As filed with the Securities and Exchange Commission on August 19, 1997
Registration No. 333-26943
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Amendment No. 3
To
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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ANCHOR ADVANCED PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
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Delaware 3089 04-3084238
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER)
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ANCHOR HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
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Delaware 3089 62-1427775
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER)
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1111 Northshore Drive, Suite N-600
Knoxville, TN 37919-4048
(423) 450-5300
(Address, including zip code, and telephone number, including
area code of Registrant's principal executive offices)
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FRANCIS H. OLMSTEAD, JR.,
Chairman, President and Chief Executive Officer
Anchor Advanced Products, Inc.
1111 Northshore Drive, Suite N-600
Knoxville, TN 37919-4048
(423) 450-5300
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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Copies of all communications to:
Francis J. Feeney, Jr., Esq.
Hutchins, Wheeler & Dittmar
A Professional Corporation
101 Federal Street
Boston, Massachusetts 02110
(617) 951-6600
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Approximate date of commencement of the proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.
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. [ ]
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The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until it shall file a further
amendment which specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a) of the Securities
Act of 1933 or until this Registration Statement shall become effective on such
date as the Commission, acting pursuant to said Section 8(a), may determine.
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PROSPECTUS
[Anchor Logo]
$100,000,000
Anchor Advanced Products, Inc.
Offer to Exchange $1,000 in principal amount of
11-3/4% Series B Senior Notes due 2004
for each $1,000 in principal amount of outstanding
11-3/4% Senior Notes due 2004
Anchor Advanced Products, Inc. (the "Issuer") hereby offers to exchange
(the "Exchange Offer") up to $100,000,000 in aggregate principal amount of its
11-3/4% Series B Senior Notes due 2004 (the "Exchange Notes") for $100,000,000
in aggregate principal amount of its outstanding 11-3/4% Senior Notes due 2004
(the "Initial Notes"; and together with the Exchange Notes, the "Notes").
The terms of the Exchange Notes are identical in all respects (including
principal amount, interest rate and maturity) to the terms of the Initial Notes
for which they may be exchanged pursuant to this offer, except that the
Exchange Notes are freely transferable by holders thereof (except as provided
in the next paragraph below) and are issued without any covenant upon the
Issuer regarding registration. The Exchange Notes will be issued under the same
indenture governing the Initial Notes. For a complete description of the terms
of the Exchange Notes, see "Description of the Exchange Notes." There will be
no cash proceeds to the Issuer from this offer. The Initial Notes are, and the
Exchange Notes will be, unconditionally guaranteed (the "Note Guarantee") on a
senior basis by Anchor Holdings, Inc. ("Holdings").
The Initial Notes were originally issued and sold on April 2, 1997 (the
"Issue Date"), in a transaction (the "Initial Offering") not registered under
the Securities Act of 1933, as amended (the "Securities Act"), in reliance upon
the exemption provided in Section 4(2) of the Securities Act. Accordingly, the
Initial Notes may not be reoffered, resold or otherwise pledged, hypothecated
or transferred in the United States unless so registered or unless an
applicable exemption from the registration requirements of the Securities Act
is available. Based upon the interpretations by the Staff of the Securities and
Exchange Commission (the "Commission") issued to third parties, the Issuer
believes that the Exchange Notes issued pursuant to the Exchange Offer in
exchange for Initial Notes may be offered for resale, resold or otherwise
transferred by holders thereof (other than any holder which 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. 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 (as defined
herein) states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of Exchange Notes received in exchange for Initial Notes where
such Exchange Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities. The Issuer has agreed
that, for a period of one year after the date on which the Registration
Statement (as defined herein) is declared effective by the Commission, it will
make this Prospectus available to any broker-dealer for use in connection with
any such resale. See "Plan of Distribution."
The Initial Notes and the Exchange Notes constitute issues of securities
with no established trading market. Any Initial Notes not tendered and accepted
in the Exchange Offer will remain outstanding. To the extent that Initial Notes
are tendered and accepted in the Exchange Offer, a holder's ability to sell
untendered and tendered but unaccepted Initial Notes could be adversely
affected. Following consummation of the Exchange Offer, the holders of the
Initial Notes will continue to be subject to the existing restrictions on
transfer thereof and the Issuer will have no further obligation to such holders
to provide for the registration under the Securities Act of the Initial Notes
held by them. No assurance can be given as to the liquidity of the trading
market for either the Initial Notes or the Exchange Notes.
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Initial Notes being tendered for exchange. The Exchange Offer will
expire at 5:00 p.m., New York City time, on September 18, 1997, unless extended
(the "Expiration Date"). The date of acceptance for exchange for the Initial
Notes (the "Exchange Date") will be the first business day following the
Expiration Date. Initial Notes tendered pursuant to the Exchange Offer may be
withdrawn at any time prior to the Expiration Date; otherwise such tenders are
irrevocable.
Interest on the Exchange Notes shall accrue from April 2, 1997 or from the
last April 1 or October 1 (each an "Interest Payment Date") on which interest
was paid on the Initial Notes so surrendered.
The current indebtedness of the Issuer as of July 11, 1997 was
$100,525,080. The ratio of earnings to fixed charges for the twenty-six weeks
ended June 28, 1997 is 1.44.
See "Risk Factors" beginning on page 11 for a description of certain
factors that should be considered by participants in the Exchange Offer.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is August 20, 1997
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AVAILABLE INFORMATION
The Issuer has filed with the Commission a Registration Statement on Form
S-4 (the "Registration Statement," which term shall include all amendments,
exhibits, annexes and schedules thereto) pursuant to the Securities Act, and
the rules and regulations promulgated thereunder, covering the Exchange Notes
being offered hereby. This Prospectus does not contain all the information set
forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission and to which
reference is hereby made. Statements made in this Prospectus as to the contents
of any contract, agreement or other document referred to are not necessarily
complete. With respect to each such contract, agreement or other document filed
as an exhibit to the Registration Statement, reference is made to the exhibit
for a more complete description of the matter involved, and each such statement
shall be deemed qualified in its entirety by such reference.
For further information with respect to the Issuer and the Notes,
reference is made to such Registration Statement. A copy of the Registration
Statement can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W. Washington, D.C. 20549, and at the Regional Offices of the Commission at 7
World Trade Center, 13th Floor, New York, New York 10048 and Northwestern
Atrium Center, 500 West Madison Street Suite 1400, Chicago, Illinois
60661-2511. Copies of such materials can be obtained from the public reference
facilities of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549
at prescribed rates. The Commission maintains a Web site that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission. The address of such site is
http://www.sec.gov.
The Issuer intends, and is required by the terms of the Indenture dated as
of April 2, 1997 (the "Indenture") between the Issuer, Holdings' and State
Street Bank and Trust Company ("State Street Bank") as trustee, under which the
Notes are issued, to furnish the holders of the Notes with annual reports
containing financial statements audited by its independent certified public
accountants and with quarterly reports containing unaudited financial
statements for each of the first three quarters of each fiscal year.
Upon completion of the Exchange Offer, the Issuer will become subject to
the informational requirements of the Securities Exchange Act of 1934, and in
accordance therewith, will file reports and other information with the
Securities and Exchange Commission.
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NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE EXCHANGE OFFER COVERED BY THIS PROSPECTUS. IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE ISSUER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE EXCHANGE NOTES 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 ANY IMPLICATIONS THAT THERE
HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE
AFFAIRS OF THE ISSUER SINCE THE DATE HEREOF.
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Until November 18, 1997, 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.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Unless the context otherwise requires, references
in this Prospectus to the "Issuer" mean Anchor Advanced Products, Inc., a
Delaware corporation, references to "Holdings" mean Anchor Holdings, Inc., a
Delaware corporation, and references to "Anchor" or the"Company" mean the
consolidated business operations of Holdings and its subsidiaries (including
those of Mid-State Plastics, Inc. ("Mid-State") prior to its acquisition by
Anchor). The Issuer is a wholly-owned subsidiary of Holdings.
THE COMPANY
Anchor is a leading designer, manufacturer and packager of precision
molded plastic products for a wide range of dental, cosmetic, medical, computer
and consumer applications. Based upon its knowledge of and experience in the
industry, the Company believes it is one of the world's largest manufacturers
of toothbrushes and a leading U.S. manufacturer of cosmetics packaging. For the
year ended December 31, 1996, the Company had net sales of $156.9 million,
EBITDA of $23.6 million and net income of $3.6 million, making it one of the
largest independent plastic injection molders in North America.
Anchor began operations in 1941 as a manufacturer of cosmetic brushes for
Maybelline and, in 1958, began producing Pepsodent[RegTM] toothbrushes for
Lever Brothers Company, Inc. The Company was acquired in 1990 by affiliates of
the Thomas H. Lee Company and management. Since 1990, management has developed
and implemented a variety of strategic initiatives in order to enhance the
Company's long-term growth, profitability and competitiveness, including:
[bullet] Capitalizing on its manufacturing and technical expertise and
reputation for quality and service to grow its dental business, including
introducing the Crest[RegTM] line of toothbrushes for Procter & Gamble in
1992.
[bullet] Consolidating its cosmetics operations in an expanded maquiladora
manufacturing facility in Matamoros, Mexico, resulting in significant
operating efficiencies and cost savings.
[bullet] Diversifying its markets and customer base through product line
expansion and the 1994 acquisition of Mid-State.
As a result of these strategic initiatives, from 1991 to 1996, Anchor
increased net sales and EBITDA at compounded annual growth rates of 15.9% and
13.2%, respectively.
For the year ended December 31, 1996, approximately 90% of the Company's
net sales were generated in five markets: dental, cosmetics, medical device,
computer component and point of purchase ("POP") displays. In the dental market
(approximately 36% of net sales in 1996), the Company designs, manufactures and
packages toothbrushes for Colgate-Palmolive, Procter & Gamble,
Chesebrough-Ponds, and SmithKline Beecham, under such well-known brand names as
Crest[RegTM], Colgate[RegTM] and Pepsodent. In 1996, Anchor manufactured over
184 million toothbrushes and, management believes, had the leading domestic
toothbrush production market share, estimated at approximately 27%. In the
cosmetics market (approximately 26% of net sales in 1996), Anchor manufactures
a comprehensive line of stock and custom mascara, lipstick and nail applicators
for L'Oreal, Maybelline, Mary Kay and Estee Lauder, under such well-known brand
names as Great Lash[RegTM] and Clinique. Based on its knowledge of and
experience in the industry, management believes that the Company has a leading
market share in several of its cosmetics lines. In the medical device market
(approximately 12% of net sales in 1996), Anchor produces intravenous equipment
and blood infusion devices for Abbott and Baxter, among others. In the computer
component market (approximately 8% of net sales in 1996), Anchor produces
bezels, battery pack cases and expansion bases for Compaq and IBM. In 1995,
leveraging its strengths in the cosmetics market, the Company began
manufacturing POP displays for Maybelline, which market accounted for
approximately 7% of net sales in 1996. The remaining 11% of net sales in 1996
was generated from the manufacture of a variety of other molded plastic
components including closures for shampoo bottles, insulating battery cases,
interior and exterior parts for power tools, and flat panel lights.
Competitive Strengths
The Company's customers are primarily large, branded consumer product
companies. Outsourcing allows Anchor's customers to optimize internal resources
and focus on their core competencies. Specifically, management believes that
customers prefer Anchor because of the following competitive strengths:
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Quality Focus. Based on its knowledge of and experience in the industry,
the Company believes it is a leader in plastic injection molding and service
quality. The Company has received numerous quality service and preferred
supplier awards from its customers, including Colgate-Palmolive, Procter &
Gamble, 3M, Abbott and IBM. Furthermore, the Company has manufactured over one
billion toothbrushes for Colgate-Palmolive and Procter & Gamble to date without
a single shipment return for manufacturing or quality defects. A major reason
for the Company's achievements is the Quality Improvement System ("QIS")
initiative instituted by management since the acquisition of the Company in
1990.
Design Capabilities. Anchor has dedicated design professionals who work
with customers to meet changing market needs. For example, the Company worked
closely with Procter & Gamble to produce the Crest Complete[RegTM] line of
toothbrushes in 1992, which uses a newly developed proprietary fusion
technology as an alternative to the conventional staple-set technology.
Broad Manufacturing Resources. With its flexible, high capacity
production facilities, Anchor is able to meet customer demands quickly and
efficiently, producing customized products with little lead time. Anchor
provides its customers with a broad range of manufacturing services, including
injection molding, bristling, decoration and packaging. Anchor's broad customer
base and high production volumes enable it to achieve economies of scale and to
maintain in inventory a wide selection of resins and other raw materials.
Capital Investment Programs. From 1991 through 1996, Anchor has spent
approximately $40.4 million on capital investment, in large part to accommodate
new product lines by building facilities dedicated to specific products or
customers. Such programs include an expanded facility in Morristown, Tennessee
for POP display production, a facility in Round Rock, Texas for the production
of computer components and the consolidation of cosmetics production facilities
in Matamoros, Mexico.
Superior Customer Service. Anchor strives to provide a high level of
customer service which management believes exceeds the service provided by
competing injection molders or its customers' in-house manufacturing
operations. The Company uses its manufacturing resources, such as computerized
ordering systems, just-in-time production and flexible manufacturing processes,
to provide its customers with a rapid turnaround time on orders and seeks to be
responsive to any changes submitted by its customers.
As a result of these competitive strengths, Anchor enjoys a large customer
base of national consumer product companies. Each of the Company's five largest
customers in 1996 (Colgate-Palmolive, Maybelline, Procter & Gamble, Abbott and
IBM) have been customers of the Company for an average of approximately 25
years. The Company's emphasis on customer partnerships and its long standing
relationships with its largest customers serve to create barriers to entry in
its served markets.
Business Strategy
Anchor's overall business strategy is to increase revenues and
profitability by pursuing the following specific strategies:
Maintain Leadership in Dental and Cosmetics Markets. The Company has
established leading market positions in the dental and cosmetics markets as a
result of its low cost manufacturing capabilities, high quality design and
excellent customer service. The Company seeks to maintain this position by
continuing to lower costs and improve the quality of its products while working
with its customers to develop innovative new products for its markets.
Develop New Products and Customers. The Company seeks to grow by
producing custom plastic products for new customers in existing markets and by
entering new markets. Examples of new markets entered by the Company in the
last few years are POP displays, disposable surgical equipment and computer
components. Where appropriate, the Company may build new facilities which
enhance its ability to provide new products such as the Company's new facility
in Round Rock, Texas. As a result of these efforts, in the future, the Company
intends to expand its sales in the medical device, computer component and POP
display markets.
Lower Costs. The Company believes that it is a low cost producer for many
of its products and that it will continue to improve productivity through its
on-going program of upgrading equipment and facilities and investing in
automation and robotics. Through its highly-trained work force, its streamlined
Mexican production facility, and
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its QIS program, management plans to improve asset utilization, increase
manufacturing productivity and reduce overhead.
Acquisitions. The Company intends to seek strategic acquisition
opportunities as the highly fragmented plastics industry continues its recent
trend toward consolidation. The Company intends to identify acquisition
opportunities similar to its 1994 acquisition of Mid-State, which offered the
Company an opportunity to broaden its customer base and expand its
manufacturing into higher growth markets. Potential markets for acquisitions
include the medical device, computer component and telecommunications equipment
markets.
Expansion into International Markets. As a result of the international
expansion of the Company's customers, Anchor is seeking to expand its
international capabilities, particularly by adding manufacturing capabilities
in China and Europe.
Anchor's executive offices are located at 1111 Northshore Drive, Suite
N-600, Knoxville, Tennessee 37919, telephone number (423) 450-5300.
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THE EXCHANGE OFFER
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The Exchange Offer ........................... The Issuer is offering to exchange (the "Exchange Offer") up
to $100.0 million aggregate principal amount of 11-3/4%
Series B Senior Notes due 2004 (the "Exchange Notes") for
$100.0 million aggregate principal amount of its outstanding
11-3/4% Senior Notes due 2004 (the "Initial Notes"; and
together with the Exchange Notes, the "Notes"). The terms
of the Exchange Notes are substantially identical in all
respects (including principal amount, interest rate and
maturity) to the terms of the Initial Notes for which they may
be exchanged pursuant to the Exchange Offer, except that the
Exchange Notes are freely transferable by holders thereof
(except as provided herein--see "The Exchange Offer--
Terms of the Exchange" and "--Terms and Conditions of the
Letter of Transmittal") and are not subject to any covenant
regarding registration under the Securities Act. The Initial
Notes are, and the Exchange Notes will be, unconditionally
guaranteed (the "Note Guarantee") on a senior basis by
Holdings.
Interest Payments ........................... Interest on the Exchange Notes shall accrue from April 2,
1997 or from the last Interest Payment Date on which interest
was paid on the Initial Notes so surrendered.
Minimum Condition ........................... The Exchange Offer is not conditioned upon any minimum
aggregate principal amount of the Initial Notes being
tendered for exchange.
Expiration Date .............................. The Exchange Offer will expire at 5:00 p.m., New York City
time, on September 18, 1997, unless extended.
Exchange Date .............................. The date of acceptance for exchange of the Initial Notes will
be the first business day following the Expiration Date.
Condition of the Exchange Offer ............ The obligation of the Issuer to consummate the Exchange
Offer is subject to certain conditions. See "The Exchange
Offer--Conditions to the Exchange Offer." The Issuer
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.
Withdrawal Rights ........................... Tenders may be withdrawn at any time prior to the Exchange
Date. Otherwise, all tenders are irrevocable. Any Initial
Notes not accepted for any reason will be returned without
expense to the tendering holders thereof as promptly as
practicable after the expiration or termination of the
Exchange Offer.
Procedures for Tendering Initial Notes ...... See "The Exchange Offer--How to Tender."
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Federal Income Tax The exchange of Initial Notes for Exchange Notes should be
Consequences ........................... treated as a "non-event" for Federal income tax purposes.
See"Income Tax Considerations."
Effects on Holders of Initial Notes ...... As a result of the making of, and upon acceptance for
exchange of all validly tendered Initial Notes pursuant to the
terms of, this Exchange Offer, the Issuer will have fulfilled
a covenant contained in the terms of the Initial Notes and the
Registration Rights Agreement (the "Registration Rights
Agreement") dated April 2, 1997 between the Issuer,
Holdings and Donaldson, Lufkin & Jenrette Securities
Corporation, CIBC Wood Gundy Securities Corp. and
NationsBanc Capital Markets, Inc. (collectively, the "Initial
Purchasers") and, accordingly, there will be no increase in the
interest rate on the Initial Notes pursuant to the terms of the
Registration Rights Agreement, the Initial Notes or the
Indenture. The holders of the Initial Notes will have no
further registration rights under the Registration Rights
Agreement with respect to the Initial Notes. Holders of the
Initial Notes who do not tender their Notes in the Exchange
Offer will continue to hold such Initial Notes and their rights
under such Initial Notes will not be altered, except for any
such rights under the Registration Rights Agreement, which
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 Initial Notes pursuant to, the Exchange
Offer. All untendered and tendered but unaccepted Initial
Notes will continue to be subject to the restrictions on
transfer provided for in the Initial Notes and in the Indenture.
To the extent that Initial Notes are tendered and accepted in
the Exchange Offer, the trading marked for untendered Initial
Notes could be adversely affected.
Terms of the Exchange Notes
The Exchange Offer applies to $100,000,000 aggregate principal amount of the Initial Notes. The form and
terms of the Exchange Notes are the same as the form and terms of the Initial Notes except as noted above and
except that the Exchange Notes have been registered under the Securities Act and, therefore, will not bear legends
restricting the transfer thereof. The Exchange Notes will evidence the same debt as the Initial Notes and will be
entitled to the benefits of the Indenture. See "Description of the Exchange Notes."
Terms capitalized below have the meanings ascribed to them in "Description of the Exchange Notes."
Notes Offered ........................... $100.0 million in aggregate principal amount of Issuer's
11-3/4% Series B Senior Notes due 2004.
Maturity Date ........................... April 1, 2004.
Interest Payment Dates .................. April 1 and October 1 of each year, commencing October 1,
1997.
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Optional Redemption ...... The Exchange Notes will be redeemable at the option of the
Issuer, in whole or in part, at any time on or after April 1, 2001
in cash at the redemption prices set forth herein, plus accrued
and unpaid interest and Liquidated Damages, if any, thereon
to the date of redemption. In addition, at any time prior to
April 1, 2000, the Issuer may on any one or more occasions
redeem up to 35% of the initially outstanding aggregate
principal amount of Exchange Notes at a redemption price
equal to 110.75% of the principal amount thereof, plus
accrued and unpaid interest and Liquidated Damages, if any,
thereon to the redemption date, with the net proceeds of one
or more Public Equity Offerings; provided that, in each case,
at least 65% of the initially outstanding aggregate principal
amount of Notes remains outstanding immediately after the
occurrence of any such redemption. See "Description of the
Notes--Optional Redemption."
Change of Control ......... Upon the occurrence of a Change of Control, each holder of
Exchange Notes will have the right to require the Issuer to
repurchase all or any part of such holder's Exchange Notes
at an offer price in cash equal to 101% of the aggregate
principal amount thereof, plus accrued and unpaid interest
and Liquidated Damages, if any, thereon to the date of
purchase. See "Description of Notes--Repurchase at the
Option of Holders--Change of Control." There can be no
assurance that, in the event of of Change of Control, the
Issuer would have sufficient funds to purchase all Notes
tendered. See "Risk Factors--Limitations on Ability to
Make Change of Control Payment."
Note Guarantee ............ The Exchange Notes will be guaranteed on a senior basis (the
"Note Guarantee") by Holdings (the "Guarantor"). The
Exchange Note Guarantee will be an unconditional
obligation of the Guarantor.
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Ranking ............... The Exchange Notes will be general unsecured obligations of
the Issuer, will rank senior in right of payment to all
subordinated indebtedness of the Issuer and pari passu in right
of payment to all existing and future senior indebtedness of the
Issuer, including indebtedness under the Issuer's $15.0 million
New Credit Facility. The Note Guarantee will be a general
unsecured obligation of Holdings, will rank senior in right of
payment to all subordinated indebtedness of Holdings and pari
passu in right of payment to all existing and future senior
indebtedness of Holdings. The Exchange Notes will be
effectively subordinated to the secured indebtedness of the
Issuer, including borrowings under the New Credit Facility,
which borrowings are secured by certain accounts receivable
and inventory of the Issuer and the Exchange Note Guarantee
will be effectively subordinated to the secured indebtedness of
Holdings. As of June 28, 1997, there was no secured indebtedness
of the Issuer and there was no indebtedness of Holdings.
Certain Covenants ...... The Indenture contains certain covenants that will limit,
among other things, the ability of the Issuer to: (1) pay
dividends, redeem capital stock or make certain other
restricted payments or investments, (ii) incur additional
indebtedness or issue preferred equity interests, (iii) merge,
consolidate or sell all or substantially all of its assets, (iv)
create liens on assets and (v) enter into certain transactions
with affiliates or related persons. See "Description of the
Notes--Certain Covenants."
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Use of Proceeds ...... There will not be any proceeds from the Exchange Offer. The
net proceeds to the Issuer from the sale of the Initial Notes
were $96.6 million (after deducting discounts, commissions,
fees and expenses thereof) and were used: (i) to prepay in full
$51.5 million in borrowings under the Revolving Credit and
Term Loan Agreement (as defined), including all accrued
interest and fees payable upon such prepayment, (ii) to pay
$22.3 million to redeem $9.0 million aggregate principal
amount of 11.67% Senior Subordinated Notes and $12.0
million aggregate principal amount of 17.55% Junior
Subordinated Notes, each due April 30, 2000 and payable to
ML- Lee Acquisition Fund II, L.P. and ML-Lee Acquisition
Fund (Retirement Accounts) II, L.P., including all accrued
interest and premiums payable upon such redemption, and
(iii) to pay $22.8 million of a $24.4 million dividend on the
Issuer's common stock (the "Issuer Dividend"). To pay the
remaining portion of the Issuer Dividend, the Issuer
borrowed approximately $1.5 million under the New Credit
Facility. All of the Issuer's common stock is owned by
Holdings. Holdings used the $24.4 million from the Issuer
Dividend, together with $5.1 million of proceeds from the
exercise of warrants and options to purchase Holdings
common stock, to pay a $29.5 million dividend on its capital
stock (the "Holdings Dividend").
</TABLE>
For a discussion of certain factors which should be considered by
prospective investors in connection with an investment in the Notes, see "Risk
Factors" on page 11.
8
<PAGE>
SUMMARY FINANCIAL DATA
The following table sets forth summary historical financial data of the
Company for the five years ended December 31, 1996, for the twenty-six weeks
ended June 29, 1996 and June 28, 1997, and summary pro forma financial data for
the year ended December 31, 1996. The summary financial data for the years
ended December 31, 1994, 1995 and 1996 were derived from the audited
consolidated financial statements of the Company included elsewhere in this
Prospectus. The financial data include information with respect to Mid-State
following its acquisition on July 29, 1994. The summary financial data for the
years ended December 31, 1992 and 1993 are derived from audited consolidated
historical financial statements of the Company not included herein. The
information presented for the twenty-six weeks ended June 29, 1996 and June 28,
1997 has been derived from the unaudited consolidated financial statements of
the Company included elsewhere in this Prospectus. Such unaudited consolidated
financial statements have been prepared on the same basis as the audited
consolidated financial statements and, in the opinion of management, include
all adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the information set forth herein. Results for the twenty-six
weeks ended June 28, 1997 are not necessarily indicative of the results to be
expected for the year ended December 31, 1997. The following table should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the historical consolidated financial
statements of the Company, including accompanying notes thereto, included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------------------
1992 1993 1994 1995 1996
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales ........................ $ 101,537 $ 118,047 $ 118,267 $ 149,366 $ 156,858
Gross profit ..................... 17,861 20,778 18,208 24,338 27,637
Selling, general and
administrative .................. 7,377 9,096 7,634 9,409 11,358
Amortization ..................... 1,089 577 1,712 1,662 1,530
--------- --------- ----------- --------- ---------
Operating income .................. 9,395 11,105 8,862 13,267 14,749
Other (Income) expense ............ (752) (110) (739) 974 408
Net Interest expense ............ 5,910 5,385 5,984 8,616 8,124
Income taxes ..................... 1,797 2,241 1,507 1,239 2,591
Extraordinary item (1) ............ (1,412) 0 334 0 0
Cumulative effect of change in
accounting for income taxes ...... -- (635) -- -- --
--------- --------- ----------- --------- ---------
Net income ........................ $ 3,852 $ 4,224 $ 1,776 $ 2,438 $ 3,626
========= ========= =========== ========= =========
Earnings per common and
equivalent share:
Income before extraordinary
item and cumulative effect ...... $ 1.93 $ 2.77 $ 1.70 $ 1.85 $ 2.58
Extraordinary item ............... 1.06 -- (.25) -- --
Cumulative effect of change in
accounting for income taxes ...... -- .48 -- -- --
--------- --------- ----------- --------- ---------
Net income ........................ $ 2.99 $ 3.25 $ 1.45 $ 1.85 $ 2.58
========= ========= =========== ========= =========
Other Data:
EBITDA (2) ........................ $ 16,636 $ 17,881 $ 18,439 $ 21,742 $ 23,627
Depreciation and amortization (3) 6,489 6,666 8,838 9,449 9,286
Capital expenditures ............ 6,776 6,729 5,724 6,932 8,028
Cash flow from operations ......... 8,515 8,684 6,875 8,822 13,076
Cash flow from investing
activities ........................ (6,762) (6,711) (33,039) (6,453) (8,014)
Cash flow from financing
activities ........................ (1,149) (2,702) 26,844 (2,265) (4,268)
<CAPTION>
26 Weeks Ended
-------------------------
June 29, June 28,
1996 1997
<S> <C> <C>
Statement of Operations Data:
Net sales ........................ $ 80,506 $ 84,745
Gross profit ..................... 15,280 13,424
Selling, general and
administrative .................. 5,550 5,490
Amortization ..................... 688 665
---------- ----------
Operating income .................. 9,042 7,269
Other (Income) expense ............ 241 87
Net Interest expense ............ 3,930 4,982
Income taxes ..................... 2,033 800
Extraordinary item (1) ............ 0 1,210
Cumulative effect of change in
accounting for income taxes ...... -- --
---------- ----------
Net income ........................ $ 2,838 $ 190
========== ==========
Earnings per common and
equivalent share:
Income before extraordinary
item and cumulative effect ...... $ 2.04 $ 1.09
Extraordinary item ............... -- (1.02)
Cumulative effect of change in
accounting for income taxes ...... -- --
---------- ----------
Net income ........................ $ 2.04 $ 0.07
========== ==========
Other Data:
EBITDA (2) ........................ $ 13,398 $ 11,887
Depreciation and amortization (3) 4,597 4,705
Capital expenditures ............ 4,783 3,481
Cash flow from operations ......... 7,882 5,877
Cash flow from investing
activities ........................ (4,783) (3,481)
Cash flow from financing
activities ........................ (3,006) (244)
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
Pro Forma Data (4):
Cash interest expense, net ..................... $ 12,028
Ratio of EBITDA to cash interest expense, net ... 2.0x
Ratio of net debt to EBITDA ..................... 4.3x
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1996
-----------------------
Pro
Actual Forma(4)
<S> <C> <C>
Balance Sheet Data:
Working capital ........................ $ 27,463 $ 34,280
Total assets ........................... 116,691 120,342
Net debt (5) ........................... 71,875 102,060
Net stockholders' equity (deficit) ...... 20,817 (4,900)
</TABLE>
- --------
(1) Represents the tax benefit in 1992 from utilization of net operating losses
carried forward. Represents loss in 1994 and 1997 on extinguishment of debt
net of tax.
(2) EBITDA represents net income plus depreciation and amortization, income
taxes, net interest expense and extraordinary items. While EBITDA should
not be construed as a substitute for income from operations, net income or
cash flows from operating activities in analyzing the Company's operating
performance, financial position or cash flows, the Company has included
EBITDA because it is commonly used by certain investors and analysts to
analyze and compare companies on the basis of operating performance,
leverage and liquidity and to determine a company's ability to service
debt. However, this measure may not be comparable to similarly titled
measures reported by other companies.
(3) Reflects depreciation and amortization less the amortization of certain
loan fees, which are included in net interest expense. See Note 5 to the
notes to the historical consolidated financial statements of the Company
included elsewhere in this Prospectus.
(4) Gives effect to the sale of the Initial Notes and the application of the
net proceeds therefrom.
(5) Net debt includes long-term debt plus current portion of long-term debt
less cash.
10
<PAGE>
RISK FACTORS
Prospective investors should consider carefully the following factors in
addition to other information included in this Prospectus before making an
investment in the Notes. This Prospectus contains forward-looking statements
concerning the Company's operations, economic performance 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 that are inherently subject to significant
uncertainties and contingencies, many of which are beyond the control of the
Company, and reflect future business decisions that are subject to change. Some
of these assumptions inevitably will not materialize, and unanticipated events
will occur that will affect the Company's results.
Substantial Leverage
The Company is, highly leveraged. After giving pro forma effect to the
sale of the Initial Notes and the application of the net proceeds therefrom, as
of June 28, 1997, the Issuer's total indebtedness outstanding was $101.2
million and the Issuer's stockholders' deficit was $3.4 million.
The Issuer's high degree of leverage could have important consequences to
the holders of the Notes, including the following: (i) the Issuer's ability to
obtain additional financing for working capital, capital expenditures,
acquisitions or general corporate purposes may be impaired in the future; (ii)
a substantial portion of the Issuer's cash flow from operations will be
required for the payment of principal and interest on its indebtedness, thereby
reducing the funds available to the Company for its operations and other
purposes; (iii) the covenants and other restrictions contained in the
Indenture, the New Credit Facility and other obligations of the Company will
limit the Company's ability to borrow additional funds or dispose of assets;
(iv) because of debt service requirements, funds available for capital
expenditures will be limited; (v) the Company may be substantially more
leveraged than certain of its competitors, which may place the Company at a
competitive disadvantage; and (vi) the Company's substantial degree of leverage
may hinder its ability to adjust rapidly to changing market conditions and
could make it more vulnerable in the event of a downturn in general economic
conditions or its business. In addition, all borrowings by the Issuer under the
New Credit Facility will be at variable rates of interest, which exposes the
Issuer to the risk of increased interest rates. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations," "Description of
the Notes" and "Description of Certain Indebtedness." The Issuer's current
annual debt service requirement is $11,750,000.
The Issuer will be required to pay principal on the Notes at maturity in
2004. The Issuer's ability to make scheduled principal payments, or to
refinance its obligations, with respect to its indebtedness, and to pay
interest thereon, will depend on its financial and operating performance,
which, in turn, is subject to prevailing economic conditions and to certain
financial, business and other factors beyond its control. If the Company's cash
flow and capital resources are insufficient to fund its debt service
obligations, the Company may be forced to reduce or delay planned capital
expenditures, sell assets, obtain additional equity capital or refinance or
restructure its debt. There can be no assurance that the Company's cash flow
and capital resources will be sufficient for payment of its indebtedness in the
future. If the Issuer is not able to satisfy its debt service obligations, it
could default on its indebtedness, including the Initial Notes, the Exchange
Notes and the New Credit Facility, which would entitle the holders of such
indebtedness to accelerate the maturity thereof. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" and "Description of Certain Indebtedness."
11
<PAGE>
Customer Concentration
A significant portion of the Company's net sales to date has been derived
from a limited number of customers. The Company's three largest customers in
1996, Colgate-Palmolive, Maybelline and Procter & Gamble, each accounted for
greater than 10% of the Company's net sales in 1996 and in the aggregate
accounted for approximately 53% of the Company's 1996 net sales. The Company
expects that it will continue to be dependent upon a limited number of
customers for a significant portion of its revenues in future periods. As a
result of this customer concentration, the Company's business, operating
results and financial condition could be materially adversely affected by the
failure of anticipated orders to materialize, by deferrals or cancellations of
orders or by its largest customers increasing their in-house production of the
Company's products or selecting other manufacturers from whom to buy products.
In addition, there can be no assurance that revenues from customers that have
accounted for significant revenues in past periods, individually or as a group,
will continue or, if continued, will reach or exceed historic levels in any
future period. The Company's operating results may in the future be subject to
substantial period-to-period fluctuations as a consequence of such customer
concentration. See "--Status of Key Customer Contracts" and
"Business--Customers."
Competition
The markets in which the Company operates are highly competitive. The
Company competes with a significant number of companies of varying sizes,
including divisions or subsidiaries of larger companies, on the basis of price,
service, quality and the ability to supply products to customers in a timely
manner. Some of these competitors have, and new competitors may have, greater
financial and other resources than the Company. Competitive pressures or other
factors, including the vertical integration by certain of the Company's major
customers of manufacturing processes traditionally outsourced to the Company,
could cause the Company to lose market share or could result in a significant
price erosion with respect to the Company's products, either of which would
have a material adverse effect on the Company's results of operations.
Furthermore, the Company's customers operate in highly competitive markets. To
the extent the Company's major customers lose market share in their respective
markets, the Company's results of operations and financial condition could be
materially and adversely affected. See "Business--Competition."
Status of Key Customer Contracts
The Company has supply contracts with three of its largest customers,
Colgate-Palmolive, Procter & Gamble and Abbott. The Company's current contract
with Colgate-Palmolive, which extends through June 30, 1999, provides that
Colgate-Palmolive, one of the Company's largest customers, will
self-manufacture substantially all of one of the three product lines
historically provided to it by the Company. The Company anticipates the full
effect of such self-manufacturing will result in a decline of approximately $11
million in annual net sales by the Company to Colgate-Palmolive by 1998. No
assurance can be given that the Company's contract with Colgate-Palmolive will
be renewed upon expiration or that any renewal of such contract will be on
terms as favorable to the Company as the current contract or that
Colgate-Palmolive will not begin the self-manufacturing of other of the
Company's product lines manufactured for Colgate-Palmolive. The loss of
Colgate-Palmolive as a customer would have a material and adverse effect on the
results of operations of the Company.
The Company's current contract with Procter & Gamble, another of the
Company's largest customers, extends through December 31, 1997. Procter &
Gamble has advised the Company that it is considering self-manufacture of the
products historically provided to it by the Company. The Company is currently
negotiating the renewal of such contract and anticipates that even if a
contract renewal is successfully negotiated, any such renewal will be on terms
significantly less favorable to the Company than the current contract. No
assurance can be given that the Company's contract with Procter & Gamble will
be renewed upon expiration. If the contract is not renewed, it would have a
material and adverse effect on the results of operations of the Company. For
fiscal 1996, Procter & Gamble accounted for $16.2 million, or 10.3%, of the
Company's net sales and $3.4 million, or 12.3%, of the Company's gross profit.
The Company's contract with Abbott for the manufacture of medical devices
at the Round Rock, Texas facility extends through the year 2000, with Abbott
having the option to renew such contract for additional one year terms. No
assurance can be given that the Company's contract with Abbott will be renewed
upon expiration or that any renewal of such contract will be on terms as
favorable to the Company as the current contract. The loss of Abbott as a
customer would have a material and adverse effect on the results of operations
of the Company. See "--Customer Concentration."
12
<PAGE>
Dependence on Suppliers
The major raw materials used in the manufacturing of the Company's
products are various plastic resins and nylon. Most of the raw materials used
in the Company's products are available from multiple sources. However, several
raw materials used in the Company's products are currently obtained from single
sources. An extended interruption in the supply of any of the raw materials or
a reduction in their quality would have a material adverse effect on the
Company's operating results. There can be no assurance that severe shortages of
raw materials will not occur in the future that could increase the cost or
delay the shipment of the Company's products and have a material adverse effect
on the Company's operating results. Significant increases in the prices of
these raw materials could also have a material adverse effect on the Company's
operating results because the Company may not be able to adjust product pricing
to reflect the increases in raw materials costs. See "Business--Suppliers."
Dependence on Key Personnel
The success of the Company depends in large part on the Company's senior
management and its ability to attract and retain other highly qualified
management personnel. The Company faces competition for such personnel from
other companies and other organizations. There can be no assurance that the
Company will be successful in hiring or retaining key personnel. See
"Management."
Environmental Regulation, Possible Changes and Related Matters
The Company and its operations are subject to comprehensive and frequently
changing federal, state and local environmental and occupational health and
safety laws and regulations, including laws and regulations governing emissions
of air pollutants, discharges of waste and storm water, and the disposal of
hazardous wastes. The Company is also subject to liability for the
investigation and remediation of environmental contamination (including
contamination caused by other parties) at properties that it owns or operates
and at other properties where the Company or its predecessors have arranged for
the disposal of hazardous substances. As a result, the Company is involved from
time to time in administrative and judicial proceedings and inquiries relating
to environmental matters. The Company believes there are currently no pending
investigations at the Company's plants and sites relating to environmental
matters, other than certain matters for which it is being defended and
indemnified by Philips Electronics North American Corporation, its former
parent. However, there can be no assurance that the Company will not be
involved in any other such proceeding in the future and that the aggregate
amount of future clean up costs and other environmental liabilities will not be
material.
Federal, state and local governments could enact laws or regulations
concerning environmental matters that increase the cost of producing, or
otherwise adversely affect the demand for, plastic products. The Company cannot
predict the environmental liabilities that may result from legislation or
regulations adopted in the future nor can the Company predict how existing or
future laws or regulations will be administered or interpreted or what
environmental conditions may be found to exist. Enactment of more stringent
laws or regulations or more strict interpretation of existing laws and
regulations could require additional expenditures by the Company, some of which
could be material. The Company does not have insurance coverage for
environmental liabilities other than in Mexico and does not anticipate
obtaining such coverage in the future.
