<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 11, 1996
REGISTRATION NO. 333-14569
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
E&S HOLDINGS CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 6719 59-2439656
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
------------------------
601 SOUTH HARBOUR ISLAND BOULEVARD, SUITE 200
TAMPA, FLORIDA 33602-3141
(813) 204-5200
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
------------------------------
PAUL L. WHITING
CHAIRMAN OF THE BOARD OF DIRECTORS,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
E&S HOLDINGS CORPORATION
601 SOUTH HARBOUR ISLAND BOULEVARD, SUITE 200
TAMPA, FLORIDA 33602-3141
(813) 204-5200
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
------------------------------
WITH A COPY TO:
<TABLE>
<S> <C>
JOHN B. TEHAN, ESQ.
SIMPSON THACHER & BARTLETT
425 LEXINGTON AVENUE
NEW YORK, NEW YORK 10017
(212) 455-2000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS
PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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 DECEMBER 11, 1996
PRELIMINARY PROSPECTUS
[LOGO]
[LOGO]
E&S HOLDINGS CORPORATION
TO BE RENAMED EVENFLO & SPALDING HOLDINGS CORPORATION
OFFER TO EXCHANGE UP TO $200,000,000 OF ITS
10 3/8% SERIES B SENIOR SUBORDINATED NOTES DUE 2006
FOR ANY AND ALL OF ITS OUTSTANDING
10 3/8% SENIOR SUBORDINATED NOTES DUE 2006
------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON ,
1997, UNLESS EXTENDED.
------------------------------
E&S Holdings Corporation, to be renamed Evenflo & Spalding Holdings
Corporation (the "Company"), hereby offers, upon the terms and subject to the
conditions set forth in this Prospectus and the accompanying Letter of
Transmittal (which together constitute the "Exchange Offer"), to exchange an
aggregate of up to $200,000,000 principal amount of 10 3/8% Series B Senior
Subordinated Notes due 2006 (the "Exchange Notes") of the Company for an
identical face amount of the issued and outstanding 10 3/8% Senior Subordinated
Notes due 2006 (the "Old Notes" and the Old Notes and the Exchange Notes,
collectively, the "Notes") of the Company from the Holders (as defined herein)
thereof. As of the date of this Prospectus, there is $200,000,000 aggregate
principal amount of the Old Notes outstanding. The terms of the Exchange Notes
are identical in all material respects to the Old Notes, except that the
Exchange Notes have been registered under the Securities Act of 1933, as amended
(the "Securities Act"), and therefore will not bear legends restricting their
transfer and will not contain certain provisions providing for an increase in
the interest rate on the Old Notes under certain circumstances relating to the
Registration Rights Agreement (as defined herein), which provisions will
terminate as to all of the Notes upon the consummation of the Exchange Offer.
Interest on the Exchange Notes will be payable semiannually on October 1 and
April 1 of each year, commencing April 1, 1997. The Exchange Notes will mature
on October 1, 2006. The Exchange Notes will be redeemable at the option of the
Company, in whole or in part, at any time or from time to time on or after
October 1, 2001, at the redemption prices set forth herein, together with
accrued and unpaid interest, if any, to the date of redemption. In addition, at
any time on or prior to October 1, 1999, the Company may redeem up to 40% of the
aggregate principal amount of the Exchange Notes originally issued with the net
proceeds of one or more Equity Offerings (as defined), at 110% of the principal
amount thereof, plus accrued and unpaid interest, if any, to the date of
redemption; PROVIDED that at least $120 million aggregate principal amount of
the Exchange Notes remains outstanding after such redemption. Upon a Change of
Control (as defined), each holder of the Exchange Notes will be able to require
the Company to purchase such holder's Exchange Notes at 101% of the principal
amount thereof, together with accrued and unpaid interest, if any, to the date
of purchase.
The Exchange Notes will be unsecured senior subordinated obligations of the
Company and will be subordinated in right of payment to all existing and future
Senior Indebtedness (as defined) of the Company, including indebtedness under
its Credit Facilities (as defined). At September 30, 1996, after giving effect
to the Recapitalization, the Financings (as defined) (including the sale of the
Old Notes) and the Etonic Acquisition (as defined), the Senior Indebtedness of
the Company was approximately $483 million (including $57 million of bankers'
acceptances) and the Company had additional availability of $142 million
(reduced to reflect $82 million of outstanding letters of credit and bankers'
acceptances) for borrowings under the Credit Facilities, all of which would be
Senior Indebtedness, if borrowed. The Company is a holding company and,
accordingly, the Old Notes are and the Exchange Notes also will be effectively
subordinated to all existing and future liabilities of the Company's
subsidiaries. As of September 30, 1996, after giving effect to the
Recapitalization, the Financings and the Etonic Acquisition, the Company's
subsidiaries had total liabilities of $678 million, including guarantees of
indebtedness under the Credit Facilities. The Credit Facilities provide that
certain change of control events with respect to the Company will constitute a
default thereunder. In the event a Change of Control occurs and the Company
fails to purchase tendered Exchange Notes, such failure would constitute an
Event of Default under the Indenture. If, as a result thereof, a default occurs
with respect to any Senior Indebtedness, the subordination provisions in the
Indenture would likely restrict payments to the holders of the Exchange Notes.
The Old Notes were issued and sold on September 30, 1996 in a transaction
not registered under the Securities Act in reliance upon an exemption from the
registration requirements thereof. 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. The
Exchange Notes are being offered hereby in order to satisfy certain obligations
of the Company contained in the Registration Rights Agreement. Based on
interpretations by the staff of the Securities and Exchange Commission (the
"Commission") set forth in no-action letters issued to third parties, the
Company believes that the Exchange Notes issued pursuant to the Exchange Offer
in exchange for Old Notes may be offered for resale, resold or otherwise
transferred by any holder thereof (other than any such holder that is an
"affiliate" of the Company within the meaning of Rule 405 promulgated under the
Securities Act) without compliance with the registration and prospectus delivery
provisions of the Securities Act, PROVIDED that such Exchange Notes are acquired
in the ordinary course of such holder's business, such holder has no arrangement
with any person to participate in the distribution of such Exchange Notes and
neither such holder nor any such other person is engaging in or intends to
engage in a distribution of such Exchange Notes. However, the Company has not
sought, and does not intend to seek, its own no-action letter, and there can be
no assurance that the staff of the Securities and Exchange Commission
("Commission") would make a similar determination with respect to the Exchange
Offer. Notwithstanding the foregoing, each broker-dealer that receives Exchange
Notes for its own account pursuant to the Exchange Offer must acknowledge that
it will deliver a prospectus in connection with any resale of such Exchange
Notes. The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. This Prospectus, as
it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with any resale of Exchange Notes received in
exchange for such Old Notes where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities (other than Old Notes acquired directly from the Company). The
Company has agreed that, for a period of 120 days after the date of this
Prospectus, it will make this Prospectus available to any broker-dealer for use
in connection with any such resale.
The Old Notes are designated for trading in the Private Offerings, Resales
and Trading through Automated Linkages ("PORTAL") market. There is no
established trading market for the Exchange Notes. The Company does not
currently intend to list the Exchange Notes on any securities exchange or to
seek approval for quotation through any automated quotation system. Accordingly,
there can be no assurance as to the development or liquidity of any market for
the Exchange Notes. The certificates representing the Exchange Notes will be
issued in fully registered form. The Exchange Notes will be represented by a
single, permanent global Exchange Note, in definitive, fully registered form
without interest coupons (the "Global Exchange Note") and will be deposited with
the Trustee as custodian for The Depository Trust Company ("DTC") and registered
in the name of a nominee of DTC. Ownership of beneficial interests in the Global
Exchange Note will be shown on, and the transfer of that ownership will be
effected only through, records maintained by DTC or its nominee or participants
therein.
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Old Notes being tendered for exchange. The date of acceptance and
exchange of the Old Notes (the "Exchange Date") will be the first business day
following the Expiration Date (as defined herein). Old Notes tendered pursuant
to the Exchange Offer may be withdrawn at any time prior to the Expiration Date.
The Company will not receive any proceeds from the Exchange Offer. The Company
will pay all of the expenses incident to the Exchange Offer. The Exchange Offer
will expire 5:00 p.m., New York City Time, on 1997, unless the
Exchange Offer is extended, in which case the term "Expiration Date" means the
latest date and time to which the Exchange Offer is extended.
----------------------------------
SEE "RISK FACTORS," BEGINNING ON PAGE 17, FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY INVESTORS IN CONNECTION WITH THE EXCHANGE
OFFER AND AN INVESTMENT IN THE EXCHANGE NOTES.
------------------------
THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE 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 , 1996
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 (together with all amendments, exhibits, schedules and supplements thereto,
the "Registration Statement") under the Securities Act with respect to the
Exchange Notes being offered hereby. This Prospectus, which forms a part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement. For further information with respect to the Company and
the Exchange Notes, reference is made to the Registration Statement. Statements
contained in this Prospectus as to the contents of any contract or other
document are not necessarily complete, and, where such contract or other
document is an exhibit to the Registration Statement, each such statement is
qualified in all respects by the provisions in such exhibit, to which reference
is hereby made. Copies of the Registration Statement may be examined without
charge at the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549, and at the web site
(http://www.sec.gov.) maintained by the Commission and at the Commission's
Regional Offices located at Seven World Trade Center, 13th Floor, New York, New
York 10048 and Citicorp Center, 500 West Madison Avenue, Suite 1400, Chicago,
Illinois 60661. Copies of all or any portion of the Registration Statement can
be obtained from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, upon payment of certain fees prescribed by
the Commission.
The Company is not currently subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Upon
completion of the Exchange Offer, the Company will be subject to the
informational requirements of the Exchange Act, and, in accordance therewith,
will file periodic reports and other information with the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549. Copies of any material so filed can
be obtained from the Public Reference Section of the Commission, upon payment of
certain fees prescribed by the Commission. In addition, pursuant to the
Indenture covering the Old Notes and the Exchange Notes, the Company has agreed
to file with the Commission and provide to the Holders the annual reports and
the information, documents and other reports otherwise required pursuant to
Section 13 of the Exchange Act. Such requirements may be satisfied through the
filing and provision of such documents and reports which would otherwise be
required pursuant to Section 13 in respect of the Company.
UNTIL , 1997 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED FINANCIAL AND OTHER INFORMATION CONTAINED
ELSEWHERE IN THIS PROSPECTUS. PROSPECTIVE INVESTORS ARE URGED TO READ THIS
PROSPECTUS IN ITS ENTIRETY. ALL REFERENCES TO THE "COMPANY" SHALL MEAN E&S
HOLDINGS CORPORATION (TO BE RENAMED EVENFLO & SPALDING HOLDINGS CORPORATION) AND
ITS CONSOLIDATED SUBSIDIARIES, THE TERM "SPALDING" REFERS TO THE COMPANY'S
SPALDING SPORTS WORLDWIDE DIVISION AND THE TERM "EVENFLO" REFERS TO EVENFLO
COMPANY, INC., A SUBSIDIARY OF SPALDING & EVENFLO COMPANIES, INC., A SUBSIDIARY
OF THE COMPANY ("S&E"), UNLESS THE CONTEXT INDICATES OTHERWISE. ALL REFERENCES
TO FISCAL YEAR IN THIS PROSPECTUS REFER TO THE FISCAL YEAR ENDING ON SEPTEMBER
30 OF EACH YEAR. FINANCIAL DATA PRESENTED ON A PRO FORMA BASIS REFLECTS THE
ACQUISITION (THE "ETONIC ACQUISITION") BY THE COMPANY OF ETONIC, INC.'S GOLF
LINES AND ATHLETIC SHOES ("ETONIC"). ALL REFERENCES TO MARKET SHARE AND
DEMOGRAPHIC DATA IN THIS PROSPECTUS ARE BASED ON INDUSTRY PUBLICATIONS AND
COMPANY DATA. AN INDEX OF DEFINED TERMS IS INCLUDED ON PAGE I-1 OF THIS
PROSPECTUS.
THE COMPANY
GENERAL
The Company is a leading global marketer, manufacturer and licensor of
branded consumer products serving the golf, sporting goods and infant and
juvenile product markets. Spalding is one of the most recognized consumer
product companies serving the sporting goods industry, and in 1995, sold more
golf balls, basketballs and softballs than any other company in the U.S. Evenflo
is the largest domestic manufacturer of juvenile car seats, juvenile stationary
activity products and breastfeeding products and is widely recognized by new
mothers for high quality, safety-tested infant and juvenile products. The
Company markets its products in over 100 countries.
Spalding, with pro forma net sales of $495 million in fiscal 1996, is a
leader in the $2.4 billion U.S. wholesale golf industry and in the $57 billion
U.S. wholesale sporting goods industry, with some of the most widely recognized
branded consumer product names such as SPALDING-REGISTERED TRADEMARK-,
TOP-FLITE-REGISTERED TRADEMARK-, ETONIC-REGISTERED TRADEMARK- and
DUDLEY-REGISTERED TRADEMARK- . Spalding's brand names are currently featured on
over 2,000 products with an emphasis on three primary categories: (i) golf
products, (ii) products for other sporting goods segments, such as basketball,
diamond sports (baseball and softball), volleyball and soccer, and (iii)
licensed athletic products, including apparel and footwear. To broaden
Spalding's line of golf products, in July 1996 the Company acquired Etonic's
line of golf accessories, including the second best selling golf shoe brand in
the U.S., golf gloves and apparel. Spalding's pro forma international sales have
grown to $153 million, or 31% of Spalding's pro forma net sales in fiscal 1996,
due in large part to the popularity of golf, basketball and volleyball outside
the United States.
Evenflo, with net sales of $237 million in fiscal 1996, is a leader in the
$1.9 billion U.S. market for juvenile and infant hardgood products, as well as a
market leader in such products in several international markets. Evenflo,
established in 1920, is one of the oldest and most recognized names in the
infant and juvenile products industry, with a 97% brand awareness for infant
feeding products among new mothers in the U.S. Evenflo brands, such as
EVENFLO-REGISTERED TRADEMARK-, EXERSAUCER-REGISTERED TRADEMARK- and ON MY
WAY-REGISTERED TRADEMARK- , currently appear on more than 400 products, with an
emphasis on two principal categories: (i) juvenile furniture, which includes car
seats, portable play yards, strollers, high chairs, cribs, activity products,
carriers and mattresses and (ii) infant feeding, which includes reusable and
disposable nurser systems, breastfeeding aids, oral development items, such as
pacifiers, and other baby care accessories. Evenflo has capitalized in recent
years on favorable demographic trends in the U.S. and abroad and from the
adoption of mandatory automobile child restraint laws in certain international
markets. Evenflo's international sales have grown to $39 million, or 16% of
Evenflo's net sales, in fiscal 1996.
3
<PAGE>
COMPETITIVE STRENGTHS
SPALDING
LEADING MARKET SHARE IN KEY PRODUCT AREAS. In 1995, Spalding was the U.S.
market share leader in golf balls (35% market share in units), basketballs (48%
market share in net sales), and softballs (27% market share in net sales). In
1995, Spalding held the leading U.S. market share position in products that
generated 60% of its pro forma net sales. Spalding sold over 25 million dozen
golf balls in fiscal 1995, approximately 30% more (by units) than its nearest
competitor. The Company believes that TOP-FLITE is the most played golf ball in
the world. By leveraging its strong market position in core product lines,
Spalding is able to increase net sales and profit margins by introducing new
lines of related products, such as TOP-FLITE TOUR-REGISTERED TRADEMARK- golf
clubs and TOP-FLITE STRATA TOUR-TM- golf balls, or line extensions in existing
products, such as the ZK-COMPOSITE-REGISTERED TRADEMARK- basketballs and
ZK-COMPOSITE-TM- volleyballs.
STRONG BRAND IDENTITY. Spalding enjoys 91% brand awareness among sports
participants in the U.S. due to its 120-year tradition of developing and
manufacturing high quality sporting goods products. The Company believes that
the NBA's exclusive endorsement of Spalding basketballs since 1983, along with
the endorsement of Spalding products by professional athletes such as Lee
Trevino, Mark O'Meara, Payne Stewart, Craig Stadler, D.A. Weibring, Bill
Glasson, Hakeem Olajuwon, Shaquille O'Neal, Rebecca Lobo and Orel Hershiser, has
contributed to Spalding's high level of domestic and international brand
awareness and strong market positions. Spalding pursues domestic and
international growth through new product introductions, line extensions and
licensing arrangements under its well established brand names, including
SPALDING, TOP-FLITE, ETONIC and DUDLEY. In addition, Spalding's strong brand
identity in its key product areas increases licensing opportunities for apparel,
footwear and other products. Sales of licensed Spalding products totaled
approximately $344 million in fiscal 1996, up from approximately $241 million in
fiscal 1992, a compound annual growth rate of 9%. Spalding realized royalty
income from such licensed sales of $14 million in fiscal 1996.
EMPHASIS ON PRODUCT DEVELOPMENT AND INNOVATION. In recent years, the
Company has derived a significant percentage of its net sales from new product
introductions and line extensions. For fiscal 1996, 33% of Spalding's net sales
came from new products and line extensions introduced during fiscal 1996.
Spalding currently holds more than 128 U.S. patents, 55 of them in golf ball
technology alone. Spalding introduced the first dimpled golf ball in the U.S.,
invented the first two-piece golf ball, developed and patented the blended
SURLYN-REGISTERED TRADEMARK- cut-resistant golf ball cover and in May 1996
introduced the TOP-FLITE STRATA TOUR, Spalding's latest product offering in the
premium golf ball market. In addition, Spalding has recently introduced one of
the first titanium irons in the market, and the popularity of Spalding's
patented ZK-COMPOSITE materials for basketballs and volleyballs has contributed
to Spalding's success in both of these markets.
LOW COST PRODUCER. Spalding is the largest golf ball manufacturer in the
U.S. and, as a result of its highly automated manufacturing process and focus on
improving efficiency, believes it is one of the lowest cost golf ball producers
in the world. Since 1992, Spalding has reduced costs per unit by 6%, reduced
average per ball production time from eight days to less than 30 hours and
increased its production capacity by approximately 45%, while improving product
quality levels.
QUALITY CUSTOMER SERVICE AND SUPPORT. Spalding believes that quality
customer service is a critical factor for success in the branded consumer
products market. Spalding has developed a highly integrated, on-line software
system which allows Spalding to expedite order entry, respond rapidly to retail
customer questions regarding product specifications and custom orders, and
direct consumers to convenient retail locations that stock Spalding products. In
response to the growing need to assist retailers with their efforts to improve
purchasing efficiencies, Spalding offers customized computer-to-computer order
entry, just-in-time inventory control and other specialized services.
4
<PAGE>
EVENFLO
STRONG MARKET SHARE IN KEY PRODUCT AREAS. In 1995, Evenflo was the U.S.
market leader (by net sales) in juvenile car seats (35% market share), juvenile
stationary activity products (in excess of 50% market share) and breastfeeding
products (50% market share). In 1995, Evenflo held leading market share
positions in products that generated over 55% of its net sales in such year. In
1995, Evenflo had one of the leading domestic market positions (by net sales) in
play yards (27% market share) and reusable nursing systems (24% market share).
Evenflo believes that its strong market shares are attributable to its design of
safety-tested products that appeal to parents' desires for fashionable products
that add convenience to the child care process. The breadth of Evenflo's product
line permits it to compete effectively internationally, resulting in significant
net sales in certain international markets.
STRONG BRAND IDENTITY. With a strong brand awareness among new mothers in
the U.S., Evenflo is one of the most widely recognized names in the infant and
juvenile products industry. Evenflo believes that its long history of developing
safety-tested, innovative products (Evenflo introduced the first nursing bottle
system in 1935) is responsible for the high levels of brand loyalty achieved by
its products. In addition, the strength of Evenflo products in the car seat and
high chair markets which are "core" products (required products for most
families with infants and juveniles) contributes to customers recognizing
Evenflo as a brand name associated with high quality consumer products. Evenflo
is able to introduce new lines and related products, such as Evenflo's car
seat/stroller combination, or product innovations, such as the stationary
EXERSAUCER, by leveraging its strong brand name awareness.
EMPHASIS ON INNOVATION AND PRODUCT DEVELOPMENT. Evenflo has developed a
number of innovative infant and juvenile products, including the first fully
transparent baby bottle, the first decorated nurser, the first convertible car
seat to pass applicable federal testing standards and the first juvenile
stationary activity product. In 1994, Evenflo successfully introduced the
stationary EXERSAUCER infant exerciser as a safer alternative to infant walkers.
Evenflo's most recent car seat offering, the ON MY WAY introduced in 1994, with
its ergonomically correct CARRY RIGHT-TM- handle, has gained a leading market
share in the infant car seat segment. By designing a car seat that attaches to a
stroller to form the new ON MY WAY TRAVEL SYSTEM-TM-, Evenflo has opened
incremental growth opportunities in strollers. Each new product Evenflo develops
is subjected to extensive evaluation to ensure it meets Evenflo's standards for
quality and safety.
QUALITY CUSTOMER SERVICE AND SUPPORT. Evenflo believes that effective
customer service is essential to maintaining the brand loyalty of new parents,
grandparents and other purchasers of infant and juvenile products. Evenflo has
established toll free customer service numbers for consumers with questions
relating to Evenflo products. Like Spalding, Evenflo offers customized
computer-to-computer order entry, just-in-time inventory control and other
specialized services to its customers.
BUSINESS STRATEGY
The Company's objective is to be a leading worldwide marketer, manufacturer
and licensor of branded consumer products. The Company intends to achieve this
objective by growing sales, both in the U.S. and abroad, continuing to introduce
high quality, innovative products, supporting the sale of those products with
excellent customer service and by making selective acquisitions.
SPALDING
Spalding's objective is to be a leading worldwide supplier of high quality
sporting goods products serving the needs of sports participants of all skill
levels. Spalding seeks to achieve this objective through the following
strategies:
INCREASE MARKET SHARE IN GOLF PRODUCTS. Spalding intends to increase market
share in each golf product market segment, particularly the premium golf market,
by pursuing the following strategies:
- INTRODUCING FREQUENT IMPROVEMENTS IN GOLF BALL TECHNOLOGY. Spalding's
introduction of the TOP-FLITE STRATA TOUR golf ball marks the fourth
consecutive year in which Spalding has introduced a new line of advanced
performance golf balls. With its patented multi-layer core and ZS
BALATA-TM- cover, the
5
<PAGE>
TOP-FLITE STRATA TOUR outperforms other premium grade golf balls in
distance and spin comparisons. The TOP-FLITE STRATA TOUR has been one of
the most successful product launches in the Company's history and has
increased Spalding's sales through the attractive on-course pro shop
channel. Through the introduction of the TOP-FLITE STRATA TOUR, along with
further enhancements to Spalding's high volume TOP-FLITE XL-TM- and
TOP-FLITE MAGNA-REGISTERED TRADEMARK- brands, Spalding intends to expand
its presence in the premium golf ball market while maintaining its unit
leadership in the mid-priced golf ball market.
- INCREASING SALES OF PREMIUM GOLF CLUBS. Spalding entered the premium golf
club market in 1994 to capitalize on the strength of the TOP-FLITE name
and establish TOP-FLITE as a major brand in the $1.2 billion U.S.
wholesale golf club market, which is highly fragmented and has grown 13%
annually over the past five years. Since the beginning of the 1996 golf
season, TOP-FLITE TOUR irons have been one of the most played irons on the
PGA Senior Tour. In addition, Spalding's U.S. premium golf club sales have
increased to $21 million in fiscal 1996 from $10 million for fiscal 1995.
Spalding recently introduced its first titanium TOP-FLITE TOUR irons and
its new MUSCLE-TM- graphite shaft which further improves the Company's
position in the premium golf club market.
- EXPANDING AND UPGRADING ITS LINE OF GOLF ACCESSORIES. The acquisition of
Etonic, the second best selling golf shoe brand in the U.S., extends the
Company's golf franchise to golf shoes and gloves, as well as enhances the
Company's distribution into on-course golf pro shops and high-end golf
retailers. Etonic currently offers over 70 styles of golf shoes which are
endorsed by several of the leading PGA tour professionals, including Phil
Mickelson. The Company intends to capitalize on the acquisition of Etonic
by introducing new shoe and glove products which complement the TOP-FLITE
line of equipment and accessories.
CONTINUE NEW SPORTING GOODS PRODUCT INNOVATIONS AND INTRODUCTIONS. Spalding
intends to expand on its leading market share in golf balls, basketballs and
softballs by continuing to develop new products in related categories. Spalding
will continue to introduce high end, innovative products for its sporting goods
segment, such as a new dimpled softball, a "soft-touch" volleyball and premium
soccer balls. Spalding also intends to continue developing new high performance
products for the increasing number of women participating in competitive sports
and the growing international market for sporting goods. In addition, Spalding
intends to utilize its Warner Bros. license for LOONEY
TUNES-REGISTERED TRADEMARK- to become a leader in the growing licensed character
segment of the athletic products industry.
GROW INTERNATIONAL SALES. Although Spalding already markets its products in
over 95 countries, management believes that significant additional opportunities
exist to increase international sales, especially in Latin America, China and
other nations in Southeast Asia. In addition to new geographic opportunities,
Spalding believes that significant international opportunities are available for
growth from both existing product lines as well as new product introductions due
to the growing international popularity of golf, basketball and volleyball.
Spalding believes that its brand name recognition in the U.S., coupled with
important product endorsements, particularly the NBA and touring golf
professionals, will allow Spalding to continue to expand in international
markets.
SELECTIVELY EXPAND LICENSING PROGRAM. Spalding intends to selectively
expand its brand name to additional product categories and new markets,
particularly outside the U.S. Spalding is currently one of the world's leading
sports brand licensors with over 100 worldwide licenses. The SPALDING and
TOP-FLITE brand names are licensed in over 45 product categories, including the
Hakeem Olajuwon shoe line by Mercury International Trading Corp., one of the
largest shoe manufacturers in the world, and an apparel line by Mitsubishi
Corporation in Japan. Spalding also recently entered into a 15-year exclusive
U.S. licensing agreement with the Sara Lee Corporation, one of the largest
apparel manufacturers in the U.S. and the maker of
Champion-Registered Trademark-, Coach-Registered Trademark-,
Hanes-Registered Trademark- and L'eggs-Registered Trademark- products, for
apparel products in the mid-price range.
6
<PAGE>
EVENFLO
Evenflo's objective is to be a worldwide leader in serving the infant and
juvenile hardgoods products markets with high quality products and excellence in
customer service. Evenflo seeks to achieve this objective by pursuing the
following strategies:
INCREASE MARKET SHARE THROUGH NEW PRODUCT INNOVATIONS. Evenflo expects to
introduce numerous new products in its juvenile furniture and infant feeding
markets in the next twelve months. Evenflo is the leading seller of infant and
juvenile car seats in the U.S. and will seek to increase its market share with
the 1996 launch of the MEDALLION-TM-, a high-end convertible (infant to toddler)
car seat. Evenflo intends to use its recent success with the ON MY WAY TRAVEL
SYSTEM, a combination car seat and stroller system, to increase sales of
strollers. Evenflo intends to introduce additional products similar to its
multi-functional PHASES-TM- high chair, which was introduced in late 1995. The
success of the PHASES high chair has increased Evenflo's share (in net sales) of
the U.S. high chair market from approximately 5% in 1994 to 13% for the six
months ended June 30, 1996.
GROW INTERNATIONAL SALES. Evenflo's international sales have grown at a
compound annual rate of more than 8% from fiscal 1992 to fiscal 1996. Evenflo
intends to continue to increase sales in international markets, which are highly
fragmented with many competitors that generally do not have the brand name,
breadth of product offerings or economies of scale possessed by Evenflo. In
addition, Evenflo expects that its strength in car seats will be an advantage in
certain foreign markets such as Korea and Singapore which have recently enacted
mandatory automobile child restraint laws. To effectively compete in
international markets, Evenflo develops products, packaging and marketing
strategies specific to targeted markets in conjunction with key foreign
distributors.
SELECTIVELY EXPAND LICENSED PRODUCT OFFERING. Evenflo anticipates that
sales of products featuring popular, licensed cartoon characters will provide
increased revenue opportunities as consumers purchase additional products based
upon the appeal of the licensed character. Evenflo has been a licensee of DISNEY
BABIES-REGISTERED TRADEMARK- for feeding products since 1985. In addition,
Evenflo introduced a number of new products featuring licensed characters, such
as PETER RABBIT & FRIENDS-REGISTERED TRADEMARK-, PADDINGTON
BEAR-REGISTERED TRADEMARK- and PRECIOUS MOMENTS-REGISTERED TRADEMARK- during
fiscal 1996. Evenflo is evaluating other licensed characters for use with both
its furniture and feeding product lines.
ETONIC ACQUISITION
In July 1996, the Company completed the Etonic Acquisition. Etonic
manufactures and/or markets golf shoes, gloves and other golf accessories, as
well as an established line of running and walking shoes. The Etonic Acquisition
reflects Spalding's strategy to expand and upgrade its line of golf products.
The Etonic golf shoe, which is the second best selling golf shoe in the U.S.
with an 18% market share (in net sales) in 1995, increases Spalding's presence
in pro shops and other high-end golf distribution channels. To complete the
Etonic Acquisition, the Company issued notes in the aggregate principal amount
of $54 million to the seller of Etonic (the "Etonic Notes") which were paid at
the closing of the Recapitalization. For the nine months ended June 30, 1996,
Etonic had net sales of $43 million.
THE RECAPITALIZATION AND THE FINANCINGS
On August 15, 1996, Strata Associates L.P. ("Strata"), an entity organized
by Kohlberg Kravis Roberts & Co., L.P. ("KKR"), and Abarco N.V., the prior
parent of the Company ("Abarco"), entered into the Recapitalization and Stock
Purchase Agreement (the "Recapitalization Agreement") pursuant to which Strata
acquired control of the Company. In connection with the Recapitalization
Agreement, Strata acquired newly issued shares of Common Stock for $221 million
(the "Equity Investment"). The Company used the proceeds from the Equity
Investment, together with approximately $776 million of aggregate proceeds from
certain financings described below (the "Financings"), to (i) redeem a portion
of the Common Stock held by Abarco for $582 million, of which $524 million was
paid in cash (the remaining consideration was paid by distribution of the
Company's investments in an affiliate promissory note and in
7
<PAGE>
the common stock and note receivable of a real estate subsidiary of the
Company); (ii) repay approximately $368 million in existing indebtedness,
including the Etonic Notes; (iii) redeem for approximately $28 million all of
the shares of S&E not owned by the Company from certain members of management of
S&E who held such shares under S&E's 1994 Management Stock Ownership Plan; (iv)
pay an estimated $31 million in transaction fees and expenses, (v) purchase
certain non-U.S. trademarks and assignment rights from an affiliate of Abarco
for $5 million; (vi) pay a transaction bonus of $5 million to certain members of
management of S&E and (vii) provide working capital of approximately $45
million, of which $26 million was used to repay bank debt the following day.
Immediately after the closing of the Recapitalization, (the "Closing"), Strata
owned approximately 88.4% of the Common Stock and Abarco retained approximately
11.6% of the Common Stock. See "Management" and "Related Party Transactions" for
additional information relating to benefits received by management and
affiliates of the Company in connection with the Recapitalization.
The Financings included (i) a $650 million credit facility comprised of a
$400 million term loan facility (the "Term Loan Facility") and a $250 million
revolving credit facility (the "Revolving Credit Facility"; together with the
Term Loan Facility, the "Credit Facilities"), of which $426 million was drawn at
the Closing, (ii) $200 million of the Notes and (iii) the Equity Investment. In
addition, as part of the Financings, the Company issued and sold 1,500,000
shares of 12 1/2% Preferred Stock (the "Preferred Stock") with an aggregate
liquidation preference of $150 million (the "Preferred Stock Offering") to
Strata, 1,000,000 shares of which were sold at the closing of the
Recapitalization and 500,000 shares of which were sold immediately thereafter.
The proceeds of the sale of the shares of Preferred Stock sold immediately after
the Recapitalization were used by the Company to repay all borrowings under its
Revolving Credit Facility incurred at the closing of the Recapitalization and
the remainder will be used for general corporate purposes.
The sources and uses of the funds for the Recapitalization and the related
transactions were as follows (dollars in millions):
<TABLE>
<CAPTION>
SOURCES OF FUNDS
<S> <C>
Term Loan and Revolving Credit Facilities...................................... $ 426
Old Notes...................................................................... 200
Preferred Stock Offering....................................................... 150(1)
Equity Investment.............................................................. 221
Repayment of management notes in connection with purchase of S&E stock......... 7
Company cash balances.......................................................... 2
---------
Total...................................................................... $ 1,006
---------
---------
USES OF FUNDS
Redemption of Abarco Common Stock.............................................. $ 524
Refinancing of existing debt................................................... 368
Redemption of S&E shares owned by management of S&E............................ 28
Estimated transaction fees and expenses........................................ 31
Transaction bonus.............................................................. 5
Acquisition of non-U.S. trademarks............................................. 5
Working capital................................................................ 45
---------
Total...................................................................... $ 1,006
---------
---------
</TABLE>
- ------------------------
(1) Of the $150 million of gross proceeds from the Preferred Stock Offering,
$100 million were received from the 1,000,000 shares of Preferred Stock
issued and sold by the Company to Strata at Closing and $50 million were
received from the 500,000 shares of Preferred Stock issued and sold by the
Company to Strata immediately following the Closing. At Closing, the Company
borrowed $26 million under the Revolving Credit Facility and applied $2
million of cash balances to complete the Recapitalization. The borrowings
under the Revolving Credit Facility were repaid the following day after
receipt by the Company of the proceeds from the sale of $50 million
liquidation preference of Preferred Stock.
8
<PAGE>
THE EXCHANGE OFFER
<TABLE>
<S> <C>
The Exchange Offer................ The Company is offering to exchange pursuant to the
Exchange Offer up to $200,000,000 aggregate principal
amount of its new 10 3/8% Series B Senior Subordinated
Notes due 2006 (the "Exchange Notes") for a like
aggregate principal amount of its outstanding 10 3/8%
Senior Subordinated Notes due 2006 (the "Old Notes").
The terms of the Exchange Notes are identical in all
material respects (including principal amount, interest
rate and maturity) to the terms of the Old Notes for
which they may be exchanged pursuant to the Exchange
Offer, except that the Exchange Notes are freely
transferrable by holders thereof (other than as provided
herein), and are not subject to any covenant regarding
registration under the Securities Act. See "The Exchange
Offer."
Interest Payments................. Interest on the Exchange Notes shall accrue from the
last Interest Payment Date (October 1 or April 1) on
which interest was paid on the Notes so surrendered or,
if no interest has been paid on such Notes, from
September 30, 1996.
Minimum Condition................. The Exchange Offer is not conditioned upon any minimum
aggregate principal amount of Old Notes being tendered
for exchange.
Expiration Date; Withdrawal of
Tender.......................... The Exchange Offer will expire 5:00 p.m., New York City
time, on , 1997, unless the Exchange Offer is
extended, in which case the term "Expiration Date" means
the latest date and time to which the Exchange Offer is
extended. Tenders may be withdrawn at any time prior to
5:00 p.m., New York City time, on the Expiration Date.
See "The Exchange Offer--Withdrawal of Rights."
Exchange Date..................... The date of acceptance for exchange of the Old Notes
will be the first business day following the Expiration
Date.
Conditions to the Exchange
Offer........................... The Exchange Offer is subject to certain customary
conditions, which may be waived by the Company. The
Company currently expects that each of the conditions
will be satisfied and that no waivers will be necessary.
See "The Exchange Offer--Certain Conditions to the
Exchange Offer." The Company reserves the right to
terminate or amend the Exchange Offer at any time prior
to the Expiration Date upon the occurrence of any such
condition.
Procedures for Tendering
Old Notes....................... Each holder of Old Notes wishing to accept the Exchange
Offer must complete, sign and date the Letter of
Transmittal, or a facsimile thereof, in accordance with
the instructions contained herein and therein, and mail
or otherwise deliver such Letter of Transmittal, or such
facsimile, together with the Old Notes and any other
required documentation to the Exchange Agent (as
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
defined herein) at the address set forth herein. See
"The Exchange Offer--Procedures for Tendering Old Notes"
and "Plan of Distribution."
Use of Proceeds................... There will be no proceeds to the Company from the
exchange of Notes pursuant to the Exchange Offer.
Federal Income Tax Consequences... The exchange of Notes pursuant to the Exchange Offer
will not be a taxable event for federal income tax
purposes. See "Certain U.S. Federal Income Tax
Consequences."
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 should
contact such registered holder promptly and instruct
such registered holder to tender on such beneficial
owner's behalf. If such beneficial owner wishes to
tender on such beneficial owner's own behalf, such
beneficial owner must, prior to completing and executing
the Letter of Transmittal and delivering the Old Notes,
either make appropriate arrangements to register
ownership of the Old Notes in such beneficial owner's
name or obtain a properly completed bond power from the
registered holder. The transfer of registered ownership
may take considerable time. See "The Exchange
Offer--Procedures for Tendering Old Notes."
Guaranteed Delivery Procedures.... Holders of Old Notes who wish to tender their Old Notes
and whose Old Notes are not entirely 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--Procedures for Tendering Old Notes."
Acceptance of Old Notes and
Delivery of Exchange Notes...... 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 the
Expiration Date. The Exchange Notes issued pursuant to
the Exchange Offer will be delivered promptly following
the Expiration Date. See "The Exchange Offer--Procedures
for Tendering Old Notes."
Effect on Holders of Old Notes.... As a result of the making of, and upon acceptance for
exchange of all validly tendered Old Notes pursuant to
the terms of, this Exchange Offer, the Company will have
fulfilled a covenant contained in the Registration
Rights Agreement (the "Registration Rights Agreement")
dated September 30, 1996 among the Company, Merrill
Lynch & Co., NationsBanc Capital Markets, Inc., BA
Securities, Inc. and BT Securities Corporation (the
"Initial Purchasers") and, accordingly, there will be no
increase in the interest rate on the Old Notes pursuant
to the terms of the Registration Rights Agreement, and
the holders of the Old Notes will have no further
registration or other rights
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
under the Registration Rights Agreement. Holders of the
Old Notes who do not tender their Old Notes in the
Exchange Offer will continue to hold such Old Notes and
will be entitled to all the rights and limitations
applicable thereto under the Indenture between the
Company and Marine Midland Bank relating to the Old
Notes and the Exchange Notes (the "Indenture"), except
for any such rights under the Registration Rights
Agreement that by their terms terminate or cease to have
further effectiveness as a result of the making of, and
the acceptance for exchange of all validly tendered Old
Notes pursuant to, the Exchange Offer. All untendered
Old Notes will continue to be subject to the
restrictions on transfer provided for in the Old Notes
and in the Indenture. To the extent that Old Notes are
tendered and accepted in the Exchange Offer, the trading
market for untendered Old Notes could be adversely
affected.
Consequence of Failure to
Exchange........................ Holders of Old Notes who do not exchange their Notes for
Exchange Notes pursuant to the Exchange Offer will
continue to be subject to the restrictions on transfer
of such Old Notes as set forth in the legend thereon as
a consequence of the offer or sale of the Old Notes
pursuant to an exemption from, or in a transaction not
subject to, the registration requirements of the
Securities Act and applicable state securities laws. 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.
Exchange Agent.................... Marine Midland Bank is serving as exchange agent (the
"Exchange Agent") in connection with the Exchange Offer.
See "The Exchange Offer--Exchange Agent."
TERMS OF THE EXCHANGE NOTES
Securities Offered................ $200,000,000 principal amount of 10 3/8% Series B Senior
Subordinated Notes due 2006.
Maturity Date..................... October 1, 2006.
Interest Payment Dates............ October 1 and April 1 of each year, commencing April 1,
1997.
Optional Redemption............... The Exchange Notes will be redeemable at the option of
the Company, in whole or in part, at any time or from
time to time, on or after October 1, 2001, at the
redemption prices set forth herein, together with
accrued and unpaid interest, if any, to the date of
redemption. In addition, at any time on or prior to
October 1, 1999, the Company may redeem up to 40% of the
aggregate principal amount of the Exchange Notes
originally issued with the net proceeds of one or more
Equity Offerings (as defined), at a redemption price
equal to 110% of the principal amount thereof, plus
accrued and unpaid interest, if any, to the
</TABLE>
11
<PAGE>
<TABLE>
<S> <C>
date of redemption; PROVIDED that at least $120 million
aggregate principal amount of the Exchange Notes remains
outstanding after such redemption. See "Description of
the Exchange Notes--Optional Redemption."
Change of Control................. Upon the occurrence of a Change of Control, each holder
of the Exchange Notes may require the Company to
purchase all or any portion of such holder's Exchange
Notes at a purchase price equal to 101% of the principal
amount thereof, together with accrued and unpaid
interest, if any, to the date of purchase. See
"Description of the Exchange Notes--Repurchase at the
Option of Holders--Change of Control."
Ranking........................... The Exchange Notes will be unsecured senior subordinated
obligations of the Company and, as such, will be
subordinated to all existing and future Senior
Indebtedness (as defined) of the Company, including
indebtedness under the Credit Facilities. By reason of
such subordination, holders of Senior Indebtedness must
be paid in full before holders of the Exchange Notes may
be paid in the event of a liquidation, dissolution or
other winding up of the Company, whether voluntary or
involuntary and whether or not involving insolvency or
bankruptcy. At September 30, 1996, after giving effect
to the Recapitalization, the Financings and the
application of the net proceeds therefrom and the Etonic
Acquisition, the Company had approximately $483 million
(including $57 million of bankers' acceptances) of
Senior Indebtedness outstanding and the Company had
additional availability of $142 million (reduced to
reflect $82 million of outstanding letters of credit and
bankers' acceptances) for borrowings under the Credit
Facilities, all of which would be Senior Indebtedness,
if borrowed. Additional Senior Indebtedness may be
incurred by the Company from time to time, subject to
certain restrictions. See "Description of the Exchange
Notes--Subordination."
The Company is a holding company and, accordingly, the
Exchange Notes also will be effectively subordinated to
all existing and future liabilities of the Company's
subsidiaries. At September 30, 1996, after giving effect
to the Recapitalization, the Financings and the
application of the net proceeds therefrom and the Etonic
Acquisition, the Company's subsidiaries had total
liabilities (including accrued expenses ($58 million)
and trade payables and bankers' acceptances ($142
million)) of $678 million, including guarantees of
indebtedness under the Credit Facilities.
Certain Covenants................. The indenture relating to the Old Notes and the Exchange
Notes (the "Indenture") contains covenants, including,
but not limited to, covenants with respect to the
following matters: (i) restricted payments; (ii)
limitation on incurrence of indebtedness and issuance of
disqualified stock; (iii) liens; (iv) merger,
consolidation, or sale of all or substantially all
assets; (v) limitation on transactions with affiliates;
(vi) dividends and
</TABLE>
12
<PAGE>
<TABLE>
<S> <C>
other payment restrictions affecting subsidiaries; (vii)
limitation of guarantees of Indebtedness by Restricted
Subsidiaries; (viii) limitations on other senior
subordinated indebtedness and (ix) asset sales. See
"Description of the Exchange Notes."
Limitations on Repurchase......... Under the Credit Facilities, unless the consent of the
lenders thereunder is obtained, the Company is
prohibited from repurchasing Exchange Notes in a Change
of Control Offer or Asset Sale Offer (each as defined),
except with the proceeds of one or more Equity
Offerings, a portion of excess cash flow and other
amounts not applied to repay borrowings under the Term
Loan Facility. The Credit Facilities also provide that
events that would constitute a change of control under
the Credit Facilities would constitute a default
thereunder. A default under the Credit Facilities would
result in an Event of Default under the Indenture if the
lenders under the Credit Facilities accelerated their
loans. In the event a Change of Control Offer or Asset
Sale Offer is required at a time when the Company is
prohibited from purchasing the Exchange Notes, the
Company could seek the consent of its lenders to the
purchase of the Exchange Notes or could attempt to
refinance the borrowings that contain such prohibition.
If the Company does not obtain such a consent or repay
such borrowings, the Company will remain prohibited from
purchasing the Exchange Notes. In such case, the
Company's failure to purchase tendered Exchange Notes
would constitute an Event of Default under the
Indenture, which would result in an event of default
under the Credit Facilities. If as a result thereof, a
default occurs with respect to any Senior Indebtedness,
the subordination provisions in the Indenture would
likely restrict payments to the holders of the Exchange
Notes. There could be no assurance that the Company
would have the financial resources to repurchase the
Notes in a Change of Control Offer or Asset Sale Offer.
Subordination..................... The Company may not make payments in respect of the
Exchange Notes (except from trusts established to
defease the Exchange Notes) if (i) a payment default
exists with respect to Designated Senior Indebtedness
(as defined) beyond any applicable period of grace or
(ii) any non-payment default occurs and is continuing
with respect to Designated Senior Indebtedness and the
Trustee receives a notice of such default. Payments will
be resumed (a) in the case of a payment default, upon
the date on which such default is cured or waived or
ceases to exist and (b) in case of a non-payment
default, the earlier of (x) the date on which such
non-payment default is cured or waived, (y) 179 days
after the Trustee receives notice of such default or (z)
the date such blockage is terminated by the requisite
holders of such Designated Senior Indebtedness.
Absence of Market................. The Exchange Notes are new securities for which there is
currently no established market. Accordingly, there can
be no assurance as to the development or liquidity of
any market for
</TABLE>
13
<PAGE>
<TABLE>
<S> <C>
the Exchange Notes. The Company does not intend to apply
for a listing on a securities exchange of the Exchange
Notes.
</TABLE>
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered by Holders of the Old Notes prior to tendering Old Notes in the
Exchange Offer.
14
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
The following table sets forth certain summary historical and pro forma
consolidated financial data of the Company. The historical consolidated
Operating Statement Data of the Company for the three fiscal years ended
September 30, 1996 have been derived from, and should be read in conjunction
with, the audited consolidated financial statements of the Company and the
related notes thereto included elsewhere in this Prospectus. The historical
consolidated Operating Statement Data of the Company for the two fiscal years
ended September 30, 1993 have been derived from audited consolidated financial
statements of the Company but which are not contained herein. The pro forma
consolidated financial data have been derived from the Pro Forma Financial
Statement (as defined) and the related notes thereto included elsewhere herein.
The pro forma operating statement data for the period presented gives effect to
the Recapitalization, the Financings, the Etonic Acquisition and the related
transactions as if such transactions were consummated on October 1, 1995 for the
year ended September 30, 1996. See "Selected Consolidated Historical Financial
Data," "Management's Discussion and Analysis of Financial Condition and Results
of Operations," "Pro Forma Condensed Consolidated Financial Statement" and the
historical consolidated financial statements and the related notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------------------
PRO FORMA(1)
1992 1993 1994 1995 1996 1996
--------- --------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
OPERATING STATEMENT DATA
Spalding net sales......................................... $ 353,262 $ 378,010 $ 411,574 $ 424,118 $ 451,915 $ 494,857
Evenflo net sales.......................................... 158,312 158,234 171,533 210,039 237,165 237,165
--------- --------- --------- --------- --------- -------------
Total net sales............................................ 511,574 536,244 583,107 634,157 689,080 732,022
Cost of sales (2).......................................... 325,337 342,276 370,328 407,334 452,037 482,397
--------- --------- --------- --------- --------- -------------
Gross profit............................................... 186,237 193,968 212,779 226,823 237,043 249,625
Selling, general and administrative expenses (3)........... 147,533 150,106 178,678 177,913 196,741 202,767
Royalty income, net........................................ (7,534) (9,328) (12,789) (13,514) (14,339) (15,582)
Management Stock Ownership Plan expense (4)................ 0 0 0 1,130 20,828 0
Recapitalization costs (5)................................. 0 0 0 0 7,700 0
Patent infringement settlement income (6).................. (2,300) 0 0 0 0 0
Litigation settlement expense (6).......................... 0 0 0 2,400 0 0
--------- --------- --------- --------- --------- -------------
Income from operations..................................... 48,538 53,190 46,890 58,894 26,113 62,440
Interest expense, net (7).................................. 11,848 8,913 17,073 38,108 46,905 66,460
Currency loss (gain), net (8).............................. 849 2,238 (144) 381 775 775
--------- --------- --------- --------- --------- -------------
Earnings (loss) before income taxes........................ 35,841 42,039 29,961 20,405 (21,567) (4,795)
Income taxes............................................... 14,330 18,000 11,938 8,683 6,100 2,600
--------- --------- --------- --------- --------- -------------
Earnings (loss) before minority interest and cumulative
effect of accounting changes............................. $ 21,511 $ 24,039 $ 18,023 $ 11,722 $ (27,667) $ (7,395)
--------- --------- --------- --------- --------- -------------
--------- --------- --------- --------- --------- -------------
Net earnings (loss)(9)..................................... $ 21,511 $ 14,419 $ 18,023 $ 10,998 $ (27,667) $ (7,395)
--------- --------- --------- --------- --------- -------------
--------- --------- --------- --------- --------- -------------
Pro forma net earnings (loss) for common shareholders
(10)..................................................... $ (27,042)
-------------
-------------
OTHER DATA (11)
Spalding EBITDA (12)....................................... $ 54,188 $ 57,981 $ 62,966 $ 70,957 $ 63,692 $ 65,724
Evenflo EBITDA (13)........................................ 19,568 14,349 15,075 17,170 23,525 23,525
Corporate EBITDA (14)...................................... (6,572) (1,908) (10,577) (11,327) (41,552) (6,208)
--------- --------- --------- --------- --------- -------------
Total EBITDA............................................... $ 67,184 $ 70,422 $ 67,464 $ 76,800 $ 45,665 $ 83,041
--------- --------- --------- --------- --------- -------------
--------- --------- --------- --------- --------- -------------
Statements of cash flow:
Operating activities..................................... $ 19,604 $ 43,263 $ 35,641 $ 16,610 $ 32,024
Investing activities..................................... (11,880) (25,348) (27,359) (15,381) (24,681)
Financing activities..................................... (34,141) (17,980) (7,190) 15,917 41,851
Depreciation and amortization.............................. 19,495 19,470 20,430 18,287 20,327 $ 21,376
Capital expenditures....................................... 11,880 25,348 19,109 15,381 19,546 19,546
Ratio of earnings to fixed charges (15)(16)................ 3.67x 5.08x 2.61x 1.51x -- --
Ratio of earnings to combined fixed charges and preferred
stock dividends (15)(17)................................. --
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
15
<PAGE>
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30, 1996
------------------
<S> <C>
HISTORICAL
------------------
<CAPTION>
<S> <C>
BALANCE SHEET DATA
Working capital............................................................................... $ 169,551
Total assets.................................................................................. 689,906
Long-term debt (net of current portion)....................................................... 625,800
Preferred Stock............................................................................... 150,000
Shareholders' equity (deficiency)............................................................. (349,451)
</TABLE>
- ------------------------
(1) Pro forma selling, general and administrative expenses, Management Stock
Ownership Plan expense, and Recapitalization costs have been adjusted to
eliminate certain expenses of affiliates and S&E's Management Stock
Ownership Plan that will no longer exist after the Recapitalization, as well
as certain nonrecurring costs incurred in connection with the
Recapitalization and the Etonic Acquisition. See "Pro Forma Condensed
Consolidated Financial Statement." See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the notes to the "Pro
Forma Condensed Consolidated Financial Statement."
(2) Included in cost of sales are unusual charges of (i) $3.1 million in 1992
for the relocation of Evenflo infant feeding facilities; (ii) $3.8 million
in 1993 for the conversion of two Evenflo manufacturing facilities to
distribution centers and for the closure of two Spalding softball
manufacturing facilities and; (iii) $1.6 million in 1996 as a result of
expensing the increase to fair value of the Etonic inventories as of the
date of the Etonic Acquisition.
(3) In fiscal 1996, selling, general and administrative expenses included the
following items: (i) $5.4 million in transaction bonus payments arising in
connection with the Recapitalization; (ii) $5.6 million of expenses related
to the completion of the Etonic Acquisition and consolidating the operations
of Etonic with those of Spalding; (iii) $2.8 million of expenses incurred by
the Company on behalf of its former parent, (iv) $2.3 million of accounts
receivable charge-offs, as a result of the bankruptcy of two of its
customers; (v) $1.3 million of costs to consolidate Evenflo's feeding and
furniture operations, which were separately managed, into one entity; and
(vi) $0.3 million of costs related to the relocation of the corporate
office.
(4) Represents $20.8 million of compensation expense related to the increase in
the estimated fair value of common stock of S&E held by certain members of
senior management through the S&E Management Stock Ownership Plan which were
redeemed in the Recapitalization.
(5) Represents $7.7 million of non-capitalized expenses, such as legal,
printing costs, and other professional fees and costs incurred in connection
with the Recapitalization.
(6) In 1992 the Company received $2.3 million from the settlements of patent
infringement suits. In 1995 the Company settled an indemnification dispute
involving an environmental matter of a former operation for $2.4 million.
(7) Pro forma net interest expense in fiscal 1996 includes amortization of
deferred financing costs of $4.6 million.
(8) Net currency losses in fiscal 1993 of $2.2 million were primarily the
result of losses from hedging activities, principally in Japan.
(9) Net earnings (loss) includes: (i) minority interest in net earnings of
consolidated subsidiary of $0.7 million, for the fiscal year ended September
30, 1995, and (ii) effective October 1, 1992, the Company adopted SFAS No.
106 "Employers' Accounting for Postretirement Benefits Other Than Pensions"
and SFAS No. 109 "Accounting for Income Taxes." As of October 1, 1992, the
Company recorded one-time charges against earnings in the form of cumulative
effects of accounting changes of $4.8 million on an after-tax basis with
respect to SFAS 106 and $4.8 million with respect to SFAS 109.
(10) Represents pro forma net earnings after reduction for preferred stock
dividend requirements and related accretion.
(11) "EBITDA" represents earnings (loss) before interest expense, income taxes,
depreciation and amortization, and excludes minority interest and cumulative
effect of accounting changes. EBITDA is not intended to represent cash flow
from operations as defined by generally accepted accounting principles and
should not be considered as an alternative to net earnings (loss) as an
indicator of the Company's operating performance or to cash flows as a
measure of liquidity. EBITDA is included in this Prospectus as it is a basis
upon which the Company assesses its financial performance, and certain
covenants in the Company's borrowing arrangements are tied to similar
measures.
(12) Spalding's historical EBITDA for 1996 has been reduced by approximately
$7.2 million of unusual items and does not include the pro forma effects of
Etonic's EBITDA of $2.0 million for the first nine months of fiscal 1996.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources--Post Recapitalization".
(13) Evenflo's historical EBITDA for 1996 has been reduced by approximately $3.6
million of unusual items. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources-- Post Recapitalization".
(14) Corporate's historical EBITDA has been reduced by an aggregate of $37.0
million of unusual items (of which $35.3 million has been adjusted in
calculating Pro Forma EBITDA as described in Note (1) above). See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources--Post Recapitalization".
(15) For purposes of determining the ratio of earnings to fixed charges and the
pro forma ratio of earnings to combined fixed charges and preferred stock
dividends, earnings are defined as earnings (loss) before income taxes and
cumulative effect of accounting changes, plus fixed charges (net of
capitalized interest). Fixed charges consist of interest expense on all
indebtedness and capitalized interest, amortization of deferred financing
costs, and one-third of rental expense on operating leases, representing
that portion of rental expense deemed by the Company to be attributable to
interest. For purposes of the computation of the ratio of earnings to
combined fixed charges and preferred stock dividends, the preferred stock
dividend requirements were increased to an amount representing the pre-tax
earnings (based on a tax rate of 35%) which are required to cover such
dividend requirements.
(16) For fiscal 1996, the deficiency of earnings to fixed charges was $21.6
million and the deficiency of pro forma earnings to fixed charges was $4.8
million.
(17) For fiscal 1996, the deficiency of pro forma earnings to combined fixed
charges and preferred stock dividends was $35.0 million.
16
<PAGE>
RISK FACTORS
HOLDERS OF OLD NOTES SHOULD CONSIDER CAREFULLY, IN ADDITION TO THE OTHER
INFORMATION CONTAINED IN THIS PROSPECTUS, THE FOLLOWING FACTORS BEFORE DECIDING
TO TENDER OLD NOTES IN THE EXCHANGE OFFER. THE RISK FACTORS SET FORTH BELOW ARE
GENERALLY APPLICABLE TO THE OLD NOTES AS WELL AS THE EXCHANGE NOTES.
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 in the legend thereon as a
consequence of the offer or sale of the Old Notes pursuant to an exemption from,
or in a transaction not subject to, the registration requirements of the
Securities Act and applicable state securities laws. In general, 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 intend to register the Old Notes under the Securities Act. Based on
interpretations by the staff of the Commission, the Company believes that
Exchange Notes issued pursuant to the Exchange Offer in exchange for Old Notes
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 Old Notes were acquired in the ordinary course of such Holders'
business and such Holders have no arrangement with any person to participate in
the distribution of such Exchange Notes. Each broker-dealer that receives
Exchange 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 Exchange Notes. See "Plan of
Distribution." To the extent that Old Notes are tendered and accepted in the
Exchange Offer, the trading market for untendered and tendered but unaccepted
Old Notes will be adversely affected.
SIGNIFICANT LEVERAGE AND DIVIDEND REQUIREMENTS
The Company incurred substantial indebtedness in connection with the
Recapitalization and the Company is highly leveraged. As of September 30, 1996,
after giving effect to the Recapitalization, the Financings and the Etonic
Acquisition, the Company had $696 million of consolidated indebtedness and $349
million of consolidated shareholders' deficiency. The Company's historical
common shareholders' deficiency increased as a result of the accounting
treatment of the Recapitalization. In addition, the Company has $150 million of
aggregate liquidation preference of Preferred Stock. Also after giving pro forma
effect to such transactions, the Company's earnings would have been insufficient
to cover (i) its fixed charges by approximately $5 million for the 1996 fiscal
year; or (ii) its fixed charges and preferred stock dividend requirements by
approximately $35 million for the 1996 fiscal year. Pro forma interest expense
for fiscal 1996 would have been $66 million. The Company's earnings would have
been insufficient to cover its fixed charges by approximately $22 million in
fiscal 1996. See "Capitalization" and "Pro Forma Condensed Consolidated
Financial Statements." In addition, on a pro forma basis, for fiscal 1996, the
Company would have had noncash preferred stock dividends of $20 million. The
Company and its subsidiaries may incur additional indebtedness in the future,
subject to certain limitations contained in the instruments governing its
indebtedness. Accordingly, the Company will have significant debt service
obligations.
The Company's debt service obligations could have important consequences to
holders of the Exchange Notes, including the following: (i) a substantial
portion of the dividends and other payments to the Company from its subsidiaries
will be dedicated to the payment of principal and interest on its indebtedness,
thereby reducing the funds available to the Company; (ii) the Company's ability
to obtain additional financing in the future may be limited; (iii) certain of
the Company's borrowings (including, but not limited to, $400 million of term
loans under the Credit Facilities at the Closing) will be at variable rates
17
<PAGE>
of interest, which could cause the Company to be vulnerable to increases in
interest rates; and (iv) all of the indebtedness incurred in connection with the
Credit Facilities will become due prior to the time the principal payments on
the Exchange Notes will become due.
The Company's ability to make scheduled payments of the principal of, or to
pay interest on, or to refinance its indebtedness (including the Exchange Notes)
and to make scheduled payments under its operating and capitalized leases
depends on its future performance, which to a certain extent is subject to
economic, financial, competitive and other factors beyond its control. Based
upon the current level of operations and anticipated growth, management believes
that future cash flow from operations, together with available borrowings under
the Revolving Credit Facility, will be adequate to meet the Company's
anticipated requirements for capital expenditures, interest payments and
scheduled principal payments. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
There can be no assurance, however, that the Company's business will continue to
generate sufficient cash flow from operations in the future to service its debt
and make necessary capital expenditures. If unable to do so, the Company may be
required to refinance all or a portion of its existing debt, including the
Exchange Notes, to sell assets or to obtain additional financing. There can be
no assurance that any such refinancing would be possible or that any such sales
of assets or additional financing could be achieved.
The Credit Facilities and the Indenture contain numerous financial and
operating covenants that will limit the discretion of the Company's management
with respect to certain business matters. These covenants will place significant
restrictions on, among other things, the ability of the Company to incur
additional indebtedness, to create liens or other encumbrances, to make certain
payments and investments, and to sell or otherwise dispose of assets and merge
or consolidate with other entities. See "Description of Credit Facilities" and
"Description of the Exchange Notes--Certain Covenants." The Credit Facilities
will also require the Company to meet certain financial ratios and tests. A
failure to comply with the obligations contained in the Credit Facilities or the
Indenture could result in an event of default under either the Credit Facilities
or the Indenture which could result in acceleration of the related debt and the
acceleration of debt under other instruments evidencing indebtedness, that may
contain cross-acceleration or cross-default provisions. If, as a result thereof,
a default occurs with respect to Senior Indebtedness, the subordination
provisions in the Indenture would likely restrict payments to the holders of the
Exchange Notes.
SUBORDINATION OF EXCHANGE NOTES TO SENIOR INDEBTEDNESS
The Company's obligations under the Exchange Notes are subordinate and
junior in right of payment to all existing and future Senior Indebtedness of the
Company. As of September 30, 1996, after giving effect to the Recapitalization,
the Financings and the application of the net proceeds therefrom and the Etonic
Acquisition, the Company had (i) approximately $483 million (including $57
million of bankers' acceptances) of Senior Indebtedness and (ii) approximately
$142 millon (reduced to reflect $82 million of outstanding letters of credit and
bankers' acceptances) available under the Revolving Credit Facility to fund
future liquidity needs of the Company, all of which would be Senior
Indebtedness, if borrowed. Additional Senior Indebtedness may be incurred by the
Company from time to time, subject to certain restrictions. By reason of such
subordination, in the event of an insolvency, liquidation, or other
reorganization of the Company, the lenders under the Credit Facilities and other
creditors who are holders of Senior Indebtedness must be paid in full before the
holders of the Exchange Notes may be paid; accordingly, there may be
insufficient assets remaining after payment of prior claims to pay amounts due
on the Exchange Notes. In addition, under certain circumstances, no payments may
be made with respect to the Exchange Notes if a default exists with respect to
certain Senior Indebtedness. See "Description of the Exchange
Notes--Subordination."
18
<PAGE>
ADVERSE CONSEQUENCES OF HOLDING COMPANY STRUCTURE
The Exchange Notes will be effectively subordinated to the obligations of
the Company's subsidiaries, including the guarantee by its subsidiaries of
obligations under the Credit Facilities, because the Company is a holding
company. In the event of an insolvency, liquidation or other reorganization of
any of the subsidiaries of the Company, the creditors of the Company (including
the holders of the Exchange Notes), as well as shareholders of the Company, will
have no right to proceed against the assets of such subsidiaries or to cause the
liquidation or bankruptcy of such subsidiaries under Federal bankruptcy laws.
Creditors of such subsidiaries, including lenders under the Credit Facilities,
would be entitled to payment in full from such assets before the Company, as a
shareholder, would be entitled to receive any distribution therefrom. Except to
the extent that the Company may itself be a creditor with recognized claims
against such subsidiaries, claims of creditors of such subsidiaries will have
priority with respect to the assets and earnings of such subsidiaries over the
claims of creditors of the Company, including claims under the Exchange Notes.
In addition, as a result of the Company being a holding company, the Company's
operating cash flow and its ability to service its indebtedness, including the
Exchange Notes, is dependent upon the operating cash flow of its subsidiaries
and the payment of funds by such subsidiaries to the Company in the form of
loans, dividends or otherwise. At September 30, 1996, after giving effect to the
Recapitalization, the Financing and the Etonic Acquisition, the subsidiaries of
the Company had aggregate liabilities (including accrued expenses ($58 million)
and trade payables, and bankers' acceptances ($142 million)) of $678 million,
including guarantees of indebtedness under the Credit Facilities.
ENCUMBRANCES ON ASSETS TO SECURE CREDIT FACILITIES
In addition to being subordinated to all existing and future Senior
Indebtedness of the Company, the Exchange Notes will not be secured by any of
the Company's assets. The Company's obligations under the Credit Facilities will
be secured by a first priority pledge of the capital stock of certain
subsidiaries. If the Company becomes insolvent or is liquidated, or if payment
under any of the Credit Facilities is accelerated, the lenders under the Credit
Facilities will be entitled to exercise the remedies available to a secured
lender under applicable law pursuant to the Credit Facilities. Accordingly, such
lenders will have a prior claim with respect to such assets. See "Description of
Credit Facilities."
CHANGE OF CONTROL
The Indenture provides that, upon the occurrence of a Change of Control the
Company will make an offer to purchase all of the Exchange Notes at a price in
cash equal to 101% of the aggregate principal amount thereof together with
accrued and unpaid interest to the date of purchase. The Credit Facilities
prohibit the Company from repurchasing any Exchange Notes, except with the
proceeds of one or more Equity Offerings and a portion of excess cash flow and
other amounts not applied to repay borrowings under the Term Loan Facility. The
Credit Facilities also provide that certain change of control events with
respect to the Company would constitute a default thereunder. A default under
the Credit Facilities would result in an Event of Default under the Indenture if
the lenders under the Credit Facilities accelerated their loans. Any future
credit agreements or other agreements relating to Senior Indebtedness to which
the Company becomes a party may contain similar restrictions and provisions. In
the event a Change of Control occurs at a time when the Company is prohibited
from purchasing the Exchange Notes, or if the Company is required to make an
Asset Sale Offer (as defined) pursuant to the terms of the Exchange Notes, the
Company could seek the consent of its lenders to the purchase of the Exchange
Notes or could attempt to refinance the borrowings that contain such
prohibition. If the Company does not obtain such a consent or repay such
borrowings, the Company will remain prohibited from purchasing the Exchange
Notes. In such case, the Company's failure to purchase tendered Exchange Notes
would constitute an Event of Default under the Indenture, which would result in
an event of default under the Credit Facilities. If, as a result thereof, a
default occurs with respect to any Senior Indebtedness, the subordination
provisions in the Indenture would likely restrict payments to the holders of the
Exchange Notes. The
19
<PAGE>
provisions relating to a Change of Control included in the Indenture may
increase the difficulty of a potential acquiror obtaining control of the
Company. See "Description of the Exchange Notes--Repurchase at the Option of
Holders--Change of Control and "Description of Credit Facilities."
