<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 14, 1998
REGISTRATION NO. 333-52657
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ISSUER OF SENIOR SUBORDINATED NOTES REGISTERED HEREBY
INDESCO INTERNATIONAL , INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3089 13-3987915
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
SUBSIDIARY GUARANTORS OF SENIOR SUBORDINATED NOTES REGISTERED HEREBY
CONTINENTAL SPRAYERS INTERNATIONAL , INC.
AFA PRODUCTS, INC.
(EXACT NAMES OF REGISTRANTS AS SPECIFIED IN THEIR CHARTERS)
<TABLE>
<S> <C> <C>
DELAWARE 3089 43-1803508
DELAWARE 3089 95-4642099
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
950 THIRD AVENUE
NEW YORK, NEW YORK 10022
(212) 593-2009
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANTS' PRINCIPAL EXECUTIVE OFFICES)
ARIEL GRATCH, PRESIDENT
INDESCO INTERNATIONAL, INC.
950 THIRD AVENUE
NEW YORK, NEW YORK 10022
(212) 593-2009
(NAME AND ADDRESS, INCLUDING ZIP CODE,
AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES OF COMMUNICATIONS TO:
STEPHEN H. COOPER, ESQ.
WEIL, GOTSHAL & MANGES LLP
767 FIFTH AVENUE
NEW YORK, NEW YORK 10153-0119
(212) 310-8000
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 in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED AUGUST 14, 1998
PROSPECTUS
INDESCO INTERNATIONAL, INC.
OFFER TO EXCHANGE ITS 9 3/4% SENIOR SUBORDINATED NOTES DUE 2008, WHICH ARE FULLY
AND UNCONDITIONALLY GUARANTEED, JOINTLY AND SEVERALLY, ON AN UNSECURED SENIOR
SUBORDINATED BASIS BY CERTAIN OF ITS SUBSIDIARIES (THE "SUBSIDIARY GUARANTORS")
AND HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, FOR ITS 9 3/4% SENIOR
SUBORDINATED NOTES DUE 2008, WHICH ARE FULLY AND UNCONDITIONALLY GUARANTEED ON
AN UNSECURED SENIOR SUBORDINATED BASIS BY THE SUBSIDIARY GUARANTORS BUT HAVE NOT
BEEN SO REGISTERED.
------------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
, 1998 UNLESS EXTENDED.
------------------------
Indesco International, Inc. (the "Company") hereby offers, upon the terms
and subject to the conditions set forth in this Prospectus and the accompanying
Letter of Transmittal (which together constitute the "Exchange Offer"), to
exchange up to $145,000,000 aggregate principal amount of its new 9 3/4% Senior
Subordinated Notes due 2008 (the "New Notes"), which are fully and
unconditionally guaranteed, jointly and severally, on an unsecured senior
subordinated basis by the Subsidiary Guarantors and have been registered under
the Securities Act of 1933, as amended (the "Securities Act"), for a like
principal amount of its outstanding 9 3/4% Senior Notes due 2008 (the "Old
Notes"), which have been similarly guaranteed by the Subsidiary Guarantors but
have not been so registered. The terms of the New Notes are identical in all
material respects to those of the Old Notes, except for certain transfer
restrictions and registration rights (including provision for payment of
Liquidated Damages in certain events) relating to the Old Notes. The New Notes
will evidence the same indebtedness as the Old Notes and will be issued pursuant
to, and entitled to the benefits of, the same Indenture that governs the Old
Notes (the "Indenture"). As used herein, the term "Notes" means the Old Notes
and the New Notes, treated as a single class.
The Company will accept for exchange any and all Old Notes validly tendered
and not withdrawn prior to 5:00 p.m., New York City time, on , 1998,
or such later date not more than 30 days thereafter to which it may be extended
(as so extended, the "Expiration Date"). Tenders of Old Notes may be withdrawn
at any time prior to the Expiration Date. The Exchange Offer is not conditioned
upon any minimum principal amount of Old Notes being tendered for exchange but
is subject to certain other customary conditions. See "The Exchange Offer."
The New Notes will be, and the Old Notes currently are, unsecured senior
subordinated obligations of the Company and will be subordinated in right of
payment to all existing and future Senior Indebtedness (as defined under
"Description of the Notes -- Certain Definitions") of the Company, including
indebtedness under its Revolving Credit Facility (as defined under "Prospectus
Summary -- the Transactions"). The New Notes will rank pari passu with all
existing and future senior subordinated indebtedness of the Company and will
rank senior to all other existing and future Subordinated Indebtedness (as
defined under "Description of the Notes -- Certain Definitions") of the Company.
The New Notes also will be, and the Old Notes currently are, effectively
subordinated to all existing and future Senior Indebtedness of the Company's
subsidiaries. At July 5, 1998, there was outstanding an aggregate of $13.9
million of indebtedness that effectively ranked senior to the Old Notes and
would effectively rank senior to the New Notes. See "Description of the
Notes -- Subordination."
The holder of each Old Note accepted for exchange will receive a New Note
having a principal amount equal to that of the surrendered Old Note. The New
Notes will bear interest from the most recent date to which interest has been
paid on the Old Notes or, if no interest has been paid on the Old Notes, from
April 23, 1998. Old Notes accepted for exchange will cease to accrue interest
from and after the date of consummation of the Exchange Offer. Holders of Old
Notes accepted for exchange will not receive any payment in respect of accrued
interest on such Old Notes. Old Notes not tendered or not accepted for exchange
will continue to accrue interest from and after the date of consummation of the
Exchange Offer.
(continued on following page)
SEE "RISK FACTORS", BEGINNING ON PAGE 12 FOR A DESCRIPTION OF CERTAIN
RISKS THAT SHOULD BE CONSIDERED BY HOLDERS BEFORE DECIDING TO TENDER THEIR OLD
NOTES IN THE EXCHANGE OFFER.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
The date of this Prospectus is , 1998
<PAGE> 3
(continued from front cover)
The Old Notes were issued and sold on April 23, 1998 in a transaction
exempt from the registration requirements of the Securities Act and may not be
offered or sold in the United States unless so registered or pursuant to an
applicable exemption under the Securities Act. The New Notes are being offered
hereunder in order to satisfy certain obligations of the Company and the
Subsidiary Guarantors contained in the Registration Rights Agreement (as defined
under "Prospectus Summary -- The Exchange Offer"). Based on interpretations by
the staff of the Securities and Exchange Commission (the "Commission") as set
forth in no-action letters issued to third parties, the Company believes that
New Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be
offered for resale, resold and otherwise transferred by any holder thereof
(other than a holder that is an "affiliate" of the Company within the meaning of
Rule 405 under the Securities Act), without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such New
Notes are acquired in the ordinary course of such holder's business and such
holder has no arrangement or understanding with any person to participate in a
distribution of such New Notes. However, the Company has not sought a no-action
letter with respect to the Exchange Offer 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 of Old Notes, other than a broker-dealer, must
acknowledge that it is not engaged in, and does not intend to engage or
participate in, a distribution of New Notes and has no arrangement or
understanding to participate in a distribution of New Notes. Each broker-dealer
that receives New Notes for its own account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in connection with any resale of
such New Notes. The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. This Prospectus, as
it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with resales of New Notes received in exchange for
Old Notes where such Old Notes were acquired by such broker-dealer as a result
of market-making activities or other trading activities. The Company has agreed
that, starting on the Expiration Date and ending on the close of business one
year after the Expiration Date, it will make this Prospectus available to any
broker-dealer for use in connection with any such resale. See "Plan of
Distribution."
The Company will not receive any proceeds from the Exchange Offer. The
Company will pay all the expenses incident to the Exchange Offer. Tenders of Old
Notes pursuant to the Exchange Offer may be withdrawn at any time prior to the
Expiration Date. In the event the Company terminates the Exchange Offer and does
not accept any Old Notes for exchange, the Company will promptly return the Old
Notes to the holders thereof. See "The Exchange Offer."
Any Old Notes not tendered and accepted in the Exchange Offer will remain
outstanding and will be entitled to all the rights and preferences and will be
subject to the limitations applicable thereto under the Indenture. Following
consummation of the Exchange Offer, the Old Notes will continue to be subject to
restrictions upon transfer and the Company will have no further obligation to
holders of the Old Notes to provide for the registration of their Old Notes
under the Securities Act. To the extent that Old Notes are tendered and accepted
in the Exchange Offer, a holder's ability to sell untendered Old Notes could be
adversely affected.
No broker-dealer, salesperson or other individual has been authorized to
give any information or to make any representation in connection with the
Exchange Offer other than those contained in this Prospectus and Letter of
Transmittal and, if given or made, such information or representation must not
be relied upon as having been authorized by the Company or the Guarantor. The
delivery of this Prospectus shall not, under any circumstances, create any
implication that the information herein is correct at any time subsequent to its
date.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
TENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN WHICH THE
EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE
SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
(ii)
<PAGE> 4
AVAILABLE INFORMATION
The Company and the Subsidiary Guarantors have filed with the Securities
and Exchange Commission (the "Commission") a Registration Statement on Form S-4
(together with all amendments, exhibits, schedules and supplements thereto, the
"Registration Statement") under the Securities Act with respect to the New Notes
being offered hereby. This Prospectus, which forms a part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement. For further information with respect to the Company, the Subsidiary
Guarantors and the New Notes, reference is made to the Registration Statement.
Statements contained in this Prospectus as to the contents of any contract or
other document are not necessarily complete, and, where such contract or other
document is an exhibit to the Registration Statement, each such statement is
qualified in all respects by the provisions in such exhibit, to which reference
is hereby made. Copies of the Registration Statement may be examined without
charge at the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549, and at the web site
(http://www.sec.gov.) maintained by the Commission and at the Commission's
Regional Offices located at Seven World Trade Center, 13th Floor, New York, New
York 10048 and Citicorp Center, 500 West Madison Avenue, Suite 1400, Chicago,
Illinois 60661. Copies of all or any portion of the Registration Statement can
be obtained from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, upon payment of certain fees prescribed by
the Commission.
The Company is not currently subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Upon
completion of the Exchange Offer, the Company will be subject to the
informational requirements of the Exchange Act, and, in accordance therewith,
will file periodic reports and other information with the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549. Copies of any material so filed can
be obtained from the Public Reference Section of the Commission, upon payment of
certain fees prescribed by the Commission. In addition, pursuant to the
Indenture covering the Old Notes and the New Notes, the Company has agreed to
file with the Commission and provide to the Noteholders the annual reports and
the information, documents and other reports otherwise required pursuant to
Section 13 of the Exchange Act. Such requirements may be satisfied through the
filing and provision of such documents and reports which would otherwise be
required pursuant to Section 13 in respect of the Company.
UNTIL , 1998 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE NEW NOTES, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION
TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements and information
relating to the Company that are based on the beliefs of management as well as
assumptions made by, and information currently available to, management. Such
forward-looking statements are principally contained in the sections "Offering
Memorandum Summary," "Risk Factors," "Unaudited Pro Forma Combined Financial
Statements," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business" and include, without limitation, the
Company's expectations and estimates as to the Company's business operations,
including the introduction of new products and future financial performance,
including growth in net sales and earnings and cash flows from operations. In
addition, in those and other portions of this Prospectus, the words
"anticipates," "believes," "estimates," "expects," "projects," "plans,"
"intends" and similar expressions, as they relate to the Company or its
management, are intended to identify forward-looking statements. Such statements
reflect the current views of the Company with respect to future events and are
subject to certain risks, uncertainties and assumptions, including the risk
factors described in this Prospectus. In addition to the factors that may be
described elsewhere in this Prospectus, the Company specifically wishes to
advise readers that the factors listed under the caption "Risk Factors" could
cause actual results to differ materially from those expressed in any
forward-looking statement. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect (including the
assumptions used in connection with the preparation of the unaudited pro forma
combined financial statements), actual results may vary materially from those
described herein as anticipated, believed, estimated or expected. The Company
does not intend to update these forward-looking statements.
------------------------
(iii)
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information, including financial
statements, included elsewhere in this Prospectus. Unless the context otherwise
requires, (i) "CSI" refers to Continental Sprayers International, Inc., a
Delaware corporation, including its predecessor, the Continental Sprayers
International division of Contico International, Inc., the business of which was
acquired by the Company on February 4, 1998 (the "CSI Acquisition"), (ii) "AFA"
refers to AFA Products, Inc., a Delaware corporation, (iii) "Polytek" refers to
AFA Polytek B.V., a Netherlands corporation, (iv) the "Company" refers to
Indesco International, Inc., a Delaware corporation ("Indesco"), together with
its subsidiaries, including CSI, AFA and Polytek, (v) all information regarding
the Company and its business gives effect to the CSI Acquisition and (vi) all
pro forma financial information assumes that the acquisitions of CSI, AFA and
Polytek occurred on April 5, 1998 for balance sheet purposes and January 1, 1997
for statement of operations purposes. Market share data contained in this
Prospectus are based on management estimates of unit sales within the trigger
sprayer and pump dispenser industries. There are no publicly available sources
of such data and, therefore, no assurance can be given as to the accuracy of
such management estimates.
THE COMPANY
The Company, created by the combination of CSI, AFA and Polytek, is a
global leader in the design, manufacture and sale of liquid dispensing products,
primarily plastic trigger sprayers, used in household consumer product
applications, such as hard surface cleaning, laundry and lawn and garden
products, as well as industrial applications, such as products for the
automotive, janitorial and sanitation markets. Management believes the Company
is the largest producer of trigger sprayers in the world, with an estimated
market share of approximately 48% in North America and 24% in Europe. The
Company's products are sold to (i) multinational, national and regional
manufacturers of brand name and private label consumer products and (ii)
independent distributors of containers and packaging products. The Company is
the only trigger sprayer manufacturer with a leading presence in both of these
market segments. For the twelve months ended December 31, 1997 and the quarter
ended April 5, 1998, on a pro forma combined basis, the Company generated net
sales of approximately $114.5 million and $29.0 million, respectively and EBITDA
(as defined below) of approximately $28.6 million and $7.0 million,
respectively.
North America is the principal market for trigger sprayers, accounting for
approximately 60% of the estimated 1.1 billion units sold worldwide during 1997.
The North American market includes large multinational and national
manufacturers of brand name consumer products, smaller manufacturers of brand
name, private label and specialty products for consumer and industrial use and
marketers of general purpose liquid spray containers that are sold in empty
form. The large consumer products manufacturers are served directly by a limited
number of trigger sprayer producers that can meet their high volume, product
innovation and consistent quality requirements. Other customers are served both
directly by trigger sprayer manufacturers and indirectly by independent
distributors that can process smaller volume orders and provide more
personalized service support. Outside North America, the principal market for
trigger sprayers is in Western Europe, where unit sales, although less on a per
capita basis than in North America, have been growing at a greater rate than
that in the United States. The Western European market, which consists primarily
of large manufacturers of consumer products, is served by brokers and agents.
Eastern Europe, Central and South America and the Pacific Rim do not yet
represent significant markets, but are expected to grow in the next several
years as per capita consumption increases and local economies in these regions
mature.
CSI is the world's largest supplier of trigger sprayers to large national
and multinational consumer products manufacturers, such as Clorox,
Monsanto/Solaris and Proctor & Gamble. CSI's reputation for quality, design
innovation, high volume production capability and competitive pricing has
enabled it to establish long-term relationships with leading multinational
consumer products companies. CSI also manufactures and sells finger-actuated
plastic pumps for nationally branded soaps and lotions. AFA is focused on
serving independent container and packaging distributors as well as smaller
manufacturers of brand name and private label consumer products. AFA is the
nation's largest supplier of trigger sprayers to independent
1
<PAGE> 6
distributors, which typically purchase in smaller volumes but at higher margins
than large multinational consumer products companies. Polytek is a major
producer and supplier of trigger sprayers to the European market and performs
custom injection molding services for European manufacturers of plastic
packaging, consumer and industrial products.
CSI's ability to meet the increasingly global requirements of its large
U.S.-based multinational customers that are seeking to expand their sales
outside North America will be enhanced by Polytek's established technological
expertise and manufacturing base in The Netherlands. CSI's El Paso manufacturing
operations will augment those at AFA's Forest City facility, which currently is
operating at full capacity, increasing the Company's ability to meet the needs
of AFA's client base and providing additional product lines to AFA's customers.
Management believes that these synergies will enable the Company to provide
enhanced customer service and product availability and will increase sales and
provide substantial cost savings.
The combination of CSI, AFA and Polytek provides the Company with a unique
blend of competitive strengths, principal among which are the following:
- The Company is the only trigger sprayer manufacturer with a leading
presence in the two principal market segments it serves. In 1997, the
Company accounted for approximately 48% of the trigger sprayers produced
in the United States, providing approximately 45% of the units shipped to
consumer products manufacturers and 67% of the units shipped to the
distributor market. In addition, the Company accounted for approximately
24% of European shipments of trigger sprayers during 1997. The Company's
market presence is supported by strong customer relationships, a well
established marketing organization and channels of distribution and a
strong reputation for customer service and responsiveness.
- CSI and Polytek are recognized as technological and product design
innovators within the trigger sprayer industry and, together with AFA
(which introduced the world's first trigger sprayer in 1959), hold a
combined portfolio of more than 200 active patents. Recent product
innovations -- such as CSI's "Quick Twist"(TM) closure system and
Polytek's precompression sprayer technology -- are expected to result in
quality enhancements for the Company's customers and potential margin
improvements for the Company as a result of reduced manufacturing costs.
- The Company has invested approximately $54.3 million during the five
years ended December 31, 1997 to increase the productive capacity and
quality and reduce the operating costs of its manufacturing facilities.
CSI's facilities in St. Peters, Missouri, augmented by Polytek's
facilities in The Netherlands, can serve the requirements of the
Company's largest multinational customers without the need for the
capital investment that would be required for a start-up facility. CSI's
El Paso plant and AFA's Forest City facilities have the capacity required
to serve the increasing product demands of independent distributors and
smaller manufacturers.
BUSINESS STRATEGY
The Company intends to capitalize on its competitive strengths to increase
revenues and cash flow through a business strategy that includes the following
key elements:
FOCUS ON GLOBAL SOURCING NEEDS OF MULTINATIONAL CONSUMER PRODUCTS
MANUFACTURERS
By combining CSI's multinational customer relationships with Polytek's
European-based capacity and manufacturing expertise, the Company has positioned
itself to capitalize on the global expansion plans of its multinational consumer
products customers and will seek to serve their sourcing needs on a worldwide
basis. Management also intends to leverage these capabilities to increase
revenues by developing new business opportunities with those multinational
consumer products companies that are not currently being served by the Company.
2
<PAGE> 7
EXPAND PRODUCT OFFERINGS TO DISTRIBUTOR NETWORK
The acquisition of CSI will allow the Company to offer to AFA's distributor
network an expanded product line of trigger sprayers, as well as lotion pumps,
enabling the Company to further strengthen its position in this market segment
without incremental manufacturing or selling expense, while extending the life
cycle of certain CSI products that, to date, have been marketed principally to
large multinational consumer products manufacturers.
ENHANCE UTILIZATION OF PRODUCTION CAPACITY
The Company anticipates moving its U.K.-based production equipment to
Polytek's facility in The Netherlands and utilizing CSI's El Paso plant to
alleviate capacity constraints currently being experienced at AFA's Forest City
facility. These steps will enable the Company to optimize its consolidated
manufacturing capabilities and to efficiently increase its total production
volume.
REALIZE SIGNIFICANT COST SAVINGS
The Company expects to achieve significant cost savings through the
rationalization of certain manufacturing operations and more efficient
utilization of its production capacity. Significant cost savings also are
expected to result from combining and centralizing various administrative
operations, adopting on a Company-wide basis the manufacturing "best" practices
from the operations of each of CSI, AFA and Polytek and combining their raw
materials requirements to achieve increased purchasing leverage. The Company
also will be introducing a new generation of products that are simpler to
manufacture, such as the T-1000(TM) trigger sprayer and the Luxor(TM) lotion
pump. These products are expected to significantly reduce production costs,
resulting in improved margins.
PURSUE SELECTIVE ACQUISITIONS
The Company intends to pursue selective acquisitions of businesses or
product lines that meet the complementary needs of its multinational and
distributor customer base in order to increase sales volume, achieve further
production efficiencies and enhance customer penetration. The Company has no
current agreements, arrangements or understandings with respect to any future
acquisitions.
THE TRANSACTIONS
On February 4, 1998, the Company consummated the CSI Acquisition for a
total cash purchase price of approximately $92.9 million. Concurrently
therewith, the Company acquired direct ownership of Polytek (which previously
was an affiliate of the Company), entered into new revolving credit and term
loan agreements and refinanced its then existing domestic credit facilities.
Funds used for the CSI Acquisition and the refinancing of the Company's existing
indebtedness were provided in the form of term loans aggregating $135.0 million
(the "Term Loans") and borrowings of approximately $2.5 million under a $30.0
million revolving credit facility (the "Revolving Credit Facility"). See
"Management's Discussion of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." Those transactions, together
with the sale of the Old Notes, are referred to collectively as the
"Transactions." The net proceeds from the sale of the Old Notes were used, in
principal part, to repay and retire all of the Term Loans.
------------------------
The Company's principal executive offices are located at 950 Third Avenue,
New York, New York 10022, and its telephone number is (212) 593-2009.
3
<PAGE> 8
THE EXCHANGE OFFER
The Exchange Offer......... The Company is offering to exchange up to
$145,000,000 aggregate principal amount of the New
Notes for a like principal amount of the Old Notes.
The issuance of the New Notes is intended to
satisfy obligations of the Company contained in a
Registration Rights Agreement, dated April 23, 1998
(the "Registration Rights Agreement"), among the
Company, the Subsidiary Guarantors and NationsBanc
Montgomery Securities LLC, the initial purchaser of
the Old Notes (the "Initial Purchaser"). For
procedures for tendering Old Notes pursuant to the
Exchange Offer, see "The Exchange Offer."
Tenders, Expiration Date;
Withdrawal............... The Exchange Offer will expire at 5:00 P.M., New
York City time, on , 1998, or such
later date (not more than 30 days thereafter) and
time to which it may be extended (as so extended,
the "Expiration Date"). A tender of Old Notes
pursuant to the Exchange Offer may be withdrawn at
any time prior to the Expiration Date. Any Old Note
not accepted for exchange for any reason will be
returned without expense to the tendering holder
thereof as promptly as practicable after the
expiration or termination of the Exchange Offer.
Federal Income Tax
Consequences............. The exchange of New Notes for Old Notes pursuant to
the Exchange Offer should not result in any income,
gain or loss to the holders of the Old Notes or the
Company for federal income tax purposes. See
"Certain Federal Income Tax Consequences."
Use of Proceeds............ There will be no proceeds to the Company from the
Exchange Offer. The net proceeds from the sale of
the Old Notes for which the New Notes will be
exchanged were used, in principal part, to repay
and retire $135.0 million aggregate principal
amount of Term Loans. See "Use of Proceeds."
Exchange Agent............. Norwest Bank Minnesota, National Association is
serving as the Exchange Agent in connection with
the Exchange Offer.
Shelf Registration
Statement.................. Under certain circumstances, certain holders of
Notes (including holders of Old Notes who are not
permitted to participate in the Exchange Offer and
holders of New Notes who may not freely resell New
Notes received in the Exchange Offer) may require
the Company to file, and use its best efforts to
cause to become effective, a shelf registration
statement under the Securities Act that would cover
reoffers and resales of Notes by such holders. See
"Description of the Notes -- Registration Rights."
Conditions to the Exchange
Offer.................... The Exchange Offer is not conditioned on any
minimum principal amount of Notes being tendered
for exchange. The Exchange Offer is subject to
certain other customary conditions, each of which
may be waived by the Company. See "The Exchange
Offer -- Certain Conditions to the Exchange Offer."
Consequences of Failure to
Exchange................. Holders of Old Notes who do not exchange their Old
Notes for New Notes pursuant to the Exchange Offer
will continue to be subject to the restrictions on
transfer of such Old Notes as set forth in the
legend thereon as a consequence of the offer and
sale of the Old Notes pursuant
4
<PAGE> 9
to exemptions from, or in transactions not subject
to, the registration requirements of the Securities
Act. In general, the Old Notes may not be offered
or sold unless registered under the Securities Act,
except pursuant to an available exemption from, or
in a transaction not subject to, the Securities Act
and applicable state securities laws. The Company
does not currently anticipate that it will register
Old Notes under the Securities Act. Based on
interpretations by the staff of the Commission, as
set forth in no-action letters issued to third
parties, the Company believes that New Notes issued
pursuant to the Exchange Offer in exchange for Old
Notes may be offered for resale, resold or
otherwise transferred by holders thereof (other
than a holder that is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and
prospectus delivery provisions of the Securities
Act, provided that such New Notes are acquired in
the ordinary course of such holder's business and
that such holder, other than a broker-dealer, has
no arrangement with any person to participate in
the distribution of such New Notes. However, the
Commission has not considered the Exchange Offer in
the context of a 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 as in such other circumstances. Each
holder of Old Notes, other than a broker-dealer,
must acknowledge that it is not engaged in, and
does not intend to engage in, a distribution of
such New Notes and has no arrangement or
understanding to participate in a distribution of
Exchange Notes. Each broker-dealer that receives
New Notes for its own account in exchange for Old
Notes must acknowledge that such Old Notes were
acquired by such broker-dealer as a result of
market-making activities or other trading
activities and that it will deliver a prospectus in
connection with any resale of such New Notes. See
"Plan of Distribution."
THE NEW NOTES
Issuer..................... Indesco International, Inc.
Securities Offered......... $145,000,000 aggregate principal amount of 9 3/4%
Senior Subordinated Notes due 2008, which are fully
and unconditionally guaranteed, jointly and
severally, on an unsecured senior subordinated
basis, by the Subsidiary Guarantors and have been
registered under the Securities Act (the "New
Notes").
Maturity Date.............. April 15, 2008.
Interest Payment Dates..... April 15 and October 15, commencing October 15,
1998.
Subsidiary Guarantors...... The New Notes will be fully and unconditionally
guaranteed, jointly and severally, on an unsecured
senior subordinated basis (the "Subsidiary
Guarantees") by each of the Company's existing and
future domestic subsidiaries that are Restricted
Subsidiaries (as defined in the New Notes)
(collectively, the "Subsidiary Guarantors"). At the
date of issuance of the New Notes, the Subsidiary
Guarantors will be Continental Sprayers
International, Inc. and AFA Products, Inc. Each
Subsidiary Guarantee will be a guarantee of payment
and not of collection. See "Description of the
Notes -- Subsidiary Guarantees."
5
<PAGE> 10
Subordination.............. The New Notes will be general unsecured obligations
of the Company, subordinated in right of payment to
all existing and future Senior Indebtedness (as
defined under "Description of the Notes -- Certain
Definitions") of the Company, which will include
borrowings under the Revolving Credit Facility. The
New Notes will also be effectively subordinated to
all existing and future Senior Indebtedness of the
Subsidiary Guarantors. At April 5, 1998, on a pro
forma basis after giving effect to the
Transactions, the aggregate amount of indebtedness
(excluding intercompany indebtedness) that would
have effectively ranked senior to the New Notes and
the Subsidiary Guarantees would have been
approximately $18.4 million, and the Company would
have had additional availability of $8.1 million
for borrowings under the Credit Facilities, all of
which would be Senior Indebtedness. At July 5,
1998, there was outstanding approximately $13.9
million of indebtedness that would have effectively
ranked senior to the New Notes. The Subsidiary
Guarantees will be subordinated in right of payment
to all existing and future Senior Indebtedness of
the relevant Subsidiary Guarantor. See "Description
of the Notes -- Subordination."