Controlling Stockholder
Holdings owns all of the Issuer's outstanding capital stock. Affiliates of
the Thomas H. Lee Company and investment partnerships for which affiliates of
the Thomas H. Lee Company serve as investment advisers (collectively, "THL")
own approximately 85% of the outstanding shares of the common stock of
Holdings, such common stock being the only class of voting capital stock of
Holdings. As a result, THL has the indirect ability to elect the Board of
Directors of the Issuer, to approve or disapprove of other matters requiring
stockholder approval and to effectively control the affairs and policies of the
Issuer. Circumstances may occur in which the interests of THL, as an indirect
equity holder of the Issuer, could be in conflict with the interests of the
holders of the Notes.
Restrictive Debt Covenants
The Indenture and the New Credit Facility contain certain restrictive
covenants which do or will affect, and in many respects significantly limit or
prohibit, among other things, the ability of the Issuer to incur indebtedness,
make prepayments of certain indebtedness, pay dividends, make investments,
engage in transactions with stockholders and affiliates, create liens, sell
assets and engage in mergers and consolidations. The New Credit Facility also
requires the
13
<PAGE>
Issuer to meet certain financial ratios and tests. These covenants may
significantly limit the operating and financial flexibility of the Issuer and
may limit its ability to respond to changes in its business or competitive
activities. The ability of the Issuer to comply with such provisions may be
affected by events beyond its control. The breach of any of these covenants
could result in a default under the New Credit Facility. In the event of any
such default, depending on the actions taken by the lenders thereunder (the
"Lenders"), the Issuer could be prohibited from making any payments of
principal or interest on the Notes. In addition, the Lenders could elect to
declare any amounts borrowed under the New Credit Facility, together with
accrued interest, to be due and payable. If the Issuer were unable to repay
such borrowings, the Lenders could proceed against their collateral. If the
indebtedness under the New Credit Facility were to be accelerated, there can be
no assurance that the assets of the Issuer would be sufficient to repay such
indebtedness and the Notes in full. See "Description of Certain Indebtedness."
Asset Encumbrances
The Issuer's obligations under the New Credit Facility are secured by
liens on the Issuer's accounts receivable and inventory. The Notes will be
unsecured and, therefore, do not have the benefit of such collateral. If an
event of default occurs under the New Credit Facility, the Lenders will have a
prior right to such collateral and may foreclose upon such collateral to the
exclusion of the holders of the Notes, notwithstanding the existence of an
event of default with respect to the Notes. Accordingly, in such event, such
collateral would first be used to repay in full amounts outstanding under the
New Credit Facility and there can be no assurance that there would be
sufficient assets remaining to satisfy in full the claims of holders of the
Notes.
Limited Ability of Guarantor to Perform Under Note Guarantee
Holdings is a holding company without significant assets other than its
equity interests in its subsidiaries. The Issuer is Holdings' principal
operating subsidiary, and Holdings is principally dependent upon the
declaration by the Issuer of dividends to pay its obligations. Under the terms
of the Indenture and the New Credit Facility, the Issuer will be significantly
restricted from declaring dividends to Holdings. Accordingly, Holdings' ability
to make payments in the event it is required to perform under its Note
Guarantee will be severely limited.
Limitations on Ability to Make Change of Control Payment
The Indenture requires the Issuer, in the event of a Change of Control, to
make an offer to purchase the Notes at 101% of the principal amount thereof,
plus accrued and unpaid interest, if any, to the date of repurchase. Certain
events involving a Change of Control may be an event of default under the New
Credit Facility or other indebtedness of the Issuer that may be incurred in the
future. Moreover, the exercise by the holders of the Notes of their right to
require the Issuer to purchase the Notes may cause a default under the New
Credit Facility or such other indebtedness even if the Change of Control does
not constitute an event of default. Finally, there can be no assurance that the
Company will have the financial resources necessary to repurchase the Notes
upon a Change of Control. See "Description of the Notes--Repurchase at the
Option of Holders--Change of Control."
Risk of Fraudulent Transfer Liability
Management of the Issuer and Holdings believe that the indebtedness
represented by the Notes and Note Guarantee is being incurred for proper
purposes and in good faith, and that, based on present forecasts, asset
valuations and other financial information, the Issuer and Holdings, after the
sale of the Notes and the application of the net proceeds therefrom, are
solvent, will have sufficient capital for carrying on their businesses and will
be able to pay their debts as they mature. See "Use of Proceeds."
Notwithstanding management's belief, if a court of competent jurisdiction in a
suit by an unpaid creditor or a representative of creditors (such as a trustee
in bankruptcy or a debtor in possession) were to find that the Issuer or
Holdings did not receive fair consideration or reasonably equivalent value for
issuing the Notes or Note Guarantee and, at the time of the incurrence of
indebtedness represented by the Notes or Note Guarantee, the Company or
Holdings was insolvent, was rendered insolvent by reason of such incurrence,
was engaged in a business or transaction for which its remaining assets
constituted unreasonably small capital, intended to incur, or believed that it
would incur, debts beyond its ability to pay as such debts matured, or intended
to hinder, delay or defraud its creditors, such court could avoid such
indebtedness or such court could subordinate such indebtedness to other
existing and future indebtedness of the Issuer or Holdings. The measure of
insolvency for purposes of the foregoing will vary depending upon the law of
the relevant jurisdiction. Generally, however, a company would be considered
insolvent for purposes of the
14
<PAGE>
foregoing if the sum of the company's debts is greater than all the company's
property at a fair valuation, or if the present fair saleable value of the
company's assets is less than the amount that will be required by the company
to pay its probable liability on its existing debts as they become absolute and
matured.
Lack of Public Market
There is no existing market for the Exchange Notes and there can be no
assurances as to the liquidity of any markets that may develop for the Exchange
Notes, the ability of holders of the Exchange Notes to sell their Exchange
Notes, or the price at which holders would be able to sell their Exchange
Notes. Future trading prices of the Exchange Notes will depend on many factors,
including, among other things, prevailing interest rates, Anchor's operating
results and the market for similar securities. The Initial Purchasers have
advised the Issuer that they currently intend to make a market in the Exchange
Notes offered hereby. However, the Initial Purchasers are not obligated to do
so and any market making may be discontinued at any time without notice. The
Issuer does not intend to apply for listing of the Exchange Notes offered
hereby on any securities exchange or through the National Association of
Securities Dealers Automated Quotation System.
Consequences of Failure to Exchange
Holders of Initial Notes who do not exchange their Initial Notes for
Exchange Notes pursuant to the Exchange Offer will continue to be subject to
the restrictions on transfer of Initial Notes set forth in the legend thereon
as a consequence of the issuance of the Initial Notes pursuant to an exemption
from, or in a transaction not subject to, the registration requirements of the
Securities Act. In general, the Initial 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 Issuer does not anticipate registering the Initial
Notes under the Securities Act. Holders of the Initial Notes who do not tender
their Notes in the Exchange Offer will continue to hold such Initial Notes and
their rights under such Initial Notes will not be altered, except for any such
rights under the Registration Rights Agreement, which 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 Initial Notes pursuant to, the
Exchange Offer.
15
<PAGE>
THE EXCHANGE OFFER
Purpose of the Exchange Offer
The Initial Notes were originally issued and sold on April 2, 1997. Such
sales were not registered under the Securities Act in reliance upon the
exemption provided by Section 4(2) of the Securities Act. In connection with
the sale of the Initial Notes, the Issuer agreed to file with the Commission a
registration statement relating to an exchange offer (the "Exchange Offer
Registration Statement") pursuant to which the Exchange Notes would be offered
in exchange for Initial Notes tendered at the option of the holders thereof or,
if applicable interpretations of the staff of the Commission did not permit the
Issuer to effect such an exchange offer, the Issuer agreed, at its cost, to
file a shelf registration statement covering resales of the Initial Notes (the
"Resale Registration Statement") and to have such Resale Registration Statement
declared effective and kept effective for a period of two years from the
effective date thereof. In the event that (i) the Issuer fails to file the
Exchange Offer Registration Statement, (ii) the Exchange Offer Registration
Statement is not declared effective by the Commission, or (iii) the Exchange
Offer is not consummated or the Resale Registration Statement is not declared
effective by the Commission, in each case within specified time periods, the
interest rate borne by the Initial Notes shall increase, which interest will
accrue and be payable in cash until completion of such filing, declaration of
effectiveness or completion of such exchange. See "Exchange Offer; Registration
Rights."
The sole purpose of the Exchange Offer is to fulfill obligations of the
Issuer with respect to the foregoing agreement. Following the consummation of
the Exchange Offer, the Issuer does not currently anticipate registering any
untendered Initial Notes under the Securities Act and will not be obligated to
do so.
Accounting Treatment
The Exchange Notes will be recorded at the carrying value of the Initial
Notes that are exchanged. Therefore, no gain or loss will be recorded in
Anchor's financial statement as a result of the transaction.
Terms of the Exchange
The Issuer 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
Initial Notes. The terms of the Exchange Notes are identical in all respects to
the terms of the Initial 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 the holders of the Exchange Notes (as well
as remaining holders of any Initial Notes) will not be entitled to registration
rights under the Registration Rights Agreement. See "Registration Rights
Agreement." The Exchange Notes will evidence the same debt as the Initial Notes
and will be entitled to the benefits of the Indenture. See "Description of the
Exchange Notes."
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Initial Notes being tendered for exchange.
Based on interpretations by the staff of the Commission set forth in
no-action letters issued to third parties, the Issuer believes that the
Exchange Notes issued pursuant to the Exchange Offer in exchange for Initial
Notes may be offered for sale, resold and otherwise transferred by any holder
of such Exchange Notes (other than any such holder which 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 holder's business and such holder has no arrangement or
understanding with any person to participate in the distribution of such
Exchange Notes. Any holder who tenders in the Exchange Offer for the purpose of
participating in a distribution of the Exchange Notes cannot rely on such
interpretations by the staff of the Commission and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any secondary resale transaction. Each broker-dealer that
receives Exchange Notes for its own account in exchange for Initial Notes,
where such Initial 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 April 2, 1997 or from the
last Interest Payment Date on which interest was paid on the Initial Notes so
surrendered.
16
<PAGE>
Tendering holders of the Initial Notes will not be required to pay
brokerage commissions or fees or, subject to the instructions on the Letter of
Transmittal, transfer taxes with respect to the exchange of the Initial Notes
pursuant to the Exchange Offer.
Expiration Date; Extensions; Termination; Amendments
The Exchange Offer shall expire on the Expiration Date. The term
"Expiration Date" means 5:00 p.m. New York City time, on September 18, 1997,
unless the Issuer, in its sole discretion, extends the period during which the
Exchange Offer is open, in which event the term "Expiration Date" shall mean
the latest time and date on which the Exchange Offer, as so extended by the
Issuer, shall expire. The Issuer reserves the right to extend the Exchange
Offer at any time and from time to time by giving oral or written notice to
State Street Bank (the "Exchange Agent") and by timely public announcement
communicated, unless otherwise required by applicable law or regulation, by
making a release to the Dow Jones New Service. During any extension of the
Exchange Offer, all Initial Notes previously tendered pursuant to the Exchange
Offer will remain subject to the Exchange Offer.
The Exchange Date will be the first business day following the Expiration
Date. The Issuer expressly reserves the right to (i) terminate the Exchange
Offer and not accept for exchange any Initial Notes if either of the events set
forth below under "Conditions to the Exchange Offer" shall have occurred and
shall not have been waived by the Issuer 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 Initial Notes, whether before or after any tender of the
Initial Notes. If any such termination or amendment occurs, the Issuer will
notify the Exchange Agent and will either issue a press release or give oral or
written notice to the holders of the Initial Notes as promptly as practicable.
Unless the Issuer terminates the Exchange Offer prior to 5:00 p.m., New York
City time, on the Expiration Date, the Issuer will exchange the Exchange Notes
for the Initial Notes on the Exchange Date.
How to Tender
The tender to the Issuer of Initial Notes by a holder thereof pursuant to
one of the procedures set forth below will constitute an agreement between such
holder and the Issuer in accordance with the terms and subject to the
conditions set forth herein and in the Letter of Transmittal.
A holder of an Initial Note 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 Initial Notes being tendered and any required
signature guarantees, to the Exchange Agent at its address set forth on the
back cover of this Prospectus on or prior to the Expiration Date, (ii)
complying with the procedure for book entry transfer described below or (iii)
complying with the guaranteed delivery procedures described below.
If tendered Initial 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 Initial Notes are to be reissued) in the
name of the registered holder (which term, for the purpose described herein,
shall include any participant in The Depository Trust Company ("DTC") (also
referred to as a book-entry transfer facility) whose name appears on a security
listing as the owner of the Initial Notes), the signature of such signer need
not be guaranteed. In any other case, the tendered Initial Notes must be
endorsed or accompanied by written instruments of transfer in form satisfactory
to the Issuer 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 or correspondent in the
United States, or by a member firm of a 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 Initial Notes not exchanged are to be delivered to an address other than
that of the registered holder appearing on the note register for the Initial
Notes, the signature in the Letter of Transmittal must be guaranteed by an
Eligible Institution.
The method of delivery of Initial Notes and all other documents is at the
election and risk of the holder. If sent by mail, it is recommended that
registered mail, return receipt requested, be used, proper insurance obtained,
and the mailing be made sufficiently in advance of the Expiration Date to
permit delivery to the Exchange Agent on or before the Expiration Date.
The Exchange Agent and DTC have confirmed that any financial institution
that is a participant in DTC's system (a "Participant") may utilize DTC's
Automated Tender Offer Program ("ATOP") to tender Initial Notes.
17
<PAGE>
The Exchange Agent will request that DTC establish an account with respect
to the Initial Notes for purposes of the Exchange Offer within two business
days after the date of this Prospectus. Any Participant may make book-entry
delivery of Initial Notes by causing DTC to transfer such Initial Notes into
the Exchange Agent's account in accordance with DTC's ATOP procedures for
transfer. However, the exchange for the Initial Notes so tendered will only be
made after timely confirmation (a "Book-Entry Confirmation") of such book-entry
transfer of Initial Notes into the Exchange Agent's account, and timely receipt
by the Exchange Agent of an Agent's Message (as such term is defined in the
next sentence) and any other documents required by the Letter of Transmittal.
The term "Agent's Message" means a message, transmitted by DTC and received by
the Exchange Agent and forming part of a Book-Entry Confirmation, which states
that DTC has received an express acknowledgment from a Participant tendering
Initial Notes which are the subject of such Book-Entry Confirmation that such
Participant has received and agrees to be bound by the terms of the Letter of
Transmittal and that the Issuer may enforce such agreement against such
Participant.
If a holder desires to accept the Exchange Offer and time will not permit
a Letter of Transmittal or Initial 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 office listed on the back cover hereof on or prior to the Expiration Date a
letter, telegram or facsimile transmission from an Eligible Institution setting
forth the name and address of the tendering holder, the names in which the
Initial Notes are registered and, if possible, the certificate numbers of the
Initial Notes to be tendered, and stating that the tender is being made thereby
and guaranteeing that within five New York Stock Exchange trading days after
the date of execution of such letter, telegram or facsimile transmission by the
Eligible Institution, the Initial Notes, in proper form for transfer (or a
confirmation of book-entry transfer of such Initial 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 Initial 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
Issuer may, at its option, reject the tender. Copies of a 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 Initial Notes is received by the Exchange Agent, (ii) a
confirmation of book-entry transfer of such Initial Notes into the Exchange
Agent's account at the book-entry transfer facility is received by the Exchange
Agent, or (iii) 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 Initial Notes tendered pursuant to a Notice of 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
Initial Notes.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance for exchange of any tender of Initial Notes will be
determined by the Issuer, whose determination will be final and binding. The
Issuer reserves the absolute right to reject any or all tenders not in proper
form or the acceptances for exchange of which may, in the opinion of the
counsel of the Issuer, be unlawful. The Issuer also reserves the absolute right
to waive any of the conditions of the Exchange Offer or any defect or
irregularity in the tender of any Initial Notes. None of the Issuer, the
Exchange Agent or any other person will be under any duty to give notification
of any defects or irregularities in tenders or incur any liability for failure
to give any such notification.
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 Initial Notes for exchange (the "Transferor")
exchanges, assigns and transfers the Initial Notes to the Issuer and
irrevocably constitutes and appoints the Exchange Agent as the Transferor's
Agent and attorney-in-fact to cause the Initial Notes to be assigned,
transferred and exchanged. The Transferor represents and
18
<PAGE>
warrants that it has full power and authority to tender, exchange, assign and
transfer the Initial Notes and to acquire Exchange Notes issuable upon the
exchange of such tendered Initial Notes, and that, when the same are accepted
for exchange, the Issuer will acquire good and unencumbered title to the
tendered Initial Notes, free and clear of all liens, restrictions, charges and
encumbrances and not subject to any adverse claim. The Transferor also warrants
that it will, upon request, execute and deliver any additional documents deemed
by the Issuer to be necessary or desirable to complete the exchange, assignment
and transfer of tendered Initial Notes or transfer ownership of such Initial
Notes on the account books maintained by a book-entry transfer facility. The
Transferor further agrees that acceptance of any tendered Initial Notes by the
Issuer and the issuance of Exchange Notes in exchange therefor shall constitute
performance in full by the Issuer of its obligations under the Registration
Rights Agreement and that the Issuer shall have no further obligations or
liabilities thereunder. 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.
By tendering Initial Notes, the Transferor certifies that it is not an
"affiliate" of the Issuer 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.
Withdrawal Rights
Initial Notes tendered pursuant to the Exchange Offer may be withdrawn at
any time prior to the Expiration Date.
For a withdrawal to be effective, a written, telegraphic, telex or
facsimile transmission notice of withdrawal must be timely received by the
Exchange Agent at its address set forth on the back cover of this Prospectus.
Any such notice of withdrawal must specify the person named in the Letter of
Transmittal as having tendered Initial Notes to be withdrawn, the certificate
numbers of Initial Notes to be withdrawn, the principal amount of Initial Notes
to be withdrawn, a statement that such holder is withdrawing his election to
have such Initial Notes exchanged, and the name of the registered holder of
such Initial Notes, and must be signed by the holder in the same manner as the
original signature on the Letter of Transmittal (including any required
signature guarantees) or be accompanied by evidence satisfactory to the Issuer
that the person withdrawing the tender has succeeded to the beneficial
ownership of the Initial Notes being withdrawn. The Exchange Agent will return
the properly withdrawn Initial Notes promptly following receipt of notice of
withdrawal. If Initial Notes have been tendered pursuant to the procedures 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 Initial 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 Issuer, and such
determination will be final and binding on all parties.
Acceptance of Note for Exchange; Delivery of Exchange Notes
Upon the terms and subject to the conditions of the Exchange Offer, the
acceptance of Initial Notes validly tendered and not withdrawn and issuance of
the Exchange Notes will be made on the Exchange Date. For the purpose of the
Exchange Offer, the Issuer shall be deemed to have accepted for exchange
validly tendered Initial Notes when, as and if the Issuer has given oral or
written notice thereof to the Exchange Agent.
The Exchange Agent will act as agent for the tendering holders of Initial
Notes for the purpose of receiving Exchange Notes from the Issuer and causing
the Initial Notes to be assigned, transferred and exchanged. Upon the terms and
subject to the conditions of the Exchange Offer, delivery of Exchange Notes to
be issued in exchange for accepted Initial Notes will be made by the Exchange
Agent promptly after acceptance of the tendered Initial Notes. Initial Notes
not accepted for exchange by the Issuer will be returned without expense to the
tendering holders promptly following the Expiration Date or, if the Issuer
terminates the Exchange Offer prior to the Expiration Date, promptly after the
Exchange Offer is so terminated.
Conditions to the Exchange Offer
Notwithstanding any other provision of the Exchange Offer, or any
extension of the Exchange Offer, the Issuer will not be required to issue
Exchange Notes in respect of any properly tendered Initial Notes not previously
accepted and may terminate the Exchange Offer (by oral or written notice to the
Exchange Agent and by timely public
19
<PAGE>
announcement communicated, unless otherwise required by applicable law or
regulation, by making a release to the Dow Jones News Service) or, at its
option, modify or otherwise amend the Exchange Offer, if there shall be
threatened, instituted or pending any action or proceeding before, or any
injunction, order or decree shall have been issued by, any court or
governmental agency or other governmental regulatory or administrative agency
or commission, (i) seeking to restrain or prohibit the making or consummation
of the Exchange Offer or any other transaction contemplated by the Exchange
Offer, or assessing or seeking any damages as a result thereof or (ii)
resulting in a material delay in the ability of the Issuer to accept for
exchange or exchange some or all of the Initial Notes pursuant to the Exchange
Offer, or any statute, rule, regulation, order or injunction shall be sought,
proposed, introduced, enacted, promulgated or deemed applicable to the Exchange
Offer or any of the transactions contemplated by the Exchange Offer by any
government or governmental authority, agency or court, domestic or foreign,
that in the reasonable judgment of the Issuer, might directly or indirectly
result in any of the consequences referred to in clauses (i) or (ii) above or,
in the reasonable judgment of the Issuer, might result in the holders of
Exchange Notes having obligations with respect to resales and transfers of
Exchange Notes which are greater than those described in the interpretations of
the Commission referred to on the cover page of this Prospectus, or would
otherwise make it inadvisable to proceed with the Exchange Offer.
In addition, the Issuer will not accept for exchange any Initial Notes
tendered and no Exchange Notes will be issued in exchange for any such Initial
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 of qualification of the Indenture under the Trust Indenture Act of 1939
(the "Trust Indenture Act").
The Issuer expressly reserves the right to terminate the Exchange Offer
and not accept for exchange any Initial Notes upon the occurrence of either of
the foregoing conditions (which represent all of the material conditions to the
acceptance by the Issuer of properly tendered Initial Notes). In addition, the
Issuer may amend the Exchange Offer at any time prior to the Expiration Date if
either of the conditions set forth above occur. Moreover, regardless of which
of such conditions has occurred, the Issuer may amend the Exchange Offer in any
manner which, in its good faith judgment, is advantageous to holders of the
Initial Notes.
The foregoing conditions are for the sole benefit of the Issuer and may be
waived by the Issuer, in whole or in part, if, in its reasonable judgment, such
waiver is not advantageous to holders of the Initial Notes. Any determination
made by the Issuer concerning an event, development or circumstance described
or referred to above will be final and binding on all parties.
Exchange Agent
State Street Bank has been appointed as the Exchange Agent for the
Exchange Offer. Letters of Transmittal must be addressed to the Exchange Agent
at its address set forth on the back cover of this Prospectus.
Delivery to an address other than as set forth herein, or transmissions of
instructions via facsimile or telex number other than the ones set forth
herein, will not constitute a valid delivery.
Solicitation of Tenders; Expenses
The Issuer has not retained any dealer-manager or similar agent in
connection with the Exchange Offer and will not make any payments to brokers,
dealers or others for soliciting acceptances of this Exchange Offer. The Issuer
will, however, pay the Exchange Agent reasonable and customary fees for its
services and will reimburse it for reasonable out-of-pocket expenses in
connection therewith. The Issuer 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 Prospectus and related documents
to the beneficial owners of the Initial Notes and in handling or forwarding
tenders for their customers.
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
Issuer. 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 Issuer 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 Initial 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 Issuer may, at its discretion, take such action as it may deem necessary to
make
20
<PAGE>
the Exchange Offer in any such jurisdiction and extend the Exchange Offer to
holders of Initial Notes in such jurisdiction. In any jurisdiction the
securities laws or blue sky laws of which require the Exchange Offer to be made
by a licensed broker or dealer, the Exchange Offer is being made on behalf of
the Issuer by one or more registered brokers or dealers which are licensed
under the laws of such jurisdiction.
Other
Participation in the Exchange Offer is voluntary and holders should
carefully consider whether to accept. Holders of the Initial Notes are urged to
consult their financial and tax advisors in making their own decisions on what
action to take.
As a result of the making of, and upon acceptance for exchange of all
validly tendered Initial Notes pursuant to the terms of this Exchange Offer,
the Issuer will have fulfilled a covenant contained in the terms of the Initial
Notes, the Indenture and the Registration Rights Agreement. Holders of the
Initial Notes who do not tender the certificates in the Exchange Offer will
continue to hold such certificates and their rights under such Initial Notes
will not be altered, except for any such rights under the Registration Rights
Agreement, which by their terms terminate or cease to have further effect as a
result of the making of this Exchange Offer. See "Description of the Initial
Notes." All untendered Initial Notes will continue to be subject to the
restrictions on transfer set forth in the Indenture. To the extent that Initial
Notes are tendered and accepted in the Exchange Offer, the trading market for
untendered Initial Notes could be adversely affected.
The Issuer may in the future seek to acquire untendered Initial Notes in
open market or privately negotiated transactions, through subsequent exchange
offers or otherwise. The Issuer has no present plan to acquire any Initial
Notes which are not tendered in the Exchange Offer or to file a registration
statement to permit resales of any Initial Notes which are not tendered
pursuant to the Exchange Offer.
21
<PAGE>
CAPITALIZATION
The following table sets forth the actual capitalization of Anchor at June
28, 1997. This table should be read in conjunction with the historical
consolidated financial statements of the Company, including the notes thereto,
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
At
June 28, 1997
--------------
(in millions)
<S> <C>
Cash ...................................................... $ 3,730
=========
Current Portion of long-term debt ........................ 237
=========
Long-term debt (excluding current maturities):
Bank Credit Agreement
Revolving Credit Facility .............................. 0
Term Loans ............................................. 0
New Credit Agreement .................................... 0
% Senior Notes due 2004 .............................. 100,000
11.925% Senior Subordinated Notes due 2000 ............... 0
17.755% Junior Subordinated Notes due 2000 ............... 0
Connecticut Development Authority Notes .................. 605
Other long-term debt (Capital Leases) ..................... 666
---------
Total long-term debt ................................. 101,271
Stockholders' Equity:
Common Stock (2) .......................................... 15
Additional Paid-in Capital (net of Treasury Stock) ...... 0
Additional Pension Liability ........................... (568)
Retained Earnings ....................................... (2,867)
---------
Treasury Stock at Cost ................................. (10)
---------
Total Stockholders' Equity (deficit) .................. (3,430)
Total Capitalization ................................. $ 97,841
=========
</TABLE>
22
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth selected historical financial data of the
Company for the five years ended December 31, 1996, for the twenty-six weeks
ended June 29, 1996 and June 28, 1997, and selected pro forma financial data
for the year ended December 31, 1996. The selected financial data for the years
ended December 31, 1994, 1995 and 1996 were derived from the audited
consolidated financial statements of the Company included elsewhere in this
Prospectus. The financial data include information with respect to Mid-State
following its acquisition on July 29, 1994. The selected financial data for the
years ended December 31, 1992 and 1993 are derived from audited consolidated
historical financial statements of the Company not included herein. The
information presented for the twenty-six weeks ended June 29, 1996 and June 28,
1997 has been derived from the unaudited consolidated financial statements of
the Company included elsewhere in this Prospectus. Such unaudited consolidated
financial statements have been prepared on the same basis as the audited
consolidated financial statements and, in the opinion of management, include
all adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the information set forth herein. Results for the twenty-six
weeks ended June 28, 1997 are not necessarily indicative of the results to be
expected for the year ended December 31, 1997. The following table should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the historical consolidated financial
statements of the Company, including accompanying notes thereto, included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------------------
1992 1993 1994 1995 1996
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales ........................ $ 101,537 $ 118,047 $ 118,267 $ 149,366 $ 156,858
Gross profit ..................... 17,861 20,778 18,208 24,338 27,637
Selling, general and
administrative .................. 7,377 9,096 7,634 9,409 11,358
Amortization ..................... 1,089 577 1,712 1,662 1,530
--------- --------- ----------- --------- ---------
Operating income .................. 9,395 11,105 8,862 13,267 14,749
Other (Income) expense ............ (752) (110) (739) 974 408
Net Interest expense ............ 5,910 5,385 5,984 8,616 8,124
Income taxes ..................... 1,797 2,241 1,507 1,239 2,591
Extraordinary item (1) ............ (1,412) 0 334 0 0
--------- --------- ----------- --------- ---------
Cumulative effect of change in
accounting for income taxes ...... -- (635) -- -- --
--------- --------- ----------- --------- ---------
Net income ........................ $ 3,852 $ 4,224 $ 1,776 $ 2,438 $ 3,626
========= ========= =========== ========= =========
Earnings per common and
equivalent share:
Income before extraordinary
item and cumulative effect ...... $ 1.93 $ 2.77 $ 1.70 $ 1.85 $ 2.58
Extraordinary item ............... 1.06 -- (.25) -- --
Cumulative effect of change in
accounting for income taxes ...... -- .48 -- -- --
--------- --------- ----------- --------- ---------
Net income ........................ $ 2.99 $ 3.25 $ 1.45 $ 1.85 $ 2.58
========= ========= =========== ========= =========
Other Data:
EBITDA (2) ........................ $ 16,636 $ 17,881 $ 18,439 $ 21,742 $ 23,627
Depreciation and amortization (3) 6,489 6,666 8,838 9,449 9,286
Capital expenditures ............ 6,776 6,729 5,724 6,932 8,028
Cash flow from operations ......... 8,515 8,684 6,875 8,822 13,076
Cash flow from investing
activities ........................ (6,762) (6,711) (33,039) (6,453) (8,014)
Cash flow from financing
activities ........................ (1,149) (2,702) 26,844 (2,265) (4,268)
<CAPTION>
26 Weeks Ended
-------------------------
June 29, June 28,
1996 1997
<S> <C> <C>
Statement of Operations Data:
Net sales ........................ $ 80,506 $ 84,745
Gross profit ..................... 15,280 13,424
Selling, general and
administrative .................. 5,550 5,490
Amortization ..................... 688 665
---------- ----------
Operating income .................. 9,042 7,269
Other (Income) expense ............ 241 87
Net Interest expense ............ 3,930 4,982
Income taxes ..................... 2,033 800
Extraordinary item (1) ............ 0 1,210
---------- ----------
Cumulative effect of change in
accounting for income taxes ...... -- --
---------- ----------
Net income ........................ $ 2,838 $ 190
========== ==========
Earnings per common and
equivalent share:
Income before extraordinary
item and cumulative effect ...... $ 2.04 $ 1.09
Extraordinary item ............... -- (1.02)
Cumulative effect of change in
accounting for income taxes ...... -- --
---------- ----------
Net income ........................ $ 2.04 $ 0.07
========== ==========
Other Data:
EBITDA (2) ........................ $ 13,398 $ 11,887
Depreciation and amortization (3) 4,597 4,705
Capital expenditures ............ 4,783 3,481
Cash flow from operations ......... 7,882 5,877
Cash flow from investing
activities ........................ (4,783) (3,481)
Cash flow from financing
activities ........................ (3,006) (244)
</TABLE>
23
<PAGE>
<TABLE>
<S> <C>
Pro Forma Data (4):
Cash interest expense, net ..................... $ 12,028
Ratio of EBITDA to cash interest expense, net ... 2.0x
Ratio of net debt to EBITDA ..................... 4.3x
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1996
-----------------------
Pro
Actual Forma(4)
<S> <C> <C>
Balance Sheet Data:
Working capital ........................ $ 27,463 $ 34,280
Total assets ........................... 116,691 120,342
Net debt (5) ........................... 71,875 102,060
Net stockholders' equity (deficit) ...... 20,817 (4,900)
</TABLE>
- --------
(1) Represents the tax benefit in 1992 from utilization of net operating losses
carried forward. Represents loss in 1994 and 1997 on extinguishment of debt
net of tax.
(2) EBITDA represents net income plus depreciation and amortization, income
taxes, net interest expense and extraordinary items. While EBITDA should
not be construed as a substitute for income from operations, net income or
cash flows from operating activities in analyzing the Company's operating
performance, financial position or cash flows, the Company has included
EBITDA because it is commonly used by certain investors and analysts to
analyze and compare companies on the basis of operating performance,
leverage and liquidity and to determine a company's ability to service
debt. However, this measure may not be comparable to similarly titled
measures reported by other companies.
(3) Reflects depreciation and amortization less the amortization of certain
loan fees, which are included in net interest expense. See Note 5 to the
notes to the historical consolidated financial statements of the Company
included elsewhere in this Prospectus.
(4) Gives effect to the sale of the Initial Notes and the application of the
net proceeds therefrom.
(5) Net debt includes long-term debt plus current portion of long-term debt
less cash.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Anchor is a leading designer, manufacturer and packager of precision
molded plastic products for a wide range of dental, cosmetic, medical, computer
and consumer applications. Based upon its knowledge of and experience in the
industry, the Company believes that it is one of the world's largest
manufacturers of toothbrushes and a leading U.S. manufacturer of cosmetics
packaging. For the year ended December 31, 1996, the Company had net sales of
$156.9 million, EBITDA of $23.6 million and net income of $3.6 million, making
it one of the largest independent plastic injection molders in North America.
Approximately 41% of the Company's 1996 net sales were made under supply
contracts with three of its largest customers, Colgate-Palmolive, Procter &
Gamble and Abbott. The remaining terms of each of such contracts are up to 3
years, excluding options to renew. Typically, contracts are renewed or replaced
by new contracts prior to expiration. The terms of the contracts vary,
including any minimum purchasing requirements and the customers' ability to
cancel, but in each case the Company passes through to its customers raw
material price increases and decreases. See "Risk Factors--Status of Key
Customer Contracts."
Anchor's principal materials are plastic resins, nylon and packaging
materials. During periods of limited supply, Anchor has typically been able to
procure sufficient quantities of plastic resins, nylon and packaging materials
to satisfy all of its customers' needs. Anchor's gross profit is substantially
unaffected by fluctuations in plastic resin and nylon prices because the
Company historically has been successful in passing through increases in those
prices to its customers by means of corresponding changes in product pricing.
Anchor began operations in 1941 as a manufacturer of cosmetic brushes for
Maybelline and, in 1958, began producing Pepsodent toothbrushes for Lever
Brothers Company, Inc. The Company was acquired in 1990 by affiliates of the
Thomas H. Lee Company and management. Since the 1990 acquisition, the Company
has pursued a growth strategy designed to increase sales while diversifying its
revenue base. In pursuit of this strategy, Anchor acquired Mid-State in 1994,
which served to expand the Company's business into the medical device and
computer component markets.
In 1993 and 1994, Anchor invested in expanded operations in Matamoros,
Mexico, where the Company ultimately relocated much of its cosmetics packaging
operations. As the Matamoros facility came on line in 1995 and 1996, Anchor
began experiencing efficiency gains in its cosmetics segment while freeing-up
domestic capacity for other uses. This increased domestic capacity allowed the
Company to convert some of its U.S. production to its newest major product
line, POP displays, which contributed significantly to increased net sales in
1996. Also in 1996, Anchor invested in a new Round Rock, Texas, facility for
the production of computer components for Compaq, which will generate a full
year of revenues in 1997.
Certain of the Company's operating data for fiscal years 1994, 1995, and
1996, for the thirteen and twenty-six weeks ended June 29, 1996 and June 28,
1997 are set forth below as percentages of net sales:
<TABLE>
<CAPTION>
Year Ended December 31, 13 Weeks Ended 26 Weeks Ended
-------------------------- ----------------------- ---------------------
June 29, June 28, June 29, June 28,
---------- ------------ ---------- ----------
1994 1995 1996 1996 1997 1996 1997
-------- -------- -------- ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales ................................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit . ........................... 15.4 16.3 17.6 18.3 15.1 18.9 15.8
Selling, general and administrative ...... 6.5 6.3 7.2 6.4 6.7 6.9 6.5
Amortization .............................. 1.4 1.1 1.0 0.8 0.7 0.8 0.8
------ ------ ------ ------ --------- ------ ------
Operating income ........................ 7.5 8.9 9.4 11.1 7.7 11.2 8.5
Other (income) expense .................. (0.6) 0.7 0.3 0.3 0.1 0.3 0.1
Net interest expense ..................... 5.1 5.8 5.2 4.8 6.7 4.8 5.9
Income taxes .............................. 1.3 0.8 1.7 2.5 0.1 2.5 0.9
Extraordinary item ........................ 0.3 -- -- 0.0 2.8 0.0 1.4
------ ------ ------ ------ --------- ------ ------
Net income .............................. 1.4% 1.6% 2.2% 3.5% (2.0)% 3.5% 0.2%
====== ====== ====== ====== ========= ====== ======
</TABLE>
25
<PAGE>
Results of Operations
13 Weeks Ended June 28, 1997 ("Second Quarter 1997")
Compared to 13 Weeks Ended June 29, 1996 ("Second Quarter 1996")
Net Sales. Net sales increased by $2.1 million, or 5.1%, to $43.2 million
for Second Quarter 97 from $41.1 million for Second Quarter 96, mainly a result
of strong sales to the L'Oreal/Maybelline group in the Company's Cosmetics
Division.
Gross Profit. Gross profit decreased by $1.0 million, or 13.3%, to $6.5
million for Second Quarter 97 from $7.5 million for Second Quarter 96, due to
lower than expected volumes in the Round Rock facility, the addition of lower
gross margin Compaq sales, and a $.6 million charge for renegotiation of a
Mexico labor contract. This one time charge allows the Company to consolidate
two union contracts, eliminating the older, higher wage contract.
Selling, General and Administrative. SG&A expenses increased $.3 million,
or 11.5%, to $2.9 million for Second Quarter 97 from $2.6 million for Second
Quarter 96, due to the higher sales volume.
Amortization. Goodwill amortization remained flat at $.3 million for
Second Quarter 97.
Operating Income. Operating income decreased by $1.3, or 28.3%, to $3.3
million for Second Quarter 97 from $4.6 million for Second Quarter 96 for the
reasons listed above.
Other Expense. Other expense decreased slightly to $.1 million for Second
Quarter 97.
Net Interest Expense. Net interest expense increased by $1.0 million, or
52.6%, to $2.9 million for Second Quarter 97 from $1.9 million for Second
Quarter 96 due to the retirement of bank debt and the issue of $100 million
Senior Notes in the second quarter.
Income Taxes. Income taxes decreased by $1.0 million, or 100.0%, to $.0
million for Second Quarter 97 from $1.0 million for Second Quarter 96 as a
result of decreased operating income.
Extraordinary Item. Extraordinary item increased by $1.2 million for
Second Quarter 97 from $.0 million for Second Quarter 96 due to the writeoff of
$.4 million in bank fees net of tax, and a $.8 million prepayment penalty
associated with the retirement of subordinated debt, all of which are net of
tax.
Net Income. Net income decreased $2.4 million, or 160.0%, to $(.9) million
for Second Quarter 97 from $1.5 million for Second Quarter 96 as a result of
the above factors.
26 Weeks Ended June 28, 1997 ("First Half 1997")
Compared to 26 Weeks Ended June 29, 1996 ("First Half 1996")
Net Sales. Net sales increased by $4.2 million, or 5.2%, to $84.7 million
for First Half 97 from $80.5 million for First Half 96, as a result of strong
sales to the L'Oreal/Maybelline group in the Company's Cosmetics Division, and
the addition of Compaq to the computer customer base.
Gross Profit. Gross profit decreased by $1.9 million, or 12.4%, to $13.4
million for First Half 97 from $15.3 million for First Half 96, due to lower
than expected volumes in the Round Rock facility, the addition of lower gross
margin Compaq sales, and a $.6 million charge for renegotiation of a Mexico
labor contract. This one time charge allows the Company to consolidate two union
contracts, eliminating the older, higher wage contract.
Selling, General and Administrative. SG&A expenses decreased $.1 million,
or 1.8%, to $5.5 million for First Half 97 from $5.6 million for First Half 96.
Amortization. Goodwill amortization remained flat at $.7 million for
First Half 97.
Operating Income. Operating income decreased by $1.7, or 18.9%, to $7.3
million for First Half 97 from $9.0 million for First Half 96 for the reasons
listed above.
