the
Company had outstanding consolidated indebtedness of $262.9 million (excluding
letters of credit in the aggregate amount of $0.9 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 $42.1 million under the New
Credit 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 all Senior Indebtedness has
been paid in full, and there may not be sufficient assets remaining to pay
amounts due on
22
<PAGE>
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 November
29, 1997, is $132.9 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 letters of intent 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 proposed acquisition of FMI and the proposal 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 1997, 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 1997, sales to Home Depot and Lowe's accounted for 13%
and 11% of the Company's net sales, respectively. For the nine months ended
November 29, 1997, sales to Home Depot and Lowe's accounted for 16% and 14% of
the Company's net sales, respectively. In fiscal year 1997, sales to the
Company's top ten customers accounted for 49% 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.
23
<PAGE>
Seasonality of Business
The Company's business is subject to seasonal fluctuation. In fiscal
1997, sales and operating income during the second and third quarters of the
year averaged approximately 71% and 90% 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 Holdings' 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.
24
<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
25
<PAGE>
unreasonably small assets or capital for the businesses in which it is engaged
and does not have 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.
26
<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
first 90-day period immediately following the occurrence of such Registration
Default in an amount equal to $.05 per
27
<PAGE>
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.
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
28
<PAGE>
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 97/8% 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 97/8% per annum after the
Expiration Date.
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
29
<PAGE>
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 bookentry 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
acknowledgement from the tendering participant, which acknowledgement 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.
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)
30
<PAGE>
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 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
31
<PAGE>
(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
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.
32
<PAGE>
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.
33
<PAGE>
CAPITALIZATION OF THE COMPANY
The following table sets forth, as of November 29, 1997, 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 Revolving Credit Facility(1)................ $ 32,855
Term Loan Facility.............................................. 100,000
Senior Subordinated Notes....................................... 130,000
-------
Total Long-Term Debt.......................................... 262,855
Stockholders' equity (deficit)(2)............................... (23,872)
--------------
Total Capitalization.......................................... $238,983
==============
- ----------
(1) The Revolving Credit Facility provides for borrowing of up to $75.0
million. Giving effect to the Recapitalization, average outstanding
borrowings under the Revolving Credit Facility would have been $10.7
million during the twelve months ended November 29, 1997. 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 $0.9 million as of November 29, 1997.
(2) The following are the components to reconcile the Company's
Stockholders' Equity (Deficit) to historical Holdings' Stockholders'
Equity (Deficit):
November 29, 1997
-------------------------------------------
DESA DESA DESA Holdings
International Holdings Consolidated
-------------- ------------- ---------------
(dollars in thousands)
Common Stock....................... $ 10 $ 127 $ 127
Capital in Excess of Par........... 31,890 79,786 79,786
Carryover Predecessor Adjustment... (32,030) (279) (32,309)
Retained Earnings (Deficit)........ (23,280) (183,717)(3) (206,997)
Cumulative Transaction Adjustment.. (462) (462)
-------- --------- -----------
Stockholders' Equity (Deficit)..... $(23,872) $(104,083) $(159,855)
======== ========= =========
(3) Includes cumulative amortization of goodwill of $129,000 and
organization costs of $891,000 plus dividends of $115,136,000 and
recapitalization consideration of $67,561,000.
34
<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
March 1, 1997 gives effect to the Recapitalization and the acquisition of the
Heath/Zenith business as if they had occurred on March 3, 1996. The Unaudited
Pro Forma Condensed Consolidated Statement of Income Data of Holdings for the
thirty-nine weeks ended November 29, 1997 give effect to the 1996
Recapitalization and the acquisition of the Health/Zenith business 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 and a
non-recurring charge of $2,286,000 related to a litigation settlement of a
patent infringement suit related to Health/Zenith. The Unaudited Pro Forma
Condensed Consolidated Balance Sheet Data of Holdings reflects the pro forma
adjustments related to the Heath/Zenith acquisition as though it had occurred on
November 29, 1997. The historical information utilized for Heath/Zenith is based
upon its financial statements for the twelve months ended December 31, 1996 and
the nine months ended October 5, 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.
35
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF INCOME DATA
Year Ended March 1, 1997
(in thousands)
Pro Forma Pro Forma
Pro Forma Adjustments for
DESA Adjustments for Heath/Zenith Heath/Zenith
Historical Recapitalization Pro Forma Historical Acquisition Pro Forma
--------------- ---------------- ------------------------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net sales...................... $209,105 $ $209,105 $ 44,415 $ $253,520
Cost of sales.................. 130,890 130,890 34,758 (209)(9) 165,439
-------- --------- -------- -------- ---------
Gross profit................... 78,215 78,215 9,657 209 88,081
Selling and administrative
expenses 45,257 (950)(1) 44,302 7,687 (984)(8)(9) 51,803
(45)(3) (28)(10)
40 (4) 826 (7)
-------- --------- --------- -------- -------- ---------
Operating profit............... 32,958 950 33,913 1,970 395 36,278
Interest expense............... 14,509 6,814 (2) 21,323 559 1,970(6) 23,852
-------- --------- --------- -------- -------- ---------
Income before income taxes..... 18,449 (5,859) 12,590 1,411 (1,575) 12,426
Income taxes................... 7,733 (2,461)(5) 5,272 494 (563)(5) 5,203
-------- --------- --------- -------- -------- ---------
Income before extraordinary item
and non-recurring charge.. $ 10,716 $ (3,398) $ 7,318 $ 917 $ (1,012) $ 7,223
======== ========= ========= ======== ======== =========
See Notes to Unaudited Pro Forma Condensed Consolidated Statement of Income Data
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF INCOME DATA
Thirty-nine Weeks Ended November 29, 1997
(in thousands)
Pro Forma Pro Forma
Pro Forma Adjustments for
DESA Adjustments for Heath/Zenith Heath/Zenith
Historical Recapitalization Pro Forma Historical Acquisition Pro Forma
--------------- ---------------- ------------------------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net sales...................... $193,404 $ $193,404 $ 41,151 $ $234,555
Cost of sales.................. 123,243 123,243 31,409 (152)(9) 154,500
-------- --------- -------- -------- ---------
Gross profit................... 70,161 70,161 9,742 152 80,055
Selling and administrative
expenses 37,559 (700)(1) 36,854 6,150 (714)(8)(9) 42,888
(35)(3) (21)(10)
30 (4) 619 (7)
-------- --------- --------- -------- -------- ---------
Operating profit............... 32,602 705 33,307 3,592 268 37,167
Interest expense............... 11,321 5,748 (2) 17,069 587 1,363(6) 19,019
-------- --------- --------- -------- -------- ---------
Income before income taxes..... 21,281 (5,043) 16,238 3,005 (1,095) 18,148
Income taxes................... 8,769 (1,981)(5) 6,788 901 (99)(5) 7,590
-------- --------- --------- -------- -------- ---------
Income before extraordinary item
and non-recurring charge.. $ 12,512 $ (3,062) $ 9,450 $ 2,104 $ (996) $ 10,558
======== ========= ========= ======== ======== =========
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)
Thirty-nine
Fiscal Year Ended Weeks Ended
March 1, 1997 November 29, 1997
------------------ -----------------
Pro Forma Adjustments:
<S> <C> <C>
(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:
Management incentive compensation plan adopted by the Company $ 500 $ 500
Less: Existing management incentive compensation plan (1,450) (1,200)
----------- -----------
Pro forma adjustment $ (950) $ (700)
=========== ===========
(2) The pro forma adjustment to interest expense for the Recapitalization
reflects the following:
Interest expense related to new debt:
New Revolving Credit Facility $ 43 $ 926
New Term Loans 8,074 6,226
New Senior Subordinated Notes 12,838 9,627
Commitment Fee: Line of Credit 181 180
Other interest and bank charges 187 110
----------- -----------
Subtotal 21,323 17,069
Less: Interest expense relating to Existing Credit Facility (14,509) (11,321)
----------- -----------
Pro forma adjustment $ 6,814 $ 5,748
=========== ===========
(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 $ 240 $ 180
Less: Historical management fee (285) (215)
----------- -----------
Pro forma adjustment $ (45) $ (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 $ 1,016 $ 762
Less: Amortization of historical deferred financing costs (976) (732)
----------- -----------
Pro forma adjustment $ 40 $ 30
=========== ===========
38
<PAGE>
<CAPTION>
Thirty-nine
Fiscal Year Ended Weeks Ended
March 1, 1997 November 29, 1997
------------------ -----------------
<S> <C> <C>
(5) To record the income tax benefit related to pro forma adjustments computed
using an effective tax rate of 42% for the Recapitalization and 36% for
the Health/Zenith acquisition.
(6) The pro forma adjustment to interest expense for the Heath/Zenith
acquisition reflects the following:
Interest expense related to new debt:
Working capital advance $ 726 $ 561
Acquisition advance 1,653 1,276
Note payable 150 113
----------- -----------
Subtotal 2,529 1,950
Less: Interest expense relating to Existing Credit Facility (559) (587)
----------- -----------
Pro forma adjustment $ 1,970 $ 1,363
=========== ===========
(7) 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 $ 677 $ 508
Less: Amortization of historical negative goodwill 149 111
----------- -----------
Pro forma adjustment $ 826 $ 619
=========== ===========
(8) 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 the acquisition $ -- $ --
Less: Historical management fee (217) (169)
----------- -----------
Pro forma adjustment $ 217 $ 169
=========== ===========
(9) To reflect savings from consolidation of Heath/Zenith warehouse with
DESA warehouse and related freight cost savings $ 209 $ 152
Reduction of salaries and fringe benefits of Heath Company
employees who did not become employees of the Company 767 545
----------- -----------
Pro forma adjustment $ (976) $ (697)
=========== ===========
(10) To eliminate depreciation recorded in Selling, General & Administrative (28
expenses related to the real estate not acquired in the Heath/Zenith
acquisition: $ (28) $ (21)
----------- -----------
Pro forma adjustment $ (28) $ (21)
=========== ===========
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED BALANCE SHEET
(in thousands)
As of November 29, 1997
------------------------------------------------------------------------
DESA Heath/Zenith Pro Forma Pro Forma
Historical Historical(A) Adjustments Holdings
---------- ------------- ----------- --------
Heath/Zenith
Acquisition Other
----------- -----
Assets
Current assets:
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents............. $ 201 $ 131 $ $ $ 332
Accounts receivable (net)
Trade................................ 65,586 8,268 (350) (4) 73,504
Other................................ -- 1,079 1,079
Inventories........................... 27,133 10,539 (120) (4) 37,552
Other current assets.................. 2,331 1,721 4,052
--------- --------- -------- --------
Total current assets.................... 95,251 21,738 (470) 116,519
Fixed assets (net).................... 11,409 1,040 (713)(2) 11,736
Goodwill(B)(C)........................ 39,999 (1,651) 29,108 (4) 1,651 (2) 69,107
Other assets.......................... 11,121 1,561 628 (4) 13,310
--------- --------- -------- -------- --------
Total assets.......................... $ 157,780 $ 22,688 $ 29,266 $ 938 $210,672
========= ========= ======== ======== ========
Liabilities and stockholders' equity (deficit)
Current liabilities:
Accounts payable...................... $ 25,114 $ 4,580 $ (1,273)(1) $ 28,421
Accrued liabilities................... 10,319 6,121 1,099 (4) 17,539
Note payable.......................... -- 7,160 (7,160)(1) 2,000
2,000 (3)
Income taxes payable.................. 2,705 -- 2,705
Current portion of long-term debt..... 22,355 221 (221)(1) 27,320
4,965 (3)
--------- --------- -------- -------- --------
Total current liabilities............... 60,493 18,082 1,099 (1,689) 77,985
(313)(1) 269,500
Long-term debt.......................... 240,500 313 29,000 (3)
Deferred tax liabilities................ 1,663 -- 1,663
Other liabilities....................... 381 -- 381
--------- --------- -------- -------- --------
Total liabilities....................... 303,037 18,395 1,099 26,998 349,529
Commitments.............................
Preferred stock......................... 14,598 -- 14,598
Stockholders' equity (deficit).......... (159,855) 4,293 6,400 (3) (153,455)
(4,293)(5)
--------- --------- -------- -------- --------
Total liabilities and stockholders' equity
(deficit)............................. $ 157,780 $ 22,688 $ 1,099 $ 29,105 $210,672
========= ========= ======== ======== ========
<FN>
(A) Heath/Zenith based upon October 5, 1997 financial statements
(B) Heath/Zenith historical goodwill is negative goodwill
(C) Amount of goodwill is different from amount calculated at date of acquisition, February 4, 1998, as shown
on F-23, Note 15.
See Notes to Unaudited Pro Forma Condensed Consolidated Balance Sheet
</FN>
</TABLE>
40
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED BALANCE SHEET
Pro Forma Adjustments:
(1) To adjust for items that were settled by Heath Company immediately prior to
acquisition
Account Payable $(1,273)
Repayment of debt - Note payable (7,160)
Current portion of long-term
debt (221)
Long-term debt (313)
(2) To eliminate items included in historical balance sheet of Heath/Zenith
but not purchased by DESA International
Fixed assets $(713)
Negative goodwill 1,651
(3) To reflect the financing of Heath/Zenith by DESA International
New Credit Facility-Revolving $13,965
New Credit Facility-Acquisition Facility 20,000
Sale of Common Stock 6,400
Note payable 2,000
--------
$42,365
========
(4) To record adjustments to historical Heath/Zenith amounts
Accounts receivable $(350)
Inventories (120)
Accrued liabilities 1,099
Deferred tax (other assets) 628
Goodwill 29,108
(5) To eliminate historical Heath/Zenith stockholders' equity.
41
<PAGE>
SELECTED FINANCIAL DATA
Set forth below are selected historical financial data and other
historical operating data of Holdings. The summary historical Statements of
Operating Data and Balance Sheet Data below for each of the years in the three
year period ended March 1, 1995 and as of March 2, 1996 and March 1, 1997 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 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 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 summary historical Statement of Operating
Data and Balance Sheet Data at and for the year ended February 27, 1993 have
been derived from the audited consolidated financial statements of the Company
which have also been audited by Ernst & Young LLP, but which are not included
elsewhere herein. The summary historical Statement of Operating Data for the
thirty-nine weeks ended November 30, 1996 and November 29, 1997 and the summary
historical Balance Sheet Data at November 29, 1997 have been derived from
Holdings' unaudited consolidated financial statements for those periods included
elsewhere in the Offering Memorandum and, in each case, include, in the opinion
of management, all adjustments consisting of normal recurring adjustments,
necessary for a fair presentation of the results for the unaudited interim
periods. Results of operations for the thirty-nine weeks ended November 29, 1997
are not necessarily indicative of the results that may be expected for the
entire year. 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.
42
<PAGE>
<TABLE>
<CAPTION>
Predecessor Successor
----------------------- |---------------------------------------------------------------------
9 Months | 3 Months Thirty-nine Weeks Ended
Ended | ended Fiscal Year -----------------------
November | February ----------- November 30,November 29,
1993 30, 1993 | 26, 1994(1) 1995 1996(1)(2) 1997 1996 1997(1)
---- -------- | ----------- ---- ---- ---- ------------------------
| (in thousand, except ratios)
Statement of Operating Data: | (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales(3)..................... $98,712 $93,349 | $29,428 $172,501 $186,324 $209,105 $173,587 $193,404
Cost of sales.................... 66,902 60,860 | 19,584 107,484 116,217 130,890 108,587 123,243
------- ------- | ------- -------- -------- -------- -------- --------
Gross profit..................... 31,810 32,489 | 9,844 65,017 70,107 78,215 65,000 70,161
Selling and administrative expenses 22,320 19,301 | 7,582 35,975 37,828 45,257 33,913 37,559
------- ------- | ------- -------- -------- -------- -------- --------
Operating profit................. 9,490 13,188 | 2,262 29,042 32,279 32,958 31,087 32,602
Interest expense................. 4,186 2,893 | 1,455 5,777 7,073 14,509 11,105 11,321
------- ------- | ------- -------- -------- -------- -------- --------
Income before income taxes....... 5,304 10,295 | 807 23,265 25,206 18,449 19,982 21,281
Income taxes..................... 2,154 4,356 | 346 10,064 10,703 7,733 8,378 8,769
------- ------- | ------- -------- -------- -------- -------- --------
Income before extraordinary item. 3,150 5,939 | 461 13,201 14,503 10,716 11,604 12,512
Extraordinary item(4)............ -- 4,150 | 238 -- 2,638 -- -- 2,308
------- ------- | ------- -------- -------- -------- -------- --------
Net income....................... 3,150 1,789 | 223 13,201 11,865 10,716 11,604 10,204
Less dividends on preferred stock -- 211 | -- 900 853 716 -- 17
------- ------- | ------- -------- -------- -------- -------- --------
Net income available for common |
stockholders................... $ 3,150 $ 1,578 | $ 223 $ 12,301 $ 11,012 $ 10,716 $ 11,604 $ 10,187
======= ======= | ======= ======== ======== ======== ======== ========
Ratio of earnings to fixed charges(5) 2.1x 4.2x | 1.5x 4.4x 4.0x 2.2x 2.6x 2.7x
Other Data: |
EBITDA(6)........................ $11,752 $14,998 | $3,176 $33,156 $36,574 $37,494 $34,785 $36,534
EBITDA margin(7)................. 11.9% 16.1% | 10.8% 19.2% 19.6% 17.9% 20.0% 18.9%
Capital expenditures............. $1,655 $964 | $456 $1,499 $2,122 $2,770 $1,570 $3,690
Depreciation..................... 1,927 1,548 | 391 2,148 2,332 2,432 2,036 2,363
Amortization..................... 335 262 | 523 1,966 1,963 2,104 1,568 1,570
Net cash provided by (used in) |
operating activities............ 4,365 (4,258)| 16,150 18,337 19,375 18,398 (13,439) (35,493)
Net cash provided by (used in) |
investing activities............. (2,170) (964)| (456) (2,176) (2,060) (2,882) (1,490) (3,296)
Net cash provided by (used in) |
financing activities............. (2,116) 5,320 | (14,186) (1,651) (17,989) (10,599) 15,186 34,086
Balance Sheet Data (at period end): |
Cash and cash equivalents........ $462 | $1,597 $16,170 $145 $5,058 $393 $201
Working capital (deficit)(8)..... 5,563 | 6,680 9,738 (1,194) (8,566) 26,130 34,758
Total assets..................... 27,867 | 84,055 107,259 85,545 91,984 137,105 157,780
Long-term debt (less current |
portion)........................ 27,956 | 62,000 49,700 149,709 130,600 163,194 240,500
Stockholders' equity (deficit)... (13,210) | 2,279 16,194 (95,402) (84,754) (83,577) (159,855)
<FN>
- ----------
(1) Holdings was party to a recapitalization in January 1996 which impacted interest expense, stockholders' equity 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 and 1996.
(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.
43
<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.
</FN>
</TABLE>
44
<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 (80% of domestic fiscal 1997 gross sales), which includes
indoor room heaters, hearth products and outdoor heaters, and (b) Specialty
Tools (20% of domestic fiscal 1997 gross sales), which includes powder actuated
fastening systems (tools and accessories) and electrical 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 20% and 29%, respectively, from fiscal 1992 to
fiscal 1997. In addition, the Company's operating profit and cash flows provided
by (used in) operating, financing and investing activities increased from
$8,175, $6,518, ($2,513) and ($3,791), respectively, in 1992 to $32,958,
$18,398, $(10,599) and $(2,882), respectively, in 1997. 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 only
three small acquisitions from fiscal 1992 to fiscal 1997. Since fiscal 1992, new
product introductions have generated approximately 56% 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 1997, approximately $19.6 million or 9.4% 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 March 1, 1997 and March 2, 1996 (dollars in thousands):
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----
Fiscal 1997
<S> <C> <C> <C> <C> <C>
Total Net Sales.. $ 24,267 $ 60,021 $ 89,299 $ 35,518 $ 209,105
Operating Profit. 319 12,220 18,546 1,873 32,958
Fiscal 1996
Total Net Sales.. $ 25,986 $ 68,138 $ 65,925 $ 26,275 $ 186,324
Operating Profit. 3,291 15,051 13,306 631 32,279
</TABLE>
45
<PAGE>
Approximately 70% 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
-----------------------------------------------------------
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Replacement Expenditures, Cost Reduction Programs, New
Products and Capacity $1,331 $1,132 $1,420 $1,499 $2,122 $2,770
Acquisitions/Buildings/Other 754(1) 523(2) 0 664(3) 0 0
------ ------ ------ ------ ------ ------
Total Capital Expenditures $2,085 $1,655 $1,420 $2,163 $2,122 $2,770
====== ====== ====== ====== ====== ======
<FN>
(1) Acquisition of a vented heater product line and an electric generator product line
(2) Bowling Green, Kentucky office building expansion to replace leased offices
(3) Acquisition of an outdoor heater product line
</FN>
</TABLE>
46
<PAGE>
Results of Operations
The following table sets forth certain income statement information for
Holdings for the fiscal years ended February 25, 1995, March 2, 1996 and March
1, 1997 and the thirty-nine week periods ended November 30, 1996 and November
29, 1997:
<TABLE>
<CAPTION>
Fiscal Year Ended Thirty-nine Weeks Ended
----------------------------------------------------------------- ---------------------------------------------
Percentage Percentage Percentage November Percentage November Percentage
of of of 30, of 29, of
1995 Net Sales 1996 Net Sales 1997 Net Sales 1996 Net Sales 1997 Net Sales
-------- ----------- -------- ----------- -------- ----------- ----------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $172,501 100.0% $186,324 100.0% $209,105 100.0% $173,587 100.0% $193,404 100.0%
Cost of sales 107,484 62.3% 116,217 62.4% 130,890 62.6% 108,587 62.6% 123,243 63.7%
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Gross profit 65,017 37.7% 70,107 37.6% 78,215 37.4% 65,000 37.4% 70,161 36.3%
Selling and
administrative
expenses 35,975 20.8% 37,828 20.3 45,257 21.6 33,913 19.5% 37,559 19.4%
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Operating profit 29,042 16.8% 32,279 17.3% 32,958 15.8% 31,087 17.9% 32,602 16.9%
Interest expense 5,777 3.3% 7,073 3.8% 14,509 6.9% 11,105 6.4% 11,321 5.9%
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Income before
provision for
taxes 23,265 13.6% 25,206 13.5% 18,449 8.9% 19,982 11.5% 21,281 11.0%
Provision for
income taxes 10,064 5.8% 10,703 5.7% 7,733 3.7% 8,378 4.8% 8,769 4.6%
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Income before
extraordinary
item 13,201 7.8% 14,503 7.8% 10,716 5.2% 11,604 6.7% 12,512 6.4%
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Extraordinary item -- 0.0% 2,638 1.4% -- 0.0% -- 0.0% 2,308 1.2%
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Net income $ 13,201 7.8% $ 11,865 6.4% $ 10,716 5.2% $ 11,604 6.7% $ 10,204 5.2%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
Thirty-nine Weeks Ended November 29, 1997 Compared to Thirty-nine Weeks Ended
November 30, 1996
Net Sales. Total net sales increased 11.4% from $173.6 million for the
thirty-nine weeks ended November 30, 1996 to $193.4 million for the thirty-nine
weeks ended November 29, 1997. Indoor heating and hearth product sales increased
36.7% from $67.6 million to $92.4 million due to increased acceptance of hearth
products in both the Company's consumer channel (e.g., Home Depot and Lowe's)
and its traditional specialty gas channel (i.e., liquid propane distributors)
and the growth of DESA's existing customers. Outdoor heating products sales
declined 12.1% from $64.3 million to $56.5 million due to the impact of the mild
1996/1997 winter weather which left certain of the Company's customers with
higher than anticipated inventory levels. Specialty tools product sales
increased 9.8% to $32.4 million due to DESA's expansion within the consumer
channel.
Cost of Sales. Cost of sales increased 13.5% from $108.6 million for
the thirty-nine weeks ended November 30, 1996 to $123.2 million for the
thirty-nine weeks ended November 29, 1997. The increase was primarily associated
with the increase in net sales over the same period. Gross profit margin
decreased from 37.4% to 36.3%. The decrease in gross profit margin resulted
primarily from the decrease in sales of outdoor heating products, which have
higher gross profit margins than hearth products and specialty tools. In
addition, gross profit was adversely impacted as a result of inefficiencies
relating to the expansion of hearth products capacity at the Shelbyville plant
(new paint system, fabrication equipment/tooling and workforce training).
Selling and Administrative Expenses. Selling and administrative
expenses increased 10.8% from $33.9 million for the thirty-nine weeks ended
November 30, 1996 to $37.6 million for the thirty-nine weeks ended November 29,
1997. The increase was due primarily to the increase in net sales over the same
period. However, these costs declined as a percentage of sales from 19.5% to
19.4% due to increased operating leverage as a result of the increase in sales
during the period.
47
<PAGE>
Operating Profit. Due to the factors described above, operating profit
increased 4.9%, from $31.1 million for the thirty-nine weeks ended November 30,
1996 to $32.6 million for the thirty-nine weeks ended November 29, 1997.
Interest Expense. Interest expense increased modestly from $11.1
million for the thirty-nine weeks ended November 30, 1996 to $11.3 million for
the thirty-nine weeks ended November 29, 1997, as higher current working capital
requirements were largely offset by the debt reductions due to increased fiscal
year 1997 cash flow.
Income Tax. Income taxes increased 6.5% from $8.4 million for the
thirty-nine weeks ended November 30, 1996 to $8.8 million for the thirty-nine
weeks ended November 29, 1997. The overall effective income tax rate was 42% for
both periods.
Net Income. Net income before extraordinary item increased 7.8% from
$11.6 million for the thirty-nine weeks ended November 30, 1996 to $12.5 million
for the thirty-nine weeks ended November 29, 1997 due to the factors described
above.
Extraordinary Item. The extraordinary item of $2.3 million in the
thirty-nine weeks ended November 29, 1997 reflects the write off of unamortized
deferred financing costs related to the 1996 Recapitalization.
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 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 18.2% from $75.2
million to $88.9 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 tool sales increased 5.0% from
$41.8 million to $43.9 million due primarily to continued growth in the consumer
channel of 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.
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
48
<PAGE>
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.
Year Ended March 2, 1996 (53 weeks) Compared to the Year Ended February 25, 1995
(52 weeks)
Net sales. Net sales increased 8.0% from $172.5 million for the year
ended February 25, 1995, to $186.3 million for the year ended March 2, 1996.
Indoor heating product sales increased by 2.4% from $67.7 million to $69.3
million due to sales increases in mini-hearth and vent-free fireplace products
partially offset by lower gas log sales resulting from higher than anticipated
customer inventories of gas logs at the beginning of fiscal 1996 in the
specialty gas channel of distribution. Outdoor heating product sales increased
14.0% from $66.0 million to $75.2 million due to increased promotion and
expansion in the hardware/home center channel. Specialty tool sales increased
7.5% from $38.9 million to $41.8 million due primarily to continued growth in
sales of powder actuated tools and related accessories.
Cost of Sales. Cost of sales increased 8.1% from $107.5 million in
fiscal 1995 to $116.2 million in fiscal 1996 due to sales growth of 8.0% for the
same period. Gross profit margin of 37.6% was comparable to prior year's gross
profit margin of 37.7%.
Selling and Administrative Expenses. Selling and administrative
expenses increased 5.2% from $36.0 million in fiscal 1995 to $37.8 million in
fiscal year 1996. However, these costs decreased as a percentage of sales from
20.8% in fiscal year 1995 to 20.3% in fiscal 1996 resulting from a reduction in
sales commissions and increased operating leverage due to the increase in sales
during the period.
Operating Profit. Due to the factors discussed above, operating profit
increased 11.1% from $29.0 million in fiscal 1995 to $32.3 million in fiscal
1996.
Interest Expense. Interest expense increased 22.4% from $5.8 million in
fiscal 1995 to $7.1 million in fiscal 1996 due to higher debt levels resulting
from higher working capital requirements and the recapitalization of Holdings in
January 1996.
Income Taxes. Income taxes increased 5.9% from $10.1 million in fiscal
1995 to $10.7 million in fiscal 1996 as the overall tax rate decreased from 43%
in fiscal 1995 to 42% in fiscal 1996 due to adoption of LIFO inventory
accounting which favorably affected income taxes.
Net Income. Net income declined 9.8% from $13.2 million in fiscal 1995
to $11.9 million in fiscal 1996.
Liquidity and Capital Resources
Historical
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 revolving 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 used in operating activities for the thirty-nine weeks ended
November 29, 1997 was $35.6 million compared to $13.4 million for the
thirty-nine weeks ended November 30, 1996, an increase of $22.2 million.
Inventories as of November 29, 1997 were $7.6 million higher than the amount at
November 30, 1996, to support higher sales and production activities. The
increase in accounts receivable from $13.1 million at March 1, 1997 to $65.6
million at November 27, 1997 is attributable to the seasonality of the Company's
sales and the industry practice which results in
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<PAGE>
many heating product receivables becoming due in December. Net cash provided by
operating activities was $18.4 million, $19.4 million and $18.3 million for
fiscal years 1997, 1996 and 1995, respectively.
Net cash used in investing activities increased from $1.5 million for
the thirty-nine weeks ended November 30, 1996 to $3.3 million for the
thirty-nine weeks ended November 29, 1997 due to capital expenditures for a new
powder paint system and fabrication equipment at the Company's Shelbyville,
Tennessee plant to support growth of hearth products. Net cash used in investing
activities was $2.9 million, $2.1 million and $2.2 million in fiscal 1997, 1996
and 1995, respectively, consisting primarily of capital expenditures for new
products, capacity increases and cost reduction programs. Fiscal 1995 also
included a $0.9 million acquisition of an outdoor heater products line.
Net cash provided by financing activities increased 125% from $15.2
million in the thirty-nine weeks ended November 30, 1996 to $34.1 million in the
thirty-nine weeks ended November 29, 1997 due to an increase in the use of the
Company's revolving credit facility to fund operations, primarily for the
increase in inventories. Net cash used in financing activities totaled $10.6
million, $18.0 million and $1.7 million in fiscal years 1997, 1996 and 1995.
The Existing Credit Facility provided for commitments in an aggregate
amount of up to $220.0 million. Borrowings outstanding under the Existing Credit
Facility were $183.1 million on November 29, 1997. Outstanding letters of credit
and foreign currency contracts established to facilitate merchandise purchases
were $0.9 million and $1.8 million, respectively, on November 29, 1997.
After the Recapitalization
Following the Recapitalization, the Company's primary sources of
liquidity will be cash flow from operations and borrowings under the Revolving
Credit Facility. The Company's primary uses of cash will be debt service
requirements, working capital and capital expenditures.
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 Revolving Credit Facility. The Term Loan Facility is comprised
of two tranches, each in the aggregate principal amount of $50.0 million. The
Revolving Credit Facility provides revolving loans in an aggregate amount of up
to $75.0 million. Upon closing of the Recapitalization, the Company borrowed the
full amount available under the Term Loan Facility and $35.5 million under the
Revolving Credit Facility. Borrowings under the Revolving Credit Facility were
used partially to refinance seasonal borrowings outstanding under the Existing
Credit Facility. The amount remaining available under the Revolving Credit
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 Revolving Credit 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
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<PAGE>
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. In addition, the Company will have
approximately $3.0 to $4.0 million of letters of credit outstanding under the
Revolving Credit 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 Company expects that capital expenditures, during fiscal 1998 will
be approximately $6.2 million, including $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 $1.3 million to expand the engineering lab and
offices at the Company's main facilities in Bowling Green, Kentucky. Capital
expenditures are expected to be funded from internally generated cash flows and
by borrowings under the 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."
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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 1997, approximately 90% of the Company's sales
were generated in the United States and 10% 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
$83.0 million in fiscal 1992 to $209.1 million in fiscal 1997, representing a
CAGR of 20%. The Company's EBITDA increased from $10.6 million, or 12.8% of
sales, in fiscal 1992, to $37.5 million, or 17.9% of sales, in fiscal 1997,
representing a CAGR of 29%. In addition, the Company's operating profit and cash
flows provided by (used in) operating, financing and investing activities
increased from $8,175, $6,518, ($2,513) and ($3,791), respectively, in 1992 to
$32,958, $18,398, $10,599 and $2,882, respectively, in 1997. For the twelve
months ended November 29, 1997, the Company had sales of $228.9 million and
EBITDA of $39.2 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 56% of the
Company's sales growth over that time period.
Zone Heating Products (80% of Fiscal 1997 Domestic Gross 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 27% with gross revenues increasing from $46.2 million in fiscal 1992 to
$155.1 million in fiscal 1997. 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 (40% of Fiscal
1997 Domestic Gross 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 (40% of Fiscal 1997 Domestic Gross 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.
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<PAGE>
Specialty Products (20% of Fiscal 1997 Domestic Gross Sales)
DESA's domestic specialty products business has experienced a CAGR of
11% with gross revenues increasing from $23.0 million in fiscal 1992 to $38.8
million in fiscal 1997. 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 and portable
generators. These products are marketed under well-known brand names such as
Remington(R), Master(R) and Powerfast(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 33.6% in fiscal 1992 to 37.4% in fiscal 1997.
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<PAGE>
The Company has been able to achieve its sales growth with efficient
use of working capital and low capital expenditures generating $127.7 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 10% of
DESA's total sales in fiscal 1997.
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 9% 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 90% of the Company's 1997 sales were domestic
and 10% of sales were international.
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<PAGE>
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 $300 million includes vent
pipes, connectors, glass fireplace doors, screens, mantles and
decorative trim.
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<TABLE>
<CAPTION>
Zone Heating Market Size and Growth
DESA's
Calendar Year % of CAGR Market
1992 1996 Market '92-'96 Share
---- ---- ------ ------- -----
($ 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
--
Source: Hearth Products Association and GAMA Statistical Release
<FN>
(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 (Domestic)
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 40% of the Company's fiscal 1997
gross sales. Sales of these products have increased at a CAGR of 30% from fiscal
1992 to fiscal 1997.
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 2.9% of the Company's indoor heating sales
in fiscal 1997 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.
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
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<PAGE>
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 (Domestic)
Outdoor heating products represent approximately 40% of the Company's
fiscal 1997 gross sales. Sales of these products have increased at a CAGR of 25%
from fiscal 1992 to fiscal 1997.
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 $25.4 million to $77.4 million from 1992
through 1997, 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 1997. DESA
sells kerosene heaters in eight sizes with retail prices ranging from $139 to
approximately $2,000.
Specialty Products (Domestic)
DESA's specialty products category consists of (i) specialty fastening
systems (i.e., powder actuated tools and staple guns) and (ii) electrical
products (i.e., chain saws and electric generators) which are sold to both DIY
and commercial customers. The specialty tool category represents 20% of the
Company's gross sales which have grown at an 11% CAGR from fiscal 1992 to fiscal
1997.
