<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 22, 1996
REGISTRATION NO. 333-8925
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 3
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
NATIONAL FIBERSTOK CORPORATION
(Exact name of registrant as specified in its charter)
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DELAWARE 2677 23-2574778
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of Industrial Identification No.)
incorporation or Classification Code Number)
organization)
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--------------------------
(314) 344-8000
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
--------------------------
ROBERT B. WEBSTER
CHIEF FINANCIAL OFFICER
NATIONAL FIBERSTOK CORPORATION
5775 PEACHTREE DUNWOODY ROAD
SUITE C150
ATLANTA, GEORGIA 30342
(404) 256-1123, EXT. 309
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
--------------------------
COPIES TO:
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Mr. David E. King Frank L. Schiff, Esq.
McCown De Leeuw & Co. White & Case
101 East 52nd Street 1155 Avenue of the Americas
31st Floor New York, New York 10036-2787
New York, New York 10022 (212) 819-8752
(212) 355-5500
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--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of 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. / /
--------------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrants
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
NATIONAL FIBERSTOK CORPORATION
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K SHOWING
LOCATION IN PROSPECTUS OF
ITEMS OF FORM S-4
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A. INFORMATION ABOUT THE TRANSACTION
1. Forepart of Registration Statement and Outside Front Cover Page; Cross Reference
Outside Front Cover Page of Prospectus..... Sheet; Inside Front Cover Page
2. Inside Front and Outside Back Cover Pages Inside Front Cover Page; Outside Back Cover
of Prospectus.............................. Page
3. Risk Factors, Ratio of Earnings to Fixed Prospectus Summary; Risk Factors; Unaudited
Charges and Other Information.............. Pro Forma Financial Data; Selected
Historical Financial Data (National
Fiberstok Corporation); Selected
Historical Consolidated Financial Data
(Transkrit Corporation)
4. Terms of the Transaction................... Prospectus Summary; The Exchange Offer;
Certain United States Federal Income Tax
Consequences; Description of the Notes
5. Pro Forma Financial Information............ Prospectus Summary; The Transaction;
Unaudited Pro Forma Consolidated Financial
Data
6. Material Contacts with the Company Being Not Applicable
Acquired...................................
7. Additional Information Required for Not Applicable
Reoffering by Persons and Parties Deemed to
be Underwriters............................
8. Interests of Named Experts and Counsel..... Not Applicable
9. Disclosure of Commission Position on Not Applicable
Indemnification for Securities Act
Liabilities................................
B. INFORMATION ABOUT THE
REGISTRANT
10. Information with Respect to S-3 Not Applicable
Registrants................................
11. Incorporation of Certain Information by Not Applicable
Reference..................................
12. Information with Respect to S-2 or S-3 Not Applicable
Registrant.................................
13. Incorporation of Certain Information by Not Applicable
Reference..................................
14. Information with Respect to Registrant Prospectus Summary; The Transaction;
Other Than S-2 or S-3 Registrant........... Capitalization; Selected Historical
Financial Data (National Fiberstok
Corporation); Selected Historical
Consolidated Financial Data (Transkrit
Corporation); Management's Discussion and
Analysis of Financial Condition and
Results of Operations; Business;
Management; Certain Related Transactions;
Description of the Notes; Description of
New Credit Facility; Financial State-
ments
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C. INFORMATION ABOUT THE COMPANY BEING
ACQUIRED
15. Information with Respect to S-3 Not Applicable
Companies..................................
16. Information with Respect to S-2 or S-3 Not Applicable
Companies..................................
17. Information with Respect to Companies Other Not Applicable
Than S-2 or S-3 Companies..................
D. VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies, Consents or Not Applicable
Authorizations are to be Solicited.........
19. Information if Proxies, Consents or Management; Certain Related Transactions
Authorizations are not to be Solicited or
in an Exchange Offer.......................
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<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED OCTOBER 22, 1996
PROSPECTUS
NATIONAL FIBERSTOK CORPORATION
OFFER TO EXCHANGE
11 5/8% SENIOR NOTES DUE 2002, SERIES B
FOR ALL OUTSTANDING 11 5/8% SENIOR NOTES DUE 2002, SERIES A
THE EXCHANGE OFFER
WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON , 1996, UNLESS EXTENDED
---------------------
National Fiberstok Corporation, a Delaware corporation (the "Company" or
"NFC"), a wholly-owned subsidiary of DEC International, Inc., a Delaware
corporation ("DEC"), hereby offers, upon the terms and subject to conditions set
forth in this Prospectus (the "Prospectus") and the accompanying Letter of
Transmittal (the "Letter of Transmittal"; together with the Prospectus, the
"Exchange Offer"), to exchange up to an aggregate principal amount of
$100,000,000 of its 11 5/8% Senior Notes Due 2002, Series B (the "New Notes")
for up to an aggregate principal amount of $100,000,000 of its outstanding
11 5/8% Senior Notes Due 2002, Series A (the "Old Notes"). The terms of the New
Notes are identical in all material respects to those of the Old Notes, except
for certain transfer restrictions, registration rights, and penalty provisions
relating to the Old Notes. The New Notes will be issued pursuant to, and
entitled to the benefits of, the Indenture (as defined) governing the Old Notes.
The New Notes and the Old Notes are sometimes referred to collectively as the
"Notes."
Interest on the New Notes will accrue from the date of issuance thereof (the
"Issue Date") at the rate of 11 5/8% PER ANNUM and will be payable semi-annually
in arrears on each June 15 and December 15, commencing on December 15, 1996. The
New Notes will be redeemable, at NFC's option, in whole at any time or in part
from time to time, on or after June 15, 1999 at the redemption prices set forth
herein, plus accrued and unpaid interest, if any, thereon to the date of
redemption. In addition, at any time or from time to time, on or prior to June
15, 1999, NFC may, at its option, use the net cash proceeds of one or more
Public Equity Offerings (as defined herein) to redeem up to $35.0 million
aggregate principal amount of New Notes at the redemption price set forth
herein, plus accrued and unpaid interest, if any, thereon to the date of
redemption; provided that at least 65% of the principal amount of New Notes
originally issued remains outstanding immediately after giving effect to any
such redemption.
The New Notes will be senior obligations of NFC ranking PARI PASSU in right
of payment with all other senior indebtedness of NFC. The New Notes will be
effectively subordinated in right of payment to all existing and future secured
indebtedness of NFC. As of June 30, 1996, after giving effect to the
Transactions (as defined herein), NFC had approximately $2.8 million of senior
secured indebtedness outstanding which effectively ranks senior in right of
payment to the New Notes.
As permitted under the Indenture, the Company's subsidiaries in existence as
of the issue date of the Old Notes have been merged, directly or indirectly,
with and into the Company with the Company surviving, and therefore the New
Notes will neither be guaranteed by such former subsidiaries nor secured by a
pledge of the capital stock thereof.
Upon the occurrence of a Change of Control (as defined herein), each holder
of the New Notes will have the right to require NFC to purchase all or a portion
of such holder's New Notes at a price equal to 101% thereof, plus accrued and
unpaid interest, if any, thereon to the date of purchase. In addition, NFC will
be obligated to offer to purchase New Notes at 100% of the principal amount
thereof, plus accrued and unpaid interest, if any, thereon to the date of
purchase in the event of certain asset sales. See "Description of the Notes."
------------------------ (CONTINUED ON NEXT PAGE)
SEE "RISK FACTORS", WHICH BEGINS AT PAGE 10, FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PARTICIPANTS IN THE EXCHANGE OFFER.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------------
THE DATE OF THIS PROSPECTUS IS OCTOBER , 1996.
<PAGE>
(CONTINUED FROM COVER)
The Old Notes were originally issued and sold on June 28, 1996 in a
transaction not registered under the Securities Act of 1933, as amended (the
"Securities Act"), in reliance upon the exemptions provided in Rule 144 A and
Regulation D under the Securities Act. Accordingly, the Old Notes may not be
reoffered, resold or otherwise pledged, hypothecated or transferred in the
United States unless so registered or unless an applicable exemption from the
registration requirements of the Securities Act is available.
The Company will accept for exchange any and all Old Notes which are
properly tendered in the Exchange Offer prior to 5:00 p.m., New York City time,
on , 1996, unless extended by the Company in its sole discretion (the
"Expiration Date"). The Expiration Date will not in any event be extended to a
date later than , 1996. Tenders of Old Notes may be withdrawn at any
time prior to 5:00 p.m., New York City time, on the Expiration Date. In the
event the Company terminates the Exchange Offer and does not accept for exchange
any Old Notes with respect to the Exchange Offer, the Company will promptly
return the Old Notes to the holders thereof. The Exchange Offer is not
conditioned upon any minimum principal amount of Old Notes being tendered for
exchange, but is otherwise subject to certain customary conditions. The Old
Notes may be tendered only in integral multiples of $1,000.
The New Notes are being offered hereunder in order to satisfy certain
obligations of the Company contained in the Registration Rights Agreement dated
June 28, 1996 (the "Registration Rights Agreement") by and among the Company,
certain former Guarantors and BT Securities Corporation and Donaldson, Lufkin
and Jenrette Securities Corporation, as the initial purchasers (the "Initial
Purchasers"), with respect to the initial sale of the Old Notes. Based on
interpretations by the staff of the Securities and Exchange Commission (the
"Commission") rendered to third parties in similar transactions, the New Notes
issued pursuant to the Exchange Offer in exchange for Old Notes may be offered
for resale, resold and otherwise transferred by respective holders thereof
(other than any such holder which is an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act, without compliance with the
registration and prospectus delivery provisions of the Securities Act), provided
that the New Notes are acquired in the ordinary course of such holder's business
and such holder has no arrangement with any person to participate in the
distribution of such New Notes and is not engaged in and does not intend to
engage in a distribution of the New Notes. Each broker-dealer that receives New
Notes for its own account pursuant to the Exchange Offer must acknowledge that
it will deliver a prospectus in connection with any resale of such New Notes.
The Letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a broker-dealer
in connection with resales of the New Notes received in exchange for Old Notes
if such New Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities. The Company has agreed
that, for a period of 180 days after the Expiration Date, it will make this
Prospectus available to any broker-dealer for use in connection with any such
resale. See "Plan of Distribution."
There has not previously been any public market for the New Notes. The
Company does not intend to list the New Notes on any securities exchange or to
seek approval for quotation through any automated quotation system. There can be
no assurance that an active market for the New Notes will develop. To the extent
that an active market for the New Notes does develop, the market value of the
New Notes will depend on market conditions (such as yields on alternative
investments), general economic conditions, the Company's financial condition,
and other factors. Such conditions might cause the New Notes, to the extent that
they are actively traded, to trade at a significant discount from face value.
See "Risk Factors -- Absence of Public Market."
The Company will not receive any proceeds from the Exchange Offer. The
Company has agreed to pay the expenses incident to the Exchange Offer.
i
<PAGE>
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THE PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY
OTHER THAN THE NEW NOTES OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR
SOLICITATION TO SUCH PERSON.
------------------------
Until , 1996 (90 days after commencement of this offering), all
dealers effecting transactions in the New Notes, whether or not participating in
this offering, may be required to deliver a Prospectus.
AVAILABLE INFORMATION
The Company has filed with the Commission a registration statement on Form
S-4 (the "Registration Statement") under the Securities Act, with respect to the
New Notes. This Prospectus, which constitutes a part of the Registration
Statement, does not contain all the information set forth in the Registration
Statement, certain items of which are contained in schedules and exhibits to the
Registration Statement as permitted by the rules and regulations of the
Commission. Statements made in this Prospectus as to the contents of any
contract, agreement or other document referred to are not necessarily complete.
With respect to each such contract, agreement or other document filed as an
exhibit to the Registration Statement, reference is made to the exhibit for a
more complete description of the matter involved, and each such statement shall
be deemed qualified in its entirety by such reference. Items of information
omitted from this Prospectus but contained in the Registration Statement may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington,
D.C. 20549 and at the following regional offices of the Commission: Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661; and
7 World Trade Center, 13th Floor, New York, New York 10048. Copies of such
material can be obtained by mail from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549 at
prescribed rates. Electronic registration statements filed through the
Electronic Data Gathering Analysis and Retrieval ("EDGAR") system are publically
available through the Commission's web site at http:/www.sec.gov. All amendments
thereto and subsequent periodic reports required to be filed under the
Securities Exchange Act of 1934, as amended, (the "Exchange Act") have been and
will be filed through EDGAR.
As a result of this offering, the Company will become subject to the
periodic reporting and other informational requirements of the Exchange Act. In
the event that the Company ceases to be subject to the informational
requirements of the Exchange Act, the Company has agreed that, so long as any
Notes remain outstanding, it will file with the Commission and distribute to
holders of the Old Notes or the New Notes, as applicable, copies of the
financial information that would have been contained in such annual reports and
quarterly reports, including management's discussion and analysis of financial
condition and results of operations, that would have been required to be filed
with the Commission pursuant to the Exchange Act. See "Description of the Notes
- -- Certain Covenants -- Reports to Holders."
ii
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY 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 NOTES THERETO, APPEARING ELSEWHERE IN THIS
PROSPECTUS. UNLESS OTHERWISE STATED IN THIS PROSPECTUS, REFERENCES TO (A) "NFC"
SHALL MEAN NATIONAL FIBERSTOK CORPORATION, A DELAWARE CORPORATION, (B)
"TRANSKRIT" SHALL MEAN THE FORMER TRANSKRIT CORPORATION, AND ITS SUBSIDIARIES
AND (C) THE "COMPANY" SHALL MEAN NFC AND TRANSKRIT AFTER GIVING EFFECT TO THE
TRANSACTIONS (AS DEFINED HEREIN). SEE "PROSPECTUS SUMMARY -- THE TRANSACTIONS."
THE COMPANY
The Company believes that it is a leading designer and manufacturer of
custom paper-based products for the mailer, direct mail, pressure sensitive
label and certain custom envelope markets. The Company has pursued a strategy of
focusing on the rapidly growing markets for non-impact self-mailers, direct mail
products and services and custom pressure sensitive labels, while maintaining
leading positions in more mature markets such as impact mailers. The Company's
products are grouped into four principal business areas that accounted for the
following percentages of pro forma 1995 net sales: impact and non-impact mailer
products (31%), direct mail products and services (13%), custom pressure
sensitive labels (24%) and custom envelopes (32%). For the latest twelve month
period ended June 30, 1996 ("LTM"), the Company had pro forma net sales of
$168.0 million, pro forma net income of $2.8 million and pro forma EBITDA (as
defined) of $22.5 million. See "Unaudited Pro Forma Financial Data."
MAILER PRODUCTS. The Company believes it is a leading U.S. manufacturer of
spot carbon impact mailers and has the largest installed base of laser and other
non-impact printer compatible mailer systems. Impact mailers are ready-to-mail,
multi-part forms, which are widely used to print correspondence such as account
statements, invoices, tax notices and utility and medical bills without opening
or sealing the envelope. Non-impact mailers are laser printer compatible
self-mailer forms which are printed, folded, sealed and mailed as payroll
checks, direct deposit statements and vendor remittances. Sales of the Company's
non-impact mailers are experiencing rapid growth due to the proliferation of
laser and ink-jet printers and the cost effectiveness of mailers versus
traditional fold and insert mailing methods. Since 1968, when the Company began
manufacturing impact mailers, the Company has been a leader in the development
of mailer technology and, at June 30, 1996, held patents valued at approximately
$19.4 million. In 1987, the Company introduced the patented
InfoSeal-Registered Trademark- self-mailer system, which led the industry in the
development of laser printer compatible mailers. InfoSeal-Registered Trademark-
is an integrated, turn-key mailer system utilizing a patented form which is
printed and then processed by dedicated equipment that moistens an adhesive and
folds the form into a one-piece mailer. The Company believes that the
InfoSeal-Registered Trademark- system has the largest installed base of
dedicated self-mailer office equipment with over 1,400 units installed.
Competitive mailer systems are available in the market which utilize more
expensive pressure seal or more maintenance intensive glue vat systems. With
1995 net sales of $9.5 million, InfoSeal-Registered Trademark- forms have
achieved compound annual net sales growth of 56% over the past five years.
DIRECT MAIL PRODUCTS AND SERVICES. The Company offers a selection of
products sold exclusively to the direct mail industry, which includes catalog
bind-in order forms, advertising inserts and coupons. The Company also provides
customers with direct mail fulfillment services. These direct mail fulfillment
services include art and copy preparation, prepress services, printing, mail
list preparation and selection, printed personalization, addressing, stuffing,
labeling and mail sorting, bundling and drop off services. To complement these
products and services, the Company's mailers, envelopes and labels are
customized and sold for use in direct mail applications. The Company's array of
products and services is extensive and management believes the Company provides
full service capability to the direct mail industry, which has grown at a
compound annual rate of 6% over the past five years.
CUSTOM PRESSURE SENSITIVE LABELS. According to an October 1995 survey
contained in BUSINESS FORMS, LABELS AND SYSTEMS (the "1995 Survey"), the Company
is the largest U.S. manufacturer of custom pressure sensitive labels sold
through independent distributors, as measured by revenues. In this segment, the
1
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Company competes with other larger national manufacturers who are dominant in
other channels, particularly in the direct sales distribution channel. The
Company differentiates itself from its competitors by offering a variety of
customized value-added label products aimed at short and medium-run customers.
Management believes that the Company is recognized for high quality products,
excellent customer service and its ability to respond quickly to time-sensitive
customer orders. The Tag and Label Manufacturers Institute estimates that the
pressure sensitive label market is growing at a compound annual rate of
approximately 10%, and the Company's custom pressure sensitive label products
have achieved compound annual net sales growth of 15%, on a pro forma basis,
over the past two years.
CUSTOM ENVELOPES. According to the Envelope Manufacturers Association (the
"EMA"), the Company is the second largest U.S. supplier of custom envelopes in
the growing Southeastern regional market (which currently represents
approximately 13% of the overall custom envelope market) as measured by
revenues. The Company has focused on the high value-added specialty segments of
the envelope market, placing particular emphasis on the direct mail,
photo-finishing and banking industries, where it has established leadership
positions. Almost all of the Company's envelope products are specially printed
or manufactured to end-user specifications and generally have higher margins
than plain commodity envelopes. The Company also produces custom expanding
envelopes, pockets, wallets and other products for the professional office. Net
sales of the Company's custom envelopes have increased at a compound annual rate
of 7% over the past two years. The Company competes in this market with many
small regional suppliers and several larger national manufacturers which compete
aggressively. Certain of these larger competitors are less highly leveraged than
the Company and may have greater financing and operating flexibility.
2
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THE INVESTORS
The controlling stockholder of NFC's parent, DEC, is McCown De Leeuw & Co.
("McCown De Leeuw"), a private investment firm specializing in buying and
building middle market businesses such as the Company. McCown De Leeuw has made
28 separate investments since 1983 and has made a number of investments in
businesses and markets related to those of the Company. Related industry
investments have included: DIMAC Corporation, a full service provider of direct
marketing products and services (now a division of Heritage Media Corporation);
Eastman Corporation, a contract office products distributor (now a division of
Office Depot, Inc.); Graphics Art Center Inc., a specialty printer of marketing
communications products and direct mail catalogs (now a division of Mail-Well
Inc.); and Specialty Paperboard, Inc., a manufacturer of specialty paper
products.
THE TRANSACTIONS
Pursuant to a Stock Purchase Agreement, dated June 19, 1996 (the "Stock
Purchase Agreement"), NFC purchased all of the outstanding capital stock of
Transkrit from its stockholders on June 28, 1996. The purchase price paid for
the capital stock of Transkrit was $86.5 million, and is subject to post-closing
adjustment for certain changes in Transkrit's working capital, other net assets,
and capital expenditures from the amounts estimated at the closing of the
acquisition (the "Acquisition"). (See "The Transactions"). At the closing of the
Acquisition, Transkrit was merged with and into NFC.
Concurrently with the consummation of the Acquisition, (i) the Company
issued the Old Notes in an aggregate principal amount of $100,000,000 (the
"Initial Offering"); (ii) DEC issued $10.0 million in aggregate liquidation
preference of preferred stock and used a portion of the proceeds therefrom to
make a capital contribution to the Company of approximately $7.8 million (the
"Parent Capital Contribution"), (iii) NFC repaid approximately $23.2 million of
existing long-term debt ("Prior Debt") and terminated its existing credit
agreement (together, the "Refinancing") and (iv) the Company executed a new
senior secured revolving credit facility (the "New Bank Credit Facility"), which
provides borrowing availability of up to $20.0 million. The Offering, the
Acquisition, the Parent Capital Contribution, the Refinancing and the execution
of the New Bank Credit Facility are referred to herein as the "Transactions."
THE EXCHANGE OFFER
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The New Notes....................... The forms and terms of the New Notes are identical in
all material respects to the terms of the Old Notes
for which they may be exchanged pursuant to the
Exchange Offer, except for certain transfer
restrictions, registration rights and penalty
interest provisions relating to the Old Notes
described below under "-- Terms of the Notes."
The Exchange Offer.................. The Company is offering to exchange up to
$100,000,000 aggregate principal amount of the New
Notes for up to $100,000,000 aggregate principal
amount of the Old Notes. Old Notes may be exchanged
only in integral multiples of $1,000.
Expiration Date; Withdrawal of The Exchange Offer will expire at 5:00 p.m., New York
Tender............................. City time, on , 1996, or such later date
and time to which it is extended by the Company (the
"Expiration Date"). The tender of Old Notes pursuant
to the Exchange Offer may be withdrawn at any time
prior to the Expiration Date. The Expiration Date
will not in any event be extended to a date later
than , 1996. Any Old Notes not accepted
for exchange for any reason will be returned without
expense to the tendering holder thereof as promptly
as practicable after the expiration or termination of
the Exchange Offer.
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Certain Conditions to the Note
Exchange Offer..................... The Exchange Offer is subject to certain customary
conditions, which may be waived by the Company. See
"The Exchange Offer -- Certain Conditions to the
Exchange Offer."
Procedures for Tendering Old Each holder of Old Notes wishing to accept the
Notes.............................. Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein and
therein, and mail or otherwise deliver such Letter of
Transmittal, or such facsimile, together with such
Old Notes and any other required documentation to the
Exchange Agent (as defined) at the address set forth
herein. By executing the Letter of Transmittal, each
holder will represent to the Company that, among
other things, (i) any New Notes to be received by it
will be acquired in the ordinary course of its
business, (ii) it has no arrangement with any person
to participate in the distribution of the New Notes
and (iii) it is not an "affiliate," as defined in
Rule 405 of the Securities Act, of the Company or, if
it is an affiliate, it will comply with the
registration and prospectus delivery requirements of
the Securities Act to the extent applicable.
Interest on the New Notes........... Interest on the New Notes will accrue from the date
of issuance (the "Issue Date") at the rate of 11 5/8%
per annum, and will be payable semi-annually in
arrears on each June 15 and December 15, commencing
December 15, 1996. Holders of the New Notes will also
on December 15, 1996 receive an amount equal to the
accrued interest on the Old Notes. Interest on the
Old Notes accepted for exchange will cease to accrue
upon issuance of the New Notes.
Special Procedures for Beneficial
Owners............................. Any beneficial owner whose Old Notes are registered
in the name of a broker, dealer, commercial bank,
trust company or other nominee and who wishes to
tender such Old Notes in the Exchange Offer should
contact such registered holder promptly instruct such
registered holder to tender on such beneficial
owner's behalf. If such beneficial owner wishes to
tender on such owner's own behalf, such owner 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 owner's name or obtain a properly
completed bond power from the registered holder. The
transfer of registered ownership may take
considerable time and may not be able to be completed
prior to the Expiration Date.
Guaranteed Delivery Procedure....... Holders of Notes who wish to tender their Old Notes
and whose Old Notes are not immediately available or
who cannot deliver their Old Notes, the Letter of
Transmittal or any other documents required by the
Letter of Transmittal to the Exchange Agent, prior to
the Expiration Date, must tender their Old Notes
according to the guaranteed delivery procedures set
forth in "The Exchange Offer -- Guaranteed Delivery
Procedures."
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Registration Requirements........... The Company has agreed to use its best efforts to
consummate by November 22, 1996, the registered
Exchange Offer pursuant to which holders of the Old
Notes will be offered an opportunity to exchange
their Old Notes for the New Notes which will be
issued without legends restricting the transfer
thereof. In the event that applicable interpretations
of the staff of the Commission do not permit the
Company to effect the Exchange Offer or in certain
other circumstances, the Company has agreed to file a
Shelf Registration Statement covering resales of the
Old Notes and to use its best efforts to cause such
Shelf Registration Statement to be declared effective
under the Securities Act and, subject to certain
exceptions, keep such Shelf Registration Statement
effective until three years after the original
issuance of the Old Notes. If the Company fails to
consummate the Exchange Offer by November 22, 1996
or, if the Company is required to file a Shelf
Registration Statement and such Shelf Registration
Statement is not declared effective or does not
remain effective under the Securities Act as set
forth under "Old Notes Registration Rights," the
Company will be subject to certain interest rate
penalties.
Certain Federal Income Tax
Considerations..................... For a discussion of certain federal income tax
considerations relating to the exchange of the New
Notes for the Old Notes, see "Certain Federal Income
Tax Considerations."
Use of Proceeds..................... There will be no proceeds to the Company from the
exchange of Notes pursuant to the Exchange Offer.
Exchange Agent...................... Wilmington Trust Company is the Exchange Agent. The
address and telephone number of the Exchange Agent
are set forth in "The Exchange Offer -- Exchange
Agent."
</TABLE>
TERMS OF THE NOTES
The form and terms of the New Notes are the same as the form and terms of
the Old Notes except that the New Notes are registered under the Securities Act
and, therefore, will not bear legends restricting the transfer thereof. See
"Description of the Notes."
RISK FACTORS
See "Risk Factors," which begins at page 10, for a discussion of certain
factors that should be considered by participants in the Exchange Offer.
5
<PAGE>
SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA
THE COMPANY
The following summary unaudited pro forma financial data gives pro forma
effect in the manner described under "Unaudited Pro Forma Financial Data" and
the notes thereto to the Transactions (including $2.3 million of annualized cost
savings related to the integration of NFC and Transkrit), as if such
transactions had occurred on January 1, 1995. The Income Statement Data and
Other Data do not purport to represent what the Company's results of operations
actually would have been if the Transactions had occurred as of such date or
what such results will be for any future periods. The information contained in
this table should be read in conjunction with "Selected Historical Financial
Data -- National Fiberstok Corporation," "Selected Historical Consolidated
Financial Data -- Transkrit Corporation," "Unaudited Pro Forma Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" the Financial Statements of NFC and accompanying notes thereto and
the Consolidated Financial Statements of Transkrit and the notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA PRO FORMA SIX MONTHS LATEST TWELVE
YEAR ENDED ENDED JUNE 30, MONTHS ENDED
DECEMBER 31, ---------------------- JUNE 30,
1995 1995 1996 1996
------------ ---------- ---------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales................................................ $ 168,760 $ 80,621 $ 79,820 $ 167,959
Cost of products sold.................................... 116,779 56,661 55,891 116,009
------------ ---------- ---------- --------------
Gross profit............................................. 51,981 23,960 23,929 51,950
Selling, general and administrative expenses............. 38,977 20,095 20,478 39,360
Relocation Expenses...................................... 657 542 -- 115
------------ ---------- ---------- --------------
Operating income......................................... 12,347 3,323 3,451 12,475
Interest expense, net.................................... 12,570 6,197 6,146 12,519
Other (income) expense................................... (871) (963) (306) (214)
------------ ---------- ---------- --------------
Income (loss) before income taxes........................ 648 (1,911) (2,389) 170
Income tax provision (benefit)........................... (1,716) (289) (1,176) (2,603)
------------ ---------- ---------- --------------
Net income (loss)........................................ $ 2,364 $ (1,622) $ (1,213 (a) $ 2,773
------------ ---------- ---------- --------------
------------ ---------- ---------- --------------
OTHER DATA:
EBITDA (b)............................................... $ 22,013 $ 8,120 $ 8,579 $ 22,472
Long-term debt to EBITDA................................. 4.56x
EBITDA to interest expense............................... 1.80x
Ratio of Earnings to Fixed Charges(c).................... 1.05x -- -- 1.01x
Depreciation and amortization............................ $ 10,552 4,978 5,249 10,823
Capital expenditures..................................... 6,480 3,269 5,043 8,254
Dividends paid (d)....................................... -- -- -- --
</TABLE>
- ------------------------------
(a) The pro forma net income (loss) for the six months ended June 30, 1996 does
not include the extraordinary loss on early retirement of debt of $798, net
of income tax benefit of $461, recorded as a result of the repayment of
certain Prior Debt upon the consummation of the Transactions.
(b) EBITDA is provided because it is a measure of an issuer's ability to
service its indebtedness commonly used by certain investors. EBITDA, as
defined herein, is a financial measure under the New Notes. The New Notes
contain a covenant which requires the Company to maintain certain minimum
levels of EBITDA, as defined. EBITDA is not a measurement of financial
performance under generally accepted accounting principles and should not
be considered an alternative to net income as a measure of performance or
to cash flow as a measure of liquidity.
EBITDA is defined as operating income, plus depreciation and amortization
and reflects (a) with respect to NFC, the elimination of the non-cash
charges related to pension, deferred financing and change in vacation
policy and the elimination of the gain on disposal of equipment, and (b)
with respect to Transkrit, the elimination of the non-cash charges related
to the pension plan.
(c) The ratio of earnings to fixed charges is computed by adding fixed charges
(interest and amortization of deferred financing costs and discounts) to
income before provision for income taxes and dividing that sum by the sum
of fixed charges. Pro forma earnings were insufficient to cover fixed
charges by $1,911 and $2,389 for the six months ended June 30, 1995 and
1996, respectively.
(d) No dividends were declared or paid on common stock during or for the
periods presented. The Indenture restricts the Company's ability to pay
dividends. (See "Risk Factors").
6
<PAGE>
RISK FACTORS
Prospective participants should carefully consider the following factors in
addition to the other information set forth in this Prospectus before
participating in the Exchange Offer.
SUBSTANTIAL LEVERAGE AND ABILITY TO SERVICE AND REFINANCE DEBT; AMORTIZATION OF
INTANGIBLE ASSETS
In connection with the Transactions, the Company incurred a significant
amount of indebtedness. As of June 30, 1996, after giving effect to the
Transactions, the Company's indebtedness was approximately $102.8 million and
its stockholder's equity was approximately $12.8 million. In addition, subject
to the restrictions in the New Bank Credit Facility and the Indenture, the
Company may incur additional indebtedness from time to time to finance
acquisitions or capital expenditures or for other purposes.
The level of the Company's indebtedness could have important consequences to
holders of the Notes, including: (i) a substantial portion of the Company's cash
flow from operations must be dedicated to debt service and will not be available
for other purposes; (ii) the Company's ability to obtain additional debt
financing in the future for working capital, capital expenditures or
acquisitions may be limited; and (iii) the Company's level of indebtedness could
limit its flexibility in reacting to changes in the industry and economic
conditions generally.
The Company's ability to pay interest on the Notes and to satisfy its other
debt obligations will depend upon its future operating performance which will be
affected by prevailing economic conditions and financial, business and other
factors, certain of which are beyond its control. The Company anticipates that
its operating cash flow, together with borrowings under the New Bank Credit
Facility, will be sufficient to meet its operating expenses and to service its
interest requirements as they become due. The Company anticipates that it will
be required to refinance the Notes at maturity. No assurance can be given that
the Company will be able to refinance the Notes on terms acceptable to it, if at
all. If the Company is unable to service its indebtedness, it will be forced to
adopt an alternative strategy that may include actions such as reducing or
delaying capital expenditures, selling assets, restructuring or refinancing its
indebtedness, or seeking additional equity capital. There can be no assurance
that any of these strategies could be effected on satisfactory terms, if at all.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." The Indenture will provide that
upon the occurrence of a Change of Control (as defined below) each Holder (as
defined below) will have the right to require that the Company purchase all or a
portion of such Holder's Notes pursuant to a Change of Control Offer (as defined
below) at a purchase price equal to 101% of the principal amount thereof, plus
accrued and unpaid interest, if any, thereon to the date of purchase. If a
Change of Control Offer is made, there can be no assurance that the Company will
have available funds sufficient to pay the Change of Control purchase price for
all the Notes that might be delivered by Holders seeking to accept the Change of
Control Offer. In the event the Company is required to purchase outstanding
Notes pursuant to a Change of Control Offer, the Company expects that it would
seek third party financing to the extent it does not have available funds to
meet its purchase obligations. However, there can be no assurance that the
Company would be able to obtain such financing. See "Description of the
Notes--Change of Control."
After giving pro forma effect to the Transactions, the Company's net income
(loss) for the six month period ended June 30, 1996 would have been
approximately $(1.2) million and the Company's earnings would have been
insufficient to cover fixed charges (including interest and amortization of
deferred financing costs and discounts) by approximately $2.4 million. As a
result of the consummation of the Transactions, approximately $52.2 million of
the Company's assets as of June 30, 1996 constituted intangible assets, and,
although the amortization changes associated therewith will not affect operating
cash flow or EBITDA, such charges will negatively affect the Company's results
of operations.
The Company's business is subject to seasonal fluctuations in the volume of
orders. Order volume typically decreases in the first half of the calendar year,
and increases in the second half of the calendar year. Although the Company
incurred a net loss for the six month periods ended June 30, 1996 and 1995 on a
pro forma basis, the Company generated pro-forma net income during both the
twelve month periods ended December 31, 1995 and June 30, 1996. The Company's
pro-forma EBITDA for the twelve month period ended June 30, 1996 of $22.5
million would be adequate to cover pro-forma debt service payments of
7
<PAGE>
$8.7 million, pro-forma payments for income taxes of $0 and projected annual
capital expenditures of $5.2 million. Although management expects that the
effect of seasonality will continue to create lower EBITDA levels in the first
half of each calendar year, management believes that annual EBITDA will be
sufficient to meet projected debt service requirements. However, there can be no
assurance that future EBITDA will be sufficient to meet debt service
requirements, or that the effects of seasonality on the Company's business will
not become more pronounced in the future.
RESTRICTIONS IMPOSED BY TERMS OF THE COMPANY'S INDEBTEDNESS
The Indenture and the New Bank Credit Facility restrict, the Company's
ability to incur additional indebtedness, incur liens, pay dividends or make
certain other restricted payments, consummate certain asset sales, enter into
certain transactions with affiliates, impose restrictions on the ability of a
subsidiary to pay dividends or make certain payments to the Company, merge or
consolidate with any other person or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of the assets of the Company. See
"Description of the Notes -- Certain Covenants" and "Description of New Bank
Credit Facility." A breach of any of these covenants could result in a default
under the Indenture and/or the New Bank Credit Facility. Upon the occurrence of
an event of default under the New Bank Credit Facility, the lenders thereunder
could elect to declare all amounts outstanding under the New Bank Credit
Facility, together with accrued interest, to be immediately due and payable. In
addition, an event of default under the Indenture would constitute a default
under the Company's lease agreement with the CIT Group (the "CIT Lease")
relating to the financing of a $2.6 million equipment line (the "Equipment")
enabling the lessor thereunder to declare all amounts outstanding thereunder to
be immediately due and payable. If the Company were unable to repay those
amounts, such lenders or lessor could proceed against the collateral granted to
them to secure that indebtedness. If the lenders under the New Bank Credit
Facility or the lessor under the CIT Lease accelerates the payment of such
indebtedness, there can be no assurance that the assets of the Company would be
sufficient to repay in full such indebtedness and the other indebtedness of the
Company, including the Notes. All of the Company's inventory, accounts
receivable, patents, trademarks and other intangibles and the proceeds thereof
have been pledged as security under the New Bank Credit Facility. See
"Description of New Bank Credit Facility." The Equipment has been pledged as
security under the CIT Lease. The Company's obligations under the Indenture
would be effectively subordinated in right of payment to the New Bank Credit
Facility and the CIT Lease upon the occurrence of an event of default
thereunder.
EXPOSURE TO FLUCTUATIONS IN PAPER COSTS AND SUPPLY
The Company's principal raw material is paper. Paper, which represented
approximately one-half of the Company's cost of goods sold in 1995, has a
historical pattern of cyclical price change based upon industry capacity versus
market demand. Supply has historically been available; however, during periods
of increased economic activity and resultant low inventory levels, paper
companies tend to place customers on allocation, which limits the short term
supply available. Prices during these periods tend to increase. The Company
maintains multiple sources of supply in all grades of paper which limits the
risk of paper shortage due to isolated paper plant shut-downs and which provides
alternate sources during allocation periods. Because the Company's customer
quotations are honored for a period of 30 days from quotation, the Company
historically has been able to pass through paper price increases to its
customers. In addition, the Company's sales contracts generally contain
provisions permitting escalation of prices based upon increases in the
underlying paper cost.
COMPETITION AND CHANGING MARKETS
The envelope, mailer, label and custom office supply industries, within
which the Company competes are fragmented and highly competitive. The Company
competes with other national and local manufacturers in many product segments.
Certain of the Company's principal competitors are less highly-leveraged than
the Company and may have greater financing and operating flexibility. There can
be no assurance that the Company will not encounter increased competition in the
future, which could have a material adverse effect on the Company's business.
See "Business -- Competition."
8
<PAGE>
EFFECTIVE SUBORDINATION OF NOTES TO SECURED INDEBTEDNESS
The Notes and the Guarantees will be effectively subordinated to secured
indebtedness of NFC, including indebtedness under the New Bank Credit Facility,
to the extent of the collateral securing such indebtedness. See "Description of
the Notes" and "Description of New Bank Credit Facility."
Subject to restrictions under the New Bank Credit Facility and the
Indenture, NFC may in the future incur additional secured indebtedness to which
the Notes will be effectively subordinated to the extent of the collateral
securing such indebtedness. See "Description of the Notes" and "Description of
New Bank Credit Facility."
IMPACT OF ENVIRONMENTAL REGULATION; GOVERNMENTAL REGULATION
Like similar companies, the Company's operations and properties are subject
to a wide variety of federal, state and local laws and regulations, including
those governing the use, storage, handling, generation, treatment, emission,
release, discharge and disposal of certain materials, substances and wastes, the
remediation of contaminated soil and groundwater, and the health and safety of
employees. As such, the nature of the Company's operations exposes it to the
risk of claims with respect to environmental protection and health and safety
matters and there can be no assurance that material costs or liabilities will
not be incurred in connection with such claims. Pursuant to these laws and
regulations, there are currently pending investigations at certain of the
Company's plants and sites at which they may have disposed of hazardous
substances. In addition, the Company has been designated as a potentially
responsible party under the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended ("Superfund") with respect to off-site
disposal of hazardous substances at two sites and may be jointly and severally
liable for the costs of environmental remediation at those sites. Based upon its
experience to date, management of NFC believes that the future cost of
compliance with existing environmental protection and health and safety laws and
regulations, and liability for known claims of this type, will not have a
material adverse effect on the Company's business or financial position.
However, future events, such as changes in existing laws and regulations or
their interpretation, and more vigorous enforcement policies of regulatory
agencies, may give rise to additional expenditures or liabilities that could be
material to the Company's business or financial position. See "Business --
Environmental, Health and Safety Matters."
DEPENDENCE ON KEY MANAGEMENT
The Company's success will continue to depend to a significant extent on its
executives and other key management personnel. There can be no assurance that
the Company will be able to retain its executive officers and key personnel or
attract additional qualified management in the future. In addition, the success
of certain of the Company's acquisitions may depend, in part, on the Company's
ability to retain management personnel and to integrate the operations of the
acquired companies.
CONTROLLING STOCKHOLDER
Certain affiliates of McCown De Leeuw & Co. (the "MDC Entities") own
substantially all of the outstanding voting stock of DEC. By virtue of such
stock ownership, the MDC Entities have the power to control all matters
submitted to stockholders of NFC and to elect all directors of NFC and its
subsidiaries. The interests of the MDC Entities as equityholders may differ from
the interests of holders of Notes. See "Security Ownership."
ABSENCE OF PUBLIC MARKET
There has not previously been any public market for the New Notes. There can
be no assurance as to the liquidity of any markets that may develop for the New
Notes, the ability of holders to sell the New Notes, or the price at which
holders would be able to sell the New Notes. Future trading prices of the New
Notes will depend on many factors, including among other things, prevailing
interest rates, the Company's operating results and the market for similar
securities. Historically, the market for securities similar to the New Notes,
including non-investment grade debt, has been subject to disruptions that have
caused substantial volatility in the prices of such securities. There can be no
assurance that any market for the New Notes, if such market develops, will not
be subject to similar disruptions.
9
<PAGE>
THE TRANSACTIONS
THE ACQUISITION
Pursuant to the Stock Purchase Agreement, NFC purchased the issued and
outstanding capital stock of Transkrit from Rogers Communications, Inc., Frank
Neubauer (Chairman and Chief Executive Officer of Transkrit) and Jack Resnick
(Chief Operating Officer of Transkrit). The purchase price paid for Transkrit at
the closing of the Acquisition was $86.5 million in cash. The purchase price is
subject to post-closing adjustment for certain changes in Transkrit's working
capital, other net assets and capital expenditures from the amounts estimated at
the closing of the Acquisition and management believes that the post-closing
adjustment will result in an increase in the purchase price of not more than
$250,000. At the closing of the Acquisition, Transkrit was merged with and into
NFC.
Concurrently with the consummation of the Acquisition, (i) the Company made
the Initial Offering, (ii) DEC issued $10.0 million in aggregate liquidation
preference of preferred stock and used a portion of the proceeds therefrom to
make the Parent Capital Contribution of $7.8 million to NFC, (iii) NFC repaid
the Prior Debt and terminated its existing credit agreements and (iv) the
Company executed the New Bank Credit Facility, which provides borrowing
availablilty of up to $20.0 million.
USE OF PROCEEDS FROM THE INITIAL OFFERING
The gross proceeds of $100.0 million from the Initial Offering were used,
together with the proceeds from the Parent Capital Contribution and cash on
hand, to pay the purchase price of the Acquisition, refinance Prior Debt, pay
fees and expenses relating to the Transactions and pay certain accrued
management fees.
USE OF PROCEEDS OF THE NEW NOTES
This Exchange Offer is intended to satisfy certain obligations of the
Company under the Registration Rights Agreement. The Company will not receive
any proceeds from the issuance of the New Notes offered hereby. In consideration
for issuing the New Notes as contemplated in this Prospectus, the Company will
receive, in exchange, Old Notes in like principal amount. The form and terms of
the New Notes are identical in all material respects to the form and terms of
the Old Notes, except as otherwise described herein under "The Exchange Offer --
Terms of the Exchange Offer." The Old Notes surrendered in exchange for the New
Notes will be retired and cancelled and cannot be reissued. Accordingly,
issuance of the New Notes will not result in any increase in the outstanding
debt of the Company.
10
<PAGE>
CAPITALIZATION
(UNAUDITED)
The following table sets forth the capitalization of the Company giving
effect to the Transactions as of June 28, 1996. This table should be read in
conjunction with the "Selected Historical Financial Data -- National Fiberstock
Corporation," "Selected Historical Consolidated Financial Data -- Transkrit
Corporation" and "Unaudited Pro Forma Financial Data" included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
NFC TRANSKRIT ADJUSTMENTS COMPANY
--------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Subordinated debt.......................... $ 4,545 $ -- $ (4,545)(a) $ --
Revolving Credit facility.................. 6,600 -- (6,600)(a) --
Long-term debt............................. 10,951 -- (10,951)(a) --
Capitalized lease obligations.............. 2,796 -- -- 2,796
Initial Offering........................... -- -- 100,000(a) 100,000
--------- --------- ----------
Total debt............................. 24,892 -- 102,796
--------- --------- ----------
Common stock............................... 3 9 (9)(b) 3
Additional paid-in capital................. 14,532 12,123 (4,359)(c) 22,296
Retained earnings (deficit)................ (8,722) 44,211 (45,009)(d) (9,520)
--------- --------- ----------
Total stockholders' equity............. 5,813 56,343 12,779
--------- --------- ----------
Total capitalization....................... $ 30,705 $ 56,343 $ 115,575
--------- --------- ----------
--------- --------- ----------
</TABLE>
- ------------------------
(a) Reflects the issuance of the Old Notes and the application of a portion of
the proceeds to the repayment of the Company's Prior Debt.
(b) Reflects the elimination of Transkrit common stock.
(c) Reflects the following:
<TABLE>
<S> <C>
Elimination of Transkrit additional paid-in capital............... $ (12,123)
Parent Capital Contribution....................................... 7,764
---------
$ (4,359)
---------
---------
</TABLE>
(d) Reflects the following:
<TABLE>
<S> <C>
Elimination of Transkrit retained earnings........................ $ (44,211)
Payment of prepayment penalty associated with early retirement of
debt(e).......................................................... (150)
Eliminiation of debt discount upon debt retirement(e)............. (604)
Write-off of existing deferred financing fees and expenses upon
early retirement of debt(e)...................................... (505)
Tax benefit from the above adjustments(e)......................... 461
---------
$ (45,009)
---------
---------
</TABLE>
(e) The Company recorded an extraordinary loss in connection with early
retirement of debt, net of income tax benefit, upon completion of the
Transactions, on June 28, 1996.
11
<PAGE>
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
Pursuant to the Registration Rights Agreement by and among the Company,
certain former Guarantors and the Initial Purchasers, the Company has agreed (i)
to file a registration statement with respect to an offer to exchange the Old
Notes for senior debt securities of the Company with terms substantially
identical to the Old Notes (except that the New Notes will not contain terms
with respect to transfer restrictions) within 30 days after the date of original
issuance of the Old Notes and (ii) to use best efforts to cause such
registration statement to become effective under the Securities Act within 120
days after such issue date. In the event that applicable law or interpretations
of the staff of the Commission do not permit the Company to file the
registration statement containing this Prospectus or to effect the Exchange
Offer, or if certain holders of the Old Notes notify the Company that they are
not permitted to participate in, or would not receive freely tradeable New Notes
pursuant to, the Exchange Offer, the Company will use its best efforts to cause
to become effective the Shelf Registration Statement with respect to the resale
of the Old Notes and to keep the Shelf Registration Statement effective until
three years after the original issuance of the Old Notes. The interest rate on
the Old Notes is subject to increase under certain circumstances if the Company
is not in compliance with its obligations under the Registration Rights
Agreement. See "Old Notes Registration Rights."
Each holder of the Old Notes who wishes to exchange such Old Notes for New
Notes in the Exchange Offer will be required to make certain representations,
including representations that (i) any New Notes to be received by it will be
acquired in the ordinary course of its business, (ii) it has no arrangement with
any person to participate in the distribution of the New Notes and (iii) it is
not an "affiliate," as defined in Rule 405 of the Securities Act, of the Company
or, if it is an affiliate, it will comply with the registration and prospectus
delivery requirements of the Securities Act to the extent applicable. See "Old
Notes Registration Rights."
RESALE OF NEW NOTES
Based on interpretations by the staff of the Commission set forth in
no-action letters issued to third-parties, the Company believes that, except as
described below, New Notes issued pursuant to the Exchange Offer in exchange for
Old Notes may be offered for resale, resold and otherwise transferred by any
holder thereof (other than a holder which is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act) without compliance with
the registration and prospectus delivery provisions of the Securities Act,
provided that such New Notes are acquired in the ordinary course of such
holder's business and such holder does not intend to participate and has no
arrangement or understanding with any person to participate in the distribution
of such New Notes. Any holder who tenders in the Exchange Offer with the
intention or 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 a secondary resale transaction. Unless an
exemption from registration is otherwise available, any such resale transaction
should be covered by an effective registration statement containing the selling
security holders information required by Item 507 of Regulation S-K under the
Securities Act. This Prospectus may be used for an offer to resell, resale or
other retransfer of New Notes only as specifically set forth herein. 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. See
"Plan of Distribution."
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept for exchange any and
all Old Notes properly tendered and not withdrawn prior to 5:00 p.m., New York
City time, on the Expiration Date. The Company will issue $1,000 principal
amount of New Notes in exchange for each $1,000 principal amount of outstanding
Old Notes surrendered pursuant to the Exchange Offer. Old Notes may be tendered
only in integral multiples of $1,000.
12
<PAGE>
The form and terms of the New Notes will be the same as the form and terms
of the Old Notes except the New Notes will be registered under the Securities
Act and hence 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, which also authorized the
issuance of the Old Notes, such that both series will be treated as a single
class of debt securities under the Indenture.
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Old Notes being tendered for exchange.
As of the date of this Prospectus, $100 million aggregate principal amount
of the Old Notes are outstanding. This Prospectus, together with the Letter of
Transmittal, is being sent to all registered holders of Old Notes. There will be
no fixed record date for determining registered holders of Old Notes entitled to
participate in 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 which are not tendered for exchange in the Exchange Offer will remain
outstanding and continue to accrue interest and will be entitled to the rights
and benefits such holders have under the Indenture and the Registration Rights
Agreement.
The Company shall be deemed to have accepted for exchange properly tendered
Notes when, as and if the Company shall have given oral or written notice
thereof to the Exchange Agent and complied with the provisions of Section 2 of
the Registration Rights Agreement. The Exchange Agent will act as agent for the
tendering holders for the purposes of receiving the New Notes from the Company.
The Company expressly reserves the right to amend or terminate the Exchange
Offer, and not to accept for exchange any Old Notes not theretofore accepted for
exchange, upon the occurrence of any of the conditions specified below under "--
Certain Conditions to the Exchange Offer."