Optional Redemption........ On or after April 15, 2003, the Company may redeem
the New Notes, in whole or in part, at the
redemption prices set forth herein, plus accrued
and unpaid interest, if any, to the date of
redemption. Notwithstanding the foregoing, at any
time or from time to time prior to April 15, 2001,
the Company may redeem, on one or more occasions,
up to 35% of the initial aggregate principal amount
of the Notes with the net proceeds of one or more
Equity Offerings (as defined under "Description of
the Notes -- Certain Definitions") at a redemption
price equal to 109.75% of the principal amount
thereof, plus accrued interest, if any, to the
redemption date (subject to the right of holders of
record on the relevant record date to receive
interest due on an interest payment date); provided
that, immediately after giving effect to such
redemption, at least 65% of the initial aggregate
principal amount of Notes remain outstanding;
provided further that any such redemption shall
occur within 60 days after the date of closing of
the immediately preceding Equity Offering. See
"Description of the Notes -- Optional Redemption."
Mandatory Redemption....... None, except at maturity on April 15, 2008.
Change of Control.......... Upon a Change of Control (as defined under
"Description of the Notes -- Certain Definitions"),
the Company will be required to make an offer to
purchase all outstanding Notes at 101% of the
principal amount thereof plus accrued and unpaid
interest thereon to the date of purchase. See
"Description of the Notes -- Repurchase at Option
of Holders -- Change of Control."
Covenants.................. The Indenture restricts, among other things, the
Company's ability to incur additional Indebtedness,
pay dividends or make certain other restricted
payments, incur liens, sell stock of subsidiaries,
apply net proceeds from certain asset sales, merge
or consolidate with any other person, sell, assign,
transfer, lease, convey or otherwise dispose of
substantially all of the assets of the Company and
enter into certain transactions with affiliates.
See "Description of the Notes -- Certain
Covenants."
6
<PAGE> 11
Exchange Offer;
Registration Rights........ Holders of New Notes (other than as set forth
below) will not be entitled to any registration
rights with respect to the New Notes. Pursuant to
the Registration Rights Agreement, the Company has
agreed, for the benefit of the holders of Old
Notes, to file a registration statement under the
Securities Act with respect to an exchange offer
for the Old Notes. The Registration Statement of
which this Prospectus is a part constitutes the
exchange offer registration statement referred to
in the Registration Rights Agreement. Under certain
circumstances described in the Registration Rights
Agreement, certain holders of Notes (including
holders of Old Notes who are not eligible to
participate in the Exchange Offer) may require the
Company to file, and use its best efforts to cause
to become effective, a shelf registration statement
under the Securities Act that would cover resales
of Notes by such holders. See "Description of the
Notes -- Exchange Offer; Registration Rights."
RISK FACTORS
Holders of Old Notes should carefully consider the information set forth in
this Prospectus and, in particular, should evaluate the specific factors set
forth under "Risk Factors" before tendering their Old Notes in exchange for New
Notes.
7
<PAGE> 12
SUMMARY UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following table sets forth certain summary unaudited pro forma
consolidated financial data of the Company for the twelve months ended December
31, 1997 and the quarter ended April 5, 1998, and are derived from the
respective Unaudited Pro Forma Consolidated Financial Statements included
elsewhere in this Offering Memorandum. The summary unaudited pro forma
consolidated statement of operations data give effect to the Company's
acquisitions of AFA, Polytek and CSI as well as the sale of the Old Notes and
the application of the proceeds therefrom as if such transactions had occurred
as of January 1, 1997. The summary unaudited pro forma consolidated balance
sheet data give effect to such acquisitions as well as the sale of the Old Notes
and the application of the proceeds therefrom, as if the same had occurred on
April 5, 1998 and should be read in conjunction with the historical financial
statements and notes thereto included elsewhere in this Offering Memorandum.
<TABLE>
<CAPTION>
TWELVE MONTHS
ENDED QUARTER
DECEMBER 31, ENDED
1997 APRIL 5, 1998
------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales..................................... $114,531 $ 28,987
Gross profit(1)............................... 30,926 7,362
Operating income.............................. 16,589 3,741
OTHER DATA:
EBITDA(2)..................................... $ 28,643 $ 6,981
Cash interest expense(3)...................... 14,605 4,005
Depreciation and amortization................. 9,356 2,439
Capital expenditures.......................... 5,436 1,954
Ratios:
Pro forma ratio of earnings to fixed
charges(4)............................... 1.2x --
Margins:
Gross margin(1)(6)......................... 27.0% 25.4%
BALANCE SHEET DATA AT APRIL 5, 1998:
Working capital............................... $ 19,258
Fixed assets, net............................. 56,082
Total assets.................................. 172,796
Total debt(5)................................. 163,431
</TABLE>
- ---------------
(Footnotes appear on page 9)
8
<PAGE> 13
Footnotes:
(1) Gross profit for the twelve months ended December 31, 1997 and for the
quarter ended April 5, 1998 reflect one-time increases in cost of sales
resulting from a $1,713 step-up in the value of AFA and Polytek inventory
and a $850 step-up in the value of CSI inventory in connection with the
acquisition of those companies, as required by Accounting Principles Board
Opinion No. 16 ("APB 16"). Gross profit and gross margin of AFA, Polytek and
CSI for the twelve months ended December 31, 1997 and for the quarter ended
April 5, 1998, on a pro forma consolidated basis, excluding the non-cash
effect of the increases in cost of sales, were $32,639 and 28.5% and $8,212
and 28.3%, respectively.
(2) EBITDA represents income before interest, income taxes, depreciation,
amortization and extraordinary items. As used herein and in the Indenture,
EBITDA is calculated after elimination of the increases in cost of sales
resulting from the non-recurring step-ups in inventory value described in
Note 1 and, therefore, may not be comparable to similarly titled measures
used by other companies. See Description of the Notes -- "Certain
Definitions" for the definitions of the terms "Consolidated EBITDA" and
"Consolidated Net Income" as used in the Indenture. Management believes that
EBITDA is a measure commonly used by analysts and investors to determine a
company's ability to incur and service its debt. EBITDA should not be
considered as an alternative to, or more meaningful than, net income, cash
flows from operating activities or other income or cash flow statement data
prepared in accordance with GAAP, or as a measure of profitability or
liquidity. EBITDA does not necessarily indicate whether cash flow will be
sufficient for cash requirements. The calculation of EBITDA does not include
the commitments of the Company for capital expenditures and payment of debt
and should not be deemed to represent funds available to the Company.
(3) Cash interest expense for the twelve months ended December 31, 1997 and the
quarter ended April 5, 1998 excludes amortization of deferred financing
costs of $515 and $134, respectively.
(4) For purposes of this ratio, earnings consist of income before provision for
income taxes and extraordinary items plus fixed charges. Fixed charges
consist of interest expense (including capitalized interest) on all
indebtedness, amortization of deferred financing costs and one-third of
rental expense. For the quarter ended April 5, 1998, earnings, as defined
above, were not adequate to cover fixed charges. The coverage deficiency was
$447.
(5) Total debt includes long-term debt (including current maturities) and
capital lease obligations.
(6) Gross margin is calculated by dividing gross profit by net sales.
9
<PAGE> 14
SUMMARY HISTORICAL FINANCIAL DATA
The following table sets forth summary historical financial data of Indesco
International, Inc. and Subsidiaries (and its predecessors) on a consolidated
basis as of December 31, 1996, December 31, 1997 and April 5, 1998 and for each
of the periods presented below. The balance sheet data and statement of
operations data set forth below are derived from the unaudited financial
statements of Indesco International, Inc. and Subsidiaries and WTI, Inc. and
Subsidiaries (the predecessor of AFA Holdings Co.) as of and for the quarters
ended April 5, 1998 and April 6, 1997, respectively, the audited historical
financial statements of AFA Holdings Co. (the Company's parent) as of and for
the five months ended December 31, 1997 and WTI, Inc. and Subsidiaries as of
December 31, 1996 and July 31, 1997 and the seven months ended July 31, 1997 and
the twelve months ended December 31, 1995 and 1996, all of which are included
elsewhere in this Prospectus. The following table also sets forth summary
financial data of CSI as of May 31, 1996 and 1997 and for each of the years in
the three-year period ended May 31, 1997, which data are derived from CSI's
audited historical financial statements included elsewhere in this Prospectus.
The balance sheet and statement of operations data for CSI as of January 31,
1998 and for the eight months ended January 31, 1997 and 1998 have been derived
from the unaudited historical financial statements of CSI included elsewhere in
this Prospectus. The following table for CSI includes data relating to assets
and liabilities of, and results of operations attributable to, certain business
operations that were not purchased in the CSI Acquisition, none of which was
material. In the opinion of management, the unaudited data include all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the data for the period presented. The data below should be read
in conjunction with the Selected Historical Financial Data, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the historical financial statements and notes thereto included elsewhere in this
Prospectus.
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
WTI, INC. AND
SUBSIDIARIES INDESCO
TWELVE MONTHS WTI, INC. AND AFA HOLDINGS CO. WTI, INC. AND INTERNATIONAL, INC.
ENDED SUBSIDIARIES FIVE MONTHS SUBSIDIARIES AND SUBSIDIARIES
DECEMBER 31, SEVEN MONTHS ENDED QUARTER ENDED QUARTER ENDED
----------------- ENDED DECEMBER 31, APRIL 6, APRIL 5,
1995 1996 JULY 31, 1997 1997 1997 1998
------- ------- ------------- ---------------- ------------- -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales................. $55,238 $54,133 $32,988 $20,108 $15,149 $ 25,016
Gross profit(1)........... 13,267 14,265 9,124 3,513 4,264 7,091
Operating income.......... 5,390 6,876 4,919 651 2,321 3,855
OTHER DATA:
EBITDA(2)................. $10,077 $11,621 $ 8,242 $ 4,279 3,923 5,741
Operating cash flows...... 6,705 6,173 5,828 1,448 1,482 (5,788)
Investing cash flows...... (4,563) (2,300) (2,544) (661) (1,278) (93,984)
Financing cash flows...... (2,241) (4,158) (1,628) (770) 337 101,416
Interest expense.......... 4,489 4,275 2,295 2,231 1,006 3,375
Depreciation and
amortization............ 4,436 4,470 2,520 1,861 1,348 1,935
Capital expenditures...... 3,604 2,218 2,498 661 1,278 1,028
Margins:
Gross margin(1)(3)...... 24.0% 26.4% 27.7% 17.5% 28.1% 28.3%
BALANCE SHEET DATA AT PERIOD END:
Working capital........... -- $ 945 -- $ 5,510 -- $ 3,932
Fixed assets, net......... -- 16,004 -- 28,009 -- 56,082
Total assets.............. -- 44.801 -- 60,887 -- 172,696
Total debt(4)............. -- 24,111 -- 51,295 -- 154,950
</TABLE>
10
<PAGE> 15
CSI
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED
FISCAL YEAR ENDED MAY 31, JANUARY 31,
----------------------------- -------------------
1995 1996 1997 1997 1998
------- ------- ------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales....................................... $58,320 $57,104 $62,249 $39,245 $ 40,972
Gross profit.................................... 15,829 12,490 13,348 7,463 9,678
Operating income................................ 9,615 6,155 7,062 3,250 5,761
OTHER DATA:
EBITDA(2)....................................... $15,358 $12,186 $13,560 $ 8,010 $ 10,086
Operating cash flows............................ 13,847 12,706 11,299 6,924 12,044
Investing cash flows............................ (5,414) (3,559) (4,609) (3,512) (2,016)
Financing cash flows............................ (8,484) (9,145) (6,699) (3,438) (10,018)
Interest expense................................ 1,355 983 616 429 147
Depreciation.................................... 5,562 6,173 6,526 4,813 4,382
Capital expenditures............................ 5,301 3,337 4,477 3,378 1,816
Margins:
Gross margin(3)............................... 27.1% 21.9% 21.4% 19.0% 23.6%
BALANCE SHEET DATA AT PERIOD END:
Working capital................................. -- $ 8,024 $ 8,937 -- $ 7,702
Fixed assets, net............................... -- 32,464 30,588 -- 28,149
Total assets.................................... -- 48,631 45,928 -- 41,660
Total debt(4)................................... -- 8,813 5,712 -- 1,058
</TABLE>
- ---------------
(1) Gross profit for Indesco International, Inc. and Subsidiaries for the five
months ended December 31, 1997 and the quarter ended April 5, 1998 reflect
one-time increases in cost of sales resulting from a $1,713 step-up in the
value of AFA and Polytek inventory and a $850 step-up in the value of CSI
inventory in connection with the acquisition of those companies, as required
by APB 16. Gross profit and gross margin of Indesco International Inc. and
Subsidiaries for the five months ended December 31, 1997 and for the quarter
ended April 5, 1998, excluding the effect of the increases in cost of sales
were $5,226 and 26.0% and $7,941 and 31.7%, respectively.
(2) EBITDA represents income before interest, income taxes, depreciation,
amortization and extraordinary items. As used herein and in the Indenture,
EBITDA is calculated after elimination of the increases in cost of sales
resulting from the non-recurring step-ups in inventory value described in
Note 1 and, therefore, may not be comparable to similarly titled measures
used by other companies. See Description of the Notes -- "Certain
Definitions" for the definitions of the terms "Consolidated EBITDA" and
"Consolidated Net Income" as used in the Indenture. Management believes that
EBITDA is a measure commonly used by analysts and investors to determine a
company's ability to incur and service its debt. EBITDA should not be
considered as an alternative to, or more meaningful than, net income, cash
flows from operating activities or other income or cash flow statement data
prepared in accordance with GAAP, or as a measure of profitability or
liquidity. EBITDA does not necessarily indicate whether cash flow will be
sufficient for cash requirements. The calculation of EBITDA does not include
the commitments of the Company for capital expenditures and payment of debt
and should not be deemed to represent funds available to the Company.
(3) Gross margin is calculated by dividing gross profit by net sales.
(4) Total debt includes long-term debt (including current maturities) and
capital lease obligations.
11
<PAGE> 16
RISK FACTORS
Holders of the Old Notes should carefully consider the following factors,
as well as the other information and financial data contained in this
Prospectus, before tendering their Old Notes in exchange for the New Notes
offered hereby. The risk factors set forth below (other than those under the
caption "Resales of New Notes") are generally applicable to the Old Notes as
well as the New Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the provisions in
the Indenture regarding transfer of the Old Notes, including the restrictions on
transfer of such Old Notes as set forth in the legend thereon, as a consequence
of the offer and sale of the Old Notes pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Securities
Act. In general, the Old Notes may not be offered or sold unless registered
under the Securities Act, except pursuant to an available exemption from, or in
a transaction that is otherwise not subject to, the Securities Act. Upon
consummation of the Exchange Offer, the Company's principal obligations under
the Registration Rights Agreement will terminate and the Company does not
currently anticipate that it will register the Old Notes under the Securities
Act. To the extent that Old Notes are tendered and accepted for exchange
pursuant to the Exchange Offer, any trading market for those Old Notes that are
not so tendered and remain outstanding could be adversely affected. See "The
Exchange Offer -- Consequences of Failure to Exchange."
RESALES OF NEW NOTES
The Company is making the Exchange Offer in reliance upon interpretations
by the staff of the Commission, as set forth in no-action letters issued to
third parties. Based on such interpretations, the Company believes that New
Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be
offered for resale, resold or otherwise transferred by holders thereof (other
than a holder that is an "affiliate" of the Company within the meaning of Rule
405 under the Securities Act) without compliance with the registration and
prospectus delivery requirements of the Securities Act, provided that such New
Notes are acquired in the ordinary course of such holder's business and that
such holder, other than a broker-dealer, has no arrangement or understanding
with any person to engage or participate in a distribution of such New Notes.
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 as in such other circumstances. Each holder
of Old Notes, other than a broker-dealer, must acknowledge that it is not
engaged in, and does not intend to engage or participate in, a distribution of
the New Notes and has no arrangement or understanding to engage or participate
in a distribution of the New Notes. If any holder is an affiliate of the Company
or is engaged in or intends to engage in or has any arrangement or understanding
with respect to the distribution of the New Notes to be acquired pursuant to the
Exchange Offer, such holder (i) may not rely on the applicable interpretations
of the staff of the Commission and (ii) must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale transaction. Each broker-dealer that receives New Notes for its own
account in exchange for Old Notes pursuant to the Exchange Offer must
acknowledge that such New Notes were acquired by such broker-dealer as a result
of market-making activities or other trading activities and that it will deliver
a prospectus in connection with any resale of such New Notes. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of New Notes received in exchange for Old Notes that were acquired
by such broker-dealer as a result of market-making activities or other trading
activities. The Company has agreed that for a period of one year after the
Expiration Date, it will make this Prospectus available to broker-dealers for
use in connection with any such resale. See "The Exchange Offer -- Resales of
New Notes."
12
<PAGE> 17
SUBSTANTIAL LEVERAGE
The Company incurred substantial indebtedness to finance the CSI
Acquisition and to refinance outstanding indebtedness, and has remained highly
leveraged and has significant debt service obligations. As of April 5, 1998,
after giving pro forma effect to the sale of the Old Notes and the related
Transactions, the Company would have had approximately $163.4 million of
indebtedness outstanding. Immediately following the sale of the Old Notes and
application of the proceeds therefrom there was outstanding approximately $10.9
million of Senior Indebtedness, representing outstanding borrowings under the
Revolving Credit Facility, and approximately $7.9 million of indebtedness under
credit facilities of Polytek (the "Polytek Facilities") that effectively ranked
senior to the Old Notes and would effectively rank senior to the New Notes. The
Revolving Credit Facility and the Polytek Facilities are referred to
collectively as the "Credit Facilities." See "Pro Forma Capitalization." Subject
to certain limitations, the Indenture and the Credit Facilities permit the
Company and its subsidiaries to incur additional indebtedness.
The degree to which the Company continues to be leveraged could have
important consequences to holders of the New Notes, including the following: (i)
the Company's ability to obtain additional financing in the future for capital
expenditures, acquisitions or general corporate purposes, including working
capital, may be limited; (ii) a substantial portion of the Company's cash flow
from operations will be required for debt service, thereby reducing the funds
available to the Company for its operations, capital expenditures, acquisitions
or other purposes; (iii) the Company's borrowings under the Revolving Credit
Facility will bear interest at variable rates, which could result in higher
interest expense if interest rates rise; (iv) 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; and (v) indebtedness incurred under the Credit
Facilities is scheduled to become due prior to the time any principal payments
are required in respect of the New Notes and, therefore, the Company may need to
refinance such indebtedness. The Company's ability to refinance the Credit
Facilities, 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 general economic and
market conditions, that are beyond the control of the Company. In addition, the
Company's operating flexibility with respect to certain business matters will be
limited by financial and restrictive covenants contained in the Indenture and
the Credit Facilities and the failure to comply with those covenants could have
a material adverse effect on the Company. There can be no assurance that those
covenants will not adversely affect the Company's ability to finance its future
operations or capital needs or to engage in business activities that may be in
its interest. See "Description of the Notes" and "Description of Other
Indebtedness."
The ability of the Company to service its indebtedness, and to comply with
the financial and restrictive covenants contained in the Indenture and the
Credit Facilities, will depend upon the Company's future performance and ability
to generate cash, which are subject to financial, economic, competitive and
other factors, many of which are beyond the Company's control. Based on the
Company's current expectations with respect to its existing business, the
Company does not expect to generate cash sufficient to repay the New Notes at
maturity and, accordingly, will have to refinance the New Notes at their
maturity. In addition, there can be no assurance that the Company will be able
to generate sufficient cash to meet its other debt service obligations. If the
Company is unable to generate sufficient funds to meet its debt service
obligations, it may be required to refinance some of its indebtedness, to sell
assets or to raise additional equity. No assurance can be given that such
refinancings, asset sales or equity sales could be accomplished or, if
accomplished, would raise sufficient funds to meet the Company's debt service
obligations. The Company's high degree of leverage and related financial
covenants could have a material adverse effect on its ability to withstand
competitive pressures or adverse economic conditions, to make acquisitions, to
obtain future financing or to take advantage of business opportunities that may
arise.
HOLDING COMPANY STRUCTURE
The Company is a holding company and, accordingly, its cash flow and
ability to service its debt, including the New Notes, is dependent upon the
earnings of its subsidiaries and the payments of funds by those subsidiaries to
the Company in the form of dividends or other distributions or pursuant to a
Subsidiary
13
<PAGE> 18
Guarantor's guarantee of the New Notes. Although the Indenture generally
prohibits the Company from permitting its Restricted Subsidiaries (including
CSI, AFA and Polytek) to allow restrictions on their ability to pay dividends
and other amounts to the Company, any such restrictions could materially and
adversely affect the Company's ability to service and repay its debts, including
the New Notes. For example, the Polytek Facilities contain a restriction on
payment of dividends in certain circumstances. See "Description of Other
Indebtedness." Creditors of those subsidiaries, including trade creditors, will
have a prior claim on the earnings and funds of those subsidiaries. Moreover,
while the Old Notes are, and the New Notes will be, guaranteed on an unsecured
senior subordinated basis by the Subsidiary Guarantors, the existing Subsidiary
Guarantors are obligors with respect to substantial indebtedness, including as
guarantors of indebtedness under the Revolving Credit Facility, and the capital
stock of those Subsidiary Guarantors has been pledged by the Company to secure
amounts borrowed under the Revolving Credit Facility. In addition, the Company's
parent corporation, Indesco Holdings Co. (the "Parent"), has guaranteed the
Company's obligations under the Revolving Credit Facility and, as security for
such guarantee, has pledged its holdings of the capital stock of the Company.
See also "-- Fraudulent Conveyance Statutes."
SUBORDINATION OF NOTES AND SUBSIDIARY GUARANTEES; ASSET ENCUMBRANCES
The Old Notes are, and the New Notes will be, general unsecured obligations
of the Company, subordinated in right of payment to all of the Company's
existing and future Senior Indebtedness (as defined in the Indenture), including
borrowings under the Revolving Credit Facility. In addition, each Subsidiary
Guarantee will be a general unsecured obligation of the relevant Subsidiary
Guarantor, and similarly subordinated in right of payment to all existing and
future Senior Indebtedness of that Subsidiary Guarantor, including its
obligations under the Revolving Credit Facility. At April 5, 1998, on a pro
forma basis after giving effect to the Transactions, the aggregate amount of
indebtedness that would have effectively ranked senior to the New Notes and the
Subsidiary Guarantees would have been approximately $18.4 million, and the
Company would have had additional availability of $8.1 million for borrowings
under the Credit Facilities, all of which would be Senior Indebtedness, if
borrowed. At July 5, 1998, there was outstanding approximately $13.9 million of
indebtedness that ranked senior to the Old Notes and would effectively rank
senior to the New Notes. Additional Senior Indebtedness may be incurred by the
Company and the Subsidiary Guarantors from time to time, subject to certain
restrictions.
In the event of the bankruptcy, liquidation or reorganization of the
Company or any Subsidiary Guarantor, the assets of the Company and the
Subsidiary Guarantors will be available to pay obligations on the New Notes only
after all Senior Indebtedness of those entities has been paid in full, following
which there may not be sufficient assets remaining to pay amounts due in respect
of New Notes then outstanding. In addition, under certain circumstances the
Company will not be permitted to pay its obligations under the Notes in the
event of a default under certain Senior Indebtedness. See "Description of the
Notes -- Subordination" and "Description of the Notes -- Subordination of
Subsidiary Guarantees."
In addition, the New Notes and each Subsidiary Guarantee will be
effectively subordinated to all secured obligations of the Company and such
Subsidiary Guarantor, respectively, to the extent of the assets securing those
obligations. The Revolving Credit Facility is secured by all of the capital
stock of the Company's domestic subsidiaries, 66% of the capital stock of the
Company's foreign subsidiaries and substantially all of the domestic assets of
the Company and its domestic subsidiaries.
The New Notes also will be effectively subordinated to all existing and
future indebtedness and other liabilities of the Company's non-U.S. Subsidiaries
that are not Subsidiary Guarantors (including indebtedness of Polytek under the
Polytek Facilities), and would be so subordinated to all existing and future
indebtedness of the Subsidiary Guarantors if the Subsidiary Guarantees were
avoided or subordinated in favor of the Subsidiary Guarantors' other creditors.
See "-- Fraudulent Conveyance Statutes."
ABILITY TO SUCCESSFULLY COMBINE OPERATIONS
The integration of CSI's operations with those of AFA and Polytek will
require substantial management, engineering and other resources. Although the
Company believes that it has sufficient resources to accomplish
14
<PAGE> 19
this integration, there can be no assurance that the Company will not experience
difficulties with manufacturing processes, tooling, manufacturing personnel or
other matters. In addition, although management believes that combining the
resources and businesses of CSI, AFA and Polytek will enhance the Company's
competitive position and business prospects, there can be no assurance that
those benefits will be realized or that the combination of the operations of CSI
with those of AFA and Polytek will be successful.
As the Company proceeds to integrate the operations of CSI, AFA and
Polytek, it will consolidate the human resources, purchasing, accounting and
management information activities of these three entities. There can be no
assurance, however, as to the timing or amount of any cost savings that may be
realized as a result of those changes, which may result in a disruption of the
Company's operations and could have a material adverse effect on its business.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
DEPENDENCE ON KEY CUSTOMERS
AFA sells its products through a network of more than 40 distributors to a
large and diversified customer base. CSI and Polytek market their trigger
sprayers directly to a small number of large consumer products manufacturers.
The Company's ten largest customers accounted for an aggregate of approximately
41.6% and 45.1% of its net sales on a consolidated pro forma basis during the
twelve months ended December 31, 1997 and the quarter ended April 5, 1998,
respectively. A substantial reduction in the Company's sales to, or the loss of,
any of these customers could have a material adverse effect on the Company's
results of operations and financial condition. In 1993, one of CSI's largest
customers, which at the time accounted for approximately 22.0% of its total unit
volume, was acquired by S.C. Johnson and in late 1994 ceased purchasing products
from CSI. The loss of this customer's business adversely impacted CSI's results
of operations in fiscal 1995 and fiscal 1996. In January 1998, Dow Brands, CSI's
largest customer, sold certain of its product lines to S.C. Johnson and
subsequently notified CSI that it would be terminating its contract with CSI
effective April 23, 1998. Dow Brands' purchases from CSI during the twelve
months ended December 31, 1997 and the quarter ended April 5, 1998 accounted for
approximately 10.0% and 10.3%, respectively of the Company's net sales on a pro
forma consolidated basis. The Company does not expect to retain any of the
business attributable to the product lines sold by Dow Brands to S.C. Johnson,
but is using and expects to continue to use the production capacity previously
allocated to this business to meet the requirements of other customers. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Marketing and Distribution; Principal Customers."
COMPETITION
The Company operates in highly competitive markets with a number of
companies of varying sizes. There can be no assurance that the Company can
continue to compete successfully with such other companies. Competitive
pressures or other factors could cause the Company's products to lose market
share or could result in significant price erosion, which would have a material
adverse effect on the Company. See "Business -- Competition."
PRICING AND AVAILABILITY OF RAW MATERIALS
The Company's results of operations may be affected by the pricing and
availability of raw materials. Sudden increases in demand or decreases in supply
can greatly increase the cost of raw materials used by the Company in the
manufacture of its products. Plastic resin (particularly polypropylene) is the
principal raw material purchased by the Company. Approximately 18.9% and 18.2%
of the Company's cost of sales, on a pro forma consolidated basis, for the
twelve months ended December 31, 1997 and the quarter ended April 5, 1998,
respectively were attributable to purchases of plastic resin. The cost of
plastic resin fluctuates, based on supply and demand, and rose significantly
from 1994 to mid-1996. In the second half of 1996, market prices for resin
decreased as new capacity came on line and such prices have continued to decline
since that date. There can be no assurance that resin prices may not rise
significantly in the future. To date, the Company has been able to obtain
sufficient quantities of plastic resin for its requirements. The Company has
long-standing
15
<PAGE> 20
relationships with its major suppliers and believes that adequate alternative
sources of supply exist for all of its major material requirements. See
"Business -- Raw Materials."