COMPETITION; ENDORSEMENTS
The sporting goods and juvenile product industries are highly competitive
and are characterized by frequent introductions of new products, often
accompanied by major advertising and promotional programs. Spalding competes
with numerous national and international companies which manufacture and
distribute sporting goods and related equipment and sports apparel, a number of
which have greater financial and other resources at their disposal. Certain of
Spalding's competitors offer types of sports equipment not sold by Spalding.
Spalding's principal competitor across numerous market segments is Wilson
Sporting Goods Co. (a subsidiary of Amer Group Ltd.). Spalding also competes in
individual market segments against other competitors, including Acushnet Company
(a subsidiary of American Brands, Inc., the producer of
Titleist-Registered Trademark-, Footjoy-Registered Trademark- and
Cobra-Registered Trademark- golf products), Callaway Golf Inc., Karsten
Manufacturing Corp. (producers of Ping-Registered Trademark- golf products),
Tommy Armour Golf Company, Taylor Made Golf Co., Inc. (a subsidiary of Salomon
S.A.), Rawlings Sporting Goods Company, Inc. and Worth, Inc.
Evenflo competes with numerous national and international companies which
manufacture and distribute infant feeding products and/or infant and juvenile
furniture, a number of which have greater financial and other resources at their
disposal. Evenflo's principal competitors include Gerber Products Company, a
subsidiary of Sandoz Ltd., Playtex Products, Inc., Johnson & Johnson, Kiddie
Products, Inc., Safety 1st, Inc., Century Products Company, Inc., Cosco Inc. (a
subsidiary of Dorel Industries Inc.), Fisher-Price (a division of Mattel, Inc.),
Gerry Babies Products Co., Inc. (a subisidary of Huffy Corporation) and Graco
Children's Products, Inc.
The Company attributes its brand name recognition, in part, to endorsements
of its products by professional athletes and sports organizations. If the
Company were unable to maintain its relationships with its endorsers, or to
successfully compete with competitors in attracting professional athletes and
sports organizations, such as the NBA, to endorse its products, then the
Company's operating results could be adversely affected. See "Business--Sales,
Marketing and Distribution."
DEPENDENCE ON CERTAIN CUSTOMERS
Certain customers are material to the business and operations of the
Company. The five largest customers of Evenflo represented approximately 51% of
Evenflo's net sales for the fiscal year ended September 30, 1996. The four
largest customers of Spalding represented approximately 19% of Spalding's net
sales for the same period. In fiscal 1995, net sales to Spalding's four largest
customers constituted approximately 22% of Spalding's total net sales. Three
customers of Evenflo and Spalding, Wal-Mart Stores, Inc. ("Wal-Mart"), Target, a
division of Dayton Hudson Corporation ("Target") and Toys "R" Us Inc. ("Toys "R"
Us"), accounted in the aggregate for approximately 22% of the Company's net
sales for the fiscal year ended September 30, 1996. During fiscal 1995 and 1996,
one of the Company's customers, Wal-Mart, accounted for approximately 11% of its
net sales. Although management does not currently expect to lose any of these
customers, the loss of one or more such customers could have a material adverse
effect on the business and operations of the Company.
DEPENDENCE ON FOREIGN MANUFACTURING
For the fiscal year ended September 30, 1996, sales of products which were
manufactured in foreign countries, primarily in Mexico, China, Thailand, Taiwan
and other countries in Southeast Asia, represented approximately 42% of the
Company's net sales. The Company's arrangements with its foreign manufacturers,
as well as the operation of the Company's facilities in Mexico and other foreign
countries, are subject to the risks of doing business abroad, such as changes in
import duties, trade restrictions, transportation
20
<PAGE>
delays, work stoppages, economic and political instability, foreign currency
fluctuations, the laws and policies of the United States and of the countries in
which the Company's products are manufactured and other factors which could have
a material adverse effect on the Company's business and results of operations.
The Company believes that the loss of its facilities in Mexico could adversely
affect the Company's business and results of operations until alternative
manufacturing arrangements were secured.
PRODUCT LIABILITY LITIGATION
Due to the nature of its products, the Company has been engaged in, and will
continue to be engaged in, the defense of product liability claims related to
its products, particularly with respect to juvenile car seats and cribs. Such
claims have caused the Company to incur material litigation and insurance
expenses. Since 1986, approximately 139 product liability lawsuits have been
brought against the Company, 89 of which related to juvenile car seats. Over the
past ten policy periods (April 1, 1986 to March 30, 1996), reserves,
out-of-pocket indemnities and expenses for car seat claims (including damage
awards, settlements, attorney fees and other related expenses, but excluding
payments by insurers and insurance premiums) have averaged approximately $1.3
million annually, when allocated to the policy periods when the related injuries
occurred, while the total reserves, out-of-pocket indemnities and expenses
(exclusive of payments by insurers and insurance premiums) for all product
liability claims have averaged approximately $1.8 million per year, on a similar
basis. From fiscal 1992 through fiscal 1996, the Company has incurred average
costs for out-of-pocket indemnities and expenses (exclusive of payments by
insurers and insurance premiums) for all product liability claims of
approximately $3.6 million. The increase in average costs for product liability
claims from $1.8 million per year for the ten-year average to $3.6 million per
year for the five-year average is due to an increase in the Company's insurance
policy deductibles. The Company anticipates that it will continue to incur
average annual litigation costs at similar levels over the next several years.
The Company currently carries substantial insurance (at a cost in fiscal 1996 of
$1.2 million) and maintains reserves for these claims. However, from December
1985 through March 1988, the Company was totally self-insured, although only one
of the 59 currently pending product liability claims relate to incidents that
occurred during that 28-month period. Based on its experience with product
liability claims, the amount of reserves established for product liability
claims against it and the levels of insurance that it maintains, the Company
believes that there are no product liability claims pending which, if adversely
determined, would have a material adverse effect on its consolidated financial
position, results of operations or cash flows. However, due to the inherent
uncertainty of litigation, it is possible that the Company may be subject to
adverse judgments which, singly or in the aggregate, could be substantial in
amount and may not be covered by insurance or reserves. In addition, no
assurance can be given that in the future a claim will not be brought against
the Company which would have a material adverse effect on the Company. See
"Business--Legal Proceedings."
The Company's product liability insurance coverage is established on policy
years beginning April 1 of each year. Effective with the policy year beginning
April 1, 1996, the primary insurance per occurrence deductible was lowered from
$2 million to $1.5 million and the corresponding policy aggregate deductible was
raised from $3 million to $3.5 million. The Company purchased separately
additional indemnity insurance in 1996 to effectively reduce the per occurrence
deductible from $1.5 million to $0.5 million and to reduce the policy year
aggregate deductible from $3.5 million to $3.0. The Company's lead umbrella
insurance carrier committed to a three-year contract on April 1, 1996. The
contract provides for $15 million of insurance coverage above the primary
insurer's limits of $1.5 million per occurrence and $3.5 million in the
aggregate. The Company presently plans on purchasing an additional $60 million
in umbrella coverage in policy year 1997 and also to continue to purchase
indemnity insurance to further reduce its product liability deductible levels.
Present reserve levels for out-of-pocket indemnities and expenses for product
liability claims are considered adequate by the Company.
21
<PAGE>
GOVERNMENTAL REGULATION
The Company's products are subject to the provisions of the Federal Consumer
Product Safety Act and the Federal Hazardous Substances Act (the "Acts") and the
regulations promulgated thereunder. The Acts authorize the Consumer Product
Safety Commission ("CPSC") to protect the public from products which present a
substantial risk of injury. The CPSC can require the repurchase or recall by the
manufacturer of articles which are found to be defective and impose fines or
penalties on the manufacturer. Similar laws exist in some states and cities and
in other countries in which the Company markets its products. Any recall of its
products could have a material adverse effect on the Company, depending on the
particular product.
In the past five years, Evenflo had approximately six such recalls and/or
other corrective actions, including corrective actions taken in June 1995 in
response to cracks experienced during sled tests of the ON MY WAY car seat and
peeling of outer layers of pacifier tips. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Year Ended September
30, 1995 Compared to Year Ended September 30, 1994." On August 20, 1996,
Consumers Union, the publisher of CONSUMER REPORTS, advised the Company that an
Evenflo TRAVEL TANDEM-REGISTERED TRADEMARK- infant automobile safety seat did
not pass an impact test conducted by CONSUMER REPORTS. As of April 1996, the
Company had already discontinued production of the particular model tested and
began production of an improved model which meets new federal safety standards
that have gone into effect as of September 1, 1996. While CONSUMER REPORTS is
asking the Government to begin a defect investigation and recommends a recall of
the TRAVEL TANDEM model which was tested, the Company believes the standards
used by CONSUMER REPORTS exceeded federal standards in effect prior to September
1, 1996. This product was in compliance with all relevant safety standards in
effect at the time the product was produced and distributed. The report by
Consumers Union has not had a material impact on Evenflo's business. On
September 10, 1996, Evenflo issued a press release which included an offer for a
free reinforcing kit to any consumer who requested one. Although Transport
Canada issued an advisory to the Canadian public recommending the use of the
reinforcing kit offered by Evenflo, as of the date of this Prospectus, a total
of less than 3,000 consumers in the U.S. and Canada have requested the
reinforcing plate. The cost of the reinforcing plate is $1.50 per unit. The
Company sold approximately 700,000 of the TRAVEL TANDEM model since 1990. As a
result, the Company does not believe the report by Consumers Union has had or
will have a material adverse effect on its results of operations. The Company
does not intend to recall such product, but in the event of a recall, the
Company would incur certain costs that, although there can be no assurance,
would not be material.
PRODUCT INNOVATION
The Company's historical success is attributable, in part, to its
introduction of products which are perceived to represent an improvement over
existing products offered by the Company or other manufacturers. The Company
believes that its future growth and success will depend significantly on its
continued ability to introduce innovative golf products and juvenile products,
and there can be no assurance of the Company's ability to do so. Innovative
designs are often not successful, and successful product designs are frequently
displaced by the introduction of other product designs by competitors which
shift market preferences in their favor. The Company's operating results may
fluctuate as a result of the amount, timing and market acceptance of new product
introductions by the Company or its competition.
RELIANCE ON CERTAIN SPORTS
Over 45% of the Company's pro forma net sales during fiscal 1996 were
related to the sale of golf products. A decline in the size of the golf products
market or other sporting goods products market from which the Company derives
sales, whether from a decrease in the popularity of particular golf products,
adverse weather conditions, a reduction in discretionary consumer spending or a
prolonged recessionary period, could have a material adverse effect on the
Company's business. See "Business--Golf Products."
22
<PAGE>
COST AND AVAILABILITY OF CERTAIN MATERIALS
Plastic resin, synthetic rubber and paper products are significant
components of the Company's products and packaging. A shortage of any of these
components or significant increases in price could adversely affect the
Company's ability to maintain its profit margin in the event price competition
did not permit the Company to increase prices. Certain materials used in the
production of golf balls are petroleum derivatives and are therefore sensitive
to fluctuations in the price of oil.
ENVIRONMENTAL MATTERS
The Company's operations are subject to federal, state and local
environmental laws and regulations that impose limitations on the discharge of
pollutants into the environment and establish standards for the handling,
generation, emission, release, discharge, treatment, storage and disposal of
certain materials, substances and wastes and the remediation of environmental
contamination (collectively, "Environmental Laws"). The Company believes that
its operations are in substantial compliance with the terms of all applicable
Environmental Laws as currently interpreted.
While historically the costs of environmental compliance have not had a
material adverse effect on the consolidated financial condition, results of
operations or cash flows of the Company, the Company cannot predict with
certainty its future costs of environmental compliance because of continually
changing compliance standards and technology. The Company expects that future
regulations and changes in the text or interpretation of existing Environmental
Laws may subject its operations to increasingly stringent standards. Compliance
with such requirements may make it necessary, at costs which may be substantial,
to retrofit existing facilities with additional pollution-control equipment and
to undertake new measures in connection with the storage, transportation,
treatment and disposal of by-products and wastes.
The Company has been named as a potentially responsible party ("PRP") with
respect to the generation and disposal of hazardous substances at sixteen sites
under the federal "Superfund" statute and/or certain analogous state statutes.
Pursuant to various federal, state and local laws and regulations, PRPs can
become liable for the costs of removal and/or remediation of those hazardous
substances disposed on, in or about such properties. The liability imposed by
the Superfund statute and analogous state statutes generally is joint and
several and imposed without regard to whether the generator knew of, or was
responsible for, the presence of such hazardous substances. The Company
estimates its liabilities with respect to such sites to be approximately $0.6
million in the aggregate based on its share of Environmental Protection Agency
estimates of cleanup costs, settlement negotiations and discussions with
contractors. However, there can be no assurance that such liabilities will not
exceed this estimate.
Regulations resulting from the 1990 Amendments to the Clean Air Act (the
"1990 Amendments") that will pertain to the Company's manufacturing operations
are currently not expected to be promulgated until 1997 or later. The Company
cannot predict the level of required capital expenditures resulting from future
environmental regulations such as those forthcoming as a result of the 1990
Amendments; however, the Company does not anticipate expenditures that will be
required by such regulations to be material. See "Business--Environmental
Matters."
DEPENDENCE ON KEY MANAGEMENT
The Company's success depends largely upon the abilities and experience of
Paul L. Whiting (President and Chief Executive Officer), George A. Dickerman
(President of Spalding Sports Worldwide Division) and George A. Harris
(President of Evenflo Company, Inc.). The loss of the services of one or more of
such key personnel could have a material adverse effect on the Company. The
Company has compensation agreements regarding severance and change of control
arrangements and non-competition agreements with each of such officers. The
Company does not maintain key-man life insurance policies on any of its
executives. See "Management" and "Ownership of Common Stock."
23
<PAGE>
CONTROL BY KKR
Approximately 88.4% of the outstanding shares of Common Stock is owned by
Strata, of which KKR Associates (Strata), L.P. ("KKR Associates (Strata)") is
the general partner. The general partner of KKR Associates (Strata) is Strata
L.L.C., a limited liability company organized under Delaware law. The members of
Strata L.L.C. are also the members of the limited liability company which is the
general partner of KKR. Accordingly, the members of Strata L.L.C. control the
Company and have the power to elect all of its directors (other than the
director appointed by Abarco), appoint new management and approve any action
requiring the approval of the Company's shareholders, including adopting
amendments to the Company's Certificate of Incorporation and approving mergers
or sales of substantially all of the Company's assets. There can be no assurance
that the interests of the members of Strata L.L.C. will not conflict with the
interests of holders of the Exchange Notes. The managing members of Strata
L.L.C. are Messrs. Henry R. Kravis, George R. Roberts, Robert I. MacDonnell,
Paul E. Raether, Michael W. Michelson, Michael T. Tokarz, James H. Greene, Jr.,
Perry Golkin, Clifton S. Robbins, Scott M. Stuart and Edward A. Gilhuly. Messrs.
Kravis and Roberts are members of the Executive Committee of Strata L.L.C.
Messrs. Kravis, Roberts, and Tokarz are also directors of the Company, as is Mr.
Marc S. Lipschultz who is a limited partner of KKR Associates (Strata). Each of
the members of Strata L.L.C. is also a member of KKR & Co. L.L.C., the limited
liability company which serves as the general partner of KKR. See "Management,"
"Ownership of Common Stock" and "Related Party Transactions."
LABOR RELATIONS
Approximately 28% of the Company's employees are unionized. While the
Company believes that its relations with its employees are good, a prolonged
labor dispute could have a material adverse effect on the Company.
FRAUDULENT TRANSFER CONSIDERATIONS
Under applicable provisions of the United States Bankruptcy Code or
comparable provisions of state fraudulent transfer or conveyance law, if the
Company, at the time it issued the Exchange Notes, (a) incurred such
indebtedness with the intent to hinder, delay or defraud creditors, or (b)(i)
received less than reasonably equivalent value or fair consideration, and
(ii)(A) was insolvent at the time of such incurrence, (B) was rendered insolvent
by reason of such incurrence (and the application of the proceeds thereof), (C)
was engaged or was about to engage in a business or transaction for which the
assets remaining with the Company constituted unreasonably small capital to
carry on its business, or (D) intended to incur, or believed that it would
incur, debts beyond its ability to pay such debts as they mature, then, in each
such case, a court of competent jurisdiction could avoid, in whole or in part,
the Exchange Notes or, in the alternative, subordinate the Exchange Notes to
existing and future indebtedness of the Company. The measure of insolvency for
purposes of the foregoing would likely vary depending upon the law applied in
such case. Generally, however, the Company would be considered insolvent if the
sum of its debts, including contingent liabilities, was greater than all of its
assets at a fair valuation, or if the present fair saleable value of its assets
was less than the amount that would be required to pay the probable liabilities
on its existing debts, including contingent liabilities, as such debts become
absolute and matured. Management of the Company believes that, for purposes of
the United States Bankruptcy Code and state fraudulent transfer or conveyance
laws, the Exchange Notes are being issued without the intent to hinder, delay or
defraud creditors and for proper purposes and in good faith, and that the
Company will receive reasonably equivalent value or fair consideration therefor,
and that after the issuance of the Exchange Notes and the application of the net
proceeds therefrom, the Company will be solvent, will have sufficient capital
for carrying on its business and will be able to pay its debts as they mature.
However, there can be no assurance that a court passing on such issues would
agree with the determination of the Company's management.
24
<PAGE>
LACK OF PRIOR MARKET FOR THE EXCHANGE NOTES
The Exchange Notes are being offered to the holders of the Old Notes. The
Old Notes were offered and sold in September 1996 to a small number of
institutional investors and are eligible for trading in the Private Offerings,
Resale and Trading through Automatic Linkages (PORTAL) Market.
The Company does not intend to apply for a listing of the Exchange Notes on
a securities exchange. There is currently no established market for the Exchange
Notes and there can be no assurance as to the liquidity of markets that may
develop for the Exchange Notes, the ability of the holders of the Exchange Notes
to sell their Exchange Notes or the price at which such holders would be able to
sell their Exchange Notes. If such markets were to exist, the Exchange Notes
could trade at prices that may be lower than the initial market values thereof
depending on many factors, including prevailing interest rates and the markets
for similar securities. Although there is currently no market for the Exchange
Notes, the Initial Purchasers have advised the Company that they currently
intend to make a market in the Exchange Notes. However, the Initial Purchasers
are not obligated to do so, and any market making with respect to the Exchange
Notes may be discontinued at any time without notice.
The liquidity of, and trading market for, the Exchange Notes also may be
adversely affected by general declines in the market for similar securities.
FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements concerning the
Company's operations, economic performances and financial condition, including,
in particular, the likelihood of the Company's success in developing and
expanding its business. These statements are based upon a number of assumptions
and estimates which are inherently subject to significant uncertainties and
contingencies, many of which are beyond the control of the Company, and reflect
future business decisions which are subject to change. Some of these assumptions
inevitably will not materialize, and unanticipated events will occur which will
affect the Company's results.
25
<PAGE>
THE RECAPITALIZATION AND THE FINANCINGS
On August 15, 1996, Strata and Abarco entered into the Recapitalization
Agreement pursuant to which Strata acquired control of the Company. In
connection with, and pursuant to the terms negotiated in, the Recapitalization
Agreement, Strata acquired newly issued shares of Common Stock for $221 million
in the Equity Investment. Pursuant to the terms of the Recapitalization
Agreement, the Company used the proceeds from the Equity Investment, together
with approximately $776 million of aggregate proceeds from the Financings to (i)
redeem a portion of the Common Stock held by Abarco for $582 million, of which
$524 million was paid in cash (the remaining consideration was paid by
distribution of the Company's investments in an affiliate promissory note of $50
million and in the common stock and note receivable of a real estate subsidiary
of the Company of $8 million); (ii) repay approximately $368 million in existing
indebtedness including the Etonic Notes; (iii) redeem for approximately $28
million (concurrent with the receipt of a $7 million payment for management
notes issued to S&E in connection with such stock) all of the shares of S&E not
owned by the Company from certain members of management of S&E who held such
shares under S&E's 1994 Management Stock Ownership Plan; (iv) pay an estimated
$31 million in transaction fees and expenses; (v) purchase certain non-U.S.
trademarks and assignment rights from an affiliate of Abarco for $5 million;
(vi) pay a transaction bonus of $5 million to certain members of management of
S&E and (vii) provide working capital of approximately $45 million, of which $26
million was used to repay bank debt the following day. Immediately after
Closing, Strata owned approximately 88.4% of the Common Stock and Abarco
retained approximately 11.6% of the Common Stock.
The Financings included (i) a $650 million credit facility comprised of the
Term Loan Facility and the Revolving Credit Facility, of which $426 million was
drawn at Closing, (ii) $200 million of the Notes, (iii) $150 million of
Preferred Stock and (iv) the Equity Investment.
The sources and uses of the funds for the Recapitalization and the related
transactions were as follows (dollars in millions):
<TABLE>
<CAPTION>
SOURCES OF FUNDS
<S> <C>
Term Loan and Revolving Credit Facilities......................................... $ 426
Old Notes......................................................................... 200
Preferred Stock Offering.......................................................... 150(1)
Equity Investment................................................................. 221
Repayment of management notes in connection with purchase of S&E stock............ 7
Company cash balances............................................................. 2
---------
Total......................................................................... $ 1,006
---------
---------
USES OF FUNDS
Redemption of Abarco Common Stock................................................. $ 524
Refinancing of existing debt...................................................... 368
Redemption of S&E shares owned by management of S&E............................... 28
Estimated transaction fees and expenses........................................... 31
Transaction bonus................................................................. 5
Acquisition of non-U.S. trademarks................................................ 5
Working capital................................................................... 45
---------
Total......................................................................... $ 1,006
---------
---------
</TABLE>
- ---------
(1) Of the $150 million of gross proceeds from the Preferred Stock Offering,
$100 million were received from the 1,000,000 shares of Preferred Stock
issued and sold by the Company to Strata at Closing and $50 million were
received from the 500,000 shares of Preferred Stock issued and sold by the
Company to Strata immediately following the Closing. At Closing, the Company
borrowed $26 million under the Revolving Credit Facility and applied $2
million of cash balances to complete the Recapitalization. The borrowings
under the Revolving Credit Facility were repaid the following day after
receipt by the Company of the proceeds from the sale of $50 million
liquidation preference of Preferred Stock.
26
<PAGE>
USE OF PROCEEDS
There will be no proceeds to the Company from the exchange of Notes pursuant
to the Exchange Offer.
The gross proceeds to the Company from the offering of the Old Notes were
$200 million. Such proceeds, together with (i) gross proceeds of the Preferred
Stock Offering of $150 million; (ii) borrowings of $426 million under the Credit
Facilities and (iii) $221 million from the Equity Investment, were used by the
Company to (a) redeem a portion of the Common Stock of the Company owned by
Abarco for aggregate cash consideration of approximately $524 million, (b) repay
existing indebtedness of the Company, which amounted to approximately $368
million, (c) redeem S&E shares owned by management of S&E for aggregate
consideration of approximately $28 million, (d) pay an estimated $31 million in
transaction fees and expenses, (e) purchase certain non-U.S. trademarks and
assignment rights from an affiliate of Abarco for $5 million, (f) pay a
transaction bonus of $5 million to certain members of management of S&E and (g)
provide working capital of approximately $45 million, of which $26 million was
used to repay bank debt the following day. The indebtedness of the Company
repaid in connection with the Recapitalization and the Financings consisted of:
(i) aggregate principal and interest of $309 million, at a weighted average
interest rate of 9.14%, owed by S&E to a syndicate of banks led by Citibank,
N.A. and NationsBank of Florida, N.A.; (ii) aggregate principal and interest of
$55 million Etonic Notes, at a weighted average interest rate of 9.0%; (iii)
aggregate principal of $4 million, at interest rates ranging from 0.00% to
7.00%, owed by S&E to various New York State agencies and Fulton County, New
York; (iv) aggregate principal amount of $66,000, at an interest rate of 10.10%,
owed by S&E to Metlife Capital Corporation; (v) aggregate principal amount of
$44,000, at an interest rate of 10.00%, owed by S&E to Metlife Capital
Corporation; and (vi) aggregate principal amount of $77,000, at an interest rate
of 8.75%, owed by S&E to the Estate of Donald J. Byrnes, the former Chief
Executive Officer of the Company. See "The Recapitalization and the Financings."
27
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated historical capitalization of
the Company as of September 30, 1996, which includes the effects of the
Recapitalization, the Financings and the application of the proceeds therefrom
and the Etonic Acquisition. This table should be read in conjunction with the
consolidated financial statements of the Company and the related notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30, 1996
-------------------
<S> <C>
HISTORICAL
-------------------
<CAPTION>
(DOLLARS IN
MILLIONS)
<S> <C>
Short-term debt:
Non-U.S. bank loans......................................................................... $ 13
Current portion of long-term debt (1)....................................................... --
-----
Subtotal.............................................................................. 13
Long-term debt:
Credit Facilities:
Revolving Credit Facility (2)............................................................. 26
Term Loan Facility........................................................................ 400
Notes..................................................................................... 200
-----
Total long-term debt.................................................................. 626
Preferred Stock............................................................................... 150
Common shareholders' equity (deficiency)...................................................... (349)
-----
Total capitalization.......................................................................... $ 440
-----
-----
</TABLE>
- ------------------------
(1) Does not include approximately $57 million of bankers acceptances included
in accounts payable.
(2) As of September 30, 1996, the Company had additional availability under the
Revolving Credit Facility of $142 million (after a reduction of $82 million
for outstanding letters of credit and bankers' acceptances). The Company
repaid the outstanding amount under the Revolving Credit Facility on October
1, 1996.
28
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENT
The following unaudited pro forma condensed statement of consolidated
earnings (the "Pro Forma Financial Statement") has been derived by the
application of pro forma adjustments to the Company's historical statement of
consolidated earnings for the year ended September 30, 1996 included elsewhere
in this Prospectus. The pro forma condensed statement of consolidated earnings
for the year presented gives effect to the Recapitalization, the Financings, the
Etonic Acquisition and the related transactions as if such transactions had been
consummated as of October 1, 1995. The adjustments, which include adjustments
relating to the Recapitalization, the Financings, the Etonic Acquisition and
related transactions, are described in the accompanying notes. The Pro Forma
Financial Statement should not be considered indicative of actual results that
would have been achieved had the Recapitalization, the Financings, the Etonic
Acquisition and the related transactions been consummated for the period
indicated and do not purport to indicate results of operations for any future
period. The Pro Forma Financial Statement should be read in conjunction with the
Company's historical financial statements and the notes thereto included
elsewhere in this Prospectus.
29
<PAGE>
E&S HOLDINGS CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
FOR THE YEAR ENDED SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADJUSTMENTS ADJUSTMENTS
FOR THE FOR THE
ETONIC RECAPITALIZATION
HISTORICAL ACQUISITION(A) AND OFFERING PRO FORMA
---------- ------------- --------------- -----------
<S> <C> <C> <C> <C>
Net sales.......................................... $ 689,080 $ 42,942 $ 732,022
Cost of sales...................................... 452,037 30,360 482,397
---------- ------------- -----------
Gross profit................................... 237,043 12,582 249,625
Selling, general and administrative expenses....... 196,741 12,842(b) $ (5,375)(c) 202,767
(1,441)(d)
Royalty income, net................................ (14,339) (1,243) (15,582)
Management Stock Ownership Plan expense............ 20,828 (20,828)(e) 0
Recapitalization costs............................. 7,700 (7,700)(e) 0
---------- ------------- --------------- -----------
Income from operations......................... 26,113 983 35,344 62,440
Interest expense, net.............................. 35,452 1,327 25,048(f) 61,827
Amortization of deferred financing
costs............................................ 11,453 (6,820)(g) 4,633
Currency loss, net................................. 775 775
---------- ------------- --------------- -----------
Earnings (loss) before income taxes............ (21,567) (344) 17,116 (4,795)
Income taxes....................................... 6,100 0 (3,500)(h) 2,600
---------- ------------- --------------- -----------
Net earnings (loss)............................ (27,667) (344) 20,616 (7,395)
Noncash preferred stock dividend and related
accretion........................................ (19,647)(i) (19,647)
---------- ------------- --------------- -----------
Net earnings (loss) for common shareholders........ $ (27,667) $ (344) $ 969 $ (27,042)
---------- -------------
---------- ------------- --------------- -----------
--------------- -----------
Ratio of earnings to fixed charges (j)............. --
-----------
-----------
Deficiency of earnings to fixed charges (j)........ $ 4,795
-----------
-----------
Ratio of earnings (loss) to combined fixed charges
and preferred stock dividends (j)................ --
-----------
-----------
Deficiency of earnings (loss) to combined fixed
charges and preferred stock dividends(j)......... $ 35,022
-----------
-----------
Pro forma consolidated EBITDA (k).................. $ 83,041
-----------
-----------
</TABLE>
30
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF EARNINGS
(a) Represents adjustments related to the Company's purchase of certain assets
of Etonic as of July 8, 1996. Since this acquisition was effected as of July
8, 1996, Etonic's operations for the nine months ended June 30, 1996 have
been added to the Company's operating results for the year ended September
30, 1996, which include Etonic's results of operations from the date of
acquisition.
(b) Includes amortization of $261 for the nine months ended June 30, 1996 of
trademarks and goodwill totaling $13,905 arising in the Etonic Acquisition.
Trademarks and goodwill are being amortized over 40 years. The Etonic
purchase price of $54,043 was allocated as follows:
<TABLE>
<S> <C>
Trade receivables.................................................. $ 22,556
Inventories........................................................ 15,642
Other current assets............................................... 3,388
Equipment.......................................................... 4,129
Trademarks and goodwill............................................ 13,905
---------
Total........................................................ 59,620
Accounts payable................................................... (4,115)
Accrual expense.................................................... (1,462)
---------
Etonic purchase price........................................ $ 54,043
---------
---------
</TABLE>
(c) Eliminated the transaction bonus of $5,375 paid to certain members of
management as part of the Recapitalization.
(d) Historically, the Company has paid an affiliate of the Company for certain
services provided by the executives of this affiliate. However, after the
Recapitalization, these services will no longer be needed; therefore an
adjustment has been reflected to reduce expenses for this transaction.
(e) Expenses related to the 1994 Management Stock Ownership Plan which will not
exist, or be replaced, after the Recapitalization. In addition, transaction
costs related to the Recapitalization have been eliminated.
(f) Adjustments to interest expense as follows:
<TABLE>
<S> <C>
Interest expense with respect to the Credit Facilities, the
Offerings and other indebtedness at an assumed weighted average
interest rate of 8.8%............................................ $ 61,827
Less interest on prior U.S. secured credit agreement and other
indebtedness..................................................... 36,779
---------
Net increase in interest expense................................... $ 25,048
---------
---------
</TABLE>
A 0.125% change in the interest rate would change annual pro forma interest
expense by $824.
(g) Represents incremental decrease in amortization of deferred financing costs
related to the Recapitalization and the Financings. Deferred financing costs
of $34,231 were amortized using the interest method for an expense of $4,633
for the year ended September 30, 1996. Included in the historical
amortization of deferred financing costs was $9,187 representing the
write-off of the deferred financing costs remaining at September 30, 1996,
on which date the prior U.S. secured credit agreement was paid off.
(h) Reflects the tax effect of taxable adjustments at the effective statutory
income tax rate of 35%.
(i) Reflects the dividends to be paid to holders of Preferred Stock.
31
<PAGE>
(j) For purposes of determining the pro forma ratios of earnings (loss) to
fixed charges and of earnings (loss) to combined fixed charges and preferred
stock dividends, earnings are defined as earnings (loss) before income taxes
plus fixed charges (net of capitalized interest). Fixed charges consist of
interest expense on all indebtedness and capitalized interest, amortization
of deferred financing costs, and one-third of rental expense on operating
leases, representing that portion of rental expense deemed by the Company to
be attributable to interest. For purposes of the computation of the ratio of
earnings (loss) to combined fixed charges and preferred stock dividends, the
preferred stock dividend requirements were increased to an amount
representing the pre-tax earnings (based on the statutory income tax rate of
35%) which are required to cover such dividend requirements.
(k) "EBITDA" represents earnings (loss) before interest expense, income taxes,
depreciation and amortization. EBITDA is not intended to represent cash flow
from operations as defined by generally accepted accounting principles and
should not be considered as an alternative to net earnings (loss) as an
indicator of the Company's operating performance or to cash flows as a
measure of liquidity. EBITDA is included in the Prospectus as it is one
basis upon which the Company assesses its financial performance, and certain
covenants in the Company's borrowing agreements are tied to similar
measures. Pro forma consolidated EBITDA has been reduced by certain unusual
items which are discussed more fully in the "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources--Post Recapitalization." The $83.0 million pro forma
consolidated EBITDA has been reduced by $12.6 million of such items.
32
<PAGE>
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
The following table sets forth certain selected historical consolidated
financial data of the Company. The historical consolidated financial statements
of the Company for the five fiscal years ended September 30, 1996 have been
audited. The historical consolidated financial data for the three fiscal years
ended September 30, 1996 have been derived from, and should be read in
conjunction with, the audited consolidated financial statements of the Company
and the related notes thereto included elsewhere in this Prospectus. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Pro Forma Condensed Consolidated Financial Statement," and the
historical consolidated financial statements and the related notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED SEPTEMBER 30,
----------------------------------------------------------
1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
<CAPTION>
<S> <C> <C> <C> <C> <C>
OPERATING STATEMENT DATA
Spalding net sales.......................................... $ 353,262 $ 378,010 $ 411,574 $ 424,118 $ 451,915
Evenflo net sales........................................... 158,312 158,234 171,533 210,039 237,165
---------- ---------- ---------- ---------- ----------
Total net sales............................................. 511,574 536,244 583,107 634,157 689,080
Cost of sales (1)........................................... 325,337 342,276 370,328 407,334 452,037
---------- ---------- ---------- ---------- ----------
Gross profit................................................ 186,237 193,968 212,779 226,823 237,043
Selling, general and administrative expenses (2)............ 147,533 150,106 178,678 177,913 196,741
Royalty income, net......................................... (7,534) (9,328) (12,789) (13,514) (14,339)
Management Stock Ownership Plan expense (3)................. 0 0 0 1,130 20,828
Recapitalization costs (4).................................. 0 0 0 0 7,700
Patent infringement settlements (5)......................... (2,300) 0 0 0 0
Litigation settlement expense (5)........................... 0 0 0 2,400 0
---------- ---------- ---------- ---------- ----------
Income from operations...................................... 48,538 53,190 46,890 58,894 26,113
Interest expense, net....................................... 11,848 8,913 17,073 38,108 46,905
Currency loss (gain), net (6)............................... 849 2,238 (144) 381 775
---------- ---------- ---------- ---------- ----------
Earnings (loss) before income taxes......................... 35,841 42,039 29,961 20,405 (21,567)
Income taxes................................................ 14,330 18,000 11,938 8,683 6,100
---------- ---------- ---------- ---------- ----------
Earnings (loss) before minority interest and cumulative
effect of accounting changes.............................. 21,511 24,039 18,023 11,722 (27,667)
Minority interest in net earnings of consolidated
subsidiary................................................ 0 0 0 724 0
Cumulative effect of accounting
changes (7)............................................... 0 9,620 0 0 0
---------- ---------- ---------- ---------- ----------
Net earnings (loss)......................................... $ 21,511 $ 14,419 $ 18,023 $ 10,998 $ (27,667)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Ratio of earnings to fixed charges (8)(9)................... 3.67x 5.08x 2.61x 1.51x --
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
-----------------------------------------------------------
1992 1993 1994 1995 1996
---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Working capital (deficiency)................................ $ 49,667 $ 61,079 $ (110,193) $ 88,124 $ 169,551
Total assets................................................ 382,747 404,336 508,068 535,645 689,906
Long-term debt (net of current portion)..................... 80,166 141,512 129,788 313,073 625,800
Shareholders' equity (deficiency) (10)...................... 128,318 67,803 (22,684) (12,976) (349,451)
</TABLE>
33
<PAGE>
- ------------------------
(1) Included in cost of sales are unusual charges of (i) $3.1 million in 1992
for the relocation of Evenflo infant feeding facilities; (ii) $3.8 million
in 1993 for the conversion of two Evenflo manufacturing facilities to
distribution centers and for the closure of two Spalding softball
manufacturing facilities; and (iii) $1.6 million in 1996 as a result of
expensing the increase to fair value of the Etonic inventories as of the
date of the Etonic Acquisition.
(2) In fiscal 1996, selling, general and administrative expenses included the
following items: (i) $5.4 million in transaction bonus payments arising in
connection with the Recapitalization; (ii) $5.6 million of expenses related
to the completion of the Etonic Acquisition and consolidating the operations
of Etonic with those of Spalding; (iii) $2.8 million of expenses incurred by
the Company on behalf of its former parent, (iv) $2.3 million of accounts
receivable charge-offs, as a result of the bankruptcy of two of its
customers; (v) $1.3 million of costs to consolidate Evenflo's feeding and
furniture operations, which were separately managed, into one entity and
(vi) $0.3 million of costs related to the relocation of the corporate
office.
(3) Represents compensation expense related to the increase in the estimated
fair value of common stock of S&E held by certain members of senior
management through the S&E Management Stock Ownership Plan which were
redeemed in the Recapitalization.
(4) Represents non-capitalized expenses, such as legal, printing costs, and
other professional fees and costs incurred in connection with the
Recapitalization.
(5) In 1992 the Company received $2.3 million from the settlements of patent
infringement suits. In 1995 the Company settled an indemnification dispute
involving an environmental matter of a former operation for $2.4 million.
(6) Net currency losses in fiscal 1993 of $2.2 million were primarily the
result of losses from hedging activities, principally in Japan.
(7) Effective October 1, 1992, the Company adopted SFAS No. 106 "Employers'
Accounting for Postretirement Benefits Other Than Pensions" and SFAS No. 109
"Accounting for Income Taxes." As of October 1, 1992, the Company recorded
one-time charges against earnings in the form of cumulative effects of
accounting changes of $4.8 million on an after-tax basis with respect to
SFAS 106 and $4.8 million with respect to SFAS 109.
(8) For purposes of determining the ratio of earnings to fixed charges,
earnings are defined as earnings (loss) before income taxes and cumulative
effect of accounting changes, plus fixed charges (net of capitalized
interest). Fixed charges consist of interest expense on all indebtedness and
capitalized interest, amortization of deferred financing costs, and
one-third of rental expense on operating leases, representing that portion
of rental expense deemed by the Company to be attributable to interest.
(9) The deficiency of earnings to fixed charges for fiscal 1996 was
approximately $21.6 million.
(10) Shareholders' equity (deficiency) as of September 30, 1994 reflects the
acquisition of the Acquired Trademarks in May 1994 (see Note E to the
Consolidated Financial Statements). Shareholders' equity (deficiency) as of
September 30, 1996 reflects the Recapitalization of the Company as of that
date (see Note A to the Consolidated Financial Statements).
34
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following discussion and analysis of the results of operations of the
Company covers periods before completion of the Recapitalization, the Financings
and the Etonic Acquisition. Accordingly, the discussion and analysis of such
periods does not reflect the significant impact that the Recapitalization, the
Financings and the Etonic Acquisition will have on the Company. See "Risk
Factors," "Pro Forma Condensed Consolidated Financial Statement" and the
discussion below under "--Liquidity and Capital Resources" for further
discussion relating to the impact that the Recapitalization, the Financings and
the Etonic Acquisition may have on the Company.
The following table sets forth operating results of the Company for the
periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
<S> <C> <C> <C>
1994 1995 1996
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Spalding net sales................................................................. $ 411,574 $ 424,118 $ 451,915
Evenflo net sales.................................................................. 171,533 210,039 237,165
--------- --------- ---------
Total net sales.................................................................... 583,107 634,157 689,080
Cost of sales...................................................................... 370,328 407,334 452,037
--------- --------- ---------
Gross profit....................................................................... 212,779 226,823 237,043
Selling, general and administrative expenses....................................... 178,678 177,913 196,741
Royalty income, net................................................................ (12,789) (13,514) (14,339)
Management Stock Ownership Plan expense............................................ 0 1,130 20,828
Recapitalization costs............................................................. 0 0 7,700
Litigation settlement expense...................................................... 0 2,400 0
--------- --------- ---------
Income from operations............................................................. 46,890 58,894 26,113
Interest expense, net.............................................................. 17,073 38,108 46,905
Currency loss (gain), net.......................................................... (144) 381 775
--------- --------- ---------
Earnings (loss) before income taxes................................................ 29,961 20,405 (21,567)
Income taxes....................................................................... 11,938 8,683 6,100
--------- --------- ---------
Earnings (loss) before minority interest........................................... 18,023 11,722 (27,667)
Minority interest in net earnings of consolidated subsidiary....................... 0 724 0
--------- --------- ---------
Net earnings (loss)................................................................ $ 18,023 $ 10,998 $ (27,667)
--------- --------- ---------
--------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
<S> <C> <C> <C>
1994 1995 1996
<CAPTION>
(PERCENTAGE OF TOTAL NET SALES)
<S> <C> <C> <C>
Spalding net sales................................................................. 70.6% 66.9% 65.6%
Evenflo net sales.................................................................. 29.4 33.1 34.4
--------- --------- ---------
Total net sales.................................................................... 100.0% 100.0% 100.0%
Cost of sales...................................................................... 63.5 64.2 65.6
--------- --------- ---------
Gross profit....................................................................... 36.5 35.8 34.4
Selling, general and administrative expenses....................................... 30.6 28.1 28.6
Royalty income, net................................................................ (2.1) (2.1) (2.1)
Management Stock Ownership Plan expense............................................ 0.0 0.1 3.0
Recapitalization costs............................................................. 0.0 0.0 1.1
Litigation settlement expense...................................................... 0.0 0.4 0.0
--------- --------- ---------
Income from operations............................................................. 8.0 9.3 3.8
Interest expense, net.............................................................. 2.9 6.0 6.8
Currency loss (gain), net.......................................................... 0.0 0.1 0.1
--------- --------- ---------
Earnings (loss) before income taxes................................................ 5.1 3.2 (3.1)
Income taxes....................................................................... 2.0 1.4 0.9
--------- --------- ---------
Earnings (loss) before minority interest........................................... 3.1 1.8 (4.0)
Minority interest in net earnings of consolidated subsidiary....................... 0.0 0.1 0.0
--------- --------- ---------
Net earnings (loss)................................................................ 3.1% 1.7% (4.0)%
--------- --------- ---------
--------- --------- ---------
</TABLE>
35
<PAGE>
YEAR ENDED SEPTEMBER 30, 1996 ("FISCAL 1996")
COMPARED TO YEAR ENDED SEPTEMBER 30, 1995 ("FISCAL 1995")
NET SALES. Net sales are gross sales net of returns, allowances, trade
discounts, freight on goods sold and royalties paid on third-party trademarks
used on the Company's products. The Company's net sales increased to $689.1
million in fiscal 1996 from $634.2 million for fiscal 1995, an increase of $54.9
million or 8.7%. Spalding's net sales increased to $451.9 million for fiscal
1996 from $424.1 million for fiscal 1995, an increase of $27.8 million or 6.6%.
Evenflo's net sales increased to $237.2 million for fiscal 1996 from $210.0
million for fiscal 1995, an increase of $27.2 million or 13.0%.
The acquisition of Etonic increased Spalding's net sales by $14.8 million in
fiscal 1996. Furthermore, Spalding experienced a 22.4% increase in fiscal 1996
net sales of golf clubs such as TOP FLITE TOUR irons and INTIMIDATOR-TM- drivers
which continued to gain consumer acceptance as a result of advertising and
on-course demonstrations by Spalding technical representatives. Spalding's net
sales of golf balls and golf bags for fiscal 1996 were up $4.1 million over
fiscal 1995 with the introduction of the STRATA-TM- and strong sales of the
MAGNA EX-TM- and HOT XL-TM-, despite a long winter and wet spring in the
Northeast and Midwest. Basketball sales were up 9.2% over fiscal 1995 with the
introduction of the SPACE JAM-TM- basketball and increased sales of ZK-COMPOSITE
basketball lines. However, sales of diamond sports products, such as softballs
and gloves, were down 22.2% compared to fiscal 1995, partially due to the long
winter and wet spring. Spalding's international net sales were down $2.9
million, or 1.9%, in fiscal 1996 compared to fiscal 1995. The decrease resulted
from lower net sales in golf, basketball and court sports products in Japan, as
well as lower NBA clothing net sales in Australia due to the discontinuation of
the NBA clothing line by the Company's Australian subsidiary and lower net sales
of basketballs in Canada and Australia. This decrease was partially offset by
strong golf ball and golf club net sales in Europe, Canada, Mexico and Southeast
Asia. For the five fiscal years prior to fiscal 1996, Spalding experienced year
over year increases in international sales. The Company believes that its
international sales will increase as the economy in Japan improves. The Company
does not believe that the decline in Spalding international sales in fiscal 1996
is indicative of a long-term trend.
The net sales increase at Evenflo was principally due to a 22.7% increase in
U.S. net sales of car seats when compared to fiscal 1995, as well as the impact
of new product introductions, including the ON MY WAY TRAVEL SYSTEM stroller,
the PHASES high chair, and the angled reusable nurser. EXERSAUCER net sales
decreased due to increased competition and lower production caused by
manufacturing downtime to modify tooling for new EXERSAUCER versions. In order
to increase EXERSAUCER sales, Evenflo recently introduced the BABY EXERSAUCER
and plans further enhanced versions of the EXERSAUCER product line. Evenflo's
international net sales were down $1.0 million compared to fiscal 1995 due
primarily to increased car seat competition in Canada and lower net sales in the
Philippines. For the five fiscal years prior to fiscal 1996, Evenflo experienced
year over year increases in international sales. The Company believes that
global demographic trends are favorable for Evenflo and the Company does not
believe that the decline in Evenflo international sales in fiscal 1996 is
indicative of a long-term trend.
GROSS PROFIT. Gross profit is net sales less cost of sales which includes
the costs necessary to make the Company's products, including the costs of raw
materials, production, warehousing and procurement. The Company's gross profit
increased to $237.0 million in fiscal 1996 from $226.8 million for fiscal 1995,
an increase of $10.2 million or 4.5%. Gross margin declined to 34.4% in fiscal
1996 from 35.8% in fiscal 1995. Spalding's gross profit increased to $178.6
million in fiscal 1996 from $174.4 million in fiscal 1995, an increase of $4.2
million or 2.4%. Evenflo's gross profit increased to $58.4 million in fiscal
1996 from $52.4 million in fiscal 1995, an increase of $6.0 million or 11.5%.
For fiscal 1996, Spalding's gross margin declined to 39.5% from 41.1% for
fiscal 1995 as manufacturing efficiencies and lower material costs were more
than offset by (i) lower international sales in Japan and Australia, (ii) the
purchase accounting effects of Etonic's inventory turnover and (iii) increased
sales of products with a lower margin such as golf clubs, Etonic golf shoes and
basketballs (as compared to golf
36
<PAGE>
balls). Evenflo's gross margin declined 0.2% during fiscal 1996 as compared with
fiscal 1995 as a result of (i) lower selling prices of EXERSAUCER and disposable
nursers, (ii) lower international sales (which typically have higher gross
margins) and (iii) a less favorable sales mix within the car seat line due to
production tool repairs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses include the costs necessary to sell the Company's
products and the general and administrative costs of managing the business,
including salaries and related benefits, commissions, advertising and promotion
expenses, bad debts, travel, amortization of intangible assets, insurance and
product liability costs and professional fees. The Company's selling, general
and administrative expenses increased to $196.7 million for fiscal 1996 from
$177.9 million for fiscal 1995, an increase of $18.8 million or 10.6%. As a
percentage of sales, selling, general and administrative expenses increased to
28.6% for fiscal 1996 from 28.1% for fiscal 1995.
Spalding's selling, general and administrative expenses increased $7.0
million during fiscal 1996 as compared with fiscal 1995 as a result of (i) $3.7
million higher advertising and selling expenses, (ii) $3.3 million in selling,
general and administrative expenses at Etonic and (iii) $1.7 million increase in
the allowance for doubtful accounts. These increases in selling, general and
administrative expenses were partially offset by $1.7 million of lower employee
benefit costs and other expenses.
Evenflo had $1.2 million higher selling, general and administrative expenses
in fiscal 1996. The increase was comprised of (i) $2.3 million increase in
allowance for doubtful accounts and (ii) $3.2 million higher advertising,
promotion, consolidation expenses and other costs. These expense increases were
partially offset by (i) $2.0 million lower product liability costs, (ii) $1.2
million of expense in fiscal 1995 relating to the consumer advisory on
pacificers discussed below which did not recur in fiscal 1996 and (iii) $1.1
million lower expenses in Mexico and Canada due to reduced marketing activities
in these countries.
The corporate office had $0.3 million lower general and administrative
expenses in fiscal 1996 primarily from lower compensation, employee benefit and
other costs.
In fiscal 1996, the Company incurred additional unusual charges of (i) $5.4
million in transaction bonus payments in connection with the Recapitalization
and (ii) $5.6 million of expenses related to the completion of the Etonic
Acquisition and consolidating the operations of Etonic with those of Spalding.
ROYALTY INCOME. Royalty income includes income from licensing the Company's
worldwide trademarks. Royalty income increased to $14.3 million in fiscal 1996
from $13.5 million in fiscal 1995. The $0.8 million increase was principally due
to higher royalty income from footwear and apparel licensees. Fiscal 1996
royalty income from the new Sara Lee apparel license exceeded the royalty income
from discontinued fiscal 1995 apparel licenses.
MANAGEMENT STOCK OWNERSHIP PLAN. Expenses related to the Company's
Management Stock Ownership Plan increased to $20.8 million for fiscal 1996 from
$1.1 million for fiscal 1995, an increase of $19.7 million. Management Stock
Ownership Plan expense represents compensation expense related to the increase
in the fair value of common stock of S&E held by certain members of senior
management which were purchased by the Company in connection with the
Recapitalization.
RECAPITALIZATION COSTS. In fiscal 1996, the Company incurred $7.7 million in
non-capitalized expenses such as legal, printing costs and other professional
fees and costs incurred in connection with the Recapitalization.
INTEREST EXPENSE. Interest expense increased to $46.9 million for fiscal
1996 from $38.1 million for fiscal 1995, an increase of $8.8 million or 23.1%.
The increase was a result of (i) the write-off of $9.2 million of deferred
financing costs relating to the prior credit facility repaid in connection with
the Recapitalization, (ii) $2.0 million in interest on higher average worldwide
borrowings and (iii) $0.9 million
37
<PAGE>
in interest on the Etonic Notes; partially offset by $3.3 million in lower
interest attributable principally to a decrease in the Company's average U.S.
borrowing rate from 10.1% for fiscal 1995 to 9.1% for fiscal 1996.
CURRENCY LOSS. Currency loss of $0.8 million was $0.4 million higher in
fiscal 1996 than fiscal 1995. See "--Liquidity and Capital Resources."
NET EARNINGS. The Company recorded a net loss of $27.7 million for fiscal
1996 compared to $11.0 million in net earnings for fiscal 1995. The decrease in
earnings from fiscal 1995 was a result of (i) $19.7 million increase in
Management Stock Ownership Plan expenses relating to the purchase of management
shares as a result of the Recapitalization, (ii) $5.4 million in transaction
bonus payments, (iii) $7.2 million of expenses related to the Etonic
Acquisition, (iv) $7.7 million of Recapitalization expenses, (v) $8.8 million in
higher interest expense, and (vi) $0.4 million in higher currency losses reduced
by (i) $4.8 million increase in earnings from operations, (ii) $2.6 million in
lower taxes and (iii) $2.4 million litigation expense which occurred in fiscal
1995 only and (iv) $0.7 million minority interest in net earnings in fiscal 1995
only.
YEAR ENDED SEPTEMBER 30, 1995 ("FISCAL 1995")
COMPARED TO YEAR ENDED SEPTEMBER 30, 1994 ("FISCAL 1994")
NET SALES. The Company's net sales increased to $634.2 million in fiscal
1995 from $583.1 million in fiscal 1994, an increase of $51.1 million or 8.8%.
Spalding's net sales increased to $424.1 million in fiscal 1995 from $411.6
million in fiscal 1994, an increase of $12.5 million or 3.0%. Evenflo's net
sales increased to $210.0 million in fiscal 1995 from $171.5 million in fiscal
1994, an increase of $38.5 million or 22.4%. On May 17, 1994, the Company
acquired substantially all of the non-U.S. trademarks related to its business
(the "Acquired Trademarks") from an affiliate of Abarco. In fiscal 1994, prior
to the acquisition, the Company paid $4.5 million in royalties for use of the
Acquired Trademarks on goods manufactured by the Company. Prior to the
acquisition of the Acquired Trademarks, the Company's accounting policy was to
net royalty payments to the former owner of the Acquired Trademarks on goods
manufactured by the Company against net sales. As a result of acquiring the
Acquired Trademarks in May 1994, no significant amounts relating to these
trademarks were netted against net sales in fiscal 1995.
Higher net sales at Spalding were attributable to increased international
sales, due primarily to increased volume in golf ball product lines and Dudley
softballs. The conversion from the 15 golf ball pack to the 18 golf ball pack
coupled with related promotional programs increased TOP-FLITE XL sales in fiscal
1995. In addition, golf club sales increased, but were offset by the close out
of the THUNDER HEAT-REGISTERED TRADEMARK- model. Dudley had record softball
sales in fiscal 1995 primarily due to new product introductions of softballs
with new leather and ZK-COMPOSITE materials. Basketball sales were comparable to
the prior fiscal year due to slow retail sales.
Evenflo's increase in net sales was principally driven by new product
introductions in the stationary activity products segment and in car seats, and
to a lesser extent Fisher Price's exit from the car seat business in fiscal
1995. The EXERSAUCER, the ULTARA 1-REGISTERED TRADEMARK- PREMIER car seat with
ADJUST-A-SHIELD-REGISTERED TRADEMARK-, and the ON MY WAY infant car seat with
CARRY RIGHT handle were among the new products which promoted increased unit
sales volume. While breastfeeding and baby care net sales increased slightly
from prior year levels, the highly competitive reusable and disposable feeding
lines coupled with the consumer advisory on pacifiers and car seats negatively
impacted the overall increase in net sales. During the second quarter of fiscal
1995, Evenflo's net sales of pacifiers were negatively affected by reports from
consumers alleging peeling of pacifiers. As a precautionary measure, Evenflo
discontinued shipments of all pacifiers and destroyed existing inventory and,
after an internal review, purchases from one of its two suppliers were halted.
The cost of such action taken with respect to pacifiers was reflected in fiscal
1995 as a $1.2 million charge to selling, general and administrative expenses.
During fiscal 1995, Evenflo discovered that the ON MY WAY infant car seat could
crack under severe test conditions, and although the crack would not affect the
car seat's ability to restrain the occupant, Evenflo advised consumers of the
cracking potential and offered them the option of a rectification kit or a
return of the product. The consumer advisory and recall cost of
38
<PAGE>
$1.7 million was deducted from net sales. Management believed these actions were
necessary to maintain its high quality standards.
GROSS PROFIT. The Company's gross profit increased to $226.8 million in
fiscal 1995 from $212.8 million in fiscal 1994, an increase of $14.0 million or
6.6%. Gross margin declined to 35.8% for fiscal 1995 from 36.5% for fiscal 1994.
Spalding's gross profit increased to $174.4 million in fiscal 1995 from $164.8
million in fiscal 1994, an increase of $9.6 million or 5.8%. Evenflo's gross
profit increased to $52.4 million in fiscal 1995 from $48.0 million in fiscal
1994, an increase of $4.4 million or 9.2%.
Spalding's gross margin increased to 41.1% in fiscal 1995 from 40.0% in
fiscal 1994. The increase was attributable to a favorable product mix with
higher golf ball sales volume.
Evenflo's gross margin decreased to 25.0% in fiscal 1995 from 28.0% in
fiscal 1994. The decrease was due principally to higher sales of car seats and
stationary activity products (representing 50% of net sales in fiscal 1995
compared to 41% in fiscal 1994) which have lower gross margins than feeding
products lines (representing 27% of net sales in fiscal 1995 compared to 35% in
fiscal 1994). Additionally, the cost of the ON MY WAY voluntary corrective
action referred to above reduced net sales by $1.7 million.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. The Company's selling, general
and administrative expenses increased to $177.9 million for fiscal 1995 from
$178.7 million for fiscal 1994, a decrease of $0.8 million. As a percentage of
sales, selling, general and administrative expenses decreased to 28.1% for
fiscal 1995 from 30.6% for fiscal 1994.
The $1.6 million increase in Spalding's selling, general and administrative
expenses included a $2.3 million increase in administrative and other expenses
reduced by $0.7 million in lower selling, advertising and promotional expenses.
The reduction in advertising and promotional expenses was a result of certain
fiscal 1994 programs designed to reposition golf balls under the TOP-FLITE brand
to a higher price point which were not repeated in fiscal 1995.
Selling, general and administrative expenses at Evenflo increased $0.9
million. This increase consisted of (i) $1.3 million in higher co-op advertising
and sales commissions, (ii) $1.2 million associated with the quality assurance
efforts and a consumer advisory on pacifiers referred to above and (iii) a $0.7
million increase in the allowance for doubtful accounts, reduced by (i) $1.5
million in fiscal 1994 expenses not incurred in fiscal 1995 associated with new
packaging costs and relocation of the Evenflo infant feeding operations to the
Canton, Georgia manufacturing facility and (ii) $0.8 million in other
miscellaneous costs.
In fiscal 1995, the corporate office general and administrative expenses
decreased $3.3 million due primarily to costs related to the Acquired Trademarks
recorded in fiscal 1994 which did not recur in fiscal 1995.
ROYALTY INCOME. Royalty income reflected a $0.7 million increase to $13.5
million in fiscal 1995 from $12.8 million in fiscal 1994. Prior to the
acquisition of the Acquired Trademarks, the Company's accounting policy with
respect to royalty income from licensed products was to net that portion of
royalty income required to be paid over to the former owner of the Acquired
Trademarks against royalty income. Consequently, by adding $1.8 million to the
fiscal 1994 royalty income to eliminate the effect of such deductions from
royalty income, royalty income decreased $1.1 million for the comparable
periods. For fiscal 1995, non-U.S. royalty income increased $1.1 million which
consisted of $1.0 million of higher royalties from Japanese manufacturers and
$0.1 million from manufacturers in other countries. U.S. royalty income
decreased $2.2 million consisting of (i) $1.2 million reduction due to a soft
footwear market coupled with the reduction by a mass merchant of purchases from
a Spalding licensee, (ii) $0.8 million decrease from terminating purchases of
mass merchandise golf clubs from a licensee to in-house production in fiscal
1995, (iii) $0.2 million decrease as Spalding transitions from current apparel
licensees to the new Sara Lee licensee and (iv) $0.3 million decrease in Evenflo
royalty income, which is partially offset by net increases in other domestic
licensees of $0.3 million.
39
<PAGE>
LITIGATION SETTLEMENT EXPENSE. In fiscal 1995 the Company incurred a
nonrecurring expense of $2.4 million to settle a dispute relating to
environmental cleanup costs of a manufacturing facility which the Company
disposed of in 1976.
INTEREST EXPENSE. Interest expense increased to $38.1 million for fiscal
1995 from $17.1 million for fiscal 1994, an increase of $21.0 million. The
increase was due to a higher average U.S. borrowing rate of 10.1% for fiscal
1995 versus 5.1% for fiscal 1994 and a higher average borrowing balance,
primarily attributable to debt incurred in connection with the purchase of the
Acquired Trademarks.
CURRENCY LOSS. Currency loss of $0.4 million in fiscal 1995 was primarily
due to a $1.3 million loss caused by the devaluation of the Mexican peso, partly
offset by currency gains. In fiscal 1994, the Company had a currency gain of
$0.1 million. See "--Liquidity and Capital Resources."
NET EARNINGS. Net earnings of $11.0 million for fiscal 1995 were $7.0
million lower than the $18.0 million net earnings for fiscal 1994. The decline
in net earnings was a result of (i) significantly higher interest expense and
(ii) a nonrecurring expense for the settlement of a litigation dispute involving
an environmental matter of a former operation, partially offset by (i) increased
earnings from operations and (ii) lower taxes.
LIQUIDITY AND CAPITAL RESOURCES
HISTORICAL. Historically, the Company's primary sources of liquidity have
been cash from operations and borrowings under various credit facilities. The
Company's business is somewhat seasonal. For fiscal 1996, quarterly net sales as
a percentage of total sales were approximately 16%, 26%, 29% and 29%,
respectively, for the first through the fourth quarters of the fiscal year. In
addition, for fiscal 1996, quarterly income from operations as a percentage of
total income from operations was approximately (10)%, 26%, 67% and 17%,
respectively, for the first through fourth quarters of such fiscal year. Many
sporting goods marketed by Spalding, especially golf products, experience higher
levels of sales in the spring and summer months. The Company's need for cash
historically has been greater in its first and second quarters when cash
generated from operating activities coupled with drawdowns from bank lines have
been invested in receivables and inventories.
Operating activities generated $32.0 million, $16.6 million and $35.6
million in cash flow in each of the 1996, 1995 and 1994 fiscal years
respectively. The $15.4 million increase in cash flow from operating activities
in fiscal 1996 compared to fiscal 1995 was due to a $19.5 million decrease in
working capital offset by $4.1 million in lower net earnings (as adjusted for
depreciation and other non-cash expenses).
The reduction in cash flow from operating activities in the 1995 fiscal year
compared to the 1994 fiscal year of $19 million was primarily due to an $18.7
million increase in working capital as inventories increased to support higher
sales volumes as well as Spalding's entry into premium golf club lines, and
receivables increased due to strong 1995 fiscal year end sales activity and
Spalding incentive programs.
The primary sources of cash flows from financing activities are from
borrowings under credit agreements available to the Company and certain non-U.S.
subsidiaries and other indebtedness of the Company. The Company's principal
credit agreements prior to the Recapitalization were a $450 million maximum
credit commitment dated October 13, 1994 and an April 17, 1996 $40 million
maximum commitment interim loan agreement. Certain non-U.S. subsidiaries of the
Company utilize various non-U.S. bank financing arrangements with a maximum
aggregate availability of U.S. $46.8 million. The Company's other indebtedness
consists primarily of financing agreements with various government agencies to
finance the costs of a manufacturing facility and equipment with scheduled
repayments through the year 2010. As part of the Recapitalization, all
indebtedness except for the non-U.S. bank financing was repaid and terminated.
40
<PAGE>
Capital expenditures for fiscal 1996 were $19.5 million compared with $15.4
million in fiscal 1995 and $19.1 million in fiscal 1994. Evenflo expended $3.5
million in fiscal 1994 to complete the construction of a new manufacturing
facility in Canton, Georgia. All other capital expenditures were used primarily
for new product introductions and to upgrade existing production equipment. In
addition, on May 17, 1994, the Company purchased the Acquired Trademarks for
$176 million. Capital expenditures for fiscal 1996 include a significant element
for a program to expand golf ball production and such expansion will continue
into fiscal 1997, resulting in capital expenditures for fiscal 1997 being
approximately $3 million to $5 million above historical levels. See
"Business--Spalding--Manufacturing, Product Procurement and Raw Materials."
POST-RECAPITALIZATION. Following the Recapitalization, the Company's
principal sources of liquidity will be from cash flow generated from operations
and borrowing under the $250 million Revolving Credit Facility. The Company's
principal uses of liquidity will be to provide working capital, meet debt
service requirements and finance the Company's strategic plans.
EBITDA is included in this Prospectus as it is a basis upon which the
Company assesses its financial performance, and certain covenants in the
Company's borrowing arrangements are tied to similar measures. The following
sets forth certain information regarding the Company's EBITDA and other net cash
flow items for fiscal 1996:
<TABLE>
<CAPTION>
HISTORICAL CASH FLOW
NET CASH PROVIDED BY (USED IN)
------------------------------------
<S> <C> <C> <C> <C> <C>
OTHER ITEMS
AFFECTING
HISTORICAL HISTORICAL OPERATING INVESTING FINANCING
EBITDA EBITDA ACTIVITIES ACTIVITIES ACTIVITIES
---------- ----------- ----------- ---------- -----------
Spalding............................................ $ 63,692 $ 9,232 $ 44,438 $ (14,941) $ 2,423
Evenflo............................................. 23,525 3,642 32,478 (9,740) (4)
Corporate........................................... (41,552) 37,034 (44,892) 0 39,432
---------- ----------- ----------- ---------- -----------
Consolidated........................................ $ 45,665 $ 49,908 $ 32,024 $ (24,681) $ 41,851
---------- ----------- ----------- ---------- -----------
---------- ----------- ----------- ---------- -----------
</TABLE>
SPALDING. Spalding's EBITDA includes Etonic for the three months from the
July 1996 acquisition date. On a pro forma basis, had Etonic's operations been
included from October 1, 1995, Spalding's EBITDA would have been increased by
approximately $2.0 million. In addition, Spalding's EBITDA was adversely
affected by unusual costs relating to Etonic aggregating approximately $7.2
million due to purchase accounting effects attributable to Etonic's inventory
turnover (approximately $1.6 million), to charges related to consolidating
Etonic's administrative operations (approximately $4.8 million) and to
additional expenses related to the Etonic Acquisition (approximately $0.8
million).
EVENFLO. Evenflo's EBITDA was adversely affected by approximately $1.3
million of unusual costs to consolidate certain of its operations that were
previously managed separately. In addition, Evenflo experienced unusually high
bad debt write-offs of approximately $2.3 million as a result of the bankruptcy
of two of its customers.