Other Expense. Other expense decreased by $.1 million to $.1 million for
First Half 97 from $.2 million for First Half 96. The other expense in 1996 was
from excess capacity charges that did not reoccur in 1997.
26
<PAGE>
Net Interest Expense. Net interest expense increased by $1.1 million, or
28.2%, to $5.0 million for First Half 97 from $3.9 million for First Half 96 due
to the retirement of bank debt and the issue of $100 million Senior Notes in the
second quarter.
Income Taxes. Income taxes decreased by $1.2 million, or 60.0%, to $.8
million for First Half 97 from $2.0 million for First Half 96 as a result of
decreased operating income.
Extraordinary Item. Extraordinary item increased by $1.2 million for
First Half 97 from $.0 million for First Half 96 due to the writeoff of $.4
million in bank fees net of tax, and a $.8 million prepayment penalty associated
with the retirement of subordinated debt, all of which are net of tax.
Net Income. Net income decreased $2.6 million, or 92.9%, to $.2 million
for First Half 97 from $2.8 million for First Half 96 as a result of the above
factors.
Fiscal 1996 versus Fiscal 1995
Net Sales. Net sales increased by $7.5 million, or 5.0%, to $156.9 million
for fiscal year 1996 from $149.4 million for fiscal year 1995, principally as a
result of inclusion of the first full year of POP display sales and an increase
in computer component sales. This increase was partially offset by a decrease
in unit sales in the dental market.
Gross Profit. Gross profit increased by $3.3 million, or 13.6%, to $27.6
million for fiscal year 1996 from $24.3 million for fiscal year 1995,
principally as a result of increased net sales in the POP display and computer
component markets as well as higher gross margins. This increase was partially
offset by a decline in gross profit in the dental market. Gross margin
increased to 17.6% for fiscal year 1996 from 16.3% in fiscal year 1995 due to
the realization of a full year of efficiency gains in the Matamoros, Mexico
manufacturing facility partially offset by inefficiencies related to the
start-up of the manufacturing facility in Round Rock, Texas. The product line
and efficiency gains from the relocation are not expected to have the
incremental contributory effect on future operating results that they have had
in the past.
Selling, General and Administrative. SG&A expenses increased by $2.0
million, or 20.7%, to $11.4 million for fiscal year 1996 from $9.4 million for
fiscal year 1995, principally as a result of professional expenses incurred in
connection with the formation of a possible joint venture in China and costs
associated with a management information systems upgrade.
Amortization. Amortization expense decreased by $0.2 million, or 7.9%, to
$1.5 million for fiscal year 1996 from $1.7 million for fiscal year 1995,
principally as a result of the expiration of certain amortized fees and
expenses incurred in the 1990 acquisition of the Company.
Operating Income. Operating income increased by $1.4 million, or 11.2%, to
$14.7 million for fiscal year 1996 from $13.3 million for fiscal year 1995.
Other Expense. Other expense decreased by $0.6 million, or 58.1%, to $0.4
million for fiscal year 1996 from $1.0 million for fiscal year 1995,
principally as a result of relocation expenses in 1995 which were not repeated
in 1996.
Net Interest Expense. Net interest expense decreased by $0.5 million, or
5.7%, to $8.1 million for fiscal year 1996 from $8.6 million for fiscal year
1995, principally as a result of a $5.0 million pay down on the Term Loan
Agreement and greater use of LIBOR rates under such agreement.
Income Taxes. Income tax expense increased by $1.4 million, or 109.1%, to
$2.6 million for fiscal year 1996 from $1.2 million for fiscal year 1995.
Net Income. Net income increased by $1.2 million, or 48.7%, to $3.6
million for fiscal year 1996 from $2.4 million for fiscal year 1995 as a result
of the above factors.
Fiscal 1995 versus Fiscal 1994
Net Sales. Net sales increased by $31.1 million, or 26.3%, to $149.4
million for fiscal year 1995 from $118.3 million for fiscal year 1994,
principally as a result of increased net sales primarily due to the inclusion
of a full year of Mid-State operations in fiscal year 1995 versus the inclusion
of five months of Mid-State operations in fiscal year 1994. The increase in net
sales also reflects the introduction of the POP display product line and
increased sales of computer components and other consumer products.
27
<PAGE>
Gross Profit. Gross profit increased by $6.1 million, or 33.7%, to $24.3
million for fiscal year 1995 from $18.2 million for fiscal year 1994,
principally as a result of the inclusion of a full year of Mid-State operations
in fiscal year 1995 and higher gross margins. Gross margin increased to 16.3%
for fiscal year 1995 from 15.4% for fiscal year 1994 substantially due to
Anchor's realization of the benefits in the second half of 1995 of its
cosmetics manufacturing consolidation into Matamoros, Mexico.
Selling, General and Administrative. SG&A expenses increased by $1.8
million, or 23.7%, to $9.4 million for fiscal year 1995 from $7.6 million for
fiscal year 1994, principally as a result of the inclusion of a full year of
Mid-State SG&A expenses and increased selling costs for the new POP display
product line.
Amortization. Amortization expense remained unchanged at $1.7 million for
fiscal year 1995 as compared to fiscal year 1994.
Operating Income. Operating income increased by $4.4 million, or 49.7%, to
$13.3 million for fiscal year 1995 from $8.9 million for fiscal year 1994.
Other (Income) Expense. Other (income) expense increased by $1.7 million
to $1.0 million for fiscal year 1995 from ($0.7) million in other income for
fiscal year 1994 principally as a result of relocation expenses incurred in
1995.
Net Interest Expense. Net interest expense increased by $2.6 million, or
43.9%, to $8.6 million for fiscal year 1995 from $6.0 million for fiscal year
1994, principally as a result of the inclusion of a full year of interest
expense paid in connection with the 1994 acquisition of Mid-State.
Income Taxes. Income tax expense decreased by $0.3 million, or 17.8%, to
$1.2 million for fiscal year 1995 from $1.5 million for fiscal year 1994.
Net Income. Net income increased by $0.7 million, or 37.3%, to $2.4
million for fiscal year 1995 from $1.8 million for fiscal year 1994 as a result
of the above factors.
Liquidity and Capital Resources
Historical
Historically, the Company has funded its business with cash generated from
operations and borrowings under its Revolving Credit and Term Loan Agreement,
with Bank of Boston as agent (the "Revolving Credit and Term Loan Agreement"),
with long-term borrowings used to finance the Company's acquisition of
Mid-State. In 1994, 1995 and 1996, the Company generated cash from operating
activities of $6.9 million, $8.8 million, and $13.1 million, respectively. The
Company's capital expenditures for 1994, 1995 and 1996 were $5.7 million, $6.9
million and $8.0 million, respectively, principally for additions to the
Company's manufacturing capacity. Also in 1994, the Company expended $27.4
million for its acquisition of Mid-State. In 1994, net borrowings increased
$28.0 million principally to fund the Mid-State acquisition. In 1995 and 1996
net borrowings were reduced by $3.3 million and $4.3 million, respectively. In
1995, the Company made approximately $0.6 million of capital expenditures at
its Waterbury facility to comply with environmental regulations.
Following Sale of the Initial Notes
After consummation of the sale of the Initial Notes and the application of
net proceeds therefrom, the Company's liquidity requirements consist primarily
of working capital needs and capital expenditures, required payments of
principal and interest on any borrowings under the New Credit Facility and
required payments of interest on the Notes and principal at maturity. The
Company estimates that its capital expenditures in 1997 will total $7 million,
of which approximately $2.5 million will be used to maintain existing
operations.
The New Credit Facility provides for revolving loans to, and the issuance
of letters of credit on behalf of, the Company, in an aggregate amount not to
exceed $15.0 million, $13.5 million of which was available at March 29, 1997
after giving pro forma effect to the sale of the Initial Notes. The New Credit
Facility will mature in 2003 and contains covenants customary for working
capital financings, including, without limitation, maximum leverage and
interest coverage ratios and minimum net worth requirements; restrictions on
capital expenditures, incurrence of additional indebtedness, dividends and
redemptions; and restrictions on mergers, acquisitions and sales of assets. See
"Description of Certain Indebtedness."
28
<PAGE>
The Issuer believes that cash flows from operating activities and its
ability to borrow under the New Credit Facility will be adequate to meet the
Issuer's debt service obligations, working capital needs and planned capital
expenditures at least through December 31, 1997.
The Indenture places significant restrictions on the Issuer's ability to
incur additional indebtedness, to make certain payments, investments, loans and
guarantees and to sell or otherwise dispose of a substantial portion of its
assets to, or merge or consolidate with, another entity. See "Description of
the Notes--Certain Covenants."
Inflation and Changing Prices
Anchor's sales and costs are subject to inflation and price fluctuations.
However, because changes in the cost of plastic resins and nylon, Anchor's
principal raw materials, are generally passed through to customers, such
changes historically have not, and in the future are not expected to have, a
material effect on Anchor's gross profit.
Impact of New Accounting Standards
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share,"
which changes the calculations used for earnings per share (EPS) and makes them
comparable to international EPS standards. It replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires dual
presentation of basic and diluted EPS on the face of the income statement for
all entities with complex capital structures and requires a reconciliation of
the numerator and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation. The effect of the standard on
quarterly consolidated financial statements would be to result in $2.79 and
$.15 of basic EPS for the quarters ended June 29, 1996 and June 28, 1997. The
standard would have no effect on the diluted EPS. The Statement is effective
for financial statements issued for periods ending after December 15, 1997;
earlier application is not permitted.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This Statement establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. The Statement is
effective for financial statements issued for periods beginning after December
15, 1997. Management has not yet determined the full effect of this Statement
on its financial statements.
29
<PAGE>
BUSINESS
General
Anchor is a leading designer, manufacturer and packager of precision
molded plastic products for a wide range of dental, cosmetic, medical, computer
and consumer applications. Based upon its knowledge of and experience in the
industry, the Company believes that it is one of the world's largest
manufacturers of toothbrushes and a leading U.S. manufacturer of cosmetics
packaging. For the year ended December 31, 1996, the Company had net sales of
$156.9 million, EBITDA of $23.6 million and net income of $3.6 million, making
it one of the largest independent plastic injection molders in North America.
Anchor began operations in 1941 as a manufacturer of cosmetic brushes for
Maybelline and, in 1958, began producing Pepsodent toothbrushes for Lever
Brothers Company, Inc. The Company was acquired in 1990 by affiliates of the
Thomas H. Lee Company and management. Since 1990, management has developed and
implemented a variety of strategic initiatives in order to enhance the
Company's long-term growth, profitability and competitiveness, including:
[bullet] Capitalizing on its manufacturing and technical expertise and
reputation for quality and service to grow its dental business, including
introducing the Crest[RegTM] line of toothbrushes for Procter & Gamble in
1992.
[bullet] Consolidating its cosmetics operations in an expanded maquiladora
manufacturing facility in Matamoros, Mexico, resulting in significant
operating efficiencies and cost savings.
[bullet] Diversifying its markets and customer base through product line
expansion and the 1994 acquisition of Mid-State.
As a result of these strategic initiatives, from 1991 to 1996, Anchor
increased net sales and EBITDA at compounded annual growth rates of 15.9% and
13.2%, respectively.
For the year ended December 31, 1996, approximately 90% of the Company's
net sales were generated in five markets: dental, cosmetics, medical device,
computer component and POP displays. In the dental market (approximately 36% of
net sales in 1996), the Company designs, manufactures and packages toothbrushes
for Colgate-Palmolive, Procter & Gamble, Chesebrough-Ponds, and SmithKline
Beecham, under such well-known brand names as Crest[RegTM], Colgate[RegTM] and
Pepsodent. In 1996, Anchor manufactured over 184 million toothbrushes and,
management believes, had the leading domestic toothbrush production market
share, estimated at approximately 27%. In the cosmetics market (approximately
26% of net sales in 1996), Anchor manufactures a comprehensive line of stock
and custom mascara, lipstick and nail applicators for L'Oreal, Maybelline, Mary
Kay and Estee Lauder, under such well-known brand names as Great Lash[RegTM]
and Clinique. Based on its knowledge of and experience in the industry,
management believes that the Company has a leading market share in several of
its cosmetics lines. In the medical device market (approximately 12% of net
sales in 1996), Anchor produces intravenous equipment and blood infusion
devices for Abbott and Baxter, among others. In the computer component market
(approximately 8% of net sales in 1996), Anchor produces bezels, battery pack
cases and expansion bases for Compaq and IBM. In 1995, leveraging its strengths
in the cosmetics market, the Company began manufacturing POP displays for
Maybelline, which market accounted for approximately 7% of net sales in 1996.
The remaining 11% of net sales in 1996 was generated from the manufacture of a
variety of other molded plastic components including closures for shampoo
bottles, insulating battery cases, interior and exterior parts for power tools,
and flat panel lights.
Competitive Strengths
The Company's customers are primarily large, branded consumer product
companies. Outsourcing allows Anchor's customers to optimize internal resources
and focus on their core competencies. Specifically, management believes that
customers prefer Anchor because of the following competitive strengths:
Quality Focus. Based on its knowledge of and experience in the industry,
the Company believes it is a leader in plastic injection molding and service
quality. The Company has received numerous quality service and preferred
supplier awards from its customers, including Colgate-Palmolive, Procter &
Gamble, 3M, Abbott and IBM. Furthermore, the Company has manufactured over one
billion toothbrushes for Colgate-Palmolive and Procter & Gamble to date without
a single shipment return for manufacturing or quality defects. A major reason
for the Company's achievements is QIS initiative instituted by management since
the acquisition of the Company in 1990.
30
<PAGE>
Design Capabilities. Anchor has dedicated design professionals who work
with customers to meet changing market needs. For example, the Company worked
closely with Procter & Gamble to produce the Crest Complete[RegTM] line of
toothbrushes in 1992, which uses a newly developed, proprietary fusion
technology as an alternative to the conventional staple-set technology.
Broad Manufacturing Resources. With its flexible, high capacity production
facilities, Anchor is able to meet customer demands quickly and efficiently,
producing customized products with little lead time. Anchor provides its
customers with a broad range of manufacturing services, including injection
molding, bristling, decoration and packaging. Anchor's broad customer base and
high production volumes enable it to achieve economies of scale and to maintain
in inventory a wide selection of resins and other raw materials.
Capital Investment Programs. Since 1991, Anchor has spent approximately
$39.4 million on capital investment, in large part to accommodate new product
lines by building facilities dedicated to specific products or customers. Such
programs include an expanded facility in Morristown, Tennessee for POP display
production, a facility in Round Rock, Texas for the production of computer
components and the consolidation of cosmetics production facilities in
Matamoros, Mexico.
Superior Customer Service. Anchor strives to provide a high level of
customer service which management believes exceeds the service provided by
competing injection molders or its customers' in-house manufacturing
operations. The Company uses its manufacturing resources, such as computerized
ordering systems, just-in-time production and flexible manufacturing processes,
to provide its customers with a rapid turnaround time on orders and seeks to be
responsive to any changes submitted by its customers.
As a result of these competitive strengths, Anchor enjoys a large customer
base of national consumer product companies. Each of the Company's five largest
customers in 1996 (Colgate-Palmolive, Maybelline, Procter & Gamble, Abbott and
IBM) have been customers of the Company for an average of approximately 25
years. The Company's emphasis on customer partnerships and its long standing
relationships with its largest customers serve to create barriers to entry in
its served markets.
Business Strategy
Anchor's overall business strategy is to increase revenues and
profitability by pursuing the following specific strategies:
Maintain Leadership in Dental and Cosmetics Markets. The Company has
established leading market positions in the dental and cosmetics markets as a
result of its low cost manufacturing capabilities, high quality design and
excellent customer service. The Company seeks to maintain this position by
continuing to lower costs and improve the quality of its products while working
with its customers to develop innovative new products for its markets.
Develop New Products and Customers. The Company seeks to grow by producing
custom plastic products for new customers in existing markets and by entering
new markets. Examples of new markets entered by the Company in the last few
years are POP displays, disposable surgical equipment and computer components.
Where appropriate, the Company may build new facilities which enhance its
ability to provide new products such as the Company's new facility in Round
Rock, Texas. As a result of these efforts, in the future, the Company intends
to expand its sales in the medical device, computer component and POP display
markets.
Lower Costs. The Company believes that it is a low cost producer for many
of its products and that it will continue to improve productivity through its
on-going program of upgrading equipment and facilities and investing in
automation and robotics. Through its highly trained work force, its streamlined
Mexican production facility, and its QIS program, management plans to improve
asset utilization, increase manufacturing productivity and reduce overhead.
Acquisitions. The Company intends to seek strategic acquisition
opportunities as the highly fragmented plastics industry continues its recent
trend toward consolidation. The Company intends to identify acquisition
opportunities similar to its 1994 acquisition of Mid-State which offered the
Company an opportunity to broaden its customer base and expand its
manufacturing into higher growth markets. Potential markets for acquisitions
include the medical device, computer component and telecommunications equipment
markets.
31
<PAGE>
Expansion into International Markets. As a result of the international
expansion of the Company's customers, Anchor is seeking to expand its
international capabilities, particularly by adding manufacturing capabilities
in China and Europe.
Industry Overview
The $100 billion plastic manufacturing industry encompasses a wide variety
of products and applications. Demand for plastics continues to be stimulated by
the use of plastic as an alternative to metals, paper and glass in a variety of
applications including packaging, durable goods and personal care products.
Anchor competes in the packaging and consumer markets, which are a large
portion of the total demand for plastics and tend to be fairly resistant to the
effects of economic cycles.
Plastics are formed into consumable products by various types of
processing methods. The main processing methods are injection molding, blow
molding, thermoforming and extrusion molding. The injection molding industry is
predominantly comprised of numerous small, independent injection molding
operations. Management estimates that plastic injection molding industry
revenues were approximately $16.5 billion in 1995. The capabilities of these
vendors are as widely varied as their end markets. The list of end uses of
injection molded plastic products includes housewares, packaging, automotive,
electrical, power tools and toys. Most vendors tend to be narrowly focused,
typically serving a regional customer base and a limited number of industries.
Furthermore, the industry-wide trend toward OEM consolidation of suppliers has
placed a financial strain on injection molders that are not capable of
investing in the necessary technology and capacity expansions required by large
customers.
Injection molders have historically competed for business on the basis of
price, quality and service. Given the competitive nature of the market, it is
difficult to differentiate on the basis of price. Customers are increasingly
seeking suppliers that can deliver rapid production schedule changes, just in
time supply and electronic data interchange. These trends require suppliers to
make significant investments in management information systems, manufacturing
capabilities, design and engineering support. Anchor believes that its
investment in these capabilities provide a competitive advantage over smaller
injection molders that cannot afford the investment.
The combination of increasingly complex applications for plastic molded
parts, the limited number of qualified molders and many OEM customers' seeking
to reduce costs through outsourcing have resulted in the creation of
partnerships between plastic injection molders and OEMs. These partnerships
enable suppliers and manufacturers to focus on long-range strategy and often
result in faster product development, increased design flexibility, lower costs
and improved quality. Given that suppliers in these partnerships are involved
in many decisions that impact costs as well as prevent production
complications, partnerships also enable molders to better preserve attractive
margins while continuing to meet customer expectations. The Company's full
service capabilities have enabled it to develop close relationships with
industry leaders seeking relationships with a limited number of high-quality
suppliers.
Markets and Products
Anchor designs, manufactures and packages precision molded plastic
products for dental, cosmetics, medical device, computer component, POP display
and consumer product markets. The Company's broad line of products include: (i)
toothbrushes and electric toothbrush heads; (ii) custom mascara packages, nail
applicators, compacts, and lipstick containers; (iii) molded medical devices
and surgical scrub brushes; (iv) personal computer components; (v) POP
displays; and (vi) other consumer products, such as shampoo bottle closures and
flat panel lights.
32
<PAGE>
The following table sets forth the percentage of total revenue for 1992
through 1996 and the twenty-six weeks ended June 29, 1996 and June 28, 1997 for
each of the Company's markets:
<TABLE>
<CAPTION>
Percentage of Company Total Revenue
---------------------------------------------------------------------------------------
June 29, June 28,
1992 1993 1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Dental Market .................. 61.8% 64.6% 54.0% 44.5% 35.8% 38.0% 35.3%
Cosmetics Market ............... 35.9% 33.7% 31.8% 25.8% 25.7% 26.6% 27.1%
Point of Purchase Market ...... 0.0% 0.0% 0.0% 1.5% 7.1% 8.0% 8.7%
Medical Market ............... 1.1% 1.1% 7.0% 13.0% 12.5% 9.9% 8.7%
Computer Market ............... 0.0% 0.0% 1.5% 3.6% 7.8% 5.2% 6.5%
Other Products ............... 1.2% 0.6% 5.7% 11.6% 11.1% 12.3% 13.7%
------ ------ ------ ------ ------ ------ ------
Total Sales .................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ====== ====== ====== ======
</TABLE>
Dental Market
Anchor is a leading independent designer, manufacturer and packager of
toothbrushes in the U.S. with an estimated market share of approximately 27% of
all toothbrush manufacturing. Management estimates that the domestic market for
toothbrushes was 676 million units in 1996. Management believes that increases
in industry sales will be generated by greater consumer awareness of the oral
hygiene benefits of more frequent toothbrush replacement, along with product
innovation and increased use of licensed logos and characters. Competition
among the major oral care companies has led to rapid product innovation in the
toothbrush market. Toothbrush marketers have been able to grow market share and
increase sales through aggressive new product introductions which clean teeth
more efficiently and are more ergonomic. Recent new product innovations include
angled bristles, various head sizes, new bristle patterns, and angled and two
component toothbrush handles.
The Company designs and manufactures toothbrushes for Colgate-Palmolive,
Procter & Gamble, Chesebrough-Ponds, and SmithKline Beecham, under such
well-known brand names as Crest[RegTM], Colgate[RegTM], Pepsodent[RegTM] and
Flexosaurus[RegTM]. In all, the Company manufactures more than 450 different
varieties of toothbrushes in 142 different colors. Furthermore, the Company
serves all major segments of the toothbrush market, producing super premium,
premium and value toothbrushes for its customers. Anchor also manufactures
electric toothbrush heads for Teledyne Water Pik, a division of Teledyne
Industries, Inc.
Anchor's position as a leading contract manufacturer of toothbrushes
requires it to produce toothbrushes to varying consumer specifications. As a
result, Anchor has the capability to respond with speed and flexibility to
customers' requirements for large or small quantities of new or improved
products. Anchor has a long history of working with its customers on product
innovations. When Procter & Gamble was launching its Crest line of
toothbrushes, Anchor collaborated with Procter & Gamble to jointly engineer
their unique bristling technology. Anchor has recently collaborated with
SmithKline Beecham in connection with its launch of the Flexosaurus toothbrush.
In addition to product design and development expertise, Anchor has packaging
and full finishing capabilities.
Anchor's supply contracts with Colgate-Palmolive and Procter & Gamble
extend through June 30, 1999 and December 31, 1997, respectively, subject to
one-year extensions. See "Risk Factors--Status of Key Customer Contracts."
Cosmetics Market
Anchor serves the eye and lip preparation and nail polish segments of the
domestic cosmetics market. Management estimates that, in 1996, eye make-up, lip
make-up and nail care products made up approximately 24% ($662 million), 22%
($611 million), and 11% ($318 million), respectively, of the total U.S.
cosmetics market, which management estimates was $2.8 billion in 1996. The
market is largely driven by a few major trends, including the continually
shifting trends of cosmetics shading and coloring, the growing importance of
skin care products and growth in the number of older consumers, a
disproportionately large segment of the market.
Anchor serves the cosmetics industry in five major product categories:
mascara, nail applicators, compacts, closures and lipstick containers. Anchor
manufacturers more than 220 different mascara packages and 19 different
lipstick containers. Anchor enjoys substantial business with the leading
cosmetics companies, including Estee
33
<PAGE>
Lauder, L'Oreal, Maybelline, Mary Kay, Revlon, Amway and Aveda, producing
products marketed under the brand names Great Lash[RegTM] and Clinique, among
others. The Company expects to continue as a major cosmetics packaging supplier
to these customers while expanding its customer base through product
innovations, such as its new, patented lipstick mechanism, Smooth Move[RegTM],
and improvement in nail applicators.
Anchor's key competitive advantages in the cosmetics industry are its
manufacturing expertise and vertical integration. Anchor's commercial strength
is derived from its ability to design products and molds, manufacture molds
in-house and produce high quality molded products using injection and blow
molding processes. Anchor then adds value through its expertise in metal
forming, mascara brush manufacture, high speed assembly and a wide range of
high quality decoration techniques.
Medical Device Market
Anchor manufacturers products for the U.S. medical device market. Plastics
are becoming more widely used in medical devices as the medical field realizes
the value of reduced breakage, the ability to manufacture extremely consistent
parts in a cost effective manner and the infection control benefits of
disposable products. The Company believes that the medical device market offers
attractive growth opportunities.
Anchor manufactures various plastic medical devices, including blood
filtration devices, angiographic syringes, intravenous equipment, in-vitro
diagnostic kits, medical scrub brushes and cardiotomy reservoirs. In addition,
in 1989, after fifteen years as a preferred Abbott supplier, the Company
entered into a ten-year contract to build, own and operate a dedicated medical
molding operation in Round Rock, Texas for Abbott's Hospital Products Division.
Also, in 1994, the Company began producing parts for disposable plastic
surgical saws to be distributed by Pfizer. Anchor's other major customers in
this market are Baxter and 3M.
Computer Component Market
Anchor is a manufacturer of plastic computer components in the U.S. The
Company believes that this market offers attractive growth opportunities due to
growth in the personal computer market, particularly with respect to laptop
computers.
Anchor manufactures standard and custom casings for computers for various
hardware vendors. In 1996, Anchor opened a facility in Round Rock, Texas
dedicated to the production of bezels, battery pack cases and expansion bases
for Compaq. In addition to Compaq, Anchor produces bezels and other computer
components for IBM. Anchor's success in developing its expanded Compaq
relationship is evidence of its ability to service the most dynamic and fastest
growing users of injection molded plastic products.
Point of Purchase Display Market
In 1995, Anchor, leveraging its relationship with Maybelline, entered into
an agreement with Maybelline to produce POP displays. The total U.S. POP
display market, as defined by the Point of Purchasing Advertising Institute, is
estimated to be approximately $12.0 billion, of which management estimates that
approximately $1.3 billion is associated with the health and beauty aid segment
of the POP display market. POP displays are comprised of a base unit, which
contains modules, shelving, racks and countertop fixtures used to present
cosmetics products at retail. The displays are molded, assembled, decorated,
packaged and delivered directly to Maybelline's customers from Anchor's
expanded Morristown, Tennessee facility. In addition to realizing revenue from
sales of the base unit, Anchor receives replacement orders for additional
modules as its customer changes its product presentation.
Consumer and Other Markets
Anchor manufactures a variety of other molded plastic components,
including shampoo bottle closures, insulating battery cases and interior and
exterior parts for power tools. Anchor's other customers include Austin
Innovation, Inc. (marketers of the Lime Light flat panel light), Seaquist and
Lydall.
Customers
Anchor operates in the dental market primarily through relationships with
some of the world's largest oral care product companies, including
Colgate-Palmolive Company ("Colgate-Palmolive"), The Procter & Gamble
Manufacturing Company ("Procter & Gamble"), Chesebrough-Ponds U.S.A. Company
("Chesebrough Ponds") and SmithKline Beecham Consumer Health Care, L.P.
("SmithKline Beecham"). Anchor also enjoys substantial
34
<PAGE>
business with several of the leading cosmetics companies including Amway
Corporation ("Amway"), Estee Lauder Companies ("Estee Lauder"), Maybelline,
Inc. ("Maybelline"), a wholly-owned subsidiary of Cosmair, Inc., which is in
turn a wholly-owned subsidiary of L'Oreal Group ("L'Oreal"), and Mary Kay
Cosmetics, Inc. ("Mary Kay"). Anchor supplies its products to a broad group of
well-known medical, computer and consumer companies, including Abbott
Laboratories ("Abbott"), Baxter Healthcare ("Baxter"), Aastrom Biosciences,
Inc. ("Aastrom"), 3M Company ("3M"), Pfizer, Inc. ("Pfizer"), Compaq Computer
Corporation ("Compaq"), IBM Corporation ("IBM"), Austin Innovation, Inc.,
Seaquist Closures, a division of Aptargroup, Inc. ("Seaquist"), and Lydall
Central, Inc. ("Lydall"). See "Risk Factors--Customer Concentration."
Anchor is party to a contract with Procter & Gamble pursuant to which
Anchor provides Procter and Gamble's requirements for certain products during
the term of the Agreement. The initial term of the Agreement extends until
December 31, 1997 with the option to extend for three additional one year
periods by mutual agreement. Price changes in the molding resin and nylon
markets will be passed on to Procter & Gamble as they occur. Procter & Gamble
may reduce or discontinue Anchor's shipments if it reduces or discontinues its
use of the commodity(ies) covered by the Agreement so long as any such
reduction or discontinuance is in the same proportion as applied by Procter &
Gamble to other suppliers. Additionally, Procter & Gamble may terminate the
Agreement if Anchor fails to maintain security, fails to maintain safety and
health standards, fails to provide a reliable work force and supervision of
appropriate quantity and quality, fails to meet Procter & Gamble's reasonable
requirements for quantity/quality/timely shipment of product or any other
material breach or default under the Agreement.
Anchor is party to an agreement with Colgate-Palmolive which has a term
ending January 30, 1999. The Agreement may be renewed by Colgate-Palmolive for
up to three successive one-year terms upon notice to Anchor of at least sixty
days prior to the expiration of the initial term or each renewal term. The
parties operate on estimated target volumes and a monthly rolling forecast for
the following six-month period. Either party may terminate the Agreement for
reasons including the cessation of operations by the other party or the
commission of a material default in any of the material terms or obligations of
the Agreement. Additionally, if there is a change of control in the beneficial
ownership of more than twenty-five percent (25%) of the outstanding voting
shares of Anchor where such sale is made to a party whose business is
materially or directly competitive with any of Colgate's business, Colgate may
terminate the Agreement.
Mid-State is party to an Agreement with Abbott under which it has
established a manufacturing facility to produce parts for Abbott. Abbott
purchases the manufacturing capacity of the facility to meet a portion of its
plastic product requirements. The Agreement extends through the year 2000.
Abbott may renew the Agreement for additional one-year terms upon 90 days
written notice to Mid-State prior to the commencement of each renewal term.
Abbott may terminate the Agreement in the event of certain occurrences,
including but not limited to, failure of the products provided to meet certain
product specifications or failure of Mid-State Plastics to meet certain
expected production levels.
Marketing and Sales
The Company serves its customers primarily through its direct field sales
force which includes 12 account managers and a number of market specific
commissioned sales agents. Several of the Company's largest customers are
serviced by a dedicated sales agent. Skilled customer service representatives
are located in each of the Company's facilities to maintain daily contact while
supporting the efforts of the salesforce. The sales effort is overseen by
divisional sales/marketing executives.
Manufacturing Operations
Primary Manufacturing
The Company manufactures many of its products using the plastic injection
molding process. The process begins when plastic resin, in the form of small
pellets, is fed into an injection molding machine. The injection molding
machine then melts the plastic resin and injects it into a multi-cavity steel
mold, forcing the plastic resin to take the final shape of the product. At the
end of each molding cycle (5 to 25 seconds), the plastic parts are ejected from
the mold into automated handling systems from which they are either packed for
shipping or further processed.
Anchor's overall manufacturing philosophy is to be customer focused,
particularly by providing the lowest total delivered cost for the products it
manufactures. Each of the Company's plants is managed by a dedicated team
responsible for the profitability of the facility and each plant has complete
tooling maintenance capabilities. The
35
<PAGE>
Company has historically made, and intends to continue to make, significant
capital investments in plant and equipment.
In addition to its plastics manufacturing, the Company manufactures
aluminum and brass components for mascara, lipstick and nail enamel packages.
This process converts strips of raw material into progressively formed, close
tolerance components. All of these components are then decorated and or
assembled to other metal or plastic components. The Company has 21 metal
forming presses in its metal stamping facility in Waterbury, Connecticut.
Secondary and Value Added Processes
The Company offers value added processes which include a wide range of
assembly, decoration and packaging services. The Company bristles toothbrushes
(using staple-set and fusion technologies), molds toothbrush handles and
provides finished packaging for virtually all molded articles. The Company
provides a full range of promotional assembly services. The Company provides
comprehensive fulfillment services for POP displays and molds product,
assembles and packages components in class 100,000 clean rooms for its medical
device market customers, alleviating the need for subsequent sterilization of
such components.
Product Development and Mold Design
The Company has a staff of engineers who use three-dimensional, computer
aided design technology to design and develop new products and prepare mold
drawings. Anchor has the ability to electronically exchange files and interface
directly with its major customers. This enables the engineers to expedite the
product development process. Engineers use in-house prototype services, which
utilize a wide range of equipment to produce prototypes and sample parts. The
Company can simulate the molding environment by running unit-cavity prototype
molds in injection molding machines dedicated to research and development of
new products. Production molds are then designed and built in-house, by one of
Anchor's two mold building facilities, or by an external shop.
Quality Assurance
Each plant uses Anchor's QIS, which includes extensive involvement of
employees to increase productivity and continually improve product quality.
Anchor has 181 employee teams working on quality and productivity projects,
with over 60% of all employees actively engaged in these teams. This teamwork
approach to problem-solving increases employee participation and provides
necessary training at all levels. Tools such as statistical process control and
design of experiments are utilized extensively.
Systems
Anchor uses an IBM AS/400 computer equipped with MAPICS XA software in all
of its facilities. This fully integrated business software system provides
support for all divisions and is the platform for the comprehensive materials
requirement planning process strategy that the Company employs. MAPICS XA also
provides financial and operational reports by plant and product line. This
accounting and control system is easily expandable to add new features and/or
locations as the Company grows.
Raw Materials
The major raw materials used in the manufacturing of the Company's
products are various plastic resins, nylon and packaging materials. Most of the
raw materials used in the Company's products are available from multiple
sources. However, several raw materials used in the Company's products are
currently obtained from single sources. Certain of the Company's contracts
provide for raw material price increases to be absorbed by these customers and
the Company seeks to pass through any increases in the cost of raw materials to
its other customers. See "Risk Factors--Dependence on Suppliers."
Competition
The markets in which the Company operates are highly competitive. The
Company competes with a significant number of companies of varying sizes,
including divisions or subsidiaries of larger companies, on the basis of price,
service, quality and the ability to supply products to customers in a timely
manner. Some of these competitors have, and new competitors may have, greater
financial and other resources than the Company. Competitive pressures or other
factors, including the vertical integration by certain of the Company's major
customers of manufacturing processes traditionally outsourced to the Company,
could cause the Company to lose market share or could result
36
<PAGE>
in a significant price erosion with respect to the Company's products, either
of which would have a material adverse effect on the Company's results of
operations. Furthermore, the Company's customers operate in highly competitive
markets. To the extent the Company's major customers lose market share in their
respective markets, the Company's results of operations and financial condition
could be materially and adversely affected. See "Risk Factors-- Competition."
In addition to facing competition from its customers, Anchor faces
competition from a number of independent injection molding manufacturers.
Anchor's major competitor in the dental market is Schiffer. Some of Anchor's
major competitors in the cosmetics market, such as Risdon Corporation and
Henlopen Manufacturing Co., Inc. compete across product lines, while most of
its competitors focus on an individual segment of the market. Anchor's primary
competitors in the medical devices market are Nypro Inc., Tech Group Inc. and
Tredegar Molded Products Co. Anchor's primary competitors in the computer
components market are Mack Molding Co. Inc., SPM Inc. and Beach Mold & Tool
Inc. Many of these competitors in the medical device and computer component
markets also compete with Anchor in the consumer and other markets. The POP
display market is served by a number of large suppliers. This market requires a
wide range of services, and the suppliers in the industry are able to perform
these services with varying degrees of self-sufficiency. The leaders include
P.O.P. Mechtronics, ADC American Display and The Niven Marketing Group.
Properties
The Company, headquartered in Knoxville, Tennessee, operates a total of
nine manufacturing facilities in five locations and two mold technology centers
throughout the United States and Mexico as detailed in the following table:
<TABLE>
<CAPTION>
Location Use Square Feet Leased/Owned
<S> <C> <C> <C>
Elk Grove, IL Mold making 10,000 Leased
Harlingen, TX Warehouse 45,000 Leased
Knoxville, TN Administrative 12,000 Leased
Matamoros, Mexico Manufacturing 118,000 Owned
Morristown, TN Plant "B" Manufacturing 180,000 Owned
Morristown, TN Plant "C" Manufacturing 120,000 Owned
Morristown, TN Warehouse 90,000 Leased
Round Rock, TX Manufacturing 71,300 Owned
Sanford, NC Mold making 12,500 Owned
Seagrove, NC Manufacturing 6,000 Owned
Seagrove, NC Manufacturing 43,600 Owned
Seagrove, NC Manufacturing 40,000 Owned
Seagrove, NC Manufacturing 43,600 Owned
Seagrove, NC Warehouse 31,700 Leased
Waterbury, CT Manufacturing 120,000 Owned
</TABLE>
None of the above leases expires prior to April 30, 1998.
Environmental Matters
The Company and its operations are subject to comprehensive and frequently
changing federal, state and local environmental and occupational health and
safety laws and regulations, including laws and regulations governing emissions
of air pollutants, discharges of waste and storm water, and the disposal of
hazardous wastes. The Company is also subject to liability for the
investigation and remediation of environmental contamination (including
contamination caused by other parties) at properties that it owns or operates
and at other properties where the Company or its predecessors have arranged for
the disposal of hazardous substances. As a result, the Company is involved from
time to time in administrative and judicial proceedings and inquiries relating
to environmental matters. The Company believes there are currently no pending
investigations at the Company's plants and sites relating to environmental
matters, other than certain matters for which it is being defended and
indemnified by Philips Electronics North American Corporation, its former
parent. However, there can be no assurance that the Company will not be
involved in any other such proceeding in the future and that the aggregate
amount of future clean up costs and other environmental liabilities will not be
material.
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<PAGE>
Federal, state and local governments could enact laws or regulations
concerning environmental matters that increase the cost of producing, or
otherwise adversely affect the demand for, plastic products. The Company cannot
predict the environmental liabilities that may result from legislation or
regulations adopted in the future nor can the Company predict how existing or
future laws or regulations will be administered or interpreted or what
environmental conditions may be found to exist. Enactment of more stringent
laws or regulations or more strict interpretation of existing laws and
regulations could require additional expenditures by the Company, some of which
could be material. The Company does not have insurance coverage for
environmental liabilities other than in Mexico and does not anticipate
obtaining such coverage in the future.
Legal Proceedings
The Company is party to lawsuits and administrative proceedings that arise
in the ordinary course of its business. Although the final results in all such
lawsuits and proceedings cannot be predicted, the Company currently believes
that their ultimate resolution, after taking into account the liabilities
accrued with respect to such matters, will not have a material adverse effect
on the Company's financial condition or results of operations.
MANAGEMENT
Directors and Executive Officers of the Company
Anchor Holdings, Inc. ("Holdings") owns all of the capital stock of the
Issuer. The following table sets forth certain information regarding each of
the Directors and executive officers of the Issuer and Holdings.