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 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.
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<PAGE>
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 1997, 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 1997, $19.6 million or 9.4% 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 9.4% from fiscal 1992 through fiscal 1997.
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 62% of its fiscal
1997 domestic sales. Other channels, including specialty heating, farm,
construction and industrial, contributed 38% of domestic sales in fiscal 1997.
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.
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
60
<PAGE>
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 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."
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<PAGE>
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 1997,
warranty costs amounted to approximately 1.4% 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 1997, total employment averaged 772 with a low of 404 employees in March and
a peak of 997 employees in October.
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 products
liability 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
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
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<PAGE>
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
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")
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 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.
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<PAGE>
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 17.5%
and 7.3% 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.
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
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<PAGE>
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 since he joined Union Bank of Switzerland in 1990. Mr. Greene serves on
the board of directors of CBP Resources, Inc. and Metrocall, Inc.
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<PAGE>
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.
Executive Compensation
The following table sets forth compensation earned for all services
rendered to the Company during fiscal 1995, fiscal 1996 and fiscal 1997, 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").
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<PAGE>
<TABLE>
<CAPTION>
Long-Term
Compensation
Awards
Number of
Annual Compensation Securities All Other
Name and Principal Fiscal Salary(1) Bonus Underlying Compensation
Position at March 1, 1997 Year ($) ($)(1) Options(2) ($)
------------------------- ---- --- ------ ---------- ---
<S> <C> <C> <C> <C> <C>
Robert H. Elman....................... 1997 565,385 820,000 -- 112,233
Chairman, Chief 1996 516,162 535,000 -- 100,255
Executive Officer 1995 385,546 512,000 -- 108,091
Terry G. Scariot...................... 1997 249,400 120,000 -- 16,203
President 1996 195,769 102,000 -- 28,829
1995 146,461 96,000 -- 24,373
John M. Kelly......................... 1997 249,400 120,000 -- 29,203
Executive Vice 1996 195,769 102,000 -- 33,039
President 1995 146,461 96,000 -- 27,000
Edward G. Patrick..................... 1997 74,822 17,500 4,000 8,111
Vice President of 1996 68,631 15,000 -- 5,697
Finance, Treasurer 1995 65,086 12,000 -- 1,277
Scott M. Nehm......................... 1997 74,822 17,500 4,000 10,766
Vice President 1996 71,383 15,000 -- 8,044
Controller 1995 67,987 12,000 -- 2,066
- ----------
<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 $650,000. 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 $292,000. 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 $292,000.
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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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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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 liable under the guarantees issued from
time to time with respect to Senior Indebtedness to the same extent as the Notes
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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.
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
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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
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
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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.
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,
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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 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
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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 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
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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 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
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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
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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
(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
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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 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
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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
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
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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 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
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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 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
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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
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
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Defeasance, the Company shall have delivered to the Trustee an opinion of
counsel in the United States reasonably acceptable to the Trustee confirming
that the Holders of the outstanding Notes will not recognize income, gain or
loss for federal income tax purposes as a result of such Covenant Defeasance and
will be subject to federal income tax on the same amounts, in the same manner
and at the same times as would have been the case if such Covenant Defeasance
had not occurred; (iv) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit (other than a Default or Event of Default
resulting from the borrowing of funds to be applied to such deposit) or insofar
as Events of Default from bankruptcy or insolvency events are concerned, at any
time in the period ending on the 91st day after the date of deposit; (v) such
Legal Defeasance or Covenant Defeasance will not result in a breach or violation
of, or constitute a default under any material agreement or instrument (other
than the Indenture) to which the Company, 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
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10 of the Indenture (which relate to subordination) will require the consent of
the Holders of at 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 settlement of transactions in such securities between Participants
through electronic book-entry changes in accounts of
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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.
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.
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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 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.
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"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 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%
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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 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
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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 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.
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"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 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.
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"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 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).
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"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 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;
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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 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
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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.
"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.
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"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) 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
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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 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 "Revolving Credit
Facility") in the principal amount of $75.0 million, a swing line facility (the
"Swing Line Facility") in the amount of $5 million and a 6-year acquisition
facility (the "Acquisition Facility") in the principal amount of $20 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 New Revolving
Credit Facility bear interest at a rate equal to LIBOR plus 225 basis points.
Amounts outstanding under the New Term Loan B and the Acquisition Facility bear
interest at a rate equal to LIBOR plus 262.5 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
Revolving Credit 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 Revolving Credit
Facility to a maximum of $15.0 million for a period of at least thirty (30) days
during each year.
Maturity
Loans made pursuant to the Revolving Credit Facility may be borrowed,
repaid and reborrowed from time to time until the sixth anniversary of the
Closing Date 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.
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.
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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 1.25:1 for
the measurement period ending in February 1998 to 1.30:1 for measurement periods
ending in or after May 2000, (ii) a minimum interest coverage ratio increasing
from 1.75:1 for the measurement period ending in February 1998 to 2.50:1 for
measurement periods ending in or after November 2000; and (iii) a maximum
leverage ratio decreasing from 6.25:1 for the measurement period ending in
February 1998 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 redeemed or purchased by Holdings or any subsidiary thereof (except
by conversion into or exchange for Junior
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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 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.
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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 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.
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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.
Voting Rights
The outstanding shares of Holdings Preferred Stock have no voting
rights except as required by law and as follows:
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(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.
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
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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 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.
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(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 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.
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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.
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
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(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;
(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,
112
<PAGE>
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.
113
<PAGE>
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 2, 1996 and March 1, 1997, and for each of the three years
in the period ended March 1, 1997 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 (excluding
Heathkit Division) as of December 31, 1996 and for the year then ended 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
<PAGE>
<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
DESA HOLDINGS CORPORATION
<S> <C>
Report of Ernst & Young LLP..................................................................................... F-2
Consolidated Balance Sheets as of March 2, 1996, March 1, 1997 and November 29, 1997
(Unaudited).................................................................................................. F-3
Consolidated Statements of Income for fiscal years ended February 25, 1995, March 2,
1996 and March 1, 1997 and the thirty-nine weeks ended November 30, 1996 and November
29, 1997 (Unaudited)......................................................................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for fiscal years ended
February 25, 1995, March 2, 1996 and March 1, 1997 and the thirty-nine weeks ended
November 29, 1997 (Unaudited) ...................................................................... F-5
Consolidated Statements of Cash Flows for fiscal years ended February 25, 1995,
March 2, 1996 and March 1, 1997 and the thirty-nine weeks ended November 30, 1996
and November 29, 1997 (Unaudited)............................................................................ F-6
Notes to Consolidated Financial Statements...................................................................... F-7
HEATH COMPANY (EXCLUDING HEATHKIT DIVISION) AND SUBSIDIARY (A WHOLLY-OWNED
SUBSIDIARY OF HEATH HOLDING CORP.)
Report of Deloitte and Touche LLP............................................................................... F-22
FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1996:
Balance Sheet................................................................................................. F-23
Statement of Operations....................................................................................... F-24
Statement of Shareholders' Equity............................................................................. F-25
Statement of Cash Flows....................................................................................... F-26
Notes to Financial Statements................................................................................. F-27
FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED OCTOBER 5, 1997:
Balance Sheet................................................................................................. F-32
Statement of Operations....................................................................................... F-33
Statement of Shareholders' Equity............................................................................. F-34
Statement of Cash Flows....................................................................................... F-35
Notes to Financial Statements................................................................................. F-36
</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 2, 1996 and March 1, 1997, and
the related consolidated statements of income, stockholders' equity (deficit)
and cash flows for each of the three years in the period ended March 1, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of DESA
Holdings Corporation at March 2, 1996 and March 1, 1997, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended March 1, 1997 in conformity with generally accepted accounting
principles.
As discussed in Note 3, the Company changed its method of determining
the cost of inventory in 1996.
Ernst & Young LLP
New York, New York
April 4, 1997
F-2
<PAGE>
<TABLE>
<CAPTION>
DESA HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPTS NUMBER OF SHARES)
MARCH 2, 1996 MARCH 1, 1997 NOVEMBER 29, 1997
----------------- ----------------- -----------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 145 $ 5,058 $ 201
Accounts receivable, net................................. 10,751 13,066 65,586
Inventories:
Raw materials......................................... 363 508 740
Work-in-process....................................... 4,519 4,386 7,831
Finished goods........................................ 10,054 10,853 18,562
---------- ---------- ----------
14,936 15,747 27,133
Deferred tax assets...................................... 1,621 1,206 1,177
Other current assets..................................... 218 555 1,154
---------- ---------- ----------
Total current assets....................................... 27,671 35,632 95,251
Property, plant and equipment:
Land..................................................... 390 390 390
Buildings and improvements............................... 4,297 4,297 4,297
Machinery and equipment.................................. 22,144 24,892 28,582
Furniture and fixtures................................... 655 640 640
---------- ---------- ----------
27,486 30,219 33,909
Less accumulated depreciation............................ 17,742 20,137 22,500
---------- ---------- ----------
9,744 10,082 11,409
Goodwill................................................... 41,947 40,829 39,999
Other assets............................................... 6,183 5,441 11,121
---------- ---------- ----------
Total assets............................................... $ 85,545 $ 91,984 $ 157,780
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable......................................... $ 10,890 $ 17,997 $ 25,114
Accrued liabilities...................................... 9,115 8,695 10,319
Income taxes payable..................................... 810 1,156 2,705
Current portion of long-term debt........................ 8,050 16,350 22,355
---------- ---------- ----------
Total current liabilities.................................. 28,865 44,198 60,493
Long-term debt............................................. 149,709 130,600 240,500
Deferred tax liabilities................................... 2,079 1,664 1,663
Other liabilities.......................................... 294 276 381
---------- ---------- ----------
Total liabilities.......................................... 180,947 176,738 303,037
Commitments
Series C redeemable preferred stock, $.01 par value;
authorized -- 2,000,000 shares; issued and outstanding
-- 17,600 shares at November 29, 1997 (liquidation
preference $17,617,000 at November 29, 1997) -- -- 14,598
Stockholders' equity (deficit):
Common stock, $.01 par value; authorized -- 30,000,000
shares at March 2, 1996 and March 1, 1997 and 50,000,000
shares at November 29, 1997; issued and outstanding --
23,363,876 shares at March 2, 1996, 23,573,876 issued March 1,
1997 and 12,606,163 shares at November 29, 1997....... 234 236 126
Nonvoting common stock, $.01 par value; authorized --
2,000,000 shares at March 2, 1996 and March 1, 1997 and
3,000,000 shares at November 29, 1997; issued and
outstanding -- 1,781,557 shares At March 2, 1996 and
March 1, 1997 and 90,604 shares at November 29, 1997.. 18 18 1
Capital in excess of par value........................... 26,514 26,722 79,786
Carryover predecessor basis adjustment................... (32,309) (32,309) (32,309)
Retained earnings (deficit).............................. (89,829) (79,113) (206,997)
Cumulative translation adjustment........................ (30) (308) (462)
---------- ---------- ----------
Total stockholders' equity (deficit)....................... (95,402) (84,754) (159,855)
---------- ---------- ----------
Total liabilities and stockholders' equity (deficit)....... $ 85,545 $ 91,984 $ 157,780
========== ========== ==========
</TABLE>
See accompanying notes.
F-3
<PAGE>
<TABLE>
<CAPTION>
DESA HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands)
Fiscal years ended Thirty-nine weeks ended
----------------------------------------- ---------------------------
February 25, March 2, March 1, November 30, November 29,
1995 1996 1997 1996 1997
------------ --------- -------- ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net sales..................................... $172,501 $186,324 $209,105 $173,587 $193,404
Operating costs and expenses:
Cost of sales............................... 107,484 116,217 130,890 108,587 123,243
Selling and administrative expenses......... 35,975 37,828 45,257 33,913 37,559
------ ------ ------ ------ ------
Operating profit.............................. 29,042 32,279 32,958 31,087 32,602
Interest expense............................ 5,777 7,073 14,509 11,105 11,321
------ ------ ------- ------- -------
Income before provision for income taxes...... 23,265 25,206 18,449 19,982 21,281
Provision for income taxes.................... 10,064 10,703 7,733 8,378 8,769
------ ------ ----- ----- -----
Income before extraordinary item.............. 13,201 14,503 10,716 11,604 12,512
Extraordinary items, net of income tax of $1,723
in 1996 and $1,495 in thirty-nine weeks
November 29, 1997.......................... -- 2,638 -- -- 2,308
-------- ----- -------- -------- -----
Net income.................................... 13,201 11,865 10,716 11,604 10,204
Less dividends on preferred stock............. 900 853 -- -- 17
-- -- -- -- --
Income available for common stockholders...... $ 12,301 $ 11,012 $ 10,716 $ 11,604 $ 10,187
======== ======== ======== ======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE>
<TABLE>
<CAPTION>
DESA HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FISCAL YEARS ENDED FEBRUARY 25, 1995, MARCH 2, 1996 AND MARCH 1, 1997
AND THE THIRTY-NINE WEEKS ENDED NOVEMBER 29, 1997 (UNAUDITED)
(IN THOUSANDS)
Carry-
Over
Pre- Total
Preferred Preferred Capital decessor Stock-
Stock Stock Nonvoting In Excess Basis Retained Cumulative holders'
Series Series Common Common Of Par Adjust- Earnings Translation Equity
A B Stock Stock Value ment (Deficit) Adjustment (Deficit)
---------- ------------ ---------- ----------- ---------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at February
26, 1994............... $ 5,150 $ 4,461 $ 225 $ -- $ 24,752 $(32,309) $ 12 $ (12) $ 2,279
Net income............... -- -- -- -- -- -- 13,201 -- 13,201
Dividends on
preferred stock........ 646 254 -- -- -- -- (900) -- --
Exercise of stock option.. -- -- 7 -- 689 -- -- -- 696
Translation adjustment.... -- -- -- -- -- -- 18 18
------- ----------- --------- --------- -------- -------- ---------- ---------- -----------
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......... 622 231 -- -- -- -- (853) -- --
Redemption of
preferred stock......... (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 adjustment.... -- -- -- -- -- -- -- (278) (278)
------- ----------- --------- --------- -------- -------- ---------- ---------- -----------
Balance at March 1, 1997.. -- -- 236 18 26,722 (32,309) (79,113) (308) (84,754)
Net income................ -- -- -- -- -- -- 10,204 -- 10,204
Repurchase of
common stock............ -- -- (1) -- (29) -- -- -- (30)
Exercise of stock options. -- -- -- -- 5 -- -- -- 5
Exercise of stock options
simultaneously with
recapitalization........ -- -- 2 -- 148 -- -- -- 150
Repurchase of common
stock related to
recapitalization........ -- -- (237) (18) (26,846) -- (138,071) -- (165,172)
Issuance of common
stock related to
recapitalization........ -- -- 126 1 82,273 -- -- -- 82,400
Expenses related to
recapitalization........ (5,489) (5,489)
Issuance of warrants...... -- -- -- -- 3,002 -- -- -- 3,002
Dividends on
preferred stock......... -- -- -- -- -- -- (17) -- (17)
Translation adjustment.... -- -- -- -- -- -- -- (154) (154)
------- ----------- --------- --------- -------- -------- ---------- ---------- -----------
Balance at November
29, 1997................ -- $ -- $ 126 1 $ 79,786 $(32,309) $ (206,997) $ (462) $ (159,855)
======= =========== ========= ========= ======== ======== ========== ========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE>
<TABLE>
<CAPTION>
DESA HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Fiscal years ended Thirty-nine weeks ended
----------------------------------------- ------------------------------
February 25, March 2, March 1, November 30, November 29,
1995 1996 1997 1996 1997
-------------- -------------- -------------- -------------- --------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities
Net income........................................... $13,201 $ 11,865 $10,716 $11,604 $10,204
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation....................................... 2,148 2,332 2,432 2,036 2,363
Amortization....................................... 1,966 1,963 2,104 1,568 1,570
Deferred income taxes.............................. (1,260) 964 -- -- 28
Equity in undistributed earnings of joint venture. (109) (119) (132) (87) (124)
Extraordinary item................................. -- 2,638 -- -- 2,308
(Increase) decrease in operating assets............
Accounts receivable, net......................... (2,656) 4,431 (2,315) (48,856) (52,520)
Inventories...................................... (6,474) (67) (811) (4,608) (11,386)
Other current assets............................. (43) (64) (337) 125 (599)
Increase (decrease) in operating liabilities:
Accounts payable................................. 6,867 (3,224) 7,107 15,836 7,117
Accrued liabilities.............................. 3,824 (2,516) (694) 4,213 1,607
Income taxes payable............................. 833 1,380 346 4,743 3,834
Other liabilities................................ 40 (208) (18) (13) 105
------- --------- ------- ------- -------
Net cash provided by (used in) operating activities.. 18,337 19,375 18,398 (13,439) (35,493)
------- --------- ------- ------- -------
Investing activities
Capital expenditures................................. (1,499) (2,122) (2,770) (1,570) (3,690)
Dividends received from joint venture................ 196 112 132 111 124
Purchase of Toro assets.............................. (873) -- -- -- --
Other................................................ -- (50) (244) (31) 270
------- --------- ------- ------- -------
Net cash used in investing activities................ (2,176) (2,060) (2,882) (1,490) (3,296)
------- --------- ------- ------- -------
Financing activities
Recapitalization Transaction:
Proceeds from new Term Loans....................... -- 155,000 -- -- 100,000
Proceeds from new revolver loan.................... -- 9,900 -- -- 35,500
Proceeds from the issuance of notes................ -- -- -- -- 130,000
Proceeds from exercise of BT Warrant............... -- 891 -- -- --
Redemption of Series A Preferred Stock............. -- (6,418) -- -- --
Redemption of Series B Preferred Stock............. -- (4,946) -- -- --
-- (50,950) -- -- (183,095)
Dividends paid on common stock and -- (113,154) -- -- --
nonvoting common stock...........................
Payment of expenses................................ -- (5,673) -- -- (16,772)
Proceeds from issuance of Series C -- -- -- -- 14,598
Redeemable Preferred Stock.......................
Proceeds from issuance of warrants................. -- -- -- -- 3,002
Exercise of stock options.......................... -- -- -- -- 150
Proceeds from issuance of common stock............. 82,400
Payments for repurchase of common stock............ -- -- -- -- (165,172)
Increase (decrease) in revolving loan................ -- (7,141) (2,759) 19,815 43,000
Principal payments of old Term Loans................. (2,250) (11,050) -- -- (6,855)
Principal payments of new Term Loans................. -- -- (8,050) (4,830) --
Decrease in promissory notes......................... (97) -- -- -- (2,645)
Exercise of stock options............................ 696 202 210 201 5
Repurchase of common stock........................... -- -- -- -- (30)
------- --------- ------- ------- -------
Net cash provided by (used in) financing activities.. (1,651) (17,989) (10,599) 15,186 34,086
------- --------- ------- ------- -------
Effect of exchange rates on cash..................... 63 (1) (4) (9) (154)
------- --------- ------- ------- -------
Increase (decrease) in cash and cash
equivalents for the period........................... 14,573 (16,025) 4,913 248 (4,857)
Cash and cash equivalents at beginning of period..... 1,597 16,170 145 145 5,058
------- --------- ------- ------- -------
Cash and cash equivalents at end of period........... $16,170 $ 145 $ 5,058 $ 393 $ 201
======= ========= ======= ======= =======
</TABLE>
See accompanying notes.
F-6
<PAGE>
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal years ended February 25, 1995, March 2, 1996 and March
1, 1997 and the thirty-nine weeks ended November 30,
1996 and November 29, 1997
(information for the thirty-nine weeks ended
November 30, 1996 and November 29, 1997 is unaudited)
1. Organization and Basis of Presentation
DESA Holdings Corporation ("Holdings") was formed in 1993 by (i) a
contribution of $13.5 million by a group of investors formed by Hicks, Muse,
Tate & Furst Incorporated ("Hicks Muse"), a privately held investment firm, for
13,500,000 shares of $.01 par value common stock which represents 60% of the
outstanding voting shares of Holdings, with the remaining 9,000,000 shares
acquired by the management shareholders of DESA Holding Corp. ("Old Holdings")
in exchange for 140,831 shares of Old Holdings, (ii) 200,000 shares of Series A
variable rate cumulative Preferred Stock issued to BT Investment Partners, Inc.
("Bankers Trust") and (iii) 176,000 shares of Series B variable rate cumulative
Preferred Stock issued to CIGNA Investments and Mutual Benefit Life Insurance
Company ("CIGNA/Mutual"). Bankers Trust also received a warrant to purchase
1,781,557 shares of common stock of Holdings (the "BT warrant") at a price of
$.50 per share and the management shareholders received options to purchase
695,876 shares of common stock of Holdings (see Note 7). The fair market values
assigned to these warrants and options were $1,781,557 and $695,876,
respectively. In December 1993, Holdings acquired all of the outstanding common
shares of DESA International, Inc. (the "Restructuring" transaction). This
Restructuring met the criteria under the Emerging Issues Task Force Issue No.
88-16, "Basis in Leveraged Buyout Transactions". 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 on the consolidated balance sheet whereas Hicks Muse's
residual interest was valued at fair value.
Holdings was refinanced on January 12, 1996 through new borrowings ("new
Term Loans") via 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, redeemed all outstanding shares of
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, as part of the refinancing in January 1996, Holdings issued
1,781,557 shares of nonvoting common stock in conjunction with the exercise of
the BT warrant. Each share of nonvoting common stock, at the option of the
holder, is convertible into one share of common stock, subject to certain
restrictions.
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. Therefore, the above described
transactions (the "1996 Recapitalization") have been accounted for as a
recapitalization with all amounts paid to the management shareholders, Bankers
Trust, Hicks Muse and CIGNA/Mutual being recorded as reductions in stockholders'
equity.
2. Company Operations
Holdings is engaged, through its wholly-owned subsidiary, DESA
International, Inc. ("DESA"), in the manufacturing and marketing of various
consumer product lines, including zone heating products and specialty products.
No single customer accounted for more than 10% of net sales in fiscal year 1995.
Two customers, which operate in the hardware homecenter industry, accounted for
10% and 11% of net sales, respectively, in fiscal year 1996 and 13% and 11% of
net sales, respectively, in fiscal year 1997. Other than a small amount of
goodwill, Holdings has no material 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.
F-7
<PAGE>
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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 1, 1997
(52 weeks), March 2, 1996 (53 weeks), and February 25, 1995 (52 weeks).
Consolidation
The accompanying consolidated financial statements include the accounts of
DESA Holdings Corporation and its wholly-owned subsidiary, DESA International,
Inc., and its wholly-owned subsidiaries, DESA Industries of Canada, Inc. and
DESA Europe B.V. All significant intercompany accounts and transactions have
been eliminated. Holdings' 50% interest in a joint venture is accounted for
using the equity method.
Interim Financial Information
The interim consolidated financial statements as of November 29, 1997 and
for the thirty-nine weeks ended November 30, 1996 and November 29, 1997 and
related disclosures in these notes are unaudited. The interim financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and notes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments, consisting of normal recurring
accruals, considered necessary for a fair presentation have been included.
Operating results for the thirty-nine weeks ended November 29, 1997 are not
necessarily indicative of the results that may be expected for the fiscal year
ending February 28, 1998.
Derivative Financial Instruments
Holdings utilizes an interest rate protection agreement to reduce interest
rate risk to effectively convert floating rate debt to a fixed rate basis, thus
reducing the impact of interest rate changes on future income. Gains and losses
pertaining to such agreement are recorded over the lives of the debt agreements
as an adjustment to interest expense.
Holdings utilizes forward exchange foreign currency contracts to reduce
foreign exchange risks that arise from foreign exchange rate movements between
the dates that foreign currency transactions are recorded and the date they are
consummated. Gains and losses related to qualifying hedges of currency risk
exposure are deferred as adjustments to carrying amounts of the related assets
when the hedged transactions occur.
Cash Equivalents
Holdings considers all highly liquid investments purchased 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. Effective February
26, 1995, Holdings changed its method of determining the cost of all its United
States' inventories from the first-in, first-out (FIFO) method to the last-in,
first-out (LIFO) method. Holdings believes the LIFO method results in a better
matching of current costs with current revenues.
F-8
<PAGE>
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
3. Summary of Significant Accounting Policies (continued)
At March 2, 1996 and March 1, 1997, approximately 95% and 88%,
respectively, of the total inventory balance is priced at LIFO. The effect of
the change in fiscal year 1996 and 1997 was to increase pre-tax income by
$95,000 and $278,000, respectively. The cumulative effect of this accounting
change and the pro forma effects on prior years' earnings have not been included
because such effects are not reasonably determinable.
If the LIFO method of valuing inventories was not used, total inventories
would have been $95,000 and $373,000 lower than reported at March 2, 1996 and
March 1, 1997, respectively.
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................................................. 3 years
Income Taxes
Holdings accounts for income taxes using the liability method as required by
Financial Accounting Standard No. 109, "Accounting for Income Taxes" ("FAS
109"). Under the provisions of FAS 109, deferred tax assets and liabilities are
determined based on tax rates expected to be in effect when the taxes will
actually be 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 selling and administrative 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 systematically 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 2,
1996 and March 1, 1997 was $2,542,000 and $3,660,000, respectively.
F-9
<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 6 months to 2 years depending upon 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 Holdings' Canadian
subsidiary and the Netherlands Guilder as the functional currency for the
European subsidiary.
Impact of Recently Issued Accounting Pronouncements
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," was issued in June 1997. Holdings will be required to
adopt the new standard for the fiscal year ending February 27, 1999, although
early adoption is permitted. The primary objective of this statement is to
report and disclose a measure ("Comprehensive Income") of all changes in equity
of a company that result from transactions and other economic events of the
period other than transactions with owners. Holdings will adopt this statement
in fiscal year 1999 and does not anticipate that the statement will have a
significant impact on its financial statements.
Statement of Financial Accounting Standards No. 131, "Disclosure about
Segments of an Enterprise and Related Information," was issued in June 1997.
Holdings will be required to adopt the new standard for the 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.
Holdings will adopt this statement in fiscal year 1999 and does not anticipate
that the adoption of the statement will have a significant impact on its
financial statements.
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. Accounts Receivable
Accounts receivable are net of an allowance for doubtful accounts of
$1,108,000, $936,000 and $962,000 at March 2, 1996, March 1, 1997 and November
29, 1997, respectively.
F-10
<PAGE>
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
5. Financing Arrangements
Outstanding borrowings consist of the following (in thousands):
<TABLE>
<CAPTION>
March March November
2, 1, 29,
1996 1997 1997
-------- --------- ----------
(Unaudited)
<S> <C> <C> <C>
Senior Subordinated Notes 97/8%......................................... $ -- $ -- $130,000
Bankers Trust Co. and Various Banks Tranche A Term
Loan (weighted average interest rate of 7.72% in
1996, 8.04% in 1997, and 8.24% for the
thirty-nine weeks ended November 29, 1997)............................ 100,000 92,500 $ --
Bankers Trust Co. and Various Banks Tranche B Term
Loan (weighted average interest rate of 9.22% in
1996, 8.54% in 1997, and 8.73% for the
thirty-nine weeks ended November 29, 1997)............................ 55,000 54,450 --
Bankers Trust Co. and Various Banks Revolving Loan
Commitment (weighted average interest rate of
7.40% in 1996 and 8.24% in 1997 and 8.32% for
the thirty-nine weeks ended November 29, 1997)........................ 2,759 -- --
NationsBank and Various Banks Tranche A Term
Loan (interest rate of 8.16% at November 29, 1997).................... -- -- 50,000
NationsBank and Various Banks Tranche B Term
Loan (interest rate of 8.53% at November 29, 1997).................... -- -- 50,000
NationsBank and Various Banks Working Capital Loan
Commitment (interest rate of 7.94% at November 29, 1997).............. -- -- 32,855
--------- --------- --------
Total outstanding borrowings............................................ 157,759 146,950 262,855
Less current portion:
Working Capital Loan Commitment......................................... -- -- 17,855
Tranche A Term Loan................................................... 7,500 13,700 3,500
Tranche B Term Loan................................................... 550 2,650 1,000
--------- --------- --------
$ 149,709 $ 130,600 $240,500
========= ========= ========
</TABLE>
As part of the 1996 Recapitalization discussed in Note 1, Holdings entered
into a new credit agreement on January 12, 1996 with Bankers Trust Co. and
various banks that consists of a Revolving Loan Commitment of up to $65,000,000,
a Tranche A Term Loan Commitment of $100,000,000 and a Tranche B Term Loan
Commitment of $55,000,000.
F-11
<PAGE>
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
5. Financing Arrangements (continued)
The Revolving Loan Commitment period extends to August 31, 2001.
Holdings can utilize up to $10,000,000 in letters of credit under this
commitment. As of March 2, 1996 and March 1, 1997, Holdings has approximately
$1,531,000 and $1,131,000, respectively, in standby letters of credit
outstanding. Currently, interest is payable at the prime rate plus 1.25% or
LIBOR plus 2.5% at Holdings' option.
Borrowings are generally limited to specific percentages of eligible trade
receivables and inventory. Holdings pays commitment fees of 1/2 of 1% per annum
on the daily unutilized Revolving Loan Commitment.
The Tranche A Term Loan Commitment period extends to August 31, 2001 with
current interest payable at the prime rate plus 1.25% or LIBOR plus 2.5% at
Holdings' option. Once repaid, Tranche A Term Loans may not be reborrowed.
The Tranche B Term Loan Commitment period extends to February 28, 2003 with
current interest payable at the prime rate plus 1.75% or LIBOR plus 3.0% at
Holdings' option. Once repaid, Tranche B Term Loans may not be reborrowed.
Commencing in fiscal 1997, the required annual repayments under the Tranche
A and Tranche B Term Loans are increased by 75% (50% if certain leverage ratios
are met) of any excess cash flows at the end of the fiscal year, as defined.
Under the terms of this provision, Holdings is obligated to make additional
payments in fiscal 1998 of $5,800,000 (Tranche A -- $3,700,000 and Tranche B --
$2,100,000).
Holdings' management believes the book values of its term loans approximate
market value. Market value is determined based on the effective interest rate at
which Holdings could borrow funds with similar remaining maturities.
Holdings purchased an interest rate protection agreement in June 1996 which
limits the maximum interest rate payable on the Term Loans to 8%. Holdings is
required to purchase an interest rate protection agreement on an annual basis
for 50% of the aggregate outstanding principal amount of its Term Loans until
the aggregate outstanding principal amount is less than $75,000,000. The New
Credit Facility discussed in Note 15, does not contain an interest rate
protection agreement requirement.
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 and leverage ratios.
Substantially all of Holdings' assets are pledged under these loan agreements.
Cash payments for interest for the years ended February 25, 1995, March 2,
1996, and March 1, 1997, were $5,425,000, $8,186,000, and $13,656,000,
respectively.
As part of the 1998 Recapitalization discussed in Note 15, Holdings entered
into a new credit agreement on November 26, 1997 with NationsBank, N.A., UBS
Securities LLC and Nationsbanc Montgomery Securities, Inc. that consists of a
Working Capital Loan Commitment of up to $75,000,000, a Tranch A Term Loan
Commitment ("New Tranche A Term Loan") of $50,000,000, a Tranche B Term Loan
Commitment ("New Tranche B Term Loan") of $50,000,000, an Acquisition Loan
Commitment of $20,000,000 and a Swing Line Commitment of up to $5,000,000. In
addition, DESA issued $130,000,000 aggregate principal amount of Senior Su
bordinated Notes ("Senior Notes").
F-12
<PAGE>
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
5. Financing Arrangements (continued)
The Working Capital Loan Commitment period extends to November 26,
2003. Holdings can utilize up to $10,000,000 in letters of credit under this
commitment. As of November 29, 1997, Holdings has approximately $900,000 in
standby letters of credit outstanding. Currently, interest is payable at the
prime rate plus 1.25% or LIBOR plus 2.25% at Holdings' option.
Borrowings are generally limited to specific percentages of eligible trade
receivables and inventory. Holdings pays commitment fees of 1/2 of 1% per annum
on the daily unutilized Working Capital Loan Commitment.
The new credit agreement requires a Clean-Up Period, as defined, under the
Working Capital Loan Commitment, for a period of thirty 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 the Working Capital advances,
Letter of Credit advances and Swing Line Advances outstanding shall not exceed
$15,000,000.
The New Tranche A Term Loan commitment period extends to November 26, 2003
with current interest payable at the prime rate plus 1.25% or LIBOR plus 2.25%
at Holdings' option. Once repaid, New Tranche A Term Loan may not be reborrowed.
The New Tranche B Term Loan commitment period extends to November 26, 2003
with current interest payable at the prime rate plus 1.625% or LIBOR plus 2.625%
at Holdings' option. Once repaid, New Tranche B Term Loan may not be reborrowed.
The Acquisition Loan commitment period extends to November 26, 2003 with
current interest payable at the prime rate plus 1.625% or LIBOR plus 2.625% at
Holdings' option. Once repaid, Acquisition Loans may not be reborrowed.
The Swing Line loan commitment period extends to November 26, 2003 with
current interest payable at the prime rate plus 1.25%.
The Senior Notes are due on December 15, 2007 with current interest payable
at 97/8% per annum. The Senior Notes can be redeemed earlier upon the occurrence
of certain events, as defined.
The following table shows the required future repayments under the
financing arrangements as of November 29, 1997 (in thousands):
<TABLE>
<CAPTION>
New New Senior Working
Tranche A Tranche B Subordinated Capital Loan
Term Loan Term Loan Notes Commitment Total
--------- --------- ------------ ------------ -------
<S> <C> <C> <C> <C> <C>
For the year ending November 30, 1998...... $ 3,500 $ 1,000 -- 17,855 $22,335
For the year ending November 30, 1999...... 6,500 1,000 -- -- 7,500
For the year ending November 30, 2000...... 10,000 1,000 -- -- 11,000
For the year ending November 30, 2001...... 10,000 1,000 -- -- 11,000
For the year ending November 30, 2002...... 10,000 1,000 -- -- 11,000
Thereafter................................. 10,000 45,000 130,000 15,000 200,000
------- -------- -------- ------- --------
$50,000 $ 50,000 $130,000 $32,855 $262,855
======= ======== ======== ======= ========
</TABLE>
F-13
<PAGE>
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
5. Financing Arrangements (continued)
Commencing in fiscal 1999, the required annual repayments under the New
Tranch A and Tranche B Term Loans are increased by 50% of any excess cash flows
at the end of the fiscal year, as defined.