CORPORATE. Corporate incurred unusual costs adversely affecting EBITDA
directly attributable to the Recapitalization and related to relocation of the
Company's corporate office. Such costs, aggregating approximately $35.6 million,
reduced corporate EBITDA as follows: (i) $20.8 million related to the S&E
Management Stock Purchase Plan; (ii) $5.4 million related to a transaction bonus
paid to the Company's management; (iii) $7.7 million in fees and other expenses
of the Recapitalization; (iv) $1.4 million relating to services provided by the
executives of Abarco that will be discontinued after the Recapitalization and
(v) $0.3 million of costs related to the relocation of the corporate office. In
addition, corporate also incurred other unusual costs (including management fees
and other expenses on behalf of Abarco) aggregating approximately $1.4 million.
Of the aforementioned items approximately $35.3 million have
41
<PAGE>
been reflected in the pro forma financial statements. Beginning in 1997
corporate will pay KKR an annual management fee of $1.0 million.
As a result of the interest expense that will be recorded in future periods
from the Financings, the Company may incur net losses for a period of time.
However, the Company does not believe that such net losses will impair its
ability to service its debt on a current basis.
The Financings include (i) $650 million under the Credit Facilities
comprised of a $400 million Term Loan Facility and a $250 million Revolving
Credit Facility, (ii) $200 million of Notes, (iii) $150 million of Preferred
Stock, and (iv) the $221 million Equity Investment. The proceeds from the Credit
Facilities, Notes, Preferred Stock and Equity Investment were used to effect the
Recapitalization and pay fees and expenses in connection therewith. At September
30, 1996, after giving effect to the Recapitalization, the Financings and the
Etonic Acquisition, the Company has borrowed the entire $400 million under the
Term Loan Facility and $25.8 million of the Revolving Credit Loans. On October
1, 1996 the $25.8 million of Revolving Credit Loans was repaid leaving an
additional availability of $168 million under the Revolving Credit Facility
(reduced to reflect $82 million of outstanding letters of credit and bankers'
acceptances).
The $400 million Term Loan Facility consists of (i) $175 million seven year
Term Loan A, (ii) $87.5 million eight year Term Loan B, (iii) $87.5 million nine
year Term Loan C and (iv) $50 million nine and one half year Term Loan D. These
Term Loans will amortize as follows:
<TABLE>
<CAPTION>
TERM TERM TERM TERM
YEAR LOAN A LOAN B LOAN C LOAN D
- -------------------------------------------------------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
(DOLLARS IN MILLIONS)
1....................................................... $ 0.0 $ 0.0 $ 0.0 $ 0.0
2....................................................... 15.0 1.0 1.0 0.5
3....................................................... 25.0 1.0 1.0 0.5
4....................................................... 25.0 1.0 1.0 0.5
5....................................................... 30.0 1.0 1.0 0.5
6....................................................... 30.0 1.0 1.0 0.5
7....................................................... 50.0 1.0 1.0 0.5
8....................................................... 81.5 1.0 0.5
9....................................................... 80.5 0.5
9.5..................................................... 46.0
--------- ----- ----- -----
$ 175.0 $ 87.5 $ 87.5 $ 50.0
--------- ----- ----- -----
--------- ----- ----- -----
</TABLE>
The Term Loan Facility is also subject to mandatory prepayment with the
proceeds of certain asset sales and certain debt offerings and a portion of
excess cash flow (as defined in the Credit Facilities). The Revolving Credit
Facility will terminate seven years after the date of the Recapitalization.
The Old Notes were issued in an aggregate amount equal to $200 million in
principal amount with cash interest payable semianually in arrears and a
maturity ten years from the date of issuance. See "Description of the Exchange
Notes--Principal, Maturity and Interest".
The Preferred Stock was issued with a $150 million aggregate liquidation
preference and has a required redemption twelve years after the date of
issuance. The Preferred Stock does not pay cash dividends. See "Description of
Preferred Stock."
CURRENCY HEDGING. The Company uses forward exchange contracts to hedge up to
six month transaction exposures from U.S. dollar purchases made by its non-U.S.
operations.
INFLATION
Inflation has not been material to the Company's operations within the
periods presented.
42
<PAGE>
BUSINESS
GENERAL
The Company is a leading global marketer, manufacturer and licensor of
branded consumer products serving the golf, sporting goods and infant and
juvenile product markets. Spalding is one of the most recognized consumer
product companies serving the sporting goods industry, and in 1995, sold more
golf balls, basketballs and softballs than any other company in the U.S. Evenflo
is the largest domestic manufacturer of juvenile car seats, juvenile stationary
activity products and breastfeeding products and is widely recognized by new
mothers for high quality, safety-tested infant and juvenile products. The
Company markets its products in over 100 countries and had pro forma net sales
of $732 million in fiscal 1996.
Spalding was founded in 1876 by Hall of Fame baseball pitcher Albert G.
Spalding and is one of the oldest, largest and best-known sporting goods
companies in the world. Spalding produced the first official major league
baseball in 1876 and the first basketballs and volleyballs in the 1890's.
Spalding has a leading market position in these product lines today and is
currently the exclusive supplier of the official NBA basketball and American
Volleyball Association ("AVA") volleyball. Additional early achievements were
the first U.S.-made footballs, golf clubs, golf balls, tennis rackets and tennis
balls. Spalding introduced the first "dimpled" golf ball in the United States in
1908; the first two-piece, solid golf ball in 1966, which today is the most
commonly played type of ball; and the SURLYN cut-resistant golf ball cover in
1971. More recently, Spalding introduced the TOP-FLITE STRATA TOUR golf ball, a
premium ball that uses a patented multi-layer core and ZS BALATA cover, the
first oversized golf ball, sold under the TOP-FLITE MAGNA brand name, the
patented TOP-FLITE TOUR golf club, the titanium TOP-FLITE TOUR irons, the MUSCLE
graphite shaft and the ZK-COMPOSITE basketball.
Evenflo was established in 1920, and its early successes came from the
development in 1935 of the modern nursing bottle nipple, which is held in place
with a screw-on bottle cap, versus the then-standard nipples which were
stretched over the bottle top. Evenflo has since developed a large number of
innovative infant feeding products, including the first fully transparent baby
bottle, the first decorated nursers, the first convertible (infant to toddler)
car seat to pass applicable federal testing standards, and the first juvenile
stationary activity product. Evenflo seeks to distinguish itself from its
competitors by continually developing innovative, high quality products and
offering them at competitive prices.
The Company has its principal executive office at 601 South Harbour Island
Boulevard, Suite 200, Tampa, Florida 33602-3141. The Company's telephone number
is (813) 204-5200.
COMPETITIVE STRENGTHS
SPALDING
LEADING MARKET SHARE IN KEY PRODUCT AREAS. In 1995, Spalding was the U.S.
market share leader in golf balls (35% market share in units), basketballs (48%
market share in net sales), and softballs (27% market share in net sales). In
1995, Spalding held the leading U.S. market share position in products that
generated 60% of its pro forma net sales. Spalding sold approximately 25 million
dozen golf balls in fiscal 1995, approximately 30% more (by units) than its
nearest competitor. The Company believes that TOP-FLITE is the most played golf
ball in the world. By leveraging its strong market position in core product
lines, Spalding is able to increase net sales and profit margins by introducing
new lines of related products, such as TOP-FLITE TOUR golf clubs and TOP-FLITE
STRATA TOUR golf balls, or line extensions in existing products, such as
ZK-COMPOSITE basketballs and volleyballs.
STRONG BRAND IDENTITY. Spalding enjoys a 91% brand awareness among sports
participants in the U.S. due to its 120-year tradition of developing and
manufacturing high quality sporting goods products. The
43
<PAGE>
Company believes that the NBA's exclusive endorsement of Spalding basketballs
since 1983, along with the endorsement of Spalding products by professional
athletes such as Lee Trevino, Mark O'Meara, Payne Stewart, Craig Stadler, D.A.
Weibring, Bill Glasson, Hakeem Olajuwon, Shaquille O'Neal, Rebecca Lobo and Orel
Hershiser, has contributed to Spalding's high level of domestic and
international brand awareness and strong market positions. Spalding pursues
domestic and international growth through new product introductions, line
extensions and licensing arrangements under its well established brand names,
including SPALDING, TOP-FLITE, ETONIC and DUDLEY. In addition, Spalding's strong
brand identity in its key product areas increases licensing opportunities for
apparel, footwear and other products. Sales of licensed Spalding products
totaled approximately $344 million in fiscal 1996, up from approximately $241
million in fiscal 1992, a compound annual growth of 9%. Spalding realized
royalty income from such licensed sales of $14 million in fiscal 1996.
EMPHASIS ON PRODUCT DEVELOPMENT AND INNOVATION. In recent years, the
Company has derived a significant percentage of its net sales from new product
introductions and line extensions. For fiscal 1996, 33% of Spalding's net sales
came from new products and line extensions introduced during fiscal 1996.
Spalding currently holds more than 128 U.S. patents, 55 of them in golf ball
technology alone. Spalding introduced the first dimpled golf ball in the U.S.,
invented the first two piece golf ball, developed and patented the blended
SURLYN cut-resistant golf ball cover and in May 1996 introduced the TOP-FLITE
STRATA TOUR, Spalding's latest product offering in the premium golf ball market.
In addition, Spalding has recently introduced one of the first titanium irons in
the market, and the popularity of Spalding's patented ZK-COMPOSITE materials for
basketballs and volleyballs has contributed to Spalding's success in both of
these markets.
LOW COST PRODUCER. Spalding is the largest golf ball manufacturer in the
U.S. and, as a result of its highly automated manufacturing process and focus on
improving efficiency, believes it is one of the lowest cost golf balls producers
in the world. Since 1992, Spalding has reduced costs per unit by 6%, reduced
average per ball production time from eight days to less than 30 hours and
increased its production capacity by approximately 45%, while improving product
quality levels.
QUALITY CUSTOMER SERVICE AND SUPPORT. Spalding believes that quality
customer service is a critical factor for success in the branded consumer
products market. Spalding has developed a highly integrated, on-line software
system which allows Spalding to expedite order entry, respond rapidly to retail
customer questions regarding product specifications and custom orders and direct
consumers to convenient retail locations that stock Spalding products. In
response to the growing need to assist retailers with their efforts to improve
purchasing efficiencies, Spalding offers customized computer-to-computer order
entry, just-in-time inventory control and other specialized services.
EVENFLO
STRONG MARKET SHARE IN KEY PRODUCT AREAS. In 1995, Evenflo was the U.S.
market leader (by net sales) in juvenile car seats (35% market share), juvenile
stationary activity products (in excess of 50% market share) and breastfeeding
products (50% market share). In 1995, Evenflo held leading market share
positions in products that generated over 55% of its net sales. In 1995, Evenflo
had one of the leading domestic market positions (by net sales) in play yards
(27% market share) and reusable nursing systems (24% market share). Evenflo
believes that its strong market shares are attributable to its design of safety-
tested products that appeal to parents' desires for fashionable products that
add convenience to the child care process. The breadth of Evenflo's product line
permits it to compete effectively in international markets and Evenflo has
significant net sales in certain international markets.
STRONG BRAND IDENTITY. With a strong brand awareness among new mothers in
the U.S., Evenflo is one of the most widely recognized names in the infant and
juvenile products industry. Evenflo believes that its long history of developing
safety-tested, innovative products (Evenflo introduced the first nursing bottle
system in 1935) is responsible for the high levels of brand loyalty achieved by
its products. In addition, the
44
<PAGE>
strength of Evenflo products in the car seat and high chair markets which are
"core" products (required products for most families with infants and juveniles)
contributes to customers recognizing Evenflo as a brand name associated with
high quality consumer products. Evenflo is able to introduce new lines and
related products, such as Evenflo's car seat/stroller combination, or product
innovations, such as the stationary EXERSAUCER, by leveraging its strong brand
name awareness.
EMPHASIS ON INNOVATION AND PRODUCT DEVELOPMENT AND SAFETY TESTING. Evenflo
has developed a number of innovative infant and juvenile products, including the
first fully transparent baby bottle, the first decorated nurser, the first
convertible car seat to pass applicable Federal testing standards, and the first
juvenile stationary activity product. In 1994, Evenflo successfully introduced
the stationary EXERSAUCER infant exerciser as a safer alternative to infant
walkers. Evenflo's most recent car seat offering, the ON MY WAY introduced in
1994, with its ergonomically correct CARRY RIGHT handle, has gained a leading
market share in the infant car seat segment. By designing a car seat that
attaches to a stroller to form the new ON MY WAY TRAVEL SYSTEM, Evenflo has
opened incremental growth opportunities in strollers. Each new product Evenflo
developes is subjected to extensive evaluation to ensure it meets Evenflo's
standards for quality and safety.
QUALITY CUSTOMER SERVICE AND SUPPORT. Evenflo believes that effective
customer service is essential to maintaining the brand loyalty of new parents,
grandparents and other purchasers of infant and juvenile products. Evenflo has
established toll free customer service numbers for consumers with questions
relating to Evenflo products. Like Spalding, Evenflo offers customized
computer-to-computer order entry, just-in-time inventory control and other
specialized services to its customers.
BUSINESS STRATEGY
SPALDING
Spalding's objective is to be a leading worldwide supplier of high quality
sporting goods products serving the needs of sports participants of all skill
levels. Spalding seeks to achieve this objective through the following
strategies, as well as by growing through selective acquisitions:
INCREASE MARKET SHARE IN GOLF PRODUCTS. Spalding intends to increase market
share in each golf product market segment, particularly the premium golf market,
by pursuing the following strategies:
- INTRODUCING FREQUENT IMPROVEMENTS IN GOLF BALL TECHNOLOGY. Spalding's
introduction of the TOP-FLITE STRATA TOUR golf ball marks the fourth
consecutive year in which Spalding has introduced a new line of advanced
performance golf balls. With its patented multi-layer core and ZS BALATA
cover, the TOP-FLITE STRATA TOUR outperforms other premium grade golf
balls in distance and spin comparisons. The TOP-FLITE STRATA TOUR has been
one of the most successful product launches in the Company's history and
has increased Spalding's sales through the attractive on-course pro shop
channel. Through the introduction of the TOP-FLITE STRATA TOUR, along with
further enhancements to Spalding's high volume TOP-FLITE XL and TOP-FLITE
MAGNA brands, Spalding intends to expand its presence in the premium golf
ball market while maintaining its unit leadership in the mid-priced golf
ball market.
- INCREASING SALES OF PREMIUM GOLF CLUBS. Spalding entered the premium golf
club market in 1994 to capitalize on the strength of the TOP-FLITE name
and establish TOP-FLITE as a major brand in the $1.2 billion U.S.
wholesale golf club market, which is highly fragmented and has grown 13%
annually over the past five years. Since the beginning of the 1996 golf
season, TOP-FLITE TOUR irons have been one of the most played irons on the
PGA Senior Tour. In addition, Spalding's U.S. premium golf club sales have
increased to $21 million for fiscal 1996 from $10 million for fiscal 1995.
Spalding
45
<PAGE>
recently introduced its first titanium TOP-FLITE TOUR irons and its new
MUSCLE graphite shaft which further improves the Company's position in the
premium golf club market.
- EXPANDING AND UPGRADING ITS LINE OF GOLF ACCESSORIES. The acquisition of
Etonic, the second best selling golf shoe brand in the U.S., extends the
Company's golf franchise to golf shoes and gloves, as well as enhances the
Company's distribution into on-course golf pro shops and high-end golf
retailers. Etonic currently offers over 70 styles of golf shoes which are
endorsed by several of the leading PGA tour professionals, including Phil
Mickelson. The Company intends to capitalize on the acquisition of Etonic
by introducing new shoe and glove products which complement the TOP-FLITE
line of equipment and accessories.
CONTINUE NEW SPORTING GOODS PRODUCT INNOVATIONS AND INTRODUCTIONS. Spalding
intends to expand on its leading market share in basketballs, softballs and
volleyballs by continuing to develop new products in related categories.
Spalding will continue to introduce high end, innovative products for its
sporting goods segment, such as a new dimpled softball, a "soft-touch"
volleyball and premium soccer balls. Spalding also intends to continue
developing new high performance products for the increasing number of women
participating in competitive sports and the growing international market for
sporting goods. In addition, Spalding intends to utilize its Warner Bros.
license for LOONEY TUNES to become a leader in the growing licensed character
segment of the athletic products industry.
GROW INTERNATIONAL SALES. Although Spalding already markets its products in
over 95 countries, management believes that significant additional opportunities
exist to increase international sales, especially in Latin America, China, and
other nations in Southeast Asia. In addition to new geographic opportunities,
Spalding believes that significant international opportunities are available for
growth from both existing product lines as well as new product introductions due
to the growing international popularity of golf, basketball and volleyball.
Spalding believes that its brand name recognition in the U.S. coupled with
important product endorsements, particularly the NBA and touring golf
professionals, will allow Spalding to continue to expand in international
markets.
SELECTIVELY EXPAND LICENSING PROGRAM. Spalding intends to selectively
expand its brand name to additional product categories and new markets,
particularly outside the U.S. Spalding is currently one of the world's leading
sports brand licensors with over 100 worldwide licenses. The SPALDING and
TOP-FLITE brand names are licensed in over 45 product categories, including the
Hakeem Olajuwon shoe line by Mercury International Trading Corp., one of the
largest shoe manufacturers in the world, and an apparel line by Mitsubishi
Corporation in Japan. Spalding also recently entered into a 15-year exclusive
U.S. licensing agreement with the Sara Lee Corp., one of the largest apparel
manufacturers in the U.S. and the maker of Champion, Coach, Hanes and L'eggs
products, for apparel products in the mid-price range.
EVENFLO
Evenflo's objective is to be a worldwide leader in serving the infant and
juvenile hardgoods products markets with high quality products and excellence in
customer service. Evenflo seeks to achieve this objective by pursuing the
following strategies, as well as by growing through selective acquisitions:
INCREASE MARKET SHARE THROUGH NEW PRODUCT INNOVATIONS. Evenflo expects to
introduce numerous new products in its juvenile furniture and infant feeding
markets in the next twelve months. Evenflo is the leading seller of infant and
juvenile car seats in the U.S. and will seek to increase its market share with
the recently launched MEDALLION, a high-end convertible (infant to toddler) car
seat. Evenflo intends to use its recent success with the ON MY WAY TRAVEL
SYSTEM, a combination car seat and stroller system, to increase sales of
strollers. Evenflo intends to introduce products similar to its multi-functional
PHASES high chair, which was introduced in late 1995 and converts from infant
feeding seat to high chair to booster seat and then to a play table and chair.
The success of the PHASES high chair has increased Evenflo's share (by net
46
<PAGE>
sales) of the U.S. high chair market from approximately 5% in 1994 to 13% for
the six months ended June 30, 1996.
GROW INTERNATIONAL SALES. Evenflo's international sales have grown at a
compound annual rate of more than 8% from fiscal 1992 to fiscal 1996. Evenflo
intends to continue to increase sales in international markets, which are highly
fragmented with many competitors that generally do not have the brand name,
breadth of product offerings or economies of scale possessed by Evenflo. In
addition, Evenflo expects that its strength in car seats will be an advantage in
certain foreign markets such as Korea and Singapore which have recently enacted
mandatory child restraint laws. To effectively compete in international markets,
Evenflo develops product, packaging and marketing strategies specific to
targeted markets in conjunction with key foreign distributors.
SELECTIVELY EXPAND LICENSED PRODUCT OFFERING. Evenflo anticipates that
sales of products featuring popular, licensed cartoon characters will provide
increased revenue opportunities as consumers purchase additional products based
upon the appeal of the licensed character. Evenflo has been a licensee of DISNEY
BABIES for feeding products since 1985. In addition, Evenflo introduced a number
of new products featuring licensed characters, such as PETER RABBIT & FRIENDS,
PADDINGTON BEAR and PRECIOUS MOMENTS during fiscal 1996. Evenflo is evaluating
other licensed characters for use with both its furniture and feeding product
lines.
SPALDING
Spalding, with pro forma net sales of $495 million in fiscal 1996, is a
leader in the $2.4 billion U.S. wholesale golf industry and in the $57 billion
U.S. wholesale sporting goods industry, with some of the most widely recognized
branded consumer product names such as SPALDING, TOP-FLITE, ETONIC and DUDLEY.
Spalding's brand names are currently featured on over 2,000 products with an
emphasis on three primary categories: (i) golf products, (ii) products for other
sporting goods segments, such as basketball, diamond sports (baseball and
softball), volleyball and soccer and (iii) licensed athletic products, including
apparel and footwear. To broaden Spalding's line of golf products, in July 1996
the Company acquired Etonic's line of golf accessories, including the second
best selling golf shoe brand in the U.S., golf gloves and apparel. Spalding's
pro forma international sales have grown to $153 million, or 31% of Spalding's
pro forma net sales in fiscal 1996, due in large part to the popularity of golf,
basketball and volleyball outside the United States.
Spalding had leading market shares in 1995 in many of its key products areas
as demonstrated by the following table:
<TABLE>
<CAPTION>
PRODUCT U.S. MARKET SHARE U.S. MARKET RANK
- ------------- ----------------- ----------------
<S> <C> <C>
Golf Balls 35% #1
Basketballs 48% #1
Softballs 27% #1
</TABLE>
GOLF PRODUCTS
GENERAL. Golf products are Spalding's largest product category, generating
worldwide pro forma net sales of more than $333 million in fiscal 1996, or
approximately 67% of Spalding's total pro forma net sales. Spalding is the U.S.
market share leader in the manufacture and marketing of golf balls, primarily
under its TOP-FLITE brand name, as well as an industry leader in introducing
innovative new golf products. Spalding offers a comprehensive array of golf
clubs, golf bags, golf shoes and other golf accessories. In addition to golf
balls, Spalding's golf products are endorsed by leading golf professionals
including Lee Trevino, Payne Stewart, Bill Glasson, Craig Stadler, Mark O'Meara
and D.A. Weibring. Spalding golf club products are played worldwide by over 100
touring golf professionals and many PGA club professionals.
47
<PAGE>
The golf industry has been growing both in the United States and worldwide,
particularly among younger players, seniors and women. In 1995, according to the
National Golf Foundation ("NGF"), approximately 25 million people played
approximately 490 million rounds of golf in the United States, and approximately
two million people are estimated to have played golf for the first time. In
addition, in the United States, the total number of golf courses increased from
13,004 in 1991 to over 15,390 in 1995. While the number of golfers (defined by
the NGF as an individual age 12 or older who played at least one round of golf)
and rounds played increased only moderately from 1986 through 1994, total
spending by golfers increased by 8.6% compounded annually over the same period.
For 1995, total wholesale expenditures on all golf products were estimated at
over $4.5 billion worldwide and at over $2.4 billion in the United States.
The Company believes that the following industry trends will favorably
impact the number of golfers, rounds of golf played and number of golf
facilities in future years:
- An aging U.S. population, with more retired individuals, is expected to
provide increasing demand for golf. The NGF estimates that approximately
25% of U.S. golfers in 1995 were over the age of fifty and that these
golfers played a disproportionate 47% of the total rounds played.
- Beginning golfers tend to be young and relatively affluent. A 1995 NGF
report estimates that almost 56% of beginning golfers are under age 30,
61% are from households where annual income exceeds $40,000, and, of that
latter percentage, 21% are from households where annual income exceeds
$75,000.
- During 1995, 309 golf courses opened in the United States, which
represents a 33% increase over golf course openings in 1994. From 1991 to
1995 the number of golf courses open for play increased by approximately
18%. According to the NGF, at year end 1995, over 800 golf courses were
under construction, with approximately 500 golf courses scheduled to open
during 1996.
The Company believes that numerous golf markets are developing worldwide. In
addition to the popularity of golf in Australia, Japan and New Zealand, the
Company believes that Asian markets, such as China, Hong Kong, India, Korea,
Malaysia and Thailand, and the South American markets, may experience
significant growth in numbers of players and rounds played. Spalding believes
that Top-Flite's strong brand name and experience in international markets will
be a competitive advantage in these emerging markets.
GOLF BALLS. Spalding was the leading manufacturer of golf balls in the $580
million U.S. wholesale market in 1995 and with worldwide net sales in fiscal
1996 of $214 million is a leader in the global golf ball market. Spalding
currently markets its line of golf balls under numerous names including
TOP-FLITE STRATA TOUR, TOP-FLITE TOUR, TOP-FLITE MAGNA, TOP-FLITE XL, TOP-FLITE
Z-BALATA and FLYING LADY-REGISTERED TRADEMARK-. Spalding believes that its
family of Top-Flite golf balls has sold more golf balls than any other family of
golf balls in the world. Spalding introduced a number of golf ball line
extensions in fiscal 1996, including the new TOP-FLITE STRATA TOUR, TOP-FLITE
MAGNA EX, TOP-FLITE HOT XL in a 15-pack, TOP-FLITE Z-BALATA, TOP-FLITE TOUR
SD-TM- and TOP-FLITE XL 90/100 balls, as well as improved range balls. Spalding
focuses its marketing efforts on pro shops, off-course golf specialty shops,
sporting goods stores and other retail outlets where the Top-Flite name is
widely recognized. In addition, the Company seeks to increase sales to women,
who have represented the fastest growing segment of the golf market.
Spalding believes that the golf ball market is highly receptive to new
product development, and therefore, Spalding seeks to lead the industry in
product innovation. For example, Spalding introduced the first two-piece golf
ball in 1966 and the blended SURLYN golf ball cover in 1971, which virtually
eliminated cutting of the cover. In 1986, Spalding introduced the TOUR EDITION
golf ball, the first two-piece golf ball to be accepted on the professional
tour. In 1993, Spalding introduced the first successful oversized golf ball,
marketed under the TOP-FLITE MAGNA name. Spalding recently introduced the
TOP-FLITE STRATA TOUR, an innovative design that uses a patented, multi-layered
core and a patented cover to improve performance. Through its research and
development efforts, Spalding has successfully introduced a new line of advanced
48
<PAGE>
performance golf balls in each of the last four years (the TOP-FLITE STRATA
TOUR, TOP-FLITE Z-BALATA, TOP-FLITE MAGNA and TOP-FLITE TOUR brands). Spalding
also customizes its golf balls with customers' names or logos (a market which
management believes to represent 20% of the total golf ball market).
GOLF CLUBS. In fiscal 1996, sales of Spalding golf clubs generated $72
million in net sales. In 1995, U.S. wholesale sales of golf clubs were estimated
at $1.2 billion. Spalding offers a wide range of golf clubs for the recreational
and professional golfer at various price points marketed primarily under the
TOP-FLITE TOUR, TOP-FLITE MAGNA, EXECUTIVE-REGISTERED TRADEMARK- and TOP-FLITE
INTIMIDATOR brand names. Spalding formed a new division in 1995, the Top-Flite
Golf Club Company, to capitalize on the strength of the Top-Flite brand name and
establish Top-Flite as a major brand in the golf club market. Since the
beginning of the 1996 golf season, TOP-FLITE TOUR irons have been extensively
used on the Senior Tour and Terry Dill, who uses the TOP FLITE INTIMIDATOR
driver exclusively, has earned the number one ranking for distance drivers on
the Senior Tour as of September 30, 1996. In addition, professional players that
play TOP-FLITE clubs have eight victories in PGA sponsored events in 1996. The
Company believes that the increased exposure of TOP-FLITE golf products on
professional tours has resulted in an increase in demand for TOP-FLITE golf club
products. U.S. net sales of professional quality TOP-FLITE golf clubs have
increased 118% during fiscal 1996 over fiscal 1995.
Spalding irons incorporate technological and design features, such as
perimeter weighting, graphite shafts, graphite and titanium head inserts and
Top-Flite's patented stabilizer bar design. Through the use of computer-aided
design and modeling software, Spalding is continually developing new golf club
features. Spalding recently announced the introduction of its first titanium
TOP-FLITE TOUR irons and its new MUSCLE graphite shaft.
Spalding's strategy is to design golf clubs for men, women and seniors of
all ability levels. Spalding pursues a pricing strategy that covers all price
points, using its TOP-FLITE TOUR, TOP-FLITE MAGNA and SPALDING brand names to
satisfy the high performance, recreational and value segments of the market,
respectively.
GOLF ACCESSORIES. Spalding also designs and markets golf accessories,
including golf bags, club covers, tees, towels, sports luggage and hats. The
Etonic Acquisition reflects Spalding's strategy to expand and upgrade its line
of golf accessories by expanding Spalding's traditional offerings of golf
products to include Etonic golf shoes (which are ranked second in domestic
market share), Etonic golf gloves and Etonic golfwear. On a pro forma basis to
reflect the Etonic Acquisition, Spalding had fiscal 1996 net sales of $48
million of golf accessories. In 1995, the U.S. wholesale market for golf
accessories was approximately $480 million.
SPORTING GOODS PRODUCTS
The sporting goods products segment includes basketballs, a broad line of
softball and baseball products, volleyballs, soccer balls and other sports
products. Spalding's sporting goods products (other than golf) accounted for
$162 million of pro forma net sales in fiscal 1996, representing Spalding's
second largest product category with approximately 33% of total Spalding pro
forma net sales.
BASKETBALLS. Spalding produced the first basketball in 1894 and is the
market share leader in the estimated $98 million U.S. market for basketballs,
with $51 million of net sales in the U.S. in fiscal 1996. From fiscal 1992 to
fiscal 1996, Spalding's U.S. sales of basketballs increased approximately 71%.
Through its license which extends through January 1997, Spalding is the
exclusive official basketball of the NBA and has used this endorsement, as well
as the endorsement of professional players such as Hakeem Olajuwon and Shaquille
O'Neal, to gain worldwide market share in this product category.
The worldwide market for basketballs has grown significantly over the past
several years and the total number of U.S. participants has increased from an
estimated 39 million in 1991 to 47 million in 1995. A significant trend has been
the increase in basketball awareness and participation internationally,
stimulated by the Olympics and the expansion of NBA television broadcasts.
49
<PAGE>
Spalding continues to develop its leadership in the basketball market
through innovative product design such as the ZI/O-TM- (a new indoor/outdoor
basketball design). In 1991, Spalding introduced its ZK-COMPOSITE basketball,
which utilizes new composite materials technology and offers excellent
performance characteristics at lower price points than leather balls. The
ZK-COMPOSITE basketball is the official ball of the Continental Basketball
Association ("CBA"), USA Basketball, the Big East, the Big 12, National
Invitational Tournament ("NIT") and the Atlantic Coast Conference Basketball
Tournaments and many college teams. Internationally, the Spalding basketball is
the official basketball of professional leagues and national teams in more than
20 basketball markets, including Italy and France.
DIAMOND SPORTS PRODUCTS. Spalding is a leading worldwide supplier of a
broad line of softball and baseball products, including balls, bats, gloves,
bags and other accessories. Spalding generated $23 million in net sales from
diamond sports products in fiscal 1996. Total wholesale expenditures in the
United States on diamond sports products were an estimated $348 million in 1995.
Spalding's Dudley Division is the leading supplier of softballs in the
world. In 1995, the Company estimated that Dudley captured approximately 27% of
the U.S. market for softballs. Dudley markets its products under the DUDLEY,
THUNDER-REGISTERED TRADEMARK- and TOURNAMENT PLUS II-REGISTERED TRADEMARK-
names.
Spalding sells a broad line of baseball products worldwide under the
SPALDING and TOP-FLITE names. Spalding has concentrated its marketing and
product development efforts primarily on the glove category for the past five
years. Spalding plans to concentrate on the high performance bat market while
continuing aggressive growth in the glove category worldwide.
VOLLEYBALLS. Spalding produced the first volleyball in 1895 and today is a
leading provider of volleyballs in the U.S. Spalding markets volleyballs under
the SPALDING, TOP-FLITE and AVA-TM- names. Spalding's TOP-FLITE
18-REGISTERED TRADEMARK- is the official ball of the American Volleyball
Association (AVA) and the California Beach Volleyball Association. The Company
has entered into a commitment letter with the NCAA to be the sole supplier of
volleyballs to NCAA tournaments and to obtain the exclusive right to use the
NCAA logo on Spalding volleyballs. Spalding sells eleven varieties of
volleyballs, including a new line of volleyballs featuring ZK-COMPOSITE
technology.
The number of participants playing volleyball in the United States in 1995
was an estimated 41 million, with 13 million beach volleyball participants.
Total wholesale expenditures in the United States on volleyballs were an
estimated $82 million in 1995. Sales of volleyballs represent less than 10% of
the Company's consolidated revenues.
SOCCER BALLS. Spalding supplies top quality soccer balls for the U.S. and
international markets. Spalding markets its soccer balls primarily under the
Spalding name. Soccer has more participants and spectators than any other sport
in the world. The number of participants worldwide is estimated to be over 400
million. The Company estimates that there were approximately 17 million soccer
participants in the United States in 1995. Total wholesale expenditures in the
United States on soccer products, excluding footwear and apparel, were an
estimated $40 million in 1995. Sales of soccer balls, individually (and together
with volleyballs) represent less than 10% of the Company's consolidated
revenues.
OTHER SPORTS PRODUCTS. Spalding markets a number of other sporting goods
and sports related products serving tennis, racquetball, handball, football and
other sports activities. Pro forma net sales of such items totaled $62 million
in fiscal 1996.
50
<PAGE>
LICENSING
Spalding is one of the leading general sports brand licensors with over 100
worldwide licensees. In exchange for royalty fees, Spalding grants licensees the
exclusive right to use specified Spalding trademarks in product categories and
geographical areas where Spalding does not enjoy competitive advantages as a
manufacturer of sporting goods. The SPALDING and TOP-FLITE brand names, are
licensed in over 45 product categories, including the Hakeem Olajuwon shoe line
by Mercury International Trading Corp., one of the largest shoe manufacturers in
the world, and an apparel line by Mitsubishi Corporation in Japan. Other
Spalding licensed products include sportswear, footwear, sunglasses, luggage,
watches and camping equipment. Sales of licensed Spalding products totalled
approximately $344 million in fiscal 1996, up from approximately $241 million in
fiscal 1992, a compound annual growth rate of 9%. International sales of
licensed products increased from approximately $99 million in 1992 to $147
million in 1996, a compound annual growth rate of 10%. As a result of the strong
sales growth of its licensed products, Spalding realized income of $14 million
in fiscal 1996 from its licensing. Spalding also recently entered into a 15-year
exclusive U.S. licensing agreement with Sara Lee Corporation, one of the largest
apparel manufacturers in the United States and the maker of Champion, Coach,
Hanes and L'eggs products, for apparel products in the mid-priced range.
Spalding maintains quality control by inspecting licensed products to ensure
that the products bearing the SPALDING and TOP-FLITE trademarks meet Spalding's
quality standards. Spalding believes that selectively licensing its brand names
for use on quality products promotes greater consumer awareness of its name and
increases its visibility in the marketplace. Spalding expects continued growth
and market penetration through licensing of footwear, active apparel and
accessories for all sports.
INTERNATIONAL
Despite a decline in international sales in fiscal 1996, Spalding has
achieved substantial growth in markets outside the United States in recent
years. See "Management's Discussion and Analysis of Financial Conditions and
Results of Operations". Spalding sells or licenses its products in over 95
countries through 110 independent distributors and 11 wholly-owned foreign
subsidiaries in Australia, Canada, France, Germany, Italy, Japan, Mexico, New
Zealand, Spain, Sweden and the United Kingdom. Spalding's pro forma
international sales have grown from $119 million in fiscal 1991 to $153 million
in fiscal 1996. Spalding's pro forma international sales represented
approximately 31% of Spalding's worldwide pro forma sales in fiscal 1996. For
example, in 1995, Spalding entered into distribution agreements with a
Singapore-based distributor and retailer, and in China, Spalding entered into a
distribution and licensing agreement with Spalding's primary inflated ball
supplier for the past 20 years. This partner of Spalding has opened a Spalding
retail store in China and expects to open two additional stores by December
1996.
Spalding sold more than 5.6 million dozen golf balls outside the United
States in fiscal 1996. Spalding believes that it has substantial market share in
golf balls in Japan, the United Kingdom, Sweden, France, Italy, Spain, Canada
and Australia.
Basketball sales outside the United States have increased significantly in
recent years. Expanded coverage of NBA games outside the United States has
helped Spalding achieve a 28% annual increase in its international sales of
basketballs over the past five years.
Due to the growing international popularity of golf, basketball and
volleyball, Spalding believes that opportunities exist to significantly increase
its international sales. Spalding seeks to promote sales internationally by
committing resources to advertising and promotional activities such as
sponsorships of or participation in golf tours, street basketball tournaments
and other sporting events.
51
<PAGE>
SALES, MARKETING AND DISTRIBUTION
Spalding products are sold worldwide in over 95 countries through its direct
sales force of 136 employees and a network of approximately 110 independent
distributors and 35 sales representative agencies. Spalding also has
subsidiaries that engage principally in sales and distribution operations in
Australia, Canada, Japan, Mexico, New Zealand and throughout Europe. Spalding
sells its products directly to approximately 20,000 retailers, including pro
shops and ranges, off-course golf specialty shops, sporting goods stores and
mass merchants. The Company also markets to corporations for special events, the
military and warehouse clubs and generates sales from catalogs. Net sales to
Spalding's four largest customers constituted approximately 19% of Spalding's
total net sales in fiscal 1996. For fiscal 1995, net sales to Spalding's four
largest customers accounted for 22% of net sales. The decline in net sales
concentration for Spalding's four largest customers from fiscal 1995 to fiscal
1996 is primarily the result of a divestiture by one of such customers of a
sports retailer and seasonal fluctuations. No single customer accounted for more
than 10% of Spalding's worldwide net sales.
Spalding's products are endorsed by numerous professional athletes,
including golfers Lee Trevino, Mark O'Meara, D.A. Weibring, Bill Glasson, Payne
Stewart and Craig Stadler, basketball players Hakeem Olajuwon, Shaquille O'Neal
and Rebecca Lobo and baseball pitcher Orel Hershiser. Spalding's products also
carry endorsements from professional leagues, including the NBA, the CBA and the
AVA. Spalding believes that endorsements by professional athletes and
affiliations with sports organizations enhance Spalding's image and improve
sales of its products.
Spalding's golf marketing campaign incorporates all of its golf products,
including golf balls, golf clubs and golf accessories. Spalding's golf
advertising program is intended to develop TOP-FLITE as a global "megabrand" for
performance grade golf products. In 1996, Spalding has substantially expanded
its advertising campaign to include various commercials for its new TOP-FLITE
STRATA TOUR golf ball and its TOP-FLITE TOUR club line.
RESEARCH AND DEVELOPMENT
Spalding has invested approximately $26 million from 1991 through 1996 in
its research and development activities. The Spalding research and development
department has developed more than 128 U.S. patents, including 55 in golf ball
technology, and consists of more than 70 scientists, engineers and technicians.
Spalding introduced the first dimpled golf ball in the U.S., invented the first
two-piece golf ball, developed and patented the blended SURLYN cut-resistant
golf ball cover and in May 1996, introduced the TOP-FLITE STRATA TOUR,
Spalding's latest introduction in the premium golf ball market. In addition,
Spalding has recently introduced one of the first titanium irons in the market
and the popularity of Spalding's patented ZK-COMPOSITE materials for basketballs
and volleyballs has contributed to number one market shares in both of these
markets. At September 30, 1996, Spalding had 87 patents pending at the U.S.
Patent and Trademark Office.
MANUFACTURING, PRODUCT PROCUREMENT AND RAW MATERIALS
The manufacture of Spalding products involves a number of highly specialized
processes. Spalding manufactures golf balls and some softballs, assembles most
of its golf clubs, and finishes custom golf balls at its own facilities.
Spalding's primary manufacturing facility is located in Chicopee, Massachusetts
and comprises approximately 700,000 square feet of manufacturing, office and
distribution space. In 1991, the Chicopee plant was redesigned and renovated to
allow a more continuous and automated production process. In 1989 a new plant
located in Gloversville, New York became fully operational for golf ball
production. In 1994, a second plant was built in Gloversville, New York, and
golf club production was consolidated at such facility in 1994. Due to strong
golf ball sales, the Company is currently manufacturing golf balls at near
capacity levels and plans to make significant capital expenditures over the next
several years to increase capacity levels. See "Management's Discussion and
Analysis of Financial Condition and
52
<PAGE>
Results of Operations--Liquidity and Capital Resources." Spalding believes that
it is one of the lowest cost producers of golf balls in the world.
Spalding utilizes third party manufacturers, located primarily in China,
Thailand, Taiwan and other countries in Southeast Asia, to produce virtually all
of its non-golf ball, most of its softball products and golf shoes. Products
representing approximately 55% of Spalding's net sales in fiscal 1995 were
produced by such third-party manufacturers. No supplier accounted for products
representing more than 3% of Spalding's fiscal 1995 net sales. Spalding believes
it has alternative sources of supply for substantially all of the products
currently produced by third party manufacturers. See "Risk Factors--Dependence
on Foreign Manufacturing."
Sourced products are manufactured according to Spalding's strict quality
control specifications. To assure the quality of its sourced products, the
Company works closely with third-party manufacturers, emphasizing product
reliability and performance standards and strict quality controls to which all
producers must adhere. Spalding continually monitors its sourced products to
ensure that they meet Spalding's quality standards. Certain of Spalding's
third-party manufacturers produce only Spalding products. In addition, Spalding
jointly develops new products with certain of its suppliers as part of
Spalding's increasingly global product development efforts. Spalding maintains a
liaison office in Taiwan with a staff of 11 to assist in the development of new
products.
The principal raw materials used by Spalding in the manufacture of its
products include synthetic rubber, ionomers, metals, synthetic leathers,
composite materials and other chemical compounds, as well as plastic, paper and
cardboard in packaging. While all raw materials are purchased from outside
sources, Spalding is not dependent upon a single supplier in any of its
operations for any material essential to its business or not otherwise
commercially available to the Company. Spalding has not experienced, and does
not anticipate, any material shortages of sourced products or supplies used in
manufacturing. Certain materials used in the production of golf balls are
petroleum derivatives and are therefore sensitive to fluctuations in the price
of oil.
COMPETITION
The sporting goods industry is highly competitive. Spalding competes
primarily on the basis of product features, brand recognition, quality and
price. Spalding competes with numerous national and international companies
which manufacture and distribute sporting goods and related equipment and sports
apparel. Certain of Spalding's competitors offer types of sports equipment not
sold by Spalding. Some of Spalding's competitors are larger and have
substantially greater financial and other resources than the Company. Spalding's
principal competitor across numerous market segments is Wilson Sporting Goods
Co. (a subsidiary of Amer Group Ltd.). Spalding also competes in individual
market segments against other competitors, including Acushnet Company (a
subsidiary of American Brands, Inc., the producer of
Titleist-Registered Trademark-, Footjoy-Registered Trademark- and
Cobra-Registered Trademark- golf products), Callaway Golf Inc., Karsten
Manufacturing Corp. (producers of Ping-Registered Trademark- golf products),
Tommy Armour, Taylor Made (a subsidiary of Salomon S.A.), Rawlings Sporting
Goods Company, Inc. and Worth, Inc.
EVENFLO
Evenflo, with net sales of $237 million in fiscal 1996, is a leader in the
$1.9 billion U.S. market for juvenile and infant hardgood products, as well as a
market leader in such products in several international markets. Evenflo,
established in 1920, is one of the oldest and most recognized names in the
infant and juvenile products industry, with a 97% brand awareness for infant
feeding products among new mothers in the U.S. Evenflo brands, such as EVENFLO,
EXERSAUCER and ON MY WAY, currently appear on more than 400 products, with an
emphasis on two principal categories: (i) juvenile furniture, which includes car
seats, portable play yards, strollers, high chairs, cribs, activity products,
carriers and mattresses and (ii) infant feeding, which includes reusable and
disposable nurser systems, breastfeeding aids, oral development
53
<PAGE>
items, such as pacifiers, and other baby care accessories. Evenflo has
benefitted in recent years by capitalizing on favorable demographic trends in
the U.S. and abroad and due to the adoption of mandatory automobile child
restraint laws in certain international markets. Despite a decline in
international sales in fiscal 1996, Evenflo's international sales have grown to
$39 million, or 16% of Evenflo's net sales, in fiscal 1996. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
Evenflo has leading market shares (by dollars based on net sales in 1995) in
many of its key product areas as demonstrated by the following table.
<TABLE>
<CAPTION>
PRODUCT U.S. MARKET SHARE U.S. MARKET RANK
- ---------------------------------------------------------------------------- --------------------- ---------------------
<S> <C> <C>
Juvenile Car Seats.......................................................... 35% # 1
Stationary Activity Products (1)............................................ 76% # 1
Breastfeeding Products...................................................... 50% # 1
Play Yards.................................................................. 27% # 2
Reusable Nursing Systems.................................................... 24% # 2
</TABLE>
- ------------------------
(1) For the nine months ended June 30, 1996, the Company believes its market
share for stationary activity products is over approximately 50% due to the
entry of new competitors in the market created by Evenflo's introduction of
the EXERSAUCER.
JUVENILE FURNITURE PRODUCTS
Evenflo is a leader in the $1.25 billion U.S. market for juvenile furniture
products. Furniture operations generated fiscal 1996 sales of $180 million, or
76% of Evenflo's total net sales. In 1995, Evenflo maintained its number one
position in juvenile car seats and juvenile stationary activity products, as
well as a strong position in high chairs, play yards, infant beds and
mattresses.
CAR SEATS. Evenflo sold more juvenile car seats in the U.S. in 1995 than any
other company. Evenflo had fiscal 1996 worldwide net sales of $90 million in the
car seat market, including $12 million of net sales in international markets.
The U.S. juvenile car seat market was estimated at $189 million in 1995 and
consists of infant car seats, convertible car seats and booster car seats. For
the first six months of 1996, Evenflo was number one in the overall juvenile car
seat market (by dollar sales) at 37%, with 55% market share in infant car seats
and 43% market share in convertible (infant to toddler) car seats (the Company
has a limited product offering in the low margin booster seat market).
Evenflo markets its juvenile car seats under the brand names MEDALLION,
ULTARA I, JOY RIDE-Registered Trademark-, TRAVEL TANDEM,
TROOPER-Registered Trademark-, CHAMPION, SCOUT-TM-, ON MY WAY and SIDEKICK-TM-.
Evenflo's car seats offer features such as detachable bases, five-point harness
systems, adjustable shields, removable pad and pillow inserts and the exclusive
CARRY RIGHT handle which incorporates a uniquely curved shape designed for ease
of carrying.
EXERCISE/ACTIVITY PRODUCTS. Evenflo has emerged as one of the primary
participants in the U.S. market for exercise/activity products. This market,
which includes juvenile jumpers, walkers and stationary activity products,
represented sales of $69 million in 1995. Evenflo generated fiscal 1995 net
sales in this market of $24 million in the U.S., capturing 35% of the overall
market and fiscal 1996 net sales of $23 million. Evenflo's strong market
position is the result of the introduction of its EXERSAUCER, a preferred
alternative to traditional walkers. The EXERSAUCER offers a new exercise and
entertainment format which enables a child to play, spin, rock and bounce in
place, making the product a desirable alternative to existing walkers and baby
exercisers. The EXERSAUCER features a patented saucer base which provides
rocking action in all directions and stationary feet which pull down to stop the
rocking action when desired. In 1995, Evenflo expanded its EXERSAUCER product
line to include both lower and higher priced units as a means of continuing to
lead the category. In addition, Evenflo offers a line of doorway jumpers for
infants.
54
<PAGE>
STROLLERS. The U.S. market for strollers was estimated at $169 million in
fiscal 1995, the largest hard goods market in the industry. Evenflo reentered
the stroller market in 1996, generating $13 million of stroller sales in fiscal
1996. Evenflo believes that its ON MY WAY TRAVEL SYSTEM, which is designed to
attach the ON MY WAY car seat into a stroller to form a car seat/stroller
combination product, presents Evenflo with a substantial opportunity because it
can leverage its leadership position in car seats into a competitive advantage
in strollers.
OTHER JUVENILE FURNITURE PRODUCTS. During fiscal 1996, Evenflo generated
$16 million in net sales of portable play yards in the U.S. Evenflo increased
its market share from approximately 14% in 1994 to approximately 27% in 1995.
These share gains have largely resulted from new product introductions such as
the HAPPY CABANA-REGISTERED TRADEMARK- line of portable play yards (introduced
in 1995). Evenflo ranked fifth in the $58 million U.S. high chair market with a
12% market share in fiscal 1995, and generated domestic net sales of $9 million
in fiscal 1996. Evenflo has gained substantial market share in high chairs,
largely a result of its PHASES high chair line which was introduced in late
1995. The PHASES high chair converts from an infant feeding seat to booster seat
to play table and chair. For the six months ended June 30, 1996, Evenflo had a
13% share of the high chair market.
Evenflo also markets various other juvenile furniture product lines,
including toddler beds, Jenny Lind cribs and mattresses. Such product lines
accounted for $20 million in fiscal 1996 net sales in the U.S.
INFANT FEEDING PRODUCTS
Evenflo is a leading competitor in the infant feeding products category and
generated fiscal 1996 net sales of approximately $57 million worldwide,
including $15 million of net sales in international markets. Sales in the infant
feeding market consist of breast pumps and other breastfeeding products,
reusable and disposable nurser systems and baby care items. Wholesale sales in
this segment of the juvenile products market totaled $435 million in 1995, up 9%
from 1994.
REUSABLE NURSER SYSTEMS. In fiscal 1996, Evenflo had $28 million in
worldwide net sales of reusable nurser products, including $9 million of net
sales in international markets. Evenflo's reusable nurser systems were the
second best selling brand in the U.S. Evenflo manufactures a full line of
nursers, nipples and accessories at all price points. Approximately 50% of the
reusable nursers sold by Evenflo in 1995 were decorated or featured licensed
characters. In 1996, Evenflo added three valuable nonexclusive licenses, PETER
RABBIT & FRIENDS, PADDINGTON BEAR and PRECIOUS MOMENTS, to its existing DISNEY
BABIES license. In addition, angled nursers, a new category since 1994,
represent 20% of industry nurser sales, and Evenflo entered this market in
January 1996 with favorable results.
BREASTFEEDING PRODUCTS. In fiscal 1996, Evenflo had $12 million in
worldwide net sales of breastfeeding products, which consist primarily of breast
pumps and pads. Evenflo maintained its number one position in 1995 in the U.S.
breastfeeding market with an estimated 50% domestic market share (by dollar
sales). Evenflo offers a complete line of breast pumps, including manual pumps
for both reusable and disposable nursers, as well as battery and electric
operated pumps. Evenflo also markets washable and disposable nursing pads.
OTHER BABY CARE PRODUCTS. In fiscal 1996, Evenflo had $17 million of net
sales of other baby products. Evenflo offers products in most product categories
of the baby care products market, including playthings, pacifiers, bibs, oral
development items, such as soothing teethers, accessories and other feeding
products, including bowls, cups and utensils. Evenflo also markets an entire
line of disposable bottle-feeding items, including disposable bottle liners,
nipples, holders and kits. Evenflo benefits from the right to use the DISNEY
BABIES, PETER RABBIT & FRIENDS, PADDINGTON BEAR and PRECIOUS MOMENTS licensed
characters on several of its most important products in the United States, as
well as in numerous international markets. In 1994, Evenflo introduced its
EVENFLO BABIES collection, in which pacifiers, teethers, cups and other baby
accessory products are decorated with Evenflo's own characters.
55
<PAGE>
INTERNATIONAL
Evenflo has had an international presence for over 50 years, selling its
products in over 60 countries, with subsidiaries in Canada, Mexico and the
Philippines. To date, international operations for Evenflo have focused largely
on infant feeding products and, in Canada, on juvenile furniture. International
sales represented approximately 16% of Evenflo's net sales in fiscal 1996.
Evenflo believes that higher birth rates, increasing income levels and the
lowering of trade barriers in certain world markets present significant growth
opportunities.
SALES, MARKETING AND DISTRIBUTION
Evenflo uses a sales force of 18 direct sales people, 48 manufacturer's
representatives and 35 independent brokers to sell to over 2,000 mass merchants,
supermarkets, drug stores, grocery stores, toy stores and other retail outlets.
For fiscal 1996, the five largest customers of Evenflo represented approximately
51% of Evenflo's net sales with Toys "R" Us and Wal-Mart representing 19% and
15%, respectively, of net sales for such period. No other customer accounted for
more than 10% of net sales for such period.
Marketing efforts are focused on building brand identity through advertising
and packaging programs, and on repositioning several existing product lines,
such as soft/frame child carriers, high chairs, play yards, mattresses and
exercisers. Marketing programs are national in scope and primarily consist of
print advertising, trade and consumer promotions and targeted sampling.
RESEARCH & DEVELOPMENT
Evenflo dedicates substantial resources to its product development efforts,
including 18 professionals in research and development. Evenflo's research and
development group has developed over 175 U.S. patents. Evenflo has developed a
number of of innovative infant and juvenile products, including the first fully
transparent baby bottle, the first decorated nurser, the first convertible
(infant to toddler) car seat to pass applicable federal testing standards and
the first juvenile stationary activity product. In 1994, Evenflo successfully
introduced the stationary EXERSAUCER baby exerciser as a safer alternative to
infant walkers. Evenflo's most recent car seat offering, the ON MY WAY
introduced in 1994, with its ergonomically correct CARRY RIGHT handle, has
gained a leading market share in the infant car seat segment. By designing a car
seat that attaches to a stroller to form the new ON MY WAY TRAVEL SYSTEM,
Evenflo has opened incremental growth opportunities in strollers. Each new
product Evenflo develops is subjected to extensive evaluation to ensure it meets
Evenflo's standards for quality and safety. At September 30, 1996, Evenflo had
44 patents pending at the U.S. Patent and Trademark Office.
In addition to Evenflo's in-house professionals, outside sources are used
for research and development, including individual designers/inventors, design
houses, universities and engineering services. As a leader in the U.S. car seat
market, Evenflo dedicates significant resources to the design and testing of its
car seat product line. In 1995, Evenflo formed a separate car seat technology
group to increase research and development efforts in this market.
Evenflo's research and development expenditures were approximately $1
million in each of fiscal 1994, 1995 and 1996.
MANUFACTURING, PROCUREMENT AND RAW MATERIALS
Evenflo maintains five primary manufacturing and assembly plants at
locations in Georgia, Ohio and Alabama and two in Mexico. Evenflo also operates
a distribution center in the Philippines and Canada. Evenflo manufactures
bottles and nipples and assembles certain infant feeding and baby care products
primarily at its facilities in Canton, Georgia and Mexico City. Car seats, high
chairs, mattresses and activity products are assembled at Evenflo's plant in
Piqua, Ohio. Jasper, Alabama serves as a soft goods
56
<PAGE>
manufacturing feeder plant for the final assembly operations in Ohio. Cribs are
manufactured and assembled at Evenflo's facility in Tijuana, Mexico.
In 1994, Evenflo consolidated its manufacturing facilities for infant
feeding and baby care products in a 293,500 square foot plant in Canton,
Georgia. The Canton facility is vertically integrated and as such manufactures
the majority of components used for the final assembly of baby care,
breastfeeding, nursers and other feeding products. Evenflo completed a
restructuring of its furniture products operations in 1993, consolidating
manufacturing into its Piqua, Ohio and Tijuana, Mexico plants. Evenflo's
consolidation has improved operating efficiency, provided for headcount
reductions and enhanced productivity levels. The consolidation has resulted in
productivity gains as measured by total personnel costs as a percentage of net
sales. Personnel costs were 16% of net sales in fiscal 1996 versus 21% in fiscal
1992.
Evenflo's sourced products are manufactured according to its specifications
by third-party manufacturers located within the U.S. and abroad, primarily in
China, Thailand, Taiwan, Hong Kong and other Southeast Asian countries. Products
representing 30% of Evenflo's net sales in fiscal 1996 were produced by such
third party manufacturers and only one supplier accounted for products
representing more than 10% of Evenflo's fiscal 1996 net sales (Lordship
Industrial Co. accounted for products representing approximately 15% of
Evenflo's fiscal 1996 net sales). Evenflo continually monitors its sourced
products with a small staff headquartered in Taiwan to ensure that products meet
Evenflo's quality standards. Evenflo believes it has alternative sources of
supply for most of the products currently produced by third party manufacturers.
See "Risk Factors--Dependence on Foreign Manufacturing."
The principal raw materials used by Evenflo in the manufacture of its
products include various plastic resins, natural and synthetic rubbers, textiles
and corrugated paper, all of which are normally readily available. While all raw
materials are purchased from outside sources, Evenflo is not dependent upon a
single supplier in any of its operations for any material essential to its
business or not otherwise commercially available to Evenflo. Evenflo does not
anticipate any significant material shortages or price movements in its inputs.
COMPETITION
The markets for Evenflo's products are highly competitive and are
characterized by the frequent introduction of new products, often accompanied by
major advertising and promotional programs. Evenflo competes primarily on the
basis of product quality, product features, price and brand name recognition.
Evenflo competes with numerous national and international companies which
manufacture and distribute infant feeding products and/or infant and juvenile
furniture. Some of Evenflo's competitors are larger and have substantially
greater financial and other resources than the Company. Evenflo's principal
competitors include Gerber Products Company, a subsidiary of Sandoz Ltd.,
Playtex Products, Inc., Johnson & Johnson, Kiddie Products, Inc., Safety 1st,
Inc., Century Products Company, Inc., Cosco Inc. (a subsidiary of Dorel
Industries Inc.), Fisher-Price (a division of Mattel, Inc.), Gerry Babies
Products Co., Inc. (a subsidiary of Huffy Corporation) and Graco Children's
Products, Inc.
The private label category has become increasingly competitive in both the
reusable and disposable bottle and nipple markets. The Company believes that
Evenflo has strong customer loyalty which has helped it compete with private
label products.
57
<PAGE>
PROPERTIES
The following table sets forth information as of September 30, 1996 with
respect to the manufacturing, warehousing and office facilities used by the
Company in its businesses:
<TABLE>
<CAPTION>
OWNED/ SQUARE
LOCATION DESCRIPTION LEASED FOOTAGE
- ---------------------------------------------------- -------------------------------------- --------- ---------
<S> <C> <C> <C>
Spalding
Chicopee, MA.................................... Manufacturing/Warehousing/Office Owned 576,000
Chicopee, MA.................................... Manufacturing/Warehousing/Office Owned 134,900
Gloversville, NY................................ Manufacturing/Warehousing/Office Owned 80,000
Gloversville, NY................................ Manufacturing/Warehousing/Office Leased 35,750
Reno, NV........................................ Warehousing/Office Leased 157,000
Brockton, MA.................................... Manufacturing/Warehousing/Office Leased 84,000
Richmond, ME.................................... Manufacturing Owned 61,000
Clinton, CT..................................... Retail Outlet Store Leased 3,000
Sellersville, PA................................ Office Leased 1,200
West Palm Beach, FL............................. Golf equipment test site Leased 625
Woodbridge, Ontario............................. Manufacturing/Warehousing/Office Leased 85,000
Australia....................................... Manufacturing/Warehousing/Office Owned 62,000
Australia....................................... Warehousing/Office Leased 10,000
Australia....................................... Warehousing/Office Leased 2,600
Australia....................................... Warehousing/Office Leased 2,500
France.......................................... Warehousing/Office Leased 10,549
Germany......................................... Warehousing/Office Leased 12,430
Italy........................................... Warehousing/Office Leased 13,347
Japan........................................... Warehousing/Office Leased 21,837
Japan........................................... Office Leased 5,578
Japan........................................... Office Leased 635
Mexico.......................................... Warehousing/Office Leased 2,012
New Zealand..................................... Warehousing/Office Leased 5,573
New Zealand..................................... Warehousing/Office Leased 4,600
Spain........................................... Office Leased 9,216
Sweden.......................................... Warehousing/Office Leased 14,672
Taiwan.......................................... Warehousing/Office Leased 1,250
United Kingdom.................................. Warehousing/Office Leased 25,250
Evenflo
Canton, GA...................................... Manufacturing/Warehousing/Office Owned 293,500
Piqua, OH....................................... Manufacturing/Warehousing/Office Owned 210,400
Piqua, OH....................................... Warehousing/Office Leased 178,195
Piqua, OH....................................... Warehousing Leased 74,000
Piqua, OH....................................... Warehousing Leased 50,000
Piqua, OH....................................... Warehousing Leased 39,800
Jasper, AL...................................... Manufacturing/Office Owned 103,000
Jasper, AL...................................... Warehousing Leased 73,000
Mexico City, Mexico............................. Manufacturing/Warehousing/Office Owned 76,308
Tijuana, Mexico................................. Manufacturing Owned 50,061
Oakville, Ontario............................... Warehousing/Office Leased 26,780
Philippines..................................... Office Leased 2,422
Hong Kong....................................... Office Leased 1,627
Taiwan.......................................... Office Leased 700
Corporate
Tampa, FL....................................... Office Leased 9,216
</TABLE>
58
<PAGE>
The Company's manufacturing and distribution facilities and U.S. sales
operations are generally located on owned premises or leased premises with a
purchase option. The Company conducts a significant portion of its international
sales operations on leased premises, which have remaining terms generally
ranging from two to five years. Substantially all leases contain renewal options
pursuant to which the Company may extend the lease terms in increments of three
to five years. The Company does not anticipate any difficulties in renewing its
leases as they expire.
The Company believes that its facilities are suitable for their present and
intended purposes and are adequate for the Company's current and expected levels
of operation.
TRADEMARKS AND PATENTS
The Company has proprietary rights to a number of trademarks which are
important to its business. SPALDING, TOP-FLITE, ETONIC and DUDLEY in the
sporting goods segment and EVENFLO, ON MY WAY, HIKE 'N
ROLL-REGISTERED TRADEMARK-, ULTARA I, JOY RIDE, CHAMPION, SNACK 'N
PLAY-Registered Trademark-, HOUDINI-Registered Trademark-, JOHNNY
JUMP-UP-Registered Trademark-, HAPPY CAMPER-Registered Trademark- and EXERSAUCER
in the juvenile products segment, are considered material to the Company's
business.
The policy of the Company is to protect proprietary products by obtaining
patents for such products when practicable. At present, the Company owns over
300 U.S. patents and has over 100 U.S. applications pending. In addition, the
Company also maintains patent protection for certain of its products in other
countries. Significant patents include the TOP-FLITE MAGNA golf ball patent
issued December 28, 1993, which gives Spalding the exclusive right to produce
all golf balls equal to or larger than 1.70 inches in diameter with a modern
dimple pattern. The TOP-FLITE STRATA TOUR golf balls contains a core composition
made from a patented polymer and a ZS BALATA outer cover for resiliency that is
also patented. Two portable play yard patents, issued in 1990 and 1991, cover a
very practical support and locking mechanism, thus giving the Company a
significant advantage over its competitors.
Although the Company believes that, collectively, its patents are important
to its business, the loss of any one patent would not have a material adverse
effect on the Company's business and results of operations. The Company actively
guards against trademark infringement through legal and other measures. See
"--Legal Proceedings."
ENVIRONMENTAL MATTERS
The Company's operations are subject to federal, state, and local
Environmental Laws that continue to be adopted and amended. These Environmental
Laws regulate, among other things, air and water emissions and discharges at the
Company's manufacturing facilities; the generation, storage, treatment,
transportation and disposal of solid and hazardous waste by the Company; the
remediation of environmental contamination; the release of toxic substances,
pollutants and contaminants into the environment at properties operated by the
Company and at other sites; and, in some circumstances, the environmental
condition of property prior to a transfer or sale (including certain facilities
previously owned or operated by the Company). Risks of significant costs and
liabilities are inherent in the Company's operations and facilities, as they are
with other companies engaged in like businesses. The Company believes, however,
that its operations are in substantial compliance with all applicable
Environmental Laws.
While historically the costs of environmental compliance have not had a
material adverse effect on the consolidated financial condition, results of
operations or cash flows of the Company, the Company cannot predict with
certainty its future costs of environmental compliance because of continually
changing compliance standards and technology. The Company expects that future
regulations and changes in the text or interpretation of existing Environmental
Laws may subject its operations to increasingly stringent standards. Compliance
with such requirements may make it necessary, at costs which may be substantial,
to retrofit existing facilities with additional pollution-control equipment and
to undertake new measures in connection with the storage, transportation,
treatment and disposal of by-products and wastes.
59
<PAGE>
The Company has been named as a potentially responsible party with respect
to the generation and disposal of hazardous substances at 16 sites under the
federal "Superfund" statute and/or certain analogous state statutes. Pursuant to
various federal, state and local laws and regulations, PRPs can become liable
for the costs of removal and/or remediation of those hazardous substances
disposed on, in or about such properties. The liability imposed by the Superfund
statute and analogous state statutes generally is joint and several and imposed
without regard to whether the generator knew of, or was responsible for, the
presence of such hazardous substances. The Company estimates the range of its
liabilities with respect to such sites to be approximately $0.6 million in the
aggregate.
Regulations resulting from the 1990 Amendments to the Clean Air Act (the
"1990 Amendments") that will pertain to the Company's manufacturing operations
are currently not expected to be promulgated until 1997 or later. The Company
cannot predict the level of required capital expenditures resulting from future
environmental regulations such as those forthcoming as a result of the 1990
Amendments; however, the Company does not anticipate expenditures that will be
required by such regulations to be material.
LEGAL PROCEEDINGS
Due to the nature of its products, the Company has been engaged in, and will
continue to be engaged in, the defense of product liability claims related to
its products, particularly with respect to juvenile car seats and cribs. Such
claims have caused the Company to incur material litigation and insurance
expenses. Since 1986, approximately 139 product liability lawsuits have been
brought against the Company, 89 of which related to juvenile car seats.
Over the past ten policy periods (April 1, 1986 to March 30, 1996),
reserves, out-of-pocket indemnities and expenses (exclusive of payments by
insurers and insurance premiums) for car seat claims (including damage awards,
settlements, attorneys' fees and other related expenses) have averaged
approximately $1.3 million per year, when allocated to the policy periods when
the related injuries occurred, while the total reserves, out-of-pocket
indemnities and expenses (exclusive of payments by insurers) for all product
liability claims have averaged approximately $1.8 million per year, on a similar
basis. From fiscal 1992 through fiscal 1996, the Company has incurred average
costs for out-of-pocket indemnities and expenses (exclusive of payments by
insurers and insurance premiums) for all product liability claims of
approximately $3.6 million. The increase in average costs for product liability
claims from $1.8 million per year for the ten-year average to $3.6 million per
year for the five-year average is due to an increase in the Company's insurance
policy deductibles. The Company believes that it will incur average annual
litigation costs of similar levels over the next several years.