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Francis H. Olmstead, Jr. ...... 59 Chairman, President and Chief Executive Officer of
Holdings and the Issuer
Robert T. Parkey ............... 60 Director and Executive Vice President of Holdings
and the Company and General Manager of Anchor
Brush Division of the Issuer
Jack C. Lail (1) ............... 64 Director and Executive Vice President of Holdings
and the Issuer
Geoffrey A. deRohan ............ 40 Director and Executive Vice President of Holdings
and the Issuer and General Manager of Anchor
Cosmetics and Mid-State Plastics Divisions of the
Issuer
Joseph M. Viglione ............ 53 Senior Vice President, Human Resources and Total
Quality of Holdings and the Issuer
Phyllis C. Best ............... 51 Senior Vice President, Finance and Controller of
Holdings and the Issuer
Claude J. Kyker ............... 54 Senior Vice President, Treasury/Logistics of
Holdings and the Issuer
Thomas R. Shepherd ............ 67 Director of Holdings and the Issuer
Scott A. Schoen ............... 38 Director of Holdings and the Issuer
Terrence M. Mullen ............ 30 Director of Holdings and the Issuer
</TABLE>
- ------------
(1) Pursuant to the terms of Mr. Lail's employment agreement, Mr. Lail
terminated his employment with the Company on or about July 28, 1997.
Francis H. Olmstead, Jr. has been Chairman, President and Chief Executive
Officer of Holdings and the Issuer since 1990. Prior to joining Anchor, Mr.
Olmstead was Executive Vice President, Industrial/Commercial Division of
Philips Lighting. He joined North American Philips Corporation in 1984 after
having served as Vice President and General Manager, Electrical Products
Division for Corning Glass.
Robert T. Parkey has been a Director and Executive Vice President of
Holdings and the Issuer and General Manager of Anchor Brush Division of the
Issuer since 1992 and was Senior Vice President of Holdings and the Issuer from
1990 to 1992. Mr. Parkey joined the Company in 1975 and was promoted to Vice
President, Healthcare Division in 1978. Prior to joining Anchor, he was Vice
President, Sales Manager with Husky Industries, a division of Husky Oil
Company.
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<PAGE>
Jack C. Lail has been a Director and Executive Vice President of Holdings
and the Issuer since 1994 and was President of Mid-State from 1971 to 1994.
Geoffrey A. deRohan has been a Director of Holdings and the Issuer and
General Manager of the Mid-State Plastics Division of the Issuer since 1996 and
Executive Vice President of Holdings and the Issuer and General Manager of the
Anchor Cosmetics Division of the Issuer since 1995. Prior to joining Anchor,
Mr. deRohan served as Vice President and General Manager of Wheaton Injection
Molding, President of Wheaton Plastic Products, and Vice President of
Development Health Care Market at Wheaton, Inc. from 1986 to 1995.
Joseph M. Viglione has been Senior Vice President, Human Resources and
Total Quality of Holdings and the Issuer since 1992 and was Vice President,
Employee Relations from 1982 to 1992.
Phyllis C. Best has been Senior Vice President, Finance and Controller of
Holdings and the Issuer since 1995 and Vice President and Controller of
Holdings and the Issuer since 1990.
Claude J. Kyker has been Senior Vice President, Treasury/Logistics of
Holdings and the Issuer since 1992 and was Vice President, Finance and
Controller from 1990 to 1992.
Thomas R. Shepherd has been a Director of Holdings and the Issuer since
1990. Mr. Shepherd has been a Managing Director of and been engaged as a
consultant to the Thomas H. Lee Company since 1986. Mr. Shepherd also serves as
Executive Vice President of Thomas H. Lee Advisors I and an officer of various
other Thomas H. Lee Company affiliates. Mr. Shepherd is a director of General
Nutrition Companies, Inc. and various private corporations.
Scott A. Schoen has been a Director of Holdings and the Issuer since 1990.
Mr. Schoen has been a Managing Director of the Thomas H. Lee Company since
1991. Mr. Schoen also serves as Vice President of Thomas H. Lee Advisors I and
Thomas H. Lee Advisors II. Mr. Schoen is a director of First Alert, Inc.,
Health o meter Products, Inc., LaSalle Re Holdings, Rayovac Corporation and
various private corporations.
Terrence M. Mullen has been a Director of Holdings and the Issuer since
1996. Mr. Mullen is currently an Associate of the Thomas H. Lee Company and had
worked at such firm from 1992 to 1994 before rejoining it in 1996.
Messrs. Schoen, Shepherd, and Mullen serve on the Board of Directors as
the representatives of Thomas H. Lee Company, an affiliate of Thomas H. Lee
Equity Partners, L.P., ML-Lee Acquisition Fund II, L.P. and ML-Lee Acquisition
Fund (Retirement Accounts) II, L.P.
Term of Office
Directors and officers are elected to serve until their respective
successors have been duly elected and qualified or until their earlier
resignation or removal. The current Directors and officers were elected on June
11, 1996.
Committees of the Board of Directors
The Board of Directors has established a Compensation Committee currently
consisting of Messrs. Olmstead, Shepherd and Schoen. The Compensation Committee
makes recommendations concerning the salaries and incentive compensation of
employees of and consultants to Anchor, and oversees and administers the
Company's stock option plans.
The Board of Directors has established an Audit Committee currently
consisting of Messrs. Schoen and Mullen. The Audit Committee is responsible for
reviewing the results and scope of audits and other services provided by the
Company's independent auditors.
Compensation of Directors
Members of the Board of Directors of the Company receive no annual fees
but are reimbursed for reasonable out-of-pocket expenses incurred in their
capacity as directors.
Compensation Committee Interlocks and Insider Participation
Messrs. Olmstead, Shepherd and Schoen served as members of the
Compensation Committee during fiscal year 1996. Mr. Olmstead was an executive
officer of Holdings and the Issuer during fiscal year 1996. Messrs. Shepherd
and Schoen were employees of Thomas H. Lee Company and were not officers or
employees of the Company or any of its subsidiaries during fiscal year 1996.
See "Certain Transactions."
39
<PAGE>
Limitation of Liability; Indemnification of Directors and Officers
The Certificates of Incorporation of Holdings and the Issuer limit the
personal liability of directors to the corporations. The By-laws of Holdings
and the Issuer provide that the corporations shall indemnify directors and
officers of the corporations to the full extent permitted by the Delaware
General Corporation Law.
Executive Compensation
The following table sets forth all compensation awarded to, earned by or
paid to the Company's Chairman, President and Chief Executive Officer during
1996 and each of the Company's four most highly compensated executive officers
(other than the Chairman, President and Chief Executive Officer) for 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
---------------------------------------------------------
Other Annual All Other
Name and Principal Positions Year Salary Bonus ($) Compensation ($)(1) Compensation ($)(2)
- ------------------------------- ------ ---------- ----------- --------------------- --------------------
<S> <C> <C> <C> <C> <C>
Francis H. Olmstead, Jr.
Chairman, President and
Chief Executive Officer 1996 $250,000 $130,000 $ 77,336 $ 11,451(6)
John J. Nugent
Executive Vice President (3) 1996 192,000 79,600 50,240 7,104
Robert T. Parkey
Executive Vice President 1996 161,000 71,300 94,987 12,898
Geoffrey A. deRohan
Executive Vice President 1996 149,999 68,400 18,994(4) 1,818(7)
Jack C. Lail
Executive Vice President 1996 139,903 48,700 932(5) 0
</TABLE>
- ------------
(1) Amounts shown include Company reimbursements of taxes paid by the Named
Executive Officers shown above, which were as follows: Mr. Olmstead,
$36,448; Mr. Nugent, $23,540; Mr. Parkey, $44,287; Mr. deRohan, $7,794;
and Mr. Lail, $19,695. Amounts shown also include Company contributions to
annuities for each of the Named Executive Officers shown above (except
Messrs. deRohan and Lail), which were as follows: Mr. Olmstead, $23,000;
Mr. Nugent, $16,500; and Mr. Parkey, $39,000.
(2) Amounts include contributions to the Company's medical plan for the Named
Executive Officers above (except for Messrs. deRohan and Lail), which were
as follows: Mr. Olmstead, $7,465; Mr. Nugent, $7,104; and Mr. Parkey,
$12,123.
(3) Mr. Nugent terminated his employment with the Company on May 2, 1997.
(4) Includes $11,200 paid by the Company for the lease of an automobile to Mr.
deRohan.
(5) Consists of $932 charged to Mr. Lail as income due to his personal use of a
Company owned automobile.
(6) Includes $3,986 reimbursed by the Company for personal financial planning
services.
(7) Includes $1,818 reimbursed by the Company for personal financial planning
services.
40
<PAGE>
Option Grants and Exercises
The following table discloses the grants of stock options during fiscal
1996 to the Named Executive Officers.
OPTION GRANTS IN FISCAL YEAR 1996
<TABLE>
<CAPTION>
Potential realizable
value at assumed
annual rates of stock
price appreciation for
Individual Option Grants option term (1)
--------------------------------------------------------------- ----------------------
Number of Percent of Total
Securities Options Exercise
Underlying Granted to or Base
Options Employees price Expiration
Name Granted (#) in Fiscal Year (per share) Date 5% 10%
- --------------------------- ------------- ----------------- ------------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Geoffrey A. deRohan ...... 10,000 100% $30.00 4/1/2006 $188,668 $478,123
</TABLE>
- ------------
(1) These values are based on assumed rates of appreciation only. Actual gains,
if any, on shares acquired on option exercises are dependent on the future
performance of Holdings' Common Stock.
1996 YEAR END OPTION VALUES (1)
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised Options In-the-Money Options
at 1996 Year End at 1996 Year End (2)
------------------------------- ------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---------------------------------- ------------- --------------- ------------- --------------
<S> <C> <C> <C> <C>
Francis H. Olmstead, Jr. ...... 40,000 0 $740,000 $0
John J. Nugent (3) ............ 28,200 0 521,700 0
Robert T. Parkey ............... 28,400 0 525,400 0
Geoffrey A. deRohan ............ 0 10,000 0 0
Jack C. Lail .................. 0 6,250 0 0
</TABLE>
- ------------
(1) No options were exercised by any of the Named Executive Officers in fiscal
1996. All such outstanding stock options other than those held by Messrs.
deRohan and Lail were exercised upon consummation of the Initial Offering.
None of Holdings' capital stock is publicly traded. Market value of the
options was calculated on the basis of the fair market value of the
underlying securities at December 31, 1996 of $28.00 per share as
determined by Holdings' Board of Directors minus the aggregate option
exercise prices.
(2) The exercise price of all such options, except for those held by Messrs.
deRohan and Lail, is $9.50 per share. Mr. deRohan's options are
exercisable at $30.00 per share and Mr. Lail's options are exercisable at
$41.30 per share.
(3) Mr. Nugent terminated his employment with the Company on May 2, 1997.
Management Stock Option Plans
1990 Time Accelerated Restricted Stock Option Plan
On October 29, 1990, Holdings adopted the 1990 Time Accelerated Restricted
Stock Option Plan, as amended effective April 1, 1996 (the "1990 Plan"). A
maximum of 163,300 shares of Holdings common stock, $.01 par value per share
("Holdings Common Stock"), may be issued pursuant to the 1990 Plan upon the
exercise of options. Under the 1990 Plan, non-qualified stock options may be
granted to members of senior management of Holdings and its subsidiaries. As of
December 31, 1996, options to purchase 163,300 shares of Holdings Common Stock
at exercise prices of $9.50-$30.00 per share have been granted.
The 1990 Plan is administered by the Board of Directors of Holdings or a
Committee consisting of three or more directors. Subject to provisions of the
1990 Plan, the Board of Directors of Holdings has the authority to select
optionees and determine the terms of the options granted, including (i) the
number of shares subject to such option,
41
<PAGE>
(ii) when the option becomes exercisable and (iii) the exercise price of the
option; provided, however, that no Option may have a term in excess of ten
years and six months from the date of grant.
The terms and conditions of an Option grant are set forth in a related
option agreement (the "Option Agreement"). An Option is not transferable by the
optionee except by will or by the laws of descent and distribution. Options
granted under the 1990 Plan will terminate upon the earliest to occur of (a)
the date ten years and six months after the date of the grant of the Option,
(b) 30 days following an optionee's voluntary termination or termination for
Cause (as defined in the Shareholders' Agreement) of employment with Holdings
or any of its subsidiaries or (c) 180 days following an optionee's termination
of employment without Cause or due to death or Disability (as defined in the
Shareholders' Agreement) of the optionee. Payment of the Option exercise price
may only be made in cash or by bank cashier's check or check.
1995 Time Accelerated Restricted Stock Option Plan
On June 11, 1996, Holdings adopted the 1995 Time Accelerated Restricted
Stock Option Plan (the "1995 Plan"). A maximum of 25,000 shares of Holdings
Common Stock may be issued pursuant to the 1995 Plan upon the exercise of
options. Under the 1995 Plan, non-qualified stock options may be granted to
members of senior management of the Company and its subsidiaries who were
formerly employed by Mid-State and who, at the time of adoption of the 1995
Plan, were employed in the Company's Mid-State Plastics Division. As of
December 31, 1996, options to purchase 25,000 shares of Holdings Common Stock
at an exercise price of $41.30 per share have been granted.
The 1995 Plan is administered by the Board of Directors of Holdings or a
Committee consisting of three or more directors. Subject to provisions of the
1995 Plan, the Board of Directors of Holdings has the authority to select
optionees and determine the terms of the options granted, including (i) the
number of shares subject to such option, (ii) when the option becomes
exercisable and (iii) the exercise price of the option; provided, however, that
no Option may have a term in excess of ten years and six months from the date
of grant.
The terms and conditions of an Option grant are set forth in a related
option agreement (the "Option Agreement"). An Option is not transferable by the
optionee except by will or by the laws of descent and distribution. Options
granted under the 1995 Plan will terminate upon the earliest to occur of (a)
the date ten years and six months after the date of the grant of the Option,
(b) 30 days following an optionee's voluntary termination or termination for
Cause (as defined in the Shareholders' Agreement) of employment with Holdings
or any of its subsidiaries or (c) 180 days following an optionee's termination
of employment without Cause or due to death or Disability (as defined in the
Shareholders' Agreement) of the optionee. Payment of the Option exercise price
may only be made in cash or by bank cashier's check or check.
Employment Agreements
The Company has entered into employment agreements, effective as of April
1, 1996 (the "Agreements"), with each of Francis H. Olmstead, Jr., Robert T.
Parkey, Geoffrey A. deRohan, Joseph M. Viglione, Claude J. Kyker and Phyllis C.
Best (each an "Employee"; collectively, the "Employees").
The initial employment terms, the base salaries for 1996 and maximum bonus
amounts (as a percentage of base salary) are set forth below:
<TABLE>
<CAPTION>
Maximum
Employee Initial Term Base Salary Bonus(1)
- ---------------------------------- -------------- ------------- ---------
<S> <C> <C> <C>
Francis H. Olmstead, Jr . ...... 12/31/98 $250,000 55.0%
Robert T. Parkey ............... 12/31/98 $161,000 40.0%
Geoffrey A. deRohan ............ 12/31/98 $145,000 40.0%
Joseph M. Viglione ............ 12/31/97 $106,200 28.5%
Claude J. Kyker ............... 12/31/97 $ 98,200 28.5%
Phyllis C. Best ............... 12/31/97 $ 93,400 25.0%
</TABLE>
- ------------
(1) The bonus will be computed on the Company's financial and other results and
the overall performance of the Employee as determined in the sole
discretion of the Board of Directors. The bonus will be paid, if at all,
in the year following the year in which it is earned.
42
<PAGE>
Upon a termination of employment due to death or disability of the
Employee, the Employee, or his estate, as the case may be, shall be entitled to
one year's base salary plus the amount of the last full-year bonus, pro-rated
to the effective date of termination. Upon a termination of employment by the
Employee for Cause (as defined in the Agreements) or termination by the Company
without Cause, the Employee shall be entitled to an amount equal to base salary
and bonus (the amount of the last full-year bonus), both computed to the end of
the term. Upon a termination of employment by the Employee without Cause or
termination by the Company with Cause, the Company may pay, at its sole
discretion, one-half of one year's base salary as consideration for a one-year
non-competition agreement with the Employee. Upon a termination of employment
due to expiration of the term of employment, the Company may pay, at its sole
discretion, one year's base salary as consideration for a one-year
non-competition agreement with the Employee. All severance payments pursuant to
this paragraph will be paid in quarterly installments. Further, if the Employee
obtains other employment during the period in which the Company is obligated to
make severance payments, the Company's obligation to make such payments will be
reduced by an amount equal to 75% of the total earnings such Employee makes
from such other employment.
Lail Employment Agreement
On July 29, 1994, upon the acquisition of Mid-State, the Company and Jack
C. Lail entered into an employment agreement whereby Mr. Lail would serve as
Executive Vice President of the Company for an annual salary of $125,000 per
year through July 28, 1997. Moreover, the agreement provides for a maximum
bonus of 40% of Mr. Lail's base salary upon the Company's attainment of certain
financial goals. Upon termination of Mr. Lail's employment for other than
disability or Cause (as set forth in the agreement), Mr. Lail shall be entitled
to receive a lump sum payment in the amount of all remaining cash payments over
the term of the agreement. Also, in such event, Mr. Lail will be entitled to
rights and benefits, as of the date of termination, under any employee benefits
maintained by the Company in which Mr. Lail participated.
Supplemental Executive Retirement Benefits Agreements
Each of the executive officers of the Company is party to a Supplemental
Executive Retirement Benefits Agreement (the "SERB Agreements") with the
Company. Under these agreements, such executive officers are, upon retirement
(as defined in the SERB Agreement), entitled to a life-time monthly retirement
benefit calculated based upon years of service and average salary as set forth
in the table below. The SERB Agreements also provide for spousal survival
benefit options. Lastly, in the event of the sale of substantially all the
assets of the Company or a change of control, each executive officer is
entitled to a lump sum payment in an amount equal to the actuarial equivalent
of the executive officer's normal retirement benefit unless the successor
entity or resulting controlling entity expressly assumes the obligations under
the SERB Agreement.
<TABLE>
<CAPTION>
Years of Service
------------------------------------------------------------
Remuneration 15 20 25 30 35
- -------------- --------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
$ 125,000 $20,625 $ 27,500 $ 34,375 $ 41,250 48,125
150,000 24,750 33,000 41,250 49,500 57,750
175,000 28,875 38,500 48,125 57,750 67,375
200,000 33,000 44,000 55,000 66,000 77,000
250,000 41,250 55,000 68,750 82,500 96,250
300,000 49,500 66,000 82,500 99,000 115,500
400,000 66,000 88,000 110,000 132,000 154,000
450,000 74,250 99,000 123,750 148,500 173,250
500,000 82,500 110,000 137,500 165,000 192,500
</TABLE>
(1) The compensation covered by this plan is the average of the employee's
highest five years, selected from the last ten calendar years, of
earnings, which are defined under this plan as the total cash compensation
paid to the employee during a calendar year includible in the employee's
gross income under the Internal Revenue Code, excluding any expense
reimbursements, deferred compensation payments, lump sum severance
43
<PAGE>
payments, stock options, or any distributions from any long-term incentive
plan, or any long-term key employee compensation program.
(2) The credited years of service under this plan for each of the Named
Executive Officers is as follows: Mr. Olmstead, 12; Mr. Nugent, 32; Mr.
Parkey, 10; Mr. deRohan, 1; and Mr. Lail, 2.
(3) The monthly retirement benefit is the higher of (i) the product of (a) the
employee's highest five years of earnings; (b) years of credited service
under the plan; and (c) 1.1% and (ii) the sum of (a) the product of (1)
the employee's highest five years of earnings; (2) years of credited
service under the plan; and (3) 1.0%; and (b) the product of (1) the
amount by which the employee's highest five years of earnings exceeds the
Average Social Security Taxable Wage Base; (2) years of credited service
under the plan; and (3) 0.6%. For purposes of this plan, the "Average
Social Security Taxable Wage Base" is the average of the maximum
limitation of wages subject to social security tax for the preceding 35
calendar years.
PRINCIPAL STOCKHOLDERS
Holdings owns all of the outstanding capital stock of the Company. The
following sets forth certain information regarding the beneficial ownership of
Holdings' common stock, $.01 par value per share (the "Common Stock"), by (i)
all stockholders of Holdings who own more than 5% of any class of such voting
securities; (ii) each director who is a stockholder; (iii) certain executive
officers; and (iv) all directors and executive officers as a group, as
determined in accordance with Rule 13(d) under the Securities Exchange Act of
1934.
<TABLE>
<CAPTION>
Number of Shares Percentage of
of Common Stock Outstanding Shares of
Name and Address of Beneficial Owner Beneficially Owned (1) Common Stock (1)
<S> <C> <C>
Thomas H. Lee Equity Partners, L.P. (2) ........................ 568,185 36.6%
ML-Lee Acquisition Fund II, L.P. (3) ........................... 410,677 26.5
ML-Lee Acquisition Fund (Retirement Accounts) II, L.P. (3) . 219,323 14.1
Thomas H. Lee (4) . ............................................. 91,130 5.9
Francis H. Olmstead, Jr. (5) ................................. 57,263 3.7
Robert T. Parkey (5) .......................................... 37,242 2.4
Jack C. Lail (5) ............................................. 9,685 **
John J. Nugent ................................................ 44,411 2.9
Joseph M. Viglione (5) ....................................... 21,244 1.4
Phyllis C. Best (5) .......................................... 7,316 **
Claude J. Kyker (5) .......................................... 18,984 1.2
Thomas R. Shepherd (6) ....................................... 5,893 **
Scott A. Schoen (7) .......................................... 5,864 **
All directors and executive officers of Holdings
as a group (11 persons) .................................... 232,231 15.0%
</TABLE>
- ------------------
** Represents less than 1%.
(1) For purposes of the computation of percentages of Holdings presented in
this table, a holder is deemed to beneficially own all shares which may be
acquired by such holder upon exercise of options held by such holder,
which options are exercisable within 60 days. Such shares which may be
acquired by such holder (but no shares which may be acquired by any other
holder upon exercise of options held by such other holder) are deemed to
be outstanding.
(2) Each of (i) THL Equity Advisors Limited Partnership, (ii) THL Equity
Trust, (iii) Thomas H. Lee as trustee of THL Equity Trust, (iv) Thomas R.
Shepherd as trustee of THL Equity Trust, and (v) Scott A. Schoen, as an
officer of THL Equity Trust, may be deemed to be the beneficial owner of
568,185 shares held by the Thomas H. Lee Equity Partners (the "Lee Fund").
Such entities and Messrs. Lee, Shepherd and Schoen disclaim beneficial
ownership of such shares. The foregoing entities and Messrs. Shepherd and
Schoen maintain their principal business address c/o Thomas H. Lee
Company, 75 State Street, Boston, MA 02109.
(3) Each of (i) Thomas H. Lee Advisors II, L.P. ("Advisors II"), the
investment advisor of each of ML-Lee Acquistion Fund II, L.P. and ML-Lee
Acqusition Fund (Retirement Accounts) II, L.P. (collectively the
44
<PAGE>
"ML-Lee Funds"), (ii) T.H. Lee Mezzanine II ("Mezzanine II"), a general
partner of Advisors II, (iii) Thomas H. Lee, as trustee of Mezzanine II
and an individual general partner of each of the ML-Lee Funds, (iv) Thomas
R. Shepherd, as trustee of Mezzanine II, and (v) Scott A. Schoen, as an
officer of Mezzanine II, may be deemed to be the beneficial owners of
630,000 shares held, in the aggregate, by the ML-Lee Funds. Each of
Advisors II, Mezzanine II, Mr. Lee, Mr. Shepherd and Mr. Schoen disclaim
ownership of such shares. Each of Advisors II and Mezzanine II maintains
their principal business address c/o Thomas H. Lee Company, 75 State
Street, Boston, MA 02109. The ML-Lee Funds maintain principal business
addresses c/o Merrill Lynch, 225 Liberty Street, World Financial Center,
South Tower -- 23rd Floor, New York, New York 10080-6123.
(4) Represents 65,711 shares which may be deemed to be beneficially owned by
State Street Bank and Trust Company of Connecticut, N.A., as trustee of
the 1989 Thomas H. Lee Nominee Trust (the "Lee Trust") and 25,419 shares
held of record by Thomas H. Lee Company ("THL Co."). State Street Bank and
Trust Company of Connecticut, N.A. disclaims beneficial ownership of the
Lee Trust shares. Does not include 1,198,185 shares which may be deemed to
be beneficially owned by Mr. Lee as a result of his relationships with the
Lee Fund and the ML-Lee Funds. Mr. Lee disclaims beneficial ownership of
such shares. Mr. Lee maintains his principal business address c/o Thomas
H. Lee Company, 75 State Street, Boston, MA 02109.
(5) The address of this shareholder is c/o Anchor Advanced Products, Inc., 1111
Northshore Drive, Suite N-600, Knoxville, Tennessee 37919.
(6) Includes options to purchase 3,003 shares from THL Co. Does not include
1,198,185 shares which may be deemed to be beneficially owned by Mr.
Shepherd as a result of his relationship with the Lee Fund and the ML-Lee
Funds. Mr. Shepherd disclaims beneficial ownership of such shares.
(7) Includes options to purchase 3,003 shares from THL Co. Does not include
1,198,185 shares which may be deemed to be beneficially owned by Mr.
Schoen as a result of his relationship with the Lee Fund and the ML-Lee
Funds. Mr. Schoen disclaims beneficial ownership of such shares.
Dividends to Holdings' Stockholders
The following table sets forth (i) the aggregate amounts invested by the
listed entities, directors and principal executive officers of the Company in
the capital stock of Holdings (assuming the exercise by such entities of all
warrants held by them and the exercise by such officers of all vested,
in-the-money options) and (ii) the aggregate amount paid by Holdings to the
listed entities, directors and officers in connection with the Holdings
Dividend upon the consummation of the sale of the Initial Notes and the payment
by the Company to Holdings of the Issuer Dividend.
<TABLE>
<CAPTION>
Name of Beneficial Owner Total Investment Aggregate Dividend
<S> <C> <C>
Thomas H. Lee Equity Partners, L.P. ........................ $5,397,758 $10,806,879
ML-Lee Acquisition Fund II, L.P. ........................... 3,901,432 7,811,077
ML-Lee Acquisition Fund (Retirement Accounts) II, L.P. ...... 2,083,568 4,171,523
Thomas H. Lee ................................................ 865,737 1,733,296
Francis H. Olmstead, Jr. .................................... 544,000 1,089,142
Robert T. Parkey ............................................. 353,800 708,343
Jack C. Lail ................................................ 400,000 184,213
John J. Nugent ............................................. 421,900 844,697
Joseph M. Viglione .......................................... 201,820 404,061
Phyllis C. Best ............................................. 69,500 139,150
Claude J. Kyker ............................................. 180,350 361,076
Thomas R. Shepherd .......................................... 27,451 54,959
Scott A. Schoen ............................................. 27,181 54,419
</TABLE>
45
<PAGE>
CERTAIN TRANSACTIONS
Management Agreement
The Company and Thomas H. Lee Company entered into an agreement dated
April 30, 1990 (the "Management Agreement"), pursuant to which Thomas H. Lee
Company received a financial advisory fee of $420,000 in connection with
structuring, negotiating and arranging the financing necessary to fund the 1990
acquisition of the Company by THL and management. In addition, pursuant to the
Management Agreement, Thomas H. Lee Company received $180,000 per year for five
years beginning August 30, 1990 for management and other consulting services
provided to the Company. After the initial five-year term, the Management
Agreement is automatically renewable on an annual basis unless either party
serves notice of termination at least 90 days prior to the renewal date. The
Company believes that the terms of this agreement are comparable to those that
would have been obtained from unaffiliated sources.
Stock Purchase Warrants
In connection with THL's acquisition of the Company in 1990, the ML-Lee
Funds were issued warrants (the "Warrants") to purchase 380,000 shares of
Common Stock. The Warrants were exercisable in whole or in part at any time
prior to April 30, 2000 at an exercise price of $9.50 per share. The Warrants
were exercised in full upon consummation of the Initial Offering.
Shareholders' Agreement
Holdings entered into a Shareholders' Agreement (the "Shareholders'
Agreement") with THL, certain of the named executive officers and certain other
management shareholders of Holdings (collectively, the "Management Investors")
in connection with the 1990 acquisition of the Company. Pursuant to the
Shareholders' Agreement, as amended and restated on July 29, 1994, the
shareholders party thereto are required to vote their shares of Common Stock to
elect a Board of Directors of Holdings consisting of certain directors
designated by THL and certain management directors. THL also must approve any
merger, consolidation, liquidation, sale of all or substantially all of
Holdings' assets, redemption of capital stock or amendment to Holdings'
Certificate of Incorporation or by-laws. The Shareholders' Agreement provides
for rights of first refusal, take along rights and preemptive rights for THL.
Certain of the Management Investors have come along rights and are subject to
redemption of their shares of Holdings capital stock in the event of a
termination of employment with Holdings and its subsidiaries. The Shareholders'
Agreement also grants THL the right to require Holdings to effect the
registration of shares of Common Stock it holds for sale to the public, subject
to certain conditions and limitations. In addition, under the terms of the
Shareholders' Agreement, if Holdings proposes to register any of its equity
securities under the Securities Act of 1933, as amended, the shareholders party
thereto are entitled to notice of such registration and are entitled to include
their shares for registration, subject to certain conditions and limitations.
All fees, costs and expenses of any registration effected on behalf of such
shareholders under the Shareholders' Agreement (other than underwriting
discounts and commissions) will be paid by Holdings.
Lease from Related Party
From time to time, the Company leases warehouse space from Jack C. Lail, a
Director and Executive Vice President of the Issuer and Holdings, near its
facilities in Seagrove, North Carolina. Anchor paid a total of $67,800 for such
warehouse space in 1996.
46
<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS
New Credit Facility
General. On April 2, 1997, the Issuer entered into a credit facility (the
"New Credit Facility") with NationsBank, N.A., as Agent, NationsBank Capital
Markets, Inc. and various lender parties thereto (the "Lenders"). The New
Credit Facility provides for revolving loans to the Company in an aggregate
amount not to exceed $15.0 million, with a $5.0 million sublimit for the
issuance of standby and commercial letters of credit. All indebtedness of the
Issuer under the New Credit Facility is guaranteed by Holdings (the
"Guarantor").
Availability. Borrowings under the New Credit Facility are subject to a
borrowing base equal to the sum of (a) 80% of "eligible receivables" and (b)
50% of "eligible inventory" (as such terms are defined in the New Credit
Facility).
Security. The New Credit Facility is secured by a first priority perfected
lien on all existing and hereafter acquired accounts receivable and inventory
of the Company and the Guarantors.
Maturity. The New Credit Facility will mature on the sixth anniversary
thereof.
Interest Rate. The New Credit Facility bears interest at a rate equal to
LIBOR plus 2.0% or the Alternative Base Rate (defined as the higher of (i) the
NationsBank prime rate and (ii) the federal funds rate plus 0.5%) plus 1.0%.
Covenants. The New Credit Facility contains covenants customary for
working capital financings, including, without limitation: (i) maximum leverage
and interest coverage ratios and minimum net worth; (ii) restrictions on
capital expenditures, incurrence of additional indebtedness, dividends and
redemptions; and (iii) restrictions of mergers, acquisitions and sales of
assets.
Events of Default. The New Credit Facility contains events of default
customary for working capital financings, including an event of default upon a
"change of control" of Holdings or the Company.
Connecticut Notes and Grant
The Company has issued a series of notes (the "Connecticut Notes") to the
Connecticut Development Authority in the aggregate principal amount of
$605,000. Each note has a maturity of six years and bears interest at a rate of
5% per annum. The Company has also received a grant of $1,000,000 from the
State of Connecticut, Department of Economic Development. The grant is subject
to certain requirements, among other things, that the Company: (i) retain
operations in Connecticut for no less than 10 years and (ii) fund at least 50%
of the entire project. Failure to meet these conditions would require immediate
repayment of all amounts advanced to the Company ($1,000,000 as of December 31,
1996) and further, such failure would constitute an event of default under the
Connecticut Notes.
47
<PAGE>
DESCRIPTION OF THE EXCHANGE NOTES
The Notes (including the Exchange Notes offered hereby) will be issued
pursuant to the terms of an indenture dated as of April 2, 1997 (the
"Indenture") between the Issuer, Holdings and State Street Bank, as trustee
(the "Trustee"). The Indenture will be subject to and governed by the
provisions of the Trust Indenture Act of 1939, as amended (the "Trust Indenture
Act"). The following summary provides an accurate description of all material
terms and provisions of the Indenture and is qualified in its entirety by
reference to the Indenture, including the definitions therein of certain terms
used below and those terms made part of the Indenture by reference to the Trust
Indenture Act. For definitions of certain capitalized terms used in the
following summary, see "--Certain Definitions."
General
The Notes will be general unsecured obligations of the Issuer and will
rank pari passu in right of payment with all current and future unsecured
senior Indebtedness of the Issuer. However, the Issuer and its Subsidiaries are
parties to the New Credit Facility and all borrowings under the New Credit
Facility are secured by a first priority Lien on certain accounts receivable
and inventory of the Issuer and, accordingly, will rank prior to the Notes with
respect to such assets. The Note Guarantee will be a general unsecured
obligation of the Guarantor, will rank senior in right of payment to all
subordinated indebtedness of the Guarantor, if any, and pari passu in right of
payment to all existing and future senior Indebtedness of the Guarantor, if
any. As of March 29, 1997, on a pro forma basis after giving effect to the sale
of the Initial Notes and the application of the net proceeds therefrom, the
Notes would have been effectively subordinated to $1.5 million of secured
Indebtedness of the Issuer and there was no secured Indebtedness of the
Guarantor. The Indenture will permit additional borrowings under the New Credit
Facility in the future.
Principal, Maturity and Interest
The Notes will be limited in aggregate principal amount to $100.0 million
and will mature on April 1, 2004. Interest on the Notes will accrue at the rate
of 113/4% per annum and will be payable semi-annually in arrears on April 1 and
October 1, commencing on October 1, 1997, to Holders of record on the
immediately preceding March 15 and September 15. Interest on the Notes will
accrue from the most recent date to which interest has been paid or, if no
interest has been paid, from the date of original issuance. Interest will be
computed on the basis of a 360-day year comprised of twelve 30-day months.
Principal, premium and Liquidated Damages, if any, and interest on the Notes
will be payable at the office or agency of the Issuer maintained for such
purpose within the City and State of New York or, at the option of the Issuer,
payment of interest may be made by check mailed to the Holders of the Notes at
their respective addresses set forth in the register of Holders of Notes;
provided that all payments of principal, premium and Liquidated Damages, if
any, and interest with respect to Notes the Holders of which have given wire
transfer instructions to the Issuer will be required to be made by wire
transfer of immediately available funds to the accounts specified by the
Holders thereof. Until otherwise designated by the Issuer, the Issuer's office
or agency in New York will be the office of the Trustee maintained for such
purpose. The Notes will be issued in denominations of $1,000 and integral
multiples thereof.
Optional Redemption
The Notes will not be redeemable at the Issuer's option prior to April 1,
2001. Thereafter, the Notes will be subject to redemption at any time at the
option of the Issuer, in whole or in part, upon not less than 30 nor more than
60 days' notice, at the redemption prices (expressed as percentages of
principal amount) set forth below plus accrued and unpaid interest and
Liquidated Damages, if any, thereon to the applicable redemption date, if
redeemed during the twelve-month period beginning on April 1 of the years
indicated below:
<TABLE>
<CAPTION>
Year Percentage
<S> <C>
2001 .............................. 105.875%
2002 ............................... 102.938
2003 and thereafter ............... 100.000%
</TABLE>
Notwithstanding the foregoing, at any time prior to April 1, 2000, the
Issuer may on any one or more occasions redeem up to 35% of the aggregate
principal amount of Notes originally issued in the Offering at a redemption
price of 110.75% of the principal amount thereof, plus accrued and unpaid
interest and Liquidated Damages, if any, thereon to the redemption date, with
the net cash proceeds of one or more Public Equity Offerings; provided
48
<PAGE>
that at least 65% of the original aggregate principal amount of Notes remains
outstanding immediately after the occurrence of each such redemption; and
provided, further, that each such redemption shall occur within 90 days of the
date of the closing of such Public Equity Offering.
Selection and Notice
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which
the Notes are listed, or, if the Notes are not so listed, on a pro rata basis,
by lot or by such method as the Trustee shall deem fair and appropriate;
provided that no Notes of $1,000 or less shall be redeemed in part. Notices of
redemption shall be mailed by first class mail at least 30 but not more than 60
days before the redemption date to each Holder of Notes to be redeemed at its
registered address. Notices of redemption may not be conditional. If any Note
is to be redeemed in part only, the notice of redemption that relates to such
Note shall state the portion of the principal amount thereof to be redeemed. A
new Note in principal amount equal to the unredeemed portion thereof will be
issued in the name of the Holder thereof upon cancellation of the original
Note. Notes called for redemption become due on the date fixed for redemption.
On and after the redemption date, interest ceases to accrue on Notes or
portions of them called for redemption.
Mandatory Redemption
Except as set forth below under "Repurchase at the Option of Holders," the
Issuer is not required to make mandatory redemption or sinking fund payments
with respect to the Notes.
Repurchase at the Option of Holders
Change of Control
Upon the occurrence of a Change of Control, each Holder of Notes will have
the right to require the Issuer to repurchase all or any part (equal to $1,000
or an integral multiple thereof) of such Holder's Notes pursuant to the offer
described below (the "Change of Control Offer") at an offer price in cash equal
to 101% of the aggregate principal amount thereof plus accrued and unpaid
interest and Liquidated Damages, if any, thereon to the date of purchase (the
"Change of Control Payment"). Within 30 calendar days following any Change of
Control, the Issuer will mail a notice to each Holder stating: (i) that the
Change of Control Offer is being made pursuant to the covenant entitled "Change
of Control" and that all Notes tendered will be accepted for payment; (ii) the
purchase price and the purchase date, which will be no earlier than 30 calendar
days nor later than 60 calendar days from the date such notice is mailed (the
"Change of Control Payment Date"); (iii) that any Note not tendered will
continue to accrue interest; (iv) that, unless the Issuer defaults in the
payment of the Change of Control Payment, all Notes accepted for payment
pursuant to the Change of Control Offer will cease to accrue interest after the
Change of Control Payment Date; (v) that Holders electing to have any Notes
purchased pursuant to a Change of Control Offer will be required to surrender
the Notes, with the form entitled "Option of Holder to Elect Purchase" on the
reverse of the Notes completed, to the Paying Agent 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; (vi) that Holders will be entitled to
withdraw their election if the Paying Agent receives, not later than the close
of business on the second Business Day preceding the Change of Control Payment
Date, a telegram, telex, facsimile transmission or letter setting forth the
name of the Holder, the principal amount of Notes delivered for purchase, and a
statement that such Holder is withdrawing such Holder's election to have such
Notes purchased; and (vii) that Holders whose Notes are being purchased only in
part will be issued new Notes equal in principal amount to the unpurchased
portion of the Notes surrendered, which unpurchased portion must be equal to
$1,000 in principal amount or an integral multiple thereof. The Issuer will
comply with the requirements of Rule 14e-1 under the Exchange Act and any other
securities laws and regulations thereunder to the extent such laws and
regulations are applicable in connection with the repurchase of the Notes as a
result of a Change of Control.
On the Change of Control Payment Date, the Issuer will, to the extent
lawful, (i) accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (ii) deposit with the Paying Agent an
amount equal to the Change of Control Payment in respect of all Notes or
portions thereof so tendered and (iii) deliver or cause to be delivered to the
Trustee the Notes so accepted together with an Officers' Certificate stating
the aggregate principal amount of Notes or portions thereof being purchased by
the Issuer. The Paying Agent will promptly mail to each Holder of Notes so
tendered the Change of Control Payment for such Notes, and the Trustee
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will promptly authenticate and mail (or cause to be transferred by book entry)
to each Holder a new Note equal in principal amount to any unpurchased portion
of the Notes surrendered, if any; provided that each such new Note will be in a
principal amount of $1,000 or an integral multiple thereof. The Issuer will
publicly announce the results of the Change of Control Offer on or as soon as
practicable after the Change of Control Payment Date. Failure of the Issuer to
comply with the foregoing Change of Control provisions would constitute an
Event of Default under the Indenture with the effects described under the
caption "--Events of Default and Remedies."
