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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 30, 1998
REGISTRATION NO. 333-43195
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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SCOVILL FASTENERS INC.
SCOVILL HOLDINGS INC.
(EXACT NAME OF REGISTRANTS AS SPECIFIED IN THEIR RESPECTIVE CHARTERS)
DELAWARE 3965 95-3959561
DELAWARE 6719 58-2365743
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL
JURISDICTION OF CLASSIFICATION CODE NUMBER) (I.R.S. EMPLOYER
INCORPORATION OR IDENTIFICATION NUMBER)
ORGANIZATION)
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SCOVILL FASTENERS INC.
SCOVILL HOLDINGS INC.
1802 SCOVILL DRIVE CLARKESVILLE,
GEORGIA 30523 (706) 754-4181
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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MARTIN A. MOORE EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER SCOVILL
FASTENERS INC. SCOVILL HOLDINGS INC. 1802 SCOVILL DRIVE CLARKESVILLE, GEORGIA
30523 (706) 754-4181
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
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WITH A COPY TO:
JONATHAN I. MARK, ESQ.
CAHILL GORDON & REINDEL
80 PINE STREET
NEW YORK, NEW YORK 10005-1702
(212) 701-3000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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EXPLANATORY NOTE
This registration statement contains two forms of prospectuses: one to be
used in connection with the Exchange Offer for the Initial Notes (the "Note
Exchange Offer Prospectus"), and the other to be used as a market-making
prospectus to be used in connection with the sale of the Exchange Notes by SBC
Warburg Dillon Read Inc. (the "Market-Making Prospectus"). The two
prospectuses are substantially the same except for the alternate pages to be
used in the Market-Making Prospectus which differ from, or are in addition to,
those in the Note Exchange Offer Prospectus. The form of Note Exchange Offer
Prospectus is included herein and is followed by those alternate pages to be
used in the Market-Making Prospectus. Each of the pages for the Market-Making
Prospectus included herein is labeled "Alternate Page to Prospectus."
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JANUARY 30, 1998
PROSPECTUS
SCOVILL FASTENERS INC.
[LOGO OF SCOVILL
OFFER TO EXCHANGE FASTENERS INC.]
11 1/4% SENIOR NOTES DUE 2007, SERIES A FOR
11 1/4% SENIOR NOTES DUE 2007,
SERIES B
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THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON , 1998, UNLESS EXTENDED (THE "EXPIRATION DATE")
-----------
Scovill Fasteners Inc., a Delaware corporation (the "Company"), hereby
offers, upon the terms and subject to conditions set forth in this Prospectus
(the "Prospectus") and the accompanying Letter of Transmittal (the "Letter of
Transmittal"; together with the Prospectus, the "Exchange Offer"), to exchange
up to an aggregate principal amount of $100,000,000 of its registered 11 1/4%
Senior Notes due 2007 (the "Exchange Notes") for up to an aggregate principal
amount of $100,000,000 of its outstanding unregistered 11 1/4% Senior Notes due
2007 (the "Initial Notes"). The form and terms of the Exchange Notes are
identical in all material respects to those of the Initial Notes, except for
certain transfer restrictions and registration rights relating to the Initial
Notes and except for certain interest provisions relating to such registration
rights. The Exchange Notes evidence the same debt as the Initial Notes and will
be issued pursuant to, and entitled to the benefits of, the Indenture (as
defined) governing the Initial Notes. See "The Exchange Offer." The Exchange
Notes and the Initial Notes are sometimes referred to collectively as the
"Notes."
The Exchange Notes are being offered hereunder in order to satisfy certain
obligations of the Company under a Registration Rights Agreement dated as of
November 26, 1997 (the "Registration Rights Agreement") among Scovill
Acquisition Inc., a Delaware corporation ("SAI"), Scovill Holdings Inc., a
Delaware corporation ("Parent" or "Guarantor") and SBC Warburg Dillon Read Inc.
and BT Alex. Brown Incorporation (the "Initial Purchasers"). The Initial Notes
were originally issued by SAI and sold to the Initial Purchasers on November
26, 1997 in a transaction 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 and Rule 144A under the Securities Act (the
"Initial Offering"). The proceeds of the Initial Offering were used to finance,
in part, the purchase by SAI of all of the capital stock of KSCO Acquisition
Corporation ("KSCO") which then owned all of the capital stock of the Company.
Predecessor then merged with and into KSCO, with KSCO surviving, and KSCO
merged with and into the Company, with the Company surviving. Following the
mergers described above, the Notes became obligations of the Company.
Interest on the Notes is payable semi-annually on May 30 and November 30 of
each year, commencing May 30, 1998. The Notes are redeemable at the option of
the Company, in whole or in part, at any time on or after November 30, 2002, at
the redemption prices set forth herein, plus accrued and unpaid interest and
Liquidated Damages (as defined), if any, to the redemption date. The Company
may also redeem Notes at its option, at any time on or prior to November 30,
2000, at a redemption price equal to 111.25% of the principal amount thereof,
plus accrued and unpaid interest and Liquidated Damages, if any, to the
redemption date, with the net proceeds of one or more Public Equity Offerings
(as defined); provided, however, that at least $65 million in aggregate
principal amount of the Notes remains outstanding following each such
redemption. Upon the occurrence of a Change of Control (as defined), the
Company will be required to make an offer to purchase all or any part of each
holder's Notes at 101% of the principal amount thereof, plus accrued and unpaid
interest and Liquidated Damages, if any, to the date of purchase.
The Notes are fully and unconditionally guaranteed by Parent (the "Parent
Guarantee"). The Notes and the Parent Guarantee are general unsecured
obligations of the Company and Parent, respectively. The Notes and the Parent
Guarantee rank pari passu in right of payment with all other existing and
future unsecured and unsubordinated obligations of the Company and Parent,
respectively, and senior to all existing and future indebtedness of the Company
and Parent that is expressly subordinated to the Notes and the Parent
Guarantee, respectively. In addition, the Notes and the Parent Guarantee are
effectively subordinated to all secured obligations of the Company and Parent,
respectively, to the extent of the assets securing such obligations. At
December 31, 1997, Parent had (i) approximately $130.4 million of consolidated
unsubordinated indebtedness outstanding (including the Notes and $30.4 million
of secured indebtedness) and (ii) no debt that would have been subordinated to
the Notes. The Notes are structurally subordinated to all obligations
(including trade payables and accrued liabilities) of the Company's
subsidiaries. The indenture pursuant to which the Notes were issued permits the
Company and its subsidiaries to incur additional indebtedness, including
secured indebtedness, subject to certain limitations.
(Cover continued on next page)
SEE "RISK FACTORS" BEGINNING ON PAGE 17 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH 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 REPRESENTATIONS TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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THE DATE OF THIS PROSPECTUS IS , 1998
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(Continued from previous page)
The Company is making the Exchange Offer in reliance on the position of the
staff of the Securities and Exchange Commission (the "Commission") set forth
in no-action letters issued to third parties unrelated to the Company.
However, the Company has not sought its own no-action letter and there can be
no assurance that the staff of the Commission would make a similar
determination with respect to the Exchange Offer.
Each Holder (as defined) desiring to participate in the Exchange Offer will
be required to represent, among other things, that (i) it is not an
"affiliate" (as defined in Rule 405 of the Securities Act) of the Company or
Parent, (ii) it is not engaged in, and does not intend to engage in, and has
no arrangement or understanding with any person to participate in, a
distribution of the Exchange Notes and (iii) it is acquiring the Exchange
Notes in its ordinary course of business (a Holder unable to make the
foregoing representations is referred to as a "Restricted Holder"). A
Restricted Holder will not be able to participate in the Exchange Offer and
may sell its Initial Notes only pursuant to a registration statement
containing the selling securityholder information required by Item 507 of
Regulation S-K under the Securities Act, or pursuant to an exemption from the
registration requirement of the Securities Act.
Each broker-dealer (other than a Restricted Holder) that receives Exchange
Notes for its own account pursuant to the Exchange Offer (a "Participating
Broker-Dealer") is required to acknowledge in the Letter of Transmittal that
it acquired the Initial Notes as a result of market-making activities or other
trading activities and that it will deliver a prospectus in connection with
the resale of such Exchange Notes. Based upon interpretations by the staff of
the Commission, the Company believes that Exchange Notes issued pursuant to
the Exchange Offer to Participating Broker-Dealers may be offered for resale,
resold, and otherwise transferred by a Participating Broker-Dealer upon
compliance with the prospectus delivery requirements, but without compliance
with the registration requirements, of the Securities Act. The Company has
agreed that for a period of nine months following consummation of the Exchange
Offer it will make this Prospectus available, for use in connection with any
such resale, to any Participating Broker-Dealer that notifies the Company in
the Letter of Transmittal that it may be subject to such prospectus delivery
requirements. The Company believes that during such period of time, delivery
of the Prospectus, as it may be amended or supplemented, will satisfy the
prospectus delivery requirements of a participating Broker-Dealer engaged in
market-making or other trading activities. See "The Exchange Offer" and "Plan
of Distribution".
Based upon interpretations by the staff of the Commission, the Company
believes that Exchange Notes issued pursuant to the Exchange Offer may be
offered for resale, resold, and otherwise transferred by a Holder thereof
(other than a Restricted Holder or a Participating Broker-Dealer) without
compliance with the registration and prospectus delivery requirements of the
Securities Act.
The Exchange Notes are new securities for which there is currently no
market. The Company presently does not intend to apply for listing or
quotation of the Exchange Notes on any securities exchange or stock market.
The Company has been advised by the Initial Purchasers that, following
completion of the Exchange Offer, they presently intend to make a market in
the Exchange Notes; however, the Initial Purchasers are not obligated to do so
and any market-making activities with respect to the Exchange Note may be
discontinued at any time without notice. There can be no assurance that an
active public market for the Exchange Notes will develop.
The Company will not receive any proceeds from the Exchange Offer and will
pay all the expenses incident to the Exchange Offer. Tenders of Initial Notes
pursuant to the Exchange Offer may be withdrawn at any time prior to the
Expiration Date. If the Company terminates the Exchange Offer and does not
accept for exchange any Initial Notes, it will promptly return the Initial
Notes to the holders thereof. See "The Exchange Offer".
The Exchange Agent for the Exchange Offer is United States Trust Company of
New York.
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Color Snap(R), Common Sense(TM), DOT(R), DuraMark(R), Gemini(TM), Gripper(R),
Klikit(R), Maxi-Snap(TM), Mighty-Snap(TM), PCI(TM), Pull-the-DOT(R), Tag
Lock(TM) and Whipper Snap(R) are trademarks of the Company. All other
trademarks or tradenames referred to in this Prospectus are the property of
their respective owners.
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SUMMARY
The following summary information is qualified in its entirety by, and should
be read in conjunction with, the financial statements and more detailed
information included elsewhere in this Prospectus. Unless the context requires
otherwise, references to the "Company" or "Fasteners" mean Scovill Fasteners
Inc. and its subsidiaries. Unless otherwise indicated, all pro forma
information herein assumes that the Transactions (as defined) occurred at the
beginning of the periods to which such information relates, in the case of
statement of operations data, and on September 30, 1997, in the case of balance
sheet data.
THE COMPANY
The Company, whose business has been in continuous operation since 1802, is a
leading designer, manufacturer and distributor of apparel fasteners and
specialty industrial fasteners. The Scovill name is the oldest and one of the
most well-known brands in the fasteners industry. In the twelve-month period
ended September 30, 1997, the Company sold more than 10 billion fastener units
worldwide. The Company has achieved and maintained its reputation by offering
its customers an integrated system of high quality fasteners, proprietary
attaching machines, technical service, on-site maintenance and customized
applications and design services tailored to individual customer needs.
The Company has two main product groups: the Apparel Group and the Industrial
Group. The Apparel Group, through its Gripper and DuraMark brands, produces
snaps, tack buttons, rivets, burrs and other snap fastener products used in
numerous apparel applications. The Company's customers and end-users include
many leading apparel design and manufacturing companies, including Wrangler,
OshKosh B'Gosh, Gerber Childrenswear, William Carter Company, Tommy Hilfiger,
Polo Ralph Lauren, Liz Claiborne and L.L. Bean. The Company believes that it
supplies the majority of the snap fasteners sold to U.S. infantswear and
childrenswear manufacturers and a substantial portion of the snap fasteners
sold to U.S. apparel manufacturers.
The Industrial Group, primarily through its DOT and PCI product lines,
produces specialty industrial fasteners including large snaps, windshield
clips, turn buttons, eyelets, grommets, screw studs, gypsy studs and other
specialty fasteners. These products are used in a broad range of industries,
including marine textile, automotive, aerospace, military, medical/surgical
products, luggage, leather goods, electronic equipment, sporting and
recreational goods and consumer batteries. The end-users of the Company's
products include a wide variety of companies, including Ford, Boeing, Baxter,
Samsonite, U.S. Marine for its Bayliner Boats, Johnston & Murphy, Eveready
Battery, Riddell for its football helmets and the U.S. Army. The Company
believes that it sells a significant portion of the specialty industrial
fasteners sold in the product markets in which it competes.
INDUSTRY
The Company operates in an industry characterized by customer switching
costs, a broad customer base in which no single customer dominates as a
purchaser of fasteners, substantial economies of scale and few manufacturers
who can match the level of service that the Company provides. Customers in the
apparel and specialty industrial fastener industries tend to be more quality-
driven than price-driven in their purchase decisions because (i) a particular
fastener constitutes a very small portion of the overall cost of a customer's
end product, (ii) defective or improperly attached fasteners can result in
costly rework or scrap and (iii) the customers' cost of attaching a fastener is
typically substantially more than the cost of the fastener itself, which leads
customers to focus on the speed, precision and flexibility of the fastener
attaching system. These factors result in steady, long-term customer
relationships for those industry participants that offer quality and service.
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The apparel snap fastener market includes snap fasteners, tack buttons,
rivets and burrs and excludes other apparel devices such as zippers, buttons
and Velcro. The primary customers for apparel snap fasteners include
manufacturers of basic garments such as jeans, infantswear, childrenswear and
outerwear. Demand for apparel snap fasteners is related to apparel industry
trends generally, which, in turn, are affected by demographics. The production
of each category of apparel depends upon population trends and consumer
spending in each apparel category. According to U.S. Department of Commerce
estimates, the value of domestic shipments of apparel and other finished
textiles has averaged over 4% growth per year since 1976. During that time, the
domestic apparel industry generally has exhibited low cyclicality, with the
value of such shipments having increased in all but two years. In foreign
markets, the Company believes that expected population growth over the next
several years and improved standards of living will result in increased apparel
sales abroad.
The specialty industrial fastener market is large and highly fragmented. The
market is comprised of a variety of niche segments with specialized customers,
competitors and products in which the Company generally earns higher margins
than it does in the apparel market. The Company estimates that the market
segments in which it currently competes constitute less than 10% of the overall
market. The Company believes that there is no dominant manufacturer that
competes in all of its markets, and the Company intends to broaden its
participation through new products and product line extensions.
COMPETITIVE STRENGTHS
The Company attributes its historical success and significant opportunities
for continued growth to the following competitive strengths:
Leading Market Position. The Company is the oldest and most established
manufacturer of a variety of apparel and specialty industrial fasteners in the
United States. The Company's fasteners have been used in many products
throughout its history, from U.S. military uniforms since the War of 1812 to
the flight suits worn by NASA shuttle astronauts. The Company's reputation for
high quality and its well-known brand names, including Scovill, Gripper and
DOT, make it a leading presence in domestic markets and provide it with a
platform for enhanced global expansion. The Company believes that it supplies
the majority of the snap fasteners sold to U.S. infantswear manufacturers, a
substantial portion of the snap fasteners sold to U.S. apparel manufacturers
generally and a significant portion of the specialty industrial fasteners sold
in the product markets in which it competes.
"Total System" Approach. In addition to manufacturing and distributing
fasteners to its customers, the Company also leases approximately 8,000
proprietary attaching machines to attach its products to those of its
customers, primarily in the apparel industry. The Company's large size enables
it to (i) employ what the Company believes to be the industry's only existing
dedicated field service force that provides on-site maintenance, which
minimizes equipment down-time, (ii) have ready access, through its servicing
relationships, to its customers' facilities, providing the Company with
opportunities to cross-sell products and to test new fastener machinery, (iii)
continue to develop next-generation attaching machines, such as the new Gemini
system, which has lower manufacturing and maintenance costs and improved
fastener application flexibility and attaching speed, and (iv) maintain an
applications development and design lab that enables customers to outsource
design functions to the Company. The Company's "total system" approach enables
it to compete based on its ability to decrease its customers' costs and improve
the quality of their products, rather than on the unit price of the Company's
fasteners.
Large Installed Base of Attaching Machines. The Company has the industry's
largest installed base of attaching machines in the United States, which
enables it to generate a recurring stream of cash flow from high volume sales
of fasteners. These machines are designed to be used only with the Company's
fasteners. The
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Company believes that customers are reluctant to switch to other manufacturers
in order to avoid the costs associated with retraining personnel, reduced
productivity and the business interruption that results from the need to
replace an entire network of machines in a plant or a production line in order
to maintain the compatibility of the network. The Company has been able to
maintain a high level of customer retention. In 1996, approximately 99% of all
of its attaching machine leases were renewed.
Broad Customer Base and Product Line. The Company's customers include many
large and well-known apparel and industrial manufacturing companies. The
Company is a leading supplier for private-label infantswear sold at Kmart,
Wal*Mart, Target and Sears stores. In 1997, no single customer accounted for
more than 7% of the Company's total net sales, and the Company's 10 largest
customers accounted for approximately 28% of the Company's total net sales. The
Company's broad line of products for apparel and specialty industrial use
reduces its exposure to any one customer segment and to fashion trends.
Reputation for High Quality. The Company has built its reputation by
producing high quality products designed and manufactured to precise
specifications. The Company has developed many of the safety standards for
infantswear adopted by the American Society of Testing Methods (the "ASTM"),
and the Company's senior quality manager is currently chairman of the ASTM
subcommittee responsible for establishing testing methodologies for the apparel
fastener industry. These methodologies provide the basis for determining
compliance with requirements for apparel set by the Consumer Products Safety
Commission.
Experienced Management Team. The Company's senior management team has an
average of over 15 years of experience in the fastener industry. Since its
formation in 1992, the management team has delivered significant revenue and
EBITDA improvements by successfully reorganizing the business and positioning
the Company for growth. Management has achieved these results by rationalizing
existing operations, exiting an unprofitable product line and integrating
domestic and international acquisitions. This team has successfully identified,
integrated and consolidated three significant acquisitions since 1992 and
established a platform for international growth. Senior management rolled over
an aggregate of $3.3 million of their stock options in KSCO into equity of
Parent, representing approximately one-half of the proceeds they would have
received in the Acquisition.
BUSINESS STRATEGY
The Company seeks to enhance its competitive position while increasing its
net sales and operating cash flow by continuing to implement the following
components of its business strategy:
Continue to Strengthen Customer Relationships. The Company intends to
continue to distinguish itself from competitors as a full-service provider. The
Company will continue to foster long-term partnerships with its customers by
providing a broad range of high quality products, consistent delivery
performance, comprehensive product support, efficient attaching machinery and
dedicated field service. The introduction of the Gemini attaching machine,
which accommodates rapid and cost-efficient switching of fastener types and is
designed to address ergonomic concerns, illustrates the Company's commitment to
customer service. The Company also continues to develop and implement value-
added services, such as specialized billing and delivery systems.
Reduce Customers' CPAF. The Company intends to develop new means to continue
its commitment to lower its customers' cost per attached fastener ("CPAF").
Customers incur significant costs beyond the unit price of fasteners; an
individual fastener typically represents only 10% of an average customer's
CPAF. CPAF is also a function of factors such as attaching speed, production
errors, equipment downtime due to changeover and maintenance and the attaching
machinery lease expense or cost. The Company's "total system" approach and its
focus on CPAF are designed to reduce the remaining costs associated with the
attaching of its fasteners.
6
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Seek Higher Margin Specialty Applications. The Company intends to take
advantage of its diverse and flexible manufacturing capabilities to enhance its
line of specialty applications, which offers higher margins. Examples of
specialty applications are stainless steel buckles for football, hockey and
cycling helmets; engineered eyelets for consumer electronics; and male/female
connectors for batteries. The Company intends to develop new applications for
current products, engineer new products and re-engineer those products obtained
through acquisitions. Unlike smaller manufacturers, the Company possesses its
own tooling, stamping, plating and finishing equipment and, therefore, can
develop specialty applications without significant capital expenditures.
Strengthen "Retail Pull." The Company seeks to have large retailers specify
the use of the Company's products in their private label apparel lines. The
Company has been designated as the sole or preferred fastener supplier for the
private-label infantswear manufactured for and sold by Wal*Mart, Kmart, Target
and Sears. Additionally, the Company's reputation for high quality and consumer
awareness has led to Kmart's joint branding on garment tags to highlight the
names of Scovill and Klikit, a Gripper brand. The Company intends to expand its
international opportunities by leveraging existing relationships with customers
that move sourcing abroad and by expanding its distribution channels overseas
to better serve them. The Company believes that the high quality of its
products, its "total system" approach and its Asian distribution channels
enhance the Company's ability to effect this strategy.
Leverage Existing Manufacturing Base. The Company intends to continue to
leverage its existing manufacturing base by incrementally expanding the
capacity of the Clarkesville facility. By optimizing its operations, adding
shifts and outsourcing particular activities, the Company believes that it can
significantly increase the output of the Clarkesville facility with limited
capital expenditures. Through the addition of increased revenue at minimal
incremental fixed costs, the Company has been able to increase EBITDA margins.
The Company expects to increase revenue through new product development and
tuck-in acquisitions, such as the 1996 acquisitions of Rau Fastener Company,
L.L.C. ("Rau") and PCI Group, Inc. ("PCI"), whose operations were consolidated
into the Company's Clarkesville, Georgia facility.
Pursue Attractive Acquisition Opportunities. The Company will continue to
evaluate opportunities to expand its sales and product offerings through
smaller, easily integrated domestic add-on acquisitions. The Company may also
explore larger international acquisitions, primarily in Europe and Asia. The
criteria for identifying attractive acquisition candidates include (i) revenue
potential, (ii) increases in manufacturing, production and other cost
efficiencies and (iii) diversification and expansion of the Company's product
lines and customer base.
THE TRANSACTIONS
SAI and Parent were formed by Saratoga Partners III, L.P. ("Saratoga") to
effect the acquisition of the Company. On October 10, 1997, SAI entered into a
Stock Purchase Agreement (the "Stock Purchase Agreement") with KSCO Acquisition
Corporation ("KSCO"), which owned all of the capital stock of Fasteners, and
the stockholders and optionholders of KSCO. Under the Stock Purchase Agreement,
SAI agreed to purchase all of the capital stock of KSCO for a purchase price in
cash of approximately $168.8 million less the amount of indebtedness of the
Company existing immediately prior to closing of the acquisition (including
indebtedness that will not be repaid in connection with the Transactions).
Concurrently with the consummation of the Offerings, SAI merged with and into
KSCO, and KSCO merged with and into Fasteners, with Fasteners surviving the
mergers. Following such mergers, the Notes became obligations of Fasteners. The
purchase of KSCO capital stock by SAI and the mergers of SAI and KSCO into
Fasteners are together referred to herein as the "Acquisition."
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In connection with the Acquisition, Saratoga and certain other investors made
a $36.6 million equity investment, consisting of (i) $0.4 million in shares of
Parent's Common Stock, par value $0.0001 per share (the "Common Stock"), and
(ii) $36.2 million aggregate liquidation preference of Parent's Series B
Preferred Stock, par value $0.0001 per share (the "Series B Preferred Stock")
(collectively, the "Saratoga Investment"). Management and the Chairman of the
Board rolled over $3.4 million of their stock options in KSCO into options to
purchase Common Stock and Series B Preferred Stock (the "Management
Investment"). The Saratoga Investment and the Management Investment are
referred to as the "Equity Investments." Concurrently with the Notes Offering,
Parent sold, for gross proceeds of $10.0 million, 100,000 Units, each Unit
consisting of $100 liquidation preference of Parent's Series A Cumulative
Redeemable Exchangeable Preferred Stock (the "Senior Preferred Stock") and one
warrant (the "Warrants") to purchase Common Stock. The net proceeds of the
Equity Investments and the Units Offering totalled $49.4 million, after fees
and expenses to Parent of $0.6 million. Parent contributed (the "Equity
Contribution") such amount to Fasteners in the form of common equity.
In connection with the Acquisition, Fasteners entered into a new senior
secured credit facility (the "New Credit Facility"), consisting of a $28.0
million term loan (the "Term Loan") and a $25.0 million revolving credit
facility (the "Revolving Credit Facility"). See "Description of Other
Indebtedness--New Credit Facility."
Proceeds from the Equity Contribution, the Notes Offering and the Term Loan
were used to finance the purchase price in the Acquisition, repurchase
attaching machinery subject to a synthetic lease (the "Synthetic Lease"), repay
the Company's then existing credit facility (the "Existing Credit Facility")
and pay related fees and expenses. The Acquisition, the repurchase of attaching
machinery subject to the Synthetic Lease, the repayment of the Existing Credit
Facility, the Offerings, the Equity Contribution, the borrowing of the Term
Loan and the payment of related fees and expenses are collectively referred to
herein as the "Transactions." The following table illustrates the sources of
funds to the Company and uses of funds by the Company relating to the
Transactions, assuming they were consummated on September 30, 1997:
SOURCES OF FUNDS
USES OF FUNDS
(Dollars in millions)
<TABLE>
<S> <C> <S> <C>
Notes..................... $100.0 Cash to selling stockholders. $ 98.1
Term Loan................. 28.0 Repurchase of equipment
Equity Contribution(a).... 49.4 subject to Synthetic Lease.. 29.2
------ Repay Existing Credit Facili-
Total................... $177.4 ty.......................... 39.3
====== Fees and expenses(b)......... 10.8
------
Total...................... $177.4
======
</TABLE>
- --------
(a) Parent funded the Equity Contribution from the Equity Investments and the
Units Offering (net of estimated fees and expenses).
(b) Excludes estimated fees and expenses of Parent related to the Units
Offering of $0.6 million.
The diagrams on the next page illustrate the Transactions and the post-
closing structure of the Company.
Saratoga is a private investment fund which, together with its related funds
(collectively, the "Saratoga Funds"), has managed corporate buyout partnerships
totaling $500 million in committed and contributed capital. The Saratoga Funds
have invested in 22 companies with an aggregate purchase valuation of
approximately $2.4 billion. Individual acquisition valuations have ranged from
$20 million to $400 million. In all of these acquisitions, the Saratoga Funds
have been the lead investor, either with sole voting control or in partnership
with other investors.
8
<PAGE>
[FLOW CHART OF TRANSACTION STRUCTURE AND POST-CLOSING STRUCTURE APPEARS HERE]
9
<PAGE>
THE EXCHANGE OFFER
REGISTRATION RIGHTS AGREEMENT...
The Initial Notes were sold by the Company on
November 26, 1997 to the Initial Purchasers
who resold the Initial Notes (i) to
"qualified institutional buyers" (as defined
in Rule 144A under the Securities Act) in
reliance upon Rule 144A under the Securities
Act and (ii) outside the United States to
persons other than U.S. persons in reliance
upon Regulation S under the Securities Act.
In connection therewith, SAI, Parent and the
Initial Purchasers entered into the
Registration Rights Agreement dated as of
November 26, 1997 (the "Registration Rights
Agreement"), providing for, among other
things, the Exchange Offer.
THE EXCHANGE OFFER.............. The Company is offering to exchange up to
$100,000,000 aggregate principal amount of
Exchange Notes for up to $100,000,000
aggregate principal amount of Initial Notes
issued in the Initial Offering in reliance
upon an exemption from registration under the
Securities Act. Upon consummation of the
Exchange Offer, the terms of the Exchange
Notes (including principal amount, interest
rate, maturity and ranking) will be identical
in all material respects to the term of the
Initial Notes for which they may be exchanged
pursuant to the Exchange Offer, except that
the Exchange Notes have been registered under
the Securities Act and therefore will not
bear legends restricting their transfer and
will not contain terms providing for an
increase in the interest rate thereon under
certain circumstances described in the
Registration Rights Agreement.
MINIMUM CONDITION............... The Exchange Offer is not conditioned upon
any minimum aggregate principal amount of
Initial Notes being tendered for exchange.
EXPIRATION DATE................. The Exchange Offer will expire at 5:00 p.m.,
New York city time, on , 1998, unless
extended (the "Expiration Date").
EXCHANGE DATE................... The date of acceptance for exchange of the
Initial Notes will be the first business day
practicable following the Expiration Date.
CONDITIONS TO THE EXCHANGE The obligation of the Company to consummate
OFFER........................... the Exchange Offer is subject to certain
conditions. See "The Exchange Offer--
Conditions." The Company reserves the right
to terminate or amend the Exchange Offer at
any time prior to the Expiration Date upon
the occurrence of any such condition.
10
<PAGE>
Tenders may be withdrawn at any time prior to
WITHDRAWAL RIGHTS............... the Expiration Date. 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 See "The Exchange Offer--Procedures for
INITIAL NOTES................... Tendering."
FEDERAL INCOME TAX The exchange of Initial Notes for Exchange
CONSEQUENCES.................... Notes by Holders will not be a taxable
exchange for federal income tax purposes, and
Holders should not recognize any taxable gain
or loss or any interest income as a result of
such exchanges.
CERTAIN REPRESENTATIONS......... Each Holder desiring to participate in the
Exchange Offer will be required to represent,
among other things, that (i) it is not an
"affiliate" (as defined in Rule 405 of the
Securities Act) of the Company, (ii) it is
not engaged in, and does not intend to engage
in, and has no arrangement or understanding
with any person to participate in, a
distribution of the Exchange Notes and (iii)
it is acquiring the Exchange Notes in the
ordinary course of its business (a Holder
unable to make the foregoing representations
is referred to as a "Restricted Holder").
TRANSFER RESTRICTIONS ON Based upon interpretations by the staff of
EXCHANGE NOTES.................. the Commission, the Company believes that
Exchange Notes issued pursuant to the
Exchange Offer to Participating Broker-
Dealers may be offered for resale, resold,
and otherwise transferred by a Participating
Broker-Dealer upon compliance with the
prospectus delivery requirements, but without
compliance with the registration requirements
of the Securities Act. The Company has agreed
that for a period of nine months following
consummation of the Exchange Offer it will
make this Prospectus available, for use in
connection with any such resale, to any
Participating Broker-Dealer that notifies the
Company in the Letter of Transmittal that it
may be subject to such prospectus delivery
requirements. The Company believes that
during such period of time, delivery of this
Prospectus, as it may be amended or
supplemented, will satisfy the prospectus
delivery requirements of a Participating
Broker-Dealer engaged in market-making or
other trading activities. See "The Exchange
Offer" and "Plan of Distribution." Based upon
interpretations by the staff of the
Commission, the Company believes that
Exchange Notes issued pursuant to the
Exchange Offer may be offered for resale,
resold, and otherwise transferred by a Holder
thereof (other than a Restricted Holder or a
Participating Broker-Dealer) without
compliance with the registration and
prospectus delivery requirements of the
Securities Act.
11
<PAGE>
EFFECT ON HOLDERS OF INITIAL As a result of the making of this Exchange
NOTES........................... Offer, and upon acceptance for exchange of
all validly tendered Initial Notes pursuant
to the terms of the Exchange Offer, the
holders of the Initial Notes will have no
further registration or other rights under
the Registration Rights Agreement, except
under certain limited circumstances. Holders
of the Initial Notes who do not tender their
Initial Notes in the Exchange Offer will
continue to hold such Initial Notes and will
be entitled to all the rights and limitations
applicable thereto under the Indenture dated
as of November 26, 1997 among SAI, Parent,
and United States Trust Company of New York,
as trustee (the "Trustee"), relating to the
Initial Notes and the Exchange Notes (as
amended, the "Indenture"). 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 the Indenture. To the
extent that Initial Notes are tendered and
accepted in the Exchange Offer, the trading
market, if any, for the Initial Notes could
be adversely affected. See "Risk Factors--
Consequences of Failure to Exchange."
CHANGE OF CONTROL............... Upon the occurrence of a Change of Control,
the Company will be required to offer to
purchase all or any part of each holder's
Notes at 101% of the principal amount
thereof, plus accrued and unpaid interest and
Liquidated Damages, if any, to the date of
purchase. There can be no assurance that the
Company will have the financial resources
necessary, or be permitted by its debt or
other agreements, to purchase the Notes upon
a Change of Control. See "Risk Factors--
Change of Control" and "Description of
Notes--Change of Control."
CERTAIN COVENANTS............... The Indenture contains certain covenants
that, among other things, limit the ability
of the Company and the Restricted
Subsidiaries to incur additional
indebtedness, pay dividends or make other
distributions, enter into sale and leaseback
transactions, make certain investments, incur
certain secured indebtedness, enter into
certain transactions with affiliates, or
enter into certain mergers or consolidations
or sell all or substantially all of the
assets of the Company and the Restricted
Subsidiaries. These covenants are subject to
a number of significant exceptions and
qualifications. See "Description of Notes--
Certain Covenants."
USE OF PROCEEDS.................
The Company will receive no cash proceeds
from the Exchange Offer. The proceeds from
the offering of the Initial Notes were used
as set forth under "The Transactions."
12
<PAGE>
CONCURRENT UNITS OFFERING
Concurrent with the Notes Offering, Parent offered 100,000 Units, each Unit
consisting of $100 liquidation preference of Senior Preferred Stock and one
warrant to purchase shares of Common Stock. The Senior Preferred Stock will be
exchangeable, at the option of Parent, into Parent's Subordinated Exchange
Debentures due 2009 (the "Exchange Debentures"), subject to certain conditions.
The Senior Preferred Stock will be mandatorily redeemable on November 30, 2009.
Dividends on the Senior Preferred Stock will be payable quarterly in arrears,
in cash or, prior to November 30, 2002 at Parent's option, in additional shares
of Senior Preferred Stock. See "Description of Units."
RISK FACTORS
For a discussion of certain factors that should be considered in evaluating
the Exchange Offer, see "Risk Factors."
13
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
(DOLLARS IN THOUSANDS)
The following table presents (i) summary historical consolidated financial
data of Predecessor-Alper (as defined) and Predecessor-KSCO (as defined) as of
the date and for the periods indicated, including the results of operations of
acquired companies from their respective dates of acquisition, and (ii) summary
pro forma financial data of Parent as of the date and for the periods indicated
after giving effect to the Transactions as though they had occurred at the
beginning of the periods presented in the case of statement of operations data
and September 30, 1997 in the case of balance sheet data. The financial data
for the period from January 1, 1995 to October 17, 1995, the period from
October 17, 1995 to December 31, 1995 and the year ended December 31, 1996 have
been derived from the consolidated financial statements of Predecessor-Alper
and Predecessor-KSCO audited by Arthur Andersen llp, independent public
accountants. The financial data for the year ended December 31, 1994 have been
derived from the consolidated financial statements of Predecessor-Alper audited
by Deloitte & Touche llp, independent auditors. The financial data as of
September 30, 1997 and for the nine months ended September 30, 1996 and 1997
have been derived from unaudited consolidated financial statements of
Predecessor-KSCO, which, in the opinion of management, reflect all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of such data. Results for the nine months ended September 30, 1997
are not necessarily indicative of results to be expected for the full year. The
pro forma financial data are not necessarily indicative of operating results or
financial position that would have been achieved had the Transactions been
consummated on the dates indicated and should not be construed as
representative of future operating results or financial position. The summary
historical and pro forma financial data should be read in conjunction with
"Selected Historical Financial Data," "Pro Forma Consolidated Financial
Statements," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the consolidated financial statements and notes
thereto included elsewhere in this Prospectus.
14
<PAGE>
<TABLE>
<CAPTION>
PREDECESSOR-ALPER(1) PREDECESSOR-KSCO(2) PARENT
-------------------- ---------------------------------------- --------------------------
PRO FORMA
--------------------------
NINE MONTHS
PERIOD ENDED NINE
YEAR ENDED FROM PERIOD FROM YEAR ENDED SEPTEMBER 30, YEAR ENDED MONTHS
DECEMBER 1/1/95 TO 10/17/95 TO DECEMBER ----------------- DECEMBER ENDED
31, 1994 10/17/95 12/31/95 31, 1996 1996 1997 31, 1996 9/30/97
---------- --------- ----------- ---------- -------- ------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............... $65,428 $53,589 $ 12,799 $91,632 $ 69,796 $73,466 $ 91,632 $ 73,466
Gross profit............ 18,383 13,329 3,446 27,032 19,533 20,362 27,282 21,484
Selling, general and
administrative
expenses(3)............ 10,534 7,822 1,827 17,051 12,733 11,697 17,226 11,772
Amortization expense.... 411 320 239 2,557 2,046 2,025 3,729 2,874
------- ------- -------- ------- -------- ------- --------- ---------
Operating income ....... 7,438 5,187 1,380 7,424 4,754 6,640 6,327 6,838
Interest expense........ 5,092 3,472 892 5,953 4,848 2,698 14,570 10,929
Other expense (income).. (629) 551 214 450 102 430 471 416
------- ------- -------- ------- -------- ------- --------- ---------
Income (loss) before
taxes and extraordinary
loss................... 2,975 1,164 274 1,021 (196) 3,512 (8,714) (4,507)
Tax provision (benefit). 634 -- 158 923 258 1,586 (2,156) (1,023)
------- ------- -------- ------- -------- ------- --------- ---------
Income (loss) before
extraordinary loss..... 2,341 1,164 116 98 (454) 1,926 (6,558) (3,484)
------- ------- -------- ------- -------- ------- --------- ---------
Net income (loss)(4).... $ 2,341 $ 1,164 $ 116 $ (852) $ (1,404) $ 1,926 $ (6,558) $ (3,484)
======= ======= ======== ======= ======== ======= ========= =========
Net income (loss)
available to common
stockholders........... $ 2,341 $ 1,164 $ 116 $ (852) $ (1,404) $ 1,926 $ (8,016) $ (4,578)
======= ======= ======== ======= ======== ======= ========= =========
OTHER DATA:
EBITDA(5)............... $14,514 $10,814 $ 2,886 $17,218 $ 12,210 $16,310 $ 17,022 $16,248
Adjusted EBITDA(6)...... 14,346 11,242 3,163 18,365 12,772 17,115 18,240 17,022
Depreciation............ 6,559 5,735 1,481 6,829 5,512 4,213 7,437 6,952
Capital expenditures.... 7,363 4,962 1,168 5,695 4,437 4,114 5,695 4,114
Adjusted Interest
Expense(7)............. 4,995 3,255 757 5,633 4,608 2,493 13,749 10,313
Earnings/Fixed
Charges(8)............. 1.56x 1.32x 1.29x 1.16x -- 1.81x -- --
EBITDA/Adjusted Interest
Expense................ 1.58x
Adjusted EBITDA/Adjusted
Interest Expense....... 1.65x
Cash flows from
operating activities... 8,027 7,027 (1,013) (1,416) (1,779) 2,476 (1,593) (1,249)
Cash flows from
investing activities... (7,187) (4,936) (45,298) 2,586 (27,423) (4,114) (136,712) (139,864)
Cash flows from
financing activities... (484) (1,998) 46,721 (977) 29,892 2,229 138,562 141,768
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------
ACTUAL PRO FORMA
-------- ---------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital(9)........................................... $ 21,437 $ 23,443
Total assets................................................. 108,742 220,515
Total debt(10)............................................... 40,130 130,269
Stockholders' equity(11)..................................... 22,762 32,169
</TABLE>
- --------
(1) On October 17, 1995, Fasteners was acquired (the "Kohlberg Acquisition") by
KSCO, which was organized by Kohlberg & Co. ("Kohlberg") for the purpose of
acquiring the capital stock of Fasteners. The Kohlberg Acquisition was
accounted for using the purchase method of accounting. Financial
information for periods prior to October 17, 1995 are for Fasteners when it
was a wholly owned subsidiary of Alper Holdings USA, Inc. ("Alper") (in
such capacity, Fasteners is referred to herein as "Predecessor-Alper"). The
Kohlberg Acquisition and the related application of purchase accounting
resulted in changes to the capital structure of Predecessor-Alper and the
historical basis of various assets and liabilities. The effect of such
changes significantly impairs the comparability of the financial position
and results of operations of Predecessor-Alper to those of KSCO.
(2) The Acquisition and the related application of purchase accounting resulted
in changes to the capital structure of KSCO (sometimes referred to herein
as "Predecessor--KSCO") and the historical basis of various assets and
liabilities. The effect of such changes significantly impairs the
comparability of the financial position and results of operations of
Predecessor-KSCO to those of Parent.
15
<PAGE>
(3) Selling, general and administrative expenses ("SG&A") includes non-
recurring income of $600 in 1994 primarily related to the favorable
resolution of matters previously accrued. SG&A also includes a non-
recurring charge for severance payments made to employees at the
Clarkesville facility who were terminated when certain Rau and PCI
employees were transferred to the Clarkesville facility. Such charge
amounted to $118 and $272 for the nine months ended September 30, 1996 and
the year ended December 31, 1996, respectively. On a pro forma basis, SG&A
also includes management fees to be paid to Saratoga by Parent, which will
be dividended by Fasteners to Parent in an amount of $600 annually.
(4) In January 1996, the Company refinanced its previously existing credit
agreements with the Existing Credit Facility, which resulted in an
extraordinary after-tax charge of $950 in the first quarter of 1996 from
the write-off of related deferred financing costs.
(5) EBITDA is defined as net income (loss) before interest expense (including
amortization of deferred financing costs), provision for income taxes,
depreciation, amortization, rental payments on the Synthetic Lease, the
non-cash portion of other expense (income), preferred stock dividends and
extraordinary items. Payments on the Synthetic Lease were $858 and $3,861
for the year ended December 31, 1996 and the nine months ended September
30, 1997, respectively. The non-cash portion of other expense (income) was
$(523) and $123 for the year ended December 31, 1994 and for the period
from January 1, 1995 to October 17, 1995, respectively, and was
insignificant for all other periods presented.
(6) Adjusted EBITDA is defined as EBITDA (as defined in footnote (5) above)
plus (i) non-recurring expense (income) included in SG&A (see footnote (3)
above), (ii) the portion of other expense (income) not included in EBITDA,
which consists of miscellaneous non-operating cash items, and (iii)
management fees to Alper, Kohlberg and, on a pro forma basis, Saratoga. On
an historical basis, management fees paid to Alper and Kohlberg, included
in the general and administrative expenses, were $538, $0, $63, $425, $342
and $375 for the year ended December 31, 1994, the period from January 1,
1995 to October 17, 1995, the period from October 17, 1995 to December 31,
1995, the year ended December 31, 1996 and the nine months ended September
30, 1996 and 1997, respectively. On a pro forma basis, management fees paid
to Saratoga would have been $600 and $450 for the year ended December 31,
1996 and for the nine months ended September 30, 1997, respectively.
The Company has included information concerning EBITDA and Adjusted EBITDA
because it is used by certain investors as a measure of a company's ability
to service its debt. EBITDA and Adjusted EBITDA are not required by
generally accepted accounting principles ("GAAP") and should not be
considered alternatives to net income determined in accordance with GAAP as
an indicator of operating performance or as an alternative to cash flow
from operating activities determined in accordance with GAAP as a measure
of liquidity. The Company's use of EBITDA may not be comparable to
similarly titled measures due to the use by other companies of different
financial statement components in calculating EBITDA.
(7) Adjusted Interest Expense is defined as interest expense less the
amortization of deferred financing costs.
(8) For the purpose of determining the ratio of earnings to combined fixed
charges and preferred stock dividends, "earnings" consist of income before
provision for income taxes and fixed charges. "Fixed charges" consist of
interest expense (including amortization of deferred financing costs) and
one third of rental expense, representing that portion of rental expense
deemed to be representative of the interest factor. On an historical basis,
earnings were insufficient to cover fixed charges by $196 for the nine
months ended September 30, 1996. On a pro forma basis, earnings were
insufficient to cover combined fixed charges and the pre-tax earnings that
would be required to cover dividends on the Senior Preferred Stock by
$11,006 and $6,226 for the year ended December 31, 1996 and nine months
ended September 30, 1997, respectively.
(9) Working capital is defined as current assets less current liabilities.
(10) Excludes off-balance sheet financing pursuant to the Synthetic Lease,
proceeds of which were applied toward repayment of debt of $31,268 in
November 1996. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--General."
(11) Pro forma stockholder's equity reflects the Equity Contribution. See "The
Transactions," "Capitalization" and "Description of Capital Stock." Pro
forma stockholder's equity is presented net of $7,831 which represents the
non-cash accounting treatment required for management's continuing
ownership interest, in accordance with the provisions of Emerging Issues
Task Force Issue No. 88-16 of the Financial Accounting Standards Board
(the "FASB").
16
<PAGE>
RISK FACTORS
Holders of Initial Notes should carefully consider the following factors, as
well as the other information and financial data contained in this Prospectus,
before exchanging Initial Notes for Exchange Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
Issuance of the Exchange Notes in exchange for the Initial Notes pursuant to
the Exchange Offer will be made only after a timely receipt by the Company of
such Initial Notes, a properly completed and duly executed Letter of
Transmittal and all other required documents. Therefore, holders of the
Initial Notes desiring to tender such Initial Notes in exchange for Exchange
Notes should allow sufficient time to ensure timely delivery. The Company is
under no duty to give notification of defects or irregularities with respect
to the tenders of Initial Notes for exchange.
Holders of Initial Notes who do not exchange their Initial Notes for
Exchange Notes pursuant to the Exchange Offer, including Holders whose Initial
Notes are tendered but not accepted, will continue to be subject to the
restrictions on transfer of such Initial Notes as set forth in the legend
thereon, and, except in certain limited circumstances, will no longer have any
registration rights with respect to the Initial Notes. 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 Company does not
intend to register the Initial Notes under the Securities Act.
As a condition to its participation in the Exchange Offer pursuant to the
terms of this Agreement, each Holder of Initial Notes shall furnish, upon the
request of the Company, prior to the consummation of the Exchange Offer, a
written representation to the Company and the Guarantor (which may be
contained in the Letter of Transmittal) to the effect that (A) it is not an
affiliate of the Company or the Guarantor within the meaning of the Act, (B)
it is not engaged in, and does not intend to engage in, and has no arrangement
or understanding with any person to participate in, a distribution of the
Exchange Notes to be issued in the Exchange Offer and (C) it is acquiring the
Exchange Notes in its ordinary course of business. Holders of Initial Notes
shall use their best efforts to cooperate in the Company's and the Guarantor's
preparations for the Exchange Offer.
Each broker-dealer that holds Initial Notes that were acquired for its own
account as a result of market-making activities or other trading activities
may exchange the Initial Notes for Exchange Notes; provided however, that such
broker-dealer must deliver a prospectus in connection with any resale of such
Exchange Notes. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with the resales of
Exchange Notes received in exchange for Initial Notes where such Initial Notes
were acquired by such broker-dealer as a result of market-making activities.
The Company has agreed that, for a period of nine months after the
consummation of the Exchange Offer it will keep this Prospectus effective,
supplemented and amended, as required by the Registration Rights Agreement, to
the extent necessary to ensure that it is available to any broker-dealer for
use in connection with any such resale. See "Plan of Distribution." To the
extent Initial Notes are exchanged, the tender of Initial Notes pursuant to
the Exchange Offer will reduce the principal amount of the Initial Notes
outstanding, which may have an adverse effect upon, and increase the
volatility of, the market price of the Initial Notes due to a reduction in
liquidity.
SUBSTANTIAL LEVERAGE; RESTRICTIVE COVENANTS
The Company is highly leveraged. At December 31, 1997, the Company had total
consolidated debt of $130.4 million (including the Notes), none of which was
subordinated to the Notes. Based on expected borrowings under the Revolving
Credit Facility, the Company's cash debt service requirements (including an
amortization payment on the Term Loan) will total approximately $15.2 million
in 1998. See also "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources" for a discussion
of scheduled debt repayments.
17
<PAGE>
Subject to the restrictions in the Indenture and the New Credit Facility,
the Company may incur additional indebtedness from time to time to provide
working capital, to finance acquisitions or capital expenditures and for other
corporate purposes. The level of the Company's indebtedness has important
consequences for holders of the Notes, including: (i) a substantial portion of
the Company's cash flow from operations must be dedicated to debt service and
will not be available for other purposes, (ii) the Company's ability to obtain
additional debt financing in the future for working capital, acquisitions or
capital expenditures may be limited, (iii) certain of the Company's
indebtedness contains financial and other restrictive covenants which, if
breached, could result in an event of default under such indebtedness, (iv)
the Company's borrowings under the New Credit Facility are and will continue
to be at variable rates of interest, which causes the Company to be vulnerable
to increases in interest rates and (v) the Company's level of indebtedness
could limit its flexibility in planning for and reacting to, and make it more
vulnerable to, competitive pressures and changes in industry and economic
conditions generally. In addition, indebtedness incurred under the New Credit
Facility is scheduled to become due prior to the time any principal payments
are required on the Notes and therefore the Company may need to refinance such
indebtedness. The Company's ability to refinance the New Credit Facility, if
necessary, will depend on, among other things, its financial condition at the
time, the restrictions in the instruments governing its then outstanding
indebtedness and other factors, including market conditions, that are beyond
the control of the Company.
The Company's ability to pay interest and principal on the Notes and to
satisfy its other debt obligations will depend upon its future operating
performance. Future operating performance will be affected by prevailing
economic conditions and financial, business and other factors, many of which
are beyond the Company's control. Based upon the current level of operations
and anticipated future growth, the Company believes that its operating cash
flow, together with borrowings under the New Credit Facility, will be
sufficient to meet its operating expenses and capital requirements and its
debt service requirements. There can be no assurance, however, that the
Company's business will continue to generate cash flow at or above current
levels or that anticipated future growth can be achieved. If the Company is
unable to generate sufficient cash flow to service its indebtedness and fund
its capital or other expenditures, it will be forced to adopt an alternative
strategy that may include reducing or delaying capital expenditures, selling
assets, restructuring or refinancing its indebtedness (including the Notes),
or seeking additional equity or debt capital. There can be no assurance that
any of these strategies could be effected on satisfactory terms, if at all,
particularly in view of the Company's high leverage following the Transactions
and the fact that substantially all of its assets are pledged to secure
borrowings under the New Credit Facility and other secured obligations.
The terms of the New Credit Facility, the Indenture, and the other
agreements governing the Company's indebtedness impose operating and financing
restrictions on the Company. Such restrictions affect, and in many respects
limit or prohibit, among other things, the ability of the Company to incur
additional indebtedness, pay dividends or repurchase stock or make other
distributions, create liens, make certain investments, sell assets, or enter
into mergers or consolidations. The New Credit Facility requires the Company
to comply with certain financial ratios and tests, under which the Company is
required to achieve certain financial and operating results. These
restrictions could limit the ability of the Company to plan for or react to
market conditions or meet extraordinary capital needs or otherwise could
restrict corporate activities. See "Description of Notes--Certain Covenants"
and "Description of Other Indebtedness." There can be no assurance that such
restrictions will not adversely affect the Company's ability to finance its
future operations or capital needs or to engage in other business activities
that would be in the interest of the Company. Moreover, any default under the
documents governing the indebtedness of the Company could have a significant
adverse effect on the market value of the Notes.
EFFECTIVE SUBORDINATION OF THE NOTES AND THE GUARANTEES
The Notes and each Guarantee are effectively subordinated to all secured
obligations of the Company and the guarantor thereof, respectively, to the
extent of the assets securing such obligations. At September 30, 1997, after
giving pro forma effect to the Transactions, the Company would have had
approximately $30.3 million of secured indebtedness outstanding, excluding the
$25.0 million Revolving Credit Facility. The New Credit Facility is secured by
all of the capital stock of the Company's domestic subsidiaries, 66% of the
capital stock of
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the Company's foreign subsidiaries and substantially all of the domestic
assets of the Company and its subsidiaries.
The Notes are structurally subordinated to all obligations (including trade
payables and accrued liabilities) of the Company's subsidiaries, other than
any subsidiary that issues a Subsidiary Guarantee. No Subsidiary Guarantees
will be required on the date of the issuance of the Notes. The Indenture
permits the Company and its subsidiaries to incur additional indebtedness,
including secured indebtedness, subject to certain limitations. The Indenture
does not limit Parent's ability to incur indebtedness.
FOREIGN SALES AND OPERATIONS; IMPACT OF NAFTA
In 1996 and the first nine months of 1997, approximately 22.1% and 26.6%,
respectively, of the Company's net sales were derived from foreign sales and
operations and export sales. In addition, a significant portion of the
Company's anticipated growth is expected to come from foreign sales and
operations. Foreign sales and operations involve varying degrees of risks and
uncertainties inherent in doing business abroad. Such risks include the
possibility of unfavorable circumstances arising from host country laws or
regulations, including unexpected changes of interpretations thereof. Other
risks include partial or total expropriation; export duties and quotas;
currency exchange rate fluctuations; restrictions on repatriation of funds;
the disruption of operations from labor and political disturbances,
insurrection, or war; and the requirements of partial local ownership of
operations in certain countries. Furthermore, customer credit risks are
exacerbated in foreign sales and operations because there often is little
information available about the credit histories of customers in certain
countries.
The value of the Company's foreign sales and earnings may vary with currency
exchange rate fluctuations. To the extent that the Company does not take steps
to mitigate the effects of changes in relative values, changes in currency
exchange rates could have an adverse effect upon the Company's results of
operations, which in turn could adversely affect the ability of Parent and the
Company to meet their debt and preferred stock obligations, including payments
on the Securities.
The North American Free Trade Agreement ("NAFTA"), implemented on January 1,
1994, removes barriers to free trade among Canada, the United States, and
Mexico. The removal of these barriers will take place over a ten-year period
between Mexico and the United States and over five years between Canada and
the United States. There can be no assurance that NAFTA will not result in an
increase in apparel imports from Mexico that compete against products
manufactured by the Company's customers in the United States. Such a
development could materially adversely affect the Company's sales in the
United States. Historically, a majority of the Company's net sales has been to
customers in the United States. No assurance can be given that the Company
will be able to increase sales outside of the United States in the event of a
decline in sales to customers in the United States.
ACQUISITION RISKS
The Company's growth in recent years has been attributable in part to
strategic business acquisitions. The Company intends to seek additional
acquisition opportunities that will allow it to increase its market
penetration, product offerings and distribution capabilities both domestically
and internationally. The criteria for identifying attractive acquisition
candidates include revenue potential, increases in manufacturing, production
and other cost efficiencies and the diversification and expansion of the
Company's product lines and customer base. There can be no assurance that the
Company will be able to successfully identify suitable acquisition candidates,
complete acquisitions, integrate acquired operations into its existing
operations or expand into new markets. The diversion of management's
attention, as well as any unforeseen difficulties or liabilities, expenses,
complications or delays that may be encountered in the integration of acquired
businesses, could have a material adverse effect on the Company. Further, once
integrated, acquired operations may not achieve levels of revenues,
profitability or productivity comparable with those achieved by the Company's
existing operations, or otherwise perform as expected. There can be no
assurance that the Company will, in future acquisitions, continue to achieve
results comparable to those from recent acquisitions.
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Depending upon the nature, size and timing of future acquisitions, the
Company may be required to raise additional financing. The Company expects
that a substantial portion of the financing of any acquisition would be
additional indebtedness. Additional indebtedness incurred to finance
acquisitions could adversely affect the Company's liquidity and financial
condition. There can be no assurance that the New Credit Facility, the
Indenture or any other loan agreements to which the Company may become a party
or subject to will permit such additional financing or that such additional
financing will be available to the Company on acceptable terms or at all. See
"Business--Business Strategy."
RAW MATERIALS
In 1996, the Company purchased approximately 11 million pounds of brass, 1.1
million pounds of steel, 0.3 million pounds of stainless steel and 0.7 million
pounds of aluminium for use in manufacturing its products. The volatility of
the prices of these materials, particularly brass, which typically is composed
of 70% copper and 30% zinc, could have a material impact on the Company's
results of operations. The cost of copper has been subject to considerable
volatility, ranging between $0.78 and $1.40 per pound in 1994, between $1.21
and $1.46 per pound in 1995 and between $0.87 and $1.30 per pound in 1996. The
volatility of copper prices has in the past adversely affected the Company's
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Results of Operations--Fiscal Year 1995
(Combined Predecessor-KSCO and Predecessor-Alper) Compared with Fiscal Year
1994 (Predecessor-Alper)."
The Company seeks to minimize the impact of price volatility by entering
into hedging arrangements. It has hedged a substantial portion of its raw
material needs through June 1998. To the extent that prices for the Company's
remaining expected needs increase before prices are set in hedging contracts,
there can be no assurance that the Company will be able to achieve adequate
margins on finished products. However, there can be no assurance that the
Company will be able to do so in the future. If the Company is unable to
maintain an adequate differential between finished product prices and material
prices and the effect cannot largely be passed on to its customers, the
Company's operating results would be materially adversely affected.
CONCENTRATION OF MANUFACTURING FACILITIES
Approximately 80% of the Company's products sold in 1996 were manufactured
at its Clarkesville, Georgia facility. The Company anticipates that a
similarly significant amount of its products will continue to be manufactured
at the Clarkesville facility. Should a natural disaster or other event result
in the operations at the Clarkesville facility being disrupted for any
significant period of time or inventory located there being damaged, the
results of operations and financial condition of the Company could be
materially adversely affected. Although the Company maintains insurance
coverage on its production facilities (including business interruption
insurance designed to reduce the impact of significant damage to its
Clarkesville facility), there can be no assurance that such insurance proceeds
would be available on a timely basis or be sufficient to offset fully such
losses. See "Business--Insurance."
COMPETITION
The Company operates in a highly competitive environment. Some of the
Company's competitors are larger, have greater financial resources and may be
less leveraged than the Company. See "Business--Competition."
CONTROLLING STOCKHOLDER
Upon consummation of the Transactions, Saratoga became the beneficial owner
of 67.2% of the voting stock of Parent, which owns all of the capital stock of
the Company. By virtue of such ownership, Saratoga is in a position to direct
the management and affairs of the Company. Saratoga may have an interest in
pursuing acquisitions, divestitures or other transactions that, in its
judgment, could enhance its equity investment, even though such transactions
might involve risks to the holders of the Securities.
RELIANCE ON KEY PERSONNEL
The Company depends to a large extent upon the abilities and continued
efforts of its senior management, the loss of any of whom could have an
adverse impact on the Company. The Company does not maintain "key
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man" insurance on any of its employees. Furthermore, the Company likely will
be dependent on the senior management of any businesses acquired in the
future. Although the Company has entered into employment agreements with
certain executive officers, if any of these persons becomes unavailable to
continue in such capacity, or if the Company is unable to attract and retain
other qualified employees, the Company's business or prospects could be
materially adversely affected. See "Management." In addition, the Company's
growth and success depend on its ability to attract and retain skilled
personnel to operate machinery used in the Company's manufacturing processes.
LIMITED PRACTICAL VALUE OF PARENT GUARANTEE
Parent will unconditionally guarantee all payments of principal and interest
on the Notes. However, since at present Parent's only significant asset is the
capital stock of the Company (and such asset is pledged to the lenders under
the New Credit Facility), if the Company should be unable to meet its payment
obligations with respect to the Notes, it is unlikely that Parent would be
able to do so.
ENVIRONMENTAL MATTERS
Like similar companies, the Company's operations and properties are subject
to a wide variety of increasingly complex and stringent federal, state, local
and foreign environmental laws and regulations, including those governing the
use, storage, handling, generation, treatment, emission, release, discharge
and disposal of certain materials and wastes, the remediation of contaminated
soil and groundwater, and the health and safety of employees (collectively,
"Environmental Laws"). As such, the nature of the Company's current and former
operations, and those of its predecessors in interest, exposes it to the risk
of claims with respect to such matters and there can be no assurance that
material costs and liabilities will not be incurred in connection with such
claims. The Company is currently subject, and may in the future be subject, to
liability for violations of Environmental Laws and remediation of
contamination at currently or formerly owned or operated facilities, including
its Clarkesville, Georgia facility. Based upon its experience to date, the
Company believes that the future cost of compliance with the existing
Environmental Laws, and liability for known environmental claims pursuant to
such Environmental Laws, will not have a material adverse effect on the cash
flow, financial condition or results of operation of the Company. However,
future events, such as new information, changes in
existing Environmental Laws or their interpretation, and more vigorous
enforcement policies of regulatory agencies, may give rise to additional
expenditures or liabilities that could be material. See "Business--
Environmental Matters."
PENSION MATTERS
As described in Note 11 to the Company's consolidated financial statements,
at December 31, 1996, the projected benefit obligations under the Company's
defined benefit pension plan exceeded the fair value of plan assets (excluding
the effect of unrecognized net gain relating thereto) by approximately $9.8
million, based on certain assumptions by the Company set forth in the Note,
which could be different from those used by the Pension Benefit Guaranty
Corporation (the "PBGC"). On November 19, 1997, the Company received a request
for information from the PBGC, a quasi-government agency which guarantees
certain benefits under defined benefit pension plans and monitors such plans.