Since 1988, the Company has maintained product liability insurance in
varying amounts (at a cost of $1.2 million in fiscal 1996). The decision on
whether to carry product liability insurance and in what amounts has been based
on a number of factors, including, primarily, the then-prevailing cost of such
insurance in relation to product liability litigation expenses (including
judgments and settlements) and the Company's prior experience with product
liability claims. Each year the Company retains an independent actuarial service
to review all product liability data and to assist the Company in establishing
reserves for both known and incurred, but not reported, claims. However, from
December 1985 through March 1988, the Company was totally self-insured, although
only one of the 59 currently pending product liability claims relates to
incidents that occurred during that 28-month period.
Based on its experience with product liability claims, the amount of
reserves established for product liability claims against it and the levels of
insurance that it maintains, the Company believes that there are no product
liability claims pending which would have a material adverse effect on its
consolidated financial position, results of operations or cash flows. However,
due to the inherent uncertainty of litigation, it is possible that the Company
may be subject to adverse judgments which could be substantial in amount and may
not be covered by insurance or reserves. In addition, no assurance can be given
that in the future a
60
<PAGE>
claim will not be brought against the Company which would have a material
adverse effect on its consolidated financial position, results of operations or
cash flows.
From time to time the Company also is involved in patent infringement
actions. The Company believes that it is not presently a defendant or plaintiff
in any patent infringement action, the outcome of which would have a material
adverse effect on its consolidated financial position, results of operations or
cash flows.
In addition to such product liability and patent infringement claims, the
Company is a party to various lawsuits arising in the ordinary course of
business. None of these other lawsuits is believed to be material with respect
to the business, assets and continuing operations of the Company.
EMPLOYEES
The Company's worldwide workforce consisted of approximately 3,070 employees
(full- and part-time) as of September 30, 1996, excluding 207 Etonic employees
who joined the Company July 25, 1996. Of the total number of employees,
approximately 2,340 were engaged in manufacturing, approximately 230 were
engaged in marketing and sales and approximately 500 were engaged in
administration. Of the total number of employees, approximately 1,490 or 49%
were employed by Spalding, and approximately 1,560 or 51% were employed by
Evenflo.
At the Company's facilities, approximately 870 of the Company's employees
are represented under collective bargaining agreements, which agreements expire
from 1996 through 1998. The Company does not anticipate any difficulty in
extending or negotiating these agreements as they expire. The Company believes
that its labor relations are good and no material labor cost increases, other
than in the ordinary course of business, are anticipated.
SEGMENT INFORMATION
For information on sales by industry segment and foreign and domestic
operations and export sales, see Note T of the Notes to the Consolidated
Financial Statements appearing elsewhere in this Prospectus.
61
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Set forth below are the names, ages and positions with the Company of the
persons who will serve as directors and executive officers of the Company,
together with certain other key personnel, after the Closing. The terms of the
directors and executive officers of the Company expire annually upon the
election and qualification of successors at the annual meetings of shareholders.
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------- --- ------------------------------------------------------------
<S> <C> <C>
Paul L. Whiting 53 Chairman of the Board of Directors, President and Chief
Executive Officer
Robert K. Adikes 57 Vice President, Secretary and General Counsel
Stephen J. Dryer 54 Vice President and Controller
W. Michael Kipphut 43 Vice President and Treasurer
George A. Dickerman 57 President of Spalding Sports Worldwide Division
George A. Harris 49 President of Evenflo Company, Inc.
Henry R. Kravis 52 Director
George R. Roberts 52 Director
Michael T. Tokarz 46 Director
Marc S. Lipschultz 27 Director
Gustavo A. Cisneros 51 Director
</TABLE>
PAUL L. WHITING has been a director of the Company since 1984, its Chairman
of the Board since October 25, 1996, its Chief Executive Officer since February
1996 and its President and Chief Operating Officer since March 1994. From
January 1991 through February 1994, he served as the Senior Vice President,
Chief Financial Officer and Treasurer of the Company and from 1981 through 1990
he served as Vice President, Finance and Treasurer. Mr Whiting was director of
Pueblo Xtra International, Inc. until November 1996. Mr. Whiting joined the
Company in 1976.
ROBERT K. ADIKES has been a Vice President of the Company since January
1990 and its Secretary since January 1986. He has been General Counsel since he
joined the Company in 1985.
STEPHEN J. DRYER has been a Vice President of the Company since January
1990 and its Controller since 1981. Mr. Dryer joined the Company in 1975.
W. MICHAEL KIPPHUT joined the Company in September 1994 as Vice President
and Treasurer. From 1977 to September 1994, he served in various financial
capacities at Tyler Corporation (a diversified manufacturing company), and from
February 1994 through September 1994 as Vice President and Treasurer thereof.
GEORGE A. DICKERMAN has been the President of the Spalding Sports Worldwide
Division of the Company since 1981. Mr. Dickerman joined the Company in 1976. He
is the current Chairman of the Board of Trustees of The Basketball Hall of Fame,
past Chairman of The Sporting Goods Manufacturers Association and past Director
of the National Golf Foundation. He also serves on the Board of Trustees of
Northwestern Mutual Life Insurance Company.
GEORGE A. HARRIS has been the President of Evenflo Company, Inc. since
October 1, 1995. He joined Evenflo Juvenile Furniture Company, Inc., a
subsidiary of the Company, as President in November 1990 and was named President
of Evenflo companies in May 1995. He was Vice President, Sales and Marketing, of
the Coleman Company, Inc., Outdoor Products Division, prior to October 1990.
HENRY R. KRAVIS is a Founding Partner of KKR and effective January 1, 1996
he became a managing member and member of the Executive Committee of the limited
liability company which serves as the
62
<PAGE>
general partner of KKR. He is also a director of AutoZone, Inc., Borden, Inc.,
Bruno's, Inc., Duracell International Inc., Flagstar Companies Inc., Flagstar
Corporation, IDEX Corporation, K-III Communications Corporation, Merit
Behavioral Care Corporation, Newsquest Capital plc, Owens-Illinois, Inc.,
Owens-Illinois Group, Inc., Safeway, Inc., Union Texas Petroleum Holdings, Inc.,
and World Color Press, Inc.
GEORGE R. ROBERTS is a Founding Partner of KKR and effective January 1,
1996 he became a managing member and member of the Executive Committee of the
limited liability company which serves as the general partner of KKR. He is also
a director of AutoZone, Inc., Borden, Inc., Bruno's, Inc., Duracell
International Inc., Flagstar Companies Inc., Flagstar Corporation, IDEX
Corporation, K-III Communications Corporation, Merit Behavioral Care
Corporation, Newsquest Capital plc, Owens-Illinois, Inc., Owens-Illinois Group,
Inc., Red Lion Properties, Inc., Safeway, Inc., Union Texas Petroleum Holdings,
Inc., and World Color Press, Inc.
MICHAEL T. TOKARZ was a General Partner of KKR from January 1, 1993 until
January 1, 1996 when he became a member of the limited liability company which
serves as the general partner of KKR. Prior to 1993, Mr. Tokarz was an Executive
at KKR. He is also a director of Flagstar Companies Inc., Flagstar Corporation,
IDEX Corporation, K-III Communications Corporation, and Safeway, Inc.
MARC S. LIPSCHULTZ has been an Executive at KKR since 1995. Prior thereto,
he was an investment banker with Goldman, Sachs & Co. for two years.
GUSTAVO A. CISNEROS has been a director of the Company since 1984. Since
prior to 1990 he has been a direct or indirect investor in and a director of
certain companies forming part of a group with indirect beneficial ownership
interests in a number of diverse commercial enterprises in Venezuela and
elsewhere. Mr. Cisneros is also a director of Pueblo Xtra International, Inc.
and Univision Communications, Inc. See "Ownership of Common Stock."
Messrs. Kravis and Roberts are first cousins.
The business address of Messrs. Kravis, Tokarz and Lipschultz is 9 West 57th
Street, New York, New York 10019 and of Mr. Roberts is 2800 Sand Hill Road,
Suite 200, Menlo Park, CA 94025. The business address of Mr. Cisneros is Avenida
La Salle, Colina Los Caobos, Caracas, Venezuela.
COMPENSATION OF DIRECTORS
All directors are reimbursed for their usual and customary expenses incurred
in attending all Board and committee meetings. It is anticipated that each
director who is not an employee of the Company will receive an aggregate annual
fee of $35,000, payable in quarterly installments. Directors who are also
employees of the Company receive no remuneration for serving as directors.
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth the compensation paid, accrued or awarded by
the Company for the account of each of the chief executive officer and the four
most highly compensated executive officers (the "Named Executive Officers") for
their services in all capacities to the Company during the fiscal year ended
September 30, 1996.
63
<PAGE>
SUMMARY COMPENSATION TABLE FOR 1996
SALARY AND INCENTIVE COMPENSATION
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
------------------------
ANNUAL COMPENSATION SECURITIES
--------------------------------------- UNDERLYING
NAME AND PRINCIPAL POSITION OTHER ANNUAL OPTIONS/ LTIP ALL OTHER
DURING FISCAL 1996(1) SALARY BONUSES(2) COMPENSATION(3) SARS PAYOUTS COMPENSATION(4)
- --------------------------------- ---------- ------------ ------------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
(UNITS)
Paul L. Whiting
Chairman of the Board of
Directors, President and Chief
Executive Officer.............. $ 350,000 $ 1,100,430 $ 119,850 -- -- $ 4,750
George A. Dickerman
President of Spalding Sports
Worldwide Division............. 317,200 592,020 149,840 -- -- 4,750
George A. Harris
President of Evenflo Company,
Inc............................ 207,850 486,230 12,140 -- $ 21,330 5,010
Stephen J. Dryer
Vice President and
Controller..................... 132,880 203,140 29,710 -- -- 3,990
Robert K. Adikes.................
Vice President, Secretary and
General Counsel................ 127,300 199,220 7,170 -- 57,170 3,820
</TABLE>
- ------------------------
(1) Alejandro Rivera, the S & E's former Vice President of Corporate Planning
and Strategic Development, is not included in the table. During fiscal 1996
he received $405,600 in salary, $1,025,690 in bonuses, and $4,750 in other
compensation.
(2) Includes transaction bonus received in connection with the Recapitalization.
(3) Amounts represent above market return paid on deferred cash awards under the
Company's Long-Term Incentive Plan. See "--Long-Term Incentive Plan."
(4) Company matching contributions to the Savings Plus Plan.
MANAGEMENT INCENTIVE BONUS PLAN
The Company maintains a Management Incentive Bonus Plan ("MIBP") for certain
identified key executives of the Company, including department managers and
executives senior thereto, including the Named Executive Officers, pursuant to
which eligible employees are awarded bonuses based on the Company's annual
operating profit (as determined in accordance with GAAP) as compared with a
target established prior to the beginning of the year. Awards under the MIBP
range within a guideline of 15% to 80% of annual salary payments, depending upon
a participant's position and commensurate responsibility. Spalding and Evenflo
MIBP objectives are set specifically for their operations, and the objectives of
the corporate staff relate to consolidated operations. If the annual results do
not meet the pre-established objectives, no bonus is earned. If annual results
exceed the pre-established objectives, the bonus paid is increased
proportionally, up to an additional bonus of no more than 100% of the employee's
guideline bonus percentage.
64
<PAGE>
LONG-TERM INCENTIVE PLAN
The Long-Term Incentive Plan ("LTIP") provides certain key employees with
cash awards based upon the attainment of established financial goals for a
predefined period, generally three years. Each participant makes an election at
the beginning of each program period to receive full payments upon vesting or to
defer partial or total payment up to seven years. This cash payout is based upon
the value of a unit, which is determined by a net earnings formula set forth in
the LTIP and calculated as of the September 30 preceding the payment. The LTIP
has been in effect since 1985. Most participants have elected to defer all or a
portion of their cash award at the end of each cycle. The value of units for
which payment has been deferred is based on the net earnings formula set forth
in the LTIP. The Company did not make any awards during fiscal 1996 to the Named
Executive Officers.
1996 STOCK OPTION PLAN
The Company has adopted the 1996 Stock Purchase and Option Plan for Key
Employees of E&S Holdings Corporation and Subsidiaries (the "1996 Plan")
providing for the issuance of shares of authorized but unissued or reacquired
shares of Common Stock, subject to adjustment to reflect certain events such as
stock dividends, stock splits, recapitalizations, mergers or reorganizations of
or by the Company. The 1996 Plan is intended to assist the Company in attracting
and retaining employees of outstanding ability and to promote the identification
of their interests with those of the stockholders of the Company. The 1996 Plan
will permit the issuance of Common Stock (the "Purchase Stock") and the grant of
Non-Qualified Stock Options and Incentive Stock Options (the "Options") to
purchase shares of Common Stock and other stock-based awards (the issuance of
Purchase Stock and the grant of Options and other stock-based awards pursuant to
the Plan being a "Grant"). Unless sooner terminated by the Company's Board of
Directors, the 1996 Plan will expire ten years after its approval by the
Company's stockholders. Such termination will not affect the validity of any
Grant outstanding on the date of termination.
The Compensation Committee of the Board of Directors will administer the
1996 Plan, including, without limitation, the determination of the employees to
whom Grants will be made, the number of shares of Common Stock subject to each
Grant, and the various terms of such Grants. The Compensation Committee of the
Board of Directors may from time to time amend the terms of any Grant, but,
except for adjustments made upon a change in the Common Stock of the Company by
reason of a stock split, spin-off, stock dividend, stock combination or
reclassification, recapitalization, reorganization, consolidation, change of
control, or similar event, such action shall not adversely affect the rights of
any participant under the 1996 Plan with respect to the Purchase Stock and the
Options without such participant's consent. The Board of Directors will retain
the right to amend, suspend or terminate the 1996 Plan. As of the date of this
prospectus, no grants have been made under the Plan.
RETIREMENT PLANS
SPALDING & EVENFLO RETIREMENT ACCOUNT PLAN ("SERA"). The Company sponsors
SERA, a cash balance defined benefit pension plan qualified under Section 401(a)
of the Internal Revenue Code of 1986, as amended (the "Code"), for all salaried
employees and the non-union Piqua, Ohio hourly employees. SERA covers all
eligible full-time employees who are over age 20 and have at least one year of
service. Annually, an addition is made to each participant's account based on a
percentage of the participant's salary for that year up to a maximum salary of
$150,000. The percentage ranges from 2% of pay for employees under age 25 to 9%
of pay for employees 60 and over. The accounts are credited with interest at a
rate determined annually by the Company.
SUPPLEMENTAL RETIREMENT PLAN ("SRP"). As a supplement to the SERA, the
Company sponsors the non-qualified SRP which covers highly compensated employees
whose benefits are limited by compensation and benefit limitations under the
Code. For employees with a salary in excess of $150,000, an addition is made to
each participant's account based on a percentage of the participant's salary for
that year. The
65
<PAGE>
percentage ranges from 2% of pay for employees under age 25 to 9% of pay for
employees 60 and over. The accounts are credited with interest at a rate
determined annually by the Company.
The estimated annual benefits payable under SERA and SRP upon retirement at
normal retirement age for each of the Named Executive Officers are as follows:
<TABLE>
<CAPTION>
YEAR ESTIMATED ANNUAL
ATTAINS BENEFIT IF RETIRES AT
NAME(2) AGE 65 NORMAL RETIREMENT AGE(1)
- ------------------------------------------------------------------------------- ----------- ------------------------
<S> <C> <C>
Paul L. Whiting................................................................ 2008 $ 80,800
George A. Dickerman............................................................ 2004 81,210
George A. Harris............................................................... 2012 62,530
Stephen J. Dryer............................................................... 2007 26,890
Robert K. Adikes............................................................... 2004 21,130
</TABLE>
- ------------------------
(1) Under SERA and SRP the normal retirement age is 65. The estimated annual
benefits shown above are in the form of a single life annuity. Benefits have
been determined by assuming a 3.5% average rate of increase in compensation
levels and an annual interest credit at a 6.5% annual rate, which is the
1996 rate for the interest credit. Benefits are computed without reference
to limitations on compensation and benefits to which the SERA is subject
under the Code because any benefits for the Named Executive Officers that
are affected by such limitations are made up under the Company's
Supplemental Retirement Plan.
(2) Alejandro Rivera, the Company's former Vice President of Corporate Planning
and Strategic Development, will attain retirement age in 2008 and his
estimated annual benefit upon retirement in 2008 will be $26,260.
SAVINGS PLUS PLAN. The Company sponsors a defined contribution plan
qualified under the Code, commonly referred to as a 401(k) plan, for all
salaried employees and the non-union Canton, Georgia and Gloversville, New York
hourly employees (the "Savings Plus Plan"). Participants may make pre-tax
contributions up to 15% of their aggregate annual salaries. The Company makes a
50% matching contribution on the first 6% of participant contributions. The
Company does not match participant contributions in excess of 6%.
MANAGEMENT STOCKHOLDER'S AGREEMENTS
In connection with the Recapitalization, the Company will enter into
stockholder's agreements (each, a "Management Stockholder's Agreement") with all
management employees that will be stockholders of the Company (each, a
"Management Stockholder").
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company did not have a compensation committee of the Board of Directors
during fiscal 1996. During fiscal 1996, only certain members of the Board were
involved in deliberations concerning executive compensation. Paul Whiting, the
current President and Chief Executive Officer, and Alejandro Rivera, the former
Vice President of Corporate Planning and Strategic Development, each served on
the Board of Directors of the Company in fiscal 1996. Messrs. Whiting and Rivera
were involved in deliberations concerning executive officer compensation. See
"Related Party Transactions."
No person who served during fiscal 1996 as an executive officer of the
Company serves or has served on the compensation committee or as a director of
another company, one of whose executive officers serves as a director of the
Company.
66
<PAGE>
OWNERSHIP OF COMMON STOCK
The following table sets forth certain information regarding the beneficial
owners of the Company's Common Stock by (i) all persons known to the Company to
own beneficially more than 5% of the Common Stock, (ii) each Director who is a
stockholder, (iii) the Chief Executive Officer and each of the Named Executive
Officers and (iv) all directors and Named Executive Officers as a group.
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES OWNED(1) PERCENTAGE
- ------------------------------------- ------------------------------------- -------------------
<S> <C> <C>
Strata L.L.C.(1)..................... 44,200,000 88.4
9 West 57th Street
New York, New York 10019
Abarco N.V.(2)....................... 5,800,000 11.6
c/o ABN Trustcompany
(Curacao N.V.)
P.O. Box 224
15 Pietermaai
Curacao, Netherlands
Antilles
Henry R. Kravis(1)................... -- --
George R. Roberts(1)................. -- --
Michael T. Tokarz(1)................. -- --
Marc S. Lipschultz(1)................ -- --
Paul L. Whiting(3)................... -- --
Robert K. Adikes(3).................. -- --
Stephen J. Dryer(3).................. -- --
W. Michael Kipphut(3)................ -- --
George A. Dickerman(3)............... -- --
George A. Harris(3).................. -- --
All officers and directors as a -- --
group(3)...........................
</TABLE>
- ------------------------
(1) Shares of Common Stock shown as beneficially owned by Strata L.L.C. are held
by Strata. Strata L.L.C. is the sole general partner of KKR Associates
(Strata). KKR Associates (Strata), a limited partnership, is the sole
general partner of Strata and possesses sole voting and investment power
with respect to such shares. Strata L.L.C. is a limited liability company
the members of which are Messrs. Henry R. Kravis, George R. Roberts, Robert
I. MacDonnell, Paul E. Raether, Michael W. Michelson, Michael T. Tokarz,
James H. Greene, Jr., Perry Golkin, Clifton S. Robbins, Scott M. Stuart and
Edward A. Gilhuly. Messrs. Kravis and Roberts are members of the Executive
Committee of Strata L.L.C. Messrs. Kravis, Roberts and Tokarz are also
directors of the Company. Mr. Marc S. Lipschultz is a limited partner of KKR
Associates (Strata) and is also a director of the Company. Each of such
individuals may be deemed to share beneficial ownership of the shares shown
as beneficially owned by Strata L.L.C. Each of such individuals disclaim
beneficial ownership of such shares. KKR Partners II, L.P. owns less than 1%
of the outstanding Common Stock.
(2) A trust for the benefit of the family of Gustavo Cisneros and a trust for
the benefit of the family of Ricardo Cisneros each owns a 50% indirect
beneficial ownership interest in the equity of Abarco. Mr. Gustavo Cisneros
is also a director of the Company. Mr. Cisneros may be deemed to have
beneficial ownership of the shares beneficially owned by the trusts created
by him. Messrs. Cisneros disclaim beneficial ownership of such shares.
(3) Does not include shares of Common Stock to be reserved for options and other
stock purchase rights that are anticipated to be granted to management under
the Plan after the Closing. See "Management--1996 Stock Option Plan."
67
<PAGE>
RELATED PARTY TRANSACTIONS
Strata L.L.C. beneficially owns approximately 88.4% of the Company's
outstanding Common Stock at Closing. The members of Strata L.L.C. are Messrs.
Henry R. Kravis, George R. Roberts, Robert I. MacDonnell, Paul E. Raether,
Michael W. Michelson, Michael T. Tokarz, James H. Greene, Jr., Perry Golkin,
Clifton S. Robbins, Scott M. Stuart and Edward A. Gilhuly. Messrs. Kravis and
Roberts are members of the Executive Committee of Strata L.L.C. Messrs. Kravis,
Roberts, and Tokarz are also directors of the Company, as is Mr. Marc S.
Lipschultz who is a limited partner of KKR Associates (Strata). Each of the
members of Strata L.L.C. is also a member of the limited liability company which
serves as the general partner of KKR and Mr. Lipschultz is an executive of KKR.
KKR, an affiliate of Strata and Strata L.L.C., received a fee of $12 million for
negotiating the Recapitalization and arranging the financing therefor and, from
time to time in the future, KKR may receive customary investment banking fees
for services rendered to the Company in connection with divestitures,
acquisitions and certain other transactions. In addition, KKR has agreed to
render management, consulting and financial services to the Company for an
initial annual fee of $1 million. See "Management--Directors and Executive
Officers," "--Compensation Committee Interlocks and Insider Participation,"
"--Compensation of Directors" and "Ownership of Common Stock."
Strata L.L.C. is the general partner of KKR Associates (Strata), a Delaware
limited partnership, of which certain past and present employees of KKR and
partnerships and trusts for the benefit of the families of such past and present
employees and a former partner of KKR are the limited partners. KKR Associates
(Strata) is the general partner of Strata, which owns approximately 88.4% of the
outstanding Common Stock.
Strata has the right, under certain circumstances and subject to certain
conditions, to require the Company to register under the Securities Act shares
of Common Stock held by it pursuant to a registration rights agreement entered
into in connection with the Recapitalization and certain stockholders'
agreements. Such registration rights will generally be available to Strata until
registration under the Securities Act is no longer required to enable them to
resell the Common Stock owned by it. Such registration rights agreement
provides, among other things, that the Company will pay all expenses in
connection with the first six registrations requested by Strata and in
connection with any registration commenced by the Company as a primary offering.
In addition to Strata, Abarco and KKR Partners II, L.P. (the owner of 1% of the
Common Stock of the Company and an affiliate of Strata) will be allowed to
participate in any registration process, subject to certain conditions and
exceptions. In addition, it is anticipated that employees participating in the
1996 Plan will be given certain registration rights. Abarco has the right, under
certain circumstances and subject to certain conditions, to require the Company
to register under the Securities Act shares of Common Stock held by it pursuant
to a registration rights agreement entered into in connection with the
Recapitalization and a stockholders' agreement. Such registration rights include
demand registration rights for up to two offerings and piggyback rights. See
"Management-- Management Stockholder's Agreements."
Strata purchased the 1,500,000 shares of Preferred Stock offered by the
Company in the Preferred Stock Offering. The Company and Strata entered into a
registration rights agreement whereby Strata will have the right commencing not
earlier than one year after the Issuance Date, subject to certain conditions, to
require the Company to register the sale of any or all of the Preferred Stock
under the Securities Act on up to three occasions at the Company's expense.
In connection with the Recapitalization, the Company redeemed Common Stock
owned beneficially by Abarco for aggregate consideration of $582 million and
redeemed shares of S&E owned by officers of S&E through a management stock plan
that was terminated upon Closing for aggregate consideration of $28 million.
Such officers financed in part their purchase of S&E shares by providing
promissory notes to the order of S&E and, in connection with the Closing, such
officers repaid in full such notes for approximately $7 million. The management
stock plan, which was cancelled on September 30, 1996,
68
<PAGE>
authorized 19,000 shares of S&E Class A common stock to be available to a select
number of the most senior officers of the Company. On November 30, 1994 certain
officers of S&E purchased 11,643 shares of Class A common stock for $8.6
million, which was based on the estimated fair market value per share as
determined by a Company formula based on earnings, as defined. The officers paid
$12,000 in cash and signed $2.6 million full recourse 7.74% secured promissory
notes due November 30, 2001 and $6.0 million nonrecourse 8.23% secured
promissory notes due November 30, 2004 (collectively, the "Management Notes").
The former chief executive officer of the Company died in September 1995. His
Class A common stock was redeemed in December 1995 at which time his Management
Notes and related interest were cancelled. The Management Notes were
collateralized by the pledge to S&E of the Class A common stock purchased by the
officers. The Class A common stock was identical to the other common stock
except it was non-voting (prior to an initial public offering or change in
control) and the stock was restricted and non-transferable (except for limited
put and call rights of the program participants in the event of the officer's
termination). The fair market valuation was determined once a year by the
executive committee, using a specified multiple of EBITDA (earnings before
interest, income taxes, depreciation, and amortization) less outstanding debt.
In addition, the Named Executive Officers and certain other officers and key
employees of the Company and its subsidiaries received a bonus payment of $5
million in connection with the Recapitalization.
Prior to May 17, 1994 the Company paid royalties to an affiliate, Dutchstar
B.V. ("Dutchstar"), at a rate of 6% of net sales for sporting good products sold
by the Company and 3% to 5% of net sales for infant products sold by the
Company, in each case for the right to sell products bearing the Company's name
in substantially all countries other than the United States under certain
non-U.S. trademarks (the "Acquired Trademarks") owned by Dutchstar's parent
company Sahara Corp. Ltd. ("Sahara"), also an affiliate of the Company. The
Company also paid to Dutchstar all royalties (less expenses in certain cases)
received from third parties for the use of the Acquired Trademarks in
substantially all countries other than the United States. Total Acquired
Trademark expense paid to Dutchstar was $6.3 million in 1994, $27,000 in 1995
and $21,000 in 1996. Dutchstar, in turn, paid royalties to Sahara for the use of
the Acquired Trademarks in countries other than the United States.
On May 17, 1994, Sahara sold the Acquired Trademarks to the Company for
aggregate consideration of $176 million, including a payable to Sahara of $32
million and immediately thereafter the Company contributed the Acquired
Trademarks to Lisco Feeding, Inc., Lisco Furniture, Inc. and Lisco Sports, Inc.
(collectively the "Lisco Subsidiaries"), each a wholly-owned subsidiary of
Lisco, Inc. ("Lisco, Inc."), a wholly-owned subsidiary of the Company. On
September 30, 1996, as part of the Recapitalization, the Company purchased the
remaining non-U.S. trademarks and assignment rights owned by Sahara for $5.1
million and immediately contributed those non-U.S. trademarks to the Lisco
Subsidiaries.
In 1993 the Company purchased a common stock interest (ultimately 65.3%) and
a preferred stock interest (ultimately 92.7%) in PXC&M Holdings, Inc. and
subsidiaries ("PXC&M") for $71.5 million in cash. The other primary common
shareholder in PXC&M was another affiliate of Abarco and the Company. PXC&M was
the ultimate parent of Pueblo Xtra International, Inc. ("Pueblo"), a supermarket
chain and video tape franchise operating in Puerto Rico, South Florida and the
U.S. Virgin Islands. On May 8, 1996, the Company's common stock investment was
diluted to less than 1% as a result of the reorganization of PXC&M resulting
from an equity investment by an Abarco affiliate. As part of this
reorganization, the Company's investment in PXC&M preferred stock was sold in
exchange for a promissory note from the Abarco affiliate. The remaining PXC&M
common stock was disposed of for a nominal amount prior to the Recapitalization.
In connection with the Recapitalization Agreement, the Company distributed to
Abarco the affiliate promissory note discussed above.
The Company and an affiliate of Abarco entered into a management agreement
providing for the performance by such Abarco affiliate of certain management
services for the Company. The Company paid such Abarco affiliate $0.8 million in
fiscal 1994, 1995 and 1996, pursuant to such management agreement. Such
management agreement was terminated at Closing.
69
<PAGE>
In fiscal 1996, the Company sold approximately $1.0 million of products to
affiliates of Abarco, including Pueblo.
The Company believes that each of the transactions described above were on
terms comparable to those that would be agreed upon through arms length
negotiations.
DESCRIPTION OF CREDIT FACILITIES
The Credit Facilities are provided by a syndicate of banks and other
financial institutions led by Bank of America National Trust and Savings
Association, as administrative agent (the "Administrative Agent"), Merrill Lynch
Capital Corporation, as documentation agent, and Nationsbank, N.A. (South), as
syndication agent. The Credit Facilities provide for $400 million in term loans
("Terms Loans") and the Revolving Credit Facility provides for $250 million of
revolving credit loans ("Revolving Credit Loans"). The Revolving Credit Facility
includes borrowing capacity available for letters of credit and bankers'
acceptances, and for borrowings on same-day notice ("Swingline Loans"). The Term
Loans are comprised of Term Loan A ($175.0 million), which has a maturity of
seven years, Term Loan B ($87.5 million), which has a maturity of eight years,
Term Loan C ($87.5 million), which has a maturity of nine years, and Term Loan D
($50.0 million) which has a maturity of nine and one-half years. The Revolving
Credit Facility commitment will terminate seven years after the date of the
Recapitalization.
All Term Loans and Revolving Credit Loans will bear interest, at the
Company's option, at either: (a) a "base rate" equal to the higher of (i) the
federal funds rate plus 0.50% per annum or (ii) the administrative agent's prime
rate, plus (A) in the case of Term Loan A, a debt to EBITDA-dependent rate
ranging from 0.00% to 1.25% per annum, (B) in the case of Term Loan B, 1.75% per
annum, (C) in the case of Term Loan C, 2.25% per annum, (D) in the case of Term
Loan D, 2.75% per annum or (E) in the case of Revolving Credit Loans and
Swingline Loans, a debt to EBITDA-dependent rate ranging from 0.00% to 1.25% per
annum or (b) a "eurodollar rate" plus (i) in the case of Term Loan A, a debt to
EBITDA-dependent rate ranging from 0.625% to 2.25% per annum, (ii) in the case
of Term Loan B, 2.75% per annum, (iii) in the case of Term Loan C, 3.25% per
annum, (iv) in the case of Term Loan D, 3.75% per annum or (v) in the case of
Revolving Credit Loans, a debt to EBITDA-dependent rate ranging from 0.625% to
2.25% per annum. Swingline Loans may only be base rate loans.
The Company will pay a commitment fee calculated at a debt to
EBITDA-dependent rate ranging from 0.20% to 0.50% per annum of the available
unused commitment under the Revolving Credit Facility in effect on each day.
Such fee will be payable quarterly in arrears and upon termination of the
Revolving Credit Facility. In addition, the Company pays a fee to the
administrative agent of $100,000 per annum, payable quarterly in arrears.
The Company will pay a letter of credit fee calculated at a debt to
EBITDA-dependent rate ranging from 0.50% to 2.125% per annum of the face amount
of each letter of credit and a fronting fee calculated at a rate equal to 0.125%
per annum of the face amount of each letter of credit. Such fees will be payable
quarterly in arrears and upon the termination of the Revolving Credit Facility.
In addition, the Company will pay customary transaction charges in connection
with any letters of credit.
The Company will pay customary fees for bankers acceptances.
70
<PAGE>
The Term Loans will be subject to the following amortization schedule:
<TABLE>
<CAPTION>
DATE FROM CLOSING TERM LOAN A TERM LOAN B TERM LOAN C TERM LOAN D
- -------------------------------------------------------- ------------- ------------- --------------- ---------------
<S> <C> <C> <C> <C>
(DOLLARS IN MILLIONS)
<CAPTION>
<S> <C> <C> <C> <C>
24 Mos.................................................. $ 15.0 $ 1.0 $ 1.0 $ 0.5
36 Mos.................................................. 25.0 1.0 1.0 0.5
48 Mos.................................................. 25.0 1.0 1.0 0.5
60 Mos.................................................. 30.0 1.0 1.0 0.5
72 Mos.................................................. 30.0 1.0 1.0 0.5
84 Mos.................................................. 50.0 1.0 1.0 0.5
96 Mos.................................................. -- 81.5 1.0 0.5
108 Mos................................................. -- -- 80.5 0.5
114 Mos................................................. -- -- -- 46.0
------ ----- ----- -----
$ 175.0 $ 87.5 $ 87.5 $ 50.0
------ ----- ----- -----
------ ----- ----- -----
</TABLE>
The Term Loans will be subject to mandatory prepayment (i) with the proceeds
of certain asset sales and certain debt offerings (excluding the Offering) and
(ii) on an annual basis with 50% of the Company's excess cash flow (as defined
in the Credit Facility) for so long as the ratio of the Company's total debt (as
defined in the Credit Facility) to EBITDA (as defined in the Credit Facility) is
greater than 4.0 to 1.0. The Credit Facility prohibits the Company from
repurchasing any Exchange Notes or Preferred Stock, subject to limited
exceptions. The Company's obligations under the Credit Facility are secured by a
pledge of the stock of certain of its subsidiaries. In addition, indebtedness
under the Credit Facility is guaranteed by the principal subsidiaries of the
Company. See "Description of the Exchange Notes--Subordination" and "Risk
Factors--Subordination of Exchange Notes to Senior Indebtedness," "--Adverse
Consequences of Holding Company Structure" and "--Encumbrances on Assets to
Secure Credit Facilities."
The Credit Facility contains customary covenants and restrictions on the
Company's ability to engage in certain activities. In addition, the Credit
Facility provides that the Company must meet or exceed certain interest coverage
and fixed charge ratios and must not exceed a leverage ratio.
Events of default under the Credit Facilities include (i) nonpayment of
principal with no period of grace and nonpayment of interest, fees or other
amounts due under the Credit Facilities within five days after the same become
due; (ii) material breach of any representation or warranty; (iii) certain
failures to perform under the pledge agreement securing obligations under the
Credit Facilities; (iv) failure to observe any term, covenant or agreement
contained in the Credit Facilities beyond an applicable period of grace; (v) the
failure by the Company or its subsidiaries (A)(1) to make payments in respect of
any Indebtedness when due and such failure continues after the applicable period
of grace or (2) to perform or observe any condition or covenant or any other
event shall occur or condition shall exist relating to such Indebtedness and the
effect of such failure, event or condition is to cause or to permit the holders
of such Indebtedness to cause such Indebtedness to be due prior to its stated
maturity and (B) the aggregate amount of such Indebtedness, together with the
aggregate amount of all other Indebtedness in default, equals or exceeds $20
million; (vi) certain events of bankruptcy or insolvency with respect to the
Company or material subsidiaries; (vii) the occurrence of certain events under
the Employee Retirement Income Security Act of 1974, as amended; (viii)
judgments against the Company or its subsidiaries of $20 million or greater that
remain unsatisfied, unvacated or unstayed pending appeal for a period of 60 days
after entry; (ix) a change of control (as defined below) under the Credit
Facilities; or (x) any material provision of the pledge agreement shall cease to
create a valid security interest or the guaranty of the Company's obligations
shall cease to be effective. The events of default included in the Credit
Facilities are more extensive than the Events of Default under the Indenture. An
Event of Default under the Indenture could not occur without such default being
an event of default under the Credit Facilities. If an Event of Default occurs
under the Credit Facilities, the subordination provisions of the Indenture would
likely restrict payments to the holders of the Exchange Notes.
71
<PAGE>
A "change of control" under the Credit Facilities will occur if (a) at any
time Continuing Directors shall not constitute a majority of the Board of
Directors of the Company; (b) KKR, its successors and its Affiliates and
management of the Company shall cease to own in the aggregate, directly or
indirectly, beneficially and of record, a majority of the outstanding Voting
Stock of the Company (other than as the result of (i) one or more public
offerings of common stock of the Company or (ii) a widely distributed private
placement of common stock of the Company that does not provide any special
director designation or special election rights or other special corporate
governance rights to the holders of such shares, in each case whether by the
Company or another Person); or (c) any Person or "group" (within the meaning of
Section 13(d) or 14(d) of the Exchange Act) shall at any time have acquired
direct or indirect beneficial ownership of a percentage of the outstanding
Voting Stock of the Company that exceeds in the aggregate the percentage of such
Voting Stock then beneficially owned, directly or indirectly, by KKR, its
successors and its Affiliates and management of the Company. The capitalized
terms included in the definition of "change of control" under the Credit
Facilities have meanings comparable to those included in the Indenture. The
definition of change of control under the Credit Facilities and the definition
of change of control under the Indenture vary in certain material respects.
72
<PAGE>
THE EXCHANGE OFFER
GENERAL
The Company hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus and in the accompanying Letter of Transmittal (which
together constitute the Exchange Offer), to exchange up to $200 million
aggregate principal amount of Exchange Notes for a like aggregate principal
amount of Old Notes properly tendered on or prior to the Expiration Date and not
withdrawn as permitted pursuant to the procedures described below. The Exchange
Offer is being made with respect to all of the Old Notes.
As of the date of this Prospectus, $200 million aggregate principal amount
of the Old Notes is outstanding. This Prospectus, together with the Letter of
Transmittal, is first being sent on or about , 1996, to all holders of
Old Notes known to the Company. The Company's obligation to accept Old Notes for
exchange pursuant to the Exchange Offer is subject to certain conditions set
forth under "Certain Conditions to the Exchange Offer" below. The Company
currently expects that each of the conditions will be satisfied and that no
waivers will be necessary.
PURPOSE OF THE EXCHANGE OFFER
The Old Notes were issued on September 30, 1996 in a transaction exempt from
the registration requirements of the Securities Act. Accordingly, the Old Notes
may not be reoffered, resold, or otherwise transferred unless so registered or
unless an applicable exemption from the registration and prospectus delivery
requirements of the Securities Act is available.
In connection with the issuance and sale of the Old Notes, the Company
entered into the Registration Rights Agreement, which requires the Company to
file with the Commission a registration statement relating to the Exchange Offer
not later than 45 days after the date of issuance of the Old Notes, and to use
its best efforts to cause the registration relating to the Exchange Offer to
become effective under the Securities Act not later than 105 days after the date
of issuance of the Old Notes and the Exchange Offer to be consummated not later
than 30 days after the date of the effectiveness of the Registration Statement
(or use its best efforts to cause to become effective by the 135th calendar day
after the Issuance Date a shelf registration statement with respect to resales
of the Old Notes). A copy of the Registration Rights Agreement has been filed as
an exhibit to the Registration Statement.
The Exchange Offer is being made by the Company to satisfy its obligations
with respect to the Registration Rights Agreement. The term "holder," with
respect to the Exchange Offer, means any person in whose name Old Notes are
registered on the books of the Company or any other person who has obtained a
properly completed bond power from the registered holder, or any person whose
Old Notes are held of record by The Depository Trust Company. Other than
pursuant to the Registration Rights Agreement, the Company is not required to
file any registration statement to register any outstanding Old Notes. Holders
of Old Notes who do not tender their Old Notes or whose Old Notes are tendered
but not accepted would have to rely on exemptions to registration requirements
under the securities laws, including the Securities Act, if they wish to sell
their Old Notes.
The Company is making the Exchange Offer in reliance on the position of the
Staff of the Commission as set forth in certain interpretive letters addressed
to third parties in other transactions. However, the Company has not sought its
own interpretive letter and there can be no assurance that the Staff would make
a similar determination with respect to the Exchange Offer as it has in such
interpretive letters to third parties. Based on these interpretations by the
Staff, the Company believes that the Exchange Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may be offered for resale, resold and
otherwise transferred by a Holder (other than any Holder who is a broker-dealer
or an "affiliate" of the Company within the meaning of Rule 405 of the
Securities Act) without further
73
<PAGE>
compliance with the registration and prospectus delivery requirements of the
Securities Act, provided that such Exchange Notes are acquired in the ordinary
course of such Holder's business and that such Holder is not participating, and
has no arrangement or understanding with any person to participate, in a
distribution (within the meaning of the Securities Act) of such Exchange Notes.
See "--Resale of Exchange Notes." Each broker-dealer that receives Exchange
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 Exchange Notes. See "Plan of Distribution."
TERMS OF THE EXCHANGE
The Company hereby offers to exchange, subject to the conditions set forth
herein and in the Letter of Transmittal accompanying this Prospectus, $1,000 in
principal amount of Exchange Notes for each $1,000 in principal amount of the
Old Notes. The terms of the Exchange Notes are identical in all material
respects to the terms of the Old Notes for which they may be exchanged pursuant
to this Exchange Offer, except that the Exchange Notes will generally be freely
transferable by holders thereof and will not be subject to any covenant
regarding registration. The Exchange Notes will evidence the same indebtedness
as the Old Notes and will be entitled to the benefits of the Indenture. See
"Description of Exchange Notes."
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Old Notes being tendered for exchange.
The Company has not requested, and does not intend to request, an
interpretation by the staff of the Commission with respect to whether the
Exchange Notes issued pursuant to the Exchange Offer in exchange for the Old
Notes may be offered for sale, resold or otherwise transferred by any holder
without compliance with the registration and prospectus delivery provisions of
the Securities Act. Instead, based on an interpretation by the staff of the
Commission set forth in a series of no-action letters issued to third parties,
the Company believes that Exchange Notes issued pursuant to the Exchange Offer
in exchange for Old Notes may be offered for sale, resold and otherwise
transferred by any holder of such Exchange Notes (other than any such holder
that is a broker-dealer or is an "affiliate" of the Company within the meaning
of Rule 405 under the Securities Act) without compliance with the registration
and prospectus delivery provisions of the Securities Act, provided that such
Exchange Notes are acquired in the ordinary course of such holder's business and
such holder has no arrangement or understanding with any person to participate
in the distribution of such Exchange Notes and neither such holder nor any other
such person is engaging in or intends to engage in a distribution of such
Exchange Notes. Since the Commission has not considered the Exchange Offer in
the context of a no-action letter, there can be no assurance that the staff of
the Commission would make a similar determination with respect to the Exchange
Offer. Any holder who is an affiliate of the Company or who tenders in the
Exchange Offer for the purpose of participating in a distribution of the
Exchange Notes cannot rely on such interpretation by the staff of the Commission
and must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with any resale transaction. Each holder, other
than a broker-dealer, must acknowledge that it is not engaged in, and does not
intend to engage in, a distribution of Exchange Notes. Each broker-dealer that
receives Exchange 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 Exchange Notes. See "Plan of
Distribution."
Interest on the Exchange Notes shall accrue from the last Interest Payment
Date on which interest was paid on the Old Notes so surrendered or, if no
interest has been paid on such Notes, from September 30, 1996.
74
<PAGE>
Tendering holders of the Old Notes shall 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 the Old Notes
pursuant to the Exchange Offer.
EXPIRATION DATE; EXTENSION; TERMINATION; AMENDMENT
The Exchange Offer will expire at 5:00 p.m., New York City time, on
, 1997, unless the Company, in its sole discretion, has extended the
period of time for which the Exchange Offer is open (such date, as it may be
extended, is referred to herein as the "Expiration Date"). The Expiration Date
will be at least 20 business days after the commencement of the Exchange Offer
in accordance with Rule 14e-1(a) under the Exchange Act. 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 to the Exchange
Agent and by giving written notice of such extension to the holders thereof or
by timely public announcement no later than 9:00 a.m. New York City time, on the
next business day after the previously scheduled Expiration Date. During any
such extension, all Old Notes previously tendered will remain subject to the
Exchange Offer unless properly withdrawn.
The Company expressly reserves the right to (i) terminate or amend the
Exchange Offer and not to accept for exchange any Old Notes not theretofore
accepted for exchange upon the occurrence of any of the events specified below
under "Certain Conditions to the Exchange Offer" which have not been waived by
the Company and (ii) amend the terms of the Exchange Offer in any manner which,
in its good faith judgment, is advantageous to the Holders of the Old Notes,
whether before or after any tender of the Notes. If any such termination or
amendment occurs, the Company will notify the Exchange Agent and will either
issue a press release or give oral or written notice to the holders of the Old
Notes as promptly as practicable.
For purposes of the Exchange Offer, a "business day" means any day other
than Saturday, Sunday or a date on which banking institutions are required or
authorized by New York State law to be closed, and consists of the time period
from 12:01 a.m. through 12:00 midnight, New York City time. Unless the Company
terminates the Exchange Offer prior to 5:00 p.m., New York City time, on the
Expiration Date, the Company will exchange the Exchange Notes for the Old Notes
on the Exchange Date.
PROCEDURES FOR TENDERING OLD NOTES
The tender to the Company of Old Notes by a holder thereof as set forth
below and the acceptance thereof by the Company will constitute a binding
agreement between the tendering holder and the Company upon the terms and
subject to the conditions set forth in this Prospectus and in the accompanying
Letter of Transmittal.
A holder of Old Notes may tender the same by (i) properly completing and
signing the Letter of Transmittal or a facsimile thereof (all references in this
Prospectus to the Letter of Transmittal shall be deemed to include a facsimile
thereof) and delivering the same, together with the certificate or certificates
representing the Old Notes being tendered and any required signature guarantees
and any other document required by the Letter of Transmittal, to the Exchange
Agent at its address set forth below on or prior to the Expiration Date (or
complying with the procedure for book-entry transfer described below) or (ii)
complying with the guaranteed delivery procedures described below.
THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS. IF SUCH DELIVERY
IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL PROPERLY INSURED, WITH RETURN
RECEIPT REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO
INSURE TIMELY DELIVERY. NO OLD NOTES OR LETTERS OF TRANSMITTAL SHOULD BE SENT TO
THE COMPANY.
75
<PAGE>
If tendered Old Notes are registered in the name of the signer of the Letter
of Transmittal and the Exchange Notes to be issued in exchange therefor are to
be issued (and any untendered Old Notes are to be reissued) in the name of the
registered holder (which term, for the purposes described herein, shall include
any participant in The Depository Trust Company (also referred to as a
"book-entry transfer facility") whose name appears on a security listing as the
owner of Old Notes), the signature of such signer need not be guaranteed. In any
other case, the tendered Old Notes must be endorsed or accompanied by written
instruments of transfer in form satisfactory to the Company and duly executed by
the registered holder, and the signature on the endorsement or instrument of
transfer must be guaranteed by a commercial bank or trust company located or
having an office, branch, agency or correspondent in the United States, or by a
member firm of a registered national securities exchange or of the National
Association of Securities Dealers, Inc. (any of the foregoing hereinafter
referred to as an "Eligible Institution"). If the Exchange Notes and/or Old
Notes not exchanged are to be delivered to an address other than that of the
registered holder appearing on the note register for the Old Notes, the
signature in the Letter of Transmittal must be guaranteed by an Eligible
Institution.
The Exchange Agent will make a request within two business days after the
date of receipt of this Prospectus to establish accounts with respect to the Old
Notes at the book-entry transfer facility for the purpose of facilitating the
Exchange Offer, and subject to the establishment thereof, any financial
institution that is a participant in the book-entry transfer facility's system
may make book-entry delivery of Old Notes by causing such book-entry transfer
facility to transfer such Old Notes into the Exchange Agent's account with
respect to the Old Notes in accordance with the book-entry transfer facility's
procedures for such transfer. Although delivery of Old Notes may be effected
through book-entry transfer into the Exchange Agent's account at the book-entry
transfer facility, an appropriate Letter of Transmittal with any required
signature guarantee and all other required documents must in each case be
transmitted to and received or confirmed by the Exchange Agent at its address
set forth below on or prior to the Expiration Date, or, if the guaranteed
delivery procedures described below are complied with, within the time period
provided under such procedures.
If a holder desires to accept the Exchange Offer and time will not permit a
Letter of Transmittal or Old Notes to reach the Exchange Agent before the
Expiration Date or the procedure for book-entry transfer cannot be completed on
a timely basis, a tender may be effected if the Exchange Agent has received at
its address set forth below on or prior to the Expiration Date, a letter,
telegram or facsimile transmission (receipt confirmed by telephone and an
original delivered by guaranteed overnight courier) from an Eligible Institution
setting forth the name and address of the tendering holder, the names in which
the Old Notes are registered and, if possible, the certificate numbers of the
Old Notes to be tendered, and stating that the tender is being made thereby and
guaranteeing that within three business days after the Expiration Date, the Old
Notes in proper form for transfer (or a confirmation of book-entry transfer of
such Old Notes into the Exchange Agent's account at the book-entry transfer
facility), will be delivered by such Eligible Institution together with a
properly completed and duly executed Letter of Transmittal (and any other
required documents). Unless Old Notes being tendered by the above-described
method are deposited with the Exchange Agent within the time period set forth
above (accompanied or preceded by a properly completed Letter of Transmittal and
any other required documents), the Company may, at its option, reject the
tender. Copies of the notice of guaranteed delivery ("Notice of Guaranteed
Delivery") which may be used by Eligible Institutions for the purposes described
in this paragraph are available from the Exchange Agent.
A tender will be deemed to have been received as of the date when (i) the
tendering holder's properly completed and duly signed Letter of Transmittal
accompanied by the Old Notes (or a confirmation of book-entry transfer of such
Old Notes into the Exchange Agent's account at the book-entry transfer facility)
is received by the Exchange Agent, or (ii) a Notice of Guaranteed Delivery or
letter, telegram or facsimile transmission to similar effect (as provided above)
from an Eligible Institution is received by the Exchange Agent. Issuances of
Exchange Notes in exchange for Old Notes tendered pursuant to a Notice of
76
<PAGE>
Guaranteed Delivery or letter, telegram or facsimile transmission to similar
effect (as provided above) by an Eligible Institution will be made only against
deposit of the Letter of Transmittal (and any other required documents) and the
tendered Old Notes.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Old Notes tendered for exchange will be determined by
the Company in its sole discretion, which determination shall be final and
binding. The Company reserves the absolute right to reject any and all tenders
of any particular Old Notes not properly tendered or not to accept any
particular Old Notes which acceptance might, in the judgment of the Company or
its counsel, be unlawful. The Company also reserves the absolute right to waive
any defects or irregularities or conditions of the Exchange Offer as to any
particular Old Notes either before or after the Expiration Date (including the
right to waive the ineligibility of any holder who seeks to tender Old Notes in
the Exchange Offer). The interpretation of the terms and conditions of the
Exchange Offer (including the Letter of Transmittal and the instructions
thereto) by the Company shall be final and binding on all parties. Unless
waived, any defects or irregularities in connection with tenders of Old Notes
for exchange must be cured within such reasonable period of time as the Company
shall determine. Neither the Company, the Exchange Agent nor any other person
shall be under any duty to give notification of any defect or irregularity with
respect to any tender of Old Notes for exchange, nor shall any of them incur any
liability for failure to give such notification.
If the Letter of Transmittal is signed by a person or persons other than the
registered holder or holders of Old Notes, such Old Notes must be endorsed or
accompanied by appropriate powers of attorney, in either case signed exactly as
the name or names of the registered holder or holders appear on the Old Notes.
If the Letter of Transmittal or any Old Notes or powers of attorney 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, proper evidence satisfactory to the Company of their authority to
so act must be submitted.
By tendering, each holder will represent to the Company that, among other
things, the Exchange Notes acquired pursuant to the Exchange Offer are being
acquired in the ordinary course of business of the person receiving such
Exchange Notes, whether or not such person is the holder, that neither the
holder nor any such other person has an arrangement or understanding with any
person to participate in the distribution of such Exchange Notes and that
neither the holder nor any such other person is an "affiliate," as defined under
Rule 405 of the Securities Act, of the Company, or if it is an affiliate it will
comply with the registration and prospectus requirements of the Securities Act
to the extent applicable.
Each broker-dealer that receives Exchange 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 Exchange Notes. See "Plan of Distribution."
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The Letter of Transmittal contains, among other things, the following terms
and conditions, which are part of the Exchange Offer.
The party tendering Notes for exchange (the "Transferor") exchanges, assigns
and transfers the Old Notes to the Company and irrevocably constitutes and
appoints the Exchange Agent as the Transferor's agent and attorney-in-fact to
cause the Old Notes to be assigned, transferred and exchanged. The Transferor
represents and warrants that it has full power and authority to tender,
exchange, assign and transfer the Old Notes and to acquire Exchange Notes
issuable upon the exchange of such tendered Notes, and that, when the same are
accepted for exchange, the Company will acquire good and unencumbered title to
the tendered Old Notes, free and clear of all liens, restrictions, charges and
encumbrances and not
77
<PAGE>
subject to any adverse claim. The Transferor also warrants that it will, upon
request, execute and deliver any additional documents deemed by the Exchange
Agent or the Company to be necessary or desirable to complete the exchange,
assignment and transfer of tendered Old Notes or transfer ownership of such Old
Notes on the account books maintained by a book-entry transfer facility. The
Transferor further agrees that acceptance of any tendered Old Notes by the
Company and the issuance of Exchange Notes in exchange therefor shall constitute
performance in full by the Company of certain of its obligations under the
Registration Rights Agreement. All authority conferred by the Transferor will
survive the death or incapacity of the Transferor and every obligation of the
Transferor shall be binding upon the heirs, legal representatives, successors,
assigns, executors and administrators of such Transferor.
The Transferor certifies that it is not an "affiliate" of the Company within
the meaning of Rule 405 under the Securities Act and that it is acquiring the
Exchange Notes offered hereby in the ordinary course of such Transferor's
business and that such Transferor has no arrangement with any person to
participate in the distribution of such Exchange Notes. Each holder, other than
a broker-dealer, must acknowledge that it is not engaged in, and does not intend
to engage in, a distribution of Exchange Notes. Each Transferor which is a
broker-dealer receiving Exchange Notes for its own account must acknowledge that
it will deliver a prospectus in connection with any resale of such Exchange
Notes. 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 Exchange
Notes received 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. The Company will, for a period of 120 days after the Expiration
Date, make copies of this Prospectus available to any broker-dealer for use in
connection with any such resale.
WITHDRAWAL RIGHTS
Tenders of Old Notes may be withdrawn at any time prior to the Expiration
Date.
For a withdrawal to be effective, a written notice of withdrawal sent by
telegram, facsimile transmission (receipt confirmed by telephone) or letter must
be received by the Exchange Agent at the address set forth herein prior to the
Expiration Date. Any such notice of withdrawal must (i) specify the name of the
person having tendered the Old Notes to be withdrawn (the "Depositor"), (ii)
identify the Old Notes to be withdrawn (including the certificate number or
numbers and principal amount of such Old Notes), (iii) specify the principal
amount of Notes to be withdrawn, (iv) include a statement that such holder is
withdrawing his election to have such Old Notes exchanged, (v) be signed by the
holder in the same manner as the original signature on the Letter of Transmittal
by which such Old Notes were tendered or as otherwise described above (including
any required signature guarantees) or be accompanied by documents of transfer
sufficient to have the Trustee under the Indenture register the transfer of such
Old Notes into the name of the person withdrawing the tender and (vi) specify
the name in which any such Old Notes are to be registered, if different from
that of the Depositor. The Exchange Agent will return the properly withdrawn Old
Notes promptly following receipt of notice of withdrawal. If Old Notes have been
tendered pursuant to the procedure for book-entry transfer, 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 or otherwise
comply with the book-entry transfer facility procedure. All questions as to the
validity of notices of withdrawals, including time of receipt, will be
determined by the Company and such determination will 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 with such
book-entry transfer facility specified by the holder) as soon as practicable
after
78
<PAGE>
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.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Company will accept, promptly on the Exchange Date, all Old Notes properly
tendered and will issue the Exchange Notes promptly after such acceptance. See
"Certain Conditions to the Exchange Offer" below. For purposes of the Exchange
Offer, the Company shall be deemed to have accepted properly tendered Old Notes
for exchange when, as and if the Company has given oral or written notice
thereof to the Exchange Agent.
For each Old Note accepted for exchange, the holder of such Old Note will
receive an Exchange Note having a principal amount equal to that of the
surrendered Old Note.
In all cases, issuance of Exchange 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 certificates for such Old 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 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 above, such non-exchanged Old Notes will be credited to an account
maintained with such book-entry transfer facility) as promptly as practicable
after the expiration of the Exchange Offer.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, or any extension
of the Exchange Offer, the Company shall not be required to accept for exchange,
or to issue Exchange Notes in exchange for, any Old Notes and may terminate or
amend the Exchange Offer (by oral or written notice to the Exchange Agent or by
a timely press release) if at any time before the acceptance of such Old Notes
for exchange or the exchange of the Exchange Notes for such Old Notes, any of
the following conditions exist:
(a) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency or regulatory authority or any
injunction, order or decree is issued with respect to the Exchange Offer
which, in the sole judgment of the Company, might materially impair the
ability of the Company to proceed with the Exchange Offer or have a material
adverse effect on the contemplated benefits of the Exchange Offer to the
Company; or
(b) any change (or any development involving a prospective change) shall
have occurred or be threatened in the business, properties, assets,
liabilities, financial condition, operations, results of operations or
prospects of the Company that is or may be adverse to the Company, or the
Company shall have become aware of facts that have or may have adverse
significance with respect to the value of the Old Notes or the Exchange
Notes or that may materially impair the contemplated benefits of the
Exchange Offer to the Company;
(c) any law, rule or regulation or applicable interpretations of the
staff of the Commission is issued or promulgated which, in the good faith
determination of the Company, do not permit the Company to effect the
Exchange Offer; or
(d) any governmental approval has not been obtained, which approval the
Company, in its sole discretion, deems necessary for the consummation of the
Exchange Offer; or
79
<PAGE>
(e) there shall have been proposed, adopted or enacted any law, statute,
rule or regulation (or an amendment to any existing law statute, rule or
regulation) which, in the sole judgment of the Company, might materially
impair the ability of the Company to proceed with the Exchange Offer or have
a material adverse effect on the contemplated benefits of the Exchange Offer
to the Company; or
(f) there shall occur a change in the current interpretation by the
staff of the Commission which permits the Exchange Notes issued pursuant to
the Exchange Offer in exchange for Old Notes to be offered for resale,
resold and otherwise transferred by holders thereof (other than any such
holder that is an "affiliate" of the Issuer within the meaning of Rule 405
under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act provided that such
Exchange Notes are acquired in the ordinary course of such holders' business
and such holders have no arrangement with any person to participate in the
distribution of such Exchange Notes; or
(g) there shall have occurred (i) any general suspension of, shortening
of hours for, or limitation on prices for, trading in securities on any
national securities exchange or in the over-the-counter market (whether or
not mandatory), (ii) any limitation by any govermental agency or authority
which may adversely affect the ability of the Company to complete the
transactions contemplated by the Exchange Offer, (iii) a declaration of a
banking moratorium or any suspension of payments in respect of banks by
Federal or state authorities in the United States (whether or not
mandatory), (iv) a commencement of a war, armed hostilities or other
international or national crisis directly or indirectly involving the United
States, (v) any limitation (whether or not mandatory) by any governmental
authority on, or other event having a reasonable likelihood of affecting,
the extension of credit by banks or other leading institutions in the United
States, or (vi) in the case of any of the foregoing existing at the time of
the commencement of the Exchange Offer, a material acceleration or worsening
thereof.
The Company expressly reserves the right to terminate the Exchange Offer and
not accept for exchange any Old Notes upon the occurrence of any of the
foregoing conditions (which represent all of the material conditions to the
acceptance by the Company of properly tendered Old Notes). In addition, the
Company may amend the Exchange Offer at any time prior to the Expiration Date if
any of the conditions set forth above occur. Moreover, regardless of whether any
of such conditions has occurred, the Company may amend the Exchange Offer in any
manner which, in its good faith judgment, is advantageous to holders of the Old
Notes.
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. If the Company waives or amends the foregoing
conditions, it will, if required by law, extend the Exchange Offer for a minimum
of five business days from the date that the Company first gives notice, by
public announcement or otherwise, of such waiver or amendment, if the Exchange
Offer would otherwise expire within such five business-day period. Any
determination by the Company concerning the events described above will be final
and binding upon all parties.
In addition, the Company will not accept for exchange any Old Notes
tendered, and no Exchange 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, as amended. In any such event the Company is required to use every
reasonable effort to obtain the withdrawal of any stop order at the earliest
possible time.
80
<PAGE>
The Exchange Offer is not conditioned upon any minimum principal amount of
Old Notes being tendered for exchange.
EXCHANGE AGENT
Marine Midland Bank has been appointed as the Exchange Agent for the
Exchange Offer. All executed Letters of Transmittal should be directed to the
Exchange Agent at one of the addresses set forth below:
<TABLE>
<S> <C>
BY HAND/OVERNIGHT COURIER: BY MAIL:
Marine Midland Bank Marine Midland Bank
Attn: Corporate Trust Administrator Attn: Corporate Trust Administrator
140 Broadway 140 Broadway
New York, New York 10006 New York, New York 10006
BY FACSIMILE:
(212) 658-6425
Attn.: Corporate Trust Administrator
Telephone: (212) 658-6433
</TABLE>
Questions and requests for assistance, requests for additional copies of this
Prospectus or of the Letter of Transmittal and requests for Notices of
Guaranteed Delivery should be directed to the Exchange Agent at the address and
telephone number set forth in the Letter of Transmittal.
DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ON THE LETTER OF TRANSMITTAL,
OR TRANSMISSIONS OF INSTRUCTIONS VIA A FACSIMILE OR TELEX NUMBER OTHER THAN THE
ONES SET FORTH ON THE LETTER OF TRANSMITTAL, WILL NOT CONSTITUTE A VALID
DELIVERY.
SOLICITATION OF TENDERS; FEES AND EXPENSES
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith. The
Company will also pay brokerage houses and other custodians, nominees and
fiduciaries the reasonable out-of-pocket expenses incurred by them in forwarding
copies of this and other related documents to the beneficial owners of the Old
Notes and in handling or forwarding tenders for their customers.
The estimated 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 $ , which includes fees and expenses of the Exchange Agent,
Trustee, registration fees, accounting, legal, printing and related fees and
expenses.
No person has been authorized to give any information or to make any
representations in connection with the Exchange Offer other than those contained
in this Prospectus. If given or made, such information or representations should
not be relied upon as having been authorized by the Company. Neither the
delivery of this Prospectus nor any exchange made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company since the respective dates as of which information is
given herein. The Exchange Offer is not being made to (nor will tenders be
accepted from or on behalf of) holders of Old Notes in any jurisdiction in which
the making of the Exchange Offer or the acceptance thereof would not be in
compliance with the laws of such jurisdiction. However, the Company may, at its
discretion, take such action as it may deem necessary to make the Exchange Offer
in any such jurisdiction and extend the Exchange Offer to holders of Old Notes
in such jurisdiction. In any jurisdiction in which the securities laws or blue
sky laws of which require the Exchange Offer to be made by
81
<PAGE>
a licensed broker or dealer, the Exchange Offer is being made on behalf of the
Company by one or more registered brokers or dealers which are licensed under
the laws of such jurisdication.
TRANSFER TAXES
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, certificates
representing Exchange Notes or 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 the Old Notes tendered, or if
tendered Old Notes are registered in the name of any person other than the
person signing the Letter of Transmittal, or if a transfer tax is imposed for
any reason other than the exchange of Old Notes pursuant to the Exchange Offer,
then the amount of any such transfer taxes (whether imposed on the registered
holder or any other persons) will be payable by the tendering holder. If
satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering holder.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the carrying value of the Old Notes
as reflected in the Company's accounting records on the date of the exchange.
Accordingly, no gain or loss for accounting purposes will be recognized by the
Company upon the exchange of Exchange Notes for Old Notes. Expenses incurred in
connection with the issuance of the Exchange Notes will be amortized over the
term of the Exchange Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for Exchange Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon. Old Notes not
exchanged pursuant to the Exchange Offer will continue to remain outstanding in
accordance with their terms. 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.
Participation in the Exchange Offer is voluntary, and holders of Old Notes
should carefully consider whether to participate. Holders of the Old Notes are
urged to consult their financial and tax advisors in making their own decision
on what action to take.
As a result of the making of, and upon acceptance for exchange of all
validly tendered Old Notes pursuant to the terms of, this Exchange Offer, the
Company will have fulfilled a covenant contained in the Registration Rights
Agreement. Holders of Old Notes who do not tender their Old Notes in the
Exchange Offer will continue to hold such Old Notes and will be entitled to all
the rights and limitations applicable thereto under the Indenture, except for
any such rights under the Registration Rights Agreement that by their terms
terminate or cease to have further effectiveness as a result of the making of
this Exchange Offer. All untendered Old Notes will continue to be subject to the
restrictions on transfer set forth in the Indenture. To the extent that Old
Notes are tendered and accepted in the Exchange Offer, the trading market for
untendered Old Notes could be adversely affected.
The Company may in the future seek to acquire subject to the terms of the
Indenture untendered Old Notes in open market or privately negotiated
transactions, through subsequent exchange offers or otherwise. The Company has
no present plan to acquire any Old Notes which are not tendered in the Exchange
Offer.