The Change of Control provisions described above will be applicable
whether or not any other provisions of the Indenture are applicable. Except as
described as above with respect to a Change of Control, the Indenture does not
contain provisions that permit the Holders of the Notes to require that the
Issuer repurchase or redeem the Notes in the event of a takeover,
recapitalization or similar transaction nor does it contain any similar "event
risk" protections for Holders of the Notes. The required cash payment due to
the Holders of Notes upon a Change of Control could deter some parties from
pursuing certain types mergers or tender offers since such transactions would
impose a potentially large cash expenditure on the part of the Issuer which may
adversely affect the Issuer's financial position. The Issuer's ability to pay
cash to the Holders of Notes upon a repurchase may be limited by the Issuer's
then existing financial resources. There can be no assurances that sufficient
funds will be available at the time of any Change of Control to make required
repurchases. See "Risk Factors--Limitations on Ability to Make Change of
Control Payment."
Although the Change of Control provision may not be waived by the Issuer,
and may be waived by the Trustee only in accordance with the provisions of the
Indenture unless the notes are defeased, there can be no assurance that any
particular transaction (including a highly leveraged transaction) cannot be
structured or effected in a manner not constituting a Change of Control.
The New Credit Facility currently prohibits the Issuer from redeeming any
Notes prior to maturity (except that the Issuer may redeem the notes in
compliance with the Optional Redemption provisions of the Indenture), and also
provides that certain change of control events with respect to the Issuer would
constitute a default thereunder. Any future credit agreements or other
agreements relating to the New Credit Facility to which the Issuer becomes a
party may contain similar restrictions and provisions. In the event a Change of
Control occurs at a time when the Issuer is prohibited from purchasing the
Notes, the Issuer could seek the consent of its lenders to the purchase of the
Notes or could attempt to refinance the borrowings that contain such
prohibition. If the Issuer does not obtain such a consent or repay such
borrowings, the Issuer will remain prohibited from purchasing the Notes. In
such case, the Issuer's failure to purchase tendered Notes would constitute an
event of Default under the Indenture which would, in turn, constitute a default
under the New Credit Facility. All borrowings under the New Credit Facility are
secured by a first priority lien on certain accounts receivable and inventory
of the Issuer. Similarly, the Issuer's failure to make any required repurchases
of Notes in the event of a Change of Control would constitute an Event of
Default under the Indenture. See "--Events of Default and Remedies."
The Issuer will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set
forth in the Indenture applicable to a Change of Control Offer made by the
Issuer and purchases all Notes validly tendered and not withdrawn under such
Change of Control Offer.
"Change of Control" means the occurrence of any of the following: (i) (a)
any transaction (including a merger or consolidation) the result of which is
that any "person" or "group" (each within the meaning of Sections 13(d) and
14(d)(2) of the Exchange Act), other than the Principals, becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of more than 50% of the total voting power of all Capital Stock
of the Issuer, the Guarantor or a successor entity normally entitled to vote in
the election of directors, managers or trustees, as applicable, calculated on a
fully diluted basis, and (b) as a result of the consummation of such
transaction, any "person" or "group" (each as defined above) becomes the
"beneficial owner" (as defined above), directly or indirectly, of more of the
voting stock of the Issuer or the Guarantor than is at the time "beneficially
owned" (as defined above) by the Principals, or (ii) the first day on which a
majority of the members of the Board of Directors are not Continuing Directors,
or (iii) the sale, lease, transfer, conveyance or other disposition (other than
by way of merger or consolidation), in one or a series of related transactions,
of all or substantially all of the assets of the Issuer and its Subsidiaries
taken as a whole or the Guarantor and its Subsidiaries taken as a whole, in
each case, to any "person" (as such term is used in Section 13(d)(3) of the
Exchange Act) other than the Principals or their Related Parties. For purposes
of this definition, any transfer of an Equity Interest of an entity that was
formed
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for the purpose of acquiring voting stock of the Issuer or the Guarantor shall
be deemed to be a transfer of such percentage of such voting stock as
corresponds to the percentage of the equity of such entity that has been so
transferred.
The definition of Change of Control includes a phrase relating to the
sale, lease, transfer, conveyance or other disposition of "all or substantially
all" of the assets of the Issuer and its Subsidiaries taken as a whole or the
Guarantor and its Subsidiaries taken as a whole. Although there is a developing
body of case law interpreting the phrase "substantially all," there is no
precise established definition of the phrase under applicable law. Accordingly,
the ability of a Holder of Notes to require the Issuer to repurchase such Notes
as a result of a sale, lease, transfer, conveyance or other disposition of less
than all of the assets of the Issuer and its Subsidiaries taken as a whole or
the Guarantor and its Subsidiaries taken as a whole to another Person or group
may be uncertain.
"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 date of the Indenture or (ii) was nominated for election or elected to such
Board of Directors with the approval of a majority of the Continuing Directors
who were members of such Board of Directors at the time of such nomination or
election.
"Principals" means Thomas H. Lee Equity Partners, L.P., THL Equity
Advisors Limited Partnership, THL Equity Trust, ML-Lee Acquisition Fund II,
L.P., ML-Lee Acquisition Fund (Retirement Accounts) II, L.P., Thomas H. Lee
Company, and any Affiliates of Thomas H. Lee Company and Francis H. Olmstead,
Jr.
"Related Party" with respect to any Principal means (i) any controlling
stockholder, 80% (or more) owned Subsidiary, or spouse or immediate family
member (in the case of an individual) of such Principal or (ii) any trust,
corporation, partnership or other entity, the beneficiaries, stockholders,
partners, owners or Persons beneficially holding an 80% or more controlling
interest of which consist of such Principal and/or such other Persons referred
to in the immediately preceding clause (i).
Asset Sales
The Indenture provides that the Issuer will not, and will not permit any
of its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the
Issuer (or the Restricted Subsidiary, as the case may be) receives
consideration at the time of such Asset Sale at least equal to the fair market
value (evidenced by a resolution of the Board of Directors set forth in an
Officers' Certificate delivered to the Trustee with respect to any Asset Sale
involving in excess of $1.0 million) of the assets or Equity Interests issued
or sold or otherwise disposed of and (ii) at least 75% of the consideration
therefor received by the Issuer or such Restricted Subsidiary is in the form of
cash or Cash Equivalents; provided that the amount of (x) any liabilities (as
shown on the Issuer's or such Restricted Subsidiary's most recent balance
sheet), of the Issuer or any Restricted Subsidiary (other than contingent
liabilities and liabilities that are by their terms subordinated to the Notes
or any guarantee thereof) that are assumed by the transferee of any such assets
pursuant to a customary novation agreement that releases the Issuer or such
Restricted Subsidiary from further liability and (y) any securities, notes or
other obligations received by the Issuer or any such Restricted Subsidiary from
such transferee that are immediately converted by the Issuer or such Restricted
Subsidiary into cash (to the extent of the cash received), shall be deemed to
be cash for purposes of this provision.
Within 360 days after the receipt of any Net Proceeds from an Asset Sale,
the Issuer or its Restricted Subsidiary, as the case may be, may apply such Net
Proceeds from such Asset Sale to permanently reduce Indebtedness under the New
Credit Facility in accordance with its terms, if applicable, or to the extent
not required to be applied thereunder, may, at its option, apply such Net
Proceeds to repayment of Indebtedness of a Restricted Subsidiary (in the case
of Net Proceeds from an Asset Sale effected by a Restricted Subsidiary) or to
an investment in a Restricted Subsidiary or in another business or capital
expenditure or other long-term/tangible assets, in each case, in the same or a
similar line of business as the Issuer or any of its Restricted Subsidiaries
were engaged in on the date of the Indenture or in businesses reasonably
related thereto. Pending the final application of any such Net Proceeds, the
Issuer may temporarily reduce Indebtedness under the New Credit Facility or
otherwise invest such Net Proceeds in any manner that is not prohibited by the
Indenture. Any Net Proceeds from Asset Sales that are not applied or invested
as provided in the first sentence of this paragraph will be deemed to
constitute "Excess Proceeds." When the aggregate amount of Excess Proceeds
exceeds $5.0 million, the Issuer will be required to make an offer to all
Holders of Notes (an "Asset Sale Offer") to purchase the maximum principal
amount of Notes that may be purchased out of the Excess Proceeds, at an offer
price in cash in an amount equal to 100% of the
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principal amount thereof plus accrued and unpaid interest and Liquidated
Damages, if any, thereon to the date of purchase, in accordance with the
procedures set forth in the Indenture. To the extent that the aggregate amount
of Notes tendered pursuant to an Asset Sale Offer is less than the Excess
Proceeds, the Issuer may use any remaining Excess Proceeds for general
corporate purposes. If the aggregate principal amount of Notes surrendered by
Holders thereof exceeds the amount of Excess Proceeds, the Trustee shall select
the Notes to be purchased on a pro rata basis. Upon completion of such offer to
purchase, the amount of Excess Proceeds shall be reset at zero.
The failure of the Issuer to comply with the foregoing Asset Sales
provision would constitute an Event of Default under the Indenture with the
effects described under the caption "--Events of Default and Remedies."
The requirement of an Asset Sale Offer could deter some parties from
pursuing certain types of take-over strategies which would trigger an Asset
Sale Offer and thereby impose the cost of repurchasing the Notes on the Issuer
which might adversely affect the Issuer's financial position.
Note Guarantee
The Issuer's payment obligations under the Notes will be guaranteed by the
Guarantor.
The Indenture provides that no Guarantor may consolidate with or merge
with or into (whether or not such Guarantor is the surviving Person), another
corporation, Person or entity whether or not affiliated with such Guarantor
unless (i) subject to the provisions of the following paragraph, the Person
formed by or surviving any such consolidation or merger (if other than such
Guarantor) assumes all the obligations of such Guarantor pursuant to a
supplemental indenture in form and substance reasonably satisfactory to the
Trustee, under the Notes and the Indenture; (ii) immediately after giving
effect to such transaction, no Default or Event of Default exists; (iii) such
Guarantor, or any Person formed by or surviving any such consolidation or
merger, would have Consolidated Net Worth (immediately after giving effect to
such transaction), equal to or greater than the Consolidated Net Worth of such
Guarantor immediately preceding the transaction; and (iv) the Issuer would be
permitted by virtue of the Issuer's pro forma Fixed Charge Coverage Ratio,
immediately after giving effect to such transaction, to incur at least $1.00 of
additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set
forth in the covenant described above under the caption "--Incurrence of
Indebtedness and Issuance of Preferred Stock."
The Indenture provides that in the event of a sale or other disposition of
all of the assets of any Guarantor, by way of merger, consolidation or
otherwise, or a sale or other disposition of all of the capital stock of any
Guarantor, then such Guarantor (in the event of a sale or other disposition, by
way of such a merger, consolidation or otherwise, of all of the capital stock
of such Guarantor) or the corporation acquiring the property (in the event of a
sale or other disposition of all of the assets of such Guarantor) will be
released and relieved of any obligations under its Note Guarantee; provided
that the Net Proceeds of such sale or other disposition are applied in
accordance with the applicable provisions of the Indenture. See "--Repurchase
at Option of Holders--Asset Sales."
Certain Covenants
The Company is highly leveraged. The Indenture does not contain any
covenants specifically relating to highly leveraged transactions; however, the
Company's ability to engage in a highly leveraged transaction is restricted by
covenants which restrict the ability of the Company to incur indebtedness, pay
dividends, make investments, engage in transactions with stockholders and
affiliates, create liens, sell assets and engage in mergers and consolidations.
These covenants are not waivable by the Company or by the Trustee without the
consent of the Holders of at least a majority in principal amount of the Notes
then outstanding.
Restricted Payments
The Indenture provides that the Issuer will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay
any dividend or make any other payment or distribution on account of the
Issuer's or any of its Restricted Subsidiaries' Equity Interests (including,
without limitation, any payment in connection with any merger or consolidation
involving the Issuer) or to the direct or indirect holders of the Issuer's or
any of its Restricted Subsidiaries' Equity Interests in their capacity as such
(other than dividends or distributions payable in Equity Interests (other than
Disqualified Stock) of the Issuer or such Restricted Subsidiary or dividends or
distributions payable to the Issuer or any Wholly Owned Restricted Subsidiary
of the Issuer); (ii) purchase, redeem or otherwise acquire or retire for value
any Equity Interests of the Issuer or any Restricted Subsidiary or other
Affiliate of the Issuer (other than any such Equity Interests owned by the
Issuer or any Wholly Owned Restricted
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Subsidiary of the Issuer); (iii) make any principal payment on or with respect
to, or purchase, redeem, defease or otherwise acquire or retire for value prior
to a scheduled mandatory sinking fund payment date or final maturity date any
Indebtedness that is pari passu with or subordinated to the Notes or the Note
Guarantee (other than Notes or the Note Guarantee); or (iv) make any Restricted
Investment (all such payments and other actions set forth in clauses (i)
through (iv) above being collectively referred to as "Restricted Payments"),
unless, at the time of and after giving effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof;
(b) the Issuer would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made
at the beginning of the applicable four-quarter period, have been permitted
to incur at least $1.00 of additional Indebtedness pursuant to the Fixed
Charge Coverage Ratio test set forth in the first paragraph of the covenant
described under the caption "--Incurrence of Indebtedness and Issuance of
Preferred Stock"; and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Issuer and its Restricted
Subsidiaries after the date of the Indenture (excluding Restricted Payments
permitted by clause (ii) of the next succeeding paragraph), is less than
the sum of (i) 50% of the Consolidated Net Income of the Guarantor for the
period (taken as one accounting period) from the beginning of the first
fiscal quarter commencing after the date of the Indenture to the end of the
Guarantor's most recently ended fiscal quarter for which internal financial
statements are available at the time of such Restricted Payment (or, if
such Consolidated Net Income for such period is a deficit, less 100% of
such deficit), plus (ii) 100% of the aggregate net cash proceeds received
by the Issuer from the issue or sale since the date of the Indenture of
Equity Interests of the Issuer (other than Disqualified Stock) or of
Disqualified Stock or debt securities of the Issuer that have been
converted into such Equity Interests (other than Equity Interests (or
Disqualified Stock or convertible debt securities) sold to a Restricted
Subsidiary of the Issuer and other than Disqualified Stock or convertible
debt securities that have been converted into Disqualified Stock), plus
(iii) to the extent that any Restricted Investment that was made after the
date of the Indenture is sold for cash or otherwise liquidated or repaid
for cash, the lesser of (A) the cash return of capital with respect to such
Restricted Investment (less the cost of disposition, if any) and (B) the
initial amount of such Restricted Investment.
The foregoing provisions will not prohibit (i) the payment of any dividend
or distribution within 60 days after the date of declaration thereof, if at
said date of declaration such payment would have complied with the provisions
of the Indenture; (ii) the redemption, repurchase, retirement, defeasance or
other acquisition of any Equity Interests of the Issuer in exchange for, or out
of the net cash proceeds of the substantially concurrent sale (other than to a
Restricted Subsidiary of the Issuer) of, other Equity Interests of the Issuer
(other than any Disqualified Stock); provided that the amount of any such net
cash proceeds that are utilized for any such redemption, repurchase,
retirement, defeasance or other acquisition shall be excluded from clause (c)
(ii) of the preceding paragraph; (iii) the defeasance, redemption, repurchase
or other acquisition of pari passu or subordinated Indebtedness with the net
cash proceeds from an incurrence of Permitted Refinancing Indebtedness; (iv)
the purchase, redemption or other acquisition prior to the stated maturity
thereof of Indebtedness that is subordinated to the Notes in exchange for or
out of the net cash proceeds of a substantially concurrent issue and sale
(other than to the Issuer or any of its Restricted Subsidiaries) of new
Indebtedness; provided that (x) the principal amount of such new Indebtedness
shall not exceed the principal amount of Indebtedness so refinanced (plus the
amount of such reasonable expenses incurred in connection therewith), (y) such
new Indebtedness shall have a Weighted Average Life to Maturity equal to or
greater than the Weighted Average Life to Maturity of the Indebtedness being
refinanced, and (z) the new Indebtedness shall be subordinate in right of
payment to the Notes; (v) the repurchase, redemption or other acquisition or
retirement for value of any Equity Interests of the Issuer held by any member
of the Issuer's (or any of its Restricted Subsidiaries') management pursuant to
any management equity subscription agreement or stock option agreement or in
connection with the termination of employment of any employees or management of
the Issuer or its Restricted Subsidiaries; provided that the aggregate price
paid for all such repurchased, redeemed, acquired or retired Equity Interests
shall not exceed $2.0 million in the aggregate plus the aggregate cash proceeds
received by the Issuer after the date of the Indenture from any reissuance of
Equity Interests by the Issuer to members of management of the Issuer and its
Restricted Subsidiaries and no Default or Event of Default shall have occurred
and be continuing immediately after any such transaction; (vi) Investments
received by the Issuer and its Restricted Subsidiaries as non-cash
consideration from Asset Sales to the extent permitted by the covenant
described under
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the caption "--Repurchase at the Option of Holders--Asset Sales;" (vii) a
Restricted Payment to Holdings for the purpose of paying a one-time dividend on
the Common Stock of Holdings from the proceeds of the Offering in an amount not
to exceed $30.0 million; and (viii) the repurchase of Notes pursuant to a
Change of Control Offer or an Asset Sale Offer.
The amount of all Restricted Payments (other than cash or Cash
Equivalents) shall be the fair market value (evidenced by a resolution of the
Board of Directors set forth in an Officers' Certificate delivered to the
Trustee) on the date of the Restricted Payment of the asset(s) proposed to be
transferred or issued by the Issuer or such Restricted Subsidiary, as the case
may be, pursuant to the Restricted Payment. Not later than the date of making
any Restricted Payment, the Issuer shall deliver to the Trustee an Officers'
Certificate stating that such Restricted Payment is permitted and setting forth
the basis upon which the calculations required by the covenant "Restricted
Payments" were computed, together with a copy of any fairness opinion or
appraisal required by the Indenture.
Incurrence of Indebtedness and Issuance of Preferred Stock
The Indenture provides that the Issuer 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,
contingently or otherwise, with respect to (collectively, "incur") any
Indebtedness (including Acquired Debt) and that the Issuer will not issue any
Disqualified Stock and will not permit any of its Restricted Subsidiaries to
issue any shares of preferred stock; provided, however, that the Issuer may
incur Indebtedness (including Acquired Debt) or issue shares of Disqualified
Stock if: the Fixed Charge Coverage Ratio for the Guarantor's most recently
ended four full fiscal quarters for which internal financial statements are
available immediately preceding the date on which such additional Indebtedness
is incurred or such Disqualified Stock is issued would have been at least 2.0
to 1, determined on a pro forma basis (including a pro forma application of the
net proceeds therefrom), as if the additional Indebtedness had been incurred,
or the Disqualified Stock had been issued, as the case may be, at the beginning
of such four-quarter period. In addition, the Indenture will also provide that
the Issuer will not incur any Indebtedness that is contractually subordinated
to any other Indebtedness of the Issuer unless such Indebtedness is also
contractually subordinated to the Notes on substantially identical terms;
provided, however, that no Indebtedness of the Issuer shall be deemed to be
contractually subordinated to any other Indebtedness of the Issuer solely by
virtue of being unsecured.
The foregoing provisions will not apply to:
(i) the incurrence by the Issuer of Indebtedness under the New Credit
Facility;
(ii) Guarantees of the Indebtedness under the New Credit Facility required
by the New Credit Facility and Guarantees permitted under or required by the
Indenture;
(iii) the incurrence by the Issuer and its Restricted Subsidiaries of the
Existing Indebtedness;
(iv) the incurrence by the Issuer of Indebtedness represented by the Notes
and the Indenture and the incurrence by Restricted Subsidiaries of Guarantees
required or permitted to be incurred under the Indenture;
(v) the incurrence by the Issuer or any of its Restricted Subsidiaries of
Capital Lease Obligations, mortgage financings or purchase money obligations,
in each case incurred for the purpose of financing all or any part of the
purchase price or cost of construction or improvement of property, plant or
equipment used in the business of the Issuer or such Subsidiary, in an
aggregate principal amount not to exceed $5.0 million at any time outstanding;
(vi) the incurrence by the Issuer or any of its Restricted Subsidiaries of
Indebtedness in connection with the acquisition of assets or a new Subsidiary;
provided that such Indebtedness was incurred by the prior owner of such assets
or such Subsidiary prior to such acquisition by the Issuer or one of its
Restricted Subsidiaries and was not incurred in connection with, or in
contemplation of, such acquisition by the Issuer or one of it Restricted
Subsidiaries; and provided further that the principal amount (or accreted
value, as applicable) of such Indebtedness, together with any other outstanding
Indebtedness incurred pursuant to this clause (vi), does not exceed $5.0
million;
(vii) the incurrence by the Issuer or any of its Restricted Subsidiaries
of Permitted Refinancing Indebtedness in exchange for, or the net proceeds of
which are used to refund, refinance or replace Indebtedness that was permitted
by the Indenture to be incurred;
(viii) the incurrence by the Issuer or any of its Restricted Subsidiaries
of intercompany Indebtedness between or among the Issuer and any of its Wholly
Owned Restricted Subsidiaries; provided, however, that (i) if the Issuer
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is the obligor on such Indebtedness, such Indebtedness is expressly
subordinated to the prior payment in full in cash of all Obligations with
respect to the Notes and (ii)(A) any subsequent issuance or transfer of Equity
Interests that results in any such Indebtedness being held by a Person other
than the Issuer or a Wholly Owned Restricted Subsidiary and (B) any sale or
other transfer of any such Indebtedness to a Person that is not either the
Issuer or a Wholly Owned Restricted Subsidiary shall be deemed, in each case,
to constitute an incurrence of such Indebtedness by the Issuer or such
Restricted Subsidiary, as the case may be;
(ix) the incurrence by the Issuer or any of its Restricted Subsidiaries of
Hedging Obligations that are incurred for the purpose of fixing or hedging
interest rate risk with respect to any floating rate Indebtedness that is
permitted by the terms of New Credit Facility or this Indenture to be
outstanding; and
(x) the Guarantee by the Issuer or any of the Guarantors of Indebtedness
of the Issuer or a Subsidiary of the Issuer that was permitted to be incurred
by another provision of this covenant.
For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness meets the criteria of more than one of the
categories described in clauses (i) through (x) above or is entitled to be
incurred pursuant to the first paragraph of this covenant, the Issuer shall, in
its sole discretion, classify such item of Indebtedness in any manner that
complies with this covenant and such item of Indebtedness will be treated as
having been incurred pursuant to only one of such clauses or pursuant to the
first paragraph hereof. Accrual of interest, the accretion of accreted value
and the payment of interest in the form of additional Indebtedness will not be
deemed to be an incurrence of Indebtedness for purposes of this covenant.
Liens
The Indenture provides that the Issuer will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create, incur,
assume or suffer to exist any Lien on any asset now owned or hereafter
acquired, or any income or profits therefrom or assign or convey any right to
receive income therefrom, except Permitted Liens.
Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries
The Indenture provides that the Issuer will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any encumbrance or restriction on
the ability of any Restricted Subsidiary to: (i)(a) pay dividends or make any
other distributions to the Issuer or any of its Restricted Subsidiaries (1) on
its Capital Stock or (2) with respect to any other interest or participation
in, or measured by, its profits, or (b) pay any indebtedness owed to the Issuer
or any of its Restricted Subsidiaries, (ii) make loans or advances to the
Issuer or any of its Restricted Subsidiaries or (iii) transfer any of its
properties or assets to the Issuer or any of its Restricted Subsidiaries,
except for such encumbrances or restrictions existing under or by reason of (a)
Existing Indebtedness as in effect on the date of the Indenture, (b) the New
Credit Facility as in effect as of the date of the Indenture, and any
amendments, modifications, restatements, renewals, increases, supplements,
refundings, replacements or refinancings thereof, provided that such
amendments, modifications, restatements, renewals, increases, supplements,
refundings, replacements or refinancings are no more restrictive with respect
to such dividend and other payment restrictions than those contained in the New
Credit Facility as in effect on the date of the Indenture, (c) the Indenture,
the Notes and the Note Guarantee, (d) applicable law, (e) any instrument
governing Indebtedness or Capital Stock of a Person acquired by the Issuer or
any of its Restricted Subsidiaries as in effect at the time of such acquisition
(except to the extent such Indebtedness was incurred in connection with or in
contemplation of such acquisition), which encumbrance or restriction is not
applicable to any Person, or the properties or assets of any Person, other than
the Person, or the property or assets of the Person, so acquired, provided
that, in the case of Indebtedness, such Indebtedness was permitted by the terms
of the Indenture to be incurred; (f) by reason of customary non-assignment
provisions in leases entered into in the ordinary course of business and
consistent with past practices, (g) purchase money obligations or Capital Lease
Obligations for property acquired in the ordinary course of business that
impose restrictions of the nature described in clause (iii) above on the
property so acquired, (h) Permitted Refinancing Indebtedness, provided that the
restrictions contained in the agreements governing such Permitted Refinancing
Indebtedness are no more restrictive than those contained in the agreements
governing the Indebtedness being refinanced, (i) customary restrictions imposed
on the transfer of copyrighted or patented materials and customary provisions
in agreements that restrict the assignees of such agreements or any rights
thereunder or (j) restrictions with respect to a Subsidiary of the Issuer
imposed pursuant to a binding agreement which has been entered into for the
sale or disposition of all or substantially all of the Capital Stock or assets
of such Subsidiary.
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Merger, Consolidation, or Sale of Assets
The Indenture provides that the Issuer may not consolidate or merge with
or into (whether or not the Issuer is the surviving corporation), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially
all of its properties or assets in one or more related transactions, to another
Person unless (i) the Issuer is the surviving corporation or the entity or the
Person formed by or surviving any such consolidation or merger (if other than
the Issuer) or to which such sale, assignment, transfer, lease, conveyance or
other disposition shall have been made is a corporation organized or existing
under the laws of the United States, any state thereof or the District of
Columbia; (ii) the entity or Person formed by or surviving any such
consolidation or merger (if other than the Issuer) or the entity or Person to
which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made assumes all the obligations of the Issuer under the Notes
and the Indenture pursuant to a supplemental indenture in a form reasonably
satisfactory to the Trustee; (iii) immediately after such transaction no
Default or Event of Default exists; and (iv) the Issuer or the entity or Person
formed by or surviving any such consolidation or merger (if other than the
Issuer), or to which such sale, assignment, transfer, lease, conveyance or
other disposition shall have been made (A) will have Consolidated Net Worth
immediately after the transaction equal to or greater than the Consolidated Net
Worth of the Issuer immediately preceding the transaction and (B) will, at the
time of such transaction and after giving pro forma effect thereto as if such
transaction had occurred at the beginning of the applicable four-quarter
period, be permitted to incur at least $1.00 of additional Indebtedness
pursuant to the Fixed Charge Coverage Ratio test set forth in the first
paragraph of the covenant described above under the caption "--Incurrence of
Indebtedness and Issuance of Preferred Stock."
Transactions with Affiliates
The Indenture provides that the Issuer will not, and will not permit any
of its Restricted Subsidiaries to, make any payment to, or sell, lease,
transfer or otherwise dispose of any of its properties or assets to or enter
into any other transaction with, or for the benefit of, any Affiliate of the
Issuer (each of the foregoing, an "Affiliate Transaction"), unless (i) such
Affiliate Transaction is on terms that are no less favorable to the Issuer or
the relevant Restricted Subsidiary than those that would have been obtained in
a comparable transaction by the Issuer or such Restricted Subsidiary with an
unrelated Person and (ii) the Issuer delivers to the Trustee (a) with respect
to any Affiliate Transaction or series of related Affiliate Transactions
involving aggregate consideration in excess of $1.0 million, a resolution of
the Board of Directors set forth in an Officers' Certificate certifying that
such Affiliate Transaction complies with clause (i) above and that such
Affiliate Transaction has been approved by a majority of the disinterested
members of the Board of Directors and (b) with respect to any Affiliate
Transaction or series of related Affiliate Transactions involving aggregate
consideration in excess of $5.0 million, an opinion as to the fairness to the
Holders of such Affiliate Transaction from a financial point of view issued by
an accounting, appraisal or investment banking firm of national standing;
provided that (w) any employment agreement entered into by the Issuer or any of
its Restricted Subsidiaries in the ordinary course of business and consistent
with the past practice of the Issuer or such Restricted Subsidiary, (x)
transactions between or among the Issuer and/or its Restricted Subsidiaries,
(y) investment banking and management fees in an aggregate amount no greater
than $180,000 per annum plus reimbursement of expenses to be paid by the Issuer
to Thomas H. Lee Company, and (z) Restricted Payments that are permitted by the
provisions of the Indenture described above under the caption "--Restricted
Payments," in each case, shall not be deemed Affiliate Transactions.
Limitation on Issuances and Sales of Capital Stock of Wholly Owned
Restricted Subsidiaries
The Indenture provides that the Issuer (i) will not, and will not permit
any Wholly Owned Restricted Subsidiary of the Issuer to, transfer, convey,
sell, lease or otherwise dispose of any Capital Stock of any Wholly Owned
Restricted Subsidiary of the Issuer to any Person (other than the Issuer or a
Wholly Owned Restricted Subsidiary of the Issuer), unless (a) such transfer,
conveyance, sale, lease or other disposition is of all the Capital Stock of
such Wholly Owned Restricted Subsidiary and (b) the cash Net Proceeds from such
transfer, conveyance, sale, lease or other disposition are applied in
accordance with the covenant described above under the caption
"--Asset Sales," and (ii) will not permit any Wholly Owned Restricted
Subsidiary of the Issuer to issue any of its Equity Interests (other than, if
necessary, shares of its Capital Stock constituting directors' qualifying
shares) to any Person other than to the Issuer or a Wholly Owned Restricted
Subsidiary of the Issuer.
Limitations on Guarantees of Company Indebtedness by Restricted
Subsidiaries
The Indenture provides that in the event that any Restricted Subsidiary,
directly or indirectly, guarantees any Indebtedness of the Issuer other than
the Notes or the New Credit Facility (the "Other Indebtedness"), the Issuer
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shall cause such Restricted Subsidiary to deliver to the Trustee a supplemental
indenture pursuant to which such Restricted Subsidiary shall concurrently
guarantee the Issuer's Obligations under the Indenture and the Notes to the
same extent that such Restricted Subsidiary guaranteed the Issuer's Obligations
under the Other Indebtedness (including waiver of subrogation, if any) and such
Additional Guarantee shall be on the same terms and subject to the same
conditions as the initial Guarantee given by Holding under the Indenture. Each
Additional Guarantee shall by its terms provide that the Additional Guarantor
making such Additional Guarantee will be automatically and unconditionally
released and discharged from its obligations under such Additional Guarantee
upon the release or discharge of the guarantee of the Other Indebtedness that
resulted in the creation of such Additional Guarantee, except a discharge or
release by, or as a result of, any payment under the guarantee of such Other
Indebtedness by such Additional Guarantor.
Additional Guarantees
The Indenture provides that (i) if the Issuer or any of its Restricted
Subsidiaries shall, after the date of the Indenture, transfer or cause to be
transferred, including by way of any Investment, in one or a series of
transactions (whether or not related), any assets, businesses, divisions, real
property or equipment having an aggregate fair market value (as determined in
good faith by the Board of Directors) in excess of $1.0 million to any
Restricted Subsidiary that is not a Guarantor, (ii) if the Issuer or any of its
Restricted Subsidiaries shall acquire another Restricted Subsidiary having
total assets with a fair market value (as determined in good faith by the Board
of Directors) in excess of $1.0 million, or (iii) if any Restricted Subsidiary
shall incur Acquired Debt, then the Issuer shall, at the time of such transfer,
acquisition or incurrence, (i) cause such transferee, acquired Restricted
Subsidiary or Restricted Subsidiary incurring Acquired Debt (if not then a
Guarantor) to execute a Note Guarantee of the Obligations of the Issuer
hereunder in the form set forth in the Indenture and (ii) deliver to the
Trustee an Opinion of Counsel, in form reasonably satisfactory to the Trustee,
that such Guarantee is a valid, binding and enforceable obligation of such
transferee, acquired Restricted Subsidiary or Restricted Subsidiary incurring
Acquired Debt, subject to customary exceptions for bankruptcy and equitable
principles. Notwithstanding the foregoing, the Issuer or any of its Restricted
Subsidiaries may make a Restricted Investment in any Wholly Owned Restricted
Subsidiary of the Issuer without compliance with this covenant provided that
such Restricted Investment is permitted by the covenant described under the
caption, "Restricted Payments."
Reports
The Indenture provides that, whether or not required by the rules and
regulations of the Securities and Exchange Commission (the "Commission"), so
long as any Notes are outstanding, the Issuer and, if required, the Guarantor
will furnish to the Holders of Notes (i) all quarterly and annual financial
information that would be required to be contained in a filing with the
Commission on Forms 10-Q and 10-K if the Issuer and/or the Guarantor were
required to file such Forms, including a "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and, with respect to the
annual information only, a report thereon by the Issuer's and/or the
Guarantor's certified independent accountants and (ii) all current reports that
would be required to be filed with the Commission on Form 8-K if the Issuer
and/or the Guarantor were required to file such reports. In addition, whether
or not required by the rules and regulations of the Commission, the Issuer will
file a copy of all such information and reports with the Commission for public
availability (unless the Commission will not accept such a filing) and make
such information available to securities analysts and prospective investors
upon request.
Events of Default and Remedies
The Indenture provides that each of the following constitutes an Event of
Default: (i) default for 30 days in the payment when due of interest on the
Notes; (ii) default in payment when due of the principal of or premium, if any,
on the Notes; (iii) failure by the Issuer to comply with the provisions
described under the captions "--Change of Control," "--Asset Sales,"
"--Restricted Payments" or "--Incurrence of Indebtedness and Issuance of
Preferred Stock," (iv) failure by the Issuer or the Guarantor for 60 days after
notice to comply with any of its other agreements in the Indenture, the Notes
or the Note Guarantee; (v) default under any mortgage, indenture or instrument
under which there may be issued or by which there may be secured or evidenced
any Indebtedness for money borrowed by the Issuer or any of its Restricted
Subsidiaries (or the payment of which is guaranteed by the Issuer or any of its
Restricted Subsidiaries) whether such Indebtedness or guarantee now exists, or
is created after the date of the Indenture, if such (a) default results in the
acceleration of such Indebtedness prior to its express maturity or shall
constitute a default in the payment of such Indebtedness at final maturity of
such Indebtedness, and (b) the principal amount of any such Indebtedness that
has been accelerated or not paid at maturity, when added to the aggregate
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principal amount of all other Indebtedness that has been accelerated or not
paid at maturity, exceeds $5.0 million; (vi) failure by the Issuer or any of
its Restricted Subsidiaries to pay final judgments aggregating in excess of
$5.0 million, which judgments are not paid, discharged or stayed for a period
of 60 days; (vii) certain events of bankruptcy or insolvency with respect to
the Issuer or any of its Restricted Subsidiaries; and (viii) except as
permitted by the Indenture, any Note Guarantee issued by a Guarantor shall be
held in any judicial proceeding to be unenforceable or invalid or shall cease
for any reason to be in full force and effect or any Guarantor or any Person
acting on behalf of any Guarantor shall deny or disaffirm its obligations under
its Note Guarantee.
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding Notes may
declare all the Notes to be due and payable immediately. Notwithstanding the
foregoing, in the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to the Issuer or any Restricted
Subsidiary that is a Significant Subsidiary, the principal of, and premium and
Liquidated Damages, if any, and any accrued and unpaid interest on all
outstanding Notes will become due and payable without further action or notice.
Holders of the Notes may not enforce the Indenture or the Notes except as
provided in the Indenture. In the event of a declaration of acceleration of the
Notes because an Event of Default has occurred and is continuing as a result of
the acceleration of any Indebtedness described in clause (v) of the preceding
paragraph, the declaration of acceleration of the Notes shall be automatically
annulled if the holders of any Indebtedness described in clause (v) have
rescinded the declaration of acceleration in respect of such Indebtedness
within 30 days of the date of such declaration and if (a) the annulment of the
acceleration of the Notes would not conflict with any judgment or decree of a
court of competent jurisdiction, and (b) all existing Events of Default, except
nonpayment of principal or interest on the Notes that became due solely because
of the acceleration of the Notes, have been cured or waived.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Issuer with
the intention of avoiding payment of the premium that the Issuer would have had
to pay if the Issuer then had elected to redeem the Notes pursuant to the
optional redemption provisions of the Indenture, an equivalent premium shall
also become and be immediately due and payable to the extent permitted by law
upon the acceleration of the Notes. If an Event of Default occurs prior to
April 1, 2001 by reason of any willful action (or inaction) taken (or not
taken) by or on behalf of the Issuer with the intention of avoiding the
prohibition on redemption of the Notes prior to such date, then the premium
specified in the Indenture shall also become immediately due and payable to the
extent permitted by law upon the acceleration of the Notes.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of the
Notes waive any existing Default or Event of Default and its consequences under
the Indenture except a continuing Default or Event of Default in the payment of
interest on, or the principal of, premium, if any, or interest on the Notes.
Subject to certain limitations, Holders of a majority in principal amount of
the then outstanding Notes may direct the Trustee in its exercise of any trust
or power. The Trustee may withhold from Holders of the Notes notice of any
continuing Default or Event of Default (except a Default or Event of Default
relating to the payment of principal or interest) if it determines that
withholding notice is in their interest.
The Issuer is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Issuer is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
An Event of Default under the Indenture is also an event of default under
the New Credit Facility. Thus, upon such an Event of Default, all obligations
under the New Credit Facility become due and payable. All borrowings under the
New Credit Facility are secured by a first priority Lien on certain accounts
receivable and inventory of the Issuer. Thus upon an Event of Default under the
Indenture, the Issuer must pay both amounts outstanding under the Notes and all
obligations under the New Credit Facility, and the Lenders under the New Credit
Facility have priority as to the assets specified above.
No Personal Liability of Directors, Officers, Employees and Stockholders
No director, officer, employee, incorporator or stockholder of the Issuer,
as such, shall have any liability for any obligations of the Issuer or any
Guarantor under the Notes, the Note Guarantee or the Indenture or for any claim
based on, in respect of, or by reason of, such obligations or their creation.