Among its powers, the PBGC may institute proceedings to terminate a defined
benefit pension plan. The PBGC has requested information with respect to the
Acquisition and its potential effect on the Company's pension plan. The
Company is complying with the PBGC's request, but cannot predict whether the
PBGC will seek to require the Company to take any actions as a result of the
Acquisition, including accelerated payment to the pension plan. The Company,
Saratoga and Kohlberg intend to cooperate with the PBGC to resolve in a timely
manner any concerns it may have. Any such actions could increase the Company's
costs of maintaining its pension plan, which could have an adverse effect on
the cash flow, financial condition or results of operations of the Company.
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MATURE INDUSTRY
The fastener industry is a mature industry in which minimal growth in sales
of fasteners is expected. Accordingly, growth in the Company's revenues and
earnings will depend significantly on the Company's ability to acquire and
consolidate profitable companies, to develop and sell higher margin specialty
applications and to achieve further cost reductions through improved
manufacturing technology.
FRAUDULENT CONVEYANCE CONSIDERATIONS
A significant portion of the net proceeds of the Offerings was distributed
to the stockholders of KSCO. In connection with the Transactions, affiliates
of Kohlberg and KSCO's other existing stockholders received an aggregate of
approximately $98.1 million. Under fraudulent transfer law, if a court were to
find in a bankruptcy, reorganization or rehabilitation case or similar
proceeding or a lawsuit by or on behalf of other creditors of the Company,
that the Initial Notes were issued with the intent to defraud, hinder or delay
creditors, or that the Company received less than fair consideration or
reasonably equivalent value for incurring the indebtedness represented by the
Initial Notes and, at the time of such incurrence, the Company (i) was
insolvent or was rendered insolvent by reason of such incurrence, (ii) was
engaged or about to engage in a business or transaction for which its
remaining property constituted unreasonably small capital or (iii) intended to
incur, or believed it would incur, debts beyond its ability to pay such debts
as they mature, such court could, among other things, (a) void all or a
portion of the Company's obligations to the holders of Notes and/or (b)
subordinate the Company's obligations to the holders of the Notes to other
existing and future indebtedness of the Company the effect of which would be
to entitle such other creditors to be paid in full before any payment could be
made on the Notes. The measure of insolvency for purposes of determining
whether a transfer is avoidable as a fraudulent transfer varies depending upon
the law of the jurisdiction which is being applied. Generally, however, a
debtor would be considered insolvent if the sum of all of its liabilities were
greater than the value of all of its property at a fair valuation, or if the
present fair saleable value of the debtor's assets were less than the amount
required to repay its probable liability on its debts as they become absolute
and mature. There can be no assurance as to what standard a court would apply
in order to determine solvency.
Management believed the Initial Notes were being issued without the intent
to hinder, defraud or delay creditors, for proper purposes and in good faith.
To the extent that proceeds from the sale of the Initial Notes were used to
finance the distribution to stockholders, a court may find that the Company
did not receive fair consideration or reasonably equivalent value for the
incurrence of the indebtedness represented by the Notes. Management believed
that the Company received equivalent value at the time the indebtedness under
the Initial Notes was incurred. As of September 30, 1997 on a pro forma basis
after giving effect to the Transactions, the Company would have had
stockholders' equity of $41.6 million. See "Capitalization." Management
believed that, although a significant portion of the net proceeds from the
sale of the Notes was distributed to stockholders of KSCO, for purposes of the
U.S. Bankruptcy Code and state fraudulent transfer or conveyance laws, the
Company was and, after the issuance of the Initial Notes and the application
of the proceeds therefrom, was, solvent, had sufficient capital for carrying
on its business and was able to pay its debts as they matured. These beliefs
were based upon the Company's operating history, management's analysis of cash
flows, the estimated fair value of the Company's assets and the Company's
estimated liabilities after giving effect to the Transactions. In determining
the estimated fair value of the Company's assets, the Board of Directors
utilized a written report of an expert in appraisals as to the equity value of
the Company and as to certain other valuation and solvency matters. The
various factors considered by the Board, as enumerated above, supported the
Board's conclusions regarding the sufficiency of the Company's capital and no
one factor was given more significance than others by the Board in reaching
its conclusions. As a result of the uncertainty of the application of
fraudulent transfer or conveyance law in transactions similar to the
Transactions, including the distribution to stockholders, there can be no
assurance that a court passing on any of the foregoing issues would agree with
management's views.
In addition, the Subsidiary Guarantees, if any are issued, may be subject to
review under fraudulent conveyance statutes in a bankruptcy, reorganization or
rehabilitation case or similar proceeding or a lawsuit by or on behalf of
other creditors of any of the guarantors thereof. In such a case, the analysis
set forth above would
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generally apply, except that the Subsidiary Guarantees could also be subject
to the claim that, since the Subsidiary Guarantees were incurred for the
benefit of the Company (and only indirectly for the benefit of the guarantors
thereof), they were incurred for less than reasonably equivalent value or fair
consideration. A court could therefore subordinate the Subsidiary Guarantees
to the other obligations of the guarantors thereof, or take other action
detrimental to holders of the Notes, including, under certain circumstances,
invalidating the Subsidiary Guarantees. No Subsidiary Guarantees will be
required on the Issue Date.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, the Company will be required to
offer to purchase all of the outstanding Notes at 101% of the principal amount
thereof, plus accrued and unpaid interest to the date of purchase. There can
be no assurance that the Company will have sufficient funds available, will be
able to raise sufficient funds through a refinancing of the Notes, or will be
permitted by its other debt agreements to purchase the Notes upon the
occurrence of a Change of Control. In addition, a Change of Control may
require the Company to offer to purchase other outstanding indebtedness and
would cause a default under the New Credit Facility. The inability to purchase
all of the tendered Notes would constitute an Event of Default (as defined)
under the Indenture. See "Description of Notes--Change of Control."
The Change of Control provision may not necessarily afford the holders of
Notes protection in the event of a highly leveraged transaction, including a
reorganization, restructuring, merger, or similar transaction involving the
Company that could adversely affect the holders because such transactions may
not involve a shift in voting power or beneficial ownership, may not involve a
shift of the required magnitude or may not otherwise fit within the definition
of Change of Control.
ABSENCE OF PUBLIC MARKET; RESTRICTIONS ON TRANSFER
The Initial Notes are eligible for trading on the Private Offerings,
Resales and Trading through Automated Linkage Market by Qualified
Institutional Buyers ("QIBs"). The Exchange Notes are new securities for which
there is no existing market. There can be no assurance as to the liquidity of
any markets that may develop for the Exchange Notes, the ability of the
holders of the Exchange Notes to sell their Exchange Notes or the price at
which 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, the Company's operating results, and
the market for similar securities. The Initial Purchasers have advised the
Company that they currently intend to make a market in the Exchange Notes.
However, the Initial Purchasers are not obligated to do so and any market-
making may be discontinued at any time without notice. The Company and Parent
do not intend to apply for listing of the Exchange Notes on any securities
exchange.
The liquidity of, and trading market for, the Exchange Notes may also be
materially and adversely affected by declines in the market for high yield
securities generally. Such a decline may materially and adversely affect such
liquidity and trading independent of the financial performance of, and
prospects for, the Company and Parent.
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Initial Notes were sold by the Company on November 26, 1997 to the
Initial Purchasers who resold the Initial Notes (i) to "qualified
institutional buyers" (as defined in Rule 144A under the Securities Act) in
reliance upon Rule 144A under the Securities Act and (ii) outside the United
States to persons other than U.S. persons in reliance upon Regulation S under
the Securities Act. In connection therewith, the Company, Guarantor and the
Initial Purchasers entered into the Registration Rights Agreement, pursuant to
which the Company and Guarantor
agreed, for the benefit of the Holders of the Initial Notes, that they would,
at their sole cost, (i) within 90 days following the original issuance of the
Initial Notes, file with the Commission the Exchange Offer Registration
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Statement (of which this Prospectus is a part) under the Securities Act with
respect to an issue of a series of new notes of the Company identical in all
material respects to the series of Initial Notes and (ii) use their best
efforts to cause such Exchange Offer Registration Statement to become
effective under the Securities Act within 120 days following the original
issuance of the Initial Notes. Upon the effectiveness of the Exchange Offer
Registration Statement, the Company will offer to the Holders of the Initial
Notes the opportunity to exchange their Initial Notes for a like principal
amount of Exchange Notes, to be issued without a legend restricting their
transfer and which may, subject to certain exceptions described below, be
reoffered and resold by the Holder without restrictions or limitations under
the Securities Act. The term "Holder" with respect to any Note means any
person in whose name such Note is registered on the books of the Company.
Each Holder desiring to participate in the Exchange Offer will be required
to represent, among other things, that (i) it is not an "affiliate" (as
defined in Rule 405 of the Securities Act) of the Company or the Guarantor
(ii) it is not engaged in, and does not intend to engage in, and has no
arrangement or understanding with any person to participate in, a distribution
of the Exchange Notes and (iii) it is acquiring the Exchange Notes in the
ordinary course of its business (a Holder unable to make the foregoing
representation is referred to as a "Restricted Holder"). A Restricted Holder
will not be able to participate in the Exchange Offer and may only sell its
Initial Notes pursuant to a registration statement containing the selling
security holder information required by Item 507 of Regulation S-K under the
Securities Act, or pursuant to an exemption from the registration requirement
of the Securities Act.
Each broker-dealer (other than a Restricted Holder) that receives Exchange
Notes for its own account pursuant to the Exchange Offer (a "Participating
Broker-Dealer") is required to acknowledge in the Letter of Transmittal that
it acquired the Initial Notes as a result of market-making activities or other
trading activities and that it will deliver a prospectus in connection with
the resale of such Exchange Notes. Based upon interpretations by the staff of
the Commission, the Company believes that Exchange Notes issued pursuant to
the Exchange Offer to Participating Broker-Dealers may be offered for resale,
resold and otherwise transferred by a Participating Broker-Dealer upon
compliance with the prospectus delivery requirements, but without compliance
with the registration requirements, of the Securities Act. The Company has
agreed that for a period of nine months following consummation of the Exchange
Offer it will make this Prospectus available, for use in connection with any
such resale, to any Participating Broker-Dealer that notifies the Company in
the Letter of Transmittal that it may be subject to such prospectus delivery
requirements. The Company believes that during such period of time, delivery
of this Prospectus, as it may be amended or supplemented, will satisfy the
prospectus delivery requirements of a Participating Broker-Dealer engaged in
market-making or other trading activities. See "The Exchange Offer" and "Plan
of Distribution".
Based upon interpretations by the staff of the Commission, the Company
believes that Exchange Notes issued pursuant to the Exchange Offer may be
offered for resale, resold, and otherwise transferred by a Holder thereof
(other than a Restricted Holder or a Participating Broker-Dealer) without
compliance with the registration and prospectus delivery requirements of the
Securities Act.
If (i) prior to the consummation of the Exchange Offer, it is reasonably
determined in good faith that (A) the Exchange Notes upon receipt would not be
tradable by Holders thereof, other than Restricted Holders, without
registration under the Securities Act and applicable state securities laws or
(B) the Commission is unlikely to permit the consummation of the Exchange
Offer or (ii) the Exchange Offer commenced but not consummated prior to May
25, 1998 for any reason, then the Company is required under the Registration
Rights Agreement to file with the Commission a shelf registration statement
(the "Shelf Registration Statement") to cover resales of Transfer Restricted
Securities (as defined) by the Holders thereof who satisfy certain conditions
relating to the provision of information for inclusion in the Shelf
Registration Statement. The Company is required under the Registration Rights
Agreement to file the Shelf Registration Statement as promptly as reasonably
practicable but in no event later than 60 days after the date on which the
Company becomes obligated to file same, to use its reasonable best effort to
cause the Shelf Registration Statement to be declared effective on or before
the 150th day after the obligation to file arises and, except under certain
circumstances, to keep the
Shelf Registration Statement continuously effective under the Securities Act
until November 30, 2007, or such earlier time when all Initial Notes are sold.
For purposes of the foregoing, "Transfer Restricted Securities"
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means each Initial Note and each Exchange Note to which clause (i)(A) of the
first sentence of this paragraph is applicable, until in the case of any such
Notes (i) such Notes have been sold pursuant to an effective registration
statement, (ii) such Notes have been sold in compliance with Rule 144 under
the Securities Act or would be permitted to be sold pursuant to Rule 144(k)
thereunder or (iii) such Notes cease to be outstanding.
The Company will, in the event of the filing of the Shelf Registration
Statement, provide to each Holder of Transfer Restricted Securities covered by
the Shelf Registration Statement copies of any Shelf Registration Statement or
any prospectuses which is a part thereof, notify each such Holder when the
Shelf Registration Statement has become effective and take certain other
actions as are required to permit unrestricted resales of Transfer Restricted
Securities. A Holder of Transfer Restricted Securities that sells such
Transfer Restricted Securities pursuant to the Shelf Registration Statement
generally will be required to be named as a selling security holder in the
related prospectus and to deliver a prospectus to the purchaser, will be
subject to certain of the civil liability provisions under the Securities Act
in connection with such sales and will be bound by the provisions of the
Registration Rights Agreement which are applicable to such Holder (including
certain indemnification obligations). In addition, Holders of Transfer
Restricted Securities will be required to deliver information to be used in
connection with the Shelf Registration Statement within a reasonable time in
order to have their Transfer Restricted Securities included in the Shelf
Registration Statement and receive any Liquidated Damages (as defined). The
Company will notify such Holders of the occurrence of any event that makes any
statement made in the Shelf Registration Statement untrue in any material
respect or that requires the making of any changes so that it will not contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading, in which case such Holders will be prohibited from using the Shelf
Registration Statement and any prospectus which is a part thereof until the
Company amends or supplements the same.
If (a) the Company and the Guarantor fail to file within 90 days, or cause
to become effective within 120 days, the Exchange Offer Registration Statement
or (b) the Company and the Guarantor are obligated to file the Shelf
Registration Statement and such Shelf Registration Statement is not filed
within 90 days, or declared effective within 150 days, of the date on which
the Company and the Guarantor became so obligated or (c) the Company and the
Guarantor fail to consummate the Exchange Offer within 30 days of the Exchange
Offer Effective Date or (d) the Shelf Registration Statement or the Exchange
Offer Registration Statement is declared effective but thereafter ceases to be
effective or usable in connection with resales of Transfer Restricted
Securities during the periods specified in the Registration Rights Agreement
(each such event referred to in clauses (a) through (d) above, a "Registration
Default"), then the Company and the Guarantor will pay liquidated damages
("Liquidated Damages") to each Holder of Transfer Restricted Securities,
during 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 Notes constituting Transfer Restricted Securities held by such
Holder. The amount of the Liquidated Damages will increase an additional $.05
per week per $1,000 principal amount constituting Transfer Restricted
Securities for each subsequent 90-day period until the applicable Registration
Default has been cured, up to a maximum amount of Liquidated Damages of $.30
per week per $1,000 principal amount of Notes constituting Transfer Restricted
Securities. All accrued Liquidated Damages will be paid by the Company on the
applicable interest payment dates to the Global Note Holder by wire transfer
of immediately available funds or by federal funds check and to the Holder of
certificated securities by mailing a check to such Holders' registered
addresses. Following the cure of all Registration Defaults, the accrual of
Liquidated Damages will cease.
Payment of Liquidated Damages is the sole remedy available to the Holders of
Transfer Restricted Securities in the event that the Company does not comply
with the deadlines set forth in the Registration Rights Agreement with respect
to the registration of Transfer Restricted Securities for resale under the
Shelf Registration Statement.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Initial
Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City
time, on the Expiration Date. The Company will issue $1,000 principal amount
of Exchange Notes in exchange for each $1,000 principal amount of outstanding
Initial Notes accepted in the Exchange Offer. Holders
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may tender some or all of their Initial Notes pursuant to the Exchange Offer.
However, Initial Notes may be tendered only in integral multiples of $1,000.
The terms of the Exchange Notes will be identical in all material respects
to the terms of the Initial Notes, except that the Exchange Notes have been
registered under the Securities Act and therefore will not bear legends
restricting their transfer and will not be entitled to Liquidated Damages, if
any, under certain circumstances described in the 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 under which the Initial
Notes were, and the Exchange Notes will be, issued.
As of the date of this Prospectus, $100.0 million aggregate principal amount
of the Initial Notes is outstanding. The Company has fixed the close of
business on , 1998 as the record date for the Exchange Offer for
purposes of determining the persons to whom this Prospectus, together with the
Letter of Transmittal, will initially be sent.
Holders of the Initial Notes do not have any appraisal or dissenters' rights
under law or the Indenture in connection with the Exchange Offer. The Company
intends to conduct the Exchange Offer in accordance with the applicable
requirements of the Exchange Act and the rules and regulations of the
Commission thereunder.
Holders who tender Initial Notes in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Initial
Notes pursuant to the Exchange Offer. The Company will pay all charges and
expenses, other than certain applicable taxes, in connection with the Exchange
Offer. See "--Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
, 1998, unless the Company, in its sole discretion, extends the Exchange
Offer, in which case the term "Expiration Date" shall mean the latest date and
time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent (as defined) of any extension by oral or written notice and will make a
public announcement thereof prior to 9:00 a.m., New York City time, on the
next business day after each previously scheduled Expiration Date unless
otherwise required by applicable law or regulation.
The Company reserves the right, in its reasonable discretion, (i) to delay
accepting any Initial Notes, to extend the Exchange Offer or, if any of the
conditions set forth below under the caption "--Conditions" shall not have
been satisfied, to terminate the Exchange Offer, by giving oral or written
notice of such delay, extension or termination to the Exchange Agent or (ii)
to amend the terms of the Exchange Offer in any manner. Any such delay in
acceptance, extension, termination or amendment will be followed as promptly
as practicable by a public announcement thereof. If the Exchange Offer is
amended in a manner determined by the Company to constitute a material change,
the Company will promptly disclose such amendment by means of a prospectus
supplement that will be distributed to the registered Holders, and the Company
will extend the Exchange Offer for a period of five to ten business days,
depending upon the significance of the amendment and the manner of disclosure
to the registered Holders, if the Exchange Offer would otherwise expire during
such five to ten business day period.
Without limiting the manner in which the Company may choose to make a public
announcement of any delay, extension, termination or amendment of the Exchange
Offer, the Company shall have no obligation to publish, advertise or otherwise
communicate any such public announcement, other than by making a timely
release to the Dow Jones News Service.
PROCEDURES FOR TENDERING
Only a Holder of Initial Notes may tender such Initial Notes in the Exchange
Offer. A Holder who wishes to tender Initial Notes for exchange pursuant to
the Exchange Offer must transmit a properly completed and duly executed Letter
of Transmittal, or a facsimile thereof, together with any required signature
guarantees, or, in the
26
<PAGE>
case of a book-entry transfer, an Agent's Message (as defined), and any other
required documents, to the Exchange Agent prior to 5:00 p.m., New York City
time, on the Expiration Date. In addition, either (i) certificates for such
Initial Notes must be received by the Exchange Agent prior to the Expiration
Date along with the Letter of Transmittal, (ii) a timely confirmation of a
book-entry transfer (a "Book-Entry Confirmation") of such Initial Notes into
the Exchange Agent's account at The Depository Trust Company ("DTC" or the
"Book-Entry Transfer Facility") pursuant to the procedure for book-entry
transfer described below, must be received by the Exchange Agent prior to the
Expiration Date or (iii) the Holder must comply with the guaranteed delivery
procedures described below. To be tendered effectively, the Initial Notes, or
Book-Entry Confirmation, as the case may be, the Letter of Transmittal and
other required documents must be received by the Exchange Agent at the address
set forth below under "--Exchange Agent" prior to 5:00 p.m., New York City
time, on the Expiration Date. DELIVERY OF DOCUMENTS TO THE BOOK ENTRY TRANSFER
FACILITY IN ACCORDANCE WITH ITS PROCEDURE DOES NOT CONSTITUTE DELIVERY TO THE
EXCHANGE AGENT.
DTC has authorized DTC participants that hold Initial Notes on behalf of
beneficial owners of Initial Notes through DTC to tender their Initial Notes
as if they were Holders. To effect a tender of Initial Notes, DTC participants
should either (i) complete and sign the Letter of Transmittal (or a manually
signed facsimile thereof), have the signature thereon guaranteed if required
by the instructions to the Letter of Transmittal, and mail or deliver the
Letter of Transmittal (or such manually signed facsimile) to the Exchange
Agent pursuant to the procedure set forth in "Procedures for Tendering" or
(ii) transmit their acceptance to DTC through the DTC Automated Tender Offer
Program ("ATOP") for which the transaction will be eligible and follow the
procedure for book-entry transfer set forth in "--Book-Entry Transfer."
The tender by a Holder will constitute an agreement between such Holder and
the Company in accordance with the terms and subject to the conditions set
forth herein and in the Letter of Transmittal.
The method of delivery of the Initial Notes and the Letter of Transmittal
and all other required documents to the Exchange Agent is at the election and
risk of the Holder. Instead of delivery by mail, it is recommended that
Holders use an overnight or hand delivery service. In all cases, sufficient
time should be allowed to assure delivery to the Exchange Agent before the
Expiration Date. No Letter of Transmittal or Initial Notes, or Book-Entry
Confirmation, as the case may be, should be sent to the Company.
Any beneficial owner whose Initial Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered Holder promptly and instruct such
registered Holder to tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such beneficial owner's own behalf, such
owner must, prior to completing and executing the Letter of Transmittal and
delivering such beneficial owner's Initial Notes, either make appropriate
arrangement to register ownership of the Initial Notes in such owner's name or
obtain a properly completed bond power from the registered Holder. The
transfer of registered ownership may take considerable time.
If the Letter of Transmittal is signed by a person other than the registered
Holder of any Initial Notes listed therein, such Initial Notes must be
endorsed or accompanied by a properly completed bond power and signed by such
registered Holder as such registered Holder's name appears on such Initial
Notes.
If the Letter of Transmittal or any Initial Notes or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity,
such persons should so indicate when signing, and unless waived by the
Company, evidence satisfactory to the Company of their authority to so act
must be submitted with the Letter of Transmittal.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Initial Notes tendered pursuant thereto are tendered (i) by a
registered Holder who has not completed the box entitled "Special Issuance
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal
or (ii) for the account of an Eligible Institution. In the event that
signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, are required to be guaranteed,
27
<PAGE>
such guarantee must be by a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc., a
commercial bank or trust company having an office or correspondent in the
United States or an "eligible guarantor institution" within the meaning of
Rule 17Ad15 under the Exchange Act (an "Eligible Institution").
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Initial Notes will be
determined by the Company in its sole discretion, which determination shall be
final and binding. The Company reserves the absolute right to reject any and
all Initial Notes not properly tendered or any Initial Notes the Company's
acceptance of which would, in the opinion of counsel for the Company, be
unlawful. The Company also reserves the right to waive any defects,
irregularities or conditions of tender as to particular Initial Notes. The
Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) shall be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Initial Notes must be cured within such time as the
Company shall determine. Neither the Company, the Exchange Agent nor any other
person shall incur any liability for failure to give notice of any defect or
irregularity with respect to any tender of Initial Notes. Tenders of Initial
Notes will not be deemed to have been made until such defects or
irregularities have been cured or waived. Any Initial Notes received by the
Exchange Agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will not be deemed to have been
properly tendered. Such Initial Notes will be returned by the Exchange Agent
to the tendering Holders, unless otherwise provided in the Letter of
Transmittal, as soon as practicable following the Expiration Date.
By tendering, each Holder will represent to the Company, among other things,
that such Holder is not a Restricted Holder. In addition, each Participating
Broker-Dealer must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. See "Plan of Distribution."
ACCEPTANCE OF INITIAL NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
For each Initial Note accepted for exchange, the Holder of such Initial Note
will receive an Exchange Note having a principal amount equal to that of the
surrendered Initial Note. For purposes of the Exchange Offer, the Company
shall be deemed to have accepted properly tendered Initial Notes for exchange
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent.
In all cases, issuance of Exchange Notes for Initial Notes that are accepted
for exchange pursuant to the Exchange Offer will be made only after timely
receipt by the Exchange Agent of certificates for such Initial Notes or a
timely Book-Entry Confirmation of such Initial Notes into the Exchange Agent's
account at the Book-Entry Transfer Facility, a properly completed and duly
executed Letter of Transmittal or Agent's Message and all other required
documents. If any tendered Initial Notes are not accepted for any reason set
forth in the terms and conditions of the Exchange Offer or if Initial Notes
are submitted for a greater principal amount than the Holder desires to
exchange, such unaccepted or non-exchanged Initial Notes will be returned
without expense to the tendering Holder thereof (or, in the case of Initial
Notes tendered by book-entry transfer into the Exchange Agent's account at the
Book-Entry Transfer Facility pursuant to the book-entry transfer procedures
described below, such non-exchanged Initial Notes will be credited to an
account maintained with such Book-Entry Transfer Facility) as promptly as
practicable after the Expiration Date.
BOOK-ENTRY TRANSFER
The Exchange Agent will establish a new account or utilize an existing
account with respect to the Initial Notes at DTC promptly after the date of
this Prospectus, and any financial institution that is a participant in DTC
and whose name appears on a security position listing as the owner of Initial
Notes may make a book-entry tender of Initial Notes by causing DTC to transfer
such Initial Notes into the Exchange Agent's account in accordance with DTC's
procedures for such transfer. However, although tender of Initial Notes may be
effected through book-entry transfer into the Exchange Agent's account at DTC,
the Letter of Transmittal (or a manually signed facsimile thereof), properly
completed and validly executed, with any required signature guarantees, or an
Agent's Message in lieu of the Letter of Transmittal, and any other required
documents, must, in any case, be
28
<PAGE>
received by the Exchange Agent at its address set forth below under the
caption "Exchange Agent" on or prior to the Expiration Date, or the guaranteed
delivery procedures described below must be complied with. The confirmation of
book-entry transfer of Initial Notes into the Exchange Agent's account at DTC
as described above is referred to herein as a "Book-Entry Confirmation."
Delivery of documents to DTC in accordance with DTC's procedures does not
constitute delivery to the Exchange Agent.
The term "Agent's Message" means a message transmitted by DTC to, and
received by, the Exchange Agent and forming a part of a Book-Entry
Confirmation, which states that DTC has received an express acknowledgement
from the participant in DTC tendering the Initial Notes stating (i) the
aggregate principal amount of Initial Notes which have been tendered by such
participant, (ii) that such participant has received and agrees to be bound by
the terms of the Letter of Transmittal and (iii) that the Company may enforce
such agreement against the participant.
GUARANTEE DELIVERY PROCEDURES
Holders who wish to tender their Initial Notes and (i) whose Initial Notes
are not immediately available, (ii) who cannot deliver their Initial Notes,
the Letter of Transmittal or any other required documents to the Exchange
Agent prior to the Expiration Date or (iii) who cannot complete the procedure
for book-entry transfer on a timely basis, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the Holder, the certificate
numbers(s) of such Initial Notes and the principal amount of Initial Notes
tendered, stating that the tender is being made thereby and guaranteeing
that, within three New York Stock Exchange trading days after the
Expiration Date, the Letter of Transmittal (or facsimile thereof) or, in
the case of a book-entry transfer, an Agent's Message, together with the
certificate(s) representing the Initial Notes, or Book-Entry Confirmation,
as the case may be, and any other documents required by the Letter of
Transmittal will be deposited by the Eligible Institution with the Exchange
Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof) or, in the case of a book-entry transfer, an Agent's
Message, as well as the certificate(s) representing all tendered Initial
Notes in proper form for transfer, or a Book-Entry Confirmation, as the
case may be, and all other documents required by the Letter of Transmittal
are received by the Exchange Agent within three New York Stock Exchange
trading days after the Expiration Date.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Initial Notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the
Expiration Date.
To withdraw a tender of Initial Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to 5:00 p.m., New York City time,
on the Expiration Date. Any such notice of withdrawal must (i) specify the
name of the person having deposited the Initial Notes to be withdrawn (the
"Depositor"), (ii) identify the Initial Notes to be withdrawn (including the
certificate number or numbers and principal amount of such Initial Notes),
(iii) be signed by the Holder in the same manner as the original signature on
the Letter of Transmittal by which such Initial Notes were tendered (including
any required signature guarantees) or be accompanied by documents of transfer
sufficient to have the Trustee with respect to the Initial Notes register the
transfer of such Initial Notes into the name of the person withdrawing the
tender and (iv) specify the name in which any such Initial Notes are to be
registered, if different from that of the Depositor. If certificates for
Initial Notes have been delivered or otherwise identified to the Exchange
Agent, then, prior to the release of such certificates, the withdrawing Holder
must also submit the serial numbers of the particular certificates to be
withdrawn and a signed notice of withdrawal with signatures guaranteed by an
Eligible Institution unless such Holder is an Eligible Institution. If Initial
Notes
29
<PAGE>
have been tendered pursuant to the procedure for book-entry transfer described
above, any notice of withdrawal must specify the name and number of the
account at the Book-Entry Transfer Facility to be credited with the withdrawn
Initial Notes and otherwise comply with the procedures of the Book-Entry
Transfer Facility. All questions as to the validity, form and eligibility
(including time of receipt) of such notices will be determined by the Company
in its sole discretion, which determination shall be final and binding on all
parties. Any Initial Notes so withdrawn will be deemed not to have been
validly tendered for purposes of the Exchange Offer and no Exchange Notes will
be issued with respect thereto unless the Initial Notes so withdrawn are
validly retendered. Properly withdrawn Initial Notes may be retendered by
following one of the procedures described above under "-- Procedures for
Tendering" at any time prior to the Expiration Date.
Any Initial Notes which have been tendered but which are not accepted for
payment due to withdrawal, rejection of tender or termination of the Exchange
Offer will be returned as soon as practicable after withdrawal, rejection of
tender or termination of the Exchange Offer to the Holder thereof without cost
to such Holder (or, in the case of Initial Notes tendered by book-entry
transfer into the Exchange Agent's account at the Book-Entry Transfer Facility
pursuant to the book-entry transfer procedures described above, such Initial
Notes will be credited to an account maintained with such Book-Entry Transfer
Facility for the Initial Notes).
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange Exchange Notes for, any
Initial Notes, and may terminate the Exchange Offer as provided herein before
the acceptance of such Initial Notes, if:
(a) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency with respect to the Exchange Offer
which, in the reasonable judgment of the Company, might materially impair
the ability of the Company to proceed with the Exchange Offer or materially
impair the contemplated benefits of the Exchange Offer to the Company, or
any material adverse development has occurred in any existing action or
proceeding with respect to the Company or any of its subsidiaries;
(b) any change, or any development involving a prospective change, in the
business or financial affairs of the Company or any of its subsidiaries has
occurred which, in the reasonable judgment of the Company, might materially
impair the ability of the Company to proceed with the Exchange Offer or
materially impair the contemplated benefits of the Exchange Offer to the
Company;
(c) any law, statute, rule or regulation is proposed, adopted or enacted,
which in the reasonable judgment of the Company, might materially impair
the ability of the Company to proceed with the Exchange Offer or materially
impair the contemplated benefits of the Exchange Offer to the Company;
(d) there shall have occurred (i) any general suspension of trading in,
or general limitation on prices for, securities on the New York Stock
Exchange, (ii) a declaration of a banking moratorium or any suspension of
payments in respect of banks in the United States or any limitation by any
governmental agency or authority that adversely affects the extension of
credit to the Company or (iii) a commencement of war, armed hostilities or
other similar international calamity directly or indirectly involving the
United States; or, in the case any of the foregoing exists at the time of
commencement of the Exchange Offer, a material acceleration or worsening
thereof; or
(e) any governmental approval has not been obtained, which approval the
Company shall, in its reasonable judgment, deem necessary for the
consummation of the Exchange Offer as contemplated hereby.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any
such condition or may be waived by the Company in whole or in part at any time
and from time to time in its reasonable discretion. The failure by the Company
at any time to exercise any of the foregoing rights shall not be deemed a
waiver of such right and each such right shall be deemed an ongoing right
which may be asserted at any time and from time to time.
If the Company determines in its reasonable judgment that any of the
conditions are not satisfied, the Company may (i) refuse to accept any Initial
Notes and return all tendered Initial Notes to the Tendering
30
<PAGE>
Holders, (ii) extend the Exchange Offer and retain all Initial Notes tendered
prior to the expiration of the Exchange Offer, subject, however, to the rights
of Holders to withdraw such Initial Notes (see "--Withdrawal of Tenders"
above) or (iii) waive such unsatisfied conditions with respect to the Exchange
Offer and accept all properly rendered Initial Notes which have not been
withdrawn. If such waiver constitutes a material change to the Exchange Offer,
the Company will promptly disclose such waiver by means of a prospectus
supplement that will be distributed to the registered Holders, and the Company
will extend the Exchange Offer for a period of five to ten business days,
depending upon the significance of the waiver and the manner of disclosure to
the registered Holders, if the Exchange Offer would otherwise expire during
such five to six business day period.
EXCHANGE AGENT
United States Trust Company of New York has been appointed as Exchange Agent
for the Exchange Offer. Requests for additional copies of this Prospectus or
of the Letter of Transmittal should be directed to the Exchange Agent
addressed as follows:
To: United States Trust Company of New York
By Hand (before 4:30 p.m.):
United States Trust Company of New York
111 Broadway
New York, New York 10006 By Overnight Courier/By Hand (after 4:30 p.m.): 770
Broadway 13t h Floor New York, New York 10003
Attn: Lower Level Corporate Trust Window
Facsimile Transmission:
(212) 780-0592
Confirm by Telephone: (800) 548-6565
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telephone or in person by officers and regular employees of the
Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay
the Exchange Agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses in connection
therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company. Such expenses include fees and expenses of the
Exchange Agent and Trustee, accounting and legal fees and printing costs,
among others.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Initial Notes pursuant to the Exchange Offer. If, however, certificates
representing Exchange Notes, or Initial Notes for principal amounts not
tendered or accepted for exchange, are to be delivered to, or are to be issued
in the name of, any person other than the registered Holder of the Initial
Notes tendered, or if tendered Initial Notes are registered in the name of any
person other than the person signing the Letter of Transmittal, or if a
transfer tax is imposed for any reason other than the exchange of Initial
Notes pursuant to the Exchange Offer, then the amount of any such transfer
taxes (whether imposed on the registered Holder or any other persons) will be
payable by the tendering Holder. If satisfactory evidence of payment of such
taxes or exemption therefrom is not submitted with the Letter of Transmittal,
the amount of such transfer taxes will be billed directly to such tendering
Holder.
31
<PAGE>
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying value as the
Initial Notes, which is the principal amount as reflected in the Company's
accounting records on the date of the exchange. Accordingly, no gain or loss
for accounting purposes will be recognized. The expenses of the Exchange Offer
and the unamortized expenses related to the issuance of the Initial Notes will
be amortized over the term of the Notes.
REGULATORY APPROVALS
The Company does not believe that the receipt of any material federal or
state regulatory approvals will be necessary in connection with the Exchange
Offer, other than the effectiveness of the Exchange Offer Registration
Statement under the Securities Act.
OTHER
Participation in the Exchange Offer is voluntary and Holders of Initial
Notes should carefully consider whether to accept the terms and conditions
thereof. Holders of the Initial Notes are urged to consult their financial and
tax advisors in making their own decisions on what action to take with respect
to the Exchange Offer.
CONSEQUENCES OF FAILURE TO PROPERLY TENDER INITIAL NOTES IN THE EXCHANGE OFFER
Issuance of the Exchange Notes in exchange for the Initial Notes pursuant to
the Exchange Offer will be made only after timely receipt by the Exchange
Agent of such Initial Notes, a properly completed and duly executed Letter of
Transmittal and all other required documents. Therefore, Holders of the
Initial Notes desiring to tender such Initial Notes in exchange for Exchange
Notes should allow sufficient time to ensure timely delivery. The Company is
under no duty to give notification of defects or irregularities with respect
to tenders of Initial Notes for exchange. Initial Notes that are not tendered
or that are tendered but not accepted by the Company for exchange, will,
following consummation of the Exchange Offer, continue to be subject to the
existing restrictions upon transfer thereof under the Securities Act and, upon
consummation of the Exchange Offer, certain rights under the Registration
Rights Agreement will terminate.
In the event the Exchange Offer is consummated, the Company will not be
required to register the unexchanged Initial Notes. Unexchanged Initial Notes
will continue to be subject to the following restrictions on transfer: (i) the
unexchanged Initial Notes may be resold only if registered pursuant to the
Securities Act, if any exemption from registration is available thereunder or
if neither such registration nor such exemption is required by law and (ii)
the unexchanged Initial Notes bear a legend restricting transfer in the
absence of registration or an exemption therefrom. The Company does not
currently anticipate that it will register the unexchanged Initial Notes under
the Securities Act. To the extent that Initial Notes are tendered and accepted
in connection with the Exchange Offer, any trading market for unexchanged
Initial Notes could be adversely affected.
32
<PAGE>
THE TRANSACTIONS
SAI and Parent were formed by Saratoga to effect the acquisition of the
Company. SAI entered into the Stock Purchase Agreement with KSCO, which owned
all of the capital stock of Fasteners, and the stockholders and optionholders
of KSCO. Under the Stock Purchase Agreement, SAI agreed to purchase all of the
capital stock of KSCO for a purchase price in cash of approximately $168.8
million less the amount of indebtedness of the Company existing immediately
prior to closing of the acquisition (including indebtedness that will not be
repaid in connection with the Transactions).
Concurrently with the consummation of the Offerings, Predecessor merged with
and into KSCO, and KSCO merged with and into Fasteners, with Fasteners
surviving the mergers. Following such mergers, the Notes became obligations of
Fasteners. The purchase of KSCO capital stock by SAI and the mergers of SAI
and KSCO into Fasteners are together referred to herein as the "Acquisition."
In connection with the Acquisition, Saratoga and certain other investors
made a $36.6 million equity investment, consisting of (i) $0.4 million in
shares of Parent's Common Stock, par value $0.0001 per share (the "Common
Stock"), and (ii) $36.2 million aggregate liquidation preference of Parent's
Series B Preferred Stock, par value $0.0001 per share (the "Series B Preferred
Stock") (collectively, the "Saratoga Investment"). Management and the Chairman
of the Board rolled over $3.4 million of their stock options in KSCO into
options to purchase Common Stock and Series B Preferred Stock (the "Management
Investment"). The Saratoga Investment and the Management Investment are
referred to as the "Equity Investments." Concurrently with the Notes Offering,
Parent offered, for gross proceeds of $10.0 million, 100,000 Units, each Unit
consisting of $100 liquidation preference of Parent's Series A Cumulative
Redeemable Exchangeable Preferred Stock (the "Senior Preferred Stock") and one
warrant (the "Warrants") to purchase Common Stock. The net proceeds of the
Equity Investments and the Units Offering totalled $49.4 million, after fees
and expenses to Parent of $0.6 million. Parent contributed (the "Equity
Contribution") such amount to Fasteners in the form of common equity. In
connection with the Acquisition, Fasteners entered into the New Credit
Facility, which consists of the $28.0 million Term Loan and the $25.0 million
Revolving Credit Facility. See "Description of Other Indebtedness--New Credit
Facility."
Proceeds from the Equity Contribution, the Notes Offering and the Term Loan
were used to finance the purchase price in the Acquisition, repurchase
attaching machinery subject to the Synthetic Lease, repay the Existing Credit
Facility and pay related fees and expenses. The Acquisition, the repurchase of
attaching machinery subject to the Synthetic Lease, the repayment of the
Existing Credit Facility, the Offerings, the Equity Contribution, the
borrowing of the Term Loan and the payment of related fees and expenses are
collectively referred to herein as the "Transactions." The following table
illustrates the sources of funds to the Company and uses of funds by the
Company relating to the Transactions, assuming they were consummated on
September 30, 1997:
SOURCES OF FUNDS
USES OF FUNDS
(Dollars in millions)
<TABLE>
<S> <C> <S> <C>
Notes..................... $100.0 Cash to selling stockholders. $ 98.1
Term Loan................. 28.0 Repurchase of equipment
Equity Contribution(a).... 49.4 subject to Synthetic Lease.. 29.2
------ Repay Existing Credit Facili-
Total................... $177.4 ty.......................... 39.3
====== Fees and expenses(b)......... 10.8
------
Total...................... $177.4
======
</TABLE>
- -------
(a) Parent funded the Equity Contribution from the Equity Investments and the
Units Offering (net of estimated fees and expenses).
(b) Excludes estimated fees and expenses of Parent related to the Units
Offering of $0.6 million.
33
<PAGE>
CAPITALIZATION
(DOLLARS IN THOUSANDS)
The following table sets forth, as of September 30, 1997, the consolidated
capitalization of (i) Predecessor-KSCO and its subsidiaries on an historical
basis and (ii) the Company and its subsidiaries after giving pro forma effect
to the Transactions. This table should be read in conjunction with "The
Transactions," "Pro Forma Consolidated Financial Statements" and the
consolidated financial statements and the notes thereto included elsewhere in
this Offering Memorandum.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
----------------------
PREDECESSOR- COMPANY
KSCO ACTUAL PRO FORMA
------------ ---------
<S> <C> <C>
Long-term debt (including current maturities)(1):
Existing Credit Facility.............................. $37,861 $ --
New Credit Facility(2)................................ -- 28,000
11 1/4% Senior Notes due 2007......................... -- 100,000
Other(3).............................................. 2,269 2,269
------- --------
Total long-term debt (including current maturities). 40,130 130,269
------- --------
Stockholders' equity:
Common stock, par value $0.01 per share, 15,000,000
shares authorized, 8,880,102 shares issued and
outstanding, actual; 1,000 shares authorized,
100 shares issued and outstanding, pro forma......... 89 --
Preferred stock, par value $0.01 per share, 20,000
shares authorized, no shares issued and outstanding,
actual and pro forma................................. -- --
Additional paid-in capital............................ 22,086 49,400
Retained earnings..................................... 1,191 --
Foreign currency translation adjustment............... (604) --
Predecessor basis adjustment(4)....................... -- (7,831)
------- --------
Total stockholders' equity.......................... 22,762 41,569
------- --------
Total capitalization................................ $62,892 $171,838
======= ========
</TABLE>
- --------
(1) Excludes off-balance sheet financing pursuant to the Synthetic Lease,
proceeds of which were applied toward repayment of debt of $31,268 in
November 1996. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--General."
(2) Excludes the $25,000 Revolving Credit Facility, which was undrawn at
closing. See "Description of Other Indebtedness--New Credit Facility."
(3) Includes long-term debt at Scovill Europe and various capital lease
obligations.
(4) Represents the non-cash accounting treatment required for management's
continuing ownership interest in accordance with the provisions of
Emerging Issues Task Force Issue No. 88-16 of the FASB.
34
<PAGE>
The following table sets forth the consolidated capitalization of Parent and
its subsidiaries (including the Company) as of September 30, 1997 assuming
that Parent had been formed at such date and after giving pro forma effect to
the Transactions. This table should be read in conjunction with "The
Transactions," "Pro Forma Consolidated Financial Statements" and the
consolidated financial statements and the notes thereto included elsewhere in
this Offering Memorandum.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------
PARENT
PRO FORMA
------------------
<S> <C>
Long-term debt (including current maturities)(1):
New Credit Facility(2) ................................... $ 28,000
11 1/4% Senior Notes due 2007............................. 100,000
Other(3) ................................................. 2,269
--------
Total long-term debt (including current maturities)..... 130,269
--------
Series A Cumulative Redeemable Exchangeable Preferred
Stock(4)................................................... 9,400
Stockholders' equity:
Series B Preferred Stock.................................. 39,600
Common Stock.............................................. --
Additional paid-in capital................................ 400
Retained earnings......................................... --
Predecessor basis adjustment(5)........................... (7,831)
--------
Total stockholders' equity.............................. 32,169
--------
Total capitalization.................................... $171,838
========
</TABLE>
- --------
(1) Excludes off-balance sheet financing pursuant to the Synthetic Lease,
proceeds of which were applied toward repayment of debt of $31,268 in
November 1996. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--General."
(2) Excludes the $25,000 Revolving Credit Facility, which was undrawn at
closing. See "Description of Other Indebtedness--New Credit Facility."
(3) Includes long-term debt at Scovill Europe and various capital lease
obligations.
(4) After fees and expenses paid by Parent of $600.
(5) Represents the non-cash accounting treatment required for management's
continuing ownership interest in accordance with the provisions of
Emerging Issues Task Force Issue No. 88-16 of the FASB.
35
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
(DOLLARS IN THOUSANDS)
The following table presents selected historical financial data of
Predecessor-Alper and Predecessor-KSCO as of the dates and for the periods
indicated, including the results of operations of acquired companies from
their respective dates of acquisition. The financial data as of December 31,
1995 and 1996 and for the period from January 1, 1995 to October 17, 1995, the
period from October 17, 1995 to December 31, 1995 and the year ended
December 31, 1996 have been derived from the consolidated financial statements
of Predecessor-Alper and Predecessor-KSCO audited by Arthur Andersen llp,
independent public accountants. The financial data for the year ended
December 31, 1994 have been derived from the consolidated financial statements
of Predecessor-Alper audited by Deloitte & Touche llp, independent auditors.
The financial data for the years ended December 31, 1992 and 1993 have been
derived from the audited consolidated financial statements of Predecessor-
Alper. The financial data as of September 30, 1997 and for the nine months
ended September 30, 1996 and 1997 have been derived from unaudited
consolidated financial statements of Predecessor-KSCO, which, in the opinion
of management, reflect all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of such data. Results for the
nine months ended September 30, 1997 are not necessarily indicative of results
to be expected for the full year. The selected historical financial data
should be read in conjunction with "Pro Forma Consolidated Financial
Statements," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the consolidated financial statements and notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PREDECESSOR-ALPER(1) PREDECESSOR-KSCO(2)
-------------------------------------- -------------------------------------------
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, PERIOD FROM PERIOD FROM YEAR ENDED SEPTEMBER 30,
------------------------- 1/1/95 TO 10/17/95 TO DECEMBER 31, ------------------
1992 1993 1994 10/17/95 12/31/95 1996 1996 1997
------- ------- ------- ----------- ----------- ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales............... $67,352 $65,066 $65,428 $53,589 $12,799 $91,632 $ 69,796 $ 73,466
Gross profit............ 16,421 15,988 18,383 13,329 3,446 27,032 19,533 20,362
Selling, general and
administrative
expenses(3)............ 8,409 14,120 10,534 7,822 1,827 17,051 12,733 11,697
Amortization expense.... 388 388 411 320 239 2,557 2,046 2,025
------- ------- ------- ------- ------- ------- -------- --------
Operating income........ 7,624 1,480 7,438 5,187 1,380 7,424 4,754 6,640
Interest expense........ 5,216 5,320 5,092 3,472 892 5,953 4,848 2,698
Other expense (income).. (308) (263) (629) 551 214 450 102 430
------- ------- ------- ------- ------- ------- -------- --------
Income (loss) before
income taxes and
extraordinary loss..... 2,716 (3,577) 2,975 1,164 274 1,021 (196) 3,512
Tax provision (benefit). 1,308 (163) 634 -- 158 923 258 1,586
------- ------- ------- ------- ------- ------- -------- --------
Income (loss) before
extraordinary loss..... 1,408 (3,414) 2,341 1,164 116 98 (454) 1,926
------- ------- ------- ------- ------- ------- -------- --------
Net income (loss)(4).... $ 1,408 $(3,414) $ 2,341 $ 1,164 $ 116 $ (852) $(1,404) $ 1,926
======= ======= ======= ======= ======= ======= ======== ========
OTHER DATA:
EBITDA(5)............... $11,393 $ 8,492 $14,514 $10,814 $ 2,886 $17,218 $ 12,210 $ 16,310
Adjusted EBITDA(6)...... 12,332 12,279 14,346 11,242 3,163 18,365 12,772 17,115
Depreciation............ 5,820 6,131 6,559 5,735 1,481 6,829 5,512 4,213
Capital expenditures.... 9,182 8,566 7,363 4,962 1,168 5,695 4,437 4,114
Adjusted Interest
Expense(7)............. 5,216 5,320 4,995 3,255 757 5,633 4,608 2,493
Earnings/Fixed
Charges(8)............. 1.50x -- 1.56x 1.32x 1.29x 1.16x -- 1.81x
Cash flows from
operating activities... 8,161 7,709 8,027 7,027 (1,013) (1,416) (1,779) 2,476
Cash flows from
investing activities... (8,984) (8,498) (7,187) (4,936) (45,298) 2,586 (27,423) (4,114)
Cash flows from
financing activities... 0 0 (484) (1,998) 46,721 (977) 29,892 2,229
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR-ALPER PREDECESSOR-KSCO
----------------------- ------------------------------
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
----------------------- ---------------- -------------
1992 1993 1994 1995 1996 1997
------- ------- ------- ------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital(9)...... $ 9,072 $11,141 $ 7,810 $ 6,688 $ 17,562 $ 21,437
Total assets............ 70,670 72,521 76,448 88,577 103,866 108,742
Total debt(10).......... -- -- 14,516 41,538 37,718 40,130
Redeemable preferred
stock.................. -- -- 19,439 -- -- --
Stockholders'
equity(11)............. 36,998 37,369 29,043 18,263 21,421 22,762
</TABLE>
36
<PAGE>
- --------
(1) On October 17, 1995, Fasteners was acquired by KSCO, which was organized by
Kohlberg for the purpose of acquiring the capital stock of Fasteners. The
Kohlberg Acquisition was accounted for using the purchase method of
accounting. Financial information for periods prior to October 17, 1995 are
for Fasteners when it was a wholly owned subsidiary of Alper. The Kohlberg
Acquisition and the related application of purchase accounting resulted in
changes to the capital structure of Predecessor-Alper and the historical
basis of various assets and liabilities. The effect of such changes
significantly impairs the comparability of the financial position and
results of operations of Predecessor-Alper to those of Predecessor-KSCO.
(2) The Acquisition and the related application of purchase accounting resulted
in changes to the capital structure of KSCO (sometimes referred to herein
as "Predecessor-KSCO") and the historical basis of various assets and
liabilities. The effect of such changes significantly impairs the
comparability of the financial position and results of operations of
Predecessor-KSCO to those of Parent.
(3) SG&A includes non-recurring expense (income) as follows: 1992--($1,500),
primarily related to reversing accruals for the disposal of the zipper
product line in an earlier year; 1993--$3,500, primarily related to the
accrual of an environmental matter at a former facility; and 1994--$(600),
primarily related to the favorable resolution of matters previously
accrued. SG&A also includes a non-recurring charge for severance payments
made to employees at the Clarkesville facility who were terminated when
certain Rau and PCI employees were transferred to the Clarkesville
facility. Such charge amounted to $118 and $272 for the nine months ended
September 30, 1996 and the year ended December 31, 1996, respectively.
(4) In January 1996, the Company refinanced its previously existing credit
agreements with the Existing Credit Facility, which resulted in an
extraordinary after-tax charge of $950 in the first quarter of 1996 from
the write-off of related deferred financing costs.
(5) EBITDA is defined as net income (loss) before interest expense (including
amortization of deferred financing costs), provision for income taxes,
depreciation, amortization, rental payments on Synthetic Lease, the non-
cash portion of other expense (income) and extraordinary items. Payments on
the Synthetic Lease were $858 and $3,861 for the year ended December 31,
1996 and the nine months ended September 30, 1997, respectively. The non-
cash portion of other expense (income) was $(2,747), $230, $(523) and $123
for the years ended December 31, 1992, 1993 and 1994, and for the period
from January 1, 1995 to October 17, 1995, respectively, and was
insignificant for all other periods presented.
(6) Adjusted EBITDA is defined as EBITDA (as defined in footnote (5) above)
plus (i) non-recurring expense (income) included in SG&A (see footnote (3)
above), (ii) the portion of other expense (income) not included in EBITDA,
which consists of miscellaneous non-operating cash items, and (iii)
management fees to Alper and Kohlberg. On an historical basis, management
fees paid to Alper and Kohlberg, included in the general and administrative
expenses, were $0, $780, $538, $0, $63, $425, $342 and $375 for the years
ended December 31, 1992, 1993 and 1994, the period from January 1, 1995 to
October 17, 1995, the period from October 17, 1995 to December 31, 1995,
the year ended December 31, 1996 and the nine months ended September 30,
1996 and 1997, respectively. The Company has included information
concerning EBITDA and Adjusted EBITDA because it is used by certain
investors as a measure of a company's ability to service its debt. EBITDA
and Adjusted EBITDA are not required by GAAP and should not be considered
alternatives to net income determined in accordance with GAAP as an
indicator of operating performance or as an alternative to cash flow from
operating activities determined in accordance with GAAP as a measure of
liquidity. The Company's use of EBITDA may not be comparable to similarly
titled measures due to the use by other companies of different financial
statement components in calculating EBITDA.
(7) Adjusted Interest Expense is defined as interest expense less the
amortization of deferred financing costs.
(8) For the purpose of determining the ratio of earnings to fixed charges,
"earnings" consist of income before provision for income taxes and fixed
charges. "Fixed charges" consist of interest expense (including
amortization of deferred financing costs) and one-third of rental expense,
representing that portion of rental expense representative of the interest
factor. Earnings were insufficient to cover fixed charges by $3,577 and
$196 for the year ended December 31, 1993 and the nine months ended
September 30, 1996, respectively.
(9) Working capital is defined as current assets less current liabilities.
(10) Excludes off-balance sheet financing pursuant to the Synthetic Lease,
proceeds of which were applied toward repayment of debt of $31,268 in
November 1996. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--General."
(11) Stockholders' equity includes affiliate advances, demand notes and
debentures from Predecessor-Alper's parent at December 31, 1992, 1993 and
1994 of $56,243, $62,046 and $31,237, respectively.
37
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated statements of operations of
Parent for the year ended December 31, 1996 and the nine months ended
September 30, 1997 give effect to the Transactions as though they had occurred
at the beginning of the periods presented. The following unaudited pro forma
consolidated balance sheet of Parent as of September 30, 1997 gives effect to
the Transactions as though they had occurred on September 30, 1997.
The pro forma adjustments are based upon available information and certain
assumptions that management believes are reasonable under the circumstances.
The pro forma consolidated financial statements are not necessarily indicative
of operating results or financial position that would have been achieved had
the Transactions been consummated on the dates indicated and should not be
construed as representative of future operating results or financial position.
The pro forma consolidated financial statements should be read in conjunction
with "The Transactions" and the consolidated financial statements and the
notes thereto included elsewhere in this Offering Memorandum.
The pro forma adjustments were applied to the respective historical
consolidated financial statements to reflect and account for the Acquisition
using the purchase method of accounting. The total purchase cost will be
allocated to the tangible and intangible assets acquired and liabilities
assumed based on their respective fair values adjusted to reflect their
carryover basis at the time the Transactions are consummated. The allocation
of the aggregate purchase price reflected in the pro forma consolidated
financial statements is preliminary. The actual purchase adjustments to
reflect the fair values of the assets and liabilities assumed will be based
upon appraisal studies that are not yet complete and management's evaluation
of such assets and liabilities and, accordingly, the adjustments that have
been included in the pro forma consolidated financial statements are subject
to change pending the final allocation of the total purchase cost of the
Acquisition. Management does not expect that differences between the
preliminary and final purchase price allocation will have a material impact on
the Company's financial position or pro forma results of operations.
38
<PAGE>
PRO FORMA CONSOLIDATED BALANCE SHEET
SCOVILL HOLDINGS INC.
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
----------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents................. $ 1,194 $ 64 (A) $ 1,258
Accounts receivable, net of allowance..... 15,048 -- 15,048
Inventories............................... 24,025 -- 24,025
Other..................................... 741 -- 741
-------- -------- --------
Total Current Assets.................... 41,008 64 41,072
-------- -------- --------
Property, Plant and Equipment, net.......... 41,473 29,200 (B) 70,673
-------- -------- --------
Other Assets
Goodwill.................................. 15,559 66,065 (C) 81,624
Trademarks................................ 2,066 14,000 (C) 16,066
Non-compete agreements.................... 2,764 -- 2,764
Deferred acquisition and financing fees... 3,725 (3,725)(C) --
-- 7,467 (A) 7,467
Deferred taxes............................ 1,298 (1,298)(D) --
Other assets.............................. 849 -- 849
-------- -------- --------
Total Other Assets...................... 26,261 82,509 108,770
-------- -------- --------
Total Assets.......................... $108,742 $111,773 $220,515
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt...... $ 1,013 $ (467)(A) $ 546
Accounts payable.......................... 9,612 -- 9,612
Accrued liabilities....................... 8,946 (1,475)(A) 7,471
-------- -------- --------
Total Current Liabilities............... 19,571 (1,942) 17,629
Long-Term Liabilities
Revolving line of credit.................. 11,930 (11,930)(A) --
Term loan................................. 25,464 (25,464)(A) --
-- 28,000 (A) 28,000
11 1/4% Senior Notes due 2007............. -- 100,000 (A) 100,000
Other debt................................ 1,723 -- 1,723
Employee benefits......................... 24,351 -- 24,351
Deferred taxes............................ -- 5,600 (C)
(1,298)(D) 4,302
Other..................................... 2,941 -- 2,941
-------- -------- --------
Total Long-Term Liabilities............. 66,409 94,908 161,317
-------- -------- --------
Series A Cumulative Redeemable Exchangeable
Preferred Stock............................ -- 9,400 (A) 9,400
Stockholders' Equity
Series B Preferred Stock.................. -- 39,600 (A) 39,600
Common Stock.............................. 89 (89)(C) --
Additional paid-in capital................ 22,086 (22,086)(C) --
400 (A) 400
Retained earnings......................... 1,191 (1,191)(C) --
Predecessor basis adjustment.............. -- (7,831)(C) (7,831)
Foreign currency translation adjustment... (604) 604 (C) --
-------- -------- --------
Total Stockholders' Equity.............. 22,762 9,407 32,169
-------- -------- --------
Total Liabilities and Stockholders'
Equity............................... $108,742 $111,773 $220,515
======== ======== ========
</TABLE>
39
<PAGE>
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
SCOVILL HOLDINGS INC.
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
----------------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Net sales................ $91,632 $ -- $ 91,632
Cost of sales............ 64,600 (250)(E) 64,350
------- -------- --------
Gross profit............ 27,032 250 27,282
Selling expenses......... 10,220 -- 10,220
General and
administrative expenses. 6,831 175 (F) 7,006
Amortization expense..... 2,557 1,172 (G) 3,729
------- -------- --------
Operating income........ 7,424 (1,097) 6,327
Other expense (income)... 450 21 (H) 471
Interest expense......... 5,953 8,617 (I) 14,570
------- -------- --------
Income (loss) before
income tax provision.... 1,021 (9,735) (8,714)
Income tax provision
(benefit)............... 923 (3,079)(D) (2,156)
------- -------- --------
Net income (loss) before $ 98 $ (6,656) $ (6,558)
extraordinary loss (J).. ------- -------- --------
Dividends and accretion
on Senior Preferred -- 1,458 (K) 1,458
Stock................... ------- -------- --------
Net income (loss)
available to common
stockholders (before
extraordinary loss)..... $ 98 $ (8,114) $ (8,016)
======= ======== ========
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997
----------------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Net sales................ $73,466 $ -- $ 73,466
Cost of sales............ 53,104 (1,122)(E) 51,982
------- -------- --------
Gross profit............ 20,362 1,122 21,484
Selling expenses......... 7,192 -- 7,192
General and
administrative expenses. 4,505 75 (F) 4,580
Amortization expense..... 2,025 849 (G) 2,874
------- -------- --------
Operating income........ 6,640 198 6,838
Other expense (income)... 430 (14)(H) 416
Interest expense......... 2,698 8,231 (I) 10,929
------- -------- --------
Income (loss) before
income tax provision.... 3,512 (8019) (4,507)
Income tax provision
(benefit)............... 1,586 (2,609)(D) (1,023)
------- -------- --------
Net income (loss)........ $ 1,926 $ (5,410) $ (3,484)
Dividends and accretion
on Senior Preferred -- 1,094 (K) 1,094
Stock................... ------- -------- --------
Net income (loss)
available to common
stockholders............ $ 1,926 $ (6,504) $ (4,578)
======= ======== ========
</TABLE>
40
<PAGE>
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
(A) These adjustments record (i) the issuance of the Notes, (ii) the borrowing
of the Term Loan, (iii) the Equity Contribution (see "The Transactions,"
"Capitalization" and "Description of Capital Stock"), (iv) the use of a
portion of the net proceeds to repurchase equipment subject to the
Synthetic Lease and to repay the Existing Credit Facility and (v) the
capitalization of deferred financing costs of $7,467. The table below
reflects the financing transactions:
<TABLE>
<CAPTION>
<S> <C>
Notes............................................................ $100,000
Term Loan........................................................ 28,000
Equity Contribution.............................................. 49,400
--------
$177,400
========
Repayment of existing indebtedness:
Current maturities and accrued interest......................... $ 1,084
Accrued Synthetic Lease payments................................ 858
Long-term loan.................................................. 25,464
Revolving line of credit........................................ 11,930
Transaction fees and expenses.................................... 7,467
--------
$ 46,803
========
</TABLE>
(B) Represents the capitalization of attaching machinery and equipment
resulting from the repurchase of equipment subject to the Synthetic Lease.