82
<PAGE>
RESALE OF EXCHANGE NOTES
The Company is making the Exchange Offer in reliance on the position of the
Staff of the Commission as set forth in certain interpretive letters addressed
to third parties in other transactions. However, the Company has not sought its
own interpretive letter and there can be no assurance that the Staff would make
a similar determination with respect to the Exchange Offer as it has in such
interpretive letters to third parties. Based on these interpretations by the
Staff, the Company believes that the Exchange Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may be offered for resale, resold and
otherwise transferred by a Holder (other than any Holder who is a broker-dealer
or an "affiliate" of the Company within the meaning of Rule 405 of the
Securities Act) without further compliance with the registration and prospectus
delivery requirements of the Securities Act, provided that such Exchange Notes
are acquired in the ordinary course of such Holder's business and that such
Holder is not participating, and has no arrangement or understanding with any
person to participate, in a distribution (within the meaning of the Securities
Act) of such Exchange Notes. However, any holder who is an "affiliate" of the
Company or who has an arrangement or understanding with respect to the
distribution of the Exchange Notes to be acquired pursuant to the Exchange
Offer, or any broker-dealer who purchased Old Notes from the Company to resell
pursuant to Rule 144A or any other available exemption under the Securities Act
(i) could not rely on the applicable interpretations of the Staff and (ii) must
comply with the registration and prospectus delivery requirements of the
Securities Act. A broker-dealer who holds Old Notes that were acquired for its
own account as a result of market-making or other trading activities may be
deemed to be an "underwriter" within the meaning of the Securities Act and must,
therefore, deliver a prospectus meeting the requirements of the Securities Act
in connection with any resale of Exchange Notes. Each such broker-dealer that
receives Exchange 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 in the Letter of
Transmittal that it will deliver a prospectus in connection with any resale of
such Exchange Notes. See "Plan of Distribution."
In addition, to comply with the securities laws of certain jurisdictions, if
applicable, the Exchange Notes may not be offered or sold unless they have been
registered or qualified for sale in such jurisdiction or an exemption from
registration or qualification is available and is complied with. The Company has
agreed, pursuant to the Registration Rights Agreement and subject to certain
specified limitations therein, to register or qualify the Exchange Notes for
offer or sale under the securities or blue sky laws of such jurisdictions as any
holder of the Exchange Notes reasonably requests in writing. Such registration
or qualification may require the imposition of restrictions or conditions
(including suitability requirements for offerees or purchasers) in connection
with the offer or sale of any Exchange Notes.
83
<PAGE>
DESCRIPTION OF THE EXCHANGE NOTES
The Old Notes were issued and the Exchange Notes offered hereby will be
issued under an indenture dated as of September 30, 1996 (the "Indenture")
between the Company, as issuer, and Marine Midland Bank, as trustee (the
"Trustee"). The terms of the Exchange Notes include those stated in the
Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"). The Exchange
Notes are subject to all such terms, and holders of the Exchange Notes are
referred to the Indenture and the Trust Indenture Act for a statement thereof.
The following summary of certain provisions of the Indenture describes the
material terms of the Indenture but does not purport to be complete and is
qualified in its entirety by reference to the Indenture, including the
definitions therein of certain terms used below. The definitions of certain
terms used in the following summary are set forth below under "Certain
Definitions." The Indenture is an exhibit to the Registration Statement of which
this Prospectus is a part.
On September 30, 1996, the Company issued $200 million aggregate principal
amount of Old Notes under the Indenture. The terms of the Exchange Notes are
identical in all material respects to the Old Notes, except for certain transfer
restrictions and registration and other rights relating to the exchange of the
Old Notes for Exchange Notes. The Trustee will authenticate and deliver Exchange
Notes for original issue only in exchange for a like principal amount of Old
Notes. Any Old Notes that remain outstanding after the consummation of the
Exchange Offer, together with the Exchange Notes, will be treated as a single
class of securities under the Indenture. Accordingly, all references herein to
specified percentages in aggregate principal amount of the outstanding Exchange
Notes shall be deemed to mean, at any time after the Exchange Offer is
consummated, such percentage in aggregate principal amount of the Old Notes and
Exchange Notes then outstanding.
GENERAL
The Exchange Notes will mature on October 1, 2006, will be limited to $200
million aggregate principal amount and will be unsecured senior subordinated
obligations of the Company. Each Exchange Note will bear interest at the rate
set forth on the cover page hereof from September 30, 1996 or from the most
recent interest payment date to which interest has been paid or duly provided
for, payable on April 1, 1997 and semiannually thereafter on October 1 and April
1 in each year until the principal thereof is paid or duly provided for to the
Person in whose name the Exchange Note (or any predecessor Exchange Note) is
registered at the close of business on the September 15 or March 15 next
preceding such interest payment date. Interest will be computed on the basis of
a 360-day year comprised of twelve 30-day months.
Principal of, premium, if any, and interest on the Exchange Notes will be
payable, and the Exchange Notes will be exchangeable and transferable at the
office or agency of the Company in the City of New York maintained for such
purposes (which initially will be the Trustee); PROVIDED, HOWEVER, that, at the
option of the Company, interest may be paid by check mailed to the address of
the Person entitled thereto as such address appears on the security register.
The Exchange Notes will be issued only in fully registered form without coupons
and only in denominations of $1,000 and any integral multiple thereof. No
service charge will be made for any registration of transfer or exchange or
redemption of Exchange Notes, but the Company may require payment in certain
circumstances of a sum sufficient to cover any tax or other governmental charge
that may be imposed in connection therewith.
Old Notes that remain outstanding after the consummation of the Exchange
Offer and Exchange Notes issued in connection with the Exchange Offer will be
treated as a single class of securities under the Indenture.
SUBORDINATION
The payment of the Subordinated Note Obligations is subordinated in right of
payment, as set forth in the Indenture, to the prior payment in full in cash
equivalents of all Senior Indebtedness, whether
84
<PAGE>
outstanding on the date of the Indenture or thereafter incurred. Upon any
distribution to creditors of the Company in a liquidation or dissolution of the
Company or in a bankruptcy, reorganization, insolvency, receivership or similar
proceeding relating to the Company or its property, an assignment for the
benefit of creditors or any marshalling of the Company's assets and liabilities,
the holders of Senior Indebtedness will be entitled to receive payment in full
in cash equivalents of such Senior Indebtedness before the holders of Exchange
Notes will be entitled to receive any payment with respect to the Subordinated
Note Obligations, and until all Senior Indebtedness is paid in full in cash
equivalents, any distribution to which the holders of Exchange Notes would be
entitled shall be made to the holders of Senior Indebtedness (except that
holders of Exchange Notes may receive (i) shares of stock and any debt
securities that are subordinated at least to the same extent as the Exchange
Notes to Senior Indebtedness and any securities issued in exchange for Senior
Indebtedness and (ii) payments made from the trusts described under "--Legal
Defeasance and Covenant Defeasance").
The Company also may not make any payment upon or in respect of the
Subordinated Note Obligations (except in such subordinated securities or from
the trust described under "--Legal Defeasance and Covenant Defeasance") if (i) a
default in the payment of the principal of, premium, if any, or interest on, or
of unreimbursed amounts under drawn letters of credit or in respect of bankers'
acceptances or fees relating to letters of credit or bankers' acceptances
constituting Designated Senior Indebtedness occurs and is continuing beyond any
applicable period of grace (a "payment default") or (ii) any other default
occurs and is continuing with respect to Designated Senior Indebtedness that
permits holders of the Designated Senior Indebtedness as to which such default
relates to accelerate its maturity (a "non-payment default") and the Trustee
receives a notice of such default (a "Payment Blockage Notice") from a
representative of holders of such Designated Senior Indebtedness. Payments on
the Exchange Notes, including any missed payments, may and shall be resumed (a)
in the case of a payment default, upon the date on which such default is cured
or waived or shall have ceased to exist or such Designated Senior Indebtedness
shall have been discharged or paid in full in cash equivalents and (b) in case
of a nonpayment default, the earlier of (x) the date on which such nonpayment
default is cured or waived, (y) 179 days after the date on which the applicable
Payment Blockage Notice is received (each such period, the "Payment Blockage
Period") or (z) the date such Payment Blockage Period shall be terminated by
written notice to the Trustee from the requisite holders of such Designated
Senior Indebtedness necessary to terminate such period or from their
representative. No new period of payment blockage may be commenced unless and
until 365 days have elapsed since the effectiveness of the immediately preceding
Payment Blockage Notice. However, if any Payment Blockage Notice within such
365-day period is given by or on behalf of any holders of Designated Senior
Indebtedness (other than the agent under the Senior Credit Facility), the agent
under the Senior Credit Facility may give another Payment Blockage Notice within
such period. In no event, however, may the total number of days during which any
Payment Blockage Period or Periods is in effect exceed 179 days in the aggregate
during any 365 consecutive day period. No nonpayment default that existed or was
continuing on the date of delivery of any Payment Blockage Notice to the Trustee
shall be, or be made, the basis for a subsequent Payment Blockage Notice unless
such default shall have been cured or waived for a period of not less than 90
days.
If the Company fails to make any payment on the Exchange Notes when due or
within any applicable grace period, whether or not on account of the payment
blockage provision referred to above, such failure would constitute an Event of
Default under the Indenture and would enable the holders of the Exchange Notes
to accelerate the maturity thereof.
The Indenture further requires that the Company promptly notify holders of
Senior Indebtedness if payment of the Exchange Notes is accelerated because of
an Event of Default.
As a result of the subordination provisions described above, in the event of
insolvency, bankruptcy, administration, reorganization, receivership or similar
proceedings relating to the Company, holders of Exchange Notes may recover less
ratably than creditors of the Company who are holders of Senior
85
<PAGE>
Indebtedness. As of September 30, 1996 the Company has approximately $483
million of Senior Indebtedness outstanding and the Company has additional
availability of $142 million (reduced to reflect $82 million of outstanding
letters of credit and bankers' acceptances) for borrowings under the Senior
Credit Facility, all of which would be Senior Indebtedness, if borrowed.
Although the Indenture contains limitations on the amount of additional
Indebtedness that the Company may incur, under certain circumstances the amount
of such Indebtedness could be substantial and, in any case, such Indebtedness
may be Senior Indebtedness. See "--Certain Covenants--Limitations on Incurrence
of Indebtedness and Issuance of Disqualified Stock."
The Company is a holding company that derives all of its operating income
and cash flow from its subsidiaries. Generally, claims of creditors of a
subsidiary, including trade creditors, secured creditors and creditors holding
indebtedness and guarantees issued by such subsidiary, and claims of preferred
stockholders (if any) of such subsidiary will have priority with respect to the
assets and earnings of such subsidiary over the claims of creditors of its
parent company, except to the extent the claims of creditors of the parent
company are guaranteed by such subsidiary. The Exchange Notes, therefore, will
be effectively subordinated to creditors (including trade creditors) and
preferred stockholders (if any) of the direct and indirect subsidiaries of the
Company. At September 30, 1996 the Company's subsidiaries had total liabilities
(including accrued expenses ($58 million) and trade payables and bankers'
acceptances ($142 million)) of $678 million, including guarantees of
Indebtedness under the Senior Credit Facility. Although the Indenture limits the
incurrence of Indebtedness and Disqualified Capital Stock such limitation is
subject to a number of significant qualifications. Moreover, the Indenture does
not impose any limitation on the incurrence by the Company or its Restricted
Subsidiaries of liabilities that are not considered Indebtedness or Disqualified
Capital Stock under the Indenture. See "--Certain Covenants-- Limitation on
Incurrence of Indebtedness and Issuance of Disqualified Stock."
"Designated Senior Indebtedness" means (i) Senior Indebtedness under the
Senior Credit Facility and (ii) any other Senior Indebtedness permitted under
the Indenture the principal amount of which is $50 million or more and that has
been designated by the Company as Designated Senior Indebtedness.
"Senior Indebtedness" means (i) the Obligations under the Senior Credit
Facility and (ii) any other Indebtedness permitted to be incurred by the Company
under the terms of the Indenture, unless the instrument under which such
Indebtedness is incurred expressly provides that it is on a parity with or
subordinated in right of payment to the Exchange Notes, including, with respect
to (i) and (ii), interest accruing subsequent to the filing of, or which would
have accrued but for the filing of, a petition for bankruptcy, whether or not
such interest is an allowable claim in such bankruptcy proceeding.
Notwithstanding anything to the contrary in the foregoing, Senior Indebtedness
will not include (1) any liability for federal, state, local or other taxes owed
or owing by the Company, (2) any obligation of the Company to any of its
Subsidiaries, (3) any accounts payable or trade liabilities arising in the
ordinary course of business (including instruments evidencing such liabilities)
other than obligations in respect of bankers' acceptances and letters of credit
under the Senior Credit Facility, (4) any Indebtedness that is incurred in
violation of the Indenture, (5) Indebtedness which, when incurred and without
respect to any election under Section 1111(b) of Title 11, United States Code,
is without recourse to the Company, (6) any Indebtedness, guarantee or
obligation of the Company which is subordinate or junior to any other
Indebtedness, guarantee or obligation of the Company, (7) Indebtedness evidenced
by the Exchange Notes and (8) Capital Stock of the Company.
"Subordinated Note Obligations" means any principal of, premium, if any, and
interest on the Exchange Notes payable pursuant to the terms of the Exchange
Notes or upon acceleration, together with and including any amounts received
upon the exercise of rights of rescission or other rights of action (including
claims for damages) or otherwise, to the extent relating to the purchase price
of the Exchange Notes or amounts corresponding to such principal, premium, if
any, or interest on the Exchange Notes.
86
<PAGE>
The Exchange Notes will rank senior in right of payment to all Subordinated
Indebtedness of the Company. At the Issuance Date the Company had no
Subordinated Indebtedness and on the Exchange Date the Company will have no
Subordinated Indebtedness.
MANDATORY REDEMPTION
The Company will not be required to make mandatory redemptions or sinking
fund payments prior to maturity of the Exchange Notes.
OPTIONAL REDEMPTION
Except as described below, the Exchange Notes will not be redeemable at the
Company's option prior to October 1, 2001. From and after October 1, 2001, the
Exchange Notes will be subject to redemption at the option of the Company, in
whole or in part, upon not less than 30 nor more than 60 days' written notice,
at the redemption prices (expressed as a percentage of principal amount) set
forth below, plus accrued and unpaid interest thereon, if any, to the applicable
redemption date, if redeemed during the twelve-month period beginning on October
1 of each of the years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- ---------------------------------- -----------
<S> <C>
2001.............................. 105.187%
2002.............................. 103.458%
2003.............................. 101.729%
2004 and thereafter............... 100.000%
</TABLE>
In addition, at any time or from time to time, on or prior to October 1,
1999, the Company may, at its option, redeem up to 40% of the aggregate
principal amount of Exchange Notes originally issued under the Indenture on the
Issuance Date at a redemption price equal to 110% of the aggregate principal
amount thereof, plus accrued and unpaid interest thereon, if any, to the
redemption date, with the net proceeds of one or more Equity Offerings; PROVIDED
that at least $120 million aggregate principal amount of Exchange Notes remains
outstanding immediately after the occurrence of such redemption; PROVIDED
FURTHER such redemption occurs within 60 days of the date of closing of each
such Equity Offering. The Trustee shall select the Exchange Notes to be
purchased in the manner described under "Repurchase at the Option of
Holders--Selection and Notice."
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL. The Indenture provides that, upon the occurrence of a
Change of Control, the Company will make an offer to purchase all or any part
(equal to $1,000 or an integral multiple thereof) of the Exchange Notes pursuant
to the offer described below (the "Change of Control Offer") at a price in cash
(the "Change of Control Payment") equal to 101% of the aggregate principal
amount thereof plus accrued and unpaid interest, if any, to the date of
purchase. The Indenture provides that within 30 days following any Change of
Control, the Company will mail a notice to each Holder of Exchange Notes issued
under the Indenture, with a copy to the Trustee, with the following information:
(1) a Change of Control Offer is being made pursuant to the covenant entitled
"Change of Control," and that all Exchange Notes properly tendered pursuant to
such Change of Control Offer will be accepted for payment; (2) the purchase
price and the purchase date, which will be no earlier than 30 days nor later
than 60 days from the date such notice is mailed, except as may be otherwise
required by applicable law (the "Change of Control Payment Date"); (3) any
Exchange Note not properly tendered will remain outstanding and continue to
accrue interest; (4) unless the Company defaults in the payment of the Change of
Control Payment, all Exchange Notes accepted for payment pursuant to the Change
of Control Offer will cease to accrue
87
<PAGE>
interest on the Change of Control Payment Date; (5) Holders electing to have any
Exchange Notes purchased pursuant to a Change of Control Offer will be required
to surrender the Exchange Notes, with the form entitled "Option of Holder to
Elect Purchase" on the reverse of the Exchange Notes completed, to the paying
agent and at the address specified in the notice prior to the close of business
on the third Business Day preceding the Change of Control Payment Date; (6)
Holders will be entitled to withdraw their tendered Exchange Notes and their
election to require the Company to purchase such Exchange Notes, PROVIDED that
the paying agent receives, not later than the close of business on the last day
of the offer period, a telegram, telex, facsimile transmission or letter setting
forth the name of the Holder, the principal amount of Exchange Notes tendered
for purchase, and a statement that such Holder is withdrawing his tendered
Exchange Notes and his election to have such Exchange Notes purchased; and (7)
that Holders whose Exchange Notes are being purchased only in part will be
issued new Exchange Notes equal in principal amount to the unpurchased portion
of the Exchange Notes surrendered, which unpurchased portion must be equal to
$1,000 in principal amount or an integral multiple thereof. The Company's
failure to comply with the provisions relating to a Change of Control Offer will
result in an Event of Default if such noncompliance continues for a 30 day
period after receipt of written notice given by the Trustee or the holders of at
least 30% in principal amount of the Exchange Notes.
The Indenture provides that, prior to complying with the provisions of this
covenant, but in any event within 30 days following a Change of Control, the
Company will either repay all outstanding amounts under the Senior Credit
Facility or offer to repay in full all outstanding amounts under the Senior
Credit Facility and repay the Obligations held by each lender who has accepted
such offer or obtain the requisite consents, if any, under the Senior Credit
Facility to permit the repurchase of the Exchange Notes required by this
covenant.
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 or regulations are applicable in connection with the repurchase
of the Exchange Notes pursuant to a Change of Control Offer. To the extent that
the provisions of any securities laws or regulations conflict with the
provisions of the Indenture, the Company will comply with the applicable
securities laws and regulations and shall not be deemed to have breached its
obligations described in the Indenture by virtue thereof.
The Indenture provides that on the Change of Control Payment Date, the
Company will, to the extent permitted by law, (1) accept for payment all
Exchange Notes or portions thereof properly tendered pursuant to the Change of
Control Offer, (2) deposit with the paying agent an amount equal to the
aggregate Change of Control Payment in respect of all Exchange Notes or portions
thereof so tendered and (3) deliver, or cause to be delivered, to the Trustee
for cancellation the Exchange Notes so accepted together with an Officers'
Certificate stating that such Exchange Notes or portions thereof have been
tendered to and purchased by the Company. The Indenture provides that the paying
agent will promptly mail to each Holder of Exchange Notes the Change of Control
Payment for such Exchange Notes, and the Trustee will promptly authenticate and
mail to each Holder a new Exchange Note equal in principal amount to any
unpurchased portion of the Exchange Notes surrendered, if any, provided, that
each such new Exchange Note will be in a principal amount of $1,000 or an
integral multiple thereof. The Company will publicly announce the results of the
Change of Control Offer on or as soon as practicable after the Change of Control
Payment Date.
The Senior Credit Facility does, and future credit agreements or other
agreements relating to Senior Indebtedness to which the Company becomes a party
may, prohibit the Company from purchasing any Exchange Notes as a result of a
Change of Control and/or provide that certain change of control events with
respect to the Company would constitute a default thereunder. In the event a
Change of Control occurs at a time when the Company is prohibited from
purchasing the Exchange Notes, the Company could seek the consent of its lenders
to the purchase of the Exchange Notes or could attempt to refinance the
borrowings that contain such prohibition. If the Company does not obtain such a
consent or repay such borrowings, the Company will remain prohibited from
purchasing the Exchange Notes. In such case, the
88
<PAGE>
Company's failure to purchase tendered Exchange Notes would constitute an Event
of Default under the Indenture. If, as a result thereof, a default occurs with
respect to any Senior Indebtedness, the subordination provisions in the
Indenture would likely restrict payments to the Holders of the Exchange Notes.
The definition of "Change of Control" includes, among other transactions, a
disposition of all or substantially all of the property and assets of the
Company and its Subsidiaries. With respect to the disposition of property or
assets, the phrase "all or substantially all" as used in the Indenture varies
according to the facts and circumstances of the subject transaction, has no
clearly established meaning under New York law (which is the choice of law under
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 property or assets of a Person, and therefore it may
be unclear as to whether a Change of Control has occurred and whether the
Company is required to make an offer to repurchase the Notes as described above.
The existence of a Holder's right to require the Company to repurchase such
Holder's Exchange Notes upon the occurrence of a Change of Control may deter a
third party from seeking to acquire the Company in a transaction that would
constitute a Change of Control.
ASSET SALES. The Indenture provides that the Company will not, and will not
permit any of its Restricted Subsidiaries to, cause, make or suffer to exist an
Asset Sale, unless (x) the Company, or its Restricted Subsidiaries, as the case
may be, receives consideration at the time of such Asset Sale at least equal to
the fair market value (as determined in good faith by the Company) of the assets
sold or otherwise disposed of and (y) at least 75% of the proceeds from such
Asset Sale when received consists of cash or Cash Equivalents; PROVIDED that the
amount of (a) any liabilities (as shown on the Company's or such Restricted
Subsidiary's most recent balance sheet) of the Company or any Restricted
Subsidiary (other than liabilities that are by their terms subordinated to the
Exchange Notes) that are assumed by the transferee of any such assets, (b) any
notes or other obligations received by the Company or any such Restricted
Subsidiary from such transferee that are immediately converted by the Company or
such Restricted Subsidiary into cash (to the extent of the cash received) and
(c) any Designated Noncash Consideration received by the Company or any of its
Restricted Subsidiaries in such Asset Sale having an aggregate fair market
value, taken together with all other Designated Noncash Consideration received
pursuant to this clause (c) that is at that time outstanding, not to exceed 5%
of Total Assets at the time of the receipt of such Designated Noncash
Consideration (with the fair market value of each item of Designated Noncash
Consideration being measured at the time received and without giving effect to
subsequent changes in value), shall be deemed to be cash for the purposes of
this provision.
Within 365 days after the Company's or any Restricted Subsidiary's receipt
of the Net Proceeds of any Asset Sale, the Company or such Restricted Subsidiary
may apply the Net Proceeds from such Asset Sale, at its option, (i) to
permanently reduce Obligations under the Senior Credit Facility (and to
correspondingly reduce commitments with respect thereto) or other Senior
Indebtedness or Pari Passu Indebtedness (PROVIDED that if the Company shall so
reduce Obligations under Pari Passu Indebtedness, it will equally and ratably
reduce Obligations under the Exchange Notes), (ii) to secure Letter of
Credit/Bankers' Acceptance Obligations to the extent related letters of credit
have not been drawn upon or returned undrawn or related bankers' acceptances
have not matured, (iii) to an investment in any one or more businesses, capital
expenditures or acquisitions of other assets in each case, used or useful in a
Similar Business and/or (iv) to an investment in properties or assets that
replace the properties and assets that are the subject of such Asset Sale.
Pending the final application of any such Net Proceeds, the Company or such
Restricted Subsidiary may temporarily reduce Indebtedness under a revolving
credit facility, if any, or otherwise invest such Net Proceeds in Cash
Equivalents or Investment Grade Securities. The Indenture will provide that any
Net Proceeds from the Asset Sale that are not invested as provided and within
the time period set forth in the first sentence of this paragraph will be deemed
to constitute "Excess Proceeds." When the aggregate amount of Excess Proceeds
exceeds $10 million, the Company shall make an offer to all Holders of Exchange
Notes (an "Asset Sale Offer") to purchase the maximum principal
89
<PAGE>
amount of Exchange Notes, that is an integral multiple of $1,000, that may be
purchased out of the Excess Proceeds at an offer price in cash equal to 100% of
the principal amount thereof, plus accrued and unpaid interest, if any, to the
date fixed for the closing of such offer, in accordance with the procedures set
forth in the Indenture. The Company will commence an Asset Sale Offer with
respect to Excess Proceeds within ten Business Days after the date that Excess
Proceeds exceeds $10 million by mailing the notice required pursuant to the
terms of the Indenture, with a copy to the Trustee. To the extent that the
aggregate amount of Exchange Notes tendered pursuant to an Asset Sale Offer is
less than the Excess Proceeds, the Company may use any remaining Excess Proceeds
for general corporate purposes. If the aggregate principal amount of Exchange
Notes surrendered by Holders thereof exceeds the amount of Excess Proceeds, the
Trustee shall select the Exchange Notes to be purchased in the manner described
under the caption "Selection and Notice" below. Upon completion of any such
Asset Sale Offer, the amount of Excess Proceeds shall be reset at zero.
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 or regulations are applicable in connection with the repurchase
of the Exchange Notes pursuant to an Asset Sale Offer. To the extent that the
provisions of any securities laws or regulations conflict with the provisions of
the Indenture, the Company will comply with the applicable securities laws and
regulations and shall not be deemed to have breached its obligations described
in the Indenture by virtue thereof.
SELECTION AND NOTICE. If less than all of the Exchange Notes are to be
redeemed at any time or if more Exchange Notes are tendered pursuant to an Asset
Sale Offer than the Company is required to purchase, selection of such Exchange
Notes for redemption or purchase, as the case may be, will be made by the
Trustee in compliance with the requirements of the principal national securities
exchange, if any, on which such Exchange Notes are listed, or, if such Exchange
Notes are not so listed, on a pro rata basis, by lot or by such other method as
the Trustee shall deem fair and appropriate (and in such manner as complies with
applicable legal requirements); PROVIDED that no Exchange Notes of $1,000 or
less shall be purchased or redeemed in part.
Notices of purchase or redemption shall be mailed by first class mail,
postage prepaid, at least 30 but not more than 60 days before the purchase or
redemption date to each Holder of Exchange Notes to be purchased or redeemed at
such Holder's registered address. If any Exchange Note is to be purchased or
redeemed in part only, any notice of purchase or redemption that relates to such
Exchange Note shall state the portion of the principal amount thereof that has
been or is to be purchased or redeemed.
A new Exchange Note in principal amount equal to the unpurchased or
unredeemed portion of any Exchange Note purchased or redeemed in part will be
issued in the name of the Holder thereof upon cancellation of the original
Exchange Note. On and after the purchase or redemption date, unless the Company
defaults in payment of the purchase or redemption price, interest shall cease to
accrue on Exchange Notes or portions thereof purchased or called for redemption.
CERTAIN COVENANTS
LIMITATION ON RESTRICTED PAYMENTS. The Indenture provides that the Company
will not, and will not permit any of its Restricted Subsidiaries to, directly or
indirectly: (i) declare or pay any dividend or make any distribution on account
of the Company's or any of its Restricted Subsidiaries' Equity Interests,
including any dividend or distribution payable in connection with any merger or
consolidation (other than (A) dividends or distributions by the Company payable
in Equity Interests (other than Disqualified Stock) of the Company or (B)
dividends or distributions by a Restricted Subsidiary of the Company so long as,
in the case of any dividend or distribution payable on or in respect of any
class or series of securities issued by a Subsidiary other than a Wholly Owned
Subsidiary, the Company or a Restricted Subsidiary of the Company receives at
least its PRO RATA share of such dividend or distribution in accordance with its
Equity
90
<PAGE>
Interests in such class or series of securities); (ii) purchase, redeem, defease
or otherwise acquire or retire for value any Equity Interests of the Company;
(iii) make any principal payment on, or redeem, repurchase, defease or otherwise
acquire or retire for value in each case, prior to any scheduled repayment, or
maturity, any Subordinated Indebtedness; or (iv) make any Restricted Investment
(all such payments and other actions set forth in clauses (i) through (iv) above
being collectively referred to as "Restricted Payments"), unless, at the time of
such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof;
(b) immediately before and immediately after giving effect to such
transaction on a pro forma basis, the Company could incur $1.00 of
additional Indebtedness under the provisions of the first paragraph of
"--Limitations on Incurrence of Indebtedness and Issuance of Disqualified
Stock"; and
(c) such Restricted Payment, together with the aggregate of all other
Restricted Payments made by the Company and its Restricted Subsidiaries
after the Issuance Date (including Restricted Payments permitted by clauses
(i), (ii) (with respect to the payment of dividends on Refunding Capital
Stock pursuant to clause (b) thereof), (v) and (ix) of the next succeeding
paragraph, but excluding all other Restricted Payments permitted by the next
succeeding paragraph), is less than the sum of (i) 50% of the Consolidated
Net Income of the Company for the period (taken as one accounting period)
from the fiscal quarter that first begins after the Issuance Date to the end
of the Company's most recently ended fiscal quarter for which internal
financial statements are available at the time of such Restricted Payment
(or, in the case such Consolidated Net Income for such period is a deficit,
minus 100% of such deficit), plus (ii) 100% of the aggregate net cash
proceeds and the fair market value, as determined in good faith by the Board
of Directors, of marketable securities received by the Company since
immediately after the closing of the Recapitalization from the issue or sale
of Equity Interests (including Retired Capital Stock (as defined below), but
excluding cash proceeds and marketable securities received from (A) the sale
of Equity Interests to members of management, directors or consultants of
the Company and its Subsidiaries after the Issuance Date to the extent such
amounts have been applied to Restricted Payments in accordance with clause
(iv) of the next succeeding paragraph, (B) the sale of $100 million
aggregate liquidation preference of Preferred Stock sold on the Issuance
Date (together with all shares of Preferred Stock issued as dividends paid
in kind on all Preferred Stock) and (C) Excluded Contributions) or debt
securities of the Company that have been converted into such Equity
Interests of the Company (other than Refunding Capital Stock (as defined
below) or Equity Interests or convertible debt securities of the Company
sold to a Restricted Subsidiary of the Company and other than Disqualified
Stock or debt securities that have been converted into Disqualified Stock)
plus (iii) 100% of the aggregate amount of cash and marketable securities
contributed (other than Excluded Contributions) to the capital of the
Company following the Issuance Date, plus (iv) 100% of the aggregate amount
received in cash and the fair market value of marketable securities (other
than Restricted Investments) received from (A) the sale or other disposition
(other than to the Company or a Restricted Subsidiary) of Restricted
Investments made by the Company and its Restricted Subsidiaries or (B) a
dividend from, or the sale (other than to the Company or a Restricted
Subsidiary) of the stock of, an Unrestricted Subsidiary (other than an
Unrestricted Subsidiary the Investment in which was made by the Company or a
Restricted Subsidiary pursuant to clauses (vi) or (x) below), plus (v) other
Restricted Payments in an aggregate amount not to exceed $15 million.
The foregoing provisions will not prohibit:
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at the date of declaration such payment would have
complied with the provisions of the Indenture;
(ii) (a) the redemption, repurchase, retirement or other acquisition of
any Equity Interests (the "Retired Capital Stock") or Subordinated
Indebtedness of the Company in exchange for, or out of the
91
<PAGE>
proceeds of the substantially concurrent sale (other than to a Restricted
Subsidiary of the Company) of, Equity Interests of the Company (other than
any Disqualified Stock) (the "Refunding Capital Stock"), and (b) if
immediately prior to the retirement of Retired Capital Stock, the
declaration and payment of dividends thereon was permitted under clause (v)
of this paragraph, the declaration and payment of dividends on the Refunding
Capital Stock in an aggregate amount per year no greater than the aggregate
amount of dividends per annum that was declarable and payable on such
Retired Capital Stock immediately prior to such retirement; PROVIDED,
HOWEVER, that at the time of the declaration of any such dividends, no
Default or Event of Default shall have occurred and be continuing or would
occur as a consequence thereof;
(iii) the redemption, repurchase or other acquisition or retirement of
Subordinated Indebtedness of the Company made by exchange for, or out of the
proceeds of the substantially concurrent sale of, new Indebtedness of the
Company so long as (A) the principal amount of such new Indebtedness does
not exceed the principal amount of the Subordinated Indebtedness being so
redeemed, repurchased, acquired or retired for value (plus the amount of any
premium required to be paid under the terms of the instrument governing the
Subordinated Indebtedness being so redeemed, repurchased, acquired or
retired), (B) such Indebtedness is subordinated to the Senior Indebtedness
and the Exchange Notes at least to the same extent as such Subordinated
Indebtedness so purchased, exchanged, redeemed, repurchased, acquired or
retired for value, (C) such Indebtedness has a final scheduled maturity date
later than the final scheduled maturity date of the Exchange Notes and (D)
such Indebtedness has a Weighted Average Life to Maturity equal to or
greater than the remaining Weighted Average Life to Maturity of the Exchange
Notes;
(iv) a Restricted Payment to pay for the repurchase, retirement or other
acquisition or retirement for value of common Equity Interests of the
Company held by any future, present or former employee, director or
consultant of the Company or any Subsidiary pursuant to any management
equity plan or stock option plan or any other management or employee benefit
plan or agreement; PROVIDED, HOWEVER, that the aggregate Restricted Payments
made under this clause (iv) does not exceed in any calendar year $5 million
(with unused amounts in any calendar year being carried over to the next two
immediately succeeding calendar years subject to a maximum (without giving
effect to the following proviso) of $10 million in any calendar year);
PROVIDED FURTHER that such amount in any calendar year may be increased by
an amount not to exceed (i) the cash proceeds from the sale of Equity
Interests of the Company to members of management, directors or consultants
of the Company and its Subsidiaries that occurs after the Issuance Date (to
the extent the cash proceeds from the sale of such Equity Interest have not
otherwise been applied to the payment of Restricted Payments by virtue of
the preceding paragraph (c)) plus (ii) the cash proceeds of key man life
insurance policies received by the Company and its Restricted Subsidiaries
after the Issuance Date less (iii) the amount of any Restricted Payments
previously made pursuant to clauses (i) and (ii) of this subparagraph (iv);
and PROVIDED FURTHER that cancellation of Indebtedness owing to the Company
from members of management of the Company or any of its Restricted
Subsidiaries in connection with a repurchase of Equity Interests of the
Company will not be deemed to constitute a Restricted Payment for purposes
of this covenant or any other provision of the Indenture;
(v) the declaration and payment of dividends to holders of any class or
series of Designated Preferred Stock (other than Disqualified Stock) issued
after the Issuance Date (including, without limitation, the declaration and
payment of dividends on Refunding Capital Stock in excess of the dividends
declarable and payable thereon pursuant to clause (ii)); PROVIDED, HOWEVER,
that for the most recently ended four full fiscal quarters for which
internal financial statements are available immediately preceding the date
of issuance of such Designated Preferred Stock, after giving effect to such
issuance on a pro forma basis, the Company and its Restricted Subsidiaries
would have had a Fixed Charge Coverage Ratio of at least 2.00 to 1.00;
92
<PAGE>
(vi) Investments in Unrestricted Subsidiaries having an aggregate fair
market value, taken together with all other Investments made pursuant to
this clause (vi) that are at that time outstanding, not to exceed $20
million at the time of such Investment (with the fair market value of each
Investment being measured at the time made and without giving effect to
subsequent changes in value);
(vii) repurchases of Equity Interests deemed to occur upon exercise of
stock options if such Equity Interests represent a portion of the exercise
price of such options;
(viii) the issuance by the Company of shares of Preferred Stock as
dividends paid in kind on the Preferred Stock or on shares of Preferred
Stock so issued as payment in kind dividends;
(ix) the payment of dividends on the Company's Common Stock, following
the first public offering of the Company's Common Stock after the Issuance
Date, of up to 6% per annum of the net proceeds received by the Company in
such public offering, other than public offerings with respect to the
Company's Common Stock registered on Form S-8; and
(x) Investments in Unrestricted Subsidiaries that are made with Excluded
Contributions
PROVIDED, HOWEVER, that at the time of, and after giving effect to, any
Restricted Payment permitted under clauses (iii), (iv), (v), (vi), (vii),
(viii), (ix) and (x), no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof; and PROVIDED FURTHER that
for purposes of determining the aggregate amount expended for Restricted
Payments in accordance with clause (c) of the immediately preceding paragraph,
only the amounts expended under clauses (i), (ii) (with respect to the payment
of dividends on Refunding Capital Stock pursuant to clause (b) thereof), (v) and
(ix) shall be included.
The Company designated all of the proceeds from the sale of the $50 million
liquidation preference of Preferred Stock issued immediately after the
Recapitalization as an Excluded Contribution.
As of the Issuance Date, all of the Company's Subsidiaries were Restricted
Subsidiaries. The Company will not permit any Unrestricted Subsidiary to become
a Restricted Subsidiary except pursuant to the second to last sentence of the
definition of "Unrestricted Subsidiary." For purposes of designating any
Restricted Subsidiary as an Unrestricted Subsidiary, all outstanding Investments
by the Company and its Restricted Subsidiaries (except to the extent repaid) in
the Subsidiary so designated will be deemed to be Restricted Payments in an
amount determined as set forth in the last sentence of the definition of
"Investments." Such designation will only be permitted if a Restricted Payment
in such amount would be permitted at such time and if such Subsidiary otherwise
meets the definition of an Unrestricted Subsidiary. Unrestricted Subsidiaries
will not be subject to any of the restrictive covenants set forth in the
Indenture.
LIMITATIONS ON INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF DISQUALIFIED
STOCK. The Indenture provides that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, create, incur,
issue, assume, guarantee or otherwise become directly or indirectly liable with
respect to (collectively, "incur" and collectively, an "incurrence" of) any
Indebtedness (including Acquired Indebtedness) or any shares of Disqualified
Stock; PROVIDED, HOWEVER, that the Company may incur Indebtedness or issue
shares of Disqualified Stock if the Fixed Charge Coverage Ratio for the Company
and its Restricted Subsidiaries for the most recently ended four full fiscal
quarters for which internal financial statements are available immediately
preceding the date of such incurrence would have been at least 2.00 to 1.00
determined on a pro forma basis (including a pro forma application of the net
proceeds therefrom), as if the additional Indebtedness had been incurred or the
Disqualified Stock had been issued, as the case may be, and the application of
proceeds had occurred at the beginning of such four-quarter period.
The foregoing limitations will not apply to:
(a) the incurrence by the Company of Indebtedness under the Senior
Credit Facility and the issuance and creation of letters of credit and
banker's acceptances thereunder (with letters of credit
93
<PAGE>
and banker's acceptances being deemed to have a principal amount equal to
the face amount thereof) up to an aggregate principal amount of $675 million
outstanding at any one time, less principal repayments of term loans and
permanent commitment reductions with respect to revolving loans and letters
of credit and banker's acceptances under the Senior Credit Facility made
after the Issuance Date;
(b) the incurrence by the Company of Indebtedness represented by the
Exchange Notes and the Old Notes and the issuance by the Company of the
Preferred Stock, in each case issued on the Issuance Date;
(c) Existing Indebtedness (other than (i) Indebtedness described in
clauses (a) and (b) and (ii) Indebtedness of any Foreign Subsidiary
outstanding on the Issuance Date together with any future Indebtedness of
any such Foreign Subsidiary incurred in connection with any undrawn
commitment or unused line of credit in each case existing on the Issuance
Date);
(d) Indebtedness (including Capitalized Lease Obligations) incurred by
the Company or any of its Restricted Subsidiaries to finance the purchase,
lease or improvement of property (real or personal) or equipment (whether
through the direct purchase of assets or the Capital Stock of any Person
owning such assets) in an aggregate principal amount which, when aggregated
with the principal amount of all other Indebtedness then outstanding and
incurred pursuant to this clause (d) (together with any Refinancing
Indebtedness with respect thereto), does not exceed $10 million;
(e) Indebtedness incurred by the Company or any of its Restricted
Subsidiaries constituting reimbursement obligations with respect to letters
of credit issued in the ordinary course of business, including without
limitation letters of credit in respect of workers' compensation claims or
self-insurance, or other Indebtedness with respect to reimbursement type
obligations regarding workers' compensation claims; PROVIDED, HOWEVER, that
upon the drawing of such letters of credit or the incurrence of such
Indebtedness, such obligations are reimbursed within 30 days following such
drawing or incurrence;
(f) Indebtedness arising from agreements of the Company or a Restricted
Subsidiary providing for indemnification, adjustment of purchase price or
similar obligations, in each case, incurred or assumed in connection with
the disposition of any business, assets or a Subsidiary, other than
guarantees of Indebtedness incurred by any Person acquiring all or any
portion of such business, assets or a Subsidiary for the purpose of
financing such acquisition; PROVIDED, HOWEVER, that (i) such Indebtedness is
not reflected on the balance sheet of the Company or any Restricted
Subsidiary (contingent obligations referred to in a footnote to financial
statements and not otherwise reflected on the balance sheet will not be
deemed to be reflected on such balance sheet for purposes of this clause
(i)) and (ii) the maximum assumable liability in respect of all such
Indebtedness shall at no time exceed the gross proceeds including noncash
proceeds (the fair market value of such noncash proceeds being measured at
the time received and without giving effect to any subsequent changes in
value) actually received by the Company and its Restricted Subsidiaries in
connection with such disposition;
(g) Indebtedness of the Company to a Restricted Subsidiary; PROVIDED
that any such Indebtedness is made pursuant to an intercompany note and is
subordinated in right of payment to the Exchange Notes; PROVIDED FURTHER
that any subsequent issuance or transfer of any Capital Stock or any other
event which results in any such Restricted Subsidiary ceasing to be a
Restricted Subsidiary or any other subsequent transfer of any such
Indebtedness (except to the Company or another Restricted Subsidiary) shall
be deemed, in each case to be an incurrence of such Indebtedness;
(h) Indebtedness of a Restricted Subsidiary to the Company or another
Restricted Subsidiary; PROVIDED that (i) any such Indebtedness is made
pursuant to an intercompany note and (ii) if a Guarantor incurs such
Indebtedness from a Restricted Subsidiary that is not a Guarantor such
94
<PAGE>
Indebtedness is subordinated in right of payment to the Guarantee of such
Guarantor; PROVIDED FURTHER that any subsequent transfer of any such
Indebtedness (except to the Company or another Restricted Subsidiary) shall
be deemed, in each case to be an incurrence of such Indebtedness;
(i) Hedging Obligations that are incurred (1) for the purpose of fixing
or hedging interest rate risk with respect to any Indebtedness that is
permitted by the terms of the Indenture to be outstanding or (2) for the
purpose of fixing or hedging currency exchange rate risk with respect to any
currency exchanges;
(j) obligations in respect of performance and surety bonds and
completion guarantees provided by the Company or any Restricted Subsidiary
in the ordinary course of business;
(k) Indebtedness of any Guarantor in respect of such Guarantor's
Guarantee;
(l) Any Excluded Guarantee of any Restricted Subsidiary;
(m) Indebtedness of the Company and any of its Restricted Subsidiaries
not otherwise permitted hereunder in an aggregate principal amount, which
when aggregated with the principal amount of all other Indebtedness then
outstanding and incurred pursuant to this clause (m), does not exceed $75
million at any one time outstanding; PROVIDED, HOWEVER that (i) Indebtedness
of a Restricted Subsidiary organized under the laws of the United States,
any State thereof, the District of Columbia or any territory thereof, which
when aggregated with the principal amount of all other Indebtedness of such
Restricted Subsidiaries then outstanding and incurred pursuant to this
clause (m), does not exceed $25 million at any one time outstanding and (ii)
Indebtedness of a Foreign Subsidiary, which when aggregated with the
principal amount of all other Indebtedness of Foreign Subsidiaries then
outstanding and incurred pursuant to this clause (m), does not exceed $50
million (or the equivalent thereof in any other currency) at any one time
outstanding (Indebtedness of any Foreign Subsidiary outstanding on the
Issuance Date is deemed to have been incurred and outstanding pursuant to
this clause (m));
(n) any guarantee by the Company of Indebtedness or other obligations of
any of its Restricted Subsidiaries so long as the incurrence of such
Indebtedness incurred by such Restricted Subsidiary is permitted under the
terms of the Indenture;
(o) Preferred Stock issued as payment in kind dividends on Preferred
Stock and any shares of Preferred Stock issued as payment in kind dividends
thereon, such dividends made pursuant to the terms of the Certificate of
Designation for such Preferred Stock as in effect on the Issuance Date; and
(p) the incurrence by the Company or any of its Restricted Subsidiaries
of Indebtedness which serves to refund, refinance or restructure any
Indebtedness incurred as permitted under the first paragraph of this
covenant and clauses (b) and (c) above, or any Indebtedness issued to so
refund, refinance or restructure such Indebtedness including additional
Indebtedness incurred to pay premiums and fees in connection therewith (the
"Refinancing Indebtedness") prior to its respective maturity; PROVIDED
HOWEVER that such Refinancing Indebtedness (i) has a Weighted Average Life
to Maturity at the time such Refinancing Indebtedness is incurred which is
not less than the remaining Weighted Average Life to Maturity of
Indebtedness being refunded or refinanced, (ii) to the extent such
Refinancing Indebtedness refinances Indebtedness subordinated or PARI PASSU
to the Exchange Notes, such Refinancing Indebtedness is subordinated or PARI
PASSU to the Exchange Notes at least to the same extent as the Indebtedness
being refinanced or refunded and (iii) shall not include (x) Indebtedness of
a Subsidiary that refinances Indebtedness of the Company or (y) Indebtedness
of the Company or a Restricted Subsidiary that refinances Indebtedness of an
Unrestricted Subsidiary; and PROVIDED FURTHER that subclauses (i) and (ii)
of this clause (p) will not apply to any refunding or refinancing of any
Senior Indebtedness.
LIENS. The Indenture provides that the Company will not, and will not
permit any of its Restricted Subsidiaries to, directly or indirectly create,
incur, assume or suffer to exist any Lien that secures
95
<PAGE>
obligations under any Pari Passu Indebtedness or Subordinated Indebtedness on
any asset or property of the Company or such Restricted Subsidiary, or any
income or profits therefrom, or assign or convey any right to receive income
therefrom, unless the Exchange Notes are equally and ratably secured with the
obligations so secured or until such time as such obligations are no longer
secured by a Lien.
The Indenture provides that no Guarantor will directly or indirectly create,
incur, assume or suffer to exist any Lien that secures obligations under any
PARI PASSU Indebtedness or subordinated Indebtedness of such Guarantor on any
asset or property of such Guarantor or any income or profits therefrom, or
assign or convey any right to receive income therefrom, unless the Guarantee of
such Guarantor is equally and ratably secured with the obligations so secured or
until such time as such obligations are no longer secured by a Lien.
MERGER, CONSOLIDATION, OR SALE OF ALL OR SUBSTANTIALLY ALL ASSETS. The
Indenture provides that the Company may not consolidate or merge with or into or
wind up into (whether or not the Company is the surviving corporation), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially all
of its properties or assets in one or more related transactions to, any Person
unless (i) the Company is the surviving corporation or the Person formed by or
surviving any such consolidation or merger (if other than the Company) or to
which such sale, assignment, transfer, lease, conveyance or other disposition
will have been made is a corporation organized or existing under the laws of the
United States, any state thereof, the District of Columbia, or any territory
thereof (the Company or such Person, as the case may be, being herein called the
"Successor Company"); (ii) the Successor Company (if other than the Company)
expressly assumes all the obligations of the Company under the Indenture and the
Exchange Notes pursuant to a supplemental indenture or other documents or
instruments in form reasonably satisfactory to the Trustee; (iii) immediately
after such transaction no Default or Event of Default exists; (iv) immediately
after giving pro forma effect to such transaction, as if such transaction had
occurred at the beginning of the applicable four-quarter period, (A) the
Successor Company would be permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the
covenant described under "--Limitations on Incurrence of Indebtedness and
Issuance of Disqualified Stock" or (B) the Fixed Charge Coverage Ratio for the
Successor Company and its Restricted Subsidiaries would be greater than such
Ratio for the Company and its Restricted Subsidiaries immediately prior to such
transaction; (v) each Guarantor, if any, unless it is the other party to the
transactions described above, shall have by supplemental indenture confirmed
that its Guarantee shall apply to such Person's obligations under the Indenture
and the Exchange Notes; and (vi) the Company shall have delivered to the Trustee
an Officers' Certificate and an opinion of counsel, each stating that such
consolidation, merger or transfer and such supplemental indenture (if any)
comply with the Indenture. The Successor Company will succeed to, and be
substituted for, the Company under the Indenture and the Exchange Notes.
Notwithstanding the foregoing clause (iv), (a) any Restricted Subsidiary may
consolidate with, merge into or transfer all or part of its properties and
assets to the Company and (b) the Company may merge with an Affiliate
incorporated solely for the purpose of reincorporating the Company in another
State of the United States so long as the amount of Indebtedness of the Company
and its Restricted Subsidiaries is not increased thereby.
Each Guarantor, if any, shall not, and the Company will not permit a
Guarantor to, consolidate or merge with or into or wind up into (whether or not
such Guarantor is the surviving corporation), or sell, assign, transfer, lease,
convey or otherwise dispose of all or substantially all of its properties or
assets in one or more related transactions to, any Person unless (i) such
Guarantor is the surviving corporation or the Person formed by or surviving any
such consolidation or merger (if other than such Guarantor) or to which such
sale, assignment, transfer, lease, conveyance or other disposition will have
been made is a corporation organized or existing under the laws of the United
States, any state thereof, the District of Columbia, or any territory thereof
(such Guarantor or such Person, as the case may be, being herein called the
"Successor Guarantor"); (ii) the Successor Guarantor (if other than such
Guarantor) expressly assumes all the obligations of such Guarantor under the
Indenture and such Guarantor's Guarantee pursuant to a supplemental indenture or
other documents or instruments in form reasonably satisfactory to
96
<PAGE>
the Trustee; (iii) immediately after such transaction no Default or Event of
Default exists; and (iv) the Company shall have delivered to the Trustee an
Officers' Certificate and an opinion of counsel, each stating that such
consolidation, merger or transfer and such supplemental indenture (if any)
comply with the Indenture. The Successor Guarantor will succeed to, and be
substituted for, such Guarantor under the Indenture and such Guarantor's
Guarantee.
TRANSACTIONS WITH AFFILIATES. The Indenture provides that the Company will
not, and will not permit any of its Restricted Subsidiaries to, sell, lease,
transfer or otherwise dispose of any of its properties or assets to, or purchase
any property or assets from, or enter into any contract, agreement,
understanding, loan, advance or guarantee with, or for the benefit of, any
Affiliate (each of the foregoing, an "Affiliate Transaction") involving
aggregate consideration in excess of $5 million, unless:
(a) such Affiliate Transaction is on terms that are not materially less
favorable to the Company or the relevant Restricted Subsidiary than those
that would have been obtained in a comparable transaction by the Company or
such Restricted Subsidiary with an unrelated Person; and
(b) the Company delivers to the Trustee with respect to any Affiliate
Transaction involving aggregate payments in excess of $10 million, a
resolution adopted by a majority of the Disinterested Directors of the Board
of Directors approving such Affiliate Transaction and set forth in an
Officers' Certificate certifying that such Affiliate Transaction complies
with clause (a) above.
The foregoing provisions will not apply to the following: (i) transactions
between or among the Company and/or any of its Restricted Subsidiaries; (ii)
Restricted Payments permitted by the provisions of the Indenture described above
under the covenant "--Limitation on Restricted Payments"; (iii) the payment of
customary annual management, consulting and advisory fees and related expenses
to KKR and its Affiliates; (iv) the payment of reasonable and customary regular
fees paid to, and indemnity provided on behalf of, officers, directors,
employees or consultants of the Company or any Restricted Subsidiary; (v)
payments by the Company or any of its Restricted Subsidiaries to KKR and its
Affiliates made pursuant to any financial advisory, financing, underwriting or
placement agreement or in respect of other investment banking activities,
including, without limitation, in connection with acquisitions or divestitures
which are approved by a majority of the Disinterested Directors of the Company
in good faith; (vi) transactions in which the Company or any of its Restricted
Subsidiaries, as the case may be, delivers to the Trustee a letter from an
Independent Financial Advisor stating that such transaction is fair to the
Company or such Restricted Subsidiary from a financial point of view or meets
the requirements of clause (a) of the preceding paragraph; (vii) payments or
loans to employees or consultants which are approved by a majority of the
Disinterested Directors of the Company in good faith; (viii) any agreement as in
effect as of the Issuance Date or any amendment thereto (so long as any such
amendment is not disadvantageous to the holders of the Exchange Notes in any
material respect) or any transaction contemplated thereby; (ix) transactions
permitted by, and complying with, the provisions of the covenant described under
"--Merger, Consolidation, or Sale of All or Substantially All Assets"; (x) the
existence of, or the performance by the Company or any of its Restricted
Subsidiaries of its obligations under the terms of, any stockholders agreement
(including any registration rights agreement or purchase agreement related
thereto) to which it is a party as of the Issuance Date and any similar
agreements which it may enter into thereafter; PROVIDED, HOWEVER, that the
existence of, or the performance by the Company or any of its Restricted
Subsidiaries of obligations under any future amendment to any such existing
agreement or under any similar agreement entered into after the Issuance Date
shall only be permitted by this clause (x) to the extent that the terms of any
such amendment or new agreement are not otherwise disadvantageous to the holders
of the Exchange Notes in any material respect; (xi) the payment of all fees and
expenses related to the Recapitalization and the Financings; and (xii)
transactions with customers, clients, suppliers, or purchasers or sellers of
goods or services, in each case in the ordinary course of business and otherwise
in compliance with the terms of the Indenture which are fair to the Company or
its Restricted Subsidiaries, in the reasonable determination of the Board of
Directors of the Company or the senior management thereof, or
97
<PAGE>
are on terms at least as favorable as might reasonably have been obtained at
such time from an unaffiliated party.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES. The
Indenture provides that the Company will not, and will not permit any of its
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause to
become effective any consensual encumbrance or consensual restriction on the
ability of any such Restricted Subsidiary to:
(a) (i) pay dividends or make any other distributions to the Company or
any of its Restricted Subsidiaries on its Capital Stock or any other
interest or participation in, or measured by, its profits or (ii) pay any
Indebtedness owed to the Company or any of its Restricted Subsidiaries;
(b) make loans or advances to the Company or any of its Restricted
Subsidiaries; or
(c) sell, lease, or transfer any of its properties or assets to the
Company, or any of its Restricted Subsidiaries;
except (in each case) for such encumbrances or restrictions existing under or by
reason of:
(1) contractual encumbrances or restrictions in effect on the Issuance
Date, including pursuant to the Senior Credit Facility and its related
documentation;
(2) the Indenture and the Exchange Notes and Old Notes;
(3) customary non-assignment or subletting provisions in leases entered
into in the ordinary course of business and consistent with past practices;
(4) purchase money obligations for property acquired in the ordinary
course of business that impose restrictions of the nature discussed in
clause (c) above on the property so acquired;
(5) applicable law or any applicable rule, regulation or order;
(6) any agreement or other instrument of a Person acquired by the
Company or any Restricted Subsidiary of the Company in existence at the time
of such acquisition (but not created in contemplation thereof), which
encumbrance or restriction is not applicable to any Person, or the
properties or assets of any Person, other than the Person, or the property
or assets of the Person, so acquired;
(7) contracts for the sale of assets, including, without limitation
customary restrictions with respect to a Subsidiary pursuant to agreement
that has been entered into for the sale or disposition of all or
substantially all of the Capital Stock or assets of such Subsidiary;
(8) secured Indebtedness otherwise permitted to be incurred pursuant to
the covenants described under "Limitations on Incurrence of Indebtedness and
Issuance of Disqualified Stock" and "Liens" that limit the right of the
debtor to dispose of the assets securing such Indebtedness;
(9) customary provisions contained in leases and other agreements
entered into in the ordinary course of business;
(10) restrictions on cash or other deposits or net worth imposed by
customers under contracts entered into in the ordinary course of business;
and
(11) any encumbrances or restrictions of the type referred to in clauses
(a), (b) and (c) above imposed by any amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements or
refinancings of the contracts, instruments or obligations referred to in
clauses (c)(1) through (c)(10) above, PROVIDED that such amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements or refinancings are, in the good faith judgment of the
Company's Board of Directors, no more restrictive with respect to such
dividend and other payment restrictions than those contained in the dividend
or other payment restrictions prior to such
98
<PAGE>
amendment, modification, restatement, renewal, increase, supplement,
refunding, replacement or refinancing.
LIMITATION ON GUARANTEES OF INDEBTEDNESS BY RESTRICTED SUBSIDIARIES. (a)
The Indenture provides that the Company will not permit any Restricted
Subsidiary to guarantee the payment of any Indebtedness of the Company or any
Indebtedness of any other Restricted Subsidiary unless (i) such Restricted
Subsidiary simultaneously executes and delivers a supplemental indenture to the
Indenture providing for a Guarantee of payment of the Exchange Notes by such
Restricted Subsidiary except that (A) if the Exchange Notes are subordinated in
right of payment to such Indebtedness, the Guarantee under the supplemental
indenture shall be subordinated to such Restricted Subsidiary's guarantee with
respect to such Indebtedness substantially to the same extent as the Exchange
Notes are subordinated to such Indebtedness under the Indenture and (B) if such
Indebtedness is by its express terms subordinated in right of payment to the
Exchange Notes, any such guarantee of such Restricted Subsidiary with respect to
such Indebtedness shall be subordinated in right of payment to such Restricted
Subsidiary's Guarantee with respect to the Exchange Notes substantially to the
same extent as such Indebtedness is subordinated to the Exchange Notes; (ii)
such Restricted Subsidiary waives and will not in any manner whatsoever claim or
take the benefit or advantage of, any rights of reimbursement, indemnity or
subrogation or any other rights against the Company or any other Restricted
Subsidiary as a result of any payment by such Restricted Subsidiary under its
Guarantee; and (iii) such Restricted Subsidiary shall deliver to the Trustee an
Opinion of Counsel to the effect that (A) such Guarantee of the Exchange Notes
has been duly executed and authorized and (B) such Guarantee of the Exchange
Notes constitutes a valid, binding and enforceable obligation of such Restricted
Subsidiary, except insofar as enforcement thereof may be limited by bankruptcy,
insolvency or similar laws (including, without limitation, all laws relating to
fraudulent transfers) and except insofar as enforcement thereof is subject to
general principles of equity; PROVIDED that this paragraph (a) shall not be
applicable to any guarantee of any Restricted Subsidiary (x) that (A) existed at
the time such Person became a Restricted Subsidiary of the Company and (B) was
not incurred in connection with, or in contemplation of, such Person becoming a
Restricted Subsidiary of the Company and (y) that guarantees the payment of
Obligations of the Company or any Restricted Subsidiary under the Senior Credit
Facility or any other bank facility which is designated as Senior Indebtedness
and any refunding, refinancing or replacement thereof, in whole or in part,
PROVIDED that such refunding, refinancing or replacement thereof constitutes
Senior Indebtedness and is not incurred pursuant to a registered offering of
securities under the Securities Act or a private placement of securities
(including under Rule 144A) pursuant to an exemption from the registration
requirements of the Securities Act, which private placement provides for
registration rights under the Securities Act (any guarantee excluded by
operations of this clause (y) being an "Excluded Guarantee").
(b) Notwithstanding the foregoing and the other provisions of the Indenture,
any Guarantee by a Restricted Subsidiary of the Notes shall provide by its terms
that it shall be automatically and unconditionally released and discharged upon
(i) any sale, exchange or transfer, to any Person not an Affiliate of the
Company, of all of the Company's Capital Stock in, or all or substantially all
the assets of, such Restricted Subsidiary (which sale, exchange or transfer is
not prohibited by the Indenture) or (ii) the release or discharge of the
guarantee which resulted in the creation of such Guarantee, except a discharge
or release by or as a result of payment under such guarantee.
LIMITATION ON OTHER SENIOR SUBORDINATED INDEBTEDNESS. The Indenture
provides that the Company will not, and will not permit any Guarantor to,
directly or indirectly, incur any Indebtedness (including Acquired Indebtedness)
that is subordinate in right of payment to any Indebtedness of the Company or
any Indebtedness of any Guarantor, as the case may be, unless such Indebtedness
is either (a) PARI PASSU in right of payment with the Exchange Notes or such
Guarantor's Guarantee, as the case may be or (b) subordinate in right of payment
to the Exchange Notes, or such Guarantor's Guarantee, as the case may be, in the
same manner and at least to the same extent as the Notes are subordinate to
Senior
99
<PAGE>
Indebtedness or such Guarantor's Guarantee is subordinate to such Guarantor's
senior Indebtedness, as the case may be.
REPORTS AND OTHER INFORMATION. Notwithstanding that the Company may not be
subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act
or otherwise report on an annual and quarterly basis on forms provided for such
annual and quarterly reporting pursuant to rules and regulations promulgated by
the Securities and Exchange Commission (the "Commission"), the Indenture
requires the Company to file with the Commission (and provide the Trustee and
Holders with copies thereof, without cost to each Holder, within 15 days after
it files them with the Commission), (a) within 90 days after the end of each
fiscal year, annual reports on Form 10-K (or any successor or comparable form)
containing the information required to be contained therein (or required in such
successor or comparable form); (b) within 45 days after the end of each of the
first three fiscal quarters of each fiscal year, reports on Form 10-Q (or any
successor or comparable form); (c) promptly from time to time after the
occurrence of an event required to be therein reported, such other reports on
Form 8-K (or any successor or comparable form); and (d) any other information,
documents and other reports which the Company would be required to file with the
Commission if it were subject to Section 13 or 15(d) of the Exchange Act;
PROVIDED, HOWEVER, the Company shall not be so obligated to file such reports
with the Commission if the Commission does not permit such filing, in which
event the Company will make available such information to prospective purchasers
of Exchange Notes, in addition to providing such information to the Trustee and
the Holders, in each case within 15 days after the time the Company would be
required to file such information with the Commission, if it were subject to
Sections 13 or 15(d) of the Exchange Act.
EVENTS OF DEFAULT AND REMEDIES
The following events constitute Events of Default under the Indenture:
(i) default in payment when due and payable, upon redemption,
acceleration or otherwise, of principal of, or premium on, if any, the
Exchange Notes whether or not such payment shall be prohibited by the
subordination provisions relating to the Exchange Notes;
(ii) default for 30 days or more in the payment when due of interest on
or with respect to the Exchange Notes whether or not such payment shall be
prohibited by the subordination provisions relating to the Exchange Notes;
(iii) failure by the Company or any Guarantor for 30 days after receipt
of written notice given by the Trustee or the holders of at least 30% in
principal amount of the Exchange Notes then outstanding to comply with any
of its other agreements in the Indenture or the Exchange Notes;
(iv) default under any mortgage, indenture or instrument under which
there is issued or by which there is secured or evidenced any Indebtedness
for money borrowed by the Company or any of its Restricted Subsidiaries or
the payment of which is guaranteed by the Company or any of its Restricted
Subsidiaries (other than Indebtedness owed to the Company or a Restricted
Subsidiary), whether such Indebtedness or guarantee now exists or is created
after the Issuance Date, if both (A) such default either (1) results from
the failure to pay any such Indebtedness at its stated final maturity (after
giving effect to any applicable grace periods) or (2) relates to an
obligation other than the obligation to pay principal of any such
Indebtedness at its stated final maturity and results in the holder or
holders of such Indebtedness causing such Indebtedness to become due prior
to its stated maturity and (B) the principal amount of such Indebtedness,
together with the principal amount of any other such Indebtedness in default
for failure to pay principal at stated final maturity (after giving effect
to any applicable grace periods), or the maturity of which has been so
accelerated, aggregate $20 million or more at any one time outstanding;
100
<PAGE>
(v) failure by the Company or any of its Significant Subsidiaries to pay
final judgments aggregating in excess of $20 million, which final judgments
remain unpaid, undischarged and unstayed for a period of more than 60 days
after such judgment becomes final, and in the event such judgment is covered
by insurance, an enforcement proceeding has been commenced by any creditor
upon such judgment or decree which is not promptly stayed;
(vi) certain events of bankruptcy or insolvency with respect to the
Company or any of its Significant Subsidiaries; or
(vii) any Guarantee shall for any reason cease to be in full force and
effect or be declared null and void or any responsible officer of the
Company or any Guarantor denies that it has any further liability under any
Guarantee or gives notice to such effect (other than by reason of the
termination of the Indenture or the release of any such Guarantee in
accordance with the Indenture).
If any Event of Default (other than of a type specified in clause (vi)
above) occurs and is continuing under the Indenture, the Trustee or the Holders
of at least 30% in principal amount of the then outstanding Exchange Notes may
declare the principal, premium, if any, interest and any other monetary
obligations on all the then outstanding Exchange Notes to be due and payable
immediately; PROVIDED, HOWEVER, that, so long as any Indebtedness permitted to
be incurred pursuant to the Senior Credit Facility shall be outstanding, no such
acceleration shall be effective until the earlier of (i) acceleration of any
such Indebtedness under the Senior Credit Facility or (ii) five business days
after the giving of written notice to the Company and the administrative agent
under the Senior Credit Facility of such acceleration. Upon the effectiveness of
such declaration, such principal and interest will be due and payable
immediately. Notwithstanding the foregoing, in the case of an Event of Default
arising under clause (vi) of the first paragraph of this section, all
outstanding Exchange Notes will become due and payable without further action or
notice. Holders of Exchange Notes may not enforce the Indenture or the Exchange
Notes except that each Holder has the right to institute suit for the
enforcement of any payment of principal (and premium, if any) and interest on a
Note on the maturity thereof, and such rights shall not be impaired without the
consent of such Holder. Subject to certain limitations, Holders of a majority in
principal amount of the then outstanding Exchange Notes may direct the Trustee
in its exercise of any trust or power. The Indenture provides that the Trustee
may withhold from Holders of Exchange Notes notice of any continuing Default or
Event of Default (except a Default or Event of Default relating to the payment
of principal, premium, if any, or interest) if it determines that withholding
notice is in their interest. In addition, the Trustee shall have no obligation
to accelerate the Exchange Notes if in the best judgment of the Trustee
acceleration is not in the best interest of the Holders of such Exchange Notes.