Each Holder of Notes by accepting
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a Note waives and releases all such liability. The waiver and release are part
of the consideration for issuance of the Notes and the Note Guarantees. 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 Issuer may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance") except for (i) the rights of Holders of outstanding Notes to
receive payments in respect of the principal of, premium, if any, and interest
on such Notes when such payments are due from the trust referred to below, (ii)
the Issuer's obligations with respect to the Notes concerning issuing temporary
Notes, registration of Notes, mutilated, destroyed, lost or stolen Notes and
the maintenance of an office or agency for payment and money for security
payments held in trust, (iii) the rights, powers, trusts, duties and immunities
of the Trustee, and the Issuer's obligations in connection therewith and (iv)
the Legal Defeasance provisions of the Indenture. In addition, the Issuer may,
at its option and at any time, elect to have the obligations of the Issuer
released with respect to certain covenants that are described in the Indenture
("Covenant Defeasance") and thereafter any omission to comply with such
obligations shall not constitute a Default or Event of Default with respect to
the Notes. In the event Covenant Defeasance occurs, certain events (not
including non-payment, bankruptcy, receivership, rehabilitation and insolvency
events) described under "Events of Default" will no longer constitute an Event
of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Issuer must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Notes, cash in U.S. dollars, non-callable Cash
Equivalents, or a combination thereof, in such amounts as will be sufficient,
in the opinion of a nationally recognized firm of independent public
accountants, to pay the principal of, premium, if any, and interest on the
outstanding Notes on the stated maturity or on the applicable redemption date,
as the case may be, and the Issuer must specify whether the Notes are being
defeased to maturity or to a particular redemption date; (ii) in the case of
Legal Defeasance, the Issuer shall have delivered to the Trustee an opinion of
counsel in the United States reasonably acceptable to the Trustee confirming
that (A) the Issuer has received from, or there has been published by, the
Internal Revenue Service a ruling or (B) since the date of the Indenture, there
has been a change in the applicable federal income tax law, in either case to
the effect that, and based thereon such opinion of counsel shall confirm that,
the Holders of the outstanding Notes will not recognize income, gain or loss
for federal income tax purposes as a result of such Legal Defeasance and will
be subject to federal income tax on the same amounts, in the same manner and at
the same times as would have been the case if such Legal Defeasance had not
occurred; (iii) in the case of Covenant Defeasance, the Issuer shall have
delivered to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that the Holders of the outstanding Notes
will not recognize income, gain or loss for federal income tax purposes as a
result of such Covenant Defeasance and will be subject to federal income tax on
the same amounts, in the same manner and at the same times as would have been
the case if such Covenant Defeasance had not occurred; (iv) no Default or Event
of Default shall have occurred and be continuing on the date of such deposit
(other than a Default or Event of Default resulting from the borrowing of funds
to be applied to such deposit) or insofar as Events of Default from bankruptcy
or insolvency events are concerned, at any time in the period ending on the
91st day after the date of deposit; (v) such Legal Defeasance or Covenant
Defeasance will not result in a breach or violation of, or constitute a default
under any material agreement or instrument (other than the Indenture) to which
the Issuer or any of its Subsidiaries is a party or by which the Issuer or any
of its Subsidiaries is bound; (vi) the Issuer must have delivered to the
Trustee an opinion of counsel to the effect that after the 91st day following
the deposit, the trust funds will not be subject to the effect of any
applicable bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally; (vii) the Issuer must deliver to the Trustee an
Officers' Certificate stating that the deposit was not made by the Issuer with
the intent of preferring the Holders of Notes over the other creditors of the
Issuer with the intent of defeating, hindering, delaying or defrauding
creditors of the Issuer or others; and (viii) the Issuer must deliver to the
Trustee an Officers' Certificate and an opinion of counsel, each stating that
all conditions precedent provided for relating to the Legal Defeasance or the
Covenant Defeasance have been complied with.
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Transfer and Exchange
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and the Issuer may
require a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Issuer is not required to transfer or exchange any Note selected
for redemption. Also, the Issuer is not required to transfer or exchange any
Note for a period of 15 days before a selection of Notes to be redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
Amendment, Supplement and Waiver
Except as provided in the next two succeeding paragraphs, the Indenture or
the Notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount of the Notes then outstanding (including
consents obtained in connection with a tender offer or exchange offer for
Notes), and any existing default or compliance with any provision of the
Indenture or the Notes may be waived with the consent of the Holders of a
majority in principal amount of the then outstanding Notes (including consents
obtained in connection with a tender offer or exchange offer for Notes).
Without the consent of each Holder affected, an amendment or waiver may
not (with respect to any Notes held by a non-consenting Holder): (i) reduce the
principal amount of Notes whose Holders must consent to an amendment,
supplement or waiver, (ii) reduce the principal of or change the fixed maturity
of any Note or alter the provisions with respect to the redemption of the Notes
(other than provisions relating to the covenants described above under the
caption "--Repurchase at the Option of Holders"), (iii) reduce the rate of or
change the time for payment of interest on any Note, (iv) waive a Default or
Event of Default in the payment of principal of or premium, if any, or interest
on the Notes (except a rescission of acceleration of the Notes by the Holders
of at least a majority in aggregate principal amount of the Notes and a waiver
of the payment default that resulted from such acceleration), (v) make any Note
payable in money other than that stated in the Notes, (vi) make any change in
the provisions of the Indenture relating to waivers of past Defaults or the
rights of Holders of Notes to receive payments of principal of or premium, if
any, or interest on the Notes, (vii) waive a redemption payment with respect to
any Note (other than a payment required by one of the covenants described above
under the caption " Repurchase at the Option of Holders") (viii) except
pursuant to the Indenture, release any Guarantor from its obligations under its
Note Guarantee, or change any Note Guarantee in any manner that would adversely
affect the Holders, or (ix) make any change in the foregoing amendment and
waiver provisions.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Issuer and the Trustee may amend or supplement the Indenture or the Notes
to cure any ambiguity, defect or inconsistency, to provide for uncertificated
Notes in addition to or in place of certificated Notes, to provide for the
assumption of the Issuer's or the Guarantor's obligations to Holders of Notes
in the case of a merger or consolidation, to make any change that would provide
any additional rights or benefits to the Holders of Notes (including providing
for additional Note Guarantees pursuant to the covenant entitled "Additional
Guarantees") or that does not adversely affect the legal rights under the
Indenture of any such Holder, or to comply with requirements of the Commission
in order to effect or maintain the qualification of the Indenture under the
Trust Indenture Act.
Concerning the Trustee
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Issuer, the Guarantor or any Affiliate of
the Issuer or the Guarantor, to obtain payment of claims in certain cases, or
to realize on certain property received in respect of any such claim as
security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must
eliminate such conflict within 90 days, apply to the Commission for permission
to continue or resign.
The Holders of a majority in principal amount of the then outstanding
Notes will have the right to direct the time, method and place of conducting
any proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the Indenture
at the request of any Holder of Notes, unless such Holder shall have offered to
the Trustee security and indemnity satisfactory to it against any loss,
liability or expense.
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Additional Information
Anyone who receives this Prospectus may obtain a copy of the Indenture
without charge by writing to Anchor Advanced Products, Inc., 1111 Northshore
Drive, Suite N-600, Knoxville, Tennessee 37919, Attention: Secretary.
Book-Entry, Delivery and Form
All of the Exchange Notes to be resold as set forth herein will initially
be issued in the form of one or more Global Notes (the "Global Notes"). The
Global Notes will be deposited on the date of the closing of the sale of the
Exchange Notes offered hereby (the "Closing Date") with, or on behalf of, the
Depositary and registered in the name of Cede & Co., as nominee of the
Depositary (such nominee being referred to herein as the "Global Note Holder").
The Depositary is a limited-purpose trust company that was created to hold
securities for its participating organizations (collectively, the
"Participants" or the "Depositary's Participants") and to facilitate the
clearance and settlement of transactions in such securities between
Participants through electronic book-entry changes in accounts of its
Participants. The Depositary's Participants include securities brokers and
dealers (including the Initial Purchasers), banks and trust companies, clearing
corporations and certain other organizations. Access to the Depositary's system
is also available to other entities such as banks, brokers, dealers and trust
companies (collectively, the "Indirect Participants" or the "Depositary's
Indirect Participants") that clear through or maintain a custodial relationship
with a Participant, either directly or indirectly. Persons who are not
Participants may beneficially own securities held by or on behalf of the
Depositary only thorough the Depositary's Participants or the Depositary's
Indirect Participants.
The Issuer expects that pursuant to procedures established by the
Depositary (i) upon deposit of the Global Notes, the Depositary will credit the
accounts of Participants designated by the Initial Purchasers with portions of
the principal amount of the Global Notes and (ii) ownership of the Exchange
Notes evidenced by the Global Notes will be shown on, and the transfer of
ownership thereof will be effected only through, records maintained by the
Depositary (with respect to the interests of the Depositary's Participants),
the Depositary's Participants and the Depositary's Indirect Participants.
Prospective purchasers are advised that the laws of some states require that
certain persons take physical delivery in definitive form of securities that
they own. Consequently, the ability to transfer Exchange Notes evidenced by the
Global Note will be limited to such extent.
So long as the Global Note Holder is the registered owner of any Exchange
Notes, the Global Note Holder will be considered the sole Holder under the
Indenture of any Notes evidenced by the Global Notes. Beneficial owners of
Exchange Notes evidenced by the Global Notes will not be considered the owners
or Holders thereof under the Indenture for any purpose, including with respect
to the giving of any directions, instructions or approvals to the Trustee
thereunder. Neither the Issuer nor the Trustee will have any responsibility or
liability for any aspect of the records of the Depositary or for maintaining,
supervising or reviewing any records of the Depositary relating to the Exchange
Notes.
Payments in respect of the principal of, premium, if any, interest and
Liquidated Damages, if any, on any Exchange Notes registered in the name of the
Global Note Holder on the applicable record date will be payable by the Trustee
to or at the direction of the Global Note Holder in its capacity as the
registered Holder under the Indenture. Under the terms of the Indenture, the
Issuer and the Trustee may treat the persons in whose names Exchange Notes,
including the Global Notes, are registered as the owners thereof for the
purpose of receiving such payments. Consequently, neither the Issuer nor the
Trustee has or will have any responsibility or liability for the payment of
such amounts to beneficial owners of Exchange Notes (including principal,
premium, if any, interest and Liquidated Damages, if any). The Issuer believes,
however, that it is currently the policy of the Depositary to immediately
credit the accounts of the relevant Participants with such payments, in amounts
proportionate to their respective holdings of beneficial interests in the
relevant security as shown on the records of the Depositary. Payments by the
Depositary's Participants and the Depositary's Indirect Participants to the
beneficial owners of Exchange Notes will be governed by standing instructions
and customary practice and will be the responsibility of the Depositary's
Participants or the Depositary's Indirect Participants.
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Certificated Securities
Subject to certain conditions, any person having a beneficial interest in
the Global Note may, upon request to the Trustee, exchange such beneficial
interest for Exchange Notes in the form of Certificated Securities. Upon any
such issuance, the Trustee is required to register such Certificated Securities
in the name of, and cause the same to be delivered to, such person or persons
(or the nominee of any thereof). In addition, if (i) the Issuer notifies the
Trustee in writing that the Depositary is no longer willing or able to act as a
depositary and the Issuer is unable to locate a qualified successor within 90
days or (ii) the Issuer, at its option, notifies the Trustee in writing that it
elects to cause the issuance of Exchange Notes in the form of Certificated
Securities under the Indenture, then, upon surrender by the Global Note Holder
of its Global Notes, Exchange Notes in such form will be issued to each person
that the Global Note Holder and the Depositary identify as being the beneficial
owner of the related Notes.
Neither the Issuer nor the Trustee will be liable for any delay by the
Global Note Holder or the Depositary in identifying the beneficial owners of
Exchange Notes and the Issuer and the Trustee may conclusively rely on, and
will be protected in relying on, instructions from the Global Note Holder or
the Depositary for all purposes.
Same-Day Settlement and Payment
The Indenture requires that payments in respect of the Exchange Notes
represented by the Global Note (including principal, premium, if any, interest
and Liquidated Damages, if any) be made in immediately available funds. With
respect to Certificated Securities, however, the Issuer will make all payments
of principal, premium, if any, interest and Liquidated Damages, if any, by
mailing a check to each Holder's registered address. Secondary trading in
long-term notes and debentures of corporate issuers is generally settled in
clearing-house or next-day funds. The Issuer expects that secondary trading in
the Certificated Securities will also be settled in immediately available
funds.
Certain Definitions
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"Additional Guarantee" means any guarantee of the Issuer's obligations
under the Indenture and the Notes issued after the Issue Date as described in
"--Certain Covenants--Limitations on Guarantees of Company Indebtedness by
Restricted Subsidiaries" and "--Certain Covenants--Additional Guarantees."
"Additional Guarantor" means any Subsidiary of the Issuer that guarantees
the Issuer's obligations under the Indenture and the Notes issued after the
Issue Date as described in "--Certain Covenants--Limitations on Guarantees of
Company Indebtedness by Restricted Subsidiaries" and "--Certain
Covenants--Additional Guarantees."
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall
mean the possession, directly or indirectly, of the power to direct or cause
the direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets or rights (including, without limitation, by way of a sale and
leaseback) other than sales of inventory in the ordinary course of business
consistent with past practices (provided that the sale, lease, conveyance or
other disposition of all or substantially all of the assets of the Issuer and
its Subsidiaries taken as a whole will be governed by the provisions of the
Indenture described above under the caption "--Change of Control" and/or the
provisions described above under the caption "--Merger, Consolidation or Sale
of Assets" and not by the provisions of the Asset Sale covenant), and (ii) the
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issue or sale by the Issuer or any of its Restricted Subsidiaries of Equity
Interests of any of the Issuer's Subsidiaries, in the case of either clause (i)
or (ii), whether in a single transaction or a series of related transactions
(a) that have a fair market value in excess of $1.0 million or (b) for net
proceeds in excess of $1.0 million. Notwithstanding the foregoing: (i) a
transfer of assets by the Issuer to a Wholly Owned Restricted Subsidiary or by
a Wholly Owned Restricted Subsidiary to the Issuer or to another Wholly Owned
Restricted Subsidiary, (ii) an issuance of Equity Interests by a Wholly Owned
Restricted Subsidiary to the Issuer or to another Wholly Owned Restricted
Subsidiary, and (iii) a Restricted Payment that is permitted by the covenant
described above under the caption "--Restricted Payments" will not be deemed to
be Asset Sales.
"Business Day" means any day that is not a Legal Holiday.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized on a balance sheet in
accordance with GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of,
the issuing Person.
"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof having maturities of not more than six
months from the date of acquisition, (iii) certificates of deposit and
eurodollar time deposits with maturities of six months or less from the date of
acquisition, bankers' acceptances with maturities not exceeding six months and
overnight bank deposits, in each case with any domestic commercial bank having
capital and surplus in excess of $500 million and a Keefe Bank Watch Rating of
"B" or better, (iv) repurchase obligations with a term of not more than seven
days for underlying securities of the types described in clauses (ii) and (iii)
above entered into with any financial institution meeting the qualifications
specified in clause (iii) above and (v) commercial paper having the highest
rating obtainable from Moody's Investors Service, Inc. or Standard & Poor's
Corporation, a division of the McGraw-Hill Companies, Inc., and in each case
maturing within six months after the date of acquisition.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus, without
duplication, (i) an amount equal to any extraordinary loss plus any net loss
realized in connection with an Asset Sale (to the extent such losses were
deducted in computing such Consolidated Net Income), plus (ii) provision for
taxes based on income or profits of such Person and its Restricted Subsidiaries
for such period, to the extent that such provision for taxes was included in
computing such Consolidated Net Income, plus (iii) consolidated interest
expense of such Person and its Restricted Subsidiaries for such period, whether
paid or accrued and whether or not capitalized (including, without limitation,
amortization of debt issuance costs and original issue discount, non-cash
interest payments, the interest component of any deferred payment obligations,
the interest component of all payments associated with Capital Lease
Obligations, commissions, discounts and other fees and charges incurred in
respect of letter of credit or bankers' acceptance financings, and net payments
(if any) pursuant to Hedging Obligations), to the extent that any such expense
was deducted in computing such Consolidated Net Income, plus (iv) depreciation,
amortization (including amortization of goodwill and other intangibles but
excluding amortization of prepaid cash expenses that were paid in a prior
period and deferred finance charges) and other non-cash charges of such Person
and its Restricted Subsidiaries for such period (excluding any such non-cash
charges to the extent that it represents an accrual of or reserve for cash
charges in any future period or amortization of a prepaid cash charges that was
paid in a prior period) to the extent that such depreciation, amortization and
other non-cash charges were deducted in computing such Consolidated Net Income.
Notwithstanding the foregoing, the provision for taxes on the income or profits
of, and the depreciation and amortization and other non-cash charges of, a
Subsidiary of the referent Person shall be added to Consolidated Net Income to
compute Consolidated Cash Flow only to the extent that a corresponding amount
would be permitted at the date of determination to be dividended to the Issuer
by such Subsidiary without prior governmental approval (that has not been
obtained), and without direct or indirect restriction pursuant to the terms of
its charter and all agreements, instruments, judgments, decrees, orders,
statutes, rules and governmental regulations applicable to that Subsidiary or
its stockholders.
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"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, determined in accordance
with GAAP; provided that (i) the Net Income (but not loss) of any Restricted
Subsidiary that is accounted for by the equity method of accounting shall be
included only to the extent of the amount of dividends or distributions paid in
cash to the Issuer or any of its Wholly Owned Restricted Subsidiaries, (ii) the
Net Income of any Restricted Subsidiary that is not a Wholly Owned Restricted
Subsidiary shall be excluded to the extent that the declaration or payment of
dividends or similar distributions by that Restricted Subsidiary of that Net
Income is not at the date of determination permitted without any prior
governmental approval (that has not been obtained) or, directly or indirectly,
by operation of the terms of its charter or any agreement, instrument,
judgment, decree, order, statute, rule or governmental regulation applicable to
that Subsidiary or its stockholders, (iii) the Net Income of any Person
acquired in a pooling of interests transaction for any period prior to the date
of such acquisition shall be excluded and (iv) the cumulative effect of a
change in accounting principles shall be excluded.
"Consolidated Net Worth" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such
Person and its consolidated Restricted Subsidiaries as of such date plus (ii)
the respective amounts reported on such Person's balance sheet as of such date
with respect to any series of preferred stock (other than Disqualified Stock)
that by its terms is not entitled to the payment of dividends unless such
dividends may be declared and paid only out of net earnings in respect of the
year of such declaration and payment, but only to the extent of any cash
received by such Person upon issuance of such preferred stock, less (x) all
write-ups (other than write-ups resulting from foreign currency translations
and write-ups of tangible assets of a going concern business made within 12
months after the acquisition of such business) subsequent to the date of the
Indenture in the book value of any asset owned by such Person or a consolidated
Restricted Subsidiary of such Person, (y) all investments as of such date in
unconsolidated Restricted Subsidiaries and in Persons that are not Restricted
Subsidiaries (except, in each case, Permitted Investments), and (z) all
unamortized debt discount and expense and unamortized deferred charges as of
such date, all of the foregoing determined in accordance with GAAP.
"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.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable
at the option of the Holder thereof, in whole or in part, on or prior to the
date that is 91 days after the date on which the Notes mature.
"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).
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Existing Indebtedness" means up to $1.8 million in aggregate principal
amount of Indebtedness of the Issuer and its Subsidiaries (other than
Indebtedness under the New Credit Facility) in existence on the date of the
Indenture, until such amounts are repaid.
"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of (i) the consolidated interest expense of such Person
and its Restricted Subsidiaries for such period, whether paid or accrued
(including, without limitation, amortization of debt issuance costs and
original issue discount, non-cash interest payments, the interest component of
any deferred payment obligations, the interest component of all payments
associated with Capital Lease Obligations, commissions, discounts and other
fees and charges incurred in respect of letter of credit or bankers' acceptance
financings, and net payments (if any) pursuant to Hedging Obligations) and (ii)
the consolidated interest expense of such Person and its Restricted
Subsidiaries that was capitalized during such period, and (iii) any interest
expense on Indebtedness of another Person that is Guaranteed by such Person or
one of its Restricted Subsidiaries or secured by a Lien on assets of such
Person or one of its Restricted Subsidiaries (whether or not such Guarantee or
Lien is called upon) and (iv) the product of (a) all dividend payments, whether
or not in cash, on any series of preferred stock of such Person or any of its
Restricted Subsidiaries, other than dividend payments on Equity Interests
payable solely in Equity Interests of the Issuer, times (b) a fraction, the
numerator of which is one and the denominator of which is one minus the then
current combined federal, state
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and local statutory tax rate of such Person, expressed as a decimal, in each
case, on a consolidated basis and in accordance with GAAP.
"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person for such period
to the Fixed Charges of such Person for such period. In the event that the
Issuer or any of its Restricted Subsidiaries incurs, assumes, Guarantees or
redeems any Indebtedness (other than revolving credit borrowings) or issues
preferred stock subsequent to the commencement of the period for which the
Fixed Charge Coverage Ratio is being calculated but prior to the date on which
the event for which the calculation of the Fixed Charge Coverage Ratio is made
(the "Calculation Date"), then the Fixed Charge Coverage Ratio shall be
calculated giving pro forma effect to such incurrence, assumption, Guarantee or
redemption of Indebtedness, or such issuance or redemption of preferred stock,
as if the same had occurred at the beginning of the applicable four-quarter
reference period. In addition, for purposes of making the computation referred
to above, (i) acquisitions that have been made by the Issuer or any of its
Restricted Subsidiaries, including through mergers or consolidations and
including any related financing transactions, during the four-quarter reference
period or subsequent to such reference period and on or prior to the
Calculation Date shall be deemed to have occurred on the first day of the
four-quarter reference period and Consolidated Cash Flow for such reference
period shall be calculated without giving effect to clause (iii) of the proviso
set forth in the definition of Consolidated Net Income, and (ii) the
Consolidated Cash Flow attributable to discontinued operations, as determined
in accordance with GAAP, and operations or businesses disposed of prior to the
Calculation Date, shall be excluded, and (iii) the Fixed Charges attributable
to discontinued operations, as determined in accordance with GAAP, and
operations or businesses disposed of prior to the Calculation Date, shall be
excluded, but only to the extent that the obligations giving rise to such Fixed
Charges will not be obligations of the referent Person or any of its Restricted
Subsidiaries following the Calculation Date.
"GAAP" means generally accepted accounting principles set forth from time
to time 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.
"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.
"Guarantor" means Anchor Holdings, Inc., a Delaware corporation, and each
Subsidiary of the Issuer, if any, that executes a Note Guarantee in accordance
with the covenants described under the captions "--Certain
Covenants--Limitations on Guarantees of Company Indebtedness by Restricted
Subsidiaries" and "--Certain Covenants--Additional Guarantees," and their
successors and assigns.
"Hedging Obligations" means, with respect to any Person, the obligations
of such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of
the purchase price of any property or representing any Hedging Obligations,
except any such balance that constitutes an accrued expense or trade payable,
if and to the extent any of the foregoing indebtedness (other than letters of
credit and Hedging Obligations) would appear as a liability upon a balance
sheet of such Person prepared in accordance with GAAP, as well as all
indebtedness of others secured by a Lien on any asset of such Person (whether
or not such indebtedness is assumed by such Person) and, to the extent not
otherwise included, the Guarantee by such Person of any indebtedness of any
other Person. The amount of any Indebtedness outstanding as of any date shall
be (i) the accreted value thereof, in the case of any Indebtedness that does
not require current payments of interest, and (ii) the principal amount
thereof, together with any interest thereon that is more than 30 days past due,
in the case of any other Indebtedness.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees
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made in the ordinary course of business), purchases or other acquisitions for
consideration of Indebtedness, Equity Interests or other securities, together
with all items that are or would be classified as investments on a balance
sheet prepared in accordance with GAAP; provided that an acquisition of assets,
Equity Interests or other securities by the Issuer for consideration consisting
of common equity securities of the Issuer shall not be deemed to be an
Investment. If the Issuer or any Restricted Subsidiary of the Issuer sells or
otherwise disposes of any Equity Interests of any direct or indirect Restricted
Subsidiary of the Issuer such that, after giving effect to any such sale or
disposition, such Person is no longer a Restricted Subsidiary of the Issuer,
the Issuer shall be deemed to have made an Investment on the date of any such
sale or disposition equal to the fair market value of the Equity Interests of
such Restricted Subsidiary not sold or disposed of in an amount determined as
provided in the final paragraph of the covenant described above under the
caption "--Restricted Payments."
"Legal Holiday" means a Saturday, a Sunday or a day on which commercial
banks in the City of New York or at a place of payment are authorized or
required by law, regulation or executive order to remain closed. If a payment
date is a Legal Holiday at a place of payment, payment may be made at that
place on the next succeeding day that is not a Legal Holiday, and no interest
shall accrue for the intervening period.
"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).
"Liquidated Damages" means the additional amounts (if any) payable by the
Issuer in the event of a Registration Default under, and as defined in, the
Registration Rights Agreement.
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b)
the disposition of any securities by such Person or any of its Subsidiaries or
the extinguishment of any Indebtedness of such Person or any of its
Subsidiaries and (ii) any extraordinary or nonrecurring gain (but not loss),
together with any related provision for taxes on such extraordinary or
nonrecurring gain (but not loss).
"Net Proceeds" means the aggregate cash proceeds received by the Issuer or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale), net of the direct costs
relating to such Asset Sale (including, without limitation, legal, accounting
and investment banking fees, and sales commissions) and any relocation expenses
incurred as a result thereof, taxes paid or payable as a result thereof (after
taking into account any available tax credits or deductions and any tax sharing
arrangements), amounts required to be applied to the repayment of Indebtedness
(other than Indebtedness under the New Credit Facility) secured by a Lien on
the asset or assets that were the subject of such Asset Sale and any reserve
for adjustment in respect of the sale price of such asset or assets established
in accordance with GAAP.
"New Credit Facility" means that certain Credit Agreement, dated as of
April 2, 1997, by and among the Issuer and NationsBank, N.A., providing for up
to $15.0 million of revolving credit borrowings, including any related notes,
guarantees, collateral documents, instruments and agreements executed in
connection therewith, and in each case as amended, modified, renewed, refunded,
replaced or refinanced from time to time.
"Non-Recourse Debt" means Indebtedness (i) as to which neither the Issuer
nor any of its Restricted Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness), (b) is directly or indirectly liable (as a guarantor or
otherwise), or (c) constitutes the lender, and (ii) no default with respect to
which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness of the
Issuer or any of its Restricted Subsidiaries to declare a default on such other
Indebtedness or cause the payment thereof to be accelerated or payable prior to
its stated maturity.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
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"Officers' Certificate" means a certificate signed on behalf of the Issuer
by two Officers of the Issuer, one of whom must be the principal executive
officer, the principal financial officer, the treasurer, or the principal
accounting officer of the Issuer, that meets the requirements of the Indenture.
"Opinion of Counsel" means an opinion from legal counsel who is reasonably
acceptable to the Trustee, that meets the requirements of the Indenture. The
counsel may be an employee of or counsel to the Issuer (or any Guarantor, if
applicable), any Subsidiary of the Issuer or the Trustee.
"Permitted Investments" means (a) any Investment in the Issuer or in a
Wholly Owned Restricted Subsidiary of the Issuer that is engaged in the same or
a similar line of business as the Issuer and its Restricted Subsidiaries were
engaged in on the date of the Indenture; (b) any Investment in Cash
Equivalents; (c) any Investment by the Issuer or any Restricted Subsidiary of
the Issuer in a Person, if as a result of such Investment (i) such Person
becomes a Wholly Owned Restricted Subsidiary of the Issuer that is engaged in
the same or a similar line of business as the Issuer and its Subsidiaries were
engaged in on the date of the Indenture or (ii) such Person is merged,
consolidated or amalgamated with or into, or transfers or conveys substantially
all of its assets to, or is liquidated into, the Issuer or a Wholly Owned
Restricted Subsidiary of the Issuer that is engaged in the same or a similar
line of business as the Issuer and its Restricted Subsidiaries were engaged in
on the date of the Indenture; (d) any Restricted Investment made as a result of
the receipt of non-cash consideration from an Asset Sale that was made pursuant
to and in compliance with the covenant described above under the caption
"--Repurchase at the Option of Holders--Asset Sales"; (e) any acquisition of
assets solely in exchange for the issuance of Equity Interests (other than
Disqualified Stock) of the Issuer; and (f) other Investments in any Person
having an aggregate fair market value (measured on the date each such
Investment was made and without giving effect to subsequent changes in value),
when taken together with all other Investments made pursuant to this clause (e)
that are at the time outstanding, not to exceed $5.0 million.
"Permitted Liens" means
(i) any Lien existing on property of the Issuer or any Subsidiary on the
date of the Indenture securing Indebtedness outstanding on such date;
(ii) any Lien securing obligations under the New Credit Facility and any
Guarantee thereof, which obligations or Guarantee are permitted by the
terms of the Indenture to be incurred and outstanding;
(iii) Liens for taxes, fees, assessments or other governmental charges
which are not delinquent or remain payable without penalty, or which are
being contested in good faith by appropriate proceedings and for which
adequate reserves in accordance with GAAP are being maintained;
(iv) carriers', warehousemen's, mechanics', landlords', materialmen's,
repairmen's or other similar Liens arising in the ordinary course of
business which are not delinquent or which are being contested in good
faith and by appropriate proceedings, which proceedings have the effect of
preventing the forfeiture or sale of the property subject thereto;
(v) Liens (other than any Lien imposed by ERISA) consisting of pledges or
deposits required in the ordinary course of business in connection with
workers' compensation, unemployment insurance and other social security
legislation;
(vi) Liens on property of the Issuer or any Subsidiary securing (a) the
non-delinquent performance of bids, trade contracts (other than for
borrowed money), leases and statutory obligations, (b) surety bonds
(excluding appeal bonds and bonds posted in connection with court
proceedings or judgments) and (c) other non-delinquent obligations of a
like nature, including pledges or deposits made in the ordinary course of
business in connection with workers' compensation, unemployment insurance
and other types of social security legislation, in each case, incurred in
the ordinary course of business;
(vii) Liens consisting of judgment or judicial attachment Liens and Liens
securing contingent obligations on appeal bonds and other bonds posted in
connection with court proceedings or judgments; provided that the
enforcement of such Liens is effectively stayed and all such Liens in the
aggregate at any time outstanding for the Issuer and its Subsidiaries do
not exceed $3.0 million;
(viii) easements, rights-of-way, restrictions and other similar
encumbrances incurred in the ordinary course of business which, in the
aggregate, are not substantial in amount, and which do not in any case
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materially detract from the value of the property subject thereto or
interfere with the ordinary conduct of the businesses of the Issuer and its
Subsidiaries taken as a whole;
(ix) purchase money security interests on any property acquired by the
Issuer or any Subsidiary in the ordinary course of business, securing
Indebtedness incurred or assumed for the purpose of financing all or any
part of the cost of acquiring such property; provided that (a) any such
Lien attaches to such property concurrently with or within 90 days after
the acquisition thereof, (b) such Lien attaches solely to the property so
acquired in such transaction, (c) the principal amount of the Indebtedness
secured thereby does not exceed 100% of the cost of such property and (d)
the principal amount of the Indebtedness secured by all such purchase money
security interests shall not at any time exceed $5.0 million;
(x) Liens securing obligations in respect of Capital Lease Obligations on
assets subject to such leases, provided that such Capital Lease Obligations
are otherwise permitted hereunder;
(xi) Liens arising solely by virtue of any statutory or common law
provision relating to bankers' liens, rights of setoff or similar rights
and remedies as to deposit accounts or other funds maintained with a
creditor depository institution; provided that (a) such deposit account is
not a dedicated cash collateral account and is not subject to restrictions
against access by the Issuer in excess of those set forth by regulations
promulgated by the Federal Reserve Board, and (b) such deposit account is
not intended by the Issuer or any Subsidiary to provide collateral to the
depository institution;
(xii) Liens in favor of the Issuer or any Wholly Owned Restricted
Subsidiary;
(xiii) Liens on property of a Person existing at the time such Person
becomes a Restricted Subsidiary or such Person is merged into or
consolidated with the Issuer or any Restricted Subsidiary of the Issuer;
provided that such Liens were in existence prior to the contemplation of
such merger or consolidation and do not extend to any assets other than
those of the Person merged into or consolidated with the Issuer;
(xiv) Liens on property existing at the time of acquisition thereof by
the Issuer or any Restricted Subsidiary of the Issuer; provided that such
Liens were in existence prior to the contemplation of such acquisition;
(xv) extensions, renewals and replacements of Liens referred to in
clauses (i) through (xiv) above; provided that any such extension, renewal
or replacement Lien is limited to the property or assets covered by the
Lien extended, renewed or replaced and does not secure any Indebtedness in
addition to that secured immediately prior to such extension, renewal or
replacement; and
(xvi) Liens securing other Indebtedness of the Issuer and its
Subsidiaries not expressly permitted by clauses (i) through (xv) above;
provided that the aggregate amount of the Indebtedness secured by Liens
permitted pursuant to this clause (xvi) does not exceed $3.0 million in the
aggregate.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Issuer
or any of its Subsidiaries issued in exchange for, or the net proceeds of which
are used to extend, refinance, renew, replace, defease or refund other
Indebtedness of the Issuer or any of its Restricted Subsidiaries; provided
that: (i) the principal amount (or accreted value, if applicable) of such
Permitted Refinancing Indebtedness does not exceed the principal amount of (or
accreted value, if applicable), plus accrued interest on, the Indebtedness so
extended, refinanced, renewed, replaced, defeased or refunded (plus the amount
of reasonable expenses incurred in connection therewith); (ii) such Permitted
Refinancing Indebtedness has a final maturity date later than the final
maturity date of, and has a Weighted Average Life to Maturity equal to or
greater than the Weighted Average Life to Maturity of, the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded; (iii) if the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded is subordinated in right of payment to the Notes, such Permitted
Refinancing Indebtedness has a final maturity date later than the final
maturity date of, and is subordinated in right of payment to, the Senior Notes
on terms at least as favorable to the Holders of Senior Notes as those
contained in the documentation governing the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; and (iv) such Indebtedness
is incurred either by the Issuer or by the Restricted Subsidiary who is the
obligor on the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded.
"Public Equity Offering" means a public offering of Equity Interests
(other than Disqualified Stock) of (i) the Issuer or (ii) Anchor Holdings, Inc.
to the extent the net proceeds thereof are contributed to the Issuer as a
capital contribution to capital stock.
68
<PAGE>
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" means Anchor Advanced Products Foreign Sales Corp.
and Cepillos de Matamoros and any Subsidiary of Holdings or any subsidiary of
the Issuer, in each case, that is not an Unrestricted Subsidiary.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Act, as such Regulation is in effect on the date hereof.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a
combination thereof) and (ii) any partnership (a) the sole general partner or
the managing general partner of which is such Person or a Subsidiary of such
Person or (b) the only general partners of which are such Person or of one or
more Subsidiaries of such Person (or any combination thereof).
"Unrestricted Subsidiary" means any Subsidiary that is designated by the
Board of Directors as an Unrestricted Subsidiary pursuant to a Board
Resolution, but only to the extent that such Subsidiary: (a) has no
Indebtedness other than Non-Recourse Debt; (b) is not party to any agreement,
contract, arrangement or understanding with the Issuer or any Restricted
Subsidiary of the Issuer unless the terms of any such agreement, contract,
arrangement or understanding are no less favorable to the Issuer or such
Restricted Subsidiary of the Issuer than those that might be obtained at the
time from Persons who are not Affiliates of the Issuer; (c) is a Person with
respect to which neither the Issuer nor any of its Restricted Subsidiaries has
any direct or indirect obligation (x) to subscribe for additional Equity
Interest or (y) to maintain or preserve such Person's financial condition or to
cause such Person to achieve any specified levels of operating results; and (d)
has not guaranteed or otherwise directly or indirectly provided credit support
for any Indebtedness of the Issuer or any of its Restricted Subsidiaries. Any
such designation by the Board of Directors shall be evidenced to the Trustee by
filing with the Trustee a certified copy of the Board Resolution giving effect
to such designation and an Officers' Certificate certifying that such
designation complied with the foregoing conditions and was permitted by the
covenant described under the caption "--Certain Covenants--Restricted
Payments." If, at any time, any Unrestricted Subsidiary would fail to meet the
foregoing requirements as an Unrestricted Subsidiary, it shall thereafter cease
to be an Unrestricted Subsidiary for purposes of the Indenture and any
Indebtedness of such Subsidiary shall be deemed to be incurred by a Restricted
Subsidiary of the Issuer as of such date (and, if such Indebtedness is not
permitted to be incurred as of such date under the covenant described under the
caption "--Certain Covenants--Incurrence of Indebtedness and Issuance of
Preferred Stock," the Issuer shall be in default of such covenant). The Board
of Directors of Issuer may at any time designate any Unrestricted Subsidiary to
be a Restricted Subsidiary; provided that such designation shall be deemed to
be an incurrence of Indebtedness by a Restricted Subsidiary of Issuer any
outstanding Indebtedness of such Unrestricted Subsidiary and such designation
shall only be permitted if (i) such Indebtedness is permitted under the
covenant described under the caption "--Certain Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock," and (ii) no Default or Event of
Default would be in existence following such designation.
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing (i) the sum
of the products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment, by (ii) the then outstanding
principal amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person and one or more Wholly Owned Subsidiaries of such
Person.
DESCRIPTION OF THE INITIAL NOTES
The terms of the Initial Notes are substantially identical in all respects
(including principal amount, interest rate and maturity) to the terms of the
Exchange Notes for which they may be exchanged pursuant to this Exchange Offer,
except that the Initial Notes are not freely transferable by holders thereof
and were issued subject to certain
69
<PAGE>
covenants regarding registration as provided therein and in the Registration
Rights Agreement (which covenants will terminate and be of no further force or
effect upon completion of this Exchange Offer). See "Registration Rights
Agreement."
EXCHANGE OFFER; REGISTRATION RIGHTS
The Issuer, Holdings and the Initial Purchasers have entered into the
Registration Rights Agreement dated as of April 2, 1997. Pursuant to the
Registration Rights Agreement, the Issuer has agreed to file with the
Commission the Exchange Offer Registration Statement on the appropriate form
under the Securities Act with respect to the Exchange Notes. Upon the
effectiveness of the Exchange Offer Registration Statement, the Issuer will
offer to the Holders of Transfer Restricted Securities pursuant to the Exchange
Offer who are able to make certain representations the opportunity to exchange
their Transfer Restricted Securities for Exchange Notes. If (i) the Issuer is
not required to file the Exchange Offer Registration Statement or permitted to
consummate the Exchange Offer because the Exchange Offer is not permitted by
applicable law or Commission policy or (ii) any Holder of Transfer Restricted
Securities notifies the Issuer within the specified time period that (A) it is
prohibited by law or Commission policy from participating in the Exchange Offer
or (B) that it may not resell the Notes acquired by it in the Exchange Offer to
the public without delivering a prospectus and the prospectus contained in the
Exchange Offer Registration Statement is not appropriate or available for such
resales or (C) that it is a broker-dealer and owns Initial Notes acquired
directly from the Issuer or an affiliate of the Issuer, the Issuer will file
with the Commission a Shelf Registration Statement to cover resales of the
Initial Notes by the Holders thereof who satisfy certain conditions relating to
the provision of information in connection with the Shelf Registration
Statement. For purposes of the foregoing, "Transfer Restricted Securities"
means each Initial Note until (i) the date on which such Initial Note has been
exchanged by a person other than a broker-dealer for an Exchange Note in the
Exchange Offer, (ii) following the exchange by a broker-dealer in the Exchange
Offer of an Initial Note for an Exchange Note, the date on which such Exchange
Note is sold to a purchaser who receives from such broker-dealer on or prior to
the date of such sale a copy of the prospectus contained in the Exchange Offer
Registration Statement, (iii) the date on which such Initial Note has been
effectively registered under the Securities Act and disposed of in accordance
with the Shelf Registration Statement or (iv) the date on which such Initial
Note is distributed to the public pursuant to Rule 144 under the Act.