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the Letter
of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than certain applicable taxes described below, in connection with the
Exchange Offer. "See -- Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date," shall mean 5:00 p.m., New York City time on
, 1996, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will mail to the registered
holders of Old Notes an announcement thereof, each prior to 9:00 a.m., New York
City time, on the next business day after the then Expiration Date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting for exchange any Old Notes, to extend the Exchange Offer or to
terminate the Exchange Offer if any of the conditions set forth below under "The
Exchange Offer -- Conditions" shall not have been satisfied, by giving oral or
written notice of such delay, extension or termination to the Exchange Agent or
(ii) to amend the terms of the Exchange Offer in any manner. Any such delay in
acceptance, extension, termination or amendment will be followed as promptly as
practicable by oral or written notice thereof to the registered holders of Old
Notes. 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
by means of a prospectus supplement that will be distributed to the registered
holders, and the Company will extend the Exchange Offer, depending upon the
significance of the amendment and the manner of disclosure to the registered
holders, if the Exchange Offer would otherwise expire during such period.
13
<PAGE>
INTEREST ON THE NEW NOTES
The New Notes will bear interest at a rate of 11 5/8% per annum, payable
semi-annually, on each June 15 and December 15, commencing December 15, 1996.
Holders of New Notes will receive interest on December 15, 1996 from the date of
initial issuance of the New Notes, plus an amount equal to the accrued interest
on the Old Notes. Interest on the Old Notes accepted for exchange will cease to
accrue upon issuance of the New Notes.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other term of the Exchange Offer, the Company will not
be required to accept for exchange, or exchange any New Notes for, any Old
Notes, and may terminate the Exchange Offer as provided herein before the
acceptance of any Old Notes for exchange, if:
(a)
any action or proceeding is instituted or threatened in any court or
by or before any governmental agency with respect to the Exchange
Offer which, in the Company's reasonable judgment, might materially impair
the ability of the Company to proceed with the Exchange Offer; or
(b)
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, which, in the Company's reasonable judgment,
might materially impair the ability of the Company to proceed with the
Exchange Offer; or
(c)
any governmental approval has not been obtained, which approval the
Company shall, in its reasonable discretion, deem necessary for the
consummation of the Exchange Offer as contemplated hereby.
The Company expressly reserves the right, at any time or from time to time,
to extend the period of time during which the Exchange Offer is open, and
thereby delay acceptance for exchange of any Old Notes, by giving oral or
written notice of such extension to the holders thereof. During any such
extensions, all Old Notes previously tendered will remain subject to the
Exchange Offer and may be accepted for exchange by the Company. Any Old Notes
not accepted for exchange for any reason will be returned without expense to the
tendering holder thereof as promptly as practicable after the expiration or
termination of the Exchange Offer.
The Company expressly reserves the right to amend or terminate the Exchange
Offer, and not to accept for exchange any Old Notes not theretofore accepted for
exchange, upon the occurrence of any of the conditions of the Exchange Offer
specified above under "-- Certain Conditions to the Exchange Offer." The Company
will give oral or written notice of any extension, amendment, non-acceptance or
termination to the holders of the Old Notes as promptly as practicable, such
notice in the case of any extension to be issued no later than 9:00 a.m., New
York City time, on the next business day after the previously scheduled
Expiration Date.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company in whole or in part at any time and
from time to time in its sole discretion. The failure by the Company at any time
to exercise any of the foregoing rights shall not be deemed a waiver of any such
right and each such right shall be deemed an ongoing right which may be asserted
at any time and from time to time.
In addition, the Company will not accept for exchange any Old Notes
tendered, and no New Notes will be issued in exchange for any such Old Notes, if
at such time any stop order shall be threatened or in effect with respect to the
Registration Statement of which this Prospectus constitutes a part or the
qualification of the Indenture under the Trust Indenture Act of 1939 (the
"TIA").
PROCEDURES FOR TENDERING
Only a holder of Old Notes may tender such Old Notes in the Exchange Offer.
To tender in the Exchange Offer, a holder must complete, sign and date the
Letter of Transmittal, or facsimile thereof, have the signature thereon
guaranteed if required by the Letter of Transmittal, and mail or otherwise
deliver such Letter of Transmittal or such facsimile to the Exchange Agent prior
to 5:00 p.m., New York City time, on the
14
<PAGE>
Expiration Date. In addition, either (i) Old Notes must be received by the
Exchange Agent along with the Letter of Transmittal, or (ii) a timely
confirmation of book-entry transfer (a "Book-Entry Confirmation") of such Old
Notes, if such procedure is available, into the Exchange Agent's account at the
Depository Trust Company (the "Book-Entry Transfer Facility") pursuant to the
procedure for book-entry transfer described below must be received by the
Exchange Agent prior to the Expiration Date, or (iii) the holder must comply
with the guaranteed delivery procedures described below. To be tendered
effectively, the Letter of Transmittal and other required documents must be
received by the Exchange Agent at the address set forth below under "The
Exchange Offer -- Exchange Agent" prior to 5:00 p.m., New York City time, on the
Expiration Date.
The tender by a holder which is not withdrawn prior to the Expiration Date
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.
THE METHOD OF DELIVERY OF OLD NOTES, THE LETTER OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE
HOLDER. 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 DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO
LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS MAY
REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR
OTHER NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Old Notes are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee and who wishes to tender
should contact the registered holder promptly and instruct such registered
holder of Old Notes to tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such owner's own behalf, such owner must,
prior to completing and executing the Letter of Transmittal and delivering such
owner's Old Notes, either make appropriate arrangements to register ownership of
the Old Notes in such owner's name or obtain a properly completed bond power
from the registered holder of Old Notes. The transfer of registered ownership
may take considerable time and may not be able to be completed prior to the
Expiration Date.
Signatures on a Letter of Transmittal or a notice of withdrawal described
below, as the case be, must be guaranteed by an Eligible Institution (as defined
below) unless the Old Notes tendered pursuant thereto are tendered (i) by a
registered holder who has not completed the box entitled "Special Issuance
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or
(ii) for the account of an Eligible Institution. In the event that signatures on
a Letter Transmittal or a notice of withdrawal, as the case may be, are required
to be guaranteed, such guarantor must be 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 which is a member of one of the recognized
signature guarantee programs identified in the Letter of Transmittal (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 a properly completed bond power, signed by such registered holder
as such registered holder's name appears on such Old Notes with the signature
thereon guaranteed by an Eligible Institution.
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,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Old Notes and withdrawal of tendered Old Notes
will be determined by the Company in its sole discretion, which
15
<PAGE>
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,
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.
Although the Company intends to notify holders of defects or irregularities with
respect to tenders of Old Notes, neither the Company, the Exchange Agent nor any
other person shall 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 properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the Exchange
Agent to the tendering holder, unless otherwise provided in the Letter of
Transmittal, as soon as practicable following the Expiration Date.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of Notes or a timely Book-Entry Confirmation of such Old
Notes into the Exchange Agent's account at the Book-Entry Transfer Facility, a
properly completed and duly executed Letter of Transmittal and all other
required documents. If any tendered Old Notes are not accepted for exchange for
any reason set forth in the terms and conditions of the Exchange Offer or if Old
Notes are submitted for a greater principal amount than the holder desires to
exchange, such unaccepted or non-exchanged Old Notes will be returned without
expense to the tendering holder thereof (or, in the case of Old Notes tendered
by book-entry transfer into the Exchange Agent's account at the Book-Entry
Transfer Facility pursuant to the book-entry transfer procedures described
below, such non-exchanged Notes will be credited to an account maintained with
such Book-Entry Transfer Facility) as promptly as practicable after the
expiration or termination of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus, and
any financial institution that is a participant in the Book-Entry Transfer
Facility's system may make book-entry delivery of Old Notes by causing the
Book-Entry Transfer Facility to transfer such Old Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility in accordance with such
Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Notes may be effected through book-entry transfer at the Book-Entry
Transfer Facility, the Letter of Transmittal or facsimile thereof, with any
required signature guarantees and any other required documents, must, in any
case, be transmitted to and received by the Exchange Agent at the address set
forth below under "-- Exchange Agent" on or prior to the Expiration Date or, if
the guaranteed delivery procedures described below are to be complied with,
within the time period provided under such procedures. Delivery of documents to
the Book-Entry Transfer Facility does not constitute delivery to the Exchange
Agent.
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 Dates, may effect a tender if:
(a)
The tender is made through an Eligible Institution;
(b)
Prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder, the registered number(s)
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
(3) New York Stock Exchange trading days after the Expiration Date, the
Letter of Transmittal (or facsimile thereof) together with the Old Notes or
a Book-Entry Confirmation, as the case may be, and any other documents
required by the Letter of Transmittal will be deposited by the Eligible
Institution with the Exchange Agent; and
16
<PAGE>
(c)
Such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as all tendered Notes in proper form for
transfer or a Book-Entry Confirmation, as the case may be, and all other
documents required by the Letter of Transmittal, are received by the
Exchange Agent within three (3) New York Stock Exchange trading days after
the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their 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.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent at one of the addresses set forth below under
"Exchange Agent." Any such notice of withdrawal must specify the name of the
person having tendered the Old Notes to be withdrawn, identify the Old Notes to
be withdrawn (including the principal amount of such Old Notes), and (where
certificates for Old Notes have been transmitted) specify the name in which such
Old Notes were registered, if different from that of the withdrawing holder. If
certificates for Old Notes have been delivered or otherwise identified to the
Exchange Agent, then, prior to the release of such certificates the withdrawing
holder must also submit the serial numbers of the particular certificates to be
withdrawn and a signed notice of withdrawal with signatures guaranteed by an
Eligible Institution unless such holder is an Eligible Institution. If Old Notes
have been tendered pursuant to the procedure for book-entry transfer described
above, any notice of withdrawal must specify the name and number of the account
at the Book-Entry Transfer Facility to be credited with the withdrawn Old Notes
and otherwise comply with the procedures of such facility. All questions as to
the validity, form and eligibility (including time of receipt) of such notices
will be determined by the Company, whose determination shall be final and
binding on all parties. Any Old Notes so withdrawn will be deemed not to have
been validly tendered for exchange for purposes of the Exchange Offer. Any Old
Notes which have been tendered for exchange but which are not exchanged for any
reason will be returned to the holder thereof without cost to such holder (or,
in the case of Old Notes tendered by book-entry transfer into the Exchange
Agent's account at the Book-Entry Transfer Facility pursuant to the book-entry
transfer procedures described above, such Old Notes will be credited to an
account maintained with such Book-Entry Transfer Facility for the Old Notes) 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 under "-- Procedures for Tendering Old Notes" above
at any time on or prior to the Expiration Date.
17
<PAGE>
EXCHANGE AGENT
Wilmington Trust Company has been appointed as Exchange Agent of the
Exchange Offer. Questions and request for assistance, request for additional
copies of this Prospectus or of the Letter of Transmittal and requests for
Notice of Guaranteed Delivery should be directed to the Exchange Agent addressed
as follows:
<TABLE>
<S> <C>
BY REGISTERED OR CERTIFIED MAIL OR BY BY HAND:
OVERNIGHT COURIER:
Wilmington Trust Company Wilmington Trust Company
Corporate Trust Administration c/o Harris Trust Company of New York,
1100 North Market Street as Agent
Rodney Square North 75 Water Street
Wilmington, Delaware 19890-0001 New York, New York 10004
BY FACSIMILE:
Wilmington Trust Company
Corporate Trust Administration
Facsimile: (302) 651-1079
Confirm by Telephone: (302) 651-8864
</TABLE>
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telephone or in person by officers and regular
employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to broker-dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company and are estimated in the aggregate to be approximately
$300,000. Such expenses include registration fees, fees and expenses of the
Exchange Agent and Trustee, accounting and legal fees and printing costs, and
related fees and expenses.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Notes pursuant to the Exchange Offer. If, however, certificates representing
Old Notes for principal amounts not tendered or accepted for exchange are to be
delivered to, or are to be issued in the name of, any person other than the
registered holder of Notes tendered, or if tendered 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 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.
TRANSFER TAXES
Holders who tender their Old Notes for exchange will not be obligated to pay
any transfer taxes in connection therewith, except that holders who instruct the
Company to register New Notes in the name of, or request that Old Notes not
tendered or not accepted in the Exchange Offer be returned to, a person other
than the registered tendering holder will be responsible for the payment of any
applicable transfer tax thereon.
18
<PAGE>
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes, as set forth (i) in the legend thereon as a
consequence of the issuance of the Old Notes pursuant to the exemptions from, or
in transactions not subject to, the registration requirements of the Securities
Act and applicable state securities laws and (ii) otherwise set forth under
"Transfer Restrictions" in the Offering Memorandum dated June 21, 1996
distributed in connection with the Initial Offering. In general, the Old Notes
may not be offered or sold, unless registered under the Securities Act, except
pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. The Company does not
currently anticipate that it will register the Old Notes under the Securities
Act. Based on interpretations by the staff of the Commission, New Notes issued
pursuant to the Exchange Offer may be offered for resale, resold or otherwise
transferred by holders thereof (other than any such holder which is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery provisions
of the Securities Act, provided that such New Notes are acquired in the ordinary
course of such holders' business and such holders have no arrangement or
understanding with respect to the distribution of the New Notes to be acquired
pursuant to the Exchange Offer. Any holder who tenders in the Exchange Offer for
the purpose of participating in a distribution of the New Notes (i) could not
rely on the applicable interpretations of the staff of the Commission and (ii)
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with a secondary resale transaction. In addition,
to comply with the securities laws of certain jurisdictions, if applicable, the
New Notes may not be offered or sold unless they have been registered or such
securities laws have been complied with. The Company has agreed, pursuant to the
Registration Rights Agreement and subject to certain specified limitations
therein, to register or qualify the New Notes for offer or sale under the
securities or blue sky laws of such jurisdictions as any holder of the New Notes
reasonably requests in writing.
19
<PAGE>
UNAUDITED PRO FORMA FINANCIAL DATA
The following Unaudited Pro Forma Combined Consolidated Statements of Income
give effect to the Transactions as if they had occurred on January 1, 1995. The
unaudited pro forma financial data are based on the historical financial
statements of NFC and Transkrit and the assumptions and adjustments described in
the accompanying notes. The Unaudited Pro Forma Combined Consolidated Statements
of Income do not (a) purport to represent what the Company's results of
operations actually would have been if the Transactions had occurred as of the
date indicated or what such results will be for any future periods or (b) give
effect to certain non-recurring charges expected to result from the
Transactions.
The unaudited pro forma financial data are based upon assumptions that the
Company believes are reasonable and should be read in conjunction with the
Financial Statements of NFC and the accompanying notes thereto and the
Consolidated Financial Statements of Transkrit and the accompanying notes
thereto included elsewhere in this Prospectus.
20
<PAGE>
UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL ADJUSTED
HISTORICAL HISTORICAL TRANSKRIT HISTORICAL TRANSACTION COMPANY
NFC TRANSKRIT ADJUSTMENTS TRANSKRIT ADJUSTMENTS PRO FORMA
----------- ----------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net Sales.............................. $ 71,257 $ 97,681 $ (178)(a) $ 97,503 $ -- $ 168,760
Cost of products sold.................. 55,708 64,223 (1,629)(b) 62,594 (1,523)(e) 116,779
----------- ----------- ------------- ----------- ------------- -----------
Gross profit....................... 15,549 33,458 1,451 34,909 1,523 51,981
Selling, general and administrative
expenses............................. 13,410 29,412 (3,641)(c) 25,771 (204)(f) 38,977
Relocation expenses.................... -- 657 -- 657 -- 657
----------- ----------- ------------- ----------- ------------- -----------
Operating income....................... 2,139 3,389 5,092 8,481 1,727 12,347
Interest (income) expense.............. 3,179 (697) 765(d) 68 9,323(g) 12,570
Other (income) expense................. -- (871) -- (871) -- (871)
----------- ----------- ------------- ----------- ------------- -----------
Income (loss) before income
taxes............................. (1,040) 4,957 4,327 9,284 (7,596) 648
Income tax provision (benefit)......... (1,900) 1,380 1,601(h) 2,981 (2,797)(h) (1,716)
----------- ----------- ------------- ----------- ------------- -----------
Net income............................. $ 860 $ 3,577 $ 2,726 $ 6,303 $ (4,799) $ 2,364
----------- ----------- ------------- ----------- ------------- -----------
----------- ----------- ------------- ----------- ------------- -----------
</TABLE>
See accompanying notes.
21
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
The Pro Forma Combined Consolidated Statement of Income for the year ended
December 31, 1995 reflects the Transactions as if they had occurred on January
1, 1995 as follows:
<TABLE>
<S> <C> <C>
(a) Reflects the disposal of the Tax Forms product line, excluding continuing product sales
transferred to another Transkrit division.
(b) Reflects the following:
Disposal of Tax Forms product line (see footnote (a)).................................... $ (227)
Conversion of Transkrit inventory valuation method from LIFO to FIFO..................... (1,402)
---------
$ (1,629)
---------
---------
(c) Reflects the following:
Reversal of compensation plan expenses................................................... $ (2,462)
Disposal of Tax Forms product line (see footnote (a)).................................... (214)
Eliminate rent expense at Transkrit related to former related-party transaction.......... (765)
Additional annual management fees to be incurred upon consummation of the Acquisition.... 100
Reversal of management fees paid to previous affiliate................................... (300)
---------
$ (3,641)
---------
---------
(d) Reflects the elimination of interest income at Transkrit related to former related-party
transaction
(e) Reflects the following:
Reduction in depreciation expense due to conversion of Transkrit to straight-line method,
net of depreciation on increased property basis due to purchase accounting adjustment... $ (1,123)
Reduction in raw material costs due to contractual commitments from suppliers based on
higher volume of purchases.............................................................. (400)
---------
$ (1,523)
---------
---------
(f) Reflects the following:
</TABLE>
<TABLE>
<S> <C> <C>
Reduction in headcount and operational expenses due to integration
of Transkrit, as follows:.........................................
--24 person reduction in staffing due to rationalization......... $ (940)
-- reduced property and casualty insurance premiums due to
greater values insured........................................... (200)
--lower telecommunication cost per minute due to volume.......... (30)
--consolidation of redundant data networks....................... (30)
--additional senior management rationalization/retirements....... (350)
--consolidation of logistics and transportation services......... (100)
--reduced employee benefit premiums.............................. (200)
---------
</TABLE>
<TABLE>
<S> <C> <C>
$ (1,850)
Reduction in depreciation expense due to conversion of Transkrit to straight-line method,
net of depreciation on increased property basis due to purchase accounting adjustment... (454)
Additional amortization of goodwill...................................................... 36
Provide additional amortization related to patents....................................... 2,064
---------
$ (204)
---------
---------
(g) Reflects the following:
Additional debt cost amortization........................................................ $ 613
Additional interest expense on borrowings for working capital needs...................... 185
Additional interest expense associated with the Notes.................................... 8,525
---------
$ 9,323
---------
---------
(h) Reflects the net additional income tax provision (benefit) as a result of the above
adjustments (except for the goodwill amortization adjustment as the amortization of
goodwill resulting from the purchase of all of the outstanding capital stock of
Transkrit will not be deductible for tax purposes), at an effective tax rate of 37%.
</TABLE>
22
<PAGE>
UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENT OF INCOME
SIX MONTHS ENDED JUNE 30, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL ADJUSTED
HISTORICAL HISTORICAL TRANSKRIT HISTORICAL TRANSACTION COMPANY PRO
NFC TRANSKRIT ADJUSTMENTS TRANSKRIT ADJUSTMENTS FORMA
----------- ----------- ------------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Net Sales............................. $ 31,816 $ 48,004 $ 0 $ 48,004 $ 0 $ 79,820
Cost of products sold................. 25,260 30,685 736(a) 31,421 (790)(d) 55,891
----------- ----------- ------ ----------- ------------ -----------
Gross profit...................... 6,556 17,319 (736) 16,583 790 23,929
Selling, general and administrative
expenses............................ 6,450 14,381 (519)(b) 13,862 166(e) 20,478
----------- ----------- ------ ----------- ------------ -----------
Operating income...................... 106 2,938 (217) 2,721 624 3,451
Interest (income) expense............. 1,557 (441) 244(c) (197) 4,786(f) 6,146
Other (income) expense................ 0 (306) 0 (306) 0 (306)
----------- ----------- ------ ----------- ------------ -----------
Income (loss) before income
taxes............................ (1,451) 3,685 (461) 3,224 (4,162) (2,389)
Income tax provision (benefit)........ (537) 1,062 (171)(g) 891 (1,530)(g) (1,176)
----------- ----------- ------ ----------- ------------ -----------
Net income (loss) before extraordinary
item (h)............................ $ (914) $ 2,623 $ (290) $ 2,333 $ (2,632) $ (1,213)
----------- ----------- ------ ----------- ------------ -----------
----------- ----------- ------ ----------- ------------ -----------
</TABLE>
See accompanying notes.
23
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
The Pro Forma Combined Consolidated Statement of Income for the six month
period ended June 30, 1996 reflects the Transactions as if they had occurred on
January 1, 1995 as follows:
<TABLE>
<S> <C> <C>
(a) Reflects the conversion of Transkrit inventory valuation method from LIFO to FIFO
(b) Reflects the following:
Reversal of compensation plan expenses.................................................. $ (121)
Additional management fees to be incurred upon consummation of the Acquisition.......... 50
Reversal of management fees paid to previous affiliate.................................. (448)
---------
(519)
---------
---------
(c) Elimination of interest income at Transkrit related to former related-party transaction.
(d) Reflects the following:
Reduction in depreciation expense due to conversion of Transkrit to straight-line
method, net of depreciation on increased property basis due to purchase accounting
adjustment............................................................................. $ (590)
Reduction in raw material costs due to contractual commitments from suppliers based on
higher purchases....................................................................... (200)
---------
$ (790)
---------
---------
(e) Reflects the following:
Reduction in headcount and operational expenses due to integration of Transkrit, as
follows:...............................................................................
</TABLE>
<TABLE>
<S> <C> <C>
--24 person reduction in staffing due to rationalization......... $ (470)
-- reduced property and casualty insurance premiums due to
greater values insured........................................... (100)
--lower telecommunication cost per minute due to volume.......... (15)
--consolidation of redundant data networks....................... (15)
--additional senior management rationalization/retirements....... (175)
--consolidation of logistics and transportation services......... (50)
--reduced employee benefit premiums.............................. (100)
---------
</TABLE>
<TABLE>
<S> <C> <C>
$ (925)
Increase in depreciation expense due to depreciation on increased property bases due to
purchase accounting adjustment, net of reduced depreciation expense resulting from the
conversion of Transkrit to straight-line method........................................ 32
Additional amortization of goodwill..................................................... 27
Provide additional amortization related to patents...................................... 1,032
---------
$ 166
---------
---------
(f) Reflects the following amounts:
Additional debt cost amortization....................................................... $ 336
Additional interest expense on borrowings for working capital needs..................... 93
Additional interest expense associated with Notes....................................... 4,357
---------
$ 4,786
---------
---------
(g) Reflects the net additional income tax benefit as a result of all transaction
adjustments, (except for the goodwill amortization adjustment as the amortization of
goodwill resulting from the purchase of all of the outstanding capital stock of
Transkrit will not be deductible for tax purposes), at an effective tax rate of 37%.
(h) Net income (loss) before extraordinary item does not include the extraordinary loss on
early retirement of debt of $798, net of income tax benefit of $461 recorded as a
result of the repayment of certain Prior Debt upon the consummation of the
Transactions.
</TABLE>
24
<PAGE>
UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENT OF INCOME
SIX MONTHS ENDED JUNE 30, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL ADJUSTED
HISTORICAL HISTORICAL TRANSKRIT HISTORICAL TRANSACTION COMPANY
NFC TRANSKRIT ADJUSTMENTS TRANSKRIT ADJUSTMENTS PRO FORMA
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net Sales................................... $ 33,833 $ 46,966 $ (178)(a) $ 46,788 $ -- $ 80,621
Cost of products sold....................... 26,624 31,646 (851)(b) 30,795 (758)(e) 56,661
----------- ----------- ----------- ----------- ----------- -----------
Gross profit............................ 7,209 15,320 673 15,993 758 23,960
Selling, general and administrative
expenses................................... 6,666 14,888 (1,438)(c) 13,450 (21)(f) 20,095
Relocation expenses......................... -- 542 -- 542 -- 542
----------- ----------- ----------- ----------- ----------- -----------
Operating income............................ 543 (110) 2,111 2,001 779 3,323
Interest (income) expense................... 1,582 (278) 399(d) $ 121 4,494(g) 6,197
Other (income) expense...................... -- (963) -- (963) -- (963)
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes....... (1,039) 1,131 1,712 2,843 (3,715) (1,911)
Income tax provision (benefit).............. -- 445 634(h) 1,079 (1,368)(h) (289)
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)........................... $ (1,039) $ 686 $ 1,078 $ 1,764 $ (2,347) $ (1,622)
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
See accompanying notes.
25
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENT OF INCOME
(DOLLARS IN THOUSANDS)
The Pro Forma Combined Consolidated Statement of Income for the six month
period ended June 30, 1995 reflects the Transactions as if they had occurred on
January 1, 1995 as follows:
(a) Reflects the disposal of the Tax Forms product line excluding continuing
product sales
transferred to another Transkrit division.
(b) Reflects the following:
<TABLE>
<S> <C>
Disposal of Tax Forms product line (see footnote (a)).................... $ (227)
Conversion of Transkrit inventory valuation method from LIFO to FIFO..... (624)
---------
$ (851)
---------
---------
</TABLE>
(c) Reflects the following:
<TABLE>
<S> <C>
Reversal of compensation plan expenses............................... $ (725)
Disposal of Tax Forms product line (see footnote (a))................ (214)
Eliminate rent expense at Transkrit related to former related-party
transaction......................................................... (399)
Additional management fees to be incurred upon consummation of the
Acquisition......................................................... 50
Reversal of management fees paid to previous affiliate............... (150)
---------
$ (1,438)
---------
---------
</TABLE>
(d) Reflects the elimination of interest income at Transkrit related to former
related-party transaction.
(e) Reflects the following:
<TABLE>
<S> <C>
Reduction in depreciation expense due to conversion of Transkrit to
straight- line method, net of depreciation on increased property
basis due to purchase accounting adjustment......................... $ (558)
Reduction in raw material costs due to contractual commitments from
suppliers based on higher volume of purchases....................... (200)
---------
$ (758)
---------
---------
</TABLE>
(f) Reflects the following:
<TABLE>
<S> <C> <C>
Reduction in headcount and operational expenses due to
integration of Transkrit, as follows:.................
--24 person reduction in staffing due to
rationalization.................................... $ (470)
--reduced property and casualty insurance premiums
due to greater values insured...................... (100)
--lower telecommunication cost per minute due to
volume............................................. (15)
--consolidation of redundant data networks........... (15)
--additional senior management
rationalization/retirements........................ (175)
--consolidation of logistics and transportation
services........................................... (50)
--reduced employee benefit premiums.................. (100)
---------
</TABLE>
<TABLE>
<S> <C>
$ (925)
</TABLE>
<TABLE>
<S> <C>
Reduction in depreciation expense due to conversion of Transkrit to
straight-line method, net of depreciation on increased property basis
due to purchase accounting adjustment................................... (145)
Additional amortization of goodwill...................................... 17
Provide additional amortization related to patents....................... 1,032
---------
$ (21)
---------
---------
</TABLE>
26
<PAGE>
(g) Reflects the following amounts:
<TABLE>
<S> <C>
Additional debt cost amortization.................................... $ 307
Additional interest expense on borrowings for working capital
needs............................................................... 93
Additional interest expense associated with the Notes................ 4,094
---------
$ 4,494
---------
---------
</TABLE>
(h) Reflects the net additional income tax provision (benefit) as a result of
the above transaction
adjustments (except for the goodwill amortization adjustment as the
amortization of goodwill resulting from the purchase of all of the
outstanding capital stock of Transkrit will not be deductible for tax
purposes), at an effective tax rate of 37%.
27
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
NATIONAL FIBERSTOK CORPORATION
The following selected historical financial data for each of the years in
the three-year period ended December 31, 1995 have been derived from, and are
qualified by reference to, the audited Financial Statements of NFC included
elsewhere in this Prospectus. The selected historical financial data set forth
below for the years ended December 31, 1991 and 1992 have been derived from the
unaudited financial statements of NFC. The selected historical unaudited
financial data set forth below for the six month periods ended June 30, 1995 and
1996 have been derived from, and are qualified by reference to, NFC's unaudited
financial statements included elsewhere herein and include all adjustments,
consisting of normal recurring adjustments, which management considers necessary
for a fair presentation of the results of NFC for such periods. Results for the
interim periods are not necessarily indicative of the results for the full year.
The selected historical financial data set forth below should be read in
conjunction with, and are qualified by reference to, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the Financial
Statements of NFC and accompanying notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------------- --------------------
1991 1992(A) 1993 1994 1995 1995 1996
----------- ----------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS) (DOLLARS IN
THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............................... $ 4,359 $ 17,905 $ 64,545 $ 65,998 $ 71,257 $ 33,833 $ 31,816
Cost of products sold................... 3,789 14,145 51,384 52,610 55,708 26,624 25,260
----------- ----------- --------- --------- --------- --------- ---------
Gross profit.......................... 570 3,760 13,161 13,388 15,549 7,209 6,556
Selling, general and administrative
expenses............................... 1,117 3,714 12,930 12,428 13,410 6,666 6,450
Provision for plan shutdown cost........ -- -- 2,251 -- -- -- --
----------- ----------- --------- --------- --------- --------- ---------
Operating income (loss)................. (547) 46 (2,020) 960 2,139 543 106
Interest expense........................ 213 803 2,873 2,975 3,179 1,582 1,557
----------- ----------- --------- --------- --------- --------- ---------
Income (loss) before income taxes..... (760) (757) (4,893) (2,015) (1,040) (1,039) (1,451)
Income tax provision (benefit).......... -- (123) (1,343) -- (1,900) -- (537)
----------- ----------- --------- --------- --------- --------- ---------
Net loss before extraordinary item........ (760) (634) (3,550) (2,015) 860 (1,039) (914)
Extraordinary loss on early retirement of
debt, net of income tax benefit of
$461.................................... -- -- -- -- -- -- (798)
----------- ----------- --------- --------- --------- --------- ---------
Net income (loss)....................... $ (760) $ (634) $ (3,550) $ (2,015) $ 860 $ (1,039) $ (1,712)
----------- ----------- --------- --------- --------- --------- ---------
----------- ----------- --------- --------- --------- --------- ---------
OTHER DATA:
EBITDA (b).............................. $ (355) $ 1,094 $ 3,610 $ 4,308 $ 5,159 $ 2,047 $ 1,864
Depreciation and amortization........... 192 1,078 3,521 3,685 4,005 1,705 1,976
Capital expenditures.................... 18 104 1,179 940 2,308 362 3,251
Dividends paid (c)...................... -- -- -- -- -- -- --
Ratio of Earnings to Fixed Charges
(d).................................... -- -- -- -- -- -- --
BALANCE SHEET DATA, AT PERIOD END:
Working capital......................... $ (489) $ 9,670 $ 7,190 $ 7,202 $ 7,182 $ 6,930 $ 20,003
Total assets............................ 2,819 42,044 39,607 37,837 38,116 37,175 137,619
Long-term debt, less current
maturities............................. 979 23,486 22,541 21,776 21,412 21,687 102,412
</TABLE>
- ------------------------------
(a) Reflects the acquisition of Diversified Assembly, Inc. and DEC
International Corporation, including its wholly-owned subsidiary, Double
Envelope Company, on March 27, 1992 and October 16, 1992, respectively. The
acquisitions were accounted for as purchases.
(b) EBITDA is provided because it is a measure of an issuer's ability to
service its indebtedness commonly used by certain investors. EBITDA, as
defined herein, is a financial measure under the New Notes. The New Notes
contain a covenant which requires the Company to maintain minimum levels of
EBITDA, as defined. EBITDA is not a measurement of financial performance
under generally accepted accounting principles and should not be considered
an alternative to net income as a measure of performance or to cash flow as
a measure of liquidity.
EBITDA is defined as operating income plus depreciation, amortization,
non-cash charges related to the pension plan and the charge for the plant
shutdown costs related to the closing of the Philadelphia, Pennsylvania
facility and reduced by the gain on disposal of equipment and the non-cash
gain due to change in vacation policy.
(c) No dividends were declared or paid on common stock during or for the
periods presented.
(d) The ratio of earnings to fixed charges is computed by adding fixed charges
(interest and amortization of deferred financing costs and discounts) to
income before provision for income taxes and dividing that sum by the sum
of fixed charges. Earnings were insufficient to cover fixed charges by
$760, $757, $4,893, $3,015, $1,040, $1,039 and $1,451 for the years ended
December 31, 1991, 1992, 1993, 1994 and 1995 and the six months ended June
30, 1995 and 1996, respectively.
28
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
TRANSKRIT CORPORATION
The following selected historical consolidated financial data for each of
the years in the three year period ended December 31, 1995 have been derived
from, and are qualified by reference to, the audited consolidated financial
statements of Transkrit included elsewhere in this Prospectus. The selected
historical consolidated financial data for each of the years in the two year
period ended December 31, 1992 have been derived from the unaudited financial
statements of Transkrit. The selected historical consolidated financial data for
the six month periods ended June 30, 1995 and June 28, 1996 have been derived
from, and are qualified by reference to, the unaudited financial statements of
Transkrit, included elsewhere herein, and include all adjustments, consisting
only of normal recurring adjustments, which management considers necessary for a
fair presentation of the results of Transkrit for such periods. Results for the
interim periods are not necessarily indicative of results for the full year. The
selected historical consolidated financial data set forth below should be read
in conjunction with, and are qualified by reference to, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements of Transkrit and accompanying notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED SIX MONTHS
DECEMBER 31, DECEMBER 31, ENDED
-------------------- --------------------------------- -------------
1991 1992 1993(A) 1994 1995 JUNE 30, 1995
--------- --------- ----------- --------- --------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales..................................... $ 86,637 $ 88,464 $ 96,003 $ 98,124 $ 97,681 $ 46,966
Cost of products sold......................... 59,763 61,829 64,921 64,851 64,223 31,646
--------- --------- ----------- --------- --------- -------------
Gross profit................................ 26,874 26,635 31,082 33,273 33,458 15,320
Selling, general and administrative
expenses..................................... 22,099 24,702 26,914 30,700 29,412 14,888
Relocation expenses (b)....................... -- 955 3,290 413 657 542
--------- --------- ----------- --------- --------- -------------
Operating income (loss)....................... 4,775 978 878 2,160 3,389 (110)
Interest (income) expense, net................ 262 268 471 713 (697) (278)
Gain on disposal of product lines and fixed
assets (c)................................... (21) (54) (71) (2,852) (558) (819)
Other (income) expense........................ (154) (88) (337) (207) (313) (144)
--------- --------- ----------- --------- --------- -------------
Income before income taxes.................. 4,688 852 815 4,506 4,957 1,131
Income taxes.................................. 1,892 417 379 1,799 1,380 445
--------- --------- ----------- --------- --------- -------------
Net income.................................... $ 2,796 $ 435 $ 436 $ 2,707 $ 3,577 $ 686
--------- --------- ----------- --------- --------- -------------
--------- --------- ----------- --------- --------- -------------
<CAPTION>
JUNE 28, 1996
-------------
<S> <C>
INCOME STATEMENT DATA:
Net sales..................................... $ 48,004
Cost of products sold......................... 30,685
-------------
Gross profit................................ 17,319
Selling, general and administrative
expenses..................................... 14,381
Relocation expenses (b)....................... --
-------------
Operating income (loss)....................... 2,938
Interest (income) expense, net................ (441)
Gain on disposal of product lines and fixed
assets (c)................................... (306)
Other (income) expense........................ --
-------------
Income before income taxes.................. 3,685
Income taxes.................................. 1,062
-------------
Net income.................................... $ 2,623
-------------
-------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA (d) (as adjusted)...................... $ 8,332 $ 7,647 $10,194 $ 12,045 $ 15,556 $ 5,668
Depreciation and amortization................. 4,921 5,503 6,345 6,776 6,024 2,927
Capital expenditures.......................... 10,565 8,642 8,529 7,187 4,172 2,907
Dividends paid................................ 2,394 1,118 174 177 -- --
Ratio of Earnings to Fixed Charges (e)........ 7.82x 2.88x 2.26x 5.89x 13.42x 5.34x
BALANCE SHEET DATA, AT PERIOD END:
Working capital............................... $ 13,206 $ 12,304 $ 8,609 $ 8,121 $ 19,127 $ 10,732
Total assets.................................. 51,076 54,976 63,151 72,702 67,042 69,778
Long-term debt, less current maturities....... 5,578 8,009 343 7,944 2,036 6,543
<CAPTION>
OTHER DATA:
<S> <C>
EBITDA (d) (as adjusted)...................... $ 5,640
Depreciation and amortization................. 2,772
Capital expenditures.......................... 1,792
Dividends paid................................ --
Ratio of Earnings to Fixed Charges (e)........ 148.40x
BALANCE SHEET DATA, AT PERIOD END:
Working capital............................... n/a
Total assets.................................. n/a
Long-term debt, less current maturities....... n/a
</TABLE>
- ------------------------------
(a) Reflects the acquisition and results of Short Run Labels, Inc. since the
date of its acquisition on August 11, 1993.
(b) Represents the incremental costs (including severance, moving and other
relocation costs) incurred to move the corporate and related production
facilities.
(c) Includes the sale of the Pegboard Accounting System product line and the
Tax Forms product line on December 2, 1994 and April 19, 1995,
respectively.
(d) EBITDA is provided because it is a measure of an issuer's ability to
service its indebtedness commonly used by certain investors. EBITDA, as
defined herein, is a financial measure under the New Notes. The New Notes
contain a covenant which requires the Company to maintain minimum levels of
EBITDA, as defined. EBITDA is not a measurement of financial performance
under generally accepted accounting principles and should not be considered
an alternative to net income as a measure of performance or to cash flow as
a measure of liquidity.
EBITDA is defined as operating income plus depreciation, amortization,
non-cash pension plan charges and non-cash compensation plan charges.
EBITDA is further adjusted by the following items.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
----------------------------------------------------- --------------------------------
1991 1992 1993 1994 1995 JUNE 30, 1995 JUNE 28, 1996
--------- --------- --------- --------- --------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
LIFO to FIFO inventory
valuation change....... $ (281) $ 144 $ (272) $ (95) $ 1,402 $ 624 $ (736)
Product line
disposals.............. (1,610) (347) (564) (41) 200 128 --
Relocation and duplicate
costs.................. -- 955 3,290 1,320 951 743 --
Parent charges.......... 295 307 309 564 965 549 448
Compensation plan
charges paid in cash... -- -- -- -- -- -- 121
--------- --------- --------- --------- --------- ------ ------
Total adjustments......... $ (1,596) $ 1,059 $ 2,763 $ 1,748 $ 3,518 $ 2,044 $ (167)
--------- --------- --------- --------- --------- ------ ------
--------- --------- --------- --------- --------- ------ ------
</TABLE>
(e) The ratio of earnings to fixed charges is computed by adding fixed charges
(interest and amortization of deferred financing costs and discounts) to
income before provision for income taxes and dividing that sum by the sum
of fixed charges.
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Pursuant to the Stock Purchase Agreement, NFC purchased all of the
outstanding capital stock of Transkrit. In connection with the Acquisition, the
Company expects to realize approximately $2.3 million of annualized cost savings
through raw material purchasing efficiencies, and reductions in headcount and
operating expenses (see detail of these savings in the pro-forma adjustments on
page 26). The Company believes that its future operating results may not be
directly comparable to historical operating results of either NFC or Transkrit
due to the Company's increased size, integration of the two businesses and
related cost savings. Certain factors which have affected the operating results
of the Company are discussed below.
PURCHASE ACCOUNTING. The Acquisition was accounted for as a purchase of
Transkrit by NFC. As a result, the assets and liabilities of Transkrit have been
recorded at their estimated fair market value. An amount equal to the excess of
the purchase price over the fair value of assumed liabilities has been allocated
to inventories, property and equipment, identifiable intangible assets and
goodwill. The Company's patents will be amortized over their remaining lives
(approximately 10 years), and goodwill will be amortized over 40 years.
Consequently, the post-Acquisition statements of income will be affected by the
amortization of such excess purchase price. See "Unaudited Pro Forma Financial
Data."
STRATEGIC ACQUISITION AND DISPOSITIONS. On August 11, 1993, Transkrit
acquired all of the outstanding capital stock of Short Run Labels, Inc. for
approximately $5.7 million, and consequently, 1993 results of operations reflect
only a portion of the financial results of Short Run Labels, Inc. On December 2,
1994, Transkrit disposed of its Pegboard Accounting System product line for
approximately $4.0 million. In addition, on April 19, 1995, Transkrit disposed
of its Tax Forms product line for $0.4 million.
RELOCATION OF OPERATIONS AND CORPORATE HEADQUARTERS. Transkrit relocated
its corporate headquarters and primary production facility from Brewster, New
York to Roanoke, Virginia between May 1994 and April 1995. Transkrit recorded
relocation expenses of $0.1 million, $0.7 million, $0.4 million and $3.3 million
during the three months ended 1995 and the fiscal years ended 1995, 1994 and
1993, respectively.
NFC recorded a non-recurring charge of $2.3 million during the year ended
December 31, 1993 relating to the shutdown of its Philadelphia, Pennsylvania
facility.
RAW MATERIALS. Paper is the Company's primary raw material requirement, and
accounted for approximately 49% of the Company's 1995 pro forma costs of goods
sold. Generally, when the price of paper decreases, the Company has short-term
opportunity to improve its operating margins due to delays in passing price
reductions through to customers. In the long-term, however, since paper price
declines tend to occur in a weak economy, net sales and operating margins tend
to decline due to lower levels of demand. Conversely, when paper prices are
increasing, operating margins may be negatively affected in the short-term since
it generally takes from 30 to 90 days to pass on such increases to customers. In
the longer-term, however, since paper price increases tend to occur in a strong
economy, the Company is generally able to pass through increases in its cost of
paper to customers and therefore maintain or improve operating margins.
RESULTS OF OPERATIONS
NATIONAL FIBERSTOK CORPORATION
NFC has three principal product lines: custom envelopes, direct mail
products and custom pressure sensitive labels. The following table summarizes
NFC's historical net sales by product line.
30
<PAGE>
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Custom Envelopes..................................... $ 47,964 $ 49,585 $ 54,527 $ 26,006 $ 25,549
Direct Mail Products................................. 13,492 13,558 13,087 6,100 4,683
Custom Pressure Sensitive Labels..................... 3,089 2,855 3,643 1,727 1,584
--------- --------- --------- --------- ---------
$ 64,545 $ 65,998 $ 71,257 $ 33,833 $ 31,816
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
NET SALES for the six-month period ended June 30, 1996 decreased $2.0
million to $31.8 million, or 5.9%, from the comparable 1996 period. In addition,
the decrease in units shipped for the six month periods ended June 30, 1996 and
1995 is consistent with the historical seasonality the Company and the market
has experienced. Sales of direct mail products during the six-month period ended
June 30, 1996 declined 23.3% as compared to the comparable period of 1995 due to
historically high paper costs which caused customers to defer or reduce order
sizes. As a result, competition increased based mostly on pricing due to less
available business in the market. The decrease in sales of direct mail products
is almost entirely attributable to units shipped as unit prices were relatively
stable period to period. During the second quarter of 1996, paper prices were
not as volatile as they were during the previous fifteen months. The recent
paper price stability has enabled the Company to increase its order volume since
June 30, 1996. Custom envelope unit shipments decreased by 9.6% during the 1996
period as compared to the same period in 1995 due to unusually harsh weather,
which caused a temporary shutdown of certain facilities of NFC, as well as
generally weak industry conditions. The decrease in envelope unit shipments was
partially offset by an increase of 7.3% in the average unit sales price during
the same comparable periods.
GROSS PROFIT, as a percentage of net sales, declined to 20.6% for the
six-month period ended June 30, 1996 from 21.3% for the comparable 1995 period,
primarily due to the reduction in volume of direct mail products. Gross profit
for the period decreased $.6 million to $6.6 million.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES for the six-month period ended
June 30, 1996 decreased $.2 million to $6.5 million, or 3.2%, from the
comparable 1995 period. Selling, general and administrative expenses, as a
percentage of net sales increased to 20.3% for the six-month period ended June
30, 1996 from 19.7% for the comparable 1995 period. While general and
administrative expenses decreased due to a reduction in administrative personnel
in mid-1995, selling expenses have increased due to a change in sales
representative compensation.
INCOME FROM OPERATIONS for the six-month period ended June 30, 1996 was $.1
million or .3% of net sales as compared to $.5 million or 1.6% of net sales for
the comparable 1995 period. The decrease in income from operations is the result
primarily of the decrease in volume of direct mail products and an increase of
certain noncash charges such as depreciation and pension costs. EBITDA for the
six-month period June 30, 1996 was $1.9 million or 5.9% of net sales as compared
to $2.0 million of 6.1% for the comparable 1995 period.
INTEREST EXPENSE for the six-month period ended June 30, 1996 and 1995 was
$1.6 million. The average debt balances for the six-month period ended June 30,
1996 were $7.1 million, $13.0 million and $4.5 million for the revolving line of
credit, long-term debt and subordinated debt, respectively, compared to $7.0
million, $11.7 million and $4.5 million for the revolving line of credit,
long-term debt and subordinated debt, respectively, for the comparable 1995
period. The weighted average interest rate for the six-month period ended June
30, 1996 was 12.6% as compared to 13.6% for the comparable 1995 period. Even
though the average debt balances were higher for the six-month period ended June
30, 1996, the weighted average
31
<PAGE>
interest rate was lower due to a lower variable rate on the revolving line of
credit and certain long-term debt. During the six-month period ended June 30,
1996, $.1 million of long-term debt interest was capitalized as
construction-in-progress.
INCOME TAX BENEFIT for the six-month period ended June 30, 1996 was $.5
million due to the recognition of the tax benefit of the net operating loss
generated during this period. The income tax benefit for the six-month period
ended June 30, 1995 was reduced to $0 due to the valuation allowance recorded.
Therefore, the effective income tax rate was 37% and 0% for the six-month period
ended June 30, 1996 and 1995, respectively.
THE EXTRAORDINARY LOSS on early retirement of debt of $.8 million, net of
income tax benefit of $.5 million, for the six-month period ended June 30, 1996
was the result of certain costs recognized in retiring certain long-term debt
and subordinated debt in connection with the Transactions.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
NET SALES for the year ended December 31, 1995 increased $5.3 million to
$71.3 million, or 8.0%, from the comparable 1994 period. Net sales of custom
envelopes increased 10.0%, or $4.9 million from 1994 to 1995. This increase in
net sales was due to a rise in the average unit sales price resulting from
passing on a portion of paper cost increases while units shipped remained
stable. While the average unit sales price for direct mail products increased
13.1% from 1994 to 1995, this was more than offset by a 14.6% decrease in units
shipped over the same period. The decrease in direct mail product units shipped
reflects a deferral or reduction in orders due to historically high paper costs.
The 27.6% increase in net sales of custom pressure sensitive labels resulted
from a 14.1% increase in units shipped and a 12.1% increase in average unit
sales price. The increase in units shipped represents new business, while the
increase in average unit sales price reflects the increase in underlying paper
costs.
GROSS PROFIT as a percentage of net sales increased to 21.8% for the year
ended December 31, 1995 from 20.3% for the comparable 1994 period as gross
profit for the period increased $2.1 million to $15.5 million. This increase was
attributable to price increases for custom envelopes and direct mail products, a
portion of which reflected paper cost increases, and improved coverage of fixed
costs due to increased production volumes of custom pressure sensitive labels.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES as a percentage of net sales
remained unchanged at 18.8% for the year ended December 31, 1995 and the
comparable 1994 period. Selling, general and administrative expense for 1995
increased to $13.4 million from $12.4 million in 1994 to support the increased
level of net sales and higher corporate development expenditures.
INCOME FROM OPERATIONS for the year ended December 31, 1995 was $2.1 million
or 3.0% of net sales as compared to $1.0 million or 1.5% for the comparable 1994
period. The increase in income from operations is due to the increase in gross
profit of $2.1 million offset by an increase in selling, general and
administrative expenses of $1.0 million. The overall increase in sales is due to
increased unit sale prices which more than offset the increase in selling,
general and administrative expenses to support the sales growth. EBITDA as a
percentage of net sales increased to 7.3% for the year ended December 31, 1995
from 6.5% for the comparable 1994 period. EBITDA for 1995 increased to $5.2
million from $4.3 million in 1994. The increase in EBITDA as a percentage of net
sales is attributable to the same factors discussed above for income from
operations.
INTEREST EXPENSE for the year ended December 31, 1995 increased $.2 million,
or 6.7%, to $3.2 million from $3.0 million for the year ended December 31, 1994.
The average debt balances for the year ended December 31, 1995 were $7.3
million, $11.4 million and $4.5 million for the revolving line of credit, long-
term debt and subordinated debt, respectively, compared to $6.7 million, $12.4
million and $4.4 million, respectively, for the comparable 1994 period. The
weighted average interest rate for the year ended December 31, 1995 was 13.8% as
compared to 12.6% for the comparable 1994 period. The increase in interest
expense resulted from higher working capital borrowing needs and, to a lesser
extent, higher average interest rates in 1995 as compared to 1994. As the
average raw material paper prices rose during 1995 as compared to 1994,
borrowings to fund such purchases were greater during 1995 as compared to 1994.