IMPACT OF EXCHANGE RATE FLUCTUATIONS ON FOREIGN SALES
Sales outside of North America (including export sales) accounted for
approximately 21.9% and 27.6% of the Company's pro forma net sales for the
twelve months ended December 31, 1997 and the quarter ended April 5, 1998,
respectively. The Company's business strategy contemplates expanding its sales
in non-U.S. markets. The U.S. dollar value of revenues derived from products
sold outside the United States (excluding U.S. export sales) varies with
currency exchange rate fluctuations, and the Company's revenues have been and
may continue to be unfavorably impacted for financial reporting purposes by
significant increases in the value of the U.S. dollar relative to certain
foreign currencies. In addition, with respect to product sales that are
denominated in a currency other than the functional currency of the country in
which the products are manufactured, the Company's margins have been and may
continue to be adversely affected by fluctuations in exchange rates. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
DEPENDENCE ON KEY PERSONNEL
The Company's operations are dependent on the efforts, ability and
experience of its key executive officers and those of its principal
subsidiaries: CSI, AFA and Polytek. The Company's continued growth and success
will depend on its ability to attract and retain skilled executive personnel and
on the ability of those personnel to successfully manage its operations. The
loss of some or all of the Company's key executive personnel could have a
material adverse effect on its results of operations.
ENVIRONMENTAL MATTERS
The Company is subject to a wide range of federal, state and local
environmental and health and safety laws and regulations, including those
governing the use, handling, discharge, disposal and emissions of hazardous
materials and wastes. Some of these environmental laws impose strict, joint and
several liability on the owner or operator of a contaminated site, as well as
any person who disposes or who arranges for the disposal of hazardous materials
at a contaminated site, whether or not the owner or operator of the property
knew of, or was responsible for, the presence of such hazardous or toxic
substances or wastes. Past and present business operations of the Company
subject to such laws, ordinances and regulations include the use, handling and
arranging for recycling or disposal of hazardous materials or wastes, including
new and waste resins, paints, lacquers, solvents, lubricants, degreasing agents
and fuels. The violation of these laws and regulations can result in civil and
criminal penalties being levied or in a cease and desist order against
operations that are not in compliance. The Company believes that its
subsidiaries are in substantial compliance with applicable environmental laws
and regulations relating to their operations and that, currently, no material
capital expenditures are necessary to maintain compliance with existing laws.
However, future laws and regulations may be more stringent and may require the
Company to incur significant additional costs. See "Business -- Environmental
Compliance."
CONTROL BY EXISTING SHAREHOLDERS
All of the outstanding capital stock of the Company is owned by the Parent.
Ariel Gratch and Yehochai Schneider, together with their affiliates,
beneficially own and, upon completion of the Transactions, will continue to
beneficially own, directly or through intermediaries, shares representing 100%
of the aggregate voting power of the Parent's outstanding capital stock (on a
fully diluted basis). As a result, Messrs. Gratch and Schneider effectively
control the Company's affairs and business and have the voting power to
determine the outcome of all matters requiring action by the Company's
stockholders, including the election of directors. Although the Company intends,
within a short period of time following consummation of the Exchange Offer, to
add two directors who are neither officers nor employees of the Company or any
of its affiliates nor members of the families of its principal shareholders, the
Board of Directors is expected to continue to be comprised substantially, if not
entirely, of persons designated or approved by Messrs. Gratch and Schneider.
16
<PAGE> 21
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of New Notes will
be entitled to require the Company to purchase any or all of the New Notes held
by such holder at 101% of the principal amount thereof, plus accrued and unpaid
interest to the date of purchase. However, the Company's ability to purchase New
Notes upon a Change of Control may be limited by the terms of the Company's then
existing contractual obligations. In addition, the Company may not have adequate
financial resources to effect such a purchase, and there can be no assurance
that the Company would be able to obtain such resources through a refinancing of
the New Notes to be purchased or otherwise. The Company's failure to purchase
all New Notes that are tendered for purchase upon the occurrence of a Change of
Control would constitute an Event of Default under the Indenture.
The Change of Control provision may not necessarily afford the holders of
the New Notes protection in the event of a highly leveraged transaction,
including a reorganization, restructuring, merger or similar transaction
involving the Company that may adversely affect the holders, because such
transactions may not involve a shift in voting power or beneficial ownership or,
even if they do, may not involve a shift of the magnitude required under the
definition of Change of Control to trigger such provisions.
FRAUDULENT CONVEYANCE STATUTES
Under applicable provisions of federal bankruptcy law or comparable
provisions of state fraudulent transfer law, if, among other things, the
Company, at the time it incurred the indebtedness evidenced by the Old Notes (or
the New Notes issued in exchange therefor), or any Subsidiary Guarantor, at the
time it executed its Subsidiary Guarantee, (i)(a) was or is insolvent or
rendered insolvent by reason of such occurrence, (b) was or is engaged in a
business or transaction for which the assets remaining with the Company or such
Subsidiary Guarantor constituted unreasonably small capital or (c) intended or
intends to incur, or believed or believes that it would incur, debts beyond its
ability to pay those debts as they mature, and (ii) the Company or such
Subsidiary Guarantor received or receives less than reasonably equivalent value
or fair consideration for the incurrence of that indebtedness, the New Notes and
the Subsidiary Guarantees could be voided, or claims in respect of the New Notes
or the Subsidiary Guarantees could be subordinated to other debts of the Company
or such Guarantor in addition to Senior Indebtedness. For similar reasons, other
indebtedness of the Company or any Subsidiary Guarantor, including indebtedness
under the Revolving Credit Facility and any pledge or other security interest
securing that indebtedness, could be voided or subordinated. The voiding or
subordination of any such pledges or other security interests or of any such
other indebtedness, could result in an event of default with respect to that
indebtedness, which could result in acceleration thereof. In addition, the
Company's payment of interest on and principal of the New Notes or a Subsidiary
Guarantor's payment of amounts pursuant to a Subsidiary Guarantee could be
voided and required to be returned to the person making such payment, or to a
fund for the benefit of the creditors of the Company or such Subsidiary
Guarantor, as the case may be.
The measures of insolvency for purposes of the foregoing considerations
will vary depending upon the law applied in any proceeding with respect to the
foregoing. Generally, however, the Company or a Subsidiary Guarantor would be
considered insolvent if (i) the sum of its debts, including contingent
liabilities, were greater than the fair saleable value of all of its assets at a
fair valuation or if the present fair saleable value of its assets were less
than the amount that would be required to pay its probable liability on its
existing debts, including contingent liabilities, as they become absolute and
mature or (ii) it could not pay its debts as they become due.
On the basis of their historical financial information, recent operating
history as discussed elsewhere herein under the headings "Selected Historical
Financial Data" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations," as well as other factors, the Company and each
Subsidiary Guarantor believes that, after giving effect to the indebtedness
incurred in connection with the Transactions, it (i) will not be insolvent, will
not have unreasonably small capital for the business in which it is engaged and
will not incur debts beyond its ability to pay such debts as they mature and
(ii) will have sufficient assets to satisfy any probable money judgment against
it in any pending action. There can be no assurance, however, as to what
standard a court would apply in making such determinations.
17
<PAGE> 22
ABSENCE OF PUBLIC MARKET
The Old Notes were issued on April 23, 1998 to a limited number of
institutional investors and are eligible for trading in the Private Offerings,
Resale and Trading through Automated Linkages (PORTAL) Market, the National
Association of Securities Dealers' screenbased, automated market for trading of
securities eligible for resale under Rule 144A under the Securities Act. To the
extent that Notes are tendered and accepted in the Exchange Offer, the trading
market for the remaining untendered Notes could be adversely affected. The New
Notes are a new issue of securities that will initially be owned by holders of
the Old Notes that elect to participate in the Exchange Offer and, therefore,
will not be widely distributed. There is no existing trading market for the New
Notes, and there can be no assurance regarding the future development of a
market for the New Notes, or the ability of holders of the New Notes to sell
their New Notes or the price at which such holders might be able to sell their
New Notes. If such a market were to develop, the Notes could trade at prices
that may be higher or lower than their principal amount, depending on many
factors, including prevailing interest rates, the Company's operating results
and the market for similar securities. The Initial Purchaser has advised the
Company that it currently intends to make a market in the New Notes. However,
the Initial Purchaser is not obligated to do so, however, and any such market
making may be discontinued at any time without notice. The Company does not
intend to apply for listing or quotation of the New Notes on any securities
exchange or market.
Historically, the market for non-investment grade debt has been subject to
disruptions that have caused substantial volatility in the prices of such
securities. There can be no assurance that the market for the New Notes will not
be subject to similar disruptions. Any such disruptions may have an adverse
effect on holders of the New Notes.
USE OF PROCEEDS
There will be no cash proceeds to the Company from the issuance of the New
Notes. As consideration for the New Notes that are issued, the Company will
receive Old Notes in a like principal amount, which Old Notes will be retired
and cancelled and may not be reissued. Accordingly, the issuance of the New
Notes will not result in any change in the Company's outstanding indebtedness.
The net proceeds from the sale of the Old Notes, after deduction of the
discount to the Initial Purchaser and related fees and expenses, were
approximately $140.0 million. Those proceeds were used primarily to repay and
retire the entire $135.0 million outstanding principal amount of the Term Loans.
The Term Loans were incurred under a facility provided by NationsBridge L.L.C.,
an affiliate of the Initial Purchaser, to finance the CSI Acquisition in
February 1998 (approximately $92.9 million) and to refinance previously
outstanding indebtedness incurred in connection with the acquisition of AFA in
July 1997 (approximately $39.6 million). For further information regarding the
Term Loans, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources." In addition, a
portion of the net proceeds were used to fund payment of (i) a deferred fee of
$573,000 to NationsCredit Commercial Corporation ("NationsCredit") arising out
of the prepayment in February 1998 of indebtedness incurred in July 1997 to
finance the acquisition of AFA and (ii) a $2.5 million distribution from the
Company to the Parent, which, together with an equal amount advanced to the
Parent by certain of its stockholders, was used by the Parent to repurchase
outstanding common stock purchase warrants held by NationsCredit. See "Certain
Transactions." The balance of the net proceeds (approximately $1,518,000) were
applied to reduce outstanding borrowings under the Revolving Credit Facility.
18
<PAGE> 23
PRO FORMA CAPITALIZATION
The following table sets forth the unaudited pro forma capitalization of
the Company at April 5, 1998 after giving pro forma effect to the sale of the
Old Notes and application of the proceeds therefrom as described under "Use of
Proceeds." The information contained in this table should be read in conjunction
with the unaudited pro forma consolidated financial statements and the
historical unaudited financial statements, each with the related notes thereto,
included elsewhere herein.
<TABLE>
<CAPTION>
APRIL 5, 1998
-----------------------
HISTORICAL PRO FORMA
---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
TOTAL DEBT (INCLUDING CURRENT MATURITIES OF LONG-TERM DEBT)
Revolving Credit Facility(1).............................. $ 11,818 $ 10,299
Term Loans................................................ 135,000 --
Other debt(2)............................................. 8,132 8,132
9 3/4% Senior Subordinated Notes due 2008.............. -- 145,000
-------- --------
Total debt........................................ 154,950 163,431
-------- --------
SHAREHOLDERS' EQUITY
Common Stock (200 shares outstanding, $.01 par value)..... -- --
Additional paid-in capital................................ 7,562 5,062
Accumulated deficit(3).................................... (3,552) (8,810)
Cumulative translation adjustment......................... 11 11
-------- --------
Total shareholders' equity (deficit).............. 4,021 (3,737)
-------- --------
Total capitalization............................ $158,971 $159,694
======== ========
</TABLE>
- ---------------
(1) At July 5, 1998, outstanding borrowings under the Revolving Credit Facility
totalled approximately $6.5 million and there was additional availability
thereunder of approximately $9.7 million.
(2) Represents outstanding debt of Polytek under the Polytek Facilities, which
was incurred in The Netherlands in Dutch guilders, stated in U.S. dollars
based on the rate of exchange in effect at April 5, 1998. At July 5, 1998,
there was outstanding approximately $7.5 million of indebtedness under the
Polytek Facilities and additional availability thereunder of approximately
$3.2 million, in each case expressed on the basis of the rate of exchange in
effect at July 3, 1998.
(3) Pro forma accumulated deficit reflects a write-off of $5.3 million of
deferred financing costs as a result of the refinancing of previously
outstanding indebtedness.
19
<PAGE> 24
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated financial statements reflect
(i) the acquisition from Contico International, Inc. in February 1998 of
substantially all the assets and business of its Continental Sprayers
International ("CSI") division, as if such acquisition had occurred on January
1, 1997 for statement of operations purposes, (ii) the consummation of the sale
of the Old Notes and application of the net proceeds therefrom as if the same
had occurred on April 5, 1998 for purposes of the unaudited pro forma
consolidated balance sheet and on January 1, 1997 for purposes of the unaudited
pro forma consolidated statements of operations and assumes the Old Notes
remained outstanding through December 31, 1997 and April 5, 1998 for purposes of
the unaudited pro forma combined statements of operations and (iii) for purposes
of the unaudited pro forma consolidated statement of operations for the twelve
months ended December 31, 1997, the acquisition from WTI, Inc. (the predecessor
of AFA Holdings Co.) in July 1997 of substantially all of the assets and
businesses of AFA and all of the outstanding capital stock of Polytek, as if
such acquisitions had occurred on January 1, 1997. The unaudited pro forma
statement of operations for the twelve months ended December 31, 1997 presents
the results of operations of WTI, Inc. and its subsidiaries for the seven months
ended July 31, 1997, the results of operations of AFA Holdings Co. and its
subsidiaries from August 1, 1997 to December 31, 1997, and the results of
operations of CSI for the twelve months ended December 31, 1997. The unaudited
pro forma statement of operations for the three month period ended April 5, 1998
presents the results of operations of Indesco International, Inc. and
Subsidiaries for the quarter ended April 5, 1998 and the results of operations
of CSI for the one month period ended January 31, 1998. The audited historical
statements of operations of CSI included in this Prospectus include the results
of operations of CSI for the years ended May 31, 1997, 1996 and 1995. The
results of operations of CSI for the twelve months ended December 31, 1997
included in the December 31, 1997 pro forma statement of operations and the one
month ended January 31, 1998 included in the April 5, 1998 pro forma statement
of operations are derived from the financial records of CSI. Pro forma
adjustments to the April 5, 1998 pro forma consolidated balance sheet as a
result of the CSI acquisition are not necessary as CSI is included in the
historical Indesco International, Inc. and Subsidiaries amounts as of April 5,
1998. Prior to its acquisition by the Company, each of these acquired businesses
operated as a separate entity. The information presented may not be indicative
of the results that would have actually been obtained had such acquisitions been
completed on the dates indicated, nor is such information intended to be
predictive of the Company's future results of operations or financial position.
These unaudited pro forma consolidated financial statements should be read in
conjunction with the historical financial statements and the related notes
thereto of the respective entities appearing elsewhere in this Prospectus.
20
<PAGE> 25
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF APRIL 5, 1998
--------------------------------------------------
INDESCO OFFERING THE
INTERNATIONAL, INC. PRO FORMA COMPANY
AND SUBSIDIARIES ADJUSTMENTS(1) PRO FORMA
------------------- -------------- ---------
<S> <C> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents................................. $ 2,675 $ $ 2,675
Accounts receivable....................................... 17,062 17,062
Inventories............................................... 14,507 14,507
Prepaid expenses and other................................ 914 914
-------- --------- --------
Total current assets............................... 35,158 35,158
Property, plant and equipment, net.......................... 56,082 56,082
Goodwill.................................................... 70,496 70,496
Patents and other intangibles............................... 5,065 5,065
Deferred financing costs.................................... 5,258 100 5,358
Other assets................................................ 637 637
-------- --------- --------
Total assets....................................... $172,696 $ 100 $172,796
======== ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current portion of long-term debt......................... $ 3,374 $ $ 3,374
Accounts payable.......................................... 4,521 4,521
Other accrued expenses.................................... 8,628 (623) 8,005
-------- --------- --------
Total current liabilities.......................... 16,523 (623) 15,900
Long term debt:
Revolving Credit Facility................................. 14,703 (1,519) 13,184
Term Loans................................................ 136,873 (135,000) 1,873
9 3/4% Senior Subordinated Notes due 2008................. 145,000 145,000
-------- --------- --------
Total long term debt............................... 151,576 8,481 160,057
Deferred income taxes....................................... 576 576
-------- --------- --------
Total liabilities.................................. 168,675 7,858 176,533
-------- --------- --------
Stockholder's equity (deficit)
Common stock.............................................. 3,242 3,242
Paid-in capital........................................... 4,320 (2,500) 1,820
Accumulated deficit....................................... (3,552) (5,258) (8,810)
Cumulative translation adjustment......................... 11 11
-------- --------- --------
Total stockholders' equity (deficit)............... 4,021 (7,758) (3,737)
-------- --------- --------
Total liabilities and stockholders' equity
(deficit)........................................ $172,696 $ 100 $172,796
======== ========= ========
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma
consolidated financial statements.
21
<PAGE> 26
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER ENDED APRIL 5, 1998
-------------------------------------------------------------------------
INDESCO CSI LESS: CSI
INTERNATIONAL, FOR THE OPERATIONS OFFERING THE
INC. AND MONTH OF NOT PRO FORMA COMPANY
SUBSIDIARIES JANUARY, 1998 ACQUIRED(2) ADJUSTMENTS(5) PRO FORMA
-------------- ------------- ----------- -------------- ---------
<S> <C> <C> <C> <C> <C>
Net sales................................... $25,016 $4,284 $(313) $ $28,987
Cost of sales............................... 17,925 4,358 (230) (428) 21,625
------- ------ ----- ------- -------
Gross profit....................... 7,091 (74) (83) 428 7,362
Operating expenses:
Selling, general & administrative
expenses................................ 3,236 289 (75) 171 3,621
------- ------ ----- ------- -------
Income from operations............. 3,855 (363) (8) 257 3,741
Other expense:
Interest.................................. 3,375 764 4,139
Other, net................................ 49 49
------- ------ ----- ------- -------
Total other expense, net........... 3,424 764 4,188
------- ------ ----- ------- -------
Income (loss) before extraordinary
item and provision for income
taxes............................ 431 (363) (8) (507) (447)
Income tax provision -- foreign............. 171 11 (2) 180
------- ------ ----- ------- -------
Income (loss) from continuing operations
before non-recurring charges directly
attributable to the early extinguishment
of debt................................... $ 260 $ (374) $ (6) $ (507) $ (627)
======= ====== ===== ======= =======
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma
consolidated financial statements.
22
<PAGE> 27
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AFA HOLDINGS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997
WTI INC. AND CO. AND ----------------------------------------------
SUBSIDIARIES SUBSIDIARIES CSI
SEVEN MONTHS FIVE MONTHS AFA HOLDINGS TWELVE MONTHS
ENDED ENDED CO. AND ENDED
JULY 31, DECEMBER 31, PRO FORMA SUBSIDIARIES DECEMBER 31,
1997 1997 ADJUSTMENTS(4) PRO FORMA 1997
------------ ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales................ $32,988 $20,108 $ $53,096 $63,799
Cost of sales............ 23,864 16,595 148 40,607 47,497
------- ------- ----- ------- -------
Gross profit..... 9,124 3,513 (148) 12,489 16,302
Selling, general and
administrative
expenses............... 4,205 2,862 (236) 6,831 6,235
------- ------- ----- ------- -------
Income from
operations..... 4,919 651 88 5,658 10,067
Other expense (income):
Interest............... 2,295 2,231 563 5,089 396
Other, net............. (803) (54) (857) (128)
------- ------- ----- ------- -------
Total other
expense........ 1,492 2,177 563 4,232 268
------- ------- ----- ------- -------
Income (loss) before
provision for income
taxes.................. 3,427 (1,526) (475) 1,426 9,799
Income tax provision
(benefit).............. 354 (152) 202 456
------- ------- ----- ------- -------
Net income
(loss)......... $ 3,073 $(1,374) $(475) $ 1,224 $ 9,343
======= ======= ===== ======= =======
<CAPTION>
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997
----------------------------------------
LESS: CSI
OPERATIONS THE
NOT PRO FORMA COMPANY
ACQUIRED(2) ADJUSTMENTS(5) PRO FORMA
----------- -------------- ---------
<S> <C> <C> <C>
Net sales................ $2,364 $ $114,531
Cost of sales............ 1,431 (3,068) 83,605
------ ------- --------
Gross profit..... 933 3,068 30,926
Selling, general and
administrative
expenses............... 597 1,868 14,337
------ ------- --------
Income from
operations..... 336 1,200 16,589
Other expense (income):
Interest............... 9,635 15,120
Other, net............. (985)
------ ------- --------
Total other
expense........ 9,635 14,135
------ ------- --------
Income (loss) before
provision for income
taxes.................. 336 (8,435) 2,454
Income tax provision
(benefit).............. 125 497 1,030
------ ------- --------
Net income
(loss)......... $ 211 $(8,932) $ 1,424
====== ======= ========
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma
consolidated financial statements.
23
<PAGE> 28
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(1) Acquisition and Related Financing
Effective February 1, 1998, the Company consummated the CSI Acquisition. On
April 23, 1998, the Company received proceeds of $145,000 from the sale of
the Notes (See "Description of the Notes"), the proceeds have been applied
as follows:
<TABLE>
<S> <C>
Repayment of Term Loans................................. $135,000
Financing Costs......................................... 4,508
Return of Capital to the Parent......................... 2,500
Reduction of Revolving Credit Borrowings................ 1,519
Interest Payable........................................ 900
Prepayment Fee.......................................... 573
--------
Total......................................... $145,000
========
</TABLE>
In addition to the financing cost reflected above, the Company has accrued
approximately $850 of additional offering cost.
The pro forma balance sheet reflects the write-off of $5,258 of financing
fees, net of accumulated amortization, in connection with the February,
1998 bank financing.
(2) The Company did not acquire certain low volume operations of CSI in the
United Kingdom that relate to the production and sale of specialty items.
(3) The Company has recorded fixed assets and identifiable intangibles at their
net historical book value, pending completion of appraisals. However,
management does not expect the final valuations resulting from the
appraisals to differ materially from the recorded amounts. Differences, if
any, between these amounts and the amounts resulting from appraisals and
valuations of these assets, which have not yet been completed, will be
reflected as adjustments to goodwill, which may increase or decrease related
depreciation and amortization charges.
(4) Pro forma adjustments to reflect the results of the acquisitions of AFA and
Polytek in the 1997 pro forma statement of operations as if the same had
occurred on January 1, 1997 are as follows:
<TABLE>
<CAPTION>
1997
-------
<S> <C>
(a) Additional fixed asset depreciation.................. $ 289
(b) Amortization of intangibles.......................... (232)
Elimination of lease payments for assets purchased... (145)
Predecessor interest elimination..................... (2,295)
(c) Interest on July 1997 financing...................... 2,858
-------
$ 475
=======
</TABLE>
(a) Reflects the depreciation of the increase in fair market value of fixed
assets acquired and the effects of new service lives.
(b) Amortization of intangibles, including patents and goodwill of
approximately $6,000 and $6,500, respectively, with lives ranging from
15 to 30 years, net of predecessor amortization.
(c) Debt incurred as a result of the acquisition of AFA and Polytek
consisted of $38,000 of long-term borrowings at an average interest
rate of 10.14% and a revolving line of credit of $7,000 at floating
rates.
24
<PAGE> 29
INDESCO INTERNATIONAL, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(5) Pro forma adjustments to reflect the CSI Acquisition and the consummation of
the sale of the Old Notes as if the same had occurred on January 1, 1997 are
as follows:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED QUARTER ENDED
DECEMBER 31, 1997 APRIL 5, 1998
------------------- -------------
<S> <C> <C>
(a) Fixed asset depreciation........ $(3,068) (428)
(b) Amortization of intangibles..... 1,868 171
(c) Increase in interest expense.... 9,635 764
(d) Income taxes.................... 497 --
(e) Write-off of finance fees....... -- 5,258
------- ------
$ 8,932 $5,765
======= ======
</TABLE>
(a) Reflects the adoption of AFA depreciation methods and the effect of new
service lives (see Note 3 above).
(b) Reflects amortization of estimated values of identifiable intangibles
and goodwill of approximately $61,000 with an amortization life of 30
years (see Note 3 above).
(c) Reflects elimination of interest charges and related amortization of
debt financing costs related primarily to the financing of the
acquisitions of AFA and CSI. Includes interest on the Notes at a rate
of 9.75% per annum and amortization of estimated deferred financing
charges, resulting in pro forma interest expense of approximately
$14,725 for the twelve months ended December 31, 1997 and $4,023 for
the quarter ended April 5, 1998. Interest on certain foreign debt
outstanding at a rate of 5.5% per annum resulted in additional interest
expense of $395 for the twelve months ended December 31, 1997 and $116
for the quarter ended April 5, 1998.
(d) The pro forma adjustment for income taxes reflects the tax effect of
the pro forma adjustments and the tax effect of S corporation earnings
of CSI treated as C corporation earnings. For the quarter ended April
5, 1998 a full valuation allowance has been recorded against the income
tax benefit resulting from the loss on the early extinguishment of debt
for U.S. tax purposes. The provision for that period reflects only
foreign taxes.
(e) Reflects the write-off of financing fees in connection with the
February acquisition of CSI and refinancing of previous outstanding
debt, before any current year amortization.
(6) Pro forma EBITDA for the quarter ended April 5, 1998 and the twelve months
ended December 31, 1997 was $6,981 and $28,643, respectively. EBITDA
represents income before interest, income taxes, depreciation, amortization
and extraordinary items. As used herein and in the Indenture, EBITDA is
calculated after elimination of the increases in cost of sales resulting
from the non-recurring step-ups in inventory value described in Note 1 and,
therefore, may not be comparable to similarly titled measures used by other
companies. See Description of the Notes -- "Certain Definitions" for the
definitions of the terms "Consolidated EBITDA" and "Consolidated Net Income"
as used in the Indenture. Management believes that EBITDA is a measure
commonly used by analysts and investors to determine a company's ability to
incur and service its debt. EBITDA should not be considered as an
alternative to, or more meaningful than, net income, cash flows from
operating activities or other income or cash flow statement data prepared in
accordance with GAAP, or as a measure of profitability or liquidity. EBITDA
does not necessarily indicate whether cash flow will be sufficient for cash
requirements. The calculation of EBITDA does not include the commitments of
the Company for capital expenditures and payment of debt and should not be
deemed to represent funds available to the Company.
25
<PAGE> 30
SELECTED HISTORICAL FINANCIAL DATA
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
The following table sets forth selected historical financial data of
Indesco International, Inc. and Subsidiaries (and its predecessors) on a
consolidated basis as of and for each of the years in the four-year period ended
December 31, 1996 and as of December 31, 1997 and April 5, 1998 and for the
quarters ended April 6, 1997 and April 5, 1998, and the five months and seven
months ended December 31, 1997 and July 31, 1997, respectively. The balance
sheet data as of April 5, 1998 and the statement of operations data for the
quarters ended April 6, 1997 and April 5, 1998 are derived from the unaudited
historical financial statements of Indesco International, Inc. and Subsidiaries
included elsewhere in this Prospectus. The balance sheet data as of December 31,
1996 and 1997 and the statement of operations data for each of the years in the
two-year period ended December 31, 1996 and for the seven and five month periods
ended July 31 and December 31, 1997, respectively, are derived from the audited
historical financial statements of AFA Holdings Co. (the Company's parent) and
WTI, Inc. and Subsidiaries (the predecessor of AFA Holdings Co.) included
elsewhere in this Prospectus. The balance sheet data as of December 31, 1993,
1994 and 1995 and the statement of operations data for each of the years in the
two-year period ended December 31, 1994 have been derived from the financial
records of WTI, Inc. and Subsidiaries. The data below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the historical financial statements and notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
WTI, INC. AND SUBSIDIARIES WTI, INC AND AFA HOLDINGS CO.