(C) The pro forma cost and the preliminary pro forma calculation of the excess
of the cost over the book value of net assets acquired is as follows:
<TABLE>
<CAPTION>
<S> <C>
Cash purchase price of equity.................................... $98,100
Transaction fees included in excess of purchase cost over book
value........................................................... 3,233
-------
Book value of KSCO's equity...................................... 22,762
Predecessor basis adjustment(i).................................. 7,831
Elimination of existing deferred financing, acquisition and
organization costs.............................................. (3,725)
-------
Adjusted book value of net assets acquired....................... 26,868
Purchase price allocated to trademarks........................... 14,000
Deferred income taxes related to valuation of trademarks......... (5,600)
-------
Excess of purchase cost over book value.......................... $66,065
=======
</TABLE>
Certain transaction fees and expenses totaling $3,233 that will be incurred
in connection with the Acquisition are included in the excess of purchase
cost over book value.
--------
(i) As further described in "The Transactions", management maintained a
continuing ownership interest in the Company. Accordingly,
stockholders' equity and the excess of purchase cost over book value
have been reduced pursuant to the provisions of Emerging Issues Task
Force Issue No. 88-16 of the FASB.
(D) Reflects the deferred tax benefit related to the loss from operations.
Based on present estimates of future operations and debt servicing related
to the Acquisition, it is management's opinion that it is more likely than
not that future tax benefits related to the Acquisition will not be
realized beyond the amount of reversing taxable temporary differences,
which continued to exceed the future tax benefits realized in the pro
forma periods presented.
41
<PAGE>
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(DOLLARS IN THOUSANDS)
(UNAUDITED)
(E) Represents depreciation expense adjustment related to repurchase of
equipment subject to the Synthetic Lease assuming an eight-year life.
Adjustment is reflected net of operating lease expense incurred under the
prior lease agreement.
(F) Reflects the elimination of management fees historically paid to Kohlberg
and the addition of management fees to be paid to Saratoga. Upon
consummation of the Transactions, Parent entered into a management
agreement with Saratoga, pursuant to which Parent will pay $600 per year
to Saratoga. Although such payments will be funded with a dividend from
Fasteners they have been reflected herein as an operating expense of
Parent.
(G) Represents the incremental amortization of goodwill based on preliminary
estimated fair values of the assets acquired and liabilities assumed using
a 40-year life. See note (C).
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------
<S> <C> <C>
Goodwill............................... $1,651 $1,238
Trademark.............................. 350 263
Less: historical amortization of
deferred transaction costs....... (829) (652)
------ ------
$1,172 $ 849
====== ======
</TABLE>
(H) The adjustment represents the charge for commitment fees on the unused
portion of the Existing Credit Facility which was repaid upon closing of
the Transactions, offset by the amount of commitment fees on the unused
portion of the Revolving Credit Facility.
(I) The pro forma adjustments to interest expense reflect the following:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------
<S> <C> <C>
Interest expense on new financing:
Term Loan(1)......................... $ 2,352 $ 1,764
Notes................................ 11,250 8,438
Interest expense on historical debt
repaid................................ (5,806) (2,587)
------- -------
7,796 7,615
Net deferred financing cost
adjustment(2)......................... 821 616
------- -------
Total adjustment....................... $ 8,617 $ 8,231
======= =======
</TABLE>
--------
(1) The assumed interest rate on the Term Loan is 8.4%. A change in the
interest rate on the Term Loan of 1% would change interest expense by
$280 and $210 for the year ended December 31, 1996 and the nine months
ended September 30, 1997, respectively.
(2) Deferred financing costs are amortized over the life of the related
debt, using a weighted average life of ten years for the Notes and six
years for the Term Loan.
(J) In January 1996, the Company refinanced its previously existing credit
agreements with the Existing Credit Facility, which resulted in an
extraordinary after-tax charge of $950 in the first quarter of 1996 from
the write-off of related deferred financing costs.
(k) Represents dividends and accretion on the Series A Cumulative Redeemable
Exchangeable Preferred Stock.
42
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and the notes thereto included elsewhere in
this Offering Memorandum. All dollar figures have been rounded to the nearest
one-tenth of one million for presentation purposes.
GENERAL
The Company, whose business has been in continuous operation since 1802, is
a leading designer, manufacturer and distributor of apparel and specialty
industrial fasteners. The Scovill name is the oldest and one of the most well-
known brands in the fasteners industry. In the twelve-month period ended
September 30, 1997, the Company sold more than 10 billion fastener units
worldwide. The Company has achieved and maintained its reputation by offering
its customers an integrated system of high quality fasteners, proprietary
attaching machines, technical service, on-site maintenance and customized
applications and design services tailored to individual customer needs.
The Company has two main product groups: the Apparel Group and the
Industrial Group. For the periods covered by the financial statements included
in this Offering Memorandum, the Company does not account for the results of
operations of its subsidiaries in the Apparel Group or the Industrial Group.
Revenues include sales of fastener products and rental income from the
leasing of attaching machines to customers. Cost of sales includes the costs
of raw material, labor and variable and fixed manufacturing overheads.
Selling, general and administrative expenses ("SG&A") consist primarily of
salaries and benefits paid to sales and administrative personnel, commissions,
and travel, marketing and advertising expenses.
During 1996, the Company acquired three companies and integrated their
operations into existing facilities. On January 24, 1996, the Company acquired
Rau, a Rhode Island apparel fastener manufacturer, for $7.9 million and PCI, a
Massachusetts-based eyelet manufacturer, for $15.6 million. The Rau
acquisition expanded the Company's customer base in its existing product
offerings. Rau's Klikit brand was integrated into the Gripper line. In April,
Rau's domestic facility was closed, relocated and integrated into the
Company's Clarkesville, Georgia facility. The Company consolidated the Rau
Canada operation with the Scovill Canada facility. PCI's operations were
integrated into the Clarkesville, Georgia facility in October. In March, the
Company also purchased Daude, a French fastener manufacturer, for $2.5
million, which was integrated into the Scovill Europe facility in Belgium in
June 1996. The Rau, PCI and Daude acquisitions were accounted for using the
purchase method of accounting and, as a result, the Company's financial
statements include the results of operations of Rau, PCI and Daude from their
dates of acquisition.
The Company ceased operations of the unprofitable zipper product line in
late 1995. In 1996, the Company relocated the PCI machine tool business of PCI
to Scovill Canada and opened a sales, warehouse and machine repair center in
Torreon, Mexico. A new distribution network was also established in Asia in
late 1996.
In November 1996, the Company refinanced its attaching machinery under the
Synthetic Lease with General Electric Capital Corporation ("GECC"). Pursuant
to the Synthetic Lease, GECC leased to the Company various fastener equipment,
which the Company then subleased to its customers. The Company originally sold
the equipment to GECC for $31.3 million. The lease was accounted for as an
operating lease in accordance with Statement of Financial Accounting Standards
No. 13, "Accounting for Leases." The sale reduced the Company's plant,
property and equipment account by $19.5 million, consisting of $22.5 million
for the cost of the attaching equipment and $3.1 million for the related
accumulated depreciation. The increase to fair market value over the amount of
the purchase price originally allocated to the attaching equipment was
recorded as a reduction of goodwill recorded in the Kohlberg Acquisition. See
Note 9 to the audited financial statements. Proceeds from the Synthetic Lease
were used to repay a term loan under the Existing Credit Facility. The
Synthetic Lease was terminated, and the equipment subject thereto repurchased,
in connection with the Transactions. See "The Transactions" and "Pro Forma
Consolidated Financial Statements." The Company
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entered into the Synthetic Lease transaction to benefit from the increased
short-term liquidity resulting from the proceeds of the sale of the equipment.
The Company decided to terminate the Synthetic Lease because it determined
that the Synthetic Lease would be inconsistent with its global expansion
strategy, which may call for the Company, in certain cases, to sell its
attaching machines (rather than lease them). In addition, rental payments
under the Synthetic Lease were greater than amortization payments on the Term
Loan (proceeds of which were used to repurchase the equipment subject to the
Synthetic Lease).
On October 17, 1995 ("Inception"), Fasteners was acquired by KSCO, which was
organized by Kohlberg & Co. for the purpose of acquiring the capital stock of
Fasteners. The Kohlberg Acquisition was accounted for using the purchase
method of accounting. Financial information for periods prior to October 18,
1995 are for Fasteners when it was a wholly owned subsidiary of Alper Holdings
USA, Inc. ("Predecessor-Alper"). The Kohlberg Acquisition and the related
application of purchase accounting resulted in changes to the capital
structure of the Predecessor and the historical basis of various assets and
liabilities. The effect of such changes significantly impairs the
comparability of the financial position and results of operations of
Predecessor-Alper and Predecessor-KSCO. The results of operations of
Predecessor-Alper and Predecessor-KSCO have been combined for purposes of
discussion of the results of operations for fiscal year 1995.
RESULTS OF OPERATIONS
The table below sets forth certain items in the statement of operations
expressed as a percentage of net sales for the periods indicated.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER
YEAR ENDED DECEMBER 31, 30,
------------------------- ------------
1994 1995 1996 1996 1997
------- ------- ------- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales............................. 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit.......................... 28.1 25.3 29.5 28.0 27.7
Selling, general and administrative
expenses............................. 16.1 14.5 18.6 18.2 15.9
Operating income...................... 11.4 9.9 8.1 6.8 9.0
Interest expense...................... 7.8 6.6 6.5 6.9 3.7
Income tax provision.................. 1.0 0.2 1.0 0.4 2.2
Net income (loss)..................... 3.6 1.9 (0.9) (2.0) 2.6
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1996
Net Sales. Net sales increased $3.7 million, or 5.3%, from $69.8 million to
$73.5 million. The increase of $1.9 million, or 2.7%, was attributable, in
part, to receipt of revenues from the former Rau and PCI operations for a full
nine months in 1997, compared to approximately eight months of revenues in
1996, measured from the dates of acquisition. Strong jeans and denimwear
orders also contributed $1.7 million, or 2.4%, of additional overall Apparel
Group sales. The Company's international subsidiaries also experienced
increased sales, resulting from the acquisition of Daude. These increases were
partially offset by initial sales declines resulting from customer concerns
relating to publicized workforce unrest due to the relocation of the PCI
operations from Bedford, Massachusetts to Clarkesville, Georgia during the
latter part of 1996. The PCI facility in New Bedford was closed in November
1996. Employees of this facility who were not relocated or chose not to be
relocated received severance and other benefits subject to the shutdown
agreement negotiated between the labor union representing the employees and
the Company. PCI no longer has any employees in New Bedford.
Gross Profit. Gross profit increased $0.8 million, or 4.2%, from $19.5
million to $20.4 million. Gross margin decreased from 28.0% to 27.7%. The cost
of goods sold in 1997 includes rental expense of $1.1 million related to the
Synthetic Lease. Without the effect of the Synthetic Lease transaction, gross
profit would have increased by $1.1 million to $21.5 million, and gross margin
would have increased to 29.3%, of which $0.8 million resulted primarily from
the Company's relocation and integration of operations from the Rau, PCI and
Daude acquisitions during 1996. In the case of the Rau and PCI integrations,
additional manufacturing volume at the Clarkesville facility absorbed a
greater portion of fixed costs.
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<PAGE>
Selling, General and Administrative Expenses. SG&A decreased $1.0 million,
or 8.1%, from $12.7 million to $11.7 million. The decrease was primarily
attributable to reductions, in late 1996, in the number of salespeople after
integration of the Rau and PCI operations and the related decrease in travel,
advertising and commission expenses. SG&A was 15.9% of net sales for the first
nine months of 1997 compared to 18.2% for the comparable period in 1996.
Operating Income. Operating income increased $1.9 million, or 39.7%, from
$4.8 million to $6.6 million. The increase attributable to acquisitions was
$1.8 million stemming from SG&A reductions and increased volume.
Interest Expense. Interest expense decreased $2.2 million, or 44.3%, from
$4.8 million to $2.7 million. This decrease was attributable to the repayment
of indebtedness with proceeds from the Synthetic Lease.
Income Tax Provision. The provision for income taxes was $1.6 million in
1997 compared to $0.3 million for 1996.
Net Income. Net income for the first nine months of 1997 was $1.9 million
compared to a loss of $1.4 million in 1996, of which loss $1.0 million was
attributable to the Synthetic Lease Charge. The remaining impact was
attributable to the factors discussed above.
FISCAL YEAR 1996 COMPARED WITH FISCAL YEAR 1995 (COMBINED PREDECESSOR-KSCO
AND PREDECESSOR-ALPER)
Net Sales. Net sales increased $25.2 million, or 38.0%, from $66.4 million
to $91.6 million. This increase was primarily attributable to increased sales
volume as a result of the 1996 acquisitions of Rau, PCI and Daude. The Rau
acquisition increased revenues in both apparel and industrial fasteners. The
PCI acquisition was a product line extension that increased industrial
fastener sales. Finally, the Daude acquisition, also a product line extension
in Europe, increased the Company's European sales.
Gross Profit. Gross profit increased $10.2 million, or 61.1%, from $16.8
million to $27.0 million. Gross margin increased from 25.3% to 29.5%. The
increases in gross profit and margin were primarily the result of the
Company's acquisitions in early 1996. The Rau and Daude facilities were
operated until April 1996 and June 1996, respectively, when operations from
the Rau facility were relocated to the Company's main manufacturing facility
in Clarkesville and the Daude operations were relocated to the Company's
facility in Belgium. The PCI facility was operated through October 1996. To a
lesser extent, the Company's increases in gross profit reflected absorption of
a greater percentage of fixed costs at the Clarkesville facility as a result
of relocating the acquired operations.
Selling, General and Administrative Expenses. SG&A increased $7.4 million,
or 76.7%, from $9.6 million to $17.1 million. The increase was a result of the
addition of administrative and selling personnel from the acquired companies.
SG&A was 18.6% of net sales for 1996 compared to 14.5% for 1995. This increase
was due to the expenses related to duplicate functions and administrative
operations of the acquired businesses prior to their integration into the
Company's existing operations.
Operating Income. Predecessor-KSCO's operating income for 1996 was $7.4
million compared with Predecessor-KSCO's $1.4 million for the period from
Inception (October 17, 1995) to December 31, 1995, or $6.6 million on an
annualized basis. The increase was attributable to the Company's acquisitions
and increased sales volume.
Interest Expense. Predecessor-KSCO's interest expense for 1996 was $6.0
million compared with Predecessor-KSCO's $0.9 million for the period from
Inception (October 17, 1995) to December 31, 1995, or $4.3 million on an
annualized basis. This increase was primarily attributable to the additional
debt incurred under the Existing Credit Facility in January 1996 in connection
with the Rau and PCI acquisitions.
Income Tax Provision. Predecessor-KSCO's income tax provision for 1996 was
$0.9 million compared with Predecessor-KSCO's $0.2 million for the period from
Inception (October 17, 1995) to December 31, 1995, or $0.8 million on an
annualized basis.
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<PAGE>
Net Income. Predecessor-KSCO's net loss for 1996 was 0.9 million (of which
$0.9 million was attributable to an extraordinary item related to the
extinguishment of debt in connection with the Rau and PCI acquisitions)
compared with Predecessor-KSCO's net income of $0.1 million for the period
from Inception (October 17, 1995) to December 31, 1995, or $0.6 million on an
annualized basis.
FISCAL YEAR 1995 (COMBINED PREDECESSOR-KSCO AND PREDECESSOR-ALPER) COMPARED
WITH FISCAL YEAR 1994 (PREDECESSOR-ALPER)
Net Sales. Net sales increased $1.0 million, or 1.5%, from $65.4 million to
$66.4 million. A $2.2 million, or 3.3%, increase in net sales from continuing
business lines was primarily attributable to increased sales of DOT and
plastic products, offset by reduced sales from the Company's discontinued
zipper product line.
Gross Profit. Gross profit decreased $1.6 million, or 8.7%, from $18.4
million to $16.8 million. Gross margin decreased from 28.1% to 25.3%. The
decreases in gross profit and margin were primarily the result of underlying
raw material cost increases. The Company's primary raw material, brass, and
its components, copper and zinc, are subject to cost variations. See "Risk
Factors -- Raw Materials." These increases were partially offset by a
reduction of manufacturing costs as a result of management's continued cost
control efforts initiated in 1994. See "-- Hedging Activities."
Selling, General and Administrative Expenses. SG&A decreased $0.9 million,
or 8.4%, from $10.5 million to $9.6 million. The decrease was a result of the
cost reduction activities initiated by management and management incentive
payments in 1994 that were not paid in 1995. SG&A was 14.5% of net sales for
1995 compared to 16.1% for 1994.
Operating Income. Predecessor-Alper's operating income for the period from
January 1, 1995 to October 17, 1995 was $5.2 million, or $6.6 million on an
annualized basis, compared with Predecessor-Alper's $7.4 million for 1994. The
decrease was attributable to increased raw material prices. The decrease was
offset by reduced manufacturing costs and SG&A.
Interest Expense. Predecessor-Alper's interest expense for the period from
January 1, 1995 to October 17, 1995 was $3.5 million, or $4.4 million on an
annualized basis, compared with Predecessor-Alper's $5.1 million for 1994. The
decrease was attributable to a renegotiated credit agreement with an affiliate
during 1994, which resulted in a significantly lower interest rate.
Income Tax Provision. Predecessor-Alper's income tax provision for the
period from January 1, 1995 to October 17, 1995 was $0 compared with
Predecessor-Alper's $0.6 million for 1994.
Net Income. Predecessor-Alper's net income for the period from January 1,
1995 to October 17, 1995 was $1.2 million, or $1.5 million on an annualized
basis, compared with Predecessor-Alper's $2.3 million for 1994. The decrease
was attributable to the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company derived its cash from funds generated by
operations and from third-party financings, including the Existing Credit
Facility. As of September 30, 1997, $11.9 million was outstanding under the
revolving line of credit available under the Existing Credit Facility. After
the Transactions, the Company's liquidity requirements will consist primarily
of scheduled payments of principal and interest on its indebtedness, working
capital needs and capital expenditures. After consummation of the
Transactions, the Company believes that its operating cash flow, together with
borrowings under the New Credit Facility, will be sufficient to meet its
operating expenses and capital requirements, and its debt service requirements
through 1998.
Capital Expenditures
The Company's capital expenditures during the first nine months of 1997
aggregated approximately $4.1 million and are not expected to exceed $6.0
million for 1997. Such expenditures were primarily for reconditioning and
purchases of attaching machines and plant machinery and equipment. Capital
expenditures for 1998 and 1999 are expected to be less than $5.0 million per
year.
Cash Flows
Net cash provided in the Company's operating activities was $2.5 million for
the first nine months of 1997. Principal working capital changes included
increases of $2.6 million and $2.4 million in accounts receivable and
inventory, respectively. The Company's cash used in investing activities
during the first nine months of 1997 related principally to capital
expenditures. Net cash provided by financing activities was $2.2 million,
reflecting $2.5 million in borrowings under the Existing Credit Facility
offset by $0.3 million in long-term debt payments.
46
<PAGE>
Net cash used by the Company's operations in 1996 was $1.4 million.
Principal working capital changes included a $6.2 million increase in
inventory, a $4.0 million decrease in accrued liabilities and a $3.0 million
increase in accounts payable. The Company's cash used in investing activities
during 1996 was $28.7 million, of which $25.3 million related to the Rau and
PCI acquisitions, including acquisition costs. Additionally, the Company had
capital expenditures of $5.7 million. Net cash provided by financing
activities was $30.3 million, reflecting a net decrease in borrowings under
the Existing Credit Facility of $5.0 million, $31.3 million in proceeds from
the Synthetic Lease transaction and $4.0 million related to the issuance of
common stock.
The Indenture and the New Credit Facility will place significant
restrictions on the Company's ability to incur additional indebtedness, pay
dividends or repurchase stock or make other distributions, create liens, make
certain investments, sell assets, or enter into mergers or consolidations. See
"Description of Notes," "Description of Other Indebtedness" and "Risk
Factors--Substantial Leverage; Restrictive Covenants."
Impact of the Transactions
The Transactions had a material impact on the Company's financial condition
and will have a material impact on the Company's results of operations and
cash flows. The Transactions resulted in the Company's consolidated total
long-term debt increasing from $40.1 million (excluding off-balance sheet
financing pursuant to the Synthetic Lease of $31.3 million) to $130.3 million
and its stockholders' equity increasing from $22.8 million to $41.6 million.
The increased debt will result in increased interest expense. Scheduled debt
repayments are $1.0 million in 1998, $3.0 million in 1999, $5.0 million in
2000, $6.0 million in 2001, $6.0 million in 2002 and $107.0 million (including
the Notes) thereafter.
In addition, the Acquisition was reflected using purchase accounting, with
the excess of the purchase price over the fair value of the Company's
identifiable net assets (such excess initially estimated at $81.6 million)
being classified as goodwill. Therefore, the amortization expense of the
Company is significantly higher than the amortization expense of Predecessor-
KSCO.
INFLATION
Inflation had a nominal impact on operations during the last three years.
Increases in operating costs were consistent with the general inflation rate
and were offset by management cost control measures and productivity
improvements.
HEDGING ACTIVITIES
Since late 1995, the Company has entered into certain hedging transactions
regarding its raw material purchases. The Company regularly purchases copper
and zinc call and put options that are regularly traded on exchanges. These
transactions (commonly referred to as "Bull Spreads") attempt to effectively
ensure maximum and minimum net purchase costs. At September 30, 1997, the
Company had outstanding (i) call options covering 2,250,000 pounds of copper,
expiring from January through July 1998 with exercise prices ranging from
$0.91 to $1.08 per pound, and (ii) put obligations covering 2,675,000 pounds
of copper, expiring from January through July 1998 with exercise prices
ranging from $0.81 to $1.00 per pound. At September 30, 1997, the Company also
had outstanding (i) call options covering 1,775,000 pounds of zinc, expiring
from October 1997 through December 1998 with exercise prices ranging from
$0.57 to $0.61 per pound, and (ii) put obligations covering 1,775,000 pounds
of zinc, expiring from October 1997 through December 1998 with exercise prices
ranging from $0.52 to $0.57 per pound. At September 30, 1997, the fair market
value of the outstanding copper and zinc put and call options was $38,000. For
the year ended December 31, 1996 and the nine months ended September 30, 1997,
hedging activities resulted in trading gains (reflected in reductions to cost
of sales) of $69,000 and $258,000.
See "Business--Raw Materials" and Note 2 to the audited financial
statements.
47
<PAGE>
YEAR 2000
The Company is modifying its computer systems to accurately process
information that includes the year 2000 date and beyond (the "Year 2000
Project"). Pursuant to current accounting rules, the cost of the Year 2000
Project must be expensed as incurred. The Company believes that future costs
of the Year 2000 Project, expected to be incurred largely in 1998, will not
have a material impact on the Company's results of operations, financial
position or cash flows.
ACQUISITIONS
The Company intends to pursue attractive acquisition opportunities that
provide products and services that complement those currently offered by the
Company. Depending upon the nature, size and timing of future acquisitions,
the Company may be required to raise additional financing. The Company expects
that a substantial portion of the financing of any acquisition would be
additional indebtedness. Additional indebtedness incurred to finance
acquisitions could adversely affect the Company's liquidity and financial
condition. There can be no assurance that the New Credit Facility, the
Indenture or any other loan agreements to which the Company may become a party
or subject to will permit such additional financing or that such additional
financing will be available to the Company on terms acceptable to its
management or at all. See "Business--Business Strategy." The timing, size or
success of any acquisition effort and the associated potential capital
commitments are currently not known. While there can be no assurance, based on
current facts and circumstances, management believes it has adequate cash
flows and financing alternatives to fund its current operations and to
implement its acquisition strategy.
ACCOUNTING STANDARDS
In 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS 130") and Statement of Financial
Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and
Related Information" ("SFAS 131"). SFAS 130 establishes standards to measure
all changes in equity that result from transactions and other economic events
other than transactions with owners. Comprehensive income is the total of net
income and all other nonowner changes in equity. SFAS 131 introduces a new
segment reporting model called the "management approach." The management
approach is based on the manner in which management organizes segments within
a company for making operating decisions and assessing performance. The
management approach replaces the notion of industry and geographic segments.
The Company will adopt SFAS 130 and SFAS 131 in fiscal year 1998. Management
believes adoption of SFAS 130 and SFAS 131 will not significantly affect the
Company's financial position or results of operations. The adoption of SFAS
131 will affect presentation of the Company's operating results within the
footnotes of the financial statements.
48
<PAGE>
BUSINESS
The Company, whose business has been in continuous operation since 1802, is
a leading designer, manufacturer and distributor of apparel fasteners and
specialty industrial fasteners. The Scovill name is the oldest and one of the
most well-known brands in the fasteners industry. In the twelve-month period
ended September 30, 1997, the Company sold more than 10 billion fastener units
worldwide. The Company has achieved and maintained its reputation by offering
its customers an integrated system of high quality fasteners, proprietary
attaching machines, technical service, on-site maintenance and customized
applications and design services tailored to individual customer needs.
The Company has two main product groups: the Apparel Group and the
Industrial Group. The Apparel Group, through its Gripper and DuraMark brands,
produces snaps, tack buttons, rivets, burrs and other snap fastener products
used in numerous apparel applications. The Company's customers and end-users
include many leading apparel design and manufacturing companies, including
Wrangler, OshKosh B'Gosh, Gerber Childrenswear, William Carter Company, Tommy
Hilfiger, Polo Ralph Lauren, Liz Claiborne and L.L. Bean. The Company believes
that it supplies the majority of the snap fasteners sold to U.S. infantswear
and childrenswear manufacturers and a substantial portion of the snap
fasteners sold to U.S. apparel manufacturers.
The Industrial Group, primarily through its DOT and PCI product lines,
produces specialty industrial fasteners including large snaps, windshield
clips, turn buttons, eyelets, grommets, screw studs, gypsy studs and other
specialty fasteners. These products are used in a broad range of industries,
including marine textile, automotive, aerospace, military, medical/surgical
products, luggage, leather goods, electronic equipment, sporting and
recreational goods and consumer batteries. The end-users of the Company's
products include a wide variety of companies, including Ford, Boeing, Baxter,
Samsonite, U.S. Marine for its Bayliner Boats, Johnston & Murphy, Eveready
Battery, Riddell for its football helmets and the U.S. Army. The Company
believes that it sells a significant portion of the specialty industrial
fasteners sold in the product markets in which it competes.
Scovill Acquisition Inc. and Scovill Holdings Inc. were organized as
Delaware corporations in October and November 1997, respectively, in
connection with the Acquisition. KSCO Acquisition Corporation was organized as
a Delaware corporation in August 1995. Scovill Fasteners Inc., a Delaware
corporation, was incorporated in 1985 as the successor to the business
operated by the fasteners division of Scovill Inc. The Company's executive
offices are located at 1802 Scovill Drive, Clarkesville, Georgia 30523, and
its telephone number is (706) 754-4181.
COMPETITIVE STRENGTHS
The Company attributes its historical success and significant opportunities
for continued growth to the following competitive strengths:
Leading Market Position. The Company is the oldest and most established
manufacturer of a variety of apparel and specialty industrial fasteners in the
United States. The Company's fasteners have been used in many products
throughout its history, from U.S. military uniforms since the War of 1812 to
the flight suits worn by NASA shuttle astronauts. The Company's reputation for
high quality and its well-known brand names, including Scovill, Gripper and
DOT, make it a leading presence in domestic markets and provide it with a
platform for enhanced global expansion. The Company believes that it supplies
the majority of the snap fasteners sold to U.S. infantswear manufacturers, a
substantial portion of the snap fasteners sold to U.S. apparel manufacturers
generally and a significant portion of the specialty industrial fasteners sold
in the product markets in which it competes.
"Total System" Approach. In addition to manufacturing and distributing
fasteners to its customers, the Company also leases approximately 8,000
proprietary attaching machines to attach its products to those of its
customers, primarily in the apparel industry. The Company's large size enables
it to (i) employ what the Company believes to be the industry's only existing
dedicated field service force that provides on-site
49
<PAGE>
maintenance, which minimizes equipment down-time, (ii) have ready access,
through its servicing relationships, to its customers' facilities, providing
the Company with opportunities to cross-sell products and to test new fastener
machinery, (iii) continue to develop next-generation attaching machines, such
as the new Gemini system, which has lower manufacturing and maintenance costs
and improved fastener application flexibility and attaching speed, and (iv)
maintain an applications development and design lab that enables customers to
outsource design functions to the Company. The Company's "total system"
approach enables it to compete based on its ability to decrease its customers'
costs and improve the quality of their products, rather than on the unit price
of the Company's fasteners.
Large Installed Base of Attaching Machines. The Company has the industry's
largest installed base of attaching machines in the United States, which
enables it to generate a recurring stream of cash flow from high volume sales
of fasteners. These machines are designed to be used only with the Company's
fasteners. The Company believes that customers are reluctant to switch to
other manufacturers in order to avoid the costs associated with retraining
personnel, reduced productivity and the business interruption that results
from the need to replace an entire network of machines in a plant or a
production line in order to maintain the compatibility of the network. The
Company has been able to maintain a high level of customer retention. In 1996,
approximately 99% of all of its attaching machine leases were renewed.
Broad Customer Base and Product Line. The Company's customers include many
large and well-known apparel and industrial manufacturing companies. The
Company is a leading supplier for private-label infantswear sold at Kmart,
Wal*Mart, Target and Sears stores. In 1997, no single customer accounted for
more than 7% of the Company's total net sales, and the Company's 10 largest
customers accounted for approximately 28% of the Company's total net sales.
The Company's broad line of products for apparel and specialty industrial use
reduces its exposure to any one customer segment and to fashion trends.
Reputation for High Quality. The Company has built its reputation by
producing high quality products designed and manufactured to precise
specifications. The Company has developed many of the safety standards for
infantswear adopted by the American Society of Testing Methods (the "ASTM"),
and the Company's senior quality manager is currently chairman of the ASTM
subcommittee responsible for establishing testing methodologies for the
apparel fastener industry. These methodologies provide the basis for
determining compliance with requirements for apparel set by the Consumer
Products Safety Commission.
Experienced Management Team. The Company's senior management team has an
average of over 15 years of experience in the fastener industry. Since its
formation in 1992, the management team has delivered significant revenue and
EBITDA improvements by successfully reorganizing the business and positioning
the Company for growth. Management has achieved these results by rationalizing
existing operations, exiting an unprofitable product line and integrating
domestic and international acquisitions. This team has successfully
identified, integrated and consolidated three significant acquisitions since
1992 and established a platform for international growth. Senior management
rolled over an aggregate of $3.3 million of their stock options in KSCO in
equity for Parent, representing approximately one-half of the proceeds they
would have received in the Acquisition.
BUSINESS STRATEGY
The Company seeks to enhance its competitive position while increasing its
net sales and operating cash flow by continuing to implement the following
components of its business strategy:
Continue to Strengthen Customer Relationships. The Company intends to
continue to distinguish itself from competitors as a full-service provider.
The Company will continue to foster long-term partnerships with its customers
by providing a broad range of high quality products, consistent delivery
performance, comprehensive product support, efficient attaching machinery and
dedicated field service. The introduction of the Gemini attaching machine,
which accommodates rapid and cost-efficient switching of fastener types and is
designed to address ergonomic concerns, illustrates the Company's commitment
to customer service. The Company also continues to develop and implement
value-added services, such as specialized billing and delivery systems.
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<PAGE>
Reduce Customers' CPAF. The Company intends to develop new means to continue
its commitment to lower its customers' cost per attached fastener ("CPAF").
Customers incur significant costs beyond the unit price of fasteners; an
individual fastener typically represents only 10% of an average customer's
CPAF. CPAF is also a function of factors such as attaching speed, production
errors, equipment downtime due to changeover and maintenance and the attaching
machinery lease expense or cost. The Company's "total system" approach and its
focus on CPAF are designed to reduce the remaining costs associated with the
attaching of its fasteners.
Seek Higher Margin Specialty Applications. The Company intends to take
advantage of its diverse and flexible manufacturing capabilities to enhance
its line of specialty applications, which offers higher margins. Examples of
specialty applications are stainless steel buckles for football, hockey and
cycling helmets; engineered eyelets for consumer electronics; and male/female
connectors for batteries. The Company intends to develop new applications for
current products, engineer new products and re-engineer those products
obtained through acquisitions. Unlike smaller manufacturers, the Company
possesses its own tooling, stamping, plating and finishing equipment and,
therefore, can develop specialty applications without significant capital
expenditures.
Strengthen "Retail Pull." The Company seeks to have large retailers specify
the use of the Company's products in their private label apparel lines. The
Company has been designated as the sole or preferred fastener supplier for the
private-label infantswear manufactured for and sold by Wal*Mart, Kmart, Target
and Sears. Additionally, the Company's reputation for high quality and
consumer awareness has led to Kmart's joint branding on garment tags to
highlight the names of Scovill and Klikit, a Gripper brand. The Company
intends to expand its international opportunities by leveraging existing
relationships with customers that move sourcing abroad and by expanding its
distribution channels overseas to better serve them. The Company believes that
the high quality of its products, its "total system" approach and its Asian
distribution channels enhance the Company's ability to effect this strategy.
Leverage Existing Manufacturing Base. The Company intends to continue to
leverage its existing manufacturing base by incrementally expanding the
capacity of the Clarkesville facility. By optimizing its operations, adding
shifts and outsourcing particular activities, the Company believes that it can
significantly increase the output of the Clarkesville facility with limited
capital expenditures. Through the addition of increased revenue at minimal
incremental fixed costs, the Company has been able to increase EBITDA margins.
The Company expects to increase revenue through new product development and
tuck-in acquisitions, such as the 1996 acquisitions of Rau Fastener Company,
L.L.C. ("Rau") and PCI Group, Inc. ("PCI"), whose operations were consolidated
into the Company's Clarkesville, Georgia facility.
Pursue Attractive Acquisition Opportunities. The Company will continue to
evaluate opportunities to expand its sales and product offerings through
smaller, easily integrated domestic add-on acquisitions. The Company may also
explore larger international acquisitions, primarily in Europe and Asia. The
criteria for identifying attractive acquisition candidates include (i) revenue
potential, (ii) increases in manufacturing, production and other cost
efficiencies and (iii) diversification and expansion of the Company's product
lines and customer base.
PRODUCT OVERVIEW
Recognizing the opportunity to improve production while enhancing the
services provided to customers, the Company has divided its operations into
two main product groups: the Apparel Group and the Industrial Group. Creating
both groups has provided the Company with several distinct advantages over
competitors. First, because each group services different customers, each
possesses a greater appreciation for the needs and specifications of
particular customers. Second, division into groups provides for better
management of working capital. Third, in focusing on their individual customer
segments, each group improves the delivery and quality of the products and
services it provides.
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The following table sets forth, for the periods specified, the net sales and
the percentage of total net sales contributed by each product category
(dollars in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------- ------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Total net sales......... $67,352 $65,066 $65,428 $66,388 $91,632 $ 69,796 $ 73,466
Apparel Group
Net sales............. $44,437 $43,964 $45,536 $46,309 $48,258 $ 36,683 $ 40,135
% of total net sales.. 66.0% 67.6% 69.6% 69.8% 52.7% 52.6% 54.6%
Industrial Group(1)
Net sales............. $16,596 $16,117 $14,175 $14,924 $19,747 $ 13,386 $ 21,987
% of total net sales.. 24.6% 24.8% 21.7% 22.5% 21.6% 19.2% 29.9%
Other(2)
Net sales............. $ 6,319 $ 4,985 $ 5,717 $ 5,155 $23,627 $ 19,727 $ 11,344
% of total net sales.. 9.4% 7.7% 8.7% 7.8% 25.8% 28.3% 15.4%
</TABLE>
- --------
(1) Includes all Canadian operations.
(2) Includes (a) European operations, (b) the zipper product line, which was
discontinued in 1995, and (c) Rau and PCI prior to their integration in
April and October 1996, respectively, into the Clarkesville facility.
Amounts also include Scovill Europe subsequent to the Rau and Daude
acquisitions in January and March 1996.
APPAREL GROUP
Industry Overview
The apparel snap fastener market includes snap fasteners, tack buttons,
rivets and burrs and excludes other apparel devices such as zippers, buttons
and Velcro. The primary customers for apparel snap fasteners are manufacturers
of basic garments such as jeans, infantswear, childrenswear and outerwear.
Demand for apparel snap fasteners is related to apparel industry trends
generally, which, in turn, are affected by demographics. The production of
each category of apparel depends upon population trends and consumer spending
in each apparel category. According to U.S. Department of Commerce estimates,
the value of domestic shipments of apparel and other finished textiles has
averaged over 4% growth per year since 1976. During that time, the domestic
apparel industry has exhibited low cyclicality, with the value of such
shipments having increased in all but two years. In foreign markets, the
Company believes expected population growth over the next several years and
improved standards of living will result in increased apparel sales abroad.
[CHART OF MANUFACTURERS' SHIPMENT OF APPAREL/OTHER FINISHED TEXTILES]
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Despite improvements in technology, manufacturing processes in the apparel
industry are still quite labor-intensive. Because labor is such a significant
cost component in apparel manufacturing, manufacturers in low-wage, developing
countries enjoy a cost advantage over U.S. manufacturers. In response, many
U.S. companies have been shifting assembly operations to low-wage countries or
turning to foreign-based contractors in an effort to lower their production
costs. As a result, some export growth has consisted of shipments of garment
parts for assembly abroad and subsequent re-importation into the United
States. The Company has been able to follow a large portion of its customers
production abroad, as evidenced by its more than 2,500 attaching machines
located outside of the United States. In addition, in marketing to national
accounts such as Sears, The Gap, and Wal*Mart, the Company will continue to
implement its "retail pull" strategy by leveraging relationships with
customers that move sourcing abroad and expanding its distribution channels
overseas to better serve them.
Product Lines
The Company's Apparel Group is composed of three main product lines:
Gripper, DuraMark and Attaching Machines. The following table sets forth, for
the periods indicated, the net sales and percentage of the Company's total net
sales contributed by each product line (dollars in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
-------------------- -------------------- --------------------
% OF TOTAL % OF TOTAL % OF TOTAL
NET SALES NET SALES NET SALES NET SALES NET SALES NET SALES
--------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Gripper................. $19,683 30.1% $19,599 29.5% $20,734 22.6%
DuraMark................ 21,416 32.7 21,581 32.5 22,296 24.3
Attaching Machines...... 4,437 6.8 5,129 7.8 5,228 5.7
------- ---- ------- ---- ------- ----
Total................. $45,536 69.6% $46,309 69.8% $48,258 52.7%
======= ==== ======= ==== ======= ====
</TABLE>
The Apparel Group serves six apparel market segments: infantswear,
childrenswear, jeans, workwear, leisurewear/fashion and disposables. The
Company competes in the apparel fastener markets in the Americas, Asia, the
Pacific Rim and Europe.
The Company has remained a leader in the apparel market through the
manufacture and sale of its Gripper product line, which consists of a variety
of fasteners such as ring sockets, segmented sockets, short and long prongs
and western pearls. In addition, the Company has become a market leader
through its growing DuraMark product line, which consists of large snap
fasteners, tack buttons, rivets and burrs. Through its "total system"
approach, the Company leases approximately 8,000 attaching machines so that
customers may attach the apparel fasteners to their apparel products. When
viewed together, the Apparel Group's product offerings, attaching machines and
support services have enabled the Company to provide a comprehensive fastener
system that improves customer product quality and lowers customers' product
costs.
The Company, in connection with its distributor in Asia, Acotex, seeks to
increase distribution capacity in China and other countries in Asia.
Management believes this expansion will allow the Company to maintain its
customer base as U.S. manufacturers, seeking to reduce costs, seek sources for
their products outside the United States. The Company utilizes a "retail pull"
strategy, whereby it seeks to have large retailers specify the use of the
Company's products in their private label apparel lines. The Apparel Group
also seeks to increase its customer base through the deployment of its new
Gemini attaching machine. The ergonomically designed Gemini machine provides
customers with high speed attaching capability and the ability to change types
quickly and efficiently, through interchangeable hopper and feed units, a
feature which most competitors' machines lack.
Gripper. Gripper is a type of snap fastener with a stud-and-socket design
that was trademarked by the Company in 1937. The Gripper trademark is so
widely recognized that it effectively defines this type of snap fastener.
Although Gripper is a versatile snap fastener that can be used on almost any
type of garment, it is most commonly used with infantswear, toddler clothing,
workwear, uniforms, western-style shirts and womenswear. The Company sells
Gripper fasteners to some of the most widely recognized brand names in the
infantswear and
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childrenswear industry, including OshKosh B'Gosh, William Carter and Gerber
Childrenswear. In addition to apparel applications, Gripper fasteners are used
in toys, wallets and a variety of other accessories.
The Rau acquisition has allowed the Company to increase its Gripper sales,
as Gripper fasteners are now marketed to Rau's Klikit customers. The Company
intends to reposition Klikit as the premium brand in the Gripper product line.
In certain applications, Klikit's ring-socket design provides a competitive
advantage against segmented-socket styles. The Company is the only significant
manufacturer of small ring-socket fasteners that are designed to high
performance specifications. The Gripper product line generally provides higher
profit margins than other products in the Apparel Group.
DuraMark. The DuraMark product line includes large snap fasteners and tack
buttons, rivets and burrs made from brass, steel, aluminum, zinc and copper.
Large snap fasteners differ from Gripper fasteners in that they are based on a
ring-socket design rather than the segmented-socket design used in Gripper
fasteners. The Company's large snap fasteners are marketed under their trade
names: Mighty-Snap and Maxi-Snap. Mighty Snap and Maxi-Snap fasteners are
generally larger than Gripper fasteners and are normally used in apparel-
related applications where greater strength is required, such as outerwear
garments. Some of the Company's customers for these snap fasteners include
such well-known names as OshKosh B'Gosh, Wrangler and Land's End.
Tack buttons are most commonly used as the waist-fastening button above the
zipper on jeans or other types of pants. Tack buttons derive their name from
the fact that they are attached to the garment from the back with a tack,
rather than being sewn to the garment. Rivets and burrs are generally sold in
tandem with tack buttons for reinforcement in stressed areas of heavy clothing
such as jeans. In addition to being functional, tack buttons, rivets and burrs
typically serve decorative functions. Accordingly, they have matching finishes
and designs. They are produced in numerous sizes and colors and typically
include a customer brand logo. Certain of the brand names which use the
Company's tack buttons, rivets and burrs include Wrangler, Polo Ralph Lauren,
The Gap and Arizona Jean.
Attaching Machine Leases. The Company leases to its customers, pursuant to
short-term lease agreements (generally one year, subject to renewal, with a
60-day notice clause), approximately 8,000 attaching machines, which are used
at customer locations to attach its products. The reliability and efficiency
of the Company's attaching machinery, which include patented components, have
proven to be key factors in maintaining a stable base of apparel fastener
sales. The Company has the industry's largest installed base of attaching
machines in the United States, which enables it to generate a recurring stream
of cash flow from high volume sales of fasteners. These machines are designed
to be used only with the Company's fasteners. The Company believes that
customers are reluctant to switch to other manufacturers in order to avoid the
costs associated with retraining personnel, reduced productivity and the
business interruption that results from the need to replace an entire network
of machines in a plant or a production line in order to maintain the
compatibility of the network. Accordingly, the Company has been able to
maintain a high level of customer retention. In 1996, approximately 99% of all
of its attaching machine leases were renewed.
The attaching machines are used primarily for apparel products. They are
used less frequently for industrial products because attaching machines are
better suited for high volume, non-bulky items that can be readily fed through
the guides at the point of attachment. Many industrial fasteners are attached
by hand or as part of another manufacturing process.
The Company supplies its customers with three core models of apparel
fastener attaching machinery that can be customized to customers'
specifications through the addition of auxiliary attachments. The Company
designed these machines and historically contracted to have them manufactured
and serviced in Connecticut. However, the assembly and reconditioning of these
machines have recently been moved to the Clarkesville facility in order to
improve control and reduce servicing costs.
The Company recently introduced a new line of attaching machines--the
Gemini. Gemini attaching machines permit an operator to change styles and
types of fasteners within minutes. The Gemini model is ergonomically designed,
has fewer moving/wear parts, and costs less to assemble when compared to
conventional attaching machines. The Company intends to selectively market
this line of machines to jeans and denimwear manufacturers as a means to gain
new customers.
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<PAGE>
The following table sets forth the Company's active attaching machine base
as of September 30, 1997:
<TABLE>
<CAPTION>
NUMBER % OF TOTAL
------ ----------
<S> <C> <C>
United States............................................ 5,484 68.6%
Canada................................................... 912 11.4
Caribbean................................................ 515 6.4
Mexico................................................... 330 4.1
Central America.......................................... 247 3.1
Belgium.................................................. 231 2.9
Other Europe............................................. 126 1.6
South America............................................ 56 0.7
Asia..................................................... 9 0.1
Other.................................................... 82 1.1
----- -----
Total.................................................. 7,992 100.0%
===== =====
</TABLE>
Typically, as part of the leasing arrangements, the Company's field
technicians provide on-site maintenance services with guaranteed 24-hour
response time (primarily in the Americas). Some customers perform the
maintenance themselves with Company-trained personnel. When machines require
more comprehensive reconditioning services, they are sent to the in-house
reconditioning center in Clarkesville. The Company has dedicated facilities
and employees through which the Company has lowered the reconditioning cost
component of capital expenditures. Not only has the Company achieved
significant cost savings per machine, but the Company also expects in-house
servicing to reduce the overall number of machines requiring reconditioning
through better administration of this process. This approach is also expected
to further improve communications and coordination between the Company's
manufacturing and field service operations and lead to shorter reconditioning
turnaround times. See "--Marketing and Sales."
INDUSTRIAL GROUP
Industry Overview
The industrial fastener market serves a wide range of manufacturers,
including those in the marine textiles, automotive, aerospace, military,
medical/surgical products, electronic equipment, sporting goods and consumer
battery industries. Growth in this market is influenced by both the economy
generally and consumer purchases of electronics, automobiles, housing and
footwear. The industrial fastener market is large and highly fragmented. The
market is comprised of a variety of niche segments with specialized customers,
competitors and products in which the Company generally earns higher margins
than it does in the apparel market. The Company estimates that the market
segments in which it currently competes constitute less than 10% of the
overall market. The Company believes that there is no dominant manufacturer
that competes in all of its markets, and the Company intends to broaden its
participation through new products and product line extensions.
The markets the Company serves with its DOT, PCI and Plastics product lines
are largely in North America. The Company has made limited sales of DOT
products in the European market. The Company plans to increase sales through
the efforts of Scovill Europe in Belgium. Other specialty fastener markets in
Europe are currently served by Scovill Europe in France.
The Company believes that there are opportunities to expand its product
offerings to include electronic equipment (such as PC boards), consumer
batteries (such as male and female connectors), identification bracelets (Tag
Lock, one-time fasteners), and grommets and washers (such as leisure products
and utility bags), among others.
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<PAGE>
Product Lines
The Company's Industrial Group is comprised of three main product lines:
DOT, PCI and Plastic Fasteners. The following table sets forth, for the
periods indicated, the net sales and percentage of net sales contributed by
each product line (dollars in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
-------------------- -------------------- --------------------
% OF TOTAL % OF TOTAL % OF TOTAL
NET SALES NET SALES NET SALES NET SALES NET SALES NET SALES
--------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
DOT..................... $10,940 16.7% $11,116 16.7% $14,080 15.5%
PCI..................... -- -- -- -- 2,054 2.2
Plastic Fasteners....... 3,235 5.0 3,808 5.8 3,613 3.9
------- ---- ------- ---- ------- ----
Total................. $14,175 21.7% $14,924 22.5% $19,747 21.6%
======= ==== ======= ==== ======= ====
</TABLE>
Industrial fasteners are sold through direct sales and authorized
distributors to a wide variety of customers, including manufacturers of marine
textiles, sporting and recreational products, electronics, electrical
equipment and footwear. The Company competes mostly in the specialty fastener
market in the Americas (including Canada) and, to a more limited extent, in
Europe and Asia.
The Company's acquisition of the DOT product line in 1991 has enabled it to
supply heavy duty snap fasteners to additional markets, including marine
textiles, automotive, luggage, medical, sporting and recreational, aircraft,
military and health-related goods. The PCI product line, acquired in 1996,
further expanded the Company's offering of industrial fasteners, which the
Company has been able to sell through its existing DOT distribution channels.
The Company's Plastic Fastener product line provides fasteners for a variety
of end uses, including use with the Company's own Gripper and DuraMark
products, as well as for those of Johnson & Johnson.
To remain competitive in the industrial fastener industry, the Company
intends to focus on methods of improving plant efficiency and cost reduction.
While investing in research and development to create new products and to re-
engineer product lines acquired through acquisitions, the Company is also
actively developing new applications for its current industrial products.
DOT and PCI Product Lines. DOT fasteners include large snaps, windshield
clips, turn buttons, screw studs, gypsy studs and other specialty fasteners.
An advantage of certain DOT products is their locking feature. Examples of DOT
products with a locking feature include Pull-the-DOT, which is a
unidirectional lock designed to open only when properly aligned, and the
Common Sense line, which has a positive locking feature that offers strength
and durability. DOT fasteners are used for, among other things: marine
textiles, automobiles, awnings, luggage, athletic outerwear, sporting goods,
tents and packaging. DOT end-users include Micron, Samsonite, Boeing and NASA.
With the acquisition of PCI, the Company expanded its industrial product
line to include footwear eyelets, grommets, washers, industrial eyelets, and
specialty stampings. PCI end-users include Zenith, Converse and Eveready. The
Company's supply division provides specialized setting tools and supplies so
that PCI customers can customize third-party manufactured attaching machines
to accommodate PCI fasteners. These products are largely able to utilize the
DOT distribution channels.
Plastic Fasteners. The Company's plastic fastener line is principally
composed of three products that are known by their trade names: Whipper Snap,
Color Snap and Tag Lock. The Whipper Snap was the first plastic snap fastener.
Each Whipper Snap is composed of four parts and employs a four-prong design
that grips fabric securely without tearing. Currently, the Whipper Snap is the
most important of the Company's plastic fasteners, measured by sales volumes,
and is primarily sold for use in protective disposable medical apparel. Since
late 1992, the demand for disposable medical garments has increased as a
result of new OSHA regulations governing the medical profession.
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<PAGE>
Color Snaps are used in packaging and other non-apparel applications. The
Tag Lock fastener is a one-way fastener that is most commonly used for one-
time use identification bracelets such as hospital bracelets and amusement
park entrance wrist bands.
MANUFACTURING AND DISTRIBUTION OPERATIONS
The Company's U.S. manufacturing facilities are situated on 31 acres owned
by the Company in Clarkesville, Georgia (approximately 90 miles northeast of
Atlanta, Georgia) and include a 230,000 square foot building used for
manufacturing and administration, as well as a 26,400 square foot attaching
machine center. The Company also leases manufacturing facilities in Montreal,
Canada, and owns a manufacturing facility in Braine le Comte, Belgium.
Beginning in 1992, the Company reorganized its manufacturing operations,
resulting in a substantial reduction in the number of employees and in total
operating costs. The Company reduced its manufacturing employee headcount from
635 at the end of 1992 to 545 at the end of 1995, prior to the acquisitions of
Rau and PCI. By integrating acquired operations into its Clarkesville
facility, the Company has increased production volume at the facility, which
has enabled it to absorb more fixed costs and indirect labor costs. In
addition, the Company reorganized its manufacturing organization to focus on
its product lines rather than production processes. The Company established
five separate production units, each dedicated to a particular product line.
These production units, in turn, are subdivided into a number of manufacturing
cells. Each production unit consists of dedicated equipment, employees and
management. As a result of the sale of its zipper line, the Company was able
to integrate the manufacturing operations of Rau and PCI at the Clarkesville
facility in 1996.
The implementation of improved manufacturing techniques, including "Total
Quality Management," "Statistical Process Control" and "Just In Time"
inventory management, has substantially increased plant production throughout
the Company by reducing bottlenecks, improving material flows and focusing the
Company on manufacturing process improvements. The Company regularly performs
maintenance under "Total Preventative Maintenance" practices on its machines
and equipment to reduce downtime and improve production efficiency. Additional
examples of improved techniques implemented by the Company include the
establishment of corrective action teams, educational programs for
manufacturing employees and vendor-certification programs.
In conjunction with the restructuring of the Company's manufacturing
organization and implementation of improved manufacturing techniques, the
Company commenced a value-added capital expenditures program. This program
emphasizes investments that improve the efficiency of the Company's
manufacturing operations, increase product quality, enhance the safety of
workers and in some cases, require a reduction in the number of employees.
These initiatives have significantly lowered the Company's manufacturing costs
and have contributed to improved gross margins.
The manufacture of a majority of the Company's products begins with the
stamping of the relevant raw material. Some products are formed through a
series of stamping steps using progressive dies while others are formed
through a single stamping step using sophisticated forming dies. These
products are then cleaned to reduce lubricant residues and prepare the surface
for finishing before being assembled and packed for shipping. To facilitate
shipping, the Company works with several different common carriers and its
manufacturing facility is readily accessible to the interstate highway system.
Availability and cost of transportation are not competitive factors affecting
the Company's business.
The Company maintains a central distribution warehouse at its manufacturing
facility and satellite warehouses in Texas and Mexico. Its products are also
available from distributor facilities located throughout the United States and
in Western Europe, Central America, South America, and the Far East. The
Company intends to use its facilities in Brussels, acquired in connection with
Rau acquisition, to increase the distribution of its products in Europe. Goods
are packaged to meet market needs for safe handling and effective storage, and
customized packaging is available for distributors in select market channels
such as the marine product line.
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<PAGE>
The Company defines capacity by individual manufacturing cells within five
product line-oriented production units, as opposed to functional processes
such as stamping or plating. The Company believes it has sufficient
manufacturing capacity in each of its product lines, including the recently
acquired Rau and PCI product lines, to meet current customer demands,
including anticipated growth thereof. By optimizing its operations, adding
shifts and outsourcing particular activities, the Company believes that it can
significantly increase the output of the Clarkesville facility with limited
capital expenditures.
INSURANCE
The Company maintains property insurance, liability insurance, business
interruption insurance and other insurance policies customary to the
manufacturing industry. The Company believes that its policies are sufficient
to cover any potential loss or liability that is likely to arise in the
future.
RAW MATERIALS
The prices of raw materials are subject to volatility. The Company's
principal raw materials are brass, steel, zinc, nickel alloys, and plastic
resins, of which brass is the most significant. These raw materials are
commodities that are widely available. In 1996, the Company purchased
approximately 11 million pounds of brass, 1.1 million pounds of steel, 0.3
million pounds of stainless steel and 0.7 million pounds of aluminum for use
in manufacturing its products. See "Risk Factors--Raw Materials."
The Company seeks to minimize the impact of price volatility through hedging
practices. The Company has hedged a substantial portion of its expected raw
material needs, largely for brass, through June 1998. To the extent that the
price for the Company's remaining needs increases before prices are set, there
can be no assurance that the Company will be able to set the price low enough
to enable the Company to achieve adequate margins on finished products,
although it has in the past been able to pass a portion of any price increase
in materials to its customers.
The Company has strong relationships with many of the largest suppliers of
raw and processed materials in the United States. The Company's policy is to
establish arrangements with select vendors, based upon price, quality, and
delivery terms. By limiting the number of its suppliers, the Company believes
that it obtains materials of consistently high quality at favorable prices. In
addition to purchase contracts, the Company has tolling agreements with some
of its suppliers whereby the suppliers reprocess the Company's scrap for a
fixed charge. These relationships afford the Company certain purchasing
advantages, including stable supply and favorable pricing arrangements.
MARKETING AND SALES
The Company's sales and marketing organization consists of four functional
areas: sales, customer service, field service and product support. These four
areas work in close cooperation with one another in an effort to maximize the
Company's sales revenue and to offer superior customer service. The general
marketing strategy of the Company is to differentiate itself from other
fastener manufacturers by offering a full range of premium branded products
and services. Components of this strategy include offering attaching machine
service, engineering and sales support through the maintenance of a network of
service personnel, a large direct field sales organization, applications
engineering, and product design and development.
Sales
After the Rau and PCI acquisitions, the Company divided its sales personnel
between the Apparel and Industrial Groups. The sales organization is further
divided by domestic U.S. regions. Regional sales managers have supervisory and
administrative responsibility for the sales personnel in their respective
regions, as well as direct sales responsibility for certain large regional
accounts.
The Company recently created a new position to handle large national
accounts such as JC Penney, Wal* Mart, Kmart, Sears, The Gap, The Limited and
other large private label apparel merchandisers. These large national
retailers contract with independent garment manufacturing firms to produce
their private label apparel
58
<PAGE>
products. The Company seeks to strengthen the "retail pull" of large retailers
by having them specify the use of the Company's products in their private
label lines. See "--Business Strategy." The Company believes that this
strategy will help increase its sales to contractors abroad that service
domestic retailers.
The Company sells its products through a twelve-person apparel sales force
and an eleven-person specialty industrial sales force. Products in Europe are
sold through a combination of direct sales in Belgium and France, as well as
through distributors in fifteen European countries. The Company has recently
signed a distribution agreement with Acotex, which provides the Company with
expanded distribution capability (including local finishing and stocking of
products) in Southeast Asia.
Marketing
The Company services lower volume customers (particularly DOT customers)
through a telemarketing office in Clarkesville, Georgia, which enables the
Company to cost-effectively reach a large number of diversified customers
throughout the United States in a cost-effective manner.
The Company maintains published price lists generally based on a single
price philosophy, subject under certain conditions to adjustments for
finishes, small lots and, in the case of DOT products, large volume. The
Company may modify pricing under specific and strict procedures in response to
competitive pricing action. To reach its markets, the Company employs a
general promotional mix, utilizing a direct field sales staff, a telemarketing
group and authorized distributors. The sales activity is supported by
participation in trade exhibitions, as well as a full advertising program in
trade publications. Other promotional activities include publicity
announcements, entertainment functions, advertising novelties and a Company
website.
Customer Service
The Company provides customers with a "total system" approach, which
includes the fasteners, attaching equipment and dedicated field service. The
Company believes that its sales depend on in-depth knowledge of customer
manufacturing procedures, responsiveness to product design changes, consistent
product quality, timely delivery, and efficient and reliable attaching
machinery. Typically, the buying decision requires a consensus among the
customer's plant managers, plant engineers and merchandising and purchasing
personnel. The Company's sales force has been able to develop and maintain
long-term customer relationships, providing it with a competitive advantage.
The Company's customer service center is located in Clarkesville, Georgia and
is dedicated to handling customer orders. The center is staffed by twelve
customer service representatives. These representatives work with the
Company's sales personnel and customer purchasing representatives to process
orders and ensure that all specifications are met. The customer service center
also handles inquiries regarding order changes, delivery and billing.
Field Service
The Company provides product support through a field service organization of
24 professionals. The Company believes its field service force is the only one
in the industry dedicated exclusively to maintenance service. These service
representatives regularly visit customer locations. Through the service
representatives, the Company is able to minimize the downtime of its attaching
machinery and increase machine efficiency, hence reducing CPAF for its
customers.
Product Support
The Company's product support includes a quality assurance department that
maintains an applications laboratory staffed by an applications engineer and
three technicians. The applications laboratory performs a variety of tests,
including strength and durability testing, in order to evaluate the
suitability of a fastener for a customer's application. The Company's
engineering department employs three dedicated graphics designers. These
designers work with a CAD/CAM system to adapt customers' logo designs to the
Company's fastener products. The Company believes that its comprehensive
product support services distinguish the Company from competitors. The Company
also has a dedicated research and development department, staffed by four
full-time employees, which focuses on new product development and
manufacturing process improvements.
59
<PAGE>
BACKLOG
At September 30, 1997 and 1996, the Company had backlog of $8.4 million and
$8.1 million, respectively. Management does not believe that a material amount
of orders constituting such backlog at September 30, 1997 will remain unfilled
at the end of 1997.
CUSTOMERS
The Company serves two major markets: apparel and industrial. The Apparel
Group serves six primary market segments, consisting of infantswear,
childrenswear, jeans, workwear, leisurewear/fashion and disposables. The
Industrial Group serves six primary market segments, consisting of automotive,
marine textiles, military, leather, sporting goods and medical.
The Company's apparel fastener customers include many of the leading apparel
design and manufacturing companies in the United States, including Wrangler,
OshKosh B'Gosh, Gerber Childrenswear, William Carter Company, Tommy Hilfiger,
Polo Ralph Lauren, Liz Claiborne and L.L. Bean. In addition, the Company
manufactures and leases to its apparel fastener customers a line of specially
designed automated attaching machines which attach its fasteners to customers'
products. Industrial fasteners are sold through direct sales and authorized
distributors to a wide variety of customers. End users of the Company's
industrial fasteners include Ford, Boeing, Baxter, Samsonite, U.S. Marine for
its Bayliner Boats, Johnston & Murphy, Eveready Battery, Riddell for its
football helmets and the U.S. Army.