Holdings' management believes the book values of its term loans approximate
market value. Market value is determined based on the effective interest rate at
which Holdings could borrow funds with similar remaining maturities.
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, and set
consolidated interest coverage, fixed charge coverage and leverage ratios.
Substantially all of Holdings' assets are pledged under these loan agreements.
6. Income Taxes
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.
Significant components of Holdings' deferred tax liabilities and assets are
as follows (in thousands):
<TABLE>
<CAPTION>
February 25, March 2, March 1,
1995 1996 1997
------------ ---------- ---------
<S> <C> <C> <C>
Deferred tax liabilities:
Depreciation and amortization.................... $ 1,861 $2,079 $1,792
Inventory reserves, including LIFO............... -- -- 146
Other-- net...................................... -- -- 35
------------- ----------- -----------
Total gross deferred tax liabilities............... 1,861 2,079 1,973
============= =========== ===========
Deferred tax assets:
Allowance for doubtful accounts.................. 390 402 324
Inventory reserves, including LIFO............... 421 72 --
Accrued expenses................................. 1,556 1,147 1,028
Other-- net...................................... -- -- 163
------------- ----------- -----------
Total gross deferred tax assets.................... 2,367 1,621 1,515
------------- ----------- -----------
Net deferred tax liabilities....................... $ (506) $ 458 $ 458
============= =========== ===========
</TABLE>
No valuation allowance is necessary as management believes that all
deductible temporary differences will be utilized as charges against reversals
of future taxable temporary differences and future taxable income.
F-14
<PAGE>
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
6. Income Taxes (continued)
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
Thirty-nine weeks ended
Fiscal Year ------------------------
----------- November 30, November 29,
1995 1996 1997 1996 1997
---------- ----------- --------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Current:
Federal................................ $ 9,356 $ 6,191 $ 5,821 $ 6,444 $ 4,207
State and local........................ 1,758 1,389 1,110 832 1,003
Foreign................................ 210 436 802 1,102 1,352
---------- ----------- --------- ----------- -----------
11,324 8,016 7,733 8,378 6,562
Deferred:
Federal................................ (1,066) 855 -- -- (65)
State and local........................ (194) 109 -- -- (13)
---------- ----------- --------- ----------- -----------
(1,260) 964 -- -- (78)
---------- ----------- --------- ----------- -----------
Total.................................... $ 10,064 $ 8,980 $ 7,733 $ 8,378 $ 6,484
========== =========== ========= =========== ===========
</TABLE>
The income statement classification of the provision for income taxes is as
follows (in thousands):
<TABLE>
<CAPTION>
Thirty-nine weeks ended
----------------------------
Fiscal year November 30, November 29,
1995 1996 1997 1996 1997
--------- ---------- ---------- -------------- ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Income tax expense attributable $10,064 $10,703 $7,733 $8,378 $8,769
to continuing operations............
Extraordinary item.................... -- (1,723) -- -- (2,285)
--------- ---------- ---------- -------------- ------------
Total................................. $10,064 $8,980 $7,733 $8,378 $6,484
========= ========== ========== ============== ============
</TABLE>
Included in earnings before income tax expense and extraordinary item for
the years ended February 25, 1995, March 2, 1996, and March 1, 1997 are foreign
earnings of $323,000, $747,000, and $1,688,000, respectively.
F-15
<PAGE>
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
6. Income Taxes (continued)
Undistributed earnings of Holdings' foreign subsidiaries amounted to
approximately $1,830,000 at March 1, 1997. Approximately $1,438,000 of those
earnings are considered to be indefinitely 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 indefinitely reinvested earnings were distributed, it is estimated
that U.S. federal and state income taxes, net of foreign tax credits of
approximately $564,000, would be due.
The effective income tax rate differs from the statutory rate as follows (in
thousands):
<TABLE>
<CAPTION>
Thirty-nine weeks ended
----------------------------
Fiscal year November 30, November 29,
1995 1996 1997 1996 1997
--------- --------- --------- -------------- ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Federal income tax at statutory
rate...................................... $ 8,143 $ 8,822 $6,457 $6,996 $6,653
State income tax, net of Federal
benefit................................... 1,017 974 722 541 645
Foreign income taxes........................ 97 436 212 446 784
Other-- net................................. 807 471 342 395 687
--- --- --- --- ---
Provision for income taxes.................. $10,064 $10,703 $7,733 $8,378 $8,769
======= ======= ====== ====== ======
</TABLE>
Cash payments for income taxes for the years ended February 25, 1995, March
2, 1996, and March 1, 1997 were $10,344,000, $8,174,000, and $7,387,000,
respectively.
7. Stockholders' Equity
Preferred Stock
Prior to the 1996 Recapitalization (see 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.
Series A and B Preferred Stock
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 1995 and 1996 were $899,925 and
$853,100 which were paid in 25,833 and 24,888 shares of Series A and 10,164 and
9,236 shares of Series B, respectively.
F-16
<PAGE>
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
7. Stockholders' Equity (continued)
Series A and B Preferred Stock (continued)
As part of the 1996 Recapitalization transactions discussed in Note 1,
Holdings redeemed 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.
Stock Option Plan
In March 1994, Holdings established the 1994 Stock Option Plan which
terminates in ten years and provides for the issuance of incentive stock options
or nonqualified stock options for 1,169,261 shares of common stock. The stock
options may be 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 cannot exceed ten years from the grant date. 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, and the exercise price of the
nonqualified options is determined by the Option Committee.
Holdings adopted Statement of Financial Accounting Standards No. 123 ("SFAS
123"), "Accounting for Stock Based Compensation," during fiscal 1997. SFAS 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 SFAS 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 with
a risk free interest rate ranging from 5.47% to 6.42%, a 0% dividend yield and
an average life of one to three years. The effect of applying the SFAS 123 fair
value method to Holdings' stock based awards results in net income that is not
materially different from the amount reported.
In fiscal 1995, 1996 and 1997, Holdings issued options to purchase 871,876
shares, 75,000 shares, and 215,000 shares, respectively, of common stock, of
which 176,000 incentive options, 51,000 incentive options, and 15,000 incentive
options, respectively, vest in three equal annual installments commencing on the
first anniversary date. The remaining 200,000 incentive options issued in fiscal
1997, 24,000 incentive options issued in fiscal 1996, and 695,876 nonqualified
options issued in fiscal 1995 vest immediately upon grant. The weighted average
fair value of an option granted during the year was $0.12 and $0.06 for the
years ended March 2, 1996 and March 1, 1997, respectively.
F-17
<PAGE>
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
7. Stockholders' Equity (continued)
Stock Option Plan (continued)
The following is a summary of transactions:
Number
of Shares
------------
Non qualified options:
Outstanding at February 26, 1994.............................. --
Granted in 1995 at $1.00 per share............................ 695,876
Exercised in 1995 at $1.00 per share.......................... (695,876)
------------
Outstanding at February 25, 1995.............................. --
============
Incentive options:
Outstanding at February 26, 1994.............................. --
Granted on April 1, 1994 at $1.00 per share................... 176,000
Forfeited in 1995 at $1.00 per share.......................... (12,000)
------------
Outstanding at February 25, 1995 at $1.00 per share........... 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 at $1.00 per share.......................... (20,000)
Granted on February 22, 1996 at $1.00 per share............... 51,000
------------
Outstanding at March 2, 1996 at $1.00 per share............... 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 at $1.00 per share............... 56,000
Granted on April 1, 1997 at $2.00 per share (Unaudited)....... 21,000
Granted on August 25, 1997 at $2.00 per share (Unaudited)..... 28,385
Exercised in 1998 at $1.00 per share (Unaudited).............. (56,000)
Exercised in 1998 at $2.00 per share (Unaudited).............. (49,385)
------------
Outstanding at November 29, 1997.............................. --
============
Shares Reserved for Issuance
At February 25, 1995, March 2, 1996, and March 1, 1997, 473,385 shares,
305,385 shares and 95,385 shares, respectively, of common stock were reserved
for the exercise and future grants of stock options. At February 25, 1995, March
2, 1996, and March 1, 1997, 1,781,557 shares of common stock were reserved for
issuance upon conversion of the nonvoting common stock.
F-18
<PAGE>
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
8. 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 $213,000, $260,000, and $299,000 for the fiscal years ended February
25, 1995, March 2, 1996, and March 1, 1997, 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.
A summary of Holdings' net periodic pension cost related to the defined
benefit plan for fiscal years 1995, 1996, and 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal Year
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Service cost -- benefits earned during the
period.................................... $ 54 $ 92 $ 85
Interest cost on projected benefit
obligation................................ 90 110 136
Actual gain on plan assets..................... 22 (251) (257)
Net amortization............................... (105) 168 141
Net pension cost............................... $ 61 $ 119 $ 105
======== ========= =========
</TABLE>
F-19
<PAGE>
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
8. Pension Plans (continued)
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 2, 1996 and March 1, 1997 (in thousands):
1996 1997
---- ----
Actuarial present value of accumulated benefit
obligation:
Vested obligation.............................. $1,523 $1,764
Unvested obligation............................ 42 60
---------- ----------
Accumulated benefit obligation...................... 1,565 $1,824
Future benefit increases............................ 94 54
---------- ----------
Projected benefit obligation........................ $1,659 $1,878
========== ==========
Plan assets at fair market value.................... $1,573 $2,081
Projected benefit obligation........................ 1,659 1,878
---------- ----------
Excess (deficiency) of plan assets over projected (86) 203
benefit obligation.............................
Unrecognized net loss............................... 209 122
Unrecognized net obligation......................... 214 188
---------- ----------
Prepaid asset....................................... $337 $513
========== ==========
The weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation was 8.25% and 8.00%,
respectively, for fiscal years 1996 and 1997. The expected long-term rate of
return on plan assets for fiscal years 1996 and 1997 was 9%. The impact in
fiscal year 1997 of the change in the weighted average discount rate used was to
increase the projected benefit obligation by approximately $28,000. Such change
in the weighted average discount rate used will impact the determination of the
net periodic pension cost in fiscal 1998.
9. Foreign Exchange Contracts
At March 1, 1997, Holdings had forward exchange foreign currency contracts,
with maturities ranging from April 1997 to December 1997, to purchase
approximately $6.8 million in foreign currencies to cover future payments to
component suppliers. The carrying values of forward exchange foreign currency
contracts approximate their estimated fair values.
F-20
<PAGE>
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
10. 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 1995, and 1996 and 1997 was approximately $665,000, $1,336,000, and
$1,624,000, respectively. Future minimum lease payments under all noncancellable
operating leases at March 1, 1997 are as follows (in thousands):
Fiscal years ending:
1998........................................................ $ 1,316
1999........................................................ 1,195
2000........................................................ 701
2001........................................................ 298
2002........................................................ 231
Thereafter.................................................. 430
---------
Total minimum lease payments.................................. $ 4,171
=========
11. Other Assets
Other assets consist of the following (in thousands):
March 2, March 1,
1996 1997
------------ ------------
Investment in joint venture...................... $ 550 $ 550
Deferred financing costs......................... 5,511 4,535
Other............................................ 122 356
------------ ------------
$6,183 $5,441
============ ============
In connection with the 1996 Recapitalization (see Note 1), Holdings charged
to income the unamortized balance of deferred financing costs of the Old Term
Loans and other related expenditures of $4,361,000 and recorded a tax benefit of
$1,723,000 (net amount of $2,638,000 is reflected as an extraordinary item). The
financing costs incurred in connection with the 1996 Recapitalization, which are
shown above net of amortization, have been capitalized and are being amortized
over the term of the new debt.
12. Foreign Operations
The accompanying consolidated financial statements include the following
amounts related to Holdings' foreign operations in Canada and Europe (in
thousands):
Fiscal Year
----------------------------
1995 1996 1997
---- ---- ----
Total assets.................................. $3,484 $ 3,211 $ 4,121
Total liabilities............................. 1,885 1,202 1,228
Net sales..................................... 8,601 11,160 17,188
Operating profit.............................. 435 953 1,695
F-21
<PAGE>
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
13. Segment Information
Operational results and other financial data presented for the principal
business segments of Holdings for the years ended February 25, 1995, March 2,
1996, and March 1, 1997 consist of the following:
<TABLE>
<CAPTION>
Zone Heating Specialty General
Products Products Corporate Total
------------ --------- --------- -----
(In thousands)
<S> <C> <C> <C> <C>
Year ended February 25, 1995
Net Sales.................................... $136,070 $36,431 -- $172,501
Operating income............................. 34,855 5,311 (11,124) 29,042
Depreciation and amortization................ 2,122 26 1,966 4,114
Total assets................................. 30,286 9,719 67,254 107,259
Capital expenditures......................... 1,395 20 84 1,499
Year ended March 2, 1996
Net Sales.................................... $147,821 $38,503 -- $186,324
Operating income............................. 39,350 5,072 (12,143) 32,279
Depreciation and amortization................ 2,296 36 1,963 4,295
Total assets................................. 25,390 10,041 50,114 85,545
Capital expenditures......................... 2,049 63 10 2,122
Year ended March 1,1997
Net sales.................................... $167,625 $41,480 -- $209,105
Operating income............................. 41,521 5,342 (13,905) 32,958
Depreciation and amortization................ 2,365 67 2,104 4,536
Total assets................................. 28,510 10,385 53,089 91,984
Capital expenditures......................... 2,432 332 6 2,770
</TABLE>
For the years end February 25, 1995, March 2, 1996 and March 1, 1997,
Holdings net export sales were $7,567,000, $5,329,000 and $2,343,000,
respectively.
14. Related Party Transactions
Holdings entered into a monitoring and oversight agreement dated as of
December 1, 1993 pursuant to which Hicks Muse has provided financial advisory
services to Holdings in connection with the negotiation and financing of the
Restructuring and will continue to provide financial advisory services to
Holdings in the future. The term of this agreement is for three years and will
continue from year to year thereafter unless terminated by either party. As
compensation for such services, Holdings will pay Hicks Muse a fee of $25,000
per quarter together with all reasonable expenses incurred in connection
therewith. This fee will be increased or decreased each fiscal year based on a
specified percentage of sales, as defined, but not less than $100,000 per annum.
Under this agreement, Hicks Muse was paid $114,000, $189,000 and $211,000 in
fiscal years 1995, 1996, and 1997, respectively.
15. Subsequent Events (Unaudited)
J.W. Childs Equity Partners, L.P. ("Childs") entered into a Stock Purchase
Agreement dated as of October 8, 1997 with Holdings and its stockholders (the
"Recapitalization Agreement"). Pursuant to the Recapitalization Agreement,
F-22
<PAGE>
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
15. Subsequent Events (Unaudited) (continued)
Childs and certain other investors and certain of Holdings' existing
stockholders acquired 100% of the equity interests in Holdings. Holdings issued
new Common Stock, Series C Redeemable Preferred Stock (the "Preferred Stock")
and Warrants to purchase 463,232 shares of Holdings nonvoting common stock (the
"Warrants") to Childs and certain other investors and certain of Holdings'
existing stockholders in exchange for aggregate consideration of $100.0 million.
Holdings used such proceeds together with a portion of the proceeds borrowed
under a new term loan, acquisition, and revolving credit facility (the "New
Credit Facility") with NationsBank, N.A. ("NationsBank"), as administrative
agent, to purchase all of its outstanding common stock in a transaction intended
to be accounted for as a recapitalization (the "1998 Recapitalization"). In
connection with the 1998 Recapitalization, Holdings entered into certain
financing transactions. Additional borrowings under the New Credit Facility,
together with the proceeds from the offering and issuance by Holdings'
subsidiary, DESA, of $130,000,000 aggregate principal amount of Senior Notes
(the "Refinancing"), were used by International to refinance its existing
indebtedness. The Senior Notes are fully and unconditionally guaranteed by
Holdings. The aforementioned 1998 Recapitalization and Refinancing transactions
are reflected in the interim financial statements for the thirty-nine weeks
ended November 29, 1997.
In connection with the aforementioned Recapitalization, Holdings charged to
expense the unamortized balance of deferred financing costs related to the 1996
Recapitalization and charged certain expenses associated with the 1998
Recapitalization against capital in excess of par value. Holdings recorded an
extraordinary item of approximately $2,308,000 net of a related income tax
benefit of approximately $1,495,000 in connection with such 1998
Recapitalization for the thirty-nine weeks ended November 29, 1997.
The holders of the 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. The Preferred Stock provides for mandatory redemption on November
30, 2009 at its liquidation value of $1,000 per share plus accrued dividends.
The liquidation value is adjustable based upon the occurrence of certain future
events, as defined.
The Warrants 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.
On January 12, 1998, Holdings entered into an agreement to purchase all of
the issued and outstanding stock of Heath Company, which was consummated on
February 4, 1998, for an aggregate purchase price of $42,365,000. Such purchase
price comprised of $40,365,000 in cash and a $2,000,000 junior subordinated note
payable. Heath Company had sales of approximately $58,000,000 and operating
profit of approximately $4,600,000 for its fiscal year ended December 31, 1997.
F-23
<PAGE>
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
15. Subsequent Events (Unaudited) (continued)
Such note payable matures on December 31, 2008 and accrues interest at a
rate of 7.5% per annum. Holdings intends to account for such acquisition using
the purchase method. The preliminary fair value of the assets acquired and
liabilities assumed at February 4, 1998 is summarized below in thousands. This
allocation is preliminary and will be adjusted as necessary based upon our
further analysis of the Heath Company acquisition over the next 12 months.
Current assets $25,757
Property, plant and equipment 458
Other 2,370
Goodwill 23,769
Current liabilities (9,989)
-------
42,365
=======
In March 1998, the Company entered into a letter of intent to acquire all
of the outstanding stock of Fireplace Manufacturers, Inc. ("FMI") for a total
purchase price of approximately $27 million. 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. Universal, 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.
F-24
<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, 1996, and the related statement of operations, shareholders'
equity, and cash flows for the year 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 (a wholly-owned subsidiary of
Heath Holding Corp.) (excluding Heathkit Division) and subsidiary as of December
31, 1996, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
April 24, 1997 (December 12, 1997 as to Note 10)
F-25
<PAGE>
HEATH COMPANY (EXCLUDING HEATHKIT DIVISION) AND SUBSIDIARY (A WHOLLY-OWNED
SUBSIDIARY OF HEATH HOLDING CORP.)
<TABLE>
<CAPTION>
BALANCE SHEET
DECEMBER 31, 1996
(IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------------------
ASSETS LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT ASSETS: CURRENT LIABILITIES:
<S> <C> <S> <C>
Cash $ 129 Note payable $ 7,130
Accounts receivable: Trade accounts payable 4,716
Trade (net of allowances for doubtful
accounts and customer returns of $399) 6,105 Payable to affiliate 1,426
Other 69 Accrued expenses:
Inventories 12,197 Warranty 1,292
Prepaid expenses 273 Compensation and benefits 394
Deferred income taxes benefit 1,937 Merchandising programs 1,261
----------
Total current assets 20,710 Settlements and other 2,370
-------
Total accrued expenses 5,317
PROPERTY, PLANT AND EQUIPMENT - NET 1,006 Current maturities of long-term debt 221
-------
Total current liabilities 18,810
DEFERRED INCOME TAXES BENEFIT 1,904 LONG-TERM DEBT, less current maturities 498
NEGATIVE GOODWILL, net of amortization of $286 1,755
MINORITY INTEREST IN NET ASSETS OF SUBSIDIARY 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
Additional paid-in capital 1,485
Retained earnings 1,071
Foreign currency translation adjustment (17)
---------
Total shareholders' equity 2,554
---------- ---------
TOTAL ASSETS $23,620 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $23,620
========== =========
</TABLE>
See notes to financial statements.
F-26
<PAGE>
HEATH COMPANY (EXCLUDING HEATHKIT DIVISION) AND SUBSIDIARY (A WHOLLY-OWNED
SUBSIDIARY OF HEATH HOLDING CORP.)
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
- ----------------------------------------------------------------------------
NET SALES $44,415
COST OF GOODS SOLD 34,758
-------------
GROSS PROFIT 9,657
OPERATING EXPENSES 7,837
-------------
INCOME FROM OPERATIONS 1,820
OTHER EXPENSE - SETTLEMENTS AND OTHER - NET 2,696
-------------
LOSS BEFORE PROVISION FOR INCOME TAXES AND
MINORITY INTEREST IN NET INCOME
OF SUBSIDIARY (876)
MINORITY INTEREST IN NET INCOME OF SUBSIDIARY 6
-------------
LOSS BEFORE PROVISION FOR INCOME TAXES (882)
PROVISION FOR INCOME TAXES (312)
-------------
NET LOSS $ (570)
=============
See notes to financial statements.
F-27
<PAGE>
HEATH COMPANY (EXCLUDING HEATHKIT DIVISION) AND SUBSIDIARY (A WHOLLY-OWNED
SUBSIDIARY OF HEATH HOLDING CORP.)
<TABLE>
<CAPTION>
STATEMENT OF SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 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
==== ====== ====== ====== ======
</TABLE>
See notes to financial statements.
F-28
<PAGE>
HEATH COMPANY (EXCLUDING HEATHKIT DIVISION) AND SUBSIDIARY (A WHOLLY-OWNED
SUBSIDIARY OF HEATH HOLDING CORP.)
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
- ------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (570)
Adjustments to reconcile net loss to net cash used in operating
activities:
Allocation of Corporate income/expense - net (879)
Amortization of negative goodwill (149)
Depreciation 295
Gain on sale of equipment (1)
Deferred income taxes (312)
Minority interest in net income of subsidiary 6
Changes in operating assets and liabilities that provided (used)
cash:
Accounts receivable (1,211)
Inventories (4,577)
Prepaid expenses (19)
Trade accounts payable 2,581
Payable to affiliate 1,173
Accrued expenses 2,457
-----------
Net cash used in operating activities (1,206)
CASH FLOWS FROM INVESTING ACTIVITIES -
Purchases of equipment and tooling (477)
Proceeds from sales of equipment 7
-----------
Net cash used in investing activities (470)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on note payable (line-of-credit) 2,230
Repayment of subordinated debt (250)
Payments on long-term debt (221)
-----------
Net cash provided by financing activities 1,759
-----------
NET INCREASE IN CASH 83
CASH AT BEGINNING OF YEAR 46
-----------
CASH AT END OF YEAR $ 129
===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -
Cash paid during the year for interest $ 566
===========
See notes to financial statements.
F-29
<PAGE>
HEATH COMPANY (EXCLUDING HEATHKIT DIVISION) AND SUBSIDIARY (A WHOLLY-OWNED
SUBSIDIARY OF HEATH HOLDING CORP.)
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1996
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - Heath 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 which is located in Hong Kong with assets of
approximately $4.6 million. 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 sub-contractors. 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.
Heath Acquisition Corp. was formed in December 1994, solely for the
purpose of acquiring the outstanding common stock of Heath Company, a
non affiliated Company. In January 1995, Heath Acquisition Corp.
acquired Heath Company. Subsequently, Heath Acquisition Corp. amended
its name to Heath Holding Corp.
Basis of Presentation - The financial statements include the accounts
of Heath/Zenith and Heath Limited. 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.
Payable to affiliate - Represents the payable to Heathkit.
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. A
portion of the deferred tax asset benefit attributable to Heath Company
was allocated to the accounts of Heath/Zenith based on the differences
between the financial statement and tax bases of the assets and
liabilities of Heath/Zenith. Also included in the deferred tax asset
benefit are amounts attributable to Heath Limited. The provision for
income taxes was allocated to Heath/Zenith based on the effective
income tax rate of Heath Company. Deferred tax assets attributable to
net operating loss (NOL's) carryforwards available to Heath Company
have been allocated 100% to Heath/Zenith. No benefit related to future
utilization of NOL's has been allocated to Heathkit.
Negative Goodwill - Negative goodwill was 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.
F-30
<PAGE>
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 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 year ended December 31, 1996
and are reflected in income from operations.
Revenue Recognition - Sales are recognized at the time product is
shipped. Returns, including "destroy-in-field" items, are netted
against sales and amounted to approximately $2,707,000 for the year
ended December 31, 1996.
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, 1996 were approximately $1,100,000.
Corporate Allocations - Interest expense, management fees (see Note 8)
and general and administrative expenses have been allocated to
Heath/Zenith. Heath Company's bank debt is currently recorded on the
accounts of Heath/Zenith. 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 Heath/Zenith based on the division's sales as a % 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 that was agreed
upon by management at the beginning of the year.
2. INVENTORY
Inventory at December 31 consisted of the following (in thousands):
Raw materials $ 690
Work-in-process 2,944
Finished goods 8,563
-------------
Total $12,197
=============
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31 consisted of the following
(in thousands):
Buildings and improvements $ 688
Machinery and equipment 1,194
Tooling 251
Construction in progress
-------------
2,133
Less accumulated depreciation 1,127
-------------
Total $1,006
=============
4. NOTE PAYABLE
Heath Company has a loan agreement (the "Agreement") with a bank which
provides a revolving line of credit and a term loan (see Note 5). 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.
F-31
<PAGE>
The revolving line of credit has a maximum borrowing commitment of $11
million and is subject to a borrowing formula. The line of credit
agreement requires the payment of interest at the bank prime rate or
base lending rate, plus 1% (9.25% at December 31, 1996) or the LIBOR
rate, plus 3.00% (8.62% at December 31, 1996). The line of credit
expires January 26, 1998.
The agreement also provides for letters of credit up to $3 million. No
advances were taken against the letters at December 31, 1996.
5. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
Term notes payable to bank - payable in monthly installments of $12,
plus interest at 1.25% over the prime rate (9.50% at December 31,
1996) or LIBOR rate plus 3.25% (8.62%
at December 31, 1996) through January 1998 $ 719
Less current portion 221
-----
Total long-term debt $ 498
=====
The annual aggregate maturities of long-term debt at December 31, 1996,
are as follows (in thousands):
1997 $ 221
1998 498
-----
Total $ 719
=====
6. RETIREMENT
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 $41,000 on behalf of Heath/Zenith
employees during the year ended December 31, 1996.
7. FEDERAL INCOME TAXES
The provision for income taxes consisted of the following (in
thousands):
Current tax liability $ 180
Benefit of operating loss carryforward (180)
Deferred tax credit (312)
--------
Provision for income taxes $ (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.
F-32
<PAGE>
Deferred tax assets resulting from temporary differences are as follows
at December 31 (in thousands):
Deferred Tax
Assets
---------------------------------------
(In Thousands)
---------------------------------------
Current Non Current
Accounts receivable $ 136
Inventory 248
Settlements 620
Accrued warranty 438
Accrued promotional allowances 429
Accrued vacations 48
Fixed assets $1,056
Net operating loss 1,063
All other 18 23
-------- --------
Subtotal 1,937 2,142
Less - valuation allowance - 238
---------- --------
Total $1,937 $1,904
====== ======
The Company has net operating loss carryforwards of approximately
$2,100,000 available to offset future taxable income. Of the total net
operating loss carryforward amount, $1,343,000 expires at a rate of
$133,000 each year for the next 10 years, while the remainder expires
in 15 years.
8. RELATED PARTY TRANSACTIONS
The Company is required to pay $21,000 per month to HIG Capital
Management, Inc., a majority shareholder, for management services.
During the year ended December 31, 1996 the Company paid approximately
$250,000 of which approximately $217,000 was allocated to Heath/Zenith.
9. MAJOR CUSTOMER TRANSACTIONS
Sales to one customer approximated $21.7 million for the year ended
December 31, 1996. Accounts receivable from this customer approximated
$2.9 million at December 31, 1996.
10. LITIGATION
On November 18, 1997, Heath Company reached a settlement in a case
involving the Company as both a defendant and plaintiff, concerning
alleged patent infringement. The cases were initiated prior to December
31, 1996. The settlement resulted in the Company paying a net amount of
$1.825 million, for which the parties received certain licenses and
covenant not to sue rights. The Company believes the license received
is of nominal future value and, therefore the settlement amount has
been recorded as an expense and accrued as a liability in the 1996
financial statements. During 1996, the Company incurred other costs of
approximately $1.1 million related to the lawsuit.
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
litigation claim surrounding 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.
F-33
<PAGE>
11. 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 300,000 shares reserved under the plan.
Transactions under the plan are summarized as follows:
Shares Price Range
Options outstanding at January 26, 1995 191,000 $1.00
Options granted 5,000 $1.00-$1.10
-------------
Options outstanding at December 31, 1995 196,000 $1.00-$1.10
Options granted 4,000 $7.00
Options terminated (1,000) $1.00-$1.10
-------------
Options outstanding at December 31, 1996 199,000 $1.00-$7.00
=============
Subsequent to year-end, 2,000 of the options granted in 1996 were
terminated and the exercise price of the remaining 2,000 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.
12. SERIES A PREFERRED STOCK
The Company has authorized 500,000 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, 1996 and December 31, 1995.
F-34
<PAGE>
HEATH COMPANY (EXCLUDING HEATHKIT DIVISION) AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF HEATH HOLDING CORP.)
BALANCE SHEET (unaudited)
5 October 1997
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash $ 131
Accounts receivable:
Trade (net of allowance for doubtful accounts and
customer returns) 8,268
Other 1,079
Inventories 10,539
Prepaid expenses 160
Deferred income taxes benefit 1,561
-----------
Total current assets 21,738
PROPERTY, PLANT AND EQUIPMENT - NET 1,040
DEFERRED INCOME TAXES BENEFIT 1,561
-----------
TOTAL ASSETS $ 24,339
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable $ 7,160
Trade accounts payable 3,307
Payable to affiliate 1,273
Accrued expenses:
Warranty 1,459
Compensation and benefits 512
Merchandising programs 1,411
Settlements and other 2,739
-----------
Total accrued expenses 6,121
Current maturities of long-term debt 221
-----------
Total current liabilities 18,082
LONG-TERM DEBT, less current maturities 313
NEGATIVE GOODWILL, (net of amortization) 1,651
MINORITY INTEREST IN NET ASSETS OF SUBSIDIARY --
SHAREHOLDERS' EQUITY:
Common stock, par value $.01 per share - voting,
2500 shares authorized; 1,500 shares
issued and outstanding, 54 shares in
treasury 15
Additional paid-in-capital 1,485
Retained Earnings 2,793
Foreign currency translation adjustment
-----------
Total shareholders' equity 4,293
-----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 24,339
===========
F-35
<PAGE>
<TABLE>
<CAPTION>
HEATH COMPANY (EXCLUDING HEATHKIT DIVISION) AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF HEATH HOLDING CORP.)
STATEMENT OF OPERATIONS (unaudited)
Thirty-nine Weeks Ended October 5, 1997 and September 29, 1996
(In thousands)
Thirty-nine Weeks Ended
------------------------------------------
September 29, 1996 October 5, 1997
----------------- --------------------
<S> <C> <C>
NET SALES 30,723 $41,151
COST OF GOODS SOLD 23,937 31,409
----------------- --------------------
GROSS PROFIT 6,786 9,742
OPERATING EXPENSES 5,942 6,256
----------------- --------------------
INCOME FROM OPERATIONS 844 3,486
OTHER EXPENSE 676 1,012
----------------- --------------------
INCOME BEFORE PROVISION FOR INCOME TAXES
AND MINORITY INTEREST IN NET INCOME
OF SUBSIDIARY 168 2,474
MINORITY INTEREST IN NET INCOME OF SUBSIDIARY 5 5
----------------- --------------------
GAIN/(LOSS) BEFORE PROVISION FOR INCOME TAX 163 2,469
PROVISION FOR INCOME TAX 28 728
----------------- --------------------
NET INCOME / (LOSS) $135 $1,741
================= ====================
</TABLE>
F-36
<PAGE>
<TABLE>
<CAPTION>
HEATH COMPANY (EXCLUDING HEATHKIT DIVISION) AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF HEATH HOLDING CORP.)
STATEMENT OF CASH FLOWS (unaudited)
Thirty-nine Weeks Ending October 5, 1997 and September
29, 1996
(In thousands)
Thirty-nine weeks ending
--------------------------
September October 5,
29, 1996 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $135 $1,741
Adj. to reconcile net income to net cash used in operating activities:
Amortization of negative Goodwill (113) (106)
Depreciation 256 351
(Gain) Loss on sale of equipment -- (1)
Deferred income taxes 253 720
Changes in operating assets and liabilities that provided (used) cash:
Accounts Receivable (987) (3,173)
Payable to affiliate 210 (156)
Inventories 1,208 1,658
Prepaid Expenses 3 113
Trade Accounts Payable (444) (1,409)
Accrued Expenses 301 803
----------- -----------
Net cash used in operating activities 822 541
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and tooling (389) (386)
Proceeds from sales of equipment -- 2
----------- -----------
Net cash provided by financing activities (389) (384)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on note payable (line of credit) (265) 30
Repayment of subordinated debt -- --
Payments on long-term debt (166) (185)
----------- -----------
Net cash provided by financing activities (431) (155)
NET INCREASE / (DECREASE) IN CASH 2 2
CASH AT BEGINNING OF FISCAL YEAR 30 129
----------- -----------
CASH AT PERIOD END $32 $131
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -
Cash paid for Interest $566 $587
</TABLE>
See notes to financial statements
DISCLOSURE: As of December 1995, balance sheet accounts were not accounted
for on a divisional basis. Therefore, figures above were
derived utilizing estimated balance sheet accounts for
Heath-Zenith at December 1995.
F-37
<PAGE>
<TABLE>
<CAPTION>
HEATH COMPANY (EXCLUDING HEATHKIT DIVISION) AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF HEATH HOLDING CORP.)
STATEMENT OF SHAREHOLDERS' EQUITY (unaudited)
Thirty-nine Weeks Ended October 5, 1997 and September
29, 1996
(In thousands)
Foreign
dditional Currency
Common Paid-In Retained Translation
Stock A Capital Earnings Adjustment Total
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 $15 $1,485 $1,641 ($17) $3,124
Net Income 135 135
----------- ----------- ----------- ----------- -----------
BALANCE, SEPTEMBER 29, 1996 $15 $1,485 $1,776 ($17) $3,259
=========== =========== =========== =========== ===========
BALANCE, JANUARY 1, 1997 $15 $1,485 $1,071 ($17) $2,554
Net loss 1,741 (2) 1,739
----------- ----------- ----------- ----------- -----------
BALANCE, OCTOBER 5, 1997 $15 $1,485 $2,812 ($19) $4,293
=========== =========== =========== =========== ===========
</TABLE>
See notes to financial statements.
F-38
<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).
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**
<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
10.18 Intellectual Property Agreement between the Company and Remington 10.18**
Arms Company dated January 29, 1988
II-2
<PAGE>
<CAPTION>
Exhibit No. Description of Document Exhibit File No.