TWELVE MONTHS ENDED SUBSIDIARIES FIVE MONTHS
DECEMBER 31, SEVEN MONTHS ENDED
------------------------------------- ENDED DECEMBER 31,
1993 1994 1995 1996 JULY 31, 1997 1997
------- ------- ------- ------- ------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................... $45,679 $48,572 $55,238 $54,133 $32,988 $20,108
Cost of sales....................... 32,918 34,418 41,971 39,868 23,864 16,595
------- ------- ------- ------- ------- -------
Gross profit(1)..................... 12,761 14,154 13,267 14,265 9,124 3,513
Selling, general and administrative
expenses.......................... 7,741 7,751 7,877 7,389 4,205 2,862
------- ------- ------- ------- ------- -------
Income from operations.............. 5,020 6,403 5,390 6,876 4,919 651
Interest expense.................... 4,178 4,289 4,489 4,275 2,295 2,231
Other expense (income), net......... (464) (163) (251) (275) (803) (54)
------- ------- ------- ------- ------- -------
Income (loss) before extraordinary
item and provision (benefit) for
taxes............................. 1,306 2,277 1,152 2,876 3,427 (1,526)
Income taxes (benefit).............. 917 761 880 354 354 (152)
------- ------- ------- ------- ------- -------
Net income (loss) before
extraordinary item................ 389 1,516 272 2,522 3,073 (1,374)
Extraordinary item -- loss on early
extinguishment of debt............
------- ------- ------- ------- ------- -------
Net income (loss)................... $ 389 $ 1,516 $ 272 $ 2,522 $ 3,073 $(1,374)
======= ======= ======= ======= ======= =======
OTHER DATA:
EBITDA(2)........................... $ 9,387 $10,710 $10,077 $11,621 $ 8,242 $ 4,279
Operating cash flows................ 6,343 5,785 6,705 6,173 5,828 1,448
Investing cash flows................ (5,283) (3,133) (4,563) (2,300) (2,544) (661)
Financing cash flows................ (328) (2,726) (2,241) (4,158) (1,628) (770)
Depreciation and amortization....... 3,903 4,144 4,436 4,470 2,520 1,861
Capital expenditures................ 5,407 3,003 3,604 2,218 2,498 661
Ratio of earnings to fixed
charges(3)........................ 1.3x 1.5x 1.3x 1.6x 2.4x --
Gross margin(4)..................... 27.9% 29.1% 24.0% 26.4% 27.7% 17.5%
BALANCE SHEET DATA AT PERIOD END:
Working capital..................... $ 672 $ 5,428 $ 3,166 $ 945 -- $ 5,510
Fixed assets, net................... 15,558 16,931 18,149 16,004 -- 28,009
Total assets........................ 42,504 46,459 47,956 44,801 -- 60,887
Total debt(5)....................... 34,282 32,394 30,827 24,111 -- 51,295
Stockholders' equity................ (2,654) (240) 762 2,413 -- 3,216
<CAPTION>
WTI, INC. AND INDESCO
SUBSIDIARIES INTERNATIONAL, INC.
QUARTER AND SUBSIDIARIES
ENDED QUARTER ENDED
APRIL 6, 1997 APRIL 5, 1998
------------- -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................... $15,149 $ 25,016
Cost of sales....................... 10,885 17,925
------- --------
Gross profit(1)..................... 4,264 7,091
Selling, general and administrative
expenses.......................... 1,943 3,236
------- --------
Income from operations.............. 2,321 3,855
Interest expense.................... 1,006 3,375
Other expense (income), net......... (254) 49
------- --------
Income (loss) before extraordinary
item and provision (benefit) for
taxes............................. 1,569 431
Income taxes (benefit).............. 166 171
------- --------
Net income (loss) before
extraordinary item................ 1,403 260
Extraordinary item -- loss on early
extinguishment of debt............ 2,438
------- --------
Net income (loss)................... $ 1,403 $ (2,178)
======= ========
OTHER DATA:
EBITDA(2)........................... $ 3,923 $ 5,741
Operating cash flows................ 1,482 (5,788)
Investing cash flows................ (1,278) (93,984)
Financing cash flows................ 337 101,416
Depreciation and amortization....... 1,348 1,935
Capital expenditures................ 1,278 1,028
Ratio of earnings to fixed
charges(3)........................ -- 1.1x
Gross margin(4)..................... 28.1% 28.3%
BALANCE SHEET DATA AT PERIOD END:
Working capital..................... -- $ 3,932
Fixed assets, net................... -- 56,082
Total assets........................ -- 172,696
Total debt(5)....................... -- 154,950
Stockholders' equity................ -- 4,021
</TABLE>
- ---------------
(Footnotes appear on page 28)
26
<PAGE> 31
CSI
The following table sets forth selected historical financial data of CSI as
of and for each of the years in the five-year period ended May 31, 1997, and as
of January 31, 1998 and for the eight-month periods ended January 31, 1997 and
1998. The statement of operations and balance sheet data as of May 31, 1996 and
1997 and for each of the years in the three-year period ended May 31, 1997, as
set forth below, are derived from the audited historical financial statements of
CSI included elsewhere in this Prospectus. The statement of operations and
balance sheet data as of May 31, 1993, 1994 and 1995 and for each of the years
in the two-year period ended May 31, 1994 have been derived from the financial
records of CSI. The balance sheet and statement of operations data of CSI as of
January 31, 1998 and for the eight-month periods ended January 31, 1997 and 1998
have been derived from the unaudited historical financial statements of CSI
included elsewhere in this Prospectus. In the opinion of management, the
unaudited financial statements of CSI include all adjustments (consisting only
of normal recurring adjustments) necessary to present fairly the data for such
periods. Interim results for the eight-month periods presented are not
necessarily indicative of results that can be expected in the future. The table
includes data relating to assets and liabilities of, and results of operations
attributable to, certain business operations that were not purchased in the CSI
Acquisition, none of which was material. The data below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the historical financial statements and notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED
TWELVE MONTHS ENDED MAY 31, JANUARY 31,
----------------------------------------------- ------------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- ------- ------- --------
(DOLLARS IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.................................... $50,672 $58,133 $58,320 $57,104 $62,249 $39,245 $ 40,972
Cost of sales................................ 32,612 41,969 42,491 44,614 48,901 31,782 31,294
------- ------- ------- ------- ------- ------- --------
Gross profit................................. 18,060 16,164 15,829 12,490 13,348 7,463 9,678
Selling, general and administrative
expenses................................... 5,515 5,174 6,214 6,335 6,286 4,213 3,917
------- ------- ------- ------- ------- ------- --------
Income from operations....................... 12,545 10,990 9,615 6,155 7,062 3,250 5,761
Interest expense............................. 651 984 1,355 983 616 429 147
Other expense, net........................... 84 (84) (181) 142 28 53 57
------- ------- ------- ------- ------- ------- --------
Income before provision for taxes............ 11,810 10,090 8,441 5,030 6,418 2,768 5,557
Income taxes................................. 267 175 260 258 361 164 253
------- ------- ------- ------- ------- ------- --------
Net income................................... $11,543 $ 9,915 $ 8,181 $ 4,772 $ 6,057 $ 2,604 $ 5,304
======= ======= ======= ======= ======= ======= ========
OTHER DATA:
EBITDA(2).................................... $15,988 $15,720 $15,358 $12,186 $13,560 $ 8,010 $ 10,086
Operating cash flows......................... 13,796 12,871 13,847 12,706 11,299 6,924 12,044
Investing cash flows......................... (8,895) (14,395) (5,414) (3,559) (4,609) (3,512) (2,016)
Financing cash flows......................... (4,908) 1,544 (8,484) (9,145) (6,699) (3,438) (10,018)
Depreciation................................. 3,527 4,646 5,562 6,173 6,526 4,813 4,382
Capital expenditures......................... 8,910 14,408 5,301 3,337 4,477 3,378 1,816
Ratio of earnings to fixed charges(3)........ 19.1x 11.3x 7.2x 6.1x 11.4x 7.5x 38.8x
Gross margin(4).............................. 35.6% 27.8% 27.1% 21.9% 21.4% 19.0% 23.6%
BALANCE SHEET DATA AT PERIOD END:
Working capital.............................. $ 7,821 $10,002 $10,170 $ 8,024 $ 8,937 -- $ 7,702
Fixed assets, net............................ 25,678 35,432 35,206 32,464 30,588 -- 28,149
Total assets................................. 40,265 51,456 50,655 48,631 45,928 -- 41,660
Total debt(5)................................ 10,860 18,548 15,329 8,813 5,712 -- 1,058
Divisional equity............................ 23,206 27,068 30,203 31,940 34,178 -- 35,276
</TABLE>
- ---------------
(Footnotes appear on page 28)
27
<PAGE> 32
Footnotes:
(1) Gross profit for the twelve months ended December 31, 1997 and for the
quarter ended April 5, 1998 reflect one-time increases in cost of sales
resulting from a $1,713 step-up in the value of AFA and Polytek inventory
and a $850 step-up in the value of CSI inventory in connection with the
acquisition of those companies, as required by Accounting Principles Board
Opinion No. 16 ("APB 16"). Gross profit and gross margin of AFA, Polytek and
CSI for the twelve months ended December 31, 1997 and for the quarter ended
April 5, 1998, on a pro forma consolidated basis, excluding the non-cash
effect of the increases in cost of sales, were $32,639 and 28.5% and $8,212
and 28.3%, respectively.
(2) EBITDA represents income before interest, income taxes, depreciation,
amortization and extraordinary items. As used herein and in the Indenture,
EBITDA is calculated after elimination of the increases in cost of sales
resulting from the non-recurring step-ups in inventory value described in
Note 1 and, therefore, may not be comparable to similarly titled measures
used by other companies. See Description of the Notes -- "Certain
Definitions" for the definitions of the terms "Consolidated EBITDA" and
"Consolidated Net Income" as used in the Indenture. Management believes that
EBITDA is a measure commonly used by analysts and investors to determine a
company's ability to incur and service its debt. EBITDA should not be
considered as an alternative to, or more meaningful than, net income, cash
flows from operating activities or other income or cash flow statement data
prepared in accordance with GAAP, or as a measure of profitability or
liquidity. EBITDA does not necessarily indicate whether cash flow will be
sufficient for cash requirements. The calculation of EBITDA does not include
the commitments of the Company for capital expenditures and payment of debt
and should not be deemed to represent funds available to the Company.
(3) For purposes of this ratio, earnings consist of income before provision for
income taxes and extraordinary items plus fixed charges. Fixed charges
consist of interest expense (including capitalized interest) on all
indebtedness, amortization of deferred financing costs and one-third of
rental expense. For the five month period ended December 31, 1997, earnings,
as defined above, were not adequate to cover fixed charges. The coverage
deficiency was $1,526.
(4) Gross margin is calculated by dividing gross profit by net sales.
(5) Total debt includes long-term debt (including current maturities) and
capital lease obligations.
28
<PAGE> 33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the pro forma
historical financial statements and the notes thereto included elsewhere in this
Prospectus.
OVERVIEW
The Company acquired the assets and business of AFA in July 1997. The
acquisition was financed with revolving credit borrowings and term loans
aggregating approximately $40.8 million (the "AFA Debt") and equity
contributions and subordinated loans from stockholders of the Parent and their
affiliates. In August 1997, through an intermediate holding company, a
stockholder of the Parent and an affiliate of another stockholder of the Parent
acquired all of the outstanding capital stock of Polytek. This acquisition was
financed with term loans and revolving credit facilities, aggregating
approximately $7.9 million, under the Polytek Facilities and equity
contributions. Effective February 1, 1998, the Company consummated the CSI
Acquisition, refinanced the AFA Debt in its entirety and acquired all the
capital stock of Polytek.
As a result of the combination of the business of CSI, AFA and Polytek, the
Company expects to achieve significant cost savings, certain of which have
already been realized. Completed cost savings include those associated with
renegotiated purchase contracts and insurance coverage. Additional business
synergies are expected to be attained through the rationalization of certain
manufacturing operations and more efficient utilization of production capacity.
Savings also are expected from the combination and centralization of various
administrative operations and adoption on a Company-wide basis of the
manufacturing "best" practices from the operations of each of CSI, AFA and
Polytek. Management estimates the total amount of such annual cost savings to be
approximately $3.8 million.
The Company also will be introducing a new generation of products that are
simpler to manufacture, such as the T-1000(TM) trigger sprayer and the Luxor(TM)
lotion pump. These products are expected to significantly reduce production
costs, resulting in improved margins.
As a result of the CSI Acquisition, the Company incurred, in accordance
with APB 16, step-ups in the valuation of CSI's inventories and certain fixed
assets as well as an overall increase in goodwill. The increase in the value of
the inventories have resulted in a non-cash increase in cost of goods sold of
$850,000 during the first quarter of 1998.
RESULTS OF OPERATIONS
AFA HOLDINGS CO.
The following discussion compares the combined results of operations of AFA
Holdings Co. and WTI for the years ended December 31, 1996 and 1995, the
seven-month period ended July 31, 1997 and the five-month period ended December
31, 1997. As required by APB 16, upon the acquisition of AFA and Polytek,
certain of the acquired assets were revalued and new service lives for
depreciable assets were established.
Prior to their acquisition by the Company, AFA and Polytek were
subsidiaries of WTI, and, accordingly, their historical results are presented in
the financial statements on a combined basis. The financial statements do not
show the separate contributions of each of AFA and Polytek to the combined
results. During the periods covered by the financial statements, AFA experienced
net sales and EBITDA growth at compound annual rates of 13.3% and 34.6%,
respectively, due primarily to new product introductions and the addition of a
specialty product application for a major multinational customer.
Since 1995, results of operations at Polytek were adversely impacted by
increased competition in the European market for trigger sprayers. Polytek did
not quickly respond to those competitive pressures and experienced a 9.5%
decline in unit shipments in 1996. In late 1996, Polytek's management took
actions to increase sales volume, including new pricing strategies, resulting in
a 20.7% increase in trigger sprayer unit
29
<PAGE> 34
sales in 1997. Polytek's gross margin declined from 25.9% in 1995 to 21.9% in
1997 on a local currency denominated basis.
Polytek is based in The Netherlands and reports its results in Dutch
guilders. The value of the Dutch guilder declined relative to the U.S. dollar by
5% in 1996 and 16% in 1997. These declines negatively impacted the combined
results of AFA and Polytek when translating Polytek's results to U.S. dollars
for financial reporting purposes.
AFA's net sales include revenues solely from trigger sprayer sales, while
Polytek's net sales include revenues from sales of trigger sprayers and custom
molding services. Cost of sales in each case includes the cost of materials,
labor and manufacturing overhead.
Selling, general and administrative expenses consist primarily of salaries
and benefits paid to sales and administrative personnel and travel, marketing,
advertising and research and development expenses and amortization of
intangibles.
<TABLE>
<CAPTION>
INDESCO
WTI, INC. AND SUBSIDIARIES AFA HOLDINGS CO. INTERNATIONAL,
--------------------------------- AND SUBSIDIARIES WTI, INC. AND INC. AND
SEVEN MONTHS FIVE MONTHS SUBSIDIARIES SUBSIDIARIES
ENDED ENDED QUARTER QUARTER
JULY 31, DECEMBER 31, ENDED ENDED
1995 1996 1997 1997 APRIL 6, 1997 APRIL 5, 1998
------- ------- ------------- ---------------- ------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net sales................ $55,238 $54,133 $32,988 $20,108 $15,149 $25,016
Cost of sales............ 41,971 39,868 23,864 16,595 10,885 17,925
------- ------- ------- ------- ------- -------
Gross profit........... 13,267 14,265 9,124 3,513 4,264 7,091
Selling, general and
administrative
expense............. 7,877 7,389 4,205 2,862 1,943 3,236
------- ------- ------- ------- ------- -------
Operating income......... 5,390 6,876 4,919 651 2,321 3,855
Interest expense......... 4,489 4,275 2,295 2,231 1,006 3,375
Other expense (income)... (251) (275) (803) (54) (254) 49
------- ------- ------- ------- ------- -------
Income before
extraordinary item
and income taxes
(benefit)........... 1,152 2,876 3,427 (1,526) 1,569 431
Income taxes (benefit)... 880 354 354 (152) 166 171
------- ------- ------- ------- ------- -------
Income before
extraordinary item..... 272 2,522 3,073 (1,374) 1,403 260
Extraordinary
item -- loss on early
extinguishment of
debt................... 2,438
------- ------- ------- ------- ------- -------
Net income (loss)........ $ 272 $ 2,522 $ 3,073 $(1,374) $ 1,403 $(2,178)
======= ======= ======= ======= ======= =======
</TABLE>
QUARTER ENDED APRIL 5, 1998 COMPARED TO THE QUARTER ENDED APRIL 6, 1997
The results of operations of the Company for the 1998 first quarter
includes the results of operations of AFA and Polytek from January 1, 1998 and
the results of operations of CSI from February 1, 1998 (the date of its
acquisition). Financial results for 1997 do not include any results of
operations of CSI. Accordingly, the Company's results of operations for the 1998
first quarter are not directly comparable to those of WTI for the first quarter
of 1997.
30
<PAGE> 35
Net sales for the 1998 first quarter were $25.0 million, an increase of
$9.9 million or 65.1%, compared to the corresponding 1997 period. The increase
was due solely to the inclusion of CSI's net sales of approximately $10.4
million for the period from February 1, 1998 to April 5, 1998. Exclusive of the
CSI results, net sales for the 1998 first quarter decreased approximately
$500,000, due primarily to the effect of a stronger U.S. dollar when translating
sales from Dutch guilders for financial reporting purposes. Net sales for
Polytek for the 1998 first quarter were 12.4 million guilders compared to 12.2
million guilders for the corresponding period in 1997. However, translated to
U.S. dollars, Polytek net sales were $6.0 million for the 1998 first quarter
compared to $6.6 million for the first quarter of 1997. Net sales for AFA did
not significantly change on a year-to-year basis.
Cost of sales for the 1998 first quarter were $7.0 million higher than the
first quarter of 1997. This increase was due solely to the inclusion of CSI's
results of operations for the period from February 1, 1998 to April 5, 1998. As
a percentage of net sales, cost of sales were 71.7% during the 1998 first
quarter compared to 71.9% for the corresponding period in 1997. AFA and
Polytek's cost of sales as a percentage of net sales (exclusive of those
attributable to CSI) were 71.3% in the 1998 first quarter compared to 71.9% for
the corresponding period in 1997.
CSI's cost of sales as a percentage of net sales for the period February 1,
1998 through April 5, 1998 was 72.1% and was adversely affected by a one-time
step-up of $850,000 of inventory. This amount was expensed during the period
from February 1, 1998 to April 5, 1998. The percentage would have been
approximately 63.5%, excluding this one-time charge. CSI's cost of sales was
beneficially impacted by reduced depreciation expense and reduced material
costs. As a result of the acquisition, depreciation has been calculated
utilizing new lives, but has not yet been affected by the results of appraisals
and valuations. Accordingly, CSI's depreciation expense may change upon
finalization of fixed asset valuations. The decrease in material costs relates
to renegotiated purchase contracts for raw materials.
Gross profit was $7.1 million for the 1998 first quarter, an increase of
$2.8 million over the corresponding period in 1997 that was due primarily to the
inclusion of CSI's results of operations subsequent to its acquisition on
February 1, 1998.
Selling, general and administrative expenses were $3.2 million, or 12.9% of
net sales, for the 1998 first quarter compared to $1.9 million, or 12.8% of net
sales, for the corresponding period in 1997. The increase of $1.3 million is
attributable to the inclusion of $1.0 million of expenses incurred by CSI
subsequent to its acquisition on February 1, 1998 and the costs associated with
establishing the Company's corporate office infrastructure. Research and
development costs were approximately the same for the two quarters.
Interest expense for the 1998 first quarter was $3.4 million compared to
$1.0 million for the first quarter of 1997. The increase is a result of interest
charges in the 1998 first quarter on debt previously incurred to finance the
acquisitions of AFA and CSI.
No U.S. tax liability is currently anticipated for 1998. Provision for
taxes in the 1998 and 1997 quarterly periods relate to income from foreign
operations.
In the 1998 first quarter, the Company incurred an extraordinary expense of
$2.4 million representing the write-off of unamortized deferred financing fees
and prepayment penalties in conjunction with the prepayment in February 1998 of
indebtedness incurred in July 1997 to fund the acquisition of AFA.
SEVEN MONTHS ENDED JULY 31, 1997
Net sales for the seven months ended July 31, 1997 were $33.0 million and
cost of goods sold were $23.9 million, or 72.4% of net sales. Selling, general
and administrative expenses for the same period were $4.2 million, or 12.7% of
net sales. During the seven months ended July 31, 1997, net cash from operations
was $5.8 million. For the same period, the Company used approximately $2.5
million for capital expenditures.
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<PAGE> 36
FIVE MONTHS ENDED DECEMBER 31, 1997
The Company's net sales for the five months ended August 1, 1997 to
December 31, 1997 were $20.1 million and cost of goods sold were $16.6 million,
or 82.6% of net sales. The cost of goods sold was impacted by a one-time
write-up of inventory pursuant to APB 16 of approximately $1.7 million, or 8.5%
of net sales. Selling, general and administrative expenses for the same period
were $2.9 million, or 14.4%. During the period from August 1, 1997 to December
31, 1997, net cash provided by operating activities was $1.5 million. For the
same period, the Company used approximately $.7 million for capital
expenditures. The Company acquired AFA for approximately $46.9 million and
Polytek for approximately $.8 million and refinancing of debt of approximately
$7.9 million.
The Company believes that its operating results for the seven months ended
July 31, 1997 and for the five months ended December 31, 1997 are not comparable
to its operating results for the year ended December 31, 1996 nor to operating
results expected to be achieved in the future due to, among other things, the
acquisitions made in 1997 and 1998, the finance costs and write-offs incurred in
connection with such acquisitions and the one-time write-ups pursuant to APB 16.
The Company believes that, due to such acquisitions, sales, cost of goods sold
and selling, general and administrative expenses in subsequent periods will
increase from that reported for the seven months ended July 31, 1997 and for the
five months ended December 31, 1997.
TWELVE MONTHS ENDED DECEMBER 31, 1996 COMPARED TO TWELVE MONTHS ENDED DECEMBER
31, 1995
Net sales. AFA's net sales increased 24.1% from $24.5 million in 1995 to
$30.4 million in 1996. The increase was primarily attributable to the inclusion
in 1996 of sales of two new trigger sprayer models introduced in late 1995. This
increase was offset by a 22.8% decrease in Polytek's net sales from $30.7
million in 1995 to $23.7 million in 1996. Polytek's net sales were adversely
impacted by a 5% reduction in the value of the Dutch guilder relative to the
U.S. dollar. Unit sales of trigger sprayers by Polytek declined 9.4% as Polytek
attempted to resist price competition in Europe. Sales of custom molding
services decreased by approximately 18.7% (on a guilder-denominated basis) in
1996 compared to 1995, when sales were favorably impacted by the accelerated
introduction of two new products by a major customer.
Gross margin. As a percentage of net sales, gross margin increased from
24.0% to 26.4%, due to an increase in gross margin at AFA as a percentage of
sales from 21.9% in 1995 to 29.2% in 1996. This increase resulted from reduced
raw material and purchased parts costs and increased manufacturing efficiencies,
together with absorption of a greater percentage of fixed manufacturing costs on
increased production levels and higher price margin on one of the new product
introductions. As a percentage of net sales, Polytek's gross margin decreased
from 25.9% in 1995 to 23.7% in 1996, due to reduced absorption of fixed
manufacturing costs associated with substantially lower production levels,
partially offset by reductions in the cost of certain materials.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased from $7.9 million in 1995 to $7.4 million in
1996. The decrease in selling, general and administrative expenses relates
primarily to a $300,000 termination payment in 1995 to a former employee. Other
costs remained relatively unchanged between the periods.
Income taxes. The provision for income taxes of $354,000 in 1996 reflects
a tax provision of $1.2 million (42% effective rate) offset by a decrease in a
valuation allowance of $848,000. The provision for income taxes in 1995 reflects
a tax provision of $525,000 (45.5%) before an increase in the valuation
allowance of $355,000. This effective rate in 1995 is affected by a pre-tax loss
for U.S. tax purposes of $1.0 million and a gain in foreign countries of $2.2
million, which affected the overall effective tax rate.
CSI
The historical financial statements of CSI represent the combined financial
statements of certain divisions of Contico. During the periods covered by those
financial statements, CSI experienced net sales growth at a compound annual rate
of 5.2% and experienced a reduction in EBITDA attributable primarily to the loss
of its largest customer in 1994, as discussed below. These financial statements
include the assets and
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<PAGE> 37
liabilities of, and the results of operations attributable to, certain business
operations of CSI that were not purchased in the CSI Acquisition, none of which
was material.
Net sales for CSI include revenues from trigger sprayer and dispenser pump
sales. Cost of sales includes materials, labor and manufacturing overhead.
Selling, general and administrative expenses consist primarily of salaries and
benefits paid to sales and administrative personnel, travel, marketing,
advertising and research and development expenses and distribution expenses.
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED
TWELVE MONTHS ENDED MAY 31, JANUARY 31,
----------------------------- ------------------
1995 1996 1997 1997 1998
------- ------- ------- ------- -------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales........................................... $58,320 $57,104 $62,249 $39,245 $40,972
Cost of sales....................................... 42,491 44,614 48,901 31,782 31,294
------- ------- ------- ------- -------
Gross profit........................................ 15,829 12,490 13,348 7,463 9,678
Selling, general and administrative expenses........ 6,214 6,335 6,286 4,213 3,917
------- ------- ------- ------- -------
Income from operations.............................. 9,615 6,155 7,062 3,250 5,761
Interest expense.................................... 1,355 983 616 429 147
Other expense (income).............................. (181) 142 28 53 57
------- ------- ------- ------- -------
Income before provision for taxes................... 8,441 5,030 6,418 2,768 5,557
Income taxes........................................ 260 258 361 164 253
------- ------- ------- ------- -------
Net income.......................................... $ 8,181 $ 4,772 $ 6,057 2,604 $ 5,304
======= ======= ======= ======= =======
</TABLE>
In 1993, one of CSI's largest customers, which accounted for approximately
22% of its total unit volume at that time, was acquired by S.C. Johnson and in
late 1994 ceased purchasing products from CSI. The loss of this customer's
business adversely impacted CSI's results of operations in fiscal 1995 and
fiscal 1996. In January 1998, following the sale of certain of its product lines
to S.C. Johnson, Dow Brands, CSI's largest customer, notified CSI that it would
be terminating its contract with CSI effective April 23, 1998. Dow Brands
purchases from CSI during the twelve months ended December 31, 1997 accounted
for approximately 18.0% of CSI's net sales for that period. The Company does not
expect to retain any of the business attributable to the product lines sold by
Dow Brands to S.C. Johnson, but is using and expects to continue to use the
production capacity previously allocated to this business to meet the
requirements of other customers.