In 1997, no single customer accounted for more than 7% of the Company's
total net sales, and the Company's 10 largest customers accounted for
approximately 28% of the Company's total net sales. The Company's broad line
of products for apparel and specialty industrial use reduces its exposure to
any one customer segment and to fashion trends. The Company plans to expand
its customer base by introducing new products, developing applications for
existing products, and promoting the use of the new Gemini attaching machine.
COMPETITION
The Company operates in a highly competitive environment. Some of the
Company's competitors have greater financial resources and may be less
leveraged than the Company. As a result of its presence in both the apparel
and industrial markets and the diversity of its products, the Company believes
that no single competitor competes with the Company across the entire range of
the Company's product lines.
In the United States, the Company primarily competes with Universal
Fasteners/Stocko and Morito. Universal, located in Kentucky, is a subsidiary
of YKK, a large Japanese company which supplies the zipper industry. Universal
competes primarily with the Company's DuraMark products. Universal recently
acquired Stocko. Stocko's products compete with the Gripper, plastic and DOT
product lines.
In the specialty industrial market, competition is highly fragmented. The
Company's largest competitor is E.B. Stimpson Company, which offers eyelets,
grommets and washers similar in variety and application to those of the
Company. The Company's remaining competitors are specialty manufacturers that
generally address only one segment of this market. These competitors include
Stocko, Fasnap, a distributor for Kane-Morito, a Japanese manufacturer whose
products compete with DOT; Mark Eyelet, whose products compete with PCI
products in the electronic equipment industry; Newmark, Inc. and EFI, Inc.,
whose products compete with PCI in the medical/surgical products industry;
Anstro, Inc., whose products compete with PCI in the footwear industry; and
E.E. Weller, whose products compete with PCI in the specialty eyelet industry.
Although the primary competitive factors for the Company's products vary
somewhat across different product categories, the principal factors
influencing competition are breadth of product line, cost of raw materials,
cost of attaching machinery, price, quality and customer service. Brand
recognition is also a differentiating factor in the Apparel Group, which
includes the Gripper product line, and in the Industrial Group, which includes
the DOT product line. The Company believes that it has remained competitive by
developing strong customer relations based on its ability to supply quality
products while minimizing costs and utilizing its "total system" approach.
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TRADEMARKS AND PATENTS
The Company currently uses numerous trademarks and trade names in its
business, including Color Snap(R), Common Sense(TM), DOT(R), DuraMark(R),
Gemini(TM), Gripper(R), Klikit(R), Maxi-Snap(TM), Mighty-Snap(TM), PCI(TM),
Pull-the-DOT(R), Tag Lock(TM), and Whipper Snap(R). In addition, the Company
owns 19 patents relating to its fasteners and attaching machinery and it has 3
patents pending. Although the products and services underlying such trademarks
and patents have achieved significant brand recognition and, as a result, are
of significant economic value, the Company does not believe that any
individual trademark or patent is of material importance to the Company's
business.
The Company also relies upon trade secret protection of its confidential and
proprietary information. The Company routinely enters into confidentiality
agreements with both high- and low-level employees. There can be no assurance
that such measures will be successful or that competitors will not be able to
discover the trade secrets on their own.
FACILITIES
Set forth in the table below is certain information relating to certain real
properties that the Company uses in its business. Two properties are owned by
the Company. The remaining properties are leased pursuant to leases expiring
at various dates through 2005.
<TABLE>
<CAPTION>
LOCATION USE
-------- ---
<S> <C>
Scovill Fasteners Inc.
Clarkesville, Georgia Manufacturing, Distribution,
Warehouse, Office (Owned)
Lewiston, Maine Office
El Paso, Texas Office/Warehouse
Wareham, Massachusetts Distribution, Warehouse, Office
Scovill Canada Inc.
Montreal, Quebec, Canada Manufacturing and Distribution
Montreal, Quebec, Canada Warehouse
Montreal, Quebec, Canada Office/Warehouse
Unifast Manufacturing
Braine-le-Comte, Belgium Manufacturing, Distribution,
Warehouse, Office (Owned)
Unifast-Daude
Soucie en Brie, France Office/Warehouse
Scovill Mexico
Torreon, Mexico Office/Warehouse
</TABLE>
ENVIRONMENTAL MATTERS
Like similar companies, the Company's operations and properties are subject
to a wide variety of increasingly complex and stringent federal, state, local
and foreign environmental laws and regulations, including those governing the
use, storage, handling, generation, treatment, emission, release, discharge
and disposal of certain materials and wastes, the remediation of contaminated
soil and groundwater, and the health and safety of employees (collectively,
"Environmental Laws").
The Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended ("CERCLA"), and similar state laws, provide for responses to
and liability for releases of certain hazardous materials into the
environment. These obligations are imposed on the current owner or operator of
a facility, the
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owner or operator of a facility at the time of disposal of hazardous materials
at the facility, any person who arranged for the treatment or disposal of
hazardous materials at the facility, and any person who accepted hazardous
materials for transport to a facility selected by such person. Liability under
CERCLA is strict, and may be joint and several. Certain federal Environmental
Laws, including the Clean Air Act, the Clean Water Act, the Resource
Conservation and Recovery Act, the Safe Drinking Water Act, the Emergency
Planning and Community Right to Know Act, each as amended, and similar state
and local Environmental Laws, regulate air emissions, water discharges,
hazardous materials and wastes, and require public disclosure related to the
use of various hazardous materials. The Company's operations are also governed
by Environmental Laws relating to workplace safety and worker health,
primarily pursuant to the federal Occupational Safety and Health Act, as
amended. Compliance with Environmental Laws may require the acquisition of
permits or other authorizations for certain activities and compliance with
various standards or procedural requirements. The Environmental Laws are
subject to frequent amendment and have historically become increasingly
stringent. The Company is currently subject, and may in the future be subject,
to liability under Environmental Laws for remediation of contamination at
currently or formerly owned or operated facilities including, presently,
remediation at its Clarksville, Georgia facility. In addition, from time to
time, the Company has been cited for violations of Environmental Laws. The
sanctions for failure to comply with such Environmental Laws can include
significant civil penalties, injunctive relief and denial or loss of, or
imposition of significant restrictions on, environmental permits. In addition,
the Company could be subject to suit by third parties in connection with
violations of or liability under Environmental Laws. In the event of liability
under Environmental Laws, the Company intends to pursue available statutory
and contractual remedies, including any applicable rights of contribution and
indemnification from predecessors in interest. However, there can be no
assurance that the Company will prevail in connection with any such claims.
As of September 30, 1997, the Company had environmental reserves of
approximately $2.9 million for environmental liabilities. Of the total reserve
for environmental liabilities, $2.6 million represents contractual payments to
a former parent. Because Environmental Laws have historically become
increasingly more stringent, costs and expenses relating to environmental
control and compliance may increase in the future.
The nature of the Company's current and former operations, and those of its
predecessors in interest, exposes it to the risk of claims with respect to
environmental matters and there can be no assurance that material costs or
liabilities will not be incurred in connection with such claims. Based upon
its experience to date, the Company believes that the future cost of
compliance with existing Environmental Laws, and liability for known
environmental claims pursuant to such Environmental Laws, will not have a
material adverse effect on the cash flow, financial condition or results of
operation of the Company. However, future events, such as new information,
changes in existing Environmental Laws or their interpretation, and more
vigorous enforcement policies of regulatory agencies, may give rise to
additional expenditures or liabilities that could be material. See "Risk
Factors--Environmental Matters."
GOVERNMENTAL REGULATIONS
A number of regulations affect the Company's business. The Company believes
that it complies substantially with all laws and regulations affecting its
business and that it does not have any material liabilities under such laws
and regulations. The Company also believes that compliance with all such laws
and regulations will not, individually or in the aggregate, have a material
adverse effect on the Company's capital expenditures, earnings or competitive
position.
LEGAL PROCEEDINGS
From time to time, the Company is named in claims involving manufacturers,
contractual disputes and other matters arising in the ordinary course of the
Company's business. Currently, no legal proceedings are pending against or
involve the Company that, in the opinion of management, could reasonably be
expected to have a material adverse effect on the business, financial
condition or results of operations of the Company. See "Risk Factors--Pension
Matters."
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<PAGE>
EMPLOYEES
As of September 30, 1997, the Company employed 813 people. Approximately 170
were employed in administrative and sales positions and 643 were employed in
manufacturing positions. None of the Company's employees at the Clarkesville
or the Montreal facilities is represented by a labor union. The 84 non-
management employees at the Belgium facility may belong to a labor union, but
under Belgian law, such membership is not required to be disclosed to the
Company.
The Company believes that its relationships with its employees are
satisfactory. Because of its dependence on apparel manufacturers and other
customers, however, the Company may be adversely affected by labor strikes,
work slowdowns and walkouts at the manufacturing facilities of such
manufacturers or other customers.
CHANGE IN INDEPENDENT AUDITORS
Following the Kohlberg Acquisition in October 1995, KSCO appointed Arthur
Andersen llp to replace Deloitte & Touche llp as the independent accountants
for KSCO and the Company. The reports of Deloitte & Touche llp on the
consolidated financial statements of the Company for the two fiscal years
prior to the change in accountants contained no adverse opinion or disclaimer
of opinion and were not qualified or modified as to uncertainty, audit scope
or accounting principles. In connection with the audits of the Company's
financial statements for each of the two fiscal years and any subsequent
interim periods preceding the change in accountants, there were no
disagreements with Deloitte & Touche llp on any matters of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure which, if not resolved to the satisfaction of Deloitte & Touche llp,
would have caused Deloitte & Touche llp to make reference to the matter in
their report on the consolidated financial statements for such years.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Set forth below are the names, ages as of September 30, 1997, and a brief
account of the business experience of each person who will be serving as an
executive officer or director of the Company and of Parent upon consummation
of the Transactions.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
David J. Barrett........ 47 President, Chief Executive Officer and Director
Martin A. Moore......... 38 Executive Vice President, Treasurer, Chief Financial Officer and Secretary
Michael Baxley.......... 40 Executive Vice President--Apparel Group
John Champagne.......... 49 Executive Vice President--Industrial Group
Robert Feltz............ 48 Executive Vice President--Business Development
William F. Andrews...... 66 Chairman of the Board
Christian L. Oberbeck... 37 Director
</TABLE>
Mr. Barrett has been with the Company since November 1991, when he joined as
Vice President of Operations. He has also served as President of the Company
and Executive Vice President of Operations. Mr. Barrett has been President and
CEO since 1995. Prior to joining the Company, Mr. Barrett held various
manufacturing, operational and administrative positions with the Newell
Company and Continental Group, Inc.
Mr. Moore joined the Company as Director of Finance in February 1992. He has
also served as the Vice President of Finance and the Vice President of Finance
and Administration. Mr. Moore was promoted to Executive Vice President in
1997. Prior to joining the Company, Mr. Moore held various financial,
controller and manufacturing positions with Frantschach AG, Quality Forms,
Inc. and Society Corporation.
Mr. Baxley joined the Company as Executive Vice President--Sales and
Marketing in February 1997. Mr. Baxley became Executive Vice President--
Apparel Group in April 1997. Prior to joining the Company, Mr. Baxley served
as Senior Vice President and General Manager of ACD Tridon, Inc. from 1994 to
1996. He was also Vice President of Marketing for Johnston & Murphy (a
division of Genesco) from 1992 to 1994. Prior to 1992, Mr. Baxley held various
positions with Proctor and Gamble and the United States Navy.
Mr. Champagne joined the Company as Vice President of Manufacturing in 1996.
He was named Executive Vice President of the Industrial Group in 1997. Before
joining the Company, Mr. Champagne worked at Rau Fastener, Inc. from 1968 to
1995, serving as President and Director from 1988 to 1995. He also served as
President of Rau Fasteners, LLC from 1995 to 1996.
Mr. Feltz joined the Company as National Sales and Service Manager in 1980.
He has also served as Vice President of Sales and Marketing Worldwide. Prior
thereto, he worked at Talon, Inc., a zipper manufacturer.
Mr. Andrews has been Chairman of the Company's Board of Directors since
1996. From 1981 to 1986, he was Chairman, President and Chief Executive
Officer of Scovill Manufacturing, Co., where he worked for more than 20 years.
Mr. Andrews is also Chairman of Schrader-Bridgeport International Inc., a
manufacturer of tire valves and pressure control devices. From 1993 to 1995,
Mr. Andrews was Chairman and Chief Executive Officer of Amdura Corporation, a
manufacturer of hardware and industrial equipment. From 1990 to 1992, he was
President and Chief Executive Officer of UNR Industries, Inc., a diversified
manufacturer of steel products. Prior to 1990, Mr. Andrews was President of
Massey Investment Company and Chairman, President, and Chief Executive Officer
of Singer Sewing Company. Mr. Andrews is also a director of Black Box
Corporation; Corrections Corporation of America; Johnson Controls, Inc.; Katy
Industries; Navistar, Inc.; Northwestern Steel and Wire Co.; and Southern New
England Telephone Company.
Mr. Oberbeck became a director of the Company upon consummation of the
Transactions and is the sole member of the Executive Committee of the Board of
Directors. Mr. Oberbeck has been a Managing Director of SBC Warburg Dillon
Read Inc. since September 1997. From February 1995 to September 1997, Mr.
Oberbeck was a Managing Director of Dillon, Read & Co. Inc. Prior to joining
Dillon, Read & Co. Inc., Mr. Oberbeck
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was a Managing Director of Castle Harlan, Inc., where he worked from October
1987 until February 1995. He is a member of the Saratoga Partners Investment
Committee and a director of J&W Scientific Incorporated, USI Holdings
Corporation and Koppers Industries, Inc.
EMPLOYMENT AGREEMENTS
In order to assure the continued service of executive management, the
Company has entered into employment agreements ("Employment Agreements") with
Messrs. Barrett, Moore, and Feltz (each, an "Executive," and together, the
"Executives"). Each of these Employment Agreements became effective upon
consummation of the Transactions. Mr. Barrett serves as Chief Executive
Officer of the Company and has an annual salary of $243,750. Mr. Moore serves
as Chief Financial Officer of the Company and has an annual salary of
$187,813. Mr. Feltz serves as Executive Vice President--Business Development
of the Company and has an annual salary of $156,250. Each contract has a
three-year term and renews annually for successive one-year periods, subject
to termination upon notice by either party. Salary for such renewal periods is
to be negotiated between the Executive and the Company. The Employment
Agreements also provide for the payment of an amount equal to two times the
annual base salary of the Executive ("Incentive Payment") upon the occurrence
of an "Incentive Event." An "Incentive Event" is generally defined as either a
sale of substantially all of the Company's assets or over 50% of its common
stock, or any transaction whereby Saratoga Partners III, L.P. or any of its
affiliates no longer controls the Board of Directors. Each Executive is
entitled to participate in the Company's benefit plans for senior executives
and receives certain fringe benefits, including a car, personal computer and
cellular telephone.
If the Company terminates the employment of any of the Executives without
Cause (as defined in the Employment Agreements) or if an Executive terminates
his employment with the Company for a specific reason set forth in the
Employment Agreements, the Executive is entitled to receive a severance
payment, equal to the greater of (1) two times the Executive's annual base
salary on that date and (2) the remainder of the base salary to be paid under
the initial three-year term of the Executive's Employment Agreement. If the
Executive voluntarily terminates his employment (other than for specifically
enumerated reasons) or the Executive's employment is terminated by the Company
for Cause, the Company is not obligated to make a severance payment to the
Executive. In addition, each Executive has agreed to not compete with the
Company during the period of his employment and for 18 months following the
termination of his employment, unless the termination is without Cause, and to
comply with confidentiality covenants. In the event that the Company
terminates the employment of any of the Executives without Cause or an
Executive terminates his employment with the Company for a specific reason set
forth in his Employment Agreement in anticipation or in connection with
certain transactions or within the two-month period prior to completing
certain transactions, the Executive is entitled to receive the Incentive
Payment, provided that any severance payments to which the Executive is
entitled upon termination of employment is reduced by the full amount of the
Incentive Payment.
The preceding description of the Employment Agreements is intended only as a
summary and is qualified in its entirety by reference to the Employment
Agreements, copies of which have been filed as exhibits to the Registration
Statement of which this Prospectus forms a part.
See also "Certain Transactions--The Acquisition."
BOARD MEMBER COMPENSATION
The Company may compensate the members of the Board of Directors who are not
full-time employees of the Company on an annual and per meeting basis, in an
amount and on a basis as may be determined in the future. The Company also may
compensate members of committees of the Board of Directors for each Committee
meeting attended. Directors of the Company receive reimbursement of their
reasonable out-of-pocket expenses incurred in connection with their board
activities. The Company intends to purchase directors' and officers' insurance
for its executive officers and directors, assuming that such insurance is
available on commercially reasonable terms.
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<PAGE>
NEW INCENTIVE STOCK OPTION PLAN
The Company has established a new stock option plan (the "New Plan") for key
executives and managers which provides for the grant of stock options
("Options") to purchase up to 12.5% of the Common Stock of Parent on a fully
diluted basis. The New Plan has the following terms: Options granted under the
New Plan will have an exercise price equal to the fair market value of the
stock underlying the Option on the date of grant, which exercise price will
increase annually at a rate of 9%, and Options will vest over a period of 5
years commencing on the first anniversary of the date of grant. Vested options
may be exercised by payment of the exercise price in cash or, if approved by
Parent's stock option committee, by delivery of a promissory note. Upon a
participant's termination of employment for cause, all of such participant's
Options will immediately expire. If a participant's employment terminates by
reason of (i) death, (ii) disability, (iii) retirement or (iv) voluntary
resignation or termination of employment other than for cause, the
participant's unvested Options will immediately expire and such participant's
vested Options will remain exercisable for a period of 90 days.
SUMMARY COMPENSATION TABLE
The following Summary Compensation Table contains information concerning the
compensation provided by the Company in 1996 and 1997 to its Chief Executive
Officer and the four other executive officers other than the Chief Executive
Officer (together, the "Named Executive Officers") of the Company.
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION
---------------- ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION
- --------------------------- ---- -------- ------- -------------
<S> <C> <C> <C> <C>
David J. Barrett........................... 1997 $189,338 $51,000 $ 4,750(1)
President and Chief Executive Officer 1996 167,916 -- 4,197(1)
Martin A. Moore............................ 1997 149,490 27,000 4,750(1)
Executive Vice President and Chief 1996 129,375 -- 3,234(1)
Financial Officer
Michael Baxley(2).......................... 1997 149,149 -- 14,798(3)
Executive Vice President--Apparel Group
John Champagne............................. 1997 133,907 65,000 853(1)
Executive Vice President--Industrial Group 1996 119,356 45,000 10,833(4)
Robert Feltz............................... 1997 137,611 25,000 10,068(5)
Executive Vice President--Business
Development 1996 124,398 -- 43,365(6)
</TABLE>
- --------
(1) Represents matching contributions made by the Company to the Named
Executive Officers' accounts under the Company's 401(k) plan.
(2) Mr. Baxley joined the Company in February 1997.
(3) Includes reimbursement for relocation expenses ($12,895) and matching
contributions made by the Company to Mr. Baxley's account under the
Company's 401(k) plan ($1,903).
(4) Represents reimbursement for relocation expenses.
(5) Includes reimbursement for office relocation expenses to home office
($6,000) and matching contributions made by the Company to Mr. Feltz's
account under the Company's 401(k) plan ($4,068).
(6) Includes reimbursement for relocation expenses ($36,632) and matching
contributions made by the Company to Mr. Feltz's account under the
Company's 401(k) plan ($3,109).
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<PAGE>
CERTAIN TRANSACTIONS
TRANSACTIONS WITH KOHLBERG
Since October 1995, the Company has paid an aggregate of $863,000 in
management fees to Kohlberg & Co., pursuant to a management services agreement
that will be terminated effective as of the closing of the Acquisition. In
January 1996, the Company paid an advisory fee of $1.0 million to Kohlberg &
Co. in conjunction with the acquisitions of PCI and Rau.
TRANSACTIONS WITH SARATOGA
In connection with the Transactions, the Company paid a transaction fee of
$1.75 million to an affiliate of Saratoga in consideration for advisory
services related to the structuring and financing of the transaction. The
Company entered into an agreement with Saratoga, pursuant to which the Company
will pay a management fee of $150,000 per quarter to Saratoga (the "Management
Services Agreement"). In addition, Saratoga will provide the Company with
advisory services in connection with significant business transactions, such
as acquisitions, for which the Company will pay Saratoga compensation
comparable for similarly situated companies. See also "Plan of Distribution."
THE ACQUISITION
In connection with the Transactions, affiliates of Kohlberg and KSCO's other
existing stockholders received an aggregate of approximately $98.1 million.
Members of management received aggregate proceeds of approximately $2.9
million in cash in consideration for their stock options in KSCO, excluding
the $3.3 million that was rolled over into options to purchase Common Stock
and Series B Preferred Stock. Certain members of management entered into
employment agreements with the Company. See "Management." In addition, William
F. Andrews, the Chairman of the Board, received proceeds of approximately $1.8
million in cash in consideration for his stock and stock options of KSCO,
excluding the $150,000 that was rolled over into options to purchase Common
Stock and Series B Preferred Stock.
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DESCRIPTION OF OTHER INDEBTEDNESS
NEW CREDIT FACILITY
Concurrently with the consummation of the Offerings, the Company entered
into the New Credit Facility with Credit Agricole Indosuez, as administrative
agent, Swiss Bank Corporation, as documentation agent and syndication agent
(the "Agent"), and a syndicate of lenders. The following summary of the
principal terms of the New Credit Facility does not purport to be complete and
is subject to the detailed provisions of the agreement governing the New
Credit Facility, a copy of which has been filed as an exhibit to the
Registration Statement of which this Prospectus forms a part. Capitalized
terms not defined under this caption have the meanings set forth in such
agreement.
The New Credit Facility consists of a $28.0 million senior secured
amortizing term loan (the "Term Loan") and a $25.0 million senior secured
revolving credit facility (the "Revolving Credit Facility").
The New Credit Facility is guaranteed (the "Guarantees") by Parent and each
existing and subsequently acquired or organized domestic subsidiary of the
Company (collectively referred to as "the Guarantors"). The New Credit
Facility is secured by (i) a first priority pledge of (x) all of the capital
stock of the Company and each of its domestic subsidiaries and (y) 66% of the
voting stock and 100% of the non-voting stock of each other direct subsidiary
and (ii) a first priority security interest in substantially all of the
domestic property, plant and equipment and other assets of Parent and its
subsidiaries.
Borrowings under the Revolving Credit Facility are available, subject to the
satisfaction of customary borrowing conditions, for working capital and other
general corporate purposes. A portion of the Revolving Credit Facility may be
used for letters of credit. Availability under the Revolving Credit Facility
is limited to a borrowing base, which is defined as the sum of (i) 85% of the
Eligible Receivables of the Company and the Guarantors at such time and (ii)
60% of the Eligible Inventory of the Company and the Guarantors at such time.
The interest rate on borrowings under the New Credit Facility is (i) LIBOR
plus 2.5% per annum or (ii) the Base Rate plus 1.5% per annum. The unused line
fee is 0.5% per annum. All or a portion of the New Credit Facility which is
borrowed may be prepaid at any time, at the option of the Company.
Amortization on the Term Loan will commence on December 31, 1998 in the
amount of $1.0 million, with quarterly amortization payments thereafter,
totaling $3.0 million in 1999, $5.0 million in 2000, $6.0 million in 2001,
$6.0 million in 2002 and $7.0 million in 2003. The New Credit Facility will
mature on the sixth anniversary of the Closing Date.
The New Credit Facility includes certain covenants which, subject to certain
specific exceptions and limitations, require the Company and its subsidiaries
to, among other things, (i) provide certain financial information; (ii) not
create or allow to be created any liens other than those permitted by the New
Credit Facility; (iii) refrain from engaging in a consolidation, acquisition,
merger or sale of assets except as allowed in the New Credit Facility; (iv)
not engage in any transaction with or for the benefit of any affiliate other
than certain arm's-length transactions; (v) prevent the existence of any
agreement that prevents the Company's subsidiaries from paying dividends or
other distributions on capital stock; (vi) refrain from making certain
restricted payments other than those allowed under the New Credit Facility;
(vii) not incur Debt other than Debt allowed under the New Credit Facility;
(viii) not engage in certain speculative transactions; (ix) not incur
operating lease expense except to the extent permitted in the New Credit
Facility; (x) not issue disqualified stock except to the extent permitted in
the New Credit Facility; (xi) not engage in any business other than businesses
allowed under the New Credit Facility; (xii) maintain certain financial ratios
as detailed below; and (xiii) not make consolidated capital expenditures in
any fiscal year except to the extent permitted under the New Credit Facility.
These covenants generally will be more restrictive than those set forth in the
Indenture. The New Credit Facility will
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<PAGE>
also require the Company to maintain the following financial covenants: (a) a
minimum ratio of Consolidated EBITDA to Fixed Charges, which begins at 1.10x
and steps up to 1.20x over three years; (b) a maximum ratio of Funded
Indebtedness to Consolidated EBITDA, which begins at 6.50x and steps down to
4.50x over five years; and (c) a minimum net worth of $28.0 million. These
financial covenants are subject to change by the Company and the lenders. See
"Risk Factors--Substantial Leverage; Restrictive Covenants."
The New Credit Facility will also contain certain other terms and
conditions, covenants and events of default.
OTHER INDEBTEDNESS
The Company's subsidiaries in Belgium have obtained various secured
revolving lines of credit from Credit General for aggregate borrowings of up
to 117,000,000 Belgian francs, which bear interest at variable rates. Such
subsidiaries are not permitted by the agreements governing such lines of
credit to make dividends or other distributions on their capital stock unless
certain financial conditions are met. Such agreements provide for an
indefinite term and are subject to Credit General's customary lending terms.
In addition, a Belgian subsidiary has obtained term loans from local lenders
aggregating 25,000,000 Belgian francs. These loans accrue interest at 6.75%
per annum, payable semiannually in arrears. Amortization payments began in
December 1996 and extend over five years.
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DESCRIPTION OF NOTES
The Initial Notes were issued, and the Exchange Notes will be issued,
pursuant to the Indenture among Scovill Acquisition Inc. (the "Company"),
Scovill Holdings Inc., as Parent Guarantor, and United States Trust Company of
New York, as trustee (the "Trustee"), a copy of which has been filed as an
exhibit to the Registration Statement of which this Prospectus forms a part.
The following is a summary of the material terms and provisions of the Notes.
The terms of the Notes include those set forth in the Indenture and those made
part of the Indenture by reference to the Trust Indenture Act of 1939, as
amended (the "Trust Indenture Act"). The Notes are subject to all such terms,
and prospective purchasers of the Notes are referred to the Indenture and the
Trust Indenture Act for a statement thereof. The following summary does not
purport to be a complete description of the Notes and is subject to the
detailed provisions of, and qualified in its entirety by reference to, the
Indenture, including the definitions of certain terms contained therein and
those terms made part of the Indenture by reference to the Trust Indenture
Act. The definitions of certain terms used in the following summary are set
forth below under "--Certain Definitions." Reference to the Notes under this
caption are references to the Exchange Notes unless the context otherwise
requires.
GENERAL
The Notes will represent general senior unsecured obligations of the
Company, limited to an aggregate principal amount of $100 million. The Notes
will be fully and unconditionally guaranteed by each Guarantor on a senior
unsecured basis. The Notes will bear interest at the rate shown on the cover
page of this Offering Memorandum, payable on May 30 and November 30 of each
year, commencing on May 30, 1998, to Holders of record at the close of
business on the May 15 or November 15, as the case may be, immediately
preceding the relevant interest payment date. 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 Issue Date of the Initial Notes. The Notes
will mature on November 30, 2007 and will be issued in registered form,
without coupons, and in denominations of $1,000 and integral multiples
thereof. The Notes will be payable as to principal, premium, if any, and
interest at the office or agency of the Company maintained for such purpose
within the City and State of New York or, at the option of the Company, by
wire transfer of immediately available funds or, in the case of certificated
securities only, by mailing a check to the registered address of the Holder
thereof. See "--Book-Entry, Delivery and Form." Until otherwise designated by
the Company, the Company's office or agency in New York will be the office of
the Trustee maintained for such purpose. The Trustee will initially be the
Paying Agent and Registrar under the Indenture. The Company may act as Paying
Agent and/or Registrar under the Indenture and the Company may change the
Paying Agent and/or Registrar without notice to the Holders.
PARENT GUARANTEE; FUTURE SUBSIDIARY GUARANTEES
Parent will fully and unconditionally guarantee the payment of Obligations
of the Company under the Notes. In addition, if the Company or any of its
Restricted Subsidiaries shall acquire or create another Subsidiary (other than
any Foreign Subsidiary) or contribute property or assets to an existing
Subsidiary, then such Subsidiary will be required to execute a Subsidiary
Guarantee, in accordance with the terms of the Indenture, unless it has been
designated as an Unrestricted Subsidiary; provided that no such Guarantee by
such Subsidiary shall be required so long as (x) the Consolidated Net Income
for the fourth fiscal quarter period immediately preceding the date of
acquisition or creation of, or contribution to, such Subsidiary for which
financial statements are available and net assets at the end of such period of
such Subsidiary does not exceed 3% of the Consolidated Net Income for such
period and net assets at such date, respectively, of the Company and its
Restricted Subsidiaries and (y) the combined Consolidated Net Income for such
period and the net assets at such date of all Restricted Subsidiaries (other
than Guarantors and Foreign Subsidiaries) does not exceed 5% of the
Consolidated Net Income for such period and the net assets at such date,
respectively, of the Company and its Restricted Subsidiaries.
Each Guarantee will be a senior unsecured obligation of the Guarantor
thereof and will rank pari passu in right of payment with all other existing
and future unsecured and unsubordinated Indebtedness of such Guarantor and
senior to all existing and future subordinated indebtedness of such Guarantor.
The obligations of each Subsidiary Guarantor under its Guarantee will be
limited so as not to constitute a fraudulent conveyance under applicable law.
No Subsidiary Guarantees were required on the Issue Date of the Initial Notes.
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The Indenture provides that no Guarantor may consolidate with or merge with
or into (whether or not such Guarantor is the surviving Person) another Person
whether or not affiliated with such Guarantor unless (i) the Person formed by
or surviving any such consolidation or merger (if other than such Guarantor)
assumes all of the obligations of such Guarantor pursuant to a supplemental
indenture, in form and substance 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; and (iii) immediately after giving
effect to such transaction, the Company could incur at least $1.00 of
additional Indebtedness pursuant to the Consolidated Fixed Charge Coverage
Ratio test set forth in the "Limitations on Additional Indebtedness" covenant.
The foregoing provisions will not prohibit the merger of two or more
Guarantors into each other or the merger of one or more Guarantors into the
Company.
The Indenture provides that, in the event of a sale or other disposition of
all of the Capital Stock of any Subsidiary Guarantor (including by way of
merger or consolidation) to a Person, other than an Affiliate of the Company,
then such Guarantor will be released and relieved of any obligations under its
Subsidiary Guarantee. In such event, the Net Available Proceeds of such sale
or other disposition will be required to be applied in accordance with the
applicable provisions of the Indenture. See "--Certain Covenants--Limitations
on Asset Sales."
RANKING
The Notes and each Guarantee are general unsecured obligations of the
Company and the applicable Guarantor thereof, respectively, and rank pari
passu in right of payment with all other existing and future unsecured and
unsubordinated Indebtedness of the Company and such Guarantor, respectively,
and senior to all existing and future subordinated indebtedness of the Company
and such Guarantor, respectively. The Notes and each Guarantee are effectively
subordinated to all secured obligations of the Company and the Guarantor
thereof, respectively, to the extent of the assets securing such obligations.
See "Risk Factors--Substantial Leverage; Restrictive Covenants" and "--
Effective Subordination of the Notes and the Guarantees" and "Capitalization."
Subject to certain limitations, the Company and its Subsidiaries (including
the Subsidiary Guarantors) may incur additional secured Indebtedness in the
future. See "--Certain Covenants--Limitations on Additional Indebtedness."
OPTIONAL REDEMPTION
The Notes will be redeemable, at the option of the Company, in whole or in
part, at any time on or after November 30, 2002, at the following redemption
prices (expressed as percentages of principal amount), together with accrued
and unpaid interest, if any, thereon to the redemption date, if redeemed
during the 12-month period beginning on November 30 of the years indicated
below:
<TABLE>
<CAPTION>
OPTIONAL
REDEMPTION PRICE
----------------
<S> <C>
2002.................................................... 105.625%
2003.................................................... 103.750%
2004.................................................... 101.875%
2005 and thereafter..................................... 100.000%
</TABLE>
Notwithstanding the foregoing, at any time on or prior to November 30, 2000,
the Company may redeem up to 35% of the aggregate principal amount of the
Notes with the net cash proceeds of one or more Public Equity Offerings at a
redemption price equal to 111.25% of the principal amount thereof, plus
accrued and unpaid interest, if any, to the redemption date; provided that (a)
at least $65.0 million aggregate principal amount of the Notes remains
outstanding immediately after the occurrence of such redemption and (b) notice
of such redemption is given within 60 days of the date of the closing of any
such Public Equity Offering.
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If less than all of the Notes are to be redeemed at any time, selection of
the Notes to be redeemed will be made by the Trustee from among the
outstanding Notes on a pro rata basis, by lot or by any other method permitted
in the Indenture. Notice of redemption will be mailed at least 30 days but not
more than 60 days before the redemption date to each Holder whose Notes are to
be redeemed at the registered address of such Holder. On and after the
redemption date, interest will cease to accrue on the Notes or portions
thereof called for redemption.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, the Company shall be obligated
to make an offer to all Holders of Notes to purchase (a "Change of Control
Offer") all outstanding Notes and will purchase, on a business day not more
than 60 days nor less than 30 days after the occurrence of the Change of
Control (such purchase date being the "Change of Control Purchase Date"), all
Notes properly tendered pursuant to such offer to purchase for a cash price
(the "Change of Control Purchase Price") equal to 101% of the principal amount
of the Notes, plus accrued and unpaid interest, if any, to the Change of
Control Purchase Date. The Change of Control Offer is required to remain open
for at least 20 business days or for such longer period as is required by law.
In order to effect a Change of Control Offer, the Company shall within 30
days after the occurrence of the Change of Control mail to the Trustee, who
shall mail to each Holder of Notes, a copy of the Change of Control Offer,
which shall state, among other things, the procedures that Holders must follow
to accept the Change of Control Offer.
The Company's obligation to make a Change of Control Offer will be satisfied
if a third party makes the Change of Control Offer in the manner and at the
times and otherwise in compliance with the requirements applicable to a Change
of Control Offer made by the Company and purchases all Notes properly tendered
and not withdrawn under such Change of Control Offer. The occurrence of the
events constituting a Change of Control under the Indenture may result in an
event of default in respect of other Indebtedness of the Company and its
Subsidiaries and, consequently, the lenders thereof may have the right to
require repayment of such Indebtedness in full. If a Change of Control Offer
is made, there can be no assurance that the Company will have available funds
sufficient to pay for all or any of the Notes that might be delivered by
Holders of Notes seeking to accept the Change of Control Offer.
In addition, the Credit Agreement or other Indebtedness could restrict the
Company's ability to purchase Notes upon a Change of Control. In the event a
Change of Control occurs at a time when the Company is prohibited from
purchasing Notes, the Company would seek the consent of its lenders to the
purchase of Notes or could attempt to refinance the Indebtedness that contains
such prohibition. If the Company does not obtain such a consent or repay such
Indebtedness, the Company could remain prohibited from purchasing Notes. In
such case, the Company's failure to make a Change of Control Offer or to
purchase Notes tendered pursuant to a Change of Control Offer would constitute
an Event of Default under the Indenture, which could, in turn, constitute a
default under such other Indebtedness.
The definition of Change of Control includes the sale of "all or
substantially all" of the assets of the Company or the Company and its
Restricted Subsidiaries taken as a whole. The phrase "all or substantially
all" is subject to interpretation under applicable legal precedent and has no
clear meaning. As a result, there may be uncertainty as to whether a Change of
Control has occurred.
The Change of Control feature of the Notes, by requiring a Change of Control
Offer, may in certain circumstances make more difficult or discourage a sale
or takeover of the Company, and, thus, the removal of incumbent management.
The Change of Control feature, however, is not part of a plan by management to
adopt a series of antitakeover provisions. Instead, the Change of Control
feature is a result of negotiations between the Company and the Initial
Purchasers. Subject to the limitations discussed below, the Company could, in
the future, enter into certain transactions, including acquisitions,
refinancings or other recapitalizations, that would not constitute a Change of
Control under the Indenture, but that could increase the amount of
Indebtedness outstanding at such time or otherwise affect the Company's
capital structure or credit ratings.
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The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder, if
applicable, in connection with the purchase of Notes pursuant to a Change of
Control Offer.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
Limitations on Additional Indebtedness. (A) (i) The Company will not, and
will not permit any of its Restricted Subsidiaries to, directly or indirectly,
incur any Indebtedness (including without limitation Acquired Indebtedness)
and (ii) the Company will not permit any of its Restricted Subsidiaries (other
than any Guarantor) to issue (except if issued to or owned beneficially and of
record by the Company or any of its Restricted Subsidiaries) any Capital Stock
having a preference in liquidation or with respect to the payment of
dividends; provided that (a) the Company and its Restricted Subsidiaries may
incur Permitted Indebtedness and (b) the Company or any Guarantor may incur
Indebtedness if, after giving effect thereto, the Company's Consolidated Fixed
Charge Coverage Ratio on the date thereof would be at least 2.0 to 1.
For purposes of determining compliance with this covenant, in the event that
an item of Indebtedness may be incurred through clause (b) of this covenant or
by meeting the criteria of one or more of the types of Permitted Indebtedness
pursuant to clause (a), the Company, in its sole discretion, (i) may classify
such item of Indebtedness under and comply with either of such clauses (or any
of such definitions), as applicable, (ii) may classify and divide such item of
Indebtedness into more than one of such clauses (or definitions), as
applicable, and (iii) may elect to comply with such clauses (or definitions),
as applicable, in any order.
(B) The Company will not, and will not permit any of its Subsidiaries that
are Guarantors to, incur any Indebtedness that is expressly subordinated to
any other Indebtedness of the Company or such Subsidiary unless such
Indebtedness by its terms is also expressly made subordinated to the Notes, in
the case of the Company, or the Subsidiary Guarantees, in the case of a
Subsidiary.
Limitations on Restricted Payments. The Company will not, and will not
permit any of its Restricted Subsidiaries to, directly or indirectly, make any
Restricted Payment (except as permitted below) if at the time of such
Restricted Payment:
(i) a Default or Event of Default shall have occurred and be continuing
or shall occur as a consequence thereof;
(ii) the Company would be unable to incur an additional $1.00 of
Indebtedness pursuant to the Consolidated Fixed Charge Coverage Ratio test
set forth in the "Limitations on Additional Indebtedness" covenant; or
(iii) the amount of such Restricted Payment, when added to the aggregate
amount of all Restricted Payments made after the Issue Date (other than any
Restricted Payment permitted under clause (3)(a), (4) or (5) of the next
paragraph), exceeds the sum (the "Basket") of (A) 50% of the Company's
Consolidated Net Income (taken as one accounting period) from the beginning
of the first fiscal quarter commencing after the Issue Date to the end of
the Company's most recently ended fiscal quarter for which financial
statements are available at the time of such Restricted Payment (or, if
such aggregate Consolidated Net Income shall be a deficit, minus 100% of
such aggregate deficit), plus (B) the net cash proceeds from the issuance
and sale (other than to a Restricted Subsidiary of the Company) after the
Issue Date of Qualified Stock, plus (C) the net cash proceeds from the
issuance or sale (other than to a Restricted Subsidiary of the Company) of
Indebtedness or shares of Disqualified Stock after the Issue Date that have
been converted into or exchanged for Qualified Stock of the Company,
together with the aggregate net cash proceeds received by the Company at
the time of such conversion or exchange, plus (D) to the extent that any
Restricted Investment that was made after the Issue Date is sold for cash
or otherwise liquidated or repaid for cash, in whole or in part, the
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lesser of (x) the cash return of capital (including repayment in cash of
Indebtedness, if applicable) with respect to such Restricted Investment
(less the cost of disposition, if any) and (y) the initial amount of such
Restricted Investment, plus (E) the amount of Restricted Investment
outstanding in an Unrestricted Subsidiary at the time such Unrestricted
Subsidiary is designated a Restricted Subsidiary of the Company in
accordance with the definition of "Unrestricted Subsidiary."
The foregoing provisions will not prohibit, so long as (with respect to
clauses (2) and (3) below) no Default or Event of Default shall have occurred
and be continuing, (1) the payment of any dividend within 60 days after the
date of declaration thereof, if at said date of declaration such payment would
have complied with the provisions of the Indenture; (2) the redemption of any
Capital Stock of the Company in exchange for, or out of the proceeds of, the
substantially concurrent sale (other than to a Restricted Subsidiary of the
Company) of any Qualified Stock of the Company; (3) the redemption of
Subordinated Indebtedness (a) with the net proceeds from or incurrence of
Permitted Refinancing Indebtedness or (b) in exchange for, or out of the
proceeds of, the substantially concurrent issue and sale of Qualified Stock of
the Company (other than (x) Capital Stock sold to a Restricted Subsidiary of
the Company and (y) Capital Stock purchased with the proceeds of loans from
the Company or any of its Restricted Subsidiaries), (4) the redemption of any
Capital Stock of the Company or of Parent, or dividends to Parent in any
amount sufficient to and for the purpose of redeeming Capital Stock of Parent,
held by any present or former employee or director of the Company or any of
its Restricted Subsidiaries (or the estate or a trust for the benefit of any
such Person) in an aggregate amount not to exceed $1.5 million in any fiscal
year (provided that any unused amounts may be carried over to the immediately
subsequent fiscal year but not beyond such fiscal year), (5) dividends to
Parent in an amount sufficient for Parent to pay its legal, accounting and
other operating expenses incurred in the ordinary course of business, but not
to exceed $200,000 in the aggregate in any fiscal year and (6) the payment in
an amount not to exceed $600,000 per year of dividends to Parent in an amount
sufficient to and for the purpose of paying fees to Saratoga or its Affiliates
pursuant to the Management Services Agreement.
The amounts referred to in clauses (1), (2), (3)(b) and (6) shall be
included as Restricted Payments in any computation made pursuant to clause
(iii) above.
Limitations on Restrictions on Distributions from Restricted
Subsidiaries. The Company will not, and will not permit any of its Restricted
Subsidiaries to, create or otherwise cause or suffer to exist or become
effective any consensual Payment Restriction with respect to any of its
Restricted Subsidiaries, except for any such Payment Restriction existing
under or by reason of (a) applicable law, (b) customary non-assignment or net
worth provisions in leases or other contracts entered into in the ordinary
course of business and consistent with past practices, (c) purchase money
obligations for property acquired in the ordinary course of business that
impose restrictions on the property so acquired, (d) customary restrictions
imposed on the transfer of copyrighted or patented materials, (e) the entering
into of a contract for the sale or other disposition of assets, directly or
indirectly, so long as such restrictions do not extend to assets that are not
subject to such sale or other disposition, (f) the terms of any agreement
evidencing any Indebtedness of Restricted Subsidiaries that was permitted by
the Indenture to be incurred that only restricts the transfer of the assets
purchased with the proceeds of such Indebtedness, (g) the terms of the Credit
Agreement in effect on the Issue Date or any similar Payment Restriction under
the Credit Agreement or any similar bank credit facility, provided that such
similar Payment Restriction, taken as a whole, is not materially more
restrictive than the Payment Restriction in effect on the Issue Date under the
Credit Agreement, (h) the terms of any agreement evidencing any Acquired
Indebtedness that was permitted to be incurred pursuant to the Indenture,
provided that such Payment Restriction only applies to assets that were
subject to such restriction and encumbrances prior to the acquisition of such
assets by the Company or its Restricted Subsidiaries, (i) contracts of a
Restricted Subsidiary in effect prior to such Person becoming a Restricted
Subsidiary and not entered into in contemplation thereof, so long as such
restriction applies only to such Restricted Subsidiary or its assets, (j)
restrictions on transfer of property or assets pursuant to any Lien permitted
under the Indenture, (k) the terms of any agreement in effect on the Issue
Date as such Payment Restriction is in effect on the Issue Date or as
thereafter amended; provided that such Payment Restriction is no more
restrictive, (1) the Indenture, the Notes or the Guarantees, and (m)
Refinancing
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Indebtedness; provided that any such Payment Restrictions that arise under
such Refinancing Indebtedness are not, taken as a whole, more restrictive than
those under the agreement creating or evidencing the Indebtedness being
refinanced.
Limitations on Transactions with Affiliates. The Company will not, and will
not permit any of its Restricted Subsidiaries to, directly or indirectly, in
one transaction or a series of related transactions, sell, lease, transfer or
otherwise dispose of any of its properties or assets to, or purchase any
property or assets from or enter into any contract, agreement, understanding,
loan, advance or guarantee with, or for the benefit of, any of their
respective Affiliates (each of the foregoing, an "Affiliate Transaction"),
unless (i) such Affiliate Transaction is on terms that are no less favorable
to the Company or the relevant Restricted Subsidiary than those that could
have been obtained in a comparable transaction by the Company or such
Restricted Subsidiary with an unrelated Person and (ii) the Company delivers
to the Trustee (a) with respect to any Affiliate Transaction (or series of
related transactions) involving aggregate payments in excess of $1.0 million,
an Officers' Certificate certifying that such Affiliate Transaction complies
with clause (i) above and a Secretary's Certificate which sets forth and
authenticates a resolution that has been adopted by a vote of a majority of
the Disinterested Directors approving such Affiliate Transaction or states
that there are no Disinterested Directors, in which case an opinion, as
described in clause (b), shall be required and (b) with respect to any
Affiliate Transaction (or series of related transactions) involving aggregate
payments in excess of $5.0 million, the certificates described in the
preceding clause (a) and an opinion as to the fairness to the Company or such
Restricted Subsidiary from a financial point of view issued by an Independent
Financial Advisor; provided, however, that the following shall not be deemed
to be Affiliate Transactions: (i) transactions exclusively between or among
(1) the Company and one or more Restricted Subsidiaries or (2) Restricted
Subsidiaries, provided, in each case, that no Affiliate of the Company (other
than any Person that is such an Affiliate solely because of the control of
such Person by the Company) owns Capital Stock of any such Restricted
Subsidiary; (ii) transactions between the Company or any Restricted Subsidiary
and any qualified employee stock ownership plan established for the benefit of
the Company's employees, or the establishment or maintenance of any such plan;
(iii) reasonable director, officer and employee compensation and other
benefit, and indemnification, arrangements approved by the Board of Directors;
(iv) transactions permitted by the "Limitations on Restricted Payments"
covenant; (v) the existence of, or the performance by the Company or any
Restricted Subsidiary under, the Management Services Agreement with respect to
fees of up to $600,000 per year and any other agreement in effect on the Issue
Date, as such agreement is in effect on the Issue Date or as amended
thereafter in any manner no less favorable to the Holders; (vi) prepaid
expenses and loans or advances to employees or directors of the Company or any
of its Subsidiaries in the ordinary course of business; (vii) the pledge of
Capital Stock of Unrestricted Subsidiaries to support the Indebtedness
thereof; (viii) the entering into of a tax sharing agreement, or payments
pursuant thereto, between the Company and/or one or more Subsidiaries, on the
one hand, and any other Person with which the Company or such Subsidiaries are
required or permitted to file a consolidated tax return or with which the
Company or such Subsidiaries are or could be part of a consolidated group for
tax purposes, on the other hand, which payments by the Company and its
Restricted Subsidiaries are not in excess of the tax liabilities that would
have been payable by them on a stand-alone basis; and (ix) the issuance and
sale by the Company to its Affiliates of Qualified Stock.
Limitations on Liens. The Company will not incur, and will not permit any
Restricted Subsidiary to, directly or indirectly create, incur, assume or
suffer to exist any Lien on any property or asset now owned or hereafter
acquired, or on any income, profits or proceeds therefrom, or assign or convey
any right to receive income therefrom, except Permitted Liens, unless prior
thereto or simultaneously therewith the Notes are equally and ratably secured;
provided that if such Indebtedness is Subordinated Indebtedness the Lien
securing such Indebtedness shall be expressly subordinated and junior to the
Lien securing the Notes.
Limitations on Asset Sales. (a) The Company will not, and will not permit
any of its Restricted Subsidiaries to, engage in any Asset Sale unless (i) the
Company or such Restricted Subsidiary receives consideration at the time of
such Asset Sale at least equal to the Fair Market Value of the assets sold,
(ii) at least 80% of the consideration received by the Company or the relevant
Restricted Subsidiary in respect of such Asset
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Sale consists of (A) cash or Cash Equivalents, (B) the assumption of
Indebtedness (other than Subordinated Indebtedness) of the Company or any
Guarantor or Indebtedness of any non-Guarantor Restricted Subsidiary, (C)
Related Assets or (D) any combination of the foregoing clauses (A), (B) and
(C).
(b) If the Company or any Restricted Subsidiary engages in an Asset Sale,
the Company or any Restricted Subsidiary may either, no later than 270 days
after such Asset Sale, (i) apply all or any of the Net Available Proceeds
therefrom to repay amounts outstanding under the Credit Agreement (including
by providing cash collateral) or any other Indebtedness (other than
Subordinated Indebtedness) of the Company or any Restricted Subsidiary;
provided, in each case, that the related loan commitment (if any) is thereby
permanently reduced by the amount of such Indebtedness so repaid or (ii)
invest all or any part of the Net Available Proceeds thereof in Related
Assets. Pending final disposition of Net Available Proceeds, amounts may be
used to repay any amounts outstanding under the Credit Agreement. The amount
of such Net Available Proceeds not applied or invested as provided in this
paragraph will constitute "Excess Proceeds."
(c) When the aggregate amount of Excess Proceeds equals or exceeds $5.0
million, the Company will be required to make an offer to purchase, from all
Holders of the Notes, an aggregate principal amount of Notes equal to such
Excess Proceeds as follows:
(i) The Company will make an offer to purchase (a "Net Proceeds Offer")
from all Holders of the Notes in accordance with the procedures set forth
in the Indenture the maximum principal amount (expressed as a multiple of
$1,000) of Notes that may be purchased (the "Payment Amount") out of the
amount of such Excess Proceeds.
(ii) The offer price for the Notes will be payable in cash in an amount
equal to 100% of the principal amount of the Notes tendered pursuant to a
Net Proceeds Offer, plus accrued and unpaid interest and Liquidated
Damages, if any, to the date such Net Proceeds Offer is consummated (the
"Offered Price"), in accordance with the procedures set forth in the
Indenture. To the extent that the aggregate Offered Price of Notes tendered
pursuant to a Net Proceeds Offer is less than the Payment Amount relating
thereto (such shortfall constituting a "Net Proceeds Deficiency"), the
Company may use such Net Proceeds Deficiency, or a portion thereof, for
general corporate purposes, subject to the limitations of the "Limitations
on Restricted Payments" covenant.
(iii) If the aggregate Offered Price of Notes validly tendered and not
withdrawn by Holders thereof exceeds the Payment Amount, Notes to be
purchased will be selected on a pro rata basis.
(iv) Upon completion of such Net Proceeds Offer, the amount of Excess
Proceeds remaining shall be zero.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder, if
applicable, in the event that an Asset Sale occurs and the Company is required
to purchase Notes as described above.
Restrictions on Sale and Leaseback Transactions. The Company will not, and
will not permit any of its Restricted Subsidiaries to, directly or indirectly,
enter into, renew or extend any Sale and Leaseback Transaction unless: (i) the
Company or such Subsidiary would be entitled, under the "Limitations on
Additional Indebtedness" covenant, to incur Indebtedness in an amount equal to
the Attributable Indebtedness with respect to such Sale and Leaseback; (ii)
such Sale and Leaseback Transaction would not result in a violation of the
"Limitation on Liens" covenant; and (iii) the Net Available Proceeds from any
such Sale and Leaseback Transaction are applied in a manner consistent with
the provisions of the "Limitations on Asset Sales" covenant.
Restrictions on Sale of Capital Stock of Restricted Subsidiaries. The
Company will not, and will not permit any Restricted Subsidiary to, directly
or indirectly sell or otherwise dispose of any of the Capital Stock of any
Restricted Subsidiary unless: (i) (a) the Restricted Subsidiary shall remain a
Restricted Subsidiary, or (b) all of the Capital Stock of such Restricted
Subsidiary shall be sold or otherwise disposed of or any Capital Stock of such
Restricted Subsidiary retained by the Company or its Restricted Subsidiaries
is treated as an Investment
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and complies with the provisions described under "Limitations on Restricted
Payments," and (ii) the Net Available Proceeds from any such sale or
disposition are applied in a manner consistent with the provisions described
under "Limitations on Asset Sales."
Reports. Whether or not required by the rules and regulations of the
Securities and Exchange Commission (the "Commission"), so long as any Notes
are outstanding, the Company and the Guarantors will file with the Commission,
to the extent such filings are accepted by the Commission, and will furnish to
the Holders of Notes all quarterly and annual reports and other information,
documents and reports that would be required to be filed with the Commission
pursuant to Section 13 of the Exchange Act if the Company and the Guarantors
were required to file under such section. The Company and the Guarantors have
agreed that, for so long as any Notes remain outstanding, they will furnish to
the Holders and beneficial holders of Notes and to prospective purchasers of
Notes designated by the Holders of Transfer Restricted Securities and to
broker-dealers, upon their request, the information required to be delivered
pursuant to Rule 144A(d)(4) under the Securities Act.
MERGER, CONSOLIDATION AND SALE OF ASSETS
The Company will not, in a single transaction or a series of related
transactions, (i) consolidate or merge with or into (other than a merger with
a Wholly Owned Restricted Subsidiary solely for the purpose of changing the
Company's jurisdiction of incorporation to another State of the United
States), or sell, lease, transfer, convey or otherwise dispose of or assign
all or substantially all of the assets of the Company and the Restricted
Subsidiaries (taken as a whole), or assign any of its obligations under the
Notes and the Indenture, to any Person or (ii) adopt a Plan of Liquidation
unless, in either case: (a) the Person formed by or surviving such
consolidation or merger (if other than the Company) or to which such sale,
lease, conveyance or other disposition or assignment shall be made (or, in the
case of a Plan of Liquidation, any Person to which assets are transferred)
(collectively, the "Successor"), is a corporation organized and existing under
the laws of the United States or any State thereof or the District of
Columbia, and the Successor assumes by supplemental indenture in a form
satisfactory to the Trustee all of the obligations of the Company under the
Notes and the Indenture; (b) immediately prior to and immediately after giving
effect to such transaction and the assumption of the obligations as set forth
in clause (a) above and the incurrence of any Indebtedness to be incurred in
connection therewith, no Default or Event of Default shall have occurred and
be continuing; and (c) immediately after and giving effect to such transaction
and the assumption of the obligations set forth in clause (a) above and the
incurrence of any Indebtedness to be incurred in connection therewith, and the
use of any net proceeds therefrom on a pro forma basis, (1) the Consolidated
Net Worth of the Company or the Successor, as the case may be, would be at
least equal to the Consolidated Net Worth of the Company immediately prior to
such transaction and (2) the Company or the Successor, as the case may be,
could incur at least $1.00 of additional Indebtedness pursuant to the
Consolidated Fixed Charge Coverage Ratio test set forth in the "Limitations on
Additional Indebtedness" covenant; and (d) each Subsidiary Guarantor, unless
it is the other party to the transactions described above, shall have by
amendment to its guarantee confirmed that its guarantee of the Notes shall
apply to the obligations of the Company or the Successor under the Notes and
the Indenture. For purposes of this covenant, any Indebtedness of the
Successor which was not Indebtedness of the Company immediately prior to the
transaction shall be deemed to have been incurred in connection with such
transaction.
The Indenture provides that upon any consolidation or merger or any transfer
of all or substantially all of the assets of the Company in accordance with
the foregoing, the surviving Person formed by such consolidation or into which
the Company is merged or to which such transfer is made shall succeed to, and
be substituted for, and may exercise every right and power of, the Company
under the Indenture with the same effect as if such surviving Person had been
named as the Company therein; provided, however, that solely for purposes of
computing the Basket described in subclause (iii) of the first paragraph of
the covenant described under "--Limitations on Restricted Payments," the
Basket shall not be affected by the Consolidated Net Income or other
attributes of the surviving Person prior to the effective time of the merger
and any such surviving Person shall be deemed to have succeeded to and be
substituted for the Company only with respect to periods subsequent to the
effective time of such merger, consolidation or transfer of assets.
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EVENTS OF DEFAULT
The following are "Events of Default" under the Indenture:
(i) failure by the Company to pay interest on any of the Notes when it
becomes due and payable and the continuance of any such failure for 30
days;
(ii) failure by the Company to pay the principal or premium, if any, on
any of the Notes when it becomes due and payable, whether at stated
maturity, upon redemption, upon acceleration or otherwise;
(iii) the Company shall fail to comply with any of its agreements or
covenants described above under "--Merger, Consolidation and Sale of
Assets," or "--Change of Control";
(iv) failure by the Company to comply with any other covenant in the
Indenture and continuance of such failure for 30 days after notice of such
failure has been given to the Company by the Trustee or by the Holders of
at least 25% of the aggregate principal amount of the Notes then
outstanding;
(v) failure by the Company or any of its Subsidiaries to make any payment
of principal on Indebtedness of the Company or any such Subsidiary at its
stated final maturity after the expiration of any applicable grace period
in an aggregate outstanding principal amount of $5.0 million or more;
(vi) a default under any Indebtedness of the Company or any Subsidiary,
whether such Indebtedness now exists or hereafter shall be created, if (A)
such default results in the Holder or Holders of such Indebtedness causing
the Indebtedness to become due prior to its stated final maturity and (B)
the outstanding principal amount of such Indebtedness, together with the
outstanding principal amount of any other such Indebtedness the maturity of
which has been so accelerated, aggregate $5.0 million or more at any one
time;
(vii) one or more final judgments or orders that exceed $5.0 million in
the aggregate for the payment of money have been entered by a court or
courts of competent jurisdiction against the Company or any Subsidiary of
the Company and such judgment or judgments have not been satisfied, stayed,
annulled or rescinded within 60 days of being entered;
(viii) certain events of bankruptcy, insolvency or reorganization
involving the Company or any Significant Subsidiary of the Company; and
(ix) except as permitted by the Indenture or by its terms, any Guarantee
ceases to be in full force and effect or any Guarantor repudiates its
obligations under any Guarantee.
If an Event of Default (other than an Event of Default specified in clause
(viii) above involving the Company) shall have occurred and be continuing
under the Indenture, the Trustee, by written notice to the Company, or the
Holders of at least 25% in aggregate principal amount of the Notes then
outstanding by written notice to the Company and the Trustee, may declare all
amounts owing under the Notes to be due and payable immediately. Upon such
declaration of acceleration, the aggregate principal of, premium, if any, and
interest on the outstanding Notes shall immediately become due and payable. If
an Event of Default specified in clause (viii) above involving the Company
occurs, all outstanding Notes shall become due and payable without any further
action or notice. The Holders of a majority in aggregate principal amount of
the Notes then outstanding may waive an existing Default or Event of Default
and its consequences, except as a result of a failure to pay principal of,
premium, if any, or interest on any Notes or in respect of a covenant or
provision which under the Indenture cannot be modified or amended without the
consent of the Holder of each outstanding Note.
The Holders may not enforce the provisions of the Indenture or the Notes
except as provided in the Indenture. Subject to certain limitations, Holders
of a majority in principal amount of the Notes then outstanding may direct the
Trustee in its exercise of any trust or power; provided, however, that such
direction does not conflict with the terms of the Indenture. The Trustee may
withhold from the Holders notice of any continuing
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Default or Event of Default (except any Default or Event of Default in payment
of principal of, premium, if any, or interest on the Notes) if the Trustee
determines that withholding such notice is in the Holders' interest.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture and, upon any Officer of the Company
becoming aware of any Default or Event of Default, a statement specifying such
Default or Event of Default and what action the Company is taking or proposes
to take with respect thereto.
LEGAL DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE
The Company may, at its option and at any time, terminate the obligations of
the Company and the Guarantors with respect to the outstanding Notes and the
Guarantees (such action being a "legal defeasance"). Such legal defeasance
means that the Company shall be deemed to have paid and discharged the entire
Indebtedness represented by the outstanding Notes and to have been discharged
from all its other obligations with respect to the Notes and the Guarantors to
have been discharged from their Guarantees, except for (i) the rights of
Holders of outstanding Notes to receive, from the trust referred to below,
payment in respect of the principal of, premium, if any, and interest on such
Notes when such payments are due, (ii) the Company's obligations to replace
any temporary Notes, register the transfer or exchange of any Notes, replace
mutilated, destroyed, lost or stolen Notes and maintain an office or agency
for payments in respect of the Notes, (iii) the rights, powers, trusts, duties
and immunities of the Trustee, and (iv) the legal defeasance provisions of the
Indenture. In addition, the Company may, at its option and at any time, elect
to terminate the obligations of the Company with respect to certain covenants
that are set forth in the Indenture, some of which are described under "--
Certain Covenants" above, and any omission to comply with such obligations
shall not constitute a Default or an Event of Default with respect to the
Notes (such action being a "covenant defeasance"). In the event covenant
defeasance occurs, certain events (not including nonpayment, bankruptcy,
insolvency and reorganization events) described under "Events of Default" will
no longer constitute an Event of Default with respect to the Notes.