The Registration Rights Agreement provides that (i) the Issuer will file
an Exchange Offer Registration Statement with the Commission on or prior to 45
days after the Closing Date, (ii) the Issuer will use its reasonable best
efforts to have the Exchange Offer Registration Statement declared effective by
the Commission on or prior to 135 days after the Closing Date, (iii) unless the
Exchange Offer would not be permitted by applicable law or Commission policy,
the Issuer will commence the Exchange Offer and use its reasonable best efforts
to issue on or prior to 30 business days after the date on which the Exchange
Offer Registration Statement was declared effective by the Commission, Exchange
Notes in exchange for all Initial Notes tendered prior thereto in the Exchange
Offer and (iv) if obligated to file the Shelf Registration Statement, the
Issuer will use its reasonable best efforts to file the Shelf Registration
Statement with the Commission on or prior to 60 days after such filing
obligation arises and to cause the Shelf Registration to be declared effective
by the Commission on or prior to 165 days after the Closing Date. If (a) the
Issuer fails to file any of the Registration Statements required by the
Registration Rights Agreement on or before the date specified for such filing,
(b) any of such Registration Statements is not declared effective by the
Commission on or prior to the date specified for such effectiveness (the
"Effectiveness Target Date"), (c) the Issuer fails to consummate the Exchange
Offer within 30 business days of the Effectiveness Target Date with respect to
the Exchange Offer Registration Statement, or (d) the Shelf Registration
Statement or the Exchange Offer Registration Statement is declared effective
but thereafter ceases to be effective or usable in connection with resales of
Transfer Restricted Securities during the periods specified in the Registration
Rights Agreement (each such event referred to in clauses (a) through (d) above
a "Registration Default"), then the Issuer will pay Liquidated Damages to each
Holder of Transfer Restricted Securities, with respect to the first 90-day
period immediately following the occurrence of such Registration Default in an
amount equal to $.05 per week per $1,000 principal amount of Initial Notes
constituting Transfer Restricted Securities held by such Holder. The amount of
the Liquidated Damages will increase by an additional $.05 per week per $1,000
principal amount constituting Transfer Restricted Securities with respect to
each subsequent 90-day period until all Registration Defaults have been cured,
up to a maximum amount of Liquidated Damages of $.50 per week per $1,000
principal amount of Initial Notes constituting Transfer Restricted Securities.
All accrued Liquidated Damages will be paid by the Issuer on each Damages
Payment Date to the Global Note Holder by wire transfer of immediately
available funds or by federal funds check and to Holders
70
<PAGE>
of Certificated Securities by mailing checks to their registered addresses.
Following the cure of all Registration Defaults, the accrual of Liquidated
Damages will cease.
Holders of Initial Notes will be required to make certain representations
to the Issuer (as described in the Registration Rights Agreement) in order to
participate in the Exchange Offer and 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 Initial Notes
included in the Shelf Registration Statement and benefit from the provisions
regarding Liquidated Damages set forth above.
INCOME TAX CONSIDERATIONS
Holders of the Notes should consult their own tax advisors with respect to
their particular circumstances and with respect to the effects of state, local
or foreign tax laws to which they may be subject.
Anchor believes, based upon the opinion of its counsel, Hutchins, Wheeler
& Dittmar, A Professional Corporation, that the following summary fairly
describes the material United States federal income tax consequences expected
to apply to the exchange of Initial Notes for Exchange Notes and the ownership
and disposition of Exchange Notes under currently applicable law. The
discussion does not cover all aspects of federal taxation that may be relevant
to, or the actual tax effect that any of the matters described herein will have
on, particular holders, and does not address state, local, foreign or other tax
laws. Further, the federal income tax treatment of a holder of the Initial
Notes and the Exchange Notes may vary depending on the holder's particular
situation. Certain holders (including insurance companies, tax-exempt
organizations, financial institutions, broker-dealers, taxpayers subject to the
alternative minimum tax and foreign persons) may be subject to special rules
not discussed below. The description assumes that holders of the Initial Notes
and the Exchange Notes will hold the Initial Notes and the Exchange Notes as
"capital assets" (generally, property held for investment purposes) within the
meaning of Section 1221 of the Code.
The Exchange
An exchange of Initial Notes for Exchange Notes will be treated as a
"non-event" for federal income tax purposes because the Exchange Notes will not
be considered to differ materially in kind or extent from the Initial Notes and
because the exchange will occur by operation of the terms of the Initial Notes.
As a result, no federal income tax consequences will result to holders
exchanging Initial Notes for Exchange Notes.
The Exchange Notes
Interest Payments on the Exchange Notes. The Initial Notes and the
Exchange Notes are debt for Federal income tax purposes. The Initial Notes were
not issued with original issue discount. The stated interest on the Initial
Notes and Exchange Notes should be considered to be "qualified stated interest"
and, therefore, will be includible in a holder's gross income (except to the
extent attributable to accrued interest at the time of purchase) as ordinary
interest income for federal income tax purposes in accordance with a holder's
tax method of accounting. If Liquidated Damages are paid (in addition to the
accrual of interest) on the Initial Notes as described above under "Exchange
Offer; Registration Rights" such Liquidated Damages payments generally should
be includable in the Holder's gross income as ordinary income when such payment
is made.
Tax Basis. A holder's adjusted tax basis (determined by taking into
account accrued interest at the time of purchase) in an Exchange Note received
in exchange for an Initial Note will equal the cost of the Initial Note to such
holder, increased by the amounts of market discount previously included in
income by the holder and reduced by any principal payments received by such
holder with respect to the Exchange Notes and by amortized bond premium. A
holder's adjusted tax basis in an Exchange Note purchased by such holder will
be equal to the price paid for such an Exchange Note (determined by taking into
account accrued interest at the time of purchase), increased by market discount
previously included in income by the holder and reduced by any principal
payments received by such holder with respect to an Exchange Note and by
amortized bond premium. See "Market Discount and Bond Premium" below.
Sale, Exchange or Retirement. Upon the sale, exchange or retirement of an
Exchange Note, a holder will recognize taxable gain or loss, if any, equal to
the difference between the amount realized on the sale, exchange or retirement
and such holder's adjusted tax basis in such Exchange Note. Such gain or loss
will be a capital gain
71
<PAGE>
or loss (except to the extent of any accrued market discount), and will be a
long-term capital gain or loss if the Exchange Note has been held for more than
one year at the time of such sale, exchange or retirement.
Market Discount and Bond Premium. Holders should be aware that the market
discount provisions of the Code may affect the Exchange Notes. These rules
generally provide that a holder who purchases Exchange Notes for an amount
which is less than their principal amount will be considered to have purchased
the Exchange Notes at a "market discount" equal to the amount of such
difference. Such holder will be required to treat any gain realized upon the
disposition of the Exchange Note as interest income to the extent of the market
discount that is treated as having accrued during the period that such holder
held such Exchange Note, unless an election is made to include such market
discount in income on a current basis. A holder of an Exchange Note who
acquires the Exchange Note at a market discount and who does not elect to
include market discount in income on a current basis may also be required to
defer the deduction of a portion of the interest on any indebtedness incurred
or continued to purchase or carry the Exchange Note until the holder disposes
of such Exchange Note in a taxable transaction.
If a holder's tax basis in an Exchange Note immediately after acquisition
exceeds the stated redemption price at maturity of such Exchange Note, such
holder may be eligible to elect to deduct such excess as amortizable bond
premium pursuant to Section 171 of the Code.
Purchasers of the Exchange Notes should consult their own tax advisors as
to the application to such purchasers of the market discount and bond premium
rules.
HOLDERS OF THE INITIAL NOTES ARE URGED TO CONSULT THEIR TAX ADVISORS
REGARDING THE PARTICULAR TAX CONSEQUENCES TO THEM OF ACQUIRING, OWNING OR
DISPOSING OF THE INITIAL NOTES AND THE EXCHANGE NOTES, INCLUDING THE
APPLICATION OF FEDERAL, STATE, LOCAL AND FOREIGN TAX LAWS, AND POSSIBLE FUTURE
CHANGES IN SUCH FEDERAL TAX LAWS.
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
issued by a broker-dealer in connection with resales of Exchange Notes received
in exchange for Initial Notes where such Notes were acquired as a result of
market-making activities or other trading activities. The Issuer has agreed
that for a period of one year after the date on which the Registration
Statement is declared effective by the Commission, it will make this
Prospectus, as amended or supplemented, available to any broker-dealer for use
in connection with any such resale. In addition, until November 18, 1997, all
dealers effecting transactions in the Exchange Notes may be required to deliver
a prospectus.
The Issuer 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 market prices prevailing at the time of resale, at prices
related to such market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such 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 Exchange 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.
For a period of one year after the date on which the Registration
Statement is declared effective by the Commission, the Issuer will promptly
send additional copies of this Prospectus and any amendment or supplement to
this Prospectus to any broker-dealer that requests such documents in the Letter
of Transmittal. The Issuer has agreed to pay all expenses incident to the
Exchange Offer other than commissions or concessions of any brokers or dealers
and will indemnify the holders of the Notes (including any broker-dealers)
against certain liabilities, including liabilities under the Securities Act.
72
<PAGE>
LEGAL MATTERS
Certain legal matters in connection with the Exchange Notes offered hereby
will be passed upon for the Company by Hutchins, Wheeler & Dittmar, A
Professional Corporation, Boston, Massachusetts.
EXPERTS
The consolidated financial statements of Anchor Holdings, Inc. and its
subsidiaries as of December 31, 1995 and 1996 and for each of the three years
in the period ended December 31, 1996 included in this Prospectus have been
included herein in reliance on the report of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
73
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
ANCHOR HOLDINGS, INC. AND SUBSIDIARIES
Report of Independent Accountants ...................................................... F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996 and June 28, 1997 .......... F-3
Consolidated Statements of Income for the Three Years Ended December 31, 1996 and for the
thirteen and twenty-six weeks ended June 29, 1996 and June 28, 1997 .................... F-4
Consolidated Statements of Stockholders' Equity for the Three Years Ended December 31,
1996 and for the twenty-six weeks ended June 28, 1997 .................................. F-5
Consolidated Statements of Cash Flows for the Three Years Ended December 31, 1996 and for
the thirteen and twenty-six weeks ended June 29, 1996 and June 28, 1997 .............. F-6
Notes to Consolidated Financial Statements ............................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
Anchor Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Anchor
Holdings, Inc. and Subsidiaries as of December 31, 1995 and 1996, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Anchor
Holdings, Inc. and Subsidiaries as of December 31, 1995 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
Knoxville, Tennessee COOPERS & LYBRAND L.L.P.
January 31, 1997
F-2
<PAGE>
ANCHOR HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands except per share data)
<TABLE>
<CAPTION>
December 31,
-----------------------------
June 28
1995 1996 1997
------------- ------------- ------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash ......................................................... $ 784 $ 1,578 $ 3,730
Accounts receivable, less allowance for doubtful accounts,
allowances, and returns of $1,063 in 1995,
$1,050 in 1996 and $956 in 1997............................. 21,758 21,400 20,290
Inventories ................................................ 20,938 20,411 20,732
Prepaid expenses and other assets ........................... 313 1,626 320
Refundable federal income taxes .............................. 416 448 1,102
Deferred income taxes ....................................... 1,886 2,023 1,604
--------- --------- ---------
Total current assets ....................................... 46,095 47,486 47,778
Property, plant, and equipment, net ........................... 52,589 52,723 52,315
Goodwill, net ................................................ 11,222 10,395 9,982
Other assets, net ............................................. 6,623 6,087 8,745
--------- --------- ---------
Total assets ............................................. $ 116,529 $ 116,691 $ 118,820
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt ........................ $ 5,000 $ 6,000 $ --
Current maturities of obligations under capital leases ...... 376 480 237
Cash Float ................................................ -- -- --
Accounts payable ............................................. 8,683 6,120 3,904
Other accrued expenses and current liabilities ............... 5,630 7,423 7,822
--------- --------- ---------
Total current liabilities ................................. 19,689 20,023 11,963
Long-term debt, less current maturities ..................... 49,490 44,702 --
Related party long-term debt ................................. 21,000 21,000 --
Bonds payable ................................................ -- -- 100,000
Accrued pension liability .................................... 4,347 4,957 5,179
Deferred income taxes ....................................... 2,473 2,906 2,845
Other long-term liabilities ................................. 2,267 2,286 2,263
--------- --------- ---------
Total liabilities .......................................... 99,266 95,874 122,250
--------- --------- ---------
Commitments and contingencies (Notes 6, 7, 8, 10, 11 and 13)
Stockholders' equity:
Common stock--par value $.01 per share; authorized
2,000,000 shares; shares issued 1,018,160 in 1995 and 1996
and 1,551,460 in 1997 ...................................... 10 10 15
Additional paid-in capital ................................. 10,240 10,240 --
Retained earnings .......................................... 7,519 11,145 (2,867)
Additional pension liability, net of tax of $304 in 1995 and
$348 in 1996 and 1997 ...................................... (496) (568) (568)
Treasury stock at cost ....................................... (10) (10) (10)
--------- --------- ---------
Total stockholders' equity (deficit) ....................... 17,263 20,817 (3,430)
--------- --------- ---------
Total liabilities and stockholders' equity (deficit) ....... $ 116,529 $ 116,691 $ 118,820
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
ANCHOR HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(in thousands except per share data)
<TABLE>
<CAPTION>
Year Ended
-----------------------------------------
December 31,
1994 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
Net sales ........................... $ 118,267 $ 149,366 $ 156,858
Cost of goods sold .................. 100,059 125,028 129,221
--------- --------- ---------
Gross profit ........................ 18,208 24,338 27,637
Amortization expense .................. 1,712 1,662 1,530
Selling, general and
administrative expense ............... 7,634 9,409 11,358
--------- --------- ---------
Operating income ..................... 8,862 13,267 14,749
--------- --------- ---------
Other income (expense):
Gain (loss) on disposal of
fixed assets ..................... (41) 23 (123)
Interest expense, net ............... (2,831) (5,463) (4,931)
Interest expense, related party ..... (3,153) (3,153) (3,193)
Other, net ........................... 780 (997) (285)
--------- --------- ---------
Total other expense, net ............ (5,245) (9,590) (8,532)
--------- --------- ---------
Income before income taxes and
extraordinary item .................. 3,617 3,677 6,217
Provision for income taxes ............ 1,507 1,239 2,591
--------- --------- ---------
Income before extraordinary
item ................................. 2,110 2,438 3,626
Extraordinary item--loss on
early extinguishment of debt,
net of $172 and $742 tax ............ 334 -- --
--------- --------- ---------
Net income (loss) ................... $ 1,776 $ 2,438 $ 3,626
========= ========= =========
Earnings per common and
common equivalent share:
Income before extraordinary
item .............................. $ 1.70 $ 1.85 $ 2.58
Extraordinary item .................. .25 -- --
--------- --------- ---------
Net income (loss) ................... $ 1.45 $ 1.85 $ 2.58
========= ========= =========
Weighted average common and
common equivalent shares
outstanding ........................ 1,348 1,348 1,406
========= ========= =========
<CAPTION>
Thirteen Weeks Ended Twenty-six Weeks Ended
--------------------------- ---------------------------
June 29, June 28, June 29, June 28,
1996 1997 1996 1997
------------ -------------- ------------ --------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net sales ........................... $ 41,092 $ 43,199 $ 80,506 $ 84,745
Cost of goods sold .................. 33,553 36,668 65,226 71,321
----------- ---------- ----------- ----------
Gross profit ........................ 7,539 6,531 15,280 13,424
Amortization expense .................. 345 322 688 665
Selling, general and
administrative expense ............... 2,635 2,875 5,550 5,490
----------- ---------- ----------- ----------
Operating income ..................... 4,559 3,334 9,042 7,269
----------- ---------- ----------- ----------
Other income (expense):
Gain (loss) on disposal of
fixed assets ..................... (1) (40) (2) (49)
Interest expense, net ............... (1,146) (2,643) (2,334) (3,914)
Interest expense, related party ...... (798) (267) (1,596) (1,068)
Other, net ........................... (128) (21) (239) (38)
----------- ---------- ----------- ----------
Total other expense, net ............ (2,073) (2,971) (4,171) (5,069)
----------- ---------- ----------- ----------
Income before income taxes and
extraordinary item .................. 2,486 363 4,871 2,200
Provision for income taxes ............ 1,033 21 2,033 800
----------- ---------- ----------- ----------
Income before extraordinary
item ................................. 1,453 342 2,838 1,400
Extraordinary item--loss on
early extinguishment of debt,
net of $172 and $742 tax ............ 0 (1,210) 0 (1,210)
----------- ---------- ----------- ----------
Net income (loss) ................... $ 1,453 ($ 868) $ 2,838 $ 190
=========== ========== =========== ==========
Earnings per common and
common equivalent share:
Income before extraordinary
item .............................. $ 1.04 $ .22 $ 2.04 $ 1.09
Extraordinary item .................. -- (.79) -- (.94)
----------- ---------- ----------- ----------
Net income (loss) ................... $ 1.04 $ (.57) $ 2.04 $ .15
=========== ========== =========== ==========
Weighted average common and
common equivalent shares
outstanding ........................ 1,394 1,540 1,394 1,280
=========== ========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
ANCHOR HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
For the years ended December 31, 1994, 1995 and 1996 and the
twenty-six weeks ended June 28, 1997
(unaudited) (in thousands)
<TABLE>
<CAPTION>
Common Stock
----------------- Additional Additional
Shares Paid-in Retained Treasury Pension
Issued Amount Capital Earnings Stock Liability Total
-------- -------- ------------ ------------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1993 ......... 1,000 $10 $ 9,490 $ 3,305 $ -- $ (331) $ 12,474
Net income ........................ -- -- -- 1,776 -- -- 1,776
Issuance of common stock ......... 18 -- 750 -- -- -- 750
Additional pension liability ...... -- -- -- -- -- (69) (69)
------ ---- ---------- ---------- ----- ------- ---------
Balances, December 31, 1994 ......... 1,018 10 10,240 5,081 -- (400) 14,931
Net income ........................ -- -- -- 2,438 -- -- 2,438
Additional pension liability ...... -- -- -- -- -- (96) (96)
Treasury stock acquired,
242.13 shares ..................... -- -- -- -- (10) -- (10)
------ ---- ---------- ---------- ----- ------- ---------
Balances, December 31, 1995 ......... 1,018 10 10,240 7,519 (10) (496) 17,263
Net income ........................ -- -- -- 3,626 -- -- 3,626
Additional pension liability ...... -- -- -- -- -- (72) (72)
------ ---- ---------- ---------- ----- ------- ---------
Balances, December 31, 1996 ......... 1,018 $10 $ 10,240 $ 11,145 $ (10) $ (568) $ 20,817
====== ==== ========== ========== ===== ======= =========
Net income ........................ -- -- -- 190 -- -- 190
Dividend paid ..................... -- -- (15,302) (14,202) -- -- (29,504)
Option exercise .................. 533 5 5,062 -- -- -- 5,067
------ ---- ---------- ---------- ----- ------- ---------
Balances, June 28, 1997 ............ 1,551 $15 $ -- $ (2,867) $ (10) $ (568) $ (3,430)
====== ==== ========== ========== ===== ======= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
ANCHOR HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Year Ended
--------------------------------------
December 31,
--------------------------------------
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ....................... $ 1,776 $ 2,438 $ 3,626
Adjustments to reconcile net income to
net cash provided (used) by operating
activities:
Deferred income taxes .................. 881 60 296
Depreciation and amortization ......... 9,466 9,768 9,605
Provision for doubtful accounts ...... 126 356 340
Provision for inventory obsolescence 88 450 266
(Gain) loss from disposal of fixed
assets .............................. 41 (23) 123
Write off of debt issue costs -- -- --
Changes in assets and liabilities, net
of effects of purchase of business
(Note 2):
Accounts receivable .................. (3,024) (1,361) 17
Inventories ........................... 1,471 (3,909) 262
Prepaid and other assets ............ (1,525) (1,634) (1,798)
Refundable federal income taxes ...... (161) 154 (32)
Accounts payable, accrued
expense and other liabilities ...... (2,264) 2,523 371
---------- ---------- ----------
Net cash provided (used) by
operating activities ............... 6,875 8,822 13,076
---------- ---------- ----------
Cash flows from investing activities:
Purchase of property, plant and
equipment .............................. (5,724) (6,932) (8,028)
Purchase of net assets of business ...... (27,394) -- --
Proceeds from sale of fixed assets ...... 79 479 14
---------- ---------- ----------
Net cash used in investing
activities ........................ (33,039) (6,453) (8,014)
---------- ---------- ----------
Cash flows from financing activities:
Checks written in excess of bank
balances .............................. (399) -- --
Borrowings on long-term debt ............ 61,935 9,886 8,647
Principal payments on long-term debt ... (33,629) (12,569) (12,435)
Exercise of options -- -- --
Payment of dividend -- -- --
Principal payments on capital lease
obligations ........................... (279) (588) (480)
Sale of common stock .................. 750 -- --
Payments of debt issue costs ............ (1,596) -- --
Proceeds from other long-term
liabilities ........................... 62 1,016 --
Shares acquired in treasury ............ -- (10) --
---------- ---------- ----------
Net cash provided by (used in)
financing activities ............... 26,844 (2,265) (4,268)
---------- ---------- ----------
Net increase (decrease) in cash ......... 680 104 794
Cash at beginning of period ............ -- 680 784
---------- ---------- ----------
Cash at end of period .................. $ 680 $ 784 $ 1,578
========== ========== ==========
Supplemental cash flow information:
Income taxes paid ..................... $ 1,492 $ 1,243 $ 1,945
Interest paid ........................... $ 5,284 $ 8,172 $ 7,799
<CAPTION>
Thirteen Weeks Ended Twenty-six Weeks Ended
----------------------- ------------------------
June 29, June 28, June 29, June 28,
1996 1997 1996 1997
----------- ----------- ----------- - -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ....................... $ 1,453 $ (868) $ 2,838 $ 190
Adjustments to reconcile net income to
net cash provided (used) by operating
activities:
Deferred income taxes .................. 0 92 74 358
Depreciation and amortization ......... 2,216 2,405 4,556 4,734
Provision for doubtful accounts ...... 1 92 3 92
Provision for inventory obsolescence (316) 38 0 125
(Gain) loss from disposal of fixed
assets .............................. 1 40 2 49
Write off of debt issue costs ......... 0 701 0 701
Changes in assets and liabilities, net
of effects of purchase of business
(Note 2):
Accounts receivable .................. (551) 4,774 (1,244) 1,017
Inventories ........................... 2,200 828 (164) (446)
Prepaid and other assets ............ 457 359 201 1,306
Refundable federal income taxes ...... 74 (972) 416 (654)
Accounts payable, accrued
expense and other liabilities ...... 4,180 (1,387) 1,200 (1,595)
--------- --------- ---------- ---------
Net cash provided (used) by
operating activities ............... 9,715 6,102 7,882 5,877
--------- --------- ---------- ---------
Cash flows from investing activities:
Purchase of property, plant and
equipment .............................. (2,299) (1,508) (4,783) (3,481)
Purchase of net assets of business ...... -- -- -- --
Proceeds from sale of fixed assets ...... -- -- -- --
--------- --------- ---------- ---------
Net cash used in investing
activities ........................ (2,299) (1,508) (4,783) (3,481)
--------- --------- ---------- ---------
Cash flows from financing activities:
Checks written in excess of bank
balances .............................. (1,248) (2,808) 971 0
Borrowings on long-term debt ............ 0 101,529 4,460 101,529
Principal payments on long-term debt ... (5,382) (71,293) (8,237) (73,231)
Exercise of options .................... 0 5,067 0 5,067
Payment of dividend .................... 0 (29,504) 0 (29,504)
Principal payments on capital lease
obligations ........................... (13) (124) (200) (266)
Sale of common stock .................. -- -- -- --
Payments of debt issue costs ............ 0 (3,839) 0 (3,839)
Proceeds from other long-term
liabilities ........................... -- -- -- --
Shares acquired in treasury ............ -- -- -- --
--------- --------- ---------- ---------
Net cash provided by (used in)
financing activities ............... (6,643) (972) (3,006) (244)
--------- --------- ---------- ---------
Net increase (decrease) in cash ......... 773 3,622 93 2,152
Cash at beginning of period ............ 104 108 784 1,578
--------- --------- ---------- ---------
Cash at end of period .................. $ 877 $ 3,730 $ 877 $ 3,730
========= ========= ========== =========
Supplemental cash flow information:
Income taxes paid ..................... $ 1,127 $ 609 $ 1,127 $ 609
Interest paid ........................... $ 1,864 $ 2,758 $ 3,770 $ 4,751
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
ANCHOR HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands except for per share data)
Anchor Holdings, Inc. (the "Company") was incorporated March 9, 1990,
under the laws of the State of Delaware. The Company's subsidiaries manufacture
and sell: brushes used in medical and dental applications; plastic and metal
packaging for the cosmetics industry; and molded plastics products, including
assembly of plastic parts and construction of molds used in the injection
molding business. Substantially all sales are made on credit without
collateral. The Company manufactures dental products in the Morristown,
Tennessee facility and cosmetics products in three facilities: Matamoros,
Mexico; Morristown, Tennessee; and Waterbury, Connecticut. The majority of the
cosmetics goods are produced in the Matamoros facility. Molded plastics
products are produced in four separate plants in Seagrove, North Carolina as
well as in a facility in Round Rock, Texas. In addition to the manufacturing
facilities, the Company operates mold technology centers in Elk Grove, Illinois
and Sanford, North Carolina.
1. Summary of Significant Accounting Policies:
The significant accounting policies followed by the Company and its
subsidiaries in the presentation of their consolidated financial statements
are summarized below:
Principles of Consolidation--The financial statements include the accounts of
Anchor Holdings, Inc. the parent holding company, its wholly owned
subsidiaries Anchor Advanced Products Foreign Sales Corporation and Anchor
Advanced Products, Inc., and its Mexican subsidiary, Cepillos de Matamoros,
S.A. de C.V. All significant intercompany balances and transactions have been
eliminated in consolidation.
Cash and Cash Equivalents--The Company considers investments with a maturity
90 days or less to be cash equivalents.
Inventories--Inventories are stated at the lower of cost or market. Cost is
determined using standard costs which approximate the first-in, first-out
method. Valuation allowances are provided for valuation adjustments related to
carrying costs in excess of estimated market value and potential obsolescence.
Property, Plant, Equipment, and Depreciation--Property, plant, and equipment
are recorded at cost. Assets under capital leases are stated at the present
value of minimum lease payments at the inception of the lease. Depreciation
and amortization are provided on the straight-line basis over the estimated
useful lives (5 to 30 years) of the various properties.
Intangible Assets and Amortization--Intangible assets represent goodwill,
organizational expenses, loan costs, and costs allocated to noncompete
agreements arising principally from the acquisition of the Company in 1990 and
the acquisition of the assets of Mid-State Plastics, Inc. in 1994. These
assets are amortized on a straight-line basis over their estimated useful
lives ranging between two and fifteen years.
Pension Plans--Pension costs for defined benefit plans are determined in
accordance with Statement of Financial Accounting Standard No. 87, and include
current costs plus the amortization of transition assets over a period of 21
years. The Company funds pension costs in accordance with the plans and legal
requirements. The Company also has a defined contribution savings plan for all
domestic employees for which it matches one-half of employee contributions up
to six percent of employee compensation.
Income Taxes--Deferred tax liabilities and assets are determined based on the
difference between the financial statements and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
Earnings Per Share--Earnings per share is based on the weighted average number
of shares of common stock and common stock equivalents outstanding during the
period. Common stock equivalents are considered to be the warrants and options
outstanding.
Reclassifications--Reclassifications have been made to certain previously
reported 1994 and 1995 amounts in order to conform with the current year's
presentations.
Significant Estimates--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates
of the financial statements
F-7
<PAGE>
ANCHOR HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands except for per share data)
1. Summary of Significant Accounting Policies (Continued):
and the reported amounts of revenues and expenses during the reporting
periods. Significant estimates of the Company include the allowance for
doubtful accounts, inventory obsolescence reserves and certain self-insured
retained risks. Actual results could differ from these estimates.
Impairment of Long-Lived Assets--In March 1995, the FASB issued Statement of
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of, which (i) requires that
long-lived assets to be held and used be reviewed for impairment whenever
events or circumstances indicate that the carrying value of an asset may not
be recoverable, (ii) requires that long-lived assets to be disposed of be
reported at the lower of the carrying amount or the fair value less costs to
sell, and (iii) provides guidelines and procedures for measuring impairment
losses that are different from previously existing guidelines and procedures.
The Company adopted the provisions of Statement 121 in 1996; the adoption did
not have a material effect on the Company's financial position, results of
operations or cash flows.
2. Acquisition of Mid-State Plastics, Inc.:
On July 29, 1994, the Company purchased substantially all of the operating
assets and assumed certain obligations of Mid-State Plastics, Inc. for a total
price of approximately $27,400. The funds used to acquire Mid-State Plastics,
Inc. were provided by the proceeds of long-term borrowings. The acquisition
was accounted for under the purchase method and, accordingly, the operating
results of Mid-State Plastics, Inc. have been included in the consolidated
operating results since the date of acquisition. The purchase price, including
the acquisition costs, was allocated to the net assets acquired based on
estimated fair values at the date of acquisition as follows:
<TABLE>
<S> <C>
Notes and accounts receivable ......... $ 3,470
Inventory .............................. 3,196
Prepaid expenses and other assets ...... 263
Property, plant and equipment ......... 12,110
Supply contract ........................ 1,000
Noncompete agreement .................. 250
Goodwill .............................. 12,094
Liabilities assumed ..................... (4,983)
---------
$ 27,400
=========
</TABLE>
3. Inventories:
Inventories at December 31, 1995 and 1996, consists of:
<TABLE>
<CAPTION>
1995 1996
--------- --------
<S> <C> <C>
Raw materials ..................... $10,281 $ 9,508
Work in process ................... 7,368 6,254
Finished goods ...................... 4,860 5,954
-------- --------
22,509 21,716
Less valuation allowances .......... 1,571 1,305
-------- --------
$20,938 $20,411
======== ========
</TABLE>
F-8
<PAGE>
ANCHOR HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands except for per share data)
4. Property, Plant, and Equipment:
Property, plant, and equipment at December 31, 1995 and 1996, consists of:
<TABLE>
<CAPTION>
1995 1996
--------- --------
<S> <C> <C>
Land ................................................... $ 1,256 $ 1,254
Buildings and improvements .............................. 15,256 17,019
Machinery and equipment ................................. 64,343 70,383
Furniture and fixtures ................................. 3,362 3,331
Leasehold improvements ................................. 1,320 938
Vehicles ................................................ 130 140
-------- --------
85,667 93,066
Less accumulated depreciation and amortization ......... 33,724 40,737
-------- --------
51,943 52,329
Construction in progress .............................. 646 394
-------- --------
$52,589 $52,723
======== ========
</TABLE>
Depreciation and amortization of property, plant and equipment was $7,126,
$7,787 and $7,756 for the years ended December 31, 1994, 1995 and 1996,
respectively.
5. Intangible and Other Assets:
Intangible and other assets at December 31, 1995 and 1996, consist of:
<TABLE>
<CAPTION>
Estimated
Useful Lives 1995 1996
-------------- --------- --------
<S> <C> <C> <C>
Intangible assets:
Grant fees ........................ 3 years $ 87 $ 87
Organizational expenses ............ 5-10 years 1,539 1,539
Loan costs ........................ 5 years 1,596 1,596
Noncompete agreement ............... 3-5 years 1,250 1,250
Supply contract ..................... 65 months 1,000 1,000
Acquisition costs .................. 5 years 1,043 1,043
Goodwill ........................... 15 years 12,392 12,392
Intangible pension asset ............ 37 years 2,004 2,004
-------- --------
20,911 20,911
Less accumulated amortization ...... 4,702 6,551
-------- --------
Other assets:
Cash value of life insurance ...... 1,616 2,105
Other assets ........................ 20 17
-------- --------
$17,845 $16,482
======== ========
</TABLE>
Amortization expense related to intangibles totaled $1,712, $1,662 and $1,530
for the years ended December 31, 1994, 1995 and 1996, respectively. The 1994
amortization also includes a write off of $495 of loan costs associated with
the debt that was refinanced (see Note 6). Amortization of loan fees that were
charged to interest expense totaled $133, $319 and $319 for the years ended
December 31, 1994, 1995 and 1996, respectively.
The intangible pension asset represents prior service cost related to the
supplemental executive retirement plan and relates to the unrecognized net
obligation at the date of initial application as described in Note 8.
F-9
<PAGE>
ANCHOR HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands except for per share data)
6. Long-Term Debt:
Long-term debt at December 31, 1995 and 1996, consists of:
<TABLE>
<CAPTION>
1995 1996
--------- --------
<S> <C> <C>
Borrowings under revolving credit agreement; floating rates (a) ... $14,740 $15,952
Term note; floating rates (b) .................................... 39,750 34,750
Senior subordinated notes, due April 30, 2000 (c) ............... 9,000 9,000
Junior subordinated notes due April 30, 2000 (c) .................. 12,000 12,000
-------- --------
75,490 71,702
Less current maturities .......................................... 5,000 6,000
-------- --------
$70,490 $65,702
======== ========
</TABLE>
a. This revolving credit agreement provides a number of options for variable
rate borrowings subject to potential limitations based on percentages of
inventories, receivables and outstanding letters of credit. The rate at
December 31, 1996 was 8.125% on $12,000 of the balance, and 9.5% on the
remaining portion. The agreement expires July 29, 1999, at which time all
borrowings are due.
b. This term note is payable in semiannual installments ranging from $500 to
$3,000, plus interest under a number of variable rate options through July
29, 1999. The rate at December 31, 1996 was 8.125%.
c. This senior and junior subordinated debt is payable to certain
stockholders. The senior subordinated notes have a cash coupon payable
quarterly in arrears. In the event the minimum quarterly fixed charge
coverage ratio is not met for any reporting period through April 2000, the
cash interest payable will be paid in the form of deferred interest notes
to the extent necessary to bring the Company back in compliance with the
minimum quarterly fixed charge coverage ratio. All interest payments
through 1996 have been paid currently in cash.
The various debt agreements contain restrictions on, among other things,
capital expenditures, payment of cash dividends, liens on assets, acquisition
or sale of subsidiaries, issuance of additional debt, purchases of
investments, and so-called "junior" payments. In addition, the agreements
contain covenants which, among other things, require the Company to maintain
certain financial ratios including minimum net worth, interest coverage ratio,
fixed charge ratio, and leverage ratio. The Company was in compliance with
these covenants at December 31, 1996. The agreements are collateralized by all
of the Company's assets as well as the stock of the Company and its
subsidiaries.
In connection with the acquisition described in Note 2, the Company refinanced
the revolving credit agreement and the term note. The net effect of the
transaction resulted in an extraordinary pre-tax loss of $505, which is
reflected in the accompanying 1994 statement of operations.
The aggregate maturities of long-term debt for each of the five years
subsequent to December 31, 1995, and in the aggregate thereafter, are as
follows:
<TABLE>
<CAPTION>
Year Amount
- ------------ --------
<S> <C>
1997 ...... $ 6,000
1998 ...... 7,000
1999 ...... 37,702
2000 ...... 21,000
--------
$71,702
========
</TABLE>
7. Leases:
The Company leases a warehouse, land, and certain equipment under capital
leases that expire on various dates through December 2000. The net book value
of buildings, land, and equipment recorded under capital leases at December
31, 1995 and 1996, was $1,774 and $1,036, respectively. Amortization of assets
held under capital leases is included with depreciation expense.
F-10
<PAGE>
ANCHOR HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands except for per share data)
7. Leases (Continued):
The Company also has a noncancelable operating lease for two facilities which
requires the Company to pay all executory costs such as maintenance, taxes,
and insurance.
Future minimum lease payments under noncancelable operating leases with
initial or remaining lease terms in excess of one year and the present value
of future minimum capital lease payments as of December 31, 1996, are as
follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
Year Ending December 31: --------- ----------
<S> <C> <C>
1997 ............................................................ $ 555 $316
1998 ............................................................ 508 279
1999 ............................................................ 269 199
2000 ............................................................ 108 115
Thereafter ...................................................... -- 57
------- -----
Total minimum lease payments .................................... 1,440 $966
======= =====
Less amounts representing interest
(at rates ranging from 10% to 11.7%) ........................... 240
Final month paid in advance .................................... 54
-------
Present value of net minimum capital lease payments ............ 1,146
Less current maturities of obligations under capital leases ...... 480
-------
Obligations under capital leases excluding current installments $ 666
=======
</TABLE>
Total rent expense for operating leases for the years ended December 31, 1994,
1995 and 1996, was $743, $1,201 and $1,779, respectively.
8. Employee Benefit Plans:
The Company sponsors pension plans covering substantially all domestic
employees. Plans covering domestic salaried employees provide benefits that
are based on an employee's years of service and compensation during the
five-year period prior to retirement. The plan covering domestic hourly
employees provides benefits of stated amounts based on an employee's years of
service. Annually, the Company contributes to the plans covering domestic
employees such amounts which are actuarially determined to provide the plans
with sufficient assets to meet future benefit payment requirements. Foreign
executives and employees are covered by fully funded programs as legally
required.
The following table sets forth the funded status of the Company's domestic
defined benefit pension plans and related amounts recognized in the Company's
consolidated balance sheets at December 31, 1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
------------------- ------------------
Salary Hourly Salary Hourly
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Actuarial present value of benefit obligations:
Benefit obligations:
Vested ....................................... $ 945 $1,605 $ 987 $1,901
Nonvested .................................... 101 34 58 41
------- ------- ------- -------
Accumulated benefit obligation ............... $1,046 $1,639 $1,045 $1,942
======= ======= ======= =======
</TABLE>
F-11
<PAGE>
ANCHOR HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands except for per share data)
8. Employee Benefit Plans (Continued):
<TABLE>
<CAPTION>
1995 1996
------------------------- -------------------------
Salary Hourly Salary Hourly
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Projected benefit obligation for service
rendered to date ........................ $ 1,622 $ 1,639 $ 1,756 $ 1,942
Plan assets at estimated fair value ...... 1,186 1,348 1,419 1,732
------- ------- ------- --------
Excess of projected benefit obligation over
plan assets .............................. (436) (291) (337) (210)
Unrecognized transition amount ............ 518 7 488 7
Unrecognized prior service cost ......... -- 116 -- 110
Unrecognized net (gain) loss ............ (288) 800 (523) 916
Unrecognized net obligation ............... -- (923) -- (1,033)
------- ------- ------- --------
Accrued (prepaid) pension cost ......... $ (206) $ (291) $ (372) $ 210
======= ======= ======= ========
</TABLE>
Plan assets consist of cash and temporary investments.
Net pension cost for the years ended December 31, 1994, 1995 and 1996,
included the following components:
<TABLE>
<CAPTION>
1994 1995 1996
------------------- -------------------- --------------------
Salary Hourly Salary Hourly Salary Hourly
-------- -------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Service cost--benefits earned during the period . $ 185 $ 173 $ 184 $ 168 $ 199 $ 182
Interest cost on projected benefit obligation ...... 95 92 106 109 130 131
Estimated/actual return on plan assets ............... (87) (86) (87) (111) (158) 14
Net amortization and deferral ........................ 23 31 22 38 84 (99)
------ ------ ------ ------- ------- ------
Net pension cost .................................... $ 216 $ 210 $ 225 $ 204 $ 255 $ 228
====== ====== ====== ======= ======= ======
</TABLE>
Assumptions used in accounting for the pension plans as of December 31,
1994, 1995 and 1996, were:
<TABLE>
<CAPTION>
1994 1995 1996
------------------- ------------------- ------------------
Salary Hourly Salary Hourly Salary Hourly
-------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Discount rate .................................... 8.0% 8.0% 8.0% 8.0% 8.0% 8.0%
Rate of increase in compensation levels ......... 5.0% N/A 4.0% N/A 3.9% N/A
Expected long-term rate of return on assets ...... 9.0% 9.0% 8.0% 9.0% 8.0% 9.0%
</TABLE>
In 1991, the Company entered into agreements with certain key executive
officers, providing for supplemental payments upon retirement, disability, or
death. The Company purchased life insurance policies to fund the liability
under these agreements, which also provide death benefits to the Company. The
following table sets forth the status of the supplemental executive retirement
plan (SERP) and related amounts recognized in the Company's consolidated
balance sheets at December 31, 1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Actuarial present value of benefit obligation--nonvested ... $ 3,547 $ 4,263
======== ========
Projected benefit obligation for services rendered to date $ 6,037 $ 7,401
Plan assets ............................................. -- --
-------- --------
Excess of projected benefit obligations over plan assets (6,037) (7,401)
Unrecognized transition amount ........................... 4,228 4,746
Unrecognized net obligation at date of initial application (1,738) (1,608)
-------- --------
Accrued pension cost .................................... $ (3,547) $ (4,263)
======== ========
</TABLE>
F-12
<PAGE>
ANCHOR HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands except for per share data)
8. Employee Benefit Plans (Continued):
The Company intends to fund the plan through Company-owned life insurance,
which has a cash value of $2,105 at December 31, 1996; however, the insurance
policies are not considered plan assets.