EIGHT MONTHS ENDED JANUARY 31, 1998 COMPARED TO EIGHT MONTHS ENDED JANUARY 31,
1997
Net sales. Net sales for the eight months ended January 31, 1998 (the
"1998 Interim Period") increased $1.7 million to $41.0 million from $39.2
million for the eight months ended January 31, 1997 (the "1997 Interim Period"),
or 4.4%. This increase was mainly attributable to increased sales in Europe to a
multinational U.S. consumer products manufacturer offset by allowances of
$875,000 provided to a customer.
Cost of sales. Costs of sales for the 1998 Interim Period decreased
$488,000 to $31.3 million from $31.8 million for the 1997 Interim Period or
1.5%. Resin price declines reduced costs by about $265,000. Indirect labor
savings from transitioning to a five-day schedule at CSI's two U.S.
manufacturing facilities were over $1.0 million, scrap and inventory losses were
reduced by more than $860,000 and the Company recorded reserves of $335,000 for
the return of certain merchandise.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased $296,000 to $3.9 million for the 1998 Interim
Period from $4.2 million for the 1997 Interim Period, or 7.0%. This decrease
resulted principally from a reduction in sales staff and lower fees paid for
professional services.
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<PAGE> 38
TWELVE MONTHS ENDED MAY 31, 1997 COMPARED TO TWELVE MONTHS ENDED MAY 31, 1996
Net sales. Net sales increased $5.1 million to $62.2 million for fiscal
1997 from $57.1 million for fiscal 1996, or 9.0%. This increase was primarily
due to increased sales in Europe and the United States to three multinational
consumer products manufacturers and sales to two new customers.
Cost of sales. Cost of sales increased $4.3 million to $48.9 million in
fiscal 1997 from $44.6 million in fiscal 1996, or 9.6%. The increase was
primarily due to increased sales volume as discussed above.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $6.3 million in both fiscal 1997 and fiscal 1996.
Administrative expenses decreased as a result of the elimination of an executive
position and a general reduction in administrative personnel, which were offset
by an increase in distribution costs in connection with the commencement of
operations at the United Kingdom facility.
TWELVE MONTHS ENDED MAY 31, 1996 COMPARED TO TWELVE MONTHS ENDED MAY 31, 1995
Net sales. Net sales decreased $1.2 million to $57.1 million for fiscal
1996 from $58.3 million for fiscal 1995, or 2.1%. This decrease was primarily
due to the impact of the loss of business of a major customer, offset in part by
increased sales of lower priced trigger sprayers to two domestic manufacturers
and new sales in Europe to a multinational consumer products manufacturer.
Cost of sales. Cost of sales increased $2.1 million to $44.6 million in
fiscal 1996 from $42.5 in fiscal 1995, or 5.0%. This increase was primarily
attributable to the loss of manufacturing efficiencies associated with
production of products for a major customer that terminated its relationship
with CSI.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $0.1 million to $6.3 million in fiscal 1996
from $6.2 million in fiscal 1995, or 1.6%.
LIQUIDITY AND CAPITAL RESOURCES
The Company acquired the assets and business of AFA in July 1997. The
acquisition was financed with the AFA Debt, aggregating approximately $40.8
million, and equity contributions and subordinated loans from stockholders of
the Parent and their affiliates. In August 1997, through an intermediate holding
company, a stockholder of the Parent and an affiliate of another stockholder of
the Parent acquired all of the outstanding capital stock of Polytek. This
acquisition was financed with term loans and revolving credit facilities
aggregating approximately $7.9 million under the Polytek Facilities and equity
contributions.
Effective February 1, 1998, the Company consummated the CSI Acquisition,
refinanced the AFA Debt in its entirety and received a contribution of all of
the capital stock of Polytek. Funds used for the CSI Acquisition and the
refinancing of the AFA Debt were provided by (a) the Term Loans, which consisted
of (i) a $70.0 million principal amount tranche A term loan bearing interest at
LIBOR plus 3.75%; and (ii) a $65.0 million tranche B term loan bearing interest
at LIBOR plus 5.5%, and (b) $2.5 million of advances under the Revolving Credit
Facility bearing interest at LIBOR plus 3.0%. The tranche A and tranche B loans
required quarterly principal amortization payments beginning in June 1998 and
were scheduled to mature on December 31, 2003 and February 4, 2005,
respectively. On April 23, 1998, the Company issued the Old Notes in the
aggregate principal amount of $145.0 million. The net proceeds from the sale of
the Old Notes were used principally to repay and retire, without premium, the
entire $135.0 million principal amount of the Term Loans.
AFA's Forest City facility, which operated at near capacity during 1997,
historically has not been capital intensive, with capital expenditures
aggregating $2.1 million, $0.7 million, and $1.9 million in 1995, 1996 and 1997,
respectively. Management believes that the availability of CSI's El Paso
manufacturing facility to augment AFA's Forest City facility will increase the
total production capacity available to service AFA's customer base as well as
provide additional product lines to market to AFA's customers.
Like AFA, Polytek has not historically been a capital intensive business,
with annual capital expenditures aggregating approximately $1.2 million, $1.5
million and $1.5 million in 1995, 1996 and 1997, respectively.
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<PAGE> 39
Throughout the 1990s, CSI invested in modern manufacturing equipment,
including injection molding presses, automated assembly machines and tooling, to
increase capacity, improve quality, reduce costs and improve manufacturing
flexibility in order to provide the high level of service required by large
consumer products manufacturers. During the six-year period ending May 1997, CSI
invested approximately $43.0 million in capital improvements, adding 37 new
injection molding presses and ten new assembly lines. CSI anticipates additional
capital investment for the introduction of the T-1000(TM) trigger sprayer and
Luxor(TM) pump, which are expected to further reduce manufacturing costs and
improve operating margins.
The net cash used for operating activities in the quarter ended April 5,
1998, was primarily affected by the increase in CSI accounts receivable from
zero at the date of the CSI acquisition to $8.0 million at April 5, 1998.
The net cash used in investing activities in the quarter ended April 5,
1998 included amounts expended to effect the CSI acquisition and capital
expenditures of $1.0 million.
During the twelve months ended December 31, 1997, AFA, Polytek and CSI
generated cash from operations of $4.7 million, $2.6 million and $15.7 million,
respectively. Capital expenditures for AFA, Polytek and CSI during this period
were $1.9 million, $1.3 million and $2.3 million, respectively. Working capital
and capital expenditure requirements of AFA and Polytek during the twelve months
ended December 31, 1997, were financed with cash from operations and revolving
credit borrowings. CSI's working capital and capital expenditure requirements
during the twelve months ended December 31, 1997 were financed with cash flow
from operations and borrowings from its then parent, Contico International, Inc.
A portion of the net proceeds for the sale of the Old Notes was used to
fund payment of (i) a deferred fee of $573,000 to NationsCredit arising out of
the prepayment in February 1998 of indebtedness incurred in July 1997 to finance
the acquisition of AFA and (ii) a $2.5 million distribution from the Company to
the Parent to be used by the Parent, together with an equal amount advanced to
the Parent by certain of its stockholders, to redeem outstanding common stock
purchase warrants held by NationsCredit. See "Certain Transactions."
The Revolving Credit Facility, which matures on February 4, 2003, provides
for borrowings from time to time in an aggregate amount not to exceed $30.0
million, subject to a Borrowing Base (as defined). Until April 30, 1999 (or
under certain conditions, September 30, 1998), the Revolving Credit Facility
will allow for additional availability of $5.0 million in excess of the
Borrowing Base (but in no event in excess of $30.0 million). At July 23, 1998,
the interest rate on the Revolving Credit Facility is LIBOR plus 2.25%. The
facility contains certain covenants, the most restrictive of which limit capital
expenditures and set forth minimum required EBITDA amounts, maximum leverage
ratios and minimum debt service coverage ratios. See "Description of Other
Indebtedness."
Immediately after giving effect to the sale of the Old Notes and the
application of the proceeds therefrom, (i) there was approximately $9.5 million
outstanding under the Revolving Credit Facility and additional borrowing
availability thereunder of approximately $14.1 million and (ii) Polytek had
outstanding under the Polytek Facilities term loans of $4.8 million, and
revolving credit borrowings of approximately $2.8 million, and there was
additional borrowing availability thereunder of approximately $2.8 million. See
"Description of Other Indebtedness."
The Company anticipates that its principal uses of cash will be to finance
working capital and capital expenditures, to pay interest on its outstanding
bank borrowings and on the Notes and, in the case of Polytek, to pay interest
and principal on its outstanding borrowings under the Polytek Facilities. The
Company's anticipated capital expenditures for 1998 and 1999 are approximately
$14.0 million and $13.7 million, respectively. These expenditures will include
continued investments in the T-1000(TM) and Luxor(TM) manufacturing platforms,
modifying the Polytek facility to accommodate additional CSI sales volumes and
ongoing maintenance capital expenditures.
The Company expects to fund its domestic cash requirements with cash flow
from operations and borrowings under the Revolving Credit Facility. The Company
expects that Polytek will fund its cash requirements with cash flow from its own
operations and borrowings under the Polytek Facilities.
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<PAGE> 40
The Company believes that net cash from operations, together with amounts
available under the Revolving Credit Facility and the Polytek Facilities, will
be adequate to fund the payment of interest on its outstanding indebtedness
(including the Notes) as well as its capital expenditure plans and working
capital needs. The Company's future operating performance and ability to service
or refinance the Notes and to service and extend or refinance the Revolving
Credit Facility and the Polytek Facilities will depend on various factors,
including market and general economic conditions, that are beyond the Company's
control. See "Risk Factors."
The Revolving Credit Facility and the Indenture impose certain restrictions
on the Company's ability to make capital expenditures and limit the Company's
ability to incur additional indebtedness. Such restrictions could limit the
Company's ability to respond to market conditions, to provide for unanticipated
capital investments or to take advantage of business or acquisition
opportunities. The covenants contained in the Credit Facilities and the Notes
also will restrict, among other things, the Company's ability to incur
additional indebtedness, pay dividends or make certain other restricted
payments, incur liens, sell stock of subsidiaries, apply net proceeds from
certain asset sales, merge or consolidate with any other person, sell, assign,
transfer, lease, convey or otherwise dispose of substantially all of the assets
of the Company and enter into certain transactions with affiliates. See
"Description of the Notes" and "Description of Other Indebtedness".
On July 29, 1998, the Company received a commitment from First Union
Commercial Corporation ("First Union") with respect to a new revolving credit
facility (the "New Credit Facility"), which will replace the existing Revolving
Credit Facility with NationsCredit. The New Credit Facility will have a five
year term and will provide for borrowings from time to time in an aggregate
amount not to exceed $30.0 million, subject to a Borrowing Base (as defined).
The New Credit Facility will contain covenants similar to those contained in the
Revolving Credit Facility, the most restrictive of which will limit capital
expenditures and will set forth maximum leverage ratios and minimum debt service
coverage ratios. See "Description of Other Indebtedness." The Company intends to
use borrowings under the New Credit Facility to retire the Revolving Credit
Facility and for the financing of the Company's ongoing working capital and
capital expenditure requirements and other general corporate purposes.
First Union's obligation to provide the New Credit Facility is subject to
certain conditions, including there not having occurred any event that has had,
or could reasonably be expected to have, a material adverse effect on the
business, properties, prospects, operations or financial condition of the
Company, the completion of a definitive credit agreement and related
documentation, compliance with all applicable laws and regulations, satisfactory
completion of legal due diligence and the receipt of certain financial
information satisfactory to First Union. There can be no assurance that these
conditions will be met or that the Company and First Union will enter into the
New Credit Facility on the terms contemplated by the commitment letter or at
all.
HEDGING
The Company has not historically entered into and does not expect in the
future to enter into, currency or raw materials hedging transactions.
EFFECTS OF INFLATION
Inflation has not had a significant impact on the Company's operations.
However, there can be no assurance that inflation will not have a material
effect on the Company's operations in the future.
SEASONALITY
Sales of trigger sprayers for use in lawn and garden applications are
generally stronger in the second quarter of the year. All other customer
requirements are fairly consistent throughout the year.
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<PAGE> 41
ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income, is effective for years beginning after December 15, 1997.
This statement requires that an enterprise classify items of comprehensive
income by their nature in the financial statements and display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of the statement of position.
Statement of Financial Accounting Standards No. 131, Disclosure About
Segments of an Enterprise and Related Information, is effective for years
beginning after December 15, 1997. This statement requires that a public
business enterprise report financial and descriptive information about its
reportable business segments.
Management of the Company believes that the future adoption of these
statements will not have a significant impact on the Company's combined
financial position, results of operations or cash flows, but will result in
additional disclosure.
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<PAGE> 42
BUSINESS
GENERAL
The Company, created by the combination of CSI, AFA and Polytek, is a
global leader in the design, manufacture and sale of liquid dispensing products,
primarily plastic trigger sprayers, used in household consumer product
applications, such as hard surface cleaning, laundry and lawn and garden
products, as well as industrial applications, such as products for the
automotive, janitorial and sanitation markets. Management believes the Company
is the largest producer of trigger sprayers in the world, with an estimated
market share of approximately 48% in North America and 24% in Europe. The
Company's products are sold to (i) multinational, national and regional
manufacturers of brand name and private label consumer products and (ii)
independent distributors of containers and packaging products. The Company is
the only trigger sprayer manufacturer with a leading presence in both of these
market segments. For the twelve months ended December 31, 1997 and the quarter
ended April 5, 1998, on a pro forma combined basis, the Company generated net
sales of approximately $114.5 million and $29.0 million, respectively, and
EBITDA of approximately $28.6 million and $7.0 million, respectively.
INDUSTRY OVERVIEW
TRIGGER SPRAYERS
Trigger sprayers are essential components of commonly used products in
household and industrial applications throughout the world. Shipments in the
world-wide trigger sprayer industry are expected to reach nearly 1.1 billion
units in 1997, which represents compound annual growth of approximately 3% since
1992. This growth is primarily due to the application of trigger sprayers to an
increasing number of end uses as well as heightened awareness of the efficiency
and aesthetics of trigger sprayers on the part of manufacturers of liquid
products. Management projects that total industry shipments will grow at an
increased compounded rate of 5%, reaching nearly 1.3 billion units by 2000. This
accelerated growth will be driven by opportunities in foreign markets,
particularly Europe and South America.
North America is the principal market for trigger sprayers, accounting for
approximately 60% of the estimated 1.1 billion units sold worldwide during 1997.
The North American market includes large multinational and national
manufacturers of brand name consumer products, smaller manufacturers of brand
name, private label and specialty products for consumer and industrial use and
marketers of general purpose liquid spray containers that are sold in empty
form. The large consumer products manufacturers are served directly by a limited
number of trigger sprayer producers that can meet their high volume, product
innovation and consistent quality requirements. Other customers are served both
directly by trigger sprayer manufacturers and indirectly by independent
distributors that can process smaller volume orders and provide more
personalized service support. Outside North America, the principal market for
trigger sprayers is in Western Europe, where unit sales, although less on a per
capita basis than in North America, have been growing at a greater rate than
that in the United States. The Western European market which consists primarily
of large manufacturers of consumer products, is served by brokers and agents.
Eastern Europe, Central and South America and the Pacific Rim do not yet
represent significant markets, but are expected to grow in the next several
years as per capita consumption increases and local economies in these regions
mature.
DISPENSING PUMPS
Finger actuated pump dispensers have long been utilized in commercial
applications, such as the food service industry, and gained popularity in
consumer applications with the introduction of liquid soap in the 1980s. Pump
dispenser usage has grown considerably in recent years, as new applications have
been developed, most notably in the markets for hair and skin care products.
Domestic sales of pump dispensers has grown at a compound annual rate of
approximately 2.0% from 1992 through 1996 totaling approximately 600.0 million
units in 1996. Management estimates that domestic growth will continue at this
pace for the remainder of the decade. The U.S. market is more mature than the
global market, which is expected to grow at a substantially faster rate.
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COMPETITIVE STRENGTHS
CSI is the world's largest supplier of trigger sprayers to large national
and multinational consumer products manufacturers, such as Clorox,
Monsanto/Solaris and Proctor & Gamble. CSI's reputation for quality, design
innovation, high volume production capability and competitive pricing has
enabled it to establish long-term relationships with leading multinational
consumer products companies. CSI also manufactures and sells finger-actuated
plastic pumps for nationally branded soaps and lotions. AFA is focused on
serving independent container and packaging distributors as well as smaller
manufacturers of brand name and private label consumer products. AFA is the
nation's largest supplier of trigger sprayers to independent distributors, which
typically purchase in smaller volumes but at higher margins than large
multinational consumer products companies. Polytek is a major producer and
supplier of trigger sprayers to the European market and performs custom
injection molding services for European manufacturers of plastic packaging,
consumer and industrial products.
CSI's ability to meet the increasingly global requirements of its large
U.S.-based multinational customers that are seeking to expand their sales
outside North America will be enhanced by Polytek's established technological
expertise and manufacturing base in The Netherlands. CSI's El Paso manufacturing
operations will augment those at AFA's Forest City facility, which currently is
operating at full capacity, increasing the Company's ability to meet the needs
of AFA's client base and providing additional product lines to AFA's customers.
Management believes that these synergies will enable the Company to provide
enhanced customer service and product availability and will increase sales and
provide substantial cost savings.
The combination of CSI, AFA and Polytek provides the Company with a unique
blend of competitive strengths, principal among which are the following:
- The Company is the only trigger sprayer manufacturer with a leading
presence in the two principal market segments it serves. In 1997, the
Company accounted for approximately 48% of the trigger sprayers produced
in the United States, providing approximately 45% of the units shipped to
consumer products manufacturers and 67% of the units shipped to the
distributor market. In addition, the Company accounted for approximately
24% of European shipments of trigger sprayers during 1997. The Company's
market presence is supported by strong customer relationships, a well
established marketing organization and channels of distribution and a
strong reputation for customer service and responsiveness.
- CSI and Polytek are recognized as technological and product design
innovators within the trigger sprayer industry and, together with AFA
(which introduced the world's first trigger sprayer in 1959), hold a
combined portfolio of more than 200 active patents. Recent product
innovations -- such as CSI's "Quick Twist"(TM) closure system and
Polytek's precompression sprayer technology -- are expected to result in
quality enhancements for the Company's customers and potential margin
improvements for the Company as a result of reduced manufacturing costs.
- The Company has invested approximately $54.3 million during the five
years ended December 31, 1997 to increase the productive capacity and
quality and reduce the operating costs of its manufacturing facilities.
CSI's facilities in St. Peters, Missouri, augmented by Polytek's
facilities in The Netherlands, can serve the requirements of the
Company's largest multinational customers without the need for the
capital investment that would be required for a start-up facility. CSI's
El Paso plant and AFA's Forest City facilities have the capacity required
to serve the increasing product demands of independent distributors and
smaller manufacturers.
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<PAGE> 44
BUSINESS STRATEGY
The Company intends to capitalize on its competitive strengths to increase
revenues and cash flow through a business strategy that includes the following
key elements:
FOCUS ON GLOBAL SOURCING NEEDS OF MULTINATIONAL CONSUMER PRODUCTS
MANUFACTURERS
By combining CSI's multinational customer relationships with Polytek's
European-based capacity and manufacturing expertise, the Company has positioned
itself to capitalize on the global expansion plans of its multinational consumer
products customers and will seek to serve their sourcing needs on a worldwide
basis. Management also intends to leverage these capabilities to increase
revenues by developing new business opportunities with those multinational
consumer products companies that are not currently being served by the Company.
EXPAND PRODUCT OFFERINGS TO DISTRIBUTOR NETWORK
The acquisition of CSI will allow the Company to offer to AFA's distributor
network an expanded product line of trigger sprayers, as well as lotion pumps,
enabling the Company to further strengthen its position in this market segment
without incremental manufacturing or selling expense, while extending the life
cycle of certain CSI products that, to date, have been marketed principally to
large multinational consumer products manufacturers.
ENHANCE UTILIZATION OF PRODUCTION CAPACITY
The Company anticipates moving its U.K.-based production equipment to
Polytek's facility in The Netherlands facilities and utilizing CSI's El Paso
plant to alleviate capacity constraints currently being experienced at AFA's
Forest City facility. These steps will enable the Company to optimize its
consolidated manufacturing capabilities and to efficiently increase its total
production volume.
REALIZE SIGNIFICANT COST SAVINGS
The Company expects to achieve significant cost savings through the
rationalization of certain manufacturing operations and more efficient
utilization of its production capacity. Significant cost savings are expected to
result from combining and centralizing various administrative operations,
adopting on a Company-wide basis the manufacturing "best" practices from the
operations of each of CSI, AFA and Polytek and combining their raw materials
requirements to achieve increased purchasing leverage. The Company also will be
introducing a new generation of products that are simpler to manufacture, such
as the T-1000(TM) trigger sprayer and the Luxor(TM) lotion pump. These new
products are expected to significantly reduce production costs, resulting in
improved margins.
PURSUE SELECTIVE ACQUISITIONS
The Company intends to pursue selective acquisitions of businesses or
product lines that meet the complementary needs of its multinational and
distributor customer base in order to increase sales, achieve further production
efficiencies and enhance customer penetration. The Company has no current
agreements, arrangements or understandings with respect to any future
acquisitions.
PRODUCTS
All of CSI's trigger sprayer products have external vents and low actuation
force. In addition, these sprayers are available in custom colors and with three
nozzle options: standard spray, fully adjustable spray or stream and foamer.
CSI's newest trigger sprayer model, the T-1000(TM), is designed to further
reduce manufacturing costs, incorporates a patented "Quick Twist"(TM) closure
system that improves customer fill line efficiency and eliminates leakage during
shipment of the customer's products. Certain of CSI's products can be outfitted
with customized shrouds that enable customers to create a distinctive look for
their packaging and while permitting CSI to employ a standard sprayer
manufacturing platform to enhance manufacturing cost
40
<PAGE> 45
effectiveness. CSI also has developed two basic models of sprayers for use in
chemical, janitorial, beauty supply, plant and garden and other commercial
applications. Both models are highly reliable and have excellent longevity and
chemical compatibility.
AFA introduced the first trigger sprayer in 1959. Today, AFA's product line
includes seven basic sprayer models and over ten product line extensions. Its
trigger sprayers can be supplied with a variety of features, including
adjustable nozzles, turreted nozzles, a three way nozzle configuration, foaming
capabilities, high output, quick priming, a high torque cap, and non-leakage
protection during shipping. AFA also offers its customers a choice of over 150
different colors. Polytek manufactures three of the seven basic trigger sprayer
models offered by AFA, which is consistent with market demand in Europe.
PUMP DISPENSERS
CSI currently offers two types of liquid pump dispensers: one for consumer
applications and one for industrial applications.
The consumer dispenser unit provides accurate quantity dispensing and is
compatible with most liquids. This product is sold to several large customers in
the high-end segment of the liquid soap and hand lotion markets. The Company's
Luxor(TM) pump dispenser is a new lightweight unit with improved valve
technology, includes the Company's new proprietary "Quick Twist"(TM) closure
system and is designed to permit greater manufacturing and assembly efficiency.
CSI's industrial pump dispenser is a versatile pump that can handle
high-viscosity liquids. It has an adjustable output and is constructed of
polypropylene and stainless steel for maximum chemical compatibility. This
product is currently used for cleaners, waxes, solvents and germicidal
detergents.
CUSTOM MOLDING SERVICES
Polytek provides custom molding services to European manufacturers of a
variety of plastic components for both consumer and industrial products. Polytek
satisfies its customers' demands by offering design and technological support,
high volume capacity, ISO 9001 designation and competitive pricing. By providing
a "complete package" of custom molding capabilities, Polytek has developed
strong relationships with a number of large multinational companies.
MARKETING AND DISTRIBUTION; PRINCIPAL CUSTOMERS
In North America, sales to major national and multinational consumer
products manufacturers are made on a direct basis through the Company's own
sales organization. Sales to smaller manufacturers and certain end users are
made directly and through AFA's network of more than 40 independent container
and packaging distributors, with over 100 sales offices throughout the United
States. AFA has maintained long-standing non-exclusive relationships with its
North American distributors, most of which have been doing business with AFA for
over ten years. In Europe, a majority of Polytek's trigger sprayers are sold to
and through distributors and commission paid agents.
The Company's products also are sold in the Pacific Rim market through
licensing arrangements under which it receives royalties. In 1997, the amount of
such royalties was immaterial. Most of the Company's business in this market is
in Japan, Thailand, Australia and New Zealand.
The Company has over 200 customers. Approximately 41.6% and 45.1% of the
Company's pro forma combined net sales for the twelve months ended December 31,
1997 and the quarter ended April 5, 1998, respectively, were to its ten largest
customers, eight of which are major national and multinational consumer products
manufacturers. In January 1998, Dow Brands, CSI's largest customer, sold certain
of its product lines to S.C. Johnson and subsequently notified CSI that it would
be terminating its contract with CSI effective April 23, 1998. See "Risk
Factors -- Dependence on Key Customers." Dow Brands' purchases from CSI during
the twelve months ended December 31, 1997 and the quarter ended April 5, 1998
accounted for approximately 10.0% and 10.3%, respectively, of the Company's net
sales on a pro forma combined basis for those periods. The Company does not
expect to retain any of the business attributable to the product lines sold
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<PAGE> 46
by Dow Brands to S.C. Johnson, but is using and expects to continue to use the
production capacity previously allocated to this business to meet the
requirements of other customers.
COMPETITION
The markets for the Company's products are highly competitive. In North
America, the Company competes primarily with Calmar Inc. and the Specialty
Products division of Owens-Illinois, Inc. The European markets for the Company's
products are highly fragmented. In addition to the presence of North American
competitors in Europe, most notably Calmar Inc., there are a number of local
competitors, including Spraysol, Canyon Corporation and Guala. In the Pacific
Rim (where the Company operates primarily through licensees), and Central and
South America, the Company typically competes with other multinational companies
as well as local producers.
The Company believes that it competes on the basis of its strong customer
relationships, its reputation for quality, reliability, performance and prompt
delivery, and the price of its products. In addition, many of the Company's
major customers are multinational companies that compete on a global basis with
worldwide brands and place increased emphasis on global sourcing of input
materials and components. Management believes that the Company's ability to
serve these customers globally from its North American and European production
bases will continue to be an important competitive factor.
RESEARCH AND DEVELOPMENT; INTELLECTUAL PROPERTY; PATENTS
Management believes that the Company is a leader in the technological
development and innovation of products in the industry. The focus of the
Company's research, development and engineering efforts is to: (i) develop
products that will increase the size of the available market, (ii) provide the
highest level of quality, (iii) develop unique value-added product features,
(iv) customize products for specific customer applications and (v) continue to
simplify the design/production process to reduce costs. Many development
projects are conducted jointly with customers and, in some instances, are
partially or fully funded by these customers.
The Company has developed and is currently producing a pre-compression
sprayer that releases the spray in a very controlled intensity and pattern. This
provides a finer, more consistent spray and eliminates dripping. The Company
also has developed several technologies that are owned but not yet in
production. For example, the Company has developed a dual-chamber sprayer that
can mix two cleaning products at the spray head for certain formulations that
would degenerate if stored in combination.
The Company's technology effort often includes cost sharing agreements with
its customers regarding the purchase of manufacturing equipment for new products
and/or additional capacity. These arrangements help the Company to share some of
the risk in both product development and product sales associated with
introducing a new product or a modified product into the market.
The Company has over 300 patents, of which 217 are active. Many of the
Company's products are protected by patents and the Company is continually
exploring opportunities for new patentable products through research and
development. While the Company believes that its patents are important to its
business and enhance its competitive position, the Company does not believe that
the loss of any one particular patent would have a material adverse effect on
its business.