The Indenture provides that the Holders of a majority in aggregate principal
amount of the then outstanding Exchange Notes issued thereunder by notice to the
Trustee may on behalf of the Holders of all of such Exchange Notes waive any
existing Default or Event of Default and its consequences under the Indenture
except a continuing Default or Event of Default in the payment of interest on,
premium, if any, or the principal of, any such Exchange Note held by a
non-consenting Holder. In the event of any Event of Default specified in clause
(iv) above, such Event of Default and all consequences thereof (including
without limitation any acceleration or resulting payment default) shall be
annulled, waived and rescinded, automatically and without any action by the
Trustee or the Holders of the Exchange Notes, if within 20 days after such Event
of Default arose (x) the Indebtedness or guarantee that is the basis for such
Event of Default has been discharged, or (y) the holders thereof have rescinded
or waived the acceleration, notice or action (as the case may be) giving rise to
such Event of Default, or (z) if the default that is the basis for such Event of
Default has been cured.
The Indenture provides that the Company is required to deliver to the
Trustee annually a statement regarding compliance with the Indenture, and the
Company is required, within five Business Days, upon becoming aware of any
Default or Event of Default or any default under any document, instrument or
101
<PAGE>
agreement representing Indebtedness of the Company or any Guarantor, to deliver
to the Trustee a statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company
or any Guarantor shall have any liability for any obligations of the Company or
the Guarantors under the Exchange Notes, the Guarantees or the Indenture or for
any claim based on, in respect of, or by reason of such obligations or their
creation. Each Holder of the Exchange Notes by accepting a Exchange Note waives
and releases all such liability. The waiver and release are part of the
consideration for issuance of the Exchange Notes. Such waiver may not be
effective to waive liabilities under the federal securities laws and it is the
view of the Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The obligations of the Company and the Guarantors, if any, under the
Indenture will terminate (other than certain obligations) and will be released
upon payment in full of all of the Exchange Notes. The Company may, at its
option and at any time, elect to have all of its obligations discharged with
respect to the outstanding Exchange Notes and have each Guarantor's obligation
discharged with respect to its Guarantee ("Legal Defeasance") and cure all then
existing Events of Default except for (i) the rights of Holders of outstanding
Exchange Notes to receive payments in respect of the principal of, premium, if
any, and interest on such Exchange Notes when such payments are due solely out
of the trust created pursuant to the Indenture, (ii) the Company's obligations
with respect to Exchange Notes concerning issuing temporary Exchange Notes,
registration of such Exchange Notes, mutilated, destroyed, lost or stolen
Exchange Notes and the maintenance of an office or agency for payment and money
for security payments held in trust, (iii) the rights, powers, trusts, duties
and immunities of the Trustee, and the Company's obligations in connection
therewith and (iv) the Legal Defeasance provisions of the Indenture. In
addition, the Company may, at its option and at any time, elect to have the
obligations of the Company and each Guarantor 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 Exchange Notes. In the event
Covenant Defeasance occurs, certain events (not including non-payment on other
indebtedness, bankruptcy, receivership, rehabilitation and insolvency events)
described under "Events of Default" will no longer constitute an Event of
Default with respect to the Exchange Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance with
respect to the Exchange Notes,
(i) the Company must irrevocably deposit with the Trustee, in trust, for
the benefit of the Holders of the Exchange Notes, cash in U.S. dollars,
non-callable Government Securities, or a combination thereof, in such
amounts as will be sufficient, in the opinion of a nationally recognized
firm of independent public accountants, to pay the principal of, premium, if
any, and interest due on the outstanding Exchange Notes on the stated
maturity date or on the applicable redemption date, as the case may be, of
such principal, premium, if any, or interest on the outstanding Exchange
Notes;
(ii) in the case of Legal Defeasance, the Company shall have delivered
to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that, subject to customary assumptions
and exclusions, (A) the Company has received from, or there has been
published by, the United States Internal Revenue Service a ruling or (B)
since the Issuance Date, there has been a change in the applicable U.S.
federal income tax law, in either case to the effect that, and based thereon
such opinion of counsel in the United States shall confirm that, subject to
customary assumptions and exclusions, the Holders of the outstanding
Exchange Notes will not recognize income, gain or loss for U.S. federal
income tax purposes as a result of such Legal
102
<PAGE>
Defeasance and will be subject to U.S. federal income tax on the same
amounts, in the same manner and at the same times as would have been the
case if such Legal Defeasance had not occurred;
(iii) in the case of Covenant Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States
reasonably acceptable to the Trustee confirming that, subject to customary
assumptions and exclusions, the Holders of the outstanding Exchange Notes
will not recognize income, gain or loss for U.S. federal income tax purposes
as a result of such Covenant Defeasance and will be subject to such tax on
the same amounts, in the same manner and at the same times as would have
been the case if such Covenant Defeasance had not occurred;
(iv) no Default or Event of Default shall have occurred and be
continuing with respect to certain Events of Default on the date of such
deposit;
(v) such Legal Defeasance or Covenant Defeasance shall not result in a
breach or violation of, or constitute a default under any material agreement
or instrument (other than the Indenture) to which the Company or any
Guarantor is a party or by which the Company or any Guarantor is bound;
(vi) the Company shall have delivered to the Trustee an Opinion of
Counsel to the effect that, as of the date of such opinion and subject to
customary assumptions and exclusions 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 under
any applicable U.S. federal or state law, and that the Trustee has a
perfected security interest in such trust funds for the ratable benefit of
the Holders;
(vii) 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 defeating, hindering, delaying or defrauding any creditors of the
Company or any Guarantor or others; and
(viii) the Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel in the United States (which opinion of
counsel may be subject to customary assumptions and exclusions) 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.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect as
to all Exchange Notes issued thereunder, when either (a) all such Exchange Notes
theretofore authenticated and delivered (except lost, stolen or destroyed
Exchange Notes which have been replaced or paid and Exchange Notes for whose
payment money has theretofore been deposited in trust and thereafter repaid to
the Company) have been delivered to the Trustee for cancellation; or (b) (i) all
such Exchange Notes not theretofore delivered to such Trustee for cancellation
have become due and payable by reason of the making of a notice of redemption or
otherwise or will become due and payable within one year and the Company or any
Guarantor has irrevocably deposited or caused to be deposited with such Trustee
as trust funds in trust an amount of money sufficient to pay and discharge the
entire indebtedness on such Exchange Notes not theretofore delivered to the
Trustee for cancellation for principal, premium, if any, and accrued interest to
the date of maturity or redemption; (ii) no Default or Event of Default with
respect to the Indenture or the Exchange Notes shall have occurred and be
continuing on the date of such deposit or shall occur as a result of such
deposit and such deposit will not result in a breach or violation of, or
constitute a default under, any other instrument to which the Company or any
Guarantor is a party or by which the Company or any Guarantor is bound; (iii)
the Company or any Guarantor has paid or caused to be paid all sums payable by
it under such Indenture; and (iv) the Company has delivered irrevocable
instructions to the Trustee under such Indenture to apply the deposited money
toward the payment of such Exchange Notes at maturity or the redemption date, as
the case may be. In addition, the Company must deliver an Officers'
103
<PAGE>
Certificate and an Opinion of Counsel to the Trustee stating that all conditions
precedent to satisfaction and discharge have been satisfied.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture, any
Guarantee and the Exchange Notes issued thereunder may be amended or
supplemented with the consent of the Holders of at least a majority in principal
amount of the Exchange Notes then outstanding (including consents obtained in
connection with a tender offer or exchange offer for the Exchange Notes), and
any existing default or compliance with any provision of the Indenture or the
Exchange Notes may be waived with the consent of the Holders of a majority in
principal amount of the outstanding Exchange Notes (including consents obtained
in connection with a tender offer or exchange offer for the Exchange Notes).
The Indenture provides that without the consent of each Holder affected, an
amendment or waiver may not (with respect to any Exchange Notes held by a
nonconsenting Holder of the Notes): (i) reduce the principal amount of the
Exchange Notes whose Holders must consent to an amendment, supplement or waiver,
(ii) reduce the principal of or change the fixed maturity of any such Exchange
Note or alter or waive the provisions with respect to the redemption of the
Exchange Notes (other than provisions relating to the covenants described under
"--Repurchase at the Option of Holders"), (iii) reduce the rate of or change the
time for payment of interest on any Exchange Note, (iv) waive a Default or Event
of Default in the payment of principal of, premium, if any, or interest on the
Exchange Notes (except a rescission of acceleration of the Exchange Notes by the
Holders of at least a majority in aggregate principal amount of such Exchange
Notes and a waiver of the payment default that resulted from such acceleration),
or in respect of a covenant or provision contained in the Indenture or any
Guarantee which cannot be amended or modified without the consent of all
Holders, (v) make any Exchange Note payable in money other than that stated in
such Exchange Notes, (vi) make any change in the provisions of the Indenture
relating to waivers of past Defaults or the rights of Holders of such Exchange
Notes to receive payments of principal of, premium, if any, or interest on such
Exchange Notes, (vii) make any change in the foregoing amendment and waiver
provisions, (viii) impair the right of any Holder of the Exchange Notes to
receive payment of principal of, or interest on such Holder's Exchange Notes on
or after the due dates therefore or to institute suit for the enforcement of any
payment on or with respect to such Holder's Exchange Notes, or (ix) make any
change in the subordination provisions of the Indenture that would adversely
affect the holders of the Exchange Notes.
The Indenture provides that, notwithstanding the foregoing, without the
consent of any Holder of Exchange Notes, the Company, any Guarantor (with
respect to a Guarantee to which it is party) and the Trustee together may amend
or supplement the Indenture, any Guarantee or the Exchange Notes (i) to cure any
ambiguity, defect or inconsistency, (ii) to provide for uncertificated Exchange
Notes in addition to or in place of certificated Exchange Notes, (iii) to comply
with the covenant relating to mergers, consolidations and sales of assets, (iv)
to provide for the assumption of the Company's or any Guarantor's obligations to
Holders of such Exchange Notes, (v) to make any change that would provide any
additional rights or benefits to the Holders of the Exchange Notes or that does
not adversely affect the legal rights under the Indenture of any such Holder,
(vi) to add covenants for the benefit of the Holders or to surrender any right
or power conferred upon the Company, (vii) to comply with requirements of the
Commission in order to effect or maintain the qualification of the Indenture
under the Trust Indenture Act or (viii) to add a Guarantor under the Indenture.
The consent of the Holders is not necessary under the Indenture to approve
the particular form of any proposed amendment. It is sufficient if such consent
approves the substance of the proposed amendment.
104
<PAGE>
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the Commission for permission to continue
or resign.
The Indenture provides that the Holders of a majority in principal amount of
the outstanding Exchange Notes issued thereunder will have the right to direct
the time, method and place of conducting any proceeding for exercising any
remedy available to the Trustee, subject to certain exceptions. The Indenture
provides that in case an Event of Default shall occur (which shall not be
cured), the Trustee will be required, in the exercise of its power, to use the
degree of care of a prudent person in the conduct of his own affairs. Subject to
such provisions, the Trustee will be under no obligation to exercise any of its
rights or powers under the Indenture at the request of any Holder of such
Exchange Notes, unless such Holder shall have offered to the Trustee security
and indemnity satisfactory to it against any loss, liability or expense.
GOVERNING LAW
The Indenture, the Exchange Notes and the Guarantees, if any, are, subject
to certain exceptions, governed by and construed in accordance with the internal
laws of the State of New York, without regard to the choice of law rules
thereof.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided. For
purposes of the Indenture, unless otherwise specifically indicated, the term
"consolidated" with respect to any Person refers to such Person consolidated
with its Restricted Subsidiaries, and excludes from such consolidation any
Unrestricted Subsidiary as if such Unrestricted Subsidiary were not an Affiliate
of such Person.
"Abarco" means Abarco N.V., a Netherlands Antilles corporation.
"Acquired Indebtedness" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person merged
with or into or became a Restricted Subsidiary of such specified Person,
including Indebtedness incurred in connection with, or in contemplation of, such
other Person merging with or into or becoming a Restricted Subsidiary of such
specified Person and (ii) Indebtedness encumbering any asset acquired by such
specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise, PROVIDED, HOWEVER,
that beneficial ownership of 10% or more of the voting securities of a Person
shall be deemed to be control.
"Asset Sale" means:
(i) the sale, conveyance, transfer or other disposition (whether in a
single transaction or a series of related transactions) of property or
assets (including by way of a sale and leaseback) of the Company or any
Restricted Subsidiary (each referred to in this definition as a
"disposition") or
105
<PAGE>
(ii) the issuance or sale of Equity Interests of any Restricted
Subsidiary (whether in a single transaction or a series of related
transactions), in each case, other than:
(a) a disposition of Cash Equivalents or Investment Grade Securities
or obsolete equipment in the ordinary course of business;
(b) the disposition of all or substantially all of the assets of the
Company in a manner permitted pursuant to the provisions described above
under "--Merger, Consolidation or Sale of All or Substantially All
Assets" or any disposition that constitutes a Change of Control pursuant
to the Indenture;
(c) any Restricted Payment that is permitted to be made, and is made,
under the first paragraph of the covenant described above under
"Limitation on Restricted Payments";
(d) any disposition, or related series of dispositions, of assets
with an aggregate fair market value of less than $1 million; and
(e) any disposition of property or assets by a Restricted Subsidiary
to the Company or by the Company or a Restricted Subsidiary to a
Wholly-Owned Restricted Subsidiary.
"Capital Stock" means with respect to any Person, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock of such Person, including, without limitation, if such Person is
a partnership, partnership interests (whether general or limited) and any other
interest or participation that confers on a Person the right to receive a share
of the profits and losses of, or distributions of assets of, such partnership.
"Capitalized Lease Obligation" means, at the time any determination thereof
is to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized and reflected as a liability on
a balance sheet in accordance with GAAP.
"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof, (iii) certificates of deposit, time
deposits and eurodollar time deposits with maturities of one year or less from
the date of acquisition, bankers' acceptances with maturities not exceeding one
year and overnight bank deposits, in each case with any commercial bank having
capital and surplus in excess of $500 million, (iv) repurchase obligations for
underlying securities of the types described in clauses (ii) and (iii) entered
into with any financial institution meeting the qualifications specified in
clause (iii) above, (v) commercial paper rated A-1 or the equivalent thereof by
Moody's or S&P and in each case maturing within one year after the date of
acquisition, (vi) investment funds investing 95% of their assets in securities
of the types described in clauses (i)-(v) above, (vii) readily marketable direct
obligations issued by any state of the United States of America or any political
subdivision thereof having one of the two highest rating categories obtainable
from either Moody's or S&P and (viii) Indebtedness or preferred stock issued by
Persons with a rating of "A" or higher from S&P or "A2" or higher from Moody's.
"Change of Control" means the occurrence of any of the following:
(i) the sale, lease or transfer, in one or a series of related
transactions, of all or substantially all of the assets of the Company and
its Subsidiaries, taken as a whole;
(ii) the Company becomes aware of (by way of a report or any other
filing pursuant to Section 13(d) of the Exchange Act, proxy, vote, written
notice or otherwise) the acquisition by any Person or group (within the
meaning of Section 13(d)(3) or Section 14(d)(2) of the Exchange Act, or any
successor provision), including any group acting for the purpose of
acquiring, holding or disposing of securities (within the meaning of Rule
13d-5(b)(1) under the Exchange Act), other than the Permitted Holders and
their Related Parties, in a single transaction or in a related series of
transactions, by way of merger, consolidation or other business combination
or purchase of beneficial ownership (within
106
<PAGE>
the meaning of Rule 13d-3 under the Exchange Act, or any successor
provision) of 50% or more of the total voting power of the Voting Stock of
the Company or such Person or group beneficially owns more of the total
voting power of the Voting Stock of the Company than the Permitted Holders
and their Related Parties;
(iii) the first day within any two-year period on which a majority of
the members of the Board of Directors of the Company are not Continuing
Directors; or
(iv) the Company consolidates with, or merges with or into, another
Person or sells, assigns, conveys, transfers, leases or otherwise disposes
of all or substantially all of its assets to any Person, or any Person
consolidates with, or merges with or into, the Company, in any such event
pursuant to a transaction in which the outstanding Voting Stock of the
Company is converted into or exchanged for cash, securities or other
property, other than (A) any such transaction where (1) the outstanding
Voting Stock of the Company is converted into or exchanged for (I) Voting
Stock (other than Disqualified Stock) of the surviving or transferee
corporation and/or (II) cash, securities and other property in an amount
which could be paid by the Company as a Restricted Payment under the
Indenture and (2) the "beneficial owners" of the Voting Stock of the Company
immediately prior to such transaction own, directly or indirectly, not less
than a majority of the Voting Stock of the surviving or transferee
corporation immediately after such transaction or (B) any such transaction
as a result of which the Permitted Holders or their Affiliates own a
majority of the total Voting Stock and Capital Stock of the surviving or
transferee corporation immediately after the transaction.
"Consolidated Depreciation and Amortization Expense" means with respect to
any Person for any period, the total amount of depreciation and amortization
expense and other noncash charges (excluding any noncash item that represents an
accrual, reserve or amortization of a cash expenditure for a future period) of
such Person and its Restricted Subsidiaries for such period on a consolidated
basis and otherwise determined in accordance with GAAP.
"Consolidated Interest Expense" means, with respect to any period, the sum
of: (a) consolidated interest expense of such Person and its Restricted
Subsidiaries for such period, to the extent such expense was deducted in
computing Consolidated Net Income (including amortization of original issue
discount, non-cash interest payments, the interest component of Capitalized
Lease Obligations, and net payments (if any) pursuant to Hedging Obligations,
excluding amortization of deferred financing fees) and (b) consolidated
capitalized interest of such Person and its Restricted Subsidiaries for such
period, whether paid or accrued, to the extent such expense was deducted in
computing Consolidated Net Income.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, and otherwise determined in accordance
with GAAP; PROVIDED, HOWEVER, that (i) any net after-tax extraordinary gains or
losses (less all fees and expenses relating thereto) shall be excluded, (ii) any
net after-tax gains or losses (less all fees and expenses relating thereto)
attributable to asset dispositions other than in the ordinary course of business
shall be excluded, (iii) the Net Income for such period of any Person that is
not a Subsidiary, or is an Unrestricted Subsidiary, or that is accounted for by
the equity method of accounting, shall be included only to the extent of the
amount of dividends or distributions or other payments paid in cash (or to the
extent converted into cash) to the referent Person or a Wholly Owned Restricted
Subsidiary thereof in respect of such period, (iv) the Net Income of any Person
acquired in a pooling of interests transaction shall not be included for any
period prior to the date of such acquisition and (v) the Net Income for such
period of any Restricted Subsidiary shall be excluded to the extent that the
declaration or payment of dividends or similar distributions by that Restricted
Subsidiary of its Net Income is not at the date of determination permitted
without any prior governmental approval (which has not been obtained) or,
directly or indirectly, by the operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to that Restricted Subsidiary
107
<PAGE>
or its stockholders, unless such restriction with respect to the payment of
dividends or in similar distributions has been legally waived.
"Contingent Obligations" means, with respect to any Person, any obligation
of such Person guaranteeing any leases, dividends or other obligations that do
not constitute Indebtedness ("primary obligations") of any other Person (the
"primary obligor") in any manner, whether directly or indirectly, including,
without limitation, any obligation of such Person, whether or not contingent,
(i) to purchase any such primary obligation or any property constituting direct
or indirect security therefor, (ii) to advance or supply funds (A) for the
purchase or payment of any such primary obligation or (B) to maintain working
capital or equity capital of the primary obligor or otherwise to maintain the
net worth or solvency of the primary obligor, or (iii) to purchase property,
securities or services primarily for the purpose of assuring the owner of any
such primary obligation of the ability of the primary obligor to make payment of
such primary obligation against loss in respect thereof.
"Continuing Directors" means, as of any date of determination, any member of
the Board of Directors who (i) was a member of such Board of Directors on the
Issuance Date or (ii) was nominated for election or elected to such Board of
Directors with, or whose election to such Board of Directors was approved by,
the affirmative vote of a majority of the Continuing Directors who were members
of such Board of Directors at the time of such nomination or election or (iii)
is any designee of a Permitted Holder or its Affiliates or was nominated by a
Permitted Holder or its Affiliates or any designees of a Permitted Holder or its
Affiliates on the Board of Directors.
"Default" means any event that is, or with the passage of time or the giving
of notice or both would be, an Event of Default.
"Designated Noncash Consideration" means the fair market value of noncash
consideration received by the Company or one of its Restricted Subsidiaries in
connection with an Asset Sale that is so designated as Designated Noncash
Consideration pursuant to an Officers' Certificate, setting forth the basis of
such valuation, executed by the principal executive officer and the principal
financial officer of the Company, less the amount of cash or Cash Equivalents
received in connection with a sale of such Designated Noncash Consideration.
"Designated Preferred Stock" means preferred stock of the Company (other
than Disqualified Stock) that is issued for cash (other than to a Restricted
Subsidiary) and is so designated as Designated Preferred Stock, pursuant to an
Officers' Certificate executed by the principal executive officer and the
principal financial officer of the Company, on the issuance date thereof, the
cash proceeds of which are excluded from the calculation set forth in paragraph
(c) of the "Restricted Payments" covenant.
"Disinterested Director" means, with respect to any transaction or series of
transactions in respect of which the Board of Directors is required to deliver a
resolution of the Board of Directors under the Indenture, a member of the Board
of Directors who does not have any material direct or indirect financial
interest in or with respect to such transaction or series of transactions
(except arising exclusively as a consequence of such member's relationship to
the Company).
"Disqualified Stock" means, with respect to any Person, any Capital Stock of
such Person which, by its terms (or by the terms of any security into which it
is convertible or for which it is puttable or exchangeable), or upon the
happening of any event, matures or is mandatorily redeemable, pursuant to a
sinking fund obligation or otherwise, or redeemable at the option of the holder
thereof, in whole or in part, in each case prior to the date 91 days after the
maturity date of the Exchange Notes; PROVIDED, HOWEVER, that if such Capital
Stock is either (i) redeemable or repurchaseable solely at the option of such
Person or (ii) issued to employees of the Company or its Subsidiaries or to any
plan for the benefit of such employees, such Capital Stock shall not constitute
Disqualified Stock unless so designated.
108
<PAGE>
"EBITDA" means, with respect to any Person for any period, the Consolidated
Net Income of such Person for such period plus (a) provision for taxes based on
income or profits of such Person for such period deducted in computing
Consolidated Net Income, plus (b) Consolidated Interest Expense of such Person
for such period, plus (c) Consolidated Depreciation and Amortization Expense of
such Person for such period to the extent such depreciation and amortization
were deducted in computing Consolidated Net Income, plus (d) any expenses or
charges related to any Equity Offering or Indebtedness permitted to be incurred
by the Indenture (including such expenses or charges related to the
Recapitalization and Financings) and deducted in such period in computing
Consolidated Net Income, plus (e) any expenses incurred prior to, or in
connection with, the Recapitalization and deducted in such period in computing
Consolidated Net Income related to the S&E Management Stock Ownership Plan, plus
(f) any expenses paid by the Company to, or for the benefit of, Abarco and its
affiliates prior to the Recapitalization for services provided by Abarco and its
affiliates to the Company and its Restricted Subsidiaries and deducted in such
period in computing Consolidated Net Income, plus (g) the amount of any
restructuring charge or reserve deducted in such period in computing
Consolidated Net Income, plus (h) without duplication, any other non-cash
charges reducing Consolidated Net Income for such period (excluding any such
charge which requires an accrual of a cash reserve for anticipated cash charges
for any future period), less, without duplication, (i) non-cash items increasing
Consolidated Net Income of such Person for such period (excluding any items
which represent the reversal of any accrual of, or cash reserve for, anticipated
cash charges in any prior period).
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Equity Offering" means any public or private sale of common stock or
preferred stock of the Company (excluding Disqualified Stock), other than public
offerings with respect to the Company's Common Stock registered on Form S-8.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations of the Commission promulgated thereunder.
"Excluded Contributions" means net cash proceeds received by the Company
after the closing of the Recapitalization from (a) capital contributions and (b)
the private sale (other than to a Restricted Subsidiary or to any Company or
Subsidiary management equity plan or stock option plan or any other management
or employee benefit plan or agreement) of Capital Stock (other than Disqualified
Stock) of the Company, in each case designated as Excluded Contributions
pursuant to an Officers' Certificate executed by the principal executive officer
and the principal financial officer of the Company on the date such capital
contributions are made or the date such Equity Interests are sold, as the case
may be, the cash proceeds of which are excluded from the calculation set forth
in paragraph (c) of the "Restricted Payments" covenant.
"Existing Indebtedness" means Indebtedness of the Company or its Restricted
Subsidiaries in existence on the Issuance Date, plus interest accruing thereon,
after application of the net proceeds of the sale of the Exchange Notes as
described in this Prospectus.
"Fixed Charge Coverage Ratio" means, with respect to any Person for any
period, the ratio of EBITDA of such Person for such period to the Fixed Charges
of such Person for such period. In the event that the Company or any of its
Restricted Subsidiaries incurs, assumes, guarantees or redeems any Indebtedness
(other than repayments of revolving credit borrowings with respect to which the
related commitment remains outstanding) or issues or redeems preferred stock
subsequent to the commencement of the period for which the Fixed Charge Coverage
Ratio is being calculated but prior to the event for
109
<PAGE>
which the calculation of the Fixed Charge Coverage Ratio is made (the
"Calculation Date"), then the Fixed Charge Coverage Ratio shall be calculated
giving pro forma effect to such incurrence, assumption, guarantee or redemption
of Indebtedness, or such issuance or redemption of preferred stock, as if the
same had occurred at the beginning of the applicable four-quarter period. For
purposes of making the computation referred to above, Investments, acquisitions,
dispositions which constitute all or substantially all of an operating unit of a
business and discontinued operations (as determined in accordance with GAAP)
that have been made by the Company or any of its Restricted Subsidiaries,
including all mergers, consolidations and dispositions, during the four-quarter
reference period or subsequent to such reference period and on or prior to the
Calculation Date shall be calculated on a pro forma basis assuming that all such
Investments, acquisitions, dispositions, discontinued operations, mergers,
consolidations (and the reduction of any associated fixed charge obligations and
the change in EBITDA resulting therefrom) had occurred on the first day of the
four-quarter reference period and without regard to clause (ii) of the
definition of Consolidated Net Income. If since the beginning of such period any
Person (that subsequently became a Restricted Subsidiary or was merged with or
into the Company or any Restricted Subsidiary since the beginning of such
period) shall have made any Investment, acquisition, disposition which
constitutes all or substantially all of an operating unit of a business,
discontinued operation, merger or consolidation that would have required
adjustment pursuant to this definition, then the Fixed Charge Coverage Ratio
shall be calculated giving pro forma effect thereto for such period as if such
Investment, acquisition, disposition, discontinued operation, merger or
consolidation had occurred at the beginning of the applicable four-quarter
period and without regard to clause (ii) of the definition of Consolidated Net
Income. For purposes of this definition, whenever pro forma effect is to be
given to a transaction, the pro forma calculations shall be made in good faith
by a responsible financial or accounting officer of the Company. If any
Indebtedness bears a floating rate of interest and is being given pro forma
effect, the interest of such Indebtedness shall be calculated as if the rate in
effect on the Calculation Date had been the applicable rate for the entire
period (taking into account any Hedging Obligations applicable to such
Indebtedness). Interest on a Capitalized Lease Obligation shall be deemed to
accrue at an interest rate reasonably determined by a responsible financial or
accounting officer of the Company to be the rate of interest implicit in such
Capitalized Lease Obligation in accordance with GAAP. For purposes of making the
computation referred to above, interest on any Indebtedness under a revolving
credit facility computed on a pro forma basis shall be computed based upon the
average daily balance of such Indebtedness during the applicable period.
Interest on Indebtedness that 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 rate, shall be deemed to have been based upon the rate actually
chosen, or, if none, then based upon such optional rate chosen as the Company
may designate.
"Fixed Charges" means, with respect to any Person for any period, the sum of
(a) Consolidated Interest Expense of such Person for such period and (b) all
cash dividend payments (excluding items eliminated in consolidation) on any
series of preferred stock of such Person.
"Foreign Subsidiary" means a Restricted Subsidiary not organized or existing
under the laws of the United States, any State thereof, the District of Columbia
or any territory thereof.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the Issuance Date. For the purposes of the
Indenture, the term "consolidated" with respect to any Person shall mean such
Person consolidated with its Restricted Subsidiaries, and shall not include any
Unrestricted Subsidiary.
110
<PAGE>
"Government Securities" means securities that are (a) direct obligations of
the United States of America for the timely payment of which its full faith and
credit is pledged or (b) obligations of a Person controlled or supervised by and
acting as an agency or instrumentality of the United States of America the
timely payment of which is unconditionally guaranteed as a full faith and credit
obligation by the United States of America, which, in either case, are not
callable or redeemable at the option of the issuer thereof, and shall also
include a depository receipt issued by a bank (as defined in Section 3(a)(2) of
the Securities Act), as custodian with respect to any such Government Securities
or a specific payment of principal of or interest on any such Government
Securities held by such custodian for the account of the holder of such
depository receipt; PROVIDED that (except as required by law) such custodian is
not authorized to make any deduction from the amount payable to the holder of
such depository receipt from any amount received by the custodian in respect of
the Government Securities or the specific payment of principal of or interest on
the Government Securities evidenced by such depository receipt.
"guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness or other obligations.
"Guarantee" means any guarantee of the obligations of the Company under the
Indenture and the Exchange Notes by any Person in accordance with the provisions
of the Indenture. When used as a verb, "Guarantee" shall have a corresponding
meaning. No Guarantees were issued in connection with the initial offering and
sale of the Old Notes.
"Guarantor" means any Person that incurs a Guarantee; PROVIDED that upon the
release and discharge of such Person from its Guarantee in accordance with the
Indenture, such Person shall cease to be a Guarantor. No Guarantees were issued
in connection with the initial offering and sale of the Old Notes.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) currency exchange or interest rate swap agreements,
currency exchange or interest rate cap agreements and currency exchange or
interest rate collar agreements and (ii) other agreements or arrangements
designed to protect such Person against fluctuations in currency exchange or
interest rates.
"Holder" means a holder of the Exchange Notes.
"Indebtedness" means, with respect to any Person, (a) any indebtedness of
such Person, whether or not contingent (i) in respect of borrowed money, (ii)
evidenced by bonds, notes, debentures or similar instruments or letters of
credit or bankers' acceptances (or reimbursement agreements in respect thereof),
(iii) representing the balance deferred and unpaid of the purchase price of any
property (including Capitalized Lease Obligations), except any such balance that
constitutes an accrued expense or trade payable or any other monetary obligation
of a trade creditor (whether or not an Affiliate), or (iv) representing any
Hedging Obligations, if and to the extent of any of the foregoing Indebtedness
(other than letters of credit and Hedging Obligations) that would appear as a
liability upon a balance sheet of such Person prepared in accordance with GAAP,
(b) to the extent not otherwise included, any obligation by such Person to be
liable for, or to pay, as obligor, guarantor or otherwise, on the Indebtedness
of another Person (other than by endorsement of negotiable instruments for
collection in the ordinary course of business) and (c) to the extent not
otherwise included, Indebtedness of another Person secured by a Lien on any
asset owned by such Person (whether or not such Indebtedness is assumed by such
Person); PROVIDED, HOWEVER, that Contingent Obligations incurred in the ordinary
course of business shall be deemed not to constitute Indebtedness.
111
<PAGE>
"Independent Financial Advisor" means an accounting, appraisal, investment
banking firm or consultant to Persons engaged in Similar Businesses of
nationally recognized standing that is, in the judgment of the Company's Board
of Directors, qualified to perform the task for which it has been engaged.
"Investment Grade Securities" means (i) securities issued or directly and
fully guaranteed or insured by the United States government or any agency or
instrumentality thereof (other than Cash Equivalents), (ii) debt securities or
debt instruments with a rating of BBB- or higher by S&P or Baa3 or higher by
Moody's or the equivalent of such rating by such rating organization, or, if no
rating of S&P or Moody's then exists, the equivalent of such rating by any other
nationally recognized securities rating agency, but excluding any debt
securities or instruments constituting loans or advances among the Company and
its Subsidiaries, and (iii) investments in any fund that invests exclusively in
investments of the type described in clauses (i) and (ii) which fund may also
hold immaterial amounts of cash pending investment and/or distribution.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the form of loans (including
guarantees), advances or capital contributions (excluding advances to customers,
commission, travel and similar advances to officers and employees made in the
ordinary course of business), purchases or other acquisitions for consideration
of Indebtedness, Equity Interests or other securities issued by any other Person
and investments that are required by GAAP to be classified on the balance sheet
of the Company in the same manner as the other investments included in this
definition to the extent such transactions involve the transfer of cash or other
property. For purposes of the definition of "Unrestricted Subsidiary" and the
covenant described under "--Certain Covenants--Restricted Payments," (i)
"Investments" shall include the portion (proportionate to the Company's equity
interest in such Subsidiary) of the fair market value of the net assets of a
Subsidiary of the Company at the time that such Subsidiary is designated an
Unrestricted Subsidiary; PROVIDED, HOWEVER, that upon a redesignation of such
Subsidiary as a Restricted Subsidiary, the Company shall be deemed to continue
to have a permanent "Investment" in an Unrestricted Subsidiary equal to an
amount (if positive) equal to (x) the Company's "Investment" in such Subsidiary
at the time of such redesignation less (y) the portion (proportionate to the
Company's equity interest in such Subsidiary) of the fair market value of the
net assets of such Subsidiary at the time of such redesignation; and (ii) any
property transferred to or from an Unrestricted Subsidiary shall be valued at
its fair market value at the time of such transfer, in each case as determined
in good faith by the Board of Directors.
"Issuance Date" means the closing date for the sale and original issuance of
the Old Notes under the Indenture.
"Letter of Credit/Bankers' Acceptance Obligations" means Indebtedness of the
Company or any of its Restricted Subsidiaries with respect to letters of credit
or bankers' acceptances constituting Senior Indebtedness or Pari Passu
Indebtedness which shall be deemed to consist of (i) the aggregate maximum
amount then available to be drawn under all such letters of credit (the
determination of such maximum amount to assume compliance with all conditions
for drawing), (ii) the aggregate face amount of all unmatured bankers'
acceptances and (iii) the aggregate amount that has then been paid by, and not
reimbursed to, the issuers under such letters of credit or creation of such
bankers' acceptances.
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the nature
thereof, any option or other agreement to sell or give a security interest in
and any filing of or agreement to give any financing statement under the Uniform
Commercial Code (or equivalent statutes) of any jurisdiction); PROVIDED that in
no event shall an operating lease be deemed to constitute a Lien.
112
<PAGE>
"Moody's" means Moody's Investors Service, Inc.
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends.
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale, net of the
direct costs relating to such Asset Sale (including, without limitation, legal,
accounting and investment banking fees, and brokerage and sales commissions),
and any relocation expenses incurred as a result thereof, taxes paid or payable
as a result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements), amounts required to be applied to
the repayment of principal, premium (if any) and interest on Indebtedness
required (other than required by clause (i) of the second paragraph of
"--Repurchase at the Option of Holders--Asset Sales") to be paid as a result of
such transaction and any deduction of appropriate amounts to be provided by the
Company as a reserve in accordance with GAAP against any liabilities associated
with the asset disposed of in such transaction and retained by the Company after
such sale or other disposition thereof, including, without limitation, pension
and other post-employment benefit liabilities and liabilities related to
environmental matters or against any indemnification obligations associated with
such transaction.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements (including, without limitation, reimbursement
obligations with respect to letters of credit and banker's acceptances), damages
and other liabilities payable under the documentation governing any
Indebtedness.
"Officers' Certificate" means a certificate signed on behalf of the Company
by two officers of the Company, one of whom must be the principal executive
officer, the principal financial officer, the treasurer or the principal
accounting officer of the Company that meets the requirements set forth in the
Indenture.
"Pari Passu Indebtedness" means (a) with respect to the Exchange Notes,
Indebtedness which ranks PARI PASSU in right of payment to the Exchange Notes
and (b) with respect to any Guarantee, Indebtedness which ranks PARI PASSU in
right of payment to such Guarantee.
"Permitted Holders" means Strata, KKR and any of their Affiliates.
"Permitted Investments" means (a) any Investment in the Company or any
Restricted Subsidiary; (b) any Investment in cash and Cash Equivalents or
Investment Grade Securities; (c) any Investment by the Company or any Restricted
Subsidiary of the Company in a Person that is a Similar Business if as a result
of such Investment (i) such Person becomes a Restricted Subsidiary or (ii) such
Person, in one transaction or a series of related transactions, is merged,
consolidated or amalgamated with or into, or transfers or conveys substantially
all of its assets to, or is liquidated into, the Company or a Restricted
Subsidiary; (d) any Investment in securities or other assets not constituting
cash or Cash Equivalents and received in connection with an Asset Sale made
pursuant to the provisions of "--Repurchase at the Option of Holders--Asset
Sales" or any other disposition of assets not constituting an Asset Sale; (e)
any Investment existing on the Issuance Date; (f) advances to employees not in
excess of $5 million outstanding at any one time; (g) any Investment acquired by
the Company or any of its Restricted Subsidiaries (i) in exchange for any other
Investment or accounts receivable held by the Company or any such Restricted
Subsidiary in connection with or as a result of a bankruptcy, workout,
reorganization or recapitalization of the issuer of such other Investment or
accounts receivable or (ii) as a result of a foreclosure by the Company or any
of its Restricted Subsidiaries with respect to any secured Investment or other
transfer of title with respect to any secured Investment in default; (h) Hedging
Obligations; (i) loans and advances to officers, directors and employees for
business-related travel expenses, moving expenses and other similar expenses, in
each
113
<PAGE>
case incurred in the ordinary course of business; (j) any Investment in a
Similar Business (other than an Investment in an Unrestricted Subsidiary) having
an aggregate fair market value, taken together with all other Investments made
pursuant to this clause (j) that are at that time outstanding, not to exceed 10%
of Total Assets at the time of such Investment (with the fair market value of
each Investment being measured at the time made and without giving effect to
subsequent changes in value); (k) Investments the payment for which consists of
Equity Interests of the Company (exclusive of Disqualified Stock); PROVIDED,
HOWEVER, that such Equity Interests will not increase the amount available for
Restricted Payments under clause (c) of the "Restricted Payments" covenant; and
(l) additional Investments having an aggregate fair market value, taken together
with all other Investments made pursuant to this clause (l) that are at that
time outstanding, not to exceed 5% of Total Assets at the time of such
Investment (with the fair market value of each Investment being measured at the
time made and without giving effect to subsequent changes in value).
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, government
or any agency or political subdivision thereof or any other entity.
"preferred stock" means any Equity Interest with preferential right of
payment of dividends or upon liquidation, dissolution, or winding up.
"Preferred Stock" means $150 million aggregate liquidation preference of the
12 1/2% Preferred Stock issued by the Company on the Issuance Date and any
shares of Preferred Stock issued as payment in kind dividends thereon or on
shares of Preferred Stock so issued as payment in kind dividends.
"Recapitalization" means the acquisition of 88.4% of the common stock, par
value $.01 per share, of the Company by Strata pursuant to the Recapitalization
and Stock Purchase Agreement dated as of August 15, 1996 among the Company,
Strata and Abarco.
"Related Parties" means any Person controlled by a Permitted Holder,
including any partnership of which a Permitted Holder or its Affiliates is the
general partner.
"Repurchase Offer" means an offer made by the Company to purchase all or any
portion of a Holder's Exchange Notes pursuant to the provisions described under
the covenants entitled "--Repurchase at the Option of Holders--Change of
Control" or "--Repurchase at the Option of Holders--Asset Sales."
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" means, at any time, any direct or indirect
Subsidiary of the Company that is not then an Unrestricted Subsidiary; PROVIDED,
HOWEVER, that upon the occurrence of any Unrestricted Subsidiary ceasing to be
an Unrestricted Subsidiary, such Subsidiary shall be included in the definition
of "Restricted Subsidiary."
"S&P" means Standard and Poor's Ratings Group.
"Securities Act" means the Securities Act of 1933, as amended, and the rules
and regulations of the Commission promulgated thereunder.
"Senior Credit Facility" means, that certain credit facility described in
this Prospectus among the Company and the lenders from time to time party
thereto, including any collateral documents, instruments and agreements executed
in connection therewith, and the term Senior Credit Facility shall also include
114
<PAGE>
any amendments, supplements, modifications, extensions, renewals, restatements
or refundings thereof and any credit facilities that replace, refund or
refinance any part of the loans, other credit facilities or commitments
thereunder, including any such replacement, refunding or refinancing facility
that increases the amount borrowable thereunder or alters the maturity thereof,
PROVIDED, HOWEVER, that, there shall not be more than one facility at any one
time that constitutes the Senior Credit Facility and, if at any time there is
more than one facility which would constitute the Senior Credit Facility, the
Company will designate to the Trustee which one of such facilities will be the
Senior Credit Facility for purposes of the Indenture.
"Significant Subsidiary" means any Subsidiary which would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Securities Act, as such Regulation is in effect on the Issuance
Date.
"Similar Business" means a business, the majority of whose revenues are
derived from sales of consumer products or any business or activity that is
reasonably similar thereto or a reasonable extension, development or expansion
thereof or ancillary thereto.
"Strata" means Strata Associates L.P., a Delaware limited partnership.
"Subordinated Indebtedness" means any Indebtedness of the Company which is
by its terms subordinated in right of payment to the Exchange Notes.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association, or other business entity (other than a partnership) of which more
than 50% of the total voting power of shares of Capital Stock entitled (without
regard to the occurrence of any contingency) to vote in the election of
directors, managers or trustees thereof is at the time of determination owned or
controlled, directly or indirectly, by such Person or one or more of the other
Subsidiaries of that Person or a combination thereof and (ii) any partnership,
joint venture, limited liability company or similar entity of which (x) more
than 50% of the capital accounts, distribution rights, total equity and voting
interests or general or limited partnership interests, as applicable, are owned
or controlled, directly or indirectly, by such Person or one or more of the
other Subsidiaries of that Person or a combination thereof whether in the form
of membership, general, special or limited partnership or otherwise and (y) such
person or any Wholly Owned Restricted Subsidiary of such person is a controlling
general partner or otherwise controls such entity.
"Total Assets" means the total consolidated assets of the Company and its
Restricted Subsidiaries, as shown on the most recent balance sheet of the
Company.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company which at
the time of determination is an Unrestricted Subsidiary (as designated by the
Board of Directors of the Company, as provided below) and (ii) any Subsidiary of
an Unrestricted Subsidiary. The Board of Directors of the Company may designate
any Subsidiary of the Company (including any existing Subsidiary and any newly
acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary unless
such Subsidiary or any of its Subsidiaries owns any Equity Interests of, or
owns, or holds any Lien on, any property of, the Company or any Subsidiary of
the Company (other than any Subsidiary of the Subsidiary to be so designated),
PROVIDED that (a) any Unrestricted Subsidiary must be an entity of which shares
of the capital stock or other equity interests (including partnership interests)
entitled to cast at least a majority of the votes that may be cast by all shares
or equity interests having ordinary voting power for the election of directors
or other governing body are owned, directly or indirectly, by the Company, (b)
the Company certifies that such designation complies with the covenants
described under "--Certain Covenants--Restricted Payments" and (c) each of (I)
the Subsidiary to be so designated and (II) its Subsidiaries has not at the time
of designation, and does not thereafter, create, incur, issue, assume, guarantee
or otherwise become directly or indirectly liable
115
<PAGE>
with respect to any Indebtedness pursuant to which the lender has recourse to
any of the assets of the Company or any of its Restricted Subsidiaries. The
Board of Directors may designate any Unrestricted Subsidiary to be a Restricted
Subsidiary; PROVIDED that, immediately after giving effect to such designation,
the Company could incur at least $1.00 of additional Indebtedness pursuant to
the Fixed Charge Coverage Ratio test described under "--Certain
Covenants--Limitations on Incurrence of Indebtedness and Disqualified Stock" on
a pro forma basis taking into account such designation. Any such designation by
the Board of Directors shall be notified by the Company to the Trustee by
promptly filing with the Trustee a copy of the board resolution giving effect to
such designation and an Officers' Certificate certifying that such designation
complied with the foregoing provisions.
"Voting Stock" means, with respect to any Person, any class or series of
capital stock of such Person that is ordinarily entitled to vote in the election
of directors thereof at a meeting of stockholders called for such purpose,
without the occurrence of any additional event or contingency.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
or Disqualified Stock, as the case may be, at any date, the quotient obtained by
dividing (i) the sum of the products of the number of years from the date of
determination to the date of each successive scheduled principal payment of such
Indebtedness or redemption or similar payment with respect to such Disqualified
Stock multiplied by the amount of such payment, by (ii) the sum of all such
payments.
"Wholly Owned Restricted Subsidiary" is any Wholly Owned Subsidiary that is
a Restricted Subsidiary.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person
100% of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person and one or
more Wholly Owned Subsidiaries of such Person.
BOOK-ENTRY DELIVERY AND FORM
The certificates representing the Exchange Notes will be issued in fully
registered form. Except as described in the next paragraph, the Exchange Notes
initially will be represented by a single, permanent global Exchange Note, in
definitive, fully registered form without interest coupons (the "Global Exchange
Note") and will be deposited with the Trustee as custodian for The Depository
Trust Company, New York, New York ("DTC") and registered in the name of a
nominee of DTC.
Holders of Exchange Notes who elect to take physical delivery of their
certificates instead of holding their interest through the Global Exchange Note
(collectively referred to herein as the "Non-Global Holders") will be issued in
registered form (a "Certificated Exchange Note"). Upon the transfer of any
Certificated Exchange Note initially issued to a Non-Global Holder, such
Certificated Exchange Note will, unless the transferee requests otherwise or a
Global Exchange Note has previously been exchanged in whole for Certificated
Exchange Notes, be exchanged for an interest in such Global Exchange Note.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a "banking
organization" within the meaning of the New York Banking Law, 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
provision of Section 17A of the Exchange Act. DTC was created to hold securities
for its participants and facilitate the clearance and settlement of securities
transactions between participants through electronic book-entry changes in
accounts of its participants, thereby eliminating the need for physical movement
of certificates. Participants
116
<PAGE>
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").
Upon the issuance of the Global Exchange Note, DTC or its custodian will
credit, on its internal system, the respective principal amount of the
individual beneficial interests represented by such Global Exchange Note to the
accounts of persons who have accounts with such depositary. Such accounts
initially will be designated by or on behalf of the Initial Purchasers.
Ownership of beneficial interests in the Global Exchange Note will be limited to
persons who have accounts with DTC ("participants") or persons who hold
interests through participants. Ownership of beneficial interests in the Global
Exchange Note will be shown on, and the transfer of that ownership will be
effected only through, records maintained by DTC or its nominee (with respect to
interests of participants) and the records of participants (with respect to
interests of persons other than participants).
So long as DTC or its nominee is the registered owner or holder of the
Global Exchange Note, DTC or such nominee, as the case may be, will be
considered the sole record owner or holder of the Exchange Notes represented by
such Global Exchange Note for all purposes under the Indenture and the Exchange
Notes. No beneficial owners of an interest in the Global Exchange Note will be
able to transfer that interest except in accordance with DTC's applicable
procedures.
The Company understands that, under existing industry practices, in the
event that the Company requests any action of Holders, or an owner of a
beneficial interest in such permanent Global Exchange Note desires to give or
take any action (including a suit for repayment of principal, premium or
interest) that a Holder is entitled to give or take under the Notes, DTC would
authorize the participants holding the relevant beneficial interests to give or
take such action, and such participants would authorize beneficial owners owning
through such participants to give or take such action or would otherwise act
upon the instruction of beneficial owners owning through them.
Payments of the principal of, premium, if any, and interest on the Global
Exchange Note will be made to DTC or its nominee, as the case may be, as the
registered owner thereof. Neither the Company, the Trustee, nor 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
Exchange Note or for maintaining, supervising or reviewing any records relating
to such beneficial ownership interests.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, or interest in respect of the Global Exchange Note
will credit participants' accounts with payments in amounts proportionate to
their respective beneficial ownership interests in the principal amount of such
Global Exchange Note, as shown on the records of DTC or its nominee. The Company
also expects that payments by participants to owners of beneficial interests in
such Global Exchange Note held through such participants will be governed by
standing instructions and customary practices, as is now the case with
securities held for the accounts of customers registered in the names of
nominees for such customers. Such payments will be the responsibility of such
participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules. If a Holder requires physical delivery of
Certificates Exchange Notes for any reason, including to sell Exchange Notes to
persons in states which require such delivery of such Exchange Notes or to
pledge such Exchange Notes, such holder must transfer its interest in the Global
Exchange Note, in accordance with the normal procedures of DTC and the
procedures set forth in the Indenture.
117
<PAGE>
Neither the Company nor the Trustee will have any responsibility for the
performance by DTC or its participants or indirect participants of their
respective obligations under the rules and procedures governing their
operations.
Subject to certain conditions, any person having a beneficial interest in
the Global Exchange Note may, upon request to the Trustee, exchange such
beneficial interest for Exchange Notes in the form of Certificated Exchange
Notes. Upon any such issuance, the Trustee is required to register such
Certificates Exchange Notes in the name of, and cause the same to be delivered
to, such person or persons (or the nominee of any thereof). In addition, if DTC
is at any time unwilling or unable to continue as a depositary for the Global
Exchange Note and a successor depositary is not appointed by the Company within
90 days, the Company will issue Certificates Exchange Notes in exchange for the
Global Exchange Note.
118
<PAGE>
EXCHANGE OFFER; REGISTRATION RIGHTS
EXCHANGE OFFER. The Company and the Initial Purchasers entered into the
Registration Rights Agreement on the Issuance Date, pursuant to which the
Company agreed, for the benefit of the holders of the Old Notes, that it will,
at its own expense, (i) file a registration statement (the "Exchange Offer
Registration Statement") with the Commission with respect to the Exchange Offer
to exchange the Old Notes for Exchange Notes having substantially identical
terms in all material respects to the Old Notes (except that the Exchange Notes
will not contain terms with respect to transfer restrictions or interest rate
increases as described herein) within 45 calendar days after the Issuance Date,
(ii) use its best efforts to cause the Exchange Offer Registration Statement to
be declared effective by the Commission under the Securities Act within 105
calendar days after the Issuance Date and (iii) use its best efforts to
consummate the Exchange Offer within 135 calendar days after the Issuance Date.
Upon the Exchange Offer Registration Statement being declared effective, the
Company will offer the Exchange Notes in exchange for surrender of the Old
Notes. The Company will keep the Exchange Offer open for at least 30 business
days (or longer if required by applicable law) after the date that notice of the
Exchange Offer is mailed to the holders of the Old Notes. For each Old Note
surrendered to the Company pursuant to the Exchange Offer, the holder who
surrendered such Old Note will receive an Exchange Note having a principal
amount equal to that of the surrendered Old Note. Interest on each Exchange Note
will accrue from the last interest payment date on which interest was paid on
the Old Note surrendered in exchange therefor or, if no interest has been paid
on such Old Note, from the original issue date of such Old Note. Under existing
interpretations of the Commission contained in several no-action letters to
third parties, the Exchange Notes would generally be freely transferable by
holders thereof after the Exchange Offer without further registration under the
Securities Act (subject to certain representations required to be made by each
holder of Old Notes, as set forth below). However, any purchaser of Old Notes
who is an "affiliate" of the Company or who intends to participate in the
Exchange Offer for the purpose of distributing the Exchange Notes (i) will not
be able to rely on the interpretation of the staff of the Commission, (ii) will
not be able to tender its Old Notes in the Exchange Offer and (iii) must comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any sale or transfer of the Exchange Notes unless such sale
or transfer is made pursuant to an exemption from such requirements. In
addition, in connection with any resales of Exchange Notes, any broker-dealer (a
"Participating Broker-Dealer") which acquired the Old Notes for its own account
as a result of market making or other trading activities must deliver a
prospectus meeting the requirements of the Securities Act. The Commission has
taken the position that Participating Broker-Dealers may fulfill their
prospectus delivery requirements with respect to the Exchange Notes (other than
a resale of an unsold allotment from the original sale of the Old Notes) with
the prospectus contained in the Exchange Offer Registration Statement. The
Company will agree to make available for a period of up to 120 days after
consummation of the Exchange Offer a prospectus meeting the requirements of the
Securities Act to any Participating Broker-Dealer and any other persons, if any,
with similar prospectus delivery requirements, for use in connection with any
resale of Exchange Notes. A Participating Broker-Dealer or any other person that
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 thereunder).
Each holder of the Old Notes (other than certain specified holders) who
wishes to exchange Old Notes for Exchange Notes in the Exchange Offer will be
required to make certain representations, including representations that (i) any
Exchange Notes to be received by it will be acquired in the ordinary course of
its business, (ii) it has no arrangement or understanding with any person to
participate in the distribution (within the meaning of the Securities Act) of
the Exchange Notes, (iii) it is not an "affiliate" (as defined in Rule 405 under
the Securities Act) of the Company or, if it is such an affiliate, it will
comply with the registration and prospectus delivery requirements of the
Securities Act to the extent applicable
119
<PAGE>
and (iv) it is not acting on behalf of any person who could not truthfully make
the foregoing representations.
SHELF REGISTRATION. In the event that (i) any changes in law or the
applicable interpretations of the staff of the Commission do not permit the
Company to effect the Exchange Offer, (ii) for any other reason the Exchange
Offer is not consummated within 135 days after the Issuance Date, (iii) under
certain circumstances, if the Initial Purchasers shall so request or (iv) any
holder of Old Notes (other than the Initial Purchasers) is not eligible to
participate in the Exchange Offer, the Company will, at its expense, (a) as
promptly as reasonably practicable file a shelf registration statement (the
"Shelf Registration Statement") covering resales of the Old Notes, (b) use its
best efforts to cause the Shelf Registration Statement to be declared effective
under the Securities Act on or prior to 135 days after the Issuance Date and (c)
use its best efforts to keep effective the Shelf Registration Statement until
the earlier of three years from the Issuance Date or such shorter period ending
when all Old Notes covered by the Shelf Registration Statement have been sold in
the manner set forth and as contemplated in the Shelf Registration Statement or
when the Old Notes become eligible for resale pursuant to Rule 144 under the
Securities Act without volume restrictions, if any. The Company, will, in the
event of the filing of the Shelf Registration Statement, provide to each holder
of the Old Notes copies of the prospectus which is a part of the Shelf
Registration Statement, notify each such holder when the Shelf Registration
Statement has become effective and take certain other actions as are required to
permit unrestricted resales of the Old Notes. A holder of Old Notes that sells
its Old Notes pursuant to the Shelf Registration Statement generally will be
required to be named as a selling securityholder in the related prospectus and
to deliver a prospectus to purchasers, will be subject to certain of the civil
liability provisions under the Securities Act in connection with such sales and
will be bound by the provisions of the Registration Rights Agreement that are
applicable to such a holder (including certain indemnification rights and
obligations thereunder). In addition, each holder of the Old Notes will be
required to deliver information to be used in connection with the Shelf
Registration Statement and to provide comments on the Shelf Registration
Statement within the time periods set forth in the Registration Rights Agreement
in order to have their Old Notes included in the Shelf Registration Statement
and to benefit from the provisions regarding liquidated damages set forth in the
following paragraph.
Although the Company intends to file the registration statements described
above, as required, there can be no assurance that such registration statements
will be filed, or, if filed, that they will become effective. In the event that
either (a) the Exchange Offer Registration Statement is not filed with the
Commission on or prior to the 45th calendar day following the Issuance Date, (b)
the Exchange Offer Registration Statement has not been declared effective on or
prior to the 105th calendar day following the Issuance Date or (c) the Exchange
Offer is not consummated or a Shelf Registration Statement is not declared
effective on or prior to the 135th calendar day following the Issuance Date, the
interest rate borne by the Old Notes shall be increased by one-quarter of one
percent per annum following such 45-day period in the case of clause (a) above,
following such 105-day period in the case of clause (b) above or following such
135-day period in the case of clause (c) above, which rate will be increased by
an additional one-quarter of one percent per annum for each 90-day period that
any additional interest continues to accrue; PROVIDED that the aggregate
increase in such annual interest rate may in no event exceed one percent. Upon
(x) the filing of the Exchange Offer Registration Statement after the 45-day
period described in clause (a) above, (y) the effectiveness of the Exchange
Offer Registration Statement after the 105-day period described in clause (b)
above or (z) the consummation of the Exchange Offer or the effectiveness of a
Shelf Registration Statement, as the case may be, after the 135-day period
described in clause (c) above, the interest rate borne by the Old Notes from the
date of such filing, effectiveness or consummation, as the case may be, will be
reduced to the original interest rate if the Company is otherwise in compliance
with this paragraph; PROVIDED, HOWEVER, that if, after any such reduction in
interest rate, a different event specified in clause (a), (b) or (c) above
occurs, the interest rate may again be increased pursuant to the foregoing
provisions. Pending the announcement of a material corporate transaction, if the
Company issues a notice that the Shelf Registration Statement is unusable, or
such a notice is required
120
<PAGE>
under applicable securities laws to be issued by the Company, and the aggregate
number of days in any consecutive twelve-month period for which all such notices
are issued or required to be issued exceeds 30 days in the aggregate, then the
interest rate borne by the Old Notes will be increased by one-quarter of one
percent per annum following the date that such Shelf Registration Statement
ceases to be usable for a period of time in excess of the period permitted
above, which rate shall be increased by an additional one-quarter of one percent
per annum at the beginning of each subsequent 90-day period; PROVIDED that the
aggregate increase in such annual interest rate may in no event exceed one
percent per annum. Upon the Company declaring that the Shelf Registration
Statement is usable after the period of time described in the preceding
sentence, the interest rate borne by the Old Notes will be reduced to the
original interest rate if the Company is otherwise in compliance with this
paragraph; PROVIDED, HOWEVER, that if after any such reduction in dividend rate
a different event of the kind described in the preceding event occurs, the
interest rate may again be increased pursuant to the foregoing provisions.
Subject to certain exceptions, the Company has agreed to indemnify Holders
participating in the Exchange Offer against any loss, liability, claim, damage
or expense (including settlement of litigation or any investigation or
proceeding by any governmental agency or body) incurred as a consequence of any
untrue statement or alleged untrue statement of a material fact contained in the
Exchange Offer Registration Statement or Shelf Registration Statement.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by, all the provisions of the Registration Rights Agreement, a copy
of which will be made available upon request to the Company.
121
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Certificate of Incorporation of the Company at Closing authorizes
100,000,000 shares of common stock, par value $.01 per share (the "Common
Stock"), of which 50,000,000 shares are outstanding and 50,000,000 shares of
preferred stock, par value $.01 per share, of which 1,500,000 shares are
outstanding with the remainders issuable in series by resolution of the Board of
Directors of the Company. The Board of Directors of the Company, in its sole
discretion, may designate and issue one or more series of preferred stock from
the authorized and unissued shares of preferred stock, subject to limitations
imposed by law or the Company's Certificate of Incorporation. The Board of
Directors is empowered to determine the designation of and the number of shares
constituting a series of preferred stock; the dividend rate for the series; the
terms and conditions of any voting, conversion and exchange rights for the
series; the amounts payable on the series upon redemption or the Company's
liquidation, dissolution or winding-up; the provisions of any sinking fund for
the redemption of purchase of shares of any series; and the preferences and
relative rights among the series of preferred stock.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share for each
share held of record on all matters submitted to a vote of stockholders. Subject
to preferential rights with respect to any series of preferred stock, holders of
Common Stock are entitled to receive ratably such dividends as may be declared
by the Board of Directors on the Common Stock out of funds legally available
therefor, and in the event of a liquidation, dissolution or winding-up of the
affairs of the Company, are entitled to share equally and ratably in all
remaining assets and funds of the Company. The holders of Common Stock have no
preemptive rights, cumulative voting rights, or rights to convert shares of
Common Stock into any other securities and are not subject to future calls or
assessments by the Company. All outstanding shares of Common Stock are fully
paid and nonassessable.
122
<PAGE>
DESCRIPTION OF THE PREFERRED STOCK
PREFERRED STOCK
The shares of Preferred Stock were issued pursuant to a certificate of
designations (the "Certificate of Designations"). The summary contained herein
of certain provisions of the Preferred Stock does not purport to be complete and
is qualified in its entirety by reference to the provisions of the Certificate
of Designations. The definitions of certain terms used in the Certificate of
Designations and in the following summary are set forth below under "--Certain
Definitions."
GENERAL
The Board of Directors adopted resolutions authorizing the issuance of up to
10,000,000 shares of Preferred Stock, which consist of the 1,500,000 shares of
Preferred Stock issued in the Preferred Stock Offering plus additional shares of
Preferred Stock which may be used to pay dividends on the Preferred Stock. The
Company filed a Certificate of Designations with respect to the Preferred Stock
with the Secretary of State of the State of Delaware as required by Delaware
law. The Preferred Stock ranks junior in right of payment to all liabilities and
obligations (whether or not for borrowed money) of the Company (other than
Common Stock and any preferred stock of the Company which by its terms is junior
to, or on parity with, the Preferred Stock). In addition, creditors and
stockholders of the Company's subsidiaries will also have priority over the
Preferred Stock with respect to claims on the assets of such subsidiaries. The
Preferred Stock, when issued and paid for and when issued in lieu of cash
dividends, will be fully paid and non-assessable, and the holders thereof will
have no subscription or preemptive rights related thereto.
RANKING
The Preferred Stock, with respect to dividends and distributions upon the
liquidation, winding-up and dissolution of the Company, will rank (i) senior to
all classes of common stock and each other class of capital stock or series of
preferred stock established after the initial issuance of the Preferred Stock by
the Board of Directors which does not expressly provide that it ranks on a
parity with the Preferred Stock as to dividends and distributions upon the
liquidation, winding-up and dissolution of the Company (collectively referred to
as "Junior Securities") and (ii) on a parity with any class of capital stock or
series of preferred stock issued by the Company established after the initial
issuance of the Preferred Stock by the Board of Directors, the terms of which
expressly provide that such class or series will rank on a parity with the
Preferred Stock as to dividends and distributions upon the liquidation,
winding-up and dissolution of the Company (collectively referred to as "Parity
Securities").
DIVIDENDS
Holders of Preferred Stock are entitled, when, as and if declared by the
Board of Directors to receive dividends on each outstanding share of the
Preferred Stock, at the annual rate of 12 1/2% of the then effective liquidation
preference per share of Preferred Stock. Dividends on the Preferred Stock are
payable quarterly in arrears on October 1, January 1, April 1 and July 1 of each
year, commencing on January 1, 1997. The right to dividends on the Preferred
Stock are cumulative (whether or not earned or declared), without interest, from
the date of issuance of the Preferred Stock. Dividends will be paid solely in
additional fully paid and non-assessable shares of Preferred Stock with an
aggregate liquidation preference equal to the amount of such dividends.
If any dividend payable on any dividend payment date is not declared or paid
in full in shares of Preferred Stock on such dividend payment date, the amount
payable as dividends on such dividend payment date that is not paid in shares of
Preferred Stock on such dividend payment date will be added to the liquidation
preference of the Preferred Stock on such dividend payment date until such
dividend is paid in additional fully paid and non-assessable shares of Preferred
Stock with an aggregate liquidation preference equal to the amount of such
dividends.
123
<PAGE>
No full dividends may be declared or paid or funds set apart for the payment
of dividends on any Parity Securities for any period unless full cumulative
dividends shall have been or contemporaneously are declared and paid in full. If
full dividends are not so paid, the Preferred Stock shall share dividends PRO
RATA with the Parity Securities. No dividends may be paid or set apart for such
payment on Junior Securities (except dividends on Junior Securities in
additional shares of Junior Securities), and no Junior Securities or Parity
Securities may be repurchased, redeemed or otherwise retired nor may funds be
set apart for payment with respect thereto, if full dividends have not been paid
on the Preferred Stock.
MANDATORY REDEMPTION
On October 1, 2008 (the "Mandatory Redemption Date"), the Company will be
required to redeem (subject to the legal availability of funds therefor) all
outstanding shares of Preferred Stock at a price equal to the liquidation
preference thereof plus all accumulated and unpaid dividends to the date of
redemption (including by way of a deemed increase in liquidation value).
OPTIONAL REDEMPTION
The Company at its option may, but shall not be required to, redeem for cash
the Preferred Stock (subject to contractual and other restrictions with respect
thereto and to the legal availability of funds therefor) at any time after
October 1, 2001, in whole or in part, at the redemption prices (expressed as a
percentage of the liquidation preference thereof) set forth below, together with
all accumulated and unpaid dividends to the redemption date (including an amount
equal to a prorated dividend for the period from the dividend payment date
immediately prior to the redemption date to the redemption date), if redeemed
during the twelve-month period beginning on October 1 of each of the years
indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---------------------------------------------------------------------------------- -----------
<S> <C>
2001.............................................................................. 106.25%
2002.............................................................................. 105.00%
2003.............................................................................. 103.75%
2004.............................................................................. 102.50%
2005.............................................................................. 101.25%
2006 and thereafter............................................................... 100.00%
</TABLE>
In addition, at any time or from time to time, on or prior to October 1,
1999, the Company may, at its option, redeem for cash shares of Preferred Stock
having an aggregate liquidation preference of up to 40% of the sum of (i) the
aggregate liquidation preference of all shares of Preferred Stock originally
issued in the Preferred Stock Offering and (ii) the aggregate liquidation
preference of all shares of Preferred Stock issued as pay-in-kind dividends on
Preferred Stock on or prior to the date of redemption (such sum being the
"Liquidation Amount"), at a redemption price per share equal to 112.5% of the
liquidation preference of such shares, together with an amount equal to all
accumulated and unpaid dividends thereon to the redemption date (including an
amount equal to a prorated dividend for the period from the dividend payment
date immediately prior to the redemption date to the redemption date), with the
net proceeds of one or more Equity Offerings; PROVIDED that Preferred Stock
having an aggregate liquidation preference of at least 60% of the Liquidation
Amount shall remain outstanding immediately after giving effect to such
redemption and PROVIDED FURTHER that such redemption occurs within 60 days of
the date of closing of each such Equity Offering.