- ----------- ----------------------- ----------------
<S> <C> <C>
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 *
23.3 Consent of Deloitte & Touche LLP *
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>
(b) The following Financial Statement Schedules are included herein:
<TABLE>
<CAPTION>
Page Number
<S> <C>
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
</TABLE>
II-3
<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-4
<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 2, 1996 and March 1, 1997, and the
related consolidated statements of income, stockholders' equity (deficit) and
cash flows for each of the three years in the period ended March 1, 1997, and
have issued our report thereon dated April 4, 1997 (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.
Ernest & Young LLP
New York, New York
April 4, 1997
S-1
<PAGE>
SCHEDULE I - Condensed Financial Information of Registrant
<TABLE>
<CAPTION>
DESA International, Inc.
Condensed Consolidated Balance Sheets
March 2, March 1,
1996 1997
----------------- --------------------
(In thousands)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 145 $ 5,058
Accounts receivables (including $122,730 and $122,520 due from
parent in 1996 and 1997, respectively) less allowance for doubtful
accounts of $1,008 and $822 in 1996 and 1997, respectively 133,481 135,586
Inventories 14,936 15,747
Prepaid expenses and other current assets 1,839 1,761
-------------- ---------------
Total current assets 150,401 158,152
Property, plant and equipment, net 9,744 10,082
Other assets (principally goodwill) 46,895 45,067
-------------- ---------------
$ 207,040 $ 213,301
============== ===============
Liabilities and Stockholder's Equity
Current liabilities $ 28,865 $ 44,198
Long-term debt 149,709 130,600
Other non-current liabilities 2,373 1,940
-------------- ---------------
Total liabilities 180,947 176,738
Stockholder's equity:
Common stock 31,900 31,900
Other stockholder's equity (5,807) 4,663
-------------- ---------------
26,093 36,563
-------------- ---------------
$ 207,040 $ 213,301
============== ===============
</TABLE>
S-2
<PAGE>
Schedule I - Condensed Financial Information of Registrant (continued)
<TABLE>
<CAPTION>
DESA International, Inc.
Condensed Consolidated Statements of Income
February 25, March 2, March 1,
1995 1996 1997
--------------------- ------------------ ------------------
(In thousands)
<S> <C> <C> <C>
Net sales $ 172,501 $ 186,324 $ 209,105
Costs and expenses:
Cost of goods sold 107,484 116,217 130,890
Selling, general and administrative 35,817 37,828 45,224
------------------------------------------------------------
Operating Profit 29,200 32,279 32,991
Interest expense 5,777 7,073 14,509
------------------------------------------------------------
Income before income taxes and extraordinary item 23,423 25,206 18,482
Income taxes 10,064 10,401 7,733
------------------------------------------------------------
Income before extraordinary item 13,359 14,805 10,749
Extraordinary item, net of income taxes of $1,421 -- 2,176 --
------------------------------------------------------------
Net income $ 13,359 $ 12,629 $ 10,749
============================================================
</TABLE>
S-3
<PAGE>
Schedule I - Condensed Financial Information of Registrant (continued)
<TABLE>
<CAPTION>
DESA International, Inc.
Condensed Consolidated Statements of Cash Flows
February 25, March 2, March 1,
1995 1996 1997
------------------ ------------------ ------------------
(In thousands)
<S> <C> <C> <C>
Net cash provided by operating activities $ 18,337 $ 19,375 $ 18,398
Investing Activities
Capital expenditures (1,499) (2,122) (2,770)
Dividends received from joint venture 196 112 132
Purchase of Toro assets (873) -- --
Other -- (50) 244
--------------- --------------- ---------------
Net cash used in investing activities (2,176) (2,060) (2,882)
Financing Activities
Proceeds from new Term Loans -- 155,000 --
Proceeds from new revolver loan -- 9,900 --
Proceeds from exercise of BT Warrant 891 --
Redemption of Series A Preferred Stock -- (6,418) --
Redemption of Series B Preferred Stock -- (4,946) --
Repayment of old Term Loans -- (50,950) --
Dividends paid on common stock and
nonvoting common stock -- (113,154) --
Payment of expenses -- (5,673) --
Decrease in revolving loan -- (7,141) (2,759)
Payments on old Term Loans (2,250) (11,050) (8,050)
Decrease in promissory notes (97) -- --
Proceeds from issuance of common stock 696 202 210
--------------- --------------- ---------------
Net cash used in financing activities (1,651) (33,339) (10,559)
Effect of exchange rates on cash 63 (1) (4)
--------------- --------------- ---------------
Increase (decrease) in cash and cash
equivalents 14,573 (16,025) 4,913
Cash and cash equivalents at beginning of
fiscal year 1,597 16,170 145
--------------- --------------- ---------------
Cash and cash equivalents at end of fiscal
year $ 16,170 $ 145 $ 5,058
=============== =============== ===============
</TABLE>
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. 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:
February 25, March 2, March 1,
1995 1996 1997
- ------------------------ -------------------------- ------------------------
(In thousands)
$ 196 $ 112 $ 132
S-5
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II - Valuation and Qualifying Accounts
DESA International, Inc.
March 1, 1997
COL. A COL. B COL. C COL. D COL. E
Additions
Charged to
Balance at Charged to Other Balance at
Beginning Costs and Accounts- Deductions - End of
Description of Period Expenses Describe Describe Period
- ------------------------------ ------------- -------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
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 March 2,1996:
Deducted from assets accounts:
Allowance for doubtful accounts 1,072,000 (160,000) (196,000)(1) 1,108,000
Year Ended February 25, 1995:
Deducted from assets accounts:
Allowance for doubtful accounts 882,000 274,000 84,000(1) 1,072,000
<FN>
(1) Uncollectible accounts written off, net of recovery.
</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 30th day of April, 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 April 30, 1998.
Signature Title Date
--------- ----- ----
/s/ Robert H. Elman Chairman, Chief Executive April 30, 1998
Robert H. Elman Officer and Director
_______*____________ Director April 30, 1998
John W. Childs
_______*____________ Director April 30, 1998
Raymond B. Rudy
/s/ Adam L. Suttin Director April 30, 1998
Adam L. Suttin
/s/ Michael Greene Director April 30, 1998
Michael Greene
/s/ Terry G. Scariot President and Director April 30, 1998
Terry G. Scariot
/s/ Edward G. Patrick Vice President of Finance, April 30, 1998
Edward G. Patrick Treasurer
/s/ Scott M. Nehm Vice President and Controller April 30, 1998
Scott M. Nehm
* By: /s/ Adam L. Suttin
Adam L. Suttin, Attorney-in-fact
<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 30th day of April, 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 April 30, 1998.
Signature Title Date
/s/ Robert H. Elman Chairman, Chief Executive April 30, 1998
Robert H. Elman Officer and Director
________*_____________ Director April 30, 1998
John W. Childs
________*_____________ Director April 30, 1998
Raymond B. Rudy
/s/ Adam L. Suttin Director April 30, 1998
Adam L. Suttin
/s/ Michael Greene Director April 30, 1998
Michael Greene
/s/ Terry G. Scariot President and Director April 30, 1998
Terry G. Scariot
/s/ Edward G. Patrick Vice President of Finance, April 30, 1998
Edward G. Patrick Treasurer
/s/ Scott M. Nehm Vice President and Controller April 30, 1998
Scott M. Nehm
* By: /s/ Adam L. Suttin
Adam L. Suttin, Attorney-in-fact
EXHIBIT 5
SULLIVAN & WORCESTER LLP
ONE POST OFFICE SQUARE
BOSTON, MASSACHUSETTS 02109
(617) 338-2800
FAX NO. 617-338-2880
IN WASHINGTON, D.C. IN NEW YORK CITY
1025 CONNECTICUT AVENUE, N.W. 767 THIRD AVENUE
WASHINGTON, D.C. 20036 NEW YORK, NEW YORK 10017
(202) 775-8190 (212) 486-8200
FAX NO. 202-293-2275 FAX NO. 212-758-2151
_________, 1998
DESA International, Inc.
2701 Industrial Drive
Bowling Green, KY 42102
Re: Registration Statement on Form S-4
$130,000,000 of Senior Subordinated Notes due 2007
Ladies and Gentlemen:
The following opinion is furnished to you in connection with the
registration pursuant to a registration statement on Form S-4 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
by DESA International, Inc., a Delaware corporation (the "Company"), of
$130,000,000 of Senior Subordinated Notes due 2007 (the "New Notes"), which New
Notes will initially be guaranteed (the "Guarantees") by DESA Holdings
Corporation, a Delaware corporation and the parent of the Company ("Holdings")
and issued under an indenture relating to the New Notes (the "Indenture") by and
among the Company, Holdings and Marine Midland Bank, as Trustee (the "Trustee").
The New Notes will be offered in exchange for a like principal amount of the
Company's 97/8% Senior Subordinated Notes due 2007 (the "Old Notes") pursuant to
that certain Registration Rights Agreement, dated as of November 26, 1997, by
and among the Company, Holdings, NationsBanc Montgomery Securities, Inc. and UBS
Securities LLC (the "Registration Rights Agreement"). The Registration Rights
Agreement was executed in connection with the private placement of the Old
Notes.
We have acted as counsel to the Company in connection with the
preparation of the Registration Statement, and we have examined originals or
copies, certified or otherwise identified to our satisfaction, of corporate
records, certificates and statements of officers and accountants of the Company,
of public officials, and such other documents as we have considered necessary in
order to furnish the opinion hereinafter set forth. We are members of the bar of
the Commonwealth of Massachusetts. Accordingly, we do not purport to be experts
on or generally familiar with, and except as to the General Corporation Law of
the State of Delaware, we express no opinion with respect to the laws of any
state other than The Commonwealth of Massachusetts.
Based on and subject to the foregoing, we are of the opinion that: (i)
the New Notes have been duly authorized by the Company and, when issued in
exchange for the Old Notes pursuant to the terms of the Indenture and the
exchange offer described in the Registration Statement, will be validly issued
and will constitute legal and binding obligations of the Company; and (ii) the
Guarantees have been duly authorized by Holdings and, when issued along with the
New Notes in accordance with the terms of the Indenture, will be validly issued
and will constitute the legal and binding obligations of Holdings, subject in
each case to the effect of (a) bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting the rights and
remedies of creditors and the obligations of debtors generally and (b) the
application of general principles of equity (regardless of whether enforcement
is considered in proceedings at law or in equity).
<PAGE>
DESA International, Inc.
__________, 1998
Page 2
We express no opinion as to the applicability (and, if applicable, the
effect) of Section 548 of the United States Bankruptcy Code or any comparable
provision of state law to the conclusions expressed above.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm made therein under the
caption "Legal Matters." In giving such consent, we do not thereby admit that we
come within the category of persons whose consent is required under Section 7 of
the Securities Act or the Rules and Regulations of the Securities and Exchange
Commission promulgated thereunder.
Very truly yours,
[When in final form to
be signed by
SULLIVAN & WORCESTER LLP]
EXHIBIT 10.19
THE INDUSTRIAL DEVELOPMENT BOARD OF
THE CITY OF SHELBYVILLE, TENNESSEE
AND
SHELBYVILLE INDUSTRIAL SPEC BUILDING - WRS - PARTNERSHIP
FACILITY LEASE AGREEMENT
DATED AS OF DECEMBER 1, 1994
<PAGE>
TABLE OF CONTENTS
Parties
Preamble
ARTICLE I
DEFINITIONS
Section 1.1. Definitions of Terms
Section 1.2. References to Lease
Section 1.3. References to Articles, Sections, Etc.
Section 1.4. Headings
ARTICLE II
REPRESENTATIONS, WARRANTIES, AND COVENANTS
Section 2.1. Representations, Warranties, and Covenants of the Issuer
Section 2.2. Representations, Warranties, and Covenants of the Company
ARTICLE III
DEMISING CLAUSE: TERM
Section 3.1. Demise of Facility
Section 3.2. Lease Term
ARTICLE IV
ACQUISITION OF THE PROJECT
Section 4.1. Assumption of Bank Loan, Issuance of Series A Note, and
Issuance of Series B Note
Section 4.2 Costs of the Project
Section 4.3 Company Required to Pay Project Costs in Event Loan Insufficient
Section 4.4. Payment of Expenses of Loan
Section 4.5. Other Amounts Payable by the Company
Section 4.6. Bank Priority
ARTICLE V
RENTAL PROVISIONS: PREPAYMENT
Section 5.1. Quiet Enjoyment
<PAGE>
Section 5.2. Rental Payments; Basic Rental Payments; and Additional
Rental Payments
Section 5.3. Credits Toward Basic Rental Payments
Section 5.4. General Obligation; Obligations of Company Unconditional
Section 5.5. Prepayment of Rental Payments
Section 5.6. Rights and Obligations of Company upon Full Prepayment of
Rental Payments
ARTICLE VI
MAINTENANCE, MODIFICATIONS,
TAXES, AND INSURANCE
Section 6.1. Maintenance of the Facility
Section 6.2. Modification of the Facility
Section 6.3. Improvements as Part of the Facility
Section 6.4. Taxes, Assessments, and Utility Charges
Section 6.5. Insurance Required
Section 6.6 Insurers and Policies
Section 6.7. Application of Net Proceeds of Insurance
Section 6.8. Advances by Issuer
Section 6.9. Obligation of Company to Maintain Insurance Regardless
of Approval
ARTICLE VII
DAMAGE, DESTRUCTION, CONDEMNATION. ETC.
Section 7.1. Damage or Destruction
Section 7.2. Condemnation
ARTICLE VIII
SPECIAL COVENANTS
Section 8.1. Warranty of Condition or Suitability; Use of Project
Section 8.2. Indemnity and Hold Harmless Provisions
Section 8.3. Reimbursement of issuer
Section 8.4. Right of Access to the Project
Section 8.5. Project as a Public Facility
Section 8.6. Compliance with Orders, Ordinances, Etc.
Section 8.7. Discharge of Liens and Encumbrances
Section 8.8. Restriction Against Certain Religious Activities
Section 8.9. Further Assurances and Corrective Instruments
Section 8.10. Granting of Easements
Section 8.11. Release of Certain Land
<PAGE>
ARTICLE IX
ASSIGNMENT; REMOVAL OF EQUIPMENT; ETC.
Section 9.1. Assignment and Subleasing
Section 9.2. Consent to Assignment
Section 9.3. Restrictions on Mortgage or Sale of Project by Issuer
Section 9.4. Removal of Fixtures
Section 9.5. Installation of Company's Own Machinery
Section 9.6. References to Loan Ineffective After Paid
ARTICLE X
EVENTS OF DEFAULT AND REMEDIES
Section 10.1. Events of Default Defined
Section 10.2. Remedies on Default
Section 10.3. Remedies Cumulative
Section 10.4. Agreement to Pay Attorneys' Fees and Expenses
Section 10.5. Delay or Omission Not a Waiver
Section 10.6. Interpretation of any Conflicting Provisions
Section 10.7. Force Majeure Provision
ARTICLE XI
OPTIONS; PURCHASE OF PROJECT; ETC.
Section 11.1. Options to Terminate
Section 11.2. Option to Purchase Project Prior to Payment of the Loan
Section 11.3. Option to Purchase Project After Payment of the Loan
Section 11.4. Option to Purchase Unimproved Land
Section 11.5. Conveyance on Exercise of Option to Purchase Project
Section 11.6. Payments Upon, and Conditions For, Early Termination
Section 11.7. Continuation of Certain Provisions
ARTICLE XII
MISCELLANEOUS
Section 12.1. Certificates and Opinions
Section 12.2. Limited Liability of the Issuer
Section 12.3. Notices
Section 12.4. Binding Effect
Section 12.5. Severability
Section 12.6 Limitation of Rights
Section 12.7. Execution of Counterparts
Section 12.8. Applicable Law
Section 12.9. Table of Contents and Section Headings Not Controlling
Section 12.10. No Liability of the City of SHELBYVILLE, Tennessee
Section 12.11. Net Lease
Section 12.12. Not Partners
<PAGE>
Signatures
Acknowledgments
Exhibits
Exhibit "A" Description of Land
Exhibit "B" Permitted Encumbrances
<PAGE>
FACILITY LEASE AGREEMENT
THIS FACILITY LEASE AGREEMENT, dated as of December 1, 1994,
by and between THE INDUSTRIAL DEVELOPMENT BOARD OF THE CITY OF SHELBYVILLE,
TENNESSEE (the "Issuer"), a public, nonprofit corporation organized and existing
under the laws of the State of Tennessee, and SHELBYVILLE INDUSTRIAL SPEC
BUILDING - WRS PARTNERSHIP, a Tennessee partnership (the "Company") (the Issuer
and the Company being herein called, collectively, the "Parties").
W I T N E S S E T H:
WHEREAS, the Issuer is a public, nonprofit corporation and a
public instrumentality of the City of Shelbyville, Tennessee and is authorized
under Chapter 53, Title 7, Tennessee Code Annotated, as amended (the "Act"), to
enter into lease agreements with manufacturing, industrial, commercial, and
financial enterprises with respect to one or more projects for such payments and
upon such terms and conditions as the Board of Directors of the Issuer may deem
advisable in accordance with the provisions of the Act in order to maintain and
increase employment opportunities by inducing such enterprises to locate in or
to remain in the State of Tennessee (the "State");
WHEREAS, to induce Desa International, Inc., a Delaware
corporation ("Desa") to locate a manufacturing facility in the City of
Shelbyville, Tennessee, the Company and Desa were informed that the Issuer would
undertake to cause the Company to acquire certain land and build a certain
manufacturing facility thereon (the land and building being referred to as the
"Facility"), and to cause Desa to equip said Facility with such furniture,
fixtures and equipment as it needed or desired for its operations (the
"Equipment"), in Shelbyville, Tennessee, which Facility is to be owned by the
Issuer and leased by the Issuer to the Company, and which Equipment is to be
owned by the Issuer and leased by the Issuer to Desa, following which the
Company acquired the land, built the Facility and leased the same to Desa who
located its manufacturing operation in Shelbyville, and the Issuer now proposes
to acquire the Facility from the Company and to lease the same back to the
Company, pursuant hereto, and to acquire the Equipment from Desa, and lease the
same back to Desa, pursuant to a certain Equipment Lease Agreement (the
"Equipment Lease"); and
WHEREAS, the Company has borrowed, and Trans Financial Bank of
Tennessee, F.S.B. ("Bank"), has lent, the sum of Seven Hundred Thousand and
NO/100 Dollars ($700,000.00) to the Company (the "Bank Loan"), to finance the
cost of the acquisition of the Facility by the Company, pursuant to that certain
Construction Loan and Disbursement Agreement, dated March 1, 1994, by and
between Bank and Company (the "Bank Loan Agreement), which loan is evidenced by
a certain Construction Loan Promissory Note of the Company, payable to the order
of the Bank in the amount of the Bank Loan, dated March 1, 1994, (the "Bank
Note"), and is secured by a certain Construction Mortgage Deed of Trust,
Security Agreement and Financing Statement, dated March 1, 1994, made by
<PAGE>
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the Company to Jack F. Stringham II, Esq., trustee, for the benefit of the Bank
(the "Bank Deed of Trust"); and
WHEREAS, the Board of Directors of the Issuer, pursuant to
Section 7- 53-102 of the Act, has found and determined that the agreement by the
Issuer to acquire, equip and lease such manufacturing facility will develop
trade and commerce in and adjacent to the City of Shelbyville, Tennessee, will
contribute to the general welfare, will alleviate conditions of unemployment
and, has induced the Company to locate in and will induce the Company to remain
in Shelbyville, Tennessee;
WHEREAS, the Issuer is authorized by law and deems it
necessary to enter into that certain Assumption Agreement (the "Assumption
Agreement"), dated as of December 1, 1994, by and among the Issuer, the Company
and the Bank, in order to finance the acquisition of the Facility and to further
the purposes of the Issuer; and
WHEREAS, the Issuer has not made and does not intend to make
any profit by reason of its business or venture in which it may engage or by
reason of its entering into this Lease, and no part of the Issuer's net
earnings, if any, will ever inure to the benefit of any person, firm or
corporation except the City of Shelbyville, Tennessee; and,
WHEREAS, the Issuer is authorized by law and has deemed it
necessary to borrow money for the purpose of acquiring the Facility and to that
end has duly authorized and directed the issuance of its not exceeding Two
Hundred Thousand and No/100 Dollars ($200,000.00) Industrial Development Revenue
Note, Series A (Desa Project) (the "Series A Note"); and
WHEREAS, the Issuer has executed a certain Collateral
Assignment of Facility Lease (the "Assignment of Facility Lease") and a certain
Deed of Trust, Assignment of Leases and Security Agreement (Facility) (the
"Facility Deed of Trust") to secure, inter alia, the loan of the indebtedness
(the "Facility Loan") evidenced by the Series A Note; and
WHEREAS, the Issuer is authorized by law and has deemed it
necessary to borrow money for the purpose of acquiring the Equipment and to that
end has duly authorized and directed the issuance of its not exceeding Eight
Hundred Sixty Thousand and No/100 Dollars ($860,000.00) Industrial Development
Revenue Note, Series B (Desa Project) (the "Series B Note"); and
WHEREAS, the Issuer has executed a certain Collateral
Assignment of Equipment Lease (the "Assignment of Equipment Lease") and a
certain Security Agreement (the "Equipment Security Document") to secure, inter
alia, the loan of the indebtedness (the "Equipment Loan") evidenced by the
Series B Note; and
WHEREAS, the Issuer is authorized by law and has deemed it
necessary to acquire the Facility and the Equipment (the Facility and the
Equipment being sometimes referred to as the "Project") as aforesaid, which
acquisition has occurred of even date herewith; and
<PAGE>
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WHEREAS, the Issuer proposes to lease the Facility to the
Company and the Company desires to lease the Facility from the Issuer upon the
terms and conditions set forth herein.
NOW, THEREFORE, for and in consideration of the premises and
the mutual covenants hereinafter contained, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1. Definitions of Terms. In addition to the words
and terms defined in the preamble hereto and elsewhere defined in this Lease,
the following words and terms as used herein, whether or not the words have
initial capitals, shall have the following meaning, unless the context or use
indicates another or different meaning or intent, and such definitions shall be
equally applicable to both the singular and plural forms of any of the words and
terms herein defined:
"Act" means Chapter 53, Title 7, Tennessee Code Annotated. as
amended and supplemented from time to time.
"Additional Rental Payments" means that portion of the Rental
Payments described in Section 5.2(b) of this Lease.
"Authorized Representative" means, in the case of the Issuer,
the Chairman, the Vice Chairman, the Secretary or any Assistant Secretary of the
Issuer; in the case of Desa, the President, any Vice President, the Secretary or
the Treasurer; in the case of the Company, W. R. (Pete) Sain, Jr. or James L.
Sain; and, in the case of any of them, such additional persons as, at the time,
are designated to act on behalf of the Issuer, Desa, or the Company, as the case
may be, by written certificate furnished to the Issuer, Desa, or to the Company,
as the case may be, containing the specimen signature of each such person and
signed on its behalf by a previously Authorized Representative.
"Bank" means Trans Financial Bank of Tennessee, F.S.B., its
successors and assigns, or any subsequent owner of the Bank Note.
"Bank Loan Documents" means, collectively, the Bank Loan
Agreement, the Bank Note, the Bank Deed of Trust and the Assumption Agreement.
"Basic Rental Payments" means that portion of the Rental
Payments described in Section 5.2(a) of this Lease.
"Building" means all buildings, structures, improvements, and
fixtures located on the Land, the acquisition of which is financed with the
proceeds of the Bank Loan or the Facility Loan, but not with the proceeds of the
Equipment Loan.
<PAGE>
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"Company" means (a) Shelbyville Industrial Spec Building - WRS
Partnership, a partnership, formerly known as Desa II Partnership, organized and
existing under the laws of the State of Tennessee, (b) any successors and
assigns of said partnership, and (c) any surviving. resulting or transferee as
permitted herein.
"Condemnation" means the taking of title to, or the use of,
the Facility under the exercise of the power of eminent domain by any
governmental entity or any other person acting under governmental authority.
"Costs of the Project" means all of those costs and expenses
enumerated in Section 4.2 hereof.
"Desa Lease" means that certain Lease, dated February 25,
1994, by and between Company and Desa, as amended by that certain First
Amendment to Lease, dated as of December 1, 1994, and as further amended
hereafter.
"Equipment" means those items of furniture, fixtures and
equipment and related property acquired by the Issuer with the proceeds of the
Series B Note, and any equipment acquired in substitution therefor and any
renewals or replacements thereof pursuant to the Equipment Lease.
"Equipment Lender" means Desa International, Inc., or any
subsequent owner of the Series B Note.
"Equipment Loan Documents" means, collectively, the Series B
Note. the Assignment of Equipment Lease, and the Equipment Security Document.
"Event of Default" or "Default" means any of those events
defined as Events of Default by Section 10.1 of this Lease.
"Facility" means, collectively, the Land and Building.
"Facility Loan Documents" means, collectively, the Series A
Note, the Assignment of Facility Lease, and the Facility Deed of Trust.
"Fiscal Year" means the fiscal year, as such from time to time
exists, of Desa.
"Gross Receipts " means all receipts, revenues, and income
received by the Company and other monies received by or on behalf of the Company
with respect to the Facility, and any sublease of the Facility.
"Independent Counsel" means an attorney or attorneys duly
admitted to practice law before the highest court of any state of the United
States of America or the District of Columbia and shall include counsel for the
Issuer and counsel for the Company.
"Issuer" means The Industrial Development Board of the City of
Shelbyville, Tennessee, and its lawful successors and assigns.
<PAGE>
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"Land" means the real estate and interests in real estate
described in Exhibit "A" hereto annexed and by this reference made a part
hereof, less such real estate and interest in real estate as may be taken by the
exercise of the power of eminent domain as provided in Article VII of this Lease
and less such real estate and interest in real estate as may be sold to the
Company pursuant to Article XI of this Lease.
"Lease" means this Facility Lease Agreement, as from time to
time supplemented or amended.
"Lender" means Shelbyville Industrial Spec Building - WRS -
Partnership, or any subsequent owner of the Series A Note.
"Lien" means any interest in Property securing an obligation
owed to anyone, whether such interest is based on the common law, statute, or
contract, and including, but not limited to, the security interest arising from
a mortgage, encumbrance, pledge, conditional sale, trust receipt, lease,
consignment, or bailment for security purposes. The term "Lien" also includes
reservations, exceptions, encroachments, easements, rights of way, covenants,
conditions, restrictions, leases, and other similar title exceptions and
encumbrances, including, but not limited to, mechanics', materialmen's,
warehousemen's, carriers', and other similar encumbrances affecting real
property. For the purposes of this Lease, one shall be deemed to be the owner of
any Property which he, she, or it has acquired or holds subject to a conditional
sale agreement or other arrangement pursuant to which title to the Property has
been retained by or vested in someone else for security purposes.
"Loan" means, collectively, the Bank Loan, the Facility Loan
and the Equipment Loan.
"Loan Documents means, collectively, the Bank Loan Document,
the Facility Loan Documents, and the Equipment Loan Documents.
"Loan Payment Date" means each date on which interest,
principal, if any, or any of the foregoing, shall be payable on the Bank Loan or
the Facility Loan.
"Net Proceeds" means so much of the gross proceeds with
respect to which that term is used as remains after payment of all expenses,
costs, and taxes, including reasonable attorney's fees and extraordinary
expenses, incurred in obtaining such gross proceeds.
"Permitted Encumbrances" means: (a) the Liens, if any,
described in Exhibit "B" attached hereto; (b) utility, access, and other
easements and rights of way, restrictions, leases and exceptions that do not, in
the written opinion of the Authorized Representative of Desa, materially impair
the utility or value of the Property affected thereby for the purposes for which
it is intended; (c) mechanics', materialmen's, warehousemen's, carriers', and
other similar liens to the extent permitted by Section 8.7 of this Lease; and,
(d) Liens for taxes at the time not delinquent.
<PAGE>
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"Project" means collectively: (a) the Facility and (b) the
Equipment.
"Property" means any interest in any kind of property or
assets, whether real, personal, or mixed, tangible or intangible.
"Rental Payments" means, collectively, the Basic Rental
Payments and the Additional Rental Payments, as described in Section 5.2 of this
Lease.
"State" means the State of Tennessee.
"Substitute Facilities" means such facilities as defined in
Section 7.2(a) of this Lease.
"Term" means the term of this Lease as specified in Section
3.3 hereof.
Section 1.2. References to Lease. The words "hereof,"
"herein," "hereunder," and other words of similar import refer to this Lease as
a whole.
Section 1.3. References to Articles. Sections. Etc. References
to Articles, Sections, and other subdivisions of this Lease are to the
designated Articles, Sections, and other subdivisions of this Lease as
originally executed.
Section 1.4. Headings. The headings of this Lease are for
convenience only and shall not define or limit the provisions hereof.
(END OF ARTICLE I)
<PAGE>
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ARTICLE II
REPRESENTATIONS, WARRANTIES, AND COVENANTS
Section 2.1. Representations. Warranties, and Covenants of the
issuer. The Issuer hereby represents, warrants, and covenants as follows as the
basis for the undertakings on its part herein contained:
(a) That the Issuer: (1) was legally created and exists
under the provisions of the Act; (2) has the power under the provisions of the
Act to enter into the transactions contemplated by this Lease and to carry out
its obligations hereunder; and, (3) has been duly authorized, by proper action,
to execute, deliver and perform this Lease and the Loan Documents;
(b) That the Project constitutes a "project" within the
meaning of the Act, and that the Issuer is entering into the Loan Documents to
aid in the financing of the Project to accomplish the public purposes of the
Act;
(c) That the Issuer will finance the costs incurred in the
acquisition of the Project in accordance with the terms and provisions hereof
and of the Equipment Lease, in order to induce and cause the Company to provide
a manufacturing facility in Shelbyville, Tennessee, such facility upon its
completion, to be leased to or occupied by (i) industrial, commercial, financial
or service enterprises; (ii) nonprofit domestic corporations or enterprises
whose purpose is the promotion, support and encouragement of either agriculture
or commerce in the State or whose purpose is the promotion of the health,
welfare and safety of the citizens of the State; or (iii) similar corporations
or enterprises, thereby maintaining and increasing employment opportunities, and
furthering the welfare of the residents of the City of Shelbyville and of the
State;
(d) That in order to finance the costs of the Project, the
Issuer is entering into the Loan Documents;
(e) That to the Issuer's knowledge, the Project, as
designed, complies with all presently applicable building and zoning ordinances;
(f) That the Issuer will not pledge the rentals and other
amounts derived from the Project other than to secure the Loan and will not
mortgage or encumber the Project;
(g) That nothing in this Lease shall be construed to
require Issuer to operate the Project other than as lessor; and
(h) That all requirements of the Act have been complied
with.
<PAGE>
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Section 2.2. Representations. Warranties. and Covenants of the
Company. The company hereby represents, warrants, and covenants as follows as
the basis for the undertaking on its part herein contained:
(a) That the Company: (i) is a partnership duly organized
and validly existing under the laws of the State; (ii) has the power and
authority to enter into this Lease; and (iii) has duly authorized the execution,
delivery, and performance of this Lease; and
(b) That the execution and delivery of this Lease and the
Facility Loan Documents will be valid and binding on the Company and that
neither the execution nor delivery of the foregoing documents, nor the
consummation of the transactions contemplated thereby, nor the fulfillment of or
compliance with the terms and conditions hereof or thereof, will conflict with
or result in a breach of any of the terms, conditions, or provisions of any
agreement or instrument to which the Company is now a party or by which it is
bound, or constitute a default hereunder or under any of the foregoing, or
result in the creation or imposition of any Lien upon any Property of the
Company under the terms of any instrument or agreement, other than the
respective Liens, if any, under the Loan Documents and under this Lease; and
(c) That throughout the Term, the Company will not take,
permit to be taken, fail to take, or permit to fail to be taken, any action
which would cause the Project not to constitute a "project" within the meaning
of the Act; and
(d) That the financing by the Issuer of the costs of
acquiring the Project will induce and cause the Company to provide said Project;
and
(e) That all of the proceeds of the Facility Loan will be
used for the payment of the Costs of the Project; and
(f) That to the knowledge of the Company, the execution,
delivery and performance in accordance with the respective terms of this Lease,
the Loan Documents and any other documents executed and delivered in connection
with this transaction do not and will not (i) violate any applicable law or (ii)
conflict with, result in a breach of or constitute a default under any
indenture, agreement or other instrument to which Company is a party or by which
Company or any of the Company's properties may be bound; and
(g) That there is no action, suit, proceeding or, to the
Company's knowledge, any inquiry or investigation at law or in equity or before
or by any public board or body pending or, to the Company's knowledge,
threatened against or affecting the Company or the Company's property, wherein
an unfavorable decision, ruling or finding would have a material, adverse effect
on the validity or enforceability of the Loan, this Lease, or the Loan
Documents, which has not been previously disclosed.
(END OF ARTICLE II)
<PAGE>
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ARTICLE III
DEMISING CLAUSE; TERM
Section 3.1. Demise of Facility. The Issuer demises and leases
to the Company, and the Company leases from the Issuer, the Facility, subject
only to permitted encumbrances, in accordance with the provisions of this Lease,
to have and to hold for the Term.
Section 3.2. Lease Term. The Term of this Lease shall commence
as of the date hereof and shall terminate January 1, 2004, unless earlier
terminated pursuant to the provisions of Article XI hereof; PROVIDED, HOWEVER,
that in no event shall this Lease be terminated (except pursuant to Section
10.2(a)(4) hereof), but the Term hereof shall continue on a month-to-month
basis, until: (a) the principal of the Loan and the interest thereon, shall have
been paid in full or provisions made for such payment; (b) all liabilities,
reasonable costs, and reasonable expenses of the Issuer, including those of its
legal counsel, incurred pursuant to, or in connection with, this Lease shall
have been fully paid and discharged to the satisfaction of the Issuer; and, (c)
all other liabilities, costs, and expenses which the Company herein assumes or
agrees to pay shall have been fully paid or satisfactory provision made
therefor.
(END OF ARTICLE III)
<PAGE>
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ARTICLE IV
ACQUISITION OF THE FACILITY
Section 4.1. Assumption of Bank Loan and Issuance of Series A
Note. In order to provide funds for the purpose of financing the cost of
acquiring the Facility, the Issuer has assumed the Bank Loan. without recourse,
pursuant to the Assumption Agreement, has issued the Series A Note, and has
entered into the other applicable Loan Documents. The Issuer and the Company
agree that the proceeds of the Bank Loan and Facility Loan shall be used to pay
for Costs of the Project. It is agreed and understood that throughout the Term,
the Facility shall be owned by the Issuer, and leased to the Company pursuant to
this Lease.