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<PAGE>
INCOME TAX BENEFIT for the year ended December 31, 1995 and 1994 was $1.9
million and $0, respectively, resulting in an effective tax rate of 183% and 0%,
respectively. The income tax benefit recorded in 1995 is the result of
benefiting the cumulative net operating loss as of December 31, 1995. As a
result, a deferred income tax asset of $1.9 million has been recorded as of
December 31, 1995.
The Company recorded the deferred tax asset in the fourth quarter of 1995
based upon the expected future reversals of temporary differences and evidence
indicating that the Company would generate taxable income within the period
prior to the expiration of the net operating loss carryforwards. Based upon the
projected loss for 1996, the cumulative temporary differences as of December 31,
1995 and the expected timing of when these items will impact taxable income, the
Company expects to generate taxable income for the year ended December 31, 1996.
In addition, based upon the reduction in historical pretax losses ranging from
$4.9 million for the year ended December 31, 1993 to $1.0 million for the year
ended December 31, 1995, as well as the Company's financial plans and forecast
for the next ten years, the deferred tax asset is expected to be fully realized
by the year 2003. Taxable income of $6.7 million would have to be realized prior
to the year ended December 31, 2010 to ensure realizability of the net operating
loss carryforwards prior to their expiration for federal income tax purposes.
The cumulative net operating loss carryforward, generated from 1989 through
1995, of $6.7 million will begin to expire in 2004 and continue through 2010.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
NET SALES for the year ended December 31, 1994 increased $1.5 million to
$66.0, or 2.3%, from the comparable 1993 period. Net sales of custom envelopes
increased 3.4% or $1.6 million from 1993 to 1994. The increase in net sales was
primarily attributable to an increase in the number of units shipped while unit
sales prices remained relatively stable. This increase in net sales was
partially offset by the discontinuance of certain low margin custom expanding
envelope contract business which decreased net sales by $1.4 million.
GROSS PROFIT as a percentage of net sales was essentially unchanged at 20.3%
for the year ended December 31, 1994 from 20.4% for the comparable 1993 period.
Gross profit for the period increased $0.2 million to $13.4 million. Custom
envelope gross profit increased slightly with sales volumes, but gross margin
results for the rest of the Company remained largely unchanged.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES as a percentage of net sales
declined to 18.8% for the year ended December 31, 1994 from 23.5% for the
comparable 1993 period. Selling, general and administrative expense for 1994
declined sharply to $12.4 million from the 1993 level of $15.2 million, which
included costs associated with the closure of the Company's Philadelphia
manufacturing facility. If the $2.3 million of closure expenses were excluded,
selling, general and administrative expenses would have declined by $0.5 million
from 1993 to 1994. This decline was attributable to personnel and other overhead
cost reductions.
INCOME (LOSS) FROM OPERATIONS for the year ended December 31, 1994 was $1.0
million or 1.5% of net sales as compared to $(2.0) million or (3.1)% for the
comparable 1993 period. The increase in income (loss) from operations was mostly
attributable to the costs associated with the closure of the Company's
Philadelphia manufacturing facility and a reduction in administrative personnel
and overhead.
INTEREST EXPENSE for the year ended December 31, 1994 increased $.1 million,
or 3.6% to $3.0 million from $2.9 million for the year ended December 31, 1993.
The average debt balances for the year ended December 31, 1994 were $6.7
million, $12.4 million and $4.4 million for the revolving line of credit, long-
term debt and subordinated debt, respectively, compared to $6.4 million, $13.5
million and $4.4 million, respectively, for the comparable 1993 period. The
weighted average interest rate for the year ended December 31, 1994 was 12.6% as
compared to 11.8% for the comparable 1993 period. The increase in interest
expense was due to higher interest rates during 1994 reduced somewhat by lower
levels of long-term debt as a result of scheduled principle payments.
INCOME TAX BENEFIT for the years ended December 31, 1994 and 1993 were $0
and $1.3 million, respectively, resulting in an effective tax rate of 0% and
(27.5%), respectively. During 1993, an income tax benefit was recorded for the
1993 net operating loss incurred up to the previously recognized deferred income
tax liability.
33
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by (used in) operating activities was $4.8 million, $(1.2)
million, $(.2) million, $1.2 million and $1.8 million for the six month periods
ended June 30, 1996 and 1995 and the years ended December 31, 1995, 1994 and
1993, respectively. The decrease in the cash provided by operating activities
for each of the three years ended December 31, 1995 resulted from the higher
profitability each year reduced by a greater amount used for the reduction in
certain liabilities. Cash provided by operating activities for the six month
period ended June 30, 1996 improved $6.0 million as compared to the same period
ended June 30, 1995. This improvement is attributable to better management of
receivable collections and timing of inventory purchases.
Net cash used in investing activities was $80.0 million, $.4 million, $1.9
million, $.3 million and $1.3 million, for the six month periods ended June 30,
1996 and 1995 and the years ended December 31, 1995, 1994 and 1993,
respectively. The cash used in investing activities for each of the three years
ended December 31, 1995 resulted from purchases of equipment. For the years
ended December 31, 1995 and 1994, the cash used in investing activities has been
reduced by the proceeds from the sale of unutilized equipment. The increase in
cash used in investing activities from June 30, 1995 to June 30, 1996 is due
primarily to the purchase of the outstanding stock of Transkrit Corporation and
subsidiaries for $76.8 million, net of cash acquired.
Capital expenditures, excluding acquisitions (but including purchases under
capital leases), were $3.3 million, $.4 million, $2.3 million, $.9 million and
$1.2 million for the six month periods ended June 30, 1996 and 1995 and the
years ended December 31, 1995, 1994 and 1993, respectively.
Net cash provided by (used in) financing activities was $77.2 million, $1.4
million, $2.3 million, $(.9) million and $(1.2) million for the six month
periods ended June 30, 1996 and 1995 and the years ended December 31, 1995, 1994
and 1993, respectively. For the years ended December 31, 1995, 1994 and 1993,
the Company used cash to pay down senior debt. During 1995, the Company borrowed
an additional $1.0 million from the senior lender to fund deposits for future
equipment purchases. As a result, the cash used for financing activities in 1995
was much lower than 1994 and 1993. The net cash provided by financing activities
for the six month period ended June 30, 1996 is primarily attributable to the
$100 million Senior Notes raised to retire certain long-term and subordinated
debt instruments and to acquire the outstanding capital stock of Transkrit
Corporation and subsidiaries. The cash used for financing activities for the six
month period ended June 30, 1995 represents payments of borrowings to the senior
lender.
34
<PAGE>
TRANSKRIT CORPORATION
Transkrit has three principal product lines: mailer systems, direct
marketing products and custom pressure sensitive labels. The following table
summarizes Transkrit's historical net sales by product line. Transkrit's mailer
systems product line include impact and non-impact
InfoSeal-Registered Trademark- mailer products and SelfLabel-TM- products.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------------- ----------------------------
1993 1994 1995 JUNE 30, 1995 JUNE 28, 1996
--------- --------- --------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Mailer Systems (a)................................. $ 54,778 $ 50,707 $ 52,159 $ 24,816 $ 24,213
Direct Mail Products and Services.................. 6,055 6,476 8,624 3,422 5,282
Custom Pressure Sensitive Labels................... 27,568 34,378 36,720 18,728 18,509
--------- --------- --------- ------------- -------------
Total Net Sales (a).............................. $ 88,401 $ 91,561 $ 97,503 $ 46,966 $ 48,004
--------- --------- --------- ------------- -------------
--------- --------- --------- ------------- -------------
</TABLE>
- ------------------------------
(a) Excludes net sales attributable to the Pegboard Accounting System product
line and the Tax Form product line. Prior to the effect of the sale of the
Pegboard Accounting System and the Tax Form product lines, net sales of
mailer systems for the years ended December 31, 1993, 1994 and 1995 and for
the six months ended June 30, 1995 would have been $62.4 million, $57.3
million, $52.3 million and $25.0 million, respectively, and net sales for
the years ended December 31, 1993, 1994 and 1995 and for the six months
ended June 30, 1995 would have been $96.0 million, $98.1 million, $97.7
million and $47.2 million, respectively.
SIX MONTHS ENDED JUNE 28, 1996 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1995
NET SALES for the six months ended June 28, 1996 increased by $1.0 million,
or 2.2% when compared to the six months ended June 30, 1995. The sales increment
was principally a result of an increase in direct mail products and services net
sales of $1.9 million, or 54.4%, when compared to the prior year period which
was due to an expanded customer base and increased sales from existing
customers. Mailer system net sales for the six months ended June 28, 1996
declined by $0.6 million, or 2.4% from the prior year period as a result of weak
market conditions for impact mailer products. Custom pressure sensitive label
net sales declined by $0.2 million, or 1.2% when compared to the prior year
period as a result of harsh weather conditions in the northeastern United States
and the timing of orders by a few large customers.
GROSS PROFIT for the six months ended June 28, 1996 increased by $2.0
million or 13.0% when compared to the six months ended June 30, 1995. This
increase was primarily due to higher paper margins and reduced labor and
operating costs associated with the Company's move from Brewster, New York to
Roanoke, Virginia.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES for the six months ended June
28, 1996 declined by $0.5 million, or 3.4%, from the comparable 1995 period.
Selling, general and administrative expenses expressed as a percentage of net
sales, decreased from 31.7% for the six months ended June 30, 1995 to 30.0% for
the six month period ended June 28, 1996. This decline was primarily a result of
higher net sales and cost efficiencies achieved from the elimination of
duplicative expenses as a result of the closure of the Brewster, New York
facility.
OPERATING INCOME for the six months ended June 28, 1996 increased to $2.9
million compared to an operating loss of $.01 million for the comparable period
in 1995. This increase is primarily due to higher net sales, higher paper
margins and elimination of relocation and redundant costs associated with the
move to Roanoke, Virginia and the closure of the Brewster, New York facility.
EBITDA for the six months ended June 28, 1996 was $5.6 million, or 11.7%, of net
sales compared to $5.7 million, or 12.1% for the comparable period last year.
INTEREST EXPENSE FOR THE SIX MONTHS ended June 28, 1996 was $0.02 million
which was $0.2 million less than the comparable period for 1995. This reduction
was due to the elimination of all debt during the second quarter of 1996.
35
<PAGE>
INCOME TAXES for the six months ended June 28, 1996 was $1.1 million
compared to $0.4 million for the comparable period in 1995. The effective tax
rate for the six months ended June 28, 1996 was 28.8% and was lower than the
statutory tax rate primarily as a result of the reversal of $0.4 million of
income tax over-accruals from prior years.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
NET SALES for the year ended December 31, 1995, decreased by $0.4 million to
$97.7 million, or 0.5%, from the comparable 1994 period. In 1994, Transkrit net
sales from the Pegboard Accounting System product line were $5.7 million and
were $0.8 million for the Tax Form product line. The Pegboard Accounting System
product line was sold in late 1994. In 1995, net sales for the Tax Form product
line prior to its sale in early 1995 were $0.2 million. If the above net sales
from these disposed product lines were excluded from 1994 and 1995 results, net
sales would have been $5.9 million, or 6.4%, higher in 1995 when compared to
1994. The growth in net sales is primarily attributable to increased net sales
in all three of Transkrit's product lines. Net sales of pressure sensitive
labels increased approximately 6.8%, or $2.3 million, from the prior period due
to increased net sales to existing customers. Net sales of direct mail products
and services increased approximately 33.2%, or $2.1 million, from the prior
period as a result of increased sales to existing customers. Net sales of
InfoSeal-Registered Trademark- products increased 23.2%, or $1.8 million, for
the 1995 period as a result of increased raw materials prices which were passed
on to customers and an increase in the installed based of
InfoSeal-Registered Trademark- users. Transkrit's net sales growth in 1995 was
offset by a decrease of $1.5 million, or 3.4%, in net sales of impact mailers.
GROSS PROFIT for the year ended December 31, 1995 was $33.5 million, which
was relatively unchanged from $33.3 million for the year ended December 31,
1994. Gross profit as a percentage of net sales increased to 34.3% for the year
ended December 31, 1995 from 33.9% for the year ended December 31, 1994. If the
Company's Pegboard Accounting System and Tax Forms product lines were excluded,
gross profit as a percentage of net sales would not have been materially
different. During 1995, gross profit from mailer products and direct mail
products and services was negatively impacted as a result of rapidly rising
paper prices, only a portion of which Transkrit was able to pass on to
customers. Relatively stable prices for pressure sensitive label stock and
increased sales volume during 1995 more than offset the decrease in gross profit
in the other product areas. In addition, Transkrit's gross profit in 1995
benefited from $0.6 million in reduced workers' compensation and health
insurance claims.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES for the year ended December 31,
1995, decreased by $1.3 million to $29.4 million from the comparable 1994
period. This decline was due to savings as result of reduced workers'
compensation and health insurance claims, lower operating and employee costs
associated with the Roanoke, Virginia facility relative to the Brewster, New
York facility and the reduction of $0.6 million in duplicate costs resulting
from the shutdown of the Brewster, New York facility in April, 1995. These
savings were partially offset by a $1.2 million increase in deferred employee
compensation charges.
OPERATING INCOME for the year ended December 31, 1995 increased by $1.2
million to $3.4 million, or 3.5% of net sales, compared to $2.2 million, or 2.2%
of net sales, for the comparable 1994 period. This increase was primarily a
result of the reduction in selling, general and administrative expenses. EBITDA
for the year ended December 31, 1995, increased $3.5 million to $15.6 million
from the comparable 1994 period.
INTEREST EXPENSE for the year ended December 31, 1995 decreased $0.5 million
to $0.4 million when compared to the prior year. This decrease was a result of a
net decrease in long term debt of $6.0 million during the calendar year 1995.
INCOME TAXES for the year ended December 31, 1995 was $1.4 million compared
to $1.8 million in the comparable 1994 period. The effective tax rate for the
year ended December 31, 1995 was 27.8%, which was lower than the statutory tax
rate primarily as a result of the reversal of $0.5 million of income tax over-
accruals from prior years.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
NET SALES in 1994 increased $2.1 million to $98.1 million, or 2.2%, from the
comparable 1993 period. If the Pegboard Accounting System and Tax Forms product
lines were excluded from net sales in 1993 and
36
<PAGE>
1994, net sales of Transkrit would have increased by $3.2 million or 3.6%. The
increase in net sales from December 31, 1993 to December 31, 1994 consisted of a
24.7%, or $6.8 million, increase in net sales of custom pressure sensitive
labels, which more than offset a 7.4%, or $4.1 million, decrease in mailer
systems sales. The mailer systems net decline resulted from the general decline
in the impact mailer market and the loss of an InfoSeal-Registered Trademark-
customer. Growth in the custom pressure-sensitive label business was due to
overall volume increases and a full-year's contribution from Short Run Labels,
Inc., which contributed approximately $4.6 million more in net sales in 1994
than in 1993.
GROSS PROFIT for the year ended December 31, 1994 increased by $2.2 million
to $33.3 million from the comparable 1993 period. Gross profit as a percent of
net sales increased to 33.9% for the year ended December 31, 1994 from 32.4% for
the 1993 period. This increase was primarily due to higher custom
pressure-sensitive label net sales and a shift in mix to higher margin products,
particularly those of the newly acquired Short Run Labels, Inc. If the Company's
Pegboard Accounting System and Tax Forms product lines were excluded, gross
profit as a percentage of net sales would not have been materially different.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES for the year ended December 31,
1994 increased $3.8 million to $30.7 million from the comparable 1993 period.
Selling, general and administrative expense as a percentage of net sales was
31.3% in 1994 compared to 28.0% in 1993. The components of the increase are $1.2
million of general and administrative expenses, $0.6 million sales and marketing
expenses, $1.1 million of bonus compensation costs, and $0.9 million of
duplicate general and administrative costs as a result of Transkrit's relocation
of its Brewster, New York operations and headquarters to Roanoke, Virginia. $1.6
million of the above increase in selling, general and administrative expenses is
related to the full year effect of Short Run Label's costs for 1994.
OPERATING INCOME for the year ended December 31, 1994 increased $1.3 million
to $2.2 million compared to $0.9 million for the prior period in 1993. This
increase was primarily attributable to a reduction in relocation expenses of
$2.9 million and a higher gross profit which was partially offset by higher
selling, general and administrative expenses. For the year ended December 31,
1994, EBITDA increased $1.9 million to $12.0 million from the comparable 1993
period.
INTEREST EXPENSE for the year ended December 31, 1994 increased $0.3 million
to $0.9 million compared to the comparable 1993 period. This increase was
primarily a result of interest expense incurred on the debt associated with the
purchase of Short Run Labels on August 11, 1993.
INCOME TAXES for the year ended December 31, 1994 was $1.8 million compared
to $0.4 million for the prior year. The effective tax rate for 1994 was 39.9%
compared to an effective tax rate of 46.5% in 1993.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $5.7 million, $2.7 million,
$8.2 million, $2.2 million and $8.9 million for the six month periods ended June
28, 1996 and June 30, 1995 and the years ended December 31, 1995, 1994 and 1993,
respectively. For the six month periods ended June 28, 1996 and June 30, 1995,
cash flows from operations were primarily provided by net income and
depreciation and amortization. The $3.0 million increase in net cash provided by
operating activities for the six months ended June 28, 1996 compared to June 30,
1995, resulted primarily from an increase in net income and accounts payable and
a decrease in deferred income taxes offset by decreases in bonus compensation
liability and income taxes payable. Net cash provided by operations increased
for the year ended December 31, 1995 by $6.0 million, when compared to the prior
year. This increase primarily resulted from a $8.0 million deferred tax benefit
recorded in 1994 and an increase in bonus compensation liability, which was
offset by increases in accounts payable and accrued expenses and income taxes
payable. Net cash provided by operations decreased by $6.7 million for the year
ended December 31, 1994 when compared to the prior year. This decrease was
primarily due to the $8.0 million deferred tax benefit recorded in 1994 and a
decrease in accounts payable and accrued expenses offset by increases in net
income and income taxes payable.
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES for the six months ended
June 28, 1996 and June 30, 1995 and for the years ended December 31, 1995, 1994
and 1993 was $3.3 million, ($1.4 million), ($2.6 million), ($6.5 million) and
($13.2 million), respectively. In 1996, $5.1 million was received from an
affiliate
37
<PAGE>
relating to the sale of the Brewster, New York facility. In 1994 and 1993, $7.0
million was used for the construction of the Roanoke, Virginia facility, and in
August of 1993, $5.5 million was used to acquire Short Run Labels.
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES for the six months ended
June 28, 1996 and June 30, 1995, and for the years ended December 31, 1995, 1994
and 1993 was ($1.6 million), ($1.6 million), ($6.0 million), $4.0 million and
$4.7 million, respectively. All net uses of cash during the six months ended
June 28, 1996, June 30, 1995 and the calendar year 1995 were related to the net
payment of long term debt obligations. During 1994, the Company received a $8.5
million capital contribution which was partially offset by $3.9 million of net
payments of long term debt. In 1993, the Company incurred $5.5 million of debt
to fund the acquisition of Short Run Labels and received a $1.7 million capital
contribution. These sources were offset by a net payment on long term debt of
$3.1 million.
LIQUIDITY AND CAPITAL RESOURCES
THE COMPANY
Following the Transactions, the debt service costs associated with the
borrowings under the New Bank Credit Facility and the Notes will significantly
increase liquidity requirements. The Notes will accrue interest at 11 5/8% per
annum and will be payable semi-annually commencing December 15, 1996. The Notes
will mature on June 15, 2002. The Indenture to the Notes limits the incurrence
of additional debt by the Company and does not allow the Company to pay any
dividends or redeem any capital stock and limits the Company's ability to sell
its assets, as defined. The Company may incur additional indebtedness as long as
its Fixed Charge Coverage Ratio, as defined, is greater than certain minimum
levels. The $20,000,000 New Bank Credit Facility bears interest at prime plus 1%
or LIBOR plus 2.25%. This facility will expire on June 28, 2001. The total
estimated interest payments for the period from June 28, 1996 to December 31,
1996 is $6,000,000. Management believes that based on current financial
performance and anticipated growth, cash flow from operations, together with the
available sources of funds including borrowings under the New Bank Credit
Facility, will be adequate, till the maturity of the Notes, to make required
payments of interest on the Company's indebtedness, to fund anticipated capital
expenditures and working capital requirements and to enable the Company to
comply with the terms of its debt agreements. Actual capital requirements may
change, particularly as a result of acquisitions the Company may make. The
Company expects that capital expenditures (exclusive of acquisitions) will be
approximately $5.2 million annually from 1996 and 1999. The Company believes
that these capital expenditure levels will be sufficient to maintain
competitiveness and to provide sufficient manufacturing capacity. The Company
also anticipates that it will be required to refinance the Notes at maturity. No
assurance can be given that the Company will be able to refinance the Notes on
terms acceptable to it, if at all. The ability of the Company to meet its debt
service obligations and reduce its total debt will be dependent, however, upon
the future performance of the Company which, in turn, will be subject to general
economic conditions and to financial, business and other factors, including
factors beyond the Company's control.
INFLATION
The Company believes that inflation, exclusive of paper prices increases,
has not had a material impact on its result of operations for the three years
ended December 31, 1995 or the six months ended June 30, 1995 and 1996.
The Company currently does not nor does it plan to engage in hedges to
offset potential charges in the cost of paper or charges in interest rates.
CHANGE IN ACCOUNTING STANDARDS
Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of."
The adoption did not have a material impact on the Company's financial condition
or results of operations.
38
<PAGE>
INDUSTRY
MAILER INDUSTRY
The Company competes in the U.S. mailer market, which includes both impact
mailers and non-impact mailer systems. Mailers are used by a wide variety of
businesses and organizations as a substitute for the most commonly used mailing
method, a printed flatsheet which is folded and inserted into envelopes. Because
of their convenience and cost advantages, mailers are widely used for the
preparation and mailing of invoices, payroll checks, account and direct deposit
statements, W-2 forms and university grade reports. Management believes that
mailers are popular with direct marketers due to the cost effectiveness of this
form of solicitation. The introduction of laser and other non-impact printer
compatible mailers, which have numerous advantages relative to traditional spot
carbon impact mailers, has expanded the range of potential applications for
customers who are willing to substitute mailers for traditional fold and insert
methods. Management believes that the growth of the overall mailer market has
been relatively flat over the past five years as a decline in impact mailer
sales during that period has been largely offset by rapid growth in sales of
non-impact mailers.
Impact mailers are an integrated mailing package with addresses and other
data printed inside the package using built-in carbonized paper and an impact
printer. With estimated annual revenues of $180 million, this market has a core
group of customers who use impact mailers for the preparation and mailing of
payroll checks, vendor payments, direct deposit statements, collection notices,
medical and utility bills and tax notices. Since the early 1990's, the impact
mailer market has decreased in size due to the rapid growth of laser, ink-jet
and other non-impact printers which are not compatible with impact mailers. This
contraction in the impact mailer market has resulted in industry consolidation.
Management believes that the decline in this market will continue, and that the
exit of certain manufacturers provides further consolidation opportunities for
focused competitors such as the Company.
Responding to the changes in office printing technology, a small number of
manufacturers, including the Company, have developed mailers which are
compatible with laser and other non-impact printer systems. Unlike impact
mailers, non-impact mailers are typically sold as an integrated system with
mailer forms and dedicated and patented folding and sealing equipment. The
non-impact mailer offers the cost advantages and convenience of a mailer form
and the versatility and image quality of a laser printed product. Non-impact
mailers have experienced rapid acceptance for the preparation and mailing of
payroll checks, vendor payments, direct deposit statements and university grade
reports. Management believes that non-impact mailer technology provides an
attractive alternative to traditional mailing methods.
DIRECT MAIL INDUSTRY
Direct marketing has become an increasingly important advertising medium and
an integral component of many companies' overall marketing programs. Direct
marketing programs are delivered to a targeted audience through a variety of
channels, including direct mail, telemarketing, print, radio and television. As
consumer data and marketing analyses have become more sophisticated, advertisers
have been able to target more specific audiences. As a result, advertisers have
used a greater number of more customized, feature-oriented marketing campaigns.
Manufacturers and fulfillment providers, such as the Company, have capitalized
on this industry trend as advertisers have demanded more specialized products
and have outsourced the execution of these campaigns.
Direct mail is the second largest direct marketing segment (after
telemarketing) with 1995 revenues of approximately $30 billion, representing
approximately 23% of total industry expenditures. Over the past five years,
direct mail expenditures have grown at a compound annual rate of approximately
6%. The Company competes in the highly fragmented direct mail segment, where the
majority of industry participants are small, specialized firms formed to
capitalize on the industry's growth. Most competitors offer customers a range of
services including strategic and creative design, information and data base
management and tracking and fulfillment production. Large corporations often
undertake direct mail campaigns internally and represent the other component of
the direct mail segment.
The Company offers a selection of products, including catalog bind-in order
forms, advertising insert booklets and coupons, which are sold exclusively to
the direct mail segment of the direct marketing industry.
39
<PAGE>
The Company also provides direct mail fullfillment services, which include
personalization, addressing and mailing. To complement these direct marketing
products, mailers, envelopes and labels produced by the Company are customized
and sold for use in direct marketing applications.
PRESSURE SENSITIVE LABEL INDUSTRY
Management estimates that the total U.S. label market (excluding
non-customized labels sold primarily in office supply stores) had 1994 revenues
of approximately $8.5 billion. The pressure sensitive label segment had
estimated 1994 revenues of $3.8 billion, representing approximately 45% of the
overall U.S. label market. The Company competes in this segment and is the
largest manufacturer selling custom pressure sensitive labels to independent
distributors. The other major segment, glue-applied labels, had estimated 1994
revenues of $4.3 billion, representing approximately 50% of the overall market.
Management estimates that the more mature glue applied label segment is growing
at 2% annually, while pressure sensitive label market is growing at 10%
annually. The rapid growth in this market is attributable to several advantages
pressure sensitive labels have over traditional glue-applied labels, such as
reduced wrinkling and superior adhesion and durability.
A number of other factors have contributed to the rapid growth of pressure
sensitive labels including: (i) new government regulations requiring an increase
in the amount of information displayed on consumer and industrial products,
including food, bulk chemicals, household appliances and automobiles; (ii)
increased use of barcoding to track retail sales of consumer products and
business inventories in a wide variety of manufacturing industries; (iii)
continued demand from businesses of all types for targeted promotional material;
and (iv) continued need for manufacturers to reduce potential product
liabilities by providing consumers with more information on the proper usage of
products. Pressure sensitive labels are used by virtually all industries,
including airlines (baggage tags), automotive (warning labels), consumer
durables (operating instructions and warnings), food and beverage (product
labeling), health and beauty (product labeling), household chemicals (product
labeling and warnings), industrial chemicals (hazard warnings), pharmaceutical
(dosage information), retail (price and inventory data) and transportation and
distribution (logistics).
The pressure sensitive label industry is served by approximately 2,000
manufacturers, most of whom operate one production facility and maintain close
relationships with local and regional customers. The fact that many pressure
sensitive label customers are accustomed to conducting business with local
manufacturers, has contributed to the fragmentation of the industry. Due to
significant economies of scale achieved through consolidation, however, national
manufacturers have acquired small regional firms and integrated them into
national networks.
CUSTOM ENVELOPE INDUSTRY
The custom envelope market accounted for 65%, or $1.9 billion, of the
overall $3 billion U.S. envelope market. Custom envelopes are distinguished from
commodity envelopes by design, printing and other finishing features which are
tailored to specific customer needs. Custom envelope features include special
shapes, labels, multiple windows and flap lengths, often designed for
compatability with specific direct-mail insertion equipment, and a large variety
of paper and printing options designed to meet specific customer needs. Major
customers in the custom envelope segment include direct mail firms, financial
institutions, publishers, utilities and businesses using the mail for billing
and advertising purposes. Due to the specific value-added features of custom
envelopes, including complex graphics and envelope enhancements, products
generally have a higher average selling price, higher gross margins and are sold
to customers under one to three year fixed term contracts.
Manufacturers of custom and specialty envelopes are generally separated into
two groups. The first group is composed of a small number of large multi-plant
companies with sales in excess of $50 million who produce both commodity and
custom envelopes for the national market or broadly cover specific regional
markets. The rest of the market consists of smaller one-plant manufacturers with
sales ranging from $1 million to $25 million and which produce custom envelopes
for local and regional customers.
40
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BUSINESS
HISTORY
DEC's predecessor company was formed in 1989 by McCown De Leeuw, a private
investment firm specializing in buying and building middle market businesses.
Since its inception, DEC has pursued an acquisition strategy aimed at creating a
leading manufacturer of custom paper-based communications products targeting the
direct mail and data processing industries. McCown De Leeuw initiated this
investment strategy with the acquisition of NFC, a manufacturer of custom file
folders, in 1989. In 1992, NFC acquired Diversified Assembly, Inc., a
manufacturer of expanding envelopes, pockets, wallets and other products for the
professional office. In late 1992, NFC acquired Double Envelope Corporation, a
manufacturer and distributor of custom envelopes, catalog bind-in order forms
and pressure sensitive labels. NFC is headquartered in Atlanta, Georgia and
operates five manufacturing facilities.
Transkrit was established in 1938 as a privately owned producer of
spot-carbonized sheets supplied to business forms printers and binders. During
the following thirty years, Transkrit expanded from a single plant and product
company into a multi-plant operation supplying the pressure sensitive label and
business forms markets. In 1968, Transkrit began producing impact mailers with
the opening of a rotary press facility in Mount Vernon, New York. In 1980,
Transkrit was acquired by Maclean Hunter Ltd., a Canadian communications
company. Transkrit diversified its product line with the acquisition of Label
Art, Inc., a leading producer of custom pressure sensitive labels in 1986.
Transkrit increased its presence in the label market with the acquisition of
Short Run Labels, Inc., a 24-hour turnaround producer of custom pressure
sensitive labels in 1993. Transkrit increased its leadership position in the
impact mailer market with the acquisition of the mailer division of Wright
Business Forms, Inc. and Bedinghaus Communications, Inc. in 1991 and 1992,
respectively. In 1994, Transkrit identified certain non-core product lines, the
Pegboard Accounting and Tax Forms, which were subsequently sold. In an effort to
reduce costs in 1995, Transkrit closed its Brewster, New York manufacturing
facility and relocated its headquarters from Brewster, New York to Roanoke,
Virginia. Transkrit has manufacturing facilities across the United States.
Pursuant to the Stock Purchase Agreement, NFC has acquired Transkrit for
$86.5 million on June 28, 1996. The purchase price is subject to certain
post-closing adjustments for certain changes in Transkrit's working capital,
other net assets and capital expenditures from the amounts estimated at the
closing of the Acquisition. See "The Transactions." The Company is a leading
manufacturer of solution-oriented paper-based products primarily for the mailer,
direct mail, custom pressure sensitive label and custom envelope markets. The
Company had pro forma LTM net sales and pro forma EBITDA of $168.0 million and
$22.5 million, respectively, for the twelve month period ended June 30, 1996.
BUSINESS STRATEGY
The Company expects to strengthen its leadership position by focusing on the
following core business strategies:
-EXPAND MARKET FOR THE INFOSEAL-REGISTERED TRADEMARK- SYSTEM. Management
believes that the proliferation of laser and other non-impact printing
technologies has created a significant new marketing opportunity for the
Company's InfoSeal-Registered Trademark- mailer system.
InfoSeal-Registered Trademark-, which is compatible with laser and other
non-impact printers, allows customers to address a variety of mailing
requirements more cost effectively than traditional fold and insert
methods. Competitive mailer systems are available on the market which
utilize more expensive pressure seal or more maintenance intensive glue vat
systems. To further broaden InfoSeal-Registered Trademark-'s potential
markets, the Company has recently developed a new desktop folder/ sealer
which it expects will address the needs of a broad range of potential
customers.
-CONTINUED INVESTMENT IN GROWING MARKETS. The Company has invested
significant capital resources to develop products serving high growth niche
markets, including an estimated $8.0 million in the development of the
InfoSeal-Registered Trademark- system and an estimated $4.4 million in
state-of-the art equipment to enhance production capabilities for custom
pressure sensitive label products. Sales of these two product lines, which
accounted for 30% of the Company's pro forma 1995 net sales, achieved
compound annual net sales growth of 13% over the past two years.
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<PAGE>
-EXPAND AND DEVELOP PRESENCE IN DIRECT MAIL INDUSTRY. The Acquisition will
broaden the Company's product and service offerings to the growing direct
mail industry. The Company intends to further develop its presence in this
market and has made significant capital investments designed to enhance its
product offerings for direct mail customers. The Company has recently
invested an estimated $5.9 million in state-of-the-art equipment to upgrade
and increase production capacity of catalog bind-in order forms and direct
mail personalization capabilities. These investments will improve the
Company's product and service offerings to its direct mail customers.
-CROSS-SELL PRODUCTS AND SERVICES. The Company has a dedicated direct sales
force through which it sells custom envelopes and direct mail products and
services and has strong relationships with its independent distributors
through which it sells mailer products and custom pressure sensitive
labels. As a result of the Acquisition, the Company will be able to
cross-sell a broader range of products through both of these well
established distribution channels.
-CONTINUED COST REDUCTIONS. The Company intends to continue to improve its
financial results through the rationalization of operations. The Company's
current management team has a successful track record of achieving cost
reductions through facility consolidation, improved management information
systems and the elimination of redundant corporate and administrative
expenses. In connection with the Acquisition, the Company expects to
realize approximately $2.3 million of annualized cost savings through raw
material purchasing efficiencies and reductions in headcount and operating
expenses.
-PURSUE COMPLEMENTARY PRODUCT LINE ACQUISITIONS. The Company plans to
pursue acquisitions which complement its existing product lines.
Specifically, the Company intends to acquire related direct mail product
and fulfillment businesses in order to expand the array of products and
services sold to its direct mail customers. To strengthen its leading
positions in other key markets, the Company plans to continue to pursue
acquisitions of small impact mailer and custom pressure sensitive label
manufacturers.
COMPETITIVE STRENGTHS
The Company believes that its products and market presence distinguish it as
one of the leading designers and manufacturers of mailer products, direct mail
products and services, custom pressure sensitive labels and custom envelopes.
The Company's position in these product segments and continued opportunities for
growth and operating profitability are attributable to the following competitive
strengths:
-MARKET LEADER. The Company believes that it is a market leader in most of
its core product lines, including mailer products, custom pressure
sensitive labels and custom envelopes. In the mailer products and custom
pressure sensitive label markets, the Company believes that it is a leading
supplier of products sold through independent distributors. According to
the EMA, the Company is a leading supplier of custom envelopes sold
directly to end-use customers in the Southeastern region of the U.S. The
Company competes in its core product lines with larger national and smaller
local manufacturers certain of which are less highly leveraged and may have
greater financing and operating flexibility.
-FOCUS ON HIGH VALUE-ADDED PRODUCTS. Almost all of the Company's products
have a high value-added component which differentiates them from lower
margin, commodity paper-based products. Substantially all of the Company's
pressure sensitive label and envelope products are customized to end-user
specifications. Most mailer products and direct mail products and services
are also customized to specific customer design or printing requirements.
The Company's patented InfoSeal-Registered Trademark- self-mailer system,
which generally uses customized forms, provides a value-added, innovative
and cost effective system for a wide variety of mail applications.
-COMPREHENSIVE DIRECT MAIL PRODUCT LINE. The Company produces a broad range
of products which target direct mail customers, including impact and
non-impact mailers, catalog bind-in order forms,
42
<PAGE>
custom pressure sensitive labels and custom envelopes. Combined with the
Company's direct mail fulfillment services, these products offer an
integrated solution to the direct mail industry which has grown at a
compound annual rate of 6% over the past five years.
-PRODUCT DEVELOPMENT EXPERTISE. The Company has a record of successful new
product introductions and service enhancements which distinguishes it as a
provider of high value-added solution-oriented technologies. Recent
examples of this product development expertise include the new, patented
InfoSeal-Registered Trademark- desktop folder/sealer which the Company
expects will significantly expand the market for the
InfoSeal-Registered Trademark- system by targeting small businesses and
satellite offices of large companies. The Company believes that it is the
first manufacturer to develop a self-mailer system targeting this market.
The Company has also recently introduced the Label Launch-TM- service, an
on-line software package enabling pressure sensitive label customers to
electronically process orders and transfer artwork directly to the
Company's pre-press and design facilities.
-DIVERSE DISTRIBUTION CHANNELS. The Company sells its products through
distribution channels which optimize access to respective end-use markets.
In its mailer and pressure sensitive label businesses, the Company believes
that it is the largest manufacturer selling through independent
distributors who provide superior coverage of the Company's small to
medium-sized customer base. In this segment, the Company competes with
other larger manufacturers who are dominant in other distribution channels,
particularly in the direct sales distribution channel. The Company's
catalog bind-in order forms and custom envelopes are sold directly to
end-users who, due to exacting specifications and high volume requirements,
prefer direct relationships with the manufacturer. The Company's strategic
partnership with Xerox Corporation, which recently selected
InfoSeal-Registered Trademark- as the non-impact mailer system to be
marketed by the Xerox Supplies Group sales force, is expected to enhance
distribution to large companies.
PRODUCTS AND SERVICES
The following chart displays pro forma net sales of the Company by product
category.
<TABLE>
<CAPTION>
PRO FORMA
SALES BY PRODUCT
CATEGORY
DECEMBER 31, 1995
---------------------
$ %
---------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Mailer Products.............................................................. $ 52,159 30.9
Direct Mail Products and Services............................................ 21,711 12.9
Custom Pressure Sensitive Labels............................................. 40,363 23.9
Custom Envelopes............................................................. 54,527 32.3
---------- ---------
Total Sales.............................................................. $ 168,760 100.0%
---------- ---------
---------- ---------
</TABLE>
MAILER PRODUCTS. The Company believes it is a leading U.S. manufacturer of
spot carbon impact mailers and has the largest installed base of laser and other
non-impact printer compatible mailer systems with approximately 1,400 units.
Impact mailers are ready-to-mail, multi-part spot carbon forms which are widely
used to print correspondence such as account statements, invoices, tax notices
and utility and medical bills, and can be printed without opening or sealing the
envelope. Non-impact mailers are laser printer compatible self-mailer forms
which are printed, folded, sealed and mailed as payroll checks, direct deposit
statements and vendor remittances. The Company's ability to produce mailers in
all popular sizes and with a wide variety of custom features enables it to offer
a broad line of high quality stock and custom mailers.
The Company believes that it offers one of the most complete impact mailer
product lines in the industry. For one-way (without a return envelope) and
two-way (with a return envelope) impact mailers, customers can have mailers
custom designed and manufactured utilizing any combination of colors, sizes and
opening features or can select from an inventory of over 150 different stock
products. Management believes that the Company's ability to provide high quality
color, complex and innovative designs and creative design support for its
products is among the best in the industry.
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<PAGE>
With its InfoSeal-Registered Trademark- product line, the Company believes
that it is a leader in the development of non-impact printed mailers which
management believes represent a significant growth opportunity.
InfoSeal-Registered Trademark- offers a turn-key solution using a patented
one-way or two-way self-mailer form which can be impact or non-impact printed,
then folded and sealed by the end user utilizing dedicated equipment. Tab
Products Co. currently markets the dedicated folding/sealing equipment which is
sold as part of the InfoSeal-Registered Trademark- system sold to moderate and
high-volume users. The Company believes that this equipment, which is the only
product currently available with easy-to-use water-based sealing technology and
which can only be used with proprietary InfoSeal-Registered Trademark- mailer
forms, enjoys an installed base of over 1,400 units. The Company competes in
this market with many small regional suppliers and several larger national
manufacturers who compete aggressively. Certain of these larger competitors are
less highly leveraged than the Company and may have greater financing and
operating flexibility. The Company's InfoSeal-Registered Trademark- end users
include the United Parcel Service, NYNEX Corporation, Automatic Data Processing,
Inc. and Georgetown University Medical Center. Later this year, the Company will
begin selling its new line of patented desk-top InfoSeal-Registered Trademark-
machines, which the Company believes will establish it as the sole provider of
non-impact printer technology to the currently untapped low volume user market.
Management expects the desktop unit to significantly expand the market for the
InfoSeal-Registered Trademark- system by targeting small businesses and
satellite offices of large companies. Management believes that the market for
non-impact printed mailer systems will experience significant growth in the near
future. A broad range of corporations and institutions are expected to use
non-impact self-mailer systems as a cost effective and laser printer compatible
alternative to traditional methods for various information processing
requirements such as payment remittances, vendor invoicing, payroll checks,
direct deposit notices and monthly account statements.
DIRECT MAIL PRODUCTS AND SERVICES. The Company offers a selection of
products sold exclusively to the direct mail industry, which include catalog
bind-in order forms, advertising inserts, coupons and promotional mailers. Often
these products include an integrated envelope or are structured such that the
order form can be folded into an envelope and mailed. The Company has developed
extensive customization capabilities enabling it to produce these inserts and
envelopes in a wide variety of sizes and styles on coated and uncoated paper
stock, using high quality lithography with options for complex multi-color
printing. The Company also provides direct mail fulfillment services. These
direct mail fulfillment services include art and copy preparation, prepress
services, printing, mail list preparation and selection, printed
personalization, addressing, stuffing, labeling, mail sorting, bundling and drop
off services. To complement these direct mail products, the Company's mailers,
envelopes and labels are customized and sold for use in direct mail
applications. The Company's direct mail customers include Bear Creek Direct
(Harry & David), Frederick's of Hollywood, Inc., the American Red Cross and
American Bankers Insurance Group.
CUSTOM PRESSURE SENSITIVE LABELS. According to the 1995 Survey, the Company
is the largest U.S. manufacturer of custom pressure sensitive labels sold to
independent distributors, as measured by revenues. The Company focuses on
customized high value-added products rather than commodity labels. Operating out
of five strategically located manufacturing facilities, the Company offers a
variety of value-added products aimed at short and medium-run customer orders.
Management believes that the Company is recognized in the industry for its high
quality products, excellent customer service and an ability to respond quickly
to time-sensitive customer orders. The Company recently introduced Label
Launch-TM- service, an on-line software application which enables pressure
sensitive label customers to electronically process orders and transfer artwork
directly to the Company's facilities, thereby reducing pre-press set up time,
order entry and shipping costs.
The Company's custom pressure sensitive label products are used by a wide
range of businesses and institutions in numerous end-use applications, including
mailing labels, promotional literature, inventory routing, packaging and retail
pricing. The Company's largest end-user markets are the retail, food and
beverage, health and beauty, toy manufacturing and chemical industries. The
Company also provides national 24-hour order processing for short production
runs requiring rapid turnaround. The Company's customers include distributors
such as Bank-N-Business Forms, Taylor Business Products and Standard
44
<PAGE>
Forms, Inc. Direct customers include the Paralyzed Veterans of America, Boston
Scientific Corporation, Hasbro, Inc. and Sterilite, Inc. No single customer
represented greater than 10% of the Company's pro forma 1995 custom pressure
sensitive label net sales.
CUSTOM ENVELOPES. According to the EMA, the Company is the second largest
U.S. supplier of custom envelopes in the growing Southeastern U.S. regional
market (which represents approximately 13% of the overall custom envelope
market) as measured by revenues. The Company has focused on the high value-added
specialty segments of the envelope market, placing a particular emphasis on the
direct mail, photo-finishing by mail and banking industries where it has
established leadership positions. Almost all of the Company's envelope products
are specially printed or manufactured to end-user specifications and generally
have higher margins than blank commodity envelopes. The Company also produces
custom expanding envelopes, pockets, wallets and other products for the
professional office. These products are hand assembled, medium to large sized
folders used to file legal documents or store and carry artwork. From its five
production facilities, the Company manufactures in excess of 2.5 billion
envelopes per year.
SALES, DISTRIBUTION AND MARKETING
MAILER PRODUCTS. The Company markets mailers to approximately 5,000
independent distributors across the U.S. through nine regional sales managers.
Distributors, in turn, sell these products to the end-user. In 1995 independent
distributors accounted for approximately 91% of the Company's mailer product net
sales with the balance sold directly to end-use customers. In addition to the
independent distributor network, the Company benefits from the marketing efforts
of its corporate partners -- the Xerox Corporation and Tab Products Co. The
Xerox Supplies Group has recently selected the Company's
InfoSeal-Registered Trademark- system as the non-impact mailer system to be
marketed by its sales force. InfoSeal-Registered Trademark- equipment for high
and moderate volume users is marketed by Tab Products Co. which manufactures the
machines. Since InfoSeal-Registered Trademark- equipment can only be used with
InfoSeal-Registered Trademark- forms, the Company expects to realize significant
repeat form sales as the installed base of these systems grows. The Company will
continue to look for innovative, cost effective ways to attract customers,
including a plan to cross-sell products to selected customers through the
Company's direct sales force.
DIRECT MAIL PRODUCTS AND SERVICES. The Company primarily sells its direct
mail products through its seven person in-house sales force which solicits
business from direct marketing companies. The Company has in excess of 150
active customers. Given long term customer relationships and large average order
sizes, the Company's sales professionals, which average over 15 years of
industry experience, are compensated on a salaried basis.
CUSTOM PRESSURE SENSITIVE LABELS. The Company markets its custom pressure
sensitive labels to both independent distributors and directly to end-users.
Over the past 24 months the Company has conducted business with approximately
26,000 independent distributors, such as business forms companies, printing
brokers, printers and quick printers. Sales to independent distributors
collectively accounted for approximately 70% of pro forma 1995 net sales with
the top 20 distributor accounts accounting for approximately 10% of pro forma
1995 custom pressure sensitive label net sales. Direct sales customers
constitute the remaining 30%.
CUSTOM ENVELOPES. Due to the exacting specifications and high volume
requirements of the custom envelope customer, the Company sells these products
directly to end-users. The Company maintains a 34 person sales force which
primarily covers the Southeastern U.S. and averages 12 years of industry
experience. These sales people receive commissions determined by the
relationship between selling price and estimated full production cost. The
Company maintains a diverse customer base with the top 20 envelope accounts
providing 43% of total 1995 envelope net sales. Expanding envelopes, pockets and
wallets are sold primarily through independent distributors due to the smaller
order size, which is typical of sales of these products.
COMPETITION
The markets for the Company's products are highly fragmented and
competitive. Competition is based upon product breadth, geographic reach,
delivery time, product quality and customer service. Customer
45
<PAGE>
relationships in the markets in which the Company competes tend to be long-term,
and service and familiarity with a customer's needs, as well as personal
factors, are important in building and maintaining such relationships.
Competitors range from large manufacturers to regional and local firms.
MAILER PRODUCTS. Impact mailers are sold through two principal distribution
channels, direct to customers and to independent distributors. The direct
channel is dominated by large manufacturers, which include Wallace Computer
Services, Inc., Moore Corporation Limited, Uarco Business Forms and the Standard
Register Company. These manufacturers generally maintain long term relationships
and tend to offer a full range of business form products, with mailers generally
representing a small percentage of total sales to customers. The Company sells
its products primarily to independent distributors. See "Business -- Products
and Services." The Company believes that it is the a leading supplier to
independent distributors.
The non-impact mailer market is comprised of three primary competitors: the
Company, Moore Corporation Limited and the Standard Register Company. These
three competitors offer self-mailer systems, that consist of one piece forms and
dedicated folder/sealer equipment and target medium and high-volume customers.
Management believes that the Company, through its patented
Infoseal-Registered Trademark- system, has the largest number of non-impact
self-mailer installations with over 1,400. The Company has recently developed a
patented low cost desktop folder/sealer machine to specifically address the low
volume small business segment. Management believes that it is the first
manufacturer to develop a self-mailer system targeting small businesses and
satellite offices of large companies.
DIRECT MAIL PRODUCTS AND SERVICES. Direct mail products and services are
primarily sold directly to end-users. Competitors which manufacture bind-in
catalog order forms and related direct mail products include Webcraft
Technologies, Inc., the Cyrill Scott Company, American In-Line Graphics, Inc.
(R.R. Donnelly & Sons Co.) and Web Inserts (World Color Press, Inc.). Other than
Webcraft, most competitors are single plant operations. The Company believes it
is among the four largest suppliers of direct mail inserts and other bind-in
mailing products. The Company's direct mail fulfillment business competes
primarily with Communicolor (the Standard Register Company) and ColorForms
(Wallace Computer Services, Inc.).
CUSTOM PRESSURE SENSITIVE LABELS. Competitors in the custom label market
sell their products either directly to end-use customers or to independent
distributors. Those competitors that sell directly to end-users include the
Standard Register Company, Moore Corporation Limited, Uarco Business Forms and
Wallace Computer Services, Inc. These companies primarily produce stock labels
but also compete in the market for custom labels. The Company is recognized as
the market leader in the independent distribution channel. Major competitors in
this highly fragmented channel include Discount Labels, Inc., Data Labels, Inc.,
Continental Datalabel, Inc., Rittenhouse, Inc. and Lancer Labels, Inc.
Competitors in this channel are typically small regional, privately-owned
operators with a single production facility.
CUSTOM ENVELOPES. Due to the high bulk and weight characteristics of
envelopes, transportation and freight costs are generally an important component
of the total cost of envelope production. With transportation costs typically
accounting for 3% of total envelope production costs, long distance trade is
often limited to high value-added products. As a result, envelope manufacturers
generally focus production facilities on immediate regional markets. The Company
estimates it has approximately 14% market share of the custom envelope market in
the Southeastern U.S. The Company's major competitors in this region are
Atlantic Envelope Co. (National Service Industries, Inc.), Allen Envelope Corp.,
Tri State Envelope Corp., Oles Envelope Corp. and, to a lesser extent, Mail-Well
Inc. and Westvaco Corp. Like the Company, most of these competitors maintain an
in-house sales force.