In order to exercise either legal defeasance or covenant defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Notes, cash in United States dollars, U.S. Government
Obligations (as defined in the Indenture), or a combination thereof, in such
amounts as will be sufficient, in the opinion of a nationally recognized firm
of independent public accountants, to pay the principal of, premium, if any,
and interest and Liquidated Damages, if any, on the outstanding Notes to
redemption or maturity; (ii) the Company shall have delivered to the Trustee
an Opinion of Counsel to the effect 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 or 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 legal defeasance or covenant
defeasance had not occurred (in the case of legal defeasance, such Opinion
must refer to and be based upon a published ruling of the Internal Revenue
Service or a change in applicable federal income tax laws); (iii) no Default
or Event of Default shall have occurred and be continuing on the date of such
deposit or insofar as clause (viii) under the first paragraph of "Events of
Default" is concerned, at any time during the period ending on the 123rd day
after the date of deposit; (iv) such legal defeasance or covenant defeasance
shall not cause the Trustee to have a conflicting interest under the Indenture
or the Trust Indenture Act with respect to any securities of the Company; (v)
such legal defeasance or covenant defeasance shall not result in a breach or
violation of, or constitute a default under, any material agreement or
instrument to which the Company or any of its Restricted Subsidiaries is a
party or by which the Company or any of its Restricted Subsidiaries is bound;
(vi) the Company shall have delivered to the Trustee an Officers' Certificate
stating that the deposit was not made by the Company with the intent of
preferring the Holders of the Notes over the other creditors of the Company
with the intent of defeating, hindering, delaying or defrauding creditors of
the Company or others; and (vii) the Company shall have delivered to the
Trustee an Officers' Certificate and an Opinion of Counsel satisfactory to the
Trustee, each stating that all conditions precedent under the Indenture
relating to either legal defeasance or covenant defeasance, as the case may
be, have been complied with.
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SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights of registration of transfer or exchange of the
Notes, as expressly provided for in the Indenture) as to all outstanding Notes
when (i) either (a) all the Notes theretofore authenticated and delivered
(except lost, stolen, mutilated or destroyed Notes which have been replaced or
paid and Notes for whose payment money or certain U.S. Government Obligations
have theretofore been deposited in trust or segregated and held in trust by
the Company and thereafter repaid to the Company or discharged from such
trust) have been delivered to the Trustee for cancellation or (b) all Notes
not theretofore delivered to the Trustee for cancellation have become due and
payable or will become due and payable at their stated final maturity within
one year, or are to be called for redemption within one year under
arrangements satisfactory to the Trustee for the serving of notice of
redemption by the Trustee in the name, and at the expense, of the Company, and
the Company has irrevocably deposited or
caused to be deposited with the Trustee funds in an amount sufficient to pay
and discharge the entire Indebtedness on the Notes not theretofore delivered
to the Trustee for cancellation, for principal of, premium, if any, and
interest and Liquidated Damages, if any, on the Notes to the date of deposit
(in the case of Notes which have become due and payable) or to the stated
final maturity or Redemption Date, as the case may be, together with
instructions from the Company irrevocably directing the Trustee to apply such
funds to the payment thereof at maturity or redemption, as the case may be;
(ii) the Company has paid all other sums payable under the Indenture by the
Company; and (iii) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel each stating that all conditions
precedent under the Indenture relating to the satisfaction and discharge of
the Indenture have been complied with.
TRANSFER AND EXCHANGE
A Holder will be able to register the transfer of or exchange Notes only in
accordance with the provisions of the Indenture. The Registrar may require a
Holder, among other things, to furnish appropriate endorsements and transfer
documents and to pay any taxes and fees required by law or permitted by the
Indenture. Without the prior consent of the Company, the Registrar is not
required (i) to register the transfer of or exchange any Note selected for
redemption, (ii) to register the transfer of or exchange any Note for a period
of 15 days before a selection of Notes to be redeemed or (iii) to register the
transfer or exchange of a Note between a record date and the next succeeding
interest payment date. The registered Holder of a Note will be treated as the
owner of such Note for all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Subject to certain exceptions, the Indenture or the Notes may be amended or
supplemented with the consent (which may include consents obtained in
connection with a tender offer or exchange offer for Notes) of the Holders of
at least a majority in principal amount of the Notes then outstanding, and any
existing Default or Event of Default under, or compliance with any provision
of, the Indenture may be waived (other than any continuing Default or Event of
Default in the payment of the principal of, premium, if any, or interest on
the Notes) with the consent (which may include consents obtained in connection
with a tender offer or exchange offer for Notes) of the Holders of a majority
in principal amount of the Notes then outstanding. Without the consent of any
Holder, the Company 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 Company's obligations to Holders in the case
of a merger or acquisition, to add a Guarantee or to make any change that does
not adversely affect the rights of any Holder.
Without the consent of each Holder affected, the Company and the Trustee may
not: (i) extend the maturity of any Note; (ii) affect the terms of any
scheduled payment of interest on or principal of the Notes (including without
limitation any redemption provisions (other than any provision described under
"--Change of Control" or "--Certain Covenants--Limitations on Asset Sales" or
the definitions related thereto)); (iii) take any action that would
subordinate the Notes or the Guarantees to any other Indebtedness of the
Company or any of the Guarantors, respectively, or otherwise change the
ranking of the Notes or the Guarantees in a manner adverse to
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the Holders; (iv) reduce the percentage of Holders necessary to consent to an
amendment, supplement or waiver to the Indenture; or (v) release a Guarantee
(except pursuant to its terms). In addition, without the consent of the
Holders of at least 75% of the aggregate principal amount of Notes affected
thereby, the Company and the Trustee may not make any change in the provisions
described above under the caption "Change of Control" or the definitions
related thereto.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee will be permitted to engage
in other transactions; however, if it acquires any conflicting interest (as
defined in the Trust Indenture Act), it must eliminate such conflict or
resign.
The Indenture provides that, in the event that an Event of Default occurs
and is not cured, the Trustee will be required, in the exercise of its power,
to use the degree of care of a prudent person in similar circumstances 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, unless such Holder shall have offered
to the Trustee security and indemnity satisfactory to the Trustee.
United States Trust Company of New York is the Trustee under the Indenture.
United States Trust Company of New York is also the Transfer Agent, Registrar
and Paying Agent for the Senior Preferred Stock and the Warrant Agent for the
Warrants.
GOVERNING LAW
The Indenture, the Notes and the Guarantees are governed by, and construed
in accordance with, the laws of the State of New York.
BOOK-ENTRY, DELIVERY AND FORM
The certificates representing the Exchange Notes will be issued in fully
registered form without interest coupons (each, a "Global Note"). Upon
issuance, each Global Note will be deposited with, or on behalf of, The
Depository Trust Company (the "Depositary") and registered in the name of Cede
& Co., as nominee of the Depositary, and the Depository or its custodian will
credit, on its internal system, the respective principal amount of the
individual beneficial interests represented by each Global Note to the
accounts of persons who have accounts with the Depositary. Ownership of
beneficial interests in a Global Note will be limited to persons who have
accounts with the Depositary ("participants") or persons who hold interests
through participants. Ownership of beneficial interests in a Global Note will
be shown on, and the transfer of that ownership will be effected only through,
records maintained by the Depositary or its nominee (with respect to interests
of participants) and the records of participants (with respect to interests of
persons other than participants).
So long as the Depositary, or its nominee, is the registered holder of a
Global Note, the Depositary or such nominee, as the case may be, will be
considered the sole owner or holder of the Notes represented by such Global
Note for all purposes under the Indenture and the Notes. No beneficial owner
of an interest in a Global Note will be able to transfer that interest except
in accordance with the Depositary's applicable procedures.
Payments of the principal of, and interest on, the Global Notes will be made
to the Depositary or its nominee, as the case may be, as the registered owner
thereof. None of the Company, the Trustee or any Paying Agent will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the Global Notes
or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
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The Company expects that the Depositary or its nominee, upon receipt of any
payment of principal or interest in respect of a Global Note, will credit
participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of such Global Note as
shown on the records of the Depositary or its nominee. The Company also
expects that payments by participants to owners of beneficial interests in
such Global Note held through such participants will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers registered in the name of nominees for such
customers. Such payments will be the responsibility of such participants.
Transfers between participants in the Depositary will be effected in the
ordinary way in accordance with the Depositary's rules and will be settled in
same-day funds.
The Depositary has advised the Company that it will take any action
permitted to be taken by a holder of Notes (including the presentation of
Notes for exchange as described below) only at the direction of one or more
participants to whose accounts an interest in the Global Notes is credited and
only in respect of such portion of the aggregate principal amount of Notes as
to which such participant or participants has or have given such direction.
The Depositary has advised the Company as follows: the Depositary is a
limited purpose trust company organized under the laws of the State of New
York, a "banking organization" within the meaning of New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the Uniform Commercial Code and a "clearing Agency" registered
pursuant to the provisions of Section 17A of the Exchange Act. The Depositary
was created to hold securities for its participants and facilitate the
clearance and settlement of securities transactions between participants
through electronic book-entry changes in accounts of its participants, thereby
eliminating the need for physical movement of certificates. Participants
include securities brokers and dealers, banks, trust companies and clearing
corporations and certain other organizations. Indirect access to the
Depositary system is available to others such as banks, brokers, dealers and
trust companies that clear through or maintain a custodial relationship with a
participant, either directly or indirectly ("indirect participants").
Although the Depositary has agreed to the foregoing procedures in order to
facilitate transfers of interests in the Global Notes among participants of
the Depositary, it is under no obligation to perform or continue to perform
such procedures, and such procedures may be discontinued at any time. Neither
the Company nor the Trustee will have any responsibility for the performance
by the Depositary or its participants or indirect participants of their
respective obligations under the rules and procedures governing their
operations.
CERTIFICATED NOTES
If (i) the Depositary is at any time unwilling or unable to continue as a
depositary for the Global Notes and a successor depositary is not appointed by
the Company within 120 days or (ii) the Company in its sole discretion
determines that the Global Notes (in whole but not in part) should be
exchanged for certificated notes, the Company will issue certificated notes in
exchange for the Global Notes. In addition, any person having a beneficial
interest in a Global Note may, upon request to the Trustee following an Event
of Default under the Indenture, exchange such beneficial interest for
certificated notes.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms.
"Acquired Indebtedness" means, with respect to any specified Person, (a)
Indebtedness of any other Person existing at the time such other Person merged
with or into or became a Restricted Subsidiary of such specified Person,
including Indebtedness incurred in connection with, or in contemplation of,
such other Person merging with or into or becoming a Restricted Subsidiary of
such specified Person or (b) assumed in connection with acquisitions of
properties or assets from such Person. Acquired Indebtedness shall be deemed
to be incurred on
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the date the acquired Person becomes a Restricted Subsidiary or the date of
the related acquisition of properties or assets from such Person.
"Affiliate" means, with respect to any specified Person, (a) any other
Person directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person or (b) any executive
officer or director of any such specified Person or other Person. For the
purposes of this definition, "control," when used with respect to any
specified Person, includes the power to vote 10% or more of any class of
voting securities of such Person or to direct the management and policies of
such Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"amend" means amend, modify, supplement, restate or amend and restate, in
whole or in part, including successively; and "amending" and "amended" have
correlative meanings.
"Asset Sale" means any sale, issuance, conveyance, transfer, lease,
assignment or other disposition to any Person other than the Company or any of
its Subsidiaries (including, without limitation, by means of a Sale and
Leaseback Transaction or a merger or consolidation) (collectively, for
purposes of this definition, a "transfer"), directly or indirectly, in one
transaction or a series of related transactions, of (a) any Capital Stock of
any Restricted Subsidiary or (b) any other properties or assets of the Company
or any of its Restricted Subsidiaries other than transfers of cash, Cash
Equivalents, accounts receivable, inventory or other properties or assets in
the ordinary course of business. For the purposes of this definition, the term
"Asset Sale" shall not include any of the following: (i) any transaction that
is governed by, and made in accordance with, the provisions described under
"Merger, Consolidation and Sales of Assets" or that constitutes a "Change of
Control"; (ii) any Restricted Payment or Restricted Investment permitted under
the "Limitations on Restricted Payments" covenant; (iii) sales of damaged,
worn-out or obsolete equipment or assets that, in the Company's reasonable
judgment, are either no longer used or useful in the business of the Company
or its Subsidiaries; (iv) any disposition of defaulted receivables for
collection; (v) the granting of any Lien, or any foreclosure thereon, granted
in compliance with the provisions described under "--Certain Covenants--
Limitations on Liens"; (vi) the conversion of any operating lease to which
attaching machinery of the Company or any of its Restricted Subsidiaries is
subject to, or the sale of any such attaching machinery pursuant to, a
Capitalized Lease Obligation; and (vii) any transfers that, but for this
clause (vii), would be Asset Sales, if after giving effect to such transfers,
the aggregate Fair Market Value of the properties or assets transferred in
such transaction or any such series of related transactions does not exceed
$100,000.
"Attributable Indebtedness" means, with respect to any particular lease
under which any Person is at the time liable, whether or not accounted for as
a Capitalized Lease Obligation, and at any date as of which the amount thereof
is to be determined, the present value of the total net amount of rent
required to be paid by such Person under the lease during the primary term
thereof, without giving effect to any renewals at the option of the lessee,
discounted from the respective due dates thereof to such date of determination
at a rate per annum equal to the discount rate which would be applicable to a
Capitalized Lease Obligation with a like term in accordance with GAAP. As used
in the preceding sentence, the "net amount of rent" under any such lease for
any such period shall mean the sum of rental and other payments required to be
made with respect to such period by the lease thereunder, excluding any
amounts required to be paid by such lessee on account of maintenance and
repairs, insurance, taxes, assessments or similar charges. In the case of any
lease that is terminable by the lessee upon payment of a penalty, such net
amount of rent shall also include the amount of such penalty, but no rent
shall be considered as required to be paid under such lease subsequent to the
first date upon which it may be so terminated.
"Board of Directors" of any Person means the Board of Directors of such
Person (or comparable governing body) or any authorized committee thereof.
"Board Resolution" means a duly adopted resolution of the Board of Directors
of the Company.
"Capital Stock" of any Person means any and all shares, rights to purchase,
warrants or options (whether
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or not currently exercisable), participations or other equivalents of or
interests in (however designated) the equity (including without limitation
common stock, preferred stock and partnership interests) of such Person.
"Capitalized Lease Obligations" means, with respect to any Person, any
obligation of that Person to pay lease payments, rent or other amounts under a
lease of (or other similar agreement conveying the right to use) any property
(whether real, personal or mixed) that is required to be classified and
accounted for as a capital lease obligation under GAAP and, for purposes of
the Indenture, the amount of that obligation at any date will be the
capitalized amount thereof at that date, as determined in accordance with
GAAP.
"Cash Equivalents" means (i) marketable obligations with a maturity of 180
days or less issued or directly and fully guaranteed or insured by the United
States of America or any agency or instrumentality thereof (provided that the
full faith and credit of the United States of America is pledged in support
thereof); (ii) demand and time deposits and certificates of deposit or
acceptances with a maturity of 180 days or less of any financial institution
that is a member of the Federal Reserve System having combined capital and
surplus and undivided profits of not less than $500 million; (iii) commercial
paper maturing no more than 180 days from the date of creation thereof issued
by a corporation that is not an Affiliate of the Company and is organized
under the laws of any state of the United States or the District of Columbia
and rated at least A-1 by S&P or at least P-1 by Moody's; (iv) repurchase
obligations with a term of not more than seven days for underlying securities
of the types described in clause (i) above entered into with any commercial
bank meeting the specifications of clause (ii) above; and (v) investments in
money market or other mutual funds substantially all of whose assets comprise
securities of the types described in clauses (i) through (iv) above.
"Change of Control" means the occurrence of any of the following: (i) the
consummation of any transaction the result of which is (x) if such transaction
occurs prior to the first sale of Voting Stock of the Company pursuant to a
registration statement under the Securities Act that results in at least 20%
of the then outstanding Voting Stock of the Company having been sold to the
public, that Permitted Holders beneficially own Voting Stock representing less
than, directly or indirectly, 51% of the voting power of the Voting Stock of
the Company, and (y) if such transaction occurs thereafter, that any Person or
group (as such term is used in Section 13(d)(3) of the Exchange Act) (other
than Permitted Holders) is or becomes the beneficial owner (as defined in Rule
13d-3 of the Exchange Act), directly or indirectly, of Voting Stock
representing more than 35% of the voting power of the Voting Stock of the
Company unless Permitted Holders beneficially own Voting Stock representing a
greater percentage of the voting power of the Voting Stock of the Company,
(ii) the Company consolidates with, or merges with or into, another person or
sells, assigns, conveys, transfers, leases or otherwise disposes of all or
substantially all of the assets of the Company and its Restricted Subsidiaries
taken as a whole to any Person, or any Person consolidates with, or merges
with or into, the Company, in any such event pursuant to a transaction in
which the outstanding Voting Stock of the Company, as the case may be, is
converted into or exchanged for cash, securities or other property, other than
any such transaction where the outstanding Voting Stock of the Company, as the
case may be, is converted into or exchanged for Voting Stock (other than
Disqualified Stock) of the surviving or transferee corporation and the
beneficial owners of the Voting Stock of the Company immediately prior to such
transaction own, directly or indirectly, Voting Stock representing not less
than a majority of the voting power of the Voting Stock of the surviving or
transferee corporation immediately after such transaction, (iii) during any
consecutive two-year period, individuals who at the beginning of such period
constituted the Board of Directors of the Company (together with any new
directors whose election by such Board of Directors or whose nomination for
election by the stockholders of the Company was approved by either (i) a vote
of two-thirds of the directors then still in office who were either directors
at the beginning of such period or whose election or nomination for election
was previously so approved or (ii) a Permitted Holder) cease for any reason to
constitute a majority of the Board of Directors of the Company then in office,
or (iv) the approval by the Holders of Capital Stock of the Company of any
plan or proposal for liquidation or dissolution of the Company.
"Consolidated Amortization Expense" of any Person for any period means the
amortization expense of such Person and its Restricted Subsidiaries for such
period (to the extent included in the computation of Consolidated Net Income
of such Person), determined on a consolidated basis in accordance with GAAP.
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"Consolidated Depreciation Expense" of any Person for any period means the
depreciation expense of such Person and its Restricted Subsidiaries for such
period (to the extent included in the computation of Consolidated Net Income
of such Person), determined on a consolidated basis in accordance with GAAP.
"Consolidated Fixed Charge Coverage Ratio" of any Person means, with respect
to any determination date, the ratio of (x) EBITDA for such Person's four full
fiscal quarters immediately preceding the determination date for which
financial statements are available to (y) the aggregate Fixed Charges of such
Person for such four fiscal quarters. In making such computations, (i) EBITDA
and Fixed Charges shall be calculated on a pro forma basis assuming that (A)
the Indebtedness to be incurred or the Disqualified Stock to be issued (and
all other Indebtedness incurred or Disqualified Stock issued after the first
day of such period of four full fiscal quarters referred to in the
"Limitations on Additional Indebtedness" covenant through and including the
date of determination), and (if applicable) the application of the net
proceeds therefrom (and from any other such Indebtedness or Disqualified
Stock), including the refinancing of other Indebtedness, had been incurred on
the first day of such four quarter period and, in the case of Acquired
Indebtedness, on the assumption that the related transaction (whether by means
of purchase, merger or otherwise) also had occurred on such date with the
appropriate adjustments with respect to such acquisition being included in
such pro forma calculation and (B) any acquisition or disposition by the
Company or any Restricted Subsidiary of any properties or assets outside the
ordinary course of business or any repayment of any principal amount of any
Indebtedness of the Company or any Restricted Subsidiary, in either case since
the first day of such period of four full fiscal quarters through and
including the date of determination, had been consummated on such first day of
such four quarter period; (ii) the Fixed Charges attributable to interest on
any Indebtedness required to be computed on a pro forma basis in accordance
with the "Limitations on Additional Indebtedness" covenant and (A) bearing a
floating interest rate shall be computed as if the rate in effect on the date
of computation had been the applicable rate for the entire period and (B)
which was not outstanding during the period for which the computation is being
made but which bears, at the option of the Company, a fixed or floating rate
of interest, shall be computed by applying, at the option of the Company,
either the fixed or floating rate; (iii) the Fixed Charges attributable to
interest on any Indebtedness under a revolving credit facility required to be
computed on a pro forma basis in accordance with the "Limitations on
Additional Indebtedness" covenant shall be computed based upon the average
daily balance of such Indebtedness during the applicable period, provided that
such average daily balance shall be reduced by the amount of any repayment of
Indebtedness under a revolving credit facility during the applicable period,
which repayment permanently reduced the commitments or amounts available to be
reborrowed under such facility; (iv) notwithstanding the foregoing clauses
(ii) and (iii), interest on Indebtedness determined on a fluctuating basis, to
the extent such interest is covered by agreements relating to Hedging
Obligations, shall be deemed to have accrued at the rate per annum resulting
after giving effect to the operation of such agreements; and (v) if after the
first day of the applicable four-quarter period the Company has permanently
retired any Indebtedness out of the net proceeds of the issuance and sale of
shares of Capital Stock (other than Disqualified Stock) of the Company within
30 days of such issuance and sale, Fixed Charges shall be calculated on a pro
forma basis as if such Indebtedness had been retired on the first day of such
period.
"Consolidated Income Tax Expense" means, for any period, the provision for
federal, state, local and foreign income taxes (including state franchise
taxes accounted for as income taxes in accordance with GAAP) of the Company
and the Restricted Subsidiaries for the period as determined on a consolidated
basis in accordance with GAAP.
"Consolidated Interest Expense" means, without duplication, with respect to
any Person for any period, the sum of the interest expense on all Indebtedness
of such Person and its Restricted Subsidiaries for such period, determined on
a consolidated basis in accordance with GAAP and including, without limitation
(i) imputed interest on Capitalized Lease Obligations, (ii) commissions,
discounts and other fees and charges owed with respect to letters of credit
securing financial obligations and bankers' acceptance financing, (iii) the
net costs associated with Hedging Obligations, (iv) amortization of financing
fees and expenses other than with respect to financing fees and expenses paid
on or prior to the Issue Date, (v) the interest portion of any deferred
payment obligations, (vi) amortization of debt discount or premium, if any,
(vii) all other non-cash interest expense, (viii)
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capitalized interest, (ix) all interest payable with respect to discontinued
operations, and (x) all interest on any Indebtedness of any other Person
guaranteed by such Person or any of its Restricted Subsidiaries.
"Consolidated Net Income" of any Person for any period means the net income
(or loss) of such Person and its Restricted Subsidiaries for such period
determined on a consolidated basis in accordance with GAAP; provided that
there shall be excluded from such net income (to the extent otherwise included
therein), without duplication: (i) the net income (or loss) of any Person
(other than a Restricted Subsidiary of the referent Person) in which any
Person other than the referent Person has an ownership interest, except to the
extent that any such income has actually been received by the referent Person
or any of its Restricted Subsidiaries in the form of cash dividends during
such period (subject in the case of a dividend or distribution paid to a
Restricted Subsidiary, to the limitation in clause (iii) below); (ii) except
to the extent includible in the consolidated net income of the referent Person
pursuant to the foregoing clause (i), the net income (or loss) of any Person
that accrued prior to the date that (a) such Person becomes a Restricted
Subsidiary (other than a Guarantor) of the referent Person or is merged into
or consolidated with the referent Person or any of its Restricted Subsidiaries
or (b) the assets of such Person are acquired by the referent Person or any of
its Restricted Subsidiaries; (iii) the net income of any Restricted Subsidiary
(other than a Guarantor) of the referent Person during such period to the
extent that the declaration or payment of dividends or similar distributions
by such Restricted Subsidiary of that income is not permitted by operation of
the terms of its charter or any agreement, instrument, judgment, decree,
order, statute, rule or governmental regulation applicable to that Restricted
Subsidiary during such period; (iv) any gain (or loss), together with any
related provisions for taxes on any such gain (or loss), realized during such
period by the referent Person or any of its Restricted Subsidiaries upon (a)
the acquisition of any securities, or the extinguishment of any Indebtedness,
of the referent Person or any of its Restricted Subsidiaries or (b) any Asset
Sale by the referent Person or any of its Restricted Subsidiaries; (v) any
extraordinary gain (or loss), together with any related provision for taxes on
any such extraordinary gain (or loss), realized by the referent Person or any
of its Restricted Subsidiaries; (vi) in the case of a successor to such Person
by consolidation, merger or transfer of its assets, any earnings of the
successor prior to such merger, consolidation or transfer of assets; and (vii)
non-cash gains and losses due solely to fluctuations in currency values; and
provided further that, subject to clause (iii) above, any gain referred to in
clauses (iv) and (v) above that relates to a Restricted Investment and that is
received in cash by the referent Person or one of its Restricted Subsidiaries
during such period shall be included in the consolidated net income of the
referent Person.
"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),
less 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
Issue Date in the book value of any asset owned by such Person or a Restricted
Subsidiary of such Person.
"Credit Agreement" means that certain Credit Agreement dated November 26,
1997 by and among the Company, the guarantors party thereto, Swiss Bank
Corporation and the other lenders party thereto, and all guarantees, notes,
security agreements, pledge agreements and other instruments in connection
therewith, as amended or refinanced from time to time, and/or one or more
letters of credit issued by one or more lenders for the benefit of the Company
and/or one or more of Parent and its Subsidiaries and in each case as amended
or refinanced from time to time.
"Currency Agreements" means any spot or forward foreign exchange agreements
and currency swap, currency option or other similar financial agreements or
arrangements entered into by the Company or any of its Restricted Subsidiaries
in the ordinary course of business and designed to protect against or manage
exposure to fluctuations in foreign currency exchange rates.
"Default" means any event, act or condition that after notice or the passage
of time or both would be an Event of Default.
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"Disinterested Director" means, with respect to any transaction or series of
transactions in respect of which a Board Resolution is required under the
Indenture, a member of the Board of Directors of the Company who does not have
any material direct or indirect financial interest (other than an interest
arising solely from the beneficial ownership of Capital Stock of the Company)
in or with respect to such transaction or series of transactions.
"Disqualified Stock" means any Capital Stock of such Person that, by its
terms, by the terms of any agreement related thereto or by the terms of any
security into which it is convertible, puttable or exchangeable, is, or upon
the happening of any event or the passage of time would be, required to be
redeemed or repurchased by such Person or any of its Restricted Subsidiaries,
whether or not at the option of the holder thereof, or matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, in
whole or in part, on or prior to the stated final maturity of the Notes;
provided, however, that (i) any class of Capital Stock of such Person that, by
its terms, authorizes such Person to satisfy in full its obligations with
respect to the payment of dividends or upon maturity, redemption (pursuant to
a sinking fund or otherwise) or repurchase thereof or otherwise by the
delivery of Qualified Stock, and that is not convertible, puttable or
exchangeable for Disqualified Stock or Indebtedness, shall not be deemed to be
Disqualified Stock so long as such Person satisfies its obligations with
respect thereto solely by the delivery of Qualified Stock and (ii) any Capital
Stock that would constitute Disqualified Stock solely because the holders
thereof (or of any security into which it is convertible or for which it is
exchangeable) have the right to require the issuer to repurchase such Capital
Stock (or such security into which it is exchangeable) upon the occurrence of
an Asset Sale or a Change of Control shall not constitute Disqualified Stock
if such Capital Stock (and all such securities into which it is convertible or
for which it is exchangeable) provides that the issuer thereof will not
repurchase or redeem any such Capital Stock (or any such security into which
it is convertible or for which it is exchangeable) pursuant to such provisions
prior to compliance by the Company with the provisions of the Indenture
described under the caption "--Change of Control" or "--Certain Covenants--
Limitations on Asset Sales," and purchase of any Notes properly tendered
pursuant to an offer to purchase required thereunder and not withdrawn.
"EBITDA" means, with respect to any Person for any period, without
duplication, the sum of the amounts for such period of (i) Consolidated Net
Income, (ii) Consolidated Income Tax Expense, (iii) Consolidated Amortization
Expense, (iv) Consolidated Depreciation Expense, (v) Fixed Charges, (vi)
prepayment or make-whole payments incurred in connection with the repayment of
Indebtedness on the Issue Date, and (vii) all other non-cash items reducing
Consolidated Net Income (excluding any such non-cash charge that results in an
accrual of a reserve for cash charges in any future period) of such Person and
its Restricted Subsidiaries, in each case determined on a consolidated basis
in accordance with GAAP (provided, however, that the amounts set forth in
clauses (ii) through (vii) shall be included without duplication and only to
the extent such amounts actually reduced Consolidated Net Income), less the
aggregate amount of all non-cash items, determined on a consolidated basis, to
the extent such items increase Consolidated Net Income.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" means, with respect to any asset or property, the sale
value that would be obtained in an arm's-length transaction between an
informed and willing seller under no compulsion to sell and an informed and
willing buyer under no compulsion to buy; provided, however, that if such
value exceeds $1.0 million, such determination shall be made in good faith by
the Board of Directors of the Company, whose determination shall be
conclusive.
"Fixed Charges" means, with respect to any Person for any period, the sum of
(a) the Consolidated Interest Expense of such Person and its Restricted
Subsidiaries for such period, and (b) the product of (i) all cash dividend
payments (and non-cash dividend payments in the case of a Person that is a
Restricted Subsidiary) on any series of preferred stock of such Person or a
Restricted Subsidiary of such Person, times (ii) a fraction, the numerator of
which is one and the denominator of which is one minus the then current
combined federal, state and local statutory tax rate of such Person, expressed
as a decimal, in each case, on a consolidated basis and in accordance with
GAAP.
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"Foreign Subsidiary" means a Restricted Subsidiary that is incorporated in a
jurisdiction other than the United States or a state thereof or the District
of Columbia and that has no material operations or assets in the United
States.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, as in effect on the Issue Date.
"guarantee" means, as applied to any obligation, (i) a guarantee (other than
by endorsement of negotiable instruments for collection in the ordinary course
of business), direct or indirect, in any manner, of any part or all of such
obligation and (ii) an agreement, direct or indirect, contingent or otherwise,
the practical effect of which is to assure in any way the payment or
performance (or payment of damages in the event of non-performance) of all or
any part of such obligation, including, without limiting the foregoing, the
payment of amounts drawn down under letters of credit. When used as a verb,
"guarantee" has a corresponding meaning.
"Hedging Obligations" of any person means the obligations of such person
pursuant to any Interest Rate Agreement or Currency Agreement.
"Holder" means a Person in whose name a Note is registered on the register
for the Notes.
"incur" means, with respect to any Indebtedness or obligation, incur,
create, issue, assume, guarantee or otherwise become directly or indirectly
liable, contingently or otherwise, with respect to such Indebtedness or
obligation. Neither the accrual of interest nor the accretion of accreted
value shall be deemed to be an incurrence.
"Indebtedness" of any Person at any date means, without duplication: (i) all
liabilities, contingent or otherwise, of such Person for borrowed money
(whether or not the recourse of the lender is to the whole of the assets of
such Person or only to a portion thereof); (ii) all obligations of such Person
evidenced by bonds, debentures, notes or other similar instruments; (iii) all
obligations of such Person in respect of letters of credit or other similar
instruments (or reimbursement obligations with respect thereto); (iv) all
obligations of such Person to pay the deferred and unpaid purchase price of
property or services, except trade payables and accrued expenses incurred by
such Person in the ordinary course of business in connection with obtaining
goods, materials or services; (v) the maximum fixed repurchase price of all
Disqualified Stock of such Person; (vi) all Capitalized Lease Obligations of
such Person; (vii) all Indebtedness of others secured by a Lien on any asset
of such Person, whether or not such Indebtedness is assumed by such Person;
(viii) all Indebtedness of others guaranteed by such Person to the extent of
such guarantee; provided that Indebtedness of the Company or its Restricted
Subsidiaries that is guaranteed by the Company or the Company's Restricted
Subsidiaries shall only be counted once in the calculation of the amount of
Indebtedness of the Company and its Restricted Subsidiaries on a consolidated
basis; and (ix) to the extent not otherwise included in this definition,
obligations under Hedging Obligations not entered into solely for the purpose
of protecting the Company or its Restricted Subsidiaries against fluctuations
in foreign currency exchange rates or interest rates on or in connection with
indebtedness of the Company or any of its Restricted Subsidiaries then
outstanding. The amount of Indebtedness of any Person at any date shall be,
without duplication, the outstanding balance at such date of all unconditional
obligations as described above, the maximum liability of such Person for any
such contingent obligations at such date and, in the case of clause (vii), the
lesser of (A) the Fair Market Value of any asset subject to a Lien securing
the Indebtedness of others on the date that the Lien attaches and (B) the
amount of the Indebtedness secured. For purposes of the preceding sentence,
the "maximum fixed repurchase price" of any Disqualified Stock that does not
have a fixed repurchase price shall be calculated in accordance with the terms
of such Disqualified Stock as if such Disqualified Stock were purchased on any
date on which Indebtedness shall be required to be determined pursuant to the
Indenture, and if such price is based upon, or measured by, the fair market
value of such Disqualified Stock (or any equity security for which it may be
exchanged or converted), such fair market value shall be determined in good
faith by the Board of Directors of such Person, which determination shall be
evidenced by a Board Resolution.
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"Independent Financial Advisor" means an accounting, appraisal or investment
banking firm of nationally recognized standing that is disinterested and
independent with respect to the Company and its Affiliates and, in the
reasonable judgment of the Company's Board of Directors, is qualified to
perform the task for which it has been engaged.
"Interest Rate Agreements" means any interest rate protection agreements and
other types of interest rate hedging agreements (including, without
limitation, interest rate swaps, caps, floors, collars and similar agreements)
designed to protect against or manage exposure to fluctuations in interest
rates.
"Investments" means, with respect to any Person, any direct or indirect
advance, loan, guarantee of Indebtedness or other extension of credit or
capital contribution to (by means of any transfer of cash or other property or
assets to others or any payment for property, assets or services for the
account or use of others), or any purchase or acquisition by such Person of
any Capital Stock, bonds, notes, debentures or other securities (including
derivatives) or evidences of Indebtedness issued by, any other Person. In
addition, the Fair Market Value of the net assets of any Restricted Subsidiary
at the time that such Restricted Subsidiary is designated an Unrestricted
Subsidiary shall be deemed to be an "Investment" made by the Company in such
Unrestricted Subsidiary at such time. "Investments" shall exclude (a)
extensions of trade credit or other advances to customers on commercially
reasonable terms in accordance with normal trade practices or otherwise in the
ordinary course of business, (b) Hedging Obligations, but only to the extent
that the same constitute Permitted Indebtedness and (c) endorsements of
negotiable instruments and documents in the ordinary course of business.
"Issue Date" means the date the Notes are initially issued.
"Lien" means any mortgage, charge, pledge, lien (statutory or other),
security interest, hypothecation, assignment for security, claim or similar
type of encumbrance (including, without limitation, any agreement to give or
grant any lease, conditional sale or other title retention agreement having
substantially the same economic effect as any of the foregoing) upon or with
respect to any property of any kind. A Person will be deemed to own subject to
a Lien any property that the Person has acquired or holds subject to the
interest of a vendor or lessor under any conditional sale agreement, capital
lease or other title retention agreement.
"Management Services Agreement" means the Management Services Agreement to
be entered into between Saratoga and/or its Affiliate, on the one hand, and
Parent and/or one or more of its Subsidiaries, as such agreement may be
amended from time to time in any manner; provided that after giving effect to
such amendment the terms thereof are, in the aggregate, no less favorable to
the Holders.
"Net Available Proceeds" means, with respect to any Asset Sale, the proceeds
thereof in the form of cash or Cash Equivalents including payments in respect
of deferred payment obligations when received in the form of cash or Cash
Equivalents (except to the extent that such obligations are financed by or
sold with recourse to the Company or any Subsidiary), net of (i) brokerage
commissions and other fees and expenses (including fees and expenses of legal
counsel, accountants and investment banks) related to such Asset Sale, (ii)
provisions for all taxes payable as a result of such Asset Sale (after taking
into account any available tax credits or deductions and any tax sharing
arrangements), (iii) amounts required to be paid to any Person (other than the
Company or any Subsidiary) owning a beneficial interest in the properties or
assets subject to the Asset Sale or having a Lien thereon and (iv) appropriate
amounts to be provided by the Company or any Subsidiary, as the case may be,
as a reserve required in accordance with GAAP against any liabilities
associated with such Asset Sale and retained by the Company or any Subsidiary,
as the case may be, after such Asset Sale, including, without limitation,
pensions and other postemployment benefit liabilities, liabilities related to
environmental matters and liabilities under any indemnification obligations
associated with such Asset Sale, all as reflected in an Officers' Certificate
delivered to the Trustee; provided, however, that any amounts remaining after
adjustments, revaluations or liquidations of such reserves shall constitute
Net Available Proceeds.
"Non-Recourse Purchase Money Indebtedness" means Indebtedness of the Company
or any of its Restricted Subsidiaries incurred (a) to finance the purchase of
any assets of the Company or any of its Restricted
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Subsidiaries within 90 days of such purchase, (b) to the extent the amount of
Indebtedness thereunder does not exceed 100% of the purchase cost of such
assets, (c) to the extent the purchase cost of such assets is or should be
included in "additions to property, plant and equipment" in accordance with
GAAP, (d) to the extent that such Indebtedness is non-recourse to the Company
or any of its Restricted Subsidiaries or any of their respective assets other
than the assets so purchased, and (e) to the extent the purchase of such
assets is not part of an acquisition of any Person. Indebtedness will not be
deemed recourse because there is recourse to the borrower, any guarantor or
any other Person for (x) environmental warranties and indemnities, or (y)
indemnities for and liabilities arising from fraud, misrepresentation,
misapplication or non-payment of rents, profits, insurance and condemnation
proceeds and other sums actually received by the borrower from secured assets
to be paid to the lender, waste and mechanics' liens.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Payment Restriction", with respect to a Subsidiary of any Person, means any
encumbrance, restriction or limitation, whether by operation of the terms of
its charter or by reason of any agreement, instrument, judgment, decree,
order, statute, rule or governmental regulation, on the ability of (i) such
Subsidiary to (a) pay dividends or make other distributions on its Capital
Stock or make payments on any obligation, liability or Indebtedness owed to
such Person or any other Subsidiary of such Person, (b) make loans or advances
to such Person or any other Subsidiary of such Person or (c) transfer any of
its properties or assets to such Person or any other Subsidiary of such Person
or (ii) such Person or any other Subsidiary of such Person to receive or
retain any such dividends, distributions or payments, loans or advances or
transfer of properties or assets.
"Permitted Holders" means (i) Saratoga Partners III, L.P., (ii) David J.
Barrett, Martin A. Moore, Michael Baxley, John Champagne, Robert Feltz, and
Frank A. Wright, and (iii) Permitted Transferees of the foregoing.
"Permitted Indebtedness" means any of the following:
(i) Indebtedness of the Company and any Guarantor under the Credit
Agreement in an aggregate principal amount at any time outstanding (with
letters of credit being deemed to have a principal amount equal to the
aggregate maximum then available to be drawn thereunder assuming compliance
with all conditions to such drawing) not to exceed the greater of (a) $25
million or (b) the sum of 80% of the book value of accounts receivable and
60% of the book value of inventory of the Company and its Restricted
Subsidiaries (as set forth on the latest available balance sheet),
calculated on a consolidated basis and in accordance with GAAP;
(ii) Indebtedness of the Company and any Guarantor under the Credit
Agreement in an aggregate principal amount at any time outstanding (with
letters of credit being deemed to have a principal amount equal to the
maximum then available to be drawn thereunder assuming compliance with all
conditions to such drawing) not to exceed $28.0 million, less the aggregate
amount of all Net Available Proceeds of Asset Sales applied to permanently
reduce the outstanding amount or the commitments with respect to such
Indebtedness pursuant to the "Limitations on Asset Sales" covenant;
(iii) Indebtedness under the Notes, the Guarantees and the Indenture;
(iv) all of the Indebtedness of the Company and its Restricted
Subsidiaries not otherwise referred to in this definition that is
outstanding on the Issue Date;
(v) Indebtedness under Interest Rate Agreements, provided that (1) such
Interest Rate Agreements are related to payment obligations on Permitted
Indebtedness or Indebtedness otherwise permitted by the Consolidated Fixed
Charge Coverage Ratio test set forth in the "Limitations on Additional
Indebtedness" covenant, and (2) the notional principal amount of such
Interest Rate Agreements does not exceed the principal amount of such
Indebtedness to which such Hedging Obligations relate;
(vi) Indebtedness under Currency Hedge Agreements, provided that (a) such
Currency Agreements are related to payment obligations on Permitted
Indebtedness or Indebtedness otherwise permitted by the
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Consolidated Fixed Charge Coverage Ratio test set forth in the "Limitations
on Additional Indebtedness" covenant or to the foreign currency cash flows
reasonably expected to be generated or required by the Company and the
Restricted Subsidiaries, (b) the notional principal amount of the Currency
Agreements does not exceed the principal amount of that Indebtedness and
the amount of those foreign currency cash flows to which such Currency
Agreements relate and (c) such Currency Agreements are entered into for the
purpose of limiting currency exchange rate risks in connection with
Indebtedness permitted to be incurred under the Indenture or transactions
entered into in the ordinary course of business;
(vii) Indebtedness of the Company to a Restricted Subsidiary and
Indebtedness of any Restricted Subsidiary to the Company or to a Restricted
Subsidiary; provided, however, that upon either (1) any such Restricted
Subsidiary ceasing to be a Restricted Subsidiary or (2) the transfer or
other disposition of any such Indebtedness (except to the Company or a
Restricted Subsidiary), the provisions of this clause (vii) shall no longer
be applicable to such Indebtedness and such Indebtedness shall be deemed,
in each case, to be incurred and shall be treated as an incurrence for
purposes of the Consolidated Fixed Charge Coverage Ratio test set forth in
the "Limitations on Additional Indebtedness" covenant at the time the
Restricted Subsidiary in question ceased to be a Restricted Subsidiary or
the time such transfer or other disposition occurred;
(viii) Indebtedness in respect of bid, performance or surety bonds issued
for the account of the Company in the ordinary course of business,
including guarantees or obligations of the Company with respect to letters
of credit supporting such bid, performance or surety obligations (in each
case other than for an obligation for money borrowed);
(ix) Indebtedness in respect of Non-Recourse Purchase Money Indebtedness
incurred by the Company or any Restricted Subsidiary;
(x) Refinancing Indebtedness;
(xi) Indebtedness of Restricted Subsidiaries in an aggregate principal
amount not to exceed $5 million at any time outstanding;
(xii) Indebtedness incurred to finance the acquisition of (1) any Person
principally engaged in the business of the Company and its Restricted
Subsidiaries as conducted on the Issue Date or any business reasonably
related thereto that becomes a Restricted Subsidiary or (2) any Related
Assets that constitute a line of business, company or other business
entity, in an aggregate principal amount not to exceed $21.0 million at any
time outstanding provided that such Person or Related Assets, after giving
pro forma effect to such Indebtedness as if it had been incurred by such
Person or Related Assets would have had a Fixed Charge Coverage Ratio of
2.0 to 1; provided that pro forma effect, to the extent permitted by
Regulation S-X pursuant to the Securities Act of 1933, may be given to cost
savings and expense reductions in connection with such acquisition; and
(xiii) other Indebtedness in an aggregate principal amount not to exceed
$2 million at any time outstanding.
"Permitted Investments" means any of the following:
(i) Investments in Cash Equivalents;
(ii) Investments in the Company or any of its Restricted Subsidiaries;
(iii) Investments by the Company or any of its Restricted Subsidiaries in
another Person, if as a result of such Investment (A) such other Person
becomes a Restricted Subsidiary or (B) such other Person is merged or
consolidated with or into, or transfers or conveys all or substantially all
of its properties and assets to, the Company or a Restricted Subsidiary;
(iv) Investments permitted under the "Limitation on Asset Sales"
covenant;
(v) Investments made in the ordinary course of business in prepaid
expenses, lease, utility, workers' compensation, performance and other
similar deposits;
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(vi) Investments received upon foreclosure, perfection or enforcement of
any Lien granted by, in the course of good faith settlement of claims
against, or by reason of a composition or readjustment of debt or a
reorganization of, any debtor of the Company or any of its Subsidiaries;
(vii) endorsements for collection or deposit in the ordinary course of
business of bank drafts and similar negotiable instruments received as
payment for ordinary course of business trade receivables;
(viii) Hedging Obligations permitted under clause (a) under the
"Limitations on Additional Indebtedness" covenant;
(ix) Loans or advances to employees or directors of the Company or any
Restricted Subsidiary in the ordinary course of business;
(x) guarantees of Indebtedness of the Company or any Restricted
Subsidiary, which guarantees are permitted to be incurred under the
Indenture;
(xi) any Investment (x) to the extent that the consideration therefor
consists of Qualified Stock or (y) out of the proceeds of a substantially
concurrent issuance and sale (other than to a Restricted Subsidiary of the
Company) of Qualified Stock (provided that such issuance and sale shall not
increase the Basket); and
(xii) Investments in an aggregate amount not to exceed $5.0 million at
any time outstanding.
"Permitted Liens" means:
(i) Liens for taxes, assessments or governmental charges or claims that
either (a) are not yet delinquent or (b) are being contested in good faith
by appropriate proceedings and as to which appropriate reserves or other
provisions have been made in accordance with GAAP;
(ii) statutory and common law Liens of landlords and carriers,
warehousemen, mechanics, suppliers, materialmen, repairmen or other similar
Liens arising in the ordinary course of business and with respect to
amounts that either (a) are not yet delinquent or (b) are being contested
in good faith by appropriate proceedings and as to which appropriate
reserves or other provisions have been made in accordance with GAAP;
(iii) Liens incurred or deposits made in the ordinary course of business
in connection with workers' compensation, unemployment insurance and other
types of social security;
(iv) Liens incurred or deposits made to secure the performance of
tenders, bids, leases, statutory obligations, surety and appeal bonds,
progress payments, government contracts, performance and return-of-money
bonds and other obligations of a similar nature (exclusive of obligations
for the payment of borrowed money), in each case, incurred in the ordinary
course of business;
(v) easements, rights-of-way, municipal and zoning ordinances,
restrictions and other similar charges or encumbrances that do not
materially interfere with the ordinary conduct of the business of the
Company or any of its Restricted Subsidiaries;
(vi) leases or subleases granted to others that do not materially
interfere with the ordinary conduct of the business of the Company or any
of its Restricted Subsidiaries and do not materially affect the value of
the property thereto;
(vii) Liens securing Refinancing Indebtedness to the extent incurred to
refinance Indebtedness that is secured by Liens and outstanding as of the
Issue Date (after giving effect to the application of the proceeds of the
Notes Offering), provided that such Refinancing Indebtedness shall be
secured solely by the assets (including improvements thereon) securing the
outstanding Indebtedness being refinanced;
(viii) Liens securing Indebtedness between the Company and its Restricted
Subsidiaries or between or among such Restricted Subsidiaries;
(ix) Liens existing as of the Issue Date to the extent and in the manner
such Liens are in effect on the Issue Date (after giving effect to the
application of the proceeds of the Notes Offering);
(x) Liens securing the Credit Agreement up to the amount of Indebtedness
permitted to be incurred under clauses (i), (ii) and (xiii) of the
definition of "Permitted Indebtedness";
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(xi) Liens arising from the rendering of a final judgment or order
against the Company or any Restricted Subsidiary that does not give rise to
an Event of Default;
(xii) Liens securing reimbursement obligations with respect to letters of
credit that encumber documents and other property relating to such letters
of credit and the products and proceeds thereof;
(xiii) Liens securing Indebtedness permitted to be incurred pursuant to
clauses (xi) and (xii) of the definition of "Permitted Indebtedness";
(xiv) Liens securing Hedging Obligations entered into with lenders under
the Credit Agreement;
(xv) Liens in favor of the Company or a Restricted Subsidiary;
(xvi) Liens securing Purchase Money Indebtedness, provided, that such
Liens extend only to the property being acquired and improvements thereon
and such Lien is created within 90 days of the purchase of such property;
(xvii) Liens securing Acquired Indebtedness permitted to be incurred
under the Indenture, provided that such Liens (x) are not incurred in
connection with, or in contemplation of, the acquisition of the property or
assets acquired and (y) do not extend to or cover any property or assets of
the Company or any of its Restricted Subsidiaries other than the property
or assets so acquired and any improvements on such property or assets;
(xviii) Liens securing obligations under the Indenture, the Notes or the
Guarantees;
(xix) Liens on property of a Person existing at the time such Person is
acquired or merged with or into or consolidated with the Company or any
Restricted Subsidiary (and not created in anticipation or contemplation
thereof); and
(xx) Liens to secure Indebtedness incurred to refinance, in whole or in
part, any Indebtedness secured by Liens referred to in the foregoing
clauses (xv) - (xix), provided that in each of clauses (xvi), (xvii) and
(xix) such Liens do not extend to any additional property or assets (other
than improvements thereon).
"Permitted Transferees" means, with respect to any Person, (x) in the case
of any Person that is a natural person, (i) such individual's spouse, estate,
lineal descendants, heirs, executors, legal representatives, administrators,
(ii) any trust for the benefit of any of the foregoing, and (y) in the case of
any Person that is not a natural person, any other Person controlled by such
Person.
"Person" means any individual, corporation, partnership, joint venture,
incorporated or unincorporated association, joint-stock company, trust,
unincorporated organization or government or other agency or political
subdivision thereof or other entity of any kind.
"Plan of Liquidation", with respect to any Person, means a plan that
provides for, contemplates or the effectuation of which is preceded or
accompanied by (whether or not substantially contemporaneously, in phases or
otherwise): (i) the sale, lease, conveyance or other disposition of all or
substantially all of the assets of such Person otherwise than as an entirety
or substantially as an entirety; and (ii) the distribution of all or
substantially all of the proceeds of such sale, lease, conveyance or other
disposition and all or substantially all of the remaining assets of such
Person to holders of Capital Stock of such Person.
"Public Equity Offering" means an offer and sale of Qualified Stock of the
Company or Parent for cash pursuant to a registration statement that has been
declared effective by the Commission pursuant to the Securities Act (other
than a registration statement on Form S-8 or otherwise relating to equity
securities issuable under any employee benefit plan); provided that any net
proceeds to Parent are contributed in cash to the common equity of the
Company.
"Purchase Money Indebtedness" means Indebtedness incurred for the purpose of
financing all or any part of the purchase price, or the cost of construction,
of any property, plant or equipment to be used in the business of the Company
and the Restricted Subsidiaries, provided that such Indebtedness shall not
exceed 100% of the lower of cost or Fair Market Value (at the time of
incurrence) of the property, plant or equipment so purchased or constructed.
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"Qualified Stock" of any Person means any and all Capital Stock of such
Person other than Disqualified Stock.
"redeem" means redeem, repurchase, defease or otherwise acquire or retire
for value; and "redemption" and "redeemed" have correlative meanings.
"refinance" means refinance, renew, extend, replace, defease or refund, in
whole or in part, including successively; and "refinancing" and "refinanced"
have correlative meanings.
"Refinancing Indebtedness" means Indebtedness of the Company or a Restricted
Subsidiary of the Company issued in exchange for, or the proceeds from the
issuance and sale or disbursement of which are used substantially concurrently
to refinance or constituting an amendment of, any Indebtedness pursuant to
clause (ii) and (iii) of the definition of Permitted Indebtedness of the
Company or any of its Restricted Subsidiaries or any Indebtedness incurred
pursuant to the Fixed Charge Coverage Ratio test set forth in the "Limitations
on Additional Indebtedness" covenant in a principal amount not in excess of
(a) the principal amount of the Indebtedness so refinanced plus (b) the lesser
of the amount of any premium required to be paid in connection with such
refinancing pursuant to the terms of the Indebtedness refinanced and the
amount of any premium reasonably determined by the issuer of such Indebtedness
as necessary to accomplish such refinancing by means of a tender offer,
exchange offer or privately negotiated repurchase plus (c) the expenses of
such issuer reasonably incurred in connection therewith (or, if such
Refinancing Indebtedness refinances Indebtedness under a revolving credit
facility or other agreement providing a commitment for subsequent borrowings,
with a maximum commitment not to exceed the maximum commitment under such
revolving credit facility or other agreement); provided that: (i) the
Refinancing Indebtedness is the obligation of the same Person; (ii) in the
case of any refinancing of Indebtedness (including the Notes) that is pari
passu with or subordinated in right of payment to the Notes, then such
Refinancing Indebtedness is pari passu with or subordinated in right of
payment to the Notes at least to the same extent as the Indebtedness being
refinanced; (iii) the Refinancing Indebtedness is scheduled to mature either
(a) no earlier than the Indebtedness being refinanced or (b) after the
maturity date of the Notes; (iv) the portion, if any, of the Refinancing
Indebtedness that is scheduled to mature on or prior to the maturity date of
the Notes has a Weighted Average Life to Maturity at the time such Refinancing
Indebtedness is incurred that is equal to or greater than the Weighted Average
Life to Maturity of the portion of the Indebtedness being repaid that is
scheduled to mature on or prior to the maturity date of the Notes; and (v) the
Refinancing Indebtedness is secured only to the extent, if at all, and by the
assets, that the Indebtedness being repaid or amended is secured.
"Related Assets" means properties and assets that will be used in the
business of the Company and its Restricted Subsidiaries as conducted on the
Issue Date or in businesses reasonably related thereto.
"Restricted Investment", with respect to any Person, means (without
duplication) any Investment by such Person other than a Permitted Investment,
including, without limitation, the designation of a Restricted Subsidiary as
an Unrestricted Subsidiary.
"Restricted Payment", with respect to any Person, means: (i) the declaration
of any dividend (other than a dividend declared or paid by a Restricted
Subsidiary to the Company or a Restricted Subsidiary) or the making of any
other payment or distribution of cash, securities or other property or assets
in respect of such Person's Capital Stock (except that a dividend payable
solely in Qualified Stock of such Person shall not constitute a Restricted
Payment); (ii) any payment on account of the redemption of such Person's
Capital Stock or any other payment or distribution made in respect thereof,
either directly or indirectly (other than a payment solely in Qualified
Stock); (iii) any Restricted Investment; or (iv) any purchase, redemption,
defeasance (including without limitation in substance or legal defeasance) or
other acquisition or retirement for value, directly or indirectly, by the
Company or a Subsidiary, prior to the scheduled maturity or prior to any
scheduled repayment of principal or sinking fund payment, as the case may be,
in respect of Subordinated Indebtedness.
"Restricted Subsidiary" means any direct or indirect Subsidiary of the
Company other than an Unrestricted Subsidiary.
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"Sale and Leaseback Transaction" means with respect to any Person an
arrangement with any bank, insurance company or other lender or investor or to
which such lender or investor is a party, providing for the leasing by such
Person or any of its Restricted Subsidiaries of any property or asset of such
Person or any of its Restricted Subsidiaries which has been or is being sold
or transferred by such Person or such Restricted Subsidiary to such lender or
investor or to any Person to whom funds have been or are to be advanced by
such lender or investor on the security of such property or asset.
"Securities Act" means the Securities Act of 1933, as amended.
"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 Securities Act, as such Regulation is in effect on the Issue
Date, except all references to "10 percent" in such definition shall be
changed to "2 percent".
"Stated Maturity" means, when used with respect to any Indebtedness or any
installment of interest thereon, the date specified in the instrument
evidencing or governing such Indebtedness as the fixed date on which the
principal of such Indebtedness or such installment of interest is due and
payable.
"Subordinated Indebtedness" means Indebtedness of the Company or any
Subsidiary that is subordinated in right of payment to the Notes or the
Subsidiary Guarantees, respectively.
"Subsidiary" of any Person means (i) any corporation of which at least a
majority of the aggregate voting power of whose Voting Stock is owned by such
Person directly or through one or more other Subsidiaries of such Person and
(ii) any entity other than a corporation in which such Person, directly or
indirectly, owns at least a majority of the voting power of the Voting Stock
of such entity, other than any such Person designated as an Unrestricted
Subsidiary in accordance with the definition of "Unrestricted Subsidiary".
"Subsidiary Guarantor" means each Person who is required to become a
Subsidiary Guarantor by the terms of the Indenture.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination will be designated an Unrestricted Subsidiary by the
Board of Directors of the Company as provided below and (ii) any Subsidiary of
an Unrestricted Subsidiary. The Board of Directors of the Company may
designate any Subsidiary of the Company as an Unrestricted Subsidiary so long
as (a) neither the Company nor any Restricted Subsidiary is directly or
indirectly liable pursuant to the terms of any Indebtedness of such Subsidiary
(other than in the form of an Investment therein in accordance with the
"Limitations on Restricted Payments" covenant); (b) no default with respect to
any Indebtedness of such Subsidiary would permit (upon notice, passage of time
or otherwise) any holder of any other Indebtedness of the Company or any
Restricted Subsidiary to declare a default on such other Indebtedness or cause
the payment thereof to be accelerated or payable prior to its Stated Maturity;
(c) such designation as an Unrestricted Subsidiary would be permitted under
the "Limitations on Restricted Payments" covenant; and (d) the Company could
incur $1.00 of additional Indebtedness (not including the incurrence of
Permitted Indebtedness) pursuant to the Consolidated Fixed Charge Coverage
Ratio test set forth in the "Limitations on Additional Indebtedness" covenant.
Any such designation by the Board of Directors shall be evidenced to the
Trustee by the filing with the Trustee of a certified copy of the Board
Resolution giving effect to such designation and an Officer's Certificate
certifying that such designation complied with the foregoing conditions and
setting forth the underlying calculations of such certificate. The Board of
Directors of the Company may designate any Unrestricted Subsidiary as a
Restricted Subsidiary if (i) immediately after giving effect to such
designation on a pro forma basis, no Default or Event of Default shall have
occurred and be continuing and (ii) Indebtedness of such Unrestricted
Subsidiary outstanding immediately following such redesignation would, if
incurred at such time, be permitted to be incurred under the Indenture.
"Voting Stock", with respect to any specified Person, means any class or
classes of Capital Stock of the specified Person pursuant to which the holders
thereof have the general voting power under ordinary circumstances to elect at
least a majority of the board of directors, managers or trustees of the
specified Person
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(irrespective of whether or not, at the time, stock of any other class or
classes has, or might have, voting power by reason of the happening of any
contingency).
"Weighted Average Life to Maturity", when applied to any Indebtedness at any
date, means 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 payment 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" means any Restricted Subsidiary to the
extent (i) all of the Capital Stock or other ownership interests in such
Restricted Subsidiary, other than any directors' qualifying shares mandated by
applicable law, is owned directly or indirectly by the Company or (ii) such
Restricted Subsidiary is organized in a foreign jurisdiction and is required
by the applicable laws and regulations of such foreign jurisdiction to be
partially owned by the government of such foreign jurisdiction or individual
or corporate citizens of such foreign jurisdiction in order for such
Restricted Subsidiary to transact business in such foreign jurisdiction,
provided that the Company, directly or indirectly, owns the remaining Capital
Stock or ownership interest in such Restricted Subsidiary and, by contract or
otherwise, controls the management and business of such Restricted Subsidiary
and derives the economic benefits of ownership of such Restricted Subsidiary
to substantially the same extent as if such Restricted Subsidiary were a
wholly owned Subsidiary.
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DESCRIPTION OF UNITS
Each Unit offered and sold by Parent consisted of one share of $100
liquidation preference of Series A Cumulative Redeemable Exchangeable
Preferred Stock of Parent (the "Senior Preferred Stock") and one Warrant to
purchase shares of Common Stock. The Senior Preferred Stock and the Warrants
comprising each Unit will not be separately tradable until 90 days after the
date of issuance of the Senior Preferred Stock, with certain exceptions (the
"Separation Date"). The Units were issued in a private transaction that is not
subject to the registration requirements of the Securities Act.
SENIOR PREFERRED STOCK
The Certificate of Incorporation of Parent (the "Certificate") authorizes
200,000 shares of Senior Preferred Stock, of which 100,000 shares were issued
in the Units Offering. Additional shares of Senior Preferred Stock may be
issued to pay certain dividends on the Senior Preferred Stock issued in the
Units Offering at the election of Parent. Subject to certain conditions, the
Senior Preferred Stock are exchangeable for Exchange Debentures at the option
of Parent on any dividend payment date.