Section 4.2. Costs of the Project. The proceeds of the Bank
Loan and the Facility Loan shall be drawn by the Company on behalf of the Issuer
to pay for Costs of the Project. For purposes of this Lease. "Costs of the
Project" shall consist of all costs of acquiring, improving, and installing the
Facility as the same may be available therefor and financed pursuant to the Bank
Loan Documents and the Facility Loan Documents, including, without limitation:
(i) all costs of acquiring the Land and the Building,
including architectural, engineering, development, consulting,
marketing and supervisory services with respect to acquisition
of the Facility under the Act, and capitalized interest
heretofore accrued or paid in connection with the temporary
financing of all or any part of the costs of any of the
foregoing;
(ii) all fees, taxes, charges, and other expenses for
recording or filing, as the case may be, the instrument or
instruments conveying the Land and the improvements, if any,
thereon to the Company, and reconveying the Land and the
improvements thereon from the Company to the Issuer, this
Lease, the Desa Lease, the Bank Loan Documents, the Facility
Loan Documents or any additional documents, instruments or
agreements relating thereto or to the Bank Loan, the Facility
Loan or this Lease;
(iii) all costs of entering into the Bank Loan and
the Facility Loan, including, but not limited to, all legal,
accounting, feasibility study, financial advisory, legal
investment, and any other fees, discounts, costs, and expenses
incurred in connection with the preparation, reproduction.
authorization, execution, and delivery of the Bank Loan and
the Facility Loan, the Bank Loan Documents, the Facility Loan
Documents, this Lease, and any and all additional documents,
instruments or agreements related thereto, and the payment of
any premium for title insurance;
(iv) reimbursement to the Company for any of the
above enumerated items of cost or expense paid by it.
<PAGE>
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Nothing contained in this Lease, or in any related documents, shall impose upon
the Issuer to see to the proper application of the proceeds of the Loan or any
disbursement thereof.
Section 4 3. Company Required to Pay Project Costs in Event
Loan Insufficient. If the moneys in the Bank Loan and the Facility Loan
available for payment of the Costs of the Project should not be sufficient to
pay the costs thereof in full, the Company agrees to complete the Facility and
to pay all that portion of the cost of the Project as may be in excess of the
moneys available therefor in the Loan. The Issuer does not make any warranty,
either express or implied, that the moneys under the Bank Loan and the Facility
Loan and which, under the provisions of this Lease, will be available for
payment of the Costs of the Project, will be sufficient to pay all costs which
will be incurred in that connection. The Company agrees that, if after
exhaustion of the moneys in the Bank Loan and the Facility Loan, the Company
should pay any portion of the Costs of the Project pursuant to the provisions of
this Section, it shall not be entitled to any reimbursement therefor from the
Issuer, nor shall it be entitled to any diminution in or postponement of the
payments required to be made hereunder.
Section 4.4. Payment of Expenses of Loan. The Company agrees
to be liable and pay for recording expenses, legal fees, printing expenses and
other fees and expenses incurred or to be incurred by or on behalf of the Issuer
in connection with or as an incident to the Bank Loan and the Facility Loan or
the Bank Loan Documents or the Facility Loan Documents.
Section 4.5. Other Amounts Payable by the Company. The Company
agrees to pay all costs and expenses (including attorney's fees), not otherwise
paid under the terms of this Lease reasonably incurred by the Issuer in
connection with, or as a direct or indirect result of, or in connection with the
administration or enforcement of, and compliance with, this Lease and the Bank
Loan or the Facility Loan, or otherwise in regard to the Facility. The Company
may, however, without creating a default hereunder, contest in good faith the
necessity, and the reasonableness of, any costs, expenses, fees, amounts,
liabilities and obligations referred to in this Section 4.5 and in Section 8.2
hereof.
Section 4.6. Bank Priority. It is agreed and understood that
the terms, conditions, provisions, liens and security interests set forth or
granted in the Bank Loan Documents are and shall continue to be secured by the
Facility with priority over those set forth or granted herein, in the Facility
Loan Documents or in the Equipment Loan Documents, as applicable. In the event
of any conflict or inconsistency between the terms and provisions of the Bank
Loan Documents, this Lease or the Facility Loan Documents, the terms and
provisions of the Bank Loan Documents shall control and prevail.
(END OF ARTICLE IV)
<PAGE>
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ARTICLE V
RENTAL PROVISIONS; PREPAYMENT
Section 5.1. Quiet Enjoyment. The Issuer hereby covenants and
agrees that it will not take any action, other than pursuant to Section 8.4 or
Article X of this Lease, to prevent the Company or Desa from having quiet and
peaceable possession and enjoyment of the Project during the Term and will, at
the request of the Company or Desa, and at the requesting person's cost, to the
extent that it may lawfully do so, join in any legal action in which the Company
or Desa asserts its right to such possession and enjoyment.
Section 5.2. Rental Payments; Basic Rental Payments; and
Additional Rental Payments. The Company covenants and agrees to pay, or cause to
be paid, as and for rental and for use of the Project, throughout the Term, the
Basic Rental Payments and the Additional Rental Payments as provided in this
Section, in funds which constitute lawful monies of the United States of America
for the payment of public and private debts, as at the time of payment.
(a) Basic Rental Payments. The Company shall, throughout
the Term, pay, or cause to be paid, as Basic Rental Payments, the following
amounts:
(1) On or prior to any installment payment date for
the Bank Loan under the Bank Note, until the principal of, and
interest on the Bank Loan shall have been fully paid, a sum
which will enable the Issuer to pay the amount payable on such
date as principal of (where at maturity, or upon acceleration
or otherwise), and interest upon the Bank Note as provided in
the Bank Loan Documents.
(2) On or prior to any installment payment date for
the Facility Loan under the Series A Note, until the principal
of, and interest on the Facility Loan shall have been fully
paid, a sum which will enable the Issuer to pay the amount
payable on such date as principal of (whether at maturity, or
upon acceleration or otherwise), and interest upon the Series
A Note as provided in the Facility Loan Documents.
(b) Additional Rental Payments. The Company shall from
time to time pay, as Additional Rental Payments, within thirty (30) days of
receipt of written demand therefor from the person entitled to payment thereof,
an amount sufficient to pay the following costs and expenses to the extent such
costs and expenses are not paid from the proceeds of the Baulk Loan or the
Facility Loan:
(1) The fees and other costs incurred for services of
such engineers, architects, attorneys, and independent
accountants as are employed to make examinations, opinions,
and reports required under, or contemplated by, this Lease;
<PAGE>
-13-
(2) The fees and other costs, not otherwise paid
under this Lease, incurred by the Issuer by reason of its
leasing of the Project or in connection with its
administration and enforcement of, and compliance with, this
Lease, or otherwise in connection with the Project; and,
(3) All amounts advanced by the Issuer under
authority of this Lease or otherwise and which the Company is
obligated to repay.
The Issuer hereby directs the Company to make the Basic Rental
Payments (i) under subsection (a)(1) to the Bank for payment of the Bank Loan,
and such payments shall be made in a timely manner so that the Issuer can comply
with the provisions of the Bank Loan Documents, and (ii) under subsection (a)(2)
to the Lender for payment of the Facility Loan, and such payments shall be made
in a timely manner so that the Issuer can comply with the provisions of the
Facility Loan Documents.
Payments of Additional Rental Payments shall be made by the
Company directly to the persons entitled to such payment.
In the event the Company shall fail to make any payment
required by this Section, the payment so in default shall continue as an
obligation hereunder of the Company until the amount in default shall have been
fully paid, and the Company shall pay, or cause to be paid, the same with
interest thereon from the date of default until so paid at a rate per annum
equal to twelve percent (12%) or the maximum rate of interest allowable by
applicable law, whichever is less.
The Company shall make the payments required by this Section
without any further notice thereof except as may be specifically required by
this Section.
Section 5.3. Credits Toward Basic Rental Payments. The
following amounts shall be credited (to the extent, if any, which such amounts
shall not have previously been the basis for such a credit) in the manner
specified, against the Basic Rental Payments, and such Basic Rental Payments
shall accordingly be reduced to the extent of any such credits:
(a) Any amounts paid as a prepayment of Basic Rental
Payments pursuant to Section 5.5 hereof;
(b) Any other amounts paid to Bank or the Lender as a
prepayment of Basic Rental Payments, the Bank Loan or the Facility Loan pursuant
to any provisions hereof or the terms thereof, including, but not necessarily
limited to, Section 9.4 hereof.
Section 5.4. General Obligation; Obligations of Company
Unconditional. The Company shall pay to or upon the order of the Issuer, at or
before the time when payable by the Issuer, all costs and liabilities incurred
by the Issuer in connection with its financing of the Facility, under the Bank
Loan Documents or the Facility Loan Documents, or otherwise as a result of the
transactions contemplated by this Lease.
<PAGE>
-14-
The obligations of the Company to make the payments required
in Section 5.2 hereof, and to perform and observe any and all of the other
covenants and agreements on its part contained herein, shall be a general
obligation of the Company and shall be absolute and unconditional irrespective
of any defense or any rights of set off, recoupment, or counterclaim which the
Company otherwise may have against the Issuer. The Company shall not: (a)
suspend, discontinue, or abate any payment required by Section 5.2 hereof
(except as provided in Section 5.3); (b) fail to observe any of its other
covenants or agreements in this Lease, the Bank Loan Documents or the Facility
Loan Documents; or, (c) except as provided in Article XI hereof, terminate this
Lease for any cause whatsoever, including, without limiting the generality of
the foregoing, failure to complete the Project; failure of Desa to occupy or to
use the Project as contemplated in this Lease or otherwise; any change or delay
in the time of availability of the Project; any defect in the title, design,
operation, merchantability, fitness, or condition of the Project or in the
suitability of the Project for the purposes or needs of Desa; failure of
consideration; eviction or constructive eviction; destruction of or damage to
the Project; commercial frustration of purpose; the taking by Condemnation of
title to or the use of all or any part of the Project; any change in the
taxation or other laws of the United States of America or of the State or any
political subdivision of either; any declaration or finding that any portion of
this Lease is invalid or unenforceable; and, any failure of the Issuer, Bank,
Desa or the Lender to perform and observe any agreement, whether express or
implied, or any duty, liability, or obligation arising out of or in connection
with this Lease or otherwise.
Nothing contained in this Section shall be construed to
release the Issuer from the performance of any of the agreements on its part
contained in this Lease, and in the event the Issuer should fail to perform any
such agreement on its part, the Company may institute such action against the
Issuer, as the Company may deem necessary to compel performance; provided,
however, that anything contained herein to the contrary notwithstanding, no such
action shall: (a) violate the agreements on the part of the Company contained in
the second paragraph of this Section; (b) diminish the amounts required to be
paid by the Company pursuant to any provision of this Lease; or (c) seek to
impose or impose any pecuniary liability on the Issuer payable from any source
other than as provided in the Loan Documents, or any personal or pecuniary
liability on any officer or director of the Issuer. The Company may, at its own
cost and expense, and in its own name or in the name of the Issuer, prosecute or
defend any action or proceeding or take any action involving third persons which
the Company deems reasonably necessary in order to secure or protect its right
to possession, occupancy, and use of the Project, and in such event the Issuer
shall, provided the Company shall pay, or cause to be paid, all costs (including
attorneys' fees) reasonably incurred by the Issuer in connection therewith as
such costs accrue, cooperate fully with the Company.
Section 5.5. Prepayment of Rental Payments. (a) Basic Rental
payments under Section 5.4(a)(1) may be prepaid in full or in part as permitted,
but only as permitted under the Bank Loan Documents or with Bank's consent in
its sole discretion, and Basic Rental Payments under Section 5.4(a)(2) may be
prepaid in full or in part at any time without premium or penalty.
<PAGE>
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(b) The amount necessary to prepay the Rental Payments in
full, or to provide for such full prepayment, shall be determined in accordance
with the provisions of Section 11.6 of this Lease.
Section 5.6. Rights and Obligations of Company Upon Full
Prepayment of Rental Payments. In the event the Rental Payments shall have been
prepaid in full, the Company shall have the option to purchase the Project in
accordance with the provisions of Section 11.3 hereof. If such option is not
exercised, then (i) this Lease shall continue in accordance with its terms, and
(ii) the Company shall have no further obligation to pay Basic Rental Payments
during such paid up period of the Term hereof.
(END OF ARTICLE V)
<PAGE>
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ARTICLE VI
MAINTENANCE, MODIFICATIONS, TAXES, AND INSURANCE
Section 6.1. Maintenance of the Facility. Throughout the Term,
the Company shall, at its own expense, keep and maintain the Facility, or cause
the Facility to be kept and maintained, in good condition, repair, and working
order (ordinary wear and tear excepted), making, or causing to be made, all
repairs and replacements thereto (whether ordinary or extraordinary, structural
or nonstructural, or foreseen or unforeseen), and operate the Facility, or cause
the Facility to be operated, as deemed necessary and proper by the Company.
Section 6.2. Modification of the Facility. (a) The Company, at
its own cost and expense, may make such additions, renewals, replacements, or
improvements to or alterations of the Project, or may construct or place on the
Facility, such additional or renewal or replacement facilities, furnishings, or
equipment, as the Company may deem desirable to attain the purposes herein
contemplated, provided that such additions, renewals, replacements,
improvements, alterations, facilities, furnishings, or equipment shall not
impair the fair market value, structural soundness, or usefulness of the
Facility.
(b) At the request of the Company or Desa, the Issuer
shall join in any application for such municipal and other governmental permits
and authorizations as the Company may deem necessary or advisable in connection
with any such construction, acquisition or installation, provided that the
Company or Desa shall indemnify and hold the Issuer harmless, or cause the
Issuer to be indemnified and held harmless, against and from all costs and
expenses, including attorneys' fees, which may be incurred by the Issuer in
connection with any such joinder or application.
Section 6.3. Improvements as Part of the Facility. All
buildings, structures, improvements, fixtures, accessions and other Property
which shall be constructed, placed, or installed in or upon the Facility as a
substitute for, or in renewal or replacement of, any buildings, structures,
improvements, fixtures, accessions, or other Property constituting part of the
Facility, shall become a part of the Facility; provided, however, that the
Company does not warrant, covenant or represent that such additions would become
a part of the Facility.
Section 6.4. Taxes, Assessments, and Utility Charges. (a) The
Company shall pay, or cause to be paid, as the same shall respectively become
due: (i) all taxes, in lieu of tax payments, regulatory fees, and governmental
charges of any kind whatsoever, including ad valorem taxes, that may at any time
be lawfully assessed or levied against or with respect to the Facility and/or
any furnishings, equipment, or other Property installed or brought by the
Company or any other person, therein or thereon, excluding, however, any taxes
levied upon or with respect to the income or revenues of the Issuer from the
Facility; (ii) all utility or other charges, including "service charges,"
incurred or imposed for the operation, maintenance, use, occupancy, upkeep, and
improvement of the Facility; and, (iii) all assessments and charges of any kind
whatsoever lawfully made by any governmental body
<PAGE>
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for public improvements which are in respect of the Facility or any part
thereof. It is acknowledged and agreed, however, that the Issuer and the Company
do not expect or intend that any ad valorem taxes will be assessed against the
Facility during the Term.
(b) The Company or any other person may, in good faith and
at its own expense, contest any such taxes, in lieu of tax payments,
assessments, and other charges, after giving notice of its intention to do so to
the Issuer. In the event of any such contest, the Company or such other person,
as applicable, may permit the taxes, assessments, or other charges so contested
to remain unpaid during the period of such contest and any appeal therefrom,
unless the Issuer shall notify the Company or such other person, as applicable,
that by nonpayment of any such items the Facility, or any part thereof, may be
imminently subject to loss or forfeiture, in which event such taxes,
assessments, or charges shall be paid promptly or secured by posting a bond in
form and substance satisfactory to the Issuer. The Issuer shall, if requested by
the Company or such other person, as applicable, and provided that the Issuer
shall be indemnified and held harmless against and from all costs and expenses
(including attorneys' fees) which may be reasonably incurred by the Issuer in
connection therewith, cooperate fully with the Company or such other person, as
applicable, in any such contest.
Section 6.5. Insurance Required. (a) At all times throughout
the Term, the Company shall maintain insurance against such risks and for such
amounts as are customarily insured against by businesses of like size and type,
paying, as the same become due and payable, all premiums in respect thereto,
including but not necessarily limited to:
(i) fire insurance with Uniform Standard Extended
Coverage Endorsements or equivalent coverage obtainable
through Federal or State programs, and vandalism and malicious
mischief insurance, as may be approved for issuance in the
State, at all times in an amount equal to not less than 80% of
the replacement cost of the Building, exclusive of excavations
and foundations with respect to the Building;
(ii) comprehensive general public liability
insurance, insuring against all claims for personal injury or
death on an occurrence basis in an amount not less than
$1,000,000 per occurrence and $1,000,000 per person, and
against all claims for property damage on an occurrence basis
in an amount not less than $500,000 per occurrence; and
(iii) workers' compensation coverage and any other
type of insurance required by the laws of the State.
Any of the insurance required above may provide deductible
provisions in amounts not exceeding that in similar policies carried by
businesses of a size and character similar to the Company, but in no event to
exceed $10,000, if reasonably obtainable, and the Company shall be a
self-insurer to the extent of the amount of the deductible obtained.
(b) The Net Proceeds of the insurance carried pursuant to
the provisions of this Section shall be paid and applied as provided by Section
6.7 hereof.
<PAGE>
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Section 6.6. Insurers and Policies. (a) Each insurance policy
required by Section 6.5 hereof: (1) shall be issued by a financially responsible
insurer (or insurers) of recognized standing, legally authorized to provide the
respective insurance in the State; and (2) shall prohibit cancellation or
modification by the insurer without at least thirty (30) days prior written
notice to the Issuer, Desa and the Company. Before the expiration of any such
policy, the Company shall furnish the Issuer and Desa evidence satisfactory to
the Issuer and Desa, that such policy has been renewed or replaced, or is no
longer required by this Lease. Without limiting the generality of the foregoing,
all insurance policies carried pursuant to Section 6.5 hereof shall name the
Company, Desa and the Issuer as parties insured thereunder as the respective
interest of each of such parties may appear, and each policy shall provide that
losses thereunder shall be adjusted by the Company, with the concurrence of
Desa, with the insurer on behalf of the insured parties.
(b) All such policies of insurance, or certificates
(acceptable to the Issuer and Desa) of the insurers, or of an agent or agents of
the insurers, that such insurance is in force and effect, shall be deposited
with the Bank.
Section 6.7. Application of Net Proceeds of Insurance. The Net
Proceeds of the insurance carried pursuant to the provisions of Section 6.5
hereof shall be applied as follows:
(a) The Net Proceeds of the insurance carried pursuant to
Sections 6.5(a)(i) hereof shall be applied as provided in Section 7.1 hereof;
and
(b) The Net Proceeds of the insurance carried pursuant to
Sections 6.5(a)(ii) and 6.5(a)(iii) hereof shall be applied toward
extinguishment or satisfaction of the liability with respect to which such
insurance proceeds may be paid.
Section 6.8. Advances by Issuer. (a) In the event the Company
shall fail to pay, or fail to cause to be paid, any tax, assessment, or
governmental charge required to be paid by the provisions of Section 6.4 hereof,
prior to the date upon which such tax, assessment or charge would become
delinquent, or maintain, or cause to be maintained, the full insurance coverage
required by the provisions of Section 6.5 hereof, the Issuer, with not less than
ten (10) days' prior written notice to the Company and Desa, may (but shall be
under no obligation to) pay such tax, assessment, or governmental charge or
obtain or maintain the required policy of insurance, and pay the premium or
premiums on the same.
(b) In the event that the Company or any other person
shall permit any unsafe or dangerous condition to exist in the Project, the
Issuer may (but shall be under no obligation to) notify the Company and Desa in
writing of such condition, and if the Company or Desa shall fail to correct such
condition, or cause such condition to be corrected, within (30) days after
receipt of such notice, may (but shall be under no obligation to) make the
required correction, improvement, or repair.
(c) All amounts so advanced by any person pursuant to
subsections (a) or (b) of this Section shall be promptly reimbursed by the
Company to the person making the advance, together with interest thereon from
the date of such advance to the date of
<PAGE>
-19-
reimbursement at a rate per annum equal to twelve percent (12%) or the maximum
rate of interest allowable by applicable law, whichever is less.
Section 6.9. Obligation of Company to Maintain Insurance
Regardless of Approval. No acceptance or approval of any insurance policy by the
Issuer shall relieve or release the Company from any liability, duty, or
obligation under the provisions of this Lease.
(END OF ARTICLE VI)
<PAGE>
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ARTICLE VII
DAMAGE, DESTRUCTION, CONDEMNATION, ETC.
Section 7.1. Damage or Destruction. (a) Subject to the Bank
Loan Documents, in the event the Facility shall be damaged or destroyed (in
whole or in part) at any time during the Term:
(i) the Company shall promptly give, or cause to be
given, written notice of such damage or destruction to the
Issuer, the Bank and Desa;
(ii) any Net Proceeds of insurance resulting from
damage to or destruction of the Facility shall be applied by
the Company, at the option of Desa, to the prepayment of all
or any portion of Rental Payments and/or to the repair or
replacement of the Facility;
(iii) so long as there shall be outstanding any
indebtedness evidenced by the Loan, the Company shall, if and
to the extent required by the Lender, promptly replace,
repair, or restore the Facility to such condition, value, and
utility to allow the Facility to operate as it was designed to
operate prior to such damage or destruction, with such
changes, alterations, and modifications (including the
substitution and addition of other Property), as may be then
approved by the Bank, Lender, Equipment Lender and Desa.
In the event such Net Proceeds of insurance, or the portion
thereof, if any, are insufficient to pay in full the costs of such replacement,
repair, rebuilding or restoration, the Company shall be obligated to complete
such replacement, repair, or restoration, paying from its own monies that
portion of the costs thereof in excess of such Net Proceeds of insurance.
All such replacements, repairs, or restoration of the Facility
made pursuant to this Section, whether or not requiring the expenditure of
monies of the Company, shall automatically become a part of the Facility the
same as if specifically described herein.
(b) If the Loan, including the interest payable thereon,
and all sums payable pursuant to Section 5.2(b) hereof, have been fully paid, or
provision therefor has been made, all such Net Proceeds of insurance shall be
paid as provided in the Equipment Lease or the Desa Lease, or if no provision
with respect thereto is made, such Net Proceeds shall be paid to the Company.
(c) The Company shall be entitled to any insurance
proceeds or portion thereof made for damage to or destruction of any Property
which, at the time of such damage or destruction, is not part of the Project.
Section 7.2. Condemnation. (a) In the event all or any part of
the title to, or the use of, the Facility shall be taken by Condemnation during
the Term:
<PAGE>
-21-
(i) the Company shall promptly give, or cause to be
given, written notice of any Condemnation proceedings of, or
affecting, the Facility, or any portion thereof, to the
Issuer, Bank, Desa, Lender and the Equipment Lender;
(ii) any Net Proceeds of any Condemnation award shall
be applied by the Company, at the option of Desa, to the
prepayment of any portion of Rental Payments, to the
restoration of the Facility, and/or to the acquisition of
Substitute Facilities, as such term is hereinafter defined;
(iii) so long as there shall be outstanding any
indebtedness evidenced by the Loan, the Company shall, to the
extent required by Desa, (i) promptly restore the Facility
(excluding any land taken by Condemnation) to such condition.
value, and utility to allow the Facility to operate as it was
designed to operate prior to such Condemnation, with such
changes, alterations, and modifications (which do not increase
expense, unless Desa pays such additional cost) as may be then
required by Desa, or (ii) acquire, by construction or
otherwise, facilities (the "Substitute Facilities"),
acceptable to Desa, of such nature and value to allow the
Facility to operate as it was designed to operate prior to
such condemnation, with such changes, alterations, and
modifications as may be then required by Desa.
In the event that such Net Proceeds are not sufficient to pay
in full the costs of such restoration of the Facility or such acquisition of
Substitute Facilities, the Company shall be obligated to complete such
restoration or acquisition, or to acquire such Substitute Facilities, as
applicable, and shall pay from its own monies that portion of the costs thereof
in excess of such Net Proceeds of any condemnation award.
The restored portions of the Facility, or the Substitute
Facilities, whether or not requiring the expenditure of the moneys of the
Company or Desa, shall automatically become part of the Facility.
(b) If the Loan, including the interest payable thereon,
and all sums payable pursuant to Section 5.2(b) hereof, have been fully paid,
all such Net Proceeds of any Condemnation award shall be paid as provided in the
Equipment Lease or the Desa Lease, or if no provision with respect thereto is
made, such Net Proceeds shall be paid to the Company.
(c) The Company shall be entitled to the proceeds of any
Condemnation award or portion thereof made for damage to, or taking of, any
Property which, at the time of such damage or taking, is not part of the
Project.
(END OF ARTICLE VII)
<PAGE>
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ARTICLE VIII
SPECIAL COVENANTS
Section 8.1. No Warranty of Condition or Suitability; Use of
Project. The Company acknowledges its full familiarity with the Land and the
Building, and it represents that it is solely responsible for the plan under
which the Facility will be operated and maintained. The Issuer makes no
representations or warranties, either express or implied, as to the condition,
title, design, operation, merchantability, or fitness of the Project, or that it
is, or will be, suitable for the purposes or needs of the Company or Desa.
Section 8.2. Indemnity and Hold Harmless Provisions. The
Company hereby releases the Issuer, its members, agents, employees, and
consultants from; agrees that the Issuer, its members, agents, employees, and
consultants shall not be liable for; and agrees to reimburse and indemnify and
hold the Issuer, its members, agents, employees, and consultants harmless from
and against, any and all: (a) liability for loss or damage to Property or any
injury to or death of any and all persons that may be occasioned by any cause
whatsoever pertaining to the Project or arising by reason of or in connection
with the acquisition, occupation, or use of said Project; (b) liability arising
from, or expense incurred by reason of, the Issuer's leasing of the Project, and
all causes of action and attorneys fees and any other expense incurred in
defending any suits or actions which may arise as a result of any of the
foregoing excluding Issuer's obligations to the Company hereunder; and (c) all
costs and expenses of the Issuer or the officers, directors, or employees
thereof, incurred as a result of carrying out its obligations under this Lease,
the Loan Documents, or any other document herein contemplated; provided,
however, that the foregoing shall not apply to the negligence or wanton or
willful misconduct of the Issuer, its members, agents, consultants and
employees.
Section 8.3. Reimbursement of Issuer. Notwithstanding that it
is the intention of the parties that the Issuer shall not incur any pecuniary
liability by reason of this Lease, or the Loan Documents, or by reason of any
actions, documents, statutes, ordinances, or regulations pertaining to the
foregoing, the Company shall promptly pay any and all costs and expenses, as
such costs and expenses accrue, which may be incurred by, or judgments which may
be rendered against, the Issuer, or any of its officers, employees, or agents at
any time or times during, or subsequent to the Term: (a) in enforcing any of the
terms, covenants, conditions, or provisions of this Lease; (b) in defending any
action, suit, or proceeding brought against the Issuer, or any of its respective
officers, employees, or agents as a result of the violation of, or failure to
comply with, any present or future Federal, State, or municipal law, ordinance,
regulation, or order, or as a result of any alleged failure, neglect,
misfeasance, or default on the part of the Company, or any of the employees,
servants, agents, or independent contractors of any of the foregoing in
connection with, arising from, or growing out of, this Lease or in connection
with the Loan, the Loan Documents, or the Project, or any operations conducted
in, or any use or occupancy of, said Project, or any action pertaining to, or
connected with, any of the foregoing.
<PAGE>
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Section 8.4. Right of Access to the Project. The Issuer and
its duly authorized agents shall have the right at all reasonable times to enter
upon, and to examine and inspect, the Project. In addition, the Issuer and its
duly authorized agents shall have such rights of access to the Project as may be
reasonably necessary for the proper maintenance and repair of the project in the
event of any failure by the Company to perform its obligations hereunder.
Section 8.5. Project as a Public Facility. The Company shall,
during the Term, admit, or cause to be admitted, persons; employ, or cause to be
employed, persons at, and render, or cause to be rendered, services at, the
Project without discrimination as to race, religion, creed, color, sex, age, or
national origin.
Section 8.6. Compliance with Orders. Ordinances. Etc. (a) The
Company shall throughout the Term, without expense to the Issuer, promptly
comply, or promptly cause compliance, with all statutes, codes, laws, acts,
ordinances, orders, judgments, decrees, injunctions, rules, regulations,
permits, licenses, authorizations, directions, contract provisions, and
requirements of all Federal, State, county, municipal, and other governments,
departments, commissions, boards, companies or associations insuring the
premises, courts, authorities, officials, and officers, foreseen or unforeseen,
ordinary or extraordinary, which now or at any time hereafter may be applicable
to the Project, or any part thereof, or to any of the streets, roads,
passageways, sidewalks, curbs, gutters adjoining the Project, or any part
thereof, or to any use, manner of use, or condition of the Project, or any part
thereof.
(b) Notwithstanding the provisions of subsection (a) of
this section, the Company or any other person may, in good faith and at his,
her, or its own expense, upon prior written notice to the Issuer, contest the
validity or the applicability of any requirement of the nature referred to in
subsection (a) of this section. In such event, the Company, or any such person,
as applicable, may fail to comply with the requirement or requirements so
contested during the period of such contest, and any appeal therefrom, unless
the Issuer or the Trustee shall notify the Company and Desa, or any such person,
as applicable, that by failure to comply with such requirement or requirements,
the Project, or any part thereof, may be imminently subject to loss or
forfeiture, in which event the Company or Desa shall promptly take such action
with respect thereto as shall be satisfactory to the Issuer. The Issuer shall,
if requested by the Company, Desa or such other person, as applicable, and
provided that the Issuer shall be indemnified and held harmless against and from
all costs and expenses (including attorneys' fees) which may be reasonably
incurred by the Issuer in connection therewith, cooperate fully with the
Company, Desa or such other person, as applicable, in any such contest.
Section 8.7. Discharge of Liens and Encumbrances. (a) The
Company shall not permit or create, or suffer to be permitted or created, any
Lien, except for Permitted Encumbrances, upon the Facility or any part thereof,
by reason of any labor, materials, or services rendered or supplied, or claimed
to be rendered or supplied, with respect to the Facility, or any part thereof.
The Company shall immediately give notice to the Issuer and Desa of the filing
or assertion of any such Lien of which it has knowledge, and shall, within
thirty (30) days after receipt of actual or constructive notice of the filing or
assertion of any
<PAGE>
-24-
such Lien, satisfy the Lien or cause it to be discharged of record or otherwise
prevent the enforcement thereby by payment, deposit, filing the requisite bond,
or taking such other action as shall be reasonably satisfactory to the Issuer.
(b) Notwithstanding the provisions of subsection (a) of
this section, the Company, Desa or any other person, may, in good faith and at
his, her, or its own expense, upon prior written notice to the Issuer, contest
any such Lien. In such event, the Company, Desa or any such person, as
applicable, may permit the Lien or encumbrance so contested to remain
undischarged and unsatisfied during the period of such contest, and any appeal
therefrom, unless the Issuer shall notify the Company and Desa, or any such
persons, as applicable, that by nonpayment of such Lien or encumbrance the
Project, or any part thereof, may be imminently subject to loss or forfeiture,
in which event, the Company or Desa shall promptly secure payment of such unpaid
Lien or encumbrance by filing, or causing to be filed, the requisite bond, in
form and substance satisfactory to the Issuer. The Issuer shall, if requested by
the Company, Desa or such other person, as applicable, and provided that the
Issuer shall be indemnified and held harmless against and from all costs and
expenses (including attorneys' fees) which may be reasonably incurred by the
Issuer in connection therewith, cooperate fully with the Company, Desa or such
other persons, as applicable, in any such contest.
Section 8.8. Restriction Against Certain Religious Activities.
The Company hereby covenants that, for such period as may be required by law, no
part of the Project shall be used for sectarian instruction, or as a place of
religious worship, or in connection with any part of a program of a school or
department of divinity of any religious denomination.
If at any time the applicable law would permit the Project to
be used for a purpose prohibited by this Section, such prohibition shall, to
that extent, be of no further force or effect. This covenant shall survive any
termination of this Lease.
Section 8.9. Further Assurances and Corrective Instruments.
The Issuer and the Company agree that they will, from time to time, execute,
acknowledge and deliver, or cause to be executed, acknowledged and delivered,
such supplements hereto and such further instruments as may reasonably be
required for correcting any inadequate or incorrect description of the Project
hereby leased or intended so to be or for carrying out the expressed intention
of this Lease.
Section 8.10. Granting of Easements. The Company may at any
time or times, subject to its leasehold interest, grant easements, licenses,
rights of way (including the dedication of public highways) and other rights or
privileges in the nature of easements with respect to any property or rights
included in the Project, or the Company may release existing easements,
licenses, rights of way and other rights and privileges with or without
consideration, and the Issuer agrees that it shall execute and deliver any
instrument necessary or appropriate to confirm and grant or release any such
easement, license, right of way or other grant or privilege upon receipt of: (1)
a copy of the instrument of grant or release, and (2) a written application
signed by the Authorized Representative of the Company and Desa requesting such
instrument and stating (i) that such grant or release is not detrimental to the
<PAGE>
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proper conduct of the business of the Company or Desa, and (ii) that such grant
or release will not impair the effective use or interfere with the operation of
the Project.
Section 8.11. Release of Certain Land. Notwithstanding any
other provisions of this Lease, the parties hereto reserve the right, at any
time and from time to time, to amend this Lease for the purpose of effecting the
release of or removal from this Lease and the leasehold estate created hereby of
(i) any unimproved part of the Land (on which no part of the Building or other
building or equipment owned by the Company or Desa and essential to the
continued operation of the Project is situated), or (ii) any part of the Land
with respect to which the Company proposes to convey fee title or an easement to
a railroad, public utility or public body in order that railroad service,
utility services or roads may be provided for the Project; provided that if at
the time any such amendment is made any of the Loan is outstanding and unpaid
such amendment shall not be effective until and unless the Lender, Bank Desa and
Equipment Lender have consented thereto in writing.
(END OF ARTICLE VIII)
ARTICLE IX
ASSIGNMENT: REMOVAL OF EQUIPMENT: ETC.
Section 9.1. Assignment and Subleasing. (a) This Lease may be
assigned and the Project subleased, as a whole or in part, by the Company
without the necessity of obtaining the consent of the Issuer, subject, however,
to each of the following conditions: (i) no assignment shall relieve the Company
from primary liability for any obligations under this Lease, and in the event of
any such assignment, the Company shall continue to remain primarily liable for
payment of the amounts specified in this Lease and for performance and absence
of the other agreements on its part provided to be performed and observed by the
Company to the same extent as though no assignment had been made; (ii) the
assignee or sublessee shall assume the obligations of the Company hereunder to
the extent of the interest assigned or subleased; (iii) the Company shall,
within thirty (30) days after the delivery thereof, furnish or cause to be
furnished to the Issuer a true and complete copy of each assignment, assumption
of obligation or sublease, as the case may be; and (iv) Desa, Bank, Lender and
Equipment Lender shall have consented to such assignment, assumption of
obligation or sublease.