RAW MATERIALS
The principal raw material used by the Company is plastic resin, primarily
polypropylene. Plastic resins are available from a number of suppliers in the
United States and in Europe. Approximately 18.9% and 18.2% of the Company's cost
of sales on a pro forma consolidated basis in 1997 and the quarter ended April
5, 1998, respectively, was attributable to purchases of plastic resin. To date,
the Company has been able to obtain sufficient quantities of plastic resin for
its requirements. The Company has long-standing relationships with its major
suppliers. See "Risk Factors -- Pricing and Availability of Raw Materials."
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<PAGE> 47
FACILITIES AND MANUFACTURING
The Company manufactures products at plants located in Forest City, North
Carolina, St. Peters, Missouri, El Paso, Texas and Helmond, The Netherlands. The
Company has additional assembly operations in Costa Rica, Mexico and the United
Kingdom.
The following table sets forth information with respect to the Company's
facilities:
<TABLE>
<CAPTION>
LOCATION SQUARE FOOTAGE OWNERSHIP FUNCTION
-------- -------------- --------- --------
<S> <C> <C> <C>
Forest City, North Carolina.... 146,000 Owned Injection molding, automated
assembly, distribution
St. Peters, Missouri........... 124,000 Owned Injection molding, automated
assembly, distribution
Helmond, The Netherlands....... 110,000 Owned Injection molding, automated
assembly, distribution
El Paso, Texas................. 101,000 Owned Injection molding, automated
Land lease assembly, distribution
Cartago, Costa Rica............ 39,615 Owned Manual assembly, distribution
Juarez, Mexico................. 35,000 Owned Manual assembly, distribution
Redruth, United Kingdom*....... 15,000 Leased Automated assembly
St. Louis, Missouri............ 9,500 Owned Mold and die construction
</TABLE>
- ---------------
* This facility is operated under a short-term lease. The Company intends to
consolidate the Redruth operations into its Helmond, The Netherlands,
facility.
Management believes that the Company's facilities are in good condition and
adequate for its present operating needs. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" for information with respect to planned capital investments
in certain of those facilities.
Plastic components are produced at the Company's own manufacturing
facilities. In addition, the Company manufactures certain other components used
in its products; the remaining components are purchased from outside suppliers.
The Company's products are assembled automatically on assembly machines
built to the Company's specifications and, at its facilities in Costa Rica and
Mexico, by hand.
EMPLOYEES
At March 31, 1998, the Company had approximately 1,571 employees, of whom
approximately 1,046 were engaged in manufacturing and manufacturing support, 42
were engaged in product sales and the balance were employed in various
administrative capacities. The 289 employees at the Company's Juarez, Mexico,
assembly facility are covered by a collective bargaining agreement that expired
in June 1998 but is expected to be renegotiated on acceptable terms. Seven
employees at the Company's St. Louis, Missouri, facility are represented by a
union. Management considers the Company's relationships with its employees to be
satisfactory.
ENVIRONMENTAL COMPLIANCE
The Company is subject to various evolving federal, state and local
environmental laws and regulations governing, among other things, the emission,
discharge, generation, handling, storage, transportation, treatment and disposal
of hazardous and non-hazardous substances and wastes. Failure to comply with
these laws could result in substantial fines and penalties. Moreover, it is
possible that the Company could be required to remediate a site to meet
applicable legal requirements. The Company believes, although there can be no
assurance, that liabilities relating to environmental matters will not have a
material adverse effect on its future financial position or results of
operations.
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<PAGE> 48
LEGAL PROCEEDINGS
The Company has from time to time been involved in legal proceedings
related to the ordinary course of its business, none of which has had a material
adverse effect on the Company. Other than one proceeding relating to a claim of
wrongful termination by the former managing director of Polytek, the outcome of
which the Company believes will not have a material adverse effect on the
Company, the Company is not currently involved in any legal proceedings and
maintains property, general liability and product liability insurance in amounts
that it believes are consistent with industry practices and adequate for its
operations.
YEAR 2000 COMPLIANCE
The Company is in the process of modifying, upgrading or replacing its
computer software applications and systems to accommodate the "year 2000" dating
changes necessary to permit correct recording of dates for 2000 and later years.
The Company does not expect the cost of its year 2000 compliance program to be
material to its financial condition or results of operations. The Company does
not currently have any information concerning the year 2000 compliance status of
its suppliers and customers.
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<PAGE> 49
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information with respect to each of the
Company's directors and executive officers. All directors hold office until the
next annual meeting of stockholders and until their successors have been elected
and qualified. All of the Company's officers are elected by the Board of
Directors and serve at the discretion of the Board of Directors. The Company
intends, shortly following completion of the Exchange Offer, to add two
additional directors, neither of whom will be affiliated with the Company's
existing stockholders or management.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Yehochai Schneider............... 64 Chairman of the Board of Directors
Ariel Gratch..................... 46 President, Chief Executive Officer and Vice
Chairman of the Board of Directors
Louis H. Dixey, Jr............... 61 Vice President, Treasurer, Chief Financial
Officer, Secretary and Director
</TABLE>
MR. SCHNEIDER has been the Chairman of the Board of Directors of the
Company since February 2, 1998. He also is the Chairman of the Board of the
Parent. Mr. Schneider has over 40 years experience in manufacturing, management
and corporate transactions. Since 1981, he has been involved in the acquisition
and operation of several businesses, including AFA, various divisions of J.P.
Stevens, and Waynesboro Textiles, Inc. Mr. Schneider is a shareholder of WTI and
served as its Chairman until the Company's acquisition of AFA and Polytek. Prior
to 1981, he served as Chief Executive Officer of A & E Plastik Pak Co., a
plastic container business that he co-founded in 1956.
MR. GRATCH has been the President, Chief Executive Officer and a Director
of the Company since February 2, 1998. He also is the President and a Director
of the Company's parent corporation and the Vice Chairman of AFA. Mr. Gratch has
fifteen years of experience in structuring and financing the acquisition of
companies in the United States and Europe. Since 1980, Mr. Gratch has been a
senior member of the New York law firm, Gratch Jacobs & Brozman, P.C.,
specializing in mergers and acquisitions of mid-sized industrial companies.
Since 1992, he has acted as principal in the acquisition and management of
various manufacturing businesses and commercial real estate operations. From
1985 through 1996, Mr. Gratch served on the Board of Directors of Tyco Toys, the
third largest toy company in the United States prior to its purchase by Mattel.
Mr. Gratch has also served on the Board of Directors of several private
companies, including Glenoit Mills, Inc., a textile and consumer goods company
(from 1989 to 1995).
MR. DIXEY has been the Vice President, Treasurer, Chief Financial Officer,
Secretary and a Director of the Company since February 2, 1998. From 1988
through 1991, Mr. Dixey served as Executive Vice President and Chief Financial
Officer of JPS Textile Group ("JPS"). From 1979 to 1988 he was a director and
Chief Financial Officer of Waynesboro Textiles, Inc. and Executive Vice
President, Chief Financial Officer and Director of AFA and Polytek. From 1990
until 1997, he was a Managing Partner of Concord Capital, a residential real
estate leasing company. In addition, from 1984 through 1994, Mr. Dixey was a
Managing Partner of Afton Capital, a commercial leasing corporation.
OTHER KEY MANAGEMENT PERSONNEL
PETER D. MANCUSO has served as President of AFA since June 1992, having
also served as President of AFA's Marketing Division from March 1991 through
June 1992. For five years prior thereto, Mr. Mancuso was the President and Chief
Executive Officer of the plastics division of Packaging Corporation of America.
He also served as a consultant for Proudfoot Company, an international
management consulting firm.
WILLIAM DRIGGERS has served as President of CSI since July 1995. From 1979
to July 1995, he was employed by Tredegar Industries, serving from 1991 to 1995
as President/General Manager of its Molded Products Division.
JAN HERPS was appointed Managing Director of Polytek in July 1997. From
1992 to July 1997, he was General Manager of Fico Tooling B.V. Brunssum, a
designer and manufacturer of encapsulation molds for the semiconductor industry.
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<PAGE> 50
JAMES A. WANTUCH has served as AFA's Vice President of Operations since May
1992. For more than six years prior thereto, he served in various manufacturing
capacities at AFA, including Production Control Manager.
BENJAMIN HOLDER has served since March 1996 as Plant Manager of CSI's
manufacturing facility in St. Peters, Missouri. For ten years prior thereto, he
was a Plant Manager in the injection molding division of Tredegar Industries.
TOM WILCOX has served as CSI's Vice President of Sales and Marketing since
June 1990, having also served as President of CSI from January 1993 through July
1995. From 1986 until joining CSI, he was Director of Sales Administration of
the Non-Foods Division of Miles Consumer Household Products.
DONALD FOSTER has served as CSI's Vice President of Research and
Development since February 1989. For more than ten years prior thereto, he was
Director of Research and Development for Realex Corporation.
DAVID GUINTA was named Executive Vice President - Director of Marketing and
Sales (Global Sales Division) of CSI effective July 27, 1998. From September
1991 until July 1998, he was employed by Calmar Inc., serving from January 1997
until July 1998 as its Vice President of North American Sales.
COMMITTEES OF THE BOARD OF DIRECTORS
It is expected that the Board of Directors will establish an Audit
Committee and a Compensation Committee. The membership of these committees has
not yet been determined pending the selection and election of additional
directors. The Compensation Committee will make recommendations concerning the
salaries and incentive compensation of employees of and consultants to the
Company and its subsidiaries. The Audit Committee will be responsible for
reviewing the results and scope of audits and other services provided by the
Company's independent auditors.
EXECUTIVE COMPENSATION
The Company paid no direct remuneration to its executive officers for the
year ended December 31, 1997. Payments were made in 1997 under a management
agreement to certain affiliates of Messrs. Gratch and Schneider. See "Certain
Transactions."
COMPENSATION OF DIRECTORS
None of the directors who are officers of the Company has received or will
receive any compensation for their service on the Company's Board of Directors.
The Company anticipates payment of compensation to non-officer directors for
their services, including attendance at meetings, the amount of which has not
yet been determined but is not expected to be significant.
EMPLOYMENT ARRANGEMENTS
Mr. Gratch has entered into a five-year employment agreement with the
Company, dated as of February 4, 1998, which contains customary employment
terms. The agreement provides for a base annual salary of $500,000, a minimum
guaranteed bonus of $200,000 and additional incentive compensation based on
increases in the Company's consolidated EBITDA. The agreement is automatically
renewable for two additional five-year terms unless otherwise terminated by the
Company or Mr. Gratch. Mr. Gratch participated in deliberations of the Board of
Directors with respect to the employment agreement.
MANAGEMENT INCENTIVE PLAN
The Parent intends to propose to its stockholders the adoption of an equity
incentive plan for management and certain other employees of the Company and its
subsidiaries (other than Messrs. Gratch or Schneider). The plan would authorize
grants of stock options and stock appreciation rights with respect to
approximately 10% of the Parent's outstanding common stock on a fully-diluted
basis. Of the aggregate options or stock appreciation rights, approximately 90%
would be allocated to senior management personnel.
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<PAGE> 51
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company is a direct wholly owned subsidiary of the Parent. The
following table sets forth certain information regarding the beneficial
ownership of the Common Stock of the Parent, as of April 30, 1998, by (i) each
director of the Company, (ii) each of the executive officers of the Company,
(iii) all executive officers and directors of the Company as a group and (iv)
each person who is the beneficial owner of more than 5% of the outstanding
Common Stock of the Parent. Except as indicated in the footnotes to the table,
the persons named in the table have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them and
the address of each such person is in care of the Company's offices at 950 Third
Avenue, New York, New York 10022.
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER PERCENTAGE OF SHARES
OF INDIVIDUAL OR ENTITY OF SHARES OUTSTANDING
- ----------------------- --------- --------------------
<S> <C> <C>
Ariel Gratch(1)(3).......................................... 7,155,000 86.7%
Yehochai Schneider.......................................... 1,095,000 15.0
AFA International Limited(2)(3)............................. 5,110,000 70.0
Waldock Limited(1)(4)....................................... 950,000 11.5
All directors and executive officers of the Company as a
group (3 persons)......................................... 8,250,000 100.0%
</TABLE>
- ---------------
(1) Includes 1,095,000 shares of Common Stock held by Mr. Gratch, 5,110,000
shares of Common Stock held by AFA International Limited and 950,000 shares
of Common Stock issuable upon exercise of the warrants held by Waldock
Limited. Mr. Gratch has voting control over the shares of Common Stock held
by AFA International Limited and the 950,000 shares of Common Stock issuable
upon the exercise of the warrants held by Waldock Limited. Mr. Gratch
disclaims beneficial ownership of the shares of Common Stock held by AFA
International Limited and by Waldock Limited.
(2) The outstanding capital stock of AFA International Limited is owned by a
trust for the benefit of members of the family of Mr. Gratch.
(3) As noted under "Certain Transactions," concurrently with consummation of the
sale of the Old Notes, AFA International Limited and Ariel Gratch advanced
to the Parent an aggregate of $2.5 million to fund the repurchase by the
Parent from NationsCredit of outstanding warrants to purchase 875,000 shares
of its Common Stock. The Parent has the option to repay the amount so
advanced by delivery to AFA International Limited and Mr. Gratch of the
repurchased warrants.
(4) Waldock Limited owns currently exercisable warrants to purchase an aggregate
of 950,000 shares of Class A Common Stock. The warrants were granted on July
29, 1997 and, unless sooner redeemed, expire July 29, 2007. The outstanding
capital stock of Waldock Limited is owned by a trust for the benefit of
members of the family of Mr. Schneider.
The Parent also has authorized a class of Preferred Stock, having a
liquidation and redemption value of $10.00 per share, that provides for payment
of dividends, out of funds legally available therefor, at an annual rate of 7%
of the liquidation value thereof. Concurrently with the consummation of the sale
of the Old Notes, an aggregate of 1,094,000 shares of such Preferred Stock were
issued to AFA International Limited and Warcop Investments Ltd., the former
stockholders of Polytek upon receipt of the outstanding capital stock of
Polytek. Of such shares, 820,500 were issued to AFA International Limited and
273,500 shares were issued to Warcop Investments Ltd. Warcop Investments Ltd. is
an affiliate of Mr. Schneider. See "Certain Transactions."
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<PAGE> 52
CERTAIN TRANSACTIONS
On July 29, 1997, Messrs. Gratch and Schneider entered into a management
agreement with AFA, providing for annual aggregate payments of $500,000 to
Messrs. Gratch and Schneider, or their respective affiliates, in consideration
of strategic and financial planning advisory services. Affiliates of Messrs.
Gratch and Schneider received an aggregate of $250,000 in 1997 pursuant to this
agreement. Effective February 4, 1998, the agreement was terminated and the
Company entered into a new management agreement with a company affiliated with
Mr. Schneider that provides for annual payments of $300,000 and expires on July
29, 2008, subject to renewal for successive five-year periods. Pursuant to the
new management agreement, Mr. Schneider's affiliated company advises the Company
on matters relating to strategic and financial planning and provides financial
and administrative services to the Company as is necessary.
From time to time in the ordinary course of business, AFA purchases certain
metal springs for use in trigger sprayers from Spring & Wire Designs LLC
("S&W"), a company affiliated with Messrs. Gratch and Schneider. In 1997, AFA
purchased for an aggregate of $90,000 approximately 6.0% of its metal springs
requirements from S&W at competitive prices. Currently, S&W is supplying
approximately 80% of AFA's requirements for metal springs. The Company
anticipates that S&W will continue to supply these components at competitive
prices to AFA and that S&W will begin supplying these components to CSI at
prices and on terms comparable to those offered to AFA.
The law firm of Gratch, Jacobs & Brozman, P.C., of which Mr. Gratch is a
senior member, provides legal services on an ongoing basis to the Company and
its subsidiaries. During fiscal 1997 and the first quarter of 1998, the Company
paid fees of approximately $364,000 and $340,000, respectively, to Gratch,
Jacobs & Brozman, P.C.
In connection with the acquisition of AFA, AFA International Limited and
Waldock Limited made loans to AFA in the principal amounts of $1,000,000 and
$2,000,000, respectively. On February 4, 1998, Parent assumed AFA's obligations
in connection with said loans, and as evidence thereof, issued unsecured
subordinated notes (the "Subordinated Notes") to AFA International Limited and
Waldock Limited in the original principal amounts of $1,000,000 and $2,000,000
(plus interest on such principal amounts accrued from July 29, 1997 through
February 4, 1998), respectively. The Subordinated Notes bear interest at 11.5%
per annum, and the principal thereof is prepayable at any time at the option of
the Parent and, unless sooner prepaid, will mature on May 15, 2008.
Concurrent with the acquisition of CSI, Polytek became a direct wholly
owned subsidiary of the Company. The Parent agreed to issue to AFA International
Limited and Warcop Investments Ltd. (a company affiliated with Mr. Schneider),
820,500 shares and 273,500 shares, respectively, of a new class of Preferred
Stock of the Parent having a liquidation and redemption value of $10.00 per
share and providing for dividends at an annual rate of 7% of the liquidation
value thereof. See "Security Ownership of Certain Beneficial Owners and
Management."
In July 1997, the Company entered into a credit facility with NationsCredit
to finance the acquisition of AFA. As an inducement to NationsCredit to provide
that credit facility, the Parent issued to NationsCredit warrants to purchase,
at a price of $0.01 per share, up to an aggregate of 1,750,000 shares of Common
Stock of the Parent (equivalent to 17.5% of its outstanding Common Stock on a
fully-diluted basis), at any time up to July 29, 2007. Concurrently with
consummation of the sale of the Old Notes, the Parent repurchased all of those
warrants for a cash payment of $5.0 million as part of a general renegotiation
of various of the terms of the Company's arrangements with NationsCredit.
Funding for such repurchase was provided by (i) distribution to the Parent by
the Company of $2.5 million and (ii) the advance to the Parent by AFA
International Limited and Mr. Gratch of a like amount in cash. The advance of
those funds was evidenced by unsecured promissory notes of the Parent bearing
interest at the rate of 11.5% per annum. The principal amount of such notes are
prepayable at any time at the option of the Parent, either in cash or by
delivery of half of the warrants so repurchased from NationsCredit, and, unless
sooner prepaid, will mature on May 15, 2008.
The Parent and its U.S. subsidiaries (including Indesco) have entered into
a tax sharing agreement providing (among other things) that Parent shall pay the
federal income tax liability of the consolidated federal income tax group that
includes Indesco and such subsidiaries and that Indesco and each such
subsidiary, subject to certain limitations, will make payments to Parent on
account of income taxes, in an amount determined as if Indesco and the
subsidiaries filed a consolidated federal income tax return that did not include
the Parent.
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<PAGE> 53
THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING OLD NOTES
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal (which together constitute the
Exchange Offer), the Company will accept for exchange Old Notes that are
properly tendered on or prior to the Expiration Date and not withdrawn as
permitted below. As used herein, the term "Expiration Date" means 5:00 p.m., New
York City time, on , 1998; provided, however, that if the Company,
in its sole discretion, has extended the period of time during which the
Exchange Offer is open, the term "Expiration Date" means the latest time and
date (not later than , 1998) to which the Exchange Offer is
extended.
As of the date of this Prospectus, $145,000,000 aggregate principal amount
of Old Notes is outstanding. This Prospectus, together with the Letter of
Transmittal, is first being sent to holders of the Old Notes on or about
, 1998, to all holders of Old Notes known to the Company. The
Company's obligation to accept Old Notes for exchange pursuant to the Exchange
Offer is subject to certain customary conditions as set forth below under
"-- Certain Conditions to the Exchange Offer."
The Company expressly reserves the right, at any time and from time to
time, to extend the period of time during which the Exchange Offer is open, and
thereby to delay acceptance for exchange of any Old Notes, by giving notice by
press release or other announcement of such extension to the holders of the
Notes as described below. However, in no event may such extension continue
beyond , 1998. During any such extension, all Old Notes previously
tendered will remain subject to the Exchange Offer and may be accepted for
exchange by the Company. Any Old Notes not accepted for exchange for any reason
will be returned without expense to the tendering holders thereof as promptly as
practicable after the expiration or termination of the Exchange Offer.
Old Notes tendered in the Exchange Offer must be in denominations of $1,000
or any integral multiple thereof.
The Company expressly reserves the right to amend or terminate the Exchange
Offer, and not to accept for exchange any Old Notes not theretofore accepted for
exchange, upon the occurrence of any of the conditions to the Exchange Offer
specified below under "-- Certain Conditions to the Exchange Offer." The Company
will give notice of any extension, amendment, non-acceptance or termination to
the holders of Old Notes as promptly as practicable, such notice in the case of
any extension to be issued by means of a press release or other public
announcement no later than 9:00 a.m., New York City time, on the next business
day after the previously scheduled Expiration Date.
PROCEDURES FOR TENDERING NOTES
Only a registered holder of Old Notes may tender such Notes in the Exchange
Offer. The tender to the Company of Old Notes by a holder thereof as set forth
below and the acceptance thereof by the Company will constitute a binding
agreement between the tendering holder and the Company upon the terms and
subject to the conditions set forth in this Prospectus and in the accompanying
Letter of Transmittal. Except as set forth below, a holder who wishes to tender
Old Notes for exchange pursuant to the Exchange Offer must transmit a properly
completed and duly executed Letter of Transmittal, including all other documents
required by such Letter of Transmittal, to The Bank of New York (the "Exchange
Agent") at one of the addresses set forth below under "Exchange Agent" on or
prior to the Expiration Date. In addition, either (i) certificates for such Old
Notes must be received by the Exchange Agent along with the Letter of
Transmittal, (ii) a timely confirmation of a book-entry transfer ("a Book-Entry
Confirmation") of such Old Notes, if such procedure is available, into the
Exchange Agent's account at The Depository Trust Company (the "Book-Entry
Transfer Facility") pursuant to the procedure for book-entry transfer described
below, must be received by the Exchange Agent prior to the Expiration Date, or
(iii) the holder must comply with the guaranteed delivery procedures described
below. THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS. IF SUCH DELIVERY
IS BY MAIL, IT IS RECOMMENDED THAT REGIS-
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TERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, BE USED. IN ALL
CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY. NO LETTERS
OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY.
Any beneficial owner of Old Notes whose Old Notes are registered in the
name of a broker, dealer, commercial bank, trust company, or other nominee and
who wishes to tender such Old Notes in the Exchange Offer should contact 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 its own
behalf, such owner must, prior to completing and executing the Letter of
Transmittal and delivering such beneficial owner's Old Notes, either make
appropriate arrangements to register ownership of such Old Notes in such
beneficial owner's name or obtain a properly completed bond power from the
registered holder. The transfer of registered ownership may take considerable
time.
Signatures on a Letter of Transmittal or a notice of withdrawal described
below (see "-- Withdrawal Rights"), as the case may be, must be guaranteed (see
"-- Guaranteed Delivery Procedures") unless the Old Notes surrendered for
exchange pursuant thereto are tendered (i) by a registered holder of those Old
Notes 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 (as defined below). 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, such guaranties must be by a financial
institution (including most banks, savings and loan associations and brokerage
houses) that is a participant in the Securities Transfer Agents Medallion
Program, the New York Stock Exchange Medallion Program or the Stock Exchanges
Medallion Program (collectively, "Eligible Institutions"). If Notes are
registered in the name of a person other than a signer of the Letter of
Transmittal, the Notes surrendered for exchange must be endorsed by or be
accompanied by a written instrument or instruments of transfer or exchange, in
satisfactory form as determined by the Company in its sole discretion, duly
executed by the registered holder exactly as the name or names of the registered
holder or holders appear on the Old Notes with the signature thereon guaranteed
by an Eligible Institution.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Old Notes tendered for exchange will be determined by
the Company in its sole discretion, which determination shall be final and
binding. The Company reserves the absolute right to reject any and all tenders
of any particular Old Notes not properly tendered or not to accept any
particular Old Notes not properly tendered or the acceptance of which might, in
the judgment of the Company or its counsel, be unlawful. The Company also
reserves the absolute right to waive any defects or irregularities or conditions
of the Exchange Offer as to any particular Old Notes either before or after the
Expiration Date (including the right to waive the ineligibility of any holder
who seeks to tender Old Notes in the Exchange Offer). The interpretation by the
Company of the terms and conditions of the Exchange Offer as to any particular
Old Notes either before or after the Expiration Date (including the Letter of
Transmittal and the instructions thereto) shall be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of Old Notes for exchange must be cured within such reasonable period of time as
the Company shall determine. None of the Company, the Exchange Agent or any
other person shall be under any duty to give notification of any defect or
irregularity with respect to any tender of Old Notes for exchange, nor shall any
of them incur any liability for failure to give such notification.
If the Letter of Transmittal or any Old Notes or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such person should so indicate when signing, and, unless waived by the
Company, proper evidence satisfactory to the Company of their authority to so
act must be submitted with the Letter of Transmittal.
By tendering Old Notes for exchange, each holder will represent to the
Company that, among other things, the New Notes acquired pursuant to the
Exchange Offer are being acquired in the ordinary course of business of the
person receiving such New Notes, whether or not such person is the holder, and
that neither the holder nor such other person has any arrangement or
understanding with any person to engage or participate in a distribution of the
New Notes. If any holder or any such other person is an "affiliate", as
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<PAGE> 55
defined under Rule 405 of the Securities Act, of the Company or is engaged in or
intends to engage in, or has an arrangement or understanding with any person to
participate in, a distribution of the New Notes to be acquired pursuant to the
Exchange Offer, such holder or any such other person (i) may not rely on the
applicable interpretation of the staff of the Commission and (ii) must comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any resale transaction. Each broker-dealer that receives New
Notes for its own account in exchange for Old Notes that were acquired by such
broker-dealer as a result of market-making or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale of
such New Notes. See "Plan of Distribution." The Letter of Transmittal states
that by so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.
ACCEPTANCE OF NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Company will accept, promptly after the Expiration Date, all Old Notes
properly tendered and will issue the New Notes promptly after acceptance of the
Old Notes. See "-- Certain Conditions to the Exchange Offer" below. For purposes
of the Exchange Offer, the Company will be deemed to have accepted properly
tendered Old Notes for exchange when, as and if the Company has given oral or
written notice thereof to the Exchange Agent.
For each Old Note accepted for exchange, the holder of such Old Note will
receive as set forth below under "Description of the Notes -- Book-Entry,
Delivery and Form" a New Note having a principal amount equal to that of the
surrendered Old Note. Accordingly, registered holders of New Notes on the
relevant record date for the first interest payment date following the
consummation of the Exchange Offer will receive interest accruing from the most
recent date to which interest has been paid on the Old Notes or, if no interest
has been paid, from April 23, 1998. Old Notes accepted for exchange will cease
to accrue interest from and after the date of consummation of the Exchange
Offer. Holders whose Old Notes are accepted for exchange will not receive any
payment in respect of accrued interest on such Old Notes otherwise payable on
any interest payment date for which the record date occurs on or after
consummation of the Exchange Offer.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of certificates for such Old Notes or a timely Book-Entry
Confirmation of such Old Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility, a properly completed and duly executed Letter of
Transmittal and all other required documents. If any tendered Old Notes are not
accepted for any reason set forth in the terms and conditions of the Exchange
Offer or if Old Notes are submitted for a greater principal amount than the
holder desires to exchange, such unaccepted or non-exchanged Old Notes will be
returned without expense to the tendering holder thereof (or, in the case of Old
Notes tendered by book-entry transfer into the Exchange Agent's account at the
Book-Entry Transfer Facility pursuant to the book-entry procedures described
below, such non-exchanged Old Notes will be credited to an account maintained
with such Book-Entry Transfer Facility) as promptly as practicable after the
expiration or termination of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus, and
any financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Old Notes by causing the
Book-Entry Transfer Facility to transfer such Old Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility in accordance with such
Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Old Notes may be effected through book-entry transfer at the
Book-Entry Transfer Facility, the Letter of Transmittal or a facsimile thereof,
with any required signature guarantees and any other required documents, must,
in any case, be transmitted to and received by the Exchange Agent at the address
set forth below under "-- Exchange Agent" on or prior to the Expiration Date or
the guaranteed delivery procedures described below must be complied with.