Furthermore, the Company may at any time on or prior to October 1, 1998 and
concurrently with or subsequent to the date on which the Company has redeemed
the maximum liquidation preference of Preferred Stock permitted to be redeemed
pursuant to the provisions of the preceding paragraph redeem for cash all and
not less than all of the Preferred Stock, outstanding, at a redemption price per
share equal to the liquidation preference thereof plus the Applicable Premium
plus accumulated and unpaid dividends to the redemption date (including an
amount equal to a prorated dividend for the period from the
124
<PAGE>
dividend payment date immediately prior to the redemption date to the redemption
date) with the net proceeds of an Equity Offering; provided that such redemption
occurs within 60 days of the date of closing of such Equity Offering.
In the event of partial redemptions of Preferred Stock, the shares to be
redeemed will be determined PRO RATA or by lot, as determined by the Company,
except that the Company may redeem such shares held by any holders of fewer than
100 shares (or shares held by holders who would hold less than 100 shares as a
result of such redemption), without regard to such PRO RATA redemption
requirement.
PROCEDURE FOR REDEMPTION
On and after a redemption date, unless the Company defaults in the payment
of the applicable redemption price, dividends will cease to accumulate on shares
of Preferred Stock called for redemption, and all rights of holders of such
shares will terminate except for the right to receive the redemption price. The
Company will send a written notice of redemption by first class mail to each
holder of record of shares of Preferred Stock, not fewer than 30 days nor more
than 60 days prior to the date fixed for such redemption. Shares of Preferred
Stock issued and reacquired will, upon compliance with the applicable
requirements of Delaware law, have the status of authorized but unissued shares
of preferred stock of the Company undesignated as to series and may, with any
and all other authorized but unissued shares of preferred stock of the Company,
be designated or redesignated and issued or reissued, as the case may be, as
part of any series of preferred stock of the Company, except that any issuance
or reissuance of shares of Preferred Stock must be in compliance with the
Certificate of Designations.
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding-up of
the Company, holders of Preferred Stock will be entitled to be paid out of the
assets of the Company available for distribution $100 per share, plus an amount
in cash equal to all accumulated and unpaid dividends thereon (including by way
of a deemed increase in liquidation value) to the date fixed for liquidation,
dissolution or winding-up of the Company (including an amount equal to a
prorated dividend from the last dividend payment date to the date fixed for
liquidation, dissolution or winding-up), before any distribution is made on any
Junior Securities, including, without limitation, on any Common Stock. If upon
any voluntary or involuntary liquidation, dissolution or winding-up of the
Company, the amounts payable with respect to the Preferred Stock and all other
Parity Securities are not paid in full, the holders of the Preferred Stock and
the Parity Securities will share equally and ratably in any distribution of
assets of the Company in proportion to the full liquidation preference and
accumulated and unpaid dividends to which each is entitled. After payment of the
full amount of the liquidation preferences and accumulated and unpaid dividends
to which they are entitled, the holders of shares of Preferred Stock will not be
entitled to any further participation in any distribution of assets of the
Company. However, neither the sale, conveyance, exchange or transfer (for cash,
shares of stock, securities or other consideration) of all or substantially all
of the property or assets of the Company nor the consolidation or merger of the
Company with one or more corporations shall be deemed to be a liquidation,
dissolution or winding-up of the Company.
The Certificate of Designations for the Preferred Stock does not contain any
provision requiring funds to be set aside to protect the liquidation preference
of the Preferred Stock, although such liquidation preference will be
substantially in excess of the par value of such shares of Preferred Stock. In
addition, the Company is not aware of any provision of Delaware law or any
controlling decision of the courts of the State of Delaware (the state of
incorporation of the Company) that requires a restriction upon the surplus of
the Company solely because the liquidation preference of the Preferred Stock
will exceed its par value. Consequently, there will be no restriction upon any
surplus of the Company solely because the liquidation preference of the
Preferred Stock will exceed the par value, and there will be no remedies
available to holders of the Preferred Stock before or after the payment of any
dividend, other than in connection with the liquidation of the Company, solely
by reason of the fact that such dividend would reduce the surplus of
125
<PAGE>
the Company to an amount less than the difference between the liquidation
preference of the Preferred Stock and its par value.
VOTING RIGHTS
Holders of the Preferred Stock have no voting rights with respect to general
corporate matters except as provided by law or as set forth in the Certificate
of Designations. The Certificate of Designations provides that if: (a) dividends
on the Preferred Stock are in arrears and unpaid for six consecutive quarterly
periods; (b) the Company fails to discharge its obligation to redeem the
Preferred Stock on the Mandatory Redemption Date or fails to otherwise discharge
any redemption obligation with respect to the Preferred Stock; (c) the Company
fails to make a Change of Control Offer if such offer is required by the
provisions set forth under "--Change of Control" below or fails to purchase
shares of Preferred Stock from holders who elect to have such shares purchased
pursuant to the Change of Control Offer; or (d) a breach or violation of any of
the provisions described under the caption "--Certain Covenants" occurs and the
breach or violation continues for a period of 30 days or more after the Company
receives notice thereof specifying the default from the holders of at least 30%
of the shares of Preferred Stock then outstanding, then the number of directors
constituting the Board of Directors will be increased by two directors and the
holders of the majority of the then outstanding Preferred Stock, voting or
consenting, as the case may be, as one class, will be entitled to elect two
directors of the expanded Board of Directors. Such voting rights will continue
until such time as, in the case of a dividend default, all dividends in arrears
on the Preferred Stock are paid in full and, in all other cases, any failure,
breach or default giving rise to such voting rights is remedied, at which time
the term of the directors elected pursuant to the provisions of this paragraph
shall terminate. Each such event described in clauses (a) through (d) above is
referred to herein as a "Voting Rights Triggering Event."
Any vacancy occurring in the office of the director elected by holders of
the Preferred Stock may be filled by the remaining directors elected by such
holders unless and until such vacancy shall be filled by such holders.
The Certificate of Designations also provides that the Company may not amend
the Certificate of Designations so as to affect adversely the specified rights,
preferences, privileges or voting rights of holders of shares of the Preferred
Stock, or authorize the issuance of any additional shares of Preferred Stock,
without the affirmative vote or consent of the holders of at least a majority of
the outstanding shares of Preferred Stock, voting or consenting, as the case may
be, as one class. The holders of at least a majority of the outstanding shares
of Preferred Stock, voting or consenting, as the case may be, as one class, may
also waive compliance with any provision of the Certificate of Designations. The
Certificate of Designations will also provide that (a) the creation,
authorization or issuance of any shares of Parity Securities or Junior
Securities or (b) the increase or decrease in the amount of authorized capital
stock of any class, including any preferred stock, shall not require the consent
of the holders of Preferred Stock and shall not be deemed to affect adversely
the rights, preferences, privileges or voting rights of holders of shares of
Preferred Stock.
Under Delaware law, holders of preferred stock will be entitled to vote as a
class upon a proposed amendment to the certificate of incorporation, whether or
not entitled to vote thereon by the certificate of incorporation, if the
amendment would increase or decrease the par value of the shares of such class,
increase or decrease the aggregate number of authorized shares of such class or
alter or change the powers, preferences or special rights of the shares of such
class so as to affect them adversely.
CHANGE OF CONTROL
The Certificate of Designations provides that, upon the occurrence of a
Change of Control, the Company will make an offer to purchase for cash all or
any part of the Preferred Stock pursuant to the offer described below (a "Change
of Control Offer") at a price in cash (a "Change of Control Payment")
126
<PAGE>
equal to 101% of the liquidation preference thereof, plus all accumulated and
unpaid dividends per share to the date of purchase (including an amount equal to
a prorated dividend for the period from the dividend payment date immediately
prior to the date of purchase to such date). The Certificate of Designations
provides that within 30 days following any Change of Control, the Company will
mail a notice to each holder of Preferred Stock with a copy to the transfer
agent, with the following information: (a) a Change of Control Offer is being
made pursuant to the covenant entitled "Change of Control," and that all
Preferred Stock properly tendered pursuant to such Change of Control Offer will
be accepted for payment; (b) the purchase price and the purchase date, which
will be no earlier than 30 days nor later than 60 days from the date such notice
is mailed, except as may be otherwise required by applicable law (the "Change of
Control Payment Date"); (c) any Preferred Stock not properly tendered will
remain outstanding and continue to accumulate dividends; (d) unless the Company
defaults in the payment of the Change of Control Payment, all Preferred Stock
accepted for payment pursuant to the Change of Control Offer will cease to
accumulate dividends on the Change of Control Payment Date; (e) holders electing
to have any shares of Preferred Stock purchased pursuant to a Change of Control
Offer will be required to surrender such shares, properly endorsed for transfer,
to the transfer agent and registrar for the Preferred Stock at the address
specified in the notice prior to the close of business on the third Business Day
preceding the Change of Control Payment Date; (f) holders will be entitled to
withdraw their tendered shares of Preferred Stock and their election to require
the Company to purchase such shares, PROVIDED that the transfer agent receives,
not later than the close of business on the last day of the offer period, a
telegram, telex, facsimile transmission or letter setting forth the name of the
holder, the aggregate liquidation preference of the Preferred Stock tendered for
purchase, and a statement that such holder is withdrawing his tendered shares of
Preferred Stock and his election to have such shares of Preferred Stock
purchased; and (g) that holders whose shares of Preferred Stock are being
purchased only in part will be issued new shares of Preferred Stock equal in
aggregate liquidation preference to the unpurchased portion of the shares of
Preferred Stock surrendered, which unpurchased portion must be equal to $1,000
in aggregate liquidation preference or an integral multiple thereof.
The Certificate of Designations provides that, prior to complying with the
provisions of this covenant, but in any event within 30 days following a Change
of Control, the Company will either repay all Indebtedness of the Company or
offer to repay in full all outstanding Obligations held by each holder of such
Indebtedness and repay the Indebtedness held by each holder who has accepted
such offer or obtain the requisite consents, if any, under such Indebtedness
necessary to permit the repurchase of the Preferred Stock required by this
covenant.
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 or regulations are applicable in connection with the repurchase
of the Preferred Stock pursuant to a Change of Control Offer. To the extent that
the provisions of any securities laws or regulations conflict with the
provisions of the Certificate of Designations, the Company will comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations described in the Certificate of Designations by virtue
thereof.
The Certificate of Designations will provide that on the Change of Control
Payment Date, the Company will, to the extent permitted by law, (a) accept for
payment all shares of Preferred Stock or portions thereof properly tendered
pursuant to the Change of Control Offer, (b) deposit with the transfer agent and
registrar an amount in cash equal to the aggregate Change of Control Payment in
respect of all shares of Preferred Stock or portions thereof so tendered and (c)
deliver, or cause to be delivered, to the transfer agent and registrar for
cancellation the shares of Preferred Stock so accepted together with an
Officers' Certificate stating that such shares of Preferred Stock or portions
thereof have been tendered to and purchased by the Company. The Certificate of
Designations provides that the transfer agent and registrar will promptly mail
to each holder of Preferred Stock the Change of Control Payment for such
Preferred Stock, and the transfer agent will promptly mail to each holder new
shares of Preferred Stock equal in aggregate liquidation preference to any
unpurchased portion of Preferred Stock surrendered, if
127
<PAGE>
any. The Company will publicly announce the results of the Change of Control
Offer on or as soon as practicable after the Change of Control Payment Date.
The Credit Facilities, and future credit agreements or other agreements
relating to Indebtedness to which the Company becomes a party may, prohibit the
Company from purchasing any Preferred Stock as a result of a Change of Control
and/or provide that certain change of control events with respect to the Company
would constitute a default thereunder. In the event a Change in Control occurs
at a time when the Company is prohibited from purchasing the Preferred Stock,
the Company could seek the consent of the holders of such Indebtedness to the
purchase of the Preferred Stock or could attempt to refinance the borrowings
that contain such prohibition. If the Company does not obtain such a consent or
repay such borrowings, the Company will remain prohibited from purchasing the
Preferred Stock. In such case, the Company's failure to purchase tendered
Preferred Stock would constitute a default under the Certificate of
Designations. If, as a result thereof, a default occurs with respect to any
Indebtedness, the funds remaining after the repurchase of such Indebtedness may
limit the Company's ability to repurchase the Preferred Stock.
The existence of a holder's right to require the Company to repurchase such
holder's Preferred Stock upon the occurrence of a Change of Control may deter a
third party from seeking to acquire the Company in a transaction that would
constitute a Change of Control.
CERTAIN COVENANTS
MERGER, CONSOLIDATION OR SALE OF ALL OR SUBSTANTIALLY ALL ASSETS. The
Certificate of Designations provides that the Company may not consolidate or
merge with or into or wind up into (whether or not the Company is the surviving
corporation), or sell, assign, transfer, lease, convey or otherwise dispose of
all or substantially all of its properties or assets in one or more related
transactions to, any Person unless (i) the Company is the surviving corporation
or the Person formed by or surviving any such consolidation or merger (if other
than the Company) or to which such sale, assignment, transfer, lease, conveyance
or other disposition will have been made is a corporation organized or existing
under the laws of the United States, any state thereof, the District of
Columbia, or any territory thereof (the Company or such Person, as the case may
be, being herein called the "Successor Company"); (ii) the Preferred Stock shall
be converted or exchanged for and shall become shares of the Successor Company
(if other than the Company) having in respect of the Successor Company the same
rights and privileges that the Preferred Stock had immediately prior to such
transaction with respect to the Company; (iii) immediately after giving effect
to such transaction, no Voting Rights Triggering Event, and no event that after
the giving of notice or lapse of time or both would become a Voting Rights
Triggering Event, shall have occurred and be continuing; and (iv) the Company
shall have delivered to the transfer agent an Officers' Certificate and an
opinion of counsel, each stating that such consolidation, merger or transfer
comply with the Certificate of Designations. The Successor Company will succeed
to, and be substituted for, the Company under the Certificate of Designations.
REPORTS AND OTHER INFORMATION. Notwithstanding that the Company may not be
subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act
or otherwise report on an annual and quarterly basis on forms provided for such
annual and quarterly reporting pursuant to rules and regulations promulgated by
the Securities and Exchange Commission (the "Commission"), the Certificate of
Designations requires the Company to file with the Commission (and provide the
Holders with copies thereof, without cost to each Holder, within 15 days after
it files them with the Commission), (a) within 90 days after the end of each
fiscal year, annual reports on Form 10-K (or any successor or comparable form)
containing the information required to be contained therein (or required in such
successor or comparable form); (b) within 45 days after the end of each of the
first three fiscal quarters of each fiscal year, reports on Form 10-Q (or any
successor or comparable form); (c) promptly from time to time after the
occurrence of an event required to be therein reported, such other reports on
Form 8-K (or any successor or comparable form) and (d) any other information,
documents and other reports which the Company would
128
<PAGE>
be required to file with the Commission if it were subject to Section 13 or
15(d) of the Exchange Act; PROVIDED, HOWEVER, the Company shall not be so
obligated to file such reports with the Commission if the Commission does not
permit such filings, in which event the Company will make available such
information to prospective purchasers of the Preferred Stock, in addition to
providing such information to the Holders, in each case within 15 days after the
time the Company would be required to file such information with the Commission,
if it were subject to Sections 13 or 15(d) of the Exchange Act.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Certificate of
Designations. Reference is made to the Certificate of Designations for a full
disclosure of all such terms, as well as any other capitalized terms used herein
for which no definition is provided.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise, PROVIDED, HOWEVER,
that beneficial ownership of 10% or more of the voting securities of a Person
shall be deemed to be control.
"Applicable Premium" means, with respect to any share of Preferred Stock the
present value of all remaining required dividend payments and payments with
respect to aggregate liquidation value due on such Preferred Stock and all
premium payments relating thereto assuming a redemption date of October 1, 2001,
computed using a discount rate equal to the Treasury Rate plus 100 basis points
minus (b) the then outstanding liquidation value of such Preferred Stock minus
(c) accrued dividends paid on the date of redemption.
"Capital Stock" means with respect to any Person, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock of such Person, including, without limitation, if such Person is
a partnership, partnership interests (whether general or limited) and any other
interest or participation that confers on a Person the right to receive a share
of the profits and losses of, or distributions of assets of, such partnership.
"Capitalized Lease Obligation" means, at the time any determination thereof
is to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized and reflected as a liability on
a balance sheet in accordance with GAAP.
"Change of Control" means the occurrence of any of the following:
(i) the sale, lease or transfer, in one or a series of related
transactions, of all or substantially all of the assets of the Company and
its Subsidiaries, taken as a whole;
(ii) the Company becomes aware of (by way of a report or any other
filing pursuant to Section 13(d) of the Exchange Act, proxy, vote, written
notice or otherwise) the acquisition by any Person or group (within the
meaning of Section 13(d)(3) or Section 14(d)(2) of the Exchange Act, or any
successor provision), including any group acting for the purpose of
acquiring, holding or disposing of securities (within the meaning of Rule
13d-5(b)(1) under the Exchange Act), other than the Permitted Holder and its
Related Parties, in a single transaction or in a related series of
transactions, by way of merger, consolidation or other business combination
or purchase of beneficial ownership (within the meaning of Rule 13d-3 under
the Exchange Act, or any successor provision) of 50% or more of the total
voting power of the Voting Stock of the Company or such Person or group
beneficially owns more of the total voting power of the Voting Stock of the
Company than the Permitted Holder and its Related Parties; (iii) the first
day within any two-year period on which a majority of the members of the
Board of Directors of the company are not Continuing Directors; or
129
<PAGE>
(iv) the Company consolidates with, or merges with or into, another Person
or sells, assigns, conveys, transfers, leases or otherwise disposes of all
or substantially all of its assets to any Person, or any Person consolidates
with, or merges with or into, the Company, in any such event pursuant to a
transaction in which the outstanding Voting Stock of the Company is
converted into or exchanged for cash, securities or other property, other
than (A) any such transaction where (1) the outstanding Voting Stock of the
Company is converted into or exchanged for (I) Voting Stock (other than
Disqualified Stock) of the surviving or transferee corporation and/or (II)
cash, securities and other property in an amount which could be paid by the
Company as a Restricted Payment under the Indenture and (2) the "beneficial
owners" of the Voting Stock of the Company immediately prior to such
transaction own, directly or indirectly, not less than a majority of the
Voting Stock of the surviving or transferee corporation immediately after
such transaction or (B) any such transaction as a result of which the
Permitted Holder or its Affiliates own a majority of the total Voting Stock
and Capital Stock of the surviving or transferee corporation immediately
after the transaction.
"Comparable Treasury Issue" means the U.S. Treasury security selected by an
Independent Investment Banker as having a maturity on or about October 1, 2001
that would be utilized, at the time of selection and in accordance with
customary financial practice, in pricing new issues of corporate debt securities
of comparable maturity.
"Comparable Treasury Price" means, with respect to any redemption date, (i)
the average of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) on the third
business day preceding such redemption date, as set forth in the daily
statistical release (or any successor release) published by the Federal Reserve
Bank of New York and designated "Composite 3:30 p.m. Quotations for U.S.
Government Securities" or (ii) if such release (or any successor release) is not
published or does not contain such prices on such business day, (A) the average
of the Reference Treasury Dealer Quotations for such redemption date, or (B) if
the Company is unable to obtain both Reference Treasury Dealer Quotations, the
only such Quotation provided. "REFERENCE TREASURY DEALER QUOTATIONS" means, with
respect to each Reference Dealer and any redemption date, the average, as
determined by the Company, of the bid and asked prices for the Comparable
Treasury Issue (expressed in each case as a percentage of its principal amount)
quoted in writing to the Company by such Reference Dealer at 5:00 p.m. on the
third business day preceding such redemption date.
"Contingent Obligations" means, with respect to any Person, any obligation
of such person guaranteeing any leases, dividends or other obligations that do
not constitute Indebtedness ("primary obligations") of any other Person (the
"primary obligor") in any manner, whether directly or indirectly, including,
without limitation, any obligation of such Person, whether or not contingent,
(i) to purchase any such primary obligation or any property constituting direct
or indirect security therefor, (ii) to advance or supply funds (A) for the
purchase or payment of any such primary obligation or (B) to maintain working
capital or equity capital of the primary obligor or otherwise to maintain the
net worth or solvency of the primary obligor, or (iii) to purchase property,
securities or services primarily for the purpose of assuring the owner of any
such primary obligation of the ability of the primary obligor to make payment of
such primary obligation against loss in respect thereof.
"Continuing Directors" means, as of any date of determination, any member of
the Board of Directors who (i) was a member of such Board of Directors on the
Issuance Date or (ii) was nominated for election or elected to such Board of
Directors with, or which election to such Board of Directors was approved by,
the affirmative vote of a majority of the Continuing Directors who were members
of such Board of Directors at the time of such nomination or election or (iii)
is any designee of the Permitted Holder or its Affiliates or was nominated by
the Permitted Holder or its Affiliates or any designees of the Permitted Holder
or its Affiliates on the Board of Directors.
"Disqualified Stock" means, with respect to any Person, any Capital Stock of
such Person which, by its terms (or by the terms of any security into which it
is convertible or for which it is puttable or
130
<PAGE>
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at
the option of the holder thereof, in whole or in part, in each case prior to the
date 91 days after the Mandatory Redemption Date; PROVIDED, HOWEVER, that if
such Capital Stock is either (i) redeemable or repurchaseable solely at the
option of such Person or (ii) issued to employees of the Company or its
Subsidiaries or to any plan for the benefit of such employees, such Capital
Stock shall not constitute Disqualified Stock unless so designated.
"Equity Offering" shall mean any public or private sale of common stock or
preferred stock of the Company (excluding Disqualified Stock), other than public
offerings with respect to the Company's common stock registered on Form S-8.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the Issuance Date.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) currency exchange or interest rate swap agreements,
currency exchange or interest rate cap agreements and currency exchange or
interest rate collar agreements and (ii) other agreements or arrangements
designed to protect such Person against fluctuations in currency exchange or
interest rates.
"Holder" shall mean a holder of shares of 12 1/2% Preferred Stock.
"Indebtedness" means, with respect to any Person, (a) any indebtedness of
such Person, whether or not contingent (i) in respect of borrowed money, (ii)
evidenced by bonds, notes, debentures or similar instruments or letters of
credit or bankers' acceptances (or reimbursement agreements in respect thereof),
(iii) representing the balance deferred and unpaid of the purchase price of any
property (including Capitalized Lease Obligations), except any such balance that
constitutes an accrued expense or trade payable or any other monetary obligation
of a trade creditor (whether or not an Affiliate), or (iv) representing any
Hedging Obligations, if and to the extent of any of the foregoing Indebtedness
(other than letters of credit and Hedging Obligations) that would appear as a
liability upon a balance sheet of such Person prepared in accordance with GAAP,
(b) to the extent not otherwise included, any obligation by such Person to be
liable for, or to pay, as obligor, guarantor otherwise, on the Indebtedness of
another Person (other than by endorsement of negotiable instruments for
collection in the ordinary course of business) and (c) to the extent not
otherwise included, Indebtedness of another Person secured by a Lien on any
asset owned by such Person (whether or not such Indebtedness is assumed by such
Person); PROVIDED, HOWEVER, that Contingent Obligations incurred in the ordinary
course of business shall be deemed not to constitute Indebtedness.
"Indenture" shall mean the Indenture dated as of September 30, 1996 between
the Company and Marine Midland Bank, as trustee.
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the nature
thereof, any option or other agreement to sell or give a security interest in
and any filing of or agreement to give any financing statement under the Uniform
Commercial Code (or equivalent statues) of any jurisdiction); PROVIDED that in
no event shall an operating lease be deemed to constitute a Lien.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements (including, without limitation, reimbursement
obligations with respect to letters of credit and banker's acceptances), damages
and other liabilities payable under the documentation governing any
Indebtedness.
131
<PAGE>
"Officer's Certificate" means a certificate signed on behalf of the Company
by two officers of the Company, one of whom must be the principal executive
officer, the principal financial officer, the treasurer or the principal
accounting officer of the Company.
"Permitted Holder" means Strata Associates L.P., KKR and any of their
Affiliates.
"Person" shall mean any individual, partnership, corporation, joint venture,
association, joint-stock company, trust, unincorporated organization, government
or any agency or political subdivision thereof or any other entity.
"Reference Dealer" means each of Merrill Lynch, Pierce, Fenner & Smith
Incorporated and NationsBanc Capital Markets, Inc. and their respective
successors: PROVIDED, HOWEVER, that if either of the foregoing Reference Dealers
shall cease to be a primary U.S. Government securities dealer in New York City
(a "Primary Treasury Dealer"), the Company shall substitute therefor another
Primary Treasury Dealer.
"Related Parties" means any person controlled by the Permitted Holder,
including any partnership of which the Permitted Holder or its Affiliates is the
general partner.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association, or other business entity (other than a partnership) of which more
than 50% of the total voting power of shares of Capital Stock entitled (without
regard to the occurrence of any contingency) to vote in the election of
directors, managers or trustees thereof is at the time of determination owned or
controlled, directly or indirectly, by such person or one or more of the other
Subsidiaries of that Person or a combination thereof and (ii) any partnership,
joint venture, limited liability company or similar entity of which (x) more
than 50% of the capital accounts, distribution rights, total equity and voting
interests in general or limited partnership interests, as applicable, are owned
or controlled, directly or indirectly, by such person or one or more of the
other Subsidiaries of that Person or a combination thereof whether in the form
of membership, general, special or limited partnership or otherwise and (y) such
person or any Wholly Owned Subsidiary of such person is a controlling general
partner or otherwise controls such entity.
"Treasury Rate" means, with respect to any redemption date, the rate per
annum equal to the semiannual equivalent yield to maturity of the Comparable
Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as
a percentage of its principal amount) equal to the Comparable Treasury Price for
such redemption date.
"Voting Stock" means, with respect to any Person, any class or series of
capital stock of such Person that is ordinarily entitled to vote in the election
of directors thereof at a meeting or stockholders called for such purpose,
without the occurrence of any additional event or contingency.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person
100% of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person and one or
more Wholly Owned Subsidiaries of such Person.
132
<PAGE>
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
The following summary describes certain United States federal income tax
consequences of the ownership of Exchange Notes as of the date hereof. Except
where noted, it deals only with Exchange Notes held as capital assets and does
not deal with special situations, such as those of dealers in securities or
currencies, financial institutions, life insurance companies, persons holding
Exchange Notes as a part of a hedging or conversion transaction or a straddle or
holders of Exchange Notes whose "functional currency" is not the U.S. dollar.
Furthermore, the discussion below is based upon the provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), and regulations, rulings and
judicial decisions thereunder as of the date hereof, and such authorities may be
repealed, revoked or modified so as to result in federal income tax consequences
different from those discussed below. Persons considering the purchase,
ownership or disposition of Exchange Notes should consult their own tax advisors
concerning the federal income tax consequences in light of their particular
situations as well as any consequences arising under the laws of any other
taxing jurisdiction.
PAYMENTS OF INTEREST
Except as set forth below, stated interest on an Exchange Note will
generally be taxable to a United States Holder as ordinary income from domestic
sources at the time it is paid or accrued in accordance with the United States
Holder's method of accounting for tax purposes. As used herein, a "United States
Holder" of an Exchange Note means a holder that is a citizen or resident of the
United States, a corporation, partnership or other entity created or organized
in or under the laws of the United States or any political subdivision thereof,
or an estate or trust the income of which is subject to United States federal
income taxation regardless of its source. A "Non-United States Holder" is a
holder that is not a United States Holder.
MARKET DISCOUNT
If a United States Holder purchases an Exchange Note for an amount that is
less than its stated principal amount, the amount of the difference will be
treated as "market discount" for federal income tax purposes, unless such
difference is less than a specified de minimis amount. Under the market discount
rules, a United States Holder will be required to treat any principal payment
on, or any gain on the sale, exchange, retirement or other disposition of, an
Exchange Note as ordinary income to the extent of the market discount which has
not previously been included in income and is treated as having accrued on such
Exchange Note at the time of such payment or disposition. In addition, the
United States Holder may be required to defer, until the maturity of the
Exchange Note or its earlier disposition in a taxable transaction, the deduction
of all or a portion of the interest expense on any indebtedness incurred or
continued to purchase or carry such Exchange Note.
Any market discount will be considered to accrue ratably during the period
from the date of acquisition to the maturity date of the Exchange Note, unless
the United States Holder elects to accrue on a constant interest method. A
United States Holder of an Exchange Note may elect to include market discount in
income currently as it accrues (on either a ratable or constant interest
method), in which case the rule described above regarding deferral of interest
deductions will not apply. This election to include market discount in income
currently, once made, applies to all market discount obligations acquired on or
after the first taxable year to which the election applies and may not be
revoked without the consent of the Internal Revenue Service ("IRS").
AMORTIZABLE BOND PREMIUM
A United States Holder that purchases an Exchange Note for an amount in
excess of the sum of all amounts payable on the Note after the purchase date
other than stated interest will be considered to have purchased the Exchange
Note at a "premium." A United States Holder generally may elect to amortize the
133
<PAGE>
premium over the remaining term of the Exchange Note on a constant yield method.
The amount amortized in any year will be treated as a reduction of the United
States Holder's interest income from the Exchange Note. Bond premium on an
Exchange Note held by a United States Holder that does not make such an election
will decrease the gain or increase the loss otherwise recognized on disposition
of the Exchange Note. The election to amortize premium on a constant yield
method once made applies to all debt obligations held or subsequently acquired
by the electing United States Holder on or after the first day of the first
taxable year to which the election applies and may not be revoked without the
consent of the IRS.
SALE, EXCHANGE AND RETIREMENT OF NOTES
A United States Holder's tax basis in an Exchange Note will, in general, be
the United States Holder's cost therefor, increased by market discount
previously included in income by the United States Holder and reduced by any
amortized premium and any cash payments on the Note other than stated interest.
Upon the sale, exchange, retirement or other disposition of an Exchange Note, a
United States Holder will recognize gain or loss equal to the difference between
the amount realized upon the sale, exchange, retirement or other disposition
(less any accrued interest, which will be taxable as such) and the adjusted tax
basis of the Exchange Note. Such gain or loss will be capital gain or loss and
will be long-term capital gain or loss if at the time of sale, exchange,
retirement or other disposition the Exchange Note has been held for more than
one year. Under current law, net capital gains of individuals are, under certain
circumstances, taxed at lower rates than items of ordinary income. The
deductibility of capital losses is subject to limitations.
TAX CONSEQUENCES OF THE EXCHANGE OFFER
In the opinion of Simpson Thacher & Bartlett (a partnership which includes
professional corporations), New York, New York, the exchanges of Old Notes for
Exchange Notes will not constitute recognition events for federal income tax
purposes. Consequently, no gain or loss will be recognized by Holders upon
receipt of the Exchange Notes. For purposes of determining gain or loss upon the
subsequent sale or exchange of Exchange Notes, a Holder's basis in Exchange
Notes will be the same as such Holder's basis in the Old Notes exchanged
therefor. Holders will be considered to have held the Exchange Notes from the
time of their original acquisition of the Old Notes.
IN ANY EVENT, PERSONS CONSIDERING THE EXCHANGE OF NOTES FOR EXCHANGE NOTES
SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE UNITED STATES FEDERAL
INCOME TAX CONSEQUENCES IN LIGHT OF THEIR PARTICULAR SITUATIONS AS WELL AS ANY
CONSEQUENCES ARISING UNDER THE LAWS OF ANY OTHER TAXING JURISDICTIONS.
NON-UNITED STATES HOLDERS
Under present United States federal income and estate tax law, and subject
to the discussion below concerning backup withholding:
(a) no withholding of United States federal income tax will be required
with respect to the payment by the Company or any Paying Agent of principal
or interest on an Exchange Note owned by a Non-United States Holder,
provided (i) that the beneficial owner does not actually or constructively
own 10% or more of the total combined voting power of all classes of stock
of the Company entitled to vote within the meaning of section 871(h)(3) of
the Code and the regulations thereunder, (ii) the beneficial owner is not a
controlled foreign corporation that is related to the Company through stock
ownership, (iii) the beneficial owner is not a bank whose receipt of
interest on an Exchange Note is described in section 881(c)(3)(A) of the
Code and (iv) the beneficial owner satisfies the statement requirement
(described generally below) set forth in section 871(h) and section 881(c)
of the Code and the regulations thereunder;
134
<PAGE>
(b) no withholding of United States federal income tax will be required
with respect to any gain or income realized by a Non-United States Holder
upon the sale, exchange, retirement or other disposition of an Exchange
Note; and
(c) an Exchange Note beneficially owned by an individual who at the time
of death is a Non-United States Holder will not be subject to United States
federal estate tax as a result of such individual's death, provided that
such individual does not actually or constructively own 10% or more of the
total combined voting power of all classes of stock of the company entitled
to vote within the meaning of section 871(h)(3) of the Code and provided
that the interest payments with respect to such Exchange Note would not have
been, if received at the time of such individual's death, effectively
connected with the conduct of a United States trade or business by such
individual.
To satisfy the requirement referred to in (a)(iv) above, the beneficial
owner of such Exchange Note, or a financial institution holding the Exchange
Note on behalf of such owner, must provide, in accordance with specified
procedures, a paying agent of the Company with a statement to the effect that
the beneficial owner is not a United States person. Pursuant to current
temporary Treasury regulations, these requirements will be met if (1) the
beneficial owner provides his name and address, and certifies, under penalties
of perjury, that he is not a United States person (which certification may be
made on an Internal Revenue Service Form W-8 (or successor form)) or (2) a
financial institution holding the Exchange Note on behalf of the beneficial
owner certifies, under penalties of perjury, that such statement has been
received by it and furnishes a paying agent with a copy thereof.
If a non-United States Holder cannot satisfy the requirements of the
"portfolio interest" exception described in (a) above, payments of premium, if
any, and interest made to such non-United States Holder will be subject to a 30%
withholding tax unless the beneficial owner of the Exchange Note provides the
Company or its paying agent, as the case may be, with a properly executed (1)
IRS Form 1001 (or successor form) claiming an exemption from withholding under
the benefit of a tax treaty or (2) IRS Form 4224 (or successor form) stating
that interest paid on the Exchange Note is not subject to withholding tax
because it is effectively connected with the beneficial owner's conduct of a
trade or business in the United States.
If a non-United States Holder is engaged in a trade or business in the
United States and premium, if any, or interest on the Exchange Note is
effectively connected with the conduct of such trade or business, the non-United
States Holder, although exempt from the withholding tax discussed above, will be
subject to United States federal income tax on such interest on a net income
basis in the same manner as if it were a United States Holder. In addition, if
such holder is a foreign corporation, it may be subject to a branch profits tax
equal to 30% of its effectively connected earnings and profits for the taxable
year, subject to adjustments. For this purpose, such premium, if any, and
interest on an Exchange Note will be included in such foreign corporation's
earnings and profits.
Any gain or income realized upon the sale, exchange, retirement or other
disposition of an Exchange Note generally will not be subject to United States
federal income tax unless (i) such gain or income is effectively connected with
a trade or business in the United States of the Non-United States Holder, or
(ii) in the case of a Non-United States Holder who is an individual, such
individual is present in the United States for 183 days or more in the taxable
year of such sale, exchange, retirement or other disposition, and certain other
conditions are met.
INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, information reporting requirements will apply to certain
payments of principal, interest and premium paid on Exchange Notes and to the
proceeds of sale of an Exchange Note made to United States Holders other than
certain exempt recipients (such as corporations). A 31 percent backup
withholding tax will apply to such payments if the United States Holder fails to
provide a taxpayer identification number or certification of foreign or other
exempt status or fails to report in full dividend and interest income.
135
<PAGE>
No information reporting or backup withholding will be required with respect
to payments made by the Company or any paying agent to Non-United States Holders
if a statement described in (a)(iv) under "Non-United States Holders" has been
received and the payor does not have actual knowledge that the beneficial owner
is a United States person.
In addition, backup withholding and information reporting will not apply if
payments of the principal, interest or premium on an Exchange Note are paid or
collected by a foreign office of a custodian, nominee or other foreign agent on
behalf of the beneficial owner of such Exchange Note, or if a foreign office of
a broker (as defined in applicable Treasury regulations) pays the proceeds of
the sale of an Exchange Note to the owner thereof. If, however, such nominee,
custodian, agent or broker is, for United States federal income tax purposes, a
United States person, a controlled foreign corporation or a foreign person that
derives 50% or more of its gross income for certain periods from the conduct of
a trade or business in the United States, such payments will not be subject to
backup withholding but will be subject to information reporting, unless (1) such
custodian, nominee, agent or broker has documentary evidence in its records that
the beneficial owner is not a United States person and certain other conditions
are met or (2) the beneficial owner otherwise establishes an exemption.
Temporary Treasury regulations provide that the Treasury is considering whether
backup withholding will apply with respect to such payments of principal,
interest or the proceeds of a sale that are not subject to backup withholding
under the current regulations.
Payments of principal, interest and premium on an Exchange Note paid to the
beneficial owner of an Exchange Note by a United States office of a custodian,
nominee or agent, or the payment by the United States office of a broker of the
proceeds of sale of an Exchange Note, will be subject to both backup withholding
and information reporting unless the beneficial owner provides the statement
referred to in (a)(iv) above and the payor does not have actual knowledge that
the beneficial owner is a United States person or otherwise establishes an
exemption. Under proposed United States Treasury regulations not currently in
effect, backup withholding will not apply to such payments absent actual
knowledge that the payee is a United States person. The IRS recently proposed
regulations addressing certain withholding, certification and information rules
which could affect the treatment of the payment of the amounts described above
(the "Proposed Regulations"). The Proposed Regulations would provide alternative
methods for satisfying the certification requirement described in clause (a)
(iv) under "--Non-United States Holders" above. The Proposed Regulations also
would require, in the case of Notes held by foreign partnerships, that (i) the
certification described in clause (a) (iv) under "--Non-United States Holders"
above be provided by the partners rather than by the foreign partnership and
(ii) the partnership provide certain information, including a United States
taxpayer identification number. A look through rule would apply in the case of
tiered partnerships. The Proposed Regulations are proposed to be effective for
payments made after December 31, 1997. There can be no assurance that the
Proposed Regulations will be adopted or as to the provisions they will include
if and when adopted in temporary or final form. Non-United States Holders should
consult their tax advisors regarding the application of these rules to their
particular situations, the availability of an exemption therefrom, the procedure
for obtaining such an exemption, if available, and the possible application of
the proposed United States Treasury regulations addressing the withholding and
information reporting rules.
Any amounts withheld under the backup withholding rules will be allowed as a
refund or a credit against such holder's United States federal income tax
liability provided the required information is furnished to the IRS.
136
<PAGE>
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. 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 Exchange Notes received in exchange for Old Notes
where such Old Notes were acquired as a result of market-making activities or
other trading activities. To the extent any such broker-dealer participates in
the Exchange Offer and so notifies the Company, or causes the Company to be so
notified in writing, the Company has agreed that a period of 120 days after the
date of this Prospectus, it will make this Prospectus, as amended or
supplemented, available to such broker-dealer for use in connection with any
such resale, and will promptly send additional copies of this Prospectus and any
amendment or supplement to this Prospectus to any broker-dealer that requests
such documents in the Letter of Transmittal. In addition, until , 1997
(90 days after the date of this Prospectus), all dealers effecting transactions
in the New Notes may be required to deliver a prospectus.
The Company will not receive any proceeds from any sale of Exchange Notes by
broker-dealers. Exchange 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 Exchange Notes or a combination of such methods of
resale, at prevailing market prices at the time of resale, at prices related to
such prevailing market prices or at 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 or the purchasers or any such Exchange Notes. Any broker-dealer that
resells Exchange Notes that were received by it for its own account pursuant to
the Exchange Offer and any broker or dealer that participates in a distribution
of such Exchange Notes may be deemed to be an "underwriter" within the meaning
of the Securities Act and any profit on any such resale of 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 incident to the Exchange Offer
(other than commissions and concessions of any broker-dealers), subject to
certain prescribed limitations, and will indemnify the holders of the Old Notes
against certain liabilities, including certain liabilities that may arise under
the Securities Act.
By its acceptance of the Exchange Offer, any broker-dealer that receives
Exchange Notes pursuant to the Exchange Offer hereby agrees to notify the
Company prior to using the Prospectus in connection with the sale or transfer of
Exchange Notes, and acknowledges and agrees that, upon receipt of notice from
the Company of the happening of any event which makes any statement in the
Prospectus untrue in any material respect or which requires the making of any
changes in the Prospectus in order to make the statements therein not misleading
or which may impose upon the Company disclosure obligations that may have a
material adverse effect on the Company (which notice the Company agrees to
deliver promptly to such broker-dealer), such broker-dealer will suspend use of
the Prospectus until the Company has notified such broker-dealer that delivery
of the Prospectus may resume and has furnished copies of any amendment or
supplement to the Prospectus to such broker-dealer.
137
<PAGE>
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Simpson Thacher
& Bartlett (a partnership which includes professional corporations), New York,
New York.
EXPERTS
The consolidated balance sheets as of September 30, 1995 and 1996 and the
consolidated statements of earnings (loss), cash flows and shareholders' equity
(deficiency) for each of the three fiscal years in the period ended September
30, 1996 of E&S Holdings Corporation included in this Prospectus have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
reports appearing herein and elsewhere in the Registration Statement, and are
included in reliance upon the reports of such firm given upon their authority as
experts in accounting and auditing.
138
<PAGE>
INDEX
<TABLE>
<CAPTION>
DEFINED TERM PAGE NUMBER
- ----------------------------------------------------------------------------------------------- -----------------
<S> <C>
1990 Amendments................................................................................ 23
1996 Plan...................................................................................... 65
Abarco......................................................................................... 7, F-7
Abarco (Notes)................................................................................. 105
Acquired Indebtedness (Notes).................................................................. 105
Acquired Trademarks............................................................................ 38, 69, F-12
Acts........................................................................................... 22
Administrative Agent........................................................................... 70
Affiliate (Notes).............................................................................. 105
Affiliate (Preferred).......................................................................... 129
Affiliate Transaction.......................................................................... 97
Applicable Premium (Preferred)................................................................. 129
Asset Sale (Notes)............................................................................. 105
Asset Sale Offer............................................................................... 90
AVA............................................................................................ 43
business day................................................................................... 75
Capital Stock (Notes).......................................................................... 106
Capital Stock (Preferred)...................................................................... 129
Capitalized Lease Obligations (Notes).......................................................... 106
Capitalized Lease Obligations (Preferred)...................................................... 129
Cash Equivalents (Notes)....................................................................... 106
CBA............................................................................................ 50
Certificate of Designations.................................................................... 123
Certificated Exchange Note..................................................................... 116
Change of Control (Notes)...................................................................... 106
Change of Control (Preferred).................................................................. 128
Change of Control Offer........................................................................ 87, 126
Change of Control Payment...................................................................... 87, 126
Change of Control Payment Date................................................................. 87, 126
Closing........................................................................................ 8, F-7
Code........................................................................................... 65, 133
Commission..................................................................................... cover, 100, 128
Common Stock................................................................................... 122
Company........................................................................................ cover, F-7
Comparable Treasury Issue (Preferred).......................................................... 130
Comparable Treasury Price (Preferred).......................................................... 130
Consolidated Depreciations and Amortization Expense (Notes).................................... 107
Consolidated Interest Expense (Notes).......................................................... 107
Consolidated Net Income (Notes)................................................................ 107
Contingent Obligatons (Notes).................................................................. 108
Contingent Obligations (Preferred)............................................................. 130
Continuing Directors (Notes)................................................................... 108
Continuing Directors (Preferred)............................................................... 130
Covenant Defeasance............................................................................ 102
CPSC........................................................................................... 22
Credit Facility................................................................................ 8, F-15
Default (Notes)................................................................................ 108
</TABLE>
I-1
<PAGE>
<TABLE>
<CAPTION>
DEFINED TERM PAGE NUMBER
- ----------------------------------------------------------------------------------------------- -----------------
<S> <C>
Depositor...................................................................................... 78
Designated Noncash Consideration (Notes)....................................................... 108
Designated Preferred Stock (Notes)............................................................. 108
DGCL........................................................................................... II-1
Disinterested Director (Notes)................................................................. 108
Disqualified Stock (Notes)..................................................................... 108
Disqualified Stock (Preferred)................................................................. 130
DTC............................................................................................ cover, 116
Dutchstar...................................................................................... 69, F-12
EBITDA (Notes)................................................................................. 109
Eligible Institution........................................................................... 76
Environmental Laws............................................................................. 23
Equity Interests (Notes)....................................................................... 109
Equity Investment.............................................................................. 7
Equity Offering (Notes)........................................................................ 109
Equity Offering (Preferred).................................................................... 130
Etonic......................................................................................... 3, F-7
Etonic Acquisition............................................................................. 3
Etonic Notes................................................................................... 7
Evenflo........................................................................................ F-7
Exchange Act................................................................................... 2
Exchange Act (Notes)........................................................................... 109
Exchange Agent................................................................................. 11
Exchange Date.................................................................................. cover
Exchange Offer................................................................................. cover
Exchange Offer Registration Statement.......................................................... 119
Exchange Notes................................................................................. cover, 9, F-17
Excluded Contributions (Notes)................................................................. 109
Excluded Guarantee............................................................................. 99
Existing Indebtedness (Notes).................................................................. 109
Expiration Date................................................................................ 75
Financings..................................................................................... 7
Fixed Charge Coverage Ratio (Notes)............................................................ 109
Fixed Charges (Notes).......................................................................... 110
Foreign Subsidiary (Notes)..................................................................... 110
GAAP (Notes)................................................................................... 110
GAAP (Preferred)............................................................................... 131
Government Securities (Notes).................................................................. 111
Global Exchange Note........................................................................... cover, 116
Grant.......................................................................................... 65
guarantee (Notes).............................................................................. 111
Guarantor (Notes).............................................................................. 111
Hedging Obligations (Notes).................................................................... 111
Hedging Obligations (Preferred)................................................................ 131
Holder (Notes)................................................................................. 111
Holder (Preferred)............................................................................. 131
Indebtedness (Notes)........................................................................... 111
Indebtedness (Preferred)....................................................................... 131
Indenture...................................................................................... 11, 12, 84
Indenture (Preferred).......................................................................... 131
</TABLE>
I-2
<PAGE>
<TABLE>
<CAPTION>
DEFINED TERM PAGE NUMBER
- ----------------------------------------------------------------------------------------------- -----------------
<S> <C>
Independent Financial Advisor (Notes).......................................................... 112
indirect participants.......................................................................... 117
Initial Purchaser.............................................................................. 10
Investment Grade Securities (Notes)............................................................ 112
Investments (Notes)............................................................................ 112
IRS............................................................................................ 133
Issuance Date (Notes).......................................................................... 112
Junior Securities.............................................................................. 123
KKR............................................................................................ 7
KKR Associates (Strata)........................................................................ 24
Legal Defeasance............................................................................... 102
Letter of Credit/Bankers' Acceptance Obligations (Notes)....................................... 112
Lien (Notes)................................................................................... 112
Lien (Preferred)............................................................................... 131
Liquidation Amount............................................................................. 124
Lisco, Inc..................................................................................... 69, F-12
Lisco Subsidiaries............................................................................. 69, F-12
LTIP........................................................................................... 65
Management Notes............................................................................... 69, F-23
Management Stockholder......................................................................... 66
Management Stockholder's Agreement............................................................. 66
Mandatory Redemption Date...................................................................... 124
MIBP........................................................................................... 64
Moody's (Notes)................................................................................ 113
Named Executive Officers....................................................................... 62
Net Income (Notes)............................................................................. 113
Net Proceeds (Notes)........................................................................... 113
NGF............................................................................................ 48
NIT............................................................................................ 50
Non-Global Holders............................................................................. 116
Notes.......................................................................................... cover
Notice of Guaranteed Delivery.................................................................. 76
non-payment default............................................................................ 85
Obligations (Notes)............................................................................ 113
Obligations (Preferred)........................................................................ 131
Officers' Certificate (Notes).................................................................. 113
Officers' Certificate (Preferred).............................................................. 132
Old Notes...................................................................................... cover, 9
Options........................................................................................ 65
Pari Passu Indebtedness (Notes)................................................................ 113
Parity Securities.............................................................................. 123
participants................................................................................... 117
Participating Broker Dealer.................................................................... 119
payment default................................................................................ 85
Payment Blockage Notice........................................................................ 85
Payment Blockage Period........................................................................ 85
Permitted Holder (Notes)....................................................................... 113
Permitted Holder (Preferred)................................................................... 132
Permitted Investments (Notes).................................................................. 113
Person (Notes)................................................................................. 114
</TABLE>
I-3
<PAGE>
<TABLE>
<CAPTION>
DEFINED TERM PAGE NUMBER
- ----------------------------------------------------------------------------------------------- -----------------
<S> <C>
Person (Preferred)............................................................................. 132
PORTAL......................................................................................... cover
Preferred Stock................................................................................ 8
preferred stock (Notes)........................................................................ 114
Preferred Stock................................................................................ F-24
Preferred Stock (Notes)........................................................................ 114
Preferred Stock Offering....................................................................... 8
Primary Treasury Dealer........................................................................ 132
Pro Forma Financial Statement.................................................................. 29
Proposed Regulations........................................................................... 136
PRP............................................................................................ 23
Pueblo......................................................................................... 69, F-8
Purchase Stock................................................................................. 65
PXC&M.......................................................................................... 69, F-8
Realco......................................................................................... F-7
Recapitalization (Notes)....................................................................... 114, F-7
Recapitalization Agreement..................................................................... 7, F-7
Reference Dealer (Preferred)................................................................... 132
Refinancing Indebtedness....................................................................... 95
Refunding Capital Stock........................................................................ 92
Registration Rights Agreement.................................................................. 10
Registration Statement......................................................................... 2
Related Parties (Notes)........................................................................ 114
Related Parties (Preferred).................................................................... 132
Repurchase Offer (Notes)....................................................................... 114
Restricted Investment (Notes).................................................................. 114
Restricted Subsidiary (Notes).................................................................. 114
Restricted Payments............................................................................ 91
Retired Capital Stock.......................................................................... 92
Revolving Credit Facility...................................................................... 8
Revolving Credit Loan(s)....................................................................... 70, F-15
S&E............................................................................................ 3, F-7
S&P (Notes).................................................................................... 114
Sahara......................................................................................... 69, F-12
Savings Plus Plan.............................................................................. 66
Secured Credit Agreement....................................................................... F-18
Securities Act................................................................................. cover
Securities Act (Notes)......................................................................... 114
Senior Credit Facility (Notes)................................................................. 114
Senior Subordinated Notes...................................................................... F-17
SERA........................................................................................... 65
Shelf Registration Statement................................................................... 120
Significant Subsidiary (Notes)................................................................. 115
Similar Business (Notes)....................................................................... 115
Spalding....................................................................................... F-7
SRP............................................................................................ 65
Strata......................................................................................... 7, F-7
Strata (Notes)................................................................................. 115
Subordinated Indebtedness (Notes).............................................................. 115
Subsidiary (Notes)............................................................................. 115
</TABLE>
I-4
<PAGE>
<TABLE>
<CAPTION>
DEFINED TERM PAGE NUMBER
- ----------------------------------------------------------------------------------------------- -----------------
<S> <C>
Subsidiary (Preferred)......................................................................... 132
Successor Company.............................................................................. 96, 128
Successor Guarantor............................................................................ 96
Swingline Loans................................................................................ 70, F-15
Target......................................................................................... 20
Term Loan(s)................................................................................... 70, F-15
Term Loan Facility............................................................................. 8
Total Assets (Notes)........................................................................... 115
Toys "R" Us.................................................................................... 20
Treasury Rate (Preferred)...................................................................... 132
Trustee........................................................................................ 84
Trust Indenture Act............................................................................ 84
Transferor..................................................................................... 77
Unrestricted Subsidiary (Notes)................................................................ 115
Voting Stock (Notes)........................................................................... 116
Voting Stock (Preferred)....................................................................... 132
Wal-Mart....................................................................................... 20
Weighted Average Life to Maturity (Notes)...................................................... 116
Wholly Owned Restricted Subsidiary (Notes)..................................................... 116
Wholly Owned Subsidiary (Notes)................................................................ 116
Wholly Owned Subsidiary (Preferred)............................................................ 132
</TABLE>
I-5
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Consolidated Financial Statements
Independent Auditors' Report............................................................................. F-2
Consolidated Balance Sheets as of September 30, 1995 and 1996............................................ F-3
Statements of Consolidated Earnings (Loss) for the years ended September 30, 1994, 1995 and 1996......... F-4
Statements of Consolidated Cash Flows for the years ended September 30, 1994, 1995 and 1996.............. F-5
Statements of Consolidated Shareholders' Equity (Deficiency) for the years ended September 30, 1994, 1995
and 1996............................................................................................... F-6
Notes to Consolidated Financial Statements............................................................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
E&S Holdings Corporation:
We have audited the accompanying consolidated balance sheets of E&S Holdings
Corporation and subsidiaries (the "Company") as of September 30, 1995 and 1996,
and the related statements of consolidated earnings (loss), cash flows and
shareholders' equity (deficiency) for each of the three fiscal years in the
period ended September 30, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of September 30,
1995 and 1996, and the results of its operations and its cash flows for each of
the three fiscal years in the period ended September 30, 1996 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Tampa, Florida
October 28, 1996
F-2
<PAGE>
E&S HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1995 1996
<S> <C> <C>
ASSETS
Current assets:
Cash.................................................................................... $ 26,104 $ 75,298
Receivables, less allowance of $3,247 in 1995 and $4,373 in 1996........................ 145,650 192,999
Inventories............................................................................. 88,782 109,171
Deferred income taxes................................................................... 9,666 11,952
Property, plant and equipment, net, to be distributed to Abarco......................... 7,028 0
Other................................................................................... 2,493 4,704
---------- ----------
Total current assets................................................................ 279,723 394,124
Property, plant and equipment, net........................................................ 69,918 78,334
Intangible assets, net.................................................................... 119,070 131,708
Deferred income taxes on acquired non-U.S. trademarks..................................... 53,346 49,432
Deferred financing costs.................................................................. 11,453 34,231
Other..................................................................................... 2,135 2,077
---------- ----------
Total assets........................................................................ $ 535,645 $ 689,906
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Non-U.S. bank loans..................................................................... $ 10,299 $ 13,028
Current maturities of long-term debt.................................................... 12,070 0
Accounts payable........................................................................ 114,296 141,708
Accrued expenses........................................................................ 54,290 69,131
Income taxes............................................................................ 644 706
---------- ----------
Total current liabilities........................................................... 191,599 224,573
Long-term debt............................................................................ 313,073 625,800
Deferred income taxes..................................................................... 13,417 16,339
Pension................................................................................... 11,500 11,753
Postretirement benefits................................................................... 8,560 8,750
Deferred compensation..................................................................... 5,920 0
Other..................................................................................... 5,039 2,142
---------- ----------
Total liabilities................................................................... 549,108 889,357
Commitments and Contingencies (Notes O, P, Q, and R)
Minority interest in consolidated subsidiary.............................................. (487) 0
Preferred Stock--at liquidation value..................................................... 0 150,000
Shareholders' equity (deficiency):
Common stock, in 1996 $.01 par value, 100,000,000 shares authorized and 50,000,000
outstanding; in 1995 $1 par value, 2,000 shares authorized and outstanding............ 2 500
Paid-in capital......................................................................... 53,898 223,125
Retained earnings (deficit)............................................................. (63,065) (568,749)
Currency translation adjustment......................................................... (3,811) (4,327)
---------- ----------
Total shareholders' equity (deficiency)............................................. (12,976) (349,451)
---------- ----------
Total liabilities and shareholders' equity (deficiency)............................. $ 535,645 $ 689,906
---------- ----------
---------- ----------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE>
E&S HOLDINGS CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED EARNINGS (LOSS)
FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1995 1996
<S> <C> <C> <C>
Net sales.................................................................... $ 583,107 $ 634,157 $ 689,080
Cost of sales................................................................ 370,328 407,334 452,037
---------- ---------- ----------
Gross profit............................................................... 212,779 226,823 237,043
Selling, general and administrative expenses................................. 178,678 177,913 196,741
Royalty income, net.......................................................... (12,789) (13,514) (14,339)
Management Stock Ownership Plan expense...................................... 0 1,130 20,828
Recapitalization costs....................................................... 0 0 7,700
Litigation settlement expense................................................ 0 2,400 0
---------- ---------- ----------
Income from operations..................................................... 46,890 58,894 26,113
Interest expense, net........................................................ 17,073 38,108 46,905
Currency loss (gain), net.................................................... (144) 381 775
---------- ---------- ----------
Earnings (loss) before income taxes and minority interest.................. 29,961 20,405 (21,567)
Income taxes................................................................. 11,938 8,683 6,100
---------- ---------- ----------
Earnings (loss) before minority interest................................... 18,023 11,722 (27,667)
Minority interest in net earnings of consolidated subsidiary................. 0 724 0
---------- ---------- ----------
Net earnings (loss)........................................................ $ 18,023 $ 10,998 $ (27,667)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE>
E&S HOLDINGS CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1995 1996
<S> <C> <C> <C>
Increase (Decrease) in Cash
Cash flows from operating activities
Net earnings (loss)............................................................ $ 18,023 $ 10,998 $ (27,667)
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation............................................................... 13,976 11,846 13,904
Intangibles amortization................................................... 6,454 6,441 6,423
Deferred income taxes...................................................... (5,300) 3,037 4,550
Pension.................................................................... 3,493 1,007 253
Postretirement benefits.................................................... 300 310 190
Deferred compensation...................................................... 610 (390) 0
Expense related to 1994 Management Stock Ownership Plan.................... 0 1,130 20,828
Deferred financing costs................................................... 59 2,225 11,453
Write-off of Etonic assets................................................. 0 0 3,300
Minority interest in consolidated subsidiary............................... 0 724 0
--------- ---------- ---------
Subtotal............................................................... 37,615 37,328 33,234
Receivables................................................................ (25,150) (11,393) (24,793)
Inventories................................................................ 1,274 (9,789) (4,747)
Current liabilities, excluding bank loans and affiliate payable............ 22,669 2,761 30,818
Other...................................................................... (767) (2,297) (2,488)
--------- ---------- ---------
Net cash provided by operating activities.............................. 35,641 16,610 32,024
Cash flows from investing activities
Capital expenditures........................................................... (19,109) (15,381) (19,546)
Acquisitions of non-U.S. trademarks from affiliate............................. (8,250) 0 (5,135)
--------- ---------- ---------
Net cash flows used in investing activities............................ (27,359) (15,381) (24,681)
--------- ---------- ---------
Net cash provided before financing activities.......................... 8,282 1,229 7,343
Cash flows from financing activities
Borrowing under new credit agreements.......................................... 150,000 320,000 625,800
Net borrowings (repayment) of prior credit agreements.......................... (10,355) (274,645) (320,000)
Net borrowings (repayment) of other indebtedness............................... 2,990 1,769 (2,414)
Repayment of Etonic notes...................................................... 0 0 (54,043)
Payment of new credit agreement financing costs................................ 0 (13,500) (34,231)
Additional capital contribution................................................ 0 0 1,219
Proceeds from issuance of preferred stock...................................... 0 0 150,000
Proceeds from issuance of common stock......................................... 0 0 221,000
Repurchase of common stock..................................................... 0 0 (524,150)
Repurchase of 1994 Management Stock Ownership Plan shares outstanding.......... 0 0 (28,219)
Collection of notes receivable from management under 1994 Management Stock
Ownership Plan............................................................... 0 0 6,889
Payment to acquire non-U.S. trademarks in excess of affiliate carrying value... (167,750) 0 0
Affiliate receivable and payable............................................... 17,925 (17,707) 0
--------- ---------- ---------
Net cash flows provided (used) by financing activities................. (7,190) 15,917 41,851
--------- ---------- ---------
Cash--net change............................................................... 1,092 17,146 49,194
beginning of period...................................................... 7,866 8,958 26,104
--------- ---------- ---------
end of period............................................................ $ 8,958 $ 26,104 $ 75,298
--------- ---------- ---------
--------- ---------- ---------
Supplemental cash flow data
Interest paid.................................................................. $ 16,367 $ 35,535 $ 35,677
Income taxes paid.............................................................. $ 20,130 $ 6,072 $ 3,385
Non-cash acquisition of Etonic net assets...................................... $ 0 $ 0 $ 54,043
Non-cash accrual of 1994 Management Stock Ownership Plan expense............... $ 0 $ 1,130 $ 0
Non-cash acquisition of non-U.S. trademarks.................................... $ 0 $ 14,293 $ 0
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE>
E&S HOLDINGS CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED CURRENCY
COMMON PAID-IN EARNINGS TRANSLATION
STOCK CAPITAL (DEFICIT) ADJUSTMENT TOTAL
<S> <C> <C> <C> <C> <C>
September 30, 1993........................................ $ 2 $ 53,898 $ 16,545 $ (2,642) $ 67,803
Net earnings for the year................................. 0 0 18,023 0 18,023
Excess of purchase price at fair market value over book
value of non-U.S. trademarks acquired from affiliate.... 0 0 (109,038) 0 (109,038)
Currency translation adjustment........................... 0 0 0 528 528
----- ---------- ----------- ----------- -----------
September 30, 1994........................................ 2 53,898 (74,470) (2,114) (22,684)
Net earnings for the year................................. 0 0 10,998 0 10,998
Minority interest in consolidated subsidiary.............. 0 0 407 234 641
Currency translation adjustment........................... 0 0 0 (1,931) (1,931)
----- ---------- ----------- ----------- -----------
September 30, 1995........................................ 2 53,898 (63,065) (3,811) (12,976)
Net earnings (loss) for the year.......................... 0 0 (27,667) 0 (27,667)
Additional capital contribution........................... 0 1,219 0 0 1,219
Issuance of common stock.................................. 1 220,999 0 0 221,000
Repurchase of common stock:
Cash and initial purchase price adjustment.............. (2) (52,492) (471,656) 0 (524,150)
Realco promissory note carrying value................... 0 0 (8,388) 0 (8,388)
Realco common stock carrying value...................... 0 0 1,711 0 1,711
Common stock split........................................ 499 (499) 0 0 0
Minority interest in consolidated subsidiary.............. 0 0 316 (234) 82
Currency translation adjustment........................... 0 0 0 (282) (282)
----- ---------- ----------- ----------- -----------
September 30, 1996........................................ $ 500 $ 223,125 $ (568,749) $ (4,327) $ (349,451)
----- ---------- ----------- ----------- -----------
----- ---------- ----------- ----------- -----------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE>
E&S HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended September 30, 1994, 1995 and 1996
(Dollars in thousands, except per share amounts)
NOTE A--ORGANIZATION
BUSINESS
E&S Holdings Corporation and subsidiaries (the "Company") is a diversified,
global manufacturer and marketer of branded consumer products serving the
sporting goods and juvenile products markets under the primary trade names
SPALDING, TOP-FLITE, ETONIC, DUDLEY and EVENFLO. The subsidiaries of the Company
are Etonic Worldwide Corporation ("Etonic") and Spalding & Evenflo Companies,
Inc. ("S&E") and subsidiaries, of which Spalding Sports Worldwide ("Spalding")
is a division and Evenflo Company, Inc. ("Evenflo") is a wholly-owned
subsidiary.
Spalding markets and licenses under the SPALDING, TOP-FLITE, ETONIC and
DUDLEY trade names a wide variety of recreational and athletic products such as
golf balls, golf clubs, golf shoes, golf bags and accessories, basketballs,
volleyballs, footballs, soccer balls, softball and baseball bats, balls and
gloves, handballs, rackets and balls for tennis and racquetball and clothing,
shoes and equipment for many other sports. Evenflo markets specialty juvenile
products including reusable and disposable baby bottle feeding systems,
breastfeeding aids, pacifiers and oral development items and other baby care
products and accessories, as well as juvenile car seats, stationary activity
products, strollers, high-chairs, portable play yards, cribs, dressers and
changing tables, child carriers and mattresses.
RECAPITALIZATION AND STOCK PURCHASE AGREEMENT
Prior to September 30, 1996, the Company was a wholly-owned subsidiary of
Abarco, N.V. ("Abarco"). On August 15, 1996, Abarco and Strata Associates L.P.
("Strata") entered into a Recapitalization and Stock Purchase Agreement (the
"Recapitalization Agreement") pursuant to which Strata acquired control of the
Company (the "Recapitalization"). The closing of the Recapitalization took place
on September 30, 1996 (the "Closing"). In connection with the Recapitalization a
portion of the common stock owned by Abarco was redeemed for total consideration
of approximately $581,933. After the Recapitalization, Strata owns approximately
88.4% of the Company's common stock and Abarco retains an approximate 11.6%
ownership.
The Recapitalization was financed with $221,000 cash proceeds of newly
issued common stock to Strata, $150,000 proceeds of non-voting redeemable
preferred stock issued to Strata (of which $50,000 was issued immediately after
the Closing), proceeds of $625,800 from certain borrowings (see Note H) and
$2,209 of the Company's cash balances. These funds were used to (i) redeem a
portion of the common stock held by Abarco for $524,150 in cash plus the fair
value of the Company's investments in an affiliate promissory note (see
Investment in PXC&M below) of $49,394 and in the E&S Realco, Inc. ("Realco")
common stock and note receivable of $8,388; (ii) repay principal and interest of
$367,894 for existing indebtedness, including the Etonic notes; (iii) redeem for
a net payment of $21,330 all of the remaining subsidiary shares issued under the
1994 Management Stock Ownership Plan (see Note M); (iv) pay an estimated $31,471
in transaction fees and expenses; (v) purchase certain non-U.S. trademarks and
assignment rights from an affiliate of Abarco for $5,135 (see Note E); (vi) pay
a transaction bonus of $5,375 to certain members of management of S&E; and (vii)
provide working capital of approximately $45,654 (of this amount $25,800 was
used to repay borrowings under the revolving credit loan on October 1, 1996).
F-7
<PAGE>
E&S HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE A--ORGANIZATION--(CONTINUED)
Immediately after the Recapitalization, the Company declared a stock split
in the form of a stock dividend of approximately 60,892 shares for each common
share then outstanding.