(b) The Company may contract for the performance by others
of operations or services on, or in connection with, the Project, or any part
thereof, for any lawful purpose; provided, however, that any such contract shall
not be inconsistent with the provisions of this Lease or the Loan Documents and
that the Company shall remain fully obligated and responsible under this Lease,
to the same extent as if such contract had not been executed.
Section 9.2. Consent to Assignment. The Issuer shall assign
its rights to receive certain monies under this Lease to the Bank and Lender as
security for the payment of the Loan. Such assignment shall in no way diminish
or impair the obligations, if any, of the Issuer under this Lease and shall be
subject and subordinate to this Lease. The Company
<PAGE>
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hereby agrees and consents to such assignment by the Issuer, and further agrees
and consents to all terms, provisions, and conditions of the Assumption
Agreement and the Assignment of Facility Lease.
Section 9.3. Restrictions on Mortgage or Sale of Project by
Issuer. The Issuer agrees that, except for any assignment, mortgage or pledge of
its interest in the rentals hereunder to Lender pursuant to the Deed of Trust
and the Assignment of Lease, it will not mortgage, sell, assign, transfer or
convey the Project or any portion thereof during the Term, except as otherwise
permitted herein.
Section 9.4. Removal of Fixtures. (a) In the event the Company
determines from time to time that any item of fixtures or improvements
constituting a part of the Facility has become inadequate, obsolete, worn out,
unsuitable, undesirable, or unnecessary, the Company may remove such item
constituting a part of the Facility, and may sell, trade-in, exchange, or
otherwise dispose of the same, as a whole or in part, provided that:
(i) Such removal will not materially impair the
overall efficiency of the operation of the Project, or
adversely affect the structural integrity of the Project; and,
(ii) The Company shall either:
(A) substitute, or cause to be substituted, for such
removed item (by direct payment of the costs thereof), and
install, or cause to be installed, in the Project, other
fixtures or related property having equal or greater value and
utility in the operation of the Project (but not necessarily
having the same function), all of which substituted property
shall be free of all Liens, other than Permitted Encumbrances,
and shall become a part of the Project; or,
(B) not make, or cause to be made, any such
substitution and installation, provided that: (i) in the case
of the sale of any such removed item (other than to itself),
or in the case of the scrap thereof, the Company shall pay, or
cause to be paid, to the Bank, or if the Bank Loan is paid,
the Lender, the proceeds from such sale of the scrap thereof,
as the case may be; or, (ii) in the case of the trade-in of
such removed item for other property not to be installed in
the Project, the Company shall pay, or cause to be paid, to
the Bank, or if the Bank Loan is paid, the Lender, an amount
of money equal to the credit received by it in such trade-in;
or, (iii) in the case of the sale of any such removed item of
fixtures, equipment, or improvements constituting a part of
the Project by the Company or in the case of any other
disposition thereof, the Company shall pay to the Bank, or if
the Bank Loan is paid, the Lender, an amount of money equal to
the fair market value thereof at the time of sale or other
disposition; and
(C) Desa shall have granted its prior written consent
(in its sole discretion).
<PAGE>
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Any monies paid to the Bank or the Lender pursuant to the
provisions of this Section shall be as a prepayment of the Bank Loan or the
Facility Loan, as applicable, and the Company shall receive a credit therefor in
accordance with the provisions of Section 5.3 hereof.
(b) Notwithstanding any provision of Section 9.4(a) hereof,
unless the Loan Documents require otherwise, the Company without being required
to make the substitution specified in Section 9.4(a)(2)(A) hereof, or the
payment specified in Section 9.4(a)(2)(B) hereof, may remove and sell or
otherwise dispose of any item or items of fixtures, or improvements constituting
part of the Facility, and without the necessity of notifying the Bank or the
Lender (but with the required prior written approval of Desa), provided that the
aggregate value of such furnishings, equipment, and improvements so removed does
not exceed: (A) Ten Thousand Dollars ($10,000) in any Fiscal Year; and, (B)
Fifty Thousand Dollars ($50,000) in all Fiscal Years during the Term. The value
of any such furnishings, equipment, or improvements so removed pursuant to this
subsection (b) shall not be included in the computations required by Section
9.4(c) hereof.
(c) The Issuer shall promptly execute any and all instruments
deemed necessary by the Company, in its sole discretion, to fully effectuate the
provisions of this Section.
Section 9.5. Installation of Desa's Own Machinery. Desa may,
from time to time, in its sole discretion and at its own expense, install
machinery, equipment and other tangible and movable property in the Project or
on the Land. All such machinery, equipment and other tangible and movable
property shall remain the sole property of Desa in which the Issuer and the
Company shall have no interest.
Section 9.6. References to Loan Ineffective After Paid. Upon
payment in full of the Bank Loan, the Facility Loan or the Equipment Loan, all
references in this Lease to the Bank Loan, the Facility Loan or the Equipment
Loan and to Bank, the Lender or Equipment Lender, as applicable, shall be
ineffective and the Bank, the Lender or Equipment Lender, as applicable, shall
not thereafter have any rights hereunder.
(END OF ARTICLE IX)
ARTICLE X
EVENTS OF DEFAULT AND REMEDIES
Section 10.1. Events of Default Defined. Each of the following
shall be an "Event of Default" under this Lease, and the terms "Event of
Default" or "Default" shall mean, whenever they are used in such Lease, any one
or more of the following events:
(a) The failure by the Company to pay, or cause to be
paid, when due, the Basic Rental Payments, or any part thereof, specified to be
paid under Section 5.2 hereof;
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(b) The filing by the Company of a voluntary petition in
bankruptcy or any petition or other pleading seeking any reorganization,
composition, readjustment, liquidation, or similar relief under any present or
future law or regulation, or the seeking of or consent to or acquiescence in the
appointment of any trustee, receiver, or liquidator of all or any substantial
part of its assets or of its interest in the Facility, or the making of a
general assignment for the benefit of creditors, or the admission in writing of
the inability by the Company to pay its debts generally as the same shall become
due;
(c) The adjudication of the Company to be bankrupt or
insolvent, or the filing of a petition or other pleading against the Company
seeking an adjudication of bankruptcy, reorganization, composition,
readjustment, liquidation, or similar relief under any present or future law or
regulation, which shall remain undismissed or unstayed for an aggregate of sixty
(60) days (whether or not consecutive), or the entry of an order or decree by a
court of competent jurisdiction, without the consent or acquiescence of the
Company, appointing a trustee in bankruptcy or reorganization or a receiver or
liquidator of the Company, of all or any substantial part of its Property, or of
the Facility, which order or decree shall continue unvacated or unstayed on
appeal or otherwise and in effect for a period of ninety (90) days (whether
consecutive or not);
(d) The occurrence of a "default" or an "event of default"
under any of the Loan Documents;
(e) Subject to Section 10.7, the failure by the Company to
observe and perform any covenant, condition, or agreement hereunder on its part
to be observed or performed [except obligations referred to in paragraphs (a),
(b) or (c) of this Section for which no such notice must be given for a period
of thirty (30) days after written notice, specifying such failure and requesting
that it be remedied, is given to the Company by the Issuer, unless the Issuer
shall agree in writing to an extension of such time prior to its expiration;
provided, however, if the failure stated in the notice cannot be corrected
within the applicable period, the Issuer will not unreasonably withhold its
consent to an extension of such time if corrective action is instituted by the
Company within the applicable period and diligently pursued until the default is
corrected.
Section 10.2. Remedies on Default. (a) Whenever an Event of
Default shall have occurred and be continuing, the Issuer or the Lender may take
any one or more of the following remedial steps:
(1) Declare, by written notice to the Company, to be
immediately due and payable, whereupon the same shall become
due and payable: (i) all unpaid Rental Payments payable
pursuant to Section 5.2 hereof in an amount equal to the
amount required to pay, or cause to be paid, the Loan; and,
(ii) all other payments due or to become due under this Lease;
(2) Withhold any or all further performance under
this Lease;
(3) Re-enter and take possession of the Project
without terminating this Lease, and sublease the Project for
the account of the Company, holding the
<PAGE>
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Company liable for the difference in the rent and other
amounts payable by such sublessee in such subleasing and the
Rental Payments and other amounts payable by the Company
hereunder;
(4) Terminate the Term, exclude the Company from
possession of the Project and use its best efforts to lease
the Project to another for the account of the Company, holding
the Company liable for all Rental Payments and other payments
due up to the effective date of such leasing and for the
difference in the amounts payable by such new lessee and the
amounts payable by the Company under this Lease; and/or
(5) Take any other action or proceeding permitted by
the terms of this
(a) Whenever any Event of Default shall have occurred and
be continuing, the Issuer may take, in addition to the above and the following,
whatever action at law or in equity may appear necessary or desirable to collect
the Rental Payments then due and thereafter to become due, or to enforce
performance and observance of any obligation, agreement, warranty or covenant of
the Company under this Lease.
(b) Any sums paid to the Issuer (other than for indemnity
for costs or other expenses) by reason of any remedy specified in this Section,
shall be used to pay all or a portion of the Loan.
(c) No action taken pursuant to this Section shall relieve
the Company from its obligation to make all payments required under Section 5.2
hereof.
(d) Notwithstanding the foregoing provisions of this
Section, until final action pursuant to this Section shall have been taken which
would preclude such action, the Company may pay all accrued unpaid Rental
Payments (exclusive of such Rental Payments accrued solely by virtue of
acceleration thereof as provided in Section 10.2(a)(1) hereof), and otherwise
fully cure all Events of Default. In such event, this Lease shall be fully
reinstated as if an Event of Default had not occurred.
Section 10.3. Remedies Cumulative. No remedy herein conferred
upon or reserved to the Issuer is intended to be exclusive of any other
available remedy, but each and every such remedy shall be cumulative and in
addition to every other remedy given under this Lease, or now or hereafter
existing at law or in equity. No delay or omission to exercise any right or
power accruing upon any Event of Default shall impair any such right or power or
shall be construed to be a waiver thereof, but any such right and power may be
exercised from time to time and as often as may be deemed expedient. In order to
entitle the Issuer to exercise any remedy reserved to it in this Article, it
shall not be necessary to give any notice, other than such notice as may be
herein expressly required in this Lease.
Section 10.4. Agreement to Pay Attorneys' Fees and Expenses.
In the event the Company shall default under any of the provisions of this
Lease, and the Issuer shall employ attorneys or incur other expenses for the
collection of amounts payable hereunder, or
<PAGE>
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the enforcement of performance or observance of any obligations or agreements on
the part of the Company herein contained, the Company shall, on demand therefor,
pay to the Issuer the reasonable fees of such attorneys and such other expenses
so incurred.
Section 10.5. Delay or Omission Not a Waiver. No delay or
omission of the Issuer to exercise any right or power accruing upon any breach
of any covenant or agreement contained herein, or upon the happening of any
other Default hereunder, shall impair any such right or power, or shall be
construed to be a waiver of any such right or power, or shall be construed to be
a waiver of any other Default hereunder, or any acquiescence therein; and every
such power, right, or remedy contained herein of the Issuer may be exercised
from time to time and as often as may be deemed expedient by the Issuer. Any
waiver, permit, consent, or approval of any form or character on the part of the
Issuer of any breach of, or default under, this Lease, or any waiver on the part
of the Issuer or the Lender of any provision or condition herein, must be in
writing and shall be effective only to the extent specifically set forth in such
writing.
Section 10.6. Interpretation of any Conflicting Provisions. In
the event of any conflict between any of the provisions hereof, or between any
such provisions and the provisions of the Loan Documents, except to the extent
otherwise provided in such document, the provisions of the Loan Documents shall
prevail.
Section 10.7. Force Majeure Provision. The provisions of
Section 10.1(d) are subject to the following limitations: if, by reason of force
majeure, the Company is unable in whole or in part to carry out the agreements
of the Company on its part herein contained, the Company shall not be deemed in
default during the continuance of such inability. The term "force majeure" as
used herein shall mean, without limitation, the following: acts of God; strikes;
lockouts or other industrial disturbances; acts of public enemies; orders of any
kind of any governmental body, including the government of the United States or
of the State or any of their departments, agencies, or officials, or any civil
or military authority; insurrections; riots; epidemics; landslides, lightning;
earthquake; fire; hurricane; storms; floods; washouts; droughts; arrests;
restraint of government and people, civil disturbances; explosions, breakage or
accident to machinery, transmission pipes, or canals; partial or entire failure
of utilities; or any other cause or event not reasonably within the control of
the Company, in each case which has the effect of making it impossible (as
distinguished from impracticable for the Company to perform, it being agreed
that the settlement of strikes, lockouts, and other industrial disturbances
shall be entirely within the discretion of the Company, and the Company shall
not be required to make settlement of strikes, lockouts, and other industrial
disturbances by acceding to the demands of the opposing party or parties when
such course is, in the judgment of the Company, unfavorable to the Company.
(END OF ARTICLE X)
<PAGE>
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ARTICLE XI
OPTIONS: PURCHASE OF FACILITY; ETC.
Section 11.1. Options to Terminate. The Company shall have,
and is hereby granted, the following options to terminate this Lease:
(a) At the time of any prepayment of the Rental Payments
in whole pursuant to the provisions of Section 5.5 hereof, the Company may
terminate this Lease (i) by paying to the appropriate person the amounts
required by Section 11.6 hereof, and (ii) by Company giving the Issuer notice in
writing of such termination.
(b) At any time after full payment of the Loan, the
Company may terminate this Lease by giving the Issuer notice in writing of such
termination.
Section 11 2. Option to Purchase Facility Prior to Payment of
the Loan. The Company shall have, and is hereby granted, the option to purchase
the Facility prior to the full payment of the Loan at the time of any prepayment
of the Rental Payments in whole pursuant to the provisions of Section 5.5
hereof. The purchase price payable by the Company in the event of its purchase
pursuant to this Section shall be a sum equal to One Hundred Dollars ($100) plus
the amount necessary to prepay the Rental Payments in whole.
Section 11.3. Option to Purchase Facility After Payment of the
Loan. The Company shall have, and is hereby granted, the further option to
purchase the Facility at any time during the Term following full payment of the
Loan for a purchase price of One Hundred Dollars ($100). To exercise the option
granted in this Section, the Company shall notify the Issuer of its intention so
to exercise such option not less than five (5) days nor more than ninety (90)
days prior to the proposed date of purchase and shall on the date of purchase
pay such purchase price to the Issuer.
Section 11.4. [This Section Intentionally Omitted]
Section 11.5. Conveyance on Exercise of Option to Purchase
Project. At the closing of any purchase pursuant to this Lease, the Issuer shall
upon receipt of the purchase price deliver to the Company the following:
documents (including, without limitation, a special warranty deed and bill of
sale) conveying to the Company good and marketable title to said Property as it
then exists, subject to the following: (i) those Liens (if any) to which title
to said Property was subject when conveyed to the Issuer; (ii) those Liens
created by the Company or to the creation or suffering of which the Company
consented; (iii) those Liens resulting from the failure of the Company to
perform or observe any of the agreements on its part contained in this Lease;
and (iv) Permitted Encumbrances other than the Loan Documents.
Section 11.6. Payments Upon. and Conditions For. Early
Termination. Termination by the Company of this Lease pursuant to Section 11.1
hereof or the purchase of the Project pursuant to Section 11.2 hereof shall not
be effective until the Company shall have made the following payments:
(a) To the Bank an amount which will be sufficient to pay
the Bank Loan in full;
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(b) To the Bank, an amount sufficient to pay all unpaid
fees and expenses of the Bank under the Bank Loan Documents or otherwise;
(c) To the Lender an amount which will be sufficient to
pay the Facility Loan in full;
(d) To the Lender, an amount sufficient to pay all unpaid
fees and expenses of the Lender under the Facility Loan Documents or otherwise;
(e) To the Issuer, an amount certified by the Issuer
sufficient to pay all unpaid fees and expenses (including attorneys' fees) of
the Issuer incurred under this Lease;
and
(f) To the appropriate person, an amount sufficient to pay
all other fees, expenses, or charges, if any, due and payable or to become due
and payable under this Lease, the Bank Loan Documents or the Facility Loan
Documents and not otherwise paid or provided for.
Section 11.7. Continuation of Certain Provisions. Upon
termination of this Lease, the liabilities of the Company under such Lease shall
terminate, except that its liabilities and obligations under Sections 8.2 and
8.3 of this Lease, and as otherwise herein expressly provided, shall
nevertheless survive.
(END OF ARTICLE XI)
ARTICLE XII
MISCELLANEOUS
Section 12.1. Certificates and Opinions. Any certificate or
opinion made or given by an officer or director of the Issuer may be based
(whether or not expressly so stated), insofar as it relates to legal matters,
upon a certificate or opinion of or representations by counsel, unless such
officer or director knows that the certificate or representations with respect
to the matter upon which his or her certificate or opinion may be based are
erroneous; and, any certificate or opinion made or given by counsel may be based
(insofar as it relates to factual matters, information with respect to which is
in the possession of the Issuer) upon the certificate or opinion of, or
representation by, an officer or director of the Issuer, unless such counsel
knows that the certificate or representations with respect to the matters upon
which his or her certificate or opinion may be based as aforesaid are erroneous.
Section 12.2. Limited Liability of the Issuer. No recourse
under or upon any obligation, covenant, agreement or certification contained in
the Loan Documents, in the Loan, or in this Lease, or in any other document
whatsoever, or under any judgment obtained against the Issuer, or by the
enforcement of any assessment or by any legal or equitable proceeding by virtue
of any constitution or statute or otherwise or under any circumstances, under or
independent of the Loan Documents, this Lease or any other
<PAGE>
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document, shall be had against any incorporator, member, director or officer, as
such, past, present or future, of the Issuer, either directly or through the
Issuer or any receiver thereof, or for the payment of any other sum or for the
performance of any obligation under the Loan Documents, this Lease, or any other
document or certification. Any and all personal liability of every nature,
whether at common law or in equity, or by statute or by constitution or
otherwise, of any such incorporator, member, director or officer, as such, to
respond by reason of any act or omission on his part or otherwise, for the
payment for or to the Issuer or any receiver thereof, of any sum that may remain
due and unpaid upon the Loan, is hereby expressly waived and released as a
condition of and consideration for the execution of the Loan Documents and this
Lease.
Section 12.3. Notices. All notices, certificates, and other
communications hereunder shall be in writing, and shall be sufficiently given
and shall be deemed given when delivered and, if delivered by mail, shall be
sent by registered mail or certified mail, return receipt requested, postage
prepaid, addressed as follows:
To the Issuer:
The Industrial Development Board
of the City of Shelbyville, Tennessee
c/o John C. Shofner, Esq.
Bomar, Shofner, Irion & Rambo
104 Depot Street
Shelbyville, TN 37160-0129
To the Company:
Shelbyville Industrial Spec Building - WRS - Partnership
c/o Sain Construction Company
713 Vincent
Manchester, Tennessee 37355
To the Bank:
Trans Financial Bank of Tennessee, F.S.B.
308 North Jackson
P.O. Box 1090
Tullahoma, Tennessee 37388-1090
To the Equipment Lender:
Desa International, Inc.
2701 Industrial Drive
P.O. Box 90004
Bowling Green, Delaware 42102-9004
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To Desa:
Desa International, Inc.
2701 Industrial Drive
P.O. Box 90004
Bowling Green, Delaware 42102-9004
Section 12.4. Binding Effect. This Lease shall inure to the
benefit of and shall be binding upon the Issuer, the Company, and the respective
heirs, executors, successors, administrators, and assigns of the foregoing.
Section 12.5. Severability. In the event any provision of this
Lease shall be held invalid or unenforceable by any court of competent
jurisdiction, such holding shall not invalidate or render unenforceable any
other provision hereof.
Section 12.6. Limitation of Rights. Except as otherwise
expressly provided herein, nothing in this Lease, express or implied, shall be
construed to confer upon any person, other than the Issuer, the Company, the
Bank, Desa, the Equipment Lender and the Lender, any right, remedy or claim,
legal or equitable, under or by reason of this Lease or any provisions hereof.
Section 12.7. Execution of Counterparts. This Lease may be
executed in several counterparts, each of which shall be an original, and all of
which shall constitute but one and the same instrument.
Section 12.8. Applicable Law. This Lease has been executed and
delivered in the State of Tennessee. It is intended that such Lease shall be
construed and governed exclusively by the applicable laws of the State of
Tennessee and the United States of America.
Section 12.9. Table of Contents and Section Headings Not
Controlling. The Table of Contents and the headings of the several Sections in
this Lease have been prepared for convenience of reference only and shall not
control, affect the meaning, or be taken as an interpretation of any provision
of this Lease.
Section 12.10. No Liability of the City of Shelbyville.
Tennessee. The City of Shelbyville, Tennessee, shall not in any event be liable
for the payment of the principal of, or interest on, the Loan, or for the
performance of any pledge, mortgage, obligation or agreement of any kind
whatsoever herein contained by or of the Issuer and neither the Loan Documents
nor any of the Issuer's agreements or obligations herein or otherwise shall be
construed to constitute an indebtedness of the City of Shelbyville, Tennessee
within the meaning of any constitutional or statutory provision whatsoever.
Section 12.11. Net Lease. This Lease shall be deemed and
consumed to be a "net lease," and the Company shall pay absolutely net during
the Term the rent and all other payments required hereunder, free of any
deductions, and without abatement, deduction or set off, other than those herein
expressly provided.
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Section 12.12. Not Partners. Nothing contained herein or in
any other document shall be deemed to render Issuer, Bank, Lender, Equipment
Lender, Desa or Company partners or venturers for any purpose.
(END OF ARTICLE XII)
<PAGE>
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IN WITNESS WHEREOF, the Issuer has caused this Lease to be executed in
its corporate name, its official seal to be hereunto affixed and attested by its
duly authorized officer, and the Company has caused this Lease to be executed in
its name and behalf by its authorized officer, all as of the date first above
written.
SHELBYVILLE INDUSTRIAL SPEC BUILDING
- WRS - PARTNERSHIP
By: /s/ W. R. Sain
Title: Managing General Partner
<PAGE>
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STATE OF TENNESSEE
COUNTY OF
Personally appeared before me, W. R. Sain. Notary Public, and
______________ and with whom I am personally acquainted (or proved to me on the
basis of satisfactory evidence), and who acknowledged that they executed the
foregoing instrument for the purposes therein contained and who further
acknowledged that they are Chairman and Secretary, respectively, of THE
INDUSTRIAL DEVELOPMENT BOARD OF THE CITY OF SHELBYVILLE, TENNESSEE, a public,
nonprofit corporation organized and existing under the laws of the State of
Tennessee, the within named bargainer and that they are authorized to execute
this instrument on behalf of said corporation.
WITNESS my hand, at office, this ___ day of December, 1994.
/s/ David A. Rudder
Notary Public
My Commission Expires:
<PAGE>
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EXHIBIT A
Land in the 7th Civil District of Bedford County,
Shelbyville, Tennessee, more particularly described as follows:
Beginning at a metal pin in fence on the west margin of
Stanley Boulevard at the southwest corner of the Claude Eady property and the
southeast corner of the herein described tract and running thence with the west
margin of Stanley Boulevard thence S 54(degree)58'W 36.20 feet to its point of
intersection with the north margin of Eagle Boulevard, thence with the north
margin of Eagle Boulevard N 73(degree)38'W 173.76 feet to a point, thence N
77(degree)13'W 255.00 feet to a metal pin, the southwest comer of the herein
described tract; thence leaving the margin N 10(degree)43'E 724.25 feet to a
metal pin in fence, the northwest corner of the herein described tract; thence S
84(degree)32'E 165.70 feet to an 18 inch white oak in fence; thence S
85(degree)l9'E 196.57 feet to a metal pin at a cedar snag at fence corner, the
northwest corner of the said Eady property and the northeast comer of the herein
described tract; thence with Eady's west line S 03(degree)09'W 134.10 feet to a
point in fence; thence S 03(degree)54'W 631.95 feet to the point of beginning,
containing 7.06 acres.
Being the property conveyed to The Industrial Development
Board of the City of Shelbyville, Tennessee, by instrument of record in Deed
Book _____, page _____, Register's Office for Bedford County, Tennessee.
<PAGE>
-39-
EXHIBIT B
PERMITTED ENCUMBRANCES
1. Taxes for the current year.
2. Matters shown on the survey of Rex Northcutt, Registered Land
Surveyor, dated February 21, 1994.
3. Easement to the City of Shelbyville, dated December 17, 1974,
of record in Deed Book 130, page 215, Register's Office for
Bedford County, Tennessee.
<PAGE>
-40-
LEASE
This LEASE, made and entered into on this the _____ day of February,
1994, by and between DESA II PARTNERSHIP hereinafter referred to as "Lessor,"
and DESA INTERNATIONAL, INC. hereinafter referred to as "Lessee".
WITNESSETH:
Lessor does hereby lease, demise and let unto Lessee a 53,000 square
feet building located on seven (7) acres of land at 783 Eagle Blvd. in the 7th
Civil District of Bedford County, Shelbyville, Tennessee including finishing per
attached Schedule A (the "Leased Premises") with cost not to exceed nine hundred
thousand dollars ($900,000), and more specifically described as follows:
Beginning at a metal pin in fence on the west margin of Stanley
Boulevard at the southwest corner of the Claude Eady property and the
southeast corner of the herein described tract and running thence with
the west margin of Stanley Boulevard thence S 54 58' W 36.20 feet to
its point of intersection with the north margin of Eagle Boulevard,
thence with the north margin of Eagle Boulevard N 73 38' W 173.76 feet
to a point, thence N 77 13' W 255.00 feet to a metal pin, the southwest
corner of the herein described tract; thence leaving the margin N 10
43' E 724.25 feet to a metal pin in fence, the northwest corner of the
herein described tract; thence S 84 32' E 165.70 feet to an 18 inch
white oak in fence; thence S 85 19' E 196.57 feet to a metal pin at a
cedar snag at fence corner, the northwest corner of the said Eady
property and the northeast corner of the herein described tract; thence
with Eady's west line S 3 09' W 134.10 feet to a point in fence; thence
S 3 54' W 631.95 feet to the point of beginning, containing 7.06 acres.
For title source see Deed Book 166; Page 240 in the Office of the
Register of Deeds, Bedford County, Tennessee FN 94-68.
This Lease is made under the following terms and conditions:
1. Term. Based upon completion of all items on Schedule A, this Lease
shall begin on June 1, 1994, and run for a period of one hundred twenty (120)
months from and after that date to May 31, 2004, provided the conditions
hereinafter set forth are faithfully kept and complied with by both parties.
DESA shall have access to the building for equipment installation on and after
May 1, 1994.
2. Purchase Option. Lessee shall have the option to purchase the land
and building at the end of sixty (60) months in May, 1999 for seven hundred
ninety thousand dollars ($790,000) and at the end of one hundred twenty (120)
months in May, 2004 for six hundred thousand dollars ($600,000).
<PAGE>
-41-
3. Renewal Option. Lessee shall have the option to renew the lease for
an additional sixty (60) month period to May 31, 2009 upon the condition that
there is no default in performance of any condition of this Lease for which a
notice of default has been given to Lessee. Such renewal term shall be upon the
same terms, covenants and conditions hereof. Further, Lessee shall have the
option at the end of such renewal period to purchase the land and building in
May, 2009 for one hundred thousand dollars ($100,000).
4. Rental. The rental price on this building during the term of the
Lease shall be ELEVEN THOUSAND FIVE HUNDRED DOLLARS ($11,500) per month, payable
by the fifteenth day of the Lease period and thereafter on the same day of each
month during the 120 months.
5. Modifications by Lessor. Lessor agrees to complete additions to the
structure as requested by the lessee which will be on the same terms and
conditions as this lease as long as interest rates and insurance rates remain
constant. Any improvements and modifications to be made by Lessor shall utilize
materials which are new, and both workmanship and materials shall be of
first-class quality.
6. Improvements by Lessee. Any improvements made by Lessee shall remain
the property of the Lessee and may be removed upon the expiration of the lease.
Lessee shall repair any damage occasioned by such removal. Should Lessee not
desire to remove said improvements, then, and in that event, Lessor may purchase
same for an amount equal to the original cost of said improvements to Lessee.
7. Insurance and Maintenance. Lessor shall be responsible for
maintaining hazard insurance to the extent of the full insurable value of the
Leased Premises for loss or damage by fire with the standard extended coverage,
vandalism and malicious mischief endorsements.
Lessee shall keep and maintain in good order, condition and repair the
Leased Premises and every part thereof. Lessee shall further maintain in good
order and repair the sidewalks, gutters, curbs, parking area and in lawn in
front of and adjacent to the Leased Premises. Lessee will, at Lessee's sole cost
and expense, maintain comprehensive liability insurance with reference to the
Leased Premises and shall name Lessor as an additional insured thereon.
8. Taxes. Lessee shall pay all real estate taxes and any other taxes
assessed against the property. Lessor will attempt to arrange for in-lieu of tax
agreement per Schedule B.
9. Utilities. Lessee shall be responsible for all utility bills and
deposits for the Leased Premises.
10. Return of Premises. Lessee agrees to return the premises at the end
of this Lease or any term renewal term in as good a condition as when this Lease
was entered into, normal wear and tear expected, or otherwise to be responsible
for repairs.
11. Restoration of Premises by Lessor.
<PAGE>
-42-
a. In the event the Leased Premises are damaged or destroyed or
rendered partially untenantable for their then use by fire or other casualty,
the Lessor shall promptly repair (but only from insurance proceeds received by
Lessor pursuant to the provisions of this Lease, less the cost of any such
recovery) the Leased Premises and restore the same to substantially the
condition in which they were immediately prior to the happening of such
casualty. Lessor's obligation to repair shall not extend to any improvements,
additions or personalty of the Lessee.
b. Rent Abatement. During the period from the date of such casualty
until the Leased Premises are repaired and restored, Lessee's obligations to pay
any basic rental due hereunder shall abate. The abatement shall be in the
proportion of the Leased Premises destroyed or rendered untenantable to the
total Leased Premises.
c. Termination Option. Notwithstanding the foregoing, in the event that
fifty percent (50%) or more of the Leased Premises or fifty percent (50%) or
more of the improvements located thereon are destroyed or rendered untenantable
by fire or other casualty, either party shall have the option to terminate this
Lease effective as of the date of such casualty by giving to the other party,
within forty-five (45) days after the happening of such casualty, written notice
of such termination. Upon the happening of such event, Lessor shall retain all
insurance proceeds payable to it pursuant to the provisions of this Lease.
12. Condemnation.
a. Complete or Substantial Condemnation. If the whole of the Leased
Premises or such portion thereof as will make the Leased Premises unsuitable for
the purposes leased is condemned for any public use or purpose by any legally
constituted authority, then, and in either of such events, this Lease shall
cease from the time when possession is taken by such public authority, and
rental shall be accounted for between Lessor and Lessee as of the date of the
surrender of possession. Such termination shall be without prejudice to the
rights of either the Lessor or Lessee to recover compensation from the
condemning authority for any loss or damage caused by such condemnation. Neither
Lessor nor Lessee shall have any rights in or to any award made to the other by
the condemning authority.
b. Partial Condemnation. If, during the term of this Lease, less than
the entire Leased Premises shall be taken in any such proceeding and if the
Leased Premises is not thereby rendered unsuitable for the purposes leased,
then, and in that event, this Lease shall upon vesting of title in the
proceeding, terminate solely as to the part so taken, and Lessor shall be
entitled to the total award made in any such proceeding. If this Lease is not
terminated as a result of complete or substantial condemnation as hereinabove
set for, this Lease shall continue for the balance of its term as to the part of
the Leased Premises remaining without any reduction or abatement of or effect
upon the term hereof or the liability of the Lessee to pay in full the rent
herein provided to be paid.
13. Assignment--Lessor's Consent Required. The Lessee may sublet all or
portions of the Leased Premises for the remainder of the term with the approval
of the Lessor, which approval shall not be unreasonably withheld, provided that
the business or occupation of the sublessee is not extra hazardous, disreputable
or illegal and provided further that the Lessee
<PAGE>
-43-
shall remain primarily liable for the payment of the rent herein reserved and
for the performance of all other terms of this Lease required to be performed by
Lessee.
14. Indemnification. Lessor warrants that there are no environmental
problems associated with this land and agrees to indemnify Lessee from any
violation of an Environmental Protection Agency guideline which is now existing,
and Lessee agrees to offer the same indemnification to Lessor for any violation
which might occur during its occupancy or because of its use of the property.
<PAGE>
-44-
IN TESTIMONY WHEREOF witness the signatures of the parties hereto on
the day and date first above written.
LESSOR:
DESA II PARTNERSHIP
BY:________________________________
LESSEE:
DESA INTERNATIONAL, INC.
BY:________________________________
Dirk D. Miller
Vice President
STATE OF TENNESSEE
COUNTY OF BEDFORD
I, the Undersigned, a Notary Public in and for the State and County
aforesaid, do hereby certify that _________________ did personally appear before
me and did certify and declare that he is the Managing Partner of a Tennessee
general partnership, and that he acknowledged he executed the foregoing Lease as
Managing Partner thereof on behalf of said partnership as duly authorized by the
partnership and as the act of the partnership for the purposes therein stated on
this ______day of ___________ , 1994.
- -------------------------
NOTARY PUBLIC
MY COMMISSION EXPIRES:____________
STATE OF TENNESSEE
COUNTY OF BEDFORD
I, the undersigned, a Notary Public in and for the State and County aforesaid,
do hereby certify that the foregoing Lease was executed before me by DESA
International, Inc. by and through Dirk D. Miller its Vice President, and that
the said Dirk D. Miller personally appeared before me, after being first duly
sworn, and declared that he was the officer
<PAGE>
-45-
designated and that he executed the foregoing Lease as Vice President of the
Corporation and that the execution of this Lease is the voluntary act and deed
of the Corporation.
WITNESS my hand on this ____ day of _____________, 1993.