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<PAGE> 56
GUARANTEED DELIVERY PROCEDURES
If a registered holder of Old Notes desires to tender such Old Notes and
such Old Notes are not immediately available, or time will not permit such
holder's Old Notes or other required documents to reach the Exchange Agent
before the Expiration Date, or the procedure for book-entry transfer cannot be
completed on a timely basis, a tender may be effected if (i) the tender is made
through an Eligible Institution, (ii) on or prior to 5:00 P.M., New York City
time, on the Expiration Date, the Exchange Agent receives from such Eligible
Institution a properly completed and duly executed Letter of Transmittal (or
facsimile thereof) and Notice of Guaranteed Delivery, substantially in the form
provided by the Company (by telegram, telex, facsimile transmission, mail or
hand delivery), setting forth the name and address of the holder of such Old
Notes and the amount of such Old Notes that are being tendered, stating that the
tender is being made thereby and guaranteeing that, within three New York Stock
Exchange ("NYSE") trading days after the date of execution of the Notice of
Guaranteed Delivery, the certificates for all physically tendered Old Notes, in
proper form for transfer, or a Book-Entry Confirmation, as the case may be, and
any other documents required by the Letter of Transmittal will be deposited by
the Eligible Institution with the Exchange Agent, and (iii) the certificates for
all physically tendered Old Notes, in proper form for transfer, or a Book-Entry
Confirmation, as the case may be, and any other documents required by the Letter
of Transmittal are deposited by the Eligible Institution within three NYSE
trading days after the date of execution of the Notice of Guaranteed Delivery.
WITHDRAWAL RIGHTS
Tenders of Old Notes may be withdrawn at any time prior to 5:00 P.M., New
York City time, on the Expiration Date. For a withdrawal to be effective, a
written notice of withdrawal must be received by the Exchange Agent at one of
the addresses set forth below under "-- Exchange Agent." Any such notice of
withdrawal must specify the name of the person having tendered the Old Notes to
be withdrawn, identify the Old Notes to be withdrawn (including the principal
amount of such Old Notes), and (where certificate for such Old Notes have been
transmitted) specify the name in which such Old Notes are registered, if
different from that of the withdrawing holder. If certificates for Old Notes
have been delivered or otherwise identified to the Exchange Agent, then, prior
to the release of such certificates the withdrawing holder must also submit the
serial numbers of the particular certificates to be withdrawn and a signed
notice of withdrawal with signatures guaranteed by an Eligible Institution
unless such holder is an Eligible Institution in which case such guarantee will
not be required. If Old Notes have been tendered pursuant to the procedure for
book-entry transfer described above, any notice of withdrawal must specify the
name and number of the account at the Book-Entry Transfer Facility to be
credited with the withdrawn Old Notes and otherwise comply with the procedures
of such facility. All questions as to the validity, form and eligibility
(including time of receipt) of such notices will be determined by the Company,
whose determination will be final and binding on all parties. Any Old Notes so
withdrawn will be deemed not have been validly tendered for exchange purposes of
the Exchange Offer. Any Old Notes that have been tendered for exchange but that
are not exchanged for any reason will be returned to the holder thereof without
cost to such holder (or, in the case of Old Notes tendered by book-entry
transfer into the Exchange Agent's account at the Book-Entry Transfer Facility
pursuant to the book-entry transfer procedures described above, such Old Notes
will be credited to an account maintained with such Book-Entry Transfer Facility
for the Old Notes) as soon as practicable after withdrawal, rejection of tender
or termination of the Exchange Offer. Properly withdrawn Old Notes may be
retendered at any time on or prior to the Expiration Date by following one of
the procedures described above under "-- Procedures for Tendering Old Notes."
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provisions of the Exchange Offer, and subject to
its obligations pursuant to the Registration Rights Agreement, the Company shall
not be required to accept for exchange, or to issue New
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Notes in exchange for, any Old Notes, and may terminate or amend the Exchange
Offer, if, at any time before the acceptance of such Old Notes for exchange, any
of the following events shall occur:
(i) any injunction, order or decree shall have been issued by any
court or any governmental agency that would prohibit, prevent or otherwise
materially impair the ability of the Company to proceed with the Exchange
Offer; or
(ii) the Exchange Offer will violate any applicable law or any
applicable interpretation of the staff or the Commission.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company in whole or in part at any time and from time to time in
its sole discretion. The failure by the Company at any time to exercise any of
the foregoing rights shall not be deemed a waiver of any such right and such
right shall be deemed an ongoing right which may be asserted at any time and
from time to time.
In addition, the Company will not accept for exchange any Old Notes
tendered, and no New Notes will be issued in exchange for any such Old Notes, if
at such time any stop order is threatened by the Commission or in effect with
respect to the Registration Statement of which this Prospectus is a part or the
qualification of the Indenture under the Trust Indenture Act of 1939, as
amended.
The Exchange Offer is not conditioned on any minimum principal amount of
Notes being tendered for exchange.
EXCHANGE AGENT
Norwest Bank Minnesota, National Association has been appointed as the
Exchange Agent for the Exchange Offer. All executed Letters of Transmittal
should be directed to the Exchange Agent at one of the addresses set forth
below. Questions and requests for assistance, requests for additional copies of
this Prospectus or the Letter of Transmittal and requests or Notices of
Guaranteed Delivery should be directed to the Exchange Agent addressed as
follows:
<TABLE>
<S> <C> <C>
By Registered or Certified Mail: By Overnight Delivery: By Hand Delivery:
Norwest Bank Minnesota, N.A. Norwest Bank Minnesota, Norwest Bank Minnesota,
Corporate Trust Operations N.A. N.A.
P.O. Box 1517 Corporate Trust Services Northstar East Building
Minneapolis, MN 55480-1517 Sixth and Marquette Avenue 608 Second Avenue South,
Minneapolis, MN 55479-0113 12th Floor
Corporate Trust Services
Minneapolis, MN
</TABLE>
Facsimile Transmission
Number:
(For Eligible Institutions Only)
(612) 667-4927
Confirm Receipt of Facsimile
by Telephone:
(612) 667-9764
DELIVERY OF THE LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH
ABOVE DOES NOT CONSTITUTE A VALID DELIVERY OF SUCH LETTER OF TRANSMITTAL.
FEES AND EXPENSES
The Company will not make any payment to brokers, dealers or others
soliciting acceptances of the Exchange Offer.
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<PAGE> 58
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company and are estimated to be approximately $425,000.
TRANSFER TAXES
Holders who tender their Old Notes for exchange will not be obligated to
pay any transfer taxes in connection therewith, except that holders who instruct
the Company to register New Notes in the name of, or request that Old Notes not
tendered or not accepted in the Exchange Offer be returned to, a person other
than the registered tendering holder will be responsible for the payment of any
applicable transfer tax thereon.
CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the provisions in
the Indenture regarding transfer of the Old Notes, including the restrictions on
transfer of such Old Notes as set forth in the legend thereon, as a consequence
of the issuance of the Old Notes pursuant to exemptions from, or in transactions
not subject to, the registration requirements of the Securities Act. In general,
the Old Notes may not be offered or sold, unless registered under the Securities
Act, except pursuant to an available exemption from, or in a transaction that is
otherwise not subject to, the Securities Act. Upon consummation of the Exchange
Offer, the Company's principal obligations under the Registration Rights
Agreement will terminate and the Company does not currently anticipate that it
will register the Old Notes under the Securities Act. To the extent that Old
Notes are tendered and accepted for exchange pursuant to the Exchange Offer, any
trading market for those Old Notes that are not so tendered and remain
outstanding could be adversely affected.
RESALES OF NEW NOTES
The Company is making the Exchange Offer in reliance upon interpretations
by the staff of the Commission, as set forth in no-action letters issued to
third parties. Based upon those interpretations, the Company believes that New
Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be
offered for resale, resold or otherwise transferred by a holder thereof (other
than a holder that is an "affiliate" of the Company within the meaning of Rule
405 under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such New
Notes are acquired in the ordinary course of such holder's business and such
holder, other than a broker-dealer, has no arrangement or understanding with any
person to engage or participate in a distribution of such New Notes. 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 as in such other circumstances. Each holder
of Old Notes, other than a broker-dealer, must acknowledge in the Letter of
Transmittal that it is not engaged in, and does not intend to engage in, a
distribution of the New Notes and has no arrangement or understanding to
participate in a distribution of the New Notes. If any holder is an affiliate of
the Company or is engaged in or intends to engage in or has any arrangement or
understanding with respect to a distribution of the New Notes to be acquired
pursuant to the Exchange Offer, such holder (i) may not rely on the applicable
interpretations of the staff of the Commission and (ii) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction.
Each broker-dealer that receives New Notes for its own account in exchange
for Old Notes pursuant to the Exchange Offer must acknowledge that such Old
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities and that it will deliver a prospectus in
connection with any resale of such New Notes. The Letter of Transmittal states
that by so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from time
to time, may be used by a broker-dealer in connection with resales of New Notes
received in exchange for Old Notes that were acquired by a broker-dealer as a
result of market-making activities or other trading activities. The Company has
agreed that starting on the Expiration Date and ending on the close of business
one year after the Expiration Date, it will make this Prospectus, as amended or
supplemented, available to broker-dealers for use in connection with any such
resale. In addition, until , 1998, all dealers effecting transactions
in the New Notes may be required to deliver a Prospectus.
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DESCRIPTION OF THE NOTES
The Old Notes were issued and the New Notes will be issued under an
indenture dated as of April 23, 1998 (the "Indenture") among the Company, the
Subsidiary Guarantors and Norwest Bank Minnesota, National Association, as
trustee (the "Trustee"). A copy of the Indenture, including the forms of the Old
Notes and the New Notes, has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part. For each Old Note accepted for
exchange, the holder of such Old Note will receive a New Note having a principal
amount equal to that of the surrendered Old Note. Old Notes that remain
outstanding after the consummation of the Exchange Offer and New Notes issued in
connection with the Exchange Offer will be treated as a single class of
securities under the Indenture. The Indenture is subject to and governed by the
Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). The
following summary of the material provisions of the Indenture does not purport
to be complete and is subject to, and qualified in its entirety by, reference to
the provisions of 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. For definitions of certain capitalized terms used in the
following summary, see "Certain Definitions" below. As used in this section, the
term "Notes" means the Old Notes and the New Notes, treated as a single class.
PRINCIPAL, MATURITY AND INTEREST
The Notes will mature on April 15, 2008, are limited in aggregate principal
amount to $145.0 million and are senior subordinated unsecured obligations of
the Company. The Indenture provides for the issuance of up to $75.0 million
aggregate principal amount of additional Notes (the "Additional Notes") having
identical terms and conditions to the outstanding Notes, subject to compliance
with the covenants contained in the Indenture. Any Additional Notes will be part
of the same issue as the outstanding Notes and will vote on all matters with the
outstanding Notes. For purposes of this "Description of the Notes," reference to
the Notes does not include Additional Notes. No offering of any such Additional
Notes is being or shall in any manner be deemed to be made by this Prospectus.
In addition, there can be no assurance as to when or whether the Company will
issue any such Additional Notes or as to the aggregate principal amount of such
Additional Notes.
Interest on the Notes will accrue at the rate of 9.75% per annum and will
be payable semi-annually on each April 15 and October 15 (each an "Interest
Payment Date"), commencing October 15, 1998, to the Holders of record on the
immediately preceding April 1 and October 1. 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 original date of issuance (the "Issue Date"). Accordingly,
registered holders of New Notes on the relevant record date for the first
Interest Payment Date following the consummation of the Exchange Offer will
receive interest from the most recent Interest Payment Date to which interest
has been paid on the Old Notes, or if no interest has been paid, from April 23,
1998 (the date of original issuance of the Old Notes). Old Notes accepted for
exchange will cease to accrue interest from and after the date of the
consummation of the Exchange Offer. Holders whose Old Notes are accepted for
exchange will not receive any payment in respect of interest on such Old Notes
otherwise payable on any Interest Payment Date for which the record date occurs
on or after the consummation of the Exchange Offer. Interest will be computed on
the basis of a 360-day year comprising twelve 30-day months.
The principal of and premium, if any, and interest on the Notes will be
payable and the Notes will be exchangeable and transferable, at the office or
agency of the Company in The City of New York maintained for such purposes
(which initially will be the office of the Trustee located in care of The
Depository Trust Company, at 55 Water Street, New York, New York 10041) or, at
the option of the Company (which option the Company currently intends to
exercise), payment of interest may be paid by check mailed to the address of the
person entitled thereto as such address appears in the security register. The
Notes will be issued only in registered form without coupons and only in
denominations of $1,000 and any integral multiple thereof. No service charge
will be made for any registration of transfer or exchange or redemption of
Notes, but the Company may require payment in certain circumstances of a sum
sufficient to cover any tax or other governmental charge that may be imposed in
connection therewith.
The Notes will not be entitled to the benefit of any sinking fund.
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SUBORDINATION
The Old Notes are and the New Notes will be unsecured senior subordinated
obligations of the Company. The payment of principal of, premium, if any, and
interest on the Notes will be subordinated in right of payment, as set forth in
the Indenture, to the prior payment in full in cash or cash equivalents of all
amounts payable under the Senior Indebtedness.
Upon any distribution to creditors of the Company in a total or partial
liquidation or dissolution of the Company or in a bankruptcy, reorganization,
insolvency, receivership or similar proceeding relating to the Company or its
property, whether voluntary or involuntary, an assignment for the benefit of
creditors or any marshaling of the Company's assets and liabilities, the holders
of Senior Indebtedness will be entitled to receive payment in full in cash or
cash equivalents of all Obligations due on or in respect of such Senior
Indebtedness (including interest after the commencement of any such proceeding
at the rate specified in the applicable Senior Indebtedness) before the Holders
of Notes will be entitled to receive any payment with respect to the Notes, and
until all Obligations with respect to Senior Indebtedness are paid in full in
cash or cash equivalents, any distribution to which the Holders of Notes (or the
Trustee on their behalf) would be entitled shall be made to the holders of
Senior Indebtedness (except that Holders of Notes may receive securities that
are subordinated at least to the same extent as the Notes to Senior Indebtedness
and any securities issued in exchange for Senior Indebtedness and Holders of
Notes may recover payments made from the trust described under the caption
"Legal Defeasance and Covenant Defeasance").
The Company also may not make any direct or indirect payment upon or in
respect of the Notes (except in such subordinated securities or from the trust
described under the caption "Legal Defeasance and Covenant Defeasance") if (i) a
default in the payment when due of all or any portion of the principal of,
premium, if any, or interest on or any other obligations under or in respect of
any Designated Senior Indebtedness exists, whether at maturity, on account of
mandatory redemption or prepayment, acceleration or otherwise and such default
shall not have been cured or waived or (ii) any other default occurs and is
continuing with respect to Designated Senior Indebtedness which permits holders
of the Designated Senior Indebtedness as to which such default relates to
accelerate its maturity and the Trustee receives a notice of such default (a
"Payment Blockage Notice") from the Agent Bank or the holders or the
representative of the holders of any Designated Senior Indebtedness. Payments on
the Notes may and shall be resumed (a) in the case of a payment default, upon
the date on which such default is cured or waived and (b) in case of a
nonpayment default, the earlier of the date on which such nonpayment default is
cured or waived or 179 days after the date on which the applicable Payment
Blockage Notice is received. No new period of payment blockage may be commenced
by a Payment Blockage Notice unless and until 360 days have elapsed since the
first day of the effectiveness of the immediately prior Payment Blockage Notice.
No nonpayment default that existed or was continuing on the date of delivery of
any Payment Blockage Notice to the Trustee shall be, or be made, the basis for a
subsequent Payment Blockage Notice, unless such default has been cured or waived
for a period of not less than 90 days.
The Indenture will further require that the Company promptly notify holders
of Senior Indebtedness if payment of the Notes is accelerated because of any
Event of Default.
As a result of the subordination provisions described above, in the event
of insolvency, bankruptcy, reorganization or liquidation of the Company,
creditors of the Company who are holders of Senior Indebtedness may recover
more, ratably, than the holders of the Notes, and assets which would otherwise
be available to pay obligations in respect of the Notes will be available only
after all Senior Indebtedness has been paid in full, and there may not be
sufficient assets remaining to pay amounts due on any or all of the Notes. See
"Risk Factors -- Subordination of Notes and Subsidiary Guarantees; Asset
Encumbrances." On a pro forma basis, after giving effect to the Transactions,
the principal amount of indebtedness outstanding at April 5, 1998 that would
have effectively ranked senior to the Notes would have been approximately $18.4
million and the Company would have had additional availability of $8.1 million
for borrowings under the Credit Agreement, all of which would be secured Senior
Indebtedness, if borrowed. The terms of the Indenture will permit the Company
and its Restricted Subsidiaries to incur additional Senior Indebtedness, subject
to certain limitations, including Indebtedness that may be secured by Liens on
property of the Company and its Restricted Subsidiaries. See the discussion
below under the captions "Certain Covenants --
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<PAGE> 61
Incurrence of Indebtedness and Issuance of Disqualified Stock" and "Certain
Covenants -- Liens." In addition, the Notes will be effectively subordinated to
all existing and future liabilities (including trade payables) of the Company's
subsidiaries that will not guarantee the Notes (the "Non-Guarantor
Subsidiaries"). On a pro forma basis, after giving effect to the Transactions,
as of April 5, 1998, the Company's Non-Guarantor Subsidiaries would have had
$8.1 million of indebtedness outstanding. See "Risk Factors -- Subordination of
Notes and Subsidiary Guarantees; Asset Encumbrances."
SUBSIDIARY GUARANTEES
Payment of the principal of (and premium, if any) and interest on the
Notes, when and as the same become due and payable, will be guaranteed, jointly
and severally, on a senior subordinated and unsecured basis (the "Subsidiary
Guarantees") by each of the Company's Restricted Subsidiaries organized within
the United States (collectively, the "Subsidiary Guarantors"). At the date of
this Prospectus, the Subsidiary Guarantors are CSI and AFA. In addition, if the
Company or any of its Restricted Subsidiaries acquires or creates another
Restricted Subsidiary (other than any Foreign Subsidiary), then such
newly-acquired or created Restricted Subsidiary shall be required to execute a
Subsidiary Guarantee, in accordance with the terms of the Indenture. See
"Certain Covenants -- Guarantees of Indebtedness by Restricted Subsidiaries."
The obligations of each Subsidiary Guarantor under its Subsidiary Guarantee is
limited in a manner that is intended to cause it not to constitute a fraudulent
conveyance or fraudulent transfer under applicable law. See "Risk
Factors -- Fraudulent Conveyance Statutes."
Each Subsidiary Guarantee is subordinated in right of payment, as set forth
in the Indenture, to the prior payment in full in cash or cash equivalents of
all amounts payable under the Senior Indebtedness of the relevant Subsidiary
Guarantor.
Upon any distribution to creditors of a Subsidiary Guarantor in a total or
partial liquidation or dissolution of such Subsidiary Guarantor or in a
bankruptcy, reorganization, insolvency, receivership or similar proceeding
relating to such Subsidiary Guarantor or its property, whether voluntary or
involuntary, an assignment for the benefit of creditors or any marshaling of
such Subsidiary Guarantor's assets and liabilities, the holders of Senior
Indebtedness of such Subsidiary Guarantor will be entitled to receive payment in
full in cash or cash equivalents of all Obligations due on or in respect of such
Senior Indebtedness (including interest after the commencement of any such
proceeding at the rate specified in the applicable Senior Indebtedness of such
Subsidiary Guarantor) before the Holders of Notes, or the Trustee on their
behalf, will be entitled to receive any payment with respect to the relevant
Subsidiary Guarantee, and until all Obligations with respect to Senior
Indebtedness of such Subsidiary Guarantor are paid in full in cash or cash
equivalents, any payment that would have been made under such Subsidiary
Guarantee shall be made to the holders of Senior Indebtedness of such Subsidiary
Guarantor (except that Holders of Notes may receive (i) Capital Stock of such
Subsidiary Guarantor (other than Disqualified Stock) and (ii) securities that
are subordinated at least to the same extent as such Subsidiary Guarantee to
Senior Indebtedness of such Subsidiary Guarantor and to any securities issued in
exchange for Senior Indebtedness of such Subsidiary Guarantor).
Such Subsidiary Guarantor also may not make any direct or indirect payment
upon or in respect of its Subsidiary Guarantee (except in such subordinated
securities of such Subsidiary Guarantor) if (i) a default in the payment when
due of all or any portion of the principal of, premium, if any, or interest on
or any other obligations under or in respect of any Designated Senior
Indebtedness of the relevant Subsidiary Guarantor exists, whether at maturity,
on account of mandatory redemption or prepayment, acceleration or otherwise and
such default shall not have been cured or waived or (ii) any other default
occurs and is continuing with respect to Designated Senior Indebtedness of such
Subsidiary Guarantor which permits holders of the Designated Senior Indebtedness
of such Subsidiary Guarantor as to which such default relates to accelerate its
maturity and the Trustee receives a Payment Blockage Notice from the holders or
the representative of the holders of any Designated Senior Indebtedness of such
Subsidiary Guarantor. Any payments under any Subsidiary Guarantee may and shall
be resumed (a) in the case of a payment default, upon the date on which such
default is cured or waived and (b) in the case of a nonpayment default, the
earlier of the date on which such nonpayment default is cured or waived or 179
days after the date on which the applicable Payment Blockage Notice is received.
No new period of payment blockage may be commenced by a Payment Blockage Notice
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unless and until 360 days have elapsed since the effectiveness of the
immediately prior Payment Blockage Notice. No nonpayment default that existed or
was continuing on the date of delivery of any Payment Blockage Notice to the
Trustee shall be, or be made, the basis for a subsequent Payment Blockage
Notice.
As a result of the subordination provisions described above, in the event
of an insolvency, bankruptcy, reorganization or liquidation of a Subsidiary
Guarantor, creditors of the relevant Subsidiary Guarantor who are holders of
Senior Indebtedness of such Subsidiary Guarantor may recover more, ratably, than
the holders of the Notes, and assets which would otherwise be available to pay
obligations in respect of the Notes will be available only after all Senior
Indebtedness of such Subsidiary Guarantor has been paid in full, and there may
not be sufficient assets remaining to pay amounts due on any or all of the
Notes. As of April 5, 1998, on a pro forma basis after giving effect to the
Transactions, the Subsidiary Guarantors would have had $10.3 million in the
aggregate of outstanding Senior Indebtedness, all of which would have consisted
of guarantees of the Credit Agreement. The terms of the Indenture will permit
Restricted Subsidiaries of the Company to incur additional Senior Indebtedness,
subject to certain limitations, including Indebtedness that may be secured by
Liens on property of the Restricted Subsidiaries. See the discussion below under
the captions "Certain Covenants -- Incurrence of Indebtedness and Issuance of
Disqualified Stock" and "Certain Covenants -- Liens."
The Indenture provides that upon a sale or other disposition to a Person
not an Affiliate of the Company of all or substantially all of the assets of any
Subsidiary Guarantor, whether by way of merger, consolidation or otherwise, or a
sale or other disposition to a Person not an Affiliate of the Company of all of
the Capital Stock of any Subsidiary Guarantor, whether by way of merger,
consolidation or otherwise, which transaction is carried out in accordance with
the covenants described below under the captions "Repurchase at the Option of
Holders -- Asset Sales" or "Certain Covenants -- Merger, Consolidation or Sale
of Assets," so long as (a) no Default or Event of Default shall have occurred
and be continuing at the time of, or would occur after giving effect on a pro
forma basis to, such release and, (b) the Company could incur at least $1.00 of
additional Indebtedness (other than Permitted Indebtedness) pursuant to the
first paragraph of "Certain Covenants -- Incurrence of Indebtedness and Issuance
of Disqualified Stock" on the date on which such release occurs, such Subsidiary
Guarantor will be deemed automatically and unconditionally released and
discharged from all of its obligations under its Subsidiary Guarantee without
any further action on the part of the Trustee or any holder of the Notes;
provided that any such termination shall occur only to the extent that all
obligations of such Subsidiary Guarantor under all of its guarantees of, and
under all of its pledges of assets or other security interests which secure any,
Indebtedness of the Company shall also terminate upon such sale, disposition or
release.
OPTIONAL REDEMPTION
The Notes will not be redeemable at the Company's option prior to April 15,
2003. Thereafter, the Notes will be redeemable, at the option of the Company, at
any time as a whole or from time to time in part, on not less than 30 nor more
than 60 days' prior notice to the Holders at the following Redemption Prices
(expressed as percentages of principal amount) together with accrued interest,
if any, to the redemption date (subject to the right of holders of record in the
relevant record date to receive interest due on an interest payment date), if
redeemed during the 12-month period beginning on April 15, of the years
indicated below.
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2003...................................................... 104.875%
2004...................................................... 103.250
2005...................................................... 101.625
2006 and thereafter....................................... 100.000
</TABLE>
Notwithstanding the foregoing, at any time or from time to time prior to
April 15, 2001, the Company may redeem, on one or more occasions, up to 35% of
the sum of (i) the initial aggregate principal amount of the Notes and (ii) the
initial aggregate principal amount of any Additional Notes with the net proceeds
of one or more Equity Offerings at a redemption price equal to 109.75% of the
principal amount thereof, plus accrued
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interest, if any, to the redemption date (subject to the right of holders of
record on the relevant record date to receive interest due on an interest
payment date); provided that, immediately after giving effect to such
redemption, at least 65% of the initial aggregate principal amount of the Notes
(excluding the Additional Notes) remains outstanding; provided further that such
redemptions shall occur within 60 days of the date of closing of each Equity
Offering.
If less than all the Notes or Additional Notes, if any, are to be redeemed,
the particular Notes to be redeemed will be selected not more than 60 days prior
to the redemption date by the Trustee by such method as the Trustee deems fair
and appropriate, provided that no Note of $1,000 in principal amount at maturity
or less shall be redeemed in part.
MANDATORY REDEMPTION
Except as set forth below under "Repurchase at the Option of Holders," the
Company is not required to make mandatory redemption or sinking fund payments
with respect to the Notes.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
If a Change of Control occurs at any time, then each Holder will have the
right to require that the Company purchase such Holder's Notes and Additional
Notes, if any, in whole or in part in integral multiples of $1,000, at a
purchase price in cash equal to 101% of the principal amount of such Notes, plus
accrued and unpaid interest, if any, to the date of purchase, pursuant to the
offer described below (the "Change of Control Offer") and the other procedures
set forth in the Indenture.
Within 30 days following any Change of Control, the Company will notify the
Trustee thereof and give written notice of such Change of Control to each Holder
of Notes and Additional Notes by first-class mail, postage prepaid, at its
address appearing in the security register, stating, among other things: (i) the
purchase price and the purchase date, which will be a Business Day no earlier
than 30 days nor later than 60 days from the date such notice is mailed or such
later date as is necessary to comply with requirements under the Exchange Act;
(ii) that any Note or Additional Note not tendered will continue to accrue
interest; (iii) that, unless the Company defaults in the payment of the purchase
price, any Notes or Additional Notes accepted for payment pursuant to the Change
of Control Offer will cease to accrue interest after the Change of Control
purchase date; and (iv) certain other procedures that a Holder must follow to
accept a Change of Control Offer or to withdraw such acceptance.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the purchase price for all
of the Notes and Additional Notes that might be tendered by Holders of Notes and
Additional Notes seeking to accept the Change of Control Offer. The failure of
the Company to make or consummate the Change of Control Offer or pay the
applicable Change of Control purchase price when due would result in an Event of
Default and would give the Trustee and the Holders of Notes and Additional Notes
the rights described under "Events of Default and Remedies."