RANK
The Senior Preferred Stock ranks, with respect to dividend distributions and
distributions upon the liquidation, winding-up and dissolution of Parent, (i)
senior to all classes of Common Stock and the Series B Preferred Stock and
each other class of capital stock or series of Preferred Stock established by
the Board of Directors of Parent the terms of which do not expressly provide
that it ranks on a parity with the Senior Preferred Stock as to dividend
distributions and distributions upon the liquidation, winding-up and
dissolution of Parent (collectively referred to with the Common Stock and the
Series B Preferred Stock as "Junior Securities"). The Senior Preferred Stock
is subject to the issuance of series of Junior Securities and securities
ranking on a parity with the Senior Preferred Stock ("Parity Securities"),
provided that Parent may not issue any new class of Parity Securities without
the approval of the holders of a majority of the shares of Senior Preferred
Stock then outstanding, except that Parent may issue and have outstanding
shares of Parity Securities issued from time to time in exchange for, or the
proceeds of which are used to redeem or repurchase, any or all of the shares
of Senior Preferred Stock or other Parity Securities.
DIVIDENDS
Holders of Senior Preferred Stock are entitled to receive, when, as and if
declared by the Board of Directors of Parent, out of funds legally available
therefor, dividends on the Senior Preferred Stock at a rate per annum applied
to the liquidation preference per share of Senior Preferred Stock. All
dividends will be cumulative whether or not earned or declared on a daily
basis from the date of issuance of the Senior Preferred Stock and will be
payable quarterly in arrears commencing on February 28, 1998. On or before
November 30, 2002, Parent may, at its option, pay dividends in cash or in
additional fully paid and non-assessable shares of Senior Preferred Stock
having an aggregate liquidation preference equal to the amount of such
dividends. After November 30, 2002 dividends may be paid only in cash.
OPTIONAL REDEMPTION
The Senior Preferred Stock may be redeemed for cash (subject to contractual
and other restrictions with respect thereto and to the legal availability of
funds therefor) at any time on or after a date which is five years following
the issuance date, in whole or in part, at the option of Parent, at certain
redemption prices (expressed as percentages of the liquidation preference
thereof) beginning on November 30, 2002, declining ratably to 100% in 2005 or
thereafter, together with an amount in cash equal to all accumulated and
unpaid dividends.
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In addition, Parent may also redeem the Senior Preferred Stock, in whole or
in part at its option, at a redemption price equal to a percentage of the
liquidation preference thereof, plus an amount in cash equal to all
accumulated and unpaid dividends (including an amount in cash equal to a
prorated dividend for the period from the dividend payment date immediately
prior to the redemption date to the redemption date), with the net proceeds of
one or more public equity offerings by Parent. The terms of certain debt
instruments of Parent and its subsidiaries, including the Credit Agreement and
the Indenture, will restrict, directly or indirectly, the ability of Parent to
redeem the Senior Preferred Stock, and future agreements to which Parent or
its subsidiaries are parties may contain similar restrictions. See
"Description of Other Indebtedness."
MANDATORY REDEMPTION
On November 30, 2009, Parent will be required to redeem (subject to the
legal availability of funds therefor) all outstanding shares of Senior
Preferred Stock at a price equal to the then effective liquidation preference
thereof, plus an amount in cash equal to all accumulated and unpaid dividends
to the redemption date. The terms of certain debt instruments of Parent and
its subsidiaries, including the Credit Agreement and the Indenture, will
restrict, directly or indirectly, the ability of Parent to redeem the Senior
Preferred Stock, and future agreements to which Parent or its subsidiaries are
parties may contain similar restrictions. See "Description of Other
Indebtedness."
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, Parent shall be obligated to
make an offer to all holders of Senior Preferred Stock to purchase all
outstanding Senior Preferred Stock and will purchase, on a business day not
more than 60 days nor less than 30 days after the occurrence of the Change of
Control, all Senior Preferred Stock properly tendered pursuant to such offer
to purchase for a cash price equal to 101% of the aggregate liquidation
preference of the Senior Preferred Stock, plus an amount in cash equal to all
accumulated and unpaid dividends per share, if any, to the purchase date.
VOTING RIGHTS
Holders of the Senior Preferred Stock have no voting rights with respect to
general corporate matters except as provided by law or as set forth in the
Certificate. The Certificate provides that in certain circumstances holders of
Senior Preferred Stock will be entitled to vote for two members of Parent's
Board of Directors or to vote as a class for certain mergers, consolidations
or sales of all or substantially all of the assets of Parent.
CERTAIN COVENANTS
The Certificate contains certain covenants that limit the ability of the
Parent to redeem or repurchase Junior Securities or Parity Securities and pay
dividends thereon, to merge or consolidate with any other entity, to sell all
or substantially all of its assets or to enter into transactions with
affiliates. The Certificate also requires Parent to deliver certain reports
and information to the holders of the Senior Preferred Stock.
EXCHANGE
Parent may at its option exchange all, but not less than all, of the then
outstanding shares of Senior Preferred Stock into Exchange Debentures on any
dividend payment date, provided that on the date of such exchange (the
"Exchange Date") there are no contractual impediments to such exchange and
certain other conditions have been met. On the Exchange Date, holders of
outstanding shares of Senior Preferred Stock will be entitled to receive a
principal amount of Exchange Debentures equal to the liquidation preference
per share, plus an amount in cash equal to all accrued and unpaid dividends to
the Exchange Date.
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The New Credit Facility contains limitations with respect to Parent's
ability to issue the Exchange Debentures, and any future credit agreements or
other agreements relating to indebtedness to which Parent or any of its
subsidiaries become a party may contain similar limitations. See "Description
of Other Indebtedness."
REGISTRATION RIGHTS; LIQUIDATED DAMAGES
Parent and the Initial Purchasers entered into the Preferred Stock
Registration Rights Agreement on the date of issuance of the Senior Preferred
Stock. Pursuant to the Preferred Stock Registration Rights Agreement, Parent
has agreed to file with the Commission a registration statement on the
appropriate form under the Securities Act with respect to the offer to
exchange the Senior Preferred Stock for a new issue of Senior Preferred Stock
of Parent registered under the Securities Act, with terms identical to those
of the Senior Preferred Stock. In certain circumstances, Parent or an
affiliate of Parent will be required to file with the Commission a shelf
registration statement to cover resales of the shares of Senior Preferred
Stock by the holders thereof. If Parent fails to satisfy these registration
obligations, it will be required to pay liquidated damages to the holders of
the Senior Preferred Stock under certain circumstances.
EXCHANGE DEBENTURES
The Exchange Debentures, if issued, will be issued pursuant to an Exchange
Debenture indenture (the "Exchange Debenture Indenture") to be dated the
Exchange Date between Parent and a trustee (the "Trustee"). The Exchange
Debentures will represent general unsecured subordinated obligations of
Parent, subordinated in right of payment, subject to certain exceptions, to
all existing and future indebtedness of Parent, including its guarantee of the
Notes and the New Credit Facility, other than any indebtedness that expressly
provides that it ranks pasi passu with or junior to the Exchange Debentures.
As of September 30, 1997, after giving pro forma effect to the Transactions,
Parent would have had approximately $128.0 million of indebtedness that would
have ranked senior to the Exchange Debentures.
The Exchange Debentures will bear interest from the Exchange Date at a rate
per annum equal to the dividend rate for the Senior Preferred Stock, payable
semi-annually, commencing with the first such date to occur after the Exchange
Date. On or before November 30, 2002, Parent may, at its option, pay interest
in cash or in additional Exchange Debentures having an aggregate principal
amount equal to the amount of such interest. Thereafter, interest may be paid
in cash only. The Exchange Debentures will mature on November 30, 2009.
OPTIONAL REDEMPTION
The Exchange Debentures will be redeemable, at the option of Parent, in
whole or in part, at any time on or after November 30, 2002, at certain
redemption prices (expressed as percentages of principal amount), together
with accrued and unpaid interest, if any, thereon to the redemption date,
beginning on November 30, 2002, declining ratably to 100% in 2005 and
thereafter. In addition, on or before November 30, 2000, Parent may redeem the
Exchange Debentures in whole or in part, at a redemption price equal to a
percentage of the principal amount thereof, plus an amount in cash equal to
all accrued and unpaid interest thereon to the redemption date, with the
proceeds of one or more Public Equity Offerings.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of Exchange
Debentures will have the right to require Parent to purchase all or any part
of such holder's Exchange Debentures at an offer price in cash equal to 101%
of the aggregate principal amount thereof, plus accrued and unpaid interest
thereon to the date of purchase. There can be no assurance that Parent will
have financial resources necessary to purchase the Exchange Debentures upon a
Change of Control.
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CERTAIN COVENANTS
The Exchange Debenture Indenture will contain covenants that, among other
things, limit the ability of Parent and its Restricted Subsidiaries (as
defined in the Exchange Debenture Indenture) to: (i) incur additional
indebtedness; (ii) pay dividends or make certain other distributions; (iii)
repurchase equity interests; (iv) consummate certain asset sales; (v) enter
into certain transactions with affiliates; (vi) incur indebtedness (other than
Indebtedness that ranks senior to the Exchange Debentures) secured by liens;
(vii) merge or consolidate with any other person; or (viii) sell, assign,
transfer, lease, convey or otherwise dispose of all or substantially all of
the assets of Parent or Parent and its Subsidiaries.
WARRANTS
GENERAL
The Warrants were issued pursuant to the Warrant Agreement between Parent
and United States Trust Company of New York, as warrant agent (the "Warrant
Agent"). Each Warrant will be evidenced by a Warrant Certificate which
entitles the holder thereof to purchase shares of Common Stock ("Warrants
Shares") from Parent at an exercise price (the "Exercise Price"), subject to
adjustment as provided in the Warrant Agreement. The Warrants may be exercised
at any time beginning one year after the issuance date of the Senior Preferred
Stock and prior to the close of business on the twelfth anniversary of the
Issue Date. Warrants that are not exercised by such date will expire.
CERTAIN TERMS
Exchange
If Parent conducts an initial public offering of equity securities (other
than Common Stock), Parent will give holders of Warrants and Warrant Shares
the opportunity to convert such Warrants into warrants to purchase such equity
securities and the opportunity to convert such Warrant Shares into such equity
securities. In addition, if the Company (or any entity owning a majority of
the Capital Stock or assets of the Company) conducts an initial public
offering of equity securities, Parent will give holders of Warrants and
Warrant Shares the opportunity to convert such Warrants into warrants to
purchase such equity securities and the opportunity to convert such Warrant
Shares into such equity securities.
Holders of Warrants will be able to exercise their Warrants only if a
registration statement relating to the Warrant Shares underlying the Warrants
is then effective and available, or the exercise of such Warrants is exempt
from the registration requirements of the Securities Act, and such securities
are qualified for sale or exempt from qualification under the applicable
securities laws of the states or other jurisdictions in which the various
holders of the Warrants reside.
Anti-dilution Provisions
The Warrant Agreement contains provisions adjusting the Exercise Price and
the number of shares of Common Stock or other securities issuable upon
exercise of a Warrant in certain circumstances.
No Rights as Stockholders
The holders of unexercised Warrants are not entitled, as such, to receive
dividends or other distributions, receive notice of any meeting of the
stockholders, consent to any action of the stockholders, receive notice of any
other stockholder proceedings, or to any other rights as stockholders of
Parent.
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Mergers or Consolidations
Subject to certain exceptions, in the event that Parent consolidates with,
merges with or into, or sells all or substantially all of its property and
assets to another person, each Warrant thereafter shall entitle the holder
thereof to receive upon exercise thereof the number of shares of capital stock
or other securities or property which the holder of Common Stock (or other
securities issuable upon exercise of the Warrants) is entitled to receive upon
completion of such consolidation, merger or sale of assets. If Parent merges
or consolidates with, or sells all or substantially all of the property and
assets of Parent to, another person and, in connection therewith,
consideration to the holders of Common Stock (or other securities issuable
upon exercise of the Warrants) in exchange for their shares is payable solely
in cash, or in the event of the dissolution, liquidation or winding-up of
Parent, then the holders of the Warrants will be entitled to receive
distributions on an equal basis with the holders of Common Stock or other
securities issuable upon exercise of the Warrants assuming the Warrants had
been exercised immediately prior to such event, less the Exercise Price.
Reservation of Shares
Parent has authorized and will reserve for issuance such number of shares of
Common Stock as will be issuable upon the exercise of all outstanding
Warrants.
REGISTRATION RIGHTS
Pursuant to the Warrant Agreement, in certain circumstances Parent is
required to file a registration statement under the Securities Act covering
the issuance of shares of Common Stock to the holders of the Warrants upon
exercise of the Warrants by the holders thereof, subject to certain
exceptions, until the earlier of (i) such time as all Warrants have been
exercised and (ii) the Expiration Date.
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CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain material United States federal income
tax consequences generally applicable to those persons exchanging Initial
Notes for the Exchange Notes offered hereby. The federal income tax
considerations set forth below are based upon currently existing provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), applicable
Treasury Regulations ("Treasury Regulations"), judicial authority, and current
administrative rulings and pronouncements of the Internal Revenue Service (the
"IRS"). There can be no assurance that the IRS will not take a contrary view,
and no ruling from the IRS has been, or will be, sought on the issues
discussed herein. Legislative, judicial, or administrative changes or
interpretations may be forthcoming that could alter or modify the statements
and conclusions set forth herein. Any such changes or interpretations may or
may not be retroactive and could affect the tax consequences discussed below.
This discussion applies only to a person who is an initial beneficial owner
and (i) an individual citizen or resident of the United States for U.S.
federal income tax purposes, (ii) a corporation, partnership or other entity
created or organized in or under the laws of the United States or any
political subdivision thereof, (iii) an estate the income of which is subject
to United States federal income tax regardless of source, (iv) a trust whose
administration is subject to the primary supervision of a United States court
and which has one or more United States persons who have the authority to
control all substantial decisions of the trust, or (v) any other person whose
income or gain in respect of the Notes is effectively connected with the
conduct of a United States trade or business (or, if applicable, attributable
to a permanent establishment situated in the United States) (a "Holder").
The summary is not a complete analysis or description of all potential
federal tax considerations that may be relevant to, or of the actual tax
effect that any of the matters described herein will have on, particular
Holders, and does not address foreign, state, local or other tax consequences.
This summary does not address the federal income tax consequences to (a)
special classes of taxpayers (such as S corporations, mutual funds, insurance
companies, financial institutions, small business investment companies,
foreign companies, nonresident alien individuals, regulated investment
companies, real estate investment trusts, dealers in securities or currencies,
broker-dealers and tax-exempt organizations) who are subject to special
treatment under the federal income tax laws, (b) Holders that hold Notes as
part of a position in a "straddle," or as part of a "hedging," "conversion,"
or other integrated investment transaction for federal income tax purposes,
(c) Holders that do not hold the Notes as capital assets within the meaning of
section 1221 of the Code or (d) Holders whose functional currency is not the
U.S. dollar. Furthermore, estate and gift tax consequences are not discussed
herein.
BECAUSE INDIVIDUAL CIRCUMSTANCES MAY DIFFER, EACH PERSON CONSIDERING
EXCHANGING INITIAL NOTES FOR EXCHANGE NOTES IS STRONGLY URGED TO CONSULT HIS
OR HER OWN TAX ADVISOR WITH RESPECT TO HIS OR HER PARTICULAR TAX SITUATION AND
AS TO ANY FEDERAL, FOREIGN, STATE, LOCAL OR OTHER TAX CONSIDERATIONS
(INCLUDING ANY POSSIBLE CHANGES IN TAX LAW) AFFECTING THE PURCHASE, HOLDING
AND DISPOSITION OF THE NOTES.
EXCHANGE OFFER
The exchange of Initial Notes for the Exchange Notes pursuant to the
Exchange Offer should not be a taxable event for U.S. federal income tax
purposes. As a result, there should be no U.S. federal income tax consequences
to Holders exchanging the Initial Notes for the Exchange Notes pursuant to the
Exchange Offer, and a Holder should have the same tax basis and holding period
in the Exchange Notes as the Initial Notes.
INTEREST
Generally, interest paid on the Notes will be taxable to a Holder as
ordinary income at the time it accrues or is received in accordance with such
Holder's method of accounting for U.S. federal income tax purposes.
MARKET DISCOUNT
If a Note is acquired at a "market discount," some or all of any gain
realized upon a subsequent sale, other disposition, or full or partial
principal payment, of such Note may be treated as ordinary income, as
described below. For this purpose, "market discount" is the excess (if any) of
the principal amount of a Note over the
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<PAGE>
purchase price thereof, subject to a statutory de minimis exception. Unless a
Holder has elected to include the market discount in income as it accrues,
gain, if any, realized on any subsequent disposition (other than in connection
with certain nonrecognition transactions) or full or partial principal payment
of such Note will be treated as ordinary income to the extent of the market
discount that is treated as having accrued during the period such Holder held
such Note.
The amount of market discount treated as having accrued will be determined
either (i) on a straight-line basis by multiplying the market discount times a
fraction, the numerator of which is the number of days the Note was held by
the Holder and the denominator of which it is the total number of days after
the date such Holder acquired the Note up to and including the date of its
maturity or (ii) if the Holder so elects, on a constant interest rate method.
A Holder may make that election with respect to any Note but, once made, such
election is irrevocable.
A Holder of a Note acquired at a market discount may elect to include market
discount in income currently, through the use of either the straight-line
inclusion method or the elective constant interest method in lieu of
recharacterizing gain upon disposition as ordinary income to the extent of
accrued market discount at the time of disposition. Once made, this election
will apply to all notes and other obligations acquired by the electing Holder
at a market discount during the taxable year for which the election is made,
and all subsequent taxable years, unless the IRS consents to a revocation of
the election. If an election is made to include market discount in income
currently, the basis of the Note in the hands of the Holder will be increased
by the amount of the market discount that is included in income.
Unless a Holder who acquires a Note at a market discount elects to include
market discount in income currently, such Holder may be required to defer
deductions for a portion of the interest paid on indebtedness allocable to
such Note in an amount not exceeding the deferred income, until such income is
realized.
BOND PREMIUM
If a Holder purchases a Note and immediately after the purchase the adjusted
basis of the Note exceeds the sum of all amounts payable on the instrument
after the purchase date (other than payments of stated interest), the Note
will be treated as having been acquired with "bond premium." A Holder may
elect to amortize such bond premium over the remaining term of such Note (or,
if it results in a smaller amount of amortizable bond premium, until an
earlier call date).
If bond premium is amortized, the amount of interest that must be included
in the Holder's income for each period ending on an interest payment date or
at the stated maturity, as the case may be, will be reduced by the portion of
premium allocable to such period based on the Note's yield to maturity (or
earlier call date, if amortization is computed by reference to such date). If
such an election to amortize bond premium is not made, a Holder must include
the full amount of each interest payment in income in accordance with his or
her regular method of accounting and will receive a tax benefit from the
premium only in computing such Holder's gain or loss upon the sale or
disposition or payment of the principal amount of the Note.
An election to amortize premium will apply to amortizable bond premium on
all notes and other bonds, the interest on which is includible in the Holder's
gross income, held at the beginning of the Holder's first taxable year to
which the election applies or that are thereafter acquired, and may be revoked
only with the consent of the IRS.
DISPOSITION OF THE NOTES
Upon the sale, exchange or retirement of a Note, a Holder will recognize
taxable gain or loss equal to the difference between the amount realized on
the sale, exchange or retirement (except to the extent attributable to accrued
interest that has not been included in income) and such Holder's adjusted tax
basis in the Note. A Holder's adjusted tax basis in a Note will generally
equal the Holder's purchase price for such Note, increased
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<PAGE>
by any market discount previously included in income by the Holder and
decreased by any amortizable bond premium, if any, deducted over the term of
the Note. Gain or loss realized on the sale, exchange or retirement of a Note
generally will be capital gain or loss. Recently enacted legislation includes
substantial changes to the federal taxation of capital gains recognized by
individuals, including a 20% maximum tax rate for certain gains from the sale
of capital assets held for more than 18 months. The deduction of capital
losses is subject to certain limitations. Prospective investors should consult
their tax advisors regarding the treatment of capital gains and losses.
The Company does not intend to treat the possibility of an optional
redemption or repurchase of the Notes as giving rise to any accrual of
original issue discount or recognition of ordinary income upon redemption,
sale or exchange of a Note. Holders may wish to consider that Treasury
Regulations regarding the treatment of certain contingencies were recently
issued and may wish to consult their tax advisers in this regard.
BACKUP WITHHOLDING
Under section 3406 of the Code and applicable Treasury Regulations, a
noncorporate Holder of the Notes may be subject to backup withholding at the
rate of 31 percent with respect to "reportable payments," which include
interest paid on or the proceeds of a sale, exchange or redemption of, the
Notes. The payor will be required to deduct and withhold the prescribed
amounts if (i) the payee fails to furnish a Taxpayer Identification Number
("TIN") to the payor in the manner required, (ii) the IRS notifies the payor
that the TIN furnished by the payee is incorrect, (iii) there has been a
"notified payee underreporting" described in section 3406(c) of the Code or
(iv) there has been a failure of the payee to certify under penalty of perjury
that the payee is not subject to withholding under section 3406(a)(1)(C) of
the Code. As a result, if any one of the events listed above occurs, the payor
will be required to withhold an amount equal to 31 percent from any interest
payment made with respect to the Notes or any payment of proceeds of a
redemption of the Notes to a noncorporate Holder. Amounts paid as backup
withholding do not constitute an additional tax and will be credited against
the Holder's federal income tax liability, so long as the required information
is provided to the IRS. The payor generally will report to the Holders of the
Notes and to the IRS the amount of any "reportable payments" for each calendar
year and the amount of tax withheld, if any, with respect to payment on those
securities.
THE FOREGOING SUMMARY IS INCLUDED HEREIN FOR GENERAL INFORMATION ONLY AND
DOES NOT DISCUSS ALL ASPECTS OF UNITED STATES FEDERAL INCOME TAXATION THAT MAY
BE RELEVANT TO A PARTICULAR HOLDER OF NOTES IN LIGHT OF HIS OR HER PARTICULAR
CIRCUMSTANCES AND INCOME TAX SITUATION. HOLDERS SHOULD CONSULT THEIR OWN TAX
ADVISORS AS TO ANY TAX CONSEQUENCES TO THEM FROM THE PURCHASE, OWNERSHIP, AND
DISPOSITION OF NOTES INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL,
FOREIGN, AND OTHER TAX LAWS.
104
<PAGE>
PLAN OF DISTRIBUTION
Each Holder desiring to participate in the Exchange Offer will be required
to represent, among other things, that (i) it is not an "Affiliate" (as
defined in Rule 405 of the Securities Act) of the Company, (ii) it is not
engaged in, and does not intend to engage in, and has no arrangement or
understanding with any person to participate in a distribution of the Exchange
Notes and (iii) it is acquiring the Exchange Notes in the ordinary course of
its business (a Holder unable to make the foregoing representations is
referred to as a "Restricted Holder"). A Restricted Holder will not be able to
participate in the Exchange Offer and may only sell its Initial Notes pursuant
to a registration statement containing the selling securityholder information
required by Item 507 of Regulation S-K under the Securities Act, or pursuant
to an exemption from the registration requirement of the Securities Act.
Each broker-dealer (other than a Restricted Holder) that receives Exchange
Notes for its own account pursuant to the Exchange Offer (a "Participating
Broker-Dealer") is required to acknowledge in the Letter of Transmittal that
it acquired the Initial Notes for its own account as a result of market-making
activities or other trading activities (other than Initial Notes acquired
directly from the Company or an affiliate of the Company) and that it will
deliver a prospectus in connection with the resale of such Exchange Notes.
Based upon interpretations by the staff of the Commission, the Company
believes that Exchange Notes issued pursuant to the Exchange Offer to
Participating Broker-Dealers may be offered for resale, resold, and otherwise
transferred by a Participating Broker-Dealer upon compliance with the
prospectus delivery requirements, but without compliance with the registration
requirements, of the Securities Act. The Company has agreed that for a period
of nine months following consummation of the Exchange Offer it will make this
Prospectus available, for use in connection with any such resale, to any
Participating Broker-Dealer that notifies the Company in the Letter of
Transmittal that it may be subject to such prospectus delivery requirements.
Such Participating Broker-Dealer must also undertake in the Letter of
Transmittal to use its reasonable best efforts to notify the Company when,
prior to the expiration of such nine-month period, it is no longer subject to
such requirements. If the Company is not so notified by any Participating
Broker-Dealers that they may be subject to such requirements or if it is later
notified by all such Participating Broker-Dealers that they are no longer
subject to such requirements, the Company will not be required to maintain the
effectiveness of the Exchange Offer Registration Statement or to amend or
supplement this Prospectus following the consummation of the Exchange Offer or
following such date of notification, as the case may be. The Company believes
that during such period of time, delivery of this Prospectus, as it may be
amended or supplemented, will satisfy the prospectus delivery requirements of
a Participating Broker-Dealer engaged in market-making or other trading
activities.
Based upon interpretations by the staff of the Commission, the Company
believes that Exchange Notes issued pursuant to the Exchange Offer may be
offered for resale, resold, and otherwise transferred by a Holder thereof
(other than a Restricted Holder or a Participating Broker-Dealer) without
compliance with the registration and prospectus delivery requirements of the
Securities Act.
The Company will not receive any proceeds from the sale of Exchange Notes by
broker-dealers. Exchange Notes received by Participating 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 prevailing market prices or at negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such Participating Broker-Dealer and/or the purchasers of
any such Exchange Notes. Any Participating Broker-Dealer that resells Exchange
Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act. The Letter of Transmittal states that by acknowledging that it
will deliver and by delivering a prospectus, a Participating Broker-Dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act.
The Company has agreed to pay all expenses incidental to the Exchange Offer
other than commissions and concessions of any brokers or dealers and will
indemnify holders of the Notes (including any broker-dealers) against certain
liabilities, including liabilities under the Securities Act, as set forth in
the Registration Rights Agreement.
105
<PAGE>
LEGAL MATTERS
Certain legal matters in connection with the Exchange Notes and the
Guarantee being issued in the Exchange Offer will be passed upon for the
Company and Parent by Cahill Gordon & Reindel (a partnership including a
professional corporation), New York, New York.
EXPERTS
The consolidated financial statements and schedule of Predecessor-KSCO as of
December 31, 1995 and 1996 and for the year ended December 31, 1996 and for
the period from Inception to December 31, 1995 and of the Predecessor for the
period from January 1, 1995 to October 17, 1995 included in this Prospectus
have been audited by Arthur Andersen llp, independent public accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.
The consolidated financial statements of Predecessor-Alper for the year
ended December 31, 1994 included in this Prospectus and the related financial
statement schedule included elsewhere in the Registration Statement have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
reports appearing herein and elsewhere in the Registration Statement, and have
been so included in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (the "Registration Statement") under the Securities Act for the
registration of the Exchange Notes offered hereby. This Prospectus, which
constitutes a part of the Registration Statement, does not contain all the
information set forth in the Registration Statement, certain portions of which
are omitted from the Prospectus as permitted by the rules and regulations of
the Commission. For further information with respect to the Company and the
Initial Notes offered hereby, reference is made to the Registration Statement,
including the exhibits thereto, and financial statements and notes filed as a
part thereof. Statements made in this Prospectus concerning the contents of
any documents referred to herein are not necessarily complete. With respect to
each such document filed with the Commission 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.
Prior to the date of this Prospectus, the Company was not subject to the
periodic reporting and certain other informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company
has agreed that, whether or not it is required to do so by the rules and
regulations of the Commission, for so long as any of the Initial Notes or the
Initial Notes as applicable, remain outstanding, it will furnish to the
holders of the Initial Notes or the Exchange Notes, as applicable, and file
with the Commission (unless the Commission will not accept such a filing) (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
Company 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 Company's
certified independent accountants and (ii) all reports that would be required
to be filed with the Commission on Form 8-K if the Company were required to
file such reports. In addition, for so long as any of the Initial Notes remain
outstanding, the Company has agreed to make available to any prospective
purchaser of the Initial Notes or beneficial owner of the Initial Notes, in
connection with any sale thereof, the information required by Rule 144A(d)(4)
under the Securities Act.
The Registration Statement and the exhibits and schedules thereto, as well
as such reports and other information filed by the Company with the
Commission, may be inspected and copied, at prescribed rates, at the public
reference facilities of the Commission, at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, or at the Commission's regional
offices at 7 World Trade Center, 13th Floor, New York, New York 10048, and
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
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Illinois 60661. Copies of such material also can be obtained by mail from the
public reference facilities of the Commission, at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. In
addition, the Commission maintains a Website that contains reports, proxy and
information statements and other information regarding registrants, such as
the Company, that file electronically with the Commission. The address of such
site is (http://www.sec.gov).
107
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
KSCO ACQUISITION CORPORATION
Report of Independent Public Accountants................................ F-2
Independent Auditors' Report............................................ F-3
Consolidated Balance Sheets as of December 31, 1996 and 1995............ F-4
Consolidated Statements of Operations for the year ended December 31,
1996, the period from Inception through December 31, 1995, the period
from January 1, 1995 through October 17, 1995, and the year ended
December 31, 1994...................................................... F-5
Consolidated Statements of Cash Flows for the year ended December 31,
1996, the period from Inception through December 31, 1995, the period
from January 1, 1995 through October 17, 1995, and the year ended
December 31, 1994...................................................... F-6
Consolidated Statements of Stockholders' Equity (Deficiency) for the
year ended December 31, 1996, the period from Inception through
December 31, 1995, the period from January 1, 1995 through October 17,
1995, and the year ended December 31, 1994............................. F-7
Notes to Consolidated Financial Statements.............................. F-8
UNAUDITED FINANCIAL STATEMENTS
Consolidated Balance Sheet as of September 30, 1997..................... F-23
Consolidated Statements of Operations for the nine months ended
September 30, 1997 and 1996............................................ F-24
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1997 and 1996............................................ F-25
Notes to Consolidated Financial Statements.............................. F-26
SCOVILL HOLDINGS INC.
Report of Independent Public Accountants................................ F-27
Balance Sheet as of November 20, 1997................................... F-28
Notes to Balance Sheet.................................................. F-29
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors
of KSCO Acquisition Corporation
We have audited the accompanying consolidated balance sheets of KSCO
ACQUISITION CORPORATION (a Delaware corporation) AND SUBSIDIARIES (the
"Company") as of December 31, 1996 and 1995 and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year
ended December 31, 1996 and the period from inception, October 17, 1995,
through December 31, 1995. We have also audited the accompanying consolidated
statements of operations, stockholders' equity (deficiency), and cash flows of
the Predecessor (businesses identified in Note 1) from January 1, 1995 through
October 17, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on 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 KSCO
Acquisition Corporation and subsidiaries as of December 31, 1996 and 1995 and
the results of their operations and their cash flows for the year ended
December 31, 1996 and the period from inception, October 17, 1995, through
December 31, 1995, and the results of the operations of the Predecessor and
its cash flows from January 1, 1995 through October 17, 1995, in conformity
with generally accepted accounting principles.
Arthur Andersen LLP
Atlanta, Georgia
March 17, 1997
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
of KSCO Acquisition Corporation
We have audited the consolidated statements of operations, changes in
stockholders' equity (deficiency), and cash flows of Scovill Fasteners Inc.
and its subsidiaries (the "Predecessor") for the year ended December 31, 1994.
These financial statements are the responsibility of the Predecessor's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of the
Predecessor's operations, changes in its stockholders' equity (deficiency) and
its cash flows for the year ended December 31, 1994 in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Atlanta, Georgia
March 17, 1995
F-3
<PAGE>
KSCO ACQUISITION CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
-------- -------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................... $ 603 $ 410
Accounts receivable, net of allowances of $640 and $326,
respectively............................................... 12,438 6,428
Inventories................................................. 21,594 10,127
Other....................................................... 1,175 68
-------- -------
TOTAL CURRENT ASSETS.................................... 35,810 17,033
-------- -------
Property, plant and equipment, net.......................... 40,389 51,849
Deferred income taxes....................................... 1,266 --
Intangible assets........................................... 26,401 19,695
-------- -------
$103,866 $88,577
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt........................ $ 830 $ 2,500
Accounts payable............................................ 10,588 4,613
Accrued liabilities......................................... 6,830 3,232
-------- -------
TOTAL CURRENT LIABILITIES............................... 18,248 10,345
-------- -------
LONG-TERM LIABILITIES
Revolving line of credit.................................... 9,424 7,100
Long-term debt.............................................. 27,464 31,938
Employee benefits........................................... 24,407 16,358
Deferred income taxes....................................... -- 1,573
Other....................................................... 2,902 3,000
-------- -------
TOTAL LONG-TERM LIABILITIES............................. 64,197 59,969
-------- -------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 15,000,000 shares authorized,
8,880,102 and 7,270,000 shares issued and outstanding,
respectively............................................... 89 73
Additional paid-in capital.................................. 22,086 18,102
Retained earnings........................................... (736) 116
Foreign currency translation adjustment..................... (18) (28)
-------- -------
TOTAL STOCKHOLDERS' EQUITY.............................. 21,421 18,263
-------- -------
$103,866 $88,577
======== =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-4
<PAGE>
KSCO ACQUISITION CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
THE CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY AND THE PREDECESSOR ARE
NOT COMPARABLE IN CERTAIN RESPECTS.
<TABLE>
<CAPTION>
THE COMPANY THE PREDECESSOR
----------------------------------- ----------------------------------
PERIOD FROM JANUARY 1, 1995
YEAR ENDED INCEPTION THROUGH THROUGH YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995 OCTOBER 17, 1995 DECEMBER 31, 1994
----------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Net sales............................................. $91,632 $12,799 $53,589 $65,428
Cost of sales......................................... 64,600 9,353 40,260 47,045
------- ------- ------- -------
Gross profit........................................ 27,032 3,446 13,329 18,383
Selling expenses...................................... 10,220 1,369 5,656 7,113
General and administrative expenses................... 6,831 458 2,166 3,421
Amortization expense.................................. 2,557 239 320 411
------- ------- ------- -------
Operating income.................................... 7,424 1,380 5,187 7,438
Other expense (income)................................ 450 214 551 (629)
Interest expense--affiliate........................... -- -- 2,084 4,362
Interest expense--other............................... 5,953 892 1,388 730
------- ------- ------- -------
Income before income tax provision and extraordinary
loss................................................. 1,021 274 1,164 2,975
Income tax provision.................................. 923 158 -- 634
------- ------- ------- -------
Income before extraordinary loss...................... 98 116 1,164 2,341
Extraordinary loss, net of $613 tax benefit........... 950 -- -- --
------- ------- ------- -------
Net income (loss)..................................... $ (852) $ 116 $ 1,164 $ 2,341
======= ======= ======= =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-5
<PAGE>
KSCO ACQUISITION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
THE CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY AND THE PREDECESSOR ARE
NOT COMPARABLE IN CERTAIN RESPECTS.
<TABLE>
<CAPTION>
THE COMPANY THE PREDECESSOR
----------------------------------- ----------------------------------
PERIOD FROM JANUARY 1, 1995
YEAR ENDED INCEPTION THROUGH THROUGH YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995 OCTOBER 17, 1995 DECEMBER 31, 1994
----------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)..................................... $ (852) $ 116 $ 1,164 $ 2,341
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation......................................... 6,829 1,481 5,735 6,559
Amortization......................................... 2,557 239 320 411
Extraordinary loss................................... 950 -- -- --
Deferred income taxes................................ 265 8 -- --
Changes in operating assets and liabilities, net of
effect of acquired businesses:
Accounts receivable, net............................. (931) 1,105 360 (1,476)
Inventories.......................................... (6,231) 772 (1,371) (379)
Other current assets................................. (883) 119 (213) 224
Accounts payable..................................... 3,042 (2,075) 1,251 (684)
Accrued liabilities.................................. (4,031) (2,313) (465) 369
Other assets and liabilities......................... (2,131) (465) 246 662
-------- -------- ------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES... (1,416) (1,013) 7,027 8,027
-------- -------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid in business acquisitions, net of cash
acquired............................................. (23,110) (40,897) -- --
Acquisition costs..................................... (2,140) (3,246) -- --
Additions to property, plant and equipment............ (5,695) (1,168) (4,962) (7,363)
Proceeds from sales of property, plant and equipment.. 2,264 13 26 176
Proceeds from sale/leaseback of attaching machines.... 31,267 -- -- --
-------- -------- ------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES... 2,586 (45,298) (4,936) (7,187)
-------- -------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) on credit line............ 2,324 3,830 (1,245) 4,516
Issuance of long-term debt............................ 23,967 35,000 -- 10,000
Repayments of long-term debt.......................... (31,268) (10,284) (278) --
Issuance of common stock.............................. 4,000 18,175 -- --
Repayments of affiliate debt.......................... -- -- (475) (15,000)
-------- -------- ------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES... (977) 46,721 (1,998) (484)
-------- -------- ------- --------
NET INCREASE IN CASH.................................. 193 410 93 356
CASH AT BEGINNING OF PERIOD........................... 410 -- 510 154
-------- -------- ------- --------
CASH AT END OF PERIOD................................. $ 603 $ 410 $ 603 $ 510
======== ======== ======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid........................................ $ 5,062 $ 718 $ 3,238 $ 250
======== ======== ======= ========
Income taxes......................................... $ -- $ -- $ -- $ 38
======== ======== ======= ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-6
<PAGE>
KSCO ACQUISITION CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(DOLLARS IN THOUSANDS)
THE CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY AND THE PREDECESSOR ARE
NOT COMPARABLE IN CERTAIN RESPECTS.
<TABLE>
<CAPTION>
UNFUNDED ACCUMULATED
ADDITIONAL PENSION BENEFITS
REDEEMABLE PAID- RETAINED EARNINGS IN EXCESS OF UNRECOGNIZED FOREIGN CURRENCY
COMMON STOCK PREFERRED STOCK IN CAPITAL (ACCUMULATED DEFICIT) PRIOR SERVICE COST TRANSLATION ADJUSTMENT
------------ --------------- ---------- --------------------- ------------------------- ----------------------
THE PREDECESSOR
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, Decem-
ber 31, 1993.... $ -- $ -- $ 7,470 $(30,974) $(995) $(178)
Net income...... 2,341
Issuance of pre-
ferred stock.... 19,439
Contribution of
capital in
connection with
transfers of
Industrial and
Apparel
Fasteners South
Africa (Pty)
Ltd. ........... 724
Declaration of
preferred divi-
dend............ (405)
Change in un-
funded accumu-
lated pension
benefits in ex-
cess of unrecog-
nized prior
service cost.... 284
Foreign currency
translation ad-
justment........ 100
----- -------- ------- -------- ----- -----
Balance, Decem-
ber 31, 1994.... $ -- $ 19,439 $ 8,194 $(29,038) $(711) $ (78)
----- -------- ------- -------- ----- -----
Net income...... 1,164
----- -------- ------- -------- ----- -----
Balance, October
17, 1995........ $ -- $ 19,439 $ 8,194 $(27,874) $(711) $ (78)
----- -------- ------- -------- ----- -----
<CAPTION>
THE COMPANY
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Acquisition--
Elimination of
Predecessor Eq-
uity (Note 1)... $ -- $(19,439) $(8,194) $ 27,874 $ 711 $ 78
Issuance of Com-
mon Stock....... 73 $18,102
Foreign Currency
Translation..... (28)
Net income...... $ 116
----- -------- ------- -------- ----- -----
Balance, Decem-
ber 31, 1995.... $ 73 $ -- $18,102 $ 116 $ -- $ (28)
----- -------- ------- -------- ----- -----
Issuance of Com-
mon Stock....... 16 3,984
Foreign Currency
Translation..... 10
Net income
(loss).......... (852)
----- -------- ------- -------- ----- -----
Balance, Decem-
ber 31, 1996.... $ 89 $ -- $22,086 $ (736) $ -- $ (18)
===== ======== ======= ======== ===== =====
<CAPTION>
TOTAL
---------
<S> <C>
Balance, Decem-
ber 31, 1993.... $(24,677)
Net income...... 2,341
Issuance of pre-
ferred stock.... 19,439
Contribution of
capital in
connection with
transfers of
Industrial and
Apparel
Fasteners South
Africa (Pty)
Ltd. ........... 724
Declaration of
preferred divi-
dend............ (405)
Change in un-
funded accumu-
lated pension
benefits in ex-
cess of unrecog-
nized prior
service cost.... 284
Foreign currency
translation ad-
justment........ 100
---------
Balance, Decem-
ber 31, 1994.... $ (2,194)
---------
Net income...... 1,164
---------
Balance, October
17, 1995........ $ (1,030)
---------
<CAPTION>
<S> <C>
Acquisition--
Elimination of
Predecessor Eq-
uity (Note 1)... $ 1,030
Issuance of Com-
mon Stock....... 18,175
Foreign Currency
Translation..... (28)
Net income...... 116
---------
Balance, Decem-
ber 31, 1995.... $ 18,263
---------
Issuance of Com-
mon Stock....... 4,000
Foreign Currency
Translation..... 10
Net income
(loss).......... (852)
---------
Balance, Decem-
ber 31, 1996.... $ 21,421
=========
</TABLE>
The accompanying notes in consolidated financial statements are an integral
part of these statements.
F-7
<PAGE>
KSCO ACQUISITION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 1. BASIS OF PRESENTATION
The consolidated balance sheets as of December 31, 1996 and 1995 and the
consolidated statements of operations, stockholders' equity and cash flows for
the year ended December 31, 1996 and the period from inception, October 17,
1995 ("Inception Date"), through December 31, 1995, include the accounts of
KSCO Acquisition Corp. ("KSCO") and Scovill Fasteners Inc. ("Fasteners"), a
wholly owned subsidiary of KSCO (collectively referred to as the "Company"),
both of which are Delaware corporations. On October 17, 1995, Fasteners was
acquired by KSCO (the "Acquisition"), for approximately $41.5 million. KSCO
was organized by Kohlberg & Co. ("Kohlberg") for the purpose of acquiring the
outstanding stock of Fasteners. This transaction was accounted for using the
purchase method of accounting. The allocation of purchase price was based upon
preliminary estimates of fair value and was finalized during 1996.
During January 1996, Fasteners purchased the outstanding common stock of Rau
Fastener Company, LLC ("Rau") for $7,892 and PCI Group, Inc. ("PCI") for
$15,551, excluding certain costs related to financing and consummating the
acquisitions (Note 3). Rau manufactured primarily snap fasteners with
locations and subsidiaries operating in Providence, Rhode Island, Brussels,
Belgium ("Unifast") and Montreal, Canada. PCI manufactured industrial and shoe
eyelets and light metal stampings.
The consolidated statements of operations, stockholders' equity and cash
flows from January 1, 1995 through October 17, 1995 and the year ended
December 31, 1994, are the financial statements of Fasteners when it was a
wholly owned subsidiary of Alper Holdings USA, Inc. ("Alper") (referred to
herein as the "Predecessor"). The Acquisition and the related application of
purchase accounting (Note 3) resulted in changes to the capital structure of
the Predecessor and the historical basis of various assets and liabilities.
The effect of such changes significantly impairs comparability of the
financial position and results of operations of the Company and the
Predecessor.
The Company is a leading manufacturer of apparel fasteners, such as snaps,
tack buttons and rivets, primarily serving the jeanswear, infantswear,
childrenswear and outerwear industries. The Company produces non-apparel
fastener products for use in automotive, marine textile, luggage, leather
goods and aerospace industries, primarily marketed under the DOT(R) trademark.
Fasteners' other non-apparel products also include industrial and shoe eyelets
and light metal stampings marketed under the PCI trademark. The Company also
designs and manufactures fastener attaching equipment, leased to customers and
placed in customers' manufacturing facilities. The Company's customers include
many of the leading apparel design and manufacturing companies in North
America and Europe.
Certain reclassifications have been made to prior period amounts to conform
to current period presentation. All amounts are expressed in thousands except
for share amounts or as otherwise noted.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
Significant transactions and balances between KSCO, Fasteners and its wholly
owned subsidiaries and entities which comprise the Predecessor have been
eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-8
<PAGE>
KSCO ACQUISITION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
Cash and cash equivalents
Cash includes cash and cash equivalents which consist of highly liquid
investments, having maturities of three months or less when acquired. Included
in accounts payable as of December 31, 1996 and 1995 were $1,898 and $1,571,
respectively, of cash overdrafts.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the last-in, first-out (LIFO) method for all domestic inventories (other
than spare parts), which accounted for approximately 55.6% and 95.6% of all
inventories as of December 31, 1996 and 1995, respectively. Cost for the
remaining inventories is determined using the first-in, first-out (FIFO)
method. The percentage decrease in inventories accounted for by the LIFO
method in 1996 resulted from the Rau Canada and Daude acquisitions. Inventory
costs include material, labor and manufacturing overhead.
Property, Plant and Equipment
Property, plant and equipment purchased in the Acquisition, as well as the
acquisitions of PCI and Rau, are stated at fair market value, as prescribed by
the purchase method of accounting. Subsequent purchases of property, plant and
equipment are stated at cost, net of accumulated depreciation.
Depreciation is computed on a straight-line basis over the estimated useful
lives of the assets. The following useful lives are used for recognizing
depreciation expense for financial reporting purposes:
<TABLE>
<CAPTION>
THE COMPANY THE PREDECESSOR
----------- ---------------
<S> <C> <C>
Computer equipment............. 3-5 years 3-5 years
Leasehold improvements......... 1-6 years 1-5 years
Buildings and improvements..... 5-30 years 5-50 years
Attaching equipment............ 4-11 years 8 years
Machinery, equipment and tool-
ing........................... 3-12 years 3-12 years
</TABLE>
Major renewals and betterments which extend the useful life of an asset are
capitalized; routine maintenance and repairs are expensed as incurred. Total
maintenance and repairs expense charged to operations was approximately
$2,161, $317, $2,097 and $2,053 for the year ended December 31, 1996, the
period ended December 31, 1995, the period ended October 17, 1995, and the
year ended December 31, 1994, respectively. Upon sale or retirement of assets,
the Company's plant, property and equipment account is reduced by the asset
cost and related accumulated depreciation, and any related gain or loss is
reflected in operations.
Intangible Assets
Intangible assets consisted of the following at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996
----------------------------
ACCUMULATED 1995
GROSS AMORTIZATION NET NET
------- ------------ ------- -------
<S> <C> <C> <C> <C>
Goodwill................................... $15,983 $ (350) $15,633 $ 9,352
Trademarks and patents..................... 2,255 (129) 2,126 4,221
Organization and deferred financing fees... 7,436 (2,855) 4,581 3,111
Covenants not to compete................... 4,975 (1,311) 3,664 2,875
Other...................................... 397 -- 397 136
------- ------- ------- -------
$31,046 $(4,645) $26,401 $19,695
======= ======= ======= =======
</TABLE>
F-9
<PAGE>
KSCO ACQUISITION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
Trademarks and patents are amortized on a straight-line basis over a period
of 40 years. Debt acquisition costs are amortized over the term of the related
outstanding debt. Organization costs are amortized on a straight-line basis
over 5 years. Covenants not to compete consist of agreements with Alper, the
former parent of Fasteners, and with the former owners of PCI (Note 3); such
agreements are amortized over 5 and 3 years, respectively. Goodwill is
amortized on a straight-line basis over 40 years.
Goodwill represents the excess of cost over the estimated fair value of the
net assets of acquired businesses. Should events or circumstances occur
subsequent to any business acquisition which bring into question the
realizable value or impairment of any component of goodwill, the Company will
evaluate the remaining useful life and balance of goodwill and make
appropriate adjustments. The Company's principal considerations in determining
impairment include the strategic benefit to the Company of the particular
business related to the questioned component of goodwill as measured by
undiscounted current and expected future operating income levels of that
particular business and expected undiscounted future cash flows.
Environmental Matters
Environmental expenditures are expensed or capitalized as appropriate,
depending on their future economic benefit. Environmental expenditures include
site investigation, physical remediation, operation and maintenance and legal
and administrative costs. Environmental accruals are established for sites
where it is probable that a loss has been incurred and the amount of the loss
can be reasonably estimated.
Recognition of Revenue
Revenue from the sale of fastener products is recorded on the date goods are
shipped to the customer. Sales returns and allowances are recorded as a charge
against revenue in the period in which the related sales are recognized.
Revenue from the lease of attaching machinery is recorded over the applicable
rental period.
Income Taxes
Income taxes are recorded in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS
109 utilizes the asset and liability method, under which deferred income taxes
are recognized for the tax consequences of "temporary differences" by applying
currently enacted statutory rates to differences between the financial
statement carrying amounts and the tax basis of existing assets and
liabilities. Under SFAS 109, the effect on deferred taxes of a change in tax
rates is recognized in income in the period that includes the enactment date.
Fasteners periodically evaluates the recognition of deferred tax assets and
provides a valuation allowance for any portion of such assets not considered
realizable. Through October 17, 1995, Fasteners was included in the
consolidated Federal return of Alper. For financial reporting purposes,
Fasteners provided income taxes as if it filed separately from Alper.
Accordingly, Federal income tax expense/(benefit) and liabilities constituted
a charge in lieu of income taxes and amounts due Alper. Since October 18,
1995, the Company has filed separate company income tax returns.
Foreign Currency Translation
The accounts of the Company's and the Predecessor's foreign subsidiaries are
translated in accordance with Statement of Financial Accounting Standards No.
52, "Foreign Currency Translation," which requires that foreign currency
assets and liabilities be translated using the exchange rates in effect at the
balance sheet date.
F-10
<PAGE>
KSCO ACQUISITION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
Results of operations are translated using the average exchange rates
prevailing throughout the period. The effects of unrealized exchange rate
fluctuations on translating foreign currency assets and liabilities into U.S.
dollars are accumulated as the cumulative foreign currency translation
adjustment in stockholders' equity. Realized gains and losses from foreign
currency transactions during the periods ended December 31, 1996, December 31,
1995, October 17, 1995 and December 31, 1994 were not material.
Research and Development Costs
Research, development, pre-production and start-up costs related to both
present and future products are expensed as incurred. Such costs amounted to
$377, $74, $271, and $381 for the periods ended December 31, 1996, December
31, 1995, October 17, 1995, and December 31, 1994, respectively, and are
classified as a component of "General and administrative expenses" in the
accompanying consolidated statements of operations.
Financial Instruments
The Company uses futures contracts to manage its inventory, both to set
pricing on purchases and to reduce the Company's exposure to price
fluctuations. Under existing accounting literature, these activities are
accounted for as hedging activities. To qualify as a hedge, the item must
expose the Company to inventory pricing risk, and the related contract must
reduce that exposure and be designated by the Company as a hedge.
Additionally, to hedge expected transactions, the significant characteristics
and expected terms of such transactions must be identified and it must be
probable that the transaction will occur.
Gains and losses on futures contracts, including gains and losses upon
termination of the contract, are matched to inventory purchases and are
included in the carrying value of inventory and charged or credited to cost of
sales as such inventory is sold or used in production. The fair market value
of commodity options held at December 31, 1996 and 1995, was $70 and $(29),
respectively.
If derivative transactions do not meet the criteria for hedges, the Company
recognizes unrealized gains or losses as they occur. If a hedged transaction
no longer exists or a hedged anticipated transaction is deemed no longer
probable to occur, cumulative gains and losses on the hedge are recognized
immediately in income and subsequent changes in fair market value of the
derivative transaction are recognized in the period the change occurs.
Concentration of Credit Risk
The Company's customers include many large and well-known apparel and
industrial manufacturing companies. In addition, the Company is a primary
supplier for Kmart's private-label infantswear and a leading supplier for
infantswear sold at Wal*Mart, Target and Sears. In 1996, no single customer
accounted for more than 8% of the Company's total net sales, and the Company's
ten largest customers accounted for approximately 26% of the Company's total
net sales. The Company's broad line of products for apparel and specialty
industrial use reduces its exposure to any one customer segment and to fashion
trends.
Asset Impairment
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" ("SFAS 121"). SFAS 121 requires that
long-lived assets, certain identifiable intangible assets and goodwill be
reviewed for impairment when expected future undiscounted cash flows are less
than the carrying value of the assets. No charges were recorded pursuant to
this statement in fiscal 1996.
F-11
<PAGE>
KSCO ACQUISITION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
Comprehensive Income and Segments
In 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS 130") and Statement of Financial
Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and
Related Information" ("SFAS 131"). SFAS 130 establishes standards to measure
all changes in equity that result from transactions and other economic events
other than transactions with owners. Comprehensive income is the total of net
income and all other nonowner changes in equity. SFAS 131 introduces a new
segment reporting model called the "management approach." The management
approach is based on the manner in which management organizes segments within
a company for making operating decisions and assessing performance. The
management approach replaces the notion of industry and geographic segments.
The Company will adopt SFAS 130 and SFAS 131 in fiscal year 1998. The Company
believes adoption of SFAS 130 and SFAS 131 will not significantly affect the
Company's financial position or results of operations.
NOTE 3. ACQUISITIONS
Rau/PCI
The acquisitions of Rau and PCI were accounted for as a purchase.
Accordingly, the consolidated financial statements of Fasteners include the
results of these operations subsequent to January 24, 1996. These acquisitions
were financed through equity contributions and cash borrowings under the New
Credit Agreement (Note 7).
The allocation of the purchase price to the underlying net assets acquired was
based upon estimates of the fair value of the net assets. The allocation of
the purchase price to the underlying net assets acquired based on the
estimated fair value assigned was as follows:
<TABLE>
<CAPTION>
RAU PCI
------ -------
<S> <C> <C>
Purchase price........................................... $7,892 $15,551
Organization and financing costs......................... 728 1,412
------ -------
Total purchase price................................. 8,620 16,963
------ -------
Less--value assigned to assets and liabilities
Cash................................................... 257 76
Accounts receivable.................................... 3,358 1,721
Inventories............................................ 3,333 1,903
Other current assets................................... 189 35
Property, plant and equipment.......................... 4,517 7,123
Organization and financing costs....................... 728 1,412
Other long-term assets................................. 47 5,243
Accounts payable and accrued liabilities............... (6,907) (4,035)
Long-term liabilities and debt assumed................. (777) (8,560)
------ -------
4,745 4,918
------ -------
Goodwill............................................... $3,875 $12,045
====== =======
</TABLE>
Fasteners
The Acquisition of Fasteners described in Note 1 was accounted for as a
purchase. Accordingly, the consolidated financial statements of Fasteners
reflect the purchase method of accounting effective October 17, 1995. The
purchase price was $41,500, excluding certain costs related to financing and
consummating the Acquisition. The purchase price was funded from the sale of
common stock and the proceeds from two term notes and a revolving line of
credit.
F-12
<PAGE>
KSCO ACQUISITION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
The allocation of the purchase price to the underlying net assets acquired
was based upon preliminary estimates of the fair value of the net assets which
was revised during 1996. During 1996, the preliminary value attributed to the
Company's trademarks was reduced by $11,770 and reallocated to the fair value
of the Company's attaching machines based on independent appraisals received,
and was also reduced by $2,487 for the settlement received in August 1996 from
an insurance company relating to an environmental matter. Trademarks were
written down as a result of the preceding adjustments to goodwill during 1996.
The allocation of the purchase price to the underlying net assets acquired was
finalized as follows:
<TABLE>
<S> <C>
Purchase price.................................................. $ 41,500
Organization and financing costs................................ 3,246
--------
Total purchase price........................................ 44,746
--------
Less--value assigned to assets and liabilities
Cash.......................................................... 603
Accounts receivable........................................... 7,540
Inventories................................................... 10,697
Other current assets.......................................... 2,597
Property, plant and equipment................................. 63,832
Organization and financing costs.............................. 3,246
Other long-term assets........................................ 4,561
Accounts payable and accrued liabilities...................... (13,891)
Long-term liabilities and debt assumed........................ (34,439)
--------
44,746
--------
Goodwill........................................................ --
========
</TABLE>
NOTE 4. INVENTORIES
Inventories as of December 31, 1996 and 1995 consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1995
------- -------
<S> <C> <C>
Raw materials................................................... $ 3,088 $ 1,486
Work in process................................................. 5,099 3,295
Finished goods.................................................. 13,407 5,346
------- -------
$21,594 $10,127
======= =======
</TABLE>
The value of inventories is reported net of allowances for obsolete, slow-
moving and discontinued product line inventory of $927 and $470 as of December
31, 1996 and 1995, respectively. If the FIFO method had been used to value all
inventories, inventories would have been increased by $49 and $0 at December
31, 1996 and 1995, respectively.
NOTE 5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of December 31, 1996 and 1995 consisted of
the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1995
------- -------
<S> <C> <C>
Land and improvements......................................... $ 327 $ 312
Buildings and improvements.................................... 7,434 7,012
Attaching equipment........................................... 3,019 23,304
Machinery, equipment and tooling.............................. 33,807 22,702
------- -------
44,587 53,330
Accumulated depreciation...................................... (4,198) (1,481)
------- -------
$40,389 $51,849
======= =======
</TABLE>
F-13
<PAGE>
KSCO ACQUISITION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
Depreciation expense was $6,829, $1,481, $5,735 and $6,559 for the periods
ended December 31, 1996, December 31, 1995, October 17, 1995 and December 31,
1994, respectively. Refer to Note 9 for a description of the sale/leaseback of
attaching machines in 1996.
NOTE 6. ACCRUED LIABILITIES
Accrued liabilities as of December 31, 1996 and 1995 consisted of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1995
------ ------
<S> <C> <C>
Salaries, wages and benefits............................... $1,454 $ 101
Deferred income taxes...................................... 1,317 752
Pension, current portion................................... 1,128 1,921
Operating lease obligations................................ 858 --
Interest................................................... 535 --
Other...................................................... 1,538 458
------ ------
$6,830 $3,232
====== ======
</TABLE>
NOTE 7. LONG-TERM DEBT
Long-term debt as of December 31, 1996 and 1995 consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1995
------- -------
<S> <C> <C>
Revolving line of credit................................ $ 9,424 $ 7,100
Term note "A"........................................... -- 19,500
Term note "B"........................................... 26,281 14,938
Other................................................... 1,578 --
Capital lease obligations............................... 435 --
------- -------
37,718 41,538
Less--Current maturities................................ (830) (2,500)
------- -------
Total long-term debt.................................... $36,888 $39,038
======= =======
</TABLE>
To finance the Acquisition, Fasteners entered into a credit agreement (the
"Original Credit Agreement") with a group of lenders on October 17, 1995. The
Original Credit Agreement provided for term notes of $20,000 and $15,000, as
well as a revolving line of credit of up to $15,000. Borrowings under the
Original Credit Agreement were collateralized by substantially all of
Fasteners' assets. Borrowing availability under the revolving line of credit
was subject to limitations based on eligible accounts receivable and
inventory, as defined in the Original Credit Agreement. As of December 31,
1995, Fasteners had borrowings of $41,538 outstanding under the Original
Credit Agreement including $7,100 of borrowings under the revolving line of
credit and $7,600 of unused credit availability.
In connection with the acquisitions of Rau and PCI in January 1996,
Fasteners refinanced its outstanding obligations under the Original Credit
Agreement with a New Credit Agreement (the "New Credit Agreement"). The New
Credit Agreement provides for term notes of $29,496 and $28,000, as well as a
revolving line of credit of up to $15,000. Borrowings under the New Credit
Agreement are collateralized by substantially all of Fasteners' assets.
Borrowing availability under the revolving line of credit is subject to
limitations based on eligible accounts
F-14
<PAGE>
KSCO ACQUISITION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
receivable and inventory, as defined in the New Credit Agreement. As of
December 31, 1996, Fasteners had borrowings of $35,705 outstanding under the
New Credit Agreement including $9,424 of borrowings under the revolving line
of credit and $26,281 under a term note. There was $3,702 of unused credit
availability at such date. In November 1996, Fasteners repaid all outstanding
obligations under the Term "A" facility principally with proceeds from the
sale/leaseback transaction of attaching equipment (Note 9). In connection with
the refinancing discussed above, Fasteners recognized an extraordinary after-
tax charge of $950 from the write-off of related deferred financing costs. The
New Credit Agreement expires on December 31, 2003.
Both the New Credit Agreement and the Original Credit Agreement allowed
Fasteners to choose among interest rate options as follows:
<TABLE>
<CAPTION>
PRIME OPTION LIBOR OPTION
------------ ------------
<S> <C> <C>
Revolving line of credit........................ Prime + 1.5% LIBOR + 2.5%
Term note "A"................................... Prime + 1.5% LIBOR + 2.5%
Term note "B"................................... Prime + 2.0% LIBOR + 3.0%
</TABLE>
Interest rates for the term notes and the revolving line of credit ranged
from 7.92% to 10.5% and 8.25% to 10.25% during 1996 and from the Inception
Date to December 31, 1995, respectively. The weighted average interest rate
was 8.7% and 8.9% during 1996 and from the Inception Date to December 31,
1995, respectively. The interest rate was 8.6% and 8.5% at December 31, 1996
and 1995, respectively. Both the New and Original Credit Agreements required
an annual commitment fee of 0.5% of the total commitment, less letters of
credit and amounts borrowed, and required Fasteners to make quarterly payments
of accrued interest outstanding on the term notes and the revolving line of
credit.
Both the New and Original Credit Agreements required that Fasteners meet
certain covenants which, among other things, require the maintenance of ratios
related to leverage and cash flow, limit the level of capital expenditures and
payment of dividends to KSCO. The Original Credit Agreement also required
mandatory principal prepayments from the proceeds of sales of assets as well
as 50% of excess cash flow, as defined.
Other debt at December 31, 1996 includes outstanding obligations of Unifast.