- -------------------------
NOTARY PUBLIC
MY COMMISSION EXPIRES:____________
<PAGE>
-46-
SCHEDULE A
PROJECT DESCRIPTION
CONCRETE FLOOR SLAB
CONCRETE SLAB ON GRADED TRUCK DOCK
ELECTRICAL
1. 800 AMP SERVICE
2. HIGH BAY HALITE LIGHTING FIXTURES
3. 110 V RECEPTACLES
4. 220 V RECEPTACLES
SPRINKLER SYSTEM FACTORY AREA
LOADING DOCKS, LEVELERS & SEALS
OUTSIDE UTILITIES, GAS, WATER ELECTRICAL SEWER &
SPRINKLER SYSTEM
SHOP RESTROOMS / BREAK ROOM
OFFICE SPACE
OFFICE SPRINKLER SYSTEM
OFFICE AREA ELECTRICAL, HEATING & COOLING
FACTORY HEATING SYSTEM
PAINT MIXING ROOM
MANTEL MANUFACTURING WALLS
GENERAL AIR PLUMBING
LP GAS PLUMBING
SECURITY SYSTEM / FIRE PROTECTION / PAGING SYSTEM
COOLING FANS (4)
PAVED PARKING LOT & DRIVEWAYS
WASHER PITS
<PAGE>
February 15, 1994
Pete Sain, Jr. & Associates
Sain Construction Co.
713 Vincent
Manchester, TN 37355
In Re: Baker-Warren Building, Shelbyville, Tn.
Gentlemen:
As Mayor of the City of Shelbyville, I believe there will be no problem
with the Shelbyville Industrial Bond Board granting an in-lieu of tax agreement
to your firm if you should purchase the captioned building for manufacturing
purposes.
The City of Shelbyville Bond Board does have the authority to grant
in-lieu of tax arrangements with industrial clients who establish manufacturing
facilities in Shelbyville. We have done this for many corporations in the past.
This would have to be voted on by the entire bond board, but I do not
foresee there being a problem with the request.
Sincerely,
Mayor Henry Feldhaus
<PAGE>
SCHEDULE B
February 18, 1994
Mr. D. S. Vitale, President
DESA, INTERNATIONAL
P.O. Box 90004
Bowling Green, KY 42102-9004
Re: Real Estate Tax Abatement
Dear Mr. Vitale:
In reference to your letter of February 16, 1994 regarding the Real Estate Tax
Abatement on the Baker-Warren Building through a lease arrangement with Pete
Sain, Jr., I, as Mayor, have discussed this arrangement with a majority of
Shelbyville City Council members and in conjunction with Dirk Miller.
We are confirming negotiations as follows:
1st five years 0 Tax
6th year 60% Tax
7th year 70% Tax
8th year 80% Tax
9th year 90% Tax
10th year 100%Tax
We hope this will satisfy your needs at this time and if we can be of further
assistance to you, please call.
Cordially,
Mayor Henry Feldhaus, III
cc: Sain Construction Co.
Pete Sain, Jr.
<PAGE>
ADDENDUM TO LEASE
This Addendum to Lease made and entered into on the _____ day of March,
1996, by and between SHELBYVILLE INDUSTRIAL SPEC BUILDING - WRS - PARTNERSHIP
(Lessor) and DESA INTERNATIONAL. INC. (Lessee).
WHEREAS, the parties have heretofore entered into a Lease dated the
25th day of February, 1994, the subject of which is the 7 acres located at 783
Eagle Boulevard, Shelbyville, Bedford County, Tennessee, and upon which is
located a 53,000 square foot industrial building presently used by Lessee; and
WHEREAS, the Lessor was designated in the aforesaid Lease of February
25, 1994, as "Desa ll Partnership;" however, at the request of Lessee, the
partnership name of Lessor was changed to Shelbyville Industrial Spec Building -
WRS Partnership; and
WHEREAS, Lessee has requested Lessor to provide an additional 20,000
square feet of building space as an addition to the present facility located
upon the leased premises; and
WHEREAS, the parties desire to enter into this Addendum to reflect
their new rental arrangement.
Now, therefore, for and in consideration of the mutual promises and
covenants contained herein, the parties agree as follows:
1. Paragraph No. 1 of the Lease is deleted and substituted in its stead
is the following: "1. Term. Based upon completion of the 20,000 square
foot addition, the modified terms of this Lease shall begin on March
15, 1996, and run for a period of 1 12 months from and after that date
to July 15, 2005, provided the conditions hereinafter set forth are
faithfully kept and complied with by both parties. Desa shall have
access to the building for equipment installation and other use on and
after May 1, 1996, or sooner if completion allows."
2. Paragraph No. 2 of the Lease is deleted and substituted in its stead
is the following:
<PAGE>
-2-
"2. Purchase Option. Lessee shall have the option to purchase the land
and the building at the end of 52 months, that is July 15, 2000, for
$1,085,000.00, and at the end of 112 months, that is July 15, 2005, for
$820,000.00."
3. Paragraph No. 3 of the Lease is deleted and substituted in its stead
is the following:
"3. Renewal Option. Lessee shall have the option to renew this Lease
for an additional 60 month period to July 15, 2010, upon the condition
that there is no default in the performance of any condition of this
lease for which a notice of default has been given to Lessee and has
not been cured. Such renewal term shall be upon the same terms,
covenants and conditions hereof. Further, Lessee shall have the option
at the end of such renewal period to purchase the land and building in
July, 2010, for $140,000.00."
4. Paragraph No. 4 of the Lease is deleted and substituted in its stead
is the following:
"4. Rental. The rental price on this building during the term of this
Lease shall be $15,500.00 per month, payable by the 15th day of the
Lease and thereafter on the same day of each month during the 112
months."
5. All other terms and conditions of the original Lease remain in full
force and effect. In the event of any conflicts or inconsistencies
between the original Lease and the terms of this Addendum, the terms of
the Addendum shall control.
WITNESS our signatures the day and date first above written.
LESSOR:
SHELBYVILLE INDUSTRIAL SPEC
BUILDING - WRS - PARTNERSHIP
By: /s/ W. R. Sain
LESSEE:
DESA INTERNATIONAL, INC.
By: /s/ T. G. Scariot
<PAGE>
-3-
STATE OF TENNESSEE
COUNTY OF
I, the undersigned, a Notary Public, in and for State and County
aforesaid, do hereby certify that W. R. Sain, did personally appear before me
and did certify and declare that he is the Managing Partner of a Tennessee
General Partnership, Shelbyville Industrial Spec Building - WRS - Partnership,
and he acknowledged that he executed the foregoing Addendum to Lease as Managing
Partner thereof on behalf of said Partnership as duly authorized by the
Partnership and as an act of the Partnership for the purposes therein contained.
Witness my hand and official seal this __ day of April, 1996.
/s/ William J. Redmond
NOTARY PUBLIC
My commission expires:
STATE OF
COUNTY OF
I, the undersigned, a Notary Public, in and for State and County
aforesaid, do hereby certify that the foregoing Addendum to Lease was executed
before me by Desa International, Inc., by and through T. G. Scariot, its
President, and that he personally appeared before me, after being duly sworn and
declared that he was the Officer designated and that he executed the foregoing
Addendum to Lease as such Officer of the Corporation and that the execution of
the Lease is the voluntary act and deed of the Corporation.
Witness my hand and official seal this __ day of April, 1996.
/s/ Linda Faith Kowen
NOTARY PUBLIC
My commission expires:
EXHIBIT 10.20
MANUFACTURING AND SUPPLY AGREEMENT
MADE AND ENTERED INTO BY AND BETWEEN:
DESA INTERNATIONAL, INC.,
AND
TANGIBLE IND. CO., LTD.,
AND
SHINN FU CORPORATION
<PAGE>
MANUFACTURING AND SUPPLY AGREEMENT
Entered into as of March 1, 1992, between DESA International, Inc., with its
principal place of business located in Bowling Green, Kentucky, U.S.A.,
hereinafter referred to as DESA, and Tangible Ind. Co., Ltd., with its principal
place of business located in Taipei, Taiwan, R.O.C., hereinafter referred to as
Tangible, and Shinn Fu Corporation with its principal place of business located
in Taipei, Taiwan, R.O.C., hereinafter referred to as SF.
WITNESSETH:
Whereas, DESA is engaged in the development, design, distribution and marketing
of I. Manual Stapleguns II. Electric Stapleguns III. Electric Nailguns IV. Cable
Tackers, with its packaging, warnings and instructions, hereinafter referred to
as the Products;
Whereas, Tangible is engaged in and possesses considerable experience, skill and
knowledge in manufacturing of the Products;
Whereas, SF is engaged in sourcing and sale of the Products from Tangible;
Whereas, DESA agrees to appoint Tangible as its exclusive manufacturer of the
Products and SF as its exclusive supplier of the Products;
Whereas, Tangible desires to develop its capabilities of manufacturing the
Products for DESA and, SF desires to supply and sell the Products to DESA; and
<PAGE>
-2-
Whereas the parties intend to establish a trustworthy and mutual relationship
between DESA, Tangible and SF regarding the manufacture and purchase of said
Products.
Now, therefore, in consideration of these premises and of the representations
and agreements hereinafter set forth, DESA, Tangible and SF do hereby covenant
and agree as follows:
1. DEFINITIONS
1.1 Pricing for "Products" as per the attached appendix "A".
1.2 On December 1, 1992 and subsequently on December 1 thereafter
during the term of this agreement, Tangible and SF will
document material price increases for Products which will be
passed through to DESA as part of price schedule found in 1.1.
1.3 COST REDUCTIONS
Product cost reductions brought about by design changes
developed jointly among DESA, Tangible and SF shall benefit
the parties according to the following schedule:
1. 50% of cost savings to DESA after full
recovery of any tooling cost related to the
change by DESA.
2. 50% of cost savings to Tangible/SF after
tooling cost is recovered by DESA.
2. DISTRIBUTION
2.1 SCOPE OF DISTRIBUTION
During the term of this Agreement, DESA will have the sole and
exclusive right to sell and to promote the sale of electric
tool Model ET-801 in U.S.A. designed
<PAGE>
-3-
and developed by Tangible and approved by DESA prior to this
agreement. DESA will permanently maintain the sole and
exclusive rights to sell and to promote the sale of manual and
electric products designed during the manufacturing agreement.
A non-exclusive license to market and to sell the Products
(except ET-801) outside of North America will be granted to
Tangible and SF upon agreed terms.
2.2 INDEPENDENT PURCHASE STATUS
This agreement does not create an agency relationship. DESA is
and will be an independent purchaser and seller of the
Products. Neither parties to this agreement shall be
authorized to make any contract or representation or to incur
any obligation or liability of any kind on behalf of the other
parties. Each party to this agreement shall be solely
responsible for all of its own expenses under the contract and
the acts of its employees.
3. PRODUCTS
3.1 PRODUCT SPECIFICATION
All products manufactured by Tangible and sold by SF to DESA
pursuant to this agreement shall be manufactured strictly in
accordance with DESA's specifications, as set forth in the
physical characteristics outline in Appendix B-1 through B-6,
and mutually agreed upon performance specifications.
3.2 Delivery tests of the Products shall be carried out in
accordance with the specifications as provided by DESA.
3.3 DESIGN
DESA is the sole owner of, and has the exclusive rights to,
the designs, patents and pattern protections, of manual
Products. Tangible and SF may not transfer
<PAGE>
-4-
the mentioned to other manual Products for any purpose
whatever. Tangible and SF can freely use the designs of
electric tools not exclusively belonging to DESA and/or
patented by DESA.
4. DELIVERY AND ORDER TERMS
4.1 PURCHASE ORDERS
All purchase orders from DESA for the Products hereunder shall
be made in writing.
4.2 PRODUCTION CAPACITY
Tangible undertakes to maintain production capacity and SF
undertakes to accept purchase orders from DESA corresponding
to volumes forecasted by DESA and anticipated in accordance
with Tangible and SF under Section 4.6 below. The foregoing
only includes the right to the forecast and is not an
obligation for DESA to purchase such forecasted quantities.
4.3 PAYMENTS
Payments for each shipment shall be by* from date of
shipment.*
4.4 TRANSPORTATION
The Products shall be delivered FOB Taiwan. The delivery terms
are to be interpreted in accordance with "Incoterms" then in
effect.
4.5 PURCHASE FORECASTS AND SCHEDULES
After negotiations with, and agreement of, Tangible and SF,
DESA shall indicate to Tangible and SF the anticipated total
volume of annual purchase for each
- ------------------
* Confidential portion omitted and filed separately with the Commission.
<PAGE>
-5-
twelve (12) month period of the agreement. In all
circumstances, should the parties not agree, the same volume
in pieces as the foregoing twelve (12) month period +/-20%
should be accepted. Such forecasts shall be provided in
writing before the end of February every year. On the basis of
said forecasts, adjusted as necessary and agreement of DESA,
Tangible and SF, every third month DESA shall issue a six (6)
month schedule, and every month an updated four (4) months
order schedule. Any changes to the four (4) month schedule
cannot be made during the first two (2) months without
approval by Tangible and SF. For new products to be
manufactured at the first occasion DESA is to provide a seven
(7) month schedule.
4.6 DELAYS IN DELIVERY
Products ordered in accordance with the firm order schedule
shall be ready for shipment within two (2) months after DESA's
order. If such orders are not fulfilled in time, Tangible and
SF shall jointly pay the following penalty:
For delays exceeding fifteen (15) days but not twenty-five
(25) days, premium freight cost as required, for delays
exceeding twenty-five (25) days, 3% of the order value, plus
premium freight cost as required; and for delays exceeding
forty-five (45) days, 5% of the order value, plus premium
freight costs as required.
4.7 FORCE MAJEURE
Failure of Tangible/SF to make any delivery for portions
thereof when due, if occasioned in whole or in part by act of
God or the public enemy, fire, explosion, flood, war, riots,
civil insurrection, sabotage, embargo, governmental
requisition
<PAGE>
-6-
or other such action of governmental authorities, or strikes
or other labor trouble, or other such occurrence, act, cause
or thing beyond the control of Tangible and SF, shall excuse
any such failure on the part of Tangible and SF. Tangible and
SF shall have no obligation or liability whatsoever arising
out of or in connection with any such failure. If the
fulfillment of an order is delayed by more than six (6)
months, due to circumstances mentioned above, each party shall
be entitled to cancel such order.
5. WARRANTY
Tangible/Sf warrant the Products will be free from defects in material,
workmanship and finish. Tangible and SF warrant that the Products will
conform to the specifications set forth in Appendix B-1 through B-5.
Tangible and SF will assume responsibilities for damages, and expenses
arising from any breach of the foregoing warranties to the following
extent: an average of the last twelve (12) months, or based on
quarterly projections for new products, free charge finished goods
replacement (DESA shall provide evidence).
Tangible and SF shall have no obligation to indemnify DESA for any
defects unless Tangible and SF are given notice of such defect within
eighteen (18) months from the date of the arrival of the Products to a
U.S.A. port or to another port appointed by DESA.
All liability of Tangible and SF under this warranty shall be offset
against amounts payable by DESA under then existing purchase orders for
Products.
<PAGE>
-7-
6. INDUSTRIAL PROPERTY RIGHTS
6.1 TRADEMARKS
Products delivered under this agreement shall be marked by
Tangible and SF with DESA's trademarks or trade names in
accordance with such instructions as DESA may from time to
time give to Tangible and SF.
Nothing in this agreement shall be construed to grant to
Tangible and SF any license or right to use any trademark or
tradename of DESA.
6.2 INFRINGEMENT
DESA states that the Products of this agreement do not
infringe upon any third party's intellectual property
including any patents, registered trademarks, or copyrights in
U.S.A.. In case the sale of the mentioned Products results in
an intellectual property claim against Tangible and SF, DESA
shall hold Tangible and SF harmless from any costs or damages
that may be incurred against Tangible and SF in any such case.
7. PRODUCT LIABILITY
7.1 INSURANCE
SF will provide DESA Product Liability Insurance coverage of a
minimum amount totaling one million U.S. dollars using a U.S.
insurance agency.
7.2 LIABILITY
Tangible and SF will not indemnify, hold harmless or defend
DESA against damages, loss, expenses, liability or claims
arising, in whole or in part, out of any deficiency in
packaging, warnings or instructions provided by DESA. If a
claim for damages by an allegedly defective product
manufactured by Tangible is filed
<PAGE>
-8-
by a third party against one of the parties to this agreement,
the latter shall inform the other parties thereof as soon as
possible.
The parties hereto shall be obligated to provide each other
with reasonable assistance, including, but not limited to
appearance at court and examining claims by a third party in
connection with litigation concerning alleged defects in a
product.
8. CONFIDENTIAL INFORMATION
Each party has received, and will for the proper performance of this
agreement receive, information from the other party, which the latter
does not ordinarily disclose to outsiders and which the latter
considers confidential and proprietary. It is especially agreed that
Tangible and SF will not be entitled to make any reference for any
purpose whatever as being the manufacturer and supplier of DESA.
Each party guarantees that all information received from the other
party before or during the term of this agreement will be used only to
carry out the terms of this agreement, shall be kept confidential and
shall be protected in the same manner as the receiving party protects
its own confidential information.
The foregoing shall not apply to information:
(A) which become lawfully known or lawfully available to
the receiving party from a third party, who received
the information lawfully and was not under a
continuing obligation of confidence regarding the
information disclosed.
<PAGE>
-9-
(B) which came in the receiving party's possession prior
to disclosure by the other party;
(C) which was in or became part of the public domain
through no breach of this agreement by the receiving
party.
9. TERM AND TERMINATION
9.1 INITIAL TERM AND RENEWAL
(A) Unless terminated as provided in Section 9.2 hereof,
this agreement shall continue in full force and
effect for an initial term expiring three (3) years
from the date hereof and hereafter shall be
automatically renewed in successive 3 year terms
unless terminated by either party by written notice
to the other at least 120 days prior to the
expiration of the initial or any renewal term hereof.
(B) All drawings, manufacturing and engineering
specifications or technical information and any
tooling supplied to Tangible or by DESA or paid by
DESA, upon termination of this agreement shall be
promptly returned to DESA within three months from
the termination. All parties should keep
records/receipts of the aforementioned
specifications, technical information, and tooling.
9.2 CAUSES FOR TERMINATION ON NON-RENEWAL
Each party may elect to terminate this agreement prior to
expiration of the initial or any renewal term, or elect not to
renew this agreement, upon written notice to the other
parties, in the event of the occurrence of any of the
following:
(A) If the other parties shall fail to perform any of
their obligations hereunder and fail to remedy such
non-performance within thirty (30) days after
receiving notice specifying the nature of the
non-performance;
<PAGE>
-10-
(B) If one party sells, assigns or transfers any of its
rights or obligations under this agreement without
having obtained the written consent of the other
parties;
(C) If one of the parties shall be declared insolvent or
bankrupt, make an assignment or other arrangement for
the benefit of creditors, or if one of the parties is
nationalized or has any material amount of its assets
expropriated.
9.3 DISPOSITION OF STOCK ON TERMINATION
Termination of this agreement shall not affect any firm orders
that may be placed but not shipped. If the agreement is
terminated by DESA and the termination is not based on
Tangible and SF's breach of contract, DESA shall be obligated
to purchase stock of products from Tangible via SF where such
stock consists of products of volumes not exceeding the
quantities stated in the last issued six months order schedule
made by DESA pursuant to Article 4.5 of this agreement. If
Tangible or SF is the party terminating the agreement, DESA
shall have the right to purchase remaining products in stock
from Tangible via SF. In both alternatives shipments shall be
made in such portions as set in the schedule.
10. JOINT VENTURE
Should DESA volume projections in a twelve (12) month period of said
Products (excluding electric stapleguns) reach one million (USD) in
purchase and actual shipment amount reaches half million (USD), a joint
venture program will be developed equally or on a prorated basis.
<PAGE>
-11-
11. NOTICES
Every notice required or contemplated by this agreement shall be
telefaxed or delivered in person addressed to the party for whom
notices are intended at the address hereinafter specified. Orders may
be sent by telefax or airmail. Unless otherwise provided in this
agreement, notice by telefax shall be effective after the firm
confirmation from the other parties. A notice sent by registered letter
shall be deemed to be received by the other parties ten (10) days after
it was sent.
DESA International, Inc.
P.O. Box 90004
2701 Industrial Drive
Bowling Green, Kentucky 42102
U.S.A.
Telefax: 502-781-9669
ATTENTION: Director of Materials
Tangible Ind. Co., Ltd.
8, LANE 551, SEC. 1, WAN SHOW RD.
KUEI-SHAN HSIANG, TAOYUAN COUNTY
Taiwan, R.O.C.
Telefax: 02-902-9944
ATTENTION: TED CHANG
Shinn Fu Corporation
9-16, NAN KAN HSIA, NAN KAN
LU-CHU HSIANG, TAOYUAN COUNTY
Taiwan, R.O.C.
Telefax: 03-326-1010
ATTENTION: Manager, OEM Division
12. GOVERNING LAW
The formation, construction, and performance of this agreement shall be
governed by the laws of Taiwan, Republic of China.
<PAGE>
-12-
13. SEPARABILITY
If any provisions of this agreement shall be deemed illegal or
unenforceable, such provision shall not affect the validity and
enforcement of all the other legal and enforceable provisions hereof.
In witness whereof, the parties have caused this agreement to be executed on the
date first above written.
DESA INTERNATIONAL TANGIBLE IND. CO., LTD.
By: /s/ Steve Marcum By: /s/ Ted Chang
Name: Steve Marcum Name: Ted Chang
Title: Director of Materials Title: President
SHINN FU CORPORATION
By: /s/ Vickie Huang
Name: Vickie Huang
Title: Vice President
<PAGE>
PRICE APPENDIX A
March 1, 1992 Manufacturing and Supply Agreement
Between
DESA International, Shinn Fu and Tangible
Selling Price in USD
Effective 3/1/92
Model Description FOB Taiwan
- ----- ----------- ----------
34302 ET-801 Electric Staplegun *
TBD ET-806 Electric Staplegun *
32003 ET-802 Electric Nailgun *
TBD Professional Staplegun *
TBD Heavy Duty Staplegun *
TBD Light Duty Staplegun *
TBD Cable Tacker *
- ----------
* Confidential portion omitted and filed separately with the Commission.
<PAGE>
APPENDIX B-1
ELECTRIC STAPLEGUN
SPECIFICATIONS
DESA Item Number: 34302
Tangible Item Number: ET-801
Description: Electric Staplegun for 1/4 to 9/16
Inch Wide Crown Staples
Power Rating: 120 Volts 10 Amps
UL Listing Required
Control Number: 3B89
Housing: Black
Trigger & On-Off Switch: Gray (Homeease Standard Color)
Clam Shell Packaging - Ultrasonic Sealed
Insert Card - 4 Colors: Blue (Pantone 300), Orange (Pantone 130) White & Black
Instruction Manual: DESA Part Number 099241-01 Revision A
6 Tools Per Shipping Carton: DESA to Provide Artwork
<PAGE>
APPENDIX B-2
ELECTRIC STAPLEGUN
SPECIFICATIONS
DESA Item Number: TBD
Tangible Item Number: ET-806
Description: Electric Staplegun for 1/4 to 9/16
Wide Crown Staples
Power Rating: 120 Volts 10 Amps
UL Listing Required
Control Number: 3B89
Housing: Black
Trigger & On-Off Switch: Gray (Homeease Standard Color)
Clam Shell Packaging
Insert Card - 4 Colors: Blue (Pantone 300), Orange (Pantone 130) White & Black
Instruction Manual: DESA Part Number TBD
6 Tools Per Shipping Carton: DESA to Provide Artwork
<PAGE>
APPENDIX B-3
ELECTRIC NAILGUN
SPECIFICATIONS
DESA Item Number: 32203
Tangible Item Number: ET-802
Description: Electric Nailgun for 1 Inch Brad Nails
Power Rating: 120 Volts 9 Amps
UL Listing Required
Control Number: 3L25
Housing: Black
Trigger & On-Off Switch: Gray (Pantone Standard Color)
Tooling Marking: Insert Into Housing
Clam Shell Packaging - Ultrasonic Sealed
Insert Card - 4 Colors:Blue (Pantone 300), Orange (Pantone 130) White & Black
Instruction Manual: DESA Part Number 099353-01 Revision A
6 Tools Per Shipping Carton: DESA to Provide Artwork
UPC Number: 0 43593 32003 X
UCC Number: 005 20 500 43593 32003 XX
Outer Carton: Kraft - Cut Case Format
<PAGE>
APPENDIX B-4
PROFESSIONAL STAPLEGUN
SPECIFICATIONS
GENERAL
All steel construction
Slide track loading with metal latch
Wire handle latch
Finish: chrome plated
Staple capacity: min. of one strip
Staple size window
Steel handle
PERFORMANCE
Power: equal to arrow T-50
Handle angle: max. 31 degree
Handle force: less than revised Swingline 10060
STAPLES
Heavy duty (.050 wide)
Wide crown
1/4 to 9/16 inch length
LIFE
20,000 staplings
PACKAGING
Clamshell
<PAGE>
APPENDIX B-5
HEAVY DUTY STAPLEGUN
SPECIFICATIONS
GENERAL
Plastic body: 2 piece ABS
Steel slide track with metal latch
Steel front cover
Finish: chrome plated
Wire handle latch
Staple capacity: one strip
Staple size window
Steel handle (same as professional tool)
PERFORMANCE
Power: equal to arrow T-50
Handle angle: max. 31 degree
Handle force: less than revised Swingline 10060
STAPLES
Heavy duty (.050 wide)
wide crown
1/4 to 9/16 length
LIFE
15,000 staplings
PACKAGING
Clamshell
<PAGE>
APPENDIX B-6
LIGHT DUTY STAPLEGUN
SPECIFICATIONS
GENERAL
Plastic body: 2 piece ABS
Steel front cover - chrome plated
Steel slide track with metal latch
Metal front
Wire handle latch
Staple capacity: one strip
Steel handle
PERFORMANCE
Power: equal to arrow JT-21
Handle angle: max. 26 degree
STAPLES
Light duty (.0235 wide)
wide crown
1/4 to 3/8 inch length
LIFE
10,000 staplings
PACKING
Clamshell
COST ESTIMATES
Tooling est: *
Est. cost: *
- -----------
* Confidential portion omitted and filed separately with the Commission.
<TABLE>
<CAPTION>
EXHIBIT 12
Fiscal Nov. 30 Feb. 26 Fiscal Fiscal Fiscal Nov. 30 Nov. 29
1993 1993 1994 1995 1996 1997 1996 1997
------ -------- -------- ------ ------ ------ -------- -------
Ratio of earnings to
fixed charges
- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income before income taxes 5,304 10,295 807 23,265 25,206 18,449 19,982 21,281
Plus fixed charges:
Interest expense 4,186 2,893 1,455 5,777 7,073 14,509 11,105 11,321
Interest factor included
in rent expense 175 50 149 286 445 541 397 490
Amortization of deferred
financing costs 270 252 206 787 893 976 762 762
------ ------ ------ ------ ------ ------ ------ ------
Total Earnings 9,935 13,490 2,617 30,115 33,617 34,475 32,246 33,854
Fixed Charges 4,631 3,195 1,810 6,850 8,411 16,026 12,264 12,573
Ratio 2.1 4.2 1.5 4.4 4.0 2.2 2.6 2.7
</TABLE>
EXHIBIT 25
Conformed Copy
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM T-1
STATEMENT OF ELIGIBILITY UNDER THE TRUST
INDENTURE ACT OF 1939 OF A CORPORATION
DESIGNATED TO ACT AS TRUSTEE
-----------
CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2)
-----------
Marine Midland Bank
(Exact name of trustee as specified in its charter)
New York 16-1057879
(Jurisdiction of incorporation (I.R.S. Employer
or organization if not a U.S. Identification No.)
national bank)
140 Broadway, New York, N.Y. 10005-1180
(212) 658-1000 (Zip Code)
(Address of principal executive offices)
Charles E. Bauer
Vice President
Marine Midland Bank
140 Broadway
New York, New York 10005-1180
Tel: (212) 658-1792
(Name, address and telephone number of agent for service)
<TABLE>
<CAPTION>
DESA INTERNATIONAL, INC.
AND OTHER REGISTRANTS
(See of Other Registrants Below)
(Exact name of obligor as specified in its charter)
<S> <C> <C>
DELAWARE 22-2940760 2701 Industrial Drive
(State or other jurisdiction (I.R.S. Employer Bowling Green, Kentucky 42102
of incorporation or organization) Identification No.) (502) 781-9600
(Address of principal executive offices)
</TABLE>
<PAGE>
Other Registrants
DESA Holdings Corporation Delaware 16-1251518
(Name of Corporation) (Jurisdiction of (IRS Employer
Incorporation) Identification Number)
2701 Industrial Drive,
Bowling Green, Kentucky 42102
(502) 781-9600
(Address of Principal Executive Offices)
9 7/8% Senior Subordinated Notes Due 2007
Guarantees of the 9 7/8% Senior Subordinated Notes Due 2007
(Title of Indenture Securities)
<PAGE>
General
Item 1. General Information.
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervisory authority to
which it is subject.
State of New York Banking Department.
Federal Deposit Insurance Corporation, Washington, D.C.
Board of Governors of the Federal Reserve System,
Washington, D.C.
(b) Whether it is authorized to exercise corporate trust powers.
Yes.
Item 2. Affiliations with Obligor.
If the obligor is an affiliate of the trustee, describe each
such affiliation.
None.
<PAGE>
Item 16. List of Exhibits.
Exhibit
TA(i) * - Copy of the Organization Certificate of Marine
Midland Bank.
TA(ii) * - Certificate of the State of New York Banking
Department dated December 31, 1993 as to the
authority of Marine Midland Bank to commence
business.
TA(iii) - Not applicable.
TA(iv) * - Copy of the existing By-Laws of Marine
Midland Bank as adopted on January 20, 1994.
TA(v) - Not applicable.
TA(vi) * - Consent of Marine Midland Bank required by
Section 321(b) of the Trust Indenture Act of
1939.
TA(vii) - Copy of the latest report of condition of the
trustee (December 31, 1997), published
pursuant to law or the requirement of its
supervisory or examining authority.
TA(viii) - Not applicable.
TA(ix) - Not applicable.
* Exhibits previously filed with the Securities and Exchange Commission
with Registration No. 33-53693 and incorporated herein by reference
thereto.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, the Trustee,
Marine Midland Bank, a banking corporation and trust company organized under the
laws of the State of New York, has duly caused this statement of eligibility to
be signed on its behalf by the undersigned, thereunto duly authorized, all in
the City of New York and State of New York on the 23rd day of February, 1998.
MARINE MIDLAND BANK
By: /s/ Frank J. Godino
Frank J. Godino
Vice President
<PAGE>
Exhibit TA (vii)
Board of Governors of the Federal Reserve System
OMB Number: 7100-0036
Federal Deposit Insurance Corporation
OMB Number: 3064-0052
Office of the Comptroller of the Currency
OMB Number: 1557-0081
Federal Financial Institutions Examination Council Expires March 31, 2000
Please refer to page i, 1
Table of Contents, for
the required disclosure
of estimated burden.
Consolidated Reports of Condition and Income for A Bank With Domestic and
Foreign Offices--FFIEC 031
Report at the close of business December 31, 1997
This report is required by law; 12 U.S.C. ss.324 (State member banks); 12 U.S.C.
ss. 1817 (State nonmember banks); and 12 U.S.C. ss.161 (National banks).
NOTE: The Reports of Condition and Income must be signed by an authorized
officer and the Report of Condition must be attested to by not less than two
directors (trustees) for State nonmember banks and three directors for State
member and National Banks.
I, Gerald A. Ronning, Executive VP & Controller
Name and Title of Officer Authorized to Sign Report
of the named bank do hereby declare that these Reports of Condition and Income
(including the supporting schedules) have been prepared in conformance with the
instructions issued by the appropriate Federal regulatory authority and are true
to the best of my knowledge and believe.
/s/ Gerald A. Ronning
Signature of Officer Authorized to Sign Report
1/26/98
Date of Signature
(971231)
(RCRI 9999)
This report form is to be filed by banks with branches and consolidated
subsidiaries in U.S. territories and possessions, Edge or Agreement
subsidiaries, foreign branches, consolidated foreign subsidiaries, or
International Banking Facilities.
The Reports of Condition and Income are to be prepared in accordance with
Federal regulatory authority instructions.
We, the undersigned directors (trustees), attest to the correctness of this
Report of Condition (including the supporting schedules) and declare that it has
been examined by us and to the best of our knowledge and belief has been
prepared in conformance with the instructions issued by the appropriate Federal
regulatory authority and is true and correct.
/s/ Malcolm Burnett
Director (Trustee)
/s/ Bernard J. Kennedy
Director (Trustee)
/s/ Sal H. Alfiero
Director (Trustee)
Submission of Reports
Each Bank must prepare its Reports of Condition and Income either:
(a) in automated formand then file the computer data file directly with the
banking agencies' collection agent, Electronic Data System Corporation
(EDS), by modem or computer diskette; or
(b) in hard-copy (paper) form and arrange for another party to convert the
paper report to automated for. That party (if other than EDS) must transmit
the bank's computer data file to EDS
To fulfill the signature and attestation requirement for the Reports of
Condition and Income for this report date, attach this signature page to the
hard-copy f the completed report that the bank places in its files.