SUPPLIERS
The Company has a broad base of high quality, national suppliers. The
primary raw materials used by the Company are uncoated and coated papers,
plastic films, inks and adhesives. Paper represents the Company's single largest
raw material. Union Camp Corp., International Paper Co., Georgia-Pacific Corp.,
Kimberly-Clark Corp. and Appleton Paper are the largest paper suppliers for the
Company's transactional mailers, direct mail products and custom envelopes. In
1995, the Company purchased paper from more than nine major suppliers. The
Company's custom pressure sensitive label business purchases paper and other key
substrates from Fasson and Flexcon Inc.
46
<PAGE>
MANUFACTURING
MAILER PRODUCTS. Mailers are produced in three facilities located in
Roanoke, Virginia, Fort Smith, Arkansas and Sparks, Nevada, thereby allowing
cost-effective national distribution. In total, these facilities utilize 20 web
offset presses ranging in width from 20 1/2" to 30 1/2" to create rolls of
printed materials which are then further converted on 18 high-speed collators
into multiple ply mailer sets. Additional major pieces of equipment in these
plants include three MICR routing encryption and five
InfoSeal-Registered Trademark- converting lines.
DIRECT MAIL PRODUCTS AND SERVICES. Direct mail products are produced in two
facilities both of which are located in Roanoke, Virginia. One of these plants
utilizes four high volume heat-set, web offset printing presses to produce a
wide range of bind-in catalog order forms, advertising inserts and other direct
mail items. These presses range in web width from 26" to 38" and are equipped
with state-of-the-art, in-line finishing equipment to functionally customize
printed products. The other facility includes six impact printers, multiple ion
deposition engines and in jet printers to personalize mailers for direct mail
applications. This equipment is controlled by in-house software.
CUSTOM PRESSURE SENSITIVE LABELS. Pressure sensitive labels are produced in
five facilities located in Fort Smith, Arkansas, San Carlos, California,
Linthicum, Maryland, Wilton, New Hampshire and Roanoke, Virginia, which are
strategically positioned throughout the U.S. Three of these plants incorporate
28 traditional flexographic presses ranging in web width from 6 1/2" to 16",
which produce a full complement of label graphics, including process printing
and foil stamping. The other two plants are designed to meet quick response
label orders and utilize 29 highly customized letter presses designed to cost
effectively produce labels in small order quantities.
CUSTOM ENVELOPES. Custom envelopes are produced in four plants located
throughout the Company's core Southeastern U.S. regional market in Gainesville,
Florida, Louisville, Kentucky, Greenville, South Carolina and Roanoke, Virginia.
Production equipment at the four envelope plants includes eight high-speed web
folding machines with in-line flexographic printing capacity which can produce
finished, customized envelopes in one pass. In addition, these plants house 44
folding machines which convert die-cut blanks into finished envelopes. Other
equipment includes computer controlled high-speed die-cutters and a variety of
off-line printing equipment. Custom expanding envelopes, pockets, wallets and
other products for the professional office are produced at the facility in
Austell, Georgia, which incorporates a wide array of specialized die-cutters and
assembly equipment.
All of the Company's mailer, direct marketing and pressure sensitive label
facilities are supported by state of the art, electronic pre-press capabilities.
These services are also available to the Company's custom envelope plants via
electronic file transfer on the Company's frame relay based intranet. The
Company's pre-press design capability is composed of Apple MacIntosh and Mecca
hardware architecture.
FACILITIES
As of June 30, 1996 the Company operated manufacturing, warehouse and
distribution facilities in the U.S. with a total floor area of approximately
808,000 square feet. Of this footage, approximately 304,000 square feet are
leased and approximately 504,000 square feet are owned.
47
<PAGE>
The following table describes the manufacturing, warehouse and distribution
facilities of the Company as of June 30, 1996.
<TABLE>
<CAPTION>
SQUARE FEET
TRANSKRIT/ OWNED/ EXPIRATION -----------------
LOCATION NFC PRODUCT(1) LEASED(2) OF LEASE
- --------------- ---------- ------------- --------- ------------ (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ARKANSAS
Fort Smith Transkrit M, SM, D O 125
Fort Smith Transkrit L L 12/31/1997 20
CALIFORNIA
San Carlos Transkrit L L Monthly 24
FLORIDA
Gainesville NFC E O 52
GEORGIA
Atlanta NFC A L 8/31/2000 5
Austell NFC E L 9/1/2001 39
KENTUCKY
Louisville NFC E L 3/31/2000 70
MARYLAND
Linthicum Transkrit L L 6/30/2000 15
NEW HAMPSHIRE
Wilton Transkrit L O 79
NEVADA
Sparks Transkrit M L 11/30/1998 42
PENNSYLVANIA
Norristown NFC D,S L 4/30/2001 15
SOUTH CAROLINA
Greenville NFC E L 6/18/1997 46
VIRGINIA
Roanoke NFC E, DMI, L O 137
Roanoke Transkrit M, SM O 111
Salem Transkrit DMF L 1/31/1998 27
</TABLE>
- ------------------------------
1. DMF=Direct Mail Fulfillment; DMI=Direct Mail Inserts; D=Distribution
Warehouse; E=Envelopes; L=Labels; M=Mailers; S=Sales Office; SM=Stock
Mailers; A=Administrative
2. O=Owned
L=Leased
EMPLOYEES
As of June 30, 1996, the Company employed approximately 1,420 people, of
which 1,040 work in manufacturing facilities and 380 work in
corporate/administrative functions. None of the Company's employees are
unionized, and the Company believes its relations with employees are good.
LEGAL PROCEEDINGS
The Company is a party to various litigation matters incidental to the
conduct of its business. The Company does not believe that the outcome of any of
the matters in which it is currently involved will have a material adverse
effect on the financial condition or results of operations of the Company.
ENVIRONMENTAL, HEALTH AND SAFETY MATTERS
Like similar companies, the Company's operations and properties are subject
to a wide variety of federal, state and local laws and regulations, including
those governing the use, storage, handling, generation, treatment, emission,
release, discharge and disposal of certain materials, substances and wastes, the
remediation of contaminated soil and groundwater, and the health and safety of
employees. As such, the nature of the Company's operations exposes it to the
risk of claims with respect to environmental protection and health and safety
matters and there can be no assurance that material costs or liabilities will
not be incurred in connection with such claims.
48
<PAGE>
In January 1988, the Company was notified by the United States Environmental
Protection Agency ("EPA") that it and 11 other parties are potentially liable
for costs incurred by the EPA in responding to the cleanup of the Dixie Caverns
Landfill Superfund Site in Roanoke County, Virginia. Subsequently, Roanoke
County expended $2.0 million to clean up a portion of the Dixie Cavern Landfill
Site and has filed suit against the Company and the 11 other potentially
responsible parties ("PRPs") for reimbursement of these cleanup costs. Although,
under Superfund, the PRPs may be jointly and severally liable for cleanup costs,
management believes that the Company's potential liability in connection with
the County's claim is de minimis, based upon the amount of waste attributable to
it in relation to the other parties. Management believes that the Company will
have no liability in connection with the remaining portion of the site, and that
the ultimate outcome of this matter will not have a material adverse impact on
the financial position or results of operations of the Company.
The EPA has also named the Company as one of a number of PRPs in connection
with the alleged disposal of hazardous substances at the Smiths Farm Landfill
Superfund Site in Kentucky. In February 1992, the Company and 35 other parties
entered into an alternative dispute resolution process ("ADRP") to allocate
liability. Subsequently, a number of the PRPs responsible for contributions of
waste to the site dropped out of the ADRP group. The remaining ADRP group
members, including the Company, have proposed a de minimis settlement to the
EPA, which, if accepted, would resolve the Company's liability in connection
with the site. Management believes that the ultimate outcome of this matter will
not have a material adverse impact on the financial position or results of
operations of the Company.
Although the Company does not anticipate that material expenditures will be
required to achieve or maintain compliance with, or resolve liability under,
environmental protection and occupational health and safety laws and
regulations, changing laws and regulations might affect the industries in which
the Company participates. Accordingly, there can be no assurance that additional
environmental, health or safety matters resulting in material liabilities or
expenditures will not be discovered or that, in the future, material
expenditures for environmental, health or safety matters will not be required by
changes in applicable laws or regulations.
49
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Directors of NFC are elected annually by its shareholder to serve during the
ensuing year or until a successor is duly elected and qualified. Executive
officers of NFC are duly elected by its Board of Directors to serve until their
respective successors are elected and qualified. The following table sets forth
certain information with respect to the directors and executive officers of NFC
following the Acquisition.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------------------- --------- ------------------------------------------------
<S> <C> <C>
John D. Weil 48 Chairman of the Board of Directors
Robert M. Miklas 44 Director, President and Chief Executive Officer
David E. De Leeuw 52 Director
David E. King 37 Director
Glenn S. McKenzie 43 Director
Calvin Ingram 62 Director
Robert B. Webster 48 Executive Vice President and Chief Financial
Officer
William Britts 63 Senior Vice President/Sales and Marketing
Thomas J. Cobery 49 Senior Vice President/President-Label Art
Jack Resnick 49 Senior Vice President/President-Transkrit
</TABLE>
John D. Weil (48), Chairman of the Board of Directors of NFC since October
1995. In 1995, Mr. Weil joined McCown De Leeuw & Co. as an operating affiliate
to assist in portfolio management. From 1991 to 1994, Mr. Weil served as
President and Chief Executive Officer of American Envelope Company. Between 1983
and 1994, Mr. Weil served as a director of the Envelope Manufacturers
Association (the "EMA"), as Chairman of the EMA's Public Affairs Committee and
has served on its Technical, Training, Plant Operations and Finance Committees.
Mr. Weil also serves as a director of Specialty Paperboard, Inc., Tiara
Motorcoach Corporation, International Data Response Corporation and Sage
Enterprises, Inc.
Robert M. Miklas (44), Director, President and Chief Executive Officer of
NFC since June 1990. Mr. Miklas has been Director, President and Chief Executive
Officer of DEC since June 1990. Prior to joining DEC, Mr. Miklas worked for 15
years with the consumer packaging division of the Boise Cascade Corporation and
its successor, Sonoco Products Company.
David E. De Leeuw (52), Director of NFC since September 1989. Mr. De Leeuw
is a managing general partner of MDC Management Company II, L.P., which is the
general partner of McCown De Leeuw & Co. II, L.P. and McCown De Leeuw
Associates, L.P., MDC Management Company IIE, L.P., the general partner of
McCown De Leeuw & Co. Offshore (Europe), L.P. and MDC Management Company IIA,
L.P., the general partner of McCown De Leeuw & Co. Offshore (Asia), L.P. He
currently serves as a director of Victoria Mortgage Corporation, OSI Holdings
Corp., Nimbus CD International, Inc., Tiara Motorcoach Corporation and Papa
Gino's Inc.
David E. King (37), Director of NFC since April 1991. Mr. King is a general
partner of MDC Management Company II, L.P., which is the general partner of
McCown De Leeuw & Co. II, L.P. and McCown De Leeuw Associates, L.P., MDC
Management Company IIE, L.P., the general partner of McCown De Leeuw & Co.
Offshore (Europe), L.P. and MDC Management Company IIA, L.P., the general
partner of McCown De Leeuw & Co. Offshore (Asia), L.P. Mr. King has been
associated with McCown De Leeuw & Co. since 1990. He currently serves as a
director of OSI Holdings Corp., International Data Response Corporation, Nimbus
CD International, Inc., Fitness Holdings, Inc. and ASC Networks, Inc.
50
<PAGE>
Glenn S. McKenzie (43), Director of NFC since October 1992. Mr. McKenzie has
been President of Alpha Investments, Inc., a management consulting firm, since
October 1991. He currently serves as a director of Specialty Paperboard, Inc.,
Nimbus CD International, Inc., Exeter Health Resources, Inc. and Tiara
Motorcoach Corporation.
Calvin Ingram (62), Director of NFC since January 1995. Mr. Ingram has
served as Chairman of AmeriComm Direct Marketing since January 1991. Mr. Ingram
currently serves as a director of AmeriMarketing Group, AmeriComm Direct
Marketing, Associated Premium and National Association of Advertising
Distributors.
Robert B. Webster (48), Executive Vice President and Chief Financial Officer
of NFC since June 1995. Mr. Webster has been the Executive Vice President and
Chief Financial Officer of DEC since June 1995. Mr. Webster served as Vice
President and Chief Financial Officer of Sunds Defibrator North America, a pulp
and paper equipment manufacturing company from March 1991 to November 1994.
William Britts (63), Senior Vice President/Sales and Marketing of NFC since
October 1992. From October 1992 to June 1996, Mr. Britts served as a Vice
President of Sales and Marketing for DEC. He joined Double Envelope Company in
1958.
Thomas J. Cobery (49), Senior Vice President of NFC since June 1996. Mr.
Cobery has been President of Label Art, Inc. since November 1987.
Jack Resnick (49), Senior Vice President of NFC since June 1996 and
President of Transkrit since January 1991. Mr. Resnick was Chief Operating
Officer of Transkrit from January 1991 until June 1996.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation paid
or accrued for the year ended December 31, 1995 for the Chief Executive Officer
of NFC and each of the four other most highly compensated executive officers of
the Company. The compensation of Messrs. Miklas, Webster and Britts was paid by
NFC and the compensation of Messrs. Resnick and Cobery was paid by Transkrit.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
COMMON STOCK ALL OTHER
NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($)(1) OPTIONS (#) COMPENSATION ($)(2)
- ------------------------------------------------- ------------ ----------- -------------- -------------------
<S> <C> <C> <C> <C>
Robert M. Miklas ................................
President and Chief Executive Officer 169,937 14,559 -0- 696(3)
Robert B. Webster ...............................
Executive Vice President and Chief Financial
Officer 84,571 30,600 -0- -0-
William Britts ..................................
Senior Vice President/Sales and Marketing 149,512 12,729 -0- 4,138(4)
Thomas J. Cobery ................................
Senior Vice President/President - Label Art 154,265 57,279 -0- 34,815(5)
Jack Resnick ....................................
Senior Vice President/President - Transkrit 185,328 34,731 -0- 43,400(6)
</TABLE>
- ------------------------
(1) Includes amounts earned and accrued in 1995.
(2) Represents the dollar value of annual compensation not properly
characterized as salary or bonus. Following Commission rules, perquisites
and other personal benefits which do not exceed 25% of the total perquisites
and other personal benefits for each of the named executive officers have
been omitted from these footnotes.
51
<PAGE>
(3) Consists of the taxable portion of group term life insurance premiums for
Mr. Miklas paid by NFC.
(4) Consists of the taxable portion of medical insurance premiums for Mr. Britts
paid by NFC.
(5) Includes bonus payments to Mr. Cobery under the Label Art, Inc. Equity Share
Plan (the "Equity Share Plan"). Pursuant to the Equity Share Plan, Mr.
Cobery has received 138,468 equity shares ("Equity Shares") simulating
ownership in Label Art, Inc. The Equity Share Plan provides that if Label
Art, Inc. declares a dividend on its common stock at any time during which a
participant has been allocated Equity Shares, the participant shall receive
a bonus, equal to the dividend he or she would have received if his or her
Equity Shares were common stock of Label Art, Inc. The Equity Share Plan was
terminated concurrently with the consummation of the Transactions. Mr.
Cobery sold 4,898 Equity Shares back to Label Art, Inc. in February, 1994
for which he received $22,114.
(6) Includes $27,416 representing dividends on 220.5 equity shares ("Stock
Credits") simulating economic ownership in Transkrit issued to Mr. Resnick
under his employment agreement with Transkrit, dated January 9, 1991 (the
"Employment Agreement"). As holder of Stock Credits, Mr. Resnick is entitled
to receive amounts equal to the cash dividends that he would have received
had he owned a number of shares of common stock of Transkrit equal to the
number of Stock Credits then credited to Mr. Resnick's account. The
Employment Agreement was terminated concurrently with consummation of the
Transactions. Also includes $15,984 representing reimbursement for
relocation expenses.
DIRECTOR COMPENSATION
Mr. Weil received $2,000 per meeting of the Board of Directors of NFC for
each of the first two quarterly meetings in 1995 and was reimbursed for his
travel and out-of-pocket expenses incurred in connection with his attendance at
such meetings. Mr. Ingram received $2,000 per meeting of the Board of Directors
of NFC in 1995, plus reimbursement for his travel and out-of-pocket expenses
incurred in connection with attendance at such meetings. Non-employee directors
of NFC are expected to receive $2,000 per regularly scheduled meeting of the
Board of Directors, $1,000 per special meeting of the Board of Directors and
$500 per Committee meeting plus, in each case, reimbursement for travel and
out-of-pocket expenses incurred in connection with attendance at all such
meetings. No other director of NFC is expected to receive compensation from NFC
for performance of services as a director of NFC (other than reimbursement for
travel and out-of-pocket expenses incurred in connection with attendance at
Board of Director meetings.)
STOCK OPTION PLAN AND OTHER BENEFIT PLANS AND ARRANGEMENTS
DEC INTERNATIONAL, INC. 1996 STOCK INCENTIVE PLAN
DEC adopted the DEC International, Inc. 1996 Stock Incentive Plan (the "1996
Plan") on June 28, 1996. The 1996 Plan is administered by the Compensation
Committee of the Board of Directors (the "Board") of DEC (or such other Board
committee as may be designated by the Board) (the "Committee"). Under the 1996
Plan, the Committee may grant or award (a) stock options (which may be either
incentive stock options ("ISOs"), within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended, or stock options other than ISOs),
(b) stock appreciation rights granted in conjunction with stock options or
independently, (c) restricted stock, (d) bonuses or other compensation payable
in stock and/or (e) other stock-based awards to executive and other key salaried
employees, including officers, as well as to consultants of NFC and its
subsidiaries and affiliates designated by the Committee, but excluding non-
employee directors and members of the Committee.
RETIREMENT PLANS
NFC sponsors two defined benefit plans, the Employees' Retirement Plan of
National Fiberstok Corporation, which covers Mr. Britts and the Transkrit
Corporation Employees' Pension Plan, which covers
52
<PAGE>
Mr. Resnick. In addition, NFC has entered into a Management Supplemental
Retirement Agreement with Mr. Britts, which provides a supplemental benefit to
the Employees' Retirement Plan of National Fiberstok Corporation.
EMPLOYEES' RETIREMENT PLAN OF NATIONAL FIBERSTOK CORPORATION The Employees'
Retirement Plan of National Fiberstok Corporation (the "NFC Plan") provides an
annual retirement benefit equal to .75% of "final average monthly compensation,"
plus .65% of "final average monthly compensation" in excess of monthly "covered
compensation," multiplied by years of credited service up to 35. Final average
monthly compensation is determined by averaging a participant's compensation
over the 60 consecutive months for which compensation was highest during the 120
months of employment ending on December 31, 1994 (or the average for such
shorter period of months if less than 60). Monthly covered compensation under
the NFC Plan is the average of the taxable wage base in effect under the Social
Security Act over the 35 year period ending with the year in which the
participant reaches his or her social security retirement age, divided by
twelve.
The following table gives the estimated annual benefit payable upon
retirement for participants in the NFC Plan:
NFC PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE
----------------------------------------------------------
REMUNERATION 15 20 25 30 35
- ---------------------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
125,000........................... 23,618 31,490 39,363 47,235 55,108
150,000........................... 28,868 38,490 48,113 57,735 67,358
175,000........................... 28,868 38,490 48,113 57,735 67,358
200,000........................... 28,868 38,490 48,113 57,735 67,358
225,000........................... 28,868 38,490 48,113 57,735 67,358
250,000........................... 28,868 38,490 48,113 57,735 67,358
275,000........................... 28,868 38,490 48,113 57,735 67,358
300,000........................... 28,868 38,490 48,113 57,735 67,358
325,000........................... 28,868 38,490 48,113 57,735 67,358
350,000........................... 28,868 38,490 48,113 57,735 67,358
375,000........................... 28,868 38,490 48,113 57,735 67,358
400,000........................... 28,868 38,490 48,113 57,735 67,358
425,000........................... 28,868 38,490 48,113 57,735 67,358
450,000........................... 28,868 38,490 48,113 57,735 67,358
475,000........................... 28,868 38,490 48,113 57,735 67,358
500,000........................... 28,868 38,490 48,113 57,735 67,358
</TABLE>
Benefits shown above are computed as a single life annuity beginning at age
65 and are not subject to any deduction for offset amounts other than Social
Security as described above.
Compensation for purposes of the NFC Plan is the total monthly earnings paid
to a participant, which includes salary and bonus, as shown in columns (c) and
(d) on the Summary Compensation Table; provided, however, compensation in excess
of $150,000 is disregarded.
The estimated years of credited service for purposes of calculating benefits
under the NFC Plan for Mr. Britts is 35.
MANAGEMENT SUPPLEMENTAL RETIREMENT AGREEMENT NFC has entered into a
Management Supplemental Retirement Agreement ("SERP") with Mr. Britts which is
not qualified under Section 401(a) of the Internal Revenue Code of 1986, as
amended ("Code"). The SERP provides an annual benefit equal to the benefit which
Mr. Britts would have been entitled to receive under the terms of the NFC Plan
in effect as of
53
<PAGE>
December 31, 1988, if it had continued in effect until his benefit commencement
date, less the greater of (i) the benefit which Mr. Britts will actually receive
under the NFC Plan or (ii) the benefit which Mr. Britts would have been entitled
to receive on his benefit commencement date under the terms of the NFC Plan, as
amended and restated as of January 1, 1989, with no further amendment.
The following table gives the estimated annual benefit payable upon
retirement to Mr. Britts under the SERP:
SERP TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE
----------------------------------------------------------
REMUNERATION 15 20 25 30 35
- ---------------------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
125,000........................... 6,785 9,047 11,308 9,686 8,063
150,000........................... 9,035 12,047 15,058 12,936 10,813
175,000........................... 16,535 22,047 27,558 26,686 25,813
200,000........................... 24,035 32,047 40,058 40,436 40,813
225,000........................... 31,535 42,047 52,558 54,186 55,813
250,000........................... 32,339 43,119 53,898 55,660 57,421
275,000........................... 32,339 43,119 53,898 55,660 57,421
300,000........................... 32,339 43,119 53,898 55,660 57,421
325,000........................... 32,339 43,119 53,898 55,660 57,421
350,000........................... 32,339 43,119 53,898 55,660 57,421
375,000........................... 32,339 43,119 53,898 55,660 57,421
400,000........................... 32,339 43,119 53,898 55,660 57,421
425,000........................... 32,339 43,119 53,898 55,660 57,421
450,000........................... 32,339 43,119 53,898 55,660 57,421
475,000........................... 32,339 43,119 53,898 55,660 57,421
500,000........................... 32,339 43,119 53,898 55,660 57,421
</TABLE>
Benefits shown above are computed as a single life annuity beginning at age
65 and are not subject to any deduction for offset amounts other than Social
Security, as described under the description of the NFC Plan above.
Compensation covered by the SERP is the same as compensation covered under
the NFC Plan.
The estimated years of credited service for purposes of calculating benefits
under the SERP for Mr. Britts is 35.
TRANSKRIT CORPORATION EMPLOYEES' PENSION PLAN The Transkrit Corporation
Employees' Pension Plan (the "Transkrit Plan") provides an annual benefit equal
to .4% of "average final compensation" multiplied by benefit service completed
before July 15, 1971, plus .7% of "average final compensation" multiplied by
benefit service completed after July 15, 1971, plus an additional 3% of "average
final compensation" multiplied by benefit service earned while an employee of
Short Run Labels, Inc., if any. Average final compensation is determined by
averaging a participant's compensation for the five consecutive calendar years
during the ten years immediately preceding retirement, termination of
employment, or death that give the highest average.
54
<PAGE>
The following table gives the estimated annual benefit payable upon
retirement for participants in the Transkrit Plan:
TRANSKRIT PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE
----------------------------------------------------------
REMUNERATION 15 20 25 30 35
- --------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
100,000........ 10,500 14,000 17,500 21,000 24,500
125,000........ 13,100 17,500 21,900 26,300 30,600
150,000........ 15,800 21,000 26,300 31,500 36,800
175,000........ 18,000 24,200 30,300 36,400 42,500
200,000........ 20,300 27,300 34,300 41,300 48,300
225,000........ 22,000 29,700 37,400 45,100 52,700
250,000........ 22,000 29,700 37,400 45,100 52,700
275,000........ 22,000 29,700 37,400 45,100 52,700
300,000........ 22,000 29,700 37,400 45,100 52,700
325,000........ 22,000 29,700 37,400 45,100 52,700
350,000........ 22,000 29,700 37,400 45,100 52,700
375,000........ 22,000 29,700 37,400 45,100 52,700
400,000........ 22,000 29,700 37,400 45,100 52,700
425,000........ 22,000 29,700 37,400 45,100 52,700
450,000........ 22,000 29,700 37,400 45,100 52,700
475,000........ 22,000 29,700 37,400 45,100 52,700
500,000........ 22,000 29,700 37,400 45,100 52,700
</TABLE>
Compensation covered by the Transkrit Plan is equal to the annual amount
paid to a participant by Transkrit which includes base salary, overtime and
commissions, as shown in the Summary Compensation Table, but excluding bonuses
as shown in the Summary Compensation Table; provided, however, compensation in
excess of $150,000 is disregarded.
The estimated years of credited service for purposes of calculating benefits
for Mr. Resnick is five. The current amount of compensation covered by the
Transkrit Plan for Mr. Resnick is $190,890.
Benefits shown above are computed as a single life annuity beginning at age
65 and are not subject to any offset amounts.
EXECUTIVE OFFICER EMPLOYMENT AGREEMENTS
NFC and Robert M. Miklas entered into an agreement dated as of June 28, 1996
which sets forth certain terms of the employment of Mr. Miklas as President and
CEO of NFC and DEC. This agreement provides for an annual base salary which may
be increased pursuant to an agreed upon plan subject to the approval of the
Compensation Committee of the Board of Directors of DEC and NFC. Mr. Miklas is
eligible to receive bonus compensation as determined from time to time by the
Board of Directors of DEC and NFC. In the event that NFC terminates Mr. Miklas'
employment under certain circumstances, Mr. Miklas shall be entitled to
continuation of his base compensation for a period of one year.
NFC and Jack Resnick entered into an agreement dated as of June 28, 1996
which sets forth certain terms of the employment of Mr. Resnick as Senior Vice
President of NFC and DEC and President of Chief Executive Officer -- Transkrit
Division. This agreement provides for an annual base salary which may be
increased pursuant to an agreed upon plan subject to the approval of the
Compensation Committee of the Board of Directors of DEC or NFC. The agreement
also provides a plan under which bonus compensation is to be awarded. In the
event that NFC terminates Mr. Resnick's employment under certain circumstances,
55
<PAGE>
Mr. Resnick shall be entitled to continuation of his base compensation for a
period of one year. On June 28, 1996, Mr. Resnick's 1991 employment agreement
with Transkrit was terminated and payment in the amount of $303,000 was made to
him in accordance with the terms of such employment agreement.
Label Art and Thomas J. Cobery entered into an agreement dated as of March
13, 1986 which sets forth certain terms of the employment of Mr. Cobery as
President of Label Art. The agreement provides for base compensation and bonus
compensation. The rate of such compensation is subject to yearly modification
upon the agreement of Mr. Cobery and Label Art. If Mr. Cobery and Label Art are
unable to agree by March 30 of any year as to any such modification, the
agreement will cease to be in force. Termination of employment by Label Art
under certain circumstances will entitle Mr. Cobery to receive his base
compensation and insurance benefits for a period of six months. If such
termination occurs after the eighth month of any year, Mr. Cobery will also be
entitled to his bonus payment for that year. On June 28, 1996, the Label Art,
Inc. Equity Share Participation Plan in which Mr. Cobery participated was
terminated and payment in the amount of $1,500,000 was made to him in accordance
with the terms of such plan.
NFC and Robert B. Webster entered into an agreement on June 9, 1995 which
sets forth certain terms of employment of Mr. Webster as Executive Vice
President and Chief Financial Officer of NFC. The agreement provides for an
annual base salary that is subject to annual upward adjustment at the discretion
of the Board of Directors of NFC. The agreement also provides for bonus
compensation based upon an agreed upon plan. In the event that NFC terminates
Mr. Webster's employment for any reason under certain circumstances, Mr. Webster
shall be entitled to his base compensation for a period of nine months.
William C. Britts and NFC are parties to an agreement dated as of April 5,
1983 which sets forth certain terms of the employment of Mr. Britts as Senior
Vice President of NFC. The agreement provides for base compensation which may be
increased by the Board of Directors of NFC. NFC may not terminate Mr. Britts'
employment without cause (as defined in such agreement). Cause included
misappropriation of funds, improper personal gain, neglect or change of control.
SECURITY OWNERSHIP
NFC
The authorized capital stock of NFC consists of 300,000 shares of common
stock, par value $.01 per share, of which 283,807 shares are issued and
outstanding, all of which have voting rights and are presently held by DEC.
DEC
The authorized capital stock of the DEC consists of (i) 4,000,000 shares of
Class A common stock, par value $.0001 per share, of which 2,512,551 shares are
issued and outstanding, and which have voting rights. In addition, DEC has
issued options to purchase 247,814 shares of Class A common stock to the
management of DEC and NFC pursuant to the 1996 Plan and warrants to purchase
132,240 shares of Class A common stock to certain investors, all of which are
outstanding; (ii) 300,000 shares of Class B common stock, par value $.0001 per
share, of which no shares are issued and outstanding, and which have no voting
rights; and (iii) 250,000 shares of Cumulative Redeemable Preferred Stock, par
value .0001 per share, of which 10,000 shares are issued and outstanding.
56
<PAGE>
The following table sets forth as of the consummation of the Transactions
the number and percentage of shares of DEC Class A Common Stock capital stock
beneficially owned by (i) each person known to the Company to be the beneficial
owner of more than 5% of any class of DEC's equity securities, (ii) each
director of the Company or DEC, and (iii) all directors and executive officers
of DEC as a group.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
BENEFICIAL PERCENTAGE OF
OWNERSHIP DEC CLASS A
OF DEC CLASS A COMMON STOCK
COMMON STOCK (1) OUTSTANDING
------------------- ---------------
<S> <C> <C>
McCown De Leeuw & Co. II, L.P.(2) ............................................. 1,403,104 55.8%
c/o McCown De Leeuw & Company
3000 Sand Hill Road
Building 3, Suite 290
Menlo Park, CA 94025
McCown De Leeuw Associates, L.P.(2) ........................................... 755,603 30.1%
c/o McCown De Leeuw & Company
3000 Sand Hill Road
Building 3, Suite 290
Menlo Park, CA 94025
MDC/JAFCO Ventures, L.P.(3) ................................................... 52,174 2.1%
c/o McCown De Leeuw & Company
3000 Sand Hill Road
Building 3, Suite 290
Menlo Park, CA 94025
David E. De Leeuw(4) .......................................................... 2,210,881 88.0%
c/o McCown De Leeuw & Company
3000 Sand Hill Road
Building 3, Suite 290
Menlo Park, CA 94025
Glenn McKenzie ................................................................ 9,294 0.4%
24 Beach Plum Way
Hampton, NH 03842
Robert Miklas ................................................................. 57,736 2.3%
4982 Carol Lane
Atlanta, GA 30327
All directors and executive officers as a group................................ 101,672 4.0%
</TABLE>
- --------------------------
(1) Class A Common Stock is the only class of capital stock of DEC which has
voting rights. Beneficial ownership is determined in accordance with the
rules of the Commission. Shares of capital stock subject to options,
warrants and convertible securities currently exercisable or convertible, or
exercisable or convertible within 60 days, are deemed outstanding for
computing the percentage of the person holding such options but are not
deemed outstanding for computing the percentage of any other person. Except
as indicated by footnote, the persons named in the table above have sole
voting and investment power with respect to all shares of capital stock
indicated as beneficially owned by them.
(2) MDC Management Company II, L.P. ("MDC II") is the general partner of both
McCown De Leeuw & Co. II, L.P. and McCown De Leeuw Associates, L.P. George
E. McCown, David E. De Leeuw, Robert B. Hellman, Jr., Charles Ayres, Steven
A. Zuckerman and David E. King are the general partners of MDC II. Mr. De
Leeuw is the managing general partner of MDC II.
(3) MDC Management Company ("MDC") is the general partner of MDC/JAFCO Ventures,
L.P. George E. McCown and David E. De Leeuw are the general partners of MDC.
Mr. De Leeuw is the managing general partner of MDC.
(4) Represents shares of DEC Class A Common Stock held by McCown De Leeuw & Co.
II, L.P., McCown De Leeuw Associates, L.P. and MDC/JAFCO Ventures, L.P. Mr.
De Leeuw, a director of the Company, may be deemed to own beneficially all
of the shares held by McCown De Leeuw & Co. II, L.P., McCown De Leeuw
Associates, L.P. and MDC/JAFCO Ventures, L.P. because of his position as
managing general partner of MDC II and MDC. Mr. De Leeuw has no direct
ownership of any Class A Common Stock of DEC and disclaims beneficial
ownership as to all of such shares, except to the extent of his proportional
partnership interests.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ACQUISITION ARRANGEMENTS
In connection with the Acquisition, certain members of management received
substantial payments for their equity interests in Transkrit. Messrs. Neubauer
and Resnick received an aggregate of approximately $9.7 million at the closing
of the Acquisition for their shares of Transkrit and pursuant to other
equity-based arrangements.
ADVISORY SERVICES AGREEMENT
NFC maintains a Advisory Services Agreement (the "Advisory Services
Agreement") with MDC Management Company II, L.P. ("MDC Management"), an
affiliate. Under the Advisory Services Agreement, MDC Management provides
certain consulting, financial, and managerial functions to the Company for a fee
initially in an amount not to exceed $350,000 in any fiscal year, which amount
may be increased to an amount not to exceed $500,000 in any fiscal year with the
approval of the members of the Board of Directors of the Company who do not have
a direct financial interest in any person receiving such payments under the
Advisory Services Agreement. MDC Management has agreed to subordinate its right
to receive such fees in the event of an acceleration of maturity of the Notes or
a bankruptcy, liquidation or insolvency proceeding involving the Company. In
1995, $187,500 was paid. NFC has recorded a liability of $562,000 on its
consolidated balance sheet for the year ended December 31, 1995 related to the
unpaid portion of these costs as of December 31, 1995, which portion was paid
upon consummation of the Transactions. The Advisory Services Agreement expires
December 31, 2000 and is renewable annually thereafter, unless terminated by NFC
for justifiable cause, as defined. NFC believes that the fees received for the
professional services rendered are at least as favorable to NFC as those which
could be negotiated with a third party.
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DESCRIPTION OF NEW BANK CREDIT FACILITY
The Company and its subsidiaries entered into a loan agreement with a
financial institution (the "Lender") pursuant to which the Lender provides to
the Company and its subsidiaries a revolving credit facility (the "New Bank
Credit Facility"). Subject to borrowing base limitations and the satisfaction of
customary borrowing conditions, the Company and its subsidiaries are permitted
to borrow up to $20.0 million under the New Bank Credit Facility. The terms of
such New Bank Credit Facility are substantially as follows:
The New Bank Credit Facility enables the Company and its subsidiaries to
obtain revolving credit loans from time to time for working capital and general
corporate purposes in an aggregate amount outstanding not to exceed the lesser
of (x) $20.0 million and (y) 80% of eligible accounts receivable plus 50% of
eligible inventory, in each case less any outstanding letter of credit
liability.
The revolving credit loans bear interest, depending on the Company's
election, at either (i) the Prime Rate (as defined therein) plus 1% per annum or
(ii) LIBOR (as defined therein) plus 2.25% per annum. The Company is obligated
to pay an annual fee of 0.5% per annum of the amount of the average unused
commitments, payable quarterly in arrears. The New Bank Credit Facility will
terminate on the fifth anniversary of the date of the consummation of the
Initial Offering, unless terminated sooner upon an event of default (as defined
therein), and outstanding revolving credit loans will be payable on such date or
such earlier date as may be accelerated following the occurrence of any event of
default.
The New Bank Credit Facility ranks PARI PASSU in right of payment with the
Notes and is secured by a lien on all of the Company's and its subsidiaries'
accounts receivable, inventory, patents, trademarks and other intangibles and
the proceeds thereof. The New Bank Credit Facility contains various restrictive
covenants and events of default customary for a transaction of this type.
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DESCRIPTION OF THE NOTES
The New Notes will be issued, and the Old Notes were issued under an
Indenture dated as of June 15, 1996 (the "Indenture") among the Company, certain
former Guarantors and Wilmington Trust Company, as trustee (the "Trustee"). For
purposes of the following summary, the Old Notes and the New Notes shall be
collectively referred to as the "Notes." The terms and conditions 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 as in effect on the date of the
Indenture. The following statements are summaries of the provisions of the Notes
and the Indenture and do not purport to be complete. Such summaries make use of
certain terms defined in the Indenture and are qualified in their entirety by
express reference to the Indenture. The definitions of certain capitalized terms
used in the following summary are set forth below under "-- Certain
Definitions." A copy of the Indenture is filed as an exhibit to the Registration
Statement of which this Prospectus is a part.
The Notes will be senior obligations of the Company, ranking PARI PASSU in
right of payment with all other senior obligations of the Company.
The Notes will be issued in fully registered form only, without coupons, in
denominations of $1,000 and integral multiples thereof. Initially, the Trustee
will act as paying agent and registrar for the Notes. The Notes may be presented
for registration of transfer and exchange at the offices of the registrar, which
initially will be the Trustee's corporate trust office. The Company may change
any paying agent and registrar without notice to holders of the Notes (the
"Holders"). The Company will pay principal (and premium, if any) on the Notes at
the Trustee's corporate office in New York, New York. At the Company's option,
interest may be paid at the Trustee's corporate trust office or by check mailed
to the registered addresses of the Holders. Any Old Notes that remain
outstanding after the completion of the Exchange Offer, together with the New
Notes issued in connection with the Exchange Offer, will be treated as a single
class of securities under the Indenture. See "The Exchange Offer; Old Notes
Registration Rights."
PRINCIPAL, MATURITY AND INTEREST
The Notes are limited in aggregate principal amount to $100,000,000 and will
mature on June 15, 2002. Interest on the Notes will accrue at the rate of
11 5/8% PER ANNUM and will be payable semi-annually in cash on each June 15 and
December 15, commencing on December 15, 1996, to the Persons who are registered
Holders at the close of business on the June 1 and December 1, respectively,
immediately preceding the applicable interest payment date. Interest on the
Notes will accrue from and including the most recent date to which interest has
been paid or, if no interest has been paid, from and including the date of
issuance.
The Notes will not be entitled to the benefit of any mandatory sinking fund.
REDEMPTION
OPTIONAL REDEMPTION.
The Notes will be redeemable, at the Company's option, in whole at any time
or in part from time to time, on and after June 15, 1999, upon not less than 30
nor more than 60 days' notice, at the following redemption prices (expressed as
percentages of the principal amount thereof) if redeemed during the twelve-month
period commencing on June 15 of the years set forth below, plus, in each case,
accrued and unpaid interest, if any, thereon to the date of redemption:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ----------------------------------------------------------------------------------------------------- -----------
<S> <C>
1999................................................................................................. 105.813%
2000................................................................................................. 102.906%
2001 and thereafter.................................................................................. 100.000%
</TABLE>
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OPTIONAL REDEMPTION UPON PUBLIC EQUITY OFFERINGS. At any time, or from time
to time, on or prior to June 15, 1999, the Company may, at its option, use the
net cash proceeds of one or more Public Equity Offerings (as defined below) to
redeem up to $35.0 million aggregate principal amount of Notes at a redemption
price equal to 111.625% of the principal amount thereof, plus accrued and unpaid
interest, if any, thereon to the date of redemption; provided that at least 65%
of the principal amount of Notes originally issued remains outstanding
immediately after giving effect to any such redemption. In order to effect the
foregoing redemption with the proceeds of any Public Equity Offering, the
Company shall make such redemption not more than 60 days after the consummation
of any such Public Equity Offering.
As used in the preceding paragraph, a "Public Equity Offering" means an
underwritten public offering of Qualified Capital Stock of either DEC
International, Inc. ("Holdings") or the Company pursuant to a registration
statement filed with and declared effective by the Commission in accordance with
the Securities Act; PROVIDED that, in the event of a Public Equity Offering by
Holdings, Holdings contributes to the capital of the Company the portion of the
net cash proceeds of such Public Equity Offering necessary to pay the aggregate
redemption price, plus accrued and unpaid interest, if any, to the redemption
date of the Notes to be redeemed pursuant to the preceding paragraph.
SELECTION AND NOTICE OF REDEMPTION
In the event that less than all of the Notes are to be redeemed at any time,
selection of such Notes for redemption will be made by the Trustee in compliance
with the requirements of the principal national securities exchange, if any, on
which the Notes are listed or, if the Notes are not then listed on a national
securities exchange, on a PRO RATA basis, by lot or by such method as the
Trustee shall deem fair and appropriate; PROVIDED, HOWEVER, that no Notes of a
principal amount of $1,000 or less shall be redeemed in part; and PROVIDED,
FURTHER, that if a partial redemption is made with the proceeds of a Public
Equity Offering, selection of the Notes or portions thereof for redemption shall
be made by the Trustee only on a PRO RATA basis or on as nearly a PRO RATA basis
as is practicable (subject to the procedures of The Depository Trust Company),
unless such method is otherwise prohibited. Notice 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 a 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 will cease to
accrue on Notes or portions thereof called for redemption as long as the Company
has deposited with the paying agent for the Notes funds in satisfaction of the
applicable redemption price pursuant to the Indenture.
GUARANTEES
Each Guarantor will unconditionally guarantee, on a senior basis, jointly
and severally, to each Holder and the Trustee, the full and prompt performance
of the Company's obligations under the Indenture and the Notes, including the
payment of principal of and interest on the Notes. The obligations of each
Guarantor are limited to the maximum amount which, after giving effect to all
other contingent and fixed liabilities of such Guarantor and after giving effect
to any collections from or payments made by or on behalf of any other Guarantor
in respect of the obligations of such other Guarantor under its Guarantee or
pursuant to its contribution obligations under the Indenture, will result in the
obligations of such Guarantor under its Guarantee not constituting a fraudulent
conveyance or fraudulent transfer under Federal or state law. Each Guarantor
that makes a payment or distribution under its Guarantee shall be entitled to a
contribution from each other Guarantor in an amount PRO RATA, based on the net
assets of each Guarantor, determined in accordance with GAAP.
Each Guarantor may consolidate with or merge into or sell its assets to the
Company or another Guarantor that is a Wholly Owned Restricted Subsidiary
without limitation, or with other Persons upon the terms and conditions set
forth in the Indenture. See "-- Certain Covenants -- Merger, Consolidation and
Sale of Assets." In the event all of the Capital Stock of a Guarantor is sold by
the Company and/or one or more of its Subsidiaries and the sale complies with
the provisions set forth in "-- Certain Covenants -- Limitation on Asset Sales,"
such Guarantor's Guarantee will be released.
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SECURITY
The Notes will be secured by a first priority Lien on and security interest
in (a) all of the issued and outstanding Capital Stock of each Subsidiary of the
Company that becomes a Guarantor after the Issue Date to the extent owned by the
Company or any of its Subsidiaries and (b) so long as a Default or an Event of
Default shall have occurred and be continuing, all dividends and distributions
with respect to Capital Stock of a Guarantor.
The Indenture and the Security Documents will provide that the Capital Stock
of a Guarantor will be released from the Lien of the Indenture and the Security
Documents in the event all of the Capital Stock of such Guarantor is sold by the
Company and/or one or more of its Subsidiaries and the sale complies with the
provisions set forth in "-- Certain Covenants -- Limitation on Asset Sales."
CHANGE OF CONTROL
The Indenture will provide that upon the occurrence of a Change of Control,
each Holder will have the right to require that the Company purchase all or a
portion of such Holder's Notes pursuant to the offer described below (the
"Change of Control Offer"), at a purchase price equal to 101% of the principal
amount thereof, plus accrued and unpaid interest, if any, thereon to the date of
purchase.
Within 30 days following the date upon which the Change of Control occurred,
the Company must send, by first class mail, a notice to each Holder, with a copy
to the Trustee, which notice shall govern the terms of the Change of Control
Offer. Such notice shall state, among other things, the purchase date, which
must be no earlier than 30 days nor later than 45 days from the date such notice
is mailed, other than as may be required by law (the "Change of Control Payment
Date"). A Change of Control Offer shall remain open for a period of 20 business
days or such longer period as may be required by law. Holders electing to have a
Note purchased pursuant to a Change of Control Offer will be required to
surrender the Note, with the form entitled "Option of Holder to Elect Purchase"
on the reverse of the Note completed, to the paying agent for the Notes at the
address specified in the notice prior to the close of business on the third
business day prior to the Change of Control Payment Date.
A Change of Control can occur in certain circumstances (pursuant to the
definition thereof) upon a sale of all or substantially all of the assets of the
Company or Holdings. In connection therewith, the phrase "all or substantially
all" as used in the Indenture (including as set forth under "Merger,
Consolidation or Sale of Substantially All Assets") varies according to the
facts and circumstances of the subject transaction, has no clearly established
meaning under New York law (which governs the Indenture) and is subject to
judicial interpretation. Accordingly, in certain circumstances there may be a
degree of uncertainty in ascertaining whether a particular transaction would
involve a disposition of "all or substantially all" of the assets of a person
and therefore it may be unclear as to whether a Change of Control has occurred
and whether the Notes are subject to a Change of Control Offer.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change of Control
purchase price for all the Notes that might be delivered by Holders seeking to
accept the Change of Control Offer. In the event the Company is required to
purchase outstanding Notes pursuant to a Change of Control Offer, the Company
expects that it would seek third party financing to the extent it does not have
available funds to meet its purchase obligations. However, there can be no
assurance that the Company would be able to obtain such financing.
Neither the Board of Directors of the Company nor the Trustee may waive the
covenant relating to the Company's obligation to make a Change of Control Offer.
Restrictions in the Indenture described herein on the ability of the Company and
the Restricted Subsidiaries to incur additional Indebtedness, to grant liens on
their property, to make Restricted Payments and to make Asset Sales may also
make more difficult or discourage a takeover of the Company, whether favored or
opposed by the management of the Company. Consummation of any such transaction
in certain circumstances may require repurchase of the Notes, and there can be
no assurance that the Company or the acquiring party will have sufficient
financial resources to effect such repurchase. Such restrictions and the
restrictions on transactions with Affiliates may, in certain circumstances, make
more difficult or discourage any leveraged buyout of the Company by the
management
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of the Company. While such restrictions cover a wide variety of arrangements
which have traditionally been used to effect highly leveraged transactions, the
Indenture may not afford the Holders of Notes protection in all circumstances
from the adverse aspects of a highly leveraged transaction, reorganization,
restructuring, merger or similar transaction.
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 Notes pursuant to a Change of Control Offer. To the extent that
the provisions of any securities laws or regulations conflict with the "Change
of Control" provisions of the Indenture, the Company shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under the "Change of Control" provisions of the
Indenture by virtue thereof.
CERTAIN COVENANTS
The Indenture will contain, among others, the following covenants:
LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS. The Company will not,
and will not permit any of the Restricted Subsidiaries to, directly or
indirectly, create, incur, assume, guarantee, acquire, become liable,
contingently or otherwise, with respect to, or otherwise become responsible for
payment of (collectively, "incur") any Indebtedness (other than Permitted
Indebtedness); PROVIDED, HOWEVER, that if no Default or Event of Default shall
have occurred and be continuing at the time of or as a consequence of the
incurrence of any such Indebtedness, the Company or any Guarantor may incur
Indebtedness (including, without limitation, Acquired Indebtedness) and any
Restricted Subsidiary may incur Acquired Indebtedness, in each case, if on the
date of the incurrence of such Indebtedness, after giving effect to the
incurrence thereof, the Consolidated Fixed Charge Coverage Ratio of the Company
is greater than (a) 1.75 to 1.0, if the date of such incurrence is on or prior
to June 15, 1997, (b) 2.00 to 1.0, if the date of such incurrence is after June
15, 1997 and on or prior to June 15, 1998, or (c) 2.25 to 1.0, if the date of
such incurrence is after June 15, 1998.
Indebtedness of a Person existing at the time such Person becomes a
Restricted Subsidiary or which is secured by a Lien on an asset acquired by the
Company or a Restricted Subsidiary (whether or not such Indebtedness is assumed
by the acquiring Person) shall be deemed incurred at the time the person becomes
a Restricted Subsidiary or at the time of the asset acquisition, as the case may
be.
The Company will not, and will not permit any Guarantor to incur any
Indebtedness (other than Acquired Indebtedness which is subordinated in right of
payment to other Acquired Indebtedness which is incurred in connection with the
same Asset Acquisition as such subordinated Acquired Indebtedness) which by its
terms (or by the terms of any agreement governing such Indebtedness) is
subordinated in right of payment to any other Indebtedness of the Company or
such Guarantor unless such Indebtedness is also by its terms (or by the terms of
any agreement governing such Indebtedness) made expressly subordinate in right
of payment to the Notes or the Gurantee of such Guarantor, as the case may be,
pursuant to subordination provisions that are substantively identical to the
subordination provisions of such Indebtedness (or such agreement) that are most
favorable to the holders of any other Indebtedness of the Company or such
Guarantor, as the case may be.