Under the New Credit Agreement and the Unifast obligations, maturities of
long-term debt as of December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997................................................ $ 753
1998................................................ 848
1999................................................ 848
2000................................................ 722
2001................................................ 9,942
Thereafter.......................................... 24,170
-------
$37,283
=======
</TABLE>
Intercompany interest expense in 1995 through the Inception Date resulted
from interest on intercompany debentures and a demand note which bore interest
at 9% and prime plus 0.5%, respectively. In connection with the Acquisition,
all intercompany notes and debentures were settled in full.
Also in 1995 through the Inception Date, Fasteners had a $22,000 credit
facility. This facility was comprised of a $12,000 revolving credit facility
and a $10,000 term loan. Outstanding borrowings under the revolving facility
bore interest at Fasteners' option of either 1.125% above the base lending
rate of the bank or 3.125% above LIBOR. Outstanding term loan borrowings bore
interest at Fasteners' option of either 1.5% above the base lending rate of
the bank or 3.5% above LIBOR. In conjunction with the Acquisition, this
facility was repaid in full.
F-15
<PAGE>
KSCO ACQUISITION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
The carrying value of both short-term and long-term debt at December 31,
1996 and 1995 approximates its fair values.
NOTE 8. OTHER LIABILITIES
Other liabilities as of December 31, 1996 and 1995 consisted of liabilities
for environmental matters of $2,902 and $3,000 at December 31, 1996 and 1995,
respectively.
NOTE 9. LEASE COMMITMENTS
Operating leases
In November 1996, Fasteners refinanced its attaching equipment under a
sale/leaseback arrangement. The equipment was sold for $31,267. Fasteners has
a purchase option at fair market value at the expiration of the lease,
November 2002. The lease is an operating lease in accordance with Statement of
Financial Accounting Standards No. 13, "Accounting for Leases." The cost and
associated depreciation of the attaching equipment of approximately $22,533
and $3,050, respectively, have been removed from the accounts. The increase to
fair market value over the amount of the purchase price originally allocated
to the attaching equipment was recorded as a reduction of goodwill recorded in
the Acquisition. Fasteners leases office space, office equipment and vehicles
for various periods through the year 2002 and it is expected in the normal
course of operations that the leases may be extended or replaced. Certain
leases provide for contingent rentals based upon additional usage of equipment
and vehicles in excess of a specified minimum. Leases for real estate
generally include options to renew for periods ranging from one to ten years.
At December 31, 1996, future minimum annual rental commitments were as
follows:
<TABLE>
<S> <C>
1997................................................ $ 5,732
1998................................................ 5,522
1999................................................ 5,356
2000................................................ 5,219
2001................................................ 5,148
Thereafter.......................................... 17,666
-------
Total minimum lease payments.................... $44,643
=======
</TABLE>
Rental expense for operating leases was $1,756, $184, $674 and $747 for the
periods ended December 31, 1996, December 31, 1995, October 17, 1995 and
December 31, 1994, respectively.
Capital lease
In 1996, Fasteners entered into a lease agreement for computer equipment
which is classified as a capital lease. The net book value of the leased
equipment included in Property, Plant and Equipment at December 31, 1996 was
$450,000 which was included in machinery and equipment. Future minimum
payments, by year, under noncancelable capital leases consist of the following
at December 31, 1996:
<TABLE>
<S> <C>
1997.................................................. $131
1998.................................................. 131
1999.................................................. 131
2000.................................................. 131
2001.................................................. 22
----
Total minimum lease payments.......................... $546
Amounts representing interest......................... (111)
----
Present value of net minimum lease payments........... 435
Less current portion.................................. (87)
----
Long-term capital lease obligation.................... $348
====
</TABLE>
F-16
<PAGE>
KSCO ACQUISITION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
10. INCOME TAXES
The following is a summary of the components of net income (loss) before
income taxes and extraordinary loss:
<TABLE>
<CAPTION>
THE COMPANY THE PREDECESSOR
------------------------- ------------------------
PERIOD FROM PERIOD FROM
INCEPTION JANUARY 1
YEAR ENDED DATE TO TO YEAR ENDED
DECEMBER 31, DECEMBER 31, OCTOBER 17, DECEMBER 31,
1996 1995 1995 1994
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Domestic.................. $1,317 $324 $1,354 $3,371
Foreign................... (296) (50) (190) (396)
------ ---- ------ ------
$1,021 $274 $1,164 $2,975
====== ==== ====== ======
</TABLE>
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
THE COMPANY THE PREDECESSOR
------------------------- ------------------------
PERIOD FROM PERIOD FROM
INCEPTION JANUARY 1
YEAR ENDED DATE TO TO YEAR ENDED
DECEMBER 31, DECEMBER 31, OCTOBER 17, DECEMBER 31,
1996 1995 1995 1994
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Current................... $ -- $150 $ -- $ 98
Deferred.................. 265 8 -- 514
Foreign................... 45 -- -- 22
----- ---- ----- ----
$ 310 $158 $ -- $634
===== ==== ===== ====
</TABLE>
The differences between the United States Federal statutory income tax rate
and the consolidated effective income tax rate are summarized as follows:
<TABLE>
<CAPTION>
THE COMPANY THE PREDECESSOR
------------------------- ------------------------
PERIOD FROM PERIOD FROM
INCEPTION JANUARY 1
YEAR ENDED DATE TO TO YEAR ENDED
DECEMBER 31, DECEMBER 31, OCTOBER 17, DECEMBER 31,
1996 1995 1995 1994
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Federal income tax ex-
pense at statutory
rates................... $429 $ 93 $ 323 $1,041
State income tax
provision, net of
federal taxes........... 66 21 71 129
Benefit for net operating
losses.................. -- -- (528) (749)
Benefit for extraordinary
item.................... (613) -- -- --
Amortization of
goodwill/deferred
transaction fees........ 292 29 77 71
Foreign tax impact....... 45 -- -- --
Other.................... 91 15 57 142
---- ---- ----- ------
$310 $158 $ -- $ 634
==== ==== ===== ======
</TABLE>
F-17
<PAGE>
KSCO ACQUISITION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
Deferred tax consequences of significant temporary differences are as
follows as of December 31, 1996 and 1995:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Fixed assets....................................... $(12,132) $(11,261)
Trademarks......................................... (1,617) (1,646)
Inventories........................................ (1,924) (2,173)
Deferred acquisition fees.......................... (2,142) --
Other.............................................. (161) --
-------- --------
(17,976) (15,080)
-------- --------
Deferred tax assets:
Net operating loss carryforwards (expiring in
2010)............................................. 4,518 --
Postretirement health and life benefits............ 5,680 4,228
Pension............................................ 4,344 2,548
Environmental matters.............................. 1,138 1,058
Other.............................................. 1,795 3,250
Inventories........................................ 450 1,671
-------- --------
17,925 12,755
-------- --------
$ (51) $ (2,325)
======== ========
</TABLE>
In connection with the Acquisition and the acquisitions of PCI and Rau,
Alper and the former owners of PCI and Rau, respectively, indemnified the
Company from any potential future tax liabilities that may arise from periods
prior to the dates of acquisition.
NOTE 11. PENSION AND OTHER EMPLOYEE BENEFIT PLANS
Pension Plan
Fasteners sponsors noncontributory defined benefit pension plans. On
December 31, 1994, Fasteners curtailed future benefits attributable to
participants in Fasteners' pension plans. The effect of this curtailment
resulted in the elimination of defined pension benefits for all future
services of active employees participating in the plans. Additionally,
Fasteners assumed the obligations of two pension plans sponsored by PCI. The
PCI plans were merged with the Fasteners plans effective March 31, 1996.
The amounts funded by Fasteners for any plan year are not less than the
minimum required under the Employee Retirement Income Security Act.
The following items are the components of the net pension cost:
<TABLE>
<CAPTION>
THE COMPANY THE PREDECESSOR
------------------------------ -------------------------
PERIOD FROM
YEAR ENDED PERIOD FROM JANUARY 1 TO YEAR ENDED
DECEMBER 31, INCEPTION DATE TO OCTOBER 17, DECEMBER 31,
1996 DECEMBER 31, 1995 1995 1994
------------ ----------------- ------------ ------------
<S> <C> <C> <C> <C>
Interest cost on
projected benefit
obligation............. $ 2,110 $ 480 $ 1,525 $ 2,063
Service cost............ 97 -- -- 257
Actual return on plan
assets................. (2,962) (749) (2,570) (1,000)
Net amortization and
deferral............... 588 362 1,526 (487)
------- ----- ------- -------
Net periodic pension
cost................... $ (167) $ 93 $ 481 $ 833
======= ===== ======= =======
</TABLE>
F-18
<PAGE>
KSCO ACQUISITION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
The following is a summary of the domestic plans' funded status as of
December 31, 1996 and 1995:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1995
------- -------
<S> <C> <C>
Actuarial present value of benefits for service rendered to
date:
Accumulated benefits based on salaries to date, including
vested benefits of $29,767 and $27,377 at December 31,
1996 and 1995, respectively.............................. $29,867 $27,503
------- -------
Projected benefit obligation................................ 29,867 27,503
Less fair value of plan assets.............................. 21,938 17,606
------- -------
Projected benefit obligation in excess of plan assets....... 7,929 9,897
Unrecognized net gain....................................... 1,896 242
------- -------
Accrued pension cost........................................ 9,825 10,139
Less current portion........................................ 1,099 1,921
------- -------
Long-term pension liabilities............................... $ 8,726 $ 8,218
======= =======
</TABLE>
The following is a summary of assumptions used to reflect expectations of
future economic conditions as they relate to Fasteners' pension plans:
<TABLE>
<CAPTION>
1996 1995 1994
----- ---- ----
<S> <C> <C> <C>
Discount rate.......................................... 7.50% 7.00% 8.50%
Expected long-term rate of return on plan assets....... 11.00% 9.00% 9.00%
</TABLE>
At December 31, 1996 and 1995, plan assets are invested approximately 24.9%
and 30.8%, respectively, in fixed income contracts with the balance in cash
and cash equivalents.
Fasteners has an additional defined benefit non-qualified pension plan
covering former employees and former employees of PCI. The pension liability
relating to this plan was $1,203 and $627 at December 31, 1996 and 1995,
respectively, of which $1,109 and $533 was classified as long-term at December
31, 1996 and 1995, respectively. Pension expense for this plan was $79, $9,
and $35 for the periods ended December 31, 1996, December 31, 1995 and October
17, 1995, respectively.
Postretirement Benefit Plans
Fasteners sponsors several defined benefit postretirement health and life
insurance benefit plans that cover both salaried and non-salaried former
employees. Fasteners assumed the obligations of a postretirement health and
life plan for former employees of PCI. All of the participants are retired
employees and beneficiaries, mostly from operations which were previously sold
or discontinued. Fasteners reserves the right to amend or discontinue all or
any part of those plans at any time. Fasteners' funding policy for its
postretirement plans is on a pay-as-you-go basis.
F-19
<PAGE>
KSCO ACQUISITION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
The following table sets forth the status of Fasteners' postretirement
benefit plans as of December 31, 1996 and 1995:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1995
------- ------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees and beneficiaries................................ $13,644 $7,607
Fully eligible active participants........................ 816 --
------- ------
Total accumulated postretirement benefit obligation......... 14,460 7,607
Unrecognized net gain....................................... 112 --
------- ------
Accumulated postretirement benefit obligation ("APBO")...... $14,572 $7,607
======= ======
</TABLE>
Net periodic postretirement benefit cost consisted of the following:
<TABLE>
<CAPTION>
THE COMPANY THE PREDECESSOR
------------------------- ------------------------
PERIOD FROM PERIOD FROM
INCEPTION JANUARY 1
YEAR ENDED DATE TO TO YEAR ENDED
DECEMBER 31, DECEMBER 31, OCTOBER 17, DECEMBER 31,
1996 1995 1995 1994
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Interest cost............ $ 990 $110 $619 $ 659
Service cost............. 101 -- -- --
Net amortization and de- -- -- -- (659)
ferral.................. ------ ---- ---- -----
Net postretirement bene- $1,091 $110 $619 $ --
fit cost................ ====== ==== ==== =====
</TABLE>
For measurement purposes, a 9.5% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1997; the rate was
assumed to decrease gradually to 6% for 2004 and remain at that level
thereafter. The health care cost trend rate has a significant effect on the
amounts reported. An increase in the health care cost trend rates of 1
percentage point would have the effect of increasing the APBO as of December
31, 1996 by a total of $1,035 and the interest cost component of net periodic
postretirement benefit cost for the year then ended by a total of $78.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.5%, 7.0% and 8.5% in 1996, 1995 and
1994, respectively.
401(k) Plan
Fasteners sponsors a 401(k) savings plan for salaried and non-salaried
employees. Participation in the plan is optional. Employer contributions are
equal to 50% of employee contributions, up to 5% of the participant's annual
salary, subject to certain limitations. Fasteners' contributions to this plan
were $248, $47, $197 and $124 for the periods ended December 31, 1996,
December 31, 1995, October 17, 1995 and December 31, 1994, respectively.
Stock Options
During October 1995, Fasteners granted certain executives options to
purchase a total of 727,000 shares of common stock at an option price of $2.50
per share. These options vest upon achievement of specified
F-20
<PAGE>
KSCO ACQUISITION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
performance targets over a three-year period or immediately upon a change in
control. As of December 31, 1996, 242,275 options were vested, as detailed
below:
<TABLE>
<CAPTION>
1996 1995
------- -------------
<S> <C> <C>
Options outstanding, beginning of year................. 727,000 --
Options outstanding, end of year....................... 727,000 727,000
Options Exercisable.................................... 242,275 --
Options granted........................................ -- 727,000
Exercise price......................................... $2.50 $2.50
Grant date............................................. -- October, 1995
</TABLE>
Fasteners adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"). Accordingly, no compensation cost has been recognized for the stock
options granted. Had compensation cost of Fasteners' stock options granted
been determined consistent with the provisions of SFAS 123, Fasteners'
compensation expense would have increased by approximately $105,000 in 1996
and an insignificant amount in 1995, based on a risk free rate of return of
7.0% and an expected 5 year life of the options.
NOTE 12. RELATED-PARTY TRANSACTIONS
Fasteners paid a fee of $1,300 to Kohlberg in conjunction with the
Acquisition. This fee has been capitalized along with other acquisition costs
incurred in the transaction. On January 24, 1996, Fasteners paid a fee of
$1,000 to Kohlberg in conjunction with the acquisitions of PCI and Rau (Note
3).
Pursuant to a management agreement, Kohlberg provides Fasteners with general
corporate administrative services. Kohlberg receives a management fee to
recover its operating expenses based upon an allocation of time devoted to
Fasteners. The management fee was $425 and $63 for the year ended December 31,
1996 and the period from the Inception Date to December 31, 1995,
respectively.
Pursuant to a Management Agreement dated January 1, 1993, Alper provided
Fasteners with general corporate administrative services. Alper received a
management fee to recover its operating expenses based upon an allocation of
time devoted to Fasteners. The management fee for 1994 and 1993 was $538 and
$780, respectively. This agreement was terminated in July 1994.
On July 18, 1994, Fasteners issued 19,440 shares of Series A redeemable,
cumulative preferred stock (par value $.01 per share) to its parent, First
City Diversified, Inc. ("FCDI"), in exchange for forgiveness of intercompany
advances totaling $19,440. The holders of the preferred stock were entitled to
receive, when, as and if declared by the Board of Directors cumulative cash
dividends on the shares of the preferred stock at an annual rate of 5% of the
liquidation preference, which was equal to $19,440 at December 31, 1994. The
dividends at December 31, 1994 were $405. The preferred dividends were paid to
FCDI on February 3, 1995.
NOTE 13. COMMITMENTS AND CONTINGENCIES
Fasteners is occasionally made a party to litigation, claims and assertions
from outside parties during the normal course of business. Management does not
believe that the unfavorable resolution of any such matters currently existing
would have a material unfavorable impact upon the Company's financial position
or results of operations.
F-21
<PAGE>
KSCO ACQUISITION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As a result of Fasteners' almost 200 years of industrial operations,
Fasteners is involved in environmental protection matters relating to the
discharge of materials into the environment and new such matters arise from
time to time. Fasteners is involved in clean-ups of a current and a former
operating location. In general, Fasteners has established accruals for those
hazardous waste sites where it is probable that a loss has been incurred and
the amount of the loss can be reasonably estimated. At December 31, 1996,
Fasteners had established accruals on a discounted basis, using a rate of
7.5%, for environmental matters in the amount of $2,954 which are not
anticipated to be of a capital nature. The total reserve for environmental
liabilities includes approximately $2,600 representing a contractual payment
to a former parent. The undiscounted amounts of the expected payments totaled
$4,575 at December 31, 1996. The reliability and precision of the loss
estimates are affected by numerous factors, such as the complexity of
investigation and remediation, the stage of site evaluation, the allocation of
responsibility among potentially responsible parties and the assertion of
additional claims. Fasteners adjusts its accruals from time to time as a
result of changes in performance standards, remediation technology, available
information and other relevant factors. The expected payments for
environmental obligations consist of $104 in 1997, $354 in 1998, $429 in each
of 1999 and 2000, and $2,449 thereafter.
In December 1993, the Predecessor filed a lawsuit against certain insurance
carriers seeking indemnification for costs paid and to be paid relating to
environmental matters. In August 1996, Fasteners received a settlement of
$2,487 relating to this claim. No liabilities are currently recorded for the
sites for which this claim related.
Fasteners has employment agreements with certain executives that contain
change in control and severance provisions.
NOTE 14. NORTH AMERICAN AND FOREIGN OPERATIONS
The Company's operations are located in the United States and Europe.
Financial information by geographic area for 1996 is as follows:
<TABLE>
<S> <C>
Net Sales by:
North America:
Domestic................................................... $ 78,348
Export..................................................... 3,275
Europe....................................................... 10,009
--------
$ 91,632
========
Operating Profit:
North America................................................ $ 6,509
Europe....................................................... 915
--------
$ 7,424
========
Identifiable assets (at end of period):
North America................................................ $ 98,168
Europe....................................................... 6,071
--------
$104,239
========
</TABLE>
Transfers of product from North America to Europe were not material during
the period presented above. Export sales from the United States include sales
to customers in Europe, Asia and Latin America. As the Company's European
operations were acquired in January 1996, export sales, operating profits and
identifiable assets were immaterial in 1995 and 1994.
F-22
<PAGE>
KSCO ACQUISITION CORPORATION
CONSOLIDATED BALANCE SHEET (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
-------------
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents........................................ $ 1,194
Accounts receivable, net of allowance of $754.................... 15,048
Inventories...................................................... 24,025
Other............................................................ 741
--------
TOTAL CURRENT ASSETS......................................... 41,008
--------
Property, plant and equipment, net............................... 41,473
--------
Deferred income taxes............................................ 1,298
Intangible Assets................................................ 24,963
--------
$108,742
========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt............................. $ 1,013
Accounts payable................................................. 9,612
Accrued liabilities.............................................. 8,946
--------
TOTAL CURRENT LIABILITIES.................................... 19,571
--------
LONG-TERM LIABILITIES
Revolving line of credit......................................... 11,930
Long-term debt................................................... 27,187
Employee benefits................................................ 24,351
Deferred income taxes............................................ --
Other............................................................ 2,941
--------
TOTAL LONG-TERM LIABILITIES.................................. 66,409
--------
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 15,000,000 shares authorized,
8,880,102 issued and outstanding................................ 89
Additional paid-in capital....................................... 22,086
Retained earnings................................................ 1,191
Foreign currency translation adjustment.......................... (604)
--------
TOTAL STOCKHOLDERS' EQUITY................................... 22,762
--------
$108,742
========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-23
<PAGE>
KSCO ACQUISITION CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER
30,
---------------
1997 1996
------- -------
<S> <C> <C>
Net sales..................................................... $73,466 $69,796
Cost of sales................................................. 53,104 50,263
------- -------
Gross profit................................................ 20,362 19,533
Selling expenses.............................................. 7,192 7,687
General and administrative expenses........................... 4,505 5,046
Amortization expense.......................................... 2,025 2,046
------- -------
Operating income............................................ 6,640 4,754
Other expense (income)........................................ 430 102
Interest expense.............................................. 2,698 4,848
------- -------
Income (loss) before income tax provision and extraordinary
loss......................................................... 3,512 (196)
Income tax provision.......................................... 1,586 258
------- -------
Income (loss) before extraordinary loss....................... 1,926 (454)
Extraordinary loss, net of $613 tax benefit................... -- 950
------- -------
Net income (loss)............................................. $ 1,926 $(1,404)
======= =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-24
<PAGE>
KSCO ACQUISITION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
( DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1997 1996
-------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................ $ 1,926 $ (1,404)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation .......................................... 4,213 5,512
Amortization........................................... 2,025 2,046
Changes in operating assets and liabilities, net of
effect of acquired businesses:
Accounts receivable, net.............................. (2,610) (2,282)
Inventories........................................... (2,431) (4,292)
Other current assets.................................. 434 (1,714)
Accounts payable...................................... (976) 4,009
Accrued liabilities................................... 1,783 (2,039)
Other assets and liabilities.......................... (1,888) (1,615)
-------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES...... 2,476 (1,779)
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid in business acquisitions, net of cash acquired. -- (23,110)
Acquisition costs........................................ -- (2,140)
Additions to property, plant and equipment............... (4,114) (4,437)
Proceeds from sales of property, plant and equipment..... -- 2,264
-------- ---------
NET CASH USED IN INVESTING ACTIVITIES.................... (4,114) (27,423)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on credit line............................ 2,506 4,900
Issuance of long-term debt............................... -- 20,992
Repayments of long-term debt............................. (277) --
Issuance of common stock................................. -- 4,000
-------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES................ 2,229 29,892
-------- ---------
NET INCREASE IN CASH..................................... 591 690
CASH AT BEGINNING OF PERIOD.............................. 603 410
-------- ---------
CASH AT END OF PERIOD.................................... $ 1,194 $ 1,100
======== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid.......................................... $ 4,389 $ 3,234
======== =========
Income taxes........................................... $ 14 $ --
======== =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-25
<PAGE>
KSCO ACQUISITION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(DOLLARS IN THOUSANDS)
1. INTERIM FINANCIAL STATEMENTS
The interim financial statements presented herein include the accounts of
KSCO Acquisition Corporation and its wholly owned subsidiaries (the "Company")
as of and for the nine months ended September 30, 1997 and 1996.
In the opinion of management, the unaudited condensed consolidated financial
statements reflect all normal recurring adjustments necessary for a fair
statement of the results of the interim periods. The results for the nine
months ended September 30, 1997 are not indicative of the results that would
be obtained for the entire fiscal year or any other interim period. Certain
information and footnote disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting
principles have been omitted from these condensed consolidated financial
statements pursuant to the applicable rules and regulations of the Securities
and Exchange Commission. These financial statements should be read in
conjunction with the audited Consolidated Financial Statements and the notes
thereto for the year ended December 31, 1996.
2. INVENTORIES
Inventories consist of the following at September 30, 1997:
<TABLE>
<S> <C>
Raw materials........................................................ $ 2,560
Work in process...................................................... 5,716
Finished goods....................................................... 15,749
-------
$24,025
=======
</TABLE>
3. SUBSEQUENT EVENT
On October 10, 1997, KSCO and its stockholders entered into a stock purchase
agreement with a third party for the sale of all of the capital stock of the
Company. In connection with the acquisition under the agreement, the Company
intends to issue senior notes and enter into a new credit facility. The
proceeds of the offering of such notes and initial borrowings under the new
credit facility will constitute a portion of the financing necessary for the
purchase price in the acquisition, to refinance certain existing indebtedness
of the Company and to repurchase certain equipment subject to a synthetic
lease.
F-26
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors
of Scovill Holdings Inc.
We have audited the accompanying balance sheet of Scovill Holdings Inc. (the
"Company") as of November 20, 1997 (date of incorporation). This balance sheet
is the responsibility of the Company's management. Our responsibility is to
express an opinion on this balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
As discussed in Note 1, the Company was inactive on November 20, 1997.
In our opinion, such balance sheet presents fairly, in all material respects,
the financial position of Scovill Holdings Inc. as of November 20, 1997 in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Atlanta, Georgia
November 20, 1997
F-27
<PAGE>
SCOVILL HOLDINGS INC.
BALANCE SHEET
NOVEMBER 20, 1997 (DATE OF INCORPORATION)
<TABLE>
<S> <C>
ASSETS.................................................................... $ 0
----
LIABILITIES............................................................... $ 0
----
STOCKHOLDERS' EQUITY:
Common stock, $.0001 par value, authorized 6 million shares; none issued
and outstanding........................................................ 0
Preferred stock, $.0001 par value, authorized 6.2 million shares, none 0
issued and outstanding................................................. ----
TOTAL STOCKHOLDERS' EQUITY............................................ 0
----
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......................... $ 0
----
</TABLE>
See notes to balance sheet
F-28
<PAGE>
SCOVILL HOLDINGS INC.
NOTES TO BALANCE SHEET
NOVEMBER 20, 1997 (DATE OF INCORPORATION)
1. ORGANIZATION
Scovill Holdings Inc. (the "Company") was incorporated on November 20, 1997
under the laws of the State of Delaware.
2. SUBSEQUENT EVENT
On November 26, 1997, the Company issued Common Stock, Preferred Stock, and
Units (consisting of Series A Cumulative Redeemable Exchangeable Preferred
Stock and Warrants to purchase Common Stock) for $.4 million, $36.2
million, and $10.0 million, respectively. The net proceeds from these
offerings were concurrently contributed to Scovill Fasteners Inc. in the
form of common equity to effect the purchase of Scovill Fasteners Inc. from
its previous owner. The Company also provided a guarantee of the debt of
Scovill Fasteners Inc. which was issued in addition to the investment
discussed above to effect the purchase.
F-29
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PRO-
SPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE GUARANTOR. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OF-
FER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR ANY
OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY
CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DE-
LIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUM-
STANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS
OF THE COMPANY OR THE GUARANTOR SINCE THE DATE HEREOF OR THAT ANY INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
---------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Summary.................................................................... 4
Risk Factors............................................................... 17
The Exchange Offer......................................................... 23
The Transactions........................................................... 33
Capitalization............................................................. 34
Selected Historical Financial Data......................................... 36
Pro Forma Consolidated Financial Statements................................ 38
Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................ 43
Business................................................................... 49
Management................................................................. 64
Certain Transactions....................................................... 67
Description of Other Indebtedness.......................................... 68
Description of Notes....................................................... 70
Description of Units....................................................... 97
Certain U.S. Federal Income Tax Considerations............................. 102
Plan of Distribution....................................................... 105
Legal Matters.............................................................. 106
Experts.................................................................... 106
Available Information...................................................... 106
Index to Financial Statements.............................................. F-1
</TABLE>
UNTIL , 1998 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EF-
FECTING TRANSACTIONS IN THE EXCHANGE NOTES, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDI-
TION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN SELLING EX-
CHANGE NOTES RECEIVED IN EXCHANGE FOR INITIAL NOTES HELD FOR THEIR OWN AC-
COUNT. SEE "PLAN OF DISTRIBUTION."
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
[LOGO OF SCOVILL FASTENERS INC.]
SCOVILL FASTENERS INC.
OFFER TO EXCHANGE
11 1/4% SENIOR NOTES DUE 2007, SERIES A
FOR 11 1/4% SENIOR NOTES DUE 2007, SERIES B
PROSPECTUS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
[ALTERNATE PAGE TO PROSPECTUS]
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JANUARY 30, 1998
PROSPECTUS
SCOVILL FASTENERS INC.
[LOGO OF SCOVILL
11 1/4% SENIOR NOTES DUE 2007, SERIES B FASTENERS INC.]
-----------
The 11 1/4% Senior Notes due 2007, Series B (the "Exchange Notes" or the
"Notes") were issued in exchange for the 11 1/4% Senior Notes due 2007, Series
A (the "Initial Notes") by Scovill Fasteners Inc. (the "Company"), a Delaware
corporation. The Notes mature on November 30, 2007. Interest on the Notes will
be payable semi-annually on May 30 and November 30 of each year, commencing May
30, 1998, to the Holders of record at the close of business on the May 15 or
November 15, as the case may be, immediately preceding the relevant interest
payment date. The Notes will be redeemable, at the option of the Company, in
whole or in part, at any time on or after November 30, 2002, at the redemption
prices set forth herein, together with accrued and unpaid interest and
Liquidated Damages, if any, to the redemption date. Notwithstanding the
foregoing, at any time on or prior to November 30, 2000, the Company may redeem
up to 35% of the aggregate principal amount of the Notes with the net cash
proceeds of one or more Public Equity Offerings at a redemption price equal to
111.25% of the principal amount thereof, plus accrued and unpaid interest and
Liquidated Damages, if any, to the redemption date; provided, however, that (a)
at least $65 million aggregate principal amount of the Notes remains
outstanding immediately after the occurrence of such redemption and (b) notice
of such redemption is given within 60 days of the date of the closing of any
such Public Equity Offering. Upon the occurrence of a Change of Control (as
defined), holders of the Notes will have the right to require the Company to
purchase all or any part of their Notes for a cash price equal to 101% of the
principal amount of the Notes, plus accrued and unpaid interest and Liquidated
Damages, if any, to the date of purchase. See "Description of Notes."
The Notes are fully and unconditionally guaranteed (the "Parent Guarantee")
by Scovill Holdings Inc. ("Parent"). In addition, if the Company or any of its
Restricted Subsidiaries shall acquire or create another Subsidiary (other than
any Foreign Subsidiary) or contribute property or assets to an existing
Subsidiary, then such Subsidiary will, under certain circumstances explained
herein, be required to execute a Subsidiary Guarantee. The Notes, the Parent
Guarantee, and any Subsidiary Guarantees are senior unsecured obligations of
the Company and will rank pari passu in right of payment with all other
existing and future unsecured and unsubordinated Indebtedness of the Company
and senior to all existing and future subordinated Indebtedness of the Company.
See "Description of Notes." At December 31, 1997, Parent had (i) approximately
$130.4 million of consolidated unsubordinated indebtedness outstanding
(including the Notes and $30.4 million of secured indebtedness) and (ii) no
indebtedness that would have been subordinated to the Notes. See
"Capitalization." The Indenture permits the Company and its subsidiaries to
incur additional indebtedness, including senior indebtedness, subject to
certain limitations. The Indenture does not limit Parent's ability to incur
indebtedness.
SEE "RISK FACTORS" BEGINNING ON PAGE 17 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH THE NOTES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATIONS TO THE
CONTRARY IS A CRIMINAL OFFENSE.
-----------
This Prospectus is to be used by SBC Warburg Dillon Read Inc. ("SBCWDR") in
connection with the offers and sales in market-making transactions at
negotiated prices related to prevailing market prices at the time of sale. The
Company does not intend to list the Exchange Notes on any securities exchange
or to seek admission thereof to trading in the Nasdaq National Market. SBCWDR
has advised the Company that it intends to make a market in the Exchange Notes;
however, it is not obligated to do so and any market-making may be discontinued
at any time. The Company will receive no portion of the proceeds of the sale of
the Exchange Notes and will bear expenses incident to the registration thereof.
The closing of the Company's exchange offer resulting in the issue of the
Exchange Notes occurred on , 1998. See "Plan of Distribution."
THE DATE OF THIS PROSPECTUS IS , 1998
<PAGE>
[ALTERNATE PAGE TO PROSPECTUS]
THE NOTES
As used in this section of the Summary and in the "Description of Notes," the
"Company" refers only to Scovill Fasteners Inc. and does not include its
subsidiaries.
ISSUER.......................... Scovill Fasteners Inc.
SECURITIES OFFERED.............. $100,000,000 principal amount of 11 1/4%
Senior Notes due 2007, Series B.
MATURITY DATE................... November 30, 2007.
INTEREST PAYMENT DATES.......... May 30 and November 30 of each year,
commencing May 30, 1998.
MANDATORY REDEMPTION............ None, except as set forth below under "Change
of Control."
GUARANTEES; SUBORDINATION.......
The Notes are guaranteed by Parent (the
"Parent Guarantee") and, under certain
circumstances, by Restricted Subsidiaries (as
defined) of the Company (the "Subsidiary
Guarantees," and together with the Parent
Guarantee, the "Guarantees"). No Subsidiary
Guarantees were required on the date of
original issuance of the Notes (the "Issue
Date"). The Notes and each Guarantee are
senior unsecured obligations of the Company
and the Guarantor thereof, respectively. The
Notes and each Guarantee rank pari passu in
right of payment with all other existing and
future unsecured and unsubordinated
obligations of the Company and the Guarantor
thereof, respectively, and senior to all
existing and future indebtedness of the
Company and such Guarantor that is expressly
subordinated to the Notes and such Guarantee,
respectively. In addition, the Notes and each
Guarantee are effectively subordinated to all
secured obligations of the Company and the
Guarantor thereof, respectively, to the
extent of the assets securing such
obligations. At December 31, 1997, Parent had
(i) approximately $130.4 million of
consolidated unsubordinated indebtedness
outstanding (including the Notes and $30.4
million of secured indebtedness) and (ii) no
indebtedness that would have been
subordinated to the Notes. The Notes are
structurally subordinated to all obligations
(including trade payables and accrued
liabilities) of the Company's subsidiaries,
other than any subsidiary that issues a
Subsidiary Guarantee. The indenture pursuant
to which the Notes were issued (the
"Indenture") permits the Company and its
subsidiaries to incur additional
indebtedness, including secured indebtedness,
subject to certain limitations. The Indenture
does not limit Parent's ability to incur
indebtedness.
10
<PAGE>
[ALTERNATE PAGE TO PROSPECTUS]
OPTIONAL REDEMPTION............. The Notes are redeemable at the option of the
Company, in whole or in part, at any time on
or after November 30, 2002, at the redemption
prices set forth herein, plus accrued and
unpaid interest and Liquidated Damages, if
any, to the redemption date. The Company may
also redeem Notes at its option, at any time
on or prior to November 30, 2000, at a
redemption price equal to 111.25% of the
principal amount thereof, plus accrued and
unpaid interest and Liquidated Damages, if
any, to the redemption date, with the net
proceeds of one or more Public Equity
Offerings; provided, however, that at least
$65 million in aggregate principal amount of
the Notes remains outstanding following each
such redemption. See "Description of Notes--
Optional Redemption."
CHANGE OF CONTROL............... Upon the occurrence of a Change of Control,
the Company will be required to offer to
purchase all or any part of each holder's
Notes at 101% of the principal amount
thereof, plus accrued and unpaid interest and
Liquidated Damages, if any, to the date of
purchase. There can be no assurance that the
Company will have the financial resources
necessary, or be permitted by its debt or
other agreements, to purchase the Notes upon
a Change of Control. See "Risk Factors--
Change of Control" and "Description of
Notes--Change of Control."
CERTAIN COVENANTS...............
The Indenture contains certain covenants
that, among other things, limit the ability
of the Company and the Restricted
Subsidiaries to incur additional
indebtedness, pay dividends or make other
distributions, enter into sale and leaseback
transactions, make certain investments, incur
certain secured indebtedness, enter into
certain transactions with affiliates, or
enter into certain mergers or consolidations
or sell all or substantially all of the
assets of the Company and the Restricted
Subsidiaries. These covenants are subject to
a number of significant exceptions and
qualifications. See "Description of Notes--
Certain Covenants."
USE OF PROCEEDS................. The Company will receive no cash proceeds
from the sale of the Exchange Notes.
11
<PAGE>
[ALTERNATE PAGE TO PROSPECTUS]
CONCURRENT UNITS OFFERING
Concurrent with the Notes Offering, Parent offered 100,000 Units, each Unit
consisting of $100 liquidation preference of Senior Preferred Stock and one
warrant to purchase shares of Common Stock. The Senior Preferred Stock will be
exchangeable, at the option of Parent, into Parent's Subordinated Exchange
Debentures due 2009 (the "Exchange Debentures"), subject to certain conditions.
The Senior Preferred Stock will be mandatorily redeemable on November 30, 2009.
Dividends on the Senior Preferred Stock will be payable quarterly in arrears,
in cash or, prior to November 30, 2002 at Parent's option, in additional shares
of Senior Preferred Stock. See "Description of Units."
RISK FACTORS
For a discussion of certain factors that should be considered in evaluating
the Exchange Notes, see "Risk Factors."
13
<PAGE>
[ALTERNATE PAGE TO PROSPECTUS]
RISK FACTORS
Prospective investors should carefully consider the following factors, as
well as the other information and financial data contained in this Prospectus,
before investing in the Exchange Notes.
SUBSTANTIAL LEVERAGE; RESTRICTIVE COVENANTS
The Company is highly leveraged. At December 31, 1997, the Company had total
consolidated debt of $130.4 million (including the Notes), none of which was
subordinated to the Notes. Based on expected borrowings under the Revolving
Credit Facility, the Company's cash debt service requirements (including an
amortization payment on the Term Loan) will total approximately $15.2 million
in 1998. See also "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources" for a discussion
of scheduled debt repayments.
17
<PAGE>
[ALTERNATE PAGE TO PROSPECTUS]
generally apply, except that the Subsidiary Guarantees could also be subject
to the claim that, since the Subsidiary Guarantees were incurred for the
benefit of the Company (and only indirectly for the benefit of the guarantors
thereof), they were incurred for less than reasonably equivalent value or fair
consideration. A court could therefore subordinate the Subsidiary Guarantees
to the other obligations of the guarantors thereof, or take other action
detrimental to holders of the Notes, including, under certain circumstances,
invalidating the Subsidiary Guarantees. No Subsidiary Guarantees will be
required on the Issue Date.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, the Company will be required to
offer to purchase all of the outstanding Notes at 101% of the principal amount
thereof, plus accrued and unpaid interest to the date of purchase. There can
be no assurance that the Company will have sufficient funds available, will be
able to raise sufficient funds through a refinancing of the Notes, or will be
permitted by its other debt agreements to purchase the Notes upon the
occurrence of a Change of Control. In addition, a Change of Control may
require the Company to offer to purchase other outstanding indebtedness and
would cause a default under the New Credit Facility. The inability to purchase
all of the tendered Notes would constitute an Event of Default (as defined)
under the Indenture. See "Description of Notes--Change of Control."
The Change of Control provision may not necessarily afford the holders of
Notes protection in the event of a highly leveraged transaction, including a
reorganization, restructuring, merger, or similar transaction involving the
Company that could adversely affect the holders because such transactions may
not involve a shift in voting power or beneficial ownership, may not involve a
shift of the required magnitude or may not otherwise fit within the definition
of Change of Control.
ABSENCE OF PUBLIC MARKET; RESTRICTIONS ON TRANSFER
The Initial Notes are eligible for trading on the Private Offerings,
Resales and Trading through Automated Linkage Market by Qualified
Institutional Buyers ("QIBs"). The Exchange Notes are new securities for which
there is no existing market. There can be no assurance as to the liquidity of
any markets that may develop for the Exchange Notes, the ability of the
holders of the Exchange Notes to sell their Exchange Notes or the price at
which 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, the Company's operating results, and
the market for similar securities. The Initial Purchasers have advised the
Company that they currently intend to make a market in the Notes. However, the
Initial Purchasers are not obligated to do so and any market-making may be
discontinued at any time without notice. The Company and Parent do not intend
to apply for listing of the Exchange Notes on any securities exchange.
The liquidity of, and trading market for, the Exchange Notes may also be
materially and adversely affected by declines in the market for high yield
securities generally. Such a decline may materially and adversely affect such
liquidity and trading independent of the financial performance of, and
prospects for, the Company and Parent.
23
<PAGE>
[ALTERNATE PAGE TO PROSPECTUS]
CERTAIN TRANSACTIONS
TRANSACTIONS WITH KOHLBERG
Since October 1995, the Company has paid an aggregate of $863,000 in
management fees to Kohlberg & Co., pursuant to a management services agreement
that will be terminated effective as of the closing of the Acquisition. In
January 1996, the Company paid an advisory fee of $1.0 million to Kohlberg &
Co. in conjunction with the acquisitions of PCI and Rau.
TRANSACTIONS WITH SARATOGA
In connection with the Transactions, the Company paid a transaction fee of
$1.75 million to an affiliate of Saratoga in consideration for advisory
services related to the structuring and financing of the transaction. The
Company entered into an agreement with Saratoga, pursuant to which the Company
will pay a management fee of $150,000 per quarter to Saratoga (the "Management
Services Agreement"). In addition, Saratoga will provide the Company with
advisory services in connection with significant business transactions, such
as acquisitions, for which the Company will pay Saratoga compensation
comparable for similarly situated companies. See also "Plan of Distribution."
THE ACQUISITION
In connection with the Transactions, affiliates of Kohlberg and KSCO's other
existing stockholders received an aggregate of approximately $98.1 million.
Members of management received aggregate proceeds of approximately $2.9
million in cash in consideration for their stock options in KSCO, excluding
the $3.3 million that was rolled over into options to purchase Common Stock
and Series B Preferred Stock. Certain members of management entered into
employment agreements with the Company. See "Management." In addition, William
F. Andrews, the Chairman of the Board, received proceeds of approximately $1.8
million in cash in consideration for his stock and stock options of KSCO,
excluding the $150,000 that was rolled over into options to purchase Common
Stock and Series B Preferred Stock.
TRANSACTIONS WITH INITIAL PURCHASERS
On November 26, 1997, SBCWDR and BT Alex. Brown Incorporated (the "Initial
Purchasers") acquired all of the Initial Notes and thereafter completed a
private placement of the Initial Notes. In connection with their acquisition
of the Initial Notes, the Initial Purchasers became entitled to the benefits
of the Registration Rights Agreement, pursuant to which the Company commenced
the Exchange Offer.
68
<PAGE>
[ALTERNATE PAGE TO PROSPECTUS]
PLAN OF DISTRIBUTION
This Prospectus is to be used by SBCWDR in connection with offers and sales
of the Notes in market-making transactions. Such sales will be made at
negotiated prices related to prevailing market prices at the time of sale.
Dillon Read may act as principal or agent in such transactions, including as
agent for the counterparty when acting as principal or as agent for both
counterparties, and may receive compensation in the form of discounts and
commissions, including from both counterparties when it acts as agent for
both.
An affiliate of SBCWDR owns 67.2% of the capital stock of Parent, which owns
all of the capital stock of the Company. The affiliate is also a party to a
Stockholders Agreement which provides for certain restrictions on the
transferability of Parent's common stock and provides for tag-along, take-
along and registration rights among the parties thereto. Pursuant to such
agreement, the affiliate of SBCWDR has the right to nominate directors who
will be members of the Parent's Board of Directors. See "Management" and
"Certain Transactions."
The Company has been advised by SBCWDR that, subject to applicable laws and
regulations, SBCWDR currently intends to make a market in the Notes following
completion of the Exchange Offer. However, Dillon Reed is not obligated to do
so and any such market-making may be interrupted or discontinued at any time
without notice. In addition, such market-making activity will be subject to
the limits imposed by the Securities Act and the Exchange Act. There can be no
assurance that an active trading market for the Notes will develop or be
sustained. See "Risk Factors--Absence of Public Market; Restrictions on
Transfer."
The Company and SBCWDR have entered into the Registration Rights Agreement
with respect to the use by the Initial Purchasers of this Prospectus. Pursuant
to such agreement, the Company has agreed to indemnify SBCWDR against certain
liabilities, including liabilities under the Securities Act.
105
<PAGE>
[ALTERNATE PAGE TO PROSPECTUS]
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PRO-
SPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE GUARANTOR. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OF-
FER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR ANY
OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY
CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DE-
LIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUM-
STANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS
OF THE COMPANY OR THE GUARANTOR SINCE THE DATE HEREOF OR THAT ANY INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
---------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Summary.................................................................... 4
Risk Factors............................................................... 17
The Transactions........................................................... 33
Capitalization............................................................. 34
Selected Historical Financial Data......................................... 36
Pro Forma Consolidated Financial Statements................................ 38
Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................ 43
Business................................................................... 49
Management................................................................. 64
Certain Transactions....................................................... 67
Description of Other Indebtedness.......................................... 68
Description of Notes....................................................... 70
Description of Units....................................................... 97
Certain U.S. Federal Income Tax Considerations............................. 102
Plan of Distribution....................................................... 105
Legal Matters.............................................................. 106
Experts.................................................................... 106
Available Information...................................................... 106
Index to Financial Statements.............................................. F-1
</TABLE>
UNTIL , 1998 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EF-
FECTING TRANSACTIONS IN THE EXCHANGE NOTES, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDI-
TION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN SELLING EX-
CHANGE NOTES RECEIVED IN EXCHANGE FOR INITIAL NOTES HELD FOR THEIR OWN AC-
COUNT. SEE "PLAN OF DISTRIBUTION."
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
[LOGO OF SCOVILL FASTENERS INC.]
SCOVILL FASTENERS INC.
11 1/4% SENIOR NOTES DUE 2007, SERIES B
PROSPECTUS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Set forth below is an estimate of the fees and expenses payable by the
Company in connection with the issuance and distribution of the Exchange
Notes.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee................. $29,500
Blue Sky fees and expenses.......................................... *
Printing expenses................................................... *
Legal fees and expenses............................................. *
Accounting fees and expenses........................................ *
Indenture Trustee fees.............................................. *
Miscellaneous....................................................... *
-------
Total........................................................... $ *
=======
</TABLE>
- --------
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the DGCL empowers a Delaware corporation to 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 such corporation) by reason of the fact that such person is or was a
director, officer, employee or agent of such corporation, or is or was serving
at the request of such corporation as director, officer, employee or agent of
another corporation or enterprise. A corporation may indemnify such person
against expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding if he acted in good faith and
in a manner reasonably believed to be in or not opposed to the best interests
of the corporation, and, with respect to any criminal action or proceeding,
has no reasonable cause to believe his conduct was unlawful. A corporation
may, in advance of the final disposition of any civil, criminal,
administrative or investigative action, suit or proceeding, pay the expense
(including attorneys' fees) included by any officer or director in defending
such action, provided that the director or officer undertake to repay such
amount if it shall ultimately be determined that he is not entitled to be
indemnified by the corporation.
A Delaware corporation may indemnify officers and directors in an action by
or in the right of the corporation to procure a judgment in its favor under
the same conditions, except that no indemnification is permitted without
judicial approval if the officer or director is adjudged to be liable to the
corporation. Where an officer or director is successful on the merits or
otherwise in the defense of any action referred to above, the corporation must
indemnify him against the expenses (including attorneys' fees) which he
actually or reasonably incurred in connection therewith. The indemnification
provided is not deemed to be exclusive of any other rights to which an officer
or director may be entitled under any corporation's bylaw, agreement, vote or
otherwise.
The Company has adopted provisions in its Certificate of Incorporation and
Bylaws that provide that the Company shall indemnify its officers and
directors to the maximum extent permitted under the DGCL. Certain directors
are also entitled to indemnification from the organizations that employ them.
The Company has purchased insurance on behalf of its officers and directors
for liabilities arising out of their capacities as such.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In connection with the Transactions, in November 1997, the Company issued an
aggregate principal amount of $100,000,000 of Initial Notes to the Initial
Purchasers in consideration for $97,000,000. At the same time, Parent issued
an aggregate principal amount of $10,000,000 of Units, each consisting of one
share of Series B Preferred Stock and one warrant to purchase shares of common
stock of the Company, to the Initial Purchasers. Based on the private nature
of these transactions and the financial sophistication of the Initial
Purchasers, each of these transactions was exempt from the Securities Act
pursuant to Section 4(2) therein.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
(a) Exhibits:
<TABLE>
<CAPTION>
NO. DESCRIPTION
--- -----------
<C> <S>
3.1 --Certificate of Incorporation of Scovill Holdings Inc.**
3.2 --By-laws of Scovill Holdings Inc.**
3.3 --Amended and Restated Certificate of Designations, Preferences and
Relative, Participating, Option and Other Special Rights of Series A
Cumulative Redeemable Exchangeable Preferred Stock.*
3.4 --Certificate of Designation, Preferences, and Relative,
Participating, Option and Other Special Rights of Series B Preferred
Stock.**
3.5 --Certificate of Incorporation of AF Acquisition Corp.**
3.6 --Certificate of Amendment of Certificate of Incorporation of AF
Acquisition Corp.**
3.7 --Certificate of Amendment of Certificate of Incorporation of Scovill
Apparel Fasteners Inc.**
3.8 --Certificate of Amendment of Certificate of Incorporation of Scovill
Apparel Fasteners Inc.**
3.9 --Certificate of Change of Location of Registered Office and of
Registered Agent of Scovill Fasteners Inc.**
3.10 --Certificate of Ownership and Merger Merging KSCO New Co. into
Scovill Fasteners Inc.**
3.11 --Certificate of Amendment of Certificate of Incorporation of Scovill
Fasteners Inc.**
3.12 --By-laws of Scovill Fasteners Inc.**
4.1 --Indenture dated as of November 26, 1997 among Scovill Acquisition
Inc., Scovill Holdings Inc., as Guarantor, and United States Trust
Company of New as Trustee (including Form of Note).**
4.2 --Registration Rights Agreement dated as of November 26, 1997 among
Scovill Acquisition Inc., Scovill Holdings Inc. and SBC Warburg
Dillon Read Inc. and BT Alex. Brown Incorporated.**
4.3 --Exchange Debenture Indenture between Scovill Holdings Inc. and the
Trustee thereunder.*
5.1 --Opinion of Cahill Gordon & Reindel regarding legality of Exchange
Notes and Guarantee.+
10.1.1 --Management Services Agreement among Scovill Fasteners Inc. and
Saratoga Partners III, L.P.*
10.1.2 --Preferred Stock Registration Rights Agreement dated as of November
26, 1997 among Scovill Holdings Inc. and SBC Warburg Dillon Read
Inc. and BT Alex. Brown Incorporated.*
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
NO. DESCRIPTION
--- -----------
<C> <S>
10.1.3 --Warrant Agreement dated as of November 26, 1997 between Scovill
Holdings Inc. and United States Trust Company of New York
(including Form of Warrant).**
10.1.4 --Warrant Registration Rights Agreement dated as of November 26,
1997 between Scovill Holdings Inc. and Unites States Trust Company
of New York.**
10.1.5 --Employment Agreement dated as of October 10, 1997 between David J.
Barrett and Scovill Acquisition Inc.**
10.1.6 --Employment Agreement dated as of October 10, 1997 between Martin
A. Moore and Scovill Acquisition Inc.**
10.1.7 --Employment Agreement dated as of October 10, 1997 between Robert
Feltz and Scovill Acquisition Inc.**
10.1.8 --Stock Purchase Agreement dated as of October 10, 1997 among SLF
Corporation, KSCO Acquisition Corporation, and the Stockholders of
KSCO Acquisition Corporation.**
10.1.10 --Tax Sharing Agreement dated as of November 26, 1997 by and among
Scovill Holdings Inc., Scovill Fasteners Inc., and the SFI
Subgroup.**
10.1.11 --Stock Option Agreement dated as of November 26, 1997 between
William F. Andrews and Scovill Holdings Inc.**
10.1.12 --Stock Option Agreement dated as of November 26, 1997 between John
Champagne and Scovill Holdings Inc.**
10.1.13 --Stock Option Agreement dated as of November 26, 1997 between
Michael Baxley and Scovill Holdings Inc.**
10.1.14 --Stock Option Agreement dated as of November 26, 1997 between
Robert W. Feltz and Scovill Holdings Inc.**
10.1.15 --Stock Option Agreement dated as of November 26, 1997 between
Martin A. Moore and Scovill Holdings Inc.**
10.1.16 --Stock Option Agreement dated as of November 26, 1997 between David
J. Barrett and Scovill Holdings Inc.**
10.1.17 --Scovill Holdings Inc. Stockholders Agreement dated as of November
26, 1997.**
10.1.18 --Scovill Holdings Inc. Subscription Agreement dated as of November
26, 1997.**
10.1.19 --Scovill Holdings Inc. Long-Term Incentive and Share Award Plan.**
10.1.20 --Material Agreements.*
10.1.21 --Credit Agreement dated as of November 26, 1997.**
16 --Letter of Deloitte & Touche LLP regarding change in certifying
accountant.+
12.1 --Statements re: Computations of Ratios.+
21.1 --List of Subsidiaries of Scovill Holdings Inc.**
21.2 --List of Subsidiaries of Scovill Fasteners Inc.**
23.1 --Consent of Arthur Andersen LLP.+
23.2 --Consent and Report on Schedule of Deloitte & Touche LLP.+
23.3 --Consent of Cahill Gordon & Reindel (included in Exhibit 5.1).+
24.1 --Powers of Attorney (included in signature pages).**
25.1 --Statement of Eligibility of Trustee on Form T-1, regarding Scovill
Fasteners Inc. and Scovill Holdings Inc.**
27.1 --Financial Data Schedule.**
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
NO. DESCRIPTION
--- -----------
<C> <S>
99.1 --Form of Letter of Transmittal.+
99.2 --Form of Notice of Guaranteed Delivery.+
</TABLE>
- --------
* To be filed by amendment.
** Previously filed.
+ Filed herewith.
(b) Financial Statement Schedule.
(1) Financial Statements
The financial statements filed as part of this Registration Statement are
listed in the Index to Financial Statements on page F-1.
(2) Schedule
Schedule II--Valuation and Qualifying Accounts.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of Registrants
pursuant to the provisions described under Item 20 above, or otherwise, the
Registrants have been advised that in the opinion of the Commission, such
indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrants of expenses incurred or paid by a director, officer or controlling
person of the Registrants 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 Registrants will, unless
in the opinion of their 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
Securities Act and will be governed by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT NO. 2 TO REGISTRATION STATEMENT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN NEW YORK, NEW YORK
ON JANUARY 30, 1998.
Scovill Holdings Inc.
/s/ David J. Barrett
By: __________________________________
DAVID J. BARRETT
Chief Executive Officer,
President and Director
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 2 TO REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
/s/ David J. Barrett Chief Executive
- ------------------------------------ Officer, President January 30,
DAVID J. BARRETT and Director 1998
/s/ Martin A. Moore Executive Vice
- ------------------------------------ President, Chief January 30,
MARTIN A. MOORE Financial Officer, 1998
and Principal
Accounting Officer
* Director January 30,
- ------------------------------------ 1998
WILLIAM F. ANDREWS
* Director January 30,
- ------------------------------------ 1998
CHRISTIAN L. OBERBECK
- ------------------------------------
*By: /s/ Martin A. Moore January 30,
---------------------------------- 1998
MARTIN A. MOORE Attorney-in-fact
II-5
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors
of KSCO Acquisition Corporation
We have audited, in accordance with generally accepted auditing standards, the
balance sheets of KSCO ACQUISITION CORPORATION AND SUBSIDIARIES as of December
31, 1996 and 1995 and the related consolidated statements of operations,
stockholders' equity and cash flows for the year ended December 31, 1996 and
the period from inception, October 17, 1995, through December 31, 1995, and
the consolidated statements of operations, stockholders' equity (deficiency),
and cash flows of the Predecessor from January 1, 1995 through October 17,
1995 included in this registration statement and have issued our report
thereon dated March 17, 1997.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The accompanying schedule of valuation
and qualifying accounts is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. The information presented in this schedule as of and for
the periods ended October 17, 1995, December 31, 1995 and December 31, 1996
has been subjected to the auditing procedures applied in the audit of the
basic financial statements and, in our opinion, fairly states in all material
respects, the financial data required to be set forth therein in relation to
the basic financial statements taken as a whole.
Arthur Andersen LLP
Atlanta, Georgia
March 17, 1997
S-1
<PAGE>
FINANCIAL STATEMENT SCHEDULE
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ------------ ---------------- --------- ----------
BALANCE AT ADDITIONS DEDUCTION BALANCE AT
BEGINNING OF CHARGED TO COSTS FROM END OF
CLASSIFICATION PERIOD AND EXPENSES RESERVES PERIOD
-------------- ------------ ---------------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
VALUATION AND QUALIFYING
ACCOUNTS DEDUCTED FROM THE
ASSETS TO WHICH THEY
APPLY:
(1) For the year ended
December 31, 1996,
Allowance for
uncollectible accounts.. $326 $376 $ 62 $640
==== ==== ==== ====
(1) For the period from
Inception through
December 31, 1995 ...... $326 $ 57 $ 57 $326
==== ==== ==== ====
(2) For the period from
January 1, 1995 through
October 17, 1995 ....... $326 $398 $398 $326
==== ==== ==== ====
(2) For the year ended
December 31, 1994,
Allowance for
uncollectible accounts.. $219 $395 $288 $326
==== ==== ==== ====
</TABLE>
- --------
(1) Predecessor-KSCO
(2) Predecessor-Alper
S-2
<PAGE>
<TABLE>
<CAPTION>
NO. DESCRIPTION INDEX PAGE
--- ----------------- ----
<C> <S> <C>
3.1 --Certificate of Incorporation of Scovill Holdings Inc.**
3.2 --By-laws of Scovill Holdings Inc.**
3.3 --Amended and Restated Certificate of Designations, Preferences
and Relative, Participating, Option and Other Special Rights
of Series A Cumulative Redeemable Exchangeable Preferred
Stock.*
3.4 --Certificate of Designation, Preferences, and Relative,
Participating, Option and Other Special Rights of Series B
Preferred Stock.**
3.5 --Certificate of Incorporation of AF Acquisition Corp.**
3.6 --Certificate of Amendment of Certificate of Incorporation of
AF Acquisition Corp.**
3.7 --Certificate of Amendment of Certificate of Incorporation of
Scovill Apparel Fasteners Inc.**
3.8 --Certificate of Amendment of Certificate of Incorporation of
Scovill Apparel Fasteners Inc.**
3.9 --Certificate of Change of Location of Registered Office and of
Registered Agent of Scovill Fasteners Inc.**
3.10 --Certificate of Ownership and Merger Merging KSCO New Co. into
Scovill Fasteners Inc.**
3.11 --Certificate of Amendment of Certificate of Incorporation of
Scovill Fasteners Inc.**
3.12 --By-laws of Scovill Fasteners Inc.**
4.1 --Indenture dated as of November 26, 1997 among Scovill
Acquisition Inc., Scovill Holdings Inc., as Guarantor, and
United States Trust Company of New as Trustee (including Form
of Note).**
4.2 --Registration Rights Agreement dated as of November 26, 1997
among Scovill Acquisition Inc., Scovill Holdings Inc. and SBC
Warburg Dillon Read Inc. and BT Alex. Brown Incorporated.**
4.3 --Exchange Debenture Indenture between Scovill Holdings Inc.
and the Trustee thereunder.*
5.1 --Opinion of Cahill Gordon & Reindel regarding legality of
Exchange Notes and Guarantee.+
10.1.1 --Management Services Agreement among Scovill Fasteners Inc.
and Saratoga Partners III, L.P.*
10.1.2 --Preferred Stock Registration Rights Agreement dated as of
November 26, 1997 among Scovill Holdings Inc. and SBC Warburg
Dillon Read Inc. and BT Alex. Brown Incorporated.*
10.1.3 --Warrant Agreement dated as of November 26, 1997 between
Scovill Holdings Inc. and United States Trust Company of New
York (including Form of Warrant).**
10.1.4 --Warrant Registration Rights Agreement dated as of November
26, 1997 between Scovill Holdings Inc. and Unites States Trust
Company of New York.**
10.1.5 --Employment Agreement dated as of October 10, 1997 between
David J. Barrett and Scovill Acquisition Inc.**
10.1.6 --Employment Agreement dated as of October 10, 1997 between
Martin A. Moore and Scovill Acquisition Inc.**
10.1.7 --Employment Agreement dated as of October 10, 1997 between
Robert Feltz and Scovill Acquisition Inc.**
10.1.8 --Stock Purchase Agreement dated as of October 10, 1997 among
SLF Corporation, KSCO Acquisition Corporation, and the
Stockholders of KSCO Acquisition Corporation.**
10.1.10 --Tax Sharing Agreement dated as of November 26, 1997 by and
among Scovill Holdings Inc., Scovill Fasteners Inc., and the
SFI Subgroup.**
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NO. DESCRIPTION INDEX PAGE
--- ----------------- ----
<C> <S> <C>
10.1.11 --Stock Option Agreement dated as of November 26, 1997 between
William F. Andrews and Scovill Holdings Inc.**
10.1.12 --Stock Option Agreement dated as of November 26, 1997 between
John Champagne and Scovill Holdings Inc.**
10.1.13 --Stock Option Agreement dated as of November 26, 1997 between
Michael Baxley and Scovill Holdings Inc.**
10.1.14 --Stock Option Agreement dated as of November 26, 1997 between
Robert W. Feltz and Scovill Holdings Inc.**
10.1.15 --Stock Option Agreement dated as of November 26, 1997 between
Martin A. Moore and Scovill Holdings Inc.**
10.1.16 --Stock Option Agreement dated as of November 26, 1997 between
David J. Barrett and Scovill Holdings Inc.**
10.1.17 --Scovill Holdings Inc. Stockholders Agreement dated as of
November 26, 1997.**
10.1.18 --Scovill Holdings Inc. Subscription Agreement dated as of
November 26, 1997.**
10.1.19 --Scovill Holdings Inc. Long-Term Incentive and Share Award
Plan.**
10.1.20 --Material Agreements.*
10.1.21 --Credit Agreement dated as of November 26, 1997.**
16 --Letter of Deloitte & Touche LLP regarding change in
certifying accountant.+
12.1 --Statements re: Computations of Ratios.+
21.1 --List of Subsidiaries of Scovill Holdings Inc.**
21.2 --List of Subsidiaries of Scovill Fasteners Inc.**
23.1 --Consent of Arthur Andersen LLP.+
23.2 --Consent and Report on Schedule of Deloitte & Touche LLP.+
23.3 --Consent of Cahill Gordon & Reindel (included in Exhibit
5.1).+
24.1 --Powers of Attorney (included in signature pages).**
25.1 --Statement of Eligibility of Trustee on Form T-1, regarding
Scovill Fasteners Inc. and Scovill Holdings Inc.**
27.1 --Financial Data Schedule.**
99.1 --Form of Letter of Transmittal.+
99.2 --Form of Notice of Guaranteed Delivery.+
</TABLE>
- --------
* To be filed by amendment.