FDIC Certificate Number 0 0 5 8 9
(RCRI 9030)
<PAGE>
REPORT OF CONDITION
Consolidating domestic and foreign subsidiaries of the
Marine Midland Bank of Buffalo
Name of Bank City
in the state of New York, at the close of business
December 31, 1997
ASSETS
Thousands
of dollars
Cash and balances due from depository institutions:
Noninterest-bearing balances
currency and coin ................................. $ 928,754
Interest-bearing balances ......................... 2,571,410
Held-to-maturity securities ....................... 0
Available-for-sale securities ..................... 3,968,837
Federal funds sold and securities purchased
under agreements to resell ........................ 497,992
Loans and lease financing receivables:
Loans and leases net of unearned
income ............................................ 21,550,115
LESS: Allowance for loan and lease
losses ............................................ 407,355
LESS: Allocated transfer risk reserve ............. 0
Loans and lease, net of unearned
income, allowance, and reserve .................... 21,142,760
Trading assets .................................... 979,454
Premises and fixed assets (including
capitalized leases) ............................... 225,646
Other real estate owned .............................. 8,092
Investments in unconsolidated
subsidiaries and associated companies ................ 0
Customers' liability to this bank on
acceptances outstanding .............................. 24,795
Intangible assets .................................... 479,713
Other assets ......................................... 488,168
Total assets ......................................... 31,315,621
<PAGE>
LIABILITIES
Deposits:
In domestic offices ............................... 20,072,724
Noninterest-bearing ............................... 4,090,858
Interest-bearing .................................. 15,981,866
In foreign offices, Edge, and Agreement
subsidiaries, and IBFs ............................... 3,834,827
Noninterest-bearing ............................... 0
Interest-bearing .................................. 3,834,827
Federal funds purchased and securities sold
under agreements to repurchase .................... 2,007,482
Demand notes issued to the U.S. Treasury ............. 192,186
Trading Liabilities .................................. 215,748
Other borrowed money:
With a remaining maturity of one year
or less ........................................... 1,402,449
With a remaining maturity of more than
one year through three years ...................... 63,601
With a remaining maturity of more than
three years ....................................... 61,707
Bank's liability on acceptances
executed and outstanding ............................. 24,795
Subordinated notes and debentures .................... 497,774
Other liabilities .................................... 719,423
Total liabilities .................................... 29,092,716
EQUITY CAPITAL
Perpetual preferred stock and related
surplus .............................................. 0
Common Stock.......................................... 205,000
Surplus .............................................. 1,984,326
Undivided profits and capital reserves ............... 8,678
Net unrealized holding gains (losses)
on available-for-sale securities ..................... 24,901
Cumulative foreign currency translation
adjustments .......................................... 0
Total equity capital ................................. 2,222,905
Total liabilities, limited-life
preferred stock, and equity capital .................. 31,315,621
<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 periods ended
March 1, 1997 and November 29, 1997 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0001051362
<NAME> DESA HOLDINGS CORPORATION
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> MAR-1-1997 FEB-28-1998
<PERIOD-START> MAR-3-1996 MAR-2-1997
<PERIOD-END> MAR-1-1997 NOV-29-1997
<CASH> 5,058,000 201,000
<SECURITIES> 0 0
<RECEIVABLES> 13,066,000 65,586,000
<ALLOWANCES> 936,000 962,000
<INVENTORY> 15,747,000 27,133,000
<CURRENT-ASSETS> 35,632,000 95,251,000
<PP&E> 30,219,000 33,909,000
<DEPRECIATION> (20,137,000) (22,500,000)
<TOTAL-ASSETS> 91,984,000 157,780,000
<CURRENT-LIABILITIES> 44,198,000 60,493,000
<BONDS> 130,600,000 240,500,000
0 17,600,000
0 0
<COMMON> 254,000 127,000
<OTHER-SE> (85,008,000) (159,982,000)
<TOTAL-LIABILITY-AND-EQUITY> 91,984,000 157,780,000
<SALES> 209,105,000 193,404,000
<TOTAL-REVENUES> 209,105,000 193,404,000
<CGS> 130,890,000 123,243,000
<TOTAL-COSTS> 130,890,000 123,243,000
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 14,509,000 11,321,000
<INCOME-PRETAX> 18,449,000 21,281,000
<INCOME-TAX> 7,733,000 8,769,000
<INCOME-CONTINUING> 10,716,000 12,512,000
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 2,308,000
<CHANGES> 0 0
<NET-INCOME> 10,716,000 10,187,000
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
DESA INTERNATIONAL, INC.
FORM OF LETTER OF TRANSMITTAL
9 7/8% SENIOR SUBORDINATED NOTES DUE 2007
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON [ ] UNLESS
EXTENDED (THE "EXPIRATION DATE").
The Exchange Agent is for the Exchange Offer is:
MARINE MIDLAND BANK
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
For Information Call:
(800) 662-9844
Delivery of this instrument to an address other than as set forth above
or transmission of instructions via a facsimile number other than the one listed
above will not constitute a valid delivery. The instructions accompanying this
Letter of Transmittal should be read carefully before this Letter of Transmittal
is completed.
The undersigned acknowledges that he or she has received the Prospectus
dated [ ] (the "Prospectus") of DESA International, Inc. (the "Company") and
this Letter of Transmittal (the "Letter of Transmittal"), which together
constitute the Company's offer (the "Exchange Offer") to exchange $1,000
principal amount (or integral multiples in excess thereof) of its 9 7/8 Senior
Notes due 2007, (the "New Notes"), which have been registered under the
Securities Act of 1933, as amended (the "Securities Act"), pursuant to a
Registration Statement of which the Prospectus is a part, for each $1,000
principal amount (or integral multiples in excess thereof) of its outstanding 9
7/8 Senior Notes due 2007 (the "Old Notes"), of which $130,000,000 aggregate
principal amount is outstanding. Other capitalized terms used but not defined
herein have the meaning given to them in the Prospectus.
This Letter is to be completed by a holder of Old Notes either if
certificates are to be forwarded herewith or if a tender of certificates for Old
Notes, if available, is to be made by book-entry transfer to the account
maintained by the Exchange Agent at The Depository Trust Company (the
"Book-Entry Transfer Facility") pursuant to the procedures set forth in "The
Exchange Offer -- Book-Entry Transfer" section of the Prospectus and an Agent's
Message is NOT delivered. Tenders by book-entry transfer may also be made by
delivering an Agent's Message in lieu of this Letter. The term "Agent's Message"
means a message, transmitted by the Book-Entry Transfer Facility to and received
by the Exchange Agent and forming a part of a Book-Entry Confirmation (as
defined below), which states that the Book-Entry Transfer Facility has received
an express acknowledgment from the tendering participant, which acknowledgment
states that such participant has received and agrees to be bound by, and makes
the representations and warranties contained in, this Letter and that the
Company may enforce this Letter against such participant.
The term "Holder" with respect to the Exchange Offer means any person
(i) 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 (ii) in whose name the Old Notes are held of record by DTC
who desires to deliver such Old Notes by book-entry transfer at DTC. The
undersigned has completed, executed and delivered this Letter of Transmittal to
indicate the action the undersigned desires to take with respect to the Exchange
Offer. Holders who wish to tender their Old Notes must complete this letter in
its entirety.
<PAGE>
2
Holders who desire to tender their Old Notes and whose Old Notes are
not lost but are not immediately available or who cannot deliver their Old Notes
and all other documents required hereby to the Exchange Agent by the Expiration
Date or who are unable to complete the procedure for book-entry transfer on a
timely basis must tender their Old Notes pursuant to the guaranteed delivery
procedure set forth in "The Exchange Offer--Procedures for Tendering."
<PAGE>
3
PLEASE READ THE INSTRUCTIONS ACCOMPANYING THIS LETTER OF TRANSMITTAL
CAREFULLY BEFORE CHECKING ANY BOX BELOW.
<TABLE>
<CAPTION>
DESCRIPTION OF 9 7/8% SENIOR SUBORDINATED NOTES DUE 2007 (OLD NOTES)
Principal Amount
Tendered (must be in
Name(s) and denominations of
Address(es) of Aggregate Principal $1,000 or any integral
Registered Holder(s) Certificate Amount Represented multiples in excess
(Please fill in, if blank) Number(s)* by Certificate(s) thereof )**
<S> <C> <C> <C>
Total
<FN>
* Need not be completed by holders of Old Notes who tender by book-entry transfer.
** Need not be completed by holders who wish to tender with respect to all Old Notes listed.
</FN>
</TABLE>
NOTE: SIGNATURES MUST BE PROVIDED BELOW. PLEASE READ THE ACCOMPANYING
INSTRUCTIONS CAREFULLY.
|_| CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY BOOK-ENTRY
TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH DTC
AND COMPLETE THE FOLLOWING:
Name of Tendering Institution:______________________________________________
DTC Book-Entry Account Number:______________________________________________
Transaction Code No:________________________________________________________
By crediting the Old Notes to the Exchange Agent's account at the
Book-Entry Transfer Facility's Automated Tender Offer Program ("ATOP") and by
complying with applicable ATOP procedures with respect to the Exchange Offer,
including transmitting to the Exchange Agent a computer-generated message (an
"Agent's Message") in which the holder of the Outstanding Debentures
acknowledges and agrees to be bound by the terms of, and makes the
representations and warranties contained in, this Letter, the participant in the
Book-Entry Transfer Facility confirms on behalf of itself and the beneficial
owners of such Old Notes all provisions of this Letter (including all
representations and warranties) applicable to it and such beneficial owner as
fully as if it had completed the information required herein and executed and
transmitted this Letter to the Exchange Agent.
|_| CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE
OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND
COMPLETE THE FOLLOWING:
Name(s) of Registered Holder(s):______________________________________________
Date of Execution of Notice of Guaranteed Delivery :__________________________
Name of Institution which Guaranteed Delivery :_______________________________
DTC Account Number:___________________________________________________________
<PAGE>
4
If Delivered by Book-Entry Transfer:
Name of Tendering Institution:______________________________________________
DTC Book-Entry Account No.:_________________________________________________
Transaction Code No.:_______________________________________________________
|_| CHECK HERE IF YOU ARE A BROKER-DEALER TENDERING OLD NOTES ACQUIRED AS A
RESULT OF MARKET-MAKING OR OTHER TRADING ACTIVITIES AND WISH TO RECEIVE
10 ADDITIONAL COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS
OR SUPPLEMENTS THERETO.
Name:____________________________
Address:_________________________
<PAGE>
5
To: Marine Midland Bank
Ladies and Gentlemen:
Subject to the terms and conditions of the Exchange Offer, the
undersigned hereby tenders to the Company the principal amount of Old Notes
indicated above. Subject to and effective upon the acceptance for exchange of
the principal amount of Old Notes tendered in accordance with this Letter of
Transmittal, the undersigned sells, assigns and transfers to, or upon the order
of, the Company all right, title and interest in and to the Old Notes tendered
hereby. The undersigned hereby irrevocably constitutes and appoints the Exchange
Agent its agent and attorney-in-fact (with full knowledge that the Exchange
Agent also acts as the agent of the Company) with respect to the tendered Old
Notes with full power of substitution to (i) deliver such Old Notes to the
Company or transfer ownership of such Old Notes on the account books maintained
by DTC, in each case, together with all accompanying evidences of transfer and
authenticity to, or upon the order of, the Company, (ii) present such Old Notes
or transfer ownership of such Old Notes on the account books maintained by DTC,
for transfer on the books of the Company and (iii) receive all benefits and
otherwise exercise all rights of beneficial ownership of such Old Notes, all in
accordance with the terms of the Exchange Offer. The power of attorney granted
in this paragraph shall be deemed irrevocable and coupled with an interest.
The undersigned hereby represents and warrants that he or she has full
power and authority to tender, sell, assign and transfer the Old Notes tendered
hereby and that the Company will acquire good and unencumbered title thereto,
free and clear of all liens, restrictions, charges and encumbrances and not
subject to any adverse claim, when the same are acquired by the Company. The
undersigned hereby acknowledges that this Exchange Offer is being made in
reliance upon an interpretation by the staff of the Securities and Exchange
Commission that any New Notes acquired in exchange for Old Notes tendered hereby
may be offered for sale, resold and otherwise transferred by holders thereof
(other than any such Holder that is an "affiliate" of the Company or any of its
subsidiaries within the meaning of Rule 405 under the Securities Act of 1933
(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 business of the Holder receiving such New
Notes and that neither the Holder nor any such other person has an arrangement
with any person to participate in the distribution of such New Notes. The
undersigned hereby further represents that (i) the New Notes acquired pursuant
to the Exchange Offer are being obtained in the ordinary course of such Holder's
business, (ii) such Holder has no arrangements with any person to participate in
the distribution (within the meaning of the Securities Act) of such New Notes
and (iii) such Holder is not an "affiliate", as defined under Rule 405 of the
Securities Act of the Company or any of its subsidiaries or, if such Holder is
an affiliate, that such Holder will comply with the registration and prospectus
delivery requirements of the Securities Act to the extent applicable. If the
undersigned is not a broker-dealer, the undersigned represents that it is not
engaged in, and does not intend to engage in, a distribution of New Notes. If
the undersigned is a broker-dealer that will receive New Notes for its own
account in exchange for Old Notes that were acquired as a result of
market-making activities or other trading activities, it acknowledges that it
will deliver a prospectus in connection with any resale of such New Notes;
however, by so acknowledging and by delivering a prospectus, the undersigned
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act. The undersigned will, upon request, execute and deliver any
additional documents deemed by the Exchange Agent or the Company to be necessary
or desirable to complete the assignment, transfer and purchase of the Old Notes
tendered hereby.
For purposes of the Exchange Offer, the Company shall be deemed to have
accepted validly tendered Old Notes, when, as and if the Company has given oral
or written notice of acceptance thereof to the Exchange Agent.
If any tendered Old Notes are not accepted for exchange pursuant to the
Exchange Offer for any reason, any such unaccepted Old Notes will be returned
(except as noted below with respect to tenders through DTC), without expense, to
the undersigned at the address shown below or at a different address as may be
indicated herein under "Special Payment Instructions" as promptly as practicable
after the Expiration Date.
All authority herein conferred or agreed to be conferred in this Letter
of Transmittal shall survive the death, incapacity or dissolution of the
undersigned, and any obligation of the undersigned hereunder shall be binding
upon the administrators, legal representatives, heirs, personal representatives,
successors and assigns of the undersigned.
The undersigned understands that tenders of Old Notes pursuant to the
procedures described under the caption "The Exchange Offer--Procedures for
Tendering" in the Prospectus and in the instructions hereto will constitute a
<PAGE>
6
binding agreement between the undersigned and the Company upon the terms and
subject to the conditions of the Exchange Offer.
Unless otherwise indicated under "Special Payment Instructions," please
issue the New Notes issued in exchange for the Old Notes accepted for exchange
and return any Old Notes not tendered or not exchanged in the name(s) of the
undersigned (or, in either such event, in the case of Old Notes tendered by DTC,
by credit to the account at DTC). Similarly, unless otherwise indicated under
"Special Delivery Instructions," please send the New Notes issued in exchange
for the Old Notes accepted for exchange and any Old Notes not tendered or not
exchanged (and accompanying documents, as appropriate) to the undersigned at the
address shown below the undersigned's signature(s), unless, in either event,
tender is being made through DTC. In the event that both "Special Payment
Instructions" and "Special Delivery Instructions" are completed, please issue
the New Notes issued in exchange for the Old Notes accepted for exchange and
return any Old Notes not tendered or not exchanged in the name(s) of, and send
said New Notes to, the person(s) so indicated. The undersigned recognizes that
the Company has no obligation pursuant to the "Special Payment Instructions" and
"Special Delivery Instructions" to transfer any Old Notes from the name of the
registered holder(s) thereof if the Company does not accept for exchange any of
the Old Notes so tendered.
Holders of the Old Notes who wish to tender their Old Notes and (i)
whose Old Notes are not immediately available or (ii) who cannot deliver their
Old Notes, this Letter of Transmittal or any other documents required hereby to
the Exchange Agent prior to the Expiration Date, may tender their Old Notes
according to the guaranteed delivery procedures set forth in the Prospectus
under the caption "The Exchange Offer--Guaranteed Delivery Procedures." See
Instruction 1 regarding the completion of the Letter of Transmittal printed
below.
SPECIAL PAYMENT INSTRUCTIONS
(See Instructions 3, 4 and 5)
To be completed ONLY if certificates for Old Notes in a principal amount not
tendered or not purchased, or New Notes issued in exchange for Old Notes
accepted for exchange, are to be issued in the name of someone other than the
undersigned.
Issue New Notes to:
Name:_____________________________________________
(Please Print)
Address:__________________________________________
__________________________________________________
__________________________________________________
(Include Zip Code)
__________________________________________________
(Tax Identification or Social Security No.)
SPECIAL DELIVERY INSTRUCTIONS
(See Instructions 3, 4 and 5)
To be completed ONLY if certificates for Old Notes in a principal amount not
tendered or not purchased, or New Notes issued in exchange for Old Notes
accepted for exchange are to be sent to someone other than the undersigned, or
the undersigned at an address other than that shown above.
Mail to:__________________________________________
Name:_____________________________________________
(Please Print)
Address:__________________________________________
__________________________________________________
__________________________________________________
(Include Zip Code)
__________________________________________________
(Tax Identification or Social Security No.)
<PAGE>
7
PLEASE SIGN HERE
WHETHER OR NOT OLD NOTES ARE BEING PHYSICALLY TENDERED HEREBY
______________________________________________ Dated: __________________________
______________________________________________ Dated: __________________________
Signature(s) of Registered Holder(s) or Authorized Signatory
Area Code and Telephone Number: ______________________________________________
The above lines must be signed by the registered holder(s) of Old Notes
as their name(s) appear(s) on the Old Notes or, if tendered by a participant in
DTC, exactly as such participant's name appears on a security position listing
as the owner of the Old Notes or by person(s) authorized to become registered
holder(s) by properly executed bond power and other documents transmitted with
this Letter of Transmittal. If Old Notes to which this Letter of Transmittal
relates are held of record by two or more joint holders, then all such holders
must sign this Letter of Transmittal. If signature is by a trustee, executor,
administrator, guardian, attorney-in-fact, officer of a corporation or other
person acting in a fiduciary or representative capacity, such person must (i)
set forth his or her full title below and (ii) unless waived by the Company,
submit evidence satisfactory to the Company of such person's authority so to
act. See Instruction 3 regarding the completion of this Letter of Transmittal
printed below.
If the signature appearing above is not the registered Holder(s) of the
Old Notes, then the registered Holder must sign a valid proxy.
Name(s):_______________________________________________________________________
_______________________________________________________________________________
(Please Print)
Capacity (full title):_________________________________________________________
Address:_______________________________________________________________________
_______________________________________________________________________________
(Include Zip Code)
GUARANTEE OF SIGNATURE(S)
(If required - See Instruction 3)
Authorized Signature:__________________________________________________________
Name:__________________________________________________________________________
(Please Print)
Name of Firm:__________________________________________________________________
Address:_______________________________________________________________________
_______________________________________________________________________________
(Include Zip Code)
Title:_________________________________________________________________________
Area Code and Telephone No.:___________________________________________________
Dated:_________________________________________________________________________
INSTRUCTIONS
<PAGE>
8
FORMING PART OF THE TERMS AND CONDITIONS
OF THE EXCHANGE OFFER
1. Delivery of this Letter of Transmittal and Old Notes. The tendered
Old Notes (or a confirmation of a book-entry transfer into the Exchange Agent's
account at DTC of all Old Notes delivered electronically), as well as a properly
completed and duly executed copy of this Letter of Transmittal or facsimile
hereof and any other documents required by this Letter of Transmittal, 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. The method of delivery of the
tendered Old Notes, this Letter of Transmittal and all other required documents
to the Exchange Agent is at the election and risk of the Holder and, except as
otherwise provided below, the delivery will be deemed made only when actually
received by the Exchange Agent. Instead of delivery by mail, it is recommended
that the Holder 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.
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, this
Letter of Transmittal or any other documents required hereby to the Exchange
Agent prior to 5:00 p.m., New York City time, on the Expiration Date, must
tender their Old Notes according to the guaranteed delivery procedures set forth
in the Prospectus. Pursuant to such procedures: (i) such tender must be made by
or through a member firm of a registered national securities exchange or of the
National Association of Securities Dealers, Inc., or a commercial bank or trust
company having an office or correspondent in the United States or an "eligible
guarantor institution" (an "Eligible Institution") within the meaning of Rule
17Ad-15 under the Securities Exchange Act of 1934, as amended; (ii) prior to the
Expiration Date, the Exchange Agent must have received from the 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 days
after the Expiration Date, this Letter of Transmittal (or facsimile hereof)
together with the Old Notes (or a confirmation of electronic delivery of
book-entry delivery into the Exchange Agent's account at DTC) and any other
required documents will be deposited by the Eligible Institution with the
Exchange Agent; and (iii) such properly completed and executed Letter of
Transmittal (or facsimile hereof), as well as all other documents required by
this Letter of Transmittal and all tendered Old Notes in proper form for
transfer (or a confirmation of electronic delivery of book-entry delivery into
the Exchange Agent's account at DTC), must be received by the Exchange Agent
within three business days after the Expiration Date, all as provided in the
Prospectus under the caption "The Exchange Offer -- Guaranteed Delivery
Procedures." Any Holder of Old Notes who wishes to tender his or her Old Notes
pursuant to the guaranteed delivery procedures described above must ensure that
the Exchange Agent receives the Notice of Guaranteed Delivery prior to 5:00
p.m., New York City time, on the Expiration Date. Upon request of 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.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of tendered Old Notes and withdrawal of 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 right to waive any defects or
irregularities or conditions of tender as to the Exchange Offer and/or
particular Old Notes. The Company's interpretation of the terms and conditions
of the Exchange Offer (including the instructions in this Letter of Transmittal)
shall 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 defects or irregularities have been
cured or waived. Any Old Notes received by the Exchange Agent that are not
validly tendered and as to which the defects or irregularities have not been
cured or waived will be returned by the Exchange Agent to the tendering Holders
of Old Notes, unless otherwise provided in this Letter of Transmittal, as soon
as practicable following the Expiration Date.
2. Partial Tenders. Tenders of Old Notes will be accepted only in
denominations of $1,000 and any integral multiples in excess thereof. If less
than the entire principal amount of any Old Notes is tendered, the tendering
Holder should fill in the principal amount tendered in the fourth column of the
box entitled "Description of 9 7/8% Senior Subordinated Notes Due 2007 (Old
Notes)" above. The entire principal amount of Old Notes delivered to the
Exchange Agent will be
<PAGE>
9
deemed to have been tendered unless otherwise indicated. If the entire principal
amount of all Old Notes is not tendered, then Old Notes for the principal amount
of Old Notes not tendered and the New Notes issued in exchange for any Old Notes
accepted will be sent to the Holder at his or her registered address, unless a
different address is provided in the appropriate box on this Letter of
Transmittal, promptly after the Old Notes are accepted for exchange.
3. Signatures on the Letter of Transmittal; Bond Powers and
Endorsements; Guarantee of Signatures. If this Letter of Transmittal (or
facsimile hereof) is signed by the record Holder(s) of the Old Notes tendered
hereby, the signature must correspond with the name(s) as written on the face of
the Old Notes without alteration, enlargement or any change whatsoever.
If this Letter of Transmittal (or facsimile hereof) is signed by the
registered Holder or Holders of Old Notes tendered and the New Notes issued in
exchange therefor are to be issued (or any untendered principal amount of Old
Notes is to be reissued) to the registered Holder, the said Holder need not and
should not endorse any tendered Old Notes, nor provide a separate bond power.
If this Letter of Transmittal (or facsimile hereof) is signed by a
person other than the registered Holder or Holders of any Old Notes listed, such
Old Notes must be endorsed or accompanied by appropriate bond powers signed as
the name of the registered Holder or Holders appears on the Old Notes.
If this Letter of Transmittal (or facsimile hereof) or any Old Notes or
bond powers are signed by trustees, executors, administrators, guardians,
attorneys-in-fact or 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, evidence satisfactory to the Company of their
authority so to act must be submitted with this Letter of Transmittal.
Endorsements on Old Notes or signatures on bond powers required by this
Instruction 3 must be guaranteed by an Eligible Institution participating in a
recognized medallion signature guarantee program.
Except as otherwise provided below, all signatures on this Letter of
Transmittal (or facsimile hereof) must be guaranteed by an Eligible Institution
participating in a recognized medallion signature guarantee program. Signatures
on this Letter of Transmittal need not be guaranteed if (i) this Letter of
Transmittal is signed by the registered Holder(s) of the Old Notes tendered
herewith (including any participant in DTC whose name appears on a security
position listing as the owner of Old Notes) and such Holder(s) have not
completed the box set forth herein entitled "Special Payments Instructions" or
the box entitled "Special Delivery Instructions" or (ii) such Old Notes are
tendered for the account of an Eligible Institution.
4. Special Issuance and Delivery Instructions. Tendering Holders should
indicate, in the applicable box or boxes, the name and address to which New
Notes or substitute Old Notes for principal amounts not tendered or not accepted
for exchange are to be issued or sent, if different from the name and address of
the person signing this Letter of Transmittal (or in the case of tender of the
Old Notes through DTC, if different from DTC). In the case of issuance in a
different name, the taxpayer identification or social security number of the
person named must also be indicated.
5. Tax Identification Number. Federal income tax law requires that a
Holder whose offered Old Notes are accepted for exchange must provide the
Company (as payor) with his, her or its correct Taxpayer Identification Number
("TIN"), which, in the case of an exchanging Holder who is an individual, is his
or her social security number. If the Company is not provided with the correct
TIN or an adequate basis for exemption, such Holder may be subject to a $50
penalty imposed by the Internal Revenue Service (the "IRS"). In addition,
delivery to such Holder of New Notes may be subject to backup withholding in an
amount equal to 31% of the gross proceeds resulting from the Exchange Offer. If
withholding results in an overpayment of taxes, a refund may be obtained. Exempt
Holders (including, among others, all corporations and certain foreign
individuals) are not subject to these backup withholding and reporting
requirements.
To prevent backup withholding, each exchanging Holder must provide his,
her or its correct TIN by completing the Substitute Form W-9 enclosed herewith,
certifying that the TIN provided is correct (or that such Holder is awaiting a
TIN) and that either (i) the Holder is exempt from backup withholding, (ii) the
Holder has not been notified by the IRS that he, she or it is subject to backup
withholding as a result of a failure to report all interest or dividends, or
(iii) the IRS has notified the Holder that he, she or it is no longer subject to
backup withholding. In order to satisfy the Exchange Agent that a foreign
individual qualifies as an exempt recipient, such Holder must submit a statement
signed under penalty of perjury attesting to such exempt status. Such statements
may be obtained from the Exchange Agent. If the Old Notes are in more than one
name or are not in the name of the actual owner, consult the Substitute Form W-9
for
<PAGE>
10
information on which TIN to report. If you do not provide your TIN to the
Company within 60 days, backup withholding will begin and continue until you
furnish your TIN to the Company.
6. Transfer Taxes. The Company will pay all transfer taxes, if any,
applicable to the exchange of Old Notes pursuant to the Exchange Offer. If,
however, New Notes or Old Notes for principal amounts 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
hereby, or if tendered Old Notes are registered in the name of any person other
than the person signing this 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 on any other person) will be payable by the tendering
Holder.
Except as provided in this Instruction 6, it will not be necessary for
transfer tax stamps to be affixed to the Old Notes listed in this Letter of
Transmittal.
7. Waiver of Conditions. The Company reserves the absolute right to
amend, waive or modify specified conditions in the Exchange Offer in the case of
any Old Notes tendered.
8. Mutilated, Lost Stolen or Destroyed Old Notes. Any tendering Holder
whose Old Notes have been mutilated, lost, stolen or destroyed should contact
the Exchange Agent at the address indicated herein for further instructions.
9. Requests for Assistance or Additional Copies. Questions and requests
for assistance and requests for additional copies of the Prospectus or this
Letter of Transmittal may be directed to the Exchange Agent at the address
specified above. The telephone number for the Exchange Agent is [ ] Holders may
also contact [ ], telephone number: [ ], or their broker, dealer, commercial
bank, trust company or other nominee for assistance concerning the Exchange
Offer.
<PAGE>
11
(DO NOT WRITE IN SPACE BELOW)
Certificate Old Notes Old Notes
Surrendered Tendered Accepted
Delivery Prepared By: ____________ Checked By: __________ Dated:______________
<PAGE>
12
<TABLE>
<CAPTION>
PAYOR'S NAME: DESA International, Inc.
<S> <C> <C>
PART I -- PLEASE PROVIDE YOUR TIN IN THE
SUBSTITUTE BOX AT RIGHT AND CERTIFY BY SIGNING AND ____________________________
Form W-9 DATING BELOW Social Security Number
OR
______________________________
Employer Identification Number
PART II -- Certification--Under penalties of perjury, I certify that:
Department of
the Treasury (1) The number shown on this form is my correct Taxpayer Identification Number (or I am waiting for
Internal Revenue a number to be issued to me), and
Service
(2) I am not subject to backup withholding because (i) I am exempt from backup withholding, (ii) I have
not been notified by the Internal Revenue Service ("IRS") that I am subject to backup withholding as
a result of a failure to report all interest or dividends, or (iii) the IRS has notified
me that I am no longer subject to backup withholding.
Certification Instructions--You must cross out item (2) in Part II above if you
Payer's Request have been notified by the IRS that you are subject to backup withholding
for Taxpayer because of underreporting interest or dividends on your tax return. However, if
Identification after being notified by the IRS that you were subject to
Number (TIN) backup withholding you received another notification from
the IRS that you are no longer subject to PART III
backup withholding, do not cross out item (2).
Awaiting TIN |_|
Signature:__________________________________ Date:_________
Name (Please Print):________________________________________
</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THE SUBSTITUTE FORM W-9 MAY RESULT
IN BACKUP WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU. PLEASE REVIEW THE
ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON
SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE
IF YOU CHECKED THE BOX IN PART III OF SUBSTITUTE FORM W-9.
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification
number has not been issued to me, and either (i) I have mailed or delivered an
application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administration Office or (ii)
I intend to mail or deliver an application in the near future. I understand that
if I do not provide a taxpayer identification number within 60 days, 31% of all
reportable payments made to me thereafter will be withheld until I provide a
number.
------------------------------------- -----------------------------
Signature Date
-------------------------------------
Name (Please Print)
EXHIBIT 99.2
FORM OF NOTICE OF GUARANTEED DELIVERY
FOR
9 7/8% SENIOR SUBORDINATED NOTES DUE 2007
OF
DESA INTERNATIONAL, INC.
As set forth in the Prospectus, dated April __, 1998 (the "Prospectus")
of DESA International, Inc. (the "Company") and the accompanying Letter of
Transmittal and instructions thereto (the "Letter of Transmittal"), this form or
one substantially equivalent hereto must be used to accept the Company's
exchange offer (the "Exchange Offer") to purchase all of its outstanding 9 7/8%
Senior Subordinated Notes Due 2007 (the "Old Notes") if (i) certificates
representing the Old Notes to be tendered for purchase and payment are not lost
but are not immediately available, (ii) time will not permit the Letter of
Transmittal, certificates representing such Old Notes or other required
documents to reach the Exchange Agent prior to the Expiration Date or (iii) the
procedures for book-entry transfer cannot be completed prior to the Expiration
Date. This form may be delivered by an Eligible Institution by mail or hand
delivery or transmitted, via telegram, telex or facsimile, to the Exchange Agent
as set forth below. All capitalized terms used herein but not defined herein
shall have the meanings ascribed to them in the Prospectus.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON [ ]
UNLESS THE OFFER IS EXTENDED (THE "EXPIRATION DATE"). TENDERS OF OLD NOTES MAY
BE WITHDRAWN AT ANY TIME PRIOR TO 5:00 P.M. ON THE EXPIRATION DATE.
The Exchange Agent for the Exchange Offer is:
MARINE MIDLAND BANK
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
For Information Call:
(800) 662-9844
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS, OR TRANSMISSION VIA
TELEGRAM, TELEX OR FACSIMILE, OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE
A VALID DELIVERY.
This form is not to be used to guarantee signatures. If a signature on
the Letter of Transmittal is required to be guaranteed by an "Eligible
Institution" participating in a recognized medallion signature guarantee program
under the instruction thereto, such signature guarantee must appear in the
applicable space provided in the signature box on the Letter of Transmittal.
<PAGE>
-2-
To: The Bank of New York
Ladies and Gentlemen:
The undersigned hereby tender(s) to the Company, upon the terms and
subject to the conditions set forth in the Exchange Offer and the Letter of
Transmittal, receipt of which is hereby acknowledged, the aggregate principal
amount of Old Notes set forth below pursuant to the guaranteed delivery
procedures set forth in the Prospectus.
The undersigned understands that tenders of Old Notes pursuant to the
Exchange Offer may not be withdrawn after 5:00 p.m., New York City time on the
Expiration Date. Tenders of Old Notes may also be withdrawn if the Exchange
Offer is terminated without any such Old Notes being purchased thereunder or as
otherwise provided in the Prospectus.
All authority herein conferred or agreed to be conferred by this Notice
of Guaranteed Delivery shall survive the death or incapacity of the undersigned
and every obligation of the undersigned under this Notice of Guaranteed Delivery
shall be binding upon the heirs, personal representatives, executors,
administrators, successors, assigns, trustees in bankruptcy and other legal
representatives of the undersigned.
PLEASE SIGN AND COMPLETE
Signature(s) of Registered Owner(s) or Names(s) of Registered Holder(s):
Authorized Signatory:
_________________________________ _________________________________
_________________________________ _________________________________
_________________________________ _________________________________
Aggregate Principal Amount of Old Address:
Notes Tendered:
_________________________________ _________________________________
_________________________________ _________________________________
_________________________________ _________________________________
Area Code and
Certificate No(s) of Old Notes Telephone No.:_________________
(if available):
If Old Notes will be delivered by
_________________________________ book-entry transfer at
_________________________________ The Depository Trust Company,
_________________________________ Insert DTC Book-entry Account
Date:____________________________ No.:__________________________
This Notice of Guaranteed Delivery must be signed by the registered holder(s) of
Old Notes exactly as its (their) name(s) appear on certificates for Old Notes,
or by person(s) authorized to become registered holder(s) by endorsements and
documents transmitted with this Notice of Guaranteed Delivery. If signature is
by a trustee, executor, administrator, guardian, attorney-in-fact, officer or
other person acting in a fiduciary or representative capacity, such person must
provide the following information.
Please print name(s) and address(es)
Name(s):___________________________________
Capacity: _________________________________
Address(es):_______________________________
<PAGE>
-3-
DO NOT SEND OLD NOTES WITH THIS FORM. NOTES SHOULD BE SENT TO THE EXCHANGE AGENT
TOGETHER WITH A PROPERLY COMPLETED AND DULY EXECUTED LETTER OF TRANSMITTAL.
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc. or a
commercial bank or trust company having an office or a correspondent in the
United States, hereby (a) represents that each holder of Old Notes on whose
behalf this tender is being made "own(s)" the Old Notes covered hereby within
the meaning of Rule 14e-4 under the Securities Exchange Act of 1934, as amended,
(b) represents that such tender of Notes complies with such Rule 14e-4, and (c)
guarantees that, within three New York Stock Exchange trading days from the date
of this Notice of Guaranteed Delivery, a properly completed and duly executed
Letter of Transmittal (or a facsimile thereof), together with certificates
representing the Old Notes covered hereby in proper form for transfer (or
confirmation of the book-entry transfer of such Old Notes into the Exchange
Agent's account at The Depository Trust Company, pursuant to the procedure for
book-entry transfer set forth in the Prospectus) and required documents will be
deposited by the undersigned with the Exchange Agent.
THE UNDERSIGNED ACKNOWLEDGES THAT IT MUST DELIVER THE LETTER OF
TRANSMITTAL AND OLD NOTES TENDERED HEREBY TO THE EXCHANGE AGENT WITHIN THE TIME
PERIOD SET FORTH ABOVE AND THAT FAILURE TO DO SO COULD RESULT IN FINANCIAL LOSS
TO THE UNDERSIGNED.
Name of Firm:_________________________ _________________________________
Authorized Signature
Address:______________________________ Name:___________________________
______________________________________
Title:___________________________
Area Code and Telephone No.: Date:____________________________
______________________________________