ACQUISITION OF ETONIC
In July 1996, the Company acquired the net assets of Etonic, which
manufactures and/or markets golf shoes, gloves and other golf accessories, as
well as an established line of running and walking shoes. To effect the
acquisition of Etonic, the Company issued promissory notes of $54,043 to the
seller in exchange for the following:
<TABLE>
<S> <C>
Trade receivables.................................................. $ 22,556
Inventories........................................................ 15,642
Other current assets............................................... 3,388
Equipment.......................................................... 4,129
Trademarks and goodwill............................................ 13,905
---------
Total........................................................ 59,620
Accounts payable................................................... (4,115)
Accrued expenses................................................... (1,462)
---------
Promissory notes payable..................................... $ 54,043
---------
---------
</TABLE>
The Etonic acquisition was accounted for using the purchase method.
Trademarks and goodwill are being amortized over 40 years.
The operating results of Etonic have been included in the statement of
consolidated earnings (loss) from the date of acquisition. On the basis of an
unaudited pro forma consolidation of the results of operations as if the
acquisition had taken place at October 1, 1994 rather than in July 1996,
consolidated net sales would have been $694,387 for the year ended September 30,
1995 and $732,022 for the year ended September 30, 1996. Consolidated pro forma
net earnings (loss) would not have been materially different from the Company's
reported amounts for 1995 and 1996.
The promissory notes payable above plus accrued interest totaling $54,935
were paid as part of the Recapitalization described above. Following the
Recapitalization, Company management decided to relocate the Etonic
administrative operations to one of the Company's other administrative
locations. As a result, the Company charged approximately $7,200 to expense in
the year ended September 30, 1996 due to purchase accounting effects
attributable to the turnover of Etonic's inventories (approximately $1,600), to
charges related to consolidating Etonic's administrative operations
(approximately $4,800) and to additional expenses related to the Etonic
Acquisition (approximately $800).
INVESTMENT IN PXC&M
In 1993 the Company purchased a common stock interest (ultimately 65.3%) and
a preferred stock interest (ultimately 92.7%) in PXC&M Holdings, Inc. and
subsidiaries ("PXC&M") for $71,500 in cash. The other primary common shareholder
in PXC&M was another affiliate of Abarco and the Company. PXC&M was the ultimate
parent of Pueblo Xtra International, Inc. ("Pueblo"), a supermarket chain and
video tape franchise operating in Puerto Rico, South Florida and the U.S. Virgin
Islands. On May 8, 1996,
F-8
<PAGE>
E&S HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE A--ORGANIZATION--(CONTINUED)
the Company's common stock investment was diluted to less than 1% as a result of
the reorganization of PXC&M resulting from an equity investment by an Abarco
affiliate. As part of this reorganization, the Company's investment in PXC&M
preferred stock was sold in exchange for a promissory note from the Abarco
affiliate. The remaining PXC&M common stock was disposed of for a nominal amount
prior to the Recapitalization.
In connection with the Recapitalization Agreement, the Company distributed
to Abarco the affiliate promissory note discussed above. The distribution of the
affiliate promissory note and the disposal of the PXC&M common stock is
analogous to a spin-off of the Company's investment in PXC&M to Abarco;
accordingly, the Company has retroactively eliminated the operations of PXC&M
from the accompanying consolidated financial statements by treating the original
investment in PXC&M of $71,500 as a non-cash distribution of a disengaged
subsidiary for the year ended September 30, 1993, the year of acquisition of
PXC&M.
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The Company was a wholly-owned subsidiary of Abarco until September 30,
1996, at which date Strata acquired control of the Company. The consolidated
financial statements include the accounts of E&S Holdings Corporation and its
wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of amounts reported in the consolidated financial
statements have been determined by using available market information and
appropriate valuation methodologies. The carrying value of all current assets
and current liabilities approximates fair value because of their short-term
nature. The fair value of long-term debt approximates the carrying value, based
on market prices.
INVENTORIES
Inventories are valued at the lower of cost or market (net realizable
value). Costs for the majority of United States inventories and certain non-U.S.
inventories have been determined by use of the last-in, first-out method. Cost
for the majority of non-U.S. inventories has been determined by use of the
first-in, first-out method.
PROPERTY, PLANT AND EQUIPMENT
These assets are stated at cost and are depreciated principally using the
straight-line method over estimated useful lives which range from 3 to 20 years.
Certain assets are depreciated for income tax purposes using accelerated
methods. Assets that become fully depreciated are removed from the asset and
related accumulated depreciation accounts.
Periodically, the Company evaluates the recoverability of the net carrying
value of its property, plant and equipment by estimating its fair value. The
fair value is compared to the carrying amount in the
F-9
<PAGE>
E&S HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
consolidated financial statements. A deficiency in fair value relative to
carrying amount is an indication of the need for a writedown due to impairment.
If the total of future undiscounted cash flows were less than the carrying
amount of the property, plant and equipment, such carrying amount would be
written down to the fair value, and a loss on impairment recognized by a charge
to earnings. The Company's accounting policy complies with Statement of
Financial Accounting Standards No. 121.
INTANGIBLE ASSETS
Intangible assets are being amortized on the straight-line basis over the
remaining lives of the patents and over 40 years for the remaining intangibles.
The Company periodically reviews the carrying values of goodwill and other
intangible assets to assess recoverability, and permanent impairments, if any,
would be recognized in current year operations.
DEFERRED FINANCING COSTS
The costs incurred to obtain financing under the various financing
agreements have been capitalized and are amortized to interest expense over the
lives of the agreements, using the interest method for term facilities and the
straight-line method for revolving credit facilities.
INCOME TAXES
Income tax expense is based on reported earnings before income taxes.
Deferred income taxes reflect the impact of temporary differences between the
amounts of assets and liabilities recognized for financial reporting purposes
and such amounts recognized for tax purposes. In accordance with Statement of
Financial Accounting Standards No. 109, these deferred taxes are measured by
applying currently enacted tax laws.
The Company and its United States subsidiaries are parties to a tax sharing
agreement which provides that each member of the consolidated return group shall
pay its share of the consolidated tax liability based on the ratio of its
separate liability to the aggregate separate liabilities of all group members. A
member shall make or receive compensatory payments to the extent its separate
liability differs from its share of the group's liability.
RETIREMENT PLANS AND POSTRETIREMENT BENEFITS
Current service costs of retirement plans and postretirement healthcare and
life insurance benefits are accrued annually. Prior service costs resulting from
amendments to the plans are amortized over the average remaining service period
of employees expected to receive benefits.
ADVERTISING
Advertising costs are expensed as incurred and included in selling, general
and administrative expenses. Advertising expenses amounted to $59,528, $59,719
and $63,267 in 1994, 1995 and 1996.
F-10
<PAGE>
E&S HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
CURRENCY TRANSLATION
Non-U.S. currency-denominated assets and liabilities are translated into
U.S. dollars at the exchange rates existing at the balance sheet dates.
Translation adjustments resulting from fluctuations in the exchange rates are
recorded as a separate component of common shareholders' equity (deficiency).
Income and expense items are translated at the average exchange rates during the
respective periods.
CURRENCY EXCHANGE CONTRACTS
Open forward currency exchange contracts are marked-to-market using the spot
rates at each balance sheet date and the change in market value is recorded by
the Company as unrealized gain or loss. The Company records realized gains or
losses when the contracts are settled.
USE OF ESTIMATES
The preparation of the accompanying consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and judgments that affect the reported amounts of assets and
liabilities and the disclosures of contingencies at the date of the consolidated
financial statements and of revenues and expenses recognized during the
reporting period. Actual results could differ from these estimates.
CASH FLOWS
For purposes of the statements of consolidated cash flows, the Company
considers all highly liquid debt instruments purchased with an original maturity
of three months or less to be cash equivalents.
NOTE C--INVENTORIES
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------
<S> <C> <C>
1995 1996
<CAPTION>
<S> <C> <C>
Finished goods......................................................... $ 60,132 $ 74,890
Work in process........................................................ 14,104 17,088
Raw materials.......................................................... 14,546 17,193
--------- ----------
Total inventories................................................ $ 88,782 $ 109,171
--------- ----------
--------- ----------
</TABLE>
The cost of 79% of 1995 and 71% of 1996 inventories was computed using the
last-in, first-out (LIFO) method of inventory valuation. Use of the LIFO method
increased the 1995 and 1996 year end inventories by $791 and $390.
F-11
<PAGE>
E&S HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE D--PROPERTY, PLANT AND EQUIPMENT, NET
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
<S> <C> <C>
1995 1996
<CAPTION>
<S> <C> <C>
Land.................................................................. $ 2,914 $ 2,917
Buildings and building improvements................................... 41,839 46,365
Machinery and equipment............................................... 88,342 102,175
---------- ----------
133,095 151,457
Accumulated depreciation.............................................. (63,177) (73,123)
---------- ----------
Property, plant and equipment, net.............................. $ 69,918 $ 78,334
---------- ----------
---------- ----------
</TABLE>
NOTE E--INTANGIBLE ASSETS, NET
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
<S> <C> <C>
1995 1996
<CAPTION>
<S> <C> <C>
United States trademarks.............................................. $ 80,303 $ 85,303
Non-U.S. trademarks................................................... 8,250 13,385
Patents............................................................... 33,500 33,500
Goodwill.............................................................. 82,427 91,374
---------- ----------
204,480 223,562
Accumulated amortization.............................................. (85,410) (91,854)
---------- ----------
Intangible assets, net.......................................... $ 119,070 $ 131,708
---------- ----------
---------- ----------
</TABLE>
Prior to May 17, 1994 the Company paid royalties to an affiliate, Dutchstar
B.V. ("Dutchstar"), at a rate of 6% of net sales for sporting good products sold
by the Company and 3% to 5% of net sales for infant products sold by the
Company, in each case for the right to sell products bearing the Company's name
in substantially all countries other than the United States under certain
non-U.S. trademarks (the "Acquired Trademarks") owned by Dutchstar's parent
company Sahara Corp. Ltd. ("Sahara"), also an affiliate of the Company. The
Company also paid to Dutchstar all royalties (less expenses in certain cases)
received from third parties for the use of the Acquired Trademarks in
substantially all countries other than the United States. Total Acquired
Trademark expense paid to Dutchstar was $6,280 in 1994, $27 in 1995 and $21 in
1996. Dutchstar, in turn, paid royalties to Sahara for the use of the Acquired
Trademarks in countries other than the United States.
On May 17, 1994, Sahara sold the Acquired Trademarks to the Company for
aggregate consideration of $176,000, including a payable to Sahara of $32,000
and immediately thereafter the Company contributed the Acquired Trademarks to
Lisco Feeding, Inc., Lisco Furniture, Inc. and Lisco Sports, Inc. (collectively
the "Lisco Subsidiaries"), each a wholly-owned subsidiary of Lisco, Inc.
("Lisco, Inc."), a wholly-owned subsidiary of the Company.
F-12
<PAGE>
E&S HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE E--INTANGIBLE ASSETS, NET--(CONTINUED)
Under generally accepted accounting principles the Acquired Trademarks were
not revalued to fair market value but were recorded at Sahara's net book value.
The purchase price of the Acquired Trademarks was recorded as follows:
<TABLE>
<CAPTION>
AMOUNT
<S> <C>
Intangible assets--net book value of Sahara...................................... $ 8,250
Deferred income taxes--tax effect of excess purchase price....................... 58,712
Retained earnings--excess of purchase price at fair market value over book value
of non-U.S. trademarks acquired from affiliate................................. 109,038
-----------
Fair market value of Acquired Trademarks......................................... $ 176,000
-----------
-----------
</TABLE>
The $8,250 carrying value of the Acquired Trademarks is being amortized over
30 years for book purposes while the $176,000 fair market value is being
amortized over 15 years for income tax purposes. The $58,712 deferred income tax
effect will be reduced as the Company recognizes the tax benefit of the
difference between the carrying value of $8,250 and the tax basis of $176,000.
Under generally accepted accounting principles, the $109,038 excess purchase
price was charged to retained earnings.
On September 30, 1996, as part of the Recapitalization, the Company
purchased the remaining non-U.S. trademarks and assignment rights owned by
Sahara for $5,135 and immediately contributed those non-U.S. trademarks to the
Lisco Subsidiaries.
As part of the July 1996 acquisition of Etonic the Company contributed all
the Etonic trademarks in the amount of $5,000 to EWW Lisco, Inc., a wholly-owned
subsidiary of the Company.
Each of Lisco, Inc., the Lisco Subsidiaries and EWW Lisco, Inc. is a
separate and distinct legal entity from the Company. Lisco, Inc., the Lisco
Subsidiaries and EWW Lisco, Inc. license the use of all the trademarks and
patents to the Company under exclusive long-term licenses until September 30,
2000 with renewal options. The royalty income and expense related to the use of
these trademarks and patents are eliminated in the consolidated financial
statements of the Company.
NOTE F--ACCRUED EXPENSES
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
<S> <C> <C>
1995 1996
<CAPTION>
<S> <C> <C>
Compensation and other employee benefits................................ $ 17,358 $ 16,983
Reserve for self insurance.............................................. 12,654 12,428
Other, principally operating expenses................................... 24,278 39,720
--------- ---------
Total accrued expenses............................................ $ 54,290 $ 69,131
--------- ---------
--------- ---------
</TABLE>
The Company's primary group health plan is self-insured. In addition to the
primary plan, employees are also offered an option of a totally insured HMO
plan. Annually approximately 35% to 45% of the Company's employees are covered
under the HMO option. Approximately 56% of the Company's employees are covered
by insured workers' compensation programs. The self-insured workers'
compensation programs are covered by a $300 per occurrence stop loss insurance
policy.
F-13
<PAGE>
E&S HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE F--ACCRUED EXPENSES--(CONTINUED)
Commercial and product liability insurance coverages are high deductible
insured programs. Commercial liability deductibles are $250 per occurrence.
Product liability deductibles are $1,000 per occurrence and $3,000 in aggregate.
As a supplement to these programs, the Company carries $75,000 in umbrella
coverage.
The reserve for self insurance claims shown in the table above covers the
deductibles and self insurance programs and is based upon an annual review by
the Company and its independent actuary of claims filed and claims incurred but
not yet reported.
NOTE G--NON-U.S. DEBT
The Company's non-U.S. subsidiaries have short-term bank financing
arrangements to support international working capital requirements. The
subsidiaries utilized these arrangements by use of direct bank borrowings,
discounting receivables, and letters of credit as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
<S> <C> <C>
1995 1996
<CAPTION>
<S> <C> <C>
Available lines of credit............................................... $ 49,200 $ 46,800
--------- ---------
--------- ---------
Amounts outstanding:
Direct bank borrowings............................................ $ 10,299 $ 13,028
Discounted receivables (netted against accounts receivable)....... 13,770 8,880
Letters of credit................................................. 5,831 2,192
--------- ---------
$ 29,900 $ 24,100
--------- ---------
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
<S> <C> <C> <C>
1994 1995 1996
<CAPTION>
<S> <C> <C> <C>
Maximum borrowings........................................... $ 25,900 $ 30,100 $ 31,800
Weighted average outstanding balances........................ $ 20,900 $ 24,700 $ 25,700
Weighted average interest rates.............................. 4.76% 6.32% 4.60%
</TABLE>
At September 30, 1996, the borrowings are mainly comprised of $13,500 in
Japanese yen and $9,100 in Australian dollars.
F-14
<PAGE>
E&S HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE H--UNITED STATES DEBT
The Company's U.S. operations have long-term bank financing arrangements to
support working capital needs and other general corporate requirements. The
operations utilized these arrangements primarily by use of direct bank
borrowings, acceptances, and letters of credit. The Company's borrowing
activities are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
<S> <C> <C>
1995 1996
<CAPTION>
<S> <C> <C>
Secured Credit Facility
Revolving Credit Loan............................................... $ 0 $ 25,800
Term Loans.......................................................... 0 400,000
Senior Subordinated Notes............................................. 0 200,000
Secured Credit Agreement.............................................. 320,000 0
Other indebtedness.................................................... 5,143 0
---------- ----------
Total debt...................................................... 325,143 625,800
Current maturities of debt............................................ 12,070 0
---------- ----------
Long-term debt.................................................. $ 313,073 $ 625,800
---------- ----------
---------- ----------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------
<S> <C> <C> <C>
1994 1995 1996
<CAPTION>
<S> <C> <C> <C>
Maximum borrowings (prior to the Recapitalization)....... $ 198,300 $ 377,600 $ 366,700
Weighted average outstanding balances.................... $ 170,700 $ 326,900 $ 338,000
Weighted average interest rates.......................... 5.09% 10.13% 9.14%
</TABLE>
As of September 30, 1995 and 1996 the Secured Credit Agreement and Secured
Credit Facility were utilized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
<S> <C> <C>
1995 1996
<CAPTION>
<S> <C> <C>
Direct borrowings..................................................... $ 320,000 $ 625,800
Acceptances (included in accounts payable)............................ 46,390 57,200
Letters of credit..................................................... 23,560 23,800
Non-U.S. bank loan guarantees......................................... 800 800
---------- ----------
$ 390,750 $ 707,600
---------- ----------
---------- ----------
</TABLE>
SECURED CREDIT FACILITY
On September 30, 1996, the Company entered into a secured credit facility
(the "Credit Facility") with a syndicate of banks and other financial
institutions. The Credit Facility provides for a $650,000 maximum credit
commitment, consisting of a seven year $250,000 revolving credit loan
("Revolving Credit Loan") and $400,000 in term loans ("Term Loans"). Term Loans
consist of (i) $175,000 seven year Term Loan A,
(ii) $87,500 eight year Term Loan B, (iii) $87,500 nine year Term Loan C, and
(iv) $50,000 nine and one half year Term Loan D. Each of the Term Loans require
annual amortization beginning September 30, 1998 and each subsequent September
30 thereafter until maturity. Revolving Credit Loans may be used for
F-15
<PAGE>
E&S HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE H--UNITED STATES DEBT--(CONTINUED)
working capital needs, special facility obligations (letters of credit and
acceptances), general corporate purposes, and for borrowings on same-day notice
("Swingline Loans"). Special facility obligations are limited to a maximum of
$180,000 and Swingline Loans are limited to a maximum of $30,000.
All Term Loans and Revolving Credit Loans will bear interest, at the
Company's option, at either: (a) a "base rate" equal to the higher of (i) the
federal funds rate plus 0.50% per annum or (ii) the administrative agent's prime
rate, plus (A) in the case of Term Loan A, a debt to EBITDA-dependent rate
ranging from 0.00% to 1.25% per annum, (B) in the case of Term Loan B, 1.75% per
annum, (C) in the case of Term Loan C, 2.25% per annum, (D) in the case of Term
Loan D, 2.75% per annum or (E) in the case of a Revolving Credit Loan and
Swingline Loans, a debt to EBITDA-dependent rate ranging from 0.00% to 1.25% per
annum or (b) a "eurodollar rate" plus (i) in the case of Term Loan A, a debt to
EBITDA-dependent rate ranging from 0.625% to 2.25% per annum, (ii) in the case
of Term Loan B, 2.75% per annum, (iii) in the case of Term Loan C, 3.25% per
annum, (iv) in the case of Term Loan D, 3.75% per annum or (v) in the case of
Revolving Credit Loans, a debt to EBITDA-dependent rate ranging from 0.625% to
2.25% per annum. Swingline Loans may only be base rate loans.
The Company will pay a commitment fee calculated at a debt to
EBITDA-dependent rate ranging from 0.20% to 0.50% per annum of the available
unused commitment under the Revolving Credit Loan in effect on each day. Such
fee will be payable quarterly in arrears and upon termination of the Revolving
Credit Loan. In addition, the Company pays a fee to the administrative agent of
$100 per annum, payable quarterly in arrears.
The Company will pay a letter of credit fee calculated at a debt to
EBITDA-dependent rate ranging from 0.50% to 2.125% per annum of the face amount
of each letter of credit and a fronting fee calculated at a rate equal to 0.125%
per annum of the face amount of each letter of credit. Such fees will be payable
quarterly in arrears and upon the termination of the Revolving Credit Loan. In
addition, the Company will pay customary transaction charges in connection with
any letters of credit.
The Term Loans will be subject to mandatory prepayments (i) with the
proceeds of certain asset sales and certain debt offerings (excluding the Senior
Subordinated Notes) and (ii) on an annual basis with 50% of the Company's excess
cash flow (as defined in the Credit Facility) for so long as the ratio of the
Company's total debt (as defined in the Credit Facility) to EBITDA (as defined
in the Credit Facility) is greater than 4.0 to 1.0. The Credit Facility
prohibits the Company from repurchasing any Senior Subordinated Notes or
Preferred Stock, subject to limited exceptions. The Company's obligations under
the Credit Facility are secured by a pledge of the stock of certain of its
subsidiaries. In addition, indebtedness under the Credit Facility is guaranteed
by the principal subsidiaries of the Company.
The Credit Facility contains customary covenants and restrictions on the
Company's ability to engage in certain activities including (i) limitations on
liens, (ii) limitations on consolidations and mergers of the Company and sales
of the assets of the Company, (iii) restrictions on the purchase, redemption or
acquisition of any capital stock, equity interest or any other obligations or
other securities and restrictions on the advances, loans, extension of credit or
capital contributions to, or investments in, other entities, (iv) restrictions
on additional indebtedness to be incurred by the Company, (v) restrictions on
payments of dividends or other distribution of assets, and (vi) compliance with
certain financial covenants relating to certain interest coverage, fixed charge
ratios, and a leverage ratio.
F-16
<PAGE>
E&S HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE H--UNITED STATES DEBT--(CONTINUED)
The Credit Facility includes customary events of default.
Scheduled maturities of the Term Loans are as follows:
<TABLE>
<CAPTION>
YEAR ENDING TERM TERM TERM TERM
SEPTEMBER 30, LOAN A LOAN B LOAN C LOAN D
<S> <C> <C> <C> <C>
1997.......................................... $ 0 $ 0 $ 0 $ 0
1998.......................................... 15,000 1,000 1,000 500
1999.......................................... 25,000 1,000 1,000 500
2000.......................................... 25,000 1,000 1,000 500
2001.......................................... 30,000 1,000 1,000 500
2002.......................................... 30,000 1,000 1,000 500
2003.......................................... 50,000 1,000 1,000 500
2004.......................................... 0 81,500 1,000 500
2005.......................................... 0 0 80,500 500
2006 (March 31, 2006)......................... 0 0 0 46,000
----------- --------- ----------- ---------
Total................................... $ 175,000 $ 87,500 $ 87,500 $ 50,000
----------- --------- ----------- ---------
----------- --------- ----------- ---------
</TABLE>
SENIOR SUBORDINATED NOTES
In conjunction with the closing of the Recapitalization on September 30,
1996 (see Note A), the Company issued $200 million aggregate principal amount of
10 3/8% Senior Subordinated Notes ("Senior Subordinated Notes"). The Senior
Subordinated Notes will mature on October 1, 2006 and are unsecured senior
subordinated obligations of the Company. Interest on the Senior Subordinated
Notes will be payable semiannually April 1 and October 1 of each year,
commencing April 1, 1997.
The Senior Subordinated Notes will be redeemable at the option of the
Company, in whole or in part, at any time on or after October 1, 2001. In
addition, at any time prior to October 1, 1999, the Company may, at its option,
redeem up to 40% of the aggregate principal amount of the Senior Subordinated
Notes at a redemption price equal to 110% of the aggregate principal amount
thereof, plus accrued interest thereon, with the proceeds of equity offerings.
The Company will not be required to make mandatory redemptions or sinking
fund payments prior to maturity of the Senior Subordinated Notes, except if
holders request that the Company repurchase the Senior Subordinated Notes in the
event of a change of control (as defined in the indenture relating to the Senior
Subordinated Notes) or upon the Company's receipt of the proceeds of certain
asset sales that are not reinvested or applied to reduce indebtedness within a
certain time period. However, the Company, in accordance with an agreement with
the holders of the Senior Subordinated Notes, is in the process of completing a
public debt offering which will result in the Company's offer to exchange its
Senior Subordinated Notes for new 10 3/8% Series B Senior Subordinated Notes due
2006 (the "Exchange Notes"). The terms of the Exchange Notes are identical in
all material respects to the terms of the Senior Subordinated Notes, except that
the Exchange Notes would be freely transferable by the holders thereof. If this
offering is not completed, the Company may be required to pay up to an
additional 1% interest on the Senior Subordinated Notes.
F-17
<PAGE>
E&S HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE H--UNITED STATES DEBT--(CONTINUED)
The Senior Subordinated Notes contain customary covenants and restrictions
on the Company's ability to engage in certain activities, which include (i)
limitations on restricted payments for the payment of dividends, (ii)
limitations on incurrence of additional indebtedness and issuance of
disqualified stock, (iii) restrictions on the merger, consolidation, or sale of
substantially all assets of the Company, (iv) limitations on transactions with
affiliates relating to the sale, lease, transfer or disposition of any of its
properties or assets in excess of certain amounts, (v) limitations on guarantees
of indebtedness by the Company, (vi) limitations on incurrence of other
subordinated indebtedness by the Company and (vii) certain reporting
requirements in accordance with Securities and Exchange Commission rules.
The Senior Subordinated Notes include customary events of default.
SECURED CREDIT AGREEMENT
Prior to September 30, 1996 the Company operated under a $450,000 secured
credit agreement (the "Secured Credit Agreement") which was used for working
capital needs and special facility obligations (letters of credit, acceptances,
non-U.S. bank loan guarantees, and currency exchange contracts). At the
Company's option, interest was based on either an "Alternate Base Rate" or a
"Eurodollar Rate", as defined.
The Secured Credit Agreement was collateralized by domestic receivables and
inventories, all the stock of its domestic subsidiaries, 65% of the stock of the
Company's non-U.S. subsidiaries, and Abarco's investments in PXC&M stock. This
debt was paid in full from initial proceeds under the Credit Facility in
connection with the closing of the Recapitalization.
SECURED INTERIM LOAN AGREEMENT
On April 17, 1996 the Company entered into a one year $40,000 secured
interim loan agreement for the benefit of two Abarco affiliated companies. The
Company borrowed $21,000 and advanced this amount to the two Abarco affiliated
companies in exchange for promissory notes which carried interest rates equal to
the credit agreement interest rates. The borrowings were secured by assets of
the two affiliates. On September 30, 1996, the affiliated promissory notes were
repaid and this loan agreement was paid in full and cancelled.
OTHER INDEBTEDNESS
The other indebtedness consists primarily of financing agreements with
various government agencies to finance the cost of a manufacturing facility and
equipment. This debt was paid in full from initial proceeds under the Credit
Facility in connection with the closing of the Recapitalization.
F-18
<PAGE>
E&S HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE I--INCOME TAXES
Earnings (loss) before income taxes and minority interest in the United
States and outside the United States, along with the components of the income
tax provision, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------
<S> <C> <C> <C>
1994 1995 1996
<CAPTION>
<S> <C> <C> <C>
Earnings (loss) before income taxes and minority interest:
United States................................................................. $ 30,553 $ 16,729 $ (18,518)
Other nations................................................................. (592) 3,676 (3,049)
--------- --------- ----------
Total..................................................................... $ 29,961 $ 20,405 $ (21,567)
--------- --------- ----------
--------- --------- ----------
Income tax provision:
Current taxes:
Federal taxes............................................................... $ 13,387 $ 3,200 $ (55)
State taxes................................................................. 1,653 88 400
Other nations' taxes........................................................ 2,198 2,358 1,205
--------- --------- ----------
Total..................................................................... 17,238 5,646 1,550
Deferred taxes:
Federal taxes............................................................... (4,013) 2,122 1,471
Other nations' taxes........................................................ (1,287) 915 3,079
--------- --------- ----------
Total..................................................................... (5,300) 3,037 4,550
--------- --------- ----------
Total income taxes........................................................ $ 11,938 $ 8,683 $ 6,100
--------- --------- ----------
--------- --------- ----------
</TABLE>
F-19
<PAGE>
E&S HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the years ended September 30, 1994, 1995 and 1996
(Dollars in thousands, except per share amounts)
NOTE I--INCOME TAXES--(CONTINUED)
The differences between the effective income tax rate and the U.S. statutory
rate are as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------
<S> <C> <C> <C>
1994 1995 1996
<CAPTION>
<S> <C> <C> <C>
U.S. statutory rate....................................................................... 35% 35% (35%)
State income taxes, net of federal benefit................................................ 3 (3) 3
Non-U.S. tax rate differences............................................................. 2 7 3
Non-U.S. losses (earnings) for which no taxes were recorded............................... 1 (1) 8
Increase in valuation allowances on non-U.S. net operating loss carryforwards............. 0 2 11
Management Stock Ownership Plan expense................................................... 0 2 34
Recapitalization costs.................................................................... 0 0 10
Other..................................................................................... (1) 1 (6)
-- -- --
Effective tax rate.................................................................... 40% 43% 28%
-- -- --
-- -- --
</TABLE>
Under the asset and liability method prescribed by SFAS 109, deferred income
taxes, net of appropriate valuation allowances, are provided for the temporary
differences between the financial reporting and tax basis of assets and
liabilities at currently enacted tax rates. Temporary differences and
carryforwards, excluding Acquired Trademarks, are as follows:
<TABLE>
<CAPTION>
CURRENT NONCURRENT
NET DEFERRED TAX ASSET NET DEFERRED TAX LIABILITY
-------------------------- --------------------------
<S> <C> <C> <C> <C>
1995 1996 1995 1996
<CAPTION>
<S> <C> <C> <C> <C>
Intangibles amortization.................................... $ 0 $ 0 $ 25,335 $ 25,367
Depreciation................................................ 0 0 1,062 (271)
Accrued liabilities......................................... 7,499 9,671 0 0
Pension..................................................... 0 0 (4,587) (4,001)
Postretirement benefits..................................... 0 0 (3,338) (3,412)
Deferred compensation....................................... 0 0 (2,309) 0
Net operating loss carryforwards............................ 0 0 (6,539) (11,164)
Capital loss carryforward................................... 0 0 0 (8,614)
Other....................................................... 2,167 2,281 (1,748) (1,344)
------ ----------- ------------ ------------
Total deferred income taxes............................. 9,666 11,952 7,876 (3,439)
Valuation allowance on net operating losses and sale of
capital asset............................................. 0 0 5,541 19,778
------ ----------- ------------ ------------
Net deferred income taxes............................... $ 9,666 $ 11,952 $ 13,417 $ 16,339
------ ----------- ------------ ------------
------ ----------- ------------ ------------
</TABLE>
On September 30, 1996, the Company had net operating losses in non-U.S.
subsidiaries of $20,474, for which a full valuation allowance has been provided.
On September 30, 1996, the Company had capital loss carryforwards of $22,086 for
which a full valuation allowance has been provided. Subsequent recognition of
the tax benefits relating to the capital loss carryforward will be credited to
retained earnings.
On September 30, 1994, 1995 and 1996 undistributed earnings of non-U.S.
subsidiaries included in consolidated retained earnings amounted to $7,500,
$8,800 and $8,100. The Company intends to continue
F-20
<PAGE>
E&S HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE I--INCOME TAXES--(CONTINUED)
to indefinitely reinvest these earnings, which reflect full provision for
non-U.S. income taxes, to expand its international operations. Accordingly, no
provision has been made for U.S. income taxes that might be payable upon
repatriation of such earnings.
The Company's federal income tax returns through September 30, 1993 have
been examined by, and settled with, the Internal Revenue Service.
NOTE J--PENSION PLANS
The Company's United States operations have noncontributory, defined benefit
pension plans covering substantially all employees. These plans provide
employees with pension benefits that are based on either, age and compensation,
or are based on stated amounts for each year of service. The Company's funding
policy is to contribute annually the minimum amounts permitted by the Internal
Revenue Code. Plan assets are invested in a broadly diversified portfolio
consisting primarily of common stock and fixed income securities.
The September 30, 1995 and 1996 funded status of the Company's United States
defined benefit plans consists of the following:
<TABLE>
<CAPTION>
ASSETS EXCEED
ACCUMULATED BENEFITS ACCUMULATED BENEFITS
EXCEED ASSETS
-------------------- --------------------
<S> <C> <C> <C> <C>
1995 1996 1995 1996
<CAPTION>
<S> <C> <C> <C> <C>
Actuarial present value of benefits based on service to date and
present pay levels:
Vested............................................................... $ 415 $ 2,158 $ 49,437 $ 49,717
Nonvested............................................................ 3 149 2,923 3,193
--------- --------- --------- ---------
Accumulated benefit obligation......................................... 418 2,307 52,360 52,910
Additional amounts related to projected pay increases.................. 13 15 102 198
--------- --------- --------- ---------
Total projected benefit obligation based on service to date............ 431 2,322 52,462 53,108
Plan assets at fair value.............................................. 515 2,749 45,522 49,871
--------- --------- --------- ---------
Projected benefit obligation in excess of (less than) plan assets...... (84) (427) 6,940 3,237
Unamortized net amount resulting from changes in plan experience and
actuarial assumptions................................................ 389 446 (834) 3,947
Unrecognized net transition obligation................................. (10) 28 958 778
Unamortized prior service cost......................................... (295) (57) 4,085 3,625
--------- --------- --------- ---------
Pension liability (asset).............................................. $ 0 $ (10) $ 11,149 $ 11,587
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
On September 30, 1995 and 1996 the Company's United States pension liability
due currently was $1,469 and $1,317 and the long-term portion was $9,680 and
$10,260.
F-21
<PAGE>
E&S HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE J--PENSION PLANS--(CONTINUED)
The 1994, 1995 and 1996 pension expense of the Company's United States
defined benefit plans includes the following components:
<TABLE>
<CAPTION>
1994 1995 1996
<S> <C> <C> <C>
Benefits earned during the period.................................................... $ 1,983 $ 2,225 $ 2,236
Interest accrued on benefits earned in prior years................................... 3,690 3,865 4,005
Return on plan assets................................................................ (3,786) (3,510) (3,775)
Net amortization..................................................................... (112) (331) (534)
--------- --------- ---------
Pension expense of domestic defined benefit plans.................................... $ 1,775 $ 2,249 $ 1,932
--------- --------- ---------
--------- --------- ---------
</TABLE>
Assumptions used in the accounting for United States defined benefit plans
as of September 30, 1994, 1995 and 1996 were:
<TABLE>
<CAPTION>
1994 1995 1996
<S> <C> <C> <C>
Discount rate................................................................................ 7.5% 7.5% 7.5%
Rate of increase in compensation levels...................................................... 4.5% 4.5% 4.5%
Expected long-term rate of return on assets.................................................. 8.5% 8.5% 8.5%
</TABLE>
The Company's United States operations and most non-U.S. subsidiaries have
separate defined contribution plans. The purpose of these defined contribution
plans is generally to provide additional financial security during retirement by
providing employees with an incentive to make regular savings. Company
contributions to the plans are based on employee contributions or compensation.
The non-U.S. plans are integrated with the benefits required by the laws of the
various countries. The Company's defined contribution plans' expenses totaled
$1,818 in 1994, $1,880 in 1995 and $1,739 in 1996.
NOTE K--POSTRETIREMENT BENEFITS
The Company provides certain postretirement health care and life insurance
benefits for its domestic retired employees and their dependents. Substantially
all of the Company's United States employees may become eligible for those
benefits if they reach normal retirement age while working for the Company. Most
international employees are covered by government sponsored programs and the
cost to the Company is not significant. The Company does not fund retiree health
care benefits in advance and has the right to modify these plans in the future.
F-22
<PAGE>
E&S HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE K--POSTRETIREMENT BENEFITS--(CONTINUED)
The September 30, 1995 and 1996 status of the postretirement benefit plans
consists of the following:
<TABLE>
<CAPTION>
1995 1996
<S> <C> <C>
Actuarial present value of benefit obligation based on service to date:
Retirees..................................................................................... $ 5,251 $ 4,934
Fully eligible active participants........................................................... 1,087 1,215
Other active participants.................................................................... 1,719 2,092
--------- ---------
Accumulated postretirement benefit obligation.................................................. 8,057 8,241
Unamortized net amount resulting from changes in plan experience and actuarial assumptions..... 627 664
--------- ---------
Postretirement benefit liability............................................................... $ 8,684 $ 8,905
--------- ---------
--------- ---------
</TABLE>
On September 30, 1995 and 1996 the postretirement benefit liability due
currently was $124 and $155 and the long-term portion was $8,560 and $8,750.
The 1994, 1995 and 1996 postretirement benefit expense includes the
following components:
<TABLE>
<CAPTION>
1994 1995 1996
<S> <C> <C> <C>
Benefits earned during the period......................................................... $ 106 $ 122 $ 136
Interest accrued on benefits earned in prior years........................................ 585 583 595
Net amortization.......................................................................... 2 (20) (17)
--------- --------- ---------
Postretirement benefit expense............................................................ $ 693 $ 685 $ 714
--------- --------- ---------
--------- --------- ---------
</TABLE>
Assumptions used in the accounting for postretirement benefit plans as of
September 30, 1994, 1995 and 1996 were:
<TABLE>
<CAPTION>
1994 1995 1996
<S> <C> <C> <C>
Discount rate.......................................................................... 7.5% 7.5% 7.5%
Rate of increase in compensation levels................................................ 4.5% 4.5% 4.5%
Assumed current year health care cost trend rate
Retirees under 65.................................................................... 14.0% 14.0% 14.0%
Medicare eligible retirees........................................................... 14.0% 14.0% 14.0%
Assumed ultimate trend rate............................................................ 6.5% 6.5% 6.5%
Year ultimate health care cost rate will be achieved................................... 2008 2009 2010
Effect of 1% increase in health care cost trend rates
Accumulated postretirement benefit obligation........................................ $ 620 $ 550 $ 570
Annual aggregate benefit and interest costs.......................................... $ 60 $ 50 $ 50
</TABLE>
NOTE L--DEFERRED COMPENSATION
In connection with a new management stock purchase plan the Company intends
to cancel the long-term incentive plans and all outstanding awards will be
vested. The Company anticipates paying the total outstanding awards in the
amount of approximately $7,100 in the 1997 fiscal year.
F-23
<PAGE>
E&S HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE L--DEFERRED COMPENSATION--(CONTINUED)
The Company's long-term incentive compensation plans grant performance
awards to certain key employees which vest upon the attainment of preestablished
multi-year performance standards. The employees make an election at the
beginning of each plan to be paid fully upon vesting or to defer partial or
total payment up to seven years. The performance awards are payable in cash
based upon a net earnings formula, as defined, as of the September 30 preceding
the payment. Compensation is recorded each year for the effect of changes based
on the net earnings formula, as defined, for the vested awards of prior plans
and the estimated awards that will be vested in future periods. Compensation
expense under these plans was $2,096 in 1994, $2,556 in 1995, and $1,092 in
1996.
NOTE M--1994 MANAGEMENT STOCK OWNERSHIP PLAN
On September 30, 1996 the 1994 Management Stock Ownership's Plan was
cancelled and all shares were purchased by the Company pursuant to the
Recapitalization Agreement (see Note A).
The 1994 Management Stock Ownership Plan authorized 19,000 shares of S&E
Class A common stock to be available to a select number of the most senior
officers of the Company. On November 30, 1994 certain officers of S&E purchased
11,643 shares of Class A common stock for $8,643, which was based on the
estimated fair market value per share as determined by a Company formula based
on earnings, as defined. The officers paid $12 in cash and signed $2,581 full
recourse 7.74% secured promissory notes due November 30, 2001 and $6,050
nonrecourse 8.23% secured promissory notes due November 30, 2004 (collectively,
the "Management Notes"). The Management Notes were collateralized by the pledge
to S&E of the Class A common stock purchased by the officers. Interest income to
the Company was either paid or capitalized on September 30 each year, at the
option of the officer. The Management Notes as well as the related Class A
common stock were pledged to the lenders under the Secured Credit Agreement
until the notes and accrued interest were paid in full.
The Class A common stock was identical to the other common stock except it
was non-voting (prior to an initial public offering or change in control) and
the stock was restricted and non-transferable (except for limited put and call
rights of the program participants in the event of the officer's termination).
The fair market valuation was determined once a year by the executive committee,
using a specified multiple of EBITDA (earnings before interest, income taxes,
depreciation, and amortization) less outstanding debt.
Compensation expense and an accrued liability to be paid upon termination of
the officers were recorded in the amount of any increase in value as determined
by the estimated fair market value formula. As a result of the Recapitalization
(see Note A), the redemption price of the remaining shares covered by this plan
(some of the shares had been redeemed in December 1995 upon the death of one of
the officers) totaled $28,219; the outstanding balance of the Management Notes
and accrued interest totaled $6,889 at September 30, 1996. Compensation expense
related to this plan was $1,130 in 1995 and $20,828 in 1996.
As of September 30, 1995, the minority interest in consolidated subsidiary
resulting from this stock issuance represented the initial purchase price of the
shares plus the officers' share of the earnings of the subsidiary less the total
of the unpaid balances of the promissory notes and unpaid accrued interest.
F-24
<PAGE>
E&S HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE N--PREFERRED STOCK
The Company authorized the issuance of up to 10,000,000 shares of nonvoting
redeemable preferred stock with a liquidation value of $100 a share, consisting
of the 1,500,000 shares of preferred stock that were acquired by Strata, as
described in Note A, plus additional shares of preferred stock which may be used
to pay dividends on the preferred stock ("Preferred Stock"). On October 1, 2008,
the Company will be required to redeem all outstanding shares of Preferred Stock
at a price equal to the liquidation preference thereof plus all accumulated and
unpaid dividends to the date of redemption. The Company at its option may, but
shall not be required at any time after October 1, 2001 to redeem for cash the
Preferred Stock at varying redemption prices. At any time on or prior to October
1, 1999, the Company may redeem for cash, shares of Preferred Stock having a
liquidation preference of up to 40% of the sum of (i) the Preferred Stock
originally issued and (ii) Preferred Stock issued as pay-in-kind dividends with
the proceeds of equity offerings. In addition, the Company may at any time on or
prior to October 1, 1998, and concurrently with or subsequent to the date on
which the Company has redeemed the maximum number of shares of Preferred Stock
permitted to be redeemed pursuant to the preceding sentence, redeem for cash all
and not less than all of the Preferred Stock at a redemption price equal to the
liquidation preference and an applicable premium.
Upon any voluntary or involuntary liquidation, dissolution or winding-up of
the Company, holders of Preferred Stock will be entitled to be paid out of the
assets of the Company available for distribution $100 per share, plus an amount
in cash equal to all accumulated and unpaid dividends thereon. Holders of
Preferred Stock are entitled, when, as and if declared by the Board of
Directors, to receive cumulative dividends at the annual rate of 12 1/2%,
payable quarterly in shares of Preferred Stock. If any dividend payable on any
dividend date is not declared or paid in full in shares of Preferred Stock on
such dividend payment date, the amount of the dividend not paid will be added to
the liquidation value of the Preferred Stock.
NOTE O--LEASE COMMITMENTS
The Company leases certain manufacturing, warehousing and office facilities,
and equipment under various operating lease arrangements expiring periodically
through 2009. The Company has no material capital leases.
The following is a schedule by year of future minimum rental payments
required under operating leases that have initial or remaining noncancelable
lease terms in excess of one year at September 30, 1996:
<TABLE>
<CAPTION>
YEAR ENDING
SEPTEMBER 30, AMOUNT
<S> <C>
1997................................................................................. $ 3,221
1998................................................................................. 1,730
1999................................................................................. 830
2000................................................................................. 618
2001................................................................................. 456
Thereafter........................................................................... 2,190
---------
Total minimum lease payments......................................................... $ 9,045
---------
---------
</TABLE>
Rental expense under these operating leases was $2,989 in 1994, $3,027 in 1995,
and $3,455 in 1996.
F-25
<PAGE>
E&S HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE P--CURRENCY EXCHANGE CONTRACTS
The Company may from time to time enter into forward currency exchange
contracts to protect inventory purchases and affiliated note activities against
changes in future currency exchange rates. A forward currency exchange contract
is an agreement between two parties to buy or sell currency at a set price on a
future date. The market value of the contract will fluctuate with changes in
currency exchange rates. The contract is marked-to-market using the spot rate at
the end of each accounting period and the change in market value is recorded by
the Company as unrealized gain or loss. The Company records realized gains or
losses when the contract is settled, equal to the difference between the value
of the contract at the time it was opened and the value of the related inventory
purchases or affiliated note activities. Risk may arise upon entering into these
contracts from unanticipated movements in the value of a foreign currency
relative to the U.S. dollar. As of September 30, 1995 and 1996, the Company had
approximately $15,086 and $7,185 of currency contracts outstanding, with
unrealized currency losses of approximately $30 in 1995 and unrealized currency
gains of approximately $53 in 1996. These contracts mature within twelve months.
NOTE Q--CONCENTRATION OF CREDIT RISK
The Company sells a broad range of consumer products in North and South
America, Europe, and the Pacific Rim. Concentrations of credit risk with respect
to trade receivables are limited due to the large number of customers comprising
the Company's customer base. Ongoing credit evaluations of customers' financial
condition are performed and, generally no collateral is required. The Company
maintains reserves for potential credit losses and such losses, in the
aggregate, have not exceeded management's expectations. During 1994, 1995, and
1996 the Company's sales to one customer amounted to 11% of net sales. No other
customer exceeded 10% in the years ended September 30, 1994, 1995 and 1996.
NOTE R--CONTINGENCIES
The Company is both a plaintiff and defendant in numerous lawsuits
incidental to its current and former operations, some alleging substantial
claims. In addition, the Company's operations are subject to federal, state, and
local environmental laws and regulations. The Company has entered into
settlement agreements with the U.S. Environmental Protection Agency and other
parties on several sites, and is still negotiating on other sites. The
settlement amounts and estimated liabilities are not significant.
Management is of the opinion that, after taking into account the merits of
defenses, insurance coverage and established reserves, the ultimate resolution
of these matters will not have a material adverse effect in relation to the
Company's consolidated financial statements.
NOTE S--RELATED PARTY TRANSACTIONS
See Note A for a description of the Company's accounting for its investment
in PXC&M.
See Note A for a description of the Recapitalization Agreement, which
resulted in the redemption of a portion of the common stock owned by Abarco.
See Note B for a description of the Company's Tax Sharing Agreement.
F-26
<PAGE>
E&S HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE S--RELATED PARTY TRANSACTIONS--(CONTINUED)
See Note E for a description of the Company's purchase of the Acquired
Trademarks, of certain affiliate payables related to this purchase, and of the
related royalty payments for their use prior to the acquisition.
See Note M for a description of the Company's 1994 Management Stock
Ownership Plan. Interest income recognized on the Management Notes totaled $581
in 1995 and $590 in 1996. This plan was cancelled on September 30, 1996.
The Company received $424, $438, and $439 of rental income from an affiliate
of Abarco in fiscal 1994, 1995, and 1996, for the lease of office space in the
building owned by Realco. This income will not continue due to the September 30,
1996 distribution of Realco to Abarco as part of the Recapitalization (see Note
A).
The Company and Finser Corporation, an affiliate of the Company, operated
under a management agreement providing for the performance by Finser Corporation
of certain management services for the Company. The Company paid Finser
Corporation $820 in fiscal 1994, 1995 and 1996, pursuant to such management
agreement. The management agreement was cancelled on September 30, 1996.
NOTE T--SEGMENT REPORTING
The following schedule presents information about the Company's continuing
operations in different industry segments and geographic locations:
<TABLE>
<CAPTION>
1994 1995 1996
<S> <C> <C> <C>
INDUSTRY SEGMENT
Net Sales
Spalding................................................................... $ 411,574 $ 424,118 $ 451,915
Evenflo.................................................................... 171,533 210,039 237,165
---------- ---------- ----------
Total net sales........................................................ $ 583,107 $ 634,157 $ 689,080
---------- ---------- ----------
---------- ---------- ----------
Earnings (Loss) Before Income Taxes and Minority Interest
Spalding................................................................... $ 48,697 $ 58,595 $ 50,274
Evenflo.................................................................... 9,506 11,652 17,023
General Corporate expenses................................................. (11,169) (9,334) (41,959)
Interest expense, net...................................................... (17,073) (38,108) (46,905)
Litigation settlement expense.............................................. 0 (2,400) 0
---------- ---------- ----------
Earnings (loss) before income taxes and minority interest.............. $ 29,961 $ 20,405 $ (21,567)
---------- ---------- ----------
---------- ---------- ----------
Identifiable Assets
Spalding................................................................... $ 297,209 $ 325,777 $ 404,800
Evenflo.................................................................... 123,211 135,658 145,965
General Corporate.......................................................... 87,648 74,210 139,141
---------- ---------- ----------
Total assets........................................................... $ 508,068 $ 535,645 $ 689,906
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-27
<PAGE>
E&S HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE T--SEGMENT REPORTING--(CONTINUED)
<TABLE>
<CAPTION>
1994 1995 1996
Capital Expenditures
<S> <C> <C> <C>
Spalding................................................................... $ 8,988 $ 8,850 $ 10,169
Evenflo.................................................................... 9,668 6,531 9,377
General Corporate.......................................................... 453 0 0
---------- ---------- ----------
Total capital expenditures............................................. $ 19,109 $ 15,381 $ 19,546
---------- ---------- ----------
---------- ---------- ----------
Depreciation and Amortization
Spalding................................................................... $ 14,270 $ 12,362 $ 13,418
Evenflo.................................................................... 5,568 5,518 6,502
General Corporate.......................................................... 592 407 407
---------- ---------- ----------
Total depreciation and amortization.................................... $ 20,430 $ 18,287 $ 20,327
---------- ---------- ----------
---------- ---------- ----------
GEOGRAPHIC LOCATION
Net Sales
United States.............................................................. $ 427,651 $ 465,515 $ 530,882
Other nations.............................................................. 155,456 168,642 158,198
---------- ---------- ----------
Total net sales........................................................ $ 583,107 $ 634,157 $ 689,080
---------- ---------- ----------
---------- ---------- ----------
Earnings (Loss) Before Income Taxes and Minority Interest
United States.............................................................. $ 57,923 $ 64,683 $ 68,622
Other nations.............................................................. 280 5,564 (1,325)
General Corporate expenses................................................. (11,169) (9,334) (41,959)
Interest expense, net...................................................... (17,073) (38,108) (46,905)
Litigation settlement expense.............................................. 0 (2,400) 0
---------- ---------- ----------
Earnings (loss) before income taxes and minority interest.............. $ 29,961 $ 20,405 $ (21,567)
---------- ---------- ----------
---------- ---------- ----------
Identifiable Assets
United States.............................................................. $ 341,333 $ 382,699 $ 473,801
Other nations.............................................................. 79,087 78,736 76,964
General Corporate.......................................................... 87,648 74,210 139,141
---------- ---------- ----------
Total assets........................................................... $ 508,068 $ 535,645 $ 689,906
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-28
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS. 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 A SOLICITATION OF AN OFFER TO BUY ANY SECURITY
OTHER THAN THOSE TO WHICH IT RELATES IN ANY JURISDICTION WHERE 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 AN IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH
IN THE PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Available Information........................... 2
Prospectus Summary.............................. 3
Risk Factors.................................... 17
The Recapitalization and the Financings......... 26
Use of Proceeds................................. 27
Capitalization.................................. 28
Pro Forma Condensed Consolidated Financial
Statement..................................... 29
Selected Consolidated Historical Financial
Data.......................................... 33
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 35
Business........................................ 43
Management...................................... 62
Ownership of Common Stock....................... 67
Related Party Transactions...................... 68
Description of Credit Facilities................ 70
The Exchange Offer.............................. 73
Description of the Exchange Notes............... 84
Exchange Offer; Registration Rights............. 119
Description of Capital Stock.................... 122
Description of the Preferred Stock.............. 123
Certain U.S. Federal Income Tax Consequences.... 133
Plan of Distribution............................ 137
Legal Matters................................... 138
Experts......................................... 138
Index........................................... I-1
Index to Financial Statements................... F-1
</TABLE>
------------------------
UNTIL , 1997 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THE DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
$200,000,000
[LOGO]
[LOGO]
E&S HOLDINGS
CORPORATION
------------------------
PROSPECTUS
------------------------
OFFER TO EXCHANGE $200,000,000 OF ITS
10 3/8% SERIES B SENIOR SUBORDINATED NOTES
DUE 2006, WHICH HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT, FOR $200,000,000
OF ITS OUTSTANDING 10 3/8% SENIOR
SUBORDINATED NOTES DUE 2006.
, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
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 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 proceedings, 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 settlement 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
charter, by-laws, disinterested director vote, stockholder vote, agreement or
otherwise. Article IV of the Registrant's By-laws requires indemnification to
the fullest extent permitted by Delaware law. The Registrant has also obtained
officers' and directors' liability insurance which insures against liabilities
that officers and directors of the Registrant, in such capacities, may incur.
Such 102(b)(7) of the DGCL permits a corporation to provide in its
certificate of incorporation that a director of the corporation shall not be
personally liable to the corporation or its stockholders for monetary damages
for breach of fiduciary duties as a director, except for liability (i) for any
transaction from which the director derives an improper personal benefit, (ii)
for acts or omissions not in good faith or that involve intentional misconduct
or a knowing violation of law, (iii) for improper payment of dividends or
redemptions of shares, or (iv) for any breach of a director's duty of loyalty to
the company or its stockholders. Article Seven of the Registrant's Restated
Certificate of Incorporation includes such a provision.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
***2.1 Recapitalization and Stock Purchase Agreement, dated August 15, 1996, by and among Strata Holdings,
L.P., E&S Holdings Corporation and Abarco N.V.
***2.2 Amendment No. 1 to the Recapitalization and Stock Purchase Agreement, dated September 30, 1996, by and
among Strata Holdings L.P., E&S Holdings Corporation and Abarco N.V.
***3.1 Restated Certificate of Incorporation of E&S Holdings Corporation
***3.2 Bylaws of E&S Holdings Corporation
***4.1 Indenture between E&S Holdings Corporation and Marine Midland Bank, as Trustee
***4.2 Form of 10 3/8 Senior Subordinated Notes due 2006
**4.3 Form of 10 3/8 Series B Senior Subordinated Notes due 2006
***4.4 Registration Rights Agreement dated September 30, 1996 among E&S Holdings Corporation, Merrill Lynch &
Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, NationsBanc Capital Markets, Inc., BA
Securities, Inc. and BT Securities Corporation.
**5 Opinion of Simpson Thacher & Bartlett
*8 Tax opinion of Simpson Thacher & Bartlett
</TABLE>
II-1
<PAGE>
<TABLE>
<C> <S>
***10.1 $650,000,000 Credit Agreement dated as of September 30, 1996, among E&S Holdings Corporation, as the
Borrower, Bank of America National Trust and Savings Association, as Swing Line Lender, as Fronting
Lender and as Administrative Agent, Merrill Lynch Capital Corporation, as Documentation Agent,
Nationsbank, N.A. (South), as Syndication Agent, and lenders.
***10.2 Guaranty dated as of September 30, 1996 made by Spalding & Evenflo Companies, Inc., Evenflo Company,
Inc., Etonic Worldwide Corporation, S&E Finance Co, Inc., Lisco, Inc., Lisco Sports, Inc., Lisco
Feeding, Inc., Lisco Furniture, Inc., and EWW Lisco, Inc. in favor of Bank of America National Trust
and Savings Association.
***10.3 Pledge Agreement dated as of September 30, 1996 made by E&S Holdings Corporation in favor of Bank of
America National Trust and Savings Association.
***10.4 Registration Rights Agreement dated as of September 30, 1996 by and among E&S Holdings Corproation,
Strata Associates, L.P., and KKR Partners II, L.P.
**12. Computation of Ratio of Earnings to Fixed Charges
***21 List of Subsidiaries
23.1 Consent of Simpson Thacher & Bartlett (included as part of its opinion filed as Exhibit 5 hereto)
23.2 Consent of Simpson Thacher & Bartlett (included as part of its opinion filed as Exhibit 8 hereto)
*23.3 Consent of Deloitte & Touche LLP, independent certified public accountants
24 Powers of Attorney (included on page II-4)
***25 Form T-1 Statement of Eligibility and Qualification under the Trust Indenture Act of 1939 of Marine
Midland Bank, as Trustee (separately bound)
**27 Financial Data Schedule
**99.1 Form of Letter of Transmittal
**99.2 Form of Notice of Guaranteed Delivery
**99.3 Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees
</TABLE>
- ------------------------
* Filed herewith.
** To be filed by amendment.
*** Filed previously.
(b) FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Report on Schedule............................................... S-1
Schedule II--Valuation and Qualifying Accounts--Three years ended September 30, 1996... S-2
</TABLE>
Schedules other than the above have been omitted because they are either not
applicable or the required information has been disclosed in the financial
statements or notes thereto.
ITEM 22. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the DGCL, the Certificate of
Incorporation and By-laws, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by
II-2
<PAGE>
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The Registrant hereby undertakes:
(1) that prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items
of the applicable form.
(2) that every prospectus: (i) that is filed pursuant to paragraph (1)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to
the registration statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial BONA FIDE offering thereof.
(3) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table
in the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(4) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial BONA FIDE offering thereof.
(5) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(6) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 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.
(7) 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 this Amendment No. 2 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Tampa, State of Florida, on the 11th day of December 1996.
E & S Holdings Corporation
By *
------------------------------------
CHAIRMAN OF THE BOARD OF DIRECTORS,
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the Registration Statement has been signed on the 11th day of December
1996 by the following persons in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ---------------------------------------------- ----------------------------------------------
<C> <S>
* Chairman of the Board of Directors,
- ------------------------------------ President and Chief Executive Officer
Paul L. Whiting (Principal Executive Officer)
/s/ W. MICHAEL KIPPHUT Vice President and Treasurer (Principal
- ------------------------------------ Financial Officer)
W. Michael Kipphut
* Vice President and Controller (Principal
- ------------------------------------ Accounting Officer)
Stephen J. Dryer
* Vice President, Secretary and General Counsel
- ------------------------------------
Robert K. Adikes
* Director
- ------------------------------------
Henry R. Kravis
* Director
- ------------------------------------
George R. Roberts
* Director
- ------------------------------------
Michael T. Tokarz
* Director
- ------------------------------------
Marc S. Lipschultz
* Director
- ------------------------------------
Gustavo A. Cisneros
*By: /s/ W. MICHAEL KIPPHUT
..........................................
W. Michael Kipphut, Attorney-in-fact
</TABLE>
II-4
<PAGE>
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
The Board of Directors
E&S Holdings Corporation:
Our audits were conducted for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in Item
21(b) is presented for the purpose of additional analysis and is not a required
part of the basic consolidated financial statements. This schedule is the
responsibility of the Company's management. Such schedule has been subjected to
the auditing procedures applied in our audits of the basic consolidated
financial statements and, in our opinion, is fairly stated in all material
respects when considered in relation to the basic consolidated financial
statements taken as a whole.
DELOITTE & TOUCHE LLP
Tampa, Florida
October 28, 1996
S-1
<PAGE>
SCHEDULE II
E&S HOLDINGS CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT CHARGED TO CHARGED BALANCE
BEGINNING COSTS AND TO OTHER AT END
DESCRIPTION OF YEAR EXPENSES ACCOUNTS(A) DEDUCTIONS(B) OF YEAR
- -------------------------------------------------- ----------- ----------- ----------- ------------- ---------
1994--
Allowance for doubtful accounts............... $ 3,153 $ 2,616 $ 358 $ 3,088 $ 3,039
1995--
Allowance for doubtful accounts............... 3,039 2,921 408 3,121 3,247
1996--
Allowance for doubtful accounts............... 3,247 6,527 1,158 6,559 4,373
</TABLE>
Notes:
(A) Recoveries on accounts previously charged off. The amount for 1996 includes
$824 for the beginning allowance from the Etonic acquisition.
(B) Uncollectible accounts written off.
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT PAGE
- --------- ----------------------------------------------------------------------------------------------- ---------
<C> <S> <C>
***2.1 Recapitalization and Stock Purchase Agreement, dated August 15, 1996, by and among Strata
Holdings, L.P., E&S Holdings Corporation and Abarco N.V.
***2.2 Amendment No. 1 to the Recapitalization and Stock Purchase Agreement, dated September 30, 1996,
by and among Strata Holdings L.P., E&S Holdings Corporation and Abarco N.V.
***3.1 Restated Certificate of Incorporation of E&S Holdings Corporation
***3.2 Bylaws of E&S Holdings Corporation
***4.1 Indenture between E&S Holdings Corporation and Marine Midland Bank, as Trustee
***4.2 Form of 10 3/8 Senior Subordinated Notes due 2006
**4.3 Form of 10 3/8 Series B Senior Subordinated Notes due 2006
***4.4 Registration Rights Agreement dated September 30, 1996 among E&S Holdings Corporation, Merrill
Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, NationsBanc Capital Markets,
Inc., BA Securities, Inc. and BT Securities Corporation.
**5 Opinion of Simpson Thacher & Bartlett
*8 Tax opinion of Simpson Thacher & Bartlett
***10.1 $650,000,000 Credit Agreement dated as of September 30, 1996, among E&S Holdings Corporation,
as the Borrower, Bank of America National Trust and Savings Association, as Swing Line Lender,
as Fronting Lender and as Administrative Agent, Merrill Lynch Capital Corporation, as
Documentation Agent, Nationsbank, N.A. (South), as Syndication Agent, and lenders.
***10.2 Guaranty dated as of September 30, 1996 made by Spalding & Evenflo Companies, Inc., Evenflo
Company, Inc., Etonic Worldwide Corporation, S&E Finance Co, Inc., Lisco, Inc., Lisco Sports,
Inc., Lisco Feeding, Inc., Lisco Furniture, Inc., and EWW Lisco, Inc. in favor of Bank of
America National Trust and Savings Association.
***10.3 Pledge Agreement dated as of September 30, 1996 made by E&S Holdings Corporation in favor of
Bank of America National Trust and Savings Association.
***10.4 Registration Rights Agreement dated as of September 30, 1996 by and among E&S Holdings
Corproation, Strata Associates, L.P., and KKR Partners II, L.P.
**12. Computation of Ratio of Earnings to Fixed Charges
***21 List of Subsidiaries
23.1 Consent of Simpson Thacher & Bartlett (included as part of its opinion filed as Exhibit 5
hereto)
23.2 Consent of Simpson Thacher & Bartlett (included as part of its opinion filed as Exhibit 8
hereto)
*23.3 Consent of Deloitte & Touche LLP, independent certified public accountants
24 Powers of Attorney (included on page II-4)
***25 Form T-1 Statement of Eligibility and Qualification under the Trust Indenture Act of 1939 of
Marine Midland Bank, as Trustee (separately bound)
**27 Financial Data Schedule
**99.1 Form of Letter of Transmittal
**99.2 Form of Notice of Guaranteed Delivery
**99.3 Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees
</TABLE>
- ------------------------
* Filed herewith.
** To be filed by amendment.
*** Filed previously.
<PAGE>
EXHIBIT 8
December 10, 1996
E & S Holdings Corporation
601 South Harbour Island Boulevard
Tampa, Florida 33602-3141
Ladies and Gentlemen:
We have acted as special counsel for E & S Holdings Corporation, a
Delaware corporation (the "Company"), in connection with the Registration
Statement on Form S-4 (the "Registration Statement") filed by the Company
with the Securities and Exchange Commission (the "Commission") under the
Securities Act of 1933, as amended (the "Securities Act"), relating to the
issuance by the Company of $200,000,000 aggregate principal amount of its 10
3/8% Senior Subordinated Notes due 2006 (the "New Notes"), which are to be
offered by the Company in exchange for $200,000,000 aggregate principal
amount of its outstanding 10 3/8% Senior Subordinated Notes due 2006 (the
"Old Notes").
We have examined the Registration Statement and the Indenture dated
as of September 30, 1996 (the "Indenture") between the Company and Marine
Midland Bank, as Trustee (the "Trustee"), which has been filed with the
Commission as an Exhibit to the Registration Statement. In addition, we have
examined, and have relied as to matters of fact upon, the originals or
copies, certified or otherwise identified to our satisfaction, of
<PAGE>
E&S Holdings Corporation -2- December 10, 1996
such corporate records, agreements, documents and other instruments and such
certificates or comparable documents of public officials and of officers and
representatives of the Company, and have made such other and further
investigations, as we have deemed relevant and necessary as a basis for the
opinion hereinafter set forth.
In such examination, we have assumed that the Indenture has been duly
authorized, executed and delivered by the Trustee. In addition, we have
assumed the genuineness of all signatures, the legal capacity of natural
persons, the authenticity of all documents submitted to us as originals and
the conformity to original documents of all documents submitted to us as
certified or photostatic copies, and the authenticity of the originals of
such latter documents.
Based upon the foregoing, and subject to the qualifications and
limitations stated herein, we hereby advise you that the statements made in
the Registration Statement under the caption "Certain U.S. Federal Income Tax
Consequences -- Tax Consequences of the Exchange Offer," insofar as they
purport to constitute summaries of matters of United States federal income
tax law and regulations or legal conclusions with respect thereto, constitute
accurate summaries of the matters described therein in all material respects.
We are members of the Bar of the State of New York and we do not
express any opinion herein concerning any law other than the law of the State
of New York and the federal law of the United States. This opinion is
rendered to you solely in connection
<PAGE>
E&S Holdings Corporation -3- December 10, 1996
with the above-described transaction and may not be relied upon for any other
purpose without our prior written consent.
We hereby consent to the use of this opinion as an Exhibit to the
Registration Statement and to the reference to our firm under the caption
"Legal Matters" in the Prospectus included therein.
Very truly yours,
SIMPSON THACHER & BARTLETT
<PAGE>
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
E&S Holdings Corporation:
We consent to the use in this Amendment No. 2 to the Registration Statement (No.
333-14569) of E&S Holdings Corporation and subsidiaries (the "Company") on Form
S-4 of our report dated October 28, 1996 appearing in the Prospectus, which is
part of this Amendment No. 2 to the Registration Statement, and of our report
dated October 28, 1996 relating to the consolidated financial statement schedule
appearing elsewhere in this Amendment No. 2 to the Registration Statement, and
to the reference to us under the heading "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
Tampa, Florida
December 11, 1996