Net pension cost for the SERP for the years ended December 31, 1994, 1995
and 1996, consists of the following:
<TABLE>
<CAPTION>
1994 1995 1996
---------- ------ -----
<S> <C> <C> <C>
Service cost--benefits earned during the period ......... $ (21) $221 $431
Interest cost on projected benefit obligations ......... 184 246 284
Net amortization ....................................... 213 131 130
------ ----- -----
$ 376 $598 $845
====== ===== =====
</TABLE>
The Company also sponsors defined contribution savings plans for substantially
all domestic employees. Contributions for the years ended December 31, 1994,
1995 and 1996, approximated $325, $456 and $492, respectively.
Pension costs for the foreign subsidiary amounted to approximately $530, $582
and $654 for the years ended December 31, 1994, 1995 and 1996, respectively.
9. Income Taxes:
The provision for income taxes for the years ended December 31, 1994, 1995 and
1996, consisted of the following:
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- -------
<S> <C> <C> <C>
Federal tax:
Current .................. $ 515 $ 939 $2,065
Deferred .................. 846 57 197
State:
Current .................. 37 32 52
Deferred .................. 35 3 99
Foreign (Mexico) tax ......... 74 208 178
------- ------- -------
$1,507 $1,239 $2,591
======= ======= =======
</TABLE>
Income tax expense varies from the amount computed by applying the federal
corporate income tax rate of 34% to income before income taxes as follows:
<TABLE>
<CAPTION>
1994 1995 1996
-------- ----------- -----------
<S> <C> <C> <C>
Computed "expected" income tax expense ........................ $1,229 $ 1,250 $ 2,144
Increase (decrease) in income taxes resulting from:
Foreign sales corporation income ........................ -- (190) (99)
State income taxes, net of federal tax effect ............ 48 23 99
Nondeductible portion of meals and entertainment ......... 101 69 48
Foreign income taxes .................................... 74 208 178
Write off charitable contribution deferred asset ......... -- -- 75
Other, net ................................................ 55 (121) 146
------- ------- -------
Actual income tax provision .............................. $1,507 $ 1,239 $ 2,591
======= ======= =======
</TABLE>
F-13
<PAGE>
ANCHOR HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands except for per share data)
9. Income Taxes (Continued):
The components of the net deferred income tax assets and liabilities as of
December 31, 1995 and 1996, are as follows:
<TABLE>
<CAPTION>
1995 1996
------------------------ -----------------------
Current Noncurrent Current Noncurrent
--------- ------------ --------- -----------
<S> <C> <C> <C> <C>
Deferred tax assets:
Estimate for doubtful accounts and returns ...... $ 351 $ -- $ 404 $ --
Inventory allowances ........................... 40 -- 667 --
Accrued expenses ................................. 614 -- 860 --
Additional pension liability ..................... 304 218 -- 834
Contributions carryforward ..................... -- 220 -- --
Net operating loss carryforward .................. 577 -- 46 --
Alternative minimum tax credits .................. -- 2,911 -- 1,332
Other .......................................... -- 298 46 495
------- --------- ------- ---------
Total deferred tax assets ..................... 1,886 3,647 2,023 2,661
------- --------- ------- ---------
Deferred tax liabilities:
Property, plant and equipment .................. -- 5,945 -- 5,567
Other .......................................... -- 175 -- --
------- --------- ------- ---------
Total deferred tax liabilities .................. -- 6,120 -- 5,567
------- --------- ------- ---------
Net deferred tax asset (liability) ............ $1,886 $ (2,473) $2,023 $ (2,906)
======= ========= ======= =========
</TABLE>
Net operating loss carryforwards utilized in 1996 were approximately $293. Net
operating loss carryforwards utilized in 1995, for federal income tax purposes
and financial statement purposes amounted to approximately $2,482. The Company
has available at December 31, 1996, $-0- of federal net operating loss
carryforwards. Net operating losses of approximately $1,466 remain to be
carried forward to offset future state taxable income. Approximately $1,332 of
alternative minimum tax credits may be carried forward indefinitely. The
amount of unrecognized deferred tax liability for temporary differences
related to investments in foreign subsidiaries that are essentially permanent
in duration were $1,496 and $1,430 for the years ending December 31, 1995 and
1996, respectively.
10. Employee Stock Options, Warrants, and Incentives:
On October 29, 1990, the Company adopted the 1990 Time Accelerated Restricted
Stock Option Plan, as amended effective April 1, 1996 (the "1990 Plan"). A
maximum of 163.3 thousand shares of the Company's common stock may be issued
pursuant to the 1990 Plan upon the exercise of options. Under the 1990 Plan,
nonqualified stock options may be granted to members of senior management of
the Company and its subsidiaries. As of December 31, 1996, options to purchase
163.3 thousand shares of the Company's common stock at exercise prices of
$9.50--$30.00 per share have been granted.
On June 11, 1996, the Company adopted the 1995 Time Accelerated Restricted
Stock Option Plan (the "1995 Plan"). A maximum of twenty-five thousand shares
of the Company's common stock may be issued pursuant to the 1995 Plan upon the
exercise of options. Under the 1995 Plan, nonqualified stock options may be
granted to members of senior management of the Company and its subsidiaries
who were formerly employed by Mid-State and who, at the time of adoption of
the 1995 Plan, were employed in the Company's Mid-State Plastics Division. As
of December 31, 1996, options to purchase twenty-five thousand shares of the
Company's common stock at exercise prices of $41.30 per share have been
granted.
Both plans are administered by the Board of Directors of the Company or a
Committee consisting of three or more directors. Subject to the provisions of
each Plan, the Board of Directors of the Company has the authority to select
optionees and determine the terms of the options granted, including (i) the
number of shares subject to such option, (ii) when the option becomes
exercisable and (iii) the exercise price of the option; provided, however,
that no option may have a term in excess of ten years and six months from the
date of grant.
F-14
<PAGE>
ANCHOR HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands except for per share data)
10. Employee Stock Options, Warrants, and Incentives (Continued):
The terms and conditions of an option grant are set forth in a related option
agreement. An option is not transferable by the optionee except by will or by
the laws of descent and distribution. Options granted under either plan will
terminate upon the earliest to occur of (a) ten years and six months have
elapsed since the date of the grant of the option, (b) 30 days following an
optionee's voluntary termination or termination for cause of employment with
the Company or any of its subsidiaries, or (c) 180 days following an
optionee's termination of employment without cause or due to death or
disability of the optionee.
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123, Accounting for Stock Based Compensation ("SFAS 123"). As
permitted by SFAS 123, the Company has chosen to apply APB Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25") and related
interpretations in accounting for its Plans. The adoption of this standard had
no impact on the financial statements as all options granted were compensatory
options. No compensation expense is recognized for the granting of options
during 1996. Had compensation cost for the Company's Plans been determined
based on the fair value at the grant dates for awards under the Plans
consistent with the method of SFAS 123, the Company's net income and net
income per share would have been reduced to the pro forma amounts of $2,431
and $1.84, respectively, for 1995 and $3,599 and $2.54, respectively, for
1996. The fair value of each option grant is estimated using the Minimum Value
Method with the following assumptions used for grants in 1995 and 1996,
risk-free interest rates of 6.04% and 6.46%, respectively; and expected lives
of 10 years.
A summary of the status of the Company's 1990 Plan as of December 31, 1994,
1995 and 1996, and changes during the years ending on those dates is presented
below:
<TABLE>
<CAPTION>
1994 1995 1996
--------------------------- --------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
-------- ---------------- -------- ---------------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of
year .............................. 153 $9.50 153 $9.50 153 $ 9.50
Granted ........................... -- 10 $30.00
Exercised ........................ -- -- --
Forfeited ........................ -- -- --
---- ----- -------
Outstanding, end of year ......... 153 $9.50 153 $9.50 163 $10.76
==== ===== =======
Options exercisable at
year-end ........................ -- 153 153
Fair value of options granted . -- $ -- $11.96
==== ===== =======
</TABLE>
A summary of the status of the Company's 1995 Plan as of December 31, 1995 and
1996, and changes during the years ending on those dates is presented below:
<TABLE>
<CAPTION>
1995 1996
--------------------------- --------------------------
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
-------- ---------------- -------- ---------------
<S> <C> <C> <C> <C>
Outstanding, beginning of year ......... -- $ -- 25 $41.30
Granted .............................. 25 41.30 -- --
Exercised .............................. -- -- -- --
Forfeited .............................. -- -- -- --
------
Outstanding, end of year ............... 25 $41.30 25 $41.30
------ ==
Options exercisable at year-end ...... -- --
====== ==
Fair value of options granted ......... $5.03 --
====== ==
</TABLE>
F-15
<PAGE>
ANCHOR HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands except for per share data)
10. Employee Stock Options, Warrants, and Incentives (Continued):
The following table summarizes information about the Plan's stock options
at December 31, 1996:
<TABLE>
<CAPTION>
Number Weighted-Average Weighted Number
Range of Outstanding Remaining Average Exercisable
Exercise Price at 12/31/96 Contractual Life Exercise Price at 12/31/96
- ---------------- ------------- ------------------ ---------------- ------------
<S> <C> <C> <C> <C>
$ 9.50 153 4 years $ 9.50 153
$30.00 10 10 $30.00 --
$41.30 25 9 $41.30 --
---- ----
188 153
==== ====
</TABLE>
The Company has issued to the ML-Lee Funds warrants to purchase 380 thousand
shares of common stock exercisable at $9.50 per share. As of December 31,
1996, no warrants had been exercised, although all of the warrants are vested.
Affiliates of the ML-Lee Funds comprise the majority holders of the Company's
common stock.
The Company had a long-term incentive compensation plan whereby certain
management employees received bonuses due to the achievement of certain
performance targets met through 1994. The bonuses totaling $2,500 were paid in
March 1995.
11. Customer Supply Agreements:
On January 11, 1991, the Company entered into an agreement with a major
customer to supply product at certain agreed-upon levels through December
1992, with an option for the customer to extend the contract for three
additional one year periods. The customer has extended the agreement through
June 30, 1999. The agreement guarantees certain gross margin percentages in
varying amounts over the term of the agreement based upon variable labor,
material and overhead costs. The agreement is cancelable by the customer;
however, if such cancellation occurs, the customer agrees to absorb a portion
of the Company's capital investment associated with the agreement in
decreasing amounts over the term of the contract. The Company is currently in
negotiation with the customer for an extension of the agreement.
On July 1, 1993, the Company entered into an agreement with another major
customer to supply product at certain agreed-upon levels through December
1997, with an option for the customer to extend the contract for three
additional one year periods. The agreement guarantees certain gross margin
percentages in varying amounts over the term of the agreement based upon
variable labor, material and overhead costs. The agreement is cancelable by
the customer; however, if such cancellation occurs, the customer agrees to
absorb a portion of the Company's capital investment associated with the
agreement in decreasing amounts over the term of the contract.
In connection with the purchase of Mid-State Plastics, Inc., discussed in Note
2, the Company assumed a contract with a customer to maintain a manufacturing
facility in Texas for the production of injection molded plastic parts. The
customer has the exclusive right, unless otherwise agreed, to purchase the
manufacturing capacity of the facility. The agreement is effective until July
2000, with the customer having the right to renew on a yearly basis. The
customer guarantees the Company 80% of capacity and if not utilized,
reimburses the Company based on a predetermined rate. In the event that
production exceeds the guarantee, the Company owes the customer an amount
computed at one-half the predetermined rate.
12. Business and Credit Concentrations:
The Company's sales are generally made on account without collateral.
Repayment terms vary based on certain conditions. The Company maintains
reserves which management believes are adequate to provide for potential
credit losses. The majority of the Company's customer base spans the United
States.
The Company had two customers which individually had accounts receivable
balances in excess of 10% of the total accounts receivable balance at December
31, 1995 and 1996, respectively. Management believes the total accounts
receivable due from these customers, which was approximately $7,600 and $6,748
at December 31,
F-16
<PAGE>
ANCHOR HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(in thousands except for per share data)
12. Business and Credit Concentrations (Continued):
1995 and 1996, respectively, is fully collectible. The respective percentage
for each customer with sales in excess of 10% of the years ended December 31,
1994, 1995 and 1996, was as follows:
<TABLE>
<CAPTION>
1994 1995 1996
------ ------ -----
<S> <C> <C> <C>
Customer A ......... 32% 29% 24%
Customer B ......... 13% 14% 19%
Customer C ......... 19% 13% 10%
</TABLE>
13. Contingencies:
The Company is subject to claims, normally employment related, in the ordinary
course of business. Management does not believe the resolution of any such
claims will result in a material adverse effect on the future financial
condition, results of operations or cash flows of the Company.
14. Fair Value of Financial Instruments:
The following methods and assumptions were used by the Company in estimating
the fair values of its financial instruments:
Current Asset and Liabilities--The carrying value of the Company's cash,
accounts receivable, accounts payable and accrued expenses approximate fair
value because of the short maturity of these instruments.
Long-Term Debt and Bank Credit Agreement--The fair value of the Company's
borrowings under term notes and revolving credit agreements was estimated
based upon current rates offered to the Company for debt of the same remaining
maturity. The fair value of such debt approximates carrying value at December
31, 1996.
The Company estimates that the fair values of its junior and senior
subordinated notes at December 31, 1996 is approximately $22,199, compared to
their carrying value of $21,000. In making such assessments, the Company
utilized quoted market prices and discounted cash flow analysis as
appropriate.
15. Related Party Transactions:
Transactions involving related parties not otherwise disclosed herein are
as follows:
Management fees of $180 each year have been paid to Thomas H. Lee Company
during 1994, 1995 and 1996, respectively, for management and other consulting
services provided to the Company. Affiliates of the Thomas H. Lee Company
comprise the majority holders of the Company's common stock.
The Company leases warehouse space (near its facilities in Seagrove, North
Carolina) from an individual that is an officer, director and shareholder. The
lease terms are month-to-month, and rent paid under the lease totaled $68 in
1996.
16. Information about the Company's Operations in Different Geographic Areas:
The Company has significant operations in Mexico as well as the United States.
The operations in Mexico do not involve sales to unaffiliated customers. All
sales for the Mexican subsidiary are to the U.S. Company and are marked up
based on a contract price, which at December 31, 1996 was 7.4%. These sales
were $6,081, $6,418, and $6,081, respectively, for the years ending December
31, 1994, 1995 and 1996 and were eliminated in consolidation.
Identifiable assets in Mexico were $15,876 and $14,823, respectively, at
December 31, 1995 and 1996. These amounts include intercompany
receivables/payables of $547 and $835, which were eliminated in consolidation.
F-17
<PAGE>
The Company had sales to customers in foreign countries of $13,919, $11,249
and $13,143 for the years ending December 31, 1994, 1995 and 1996.
17. Anchor Advanced Products, Inc. Separate Company Financial Statements
As described in footnote 18, Anchor Advanced Products, Inc. (the Issuer)
issued $100,000,000 of 11-3/4% Senior Notes due 2004. These notes have been
guaranteed fully and unconditionally by the parent company, Anchor Holdings,
Inc. The separate financial statements of the Issuer are not included herein
because management has determined that they are not materially different from
those of Anchor Holdings, Inc. Summarized financial information of the Issuer
for the years ended December 31, 1994, 1995, and 1996 and for the unaudited
thirteen and twenty-six weeks ended June 29, 1996 and June 28, 1997, are as
follows:
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-six Weeks Ended
June 29, June 28, June 29, June 28,
1994 1995 1996 1996 1997 1996 1997
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Current assets N/A $45,680 $47,052 N/A N/A N/A $47,300
Noncurrent assets N/A 70,416 69,192 N/A N/A N/A 70,900
Current liabilities N/A 19,689 20,023 N/A N/A N/A 11,963
Noncurrent liabilities N/A 79,577 75,851 N/A N/A N/A 110,287
Net Sales $118,267 149,366 156,858 $41,092 $43,199 $80,506 84,745
Gross profit 18,208 24,338 27,637 7,539 6,531 15,280 13,424
Income from operations
before extraordinary
items 1,927 2,189 3,417 1,403 292 2,738 1,300
Net income (loss) 1,593 2,189 3,417 1,403 (918) 2,738 90
</TABLE>
18. Quarterly Information (Unaudited)
The quarterly consolidated financial statements include the accounts of Anchor
Holdings, Inc. and its wholly-owned subsidiaries (the Company). All
significant intercompany balances and transactions have been eliminated in
consolidation. The quarterly consolidated financial statements have been
prepared, without audit, in accordance with generally accepted accounting
principles, pursuant to the rules and regulations of the Securities and
Exchange Commission. In the opinion of management, the quarterly consolidated
financial statements include all adjustments which are necessary for a fair
presentation of the financial position and results of operations for the
interim periods presented; such adjustments being of a normal recurring
nature. Certain information and footnote disclosures have been condensed or
omitted pursuant to such rules and regulations. It is suggested that these
quarterly consolidated financial statements and notes thereto be read in
conjunction with the consolidated financial statements and notes thereto
included for the year ended December 31, 1996. Results of operations in
interim periods are not necessarily indicative of results to be expected for a
full year.
The components of inventory for the quarter ended June 28, 1997 are as
follows:
<TABLE>
<S> <C>
Raw materials .................. $10,022
Work in process ............... 6,554
Finished goods .................. 5,586
--------
22,162
Less valuation allowances ...... 1,430
--------
$20,732
========
</TABLE>
The income tax expense for the quarters ended June 29, 1996 and June 28, 1997
varies from the amount of expense computed by applying the federal corporate
income tax rate of 34% to net income before taxes due to comparable items
reflected in the years ended December 31, 1995 and 1996 footnote.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share," which changes the
calculations used for earnings per share (EPS) and makes them comparable to
international EPS standards. It replaces the presentation of primary EPS with a
presentation of basic EPS. It also requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation. The effect of the standard on quarterly
consolidated financial statements would be to result in $2.79 and $0.15 of
basic EPS for the quarters ended June 29, 1996 and June 28, 1997. The standard
would have no effect on the diluted EPS. The Statement is effective for
financial statements issued for periods ending after December 15, 1997; earlier
application is not permitted.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This Statement establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and interim financial reports issued
to shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. The Statement is
effective for financial statements issued for periods beginning after December
15, 1997. Management has not yet determined the full effect of this Statement
on its financial statements.
On April 2, 1997, Anchor Advanced Products, Inc. (the Issuer) issued
$100,000,000 of 11-3/4% Senior Notes due 2004. The net proceeds to the Issuer
from the sale of the Initial Notes was $96.6 million (after deducting
discounts, commissions, fees and expenses thereof) and were used: (i) to
prepay in full $51.5 million in borrowings under the Revolving Credit and Term
Loan Agreement, including all accrued interest and fees payable upon such
prepayment, (ii) to pay $22.3 million to redeem $9.0 million aggregate
principal amount of Senior Subordinated Notes and $12.0 million aggregate
principal amount of Junior Subordinated Notes, each due April 30, 2000 and
F-18
<PAGE>
payable to ML-Lee Acquisition Fund II, L.P. and ML-Lee Acquisition Fund
(Retirement Accounts) II, L.P., including all accrued interest and premiums
payable upon such redemption, and (iii) to pay $22.8 million of a $24.4
million dividend on the Issuer's common stock. To pay the remaining portion of
the dividend, the Issuer borrowed approximately $1.5 million under the New
Credit Facility. All of the Issuer's common stock is owned by Anchor Holdings,
Inc. (the Company). The Company used the $24.4 million from the Issuer
dividend, together with $5.1 million of proceeds from the exercise of warrants
and options to purchase the Company's common stock, to pay a $29.5 million
dividend on its capital stock. Immediately prior to the payment of the
dividend, all of the outstanding warrants and 153,300 of the options were
exercised. Anchor Holdings, Inc. has guaranteed the Senior Notes fully and
unconditionally. The separate financial statements of Anchor Advanced
Products, Inc. are not included herein because management has determined that
they are not materially different from those of the Company.
F-19
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesperson, or other person has been authorized to give any
information or to make any representations in connection with this Offering
other than those contained in this Prospectus and, if given or made, such
information or representation must not be relied upon as having been authorized
by the Company or the Initial Purchasers. This Prospectus does not constitute
an offer to sell or a solicitation of an offer to buy any securities other than
the securities to which it relates, nor does it constitute an offer to sell or
the solicitation of an offer to buy such securities in any jurisdiction in
which such offer or solicitation is not authorized, or in which the person
making such offer or solicitation is not qualified to do so, or to any person
to whom it is unlawful to make such an offer or solicitation. Neither the
delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company since the date hereof or that the information contained
herein is correct as of any time subsequent to its date.
-------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Page
Summary ................................. 1
Risk Factors .............................. 11
The Exchange Offer ........................ 16
Capitalization ........................... 22
Selected Financial Data .................. 23
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ........................... 25
Business ................................. 30
Management .............................. 38
Principal Stockholders .................. 44
Certain Transactions ..................... 46
Description of Certain Indebtedness ...... 47
Description of the Exchange Notes ......... 48
Description of the Initial Notes ......... 69
Exchange Offer; Registration Rights ...... 70
Income Tax Considerations ............... 71
Plan of Distribution ..................... 72
Legal Matters ........................... 73
Experts ................................. 73
Index to Financial Statements ............ F-1
</TABLE>
$100,000,000
[Anchor Logo]
Anchor Advanced
Products, Inc.
11-3/4% Series B Senior Notes
due 2004
-----------------------------------------------
PROSPECTUS
-----------------------------------------------
August 20, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors And Officers
Section 145 of the General Corporation Law of the State of Delaware
provides as follows:
(a) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation)
by reason of the fact that he is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interest of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of
any action, suit or proceeding by judgment, order, settlement, conviction
or upon a plea of nolo contendere or its equivalent, shall not, of itself,
create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
(b) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the corporation to procure a judgment
in its favor by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request
of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses (including attorneys' fees) actually and reasonably incurred by
him in connection with the defense or settlement of such action or suit if
he acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the corporation and except that no
indemnification shall be made in respect to any claim, issue or matter as
to which such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the Court of Chancery or the
court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or such
other court shall deem proper.
(c) To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense of
any action, suit or proceeding referred to in subsections (a) and (b) of
this section, or in defense of any claim, issue or matter therein, he shall
be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith.
(d) Any indemnification under subsections (a) and (b) of this section
(unless ordered by a court) shall be made by the corporation only as
authorized in the specific case upon a determination that indemnification
of the director, officer, employee or agent is proper in the circumstances
because he has met the applicable standard of conduct set forth in
subsections (a) and (b) of this section. Such determination shall be made
(1) by a majority vote of the board of directors who are not parties to
such action, suit or proceeding, even though less than a quorum, or (2) if
there are no such directors, or, if such directors so direct, by
independent legal counsel in a written opinion, or (3) by the shareholders.
(e) Expenses (including attorneys' fees) incurred by an officer or
director in defending any civil, criminal, administrative or investigative
action, suit or proceeding may be paid by the corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such
amount if it shall ultimately be determined that he is not entitled to be
indemnified by the corporation as authorized in this section. Such expenses
(including attorneys' fees) incurred by other employees and agents may be
so paid upon such terms and conditions, if any, as the board of directors
deems appropriate.
II-1
<PAGE>
(f) The indemnification and advancement of expenses provided by, or
granted pursuant to, the other subsections of this section shall not be
deemed exclusive of any other rights to which those seeking indemnification
or advancement of expenses may be entitled under any bylaw, agreement, vote
of shareholders or disinterested directors or otherwise, both as to action
in his official capacity and as to action in another capacity while holding
such office.
(g) A corporation shall have power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee, or agent
of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against him and incurred by him in any such capacity, or arising
out of his status as such, whether or not the corporation would have the
power to indemnify him against such liability under this section.
(h) For purposes of this section, references to the corporation shall
include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued,
would have had power and authority to indemnify its directors, officers,
and employees or agents, so that any person who is or was a director,
officer, employee or agent of such constituent corporation, or is or was
serving at the request of such constituent corporation as a director,
officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, shall stand in the same position under
this section with respect to the resulting or surviving corporation as he
would have with respect to such constituent corporation if its separate
existence had continued.
(i) For purposes of this section, references to other enterprises shall
include employee benefit plans; references to fines shall include any
excise taxes assessed on a person with respect to any employee benefit
plan; and references to serving at the request of the corporation shall
include any service as a director, officer, employee, or agent of the
corporation which imposes duties on, or involves services by, such
director, officer, employee or agent with respect to an employee benefit
plan, its participants or beneficiaries; and a person who acted in good
faith and in a manner he reasonably believed to be in the interest of the
participants and beneficiaries of an employee benefit plan shall be deemed
to have acted in a manner not opposed to the best interests of the
corporation as referred to in this section.
(j) The indemnification and advancement of expenses provided by, or
granted pursuant to, this section shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
Article 10 of the By-laws of the Issuer provides as follows:
ARTICLE 10
INDEMNIFICATION
Section 10.1 Third Party Actions. The Corporation shall indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in
the right of the Corporation) by reason of the fact that he is or was a
Director, officer, employee or agent of the Corporation, or is or was
serving at the request of the Corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorney's fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith
and in a manner he reasonably believed to be in or not opposed to the best
interests of the Corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon plea of nolo contendere or its equivalent,
shall not, of itself, create a presumption that the person did not act in
good faith and in a manner which he reasonably believed to be in or not
opposed to the best interests of the Corporation, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that his
conduct was unlawful.
II-2
<PAGE>
Section 10.2 Derivative Actions. The Corporation shall indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
Corporation to procure a judgment in its favor by reason of the fact that
he is or was a Director, officer, employee or agent of the Corporation, or
is or was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust
or other enterprise against expenses (including attorneys' fees) actually
and reasonably incurred by him in connection with the defense or settlement
of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Corporation and except that no indemnification shall be made in respect of
any claim, issue or matter as to which such person shall have been adjudged
to be liable for negligence or misconduct in the performance of his duty to
the Corporation unless and only to the extent that the Court of Chancery or
the court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or such
other court shall deem proper.
Section 10.3 Expenses. To the extent that a Director, officer, employee
or agent of the Corporation has been successful on the merits or otherwise
in defense of any action, suit or proceeding referred to in Sections 10.1
and 10.2, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith.
Section 10.4 Authorization. Any indemnification under Sections 10.1 and
10.2 (unless ordered by a court) shall be made by the Corporation only as
authorized in the specific case upon a determination that indemnification
of the Director, officer, employee or agent is proper in the circumstances
because he has met the applicable standard of conduct set forth in Sections
10.1 and 10.2. Such determination shall be made (a) by the Board of
Directors by a majority vote of a quorum consisting of Directors who were
not parties to such action, suit or proceeding, or (b) if such a quorum is
not obtainable, or, even if obtainable a quorum of disinterested Directors
so directs, by independent legal counsel in a written opinion, or (c) by
the stockholders.
Section 10.5 Advance Payment of Expenses. Expenses incurred by an officer
or Director in defending a civil or criminal action, suit or proceeding may
be paid by the Corporation in advance of the final disposition of such
action, suit or proceeding as authorized by the Board of Directors in the
specific case upon receipt of an undertaking by or on behalf of such
officer or Director to repay such amount unless it shall ultimately be
determined that he is entitled to be indemnified by the Corporation as
authorized in this Article 10. Such expenses incurred by other employees
and agents may be so paid upon such terms and conditions, if any, as the
Board of Directors deems appropriate.
Section 10.6 Non-Exclusiveness. The indemnification provided by this
Article 10 shall not be deemed exclusive of any other rights to which those
seeking indemnification may be entitled under any by-law, agreement, vote
of stockholders or disinterested Directors or otherwise, both as to action
in his official capacity and as to action in another capacity while holding
such office, and shall continue as to a person who has ceased to be a
Director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
Section 10.7 Insurance. The Corporation shall have power to purchase and
maintain insurance on behalf of any person who is or was a Director,
officer, employee or agent of the Corporation, or is or was serving at the
request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the
Corporation would have the power to indemnify him against such liability
under the provisions of this Article 10.
Section 10.8 Constituent Corporations. The Corporation shall have power
to indemnify any person who is or was a director, officer, employee or
agent of a constituent corporation absorbed in a consolidation or merger
with this Corporation or is or was serving at the request of such
constituent corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
in the same manner as hereinabove provided for any person who is or was a
Director, officer, employee or agent of the Corporation, or is or was
serving at the request of the Corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise.
Section 10.9 Additional Indemnification. In addition to the foregoing
provisions of this Article 10, the Corporation shall have the power, to the
full extent provided by law, to indemnify any person for any act or
II-3
<PAGE>
omission of such person against all loss, cost, damage and expense
(including attorney's fees) if such person is determined (in the manner
prescribed in Section 10.4 hereof) to have acted in good faith and in a
manner he reasonably believed to be in, or not opposed to, the best
interest of the Corporation.
Article X of the Certificate of Incorporation of the Issuer provides in
relevant part as follows:
No director shall be personally liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a
director notwithstanding any provision of law imposing such liability;
provided, however, that, to the extent provided by applicable law, this
provision shall not eliminate the liability of a director (i) for any
breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section
174 of the General Corporation Law of Delaware, or (iv) for any transaction
from which the director derived an improper personal benefit. No amendment
to or repeal of this provision shall apply to or have any effect on the
liability or alleged liability of any director for or with respect to any
acts or omissions of such director occurring prior to such amendment or
repeal.
The Company may purchase a Directors and Officers Liability Insurance
Policy for certain losses arising from certain claims and charges,
including claims and charges under the Securities Act, which may be made
against such persons while acting in their capacities as directors and
officers of the Company.
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits.
<TABLE>
<S> <C>
3.1 Restated Certificate of Incorporation of Anchor Advanced Products, Inc.*
3.2 By-Laws of Anchor Advanced Products, Inc.*
3.3 Restated Certificate of Incorporation of Anchor Holdings, Inc.*
3.4 By-Laws of Anchor Holdings, Inc.*
4.1 Form of Note (included in Exhibit 4.2 hereto).*
4.2 Indenture dated as of April 2, 1997 between Anchor Advanced Products, Inc., Anchor
Holdings, Inc. and Fleet National Bank, as Trustee.*
5.1 Opinion of Hutchins, Wheeler & Dittmar, A Professional Corporation regarding legality
of securities being registered.*
8.1 Opinion of Hutchins, Wheeler & Dittmar, A Professional Corporation regarding tax
matters.*
10.1 Anchor Holdings, Inc. Amended and Restated Shareholders Agreement dated July 29, 1994.*
10.2 Form of Employment Agreement.*
10.3 Form of Supplemental Executive Retirement Benefit Agreement and Side Letter.*
10.4 Exit Bonus Agreement between Anchor Holdings, Inc. and Francis H. Olmstead, Jr.*
10.5 Management Agreement between Thomas H. Lee Company, Anchor Acquisition Corp. ,
Anchor Brush Company and Anchor Cosmetics Company dated as of April 30, 1990.*
+10.6 Agreement by and between Abbott Laboratories and Mid-State Plastics, Inc., dated as of
December 5, 1989, as supplemented by letters dated August 5, 1994, September 11,
1995, September 19, 1995 and March 5, 1997.*
+10.7 Memorandum of Agreement by and between The Procter & Gamble Manufacturing
Company and Anchor Advanced Products, Inc. dated as of December 16, 1995.*
+10.8 Letter Agreement by and between Anchor Advanced Products, Inc. and Colgate-
Palmolive Company, dated as of July 12, 1996.*
10.9 Form of Connecticut Development Authority Note.*
10.10 Purchase Agreement by and between Anchor Advanced Products, Inc., Anchor Holdings,
Inc. and Donaldson, Lufkin & Jenrette Securities Corporation, CIBC Wood Gundy
Securities Corp. and NationsBanc Capital Markets, Inc. dated as of March 26, 1997.*
10.11 Registration Rights Agreement by and between Anchor Advanced Products, Inc.,
Anchor Holdings, Inc. and Donaldson, Lufkin & Jenrette Securities Corporation, CIBC
Wood Gundy Securities Corp. and NationsBanc Capital Markets, Inc. dated as of
April 2, 1997.*
</TABLE>
II-4
<PAGE>
<TABLE>
<S> <C>
10.12 Credit Agreement by and between Anchor Advanced Products, Inc., Anchor Holdings,
Inc. and NationsBank, N.A. dated as of April 2, 1997.*
11.1 Statement re Computation of Per Share Earnings.*
12.1 Computation of Ratio of Earnings to Fixed Charges.*
21.1 List of subsidiaries of Anchor Holdings, Inc.*
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Intentionally Omitted
23.3 Consent of Hutchins, Wheeler & Dittmar, A Professional Corporation (included in
Exhibit 5.1).*
24.1 Powers of Attorney (Contained on the signature page to this Registration Statement).*
25.1 Statement on Form T-1 of the eligibility of the Trustee.*
27.1 Financial Data Schedule.*
99.1 Letter of Transmittal.*
99.2 Notice of Guaranteed Delivery.*
99.3 Form of Exchange Agent Agreement between Anchor Advanced Products, Inc., Anchor
Holdings, Inc. and State Street Bank and Trust Company.*
</TABLE>
+ Portions of this Exhibit have been omitted and separately filed with the
Securities and Exchange Commission pursuant to an application for an order
declaring confidential treatment thereof.
* Previously filed.
(b) Financial Statement Schedules.
S-1 Independent Auditors' Report on Financial Statement Schedule.*
S-2 Schedule I -- Valuation and Qualifying Accounts*
Schedules other than those listed above have been omitted since the
information is not applicable, not required or is included in the financial
statements or notes thereto.
* Previously filed.
Item 22. Undertakings.
(a) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the provisions described under Item 20
above or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
(b) The undersigned registrant hereby undertakes 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
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through the date
of responding to the request.
(c) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Knoxville, State of Tennessee, on the 19th day of August, 1997.
ANCHOR ADVANCED PRODUCTS, INC.
By: /s/ Francis H. Olmstead, Jr.
----------------------------------
Francis H. Olmstead, Jr.
Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- ---------------------------------- --------------------------------------- ---------------
<S> <C> <C>
/s/ Francis H. Olmstead, Jr. Chairman, President and Chief August 19, 1997
- ------------------------- Executive Officer (Principal Executive
Francis H. Olmstead, Jr. Officer)
* Executive Vice President and Director August 19, 1997
-------------------------
Robert T. Parkey
* Executive Vice President and Director August 19, 1997
-------------------------
Jack C. Lail
* Executive Vice President and Director August 19, 1997
-------------------------
Geoffrey A. deRohan
/s/ Phyllis C. Best Senior Vice President, Finance and August 19, 1997
- ------------------------- Controller (Principal Financial and
Phyllis C. Best Accounting Officer)
* Director August 19, 1997
-------------------------
Scott A. Schoen
* Director August 19, 1997
-------------------------
Thomas R. Shepherd
* Director August 19, 1997
-------------------------
Terrence M. Mullen
*By: /s/ Francis H. Olmstead Jr.
- -------------------------
Francis H. Olmstead Jr.
Attorney-in-fact
</TABLE>
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Knoxville, State of Tennessee, on the 19th day of August, 1997.
ANCHOR HOLDINGS, INC.
By: /s/ Francis H. Olmstead, Jr.
----------------------------------
Francis H. Olmstead, Jr.
Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- ---------------------------------- --------------------------------------- ---------------
<S> <C> <C>
/s/ Francis H. Olmstead, Jr. Chairman, President and Chief August 19, 1997
- ------------------------- Executive Officer (Principal Executive
Francis H. Olmstead, Jr. Officer)
* Executive Vice President and Director August 19, 1997
-------------------------
Robert T. Parkey
* Executive Vice President and Director August 19, 1997
-------------------------
Jack C. Lail
* Executive Vice President and Director August 19, 1997
-------------------------
Geoffrey A. deRohan
/s/ Phyllis C. Best Senior Vice President, Finance and August 19, 1997
- ------------------------- Controller (Principal Financial and
Phyllis C. Best Accounting Officer)
* Director August 19, 1997
-------------------------
Scott A. Schoen
* Director August 19, 1997
-------------------------
Thomas R. Shepherd
* Director August 19, 1997
-------------------------
Terrence M. Mullen
*By: /s/ Francis H. Olmstead Jr.
- -------------------------
Francis H. Olmstead Jr.
Attorney-in-fact
</TABLE>
II-7
<PAGE>
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
Our report on the consolidated financial statements of Anchor Holdings, Inc.
and Subsidiaries as of December 31, 1995 and 1996 and for each of the three
years in the period ended December 31, 1996 is included on page F-2 of this
Form S-4 Registration Statement. In connection with our audits of such
financial statements, we have also audited the related financial statement
schedule listed in the index on page II-5 of this Form S-4 Registration
Statement.
In our opinion, the financial statements schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Knoxville, Tennessee
January 31, 1997
S-1
<PAGE>
Schedule I
ANCHOR HOLDINGS, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years ended December 31, 1994, 1995 and 1996
(in thousands)
<TABLE>
<CAPTION>
Balance at Charged to Charge to Balance at
Description beginning of period expense other account Deductions end of period
- ------------------------------------------- --------------------- ------------ --------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
1994:
Allowance for bad debts ............... $ 508 $ 126 $ -- $ 131 $ 503
Allowance for returns and allowances ... 144 -- 1,464 1,347 261
Reserve for self insurance risk ......... 923 2,504 -- 2,436 991
Reserve for inventory obsolescence ...... 1,211 88 -- 78 1,221
------- ------- ------- ------- -------
$2,786 $2,719 $1,464 $3,993 $2,976
======= ======= ======= ======= =======
1995:
Allowance for bad debts ............... $ 503 $ 356 $ 66 $ 162 $ 763
Allowance for returns .................. 261 -- 2,008 1,969 300
Reserve for self insurance risk ......... 991 2,146 -- 2,451 686
Reserve for inventory obsolescence ...... 1,221 450 -- 100 1,571
------- ------- ------- ------- -------
$2,976 $2,607 $2,419 $4,682 $3,320
======= ======= ======= ======= =======
1996:
Allowance for bad debts ............... $ 763 $ 340 $ -- $ 197 $ 906
Allowance for returns .................. 300 -- 2,488 2,644 144
Reserve for self insurance risk ......... 686 4,732 -- 4,075 1,343
Reserve for inventory obsolescence ...... 1,571 266 -- 532 1,305
------- ------- ------- ------- -------
$3,320 $5,750 $2,488 $7,860 $3,698
======= ======= ======= ======= =======
</TABLE>
S-2
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-4 (File
No. 333-26943) of our report dated January 31, 1997, on our audits of the
consolidated financial statements and financial statement schedules of Anchor
Holdings, Inc. We also consent to the reference to our firm under the caption
"Experts."
COOPERS & LYBRAND L.L.P.
Knoxville, Tennessee
August 19, 1997