LIMITATION ON RESTRICTED PAYMENTS. The Company will not, and will not cause
or permit any of the Restricted Subsidiaries to, directly or indirectly, (a)
declare or pay any dividend or make any distribution (other than dividends or
distributions payable in Qualified Capital Stock of the Company) on or in
respect of shares of the Company's or Holding's Capital Stock to holders of such
Capital Stock, (b) purchase, redeem or otherwise acquire or retire for value any
Capital Stock of the Company or Holdings or any warrants, rights or options to
purchase or acquire shares of any class of such Capital Stock, (c) make any
principal payment on, purchase, defease, redeem, prepay, decrease or otherwise
acquire or retire for value, prior to any scheduled final maturity, scheduled
repayment or scheduled sinking fund payment, any Indebtedness of the Company or
a Guarantor that is subordinate or junior in right of payment to the Notes or
such Guarantor's Guarantee, as the case may be, or (d) make any Investment
(other than a Permitted Investment) (each of the foregoing actions set forth in
clauses (a), (b) (c) and (d) being referred to as a "Restricted Payment"), if at
the time of such Restricted Payment or immediately after giving effect thereto,
(i) a Default or an Event of
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Default shall have occurred and be continuing or (ii) the Company is not able to
incur at least $1.00 of additional Indebtedness (other than Permitted
Indebtedness) in compliance with the covenant described under "-- Limitation on
Incurrence of Additional Indebtedness" or (iii) the aggregate amount of
Restricted Payments (including such proposed Restricted Payment) made subsequent
to the Issue Date (the amount expended for such purposes, if other than in cash,
being the fair market value of such property as determined reasonably and in
good faith by the Board of Directors of the Company) shall exceed the sum of:
(w) 50% of the cumulative Consolidated Net Income (or if cumulative Consolidated
Net Income shall be a loss, minus 100% of such loss) of the Company earned
subsequent to the Issue Date and on or prior to the date the Restricted Payment
occurs (the "Reference Date") (treating such period as a single accounting
period); PLUS (x) 100% of the aggregate net cash proceeds received by the
Company from any Person (other than a Subsidiary of the Company) from the
issuance and sale subsequent to the Issue Date and on or prior to the Reference
Date of Qualified Capital Stock of the Company; PLUS (y) without duplication of
any amounts included in clause (iii)(x) above, 100% of the aggregate net cash
proceeds of any equity contribution received by the Company from a holder of the
Company's Capital Stock (excluding, in the case of clauses (iii)(x) and (y), any
net cash proceeds from (A) a Public Equity Offering to the extent used to redeem
the Notes and (B) the Parent Capital Contribution); PLUS (z) an amount equal to
the consolidated net Investments on the date of Revocation made by the Company
and/or any of the Restricted Subsidiaries in any Subsidiary of the Company that
has been designated an Unrestricted Subsidiary after the Issue Date upon its
redesignation as a Restricted Subsidiary in accordance with the covenant
described under "-- Limitation on Designations of Unrestricted Subsidiaries."
Notwithstanding the foregoing, the provisions set forth in the immediately
preceding paragraph shall not prohibit: (1) the payment of any dividend or
redemption payment within 60 days after the date of declaration of such dividend
or the applicable redemption if the dividend or redemption payment, as the case
may be, would have been permitted on the date of declaration; (2) if no Default
or Event of Default shall have occurred and be continuing, the acquisition of
any shares of Capital Stock of the Company or Holdings, either (A) solely in
exchange for shares of Qualified Capital Stock of the Company or (B) through the
application of net proceeds of a substantially concurrent sale for cash (other
than to a Subsidiary of the Company) of shares of Qualified Capital Stock of the
Company; (3) if no Default or Event of Default shall have occurred and be
continuing, the acquisition of any Indebtedness of the Company or a Guarantor
that is subordinate or junior in right of payment to the Notes or such
Guarantor's Guarantee, as the case may be, either (A) solely in exchange for
shares of Qualified Capital Stock of the Company, or (B) through the application
of net proceeds of a substantially concurrent sale for cash (other than to a
Subsidiary of the Company) of (I) shares of Qualified Capital Stock of the
Company or (II) Refinancing Indebtedness; (4) the making of payments by the
Company to Holdings in an amount not in excess of the federal, state and local
income tax liability that the Company and its Subsidiaries would have been
liable for if the Company, together with its Subsidiaries, had filed its
consolidated tax return on a stand-alone basis; PROVIDED that such payments
shall be made by the Company no earlier than five days prior to the date on
which Holdings is required to make its payments to the Internal Revenue Service
or state or local taxing authorities, as the case may be; (5) the making of
payments by the Company to Holdings to pay operating expenses, not to exceed
$500,000 in any fiscal year; (6) the making of payments, by the Company to
Holdings to purchase Capital Stock of Holdings beneficially owned by directors,
officers and employees of the Company or any of its Subsidiaries pursuant to the
terms of employment contracts or employee benefit plans of the Company or any of
its Subsidiaries not to exceed $250,000 in any fiscal year; (7) if no Default or
Event of Default shall have occurred and be continuing, the making of payments
by the Company to Holdings to pay regularly scheduled dividends on the Holdings
Preferred Stock; and (8) if no Default or Event of Default shall have occurred
and be continuing, the making of other Restricted Payments not to exceed $2.0
million in the aggregate. In determining the aggregate amount of Restricted
Payments made subsequent to the Issue Date in accordance with clause (iii) of
the immediately preceding paragraph, amounts expended pursuant to clauses (1),
(2), (6), (7) and (8) shall be included in such calculation.
LIMITATION ON ASSET SALES. The Company will not, and will not permit any of
the Restricted Subsidiaries to, consummate an Asset Sale unless (a) the Company
or the applicable Restricted Subsidiary, as the case may be, receives
consideration at the time of such Asset Sale at least equal to the fair market
value of the
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assets sold or otherwise disposed of (as determined in good faith by the
Company's Board of Directors), (b) at least 80% of the consideration received by
the Company or the Restricted Subsidiary, as the case may be, from such Asset
Sale shall be in the form of cash or Cash Equivalents and is received at the
time of such disposition; and (c) upon the consummation of an Asset Sale, the
Company shall apply, or cause such Restricted Subsidiary to apply, the Net Cash
Proceeds relating to such Asset Sale within 270 days of receipt thereof either
(i) to the extent the properties or assets that were the subject of such Asset
Sale secured Indebtedness permitted to be incurred under the Indenture pursuant
to a Lien permitted under the Indenture, to prepay any such Indebtedness and
effect a permanent reduction in the availability of borrowing under the
agreement(s) governing such Indebtedness, (ii) to make an investment in
properties or assets that replace the properties or assets that were the subject
of such Asset Sale or in properties or assets that will be used in the business
of the Company and the Restricted Subsidiaries as existing on the Issue Date or
in businesses reasonably related thereto ("Replacement Assets"), or (iii) a
combination of prepayment and investment permitted by the foregoing clauses
(c)(i) and (c)(ii). On the 271st day after an Asset Sale or such earlier date,
if any, as the Board of Directors of the Company determines not to apply the Net
Cash Proceeds relating to such Asset Sale as set forth in clauses (c)(i),
(c)(ii) and (c)(iii) of the next preceding sentence (each, a "Net Proceeds Offer
Trigger Date"), such aggregate amount of Net Cash Proceeds which have not been
applied on or before such Net Proceeds Offer Trigger Date as permitted in
clauses (c)(i), (c)(ii) and (c)(iii) of the next preceding sentence (each a "Net
Proceeds Offer Amount") shall be applied by the Company or such Restricted
Subsidiary, as the case may be, to make an offer to purchase (a "Net Proceeds
Offer") on a date (the "Net Proceeds Offer Payment Date") not less than 30 nor
more than 45 days following the applicable Net Proceeds Offer Trigger Date, from
all Holders on a PRO RATA basis, that principal amount of Notes equal to the Net
Proceeds Offer Amount at a price equal to 100% of the principal amount of the
Notes to be purchased, plus accrued and unpaid interest, if any, thereon to the
date of purchase; PROVIDED, HOWEVER, that if at any time any non-cash
consideration received by the Company or any Restricted Subsidiary, as the case
may be, in connection with any Asset Sale is converted into or sold or otherwise
disposed of for cash (other than interest received with respect to any such
non-cash consideration), then such conversion or disposition shall be deemed to
constitute an Asset Sale hereunder and the Net Cash Proceeds thereof shall be
applied in accordance with this covenant. The Company may defer the Net Proceeds
Offer until there is an aggregate unutilized Net Proceeds Offer Amount equal to
or in excess of $5.0 million resulting from one or more Asset Sales (at which
time, the entire unutilized Net Proceeds Offer Amount, and not just the amount
in excess of $5.0 million, shall be applied as required pursuant to this
paragraph).
In the event of the transfer of substantially all (but not all) of the
property and assets of the Company and the Restricted Subsidiaries as an
entirety to a Person in a transaction permitted under "-- Merger, Consolidation
and Sale of Assets," the successor corporation shall be deemed to have sold the
properties and assets of the Company and the Restricted Subsidiaries not so
transferred for purposes of this covenant, and shall comply with the provisions
of this covenant with respect to such deemed sale as if it were an Asset Sale.
In addition, the fair market value of such properties and assets of the Company
or the Restricted Subsidiaries deemed to be sold shall be deemed to be Net Cash
Proceeds for purposes of this covenant.
Notwithstanding the two immediately preceding paragraphs, the Company and
the Restricted Subsidiaries will be permitted to consummate an Asset Sale
without complying with such paragraphs to the extent (a) at least 80% of the
consideration for such Asset Sale constitutes Replacement Assets and (b) such
Asset Sale is for fair market value; PROVIDED that any consideration not
constituting Replacement Assets received by the Company or any of the Restricted
Subsidiaries in connection with any Asset Sale permitted to be consummated under
this paragraph shall constitute Net Cash Proceeds subject to the provisions of
the two immediately preceding paragraphs.
Notice of each Net Proceeds Offer will be mailed to the record Holders as
shown on the register of Holders within 25 days following the Net Proceeds Offer
Trigger Date, with a copy to the Trustee, and shall comply with the procedures
set forth in the Indenture. Upon receiving notice of the Net Proceeds Offer,
Holders may elect to tender their Notes in whole or in part in integral
multiples of $1,000 in exchange for cash. To the extent Holders properly tender
Notes with an aggregate principal amount exceeding the Net
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Proceeds Offer Amount, Notes of tendering Holders will be purchased on a PRO
RATA basis (based on principal amounts tendered). A Net Proceeds Offer shall
remain open for a period of 20 business days or such longer period as may be
required by law.
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 Notes pursuant to a Net Proceeds Offer. To the extent that the
provisions of any securities laws or regulations conflict with the "Asset Sale"
provisions of the Indenture, the Company shall comply with the applicable
securities laws and regulations and shall not be deemed to have breached its
obligations under the "Asset Sale" provisions of the Indenture by virtue
thereof.
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES. The Company will not, and will not cause or permit any of the
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or
permit to exist or become effective any encumbrance or restriction on the
ability of any Restricted Subsidiary to (a) pay dividends or make any other
distributions on or in respect of its Capital Stock; (b) make loans or advances
or to pay any Indebtedness or other obligation owed to the Company or any other
Restricted Subsidiary; or (c) transfer any of its property or assets to the
Company or any other Restricted Subsidiary, except for such encumbrances or
restrictions existing under or by reason of: (i) applicable law; (ii) the
Indenture; (iii) customary non-assignment provisions of any contract or any
lease governing a leasehold interest of any Restricted Subsidiary; (iv) any
instrument governing Acquired Indebtedness, which encumbrance or restriction is
not applicable to any Person, or the properties or assets of any Person, other
than the Person or the properties or assets of the Person so acquired; (v)
agreements existing on the Issue Date to the extent and in the manner such
agreements are in effect on the Issue Date; or (vi) an agreement governing
Refinancing Indebtedness incurred to Refinance the Indebtedness issued, assumed
or incurred pursuant to an agreement referred to in clause (ii), (iv) or (v)
above; PROVIDED, HOWEVER, that the provisions relating to such encumbrance or
restriction contained in any such Refinancing Indebtedness are no less favorable
to the Holders in any material respect as determined by the Board of Directors
of the Company in their reasonable and good faith judgment than the provisions
relating to such encumbrance or restriction contained in the applicable
agreement referred to in such clause (ii), (iv) or (v).
LIMITATION ON PREFERRED STOCK OF RESTRICTED SUBSIDIARIES. The Company will
not permit any of the Restricted Subsidiaries to issue any Preferred Stock
(other than to the Company or to a Wholly Owned Restricted Subsidiary) or permit
any Person (other than the Company or a Wholly Owned Restricted Subsidiary) to
own any Preferred Stock of any Restricted Subsidiary.
LIMITATION ON LIENS. The Company will not, and will not cause or permit any
of the Restricted Subsidiaries to, directly or indirectly, create, incur, assume
or permit or suffer to exist any Liens of any kind against or upon any property
or assets of the Company or any of the Restricted Subsidiaries, whether owned on
the Issue Date or acquired after the Issue Date, or any proceeds therefrom, or
assign or otherwise convey any right to receive income or profits therefrom
unless (a) in the case of Liens securing Indebtedness that is expressly
subordinate or junior in right of payment to the Notes or any Guarantee, the
Notes or such Guarantee as the case may be, are secured by a Lien on such
property, assets or proceeds that is senior in priority to such Liens and (b) in
all other cases, the Notes and the Guarantees are equally and ratably secured,
except for (i) Liens existing as of the Issue Date to the extent and in the
manner such Liens are in effect on the Issue Date (and any extentions,
replacements or renewals thereof covering property or assets secured by such
Liens on the Issue Date); (ii) Liens securing the Notes and the Guarantees;
(iii) Liens of the Company or a Restricted Subsidiary on assets of any
Restricted Subsidiary; (iv) Liens securing Refinancing Indebtedness which is
incurred to Refinance any Indebtedness which has been secured by a Lien
permitted under the Indenture and which has been incurred in accordance with the
provisions of the Indenture; PROVIDED, HOWEVER, that such Liens (x) are no less
favorable to the Holders and are not more favorable to the lienholders with
respect to such Liens than the Liens in respect of the Indebtedness being
Refinanced and (y) do not extend to or cover any property or assets of the
Company or any of the Restricted Subsidiaries not securing the Indebtedness so
Refinanced; and (v) Permitted Liens.
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MERGER, CONSOLIDATION AND SALE OF ASSETS. The Company will not, in a single
transaction or series of related transactions, consolidate or merge with or into
any Person, or sell, assign, transfer, lease, convey or otherwise dispose of (or
cause or permit any Restricted Subsidiary to sell, assign, transfer, lease,
convey or otherwise dispose of) all or substantially all of the Company's assets
(determined on a consolidated basis for the Company and the Restricted
Subsidiaries), whether as an entirety or substantially as an entirety to any
Person unless: (a) either (i) the Company shall be the surviving or continuing
corporation or (ii) the Person (if other than the Company) formed by such
consolidation or into which the Company is merged or the Person which acquires
by sale, assignment, transfer, lease, conveyance or other disposition the
properties and assets of the Company and the Restricted Subsidiaries
substantially as an entirety (the "Surviving Entity") (x) shall be a corporation
organized and validly existing under the laws of the United States or any state
thereof or the District of Columbia and (y) shall expressly assume, by
supplemental indenture (in form and substance satisfactory to the Trustee),
executed and delivered to the Trustee, the due and punctual payment of the
principal of, premium, if any, and interest on all of the Notes and the
performance of every covenant of the Notes, the Indenture, the Security
Documents to which the Company is a party and the Registration Rights Agreement
on the part of the Company to be performed or observed; (b) immediately after
giving effect to such transaction and the assumption contemplated by clause
(a)(ii)(y) above (including giving effect to any Indebtedness incurred or
anticipated to be incurred in connection with or in respect of such
transaction), the Company or such Surviving Entity, as the case may be, (i)
shall have a Consolidated Net Worth equal to or greater than the Consolidated
Net Worth of the Company immediately prior to such transaction and (ii) shall be
able to incur at least $1.00 of additional Indebtedness (other than Permitted
Indebtedness) pursuant to the covenant described under "-- Limitation on
Incurrence of Additional Indebtedness"; (c) immediately before and immediately
after giving effect to such transaction and the assumption contemplated by
clause (a)(ii)(y) above (including, without limitation, giving effect to any
Indebtedness incurred or anticipated to be incurred and any Lien granted in
connection with or in respect of the transaction), no Default or Event of
Default shall have occurred or be continuing; and (d) the Company or the
Surviving Entity, as the case may be, shall have 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, if a supplemental indenture is required in connection with such
transaction, such supplemental indenture comply with the applicable provisions
of the Indenture and that all conditions precedent in the Indenture relating to
such transaction have been satisfied.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more Restricted
Subsidiaries the Capital Stock of which constitutes all or substantially all of
the properties and assets of the Company, shall be deemed to be the transfer of
all or substantially all of the properties and assets of the Company.
Upon any consolidation, combination or merger or any transfer of all or
substantially all of the assets of the Company in accordance with the foregoing,
in which the Company is not the continuing corporation, the successor Person
formed by such consolidation or into which the Company is merged or to which
such conveyance, lease or transfer is made shall succeed to, and be substituted
for, and may exercise every right and power of, the Company under the Indenture
and the Notes with the same effect as if such surviving entity had been named as
such.
Each Guarantor (other than any Guarantor whose Guarantee is to be released
in accordance with the terms of the Guarantee and the Indenture in connection
with any transaction complying with the provisions of the Indenture described
under "-- Limitation on Asset Sales") will not, and the Company will not cause
or permit any Guarantor to, consolidate with or merge with or into any Person
other than the Company or another Guarantor unless: (a) the entity formed by or
surviving any such consolidation or merger (if other than the Guarantor) or to
which such sale, lease, conveyance or other disposition shall have been made is
a corporation organized and existing under the laws of the United States or any
state thereof or the District of Columbia; (b) such entity assumes by
supplemental indenture all of the obligations of the Guarantor under its
Guarantee and any Security Documents to which such Guarantor is a party; (c)
immediately after giving effect to such transaction, no Default or Event of
Default shall have occurred and be continuing; and
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(d) immediately after giving effect to such transaction and the use of any net
proceeds therefrom on a PRO FORMA basis, the Company could satisfy the
provisions of clause (b) of the first paragraph of this covenant. Any merger or
consolidation of a Guarantor with and into the Company (with the Company being
the surviving entity) or another Guarantor need only comply with clause (d) of
the first paragraph of this covenant.
LIMITATIONS ON TRANSACTIONS WITH AFFILIATES. (a) The Company will not, and
will not permit any of the Restricted Subsidiaries to, directly or indirectly,
enter into or permit to exist any transaction or series of related transactions
(including, without limitation, the purchase, sale, lease or exchange of any
property or the rendering of any service) with, or for the benefit of, any of
their respective Affiliates (each an "Affiliate Transaction"), other than (i)
Affiliate Transactions permitted under paragraph (b) of this covenant and (ii)
Affiliate Transactions on terms that are no less favorable to the Company on the
applicable Restricted Subsidiary than those that might reasonably have been
obtained in a comparable transaction at such time on an arm's-length basis from
a Person that is not an Affiliate of the Company or such Restricted Subsidiary.
All Affiliate Transactions (and each series of related Affiliate Transactions
which are similar or part of a common plan) involving aggregate payments or
other property with a fair market value in excess of $1.0 million shall be
approved by the Board of Directors of the Company, such approval to be evidenced
by a Board Resolution stating that such Board of Directors has determined that
such transaction complies with the foregoing provisions. If the Company or any
Restricted Subsidiary enters into an Affiliate Transaction (or a series of
related Affiliate Transactions related to a common plan) that involves an
aggregate fair market value of more than $5.0 million, the Company shall, prior
to the consummation thereof, obtain a favorable opinion as to the fairness of
such transaction or series of related transactions to the Company or the
relevant Restricted Subsidiary, as the case may be, from a financial point of
view, from an Independent Financial Advisor and file the same with the Trustee.
(b) The restrictions set forth in clause (a) shall not apply to (i)
reasonable fees and compensation paid to and indemnity provided on behalf of,
officers, directors, employees or consultants of the Company or any Restricted
Subsidiary as determined in good faith by the Company's Board of Directors; (ii)
transactions exclusively between or among the Company and any of the Restricted
Subsidiaries or exclusively between or among such Restricted Subsidiaries,
provided such transactions are not otherwise prohibited by the Indenture; (iii)
Restricted Payments permitted by the Indenture; (iv) payments by the Company to
MDC Entities pursuant to the terms of the Advisory Services Agreement initially
in an amount not to exceed $350,000 in any fiscal year, which amount may be
increased to an amount not to exceed $500,000 in any fiscal year with the
approval of the members of the Board of Directors of the Company who do not have
a direct financial interest in any Person receiving such payments under the
Advisory Services Agreement; and (v) the purchase by the Company of notes
payable by shareholders of Holdings from MDC Entities in an aggregate amount not
to exceed $685,000; PROVIDED that any such purchase shall be a Restricted
Payment for purposes of the covenant described under "-- Limitation on
Restricted Payments."
ADDITIONAL SUBSIDIARY GUARANTEES. If the Company or any of the Restricted
Subsidiaries transfers or causes to be transferred, in one transaction or a
series of related transactions, any property to any Restricted Subsidiary that
is not a Guarantor, or if the Company or any of the Restricted Subsidiaries
shall organize, acquire or otherwise invest in or hold an Investment in another
Restricted Subsidiary having total consolidated assets with a book value in
excess of $500,000, then such transferee or acquired or other Restricted
Subsidiary shall (a) execute and deliver to the Trustee a supplemental indenture
in form reasonably satisfactory to the Trustee pursuant to which such Restricted
Subsidiary shall unconditionally guarantee all of the Company's obligations
under the Notes and the Indenture on the terms set forth in the Indenture and
(b) deliver to the Trustee an opinion of counsel that such supplemental
indenture has been duly authorized, executed and delivered by such Restricted
Subsidiary and constitutes a legal, valid, binding and enforceable obligation of
such Restricted Subsidiary. Thereafter, such Restricted Subsidiary shall be a
Guarantor for all purposes of the Indenture.
REPORTS TO HOLDERS. The Company will deliver to the Trustee within 15 days
after the filing of the same with the Commission, copies of the quarterly and
annual reports and of the information, documents and other reports, if any,
which the Company is required to file with the Commission pursuant to Section 13
or
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15(d) of the Exchange Act. Notwithstanding that the Company may not be subject
to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the
Company will file with the Commission, to the extent permitted, and provide the
Trustee and Holders with such annual reports and such information, documents and
other reports specified in Sections 13 and 15(d) of the Exchange Act. The
Company will also comply with the other provisions of 314(a) of the TIA.
LIMITATION ON DESIGNATIONS OF UNRESTRICTED SUBSIDIARIES. The Company may
designate any Subsidiary of the Company (other than a Subsidiary of the Company
which owns Capital Stock of a Restricted Subsidiary) as an "Unrestricted
Subsidiary" under the Indenture (a "Designation") only if:
(a)
no Default shall have occurred and be continuing at the time of or
after giving effect to such Designation; and
(b)
the Company would be permitted under the Indenture to make an
Investment at the time of Designation (assuming the effectiveness of
such Designation) in an amount (the "Designation Amount") equal to the sum
of (i) fair market value of the Capital Stock of such Subsidiary owned by
the Company and the Restricted Subsidiaries on such date and (ii) the
aggregate amount of other Investments of the Company and the Restricted
Subsidiaries in such Subsidiary on such date; and
(c)
the Company would be permitted to incur $1.00 of additional
Indebtedness (other than Permitted Indebtedness) pursuant to the
covenant described under "-- Limitation on Incurrence of Additional
Indebtedness" at the time of Designation (assuming the effectiveness of such
Designation).
In the event of any such Designation, the Company shall be deemed to have
made an Investment constituting a Restricted Payment pursuant to the covenant
described under "-- Limitation on Restricted Payments" for all purposes of the
Indenture in the Designation Amount. The Indenture will further provide that the
Company shall not, and shall not permit any Restricted Subsidiary to, at any
time (x) provide direct or indirect credit support for or a guarantee of any
Indebtedness of any Unrestricted Subsidiary (including of any undertaking,
agreement or instrument evidencing such Indebtedness), (y) be directly or
indirectly liable for any Indebtedness of any Unrestricted Subsidiary or (z) be
directly or indirectly liable for any Indebtedness which provides that the
holder thereof may (upon notice, lapse of time or both) declare a default
thereon or cause the payment thereof to be accelerated or payable prior to its
final scheduled maturity upon the occurrence of a default with respect to any
Indebtedness of any Unrestricted Subsidiary (including any right to take
enforcement action against such Unrestricted Subsidiary), except, in the case of
clause (x) or (y), to the extent permitted under the covenant described under
"-- Limitation on Restricted Payments."
The Indenture will further provide that the Company may revoke any
Designation of a Subsidiary as an Unrestricted Subsidiary (a "Revocation"),
whereupon such Subsidiary shall then constitute a Restricted Subsidiary, if:
(a)
no Default shall have occurred and be continuing at the time of and
after giving effect to such Revocation; and
(b)
all Liens and Indebtedness of such Unrestricted Subsidiary
outstanding immediately following such Revocation would, if incurred
at such time, have been permitted to be incurred for all purposes of the
Indenture.
All Designations and Revocations must be evidenced by Board Resolutions of
the Company delivered to the Trustee certifying compliance with the foregoing
provisions.
EVENTS OF DEFAULT
The following events will be defined in the Indenture as "Events of
Default":
(a)
the failure to pay interest on any Notes when the same becomes due
and payable and the default continues for a period of 30 days;
(b)
the failure to pay the principal on any Notes, when such principal
becomes due and payable, at maturity, upon redemption or otherwise
(including the failure to make a payment to purchase Notes tendered pursuant
to a Change of Control Offer or a Net Proceeds Offer);
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(c)
a default in the observance or performance of any other covenant or
agreement contained in the Indenture or the Security Documents which
default continues for a period of 30 days after the Company receives written
notice specifying the default (and demanding that such default be remedied)
from the Trustee or the Holders of at least 25% of the outstanding principal
amount of the Notes (except in the case of a default with respect to the
covenant described under "-- Certain Covenants -- Merger, Consolidation and
Sale of Assets", which will constitute an Event of Default with such notice
requirement but without such passage of time requirement);
(d)
a default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness of the Company or of any Restricted Subsidiary (or the payment
of which is guaranteed by the Company or any Restricted Subsidiary), whether
such Indebtedness now exists or is created after the Issue Date, which
default (i) is caused by a failure to pay principal of or premium, if any,
or interest on such Indebtedness after any applicable grace period provided
in such Indebtedness on the date of such default (a "payment default") or
(ii) 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 at least $5.0 million;
(e)
one or more judgments in an aggregate amount in excess of $5.0
million shall have been rendered against the Company or any of the
Restricted Subsidiaries and such judgments remain undischarged, unpaid or
unstayed for a period of 60 days after such judgment or judgments become
final and non-appealable;
(f)
certain events of bankruptcy affecting the Company or any of its
Significant Subsidiaries;
(g)
any Guarantee of a Significant Subsidiary ceases to be in full force
and effect or any Guarantee of a Significant Subsidiary is declared
to be null and void and unenforceable or any Guarantee of a Significant
Subsidiary is found to be invalid or any Guarantor which is a Significant
Subsidiary denies its liability under its Guarantee (other than by reason of
release of such Guarantor in accordance with the terms of the Indenture); or
(h)
except as contemplated by their terms, any of the Security Documents
ceases to be in full force or effect or ceases to give the Trustee,
in any material respect, the Liens, rights, powers and privileges purported
to be created thereby.
If an Event of Default (other than an Event of Default specified in clause
(f) above) shall occur and be continuing, the Trustee or the Holders of at least
25% in principal amount of outstanding Notes may declare the principal of,
premium, if any, and accrued and unpaid interest on all the Notes to be due and
payable by notice in writing to the Company and the Trustee specifying the
respective Event of Default and that it is a "notice of acceleration", and the
same shall become immediately due and payable. If an Event of Default specified
in clause (f) above occurs and is continuing, then all unpaid principal of, and
premium, if any, and accrued and unpaid interest on all of the outstanding Notes
shall IPSO FACTO become and be immediately due and payable without any
declaration or other act on the part of the Trustee or any Holder.
The Indenture will provide that, at any time after a declaration of
acceleration with respect to the Notes as described in the preceding paragraph,
the Holders of a majority in principal amount of the Notes may rescind and
cancel such declaration and its consequences (a) if the rescission would not
conflict with any judgment or decree, (b) if all existing Events of Default have
been cured or waived except nonpayment of principal or interest that has become
due solely because of the acceleration, (c) to the extent the payment of such
interest is lawful, interest on overdue installments of interest and overdue
principal, which has become due otherwise than by such declaration of
acceleration, has been paid, (d) if the Company has paid the Trustee its
reasonable compensation and reimbursed the Trustee for its expenses,
disbursements and advances and (e) in the event of the cure or waiver of an
Event of Default of the type described in clause (f)
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of the description of Events of Default above, the Trustee shall have received
an officers' certificate and an opinion of counsel that such Event of Default
has been cured or waived. No such rescission shall affect any subsequent Default
or impair any right consequent thereto.
The Holders of a majority in principal amount of the Notes may waive any
existing Default or Event of Default under the Indenture, and its consequences,
except a default in the payment of the principal of or interest on any Notes.
Holders of the Notes may not enforce the Indenture, the Security Documents
or the Notes except as provided in the Indenture and under the TIA. Subject to
the provisions of the Indenture relating to the duties of the Trustee, the
Trustee is under no obligation to exercise any of its rights or powers under the
Indenture or the Security Documents at the request, order or direction of any of
the Holders, unless such Holders have offered to the Trustee reasonable
indemnity. Subject to all provisions of the Indenture and applicable law, the
Holders of a majority in aggregate principal amount of the then outstanding
Notes have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee.
Under the Indenture, the Company is required to provide an officers'
certificate to the Trustee promptly upon any such officer obtaining knowledge of
any Default or Event of Default (provided that such officers shall provide such
certification at least annually whether or not they know of any Default or Event
of Default) that has occurred and, if applicable, describe such Default or Event
of Default and the status thereof.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have its
obligations and the obligations of the Guarantors discharged with respect to the
outstanding Notes ("Legal Defeasance"). Such Legal Defeasance means that the
Company shall be deemed to have paid and discharged the entire indebtedness
represented by the outstanding Notes, and satisfied all of its obligations with
respect to the Notes, except for (a) the rights of Holders to receive payments
in respect of the principal of, premium, if any, and interest on the Notes when
such payments are due, (b) 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 payments,
(c) the rights, powers, trust, duties and immunities of the Trustee and the
Company's obligations in connection therewith and (d) 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, reorganization 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, (a) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit of
the Holders cash in United States dollars, non-callable United States government
obligations, 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 on the Notes on the
stated date for payment thereof or on the applicable redemption date, as the
case may be; (b) 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 (i) the Company has received from, or
there has been published by, the Internal Revenue Service a ruling or (ii) 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 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; (c) in the case of Covenant Defeasance, the Company
shall have delivered to the Trustee an opinion of counsel in the United States
reasonably acceptable to the Trustee confirming that the Holders will not
recognize income, gain or loss for federal
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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;
(d) no Default or Event of Default shall have occurred and be continuing on the
date of 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; (e) such Legal Defeasance or Covenant Defeasance
shall not result in a breach or violation of, or constitute a default under the
Indenture or any other agreement or instrument to which the Company or any of
its Subsidiaries is a party or by which the Company or any of its Subsidiaries
is bound; (f) the Company shall have delivered to the Trustee an officers'
certificate stating that the deposit was not made by the Company with the intent
of preferring the Holders over any other creditors of the Company or with the
intent of defeating, hindering, delaying or defrauding any other creditors of
the Company or others; (g) the Company shall have delivered to the Trustee an
officers' certificate and an opinion of counsel, each stating that all
conditions precedent provided for or relating to the Legal Defeasance or the
Covenant Defeasance, as the case may be, have been complied with; (h) the
Company shall 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; and (i) certain other
customary conditions precedent are satisfied.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights of registration of transfer or exchange of the
Notes, as expressly provided for in the Indenture) as to all outstanding Notes
when (a) either (i) all the Notes theretofore authenticated and delivered
(except lost, stolen or destroyed Notes which have been replaced or paid and
Notes for whose payment money has theretofore been deposited in trust or
segregated and held in trust by the Company and thereafter repaid to the Company
or discharged from such trust) have been delivered to the Trustee for
cancellation or (ii) all Notes not theretofore delivered to the Trustee for
cancellation have become due and payable and the Company has irrevocably
deposited or caused to be deposited with the Trustee funds in an amount
sufficient to pay and discharge the entire Indebtedness on the Notes not
theretofore delivered to the Trustee for cancellation, for principal of,
premium, if any, and interest on the Notes to the date of deposit together with
irrevocable instructions from the Company directing the Trustee to apply such
funds to the payment thereof at maturity or redemption, as the case may be; (b)
the Company has paid all other sums payable under the Indenture by the Company;
and (c) the Company has delivered to the Trustee an officers' certificate and an
opinion of counsel stating that all conditions precedent under the Indenture
relating to the satisfaction and discharge of the Indenture have been complied
with.
MODIFICATION OF THE INDENTURE
From time to time, the Company, the Guarantors and the Trustee, without the
consent of the Holders, may amend the Indenture and the Security Documents for
certain specified purposes, including curing ambiguities, defects or
inconsistencies, so long as such change does not, in the opinion of the Trustee,
adversely affect the rights of any of the Holders in any material respect. In
formulating its opinion on such matters, the Trustee will be entitled to rely on
such evidence as it deems appropriate, including, without limitation, solely on
an opinion of counsel. Other modifications and amendments of the Indenture and
the Security Documents may be made with the consent of the Holders of a majority
in principal amount of the then outstanding Notes issued under the Indenture,
except that, without the consent of each Holder affected thereby, no amendment
may: (a) reduce the amount of Notes whose Holders must consent to an amendment;
(b) reduce the rate of or change or have the effect of changing the time for
payment of interest, including defaulted interest, on any Notes; (c) reduce the
principal of or change or have the effect of changing the fixed maturity of any
Notes, or change the date on which any Notes may be subject to redemption or
repurchase, or reduce the redemption or repurchase price therefor; (d) make any
Notes payable in money other than that stated in the Notes; (e) make any change
in provisions of the Indenture protecting the right of each Holder to receive
payment of principal of and interest on such Note on or after the due date
thereof or to bring suit to enforce such payment, or permitting Holders of a
majority in principal amount of Notes to waive Defaults or Events of Default;
(f) amend, change or modify in any
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material respect the obligation of the Company to make and consummate a Change
of Control Offer in the event of a Change of Control or make and consummate a
Net Proceeds Offer with respect to any Asset Sale that has been consummated or
modify any of the provisions or definitions with respect thereto; (g) modify or
change any provision of the Indenture or the related definitions affecting
ranking of the Notes or any Guarantee in a manner which adversely affects the
Holders; (h) release any Guarantor from any of its obligations under its
Guarantee or the Indenture otherwise than in accordance with the terms of the
Indenture or (i) release or adversely affect the ranking of any Lien on assets
or property securing the Notes except in compliance with the provisions of the
Indenture and the Security Documents.
GOVERNING LAW
The Indenture and the Security Documents will provide that the Indenture,
the Security Documents, the Notes and the Guarantees will be governed by, and
construed in accordance with, the laws of the State of New York but without
giving effect to applicable principles of conflicts of law to the extent that
the application of the law of another jurisdiction would be required thereby.
THE TRUSTEE
The Indenture will provide that, except during the continuance of an Event
of Default, the Trustee will perform only such duties as are specifically set
forth in the Indenture. During the existence of an Event of Default, the Trustee
will exercise such rights and powers vested in it by the Indenture, and use the
same degree of care and skill in its exercise as a prudent man would exercise or
use under the circumstances in the conduct of his own affairs.
The Indenture and the provisions of the TIA contain certain limitations on
the rights of the Trustee, should it become a creditor of the Company or a
Guarantor, to obtain payments of claims in certain cases or to realize on
certain property received in respect of any such claim as security or otherwise.
Subject to the TIA, the Trustee will be permitted to engage in other
transactions; PROVIDED that if the Trustee acquires any conflicting interest as
described in the TIA, it must eliminate such conflict or resign.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms to be used in
the Indenture. Reference is made to the form of Indenture for the full
definition of all such terms, as well as any other terms used herein for which
no definition is provided.
"ACQUIRED INDEBTEDNESS" means Indebtedness of a Person or any of its
Subsidiaries existing at the time such Person becomes a Restricted Subsidiary or
at the time it merges or consolidates with the Company or any of the Restricted
Subsidiaries or assumed by the Company or a Restricted Subsidiary in connection
with the acquisition of assets from such Person and in each case not incurred in
connection with, or in anticipation or contemplation of, such Person becoming a
Restricted Subsidiary or such acquisition, merger or consolidation.
"ADVISORY SERVICES AGREEMENT" means the Advisory Services Agreement dated as
of October 16, 1992 among MDC Management Company II, L.P., MDC Management
Company and the Company, as the same may be amended from time to time.
"AFFILIATE" means, with respect to any specified Person, any other Person
who directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, such specified Person. The term
"control" means the possession, directly or indirectly, of the power to direct
or cause the direction of the management and policies of a Person, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative of the foregoing.
"AFFILIATE TRANSACTION" has the meaning set forth under "-- Certain
Covenants -- Limitation on Transactions with Affiliates."
"ASSET ACQUISITION" means (a) an Investment by the Company or any Restricted
Subsidiary in any other Person pursuant to which such Person shall become a
Restricted Subsidiary, or shall be merged with or into the Company or any
Restricted Subsidiary, or (b) the acquisition by the Company or any Restricted
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Subsidiary of the assets of any Person (other than a Restricted Subsidiary)
which constitute all or substantially all of the assets of such Person or
comprises any division or line of business of such Person or any other
properties or assets of such Person other than in the ordinary course of
business.
"ASSET SALE" means any direct or indirect sale, issuance, conveyance,
transfer, lease (other than operating leases entered into in the ordinary course
of business), assignment or other transfer for value by the Company or any of
the Restricted Subsidiaries (including any Sale and Leaseback Transaction) to
any Person other than the Company or a Restricted Subsidiary of (a) any Capital
Stock of any Restricted Subsidiary; or (b) any other property or assets of the
Company or any Restricted Subsidiary other than in the ordinary course of
business; PROVIDED, HOWEVER, that Asset Sales shall not include (i) a
transaction or series of related transactions for which the Company or the
Restricted Subsidiaries receive aggregate consideration of less than $350,000,
(ii) the sale, lease, conveyance, disposition or other transfer of all or
substantially all of the assets of the Company as permitted under "-- Certain
Covenants -- Merger, Consolidation and Sale of Assets" (iii) disposals or
replacements of obsolete equipment in the ordinary course of business and (iv)
the sale, lease, conveyance, disposition or other transfer by the Company or any
Restricted Subsidiary of assets or property to one or more Restricted
Subsidiaries.
"BOARD OF DIRECTORS" means, as to any Person, the board of directors of such
Person or any duly authorized committee thereof.
"BOARD RESOLUTION" means, with respect to any Person, a copy of a resolution
certified by the Secretary or an Assistant Secretary of such Person to have been
duly adopted by the Board of Directors of such Person and to be in full force
and effect on the date of such certification, and delivered to the Trustee.
"CAPITALIZED LEASE OBLIGATION" means, as to any Person, the obligations of
such Person under a lease that are required to be classified and accounted for
as capital lease obligations under GAAP, and the amount of such obligations at
any date shall be the capitalized amount of such obligations at such date,
determined in accordance with GAAP.
"CAPITAL STOCK" means (a) with respect to any Person that is a corporation,
any and all shares, interests, participations or other equivalents (however
designated and whether or not voting) of corporate stock, including each class
of Common Stock and Preferred Stock of such Person and (b) with respect to any
Person that is not a corporation, any and all partnership or other equity
interests of such Person.
"CASH EQUIVALENTS" means (a) marketable direct obligations issued by, or
unconditionally guaranteed by, the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States, in
each case maturing within one year from the date of acquisition thereof; (b)
marketable direct obligations issued by any state of the United States of
America or any political subdivision of any such state or any public
instrumentality thereof maturing within one year from the date of acquisition
thereof and, at the time of acquisition, having one of the two highest ratings
obtainable from either Standard & Poor's Corporation ("S&P") or Moody's
Investors Service, Inc. ("Moody's"); (c) commercial paper maturing no more than
one year from the date of creation thereof and, at the time of acquisition,
having a rating of at least A-1 from S&P or at least P-1 from Moody's; (d)
certificates of deposit or bankers' acceptances maturing within one year from
the date of acquisition thereof issued by any bank organized under the laws of
the United States of America or any state thereof or the District of Columbia or
any United States branch of a foreign bank having at the date of acquisition
thereof combined capital and surplus of not less than $250,000,000; (e)
repurchase obligations with a term of not more than seven days for underlying
securities of the types described in clause (a) above entered into with any bank
meeting the qualifications specified in clause (d) above; and (f) investments in
money market funds which invest substantially all their assets in securities of
the types described in clauses (a) through (e) of this definition.
"CHANGE OF CONTROL" means the occurrence of one or more of the following
events: (a) any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all or substantially all of the assets of the
Company or Holdings to any Person or group of related Persons for purposes of
Section 13(d) of the Exchange Act (a "Group") (whether or not otherwise in
compliance with the provisions of the Indenture) other than Permitted Holder(s);
(b) the approval by the holders of Capital Stock of the Company
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or Holdings, as the case may be, of any plan or proposal for the liquidation or
dissolution of the Company or Holdings, as the case may be, (whether or not
otherwise in compliance with the provisions of the Indenture); (c) any Person or
Group (other than the Permitted Holders(s)) shall become the owner, directly or
indirectly, beneficially or of record, of shares representing more than 50% of
the aggregate ordinary voting power represented by the issued and outstanding
Capital Stock of the Company or Holdings; or (d) the replacement of a majority
of the Board of Directors of the Company or Holdings over a two-year period from
the directors who constituted the Board of Directors of the Company or Holdings,
as the case may be, at the beginning of such period, and such replacement shall
not have been approved by a vote of at least a majority of the Board of
Directors of the Company or Holdings, as the case may be, then still in office
who either were members of such Board of Directors at the beginning of such
period or whose election as a member of such Board of Directors was previously
so approved.
"CHANGE OF CONTROL OFFER" has the meaning set forth under "-- Change of
Control."
"CHANGE OF CONTROL PAYMENT DATE" has the meaning set forth under "-- Change
of Control."
"COMMON STOCK" of any Person means any and all shares, interests or other
participations in, and other equivalents (however designated and whether voting
or non-voting) of such Person's common stock, whether outstanding on the Issue
Date or issued after the Issue Date, and includes, without limitation, all
series and classes of such common stock.
"COMMISSION" means the Securities and Exchange Commission.
"COMPANY" means National Fiberstok Corporation.
"CONSOLIDATED EBITDA" means, for any period, the sum (without duplication)
of (a) Consolidated Net Income and (b) to the extent Consolidated Net Income has
been reduced thereby, (i) all income taxes of the Company and the Restricted
Subsidiaries paid or accrued in accordance with GAAP for such period (other than
income taxes attributable to extraordinary, unusual or nonrecurring gains or
losses or taxes attributable to sales or dispositions outside the ordinary
course of business), (ii) Consolidated Interest Expense and (iii) Consolidated
Non-cash Charges, LESS any non-cash items increasing Consolidated Net Income for
such period, all as determined on a consolidated basis for the Company and the
Restricted Subsidiaries in accordance with GAAP.
"CONSOLIDATED FIXED CHARGE COVERAGE RATIO" means, with respect to the
Company, the ratio of Consolidated EBITDA of the Company during the four full
fiscal quarters (the "Four Quarter Period") ending on or prior to the date of
the transaction giving rise to the need to calculate the Consolidated Fixed
Charge Coverage Ratio (the "Transaction Date") to Consolidated Fixed Charges of
the Company for the Four Quarter Period. In addition to and without limitation
of the foregoing, for purposes of this definition, "Consolidated EBITDA" and
"Consolidated Fixed Charges" shall be calculated after giving effect on a PRO
FORMA (including any PRO FORMA expense and cost reductions calculated on a basis
consistent with Regulation S-X under the Securities Act) basis for the period of
such calculation to (a) the incurrence or repayment of any Indebtedness of the
Company or any of the Restricted Subsidiaries (and the application of the
proceeds thereof) giving rise to the need to make such calculation and any
incurrence or repayment of other Indebtedness (and the application of the
proceeds thereof), other than the incurrence or repayment of Indebtedness in the
ordinary course of business for working capital purposes pursuant to working
capital facilities, occurring during the Four Quarter Period or at any time
subsequent to the last day of the Four Quarter Period and on or prior to the
Transaction Date, as if such incurrence or repayment, as the case may be (and
the application of the proceeds thereof), occurred on the first day of the Four
Quarter Period and (b) any Asset Sales or Asset Acquisitions (including, without
limitation, any Asset Acquisition giving rise to the need to make such
calculation as a result of the Company or one of the Restricted Subsidiaries
(including any Person who becomes a Restricted Subsidiary as a result of the
Asset Acquisition) incurring, assuming or otherwise being liable for Acquired
Indebtedness and also including any Consolidated EBITDA attributable to the
assets which are the subject of the Asset Acquisition or Asset Sale during the
Four Quarter Period) occurring during the Four Quarter Period or at any time
subsequent to the last day of the Four Quarter Period and on or prior to the
Transaction Date, as if such Asset Sale or Asset Acquisition (including the
incurrence, assumption or liability for any such Acquired Indebtedness) occurred
on the first day of the Four Quarter Period. If the Company or any of the
Restricted Subsidiaries directly or indirectly guarantees
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Indebtedness of a third Person, the preceding sentence shall give effect to the
incurrence of such guaranteed Indebtedness as if the Company or the Restricted
Subsidiary, as the case may be, had directly incurred or otherwise assumed such
guaranteed Indebtedness. Furthermore, in calculating "Consolidated Fixed
Charges" for purposes of determining the denominator (but not the numerator) of
this "Consolidated Fixed Charge Coverage Ratio," (i) interest on outstanding
Indebtedness determined on a fluctuating basis as of the Transaction Date and
which will continue to be so determined thereafter shall be deemed to have
accrued at a fixed rate PER ANNUM equal to the rate of interest on such
Indebtedness in effect on the Transaction Date; (ii) if interest on any
Indebtedness actually incurred on the Transaction Date may optionally be
determined at an interest rate based upon a factor of a prime or similar rate, a
eurocurrency interbank offered rate, or other rates, then the interest rate in
effect on the Transaction Date will be deemed to have been in effect during the
Four Quarter Period; and (iii) notwithstanding clause (i) above, interest on
Indebtedness determined on a fluctuating basis, to the extent such interest is
covered by agreements relating to Interest Swap Obligations, shall be deemed to
accrue at the rate PER ANNUM resulting after giving effect to the operation of
such agreements.
"CONSOLIDATED FIXED CHARGES" means, with respect to the Company for any
period, the sum, without duplication, of (a) Consolidated Interest Expense
(including any premium or penalty paid in connection with redeeming or retiring
Indebtedness of the Company and the Restricted Subsidiaries prior to the stated
maturity thereof pursuant to the agreements governing such Indebtedness), plus
(b) the product of (i) the amount of all dividend payments on the Holdings
Preferred Stock and any series of Preferred Stock of the Company (other than
dividends paid in Qualified Capital Stock) paid, accrued or scheduled to be paid
or accrued during such period times (ii) a fraction, the numerator of which is
one and the denominator of which is one minus the then current effective
consolidated federal, state and local income tax rate of such Person, expressed
as a decimal.
"CONSOLIDATED INTEREST EXPENSE" means, with respect to the Company for any
period, the sum of, without duplication: (a) the aggregate of the interest
expense of the Company and the Restricted Subsidiaries for such period
determined on a consolidated basis in accordance with GAAP, including without
limitation, (i) any amortization of original issue discount, (ii) the net costs
under Interest Swap Obligations, (iii) all capitalized interest and (iv) the
interest portion of any deferred payment obligation; and (b) the interest
component of Capitalized Lease Obligations paid, accrued and/or scheduled to be
paid or accrued by the Company and the Restricted Subsidiaries during such
period as determined on a consolidated basis in accordance with GAAP.
"CONSOLIDATED NET INCOME" means, with respect to the Company for any period,
the aggregate net income (or loss) of the Company and the Restricted
Subsidiaries for such period on a consolidated basis, determined in accordance
with GAAP; PROVIDED that there shall be excluded therefrom (a) after-tax gains
from Asset Sales or abandonments or reserves relating thereto, (b) after-tax
items classified as extraordinary or nonrecurring gains, (c) the net income of
any Person acquired in a "pooling of interests" transaction accrued prior to the
date it becomes a Restricted Subsidiary or is merged or consolidated with the
Company or any Restricted Subsidiary, (d) the net income (but not loss) of any
Restricted Subsidiary to the extent that the declaration of dividends or similar
distributions by that Restricted Subsidiary of that income is restricted by a
contract, operation of law or otherwise, (e) the net income of any Person, other
than a Restricted Subsidiary, except to the extent of cash dividends or
distributions paid to the Company or to a Restricted Subsidiary by such Person,
(f) income or loss attributable to discontinued operations (including, without
limitation, operations disposed of during such period whether or not such
operations were classified as discontinued), and (g) in the case of a successor
to the Company by consolidation or merger or as a transferee of the Company's
assets, any net income (or loss) of the successor corporation prior to such
consolidation, merger or transfer of assets.