** Previously filed.
+ Filed herewith.
<PAGE>
EXHIBIT 5.1
-----------
[LETTERHEAD OF CAHILL GORDON & REINDEL]
January 30, 1998
(212) 701-3000
Scovill Fasteners Inc.
Scovill Holdings Inc.
1802 Scovill Drive
Clarkesville, Georgia 30523
Ladies and Gentlemen:
We have examined a copy of the Registration Statement on Form S-1,
with all amendments thereto (No. 333-43195) (the "Registration Statement"),
filed by Scovill Fasteners Inc. (the "Company") and Scovill Holdings Inc.
("Parent") with the Securities and Exchange Commission (the "Commission") on
December 24, 1997 and relating to the registration pursuant to the provisions of
the Securities Act of 1933, as amended (the "Act"), of (i) up to $100,000,000
principal amount of 11 1/4% Senior Notes due 2007, Series B (the "Exchange
Notes"), and (ii) Parent's unconditional guarantee of such Exchange Notes (the
"Guarantee", and together with the Exchange Notes, the "Securities"). The
Securities will be issued pursuant to an indenture dated as of November 26, 1997
(the "Indenture") by and among the Company, Parent, and United States Trust
Company of New York, in connection with the exchange offer (the "Exchange
Offer") pursuant to the Registration Rights Agreement dated November 26, 1997 by
and among the Company, Parent, SBC Warburg Dillon Read Inc., and BT Alex. Brown
Incorporated. The Exchange Notes, which upon the effectiveness of the
Registration Statement will be registered under the Act, will be issued in the
Exchange Offer for a like principal amount of the Company's outstanding 11 1/4%
Senior Notes due 2007, Series A (the "Initial Notes"), which are not registered
under the Act.
In rendering this opinion, we have reviewed such documents and made
such investigations as we have deemed appropriate.
Based on the foregoing, and subject to the qualifications stated
herein, we are of the opinion that:
The Exchange Notes have been duly authorized for issuance by the
Company and, when duly executed, authenticated, registered, issued and delivered
in exchange for Initial Notes of a like principal amount, in accordance with the
terms of the Exchange Offer and the Indenture as contemplated by the
Registration Statement, will constitute valid and binding obligations of the
Company, entitled to the benefits
<PAGE>
of the Indenture, and enforceable against the Company in accordance with their
terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance and similar laws affecting creditors' rights and remedies
generally and subject to general principles of equity.
The Guarantee has been duly authorized by Parent and when, in
accordance with the terms of the Indenture as contemplated by the Registration
Statement, the Exchange Notes have been duly executed, authenticated,
registered, issued and delivered and the Guarantee has been duly executed,
issued, and delivered, the Guarantee will constitute a valid and binding
obligation of Parent, enforceable against Parent in accordance with its terms,
subject to applicable bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance and similar laws affecting creditors' rights and remedies
generally and subject to general principles of equity.
We are members of the bar of the State of New York and do not purport
to be experts in, or to express any opinion concerning, the laws of any
jurisdiction other than the law of the State of New York, the Delaware General
Corporation Law, and the federal laws of the United States of America.
Neither this opinion nor any part hereof may be delivered to, used or
relied upon by any person other than you without our prior written consent.
We hereby consent to the filing of this opinion with the Commission as
an exhibit to the Registration Statement and to the reference to our firm under
the caption "Legal Matters" in the Registration Statement and the related
prospectus. Our consent to such reference does not constitute a consent under
Section 7 of the Act, and in consenting to such reference we have not certified
any part of the Registration Statement and do not otherwise come within the
categories of persons whose consent is required under said Section 7 or under
the rules and regulations of the Commission thereunder.
Very truly yours,
/s/ CAHILL GORDON & REINDEL
----------------------------
Cahill Gordon & Reindel
<PAGE>
Exhibit 12.1
SCOVILL HOLDINGS INC.
STATEMENT REGARDING COMPUTATION OF RATIO OF EARNINGS
TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(IN THOUSANDS, EXCEPT RATIO)
<TABLE>
<CAPTION>
----------
Period from Period from Nine Nine
Year Ended 1/1/95 to 10/17/95 Year Ended Months Ended Months Ended Year Ended
12/31/94 10/17/95 12/31/95 12/31/96 9/30/96 9/30/97 12/31/96
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Pretax Income (loss) $ 2,975 $ 1,164 $ 274 $ 1,021 $ (196) $ 3,512 (8,714)
Fixed charges (excluding
preferred stock dividends) 5,339 3,694 953 6,532 5,070 4,338 15,149
----------------------------------------------------------------------------------------------------
8,314 4,858 1,227 7,553 4,874 7,850 6,435
Fixed Charges:
Pre-tax income required to
cover preferred stock
dividends -- -- -- -- -- -- 2,292
Interest expense 5,092 3,472 892 5,953 4,848 2,698 14,570
Interest factor related
to rentals 247 222 61 579 222 1,640 579
----------------------------------------------------------------------------------------------------
5,339 3,694 953 6,532 5,070 4,338 17,441
Ratio of earnings to
fixed charges and
preferred stock dividends 1.56x 1.32x 1.29x 1.16x 0.96x 1.81x 0.37x
====================================================================================================
<CAPTION>
---Pro Forma---
Nine
Months Ended
9/30/97
---------------
<S> <C>
Earnings:
Pretax Income (loss) (4,507)
Fixed charges (excluding
preferred stock dividends) 12,569
---------------
8,062
Fixed Charges:
Pre-tax income required to
cover preferred stock
dividends 1,719
Interest expense 10,929
Interest factor related
to rentals 1,640
---------------
14,288
Ratio of earnings to
fixed charges and
preferred stock dividends 0.56x
===============
</TABLE>
<PAGE>
EXHIBIT 16
January 26, 1998
Securities and Exchange Commission
Mail Stop 9-5
450 5th Street, N.W.
Washington, D.C. 20549
Dear Sirs/Madams:
We have read and agree with the comments in "Business--Change in Independent
Auditors" of Form S-1 of Scovill Fasteners Inc. and Scovill Holdings Inc. dated
December 24, 1997.
Yours truly,
Deloitte & Touche LLP
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the inclusion in this
Registration Statement of our reports dated March 17, 1997 and November 20,
1997, and to all references to our firm included in this Registration
Statement.
Arthur Andersen LLP
Atlanta, Georgia
January 29, 1998
<PAGE>
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
We consent to the use in this Amendment No. 2 of the Registration Statement of
Scovill Fasteners Inc. and Scovill Holdings Inc. on Form S-1 of our report dated
March 17, 1995, appearing in the Prospectus, which is part of this Registration
Statement, and to the references to us under the headings "Selected Financial
Data" and "Experts" in such Prospectus.
Our audit of the financial statements referred to in our aforementioned report
also included the financial statement schedule of Scovill Fasteners Inc., listed
in Item 16 (b)(2). This financial statement schedule is the responsibility of
the Scovill Fasteners Inc.'s management. Our responsibility is to express an
opinion based on our audit. In our opinion, the information presented in such
financial statement schedule for the year ended December 31, 1994, when
considered in relation to the basic 1994 financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
Atlanta, Georgia
January 30, 1998
<PAGE>
EXHIBIT 99.1
LETTER OF TRANSMITTAL
FOR
OFFER FOR ALL OUTSTANDING 11 1/4% SENIOR NOTES DUE 2007, SERIES A
IN EXCHANGE FOR UP TO $100,000,000 AGGREGATE PRINCIPAL AMOUNT OF
11 1/4% SENIOR NOTES DUE 2007, SERIES B
OF
SCOVILL FASTENERS INC.
PURSUANT TO THE PROSPECTUS
DATED JANUARY , 1998
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
, 1998, UNLESS EXTENDED OR TERMINATED (THE "EXPIRATION DATE").
The Exchange Agent for the Exchange Offer is:
UNITED STATES TRUST COMPANY OF NEW YORK
By Hand (after 4:30 By Hand (before 4:30 p.m.): By Registered Or
p.m.) Or Overnight Certified Mail:
Delivery:
United States Trust United States Trust United States Trust
Company of New York Company of New York Company of New York P.O.
770 Broadway, 13th Floor 111 Broadway Box 843 Cooper Station
New York, New York 10003 Attention: Lower Level New York, New York 10276
Attention: Lower Level Corporate Trust Window Attention: Corporate
Corporate Trust Window New York, New York 10006 Trust Services
Facsimile Transmissions:
(212) 780-0592
To Confirm by Telephone or for Information Call:
(800) 548-6565
DELIVERY OF THIS LETTER OF TRANSMITTAL (THIS "LETTER OF TRANSMITTAL") TO AN
ADDRESS, OR TRANSMISSION VIA FACSIMILE TO A NUMBER, OTHER THAN AS SET FORTH
ABOVE, WILL NOT CONSTITUTE A VALID TENDER OF 11 1/4% SENIOR NOTES DUE 2007,
SERIES A (THE "INITIAL NOTES").
The Instructions contained herein should be read carefully before this
Letter of Transmittal is completed and signed.
This Letter of Transmittal is to be used by registered holders of Initial
Notes ("Holders") if: (i) certificates representing Initial Notes are to be
physically delivered to the Exchange Agent by such Holders; (ii) tender of
Initial Notes is to be made by book-entry transfer to the Exchange Agent's
account at The Depositary Trust Company ("DTC" or the "Book-Entry Transfer
Facility") pursuant to the procedures set forth in the Prospectus, dated
, 1998 (as the same may be amended from time to time, the "Prospectus")
under the caption "The Exchange Offer--Book-Entry Transfer" by any financial
institution that is a participant in DTC and whose name appears on a security
position listing as the owner of Initial Notes or (iii) delivery of Initial
Notes is to be made according to the guaranteed delivery procedures set forth
in the Prospectus under the caption "The Exchange Offer--Guaranteed Delivery
Procedures," and, in each case, instructions are not being transmitted through
the DTC
1
<PAGE>
Automated Tender Program ("ATOP"). DELIVERY OF DOCUMENTS TO THE BOOK-ENTRY
TRANSFER FACILITY IN ACCORDANCE WITH SUCH BOOK-ENTRY TRANSFER FACILITY'S
PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
In order to properly complete this Letter of Transmittal, a Holder must (i)
complete the box entitled "Method of Delivery" by checking one of the three
boxes therein and supplying the appropriate information, (ii) complete the box
entitled "Description of Initial Notes," (iii) if such Holder is a
Participating Broker-Dealer (as defined below) and wishes to receive
additional copies of the Prospectus for delivery in connection with resales of
Exchange Notes, check the applicable box, (iv) sign this Letter of Transmittal
by completing the box entitled "Please Sign Here," (v) if appropriate, check
and complete the boxes relating to the "Special Issuance Instructions" and
"Special Delivery Instructions" and (vi) complete the Substitute Form W-9.
Each Holder should carefully read the detailed Instructions below prior to the
completing this Letter of Transmittal. See "The Exchange Offer--Procedures For
Tendering" in the Prospectus.
Holders of Initial Notes that are tendering by book-entry transfer to the
Exchange Agent's account at DTC can execute the tender through ATOP, for which
the transaction will be eligible. DTC participants that are accepting the
Exchange Offer should transmit their acceptance to DTC, which will edit and
verify the acceptance and execute a book-entry delivery to the Exchange
Agent's account at DTC. DTC will then send an Agent's Message to the Exchange
Agent for its acceptance. Delivery of the Agent's Message by DTC will satisfy
the terms of the Exchange Offer as to execution and delivery of a Letter of
Transmittal by the participant identified in the Agent's Message. DTC
participants may also accept the Exchange Offer by submitting a Notice of
Guaranteed Delivery through ATOP.
If Holders desire to tender Initial Notes pursuant to the Exchange Offer and
(i) certificates representing such Initial Notes are not lost but are not
immediately available, (ii) time will not permit this Letter of Transmittal,
certificates representing such Holder's Initial Notes and all other required
documents to reach the Exchange Agent prior to the Expiration Date or (iii)
the procedures for book-entry transfer cannot be completed prior to the
Expiration Date, such Holders may effect a tender of such Initial Notes in
accordance with the guaranteed delivery procedures set forth in the Prospectus
under the caption "The Exchange Offer--Guaranteed Delivery Procedures." See
Instruction 2 below.
A Holder having Initial Notes registered in the name of a broker, dealer,
commercial bank, trust company or other nominee must contact such broker,
dealer, commercial bank, trust company or other nominee if they desire to
accept the Exchange Offer with respect to the Initial Notes so registered.
THE EXCHANGE OFFER IS NOT BEING MADE TO (NOR WILL TENDERS OF INITIAL NOTES
BE ACCEPTED FROM OR ON BEHALF OF) HOLDERS IN ANY JURISDICTION IN WHICH THE
MAKING OR ACCEPTANCE OF THE EXCHANGE OFFER WOULD NOT BE IN COMPLIANCE WITH THE
LAWS OF SUCH JURISDICTION.
All capitalized terms used herein and not defined herein shall have the
meaning ascribed to them in the Prospectus.
2
<PAGE>
Your bank or broker can assist you in completing this form. The instructions
included with this Letter of Transmittal must be followed. Questions and
requests for assistance or for additional copies of the Prospectus, this
Letter of Transmittal and the Notice of Guaranteed Delivery may be directed to
the Exchange Agent, whose address and telephone number appear on the front
cover of this Letter of Transmittal. See Instruction 11 below.
- -------------------------------------------------------------------------------
METHOD OF DELIVERY
- -------------------------------------------------------------------------------
[_] CHECK HERE IF CERTIFICATES FOR TENDERED INITIAL NOTES ARE BEING DELIVERED
HEREWITH.
[_] CHECK HERE IF TENDERED INITIAL NOTES ARE BEING DELIVERED BY BOOK-ENTRY
TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH A
BOOK-ENTRY TRANSFER FACILITY AND COMPLETE THE FOLLOWING:
Name of Tendering Institution: ___________________________________________
Account Number: _____________ Transaction Code Number: ____________
[_] CHECK HERE IF TENDERED INITIAL NOTES ARE BEING DELIVERED PURSUANT TO A
NOTICE OF GUARANTEED DELIVERY PREVIOUSLY DELIVERED TO THE EXCHANGE AGENT
PURSUANT TO INSTRUCTION 2 BELOW AND COMPLETE THE FOLLOWING:
Name of Registered Holder(s): ____________________________________________
Window Ticket No. (if any): ______________________________________________
Date of Execution of Notice of Guaranteed Delivery: ______________________
Name of Eligible Institution that Guaranteed Delivery: ___________________
If Delivered by Book-Entry Transfer (yes or no): _________________________
Account Number: _____________ Transaction Code Number: ____________
- -------------------------------------------------------------------------------
List below the Initial Notes to which this Letter of Transmittal relates. If
the space provided below is inadequate, list the certificate numbers and
principal amounts on a separately signed schedule and affix the schedule to
this Letter of Transmittal.
DESCRIPTION OF INITIAL NOTES
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AGGREGATE
NAME(S) AND ADDRESS(ES) OF HOLDER(S) CERTIFICATE PRINCIPAL AMOUNT PRINCIPAL AMOUNT
(PLEASE FILL IN, IF BLANK) NUMBERS* REPRESENTED** TENDERED
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
-------------------------------------------------------
-------------------------------------------------------
-------------------------------------------------------
-------------------------------------------------------
-------------------------------------------------------
-------------------------------------------------------
TOTAL PRINCIPAL
AMOUNT OF INITIAL
NOTES
</TABLE>
- -------------------------------------------------------------------------------
* Need not be completed by Holders tendering by book-entry transfer (see
below).
** Unless otherwise indicated in the column labeled "Principal Amount
Tendered" and subject to the terms and conditions of the Prospectus, a
Holder will be deemed to have tendered the entire aggregate principal
amount represented by the Initial Notes indicated in the column labeled
"Aggregate Principal Amount Represented." See Instruction 3.
3
<PAGE>
FOR PARTICIPATING BROKER-DEALERS ONLY:
[_]CHECK HERE AND PROVIDE THE INFORMATION REQUESTED BELOW IF YOU ARE A
PARTICIPATING BROKER-DEALER (AS DEFINED BELOW) AND WISH TO RECEIVE 10
ADDITIONAL COPIES OF THE PROSPECTUS AND, DURING THE NINE-MONTH PERIOD
FOLLOWING THE CONSUMMATION OF THE EXCHANGE OFFER, 10 COPIES OF ANY
AMENDMENTS OR SUPPLEMENTS THERETO, AS WELL AS ANY NOTICES FROM THE COMPANY
TO SUSPEND AND RESUME USE OF THE PROSPECTUS. BY TENDERING ITS INITIAL NOTES
AND EXECUTING THIS LETTER OF TRANSMITTAL, EACH PARTICIPATING BROKER-DEALER
AGREES TO USE ITS REASONABLE BEST EFFORTS TO NOTIFY THE COMPANY OR THE
EXCHANGE AGENT WHEN IT HAS SOLD ALL OF ITS EXCHANGE NOTES. (IF NO
PARTICIPATING BROKER-DEALERS CHECK THIS BOX, OR IF ALL PARTICIPATING
BROKER-DEALERS WHO HAVE CHECKED THIS BOX SUBSEQUENTLY NOTIFY THE COMPANY OR
THE EXCHANGE AGENT THAT ALL THEIR EXCHANGE NOTES HAVE BEEN SOLD, THE
COMPANY WILL NOT BE REQUIRED TO MAINTAIN THE EFFECTIVENESS OF THE EXCHANGE
OFFER REGISTRATION STATEMENT OR TO UPDATE THE PROSPECTUS AND WILL NOT
PROVIDE ANY NOTICES TO ANY HOLDERS TO SUSPEND OR RESUME USE OF THE
PROSPECTUS.)
PROVIDE THE NAME OF THE INDIVIDUAL WHO SHOULD RECEIVE, ON BEHALF OF THE
HOLDER, ADDITIONAL COPIES OF THE PROSPECTUS, AND AMENDMENTS AND SUPPLEMENTS
THERETO, AND ANY NOTICES TO SUSPEND AND RESUME USE OF THE PROSPECTUS:
NAME: ______________________________________________________________________
ADDRESS: ___________________________________________________________________
TELEPHONE NO.: _____________________________________________________________
FACSIMILE NO.: _____________________________________________________________
4
<PAGE>
NOTE: SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
By execution hereof, the undersigned acknowledges receipt of the Prospectus,
dated , 1998 (as the same may be amended from time to time, the
"Prospectus" and, together with the Letter of Transmittal, the "Exchange
Offer"), of Scovill Fasteners Inc., a Delaware corporation (the "Company"),
and this Letter of Transmittal and instructions hereto, which together
constitute Company's offer to exchange $1,000 principal amount of the 11 1/4%
Senior Notes due 2007, Series B (the "Exchange Notes") of the Company, upon
the terms and subject to the conditions set forth in the Exchange Offer, for
each $1,000 principal amount of their outstanding 11 1/4% Senior Notes due
2007, Series A (the "Initial Notes").
Upon the terms and subject to the conditions of the Exchange Offer, the
undersigned hereby tenders to the Company the principal amount of Initial
Notes indicated above. Subject to, and effective upon, the acceptance for
exchange of the Initial Notes tendered herewith, the undersigned hereby
exchanges, assigns and transfers to, or upon the order of, the Company all
right, title and interest in and to such Initial Notes. The undersigned hereby
irrevocably constitutes and appoints the Exchange Agent as the true and lawful
agent and attorney-in-fact of the undersigned (with full knowledge that the
Exchange Agent also acts as the agent of the Company) with respect to such
Initial Notes with full power of substitution (such power-of-attorney being
deemed to be an irrevocable power coupled with an interest) to (i) present
such Initial Notes and all evidences of transfer and authenticity to, or
transfer ownership of, such Initial Notes on the account books maintained by
the Book-Entry Transfer Facility to, or upon the order of, the Company, (ii)
present such Initial Notes for transfer of ownership on the books of the
Company or the trustee under the Indenture (the "Trustee") and (iii) receive
all benefits and otherwise exercise all rights of beneficial ownership of such
Initial Notes, all in accordance with the terms of and conditions of the
Exchange Offer as described in the Prospectus.
The undersigned represents and warrants that it has full power and authority
to tender, exchange, assign and transfer the Initial Notes tendered hereby and
to acquire Exchange Notes issuable upon the exchange of such tendered Initial
Notes, and that, when the same are accepted for exchange, the Company 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 or right. The undersigned also warrants that it will, upon
request, execute and deliver any additional documents deemed by the Exchange
Agent or the Company to be necessary or desirable to complete the exchange,
assignment and transfer of the Initial Notes tendered hereby or transfer
ownership of such Initial Notes on the account books maintained by the book-
entry transfer facility.
The Exchange Offer is subject to certain conditions as set forth in the
Prospectus under the caption "The Exchange Offer--Conditions." The undersigned
recognizes that as a result of these conditions (which may be waived by the
Company, in whole or in part, in the reasonable discretion of the Company), as
more particularly set forth in the Prospectus, the Company may not be required
to exchange any of the Initial Notes tendered hereby and, in such event, the
Initial Notes not exchanged will be returned to the undersigned at the address
shown above.
THE EXCHANGE OFFER IS NOT BEING MADE TO ANY BROKER-DEALER WHO PURCHASED
INITIAL NOTES DIRECTLY FROM THE COMPANY FOR RESALE PURSUANT TO RULE 144A UNDER
THE SECURITIES ACT OR TO ANY PERSON THAT IS AN "AFFILIATE" OF THE COMPANY OR
OF SCOVILL HOLDINGS INC. ("PARENT") WITHIN THE MEANING OF RULE 405 UNDER THE
SECURITIES ACT. THE UNDERSIGNED UNDERSTANDS AND AGREES THAT THE COMPANY
RESERVES THE RIGHT NOT TO ACCEPT TENDERED INITIAL NOTES FROM ANY TENDERING
HOLDER IF THE COMPANY DETERMINES, IN ITS REASONABLE DISCRETION, THAT SUCH
ACCEPTANCE COULD RESULT IN A VIOLATION OF APPLICABLE SECURITIES LAWS.
The undersigned, if the undersigned is a beneficial holder, represents, or,
if the undersigned is a broker, dealer, commercial bank, trust company or
other nominee, represents that it has received representations from the
beneficial owners of the Initial Notes (the "Beneficial Owner") stating that,
(i) the Exchange Notes to be acquired in connection with the Exchange Offer by
the Holder and each Beneficial Owner of the Initial Notes are being acquired
by the Holder
5
<PAGE>
and each such Beneficial Owner in the ordinary course of their business, (ii)
the Holder and each such Beneficial Owner are not engaged in, do not intend to
engage in, and have no arrangement or understanding with any person to
participate in, a distribution of the Exchange Notes, (iii) the Holder and
each Beneficial Owner acknowledge and agree that any person participating in
the Exchange Offer for the purpose of distributing the Exchange Notes cannot
rely on the interpretations of the staff of the Commission discussed in the
Prospectus under the caption "The Exchange Offer--Purpose and Effect of the
Exchange Offer" and may only sell the Exchange Notes acquired by such person
pursuant to a registration statement containing the selling securityholder
information required by Item 507 of Regulation S-K under the Securities Act,
(iv) if the Holder is a broker-dealer that acquired Initial Notes as a result
of market-making activities or other trading activities, it will deliver a
prospectus in connection with any resale of Exchange Notes acquired in the
Exchange Offer (but by so acknowledging and by delivering a prospectus, the
undersigned will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act) and (v) neither the Holder nor any such
Beneficial Owner is an "affiliate," as defined under Rule 405 of the
Securities Act, of the Company or of Parent or is a broker-dealer who
purchased Initial Notes directly from the Company for resale pursuant to Rule
144A under the Securities Act.
EACH BROKER-DEALER WHO ACQUIRED INITIAL NOTES FOR ITS OWN ACCOUNT AS A
RESULT OF MARKET-MAKING ACTIVITIES OR OTHER TRADING ACTIVITIES (A
"PARTICIPATING BROKER-DEALER"), BY TENDERING SUCH INITIAL NOTES AND EXECUTING
THIS LETTER OF TRANSMITTAL, AGREES THAT, UPON RECEIPT OF NOTICE FROM THE
COMPANY OF THE OCCURRENCE OF ANY EVENT OR THE DISCOVERY OF ANY FACT WHICH
MAKES ANY STATEMENT CONTAINED OR INCORPORATED BY REFERENCE IN THE PROSPECTUS
UNTRUE IN ANY MATERIAL RESPECT OR WHICH CAUSES THE PROSPECTUS TO OMIT TO A
STATE A MATERIAL FACT NECESSARY IN ORDER TO MAKE THE STATEMENTS CONTAINED OR
INCORPORATED BY REFERENCE THEREIN, IN LIGHT OF THE CIRCUMSTANCES UNDER WHICH
THEY WERE MADE, NOT MISLEADING OR OF THE OCCURRENCE OR CERTAIN OTHER EVENTS
SPECIFIED IN THE REGISTRATION RIGHTS AGREEMENT, SUCH PARTICIPATING BROKER-
DEALER WILL SUSPEND THE SALE OF EXCHANGE NOTES PURSUANT TO THE PROSPECTUS
UNTIL THE COMPANY HAS AMENDED OR SUPPLEMENTED THE PROSPECTUS TO CORRECT SUCH
MISSTATEMENT OR OMISSION AND HAS FURNISHED COPIES OF THE AMENDED OR
SUPPLEMENTED PROSPECTUS TO THE PARTICIPATING BROKER-DEALER OR THE COMPANY HAS
GIVEN NOTICE THAT THE SALE OF THE EXCHANGE NOTES MAY BE RESUMED, AS THE CASE
MAY BE.
EACH PARTICIPATING BROKER-DEALER SHOULD CHECK THE BOX HEREIN UNDER THE
CAPTION "FOR PARTICIPATING BROKER-DEALERS ONLY" IN ORDER TO RECEIVE ADDITIONAL
COPIES OF THE PROSPECTUS, AND ANY AMENDMENTS AND SUPPLEMENTS THERETO, FOR USE
IN CONNECTION WITH RESALES OF THE EXCHANGE NOTES, AS WELL AS ANY NOTICES FROM
THE COMPANY TO SUSPEND AND RESUME USE OF THE PROSPECTUS. BY TENDERING ITS
INITIAL NOTES AND EXECUTING THIS LETTER OF TRANSMITTAL, EACH PARTICIPATING
BROKER- DEALER AGREES TO USE ITS REASONABLE BEST EFFORTS TO NOTIFY THE COMPANY
OR THE EXCHANGE AGENT WHEN IT HAS SOLD ALL OF ITS EXCHANGE NOTES. IF NO
PARTICIPATING BROKER- DEALERS CHECK SUCH BOX, OR IF ALL PARTICIPATING BROKER-
DEALERS WHO HAVE CHECKED SUCH BOX SUBSEQUENTLY NOTIFY THE COMPANY OR THE
EXCHANGE AGENT THAT ALL THEIR EXCHANGE NOTES HAVE BEEN SOLD, THE COMPANY WILL
NOT BE REQUIRED TO MAINTAIN THE EFFECTIVENESS OF THE EXCHANGE OFFER
REGISTRATION STATEMENT OR TO UPDATE THE PROSPECTUS AND WILL NOT PROVIDE ANY
HOLDERS WITH ANY NOTICES TO SUSPEND OR RESUME USE OF THE PROSPECTUS.
The undersigned understands that tenders of the Initial Notes pursuant to
any one of the procedures described under "The Exchange Offer--Procedures for
Tendering" in the Prospectus and in the instructions hereto will constitute a
binding agreement between the undersigned and the Company in accordance with
the terms and subject to the conditions of the Exchange Offer. All authority
herein conferred or agreed to be conferred by this Letter of Transmittal and
every obligation of the undersigned hereunder shall be binding upon the heirs,
legal representatives,
6
<PAGE>
successors and assigns, executors, administrators and trustees in bankruptcy
of the undersigned and shall survive the death or incapacity of the
undersigned. Tendered Initial Notes may be withdrawn at any time prior to 5:00
p.m. on the Expiration Date in accordance with the terms of the Exchange
Offer.
The undersigned understands that by tendering Initial Notes pursuant to one
of the procedures described under "The Exchange Offer--Procedures for
Tendering" in the Prospectus and the instructions hereto, the tendering Holder
will be deemed to have waived the right to receive any payment in respect of
interest on the Initial Notes accrued up to the date of issuance of the
Exchange Notes.
The undersigned also understands and acknowledges that the Company reserves
the right in their sole discretion to purchase or make offers for any Initial
Notes that remain outstanding subsequent to the Expiration Date in the open
market, in privately negotiated transactions, through subsequent exchange
offers or otherwise. The terms of any such purchases or offers could differ
from the terms of the Exchange Offer.
The undersigned understands that the delivery and surrender of the Initial
Notes is not effective, and the risk of loss of the Initial Notes does not
pass to the Exchange Agent, until receipt by the Exchange Agent of this Letter
of Transmittal, or a manually signed facsimile hereof, properly completed and
duly executed, with any required signature guarantees, together with all
accompanying evidences of authority and any other required documents in form
satisfactory to the Company. All questions as to form of all documents and the
validity (including time of receipt) and acceptance of tenders and withdrawals
of Initial Notes will be determined by the Company, in their sole discretion,
which determination shall be final and binding.
Unless otherwise indicated herein in the box entitled "Special Issuance
Instructions," the undersigned hereby requests that any Initial Notes
representing principal amounts not tendered or not accepted for exchange be
issued in the name(s) of the undersigned and that Exchange Notes be issued in
the name(s) of the undersigned (or, in the case of Initial Notes delivered by
book-entry transfer, by credit to the account at the Book-Entry Transfer
Facility). Similarly, unless otherwise indicated herein in the box entitled
"Special Delivery Instructions," the undersigned hereby requests that any
Initial Notes representing principal amounts not tendered or not accepted for
exchange and Exchange Notes be delivered to the undersigned at the address(es)
shown above. The undersigned recognizes that the Company has no obligation
pursuant to the "Special Issuance Instructions" box or "Special Delivery
Instructions" box to transfer any Initial Notes from the name of the
registered Holder(s) thereof if the Company does not accept for exchange any
of the principal amount of such Initial Notes so tendered.
7
<PAGE>
PLEASE SIGN HERE
(TO BE COMPLETED BY ALL HOLDERS OF INITIAL NOTES
REGARDLESS OF WHETHER INITIAL NOTES ARE BEING PHYSICALLY DELIVERED HEREWITH)
This Letter of Transmittal must be signed by the Holder(s) of Initial
Notes exactly as their name(s) appear(s) on certificate(s) for Initial
Notes or, if delivered by a participant in the Book-Entry Transfer
Facility, exactly as such participant's name appears on a security position
listing as the owner of Initial Notes, or by person(s) authorized to become
Holder(s) by endorsements and documents transmitted with this Letter of
Transmittal. If signature is by a trustee, executor, administrator,
guardian, attorney-in-fact, officer or other person acting in a fiduciary
or representative capacity, such person must set forth his or her full
title below under "Capacity" and submit evidence satisfactory to the
Company of such person's authority to so act. See Instruction 4 below.
If the signature appearing below is not of the record holder(s) of the
Initial Notes, then the record holder(s) must sign a valid bond power.
X...........................................................................
X...........................................................................
SIGNATURE(S) OF REGISTERED HOLDER(S) OR AUTHORIZED SIGNATORY
Date: ................................................................, 1998
Name: ......................................................................
Capacity: ..................................................................
Address: ...................................................................
....................................................................
(INCLUDING ZIP CODE)
Area Code and Telephone No.: ...............................................
PLEASE COMPLETE SUBSTITUTE FORM W-9 ON HEREIN
[_]CHECK HERE IF YOU ARE A BROKER DEALER WHO ACQUIRED THE INITIAL NOTES FOR
ITS OWN ACCOUNT AS A RESULT OF MARKET-MAKING OR OTHER TRADING ACTIVITIES
AND WISH TO RECEIVE ADDITIONAL COPIES OF THE PROSPECTUS AND COPIES OF
ANY AMENDMENTS OR SUPPLEMENTS THERETO.
Name: ..................................................................
Address.................................................................
MEDALLION SIGNATURE GUARANTEE (SEE INSTRUCTION 4 BELOW)
CERTAIN SIGNATURES MUST BE GUARANTEED BY AN ELIGIBLE INSTITUTION
.................................................................
(NAME OF ELIGIBLE INSTITUTION GUARANTEEING SIGNATURES)
.................................................................
(ADDRESS (INCLUDING ZIP CODE) AND TELEPHONE NUMBER (INCLUDING AREA CODE) OF
FIRM)
.................................................................
(AUTHORIZED SIGNATURE)
.................................................................
(PRINTED NAME)
.................................................................
(TITLE)
Dated: ..............................................................., 1998
8
<PAGE>
SPECIAL ISSUANCE INSTRUCTIONS (SEE SPECIAL DELIVERY INSTRUCTIONS (SEE
INSTRUCTIONS 3, 4, 5 AND 7) INSTRUCTIONS 4 AND 9)
To be completed ONLY if Initial To be completed ONLY if Initial
Notes in a principal amount not Notes in a principal amount not
tendered or not accepted for ex- tendered or not accepted for
change are to be issued in the exchange or Exchange Notes are to
name of, or Exchange Notes are to be sent to someone other than the
be issued in the name of, someone person or persons whose
other than the person or persons signature(s) appear(s) within this
whose signature(s) appear(s) Letter of Transmittal or to an
within this Letter of Transmittal. address different from that shown
in the box entitled "Description
of Initial Notes" within this
Letter of Transmittal.
Issue [_] Initial Notes
[_] Exchange Notes
(check as applicable)
Issue [_] Initial Notes
Name ______________________________ [_] Exchange Notes
(PLEASE PRINT) (check as applicable)
Address ___________________________
___________________________________ Name_______________________________
(ZIP CODE) (PLEASE PRINT)
___________________________________ Address ___________________________
(TAX IDENTIFICATION OR SOCIAL ___________________________________
SECURITY NUMBER) (ZIP CODE)
(SEE SUBSTITUTE FORM W-9 HEREIN)
Credit Initial Notes not tendered
or not exchanged by book entry
transfer to the Book Entry Trans-
fer Facility account set below:
___________________________________
(BOOK ENTRY TRANSFER FACILITY
ACCOUNT NUMBER)
Credit Exchange Notes to the Book
Entry Transfer Facility account
set below:
___________________________________
(BOOK ENTRY TRANSFER FACILITY
ACCOUNT NUMBER)
9
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND CERTIFICATES FOR INITIAL NOTES
OR BOOK-ENTRY CONFIRMATION; WITHDRAWAL OF TENDERS.
To tender Initial Notes in the Exchange Offer, physical delivery of
certificates for Initial Notes or confirmation of a book-entry transfer into
the Exchange Agent's account with a Book-Entry Transfer Facility of Initial
Notes tendered electronically, as well as a properly completed and duly
executed copy or manually signed facsimile of this Letter of Transmittal, or
in the case of a book-entry transfer, an Agent's Message, and any other
documents required by this Letter of Transmittal, must be received by the
Exchange Agent at its address set forth herein prior to 5:00 p.m. New York
City time on the Expiration Date. Tenders of Initial Notes in the Exchange
Offer may be made prior to the Expiration Date in the manner described in the
preceding sentence and otherwise in compliance with this Letter of
Transmittal. THE METHOD OF DELIVERY OF THIS LETTER OF TRANSMITTAL,
CERTIFICATES FOR INITIAL NOTES AND ALL OTHER REQUIRED DOCUMENTS TO THE
EXCHANGE AGENT, INCLUDING DELIVERY THROUGH DTC AND ANY ACCEPTANCE OF AN
AGENT'S MESSAGE TRANSMITTED THROUGH ATOP, IS AT THE ELECTION AND RISK OF THE
HOLDER TENDERING INITIAL NOTES. IF SUCH DELIVERY IS MADE BY MAIL, IT IS
SUGGESTED THAT THE HOLDER USE PROPERLY INSURED, REGISTERED MAIL WITH RETURN
RECEIPT REQUESTED AND THAT SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY
DELIVERY. NO ALTERNATIVE, CONDITIONAL OR CONTINGENT TENDERS OF INITIAL NOTES
WILL BE ACCEPTED. Except as otherwise provided below, the delivery will be
made when actually received by the Exchange Agent. THIS LETTER OF TRANSMITTAL,
CERTIFICATES FOR THE INITIAL NOTES AND ANY OTHER REQUIRED DOCUMENTS SHOULD BE
SENT ONLY TO THE EXCHANGE AGENT, NOT TO THE COMPANY, THE TRUSTEE OR DTC.
Initial Notes tendered pursuant to the Exchange Offer may be withdrawn at
any time prior to 5:00 p.m. New York time on the Expiration Date. In order to
be valid, notice of withdrawal of tendered Initial Notes must comply with the
requirements set forth in the Prospectus under the caption "The Exchange
Offer--Withdrawal of Tenders."
2. GUARANTEED DELIVERY PROCEDURES.
If Holders desire to tender Initial Notes pursuant to the Exchange Offer and
(i) certificates representing such Initial Notes are not lost but are not
immediately available, (ii) time will not permit this Letter of Transmittal,
certificates representing such Holder's Initial Notes and all other required
documents to reach the Exchange Agent prior to the Expiration Date or (iii)
the procedures for book-entry transfer cannot be completed prior to the
Expiration Date, such Holders may effect a tender of Initial Notes in
accordance with the guaranteed delivery procedures set forth in the Prospectus
under the caption "The Exchange Offer--Guaranteed Delivery Procedures."
Pursuant to the guaranteed delivery procedures:
(i) such tender must be made by or through an Eligible Institution;
(ii) prior to the Expiration Date, the Exchange Agent must have received
from such Eligible Institution, at one of the addresses set forth on the
cover of this Letter of Transmittal, a properly completed and validly
executed Notice of Guaranteed Delivery (by manually signed facsimile
transmission, mail or hand delivery) in substantially the form provided
with the Prospectus, setting forth the name(s) and address(es) of the
registered Holder(s) and the principal amount of Initial Notes being
tendered and stating that the tender is being made thereby and guaranteeing
that, within three New York Stock Exchange ("NYSE") trading days from the
date of the Notice of Guaranteed Delivery, the Letter of Transmittal (or a
manually signed facsimile thereof), properly completed and duly executed,
or, in the case of a book-entry transfer, an Agent's Message, together with
certificates representing the Initial Notes (or confirmation of book-entry
transfer of such Initial Notes into the Exchange Agent's account at a Book-
Entry Transfer Facility), and any other documents required by this Letter
of Transmittal and the instructions thereto, will be deposited by such
Eligible Institution with the Exchange Agent; and
(iii) this Letter of Transmittal (or a manually signed facsimile
thereof), properly completed and validly executed with any required
signature guarantees, or, in the case of a book-entry transfer, an Agent's
Message, together with certificates for all Initial Notes in proper form
for transfer (or a Book-Entry Confirmation with respect to all tendered
Initial Notes), and any other required documents must be received by the
Exchange Agent within three NYSE trading days after the date of such Notice
of Guaranteed Delivery.
10
<PAGE>
3. PARTIAL TENDERS.
If less than the entire principal amount of any Initial Notes evidenced by a
submitted certificate is tendered, the tendering Holder must fill in the
principal amount tendered in the last column of the box entitled "Description
of Initial Notes" herein. The entire principal amount represented by the
certificates for all Initial Notes delivered to the Exchange Agent will be
deemed to have been tendered, unless otherwise indicated. The entire principal
amount of all Initial Notes not tendered or not accepted for exchange will be
sent (or, if tendered by book-entry transfer, returned by credit to the
account at the Book-Entry Transfer Facility designated herein) to the Holder
unless otherwise provided in the "Special Issuance Instructions" or "Special
Delivery Instructions" boxes of this Letter of Transmittal.
4. SIGNATURES ON THIS LETTER OF TRANSMITTAL, BOND POWERS AND ENDORSEMENTS;
GUARANTEE OF SIGNATURES.
If this Letter of Transmittal is signed by the Holder(s) of the Initial
Notes tendered hereby, the signature(s) must correspond with the name(s) as
written on the face of the certificate(s) without alteration, enlargement or
any change whatsoever. If this Letter of Transmittal is signed by a
participant in one of the Book-Entry Transfer Facilities whose name is shown
as the owner of the Initial Notes tendered hereby, the signature must
correspond with the name shown on the security position listing as the owner
of the Initial Notes.
If any of the Initial Notes tendered hereby are registered in the name of
two or more Holders, all such Holders must sign this Letter of Transmittal. If
any tendered Initial Notes are registered in different names on several
certificates, it will be necessary to complete, sign and submit as many
separate copies of this Letter of Transmittal and any necessary accompanying
documents as there are different names in which certificates are held.
If this Letter of Transmittal or any certificates for Initial Notes or bond
powers are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, officers of corporations or others acting in a fiduciary or
representative capacity, such persons should so indicate when signing, and
proper evidence satisfactory to the Company of their authority so to act must
be submitted with this Letter of Transmittal.
IF THIS LETTER OF TRANSMITTAL IS EXECUTED BY A PERSON OR ENTITY WHO IS NOT
THE REGISTERED HOLDER, THEN THE REGISTERED HOLDER MUST SIGN A VALID BOND
POWER, WITH THE SIGNATURE OF SUCH REGISTERED HOLDER GUARANTEED BY A
PARTICIPANT IN A RECOGNIZED MEDALLION SIGNATURE PROGRAM (A "MEDALLION
SIGNATURE GUARANTOR").
No signature guarantee is required if (i) this Letter of Transmittal is
signed by the registered Holder(s) of the Initial Notes tendered herewith (or
by a participant in one of the Book-Entry Transfer Facilities whose name
appears on a security position listing as the owner of Initial Notes) and
certificates for Exchange Notes or for any Initial Notes for principal amounts
not tendered or not accepted for exchange are to be issued, directly to such
Holder(s) or, if tendered by a participant in one of the Book-Entry Transfer
Facilities, any Initial Notes for principal amounts not tendered or not
accepted for exchange are to be credited to such participant's account at such
Book-Entry Transfer Facility and neither the "Special Issuance Instructions"
box nor the "Special Delivery Instructions" box of this Letter of Transmittal
has been completed or (ii) such Initial Notes are tendered for the account of
an Eligible Institution. IN ALL OTHER CASES, ALL SIGNATURES ON LETTERS OF
TRANSMITTAL ACCOMPANYING INITIAL NOTES MUST BE GUARANTEED BY A MEDALLION
SIGNATURE GUARANTOR. In all such other cases (including if this Letter of
Transmittal is not signed by the Holder), the Holder must either properly
endorse the certificates for Initial Notes tendered or transmit a separate
properly completed bond power with this Letter of Transmittal (in either case,
executed exactly as the name(s) of the registered Holder(s) appear(s) on such
Initial Notes, and, with respect to a participant in a Book-Entry Transfer
Facility whose name appears on a security position listing as the owner of
Initial Notes, exactly as the name(s) of the participant(s) appear(s) on such
security position listing), with the signature on the endorsement or bond
power guaranteed by a Medallion Signature Guarantor, unless such certificates
or bond powers are executed by an Eligible Institution.
Endorsements on certificates for Initial Notes and signatures on bond powers
provided in accordance with this Instruction 4 by registered Holders not
executing this Letter of Transmittal must be guaranteed by a Medallion
Signature Guarantor.
11
<PAGE>
5.SPECIAL ISSUANCE AND SPECIAL DELIVERY INSTRUCTIONS.
Tendering Holders should indicate in the applicable box or boxes the name
and address to which Initial Notes for principal amounts not tendered or not
accepted for exchange or certificates for Exchange Notes, if applicable, are
to be issued or sent, if different from the name and address of the Holder
signing this Letter of Transmittal. In the case of payment to a different
name, the taxpayer identification or social security number of the person
named must also be indicated.
6.TAXPAYER IDENTIFICATION NUMBER.
Each tendering Holder is required to provide the Exchange Agent with the
Holder's social security or Federal employer identification number, on
Substitute Form W-9, which is provided under "Important Tax Information"
below, or alternatively, to establish another basis for exemption from backup
withholding. A Holder must cross out item (2) in the Certification box in Part
III on Substitute Form W-9 if such Holder is subject to backup withholding.
Failure to provide the information on the form may subject such Holder to 31%
Federal backup withholding tax on any payment made to the Holder with respect
to the Exchange Offer. The appropriate box in Part I of the form should be
checked if the tendering or consenting Holder has not been issued a Taxpayer
Identification Number ("TIN") and has either applied for a TIN or intends to
apply for a TIN in the near future. If the box in Part I is checked, the
Holder should also sign the attached Certification of Awaiting Taxpayer
Identification Number. If the Exchange Agent is not provided with a TIN within
60 days thereafter, the Exchange Agent will withhold 31% on all such payments
of the Exchange Notes until a TIN is provided to the Exchange Agent.
7.TRANSFER TAXES.
The Company will pay all transfer taxes applicable to the exchange and
transfer of Initial Notes pursuant to the Exchange Offer, except if (i)
deliveries of certificates for Initial Notes for principal amounts not
tendered or not accepted for exchange are registered or issued in the name of
any person other than the Holder of Initial Notes tendered thereby, (ii)
tendered certificates are registered in the name of any person other than the
person signing this Letter of Transmittal or (iii) a transfer tax is imposed
for any reason other than the exchange of Initial Notes pursuant to the
Exchange Offer, in which case the amount of any transfer taxes (whether
imposed on the registered Holder or any other persons) will be payable by the
tendering Holder. If satisfactory evidence of payment of such taxes or
exemption therefrom is not submitted herewith, the amount of such transfer
taxes will be billed directly to such tendering Holder.
8.IRREGULARITIES.
All questions as to the form of all documents and the validity (including
time of receipt) and acceptance of all tenders and withdrawals of Initial
Notes will be determined by the Company, in its sole discretion, which
determination shall be final and binding. ALTERNATIVE, CONDITIONAL OR
CONTINGENT TENDERS OF INITIAL NOTES WILL NOT BE CONSIDERED VALID. The Company
reserves the absolute right to reject any and all tenders of Initial Notes
that are not in proper form or the acceptance of which, in the Company's
opinion, would be unlawful. The Company also reserves the right to waive any
defects, irregularities or conditions of tender as to particular Initial
Notes. The Company's interpretations of the terms and conditions of the
Exchange Offer (including the instructions in this Letter of Transmittal) will
be final and binding. Any defect or irregularity in connection with tenders of
Initial Notes must be cured within such time as the Company determines, unless
waived by the Company. Tenders of Initial Notes shall not be deemed to have
been made until all defects or irregularities have been waived by the Company
or cured. A defective tender (which defect is not waived by the Company or
cured by the Holder) will not constitute a valid tender of Initial Notes and
will not entitle the Holder to Exchange Notes. None of the Company, the
Trustee, the Exchange Agent or any other person will be under any duty to give
notice of any defect or irregularity in any tender or withdrawal of any
Initial Notes, or incur any liability to Holders for failure to give any such
notice.
9.WAIVER OF CONDITIONS.
The Company reserve the right, in its reasonable discretion, to amend or
waive any of the conditions to the Exchange Offer.
12
<PAGE>
10.MUTILATED, LOST, STOLEN OR DESTROYED CERTIFICATES FOR INITIAL NOTES.
Any Holder whose certificates for Initial Notes have been mutilated, lost,
stolen or destroyed should write to or telephone the Trustee at the address or
telephone number set forth on the cover of this Letter of Transmittal for the
Exchange Agent.
11.REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES.
Questions relating to the procedure for tendering Initial Notes and requests
for assistance or additional copies of the Prospectus, this Letter of
Transmittal, the Notice of Guaranteed Delivery or other documents may be
directed to the Exchange Agent, whose address and telephone number appear
above.
IMPORTANT TAX INFORMATION
Under Federal income tax laws, a Holder who tenders Initial Notes prior to
receipt of the Exchange Notes is required to provide the Exchange Agent with
such Holder's correct TIN on the Substitute Form W-9 below or otherwise
establish a basis for exemption from backup withholding. If such Holder is an
individual, the TIN is his or her social security number. If the Exchange
Agent is not provided with the correct TIN, a $50 penalty may be imposed by
the Internal Revenue Service ("IRS") and payments, including any New Notes,
made to such Holder with respect to Initial Notes exchanged pursuant to the
Exchange Offer may be subject to backup withholding.
Certain Holders (including, among others, all corporations and certain
foreign persons) are not subject to these backup withholding and reporting
requirements. Exempt Holders should indicate their exempt status on the
Substitute Form W-9. A foreign person may qualify as an exempt recipient by
submitting to the Exchange Agent a properly completed IRS Form W-8, signed
under penalties of perjury, attesting to that Holder's exempt status. A Form
W-8 can be obtained from the Exchange Agent. See the enclosed "Guidelines for
Certification of Taxpayer Identification Number on Substitute Form W-9" for
additional instructions. Holders are urged to consult their own tax advisors
to determine whether they are exempt.
If backup withholding applies, the Exchange Agent is required to withhold
31% of any payments made to the Holder or other payee. Backup withholding is
not an additional Federal income tax. Rather, the Federal income tax liability
of persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained from the IRS.
PURPOSE OF SUBSTITUTE FORM W-9
To prevent backup withholding on payments, including any Exchange Notes,
made with respect to Initial Notes exchanged pursuant to the Exchange Offer,
the Holder is required to provide the Exchange Agent with (i) the Holder's
correct TIN by completing the form below, certifying that the TIN provided on
the Substitute Form W-9 is correct (or that such Holder is awaiting a TIN) and
that (A) such Holder is exempt from backup withholding, (B) the Holder has not
been notified by the IRS that the Holder is subject to backup withholding as a
result of failure to report all interest or dividends or (C) the IRS has
notified the Holder that the Holder is no longer subject to backup withholding
and (ii) if applicable, an adequate basis for exemption.
WHAT NUMBER TO GIVE THE EXCHANGE AGENT
The Holder is required to give the Exchange Agent the TIN (e.g., social
security number or employer identification number) of the registered Holder.
If the Initial Notes are held in more than one name or are held not in the
name of the actual owner, consult the enclosed "Guidelines for Certification
of Taxpayer Identification Number on Substitute Form W-9" for additional
guidance on which number to report.
13
<PAGE>
SUBSTITUTE FORM W-9
REQUEST FOR TAXPAYER IDENTIFICATION NUMBER AND CERTIFICATION
PAYOR'S NAME: SCOVILL FASTENERS INC.
PAYEE INFORMATION
(Please print or type)
Individual or business name (if joint account, list first and circle the
name of person or entity whose number you furnish in Part 1 below):
- --------------------------------------------------------------------------------
Check appropriate box: [_] Individual/Sole proprietor [_] Corporation
[_] Partnership [_] Other
- --------------------------------------------------------------------------------
Address (number, street, and apt. or suite no.): _________________________
- --------------------------------------------------------------------------------
City, state, and ZIP code: _______________________________________________
- --------------------------------------------------------------------------------
PART II PAYEES EXEMPT
FROM BACKUP WITHHOLDING
PART I TAXPAYER IDENTIFICATION NUMBER ("TIN") Check box (See page 2 of
Enter your TIN below. For individuals, this is your the Guidelines for further
social security number. For other entities, it is clarification. Even
your employer identification number. Refer to the if you are exempt
chart on page 1 of the Guidelines for Certification from backup
of Taxpayer Identification Number on Substitute withholding, you
Form W-9 (the "Guidelines") for further should still
clarification. If you do not have a TIN, see complete and sign
instructions on how to obtain a TIN on page 2 of the certification
the Guidelines, check the appropriate box below below):
indicating that you have applied for a TIN and, in
addition to the Part III Certification, sign the
attached Certification of Awaiting Taxpayer
Identification Number.
[_] EXEMPT
Social security number:
[_] [_] [_] - [_] [_] - [_] [_] [_] [_]
[_] Applied For
Employer identification number:
[_] [_] - [_] [_] [_] [_] [_] [_] [_]
- --------------------------------------------------------------------------------
PART III CERTIFICATION
Certification Instructions: You must cross out item 2 below if you have
been notified by the Internal Revenue Service (the "IRS") that you are
currently subject to backup withholding because of underreporting
interest or dividends on your tax return (See page 2 of the Guidelines
for further clarification).
Under penalties of perjury, I certify that:
1. The number shown on this form is my correct taxpayer identification
number (or I am waiting for a number to be issued to me), and
2. I am not subject to backup withholding because: (a) I am exempt from
backup withholding, (b) I have not been notified by the IRS that I am
subject to backup withholding as a result of a failure to report all
interest or dividends or (c) the IRS has notified me that I am no
longer subject to backup withholding.
Signature ____________________ Date _________________________
NOTE: FAILURE TO COMPLETE AND RETURN THIS SUBSTITUTE FORM W-9
MAY RESULT IN BACKUP WITHHOLDING OF 31% OF ANY PAYMENT MADE TO
YOU PURSUANT TO THE EXCHANGE OFFER. PLEASE REVIEW THE ENCLOSED
"GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER
ON SUBSTITUTE FORM W-9" FOR ADDITIONAL DETAILS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATION IF YOU CHECKED
THE BOX "APPLIED FOR" IN PART I OF SUBSTITUTE FORM W-9
CERTIFICATION OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify, under penalties of perjury, that a TIN has not
been issued to me, and either (a) I have mailed or delivered
an application to receive a TIN to the appropriate IRS
Service Center or Social Security Administration Office or
(b) I intend to mail or deliver an application in the near
future. I understand that I must provide a TIN to the payor
within 60 days of submitting this Substitute Form W-9 and
that if I do not provide a TIN to the payor within 60 days,
the payor is required to withhold 31% of all reportable
payments thereafter to me until I furnish the payor with a
TIN.
____________________
Signature
____________________
Date
14
<PAGE>
EXHIBIT 99.2
NOTICE OF GUARANTEED DELIVERY
FOR
TENDER OF ALL OUTSTANDING
11 1/4% SENIOR NOTES DUE 2007, SERIES A
IN EXCHANGE FOR
11 1/4% SENIOR NOTES DUE 2007, SERIES B
OF
SCOVILL FASTENERS INC.
As set forth in the Prospectus dated , 1998 (as the same may be amended
from time to time, the "Prospectus") of Scovill Fasteners Inc., a Delaware
corporation (the "Company"), under the caption "The Exchange Offer--Guaranteed
Delivery Procedures," and in the accompanying Letter of Transmittal (the
"Letter of Transmittal") and Instruction 2 thereto, this form or one
substantially equivalent, must be used to tender any of the Company's
outstanding 11 1/4% Senior Notes due 2007, Series A (the "Initial Notes")
pursuant to the Exchange Offer if (i) certificates representing the Initial
Notes to be tendered for exchange are not lost but are not immediately
available, (ii) time will not permit a Holder's Letter of Transmittal,
certificates representing the Initial Notes to be tendered and all other
required documents to reach United States Trust Company of New York (the
"Exchange Agent") prior to the Expiration Date or (iii) the procedures for
book-entry transfer cannot be completed prior to the Expiration Date. This
form may be delivered by an Eligible Institution by mail or hand delivery or
transmitted, via manually signed facsimile, to the Exchange Agent as set forth
below.
Terms not otherwise defined herein shall have their respective meanings as
set forth in the Prospectus.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
, 1998, UNLESS EXTENDED OR TERMINATED (THE "EXPIRATION DATE").
The Exchange Agent for the Exchange Offer is:
UNITED STATES TRUST COMPANY OF NEW YORK
By Hand (after 4:30 p.m.) Or By Hand (before 4:30 p.m.)
Overnight Delivery:
United States Trust Company of New United States Trust Company of New
York York
770 Broadway 111 Broadway
13th Floor New York, New York 10006
New York, New York 10003 Attention: Lower Level Corporate
Attention: Lower Level Corporate Trust Window
Trust Window
Facsimile Transmissions: By Registered Or Certified Mail:
(212) 780-0592
United States Trust Company of New
To Confirm by Telephone York
or for Information Call: P.O. Box 843 Cooper Station
(800) 548-6565 New York, New York 10276
Attention: Corporate Trust Services
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER THAN AS
SET FORTH ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE TRANSMISSION TO
A NUMBER OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
<PAGE>
LADIES AND GENTLEMEN:
The undersigned hereby tender(s) to the Company, upon the terms and subject
to the conditions set forth in the Prospectus and the Letter of Transmittal,
receipt of which is hereby acknowledged, the principal amount of Initial Notes
set forth below pursuant to the guaranteed delivery procedures set forth in
the Prospectus under the caption "The Exchange Offer--Guaranteed Delivery
Procedures."
The undersigned hereby represents and warrants that the undersigned has full
power and authority to tender the Initial Notes. The undersigned will, upon
request, execute and deliver any additional documents deemed by the Exchange
Agent or the Company to be necessary or desirable for the perfection of the
undersigned's tender.
Tenders may be withdrawn in accordance with the procedures set forth in the
Prospectus. The undersigned authorizes the Exchange Agent to deliver this
Notice of Guaranteed Delivery to the Company and the Trustee as evidence of
the undersigned's tender of Initial Notes.
All authority herein conferred or agreed to be conferred by this Notice of
Guaranteed Delivery shall survive the death or incapacity of the undersigned
and every obligation of the undersigned under this Notice of Guaranteed
Delivery shall be binding upon the heirs, personal representatives, executors,
administrators, successors, assigns, trustees in bankruptcy and other legal
representatives of the undersigned.
2
<PAGE>
PLEASE SIGN AND COMPLETE
- --------------------------------------------------------------------------------
Signatures of Registered Date: _______________________________
Holder(s) or Authorized
Signatory:
Address: ____________________________
-------------------------------------
-----------------------------------
-------------------------------------
-----------------------------------
-----------------------------------------------------------------------------
Name(s) of Registered Holder(s): Area Code and Telephone No.:
----------------------------------- -------------------------------------
----------------------------------- -------------------------------------
- --------------------------------------------------------------------------------
Principal Amount of Notes Tendered: If Notes will be delivered by book-
entry transfer, complete the
following:
-----------------------------------
Certificate No.(s) of Notes (if
available): Depository Account No. ______________
- --------------------------------------------------------------------------------
-----------------------------------
This Notice of Guaranteed Delivery must be signed by the Holder(s) exactly
as their names appear on certificates for Initial Notes or on a security
position listing as the owner of Initial Notes, or by person(s) authorized
to become Holder(s) by endorsements and documents transmitted with this
Notice of Guaranteed Delivery. If signature is by a trustee, executor,
administrator, guardian, attorney-in-fact, officer or other person acting in
a fiduciary or representative capacity, such person must set forth his or
her full title below under "Capacity" and submit evidence satisfactory to
the Company of such person's authority to so act.
Please print name(s) and address(es)
Name(s): ____________________________________________________________________
-----------------------------------------------------------------------------
Capacity: ___________________________________________________________________
Address(es): ________________________________________________________________
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
DO NOT SEND INITIAL NOTES WITH THIS FORM. INITIAL NOTES SHOULD BE SENT
TOGETHER WITH A PROPERLY COMPLETED AND VALIDLY EXECUTED LETTER OF
TRANSMITTAL AND ANY OTHER RELATED DOCUMENTS.
3
<PAGE>
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
- --------------------------------------------------------------------------------
The undersigned, a member firm of a registered national securities exchange
or of the National Association of Securities Dealers, Inc. or a commercial
bank or trust company having an office or correspondent in the United
States, hereby guarantees that, within three New York Stock Exchange trading
days from the date of this Notice of Guaranteed Delivery, a properly
completed and duly executed Letter of Transmittal (or a manually signed
facsimile thereof), together with certificates representing the Initial
Notes tendered hereby in proper form for transfer (or confirmation of the
book-entry transfer of such Initial Notes into the Depositary's account at a
Book-Entry Transfer Facility, pursuant to the procedure for book-entry
transfer set forth in the Prospectus under the caption "The Exchange Offer--
Book-Entry Transfer"), and any other required documents will be deposited by
the undersigned with the Exchange Agent at its address set forth above.
Name of Firm: _____________________ ___________________________________
Authorized Signature
Address: __________________________
Name: _____________________________
___________________________________
Title: ____________________________
Area Code and Telephone No.: ______
Date: _____________________________
4