"CONSOLIDATED NET WORTH" of any Person means the consolidated stockholders'
equity of such Person, determined on a consolidated basis in accordance with
GAAP, less (without duplication) amounts attributable to Disqualified Capital
Stock of such Person; PROVIDED that the Consolidated Net Worth of any Person
shall exclude the effect of any non-cash charges relating the acceleration of
stock options or similar securities of such Person or another Person with which
such Person is merged or consolidated.
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"CONSOLIDATED NON-CASH CHARGES" means, with respect to the Company, for any
period, the aggregate depreciation, amortization and other non-cash expenses of
the Company and the Restricted Subsidiaries reducing Consolidated Net Income of
the Company for such period, determined on a consolidated basis in accordance
with GAAP (excluding any such charges constituting an extraordinary item or loss
or any such charge which requires an accrual of or a reserve for cash charges
for any future period).
"COVENANT DEFEASANCE" has the meaning set forth under "-- Legal Defeasance
and Covenant Defeasance."
"DEFAULT" means an event or condition the occurrence of which is, or with
the lapse of time or the giving of notice or both would be, an Event of Default.
"DESIGNATION" has the meaning set forth under "-- Certain Covenants --
Limitation on Designations of Unrestricted Subsidiaries."
"DESIGNATION AMOUNT" has the meaning set forth under "-- Certain Covenants
- -- Limitation on Designations of Unrestricted Subsidiaries."
"DISQUALIFIED CAPITAL STOCK" means that portion of any Capital Stock which,
by its terms (or by the terms of any security into which it is convertible or
for which it is exchangeable), or upon the happening of any event, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the sole option of the holder thereof on or prior to the final
maturity date of the Notes.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, or any
successor statute or statutes thereto.
"FAIR MARKET VALUE" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction, for cash,
between a willing seller and a willing buyer, neither of whom is under undue
pressure or compulsion to complete the transaction. Fair market value shall be
determined by the Board of Directors of the Company acting reasonably and in
good faith and shall be evidenced by a Board Resolution of the Company delivered
to the Trustee.
"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 may be approved by a significant segment of the accounting
profession of the United States, which are in effect as of the Issue Date.
"GUARANTOR" means each of the Company's Subsidiaries that in the future
executes a supplemental indenture in which such Subsidiary agrees to be bound by
the terms of the Indenture as a Guarantor; provided that any Person constituting
a Guarantor as described above shall cease to constitute a Guarantor when its
Guarantee is released in accordance with the terms of the Indenture.
"HOLDINGS" has the meaning set forth under "-- Redemption -- Optional
Redemption upon Public Equity Offerings."
"HOLDINGS PREFERRED STOCK" means the $10.0 million aggregate liquidation
preference of 9.0% Preferred Stock of Holdings issued on the Issue Date.
"INCUR" has the meaning set forth under "-- Certain Covenants -- Limitation
on Incurrence of Additional Indebtedness."
"INDEBTEDNESS" means with respect to any Person, without duplication, (a)
all Obligations of such Person for borrowed money, (b) all Obligations of such
Person evidenced by bonds, debentures, notes or other similar instruments, (c)
all Capitalized Lease Obligations of such Person, (d) all Obligations of such
Person issued or assumed as the deferred purchase price of property, all
conditional sale obligations and all Obligations under any title retention
agreement (but excluding trade accounts payable and other accrued liabilities
arising in the ordinary course of business that are not overdue by 120 days or
more or are being contested in good faith by appropriate proceedings promptly
instituted and diligently conducted), (e) all
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Obligations for the reimbursement of any obligor on any letter of credit,
banker's acceptance or similar credit transaction, (f) guarantees and other
contingent obligations in respect of Indebtedness referred to in clauses (a)
through (e) above and clause (h) below, (g) all Obligations of any other Person
of the type referred to in clauses (a) through (f) above which are secured by
any Lien on any property or asset of such Person, the amount of such Obligation
being deemed to be the lesser of the fair market value of such property or asset
or the amount of the Obligation so secured, (h) all Obligations under currency
agreements and interest swap agreements of such Person and (i) all Disqualified
Capital Stock issued by such Person with the amount of Indebtedness represented
by such Disqualified Capital Stock being equal to the greater of its voluntary
or involuntary liquidation preference and its maximum fixed repurchase price.
For purposes hereof, the "maximum fixed repurchase price" of any Disqualified
Capital Stock which does not have a fixed repurchase price shall be calculated
in accordance with the terms of such Disqualified Capital Stock as if such
Disqualified Capital Stock were purchased on any date on which Indebtedness
shall be required to be determined pursuant to the Indenture, and if such price
is based upon, or measured by, the fair market value of such Disqualified
Capital Stock, such fair market value shall be determined reasonably and in good
faith by the Board of Directors of the Company.
"INDEPENDENT FINANCIAL ADVISOR" means a firm (a) which does not, and whose
directors, officers and employees or Affiliates do not, have a direct or
indirect material financial interest in the Company and (b) which, in the
judgment of the Board of Directors of the Company, is otherwise independent and
qualified to perform the task for which it is to be engaged.
"INITIAL PURCHASERS" means, collectively, BT Securities Corporation and
Donaldson, Lufkin & Jenrette Securities Corporation.
"INTEREST SWAP OBLIGATIONS" means the obligations of any Person pursuant to
any arrangement with any other Person, whereby, directly or indirectly, such
Person is entitled to receive from time to time periodic payments calculated by
applying either a floating or a fixed rate of interest on a stated notional
amount in exchange for periodic payments made by such other Person calculated by
applying a fixed or a floating rate of interest on the same notional amount and
shall include, without limitation, interest rate swaps, caps, floors, collars
and similar agreements.
"INVESTMENT" means, with respect to any Person, any direct or indirect loan
or other extension of credit (including, without limitation, a guarantee) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition by such Person of any Capital Stock,
bonds, notes, debentures or other securities or evidences of Indebtedness issued
by, any Person. "Investment" shall exclude extensions of trade credit by the
Company and the Restricted Subsidiaries on commercially reasonable terms in
accordance with normal trade practices of the Company or such Restricted
Subsidiary, as the case may be. If the Company or any Restricted Subsidiary
sells or otherwise disposes of any Capital Stock of any Restricted Subsidiary
such that, after giving effect to any such sale or disposition, it ceases to be
a Subsidiary of the Company, the Company shall be deemed to have made an
Investment on the date of any such sale or disposition equal to the fair market
value of the Capital Stock of such Restricted Subsidiary not sold or disposed
of.
"ISSUE DATE" means the date of original issuance of the Notes.
"LEGAL DEFEASANCE" has the meaning set forth under "-- Legal Defeasance and
Covenant Defeasance."
"LIEN" means any lien, mortgage, deed of trust, pledge, security interest,
charge or encumbrance of any kind (including any conditional sale or other title
retention agreement, any lease in the nature thereof and any agreement to give
any security interest).
"MDC ENTITIES" means collectively McCown DeLeeuw & Co. II, LP, McCown
DeLeeuw Associates, LP and MDC/JAF CO Vendors, LP and any of their respective
Affiliates.
"NET CASH PROCEEDS" means, with respect to any Asset Sale, the proceeds in
the form of cash or Cash Equivalents including payments in respect of deferred
payment obligations when received in the form of cash or Cash Equivalents (other
than the portion of any such deferred payment constituting interest)
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received by the Company or any of the Restricted Subsidiaries from such Asset
Sale net of (a) reasonable out-of-pocket expenses and fees relating to such
Asset Sale (including, without limitation, legal, accounting and investment
banking fees and sales commissions), (b) taxes paid or payable after taking into
account any reduction in consolidated tax liability due to available tax credits
or deductions and any tax sharing arrangements, (c) repayment of Indebtedness
that is required to be repaid in connection with such Asset Sale and (d)
appropriate amounts to be provided by the Company or any Restricted Subsidiary,
as the case may be, as a reserve, in accordance with GAAP, against any post
closing adjustments or liabilities associated with such Asset Sale and retained
by the Company or any Restricted Subsidiary, as the case may be, after such
Asset Sale, including, without limitation, pension and other post-employment
benefit liabilities, liabilities related to environmental matters and
liabilities under any indemnification obligations associated with such Asset
Sale.
"NET PROCEEDS OFFER" has the meaning set forth under "-- Certain Covenants
- -- Limitation on Asset Sales."
"NET PROCEEDS OFFER AMOUNT" has the meaning set forth under "-- Certain
Covenants -- Limitation on Asset Sales."
"NET PROCEEDS OFFER PAYMENT DATE" has the meaning set forth under "--
Certain Covenants -- Limitation on Asset Sales."
"NET PROCEEDS OFFER TRIGGER DATE" has the meaning set forth under "--
Certain Covenants -- Limitation on Asset Sales."
"OBLIGATIONS" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other liabilities
payable under the documentation governing any Indebtedness.
"PARENT CAPITAL CONTRIBUTION" means the equity capital contribution of
approximately $7.4 million made by Holdings to the Company on the Issue Date
with a portion of the proceeds from the issuance of the Holdings Preferred
Stock.
"PERMITTED HOLDER" means each of the general partners of MDC Management
Company II, LP, MDC Management Company IIE, LP and MDC Management Company IIA,
LP and any Person controlled by one or more of such general partners.
"PERMITTED INDEBTEDNESS" means, without duplication, each of the following:
(a)
Indebtedness under the Notes, the Indenture and the Guarantees;
(b)
Indebtedness incurred pursuant to the Revolving Credit Facility in an
aggregate principal amount at any time outstanding not to exceed the
greater of (i) the sum of (x) 80.0% of the net book value of accounts receivable
of the Company and its Restricted Subsidiaries and (y) 60.0% of the net book
value of the inventory of the Company and its Restricted Subsidiaries and (ii)
$20.0 million, in each case, reduced by any required permanent repayments (which
are accompanied by a corresponding permanent commitment reduction) thereunder;
(c)
Interest Swap Obligations of the Company or a Guarantor covering
Indebtedness of the Company or any of the Restricted Subsidiaries and
Interest Swap Obligations of any Restricted Subsidiary (other than a Guarantor)
covering Indebtedness of such Restricted Subsidiary; PROVIDED, HOWEVER, that
such Interest Swap Obligations are entered into to protect the Company and the
Restricted Subsidiaries from fluctuations in interest rates on Indebtedness
incurred in accordance with the Indenture to the extent the notional principal
amount of such Interest Swap Obligation does not exceed the principal amount of
the Indebtedness to which such Interest Swap Obligation relates;
(d)
Indebtedness of a Restricted Subsidiary to the Company or to another
Restricted Subsidiary for so long as such Indebtedness is held by the
Company or a Restricted Subsidiary, in each case subject to no Lien held by a
Person other than the Company or a Restricted Subsidiary; provided that if as of
any date any
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Person other than the Company or a Restricted Subsidiary owns or holds any such
Indebtedness or holds a Lien in respect of such Indebtedness, such date shall be
deemed the incurrence of Indebtedness not constituting Permitted Indebtedness by
the issuer of such Indebtedness;
(e)
Indebtedness of the Company to a Restricted Subsidiary for so long as
such Indebtedness is held by a Restricted Subsidiary, in each case
subject to no Lien; PROVIDED that (i) any Indebtedness of the Company to any
Restricted Subsidiary that is not a Guarantor is unsecured and subordinated,
pursuant to a written agreement, to the Company's obligations under the
Indenture and the Notes and (ii) if as of any date any Person other than a
Restricted Subsidiary owns or holds any such Indebtedness or holds a Lien in
respect of such Indebtedness, such date shall be deemed the incurrence of
Indebtedness not constituting Permitted Indebtedness by the Company;
(f)
Indebtedness arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument inadvertently (except
in the case of daylight overdrafts) drawn against insufficient funds in the
ordinary course of business; PROVIDED, HOWEVER, that such Indebtedness is
extinguished within two business days of incurrence;
(g)
Indebtedness of the Company or any of the Restricted Subsidiaries
represented by letters of credit for the account of the Company or such
Restricted Subsidiary, as the case may be, in order to provide security for
workers' compensation claims, payment obligations in connection with
self-insurance or similar requirements in the ordinary course of business;
(h)
Refinancing Indebtedness;
(i)
Capitalized Lease Obligations of the Company outstanding on the Issue
Date;
(j)
Capitalized Lease Obligations and Purchase Money Indebtedness of the
Company or any of the Restricted Subsidiaries (and any refinancings
thereof) not to exceed $7.5 million at any one time outstanding; and
(k)
additional Indebtedness of the Company or any of the Guarantors in an
aggregate principal amount not to exceed $5.0 million at any one time
outstanding (which Indebtedness may, but need not, be incurred under the
Revolving Credit Facility).
"PERMITTED INVESTMENTS" means (a) Investments by the Company or any
Restricted Subsidiary in any Person that is or will become immediately after
such Investment a Restricted Subsidiary or that will merge or consolidate into
the Company or a Restricted Subsidiary, (b) Investments in the Company by any
Restricted Subsidiary; PROVIDED that any Indebtedness evidencing any such
Investment held by a Restricted Subsidiary that is not a Guarantor is unsecured
and subordinated, pursuant to a written agreement, to the Company's obligations
under the Notes and the Indenture; (c) investments in cash and Cash Equivalents;
(d) loans and advances to employees and officers of the Company or any of the
Restricted Subsidiaries in the ordinary course of business for bona fide
business purposes not in excess of $1.0 million at any one time outstanding; (e)
Interest Swap Obligations entered into in the ordinary course of the Company's
or the Restricted Subsidiaries' businesses and otherwise in compliance with the
Indenture; (f) Investments in Unrestricted Subsidiaries not to exceed $1.5
million at any one time outstanding; (g) Investments in Persons other than
Subsidiaries not to exceed $500,000 at any one time outstanding; (h) Investments
in securities of trade creditors or customers received pursuant to any plan of
reorganization or similar arrangement upon the bankruptcy or insolvency of such
trade creditors or customers; and (i) Investments made by the Company or the
Restricted Subsidiaries as a result of consideration received in connection with
an Asset Sale made in compliance with the covenant described under "-- Certain
Covenants -- Limitation on Asset Sales" covenant.
"PERMITTED LIENS" means the following types of Liens:
(a)
Liens for taxes, assessments or governmental charges or claims either (i)
not delinquent or (ii) contested in good faith by appropriate proceedings
and as to which the Company or a Restricted Subsidiary, as the case may be,
shall have set aside on its books such reserves as may be required pursuant to
GAAP;
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(b)
statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen and other Liens imposed by
law incurred in the ordinary course of business for sums not yet delinquent or
being contested in good faith, if such reserve or other appropriate provision,
if any, as shall be required by GAAP shall have been made in respect thereof;
(c)
Liens incurred or deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance and other
types of social security, including any Lien securing letters of credit issued
in the ordinary course of business consistent with past practice in connection
therewith, or to secure the performance of tenders, statutory obligations,
surety and appeal bonds, bids, leases, government contracts, performance and
return-of-money bonds and other similar obligations (exclusive of obligations
for the payment of borrowed money);
(d)
judgment Liens not giving rise to an Event of Default;
(e)
easements, rights-of-way, zoning restrictions and other similar charges
or encumbrances in respect of real property not interfering in any
material respect with the ordinary conduct of the business of the Company or any
of the Restricted Subsidiaries;
(f)
any interest or title of a lessor under any Capitalized Lease Obligation;
provided that such Liens do not extend to any property or assets which is
not leased property subject to such Capitalized Lease Obligation;
(g)
Liens securing Purchase Money Indebtedness of the Company or any
Restricted Subsidiary; PROVIDED, HOWEVER, that (i) the Purchase Money
Indebtedness shall not be secured by any property or assets of the Company or
any Restricted Subsidiary other than the property and assets so acquired and
(ii) the Lien securing such Indebtedness shall be created within 90 days of such
acquisition;
(h)
Liens securing reimbursement obligations with respect to commercial
letters of credit which encumber documents and other property relating to
such letters of credit and products and proceeds thereof;
(i)
Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual, or warranty requirements of the
Company or any of the Restricted Subsidiaries, including rights of offset and
set-off;
(j)
Liens securing Interest Swap Obligations which Interest Swap Obligations
relate to Indebtedness that is otherwise permitted under the Indenture;
(k)
Lien on accounts receivable, inventory, patents, trademarks and other
intangibles and proceeds thereof of the Company and the Restricted
Subsidiaries securing Indebtedness under the Revolving Credit Facility; and
(l)
Liens securing Acquired Indebtedness incurred in accordance with the
covenant described under "-- Certain Covenants -- Limitation on
Incurrence of Additional Indebtedness;" PROVIDED that (i) such Liens secured
such Acquired Indebtedness at the time of and prior to the incurrence of such
Acquired Indebtedness by the Company or a Restricted Subsidiary and were not
granted in connection with, or in anticipation of, the incurrence of such
Acquired Indebtedness by the Company or a Restricted Subsidiary and (ii) such
Liens do not extend to or cover any property or assets of the Company or of any
of the Restricted Subsidiaries other than the property or assets that secured
the Acquired Indebtedness prior to the time such Indebtedness became Acquired
Indebtedness of the Company or a Restricted Subsidiary and are no more favorable
to the lienholders than those securing the Acquired Indebtedness prior to the
incurrence of such Acquired Indebtedness by the Company or a Restricted
Subsidiary.
"PERSON" means an individual, partnership, corporation, unincorporated
organization, trust or joint venture, or a governmental agency or political
subdivision thereof.
"PREFERRED STOCK" of any Person means any Capital Stock of such Person that
has preferential rights to any other Capital Stock of such Person with respect
to dividends or redemptions or upon liquidation.
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"PUBLIC EQUITY OFFERING" has the meaning set forth under "-- Redemption --
Optional Redemption upon Public Equity Offerings."
"PURCHASE MONEY INDEBTEDNESS" means Indebtedness the net proceeds of which
are used for the purchase of property or assets acquired in the normal course of
business by the Person incurring such Indebtedness.
"QUALIFIED CAPITAL STOCK" means any Capital Stock that is not Disqualified
Capital Stock.
"REFERENCE DATE" has the meaning set forth under "-- Certain Covenants --
Limitation on Restricted Payments."
"REFINANCE" means, in respect of any security or Indebtedness, to refinance,
extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue a
security or Indebtedness in exchange or replacement for, such security or
Indebtedness in whole or in part. "Refinanced" and "Refinancing" shall have
correlative meanings.
"REFINANCING INDEBTEDNESS" means any Refinancing by the Company or any
Restricted Subsidiary of the Company of Indebtedness incurred in accordance with
the covenant described under "-- Certain Covenants -- Limitation on Incurrence
of Additional Indebtedness" covenant (other than pursuant to clause (b), (c),
(d), (e), (f), (g), (j) or (k) of the definition of Permitted Indebtedness), in
each case that does not (i) result in an increase in the aggregate principal
amount of Indebtedness of such Person as of the date of such proposed
Refinancing (plus the amount of any premium required to be paid under the terms
of the instrument governing such Indebtedness and plus the amount of reasonable
expenses incurred by the Company and the Restricted Subsidiaries in connection
with such Refinancing) or (ii) create Indebtedness with (x) a Weighted Average
Life to Maturity that is less than the Weighted Average Life to Maturity of the
Indebtedness being Refinanced or (y) a final maturity earlier than the final
maturity of the Indebtedness being Refinanced; PROVIDED that (1) if such
Indebtedness being Refinanced is Indebtedness of the Company or a Guarantor,
then such Refinancing Indebtedness shall be Indebtedness solely of the Company
and/or such Guarantor and (2) if such Indebtedness being Refinanced is
subordinate or junior to the Notes or a Guarantee, then such Refinancing
Indebtedness shall be subordinate to the Notes or such Guarantee, as the case
may be, at least to the same extent and in the same manner as the Indebtedness
being Refinanced.
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights Agreement
dated as of the Issue Date among the Company, the Guarantors and the Initial
Purchasers.
"REPLACEMENT ASSETS" has the meaning set forth under "-- Certain Covenants
- -- Limitation on Asset Sales."
"RESTRICTED PAYMENT" has the meaning set forth under "-- Certain Covenants
- -- Limitation on Restricted Payments."
"RESTRICTED SUBSIDIARY" means any Subsidiary of the Company that has not
been designated by the Board of Directors of the Company, by a Board Resolution
delivered to the Trustee, as an Unrestricted Subsidiary pursuant to and in
compliance with the covenant described under "-- Certain Covenants -- Limitation
on Designations of Unrestricted Subsidiaries." Any such Designation may be
revoked by a Board Resolution of the Company delivered to the Trustee, subject
to the provisions of such covenant.
"REVOCATION" has the meaning set forth under "-- Certain Covenants --
Limitation on Designations of Unrestricted Subsidiaries."
"REVOLVING CREDIT FACILITY" means the Credit Agreement dated as of June 28,
1996, between the Company, one or more of the Guarantors and Heller Financial,
Inc., together with the related documents thereto (including, without
limitation, any guarantee agreements and security documents), in each case as
such agreements may be amended (including any amendment and restatement
thereof), supplemented or otherwise modified from time to time, including any
agreement extending the maturity of, refinancing, replacing or otherwise
restructuring (including increasing the amount of available borrowings
thereunder (PROVIDED that such increase in borrowings is permitted by the
covenant described under "-- Certain
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Covenants -- Limitation on Incurrence of Additional Indebtedness") or adding
Subsidiaries of the Company as additional borrowers or guarantors thereunder)
all or any portion of the Indebtedness under such agreement or any successor or
replacement agreement and whether by the same or any other agent, lender or
group of lenders.
"SALE AND LEASEBACK TRANSACTION" means any direct or indirect arrangement
with any Person or to which any such Person is a party, providing for the
leasing to the Company or a Restricted Subsidiary of any property, whether owned
by the Company or any Restricted Subsidiary at the Issue Date or later acquired,
which has been or is to be sold or transferred by the Company or such Restricted
Subsidiary to such Person or to any other Person from whom funds have been or
are to be advanced by such Person on the security of such property.
"SECURITY DOCUMENTS" means, collectively, each of the securities pledge
agreements between the Company or one of its Subsidiaries, as the case may be,
and the Trustee pursuant to which capital stock of the Guarantors will be
pledged to secure the Notes in accordance with the provisions of the Indenture
and all other instruments evidencing or creating any security interest in favor
of the Trustee for the benefit of the Holders, as the same may be amended from
time to time in accordance with their terms.
"SIGNIFICANT SUBSIDIARY" shall have the meaning set forth in Rule 1.02(v) of
Regulation S-X under the Securities Act.
"SUBSIDIARY", with respect to any Person, means (a) any corporation of which
the outstanding Capital Stock having at least a majority of the votes entitled
to be cast in the election of directors under ordinary circumstances shall at
the time be owned, directly or indirectly, by such Person or (b) any other
Person of which at least a majority of the voting interest under ordinary
circumstances is at the time, directly or indirectly, owned by such Person.
"SURVIVING ENTITY" has the meaning set forth under "-- Certain Covenants --
Merger, Consolidation and Sale of Assets."
"UNRESTRICTED SUBSIDIARY" means any Subsidiary of the Company designated as
such pursuant to and in compliance with the covenant described under "-- Certain
Covenants -- Limitation on Designations of Unrestricted Subsidiaries." Any such
designation may be revoked by a Board Resolution of the Company delivered to the
Trustee, subject to the provisions of such covenant.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the then outstanding
aggregate principal amount of such Indebtedness into (b) the sum of the total of
the products obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required payment of
principal, including payment at final maturity, in respect thereof, by (ii) the
number of years (calculated to the nearest one-twelfth) which will elapse
between such date and the making of such payment.
"WHOLLY OWNED RESTRICTED SUBSIDIARY" means any Restricted Subsidiary of
which all the outstanding voting securities (other than in the case of a foreign
Restricted Subsidiary, directors' qualifying shares or an immaterial amount of
shares required to be owned by other Persons pursuant to applicable law) are
owned by the Company or another Wholly Owned Restricted Subsidiary.
OLD NOTES REGISTRATION RIGHTS
Pursuant to the Registration Rights Agreement, NFC and certain former
Guarantors have agreed to file with the Commission the Exchange Offer
Registration Statement on an appropriate form under the Securities Act with
respect to an offer to exchange the Old Notes for the New Notes. Upon the
effectiveness of the Exchange Offer Registration Statement, NFC will offer to
the holders of Old Notes who are able to make certain representations the
opportunity to exchange their Old Notes for New Notes. If (a) NFC is not
permitted to file the Exchange Offer Registration Statement or to consummate the
Exchange Offer because the Exchange Offer is not permitted by applicable law or
Commission policy or (b) any holder of Old Notes notifies NFC on or prior to the
30th day following the Issue Date that (i) due to a change in applicable law or
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policy it is not entitled to participate in the Exchange Offer, (ii) due to a
change in applicable law or policy it may not resell the New Notes acquired by
it in the Exchange Offer to the public without delivering a prospectus and the
prospectus contained in the Exchange Offer Registration Statement is not
appropriate or available for such resales by such holder or (iii) it owns Old
Notes acquired directly from NFC or an affiliate of NFC, NFC and the Guarantors
will file with the Commission the Shelf Registration Statement to cover resales
of each Transfer Restricted Note (as defined) by the holder thereof. NFC and the
Guarantors will use their best efforts to cause the applicable registration
statement to be declared effective as promptly as possible by the Commission.
For purposes of the foregoing, a "Transfer Restricted Note" means each Old Note
until (a) the date on which such Old Note has been exchanged by a person other
than a broker-dealer for a New Note in the Exchange Offer, (b) following the
exchange by a broker-dealer in the Exchange Offer of an Old Note for a New Note,
the date on which such Old Note is sold to a purchaser who receives from such
broker-dealer on or prior to the date of such sale a copy of the prospectus
contained in the Exchange Offer Registration Statement, (c) the date on which
such New Note has been effectively registered under the Securities Act and
disposed of in accordance with the Shelf Registration Statement, (d) the day on
which such Old Note is eligible for sale to the public without volume or manner
of sale restrictions under Rule 144(k) under the Securities Act, or (e) such Old
Note ceases to be outstanding.
Under existing Commission interpretations, the New Notes would, in general,
be freely transferable after the Exchange Offer without further registration
under the Securities Act; provided that in the case of broker-dealers
participating in the Exchange Offer, a prospectus meeting the requirements of
the Securities Act will be delivered upon resale by such broker-dealer in
connection with resales of the New Notes. NFC and the Guarantors have agreed,
for a period of 180 days after consummation of the Exchange Offer, to make
available a prospectus meeting the requirements of the Securities Act to any
such broker-dealer for use in connection with any resale of any New Notes
acquired in the Exchange Offer. A broker-dealer which delivers such a prospectus
to purchasers in connection with such resales will be subject to certain of the
civil liability provisions under the Securities Act and will be bound by the
provisions of the Registration Rights Agreement (including certain
indemnification rights and obligations).
Each holder of Notes who wishes to exchange such Old Notes for New Notes in
the Exchange Offer will be required to make certain representations, including
representations that (a) any New Notes to be received by it will be acquired in
the ordinary course of its business, (b) it has no arrangement with any person
to participate in the distribution of the New Notes and (c) it is not an
"affiliate," as defined in Rule 405 of the Securities Act, of NFC, or, if it is
an affiliate, it will comply with the registration and prospectus delivery
requirements of the Securities Act to the extent applicable.
If the holder is not a broker-dealer, it will be required to represent that
it is not engaged in, and does not intend to engage in, the distribution of the
New Notes. If the holder 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 will be required to
acknowledge that it will deliver a prospectus in connection with any resale of
such New Notes.
The Registration Rights Agreement provides that: (a) unless the Exchange
Offer would not be permitted by applicable law or Commission policy, NFC will
file the Exchange Offer Registration Statement with the Commission on or prior
to the 30th day after the Issue Date, (b) unless the Exchange Offer would not be
permitted by applicable law or Commission policy, NFC will use its best efforts
to have the Exchange Offer Registration Statement declared effective by the
Commission on or prior to the 120th day after the Issue Date, (c) unless the
Exchange Offer would not be permitted by applicable law or Commission policy,
NFC will commence the Exchange Offer and use its best efforts to issue, on or
prior to 20 business days after the date on which the Exchange Offer
Registration Statement was declared effective by the Commission, New Notes in
exchange for all Old Notes tendered prior thereto in the Exchange Offer and (d)
if obligated to file the Shelf Registration Statement, NFC will file the Shelf
Registration Statement prior to the later of (i) 60 days after the Issue Date or
(ii) 30 days after such filing obligation arises and use its best efforts to
cause the Shelf Registration Statement to be declared effective by the
Commission on or prior to 90 days after the filing thereof; PROVIDED that if NFC
has not commenced the Exchange Offer within 120 days of the Issue Date, NFC will
file the Shelf Registration with the Commission on or prior to the 121st day
after the
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Issue Date. NFC shall use its best efforts to keep such Shelf Registration
Statement continuously effective, supplemented and amended until the third
anniversary of the Issue Date or such shorter prior that will terminate when all
the Transfer Restricted Notes covered by the Shelf Registration Statement have
been sold pursuant thereto.
If (a) NFC fails 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 are not declared effective by the
Commission on or prior to the date specified for such effectiveness (the
"Effectiveness Target Date"), (c) NFC fails to consummate the Exchange Offer
within 20 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, subject to certain exceptions, ceases to be effective or usable in
connection with the Exchange Offer or resales of Transfer Restricted Notes, as
the case may be, 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 interest rate on Transfer Restricted Notes
will increase ("Additional Interest"), with respect to the first 90-day period
immediately following the occurrence of such Registration Default by 0.5% PER
ANNUM and will increase by an additional 0.5% per annum with respect to each
subsequent 90-day period until such Registration Default has been cured, up to a
maximum amount of 1.0% PER ANNUM. Following the cure of all Registration
Defaults, the accrual of Additional Interest will cease and the interest rate
will revert to the original rate.
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CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
The following summary of the material anticipated federal income tax
consequences of the issuance of New Notes and the Exchange Offer is based upon
the provisions of the Internal Revenue Code of 1986, as amended, the final,
temporary and proposed regulations promulgated thereunder, and administrative
rulings and judicial decisions now in effect, all of which are subject to change
(possibly with retroactive effect) or different interpretations. The following
summary is based on an opinion of counsel to the Company which is not binding on
the Internal Revenue Service ("IRS") and there can be no assurance that the IRS
will take a similar view with respect to the tax consequences described below.
No ruling has been or will be requested by the Company from the IRS on any tax
matters relating to the New Notes or the Exchange Offer. This discussion does
not purport to address all of the possible federal income tax consequences or
any state, local or foreign tax consequences of the acquisition, ownership and
disposition of the Old Notes, the New Notes or the Exchange Offer. It is limited
to investors who will hold the Old Notes and the New Notes as capital assets and
does not address the federal income tax consequences that may be relevant to
particular investors in light of their unique circumstances or to certain types
of investors (such as dealers in securities, insurance companies, financial
institutions, foreign corporations, partnerships, trusts, nonresident
individuals, and tax-exempt entities) who may be subject to special treatment
under federal income tax laws.
INDEBTEDNESS
The Old Notes and the New Notes should be treated as indebtedness of the
Company. In the unlikely event the Old Notes or the New Notes were treated as
equity, the amount treated as a distribution on any such Old Note or New Note
would first be taxable to the holder as dividend income to the extent of the
Company's current and accumulated earnings and profits, and would next be
treated as a return of capital to the extent of the holder's tax basis in the
Old Notes or New Notes, with any remaining amount treated as a gain from the
sale of an Old Note or a New Note. In addition, in the event of equity
treatment, amounts received in retirement of an Old Note or a New Note might in
certain circumstances be treated as a dividend, and the Company could not deduct
amounts paid as interest on such Old Notes or New Notes. The remainder of this
discussion assumes that the Old Notes and the New Notes will constitute
indebtedness.
EXCHANGE OFFER
The exchange of the Old Notes for New Notes pursuant to the Exchange Offer
should not be treated as an "exchange" because the New Notes should not be
considered to differ materially in kind or extent from the Old Notes. Rather,
the New Notes received by a holder of the Old Notes should be treated as a
continuation of the Old Notes in the hands of such holder. As a result, there
should be no federal income tax consequences to holders exchanging the Old Notes
for the New Notes pursuant to the Exchange Offer, and the holding period of New
Notes in the hands of a holder should include the holding period of the Old
Notes exchanged into such New Notes.
INTEREST
A holder of an Old Note or a New Note will be required to report stated
interest on the Old Note and the New Note as interest income in accordance with
the holder's method of accounting for tax purposes. Because the Old Notes were
issued at par there is no original issue discount pursuant to the de minimis
exception to the "original issue discount" rules.
TAX BASIS IN OLD NOTES AND NEW NOTES
A holder's tax basis in an Old Note will generally be the holder's purchase
price for the Old Note. If a holder of an Old Note exchanges the Old Note for a
New Note pursuant to the Exchange Offer, the tax basis of the New Note
immediately after such exchange should equal the holder's tax basis in the Old
Note immediately prior to the exchange.
DISPOSITION OF OLD NOTES OR NEW NOTES
The sale, exchange, redemption or other disposition of an Old Note or a New
Note, except in the case of an exchange pursuant to the Exchange Offer (see the
above discussion), generally will be a taxable event. A holder generally will
recognize gain or loss equal to the difference between (i) the amount of cash
plus the
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fair market value of any property received upon such sale, exchange, redemption
or other taxable disposition of the Old Note or the New Note (except to the
extent attributable to accrued interest) and (ii) the holder's adjusted tax
basis in such debt instrument. Such gain or loss will be capital gain or loss,
and will be long term if the Old Notes or the New Notes have been held for more
than one year at the time of the sale or other disposition.
PURCHASERS OF OLD NOTES AT OTHER THAN ORIGINAL ISSUANCE PRICE
The foregoing does not discuss special rules which may affect the treatment
of purchasers that acquired Old Notes other than at par, including those
provisions of the Internal Revenue Code relating to the treatment of "market
discount," and "amortizable bond premium." Any such purchaser should consult its
tax advisor as to the consequences to him of the acquisition, ownership, and
disposition of Old Notes.
BACKUP WITHHOLDING
Unless a holder provides its correct taxpayer identification number
(employer identification number or social security number) to the Company and
certifies that such number is correct, generally under the federal income tax
backup withholding rules, 31% of (1) the interest paid on the Old Notes and the
New Notes, and (2) proceeds of sale of the Old Notes and the New Notes, must be
withheld and remitted to the United States Treasury. Therefore, each holder
should complete and sign the Substitute Form W-9 included so as to provide the
information and certification necessary to avoid backup withholding. However,
certain holders (including, among others, certain foreign individuals) are not
subject to these backup withholding and reporting requirements. For a foreign
individual holder to qualify as an exempt foreign recipient, that holder must
submit a statement, signed under penalties of perjury, attesting to that
individual's exempt foreign status. Such statements can be obtained from the
Company. For further information concerning backup withholding and instructions
for completing the Substitute Form W-9 (including how to obtain a taxpayer
identification number if you do not have one and how to complete the Substitute
Form W-9 if the Old Notes are held in more than one name), contact the Company's
assistant Secretary, 5775 Peachtree Dunwoody Road, Suite C150, Atlanta, GA 30342
or telephone number (404) 256-1123, Ext. 304.
Backup withholding is not an additional federal income tax. Rather, the
federal income tax liability of a person subject to backup withholding will be
reduced by the amount of tax withheld. If backup withholding results in an
overpayment of taxes, a refund may be obtained from the IRS.
BOOK-ENTRY; DELIVERY AND FORM
The New Notes initially will be represented by a single, permanent global
certificate in definitive, fully registered form (the "Global Note"). The Global
Note will be deposited on the Closing Date with, or on behalf of, The Depository
Trust Company ("DTC") and registered in the name of a nominee of DTC.
THE GLOBAL NOTES. NFC expects that pursuant to procedures established by
DTC (a) upon the issuance of the Global Notes, DTC or its custodian will credit,
on its internal system, the principal amount of Notes of the individual
beneficial interests represented by the Global Notes to the respective accounts
of persons who have accounts with DTC and (b) ownership of beneficial interests
in the Global Notes will be shown on, and the transfer of such ownership will be
effected only through, records maintained by DTC or its nominee (with respect to
interests of Participants (as defined herein)) and the records of Participants
(with respect to interests of persons other than Participants). Such accounts
initially will be designated by or on behalf of the Initial Purchasers and
ownership of beneficial interests in the Global Notes will be limited to persons
who have accounts with DTC ("Participants") or persons who hold interests
through Participants. Interests in the Global Notes may be held directly through
DTC, by Participants, or indirectly through organizations which are
Participants.
So long as DTC, or its nominee, is the registered owner or holder of the
Global Notes, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the New Notes represented by such Global Notes for all
purposes under the Indenture. No beneficial owner of an interest in any Global
Notes will be able to transfer that interest except in accordance with DTC's
procedures, in addition to those provided for under the Indenture.
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Payments of the principal of, premium, if any, and interest (including
Additional Interest) on the Global Notes will be made to DTC or its nominee, as
the case may be, as the registered owner thereof. None of NFC, the Trustee or
any paying agent will have any responsibility or liability for any aspect of the
records relating to or payments made on account of beneficial ownership
interests in the Global Notes or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interest.
NFC expects that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, or interest (including Additional Interest) in
respect of the Global Notes, will credit Participants' accounts with payments in
amounts proportionate to their respective beneficial interests in the principal
amount of the Global Notes as shown on the records of DTC or its nominee. NFC
also expects that payments by Participants to owners of benefits interests in
the Global Notes held through such Participants will be governed by standing
instructions and customary practice, as is now the case with securities held for
the accounts of customers registered in the names of nominees for such
customers. Such payments will be the responsibility of such Participants.
Transfers between Participants will be effected in the ordinary way in
accordance with DTC rules and will be settled in clearinghouse funds. If a
holder requires physical delivery of a Certificated Note for any reason,
including to sell New Notes to persons in states which require physical delivery
of the New Notes, or to pledge such securities, such holder must transfer its
interest in a Global Note in accordance with the normal procedures of DTC and
with the procedures set forth in the Indenture.
DTC has advised NFC that it will take any action permitted to be taken by a
holder of New Notes (including the presentation of New Notes for exchange as
described below) only at the direction of one or more Participants to whose
account the DTC interests in the Global Notes are credited and only in respect
of such portion of the aggregate principal amount of New Notes as to which such
Participant or Participants has or have given such direction. However, if there
is an Event of Default under the Indenture, DTC will exchange the Global Notes
in whole for Certificated Notes, which it will distribute to the Participants
and which will be legended as set forth under the heading "Transfer
Restrictions."
DTC has advised NFC as follows: DTC is a limited purpose trust company
organized under the laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the Uniform
Commercial Code and a "Clearing Agency" registered pursuant to the provisions of
Section 17A of the Exchange Act. DTC was created to hold securities for
Participants and facilitate the clearance and settlement of securities
transactions between Participants through electronic book-entry changes in
accounts of its Participants, thereby eliminating the need for physical movement
of certificates. Participants include securities brokers and dealers, banks,
trust companies and clearing corporations and certain other organizations.
Indirect access to the DTC system is available to others such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly ("Indirect
Participants").
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Notes among Participants, it is under no
obligation to perform such procedures, and such procedures may be discontinued
at any time. Neither NFC nor the Trustee will have any responsibility for the
performance by DTC or the Participants or Indirect Participants of their
respective obligations under the rules and procedures governing their
operations.
CERTIFICATED NOTES. If DTC is at any time unwilling or unable to continue
as a depositary for the Global Notes and a successor depositary is not appointed
by NFC within 90 days, Certificated Notes will be issued in exchange for the
Global Notes.
88
<PAGE>
PLAN OF DISTRIBUTION
Based on interpretations by the Staff set forth in no-action letters issued
to third parties, the Company believes that New Notes issued pursuant to the
Exchange Offer in exchange for the Old Notes may be offered for resale, resold
and otherwise transferred by holders thereof (other than any holder which is (i)
an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act, (ii) a broker-dealer who acquired Notes directly from the
Company or (iii) broker-dealers who acquired Notes as a result of market-making
or other trading activities) 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 are not engaged in, and do not intend to engage in, and have no
arrangement or understanding with any person to participate in, a distribution
of such New Notes; provided that broker-dealers ("Participating Broker-Dealers")
receiving New Notes in the Exchange Offer will be subject to a prospectus
delivery requirement with respect to resales of such New Notes. To date, the
Staff has taken the position that Participating Broker-Dealers may fulfill their
prospectus delivery requirements with respect to transactions involving an
exchange of securities such as the exchange pursuant to the Exchange Offer
(other than a resale of an unsold allotment from the sale of the Old Notes to
the Initial Purchasers) with the Prospectus, contained in the Exchange Offer
Registration Statement. Pursuant to the Registration Rights Agreement, the
Company has agreed to permit Participating Broker-Dealers and other persons, if
any, subject to similar prospectus delivery requirements to use this Prospectus
in connection with the resale of such New Notes. The Company has agreed that,
for a period of 180 days after the Expiration Date, it will make this
Prospectus, and any amendment or supplement to this Prospectus, available to any
broker-dealer that requests such documents in the Letter of Transmittal.
Each holder of the Old Notes who wishes to exchange its Old Notes for New
Notes in the Exchange Offer will be required to make certain representations to
the Company as set forth in "The Exchange Offer -- Terms and Conditions of the
Letter of Transmittal." In addition, each holder who is a broker-dealer and who
receives New Notes for its own account in exchange for Old Notes that were
acquired by it as a result of market-making activities or other trading
activities, will be required to acknowledge that it will deliver a prospectus in
connection with any resale by it of such New Notes.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such New Notes. Any broker-dealer
that resells New Notes that were received by it for its own account pursuant to
the Exchange Offer and any broker or dealer that participates in a distribution
of such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of New Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
The Company has agreed to pay all expenses incidental to the Exchange Offer
other than commissions and concessions of any brokers or dealers and will
indemnify holders of the Old Notes (including any broker-dealers) against
certain liabilities, including liabilities under the Securities Act, as set
forth in the Registration Rights Agreement.
89
<PAGE>
EXPERTS
The NFC balance sheets as of December 31, 1994 and 1995 and the statements
of operations, stockholder's equity and cash flows for each of the three years
in the period ended December 31, 1995 included in this Prospectus have been
audited by Arthur Andersen LLP, independent public accountants, as stated in
their report with respect thereto, and are included herein on reliance upon the
authority of said firm as experts in giving said report.
The Transkrit consolidated balance sheets as of December 31, 1994 and 1995,
and the consolidated statements of income, changes in shareholders' equity and
cash flows for each of the years in the three-year period ended December 31,
1995 have been included in this Prospectus and in the Registration Statement in
reliance upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, included herein, and upon the authority of said firm as experts in
accounting and auditing.
LEGAL MATTERS
The validity of the issuance of securities offered hereby and certain tax
matters will be passed upon for the Company by White & Case, New York, New York.
90
<PAGE>
INDEX TO FINANCIAL STATEMENTS
NATIONAL FIBERSTOK CORPORATION
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Public Accountants................................................................... F-2
Balance Sheets at December 31, 1994 and 1995 and June 30, 1996 (unaudited)................................. F-4
Statements of Operations for the years ended December 31, 1993, 1994 and 1995 and the six months ended June
30, 1995 and 1996 (unaudited)............................................................................ F-6
Statements of Stockholder's Equity for the years ended December 31, 1993, 1994 and 1995.................... F-7
Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995 and the six months ended June
30, 1995 and 1996 (unaudited)............................................................................ F-8
Notes to Financial Statements.............................................................................. F-9
</TABLE>
TRANSKRIT AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Independent Auditors' Report............................................................................... F-20
Consolidated Balance Sheets at December 31, 1994 and 1995.................................................. F-21
Consolidated Statements of Income for the years ended December 31, 1993, 1994 and 1995 and the six months
ended June 30, 1995 and June 28, 1996 (unaudited)........................................................ F-23
Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1993, 1994 and
1995..................................................................................................... F-24
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995 and the six
months ended June 30, 1995 and June 28, 1996 (unaudited)................................................. F-25
Notes to Consolidated Financial Statements................................................................. F-26
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholder of National Fiberstok
Corporation:
We have audited the accompanying balance sheets of NATIONAL FIBERSTOK
CORPORATION (a Delaware corporation) as of December 31, 1994 and 1995 and the
related statements of operations, stockholder's equity, and cash flows for each
of the three years in the period ended December 31, 1995. 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 financial position of National Fiberstok
Corporation as of December 31, 1994 and 1995 and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1995 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
May 24, 1996
(except with respect
to the matter discussed
in Note 10, as to which
the date is September 17,
1996)
F-2
<PAGE>
(This page has been left blank intentionally.)
F-3
<PAGE>
NATIONAL FIBERSTOK CORPORATION
BALANCE SHEETS
DECEMBER 31, 1994 AND 1995 AND JUNE 30, 1996 (UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------
1994 1995
------------- ------------- JUNE 30, 1996
--------------
(UNAUDITED)
<S> <C> <C> <C>
Current Assets:
Cash............................................................. $ 283,322 $ 444,422 $ 1,135,872
Accounts receivable, net of allowance for doubtful accounts of
$141,841, $171,950, and $602,819, respectively.................. 9,091,880 8,875,098 17,868,029
Inventories...................................................... 5,733,570 5,591,888 11,493,166
Investment securities............................................ -- -- 2,620,000
Other............................................................ 355,981 363,935 3,606,743
------------- ------------- --------------
Total current assets....................................... 15,464,753 15,275,343 36,723,810
------------- ------------- --------------
Property and Equipment:
Land............................................................. 360,369 335,982 1,852,581
Buildings........................................................ 1,759,649 1,762,147 12,560,395
Machinery and equipment.......................................... 10,982,694 11,247,136 33,889,475
Office equipment, furniture and fixtures......................... 366,546 890,809 4,087,381
Leasehold improvements........................................... 53,547 70,290 1,035,605
Construction in progress......................................... -- 1,383,915 1,125,280
------------- ------------- --------------
13,522,805 15,690,279 54,550,717
Less accumulated depreciation and amortization................... (3,642,232) (5,388,670) (6,303,053)
------------- ------------- --------------
Net property and equipment................................. 9,880,573 10,301,609 48,247,664
------------- ------------- --------------
Other Assets:
Patents.......................................................... -- -- 19,444,000
Goodwill, net of accumulated amortization of $594,355, $830,468,
and $948,524, respectively...................................... 8,382,301 8,146,188 24,987,191
Covenants not to compete, net of accumulated amortization of
$3,242,741, $4,667,741, and $5,321,908, respectively............ 2,407,292 982,292 868,609
Deferred financing costs, net of accumulated amortization of
$602,755, $833,339, and $0, respectively........................ 819,038 588,454 5,062,512
Prepaid pension cost (Note 8).................................... 742,126 922,436 1,885,164
Deferred income taxes (Note 5)................................... -- 1,900,000 --
Other............................................................ 140,519 -- 399,784
------------- ------------- --------------
Total other assets......................................... 12,491,276 12,539,370 52,647,260
------------- ------------- --------------
Total assets............................................... $ 37,836,602 $ 38,116,322 $ 137,618,734
------------- ------------- --------------
------------- ------------- --------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-4
<PAGE>
NATIONAL FIBERSTOK CORPORATION
BALANCE SHEETS
DECEMBER 31, 1994 AND 1995 AND JUNE 30, 1996 (UNAUDITED)
LIABILITIES AND STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------
1994 1995
------------- ------------- JUNE 30, 1996
--------------
(UNAUDITED)
<S> <C> <C> <C>
Current Liabilities:
Current portion of long-term debt................................ $ 1,473,064 $ 2,105,935 $ 384,295
Bank overdraft................................................... -- 2,354,439 1,878,659
Accounts payable................................................. 4,226,033 2,082,277 3,747,726
Accrued transaction expenses..................................... -- -- 1,789,645
Accrued expenses and other....................................... 2,563,747 1,550,494 8,920,058
------------- ------------- --------------
Total current liabilities...................................... 8,262,844 8,093,145 16,720,383
------------- ------------- --------------
Noncurrent Liabilities............................................. 1,930,517 1,883,713 5,707,135
------------- ------------- --------------
Long-Term Debt (Note 4):
Old Notes........................................................ -- -- 100,000,000
Long-term debt................................................... 10,322,488 9,847,535 2,411,999
Revolving line of credit......................................... 7,000,000 7,050,000 --
Subordinated debt................................................ 4,453,524 4,514,710 --
------------- ------------- --------------
Total long-term debt........................................... 21,776,012 21,412,245 102,411,999
------------- ------------- --------------
Commitments and Contingencies (Note 9)
Stockholder's Equity:
Common stock, $.01 par value, 300,000 shares authorized, 283,807
shares issued and outstanding................................... 2,838 2,838 2,838
Additional paid-in capital....................................... 14,532,070 14,532,070 22,296,581
Accumulated deficit.............................................. (8,667,679) (7,807,689) (9,520,202)
------------- ------------- --------------
Total stockholder's equity..................................... 5,867,229 6,727,219 12,779,217
------------- ------------- --------------
Total liabilities and stockholder's equity..................... $ 37,836,602 $ 38,116,322 $ 137,618,734
------------- ------------- --------------
------------- ------------- --------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-5
<PAGE>
NATIONAL FIBERSTOK CORPORATION
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994, AND 1995
AND THE SIX-MONTH PERIODS ENDED JUNE 30, 1995 AND 1996 (UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30
------------------------------------------- ----------------------------
1993 1994 1995 1995 1996
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales............................ $ 64,544,948 $ 65,998,093 $ 71,257,112 $ 33,833,212 $ 31,816,116
Cost of products sold................ 51,383,635 52,610,089 55,708,018 26,623,751 25,259,694
------------- ------------- ------------- ------------- -------------
Gross profit......................... 13,161,313 13,388,004 15,549,094 7,209,461 6,556,422
------------- ------------- ------------- ------------- -------------
Operating expenses:
Selling............................ 5,887,840 5,936,621 6,760,438 3,336,311 3,618,696
General and administrative......... 5,401,862 4,777,837 4,833,618 2,477,784 2,059,235
Amortization:
Covenants not to compete......... 1,396,133 1,425,000 1,439,607 712,500 654,167
Goodwill......................... 195,946 240,433 236,113 114,974 118,056
Other............................ 48,000 48,000 140,000 24,001 --
Provision for plant shutdown....... 1,595,277 -- -- -- --
Provision for building disposal.... 656,000 -- -- -- --
------------- ------------- ------------- ------------- -------------
Total operating expenses......... 15,181,058 12,427,891 13,409,776 6,665,570 6,450,154
------------- ------------- ------------- ------------- -------------
Income (loss) from operations........ (2,019,745) 960,113 2,139,318 543,891 106,268
Interest expense..................... 2,872,483 2,974,755 3,179,328 1,581,583 1,557,598
------------- ------------- ------------- ------------- -------------
Net loss before income taxes and
extraordinary item.................. (4,892,228) (2,014,642) (1,040,010) (1,037,692) (1,451,330)
Income tax benefit................... 1,342,723 -- 1,900,000 -- 536,579
------------- ------------- ------------- ------------- -------------
Net loss before extraordinary item... (3,549,505) (2,014,642) 859,990 (1,037,692) (914,751)
Extraordinary loss on early
retirement of debt, net of tax
benefit of $460,864................. -- -- -- -- (797,762)
------------- ------------- ------------- ------------- -------------
Net income (loss).................... $ (3,549,505) $ (2,014,642) $ 859,990 $ (1,037,692) $ (1,712,513)
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
NATIONAL FIBERSTOK CORPORATION
STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994, AND 1995
AND THE SIX MONTH PERIOD ENDED JUNE 30, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES ADDITIONAL
COMMON COMMON PAID-IN ACCUMULATED
STOCK STOCK CAPITAL DEFICIT TOTAL
---------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1992................... 283,807 $ 2,838 $ 14,532,070 $ (3,103,532) $ 11,431,376
Net loss..................................... -- -- -- (3,549,505) (3,549,505)
---------- ----------- ------------- ------------- -------------
Balance, December 31, 1993................... 283,807 2,838 14,532,070 (6,653,037) 7,881,871
Net loss..................................... -- -- -- (2,014,642) (2,014,642)
---------- ----------- ------------- ------------- -------------
Balance, December 31, 1994................... 283,807 2,838 14,532,070 (8,667,679) 5,867,229
Net income................................... -- -- -- 859,990 859,990
---------- ----------- ------------- ------------- -------------
Balance, December 31, 1995................... 283,807 2,838 14,532,070 (7,807,689) 6,727,219
---------- ----------- ------------- ------------- -------------
---------- ----------- ------------- ------------- -------------
Capital contribution......................... -- -- 7,764,511 -- 7,764,511
Net loss..................................... -- -- -- (1,712,513) (1,712,513)
---------- ----------- ------------- ------------- -------------
Balance, June 30, 1996....................... 283,807 $ 2,838 $ 22,296,581 $ (9,520,202) $ 12,779,217
---------- ----------- ------------- ------------- -------------
---------- ----------- ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
NATIONAL FIBERSTOK CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994, AND 1995
AND THE SIX-MONTH PERIODS ENDED JUNE 30, 1995 AND 1996 (UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------
1993 1994 1995
---------- ---------- ---------- JUNE 30
------------------------
1995 1996
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income.............................. $(3,549,505) $(2,014,642) $ 859,990 ($1,051,887) ($1,712,513)
---------- ---------- ---------- ----------- -----------
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Extraordinary loss on early retirement of
debt, net of income tax benefit............. -- -- -- -- 797,762
Depreciation and amortization................ 3,521,041 3,685,439 4,004,992 1,705,234 1,975,599
Provision for plant shutdown................. 1,595,277 -- -- -- --
Provision for building disposal.............. 656,000 -- -- -- --
Provision for deferred income taxes.......... (1,342,723) -- (1,900,000) -- (536,579)
Net gain on disposal of property and
equipment................................... -- (86,604) (173,646) -- (237,536)
Amortization of prepaid pension asset........ 172,184 (77,853) (180,310) (90,158) 150,072
Imputed interest............................. 117,344 134,501 130,172 65,086 56,039
Changes in operating assets and liabilities:
Accounts receivable........................ (593,182) (1,117,611) 216,782 226,282 1,562,029
Inventories................................ 281,347 (459,217) 141,682 (551,229) 785,188
Other assets............................... 348,879 (257,594) (7,436) (278,642) (401,217)
Accounts payable........................... (522,834) 2,563,236 (2,143,754) (864,402) (55,038)
Accrued expenses and other................. 1,163,032 (1,166,381) (1,165,768) (377,226) 132,331
---------- ---------- ---------- ----------- -----------
Total adjustments........................ 5,396,365 3,217,916 (1,077,286) (165,055) 4,228,650
---------- ---------- ---------- ----------- -----------
Net cash provided by (used in) operating
activities.............................. 1,846,860 1,203,274 (217,296) (1,216,942) 2,516,137
---------- ---------- ---------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............ (1,179,251) (940,387) (2,308,105) (361,660) (645,538)
Proceeds from sale of property and equipment... -- 546,959 369,194 -- 422,041
Restricted certificate of deposit.............. 125,000 125,000 -- -- --
Cash paid for assets acquired.................. (229,000) -- -- -- --
Cash paid for business acquired, net of cash
acquired...................................... -- -- -- -- (79,421,557)
---------- ---------- ---------- ----------- -----------
Net cash used in investing activities.... (1,283,251) (268,428) (1,938,911) (361,660) (79,645,054)
---------- ---------- ---------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in bank overdraft, net..... 0 0 2,354,437 1,618,800 (2,354,437)
Borrowings (payments) on Term Loan B........... -- -- 1,000,000 -- (4,500,000)
Payments on Term Loan A........................ (1,050,000) (1,250,000) (1,050,000) (700,000) (7,400,000)
Payments on other long-term debt............... (300,000) (100,000) -- -- (5,150,000)
Payments on capital leases..................... (7,924) (8,206) (37,130) (17,398) (26,840)
Net borrowings (payments) on revolving line of
credit........................................ 200,000 500,000 50,000 500,000 (7,050,000)
Additional capital contribution................ -- -- -- -- 7,764,511
Increase in deferred financing costs........... -- -- -- -- (3,462,867)
Proceeds from issuance of long-term debt....... -- -- -- -- 100,000,000
---------- ---------- ---------- ----------- -----------
Net cash provided by (used in) financing
activities.............................. (1,157,924) (858,206) 2,317,307 1,401,402 77,820,367
---------- ---------- ---------- ----------- -----------
NET (DECREASE) INCREASE IN CASH.................. (594,315) 76,640 161,100 (177,200) 691,450
CASH, BEGINNING OF PERIOD........................ 800,997 206,682 283,322 283,322 444,422
---------- ---------- ---------- ----------- -----------
CASH, END OF PERIOD.............................. $ 206,682 $ 283,322 $ 444,422 $ 106,122 $1,135,872
---------- ---------- ---------- ----------- -----------
---------- ---------- ---------- ----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH PAID FOR
INTEREST........................................ $2,470,000 $2,412,000 $2,821,000
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-8
<PAGE>
NATIONAL FIBERSTOK CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994, AND 1995 AND
THE SIX-MONTH PERIODS ENDED JUNE 30, 1995 AND 1996 (UNAUDITED)
1. BACKGROUND
National Fiberstok Corporation ("NFC" or the "Company"), a wholly-owned
subsidiary of DEC International, Inc. ("DEC"), manufactures and distributes a
broad range of stationery products, including envelopes, catalog inserts,
labels, and office supplies. The Company markets its products to customers
throughout the United States through divisions in Roanoke, Virginia; Austell,
Georgia; Louisville, Kentucky; Gainesville, Florida; and Greenville, South
Carolina.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
For purposes of reporting cash flows, the Company considers all highly
liquid investments, principally with an original maturity of 90 days or less, to
be cash equivalents.
INVESTMENT SECURITIES
Investment securities consist of zero-coupon municipal debt securities which
are classified as held-to-maturity and are stated at cost. Interest income is
recognized when earned.
ACCOUNTS RECEIVABLE
A summary of changes in the allowance for doubtful accounts is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1993 1994 1995
---------- ----------- ----------
<S> <C> <C> <C>
Balance, beginning of period................................................ $ 237,330 $ 148,084 $ 141,841
Provisions.................................................................. -- 83,602 78,089
Recoveries.................................................................. 1,077 18,770 18,679
Write-offs.................................................................. (90,323) (108,615) (66,659)
---------- ----------- ----------
Balance, end of period...................................................... $ 148,084 $ 141,841 $ 171,950
---------- ----------- ----------
---------- ----------- ----------
</TABLE>
INVENTORIES
Inventories are stated at the lower of cost or market. Costs of raw
materials are determined using the first-in, first-out ("FIFO") method. Costs
(net of an obsolescence reserve) of work in process, finished goods, and
customized stock (consisting of product which has been produced and held for
certain customers under short-term delayed-shipping arrangements) are determined
using the average cost (which approximates FIFO) or FIFO method.
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------------- -------------
1994 1995 1996
------------ ------------ -------------
<S> <C> <C> <C>
Raw materials......................................................... $ 3,342,522 $ 2,764,452 $ 6,010,949
Work in process....................................................... 799,460 968,671 1,326,026
Finished goods........................................................ 414,393 556,649 2,968,527
Customized stock...................................................... 1,177,195 1,302,116 1,187,664
------------ ------------ -------------
$ 5,733,570 $ 5,591,888 $ 11,493,166
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
F-9
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and are depreciated using the
straight-line method over the following lives:
<TABLE>
<CAPTION>
Buildings..................................................................... 30 years
<S> <C>
Machinery and equipment....................................................... 5 to 7 years
Office equipment.............................................................. 4 to 5 years
4 to 30
Leasehold improvements........................................................ years
</TABLE>
Leasehold improvements are depreciated over the lesser of the useful lives
of the assets or the lease term.
The Company's policy is to remove the cost and accumulated depreciation of
retirements from the accounts and recognize the related gain or loss upon the
disposition of assets.
GOODWILL
Goodwill is stated at cost less accumulated amortization and is amortized
over 15 to 40 years using the straight-line method. The recoverability of
goodwill is periodically reviewed by management based on current and anticipated
conditions. The amount of goodwill considered realizable, however, could be
reduced in the near term if changes occur in anticipated conditions. Based upon
management's review of projected undiscounted cash flow from operations and
other pertinent information, management is of the opinion that there has been no
diminution in the value assigned to goodwill.
COVENANTS NOT TO COMPETE
Covenants not to compete have been recorded at cost and are being amortized
on a straight-line basis over the terms (three to four years) of the agreements.
DEFERRED FINANCING COSTS
Deferred financing costs represent costs incurred to raise financing and are
amortized over the relevant terms of the borrowings (Note 4).
INCOME TAXES
The Company computes its provision for income taxes on a separate return
basis. The Company accounts for income taxes using the asset and liability
method for recognition of deferred tax liabilities and assets. Under the asset
and liability method, deferred income taxes are recognized for the tax
consequences of temporary differences, net operating losses, and tax credits by
applying enacted statutory tax rates applicable to future years to differences
between the financial statement carrying amounts and the tax bases of existing
assets and liabilities.
REVENUE RECOGNITION
Sales are recorded as products are shipped, except for certain sales for
which revenue is recognized when the customer is billed based on passage of
legal title at the date of billing. Such "bill and hold" sales are not material
to the Company's results of operations.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements as well as during the reporting period.
Actual results could differ from these estimates.
CONCENTRATION OF RISK
During 1993, 1994, and 1995, the Company's ten largest customers accounted
for 27%, 29%, and 25%, respectively, of total company sales. No individual
customer accounted for more than 6% of sales in any year. In management's
opinion, a loss of any one individual customer would not have a material impact
on the Company's financial position or operations.
F-10
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company's largest purchased raw material is paper. While the Company
utilizes multiple paper suppliers, it obtained 44%, 49% and 67% of its paper
from two suppliers in 1993, 1994, and 1995, respectively. Further, the supply
and price of paper are cyclical in nature. As a result, the Company is subject
to the risk that pricing may significantly impact results of operations and that
it may be unable to purchase sufficient quantities of paper to meet production
requirements during times of tight supply. While the Company believes that it
could obtain other suppliers of paper, industry conditions previously discussed
may have a material effect on the Company's results of operations.
VACATION POLICY
In 1995, the Company revised its vacation policy, whereby employees must
take vacation earned during the year prior to December 31 or forfeit the
balance. As a result of this change in policy, a vacation accrual is no longer
required as of December 31, 1995, and approximately $575,000 of accrued vacation
was reversed and is reflected as a reduction in cost of products sold in 1995.
Accrued vacation at December 31, 1994 was $557,000.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash, accounts
receivable, accounts payable, and debt. The carrying amounts of cash, accounts
receivable, and accounts payable approximate their fair values because of the
short-term maturity of such instruments. The carrying value of the debt, except
the Rice Note, (Note 4) approximates its fair value, because interest rates on
the debt are periodically adjusted and approximate current market rates. The
fair value of the Rice Note, discounted at 10.5%, which approximates market, is
$5,648,000.
ADOPTION OF ACCOUNTING STANDARD
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of," which establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles, and goodwill related to those assets to be held and used as well as
long-lived assets and certain identifiable intangibles to be disposed of. The
adoption of this standard was not material to the Company's financial position
or results of operations.
INTERIM UNAUDITED DATA FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996
In the opinion of management, the unaudited financial statements contain all
the normal and recurring adjustments necessary to present fairly the financial
position of the Company as of June 30, 1996 and the results of the Company's
operations and its cash flows for the six months ended June 30, 1995 and 1996 in
conformity with generally accepted accounting principles. The results of
operations for the six month period ended June 30, 1996 are not necessarily
indicative of the results to be expected for the year (Note 10).
3. BUILDING DISPOSAL AND PLANT SHUTDOWN
During 1993, the Company adopted a formal plan to discontinue operations at
the Philadelphia division and move portions of that operation to the Austell,
Georgia location. As part of such plan, the Company discontinued production in
August 1994 and moved a large portion of the equipment and inventory to the
Austell location. As a result, the Company recorded a charge of $1,595,277 to
write down the division's assets to their net realizable values and to accrue
for future operating lease commitments, severance costs, and costs of relocating
portions of the Philadelphia operation to Austell, Georgia. In conjunction with
the relocation of certain portions of the Philadelphia operations to Austell,
management decided to sell the former Austell facility and relocate to a larger
facility in Austell. Accordingly, the net book value of the building to be
disposed of was adjusted to the estimated fair market value. The impact of the
asset write-down was $656,000 and is recorded as a charge to 1993 earnings.
F-11
<PAGE>
4. LONG-TERM DEBT
Long-term debt as of December 31, 1994 and 1995 consists of the following:
<TABLE>
<CAPTION>
1994 1995
------------- -------------
<S> <C> <C>
Term Loan A payable to Heller Financial, Inc. ("Heller"), quarterly principal
payments ranging from $250,000 to $500,000 for the period commencing December 31,
1992 through September 30, 1999, bearing interest at a base rate plus 1.75%
(10.25% at December 31, 1994 and 1995)............................................ $ 8,450,000 $ 7,400,000
Term Loan B payable to Heller, payable in four successive quarterly principal
payments of $875,000 commencing the earlier of December 31, 1999 or upon full
payment of Term Loan A and the balance due on December 31, 2000, bearing interest
at a base rate plus 5% (13.5% at December 31, 1994 and 1995)...................... 3,500,000 4,500,000
Revolving line of credit payable to Heller, principal payable in full upon the
earlier of termination, as defined, or September 30, 2000, bearing interest at a
base rate plus 1.75% (10.25% at December 31, 1994 and 1995)....................... 7,000,000 7,050,000
Subordinated note payable to Rice Mezzanine Lenders, L.P. ("Rice"), principal
balloon payment due on the earlier of termination, as defined, or September 30,
2000, bearing interest at 14%..................................................... 5,000,000 5,000,000
Other.............................................................................. 84,673 226,991
Less unamortized portion of discount due to value assigned to parent company
warrants attached to Term Loans A and B and subordinated note payable............. (785,597) (658,811)
------------- -------------
23,249,076 23,518,180
Less current portion............................................................... (1,473,064) (2,105,935)
------------- -------------
$ 21,776,012 $ 21,412,245
------------- -------------
------------- -------------
</TABLE>
Maturities of long-term debt and capital lease obligations at December 31,
1995 are as follows:
<TABLE>
<CAPTION>
LONG-TERM SUBORDINATED
DEBT DEBT
------------- ------------
<S> <C> <C>
1996................................................................................ $ 2,105,935 $ --
1997................................................................................ 1,901,129 --
1998................................................................................ 2,056,792 --
1999................................................................................ 2,436,369 --
2000................................................................................ 10,676,766 5,000,000
------------- ------------
$ 19,176,991 $5,000,000
------------- ------------
------------- ------------
</TABLE>
The Company maintains a term loan and line-of-credit agreement (the "Credit
Agreement") with Heller. Under the terms of the Credit Agreement, as amended,
the Company has an $11,000,000 term loan ("Term Loan A"), a $4,500,000 term loan
("Term Loan B"), and a $8,500,000 revolving line-of-credit facility (the "Line")
as of December 31, 1995. As consideration for the Credit Agreement, the parent
made available to the Company stock warrants to purchase 254,435 shares of DEC
Class B common stock. The warrants were transferred to Heller in connection with
the initiation of the Credit Agreement. The warrants were valued at $400,000 and
were recorded as a discount to the face value of Term Loan A and Term Loan B.
The effect of the warrants at the inception of Term Loan A and Term Loan B was
to cause effective yields of 10.35% and 13.33%, respectively. The effective
yield for Term Loan A was 9.9% and 10.6% for the years
F-12
<PAGE>
4. LONG-TERM DEBT (CONTINUED)
ended December 31, 1994 and 1995, respectively. The effective yield for Term
Loan B was 14.0% and 13.8% for the years ended December 31, 1994 and 1995,
respectively. Maximum borrowings under the Line are $8,500,000, reduced by the
amount of the lender guaranty reserve, as defined, which was $0 at December 31,
1994 and 1995. Borrowings under the Credit Agreement are subject to certain
financial covenants that include, among others, limits on capital expenditures,
a minimum ratio of fixed charge coverages, and a minimum amount of earnings
before income taxes, depreciation, interest, and amortization, as defined. The
Company is in compliance with each of these covenants as of December 31, 1995.
The Company also maintains a $5,000,000 note purchase agreement (the "Rice
Note"), as amended, with Rice. The Rice Note is subordinate to the Credit
Agreement. As consideration for the Rice Note, the parent made available to the
Company stock warrants to purchase 413,457 shares of DEC's Class A common stock.
The warrants were transferred to Rice with the issuance of the Rice Note. The
warrants were valued at $649,954 and were recorded as a discount to the debt.
The effective interest rate on the Rice Note, after discounting for the
warrants, is 17.12%. The Rice Note is subject to certain financial covenants
which include, among others, limits on capital expenditures, minimum levels of
fixed charge coverages, and minimum earnings before income taxes, depreciation,
interest, and amortization, as defined. The Company is in compliance with each
of these covenants as of December 31, 1995. In addition, the Rice Note has
cross-default provisions with the Credit Agreement.
Interest expense on long-term debt and capital leases in 1993, 1994, and
1995 was approximately $2,872,000, $2,975,000, and $3,179,000, respectively,
including approximately $117,000, $123,000, and $127,000, respectively, of
warrant-related discount amortization and $314,000, $259,000, and $231,000,
respectively, of deferred finance cost amortization.
5. INCOME TAXES
The income tax benefits for the years ended December 31, 1993, 1994 and 1995
represent the income tax benefit from operating losses. As a result, income tax
beenfits for all periods presented consist of deferred tax benefits.
The reconciliation of the federal statutory income tax rate to the Company's
effective income tax rate for the 1993, 1994, and 1995 benefit for income taxes
is as follows:
<TABLE>
<CAPTION>
1993 1994 1995
------------- ----------- -------------
<S> <C> <C> <C>
Federal tax benefit at statutory rate.................................. $ (1,663,358) $ (684,978) $ (353,600)
State, net of federal benefit.......................................... (220,150) -- (34,000)
Change in valuation allowance.......................................... 533,242 612,467 (1,485,000)
Other, net............................................................. 7,543 72,511 (27,400)
------------- ----------- -------------
Actual income tax benefit.............................................. $ (1,342,723) $ -- $ (1,900,000)
------------- ----------- -------------
------------- ----------- -------------
Effective tax rate..................................................... 27% 0% 183%
------------- ----------- -------------
------------- ----------- -------------
</TABLE>
F-13
<PAGE>
5. INCOME TAXES (CONTINUED)
Significant components of the Company's net deferred tax assets as of
December 31, 1994 and 1995 are as follows:
<TABLE>
<CAPTION>
1994 1995
------------- -------------
<S> <C> <C>
Deferred tax assets (liabilities):
Net operating loss carryforwards.................................................. $ 2,059,000 $ 2,692,000
Book basis in property over tax basis............................................. (2,473,000) (2,710,000)
Goodwill.......................................................................... 12,000 (143,000)
Prepaid pension cost.............................................................. (282,000) (369,000)
Employee benefit accruals......................................................... 711,000 490,000
Accrued liabilities not currently deductible...................................... 1,442,000 1,859,000
Other, net........................................................................ 16,000 81,000
------------- -------------
Net deferred tax assets before valuation allowance.................................. 1,485,000 1,900,000
Valuation allowance................................................................. (1,485,000) --
------------- -------------
Net deferred tax assets............................................................. $ -- $ 1,900,000
------------- -------------
------------- -------------
</TABLE>
In 1993, the Company recorded the benefit of its net operating loss
carryforwards generated in that year reduced by a valuation allowance of
$533,000. The valuation allowance reduced the net deferred tax asset to zero, as
management determined that, based upon its expectations at that time regarding
future taxable income, realization was not more likely than not. In 1994, the
Company recorded an additional valuation allowance of $612,000 consistent with
the 1993 treatment. The decrease in the valuation allowance in 1995 results from
benefiting net operating losses expected to be realized in the future based on
improvements in operating results during 1995 and anticipated future earnings.
As a result, the Company has recorded a deferred tax asset of $1,900,000 as of
December 31, 1995 for income tax loss carryforwards.
The net operating loss carryforwards will be used to offset future taxable
income, subject to their expirations beginning in 2004 and continuing through
2010. Any future issuance of stock by the Company could result in an ownership
change, as defined by the Tax Reform Act of 1986, and could limit utilization of
net operating loss carryforwards. Also, benefits derived from using net
operating loss carryforwards to offset any taxes calculated as alternative
minimum tax could be less than the recorded amount of the net operating loss
carryforwards. Although realization is not assured, management believes it will
be realized.
6. CAPITAL STOCK
The Company has authorized 300,000 shares of common stock with a par value
of $.01 per share. As of December 31, 1995, 283,807 shares are issued and
outstanding.
7. RELATED-PARTY TRANSACTIONS
MANAGEMENT FEE
The Company maintains a Advisory Services Agreement (the "Agreement") with
MDC Management Company II, L.P. ("MDC"), an affiliate. Under the Agreement, MDC
provides certain consulting, financial, and managerial functions for a $250,000
annual fee. In 1994 and 1995, $0 and $187,500, respectively, were paid. The
Company has recorded a liability of $500,000, $562,000, and $562,000 on the
accompanying balance sheets related to the unpaid portion of these costs as of
December 31, 1994 and 1995 and June 30, 1996, respectively. No payments shall be
made by the Company to MDC under the Agreement if there is an event of default,
as defined, under the Credit Agreement (Note 4). As of June 30, 1996, there are
no such events of default. In addition, payments under the Agreement are limited
until certain events are satisfied under the Credit Agreement. As a result of
and concurrent with the anticipated transactions (Note 10), the
F-14
<PAGE>
7. RELATED-PARTY TRANSACTIONS (CONTINUED)
Company expects to pay the accrued management fees and to continue with the
terms of the Agreement. The Agreement expires December 31, 2000 and is renewable
annually thereafter, unless terminated by the Company for justifiable cause, as
defined.
STOCKHOLDERS' AGREEMENT
In 1992, certain NFC officers and former officers purchased an aggregate of
298,150 shares of DEC common stock, representing 12% of the voting common stock
of DEC. The stock was purchased at $4.33, the fair value at the date of
purchase, and were paid for with $620,000 of cash and $670,000 of 6% nonrecourse
notes. All stockholders of DEC are subject to the terms of a stockholders'
agreement. This agreement restricts the stockholders' ability to sell, transfer,
and assign the DEC common stock, with DEC having the first right of purchase.
The holders of the stock may be forced to sell the shares to DEC under certain
conditions. In addition, on expiration of a stockholder's employment with the
Company, the Company has the option to buy back the stockholder's common stock
at a specified price primarily based upon either the cost of the shares or the
book value of DEC.
8. EMPLOYEE BENEFIT PLANS
EMPLOYEES' RETIREMENT PLAN
The Company has a defined benefit pension plan (the "Plan") covering certain
employees. On December 20, 1993, the Company again amended the Plan, freezing
future participation to any new employees of the Company effective December 31,
1993. Effective December 31, 1994, the Company again amended the Plan, freezing
future accrual of benefits for all participants. In conjunction with this
amendment, all participants in the Plan have been retroactively vested. As a
result of these amendments, a curtailment gain of $399,333 was recorded in 1994
as a reduction to the related net periodic pension cost.
The funded status of the Plan as of December 31, 1994 and 1995 is as
follows:
<TABLE>
<CAPTION>
1994 1995
-------------- --------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated projected benefit obligation........................................ $ (16,035,066) $ (17,030,297)
Plan assets at fair value....................................................... 16,777,196 17,345,512
Plan assets greater than projected benefit obligation............................. 742,130 315,215
Unrecognized net loss from past experience........................................ -- 607,221
-------------- --------------
Prepaid pension cost.............................................................. $ 742,130 $ 922,436
-------------- --------------
-------------- --------------
</TABLE>
The weighted average discount rates used to measure the accumulated
projected benefit obligation are 8.00% and 7.75% for 1994 and 1995,
respectively. The assumed rates of increase in future compensation levels are
5%, and the expected long-term rates of return on assets are 8.75% for both 1994
and 1995.
Net periodic pension costs for 1993, 1994, and 1995 include the following:
<TABLE>
<CAPTION>
1993 1994 1995
------------- ------------- -------------
<S> <C> <C> <C>
Service cost--benefits earned during the period...................... $ 368,825 $ 437,088 $ --
Interest cost on projected benefit obligation........................ 1,316,812 1,388,943 1,230,610
Actual return on plan assets......................................... (1,498,941) 521,415 (1,772,831)
Net amortization and deferral........................................ (14,512) (2,025,970) 361,915
------------- ------------- -------------
$ 172,184 $ 321,476 $ (180,306)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
F-15
<PAGE>
8. EMPLOYEE BENEFIT PLANS (CONTINUED)
DEFERRED COMPENSATION PLANS
The Company has unfunded deferred compensation plans that provide retirement
benefits to a certain officer and former key employees. The plans provide
retirement benefits generally based on the service provided by the employees to
the Company. Benefits are vested as service is provided. Plan participants have
the option of receiving a lump-sum payment at retirement or periodic payments
after retirement, subject to approval from the Company's board of directors. The
Company provides for these plans during the related service lives of the
participants at amounts sufficient to accrue the present value of benefits
earned to their retirement dates. Effective December 31, 1994, the Company froze
future benefit accruals under these deferred compensation agreements. Included
in the accompanying balance sheets are liabilities of $550,000 and $426,000 for
these plans as of December 31, 1994 and 1995, respectively.
401(K) SAVINGS PLAN
In July 1992, the Company instituted a retirement savings plan, (the "401(k)
Plan") for nonunion employees at certain locations. The 401(k) Plan provides for
employee contributions of up to 10% of employee compensation and company
matching contributions of 50% of employee contributions up to 6% of employee
compensation, as defined. Effective January 1, 1995, the Company amended the
401(k) savings plan to increase company matching contributions to 60% of
employee contributions and to allow participation by all employees (meeting
eligibility requirements, as defined) of the Company. The Company recorded an
expense of approximately $21,000, $41,000, and $404,000 in 1993, 1994 and 1995,
respectively, as a result of contributions to the 401(k) Plan.
POSTRETIREMENT BENEFITS
The Company provides certain health care and life insurance benefits for
certain retired individuals. The Company accounts for these benefits in
accordance with SFAS No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions." This statement requires the accrual of the costs of
providing postretirement benefits, including medical and life insurance
coverage, during the active service period of the employee. The plan was frozen
in 1993 and all eligible participants of the plan are retired.
Interest cost, representing all of the net periodic postretirement benefit
expense for the years ended December 31, 1993, 1994, and 1995, was $37,000, $0,
and $56,000, respectively. In addition, the impact of the change in the assumed
discount rate was a benefit of $56,000 for the year ended December 31, 1995.
The accrued postretirement benefit obligation at December 31, 1994 and 1995
was $957,000 and $771,000, respectively.
Assumptions used in the computation of postretirement benefit expense and
the related obligation are as follows:
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Discount rate used to determine accumulated postretirement benefit
obligation................................................................... 7% 8%
Initial health care cost trend rate........................................... 13% 13%
Ultimate health care cost trend rate.......................................... 5% 5%
Year ultimate health care cost trend rate reached............................. 2003 2004
</TABLE>
If the health care trend rates increased 1% for all future years, the
accumulated postretirement benefit obligation as of December 31, 1995 would have
increased by 7%. The effect of such a change on the interest cost for 1995 would
have been an increase of approximately $55,000.
F-16
<PAGE>
9. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company has certain noncancelable operating leases for office and plant
facilities and office equipment. The total rental expense was $790,000,
$641,000, and $351,000 in 1993, 1994, and 1995, respectively. Minimum annual
rental payments remaining under noncancelable operating leases as of December
31, 1995 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
<S> <C>
1996................................................................................................ $445,000
1997................................................................................................ 411,000
1998................................................................................................ 384,000
1999................................................................................................ 393,000
2000................................................................................................ 290,000
Thereafter.......................................................................................... 127,000
------------
$2,050,000
------------
------------
</TABLE>
ENVIRONMENTAL LIABILITIES
In January 1988, the Company was notified by the United States Environmental
Protection Agency ("EPA') that it and 11 other parties are potentially liable
for costs incurred by the EPA in responding to the cleanup of the Dixie Caverns
Landfill Superfund Site in Roanoke County, Virginia. Subsequently, Roanoke
County expended $2,000,000 to clean up a portion of the Dixie Cavern landfill
site and has filed suit against the Company and the 11 other potentially
responsible parties ("PRPs")for reimbursement of these cleanup costs. Although,
under Superfund, the PRPs may be jointly and severally liable for cleanup costs,
management believes that the Company's potential liability in connection with
the County's claim is de minimis, based upon the amount of waste attributable to
it in relation to the other parties. Management believes that the Company will
have no liability in connection with the remaining portion of the site, and that
the ultimate outcome of this matter will not have a material adverse impact on
the financial position or results of operations of the Company.
The EPA has also named the Company as one of a number of PRPs in connection
with the alleged disposal of hazardous substances at the Smiths Farm Landfill
Superfund Site in Kentucky. In February 1992, the Company and 35 other parties
entered into an alternative dispute resolution process ("ADRP") to allocate
liability. Subsequently, a number of the PRPs responsible for contributions of
waste to the site dropped out of the ADRP group. The remaining ADRP group
members, including the Company, have proposed a de minimis settlement to the
EPA, which, if accepted, would resolve the Company's liability in connection
with the site. Management believes that the ultimate outcome of this matter will
not have a material adverse impact on the financial position or results of
operations of the Company.
EQUIPMENT CONSTRUCTION
The Company entered into contracts with various vendors to purchase and
construct a new equipment line (the "Equipment"). The contracts commenced in
October 1995, and installation was completed in April 1996. The aggregate
purchase and installation costs are approximately $3,600,000. The Equipment is
being financed with a $1,000,000 borrowing from Heller under Term Loan B and a
$2,600,000 borrowing from The CIT Group ("CIT").
Under the CIT lease agreement, CIT will have a first-perfected security
interest in the Equipment. Upon completion of the installation of the Equipment,
monthly principal and interest payments will be made over five years. Interest
will be charged based on the base rental factor, as defined. At the end of the
lease term, the Company will have the option to purchase the Equipment at 20% of
the original cost of the Equipment, as defined. The CIT loan document is
cross-defaulted with the Credit Agreement if such default is not cured within 90
days following the default to the satisfaction of Heller.
F-17
<PAGE>
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Through December 31, 1995, the Company expended $1,130,000 for the purchase
and installation of the Equipment included in the accompanying balance sheet in
construction in progress. This was financed through the $1,000,000 borrowed from
Heller on Term Loan B and the Company's working capital.
10. SUBSEQUENT EVENT
On June 28, 1996, pursuant to a Stock Purchase Agreement dated June 19,
1996, the Company acquired all of the issued and outstanding capital stock of
Transkrit Corporation ("Transkrit") for $86.5 million, subject to final
post-closing adjustment for certain changes in Transkrit's working capital,
other net assets, and capital expenditures from the amounts estimated at the
closing of the acquisition. Subsequent to the acquisition, Transkrit and all of
its subsidiaries were merged into the Company.
The acquisition has been accounted for using the purchase method of
accounting and accordingly, the results of operations of Transkrit have been
included in the results of operations of the Company since June 29, 1996. The
purchase price was allocated to assets and liabilities based on their estimated
fair value as of the date of the acquisition. The excess of the consideration
paid over the estimated fair value of net assets acquired currently estimated at
$16,959,000 has been recorded as goodwill and is being amortized on the
straight-line basis over 40 years. The following presents on an unaudited pro
forma basis the Company's results of operations as though the acquisition and
related transactions discussed below had occurred on January 1, 1995:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE SIX MONTHS
DECEMBER 31, 1995 ENDED JUNE 30, 1996
------------------ -------------------
<S> <C> <C>
Net sales................................................................ $ 168,760,000 $ 79,820,000
Operating income......................................................... 12,347,000 3,451,000
Net income (loss) before extraordinary item.............................. 2,364,000 (1,213,000)
</TABLE>
Concurrent with the consummation of the acquisition, the Company issued
$100,000,000 aggregate principal amount of unsecured 11 5/8% Senior Notes due
June 15, 2002 (the "Old Notes"). Principal and interest are payable semiannually
commencing on December 15, 1996. The Old Notes are senior obligations of the
Company and will be PARI PASSU in right of payment to all future senior
indebtedness. Under a registration rights agreement dated June 28, 1996 entered
into by the Company, the initial purchasers of the Old Notes, and certain other
parties, the Company is undertaking an offer of exchange whereby the Old Notes
may be exchanged, under certain conditions and subject to the approval of the
Securities and Exchange Commission, for new notes (the "New Notes") which may be
offered for resale, resold and otherwise transferred by respective holders,
under certain conditions.
The purchase of the New Notes is subject to certain risks. See "Risk
Factors" elsewhere in the accompanying Prospectus.
Concurrent with the consummation of the acquisition, DEC issued $10.0
million in aggregate liquidation preference of preferred stock and used a
portion of the proceeds therefrom to make a capital contribution to the Company
of $7.8 million.
Concurrent with the issuance of the Old Notes, the Company repaid
approximately $23.2 million of existing long-term debt and terminated the Credit
Agreement and as a result, recorded an extraordinary loss on early retirement of
debt of $798,000 (net of income tax benefit of $461,000) related to the payment
of certain prepayment penalties and unaccreted discount and the write-off of
related unamortized deferred financing costs.
The Indenture to the Senior Notes limits the incurrence of additional debt
by the Company does not allow the Company to pay any dividends or redeem any
capital stock and limits the Company's ability to sell its assets, as defined.
The Company may incur additional indebtedness as long as its Fixed Charge
Coverage Ratio, as defined, is greater than certain minimum levels. Concurrent
with the termination of the Credit Agreement, the merged Company entered into a
new senior secured revolving credit facility (the "New Bank Credit Facility")
which provides borrowings of up to $20,000,000 and bears interest at prime plus
1% or LIBOR plus 2.25%. This facility will expire on June 28, 2001. Following
the Transactions, the debt service costs associated with the borrowings under
the New Bank Credit Facility and the Notes will significantly increase liquidity
requirements.
F-18
<PAGE>
10. SUBSEQUENT EVENT (CONTINUED)
The total estimated interest payments for the period from June 28, 1996 to
December 31, 1996 is $6,000,000. Management believes that based on current
financial performance and anticipated growth, cash flow from operations,
together with the available sources of funds including borrowings under the New
Bank Credit Facility, available cash will be adequate, until the maturity of the
Notes, to make required payments of interest on the Company's indebtedness, to
fund anticipated capital expenditures and working capital requirements and to
enable the Company to comply with the terms of its debt agreements. The Company
anticipates that it will be required to refinance the Notes at maturity. No
assurance can be given that the Company will be able to refinance the Notes on
terms acceptable to it, if at all. The ability of the Company to meet its debt
service obligations and reduce its total debt will be dependent, however, upon
the future performance of the Company which, in turn, will be subject to general
economic conditions and to financial, business and other factors, including
factors beyond the Company's control.
F-19
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
TRANSKRIT Corporation:
We have audited the accompanying consolidated balance sheets of TRANSKRIT
Corporation and subsidiaries as of December 31, 1994 and 1995, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1995.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of TRANSKRIT
Corporation and subsidiaries as of December 31, 1994 and 1995, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1995, in conformity with generally accepted accounting
principles.
As discussed in note 9 to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 109,
ACCOUNTING FOR INCOME TAXES, as of January 1, 1993.
KPMG PEAT MARWICK LLP
Roanoke, Virginia
May 24, 1996
F-20
<PAGE>
TRANSKRIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................................. $ 759 $ 280
Accounts receivable, less allowance of $704 in 1994 and $495 in 1995...................... 11,432 11,923
Inventories............................................................................... 5,089 4,118
Prepaid expenses and other current assets................................................. 1,560 1,407
Deferred income taxes..................................................................... 662 1,649
Notes and other receivables from affiliates, net.......................................... -- 5,528
Investment securities..................................................................... -- 2,508
--------- ---------
Total current assets.................................................................... 19,502 27,413
Investment securities....................................................................... 2,299 --
Property, plant and equipment, net.......................................................... 25,822 23,735
Goodwill and other intangible assets, net................................................... 9,026 8,436
Notes receivable from affiliates............................................................ 7,711 --
Deferred income taxes....................................................................... 7,994 7,117
Other assets................................................................................ 348 341
--------- ---------
Total assets............................................................................ $ 72,702 $ 67,042
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-21
<PAGE>
TRANSKRIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995
(DOLLARS IN THOUSANDS)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- ---------
<S> <C> <C>
Current liabilities:
Current portion of long-term debt......................................................... $ 45 $ 2
Bank overdraft............................................................................ 1,494 1,455
Accounts payable.......................................................................... 3,216 2,218
Accrued relocation expenses............................................................... 754 --
Other accrued expenses.................................................................... 4,493 4,120
Income taxes payable to parent............................................................ 1,096 --
Income taxes payable...................................................................... 283 133
Deferred gain from sale of real estate.................................................... -- 358
--------- ---------
Total current liabilities............................................................... 11,381 8,286
Long-term debt, excluding current portion................................................... 7,944 2,036
Deferred gain from sale of real estate...................................................... 2,426 --
Compensation liability...................................................................... 1,573 3,735
Other liabilities........................................................................... 205 256
--------- ---------
Total liabilities....................................................................... 23,529 14,313
--------- ---------
Shareholders' equity:
Common stock, $1 par value:
Authorized shares, 10,000; issued and outstanding shares, 8,709 in 1994 and 8,897 in
1995................................................................................... 9 9
Class B common stock, $1 par value:
Authorized shares, 10,000; issued and outstanding shares, none.......................... -- --
Additional paid-in capital................................................................ 11,622 12,122
Notes receivable from shareholder......................................................... (500) (1,000)
Retained earnings......................................................................... 38,042 41,598
--------- ---------
Total shareholders' equity.............................................................. 49,173 52,729
Commitments and contingencies
--------- ---------
Total liabilities and shareholders' equity.............................................. $ 72,702 $ 67,042
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-22
<PAGE>
TRANSKRIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
SIX MONTHS ENDED JUNE 30, 1995 AND JUNE 28, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED
------------------------------- ----------------------------
1993 1994 1995 JUNE 30, 1995 JUNE 28, 1996
--------- --------- --------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales.......................................... $ 96,003 $ 98,124 $ 97,681 $ 46,966 $ 48,004
Cost of products sold.............................. 64,921 64,851 64,223 31,646 30,685
--------- --------- --------- ------------- -------------
Gross profit....................................... 31,082 33,273 33,458 15,320 17,319
Operating expenses:
Selling, general and administrative expenses..... 26,914 30,700 29,412 14,888 14,381
Relocation expenses.............................. 3,290 413 657 542 --
--------- --------- --------- ------------- -------------
Operating income (loss)............................ 878 2,160 3,389 (110) 2,938
Other income (expense):
Interest expense to parent, net.................. (560) (820) -- -- --
Other interest expense........................... (87) (102) (399) (265) (25)
Interest income.................................. 176 209 1,096 543 466
Gain on disposal of product lines................ -- 2,829 389 395 --
Gain on disposal of property, plant and
equipment....................................... 71 23 169 424 306
Other, net....................................... 337 207 313 144 --
--------- --------- --------- ------------- -------------
Other income (expense), net........................ (63) 2,346 1,568 1,241 747
--------- --------- --------- ------------- -------------
Income before income taxes......................... 815 4,506 4,957 1,131 3,685
Income taxes....................................... 379 1,799 1,380 445 1,062
--------- --------- --------- ------------- -------------
Net income......................................... $ 436 $ 2,707 $ 3,577 $ 686 $ 2,623
--------- --------- --------- ------------- -------------
--------- --------- --------- ------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-23
<PAGE>
TRANSKRIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOTES
ADDITIONAL RECEIVABLE
PAID-IN FROM RETAINED
COMMON STOCK CAPITAL SHAREHOLDER EARNINGS TOTAL
------------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1992 (unaudited)............... $ 8 $ 824 $ -- $ 35,250 $ 36,082
Net income.............................................. -- -- -- 436 436
Dividends paid ($20.55 per share)....................... -- -- -- (174) (174)
Capital contribution.................................... -- 1,756 -- -- 1,756
--
----------- ----------- --------- ---------
Balances at December 31, 1993........................... 8 2,580 -- 35,512 38,100
Net income.............................................. -- -- -- 2,707 2,707
Dividends paid ($20.90 per share)....................... -- -- -- (177) (177)
Capital contributions................................... -- 8,543 -- -- 8,543
Issuance of common stock (239 shares)................... 1 499 (500) -- --
--
----------- ----------- --------- ---------
Balances at December 31, 1994........................... 9 11,622 (500) 38,042 49,173
Net income.............................................. -- -- -- 3,577 3,577
Issuance of common stock (188 shares)................... -- 500 (500) -- --
Other deductions........................................ -- -- -- (21) (21)
--
----------- ----------- --------- ---------
Balances at December 31, 1995........................... $ 9 $ 12,122 $ (1,000) $ 41,598 $ 52,729
--
--
----------- ----------- --------- ---------
----------- ----------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-24
<PAGE>
TRANSKRIT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
SIX MONTHS ENDED JUNE 30, 1995 AND JUNE 28, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED
------------------------------- ----------------------------
1993 1994 1995 JUNE 30, 1995 JUNE 28, 1996
--------- --------- --------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................... $ 436 $ 2,707 $ 3,577 $ 686 $ 2,623
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization of property,
plant and equipment.......................... 5,885 6,163 5,434 2,632 2,487
Amortization of goodwill and other intangible
assets....................................... 460 613 590 295 285
Loss on disposal of product line fixed
assets....................................... -- 131 -- -- --
Gain on disposal of property, plant and
equipment.................................... (71) (23) (169) (424) (282)
Deferred income taxes......................... (933) (8,041) (110) (142) 2,002
Accrued interest receivable on investment
securities................................... (176) (191) (209) (105) (112)
(Increase) decrease in:
Accounts receivable, net.................... (187) (1) (491) 1,092 1,407
Inventories................................. (146) 705 971 (389) (572)
Prepaid expenses and other assets........... 545 (686) 160 325 501
Other receivables from affiliates, net...... -- -- (425) 19 425
Increase (decrease) in:
Accounts payable and accrued expenses....... 2,803 (1,022) (2,125) (1,705) 1,249
Income taxes payable........................ 367 1,007 (1,246) (153) (1,549)
Due to parent............................... 32 (422) -- -- --
Compensation liability...................... (151) 1,072 2,162 557 (2,735)
Other liabilities........................... -- 205 51 -- (13)
--------- --------- --------- ------------- -------------
Net cash provided by operating activities......... 8,864 2,217 8,170 2,688 5,716
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment...... (8,529) (7,187) (4,172) (2,907) (1,792)
Proceeds from disposal of property, plant and
equipment...................................... 908 338 327 260 7
Proceeds from disposal of product line fixed
assets......................................... -- 369 -- -- --
Collections of notes receivable from
affiliates..................................... -- -- 1,207 1,207 5,103
Acquisition of Short Run Labels, Inc., net of
cash acquired.................................. (5,532) -- -- -- --
--------- --------- --------- ------------- -------------
Net cash provided by (used in) investing
activities....................................... (13,153) (6,480) (2,638) (1,440) 3,318
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in bank overdraft, net...... 633 (607) (39) (171) 426
Capital contribution............................ 1,756 8,543 -- -- --
Proceeds from long-term debt.................... -- 17,486 18,188 9,404 5,236
Principal payments on long-term debt............ (1,274) (10,242) (24,139) (10,841) (7,274)
Long-term advances from parent.................. 5,491 -- -- -- --
Principal payments on long-term advances from
parent......................................... (1,700) (10,973) -- -- --
Other deductions................................ -- -- (21) (21) (10)
Dividends paid.................................. (174) (177) -- -- --
--------- --------- --------- ------------- -------------
Net cash provided by (used in) financing
activities....................................... 4,732 4,030 (6,011) (1,629) (1,622)
--------- --------- --------- ------------- -------------
Net increase (decrease) in cash and cash
equivalents...................................... 443 (233) (479) (381) 7,412
Cash and cash equivalents at beginning of the
period........................................... 549 992 759 759 280
--------- --------- --------- ------------- -------------
Cash and cash equivalents at end of the period.... $ 992 $ 759 $ 280 $ 378 $ 7,692
--------- --------- --------- ------------- -------------
--------- --------- --------- ------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-25
<PAGE>
TRANSKRIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993, 1994 AND 1995 AND
SIX MONTHS ENDED JUNE 30, 1995 AND JUNE 28, 1996
(INFORMATION FOR THE SIX MONTHS
ENDED JUNE 30, 1995 AND JUNE 28, 1996 IS UNAUDITED)
(1) OWNERSHIP AND CORPORATE REORGANIZATION
TRANSKRIT Corporation (the "Company") is headquartered in Roanoke, Virginia
and is a national manufacturer of business forms, labels and other printed
products for the trade. The Company has been operating in the United States
since 1938. Effective December 22, 1994, upon the acquisition of Maclean Hunter,
Ltd. (MHL), a Canadian corporation, by Rogers Communications, Inc. (Rogers), a
Canadian corporation, the Company became an 89.2 percent owned subsidiary of
Rogers. Prior to December 22, 1994, the Company was an 89.2 percent owned
subsidiary of Maclean Hunter, Inc. (MHI), a wholly-owned subsidiary of MHL. As
of December 31, 1995 Rogers owns 87.3 percent of the Company's outstanding
common shares. The Company's financial statements have been presented on a
historical cost basis and do not reflect a basis adjustment for the purchase
method of accounting. The parent company did not incur any expenses on behalf of
the Company. Accordingly, the consolidated statements of income of the Company
reflect all of its costs of doing business.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
PRINCIPLES OF CONSOLIDATION
The Company's results have been consolidated with its subsidiaries, Label
Art, Inc. (Label Art), InfoSeal-Registered Trademark- International, Inc.,
Putnam Graphic Innovations, Inc., and Government Forms and Systems, Inc. All
significant related intercompany balances and transactions have been eliminated
in consolidation.
CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid debt instruments with a maturity at date of purchase
of three months or less to be cash equivalents.
The Company does not believe it is exposed to any significant credit risk on
money market funds with commercial banks because its policy is to make such
deposits only with highly rated institutions.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the last-in, first-out method.
INVESTMENT SECURITIES
Investment securities at December 31, 1994 and 1995 consist of zero-coupon
municipal debt securities which are classified as held-to-maturity. Management
determines the appropriate classification of debt securities at the time of
purchase. Debt securities are classified as held-to-maturity when the Company
has the positive intent and the ability to hold the securities to maturity.
Held-to-maturity securities are stated at cost. Interest income on securities
classified as held-to-maturity is recognized when earned.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation of property, plant and equipment is
calculated using both straight-line and accelerated methods over the estimated
useful lives of the assets. Estimated useful lives are 25 to 33 years for
buildings, 8 years for building improvements, 3 to 8 years for machinery and
equipment and 5 to 7 years for furniture and fixtures. Leasehold improvements
are amortized over the shorter of the lease term or estimated life of the asset.
Maintenance, repairs and minor replacements are charged to expense as incurred;
major renewals and betterments are capitalized. The cost and related accumulated
depreciation or amortization on property, plant and equipment are eliminated
from the accounts upon disposal, and any resulting gain or loss is included in
the determination of net income.
F-26
<PAGE>
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED)
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill, which represents the excess of purchase price over fair value of
assets acquired, is amortized on a straight-line basis over 15 to 40 years and
relates to the acquisitions of subsidiaries. The Company assesses the
recoverability of this intangible asset by determining whether the amortization
of the goodwill balance over its remaining life can be recovered through
undiscounted future operating cash flows of the acquired operation. The
assessment of the recoverability of goodwill will be impacted if estimated
future operating cash flows are not achieved.
Other intangible assets include various noncompete agreements which are
amortized over the lives of the agreements (5 to 10 years) using the
straight-line method.
REVENUE RECOGNITION
Sales and cost of products sold are recognized primarily upon shipment of
products.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred. For the years ended
December 31, 1993, 1994 and 1995, research and development costs charged to
expense were approximately $289,000, $50,000 and $30,000, respectively.
INCOME TAXES
The Company computes its provision for income taxes on a stand alone basis.
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
ADVERTISING COSTS
Advertising costs consist of various marketing expenses, including
advertisements, and are expensed as incurred.
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 the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to the consolidated financial
statements to place them on a comparable basis.
UNAUDITED INTERIM INFORMATION
The financial information with respect to the six months ended June 30, 1995
and June 28, 1996 is unaudited. In the opinion of management, such information
contains all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the results of such periods.
The results of operations for the six months ended June 28, 1996 are not
necessarily indicative of the results to be expected for the full year.
F-27
<PAGE>
(3) ALLOWANCE FOR ACCOUNTS RECEIVABLE
A summary of the changes in the allowance for accounts receivable follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Balances, beginning of period................................................. $ 713 $ 782 $ 704
Provisions.................................................................... 226 134 (3)
Recoveries.................................................................... 9 6 6
Write-offs.................................................................... (166) (218) (212)
--------- --------- ---------
Balances, end of period....................................................... $ 782 $ 704 $ 495
--------- --------- ---------
--------- --------- ---------
</TABLE>
(4) INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Raw materials and supplies........................................................... $ 2,341 $ 1,880
Work in process...................................................................... 560 843
Finished products.................................................................... 2,188 1,395
--------- ---------
$ 5,089 $ 4,118
--------- ---------
--------- ---------
</TABLE>
If the first-in, first-out method of inventory accounting had been used,
inventories would have been approximately $1,692,000 and $3,094,000 higher than
reported at December 31, 1994 and 1995, respectively. During the years ended
December 31, 1994 and 1995, the Company liquidated a portion of its LIFO
inventory resulting in a liquidation loss of approximately $15,000, net of
income tax effect, in 1994 and a liquidation gain of approximately $245,000, net
of income tax effect, in 1995.
(5) INVESTMENT SECURITIES
The following is a summary of held-to-maturity securities (in thousands):
<TABLE>
<CAPTION>
GROSS
UNREALIZED ESTIMATED
COST GAINS FAIR VALUE
--------- ------------- -----------
<S> <C> <C> <C>
DECEMBER 31, 1994
Debt securities....................................................... $ 2,299 $ 111 $ 2,410
--------- ----- -----------
--------- ----- -----------
DECEMBER 31, 1995
Debt securities....................................................... $ 2,508 $ 69 $ 2,577
--------- ----- -----------
--------- ----- -----------
</TABLE>
The above securities mature in July 1996.
F-28
<PAGE>
(6) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Land.............................................................................. $ 1,285 $ 1,285
Buildings and improvements........................................................ 12,411 12,479
Machinery and equipment........................................................... 45,479 41,564
Furniture and fixtures............................................................ 2,506 2,395
Leasehold improvements............................................................ 2,326 2,629
Construction in progress.......................................................... 1,492 1,946
--------- ---------
65,499 62,298
Less accumulated depreciation and amortization.................................... 39,677 38,563
--------- ---------
Property, plant and equipment, net................................................ $ 25,822 $ 23,735
--------- ---------
--------- ---------
</TABLE>
(7) GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets, net of accumulated amortization,
consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Goodwill............................................................................. $ 9,783 $ 9,783
Noncompete agreements................................................................ 1,161 1,161
--------- ---------
10,944 10,944
Less accumulated amortization........................................................ 1,918 2,508
--------- ---------
Goodwill and other intangible assets, net............................................ $ 9,026 $ 8,436
--------- ---------
--------- ---------
</TABLE>
(8) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Note payable to financial institution................................................ $ 7,943 $ 2,036
Other................................................................................ 46 2
--------- ---------
7,989 2,038
Less current portion................................................................. 45 2
--------- ---------
Long-term debt, excluding current portion............................................ $ 7,944 $ 2,036
--------- ---------
--------- ---------
</TABLE>
The note payable to financial institution represents an unsecured revolving
credit arrangement with First Union National Bank of Virginia (the "Bank") in
the original amount of $17,500,000 that reduced to $16,250,000 on December 31,
1995, reduces further to $15,000,000 on December 31, 1996, and has a maturity
date of January 31, 1997. Interest is based upon the 30-day London Interbank
Offered Rate (LIBOR) plus .95 percent (6.92 percent at December 31, 1995) due
and payable every 30 days in arrears. The Company is required to provide the
Bank with certain financial information on a quarterly basis and has agreed to
certain financial covenants which are also reported to the Bank quarterly. At
December 31, 1995, the Company was in violation of a debt covenant. The Bank has
waived this specific event of default through January 31, 1997, the maturity
date of the note payable.
Interest paid for the years ended December 31, 1993, 1994 and 1995 was
$702,000, $920,000 and $424,000, respectively.
F-29
<PAGE>
(9) INCOME TAXES
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES. The adoption of this
statement did not have a significant effect on the Company's consolidated
financial statements.
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal............................................................... $ 1,034 $ 8,125 $ 1,408
State................................................................. 278 1,715 82
--------- --------- ---------
1,312 9,840 1,490
--------- --------- ---------
Deferred:
Federal............................................................... (729) (6,614) (134)
State................................................................. (204) (1,427) 24
--------- --------- ---------
(933) (8,041) (110)
--------- --------- ---------
Total income taxes...................................................... $ 379 $ 1,799 $ 1,380
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company's income tax expense for the years ended December 31, 1993, 1994
and 1995, differed from amounts computed by applying the U.S. Federal income tax
rate of 34 percent to the Company's income before income taxes as a result of
the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Computed "expected" income tax expense..................................... $ 277 $ 1,532 $ 1,685
Increase in (reduction of) income tax expense resulting from:
Decrease in beginning-of-the-year balance of the valuation allowance for
deferred tax assets..................................................... (472) (1,174) --
Expiration of state investment tax credit carryforwards.................. 472 1,174 --
State tax expense, net of federal impact................................. 49 232 242
Adjustment of current tax liability...................................... 87 (64) (520)
Tax-exempt interest income............................................... (60) (65) (71)
Goodwill amortization.................................................... 43 43 43
Nondeductible meals and entertainment.................................... 20 52 44
Other, net............................................................... (37) 69 (43)
--------- --------- ---------
Reported income tax expense................................................ $ 379 $ 1,799 $ 1,380
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-30
<PAGE>
(9) INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Tax basis of InfoSeal-Registered Trademark- intangible assets in excess of book
basis............................................................................. $ 6,617 $ 6,073
Deferred gain from sale of real estate............................................. 949 143
Tax basis of receivables from affiliate in excess of book basis.................... -- 541
Equity share plan accruals and other compensation plans............................ 694 1,604
Relocation accrual................................................................. 291 --
Accounts receivable allowance...................................................... 160 124
Inventories, due to additional costs inventoried for tax purposes.................. 71 67
Vacation accrual................................................................... 114 160
Pension and welfare plans.......................................................... 11 34
Other.............................................................................. 138 138
--------- ---------
Total gross deferred tax assets...................................................... 9,045 8,884
Less valuation allowance............................................................. -- --
--------- ---------
Net deferred tax assets.............................................................. 9,045 8,884
--------- ---------
</TABLE>
<TABLE>
<S> <C> <C>
Deferred tax liabilities:
Depreciation...................................................... $ (270) $ (109)
Pension and welfare plans......................................... (118) (9)
Other............................................................. (1) --
--------- ---------
Total gross deferred tax liabilities................................ (389) (118)
--------- ---------
Net deferred tax asset, including current net asset of $662 in 1994
and $1,649 in 1995................................................. $ 8,656 $ 8,766
--------- ---------
--------- ---------
</TABLE>
Based on the Company's historical and current pretax earnings, management
believes that is more likely than not that the recorded deferred tax assets will
be realized.
Income taxes paid, net of refunds received, for the years ended December 31,
1993, 1994 and 1995 were $945,000, $8,833,000 and $2,736,000, respectively.
(10)PENSION AND OTHER EMPLOYEE BENEFIT PLANS
DEFINED BENEFIT PENSION PLAN
The Company maintains a noncontributory defined benefit pension plan
covering all eligible employees. Normal retirement age is 65, but a provision is
made for early retirement. Benefits are based on the employee's compensation and
years of service. The Company makes annual contributions to the plan equal to
the maximum amount that can be deducted for income tax purposes. Plan assets
consist principally of equity and debt securities.
The 1994 and 1995 projected benefit obligation was computed using the
"projected unit credit method," assuming a discount rate on benefit obligations
of 8 and 7.25 percent, respectively, an expected long-term rate of return on
plan assets of 9 percent and annual salary increases of 5 and 4 percent,
respectively, over the average remaining service lives of employees in the
plans.
F-31
<PAGE>
(10)PENSION AND OTHER EMPLOYEE BENEFIT PLANS (CONTINUED)
The following sets forth the funded status of the plan and amounts
recognized in the Company's consolidated balance sheets:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligations, including vested benefits of $2,832 and $2,011,
respectively...................................................................... $ 2,895 $ 2,147
--------- ---------
--------- ---------
Projected benefit obligations........................................................ (4,993) (3,854)
Plan assets at fair value............................................................ 5,802 5,107
--------- ---------
Projected benefit obligation less than plan assets................................... 809 1,253
Unrecognized net gain................................................................ (253) (945)
Unrecognized prior service cost...................................................... 113 105
Unrecognized net asset at January 1, 1986 being amortized over 15 years.............. (558) (465)
--------- ---------
(Accrued) prepaid pension costs included in other noncurrent (liabilities) assets.... $ 111 $ (52)
--------- ---------
--------- ---------
</TABLE>
Net pension cost included the following components:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost............................................................... $ 440 $ 494 $ 406
Interest cost on projected benefit obligation.............................. 345 350 334
Return on assets........................................................... (638) 386 (1,435)
Net amortization and deferral.............................................. (100) (1,145) 858
--------- --------- ---------
Net pension cost........................................................... $ 47 $ 85 $ 163
--------- --------- ---------
--------- --------- ---------
</TABLE>
DEFINED CONTRIBUTION PLAN
The Company has a salary reduction plan covering all eligible employees
under Section 401(k) of the Internal Revenue Code. The Plan includes a provision
which allows employees to make pretax contributions. The Company matches between
15 to 45 percent of employee contributions up to 4 to 6 percent of the
employee's salary. The Company recognized contribution expense of $315,000,
$303,000 and $260,000 for the years ended December 31, 1993, 1994 and 1995,
respectively.
HEALTH AND WELFARE
The Company's independently administered self-insurance program provides
health insurance coverage for employees and their dependents on a
cost-reimbursement basis. Under the program, the Company is obligated for claims
payments. A stop loss insurance contract executed with an insurance carrier
covers claims in excess of $100,000 per covered individual per year. During the
years ended December 31, 1993, 1994 and 1995, total claims expense of
$3,916,000, $3,348,000 and $2,658,000, respectively, was incurred, which
represents claims processed, premium expenses, administration fees and an
estimate for claims incurred but not reported.
The Company is also self-insured for workers' compensation. Workers'
compensation expense was $654,000, $687,000 and $556,000 for the years ended
December 31, 1993, 1994 and 1995, respectively.
(11)COMPENSATION PLANS
EQUITY SHARE PLAN
The Company's Label Art subsidiary has an Equity Share Plan which awards
shares simulating equity ownership to key employees. These equity shares do not
represent common stock or any rights associated with stock ownership of Label
Art. The units vest immediately to the employees and the value of a share is
determined annually based on Label Art's operating performance or net worth, as
defined in the plan. At December 31, 1994 and 1995, there were 345,944 shares
outstanding. Provisions of approximately $161,000,
F-32
<PAGE>
(11)COMPENSATION PLANS (CONTINUED)
$1,271,000 and $2,138,000 were charged against income related to this plan for
the years ended December 31, 1993, 1994 and 1995, respectively. As of December
31, 1994 and 1995, the compensation liability included $1,358,000 and
$3,224,000, respectively, related to this plan.
CLASS B COMMON STOCK INCENTIVE PLAN
The Company has a long-term incentive plan which provides for a cash payment
at retirement, death or disability based on the difference between (a) the entry
level price per Class B common share adjusted for cumulative earnings per share
and (b) the price per share paid to Class B shareholders in connection with a
1980 redemption of Class B common shares compounded at 6 percent per annum.
Provision of $5,000 was charged against income related to this plan for the year
ended December 31, 1995. For the years ended December 31, 1993 and 1994, there
were no charges to income for this plan. As of December 31, 1994 and 1995, the
compensation liability included $215,000 and $220,000, respectively, related to
this plan.
STOCK CREDITS
At December 31, 1995, there were 220.5 stock credits outstanding to the
Company's President. This executive is entitled to receive additional stock
credits, if employed by the Company, on March 1, 1997. These stock credits do
not represent common stock or any rights associated with stock ownership of the
Company. The calculation of stock credits is determined by dividing 500,000 by
the product of the preceding fiscal year's earnings per share, as adjusted,
multiplied by 13.
Upon death, disability or other termination of employment, other than for
cause, the Company shall redeem the stock credits and pay the executive or his
heirs additional compensation equal to the appreciation in the value of the
stock credits, if any. This is calculated by the product of the executive's
outstanding stock credits and the most recent fiscal year's earnings per share,
as adjusted, multiplied by 13 less the cumulative value of the stock credits at
the time they were awarded to the executive.
In addition, the executive shall be entitled to receive additional
compensation in lieu of dividends that would have been paid to the executive had
he owned a number of common shares equal to the number of stock credits credited
to his account.
The interest of the executive in and the right to redeem stock credits
cannot be assigned or pledged by the executive. For the year ended December 31,
1993, there were no charges to income related to stock credits. Provisions of
$5,000 and $319,000 were charged against income related to the appreciation of
the value of the stock credits and additional compensation in lieu of dividends
for the years ended December 31, 1994 and 1995, respectively. As of December 31,
1995, the compensation liability included $291,000 related to stock credits.
STOCK PURCHASE AGREEMENT
Under the Stock Purchase Agreement described in note 21, the Company is
required to satisfy all liabilities related to the above compensation
arrangements prior to the closing date of the transaction described in note 21.
(12)LEASES
The Company rents facilities and equipment under noncancelable operating
lease agreements. Total rental expense for all operating leases was $607,000,
$666,000 and $1,399,000 for the years ended December 31, 1993, 1994 and 1995,
respectively.
F-33
<PAGE>
(12)LEASES (CONTINUED)
Future minimum lease payments under all noncancelable operating leases at
December 31, 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
- -----------------------------------------------------------------------------------------------
<S> <C>
1996.......................................................................................... $ 577
1997......................................................................................... 523
1998......................................................................................... 311
1999......................................................................................... 122
2000......................................................................................... 59
---------
$ 1,592
---------
---------
</TABLE>
(13)CORPORATE RELOCATION EXPENSES
On May 27, 1993, the Board of Directors decided to relocate corporate
facilities from Brewster, New York to Roanoke, Virginia. As a result, the
Company has taken a charge to operations of approximately $3,290,000, $413,000
and $657,000 for the years ended December 31, 1993, 1994 and 1995, respectively.
The relocation charge for the six months ended June 30, 1995 was approximately
$542,000. The initial phase of this relocation occurred on February 18, 1994 and
was substantially completed by the end of the first quarter, 1995. This process
contributed to the voluntary severance of approximately 163 employees. Included
in relocation charges to operations are $1,081,000, $413,000 and $514,000 in
1993, 1994 and 1995, which relates to severance for employees who elected not to
relocate to Roanoke, Virginia. The remaining relocation charges relate to moving
and other expenses incurred by the Company and its employees to relocate from
Brewster, New York.
(14)RELATED PARTY TRANSACTIONS
In accordance with the terms of certain agreements with MHI and MHL, which
expired on December 22, 1994, the Company charged interest on advances made to
MHI, paid interest on advances from MHI and reimbursed MHL for management
advisory services rendered to the Company. Net interest expense paid to MHI was
$560,000 in 1993 and $820,000 in 1994. The rate of interest charged on advances
to MHI was based on independent quotes of 30-day commercial paper. The Company
paid MHI the current prime rate and the current prime rate less 1 percent for
advances to the Company for 1993 and 1994, respectively. There were no amounts
due to/from MHI as of December 31, 1994.
The Company paid $309,000 and $564,000 to MHL for the cost of management
services in 1993 and 1994. The 1994 expense includes $286,000 related to a
one-time charge related to the acquisitions of MHL by Rogers.
Pursuant to the terms of certain agreements with Rogers, the Company was
charged an amount for management advisory services by Rogers on a monthly basis
through December 31, 1995 based on the greater of $25,000 or a percentage of net
sales, as defined. During 1995, the Company incurred $300,000 for the cost of
management services, of which $25,000 payable to Rogers has been netted against
other receivables from affiliates at December 31, 1995. The cost of management
services was $150,000 and $448,000 for the six months ended June 30, 1995 and
June 28, 1996, respectively. There were no amounts directly due to/from Rogers
as of December 31, 1994.
On December 22, 1994, the Company sold certain real property located in
Brewster, New York and Miami, Florida to affiliated real estate subsidiaries
(Rogers Realty Corporation of New York and Rogers Realty Corporation of Florida)
which are indirectly owned by Rogers. As a result of these transactions, the
Company recorded notes receivable of $7.7 million and deferred gains of $2.4
million which are not reflected on the 1994 consolidated statement of cash
flows. These properties were leased by the Company on a month-to-month basis
pursuant to sale and leaseback arrangements with these affiliates of Rogers. For
the six months ended June 30, 1995 and the year ended December 31, 1995, total
rent expense incurred on these related party leases totaled $399,000 and
$765,000, respectively. Effective December 31, 1995, these lease arrangements
were terminated.
F-34
<PAGE>
(14)RELATED PARTY TRANSACTIONS (CONTINUED)
On March 31, 1995, Rogers Realty Corporation of Florida sold its real
property in Miami, Florida to an unrelated party. Consequently, the Company was
paid in full for its outstanding note receivable of $1.2 million and all accrued
interest thereon. As a result, the deferred gain on the sale of $667,000,
recorded in 1994 when such real property was sold to Rogers Realty Corporation
of Florida, has been recognized as income for the six months ended June 30, 1995
and the year ended December 31, 1995. Total interest income recorded on these
related party notes receivable totaled $765,000, $399,000 and $244,000 for the
year ended December 31, 1995 and the six months ended June 30, 1995 and June 28,
1996, respectively.
During 1995, Rogers Realty Corporation of New York entered into a sales
agreement with an unrelated party to purchase the Brewster, New York real
property. In order to refurbish the facility to improve its marketability, the
Company advanced $504,000 to Rogers Realty Corporation of New York during 1995
to pay for building improvements and environmental remediation costs and has
recorded these advances as a receivable from the affiliate as of December 31,
1995. Based on the estimated net proceeds of approximately $5.6 million expected
from the pending sale of the Brewster facility, the Company has determined that
a portion of the aggregate receivable from this affiliate will not be collected.
Accordingly, the deferred gain determined as of December 22, 1994 and the
aggregate receivable have been reduced by approximately $1.4 million as of
December 31, 1995. This has not been reflected on the consolidated statements of
cash flows.
Effective December 22, 1994, the Company formed a new operating subsidiary,
InfoSeal-Registered Trademark- International, Inc.
(InfoSeal-Registered Trademark-), that is 99 percent owned by the Company. The
Company transferred principally all of the tangible and intangible assets of its
InfoSeal-Registered Trademark- business to InfoSeal-Registered Trademark-. The
transfer of assets to InfoSeal-Registered Trademark- and sale of real property
to affiliated entities described above resulted in a taxable event under the
Internal Revenue Code.
As of December 31, 1994 and 1995, prepaid expenses and other current assets
includes $62,000 and $47,000, respectively, due from officers and employees, and
other noncurrent assets includes notes and accrued interest receivable from
officers in the amount of $107,000 and $235,000, respectively, of which $15,000
and $77,000, respectively, represents accrued interest receivable on notes
receivable from shareholder (see note 15).
(15)SHAREHOLDERS' EQUITY
On July 11, 1994, the Company sold 239 common shares to the Company's
President and accepted a $500,000 note receivable in return. On March 1, 1995,
the Company sold 188 shares to the same Company executive and accepted a
$500,000 note receivable. These notes receivable are due and payable upon death,
disability or termination of employment, bear interest compounded semiannually
on June 30 and December 31 at an annual rate equal to the greater of 6 percent
or the applicable federal rate on each semiannual date per the Internal Revenue
Code and are recorded as a reduction of shareholders' equity. These transactions
are not reflected on the accompanying consolidated statements of cash flows.
Included in interest income for the years ended December 31, 1994 and 1995 was
$15,000 and $62,000, respectively, related to these notes.
The Company's President, if employed by the Company, has the option of
purchasing additional common shares for $500,000 during the three-year period
commencing March 1, 1998. The amount of shares that can be purchased during the
three-year period will be calculated based on a defined formula. This option
will terminate upon the closing of the transaction described in note 21.
The Company has a Stock Redemption Agreement with its two minority
shareholders who own a total of 12.7 percent of the Company's outstanding common
stock. Under this agreement, the redemption price per share is calculated by the
average consolidated earnings per share of the two preceding fiscal years, as
adjusted, prior to the date of redemption multiplied by 13. Upon death,
disability or termination, the minority shareholders must sell to the Company,
and the Company must purchase, any and all option shares outstanding. The Stock
Redemption Agreement will terminate upon the closing of the transaction
described in note 21.
F-35
<PAGE>
(16)ACQUISITION OF SUBSIDIARY AND DISPOSAL OF PRODUCT LINES
On August 11, 1993, Label Art, Inc., a wholly-owned subsidiary of the
Company, acquired Short Run Labels, Inc. in exchange for $5,736,000 cash. The
acquisition was accounted for as a purchase; accordingly, the results of
operations for Short Run Labels, Inc. are included in the consolidated financial
statements only from the date of acquisition. Pro forma results of operations
are not presented because the effect is not material to the consolidated
statements of income. The goodwill arising as a result of the excess of the
purchase price over the fair value of net assets acquired is being amortized on
the straight-line method over 15 years.
The following table summarizes the acquisition:
<TABLE>
<CAPTION>
(DOLLARS IN
THOUSANDS)
---------------------
<S> <C>
Purchase price................................................................... $ 5,736
------
Cash............................................................................. 204
Accounts receivable.............................................................. 66
Inventory........................................................................ 151
Property, plant and equipment.................................................... 1,100
Other assets..................................................................... 154
Accounts payable and accrued expenses............................................ (279)
Long-term debt................................................................... (440)
------
Net assets acquired (estimated fair market value)................................ 956
------
Excess of purchase price over fair value of net assets acquired (goodwill)....... $ 4,780
------
------
</TABLE>
On December 2, 1994, the Company sold certain assets of its Flat Division
product line to The Reynolds and Reynolds Company ("Reynolds") resulting in a
net gain of $2,829,000 in 1994. In 1995, the Company recognized additional costs
of $16,000 relating to the disposal of its Flat Division. The asset purchase
agreement provided, among other things, that the Company covenant not to compete
with Reynolds in the pegboard, one-write accounting system and HCFA medical
claim form businesses for a period of five years from the date of sale.
On April 19, 1995, the Company sold certain assets of its Tax Forms Business
product line to Taylor Corporation ("Taylor") resulting in a net gain of
$405,000. The asset purchase agreement provided, among other things, that the
Company covenant not to compete with Taylor in the manufacturing or imprinting,
and sale or distribution of generic or custom tax forms in the U.S. for a period
of five years from the date of sale. In addition, on April 19, 1995, the Company
entered into a manufacturing agreement with Taylor whereby Taylor will purchase
no less than 75 percent of its tax form mailer requirements for a period of five
years up to an agreed-upon maximum dollar value.
(17)FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, DISCLOSURES ABOUT FAIR
VALUE OF FINANCIAL INSTRUMENTS, requires the Company to disclose estimated fair
values of its financial instruments. SFAS 107 defines the fair value of a
financial instrument as the amount at which the instrument could be exchanged in
a current transaction between willing parties.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments: The carrying amounts reported in the
consolidated balance sheet for cash, notes receivable and long-term debt
approximate fair value. The fair value of long-term debt is estimated by
discounting the future cash flows of each instrument at rates currently offered
to the Company for similar debt instruments of comparable maturities by the
Company's bank. The fair values of investment securities (see note 5) are based
on dealer quotes at the reporting date for those or similar investments.
(18)CONTINGENCIES
In the normal course of business, the Company is subject to proceedings,
lawsuits and other claims. Such matters are subject to many uncertainties, and
outcomes are not predictable with assurance. There are
F-36
<PAGE>
(18)CONTINGENCIES (CONTINUED)
no legal proceedings, lawsuits or other claims pending against or involving the
Company which, in the opinion of management, will have a material adverse impact
upon the consolidated financial position, results of operations or liquidity of
the Company.
(19)BUSINESS AND CREDIT CONCENTRATIONS
The Company provides credit, in the normal course of business, to industry
dealers and distributors. Concentration of credit risk with respect to trade
receivables is limited due to the Company's large number of customers. The
Company also performs ongoing credit evaluations of its customers. Management
believes that credit risks at December 31, 1994 and 1995 have been adequately
provided for in the consolidated financial statements.
The Company's raw materials are readily available, and the Company is not
dependent on a single supplier or only a few suppliers.
(20)NEW ACCOUNTING STANDARD
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. SFAS 121 requires
companies to review long-lived assets and certain identifiable intangibles to be
held, used or disposed of, for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The Company adopted this statement effective January 1, 1996. The
adoption of this statement did not have a significant effect on the Company's
consolidated financial statements.
(21)SUBSEQUENT EVENT (UNAUDITED)
On April 25, 1996, Rogers and National Fiberstock Corporation (the "Buyer")
signed a letter of intent whereby the Buyer would acquire the Company. It is the
further intention of both parties and the Company's two minority shareholders,
to enter into a Stock Purchase Agreement (the "Agreement") which contemplates a
transaction in which the Buyer will purchase from the Sellers, and the Sellers
will sell to the Buyer, all of the outstanding capital stock of the Company in
return for cash. In addition, the Agreement stipulates that on or prior to the
closing date of the transaction, the Company shall satisfy all liabilities under
and terminate each of the compensation arrangements described in note 11.
F-37
<PAGE>
- ------------------------------------------------
------------------------------------------------
- ------------------------------------------------
------------------------------------------------
NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFER
CONTAINED HEREIN, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THOSE TO
WHICH IT RELATES, NOR DOES IT CONSTITUTE AN OFFER TO SELL, OR THE SOLICITATION
OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
--------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Available Information.......................... ii
Prospectus Summary............................. 1
Risk Factors................................... 7
The Transactions............................... 10
Use of Proceeds of the New Notes............... 10
Capitalization................................. 11
The Exchange Offer............................. 12
Unaudited Pro Forma Financial Data............. 20
Selected Historical Financial Data -- National
Fiberstok Corporation......................... 28
Selected Historical Consolidated Financial Data
-- Transkrit Corporation...................... 29
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 30
Industry....................................... 39
Business....................................... 41
Management..................................... 50
Security Ownership............................. 56
Certain Relationships and Related
Transactions.................................. 58
Description of New Bank Credit Facility........ 59
Description of Notes........................... 60
Old Notes Registration Rights.................. 83
Certain U.S. Federal Income Tax Consequences... 86
Transfer Restrictions..........................
Book-Entry; Delivery and Form.................. 87
Plan of Distribution........................... 89
Experts........................................ 90
Legal Matters.................................. 90
Index to Financial Statements.................. F-1
</TABLE>
--------------
PROSPECTUS
--------------
NATIONAL FIBERSTOK
CORPORATION
OFFER TO EXCHANGE
11 5/8% SENIOR NOTES DUE 2002, SERIES B
FOR ALL OUTSTANDING 11 5/8% SENIOR NOTES DUE 2002, SERIES A
OCTOBER , 1996
- ------------------------------------------------
------------------------------------------------
- ------------------------------------------------
------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Certificate of Incorporation of the Company provides that no director
shall be personally liable to the Corporation or its stockholders for monetary
damages for any breach of fiduciary duty by such director as a director.
Notwithstanding the foregoing sentence, a director shall be liable to the extent
provided by Delaware General Corporation Law, (i) for breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct of a knowing
violation of law, (iii) pursuant to Section 174 of the Delaware General
Corporation Law or (iv) for any tranaction from which director derived an
improper prsonal benefit.
Section 145 of the Delaware General Corporation Law (the "DGCL") provides
that a corporation may indemnify directors and officers as well as other
employees and individuals against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement in connection with specified
actions, suits or proceedings, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation, a
"derivative action") if they acted in good faith and in a manner they reasonably
believed to be in or not opposed to the best interests of the corporation, and,
with respect to any criminal action or proceeding, if they had no reasonable
cause to believe their conduct was unlawful. A similar standard is applicable in
the case of derivative actions, except that indemnification only extends to
expenses (including attorneys' fees) incurred in connection with the defense or
settlememt of such actions, and the statute requires court approval before there
can be any indemnification where the person seeking indemnification has been
found liable to the corporation. The statute provides that it is not exclusive
of other indemnification that may be granted by a corporation's bylaws,
disinterested director vote, stockholder vote, agreement or otherwise.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------
<C> <S>
*1. Purchase Agreement dated as of June 21, 1996 among the Company, Label Art, Inc., Putnam Graphic
Innovations, Inc., InfoSeal International, Inc., Government Forms and Systems, Inc., Boharb
Corporation, Short Run Labels, Inc., BT Securities Corporation and Donaldson, Lufkin & Jenrette
Securities Corporation.
*2. Certificate of Ownership and Merger merging Transkrit Corporation into the Company filed with the
Secretary of State of Delaware on June 28, 1996.
*3.1 Certificate of Incorporation of the Company, as amended to date, filed with the Secretary of State
of the State of Delaware on August 18, 1989.
*3.2 By-laws of the Company.
*4.1 Indenture dated as of June 15, 1996 among the Company, Label Art, Inc., Putnam Graphic
Innovations, Inc., InfoSeal International, Inc., Government Forms and Systems, Inc., Boharb
Corporation, Short Run Labels, Inc. and Wilmington Trust Company (the "Indenture").
*4.2 Specimen Certificate of 11 5/8% Series A Senior Note due 2002 (included in Exhibit 4.1 hereto).
*4.3 Specimen Certificate of 11 5/8% Series B Senior Note due 2002 (the "New Notes") (included in
Exhibit 4.1 hereto).
*4.4 Form of Guarantee of securities issued pursuant to the Indenture (included in Exhibit 4.1 hereto).
*4.5 The Registration Rights Agreement dated as of June 28, 1996 among the Company, Label Art, Inc.,
Putnam Graphic Innovations, Inc., InfoSeal International, Inc., Government Forms and Systems,
Inc., Boharb Corporation, Short Run Labels, Inc., BT Securities Corporation and Donaldson, Lufkin
& Jenrette Securities Corporation.
*4.6 Securities Pledge Agreement dated as of June 28, 1996 between National Fiberstok Corporation and
Wilmington Trust Company.
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------
*4.7 Securities Pledge Agreement dated as of June 28, 1996 between Label Art, Inc. and Wilmington Trust
Company.
<C> <S>
*4.9 Securities Pledge Agreement dated as of June 28, 1996 between Boharb Corporation and Wilmington
Trust Company.
*5.1 Opinion of White & Case regarding the legality of the New Notes.
8.1 Opinion of White & Case regarding certain tax matters.
*10.1 Master Lease Agreement dated as of December 21, 1995 between the CIT Group Equipment Financing,
Inc. and the Company.
*10.2 Lease Agreement dated October 4, 1990 by and between Dermody Industrial Group as Landlord and the
Company as Tenant for the property located at 855 Linda Way, Sparks, Nevada.
*10.3 Lease Agreement dated September 1, 1988 by and between Klein Tools as Landlord and Label Art, Inc.
as Tenant for the property located at 5721 South Zero Street, Fort Smith, Arkansas.
*10.4 Occupancy Agreement dated as of August 11, 1993 among Gailerd Smith and Eileen Ruder as Landlords
and Short Run Labels, Inc. as Tenant for the property located at 1681 Industrial Road, San
Carlos, California.
*10.5 Lease Agreement dated as of May 23, 1995 between FRP Development Corp. as Landlord and Short Run
Labels, Inc. as Tenant for the property located at 812 Oregon Avenue, Linthicum, Maryland.
*10.6 Lease Agreement dated as of March 28, 1991 between the Company as Tenant and the Prudential Jimmie
Taylor Realtors as Landlord for the property located at 4407 South 16th Street, Fort Smith,
Arkansas.
*10.7 Indenture of Lease dated as of June 19, 1992 between C.E. Runion as Landlord and the Company as
Tenant for the property located at Highway 25, Travelers Rest, Greenville County, South Carolina.
*10.8 Lease Agreement dated as of September 2, 1994 between Tornetta Realty Corp. as Landlord and the
Company as Tenant for the property located at 2051A Potshop Lane, Norristown, PA.
*10.9 Lease Agreement dated as of April 1, 1980 between C-S-K Louisville as Landlord and the Company as
Tenant for the property located at 7707 National Turnpike, Louisville, Kentucky 40214.
*10.10 Lease Agreement dated as of May 10, 1994 between Jadow Realty Company, L.P. as Landlord and the
Company as Tenant for the premises located at 7990 Second Flag Drive, Cobb County, Georgia.
*10.11 Office Building Lease dated as of June 20, 1995 between Peachtree Dunwoody Partners, L.P. as
Landlord and the Company as Tenant for the property located at 5775 Peachtree Dunwoody Road,
Atlanta, GA.
*10.12 Transkrit Corporation, Employees' Pension Plan Restated as of January 1, 1989.
*10.13 Management Supplemental Retirement Agreement dated as of January 1, 1990 between the Company and
William C. Britts.
*10.14 Employee's Retirement Plan of National Fiberstok Corporation.
*10.15 Amended and Restated Advisory Services Agreement dated as of June 28, 1996 among the Company, MDC
Management Company II, L.P. and MDC Management Company.
*10.16 Employment Agreement dated as of June 28, 1996 between Robert M. Miklas and the Company.
*10.17 Employment Agreement dated as of June 9, 1995, as amended, between Robert B. Webster and the
Company.
*10.18 Employment Agreement dated as of June 28, 1996 between Jack Resnick and the Company.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------
*10.19 Employment Agreement dated as of June 28, 1996 between Thomas J. Cobery and the Company.
<C> <S>
*10.20 Non-Competition Agreement dated as of March 13, 1986 between the Company and Thomas J. Cobery.
*10.21 Employment Agreement dated as of April 5, 1983 between the Company and William C. Britts.
*10.22 DEC International, Inc. 1996 Stock Incentive Plan.
*10.23 Credit Agreement dated as of June 28, 1996 among the Company, Label Art, Inc., Putnam Graphic
Innovations, Inc., InfoSeal International, Inc., Government Forms and Systems, Inc., Boharb
Corporation, Short Run Labels, Inc. and Heller Financial, Inc.
*12.1 Statement re computation of ratios.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of KPMG Peat Marwick LLP.
*23.3 Consent of White & Case (contained in the opinion filed as Exhibit 5.1 hereto).
23.4 Consent of White & Case (contained in Exhibit 8.1 hereto).
*24.1 Power of Attorney (see pages II-4 through II-11).
*25.1 Statement of eligibility of trustee.
*99.1 Form of Letter of Transmittal for New Notes.
*99.2 Form of Notice of Guaranteed Delivery for New Notes.
*99.3 Letter to Brokers.
*99.4 Letter to Clients.
*99.5 Instruction to Registered Holder and/or Book Entry Transfer Participant from Beneficial Owner.
*99.6 Guidelines for Certificate of Taxpayer Identification Number on substitute Form W-9.
</TABLE>
- ------------------------
*Previously filed.
ITEM 22. UNDERTAKINGS.
(a) The undersigned registrant hereby undertake that insofar as
indemnification for liabilities arising under the Securities Act of 1933, as
amended (the "Act") may be permitted to directors, officers and controlling
persons of the Registrants pursuant to the foregoing provisions, or otherwise,
the Registrants have 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 of
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 its is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(b) The undersigned registrants hereby undertake to respond to requests for
information that is incorporated by reference into this 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 registrants hereby undertake 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-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused Amendment No. 3 to this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Atlanta, State of Georgia, on October 22, 1996.
NATIONAL FIBERSTOK CORPORATION
By: /s/ ROBERT M. MIKLAS
------------------------------------
Robert M. Miklas
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, Amendment No. 3
to this Registration Statement has been signed by the following persons in the
capacities indicated on October 22, 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
/S/ ROBERT M. MIKLAS
-------------------------------------------- Director, President and Chief Executive Officer
Robert M. Miklas (Principal Executive Officer)
*
-------------------------------------------- Vice President and Chief Financial Officer
Robert B. Webster (Principal Financial and Accounting Officer)
*
-------------------------------------------- Director
John D. Weil
*
-------------------------------------------- Director
David E. De Leeuw
*
-------------------------------------------- Director
David E. King
*
-------------------------------------------- Director
Glenn S. McKenzie
*
-------------------------------------------- Director
Calvin Ingram
</TABLE>
*By: /s/ ROBERT M. MIKLAS
-----------------------------------
Robert M. Miklas
Attorney-in-fact
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- -----------------------------------------------------------------------------------------------------
<C> <S>
*1. Purchase Agreement dated as of June 21, 1996 among the Company, Label Art, Inc., Putnam Graphic
Innovations, Inc., InfoSeal International, Inc., Government Forms and Systems, Inc., Boharb
Corporation, Short Run Labels, Inc., BT Securities Corporation and Donaldson, Lufkin & Jenrette
Securities Corporation.
*2. Certificate of Ownership and Merger merging Transkrit Corporation into the Company filed with the
Secretary of State of Delaware on June 28, 1996.
*3.1 Certificate of Incorporation of the Company, as amended to date, filed with the Secretary of State of
the State of Delaware on August 18, 1989.
*3.2 By-laws of the Company.
*4.1 Indenture dated as of June 15, 1996 among the Company, Label Art, Inc., Putnam Graphic Innovations,
Inc., InfoSeal International, Inc., Government Forms and Systems, Inc., Boharb Corporation, Short
Run Labels, Inc. and Wilmington Trust Company (the "Indenture").
*4.2 Specimen Certificate of 11 5/8% Series A Senior Note due 2002 (included in Exhibit 4.1 hereto).
*4.3 Specimen Certificate of 11 5/8% Series B Senior Note due 2002 (the "New Notes") (included in Exhibit
4.1 hereto).
*4.4 Form of Guarantee of securities issued pursuant to the Indenture (included in Exhibit 4.1 hereto).
*4.5 The Registration Rights Agreement dated as of June 28, 1996 among the Company, Label Art, Inc.,
Putnam Graphic Innovations, Inc., InfoSeal International, Inc., Government Forms and Systems, Inc.,
Boharb Corporation, Short Run Labels, Inc., BT Securities Corporation and Donaldson, Lufkin &
Jenrette Securities Corporation.
*4.6 Securities Pledge Agreement dated as of June 28, 1996 between National Fiberstok Corporation and
Wilmington Trust Company.
*4.7 Securities Pledge Agreement dated as of June 28, 1996 between Label Art, Inc. and Wilmington Trust
Company.
*4.9 Securities Pledge Agreement dated as of June 28, 1996 between Boharb Corporation and Wilmington Trust
Company.
*5.1 Opinion of White & Case regarding the legality of the New Notes.
8.1 Opinion of White & Case regarding certain tax matters.
*10.1 Master Lease Agreement dated as of December 21, 1995 between the CIT Group Equipment Financing, Inc.
and the Company.
*10.2 Lease Agreement dated October 4, 1990 by and between Dermody Industrial Group as Landlord and the
Company as Tenant for the property located at 855 Linda Way, Sparks, Nevada.
*10.3 Lease Agreement dated September 1, 1988 by and between Klein Tools as Landlord and Label Art, Inc. as
Tenant for the property located at 5721 South Zero Street, Fort Smith, Arkansas.
*10.4 Occupancy Agreement dated as of August 11, 1993 among Gailerd Smith and Eileen Ruder as Landlords and
Short Run Labels, Inc. as Tenant for the property located at 1681 Industrial Road, San Carlos,
California.
*10.5 Lease Agreement dated as of May 23, 1995 between FRP Development Corp. as Landlord and Short Run
Labels, Inc. as Tenant for the property located at 812 Oregon Avenue, Linthicum, Maryland.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- -----------------------------------------------------------------------------------------------------
*10.6 Lease Agreement dated as of March 28, 1991 between the Company as Tenant and the Prudential Jimmie
Taylor Realtors as Landlord for the property located at 4407 South 16th Street, Fort Smith,
Arkansas.
<C> <S>
*10.7 Indenture of Lease dated as of June 19, 1992 between C.E. Runion as Landlord and the Company as
Tenant for the property located at Highway 25, Travelers Rest, Greenville County, South Carolina.
*10.8 Lease Agreement dated as of September 2, 1994 between Tornetta Realty Corp. as Landlord and the
Company as Tenant for the property located at 2051A Potshop Lane, Norristown, PA.
*10.9 Lease Agreement dated as of April 1, 1980 between C-S-K Louisville as Landlord and the Company as
Tenant for the property located at 7707 National Turnpike, Louisville, Kentucky 40214.
*10.10 Lease Agreement dated as of May 10, 1994 between Jadow Realty Company, L.P. as Landlord and the
Company as Tenant for the premises located at 7990 Second Flag Drive, Cobb County, Georgia.
*10.11 Office Building Lease dated as of June 20, 1995 between Peachtree Dunwoody Partners, L.P. as Landlord
and the Company as Tenant for the property located at 5775 Peachtree Dunwoody Road, Atlanta, GA.
*10.12 Transkrit Corporation, Employees' Pension Plan Restated as of January 1, 1989.
*10.13 Management Supplemental Retirement Agreement dated as of January 1, 1990 between the Company and
William C. Britts.
*10.14 Employee's Retirement Plan of National Fiberstok Corporation.
*10.15 Amended and Restated Advisory Services Agreement dated as of June 28, 1996 among the Company, MDC
Management Company II, L.P. and MDC Management Company.
*10.16 Employment Agreement dated as of June 28, 1996 between Robert M. Miklas and the Company.
*10.17 Employment Agreement dated as of June 9, 1995, as amended, between Robert B. Webster and the Company.
*10.18 Employment Agreement dated as of June 28, 1996 between Jack Resnick and the Company.
*10.19 Employment Agreement dated as of June 28, 1996 between Thomas J. Cobery and the Company.
*10.20 Non-Competition Agreement dated as of March 13, 1986 between the Company and Thomas J. Cobery.
*10.21 Employment Agreement dated as of April 5, 1983 between the Company and William C. Britts.
*10.22 DEC International, Inc. 1996 Stock Incentive Plan.
*10.23 Credit Agreement dated as of June 28, 1996 among the Company, Label Art, Inc., Putnam Graphic
Innovations, Inc., InfoSeal International, Inc., Government Forms and Systems, Inc., Boharb
Corporation, Short Run Labels, Inc. and Heller Financial, Inc.
*12.1 Statement re computation of ratios.
*23.1 Consent of Arthur Andersen LLP.
*23.2 Consent of KPMG Peat Marwick LLP.
*23.3 Consent of White & Case (contained in the opinion filed as Exhibit 5.1 hereto).
23.4 Consent of White & Case (contained in Exhibit 8.1 hereto).
*24.1 Power of Attorney (see pages II-4 through II-11).
*25.1 Statement of eligibility of trustee.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- -----------------------------------------------------------------------------------------------------
*99.1 Form of Letter of Transmittal for New Notes.
<C> <S>
*99.2 Form of Notice of Guaranteed Delivery for New Notes.
*99.3 Letter to Brokers.
*99.4 Letter to Clients.
*99.5 Instruction to Registered Holder and/or Book Entry Transfer Participant from Beneficial Owner.
*99.6 Guidelines for Certificate of Taxpayer Identification Number on substitute Form W-9.
</TABLE>
- ------------------------
*Previously filed.
<PAGE>
EXHIBIT 8.1
October 17, 1996
National Fiberstok Corporation
5775 Peachtree Dunwoody Road
Suite C150
Atlanta, Georgia 30342
Ladies and Gentlemen:
We have acted as your special counsel in connection with the transactions
described in the Registration Statement on Form S-4 (Registration No. 333-8925)
(the "Registration Statement") filed with the Securities and Exchange Commission
(the "Commission") pursuant to the Securities Act of 1933, as amended (the
"Securities Act"), on July 26, 1996 by National Fiberstok Corporation, a
Delaware corporation (the "Company"), and described in the Company's Offer to
Exchange 11 5/8% Senior Notes due 2002, Series B (the "New Notes") for all
outstanding 11 5/8% Senior Notes due 2002, Series A (the "Old Notes") set forth
in the Prospectus (the "Prospectus") contained within the Registration
Statement. Capitalized terms used but not otherwise defined herein shall have
the meaning ascribed thereto in the Registration Statement.
Our opinion is based on an examination of the Registration Statement, the
Prospectus, and such other documents, corporate records and materials as we have
deemed necessary or appropriate for the purposes of this opinion. We assume that
all transactions relating to the exchange pursuant to the Exchange Offer will be
carried out in accordance with the terms of the governing documents without any
amendments thereto or waiver of any terms thereof, and that such documents
represent the entire agreement of the parties thereto. We understand the
relevant facts to be as follows:
The Old Notes were originally issued and sold on June 21, 1996 in a
transaction not registered under the Securities Act, in reliance upon the
exemption provided in Rule 144A and Regulation D under the Securities Act.
Accordingly, the Old Notes are generally subject to substantial transfer
restrictions unless such notes are registered or unless an applicable exemption
from the registration requirements of the Securities Act is available. Pursuant
to a Registration Rights Agreement dated June 28, 1996 (the "Registration Rights
Agreement") by and among the Company, the Guarantors and the initial purchasers
of the Old Notes (the "Initial Purchasers") with respect to the Old Notes, the
Company agreed to use its best efforts to consummate by November 22, 1996 the
registered Exchange Offer pursuant to which holders of the Old Notes would be
offered an opportunity to exchange their Old Notes for the New Notes which would
be issued without legends restricting the transfer thereof. Attentively, under
certain circumstances, the Company agreed to file a Shelf Registration statement
covering resales of the Old Notes and to cause such Shelf Registration statement
to be declared effective under the Securities Act. Failure of the Company to
comply with the requirements of the Registration Rights Agreement could result
in additional interest up to 1% payable with respect to the Old Notes; the New
Notes will not be subject to such contingent additional interest. In general,
the New Notes will be freely transferable after the Exchange Offer without
further registration under the Securities Act. Except as noted above, the terms
of the New Notes are identical to those of the Old Notes.
Based on the foregoing and subject to the assumptions, qualifications and
limitations contained herein, we hereby confirm that the statements set forth in
the Prospectus under the heading "Certain Federal Income Tax Consequences"
constitute our opinion with respect to the material United States Federal income
tax consequences of the exchange pursuant to the Exchange Offer, and the
ownership and disposition of the Old Notes or the New Notes by holders who hold
such notes as capital assets. The possibility exists that contrary positions may
be taken by the Internal Revenue Service and that a court may agree with such
contrary position.
<PAGE>
WHITE & CASE
National Fiberstok Corporation
Page 2
The foregoing opinion is specific to the transactions and the documents
referred to herein, and is based upon the facts known to us as of the date
hereof.
The foregoing opinion is predicated upon the Code, the regulations
thereunder, the administrative and judicial interpretations of the Code and
regulations, in each case as in effect on the date hereof. Any change in
applicable law or in any of the facts or other assumptions upon which we have
relied, may adversely affect such opinion.
We hereby consent to the filing with the Securities and Exchange Commission
of this opinion as an exhibit to National Fiberstok Corporation's Registration
Statement on Form S-4 relating to the exchange of the Old Notes for the New
Notes and to the reference to our firm under the heading "Certain Federal Income
Tax Consequences" in the Prospectus. In giving such consent, we do not thereby
admit that we are in the category of persons whose consent is required under
Section 7 of the Securities Act.
Very truly yours,
/s/ White & Case