The Credit Agreement provides that certain change of control events with
respect to the Company would constitute a default thereunder. Any future credit
agreements or other agreements relating to Senior Indebtedness to which the
Company becomes a party may contain similar restrictions and provisions. In the
event a Change of Control occurs at a time when the Company is prohibited from
purchasing Notes and Additional Notes, if any, the Company could seek the
consent of its lenders to the purchase of Notes and Additional Notes or could
attempt to refinance the borrowings that contain such prohibition. If the
Company does not obtain such a consent or repay such borrowings, the Company
will remain prohibited from purchasing Notes and Additional Notes, if any. In
such case, the Company's failure to purchase tendered Notes and Additional Notes
would constitute an Event of Default under the Indenture which would, in turn,
constitute a default under the Credit Agreement. In such circumstances, the
subordination provisions in the Indenture would likely restrict payments to the
Holders of Notes and Additional Notes.
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One of the events that constitutes a Change of Control under the Indenture
is the disposition of "all or substantially all" of the Company's assets. This
term has not been interpreted under New York law (which is the governing law of
the Indenture) to represent a specific quantitative test. As a consequence, in
the event Holders of Notes and Additional Notes elect to require the Company to
purchase the Notes and Additional Notes and the Company elects to contest such
election, there can be no assurance as to how a court interpreting New York law
would interpret the phrase in many circumstances.
The existence of a Holder's right to require the Company to purchase such
Holder's Notes or Additional Notes upon a Change of Control may deter a third
party from acquiring the Company in a transaction that constitutes a Change of
Control.
The definition of "Change of Control" in the Indenture is limited in scope.
The provisions of the Indenture may not afford Holders of Notes or Additional
Notes the right to require the Company to repurchase such Notes or Additional
Notes in the event of a highly leveraged transaction or certain transactions
with the Company's management or its affiliates, including a reorganization,
restructuring, merger or similar transaction involving the Company (including,
in certain circumstances, an acquisition of the Company by management or its
affiliates) that may adversely affect Holders, if such transaction is not a
transaction defined as a Change of Control. See "Certain Definitions" below for
the definition of "Change of Control." A transaction involving the Company's
management or its affiliates, or a transaction involving a recapitalization of
the Company, would result in a Change of Control if it is the type of
transaction specified in such definition.
The Company will comply with the applicable tender offer rules including
Rule 14e-1 under the Exchange Act, and any other applicable securities laws and
regulations in connection with a Change of Control Offer. To the extent that the
provisions of any securities laws or regulations conflict with the provisions of
the covenant described hereunder, the Company shall comply with the applicable
securities laws and regulations and shall not be deemed to have breached its
obligations under the covenant described hereunder by virtue thereof.
The Company will not, and will not permit any Restricted Subsidiary to,
create any restriction (other than restrictions (i) existing under Indebtedness
as in effect on the Closing Date or (ii) in refinancings of such Indebtedness or
in other Senior Indebtedness hereafter incurred so long as such restrictions on
indebtedness referred to in this clause (ii) are no more restrictive than the
restrictions in Indebtedness in existence on the Closing Date) that would
materially impair the ability of the Company to make a Change of Control Offer
to purchase the Notes or Additional Notes tendered for purchase.
Restrictions in the Indenture described herein on the ability of the
Company and its Restricted Subsidiaries to incur additional Indebtedness, to
grant Liens on its or their property, to make Restricted Payments and to make
Asset Sales may also make more difficult or discourage a takeover of the
Company, whether favored or opposed by the management of the Company.
Consummation of any such transaction in certain circumstances may require
redemption or repurchase of the Notes and Additional Notes, if any, and there
can be no assurance that the Company or the acquiring party will have sufficient
financial resources to effect such redemption or repurchase. In certain
circumstances, such restrictions and the restrictions on transactions with
Affiliates may make more difficult or discourage any leveraged buyout of the
Company or any of its Restricted Subsidiaries. While such restrictions cover a
variety of arrangements which have traditionally been used to effect highly
leveraged transactions, the Indenture may not afford the Holders of Notes and
Additional Notes, if any, protection in all circumstances from the adverse
aspects of a highly leveraged transaction, reorganization, restructuring, merger
or similar transaction.
ASSET SALES
The Company will not, and will not permit any Restricted Subsidiary to,
engage in any Asset Sale unless (i) the consideration received by the Company or
such Restricted Subsidiary for such Asset Sale is not less than the fair market
value of the assets sold evidenced by a resolution of the Board of Directors of
such entity set forth in an officers' certificate delivered to the Trustee and
(ii) the consideration received by the Company or the relevant Restricted
Subsidiary in respect of such Asset Sale consists of at least 75% cash or cash
equivalents (for purposes of this clause (ii), cash and cash equivalents
includes (a) the principal amount of
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any Indebtedness for money borrowed (as reflected in the Company's consolidated
balance sheet) of the Company or any Restricted Subsidiary that is assumed by
any transferee of any such assets or other property in such Asset Sale and (b)
any securities, notes or other obligations received by the Company or such
Restricted Subsidiary from such transferee that are converted within 30 days of
consummation of such Asset Sale by the Company or such Restricted Subsidiary
into cash and cash equivalents (to the extent of the cash and cash equivalents
received)).
If the Company or any Restricted Subsidiary engages in an Asset Sale, the
Company may, at its option, within 12 months after such Asset Sale, (i) apply
all or a portion of the Net Cash Proceeds to the permanent reduction of amounts
outstanding under the Credit Agreement or to the permanent repayment of other
senior Indebtedness of the Company or a Restricted Subsidiary or (ii) invest (or
enter into a legally binding agreement to invest) all or a portion of such Net
Cash Proceeds in properties and assets to replace the properties and assets that
were the subject of the Asset Sale or in properties and assets that will be used
in the business of the Company or its Restricted Subsidiaries, as the case may
be. If any such legally binding agreement to invest such Net Cash Proceeds is
terminated, the Company may, within 90 days of such termination or within 12
months of such Asset Sale, whichever is later, invest such Net Cash Proceeds as
provided in clause (i) or (ii) (without regard to the parenthetical contained in
such clause (ii)) above. The amount of such Net Cash Proceeds not so used as set
forth above in this paragraph shall constitute "Excess Proceeds."
When the aggregate amount of Excess Proceeds exceeds $5 million, the
Company will, within 30 days thereafter, make an offer to purchase (an "Excess
Proceeds Offer") from all Holders of Notes and Additional Notes, if any, on a
pro rata basis, in accordance with the procedures set forth in the Indenture,
the maximum principal amount (expressed as a multiple of $1,000) of Notes and
Additional Notes, if any, that may be purchased with the Excess Proceeds, at a
purchase price in cash equal to 100% of the principal amount thereof, plus
accrued interest, if any, to the date such offer to purchase is consummated. To
the extent that the aggregate principal amount of Notes and Additional Notes, if
any, tendered pursuant to such offer to purchase is less than the Excess
Proceeds, the Company may use such deficiency for general corporate purposes. If
the aggregate principal amount of Notes and Additional Notes, if any, validly
tendered and not withdrawn by holders thereof exceeds the Excess Proceeds, the
Notes and Additional Notes, if any, to be purchased will be selected on a pro
rata basis. Upon completion of such offer to purchase, the amount of Excess
Proceeds will be reset to zero.
The Company will comply with the applicable tender offer rules including
Rule 14e-1 under the Exchange Act, and any other applicable securities laws and
regulations in connection with the repurchase of Notes as a result of an Asset
Sale. To the extent that the provisions of any securities laws or regulations
conflict with the provisions of the covenant described hereunder, the Company
shall comply with the applicable securities laws and regulations and shall not
be deemed to have breached its obligations under the covenant described
hereunder by virtue thereof.
CERTAIN COVENANTS
RESTRICTED PAYMENTS
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, take any of the following actions:
(a) declare or pay any dividend on, or make any distribution to
holders of, any shares of the Capital Stock of the Company or any
Restricted Subsidiary, other than (i) dividends or distributions payable
solely in Qualified Equity Interests or (ii) dividends or distributions by
a Restricted Subsidiary payable to the Company or another Restricted
Subsidiary;
(b) purchase, redeem or otherwise acquire or retire for value,
directly or indirectly, any shares of Capital Stock, or any options,
warrants or other rights to acquire such shares of Capital Stock, of the
Company, any Restricted Subsidiary or any Affiliate of the Company (other
than, in either case, any such Capital Stock owned by the Company or any of
its Restricted Subsidiaries);
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(c) make any principal payment on, or repurchase, redeem, defease or
otherwise acquire or retire for value, prior to any scheduled principal
payment, sinking fund payment or maturity, any Pari Passu Indebtedness or
Subordinated Indebtedness; and
(d) make any Investment (other than a Permitted Investment) in any
Person;
(such payments or other actions described in (but not excluded from) clauses (a)
through (d) being referred to as "Restricted Payments"), unless at the time of,
and immediately after giving effect to, the proposed Restricted Payment:
(i) no Default or Event of Default has occurred and is continuing,
(ii) the Company could incur at least $1.00 of additional Indebtedness
pursuant to the first paragraph of the covenant described under the caption
"-- Incurrence of Indebtedness and Issuance of Disqualified Stock," and
(iii) the aggregate amount of all Restricted Payments made after the
Closing Date does not exceed the sum of:
(A) 50% of the aggregate Consolidated Net Income of the Company
during the period (taken as one accounting period) from the first day of
the Company's fiscal quarter during which the Closing Date occurs to the
last day of the Company's most recently ended fiscal quarter for which
internal financial statements are available at the time of such proposed
Restricted Payment (or, if such aggregate cumulative Consolidated Net
Income is a loss, minus 100% of such amount); plus
(B) the aggregate net cash proceeds received by the Company after
the Closing Date from the issuance or sale (other than to a Subsidiary)
of either (1) Qualified Equity Interests of the Company or (2) debt
securities or Disqualified Stock that have been converted into or
exchanged for Qualified Equity Interests of the Company, together with
the aggregate net cash proceeds received by the Company at the time of
such conversion or exchange.
Notwithstanding the foregoing, the Company and its Restricted Subsidiaries
may take the following actions, so long as no Default or Event of Default has
occurred and is continuing or would occur:
(a) the payment of any dividend in cash or Qualified Equity Interests
of the Company within 60 days after the date of declaration thereof, if at
the declaration date such payment would not have been prohibited by the
foregoing provisions;
(b) the repurchase, redemption or other acquisition or retirement for
value of any shares of Capital Stock of the Company, in exchange for, or
out of the net cash proceeds of a substantially concurrent issuance and
sale (other than to a Subsidiary) of, Qualified Equity Interests of the
Company;
(c) the purchase, redemption, defeasance or other acquisition or
retirement for value of any Pari Passu Indebtedness or Subordinated
Indebtedness in exchange for, or out of the net cash proceeds of a
substantially concurrent issuance and sale (other than to a Subsidiary) of,
shares of Qualified Equity Interests of the Company;
(d) the purchase, redemption, defeasance or other acquisition or
retirement for value of Pari Passu Indebtedness or Subordinated
Indebtedness in exchange for, or out of the net cash proceeds of a
substantially concurrent issuance or sale (other than to a Subsidiary) of,
Pari Passu Indebtedness or Subordinated Indebtedness, respectively, so long
as the Company or a Restricted Subsidiary would be permitted to refinance
such original Pari Passu Indebtedness or Subordinated Indebtedness with
such new Pari Passu Indebtedness or Subordinated Indebtedness pursuant to
clause (iv) of the definition of Permitted Indebtedness;
(e) the repurchase of any Subordinated Indebtedness at a purchase
price not greater than 101% of the principal amount of such Subordinated
Indebtedness in the event of a Change of Control in accordance with
provisions similar to the "Change of Control" covenant; provided that,
prior to or simultaneously with such repurchase, the Company has made the
Change of Control Offer as provided in
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such covenant with respect to the Notes and has repurchased all Notes
validly tendered for payment in connection with such Change of Control
Offer;
(f) the purchase, redemption, acquisition, cancellation or other
retirement for value of shares of Capital Stock of the Company or the
Parent, options on any such shares or related stock appreciation rights or
similar securities held by officers or employees or former officers or
employees of the Company or of any Restricted Subsidiary (or their estates
or beneficiaries under their estates) or by any employee benefit plan, upon
death, disability, retirement or termination of employment or pursuant to
the terms of any employee benefit plan or any other agreement under which
such shares of stock or related rights were issued; provided that the
aggregate cash consideration paid for such purchase, redemption,
acquisition, cancellation or other retirement of such shares of Capital
Stock after the Closing Date does not exceed in any fiscal year the sum of
(i) $500,000 and (ii) amounts referred to in clause (i) that remains unused
from the two immediately preceding fiscal years;
(g) the payment of any dividend or distribution by the Company to the
Parent pursuant to the terms of the tax sharing agreement in existence on
the Closing Date among the Company, the Parent and other members of the
consolidated group of corporations of which the Company is a member, and
any amendments to such agreement, provided that the tax sharing agreement
as so amended is no less favorable in any material respect to the Company
than the tax sharing agreement in effect on the Closing Date;
(h) the payment of dividends or distributions to the Parent to pay its
franchise taxes and other fees required to maintain its legal existence and
to provide for operating expenses of up to $150,000 in any fiscal year of
the Company;
(i) the payment of a distribution to the Parent that does not exceed
$2,500,000 on the Closing Date for the Parent's repurchase from
NationsCredit of warrants to purchase the Parent's common stock; and
(j) other Restricted Payments that do not exceed $1,000,000.
The actions described in clauses (b), (c), (e) and (j) of this paragraph
will be Restricted Payments that will be permitted to be taken in accordance
with this paragraph but will reduce the amount that would otherwise be available
for Restricted Payments under clause (iii) of the first paragraph of this
covenant and the actions described in clauses (a), (d), (f), (g), (h) and (i) of
this paragraph will be Restricted Payments that will be permitted to be taken in
accordance with this paragraph and will not reduce the amount that would
otherwise be available for Restricted Payments under clause (iii) of the first
paragraph of this covenant.
For the purpose of making any calculations under the Indenture (i) if a
Restricted Subsidiary is designated an Unrestricted Subsidiary, the Company will
be deemed to have made an Investment in an amount equal to the greater of the
fair market value or net book value of the net assets of such Restricted
Subsidiary at the time of such designation as determined by the Board of
Directors of the Company, and (ii) any property transferred to or from an
Unrestricted Subsidiary will be valued at fair market value at the time of such
transfer, as determined by the Board of Directors of the Company. The amount of
all Restricted Payments (other than cash) shall be the fair market value on the
date of the Restricted Payment of the asset(s) or securities proposed to be
transferred or issued by the Company or such Restricted Subsidiary, as the case
may be, pursuant to the Restricted Payment. The fair market value of any
non-cash Restricted Payment shall be determined by the Board of Directors whose
resolution with respect thereto shall be delivered to the Trustee, such
determination to be based upon an opinion or appraisal issued by an accounting,
appraisal or investment banking firm of national standing if such fair market
value exceeds $5 million. Not later than the date of making any Restricted
Payment, the Company shall deliver to the Trustee an officers' certificate
stating that such Restricted Payment is permitted and setting forth the basis
upon which the calculations required under "Certain Covenants -- Restricted
Payments" were computed, together with a copy of any fairness opinion or
appraisal required by the Indenture.
If the aggregate amount of all Restricted Payments calculated under the
foregoing provision includes an Investment in an Unrestricted Subsidiary or
other Person that thereafter becomes a Restricted Subsidiary, the aggregate
amount of all Restricted Payments calculated under the foregoing provision will
be reduced by the
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lesser of (x) the net asset value of such Subsidiary at the time it becomes a
Restricted Subsidiary and (y) the initial amount of such Investment.
If an Investment resulted in the making of a Restricted Payment, the
aggregate amount of all Restricted Payments calculated under the foregoing
provision will be reduced by the amount of any net reduction in such Investment
(resulting from the payment of interest or dividends, loan repayment, transfer
of assets or otherwise, other than the redesignation of an Unrestricted
Subsidiary or other Person as a Restricted Subsidiary), to the extent such net
reduction is not included in the Company's Consolidated Net Income; provided
that the total amount by which the aggregate amount of all Restricted Payments
may be reduced may not exceed the lesser of (x) the cash proceeds received by
the Company and its Restricted Subsidiaries in connection with such net
reduction and (y) the initial amount of such Investment.
In computing the Consolidated Net Income of the Company for purposes of the
foregoing clause (iii)(A) of the first paragraph of this covenant, (i) the
Company may use audited financial statements for the portions of the relevant
period for which audited financial statements are available on the date of
determination and unaudited financial statements and other current financial
data based on the books and records of the Company for the remaining portion of
such period and (ii) the Company will be permitted to rely in good faith on the
financial statements and other financial data derived from its books and records
that are available on the date of determination. If the Company makes a
Restricted Payment that, at the time of the making of such Restricted Payment,
would in the good faith determination of the Company be permitted under the
requirements of the Indenture, such Restricted Payment will be deemed to have
been made in compliance with the Indenture notwithstanding any subsequent
adjustments made in good faith to the Company's financial statements affecting
Consolidated Net Income of the Company for any period.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF DISQUALIFIED STOCK
The Company will not, and will not permit any Restricted Subsidiary to,
create, issue, assume, guarantee or in any manner become directly or indirectly
liable for the payment of, or otherwise incur (collectively, "incur"), any
Indebtedness (including Acquired Indebtedness and the issuance of Disqualified
Stock), except that the Company or any Subsidiary Guarantor may incur
Indebtedness if, at the time of such event, the Fixed Charge Coverage Ratio for
the immediately preceding four full fiscal quarters for which internal financial
statements are available, taken as one accounting period, would have been equal
to at least 2.0 to 1.0.
In making the foregoing calculation for any four-quarter period that
includes the Closing Date, pro forma effect will be given to the Offering, as if
such transactions had occurred at the beginning of such four-quarter period. In
addition (but without duplication), in making the foregoing calculation, pro
forma effect will be given to: (i) the incurrence of such Indebtedness and (if
applicable) the application of the net proceeds therefrom, including to
refinance other Indebtedness, as if such Indebtedness was incurred and the
application of such proceeds occurred at the beginning of such four-quarter
period; (ii) the incurrence, repayment or retirement of any other Indebtedness
by the Company or its Restricted Subsidiaries since the first day of such
four-quarter period as if such Indebtedness was incurred, repaid or retired at
the beginning of such four-quarter period; and (iii) the acquisition (whether by
purchase, merger or otherwise) or disposition (whether by sale, merger or
otherwise) of any company, entity or business acquired or disposed of by the
Company or its Restricted Subsidiaries, as the case may be, since the first day
of such four-quarter period, as if such acquisition or disposition occurred at
the beginning of such four-quarter period. In making a computation under the
foregoing clause (i) or (ii), (A) the amount of Indebtedness under a revolving
credit facility will be computed based on the average daily balance of such
Indebtedness during such four-quarter period, (B) if such Indebtedness bears, at
the option of the Company, a fixed or floating rate of interest, interest
thereon will be computed by applying, at the option of the Company, either the
fixed or floating rate, and (C) the amount of any Indebtedness that bears
interest at a floating rate will be calculated as if the rate in effect on the
date of determination had been the applicable rate for the entire period (taking
into account any Hedging Obligations applicable to such Indebtedness if such
Hedging Obligations have a remaining term at the date of determination in excess
of 12 months).
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Notwithstanding the foregoing, the Company may, and may permit its
Restricted Subsidiaries to, incur the following Indebtedness ("Permitted
Indebtedness"):
(i) Indebtedness of the Company or any Subsidiary Guarantor under the
Credit Agreement (and the incurrence by any Subsidiary Guarantor of
guarantees thereof) in an aggregate principal amount at any one time
outstanding not to exceed the greater of (x) $30 million or (y) the amount
of the Borrowing Base of the Company, less any amounts applied to the
permanent reduction of such credit facilities pursuant to the provisions of
the covenant described under the caption "-- Repurchase at the Option of
Holders -- Asset Sales;"
(ii) Indebtedness represented by the Notes (other than the Additional
Notes) and the Subsidiary Guarantees;
(iii) Existing Indebtedness (other than the Polytek Credit Agreement);
(iv) the incurrence by the Company of Permitted Refinancing
Indebtedness in exchange for, or the net proceeds of which are used to
refund, refinance or replace, any Indebtedness that is permitted to be
incurred under clause (ii) or (iii) above;
(v) Indebtedness owed by the Company to any Wholly Owned Restricted
Subsidiary or owed by any Restricted Subsidiary to the Company or a Wholly
Owned Restricted Subsidiary (provided that such Indebtedness is held by the
Company or such Restricted Subsidiary); provided, however, that any
Indebtedness of the Company owing to any such Restricted Subsidiary is
unsecured and subordinated in right of payment from and after such time as
the Notes shall become due and payable (whether at Stated Maturity,
acceleration, or otherwise) to the payment and performance of the Company's
obligations under the Notes;
(vi) Indebtedness of the Company or any Restricted Subsidiary under
Hedging Obligations incurred in the ordinary course of business;
(vii) Indebtedness of the Company or any Restricted Subsidiary
consisting of guarantees, indemnities or obligations in respect of purchase
price adjustments in connection with the acquisition or disposition of
assets, including, without limitation, shares of Capital Stock;
(viii) either (A) Capitalized Lease Obligations of the Company or any
Restricted Subsidiary or (B) Indebtedness under purchase money mortgages or
secured by purchase money security interests, in each case, incurred to
finance the purchase, lease or improvement of real or personal property so
long as (x) such Indebtedness is not secured by any property or assets of
the Company or any Restricted Subsidiary other than the property and assets
so acquired and (y) such Indebtedness is created within 90 days of the
acquisition of the related property; provided that the aggregate amount of
Indebtedness under clauses (A) and (B) does not exceed $10 million at any
one time outstanding;
(ix) Guarantees by any Restricted Subsidiary made in accordance with
the provisions of the covenant described under the caption "-- Guarantees
of Indebtedness by Restricted Subsidiaries;"
(x) Indebtedness under the Polytek Credit Agreement in an aggregate
principal amount at any one time outstanding not to exceed the greater of
(A) $11 million or (B) the amount of the Borrowing Base of Polytek;
(xi) Indebtedness of the Company or any Subsidiary Guarantor not
permitted by any other clause of this definition, in an aggregate principal
amount not to exceed $10 million at any one time outstanding; and
(xii) Indebtedness in respect of surety or performance bonds, worker's
compensation claims, payment obligations in connection with self-insurance
and other similar requirements arising in the ordinary course of business.
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LIENS
(a) The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, create, incur, assume or suffer to exist any Lien
securing Pari Passu Indebtedness or Subordinated Indebtedness of the Company on
or with respect to any of its property or assets, including any shares of stock
or indebtedness of any Restricted Subsidiary, whether owned at the Closing Date
or thereafter acquired, or any income, profits or proceeds therefrom, or assign
or otherwise convey any right to receive income thereon, unless (i) in the case
of any Lien securing Subordinated Indebtedness, the Notes are secured by a Lien
on such property, assets or proceeds that is senior in priority to such Lien and
(ii) in the case of any Lien securing Pari Passu Indebtedness, the Notes are
secured by a Lien on such property, assets or proceeds that is senior in
priority to or pari passu with such Lien.
(b) The Company will not permit any Subsidiary Guarantor to, directly or
indirectly, create, incur, assume or suffer to exist any Lien securing Pari
Passu Indebtedness or Subordinated Indebtedness of such Subsidiary Guarantor on
or with respect to such Subsidiary Guarantor's properties or assets, including
any shares of stock or Indebtedness of any other Restricted Subsidiary, whether
owned at the date of the Indentures or thereafter acquired, or any income,
profits or proceeds therefrom, or assign or otherwise convey any right to
receive income thereon, unless (i) in the case of any Lien securing Pari Passu
Indebtedness of such Subsidiary Guarantor, each Subsidiary Guarantee of such
Subsidiary Guarantor is secured by a Lien on such property, assets or proceeds
that is senior in priority to or pari passu with such Lien and (ii) in the case
of any Lien securing Subordinated Indebtedness of such Subsidiary Guarantor,
each Subsidiary Guarantee of such Subsidiary Guarantor is secured by a Lien on
such property, assets or proceeds that is senior in priority to such Lien.
DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, create or otherwise cause or suffer to exist or become
effective any consensual encumbrance or consensual restriction of any kind on
the ability of any Restricted Subsidiary to (a) pay dividends, in cash or
otherwise, or make any other distributions on or in respect of its Capital
Stock, (b) pay any Indebtedness owed to the Company or any other Restricted
Subsidiary, (c) make loans or advances to the Company or any other Restricted
Subsidiary or (d) transfer any of its properties or assets to the Company or any
other Restricted Subsidiary, except for such encumbrances or restrictions
imposed under or by reason of:
(i) any agreement existing on the Closing Date;
(ii) customary non-assignment provisions of any lease governing a
leasehold interest of the Company or any Restricted Subsidiary;
(iii) the refinancing or successive refinancing of Indebtedness
incurred under the agreements in effect on the Closing Date, so long as
such encumbrances or restrictions are no more restrictive than those
contained in such original agreement;
(iv) any agreement or other instrument of a Person acquired by the
Company or any Restricted Subsidiary in existence at the time of such
acquisition (but not created in contemplation thereof), which encumbrance
or restriction is not applicable to any Person, or the properties or assets
of any Person, other than the Person, or the property or assets of the
Person, so acquired; or
(v) any restriction with respect to a Restricted Subsidiary imposed
pursuant to an agreement entered into for the sale or disposition of all or
substantially all the Capital Stock or assets of such Restricted Subsidiary
pending the closing of such sale or disposition.
LIMITATION ON LAYERING DEBT
The Company and each Subsidiary Guarantor will not incur, create, issue,
assume, guarantee or otherwise become liable for any Indebtedness or guarantee,
as applicable, that is subordinate or junior in right
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of payment to any Senior Indebtedness and senior in any respect in right of
payment to the Notes or such Subsidiary Guarantor's Subsidiary Guarantee,
respectively.
MERGER, CONSOLIDATION OR SALE OF ASSETS
The Company may not, in a single transaction or series of related
transactions, consolidate or merge with or into (whether or not the Company is
the surviving corporation), or directly and/or indirectly through its
Subsidiaries, sell, assign, transfer, lease, convey or otherwise dispose of all
or substantially all of its properties or assets (determined on a consolidated
basis for the Company and its Subsidiaries taken as a whole) in one or more
related transactions to, another corporation, Person or entity unless:
(a) either (i) the Company is the surviving corporation or (ii) in the
case of a transaction involving the Company, the entity or the Person
formed by or surviving any such consolidation or merger (if other than the
Company) or to which such sale, assignment, transfer, lease, conveyance or
other disposition shall have been made (the "Surviving Entity") is a
corporation organized or existing under the laws of the United States, any
state thereof or the District of Columbia and assumes all the obligations
of the Company under the Notes and the Indenture pursuant to a supplemental
indenture in a form reasonably satisfactory to the Trustee;
(b) immediately after giving effect to such transaction and treating
any obligation of the Company in connection with or as a result of such
transaction as having been incurred as of the time of such transaction, no
Default or Event of Default has occurred and is continuing;
(c) the Company (or the Surviving Entity if the Company is not the
continuing obligor under the Indenture) could, at the time of such
transaction and after giving pro forma effect thereto as if such
transaction had occurred at the beginning of the applicable four-quarter
period, incur at least $1.00 of additional Indebtedness (other than
Permitted Indebtedness) pursuant to the first paragraph of "-- Incurrence
of Indebtedness and Issuance of Disqualified Stock;"
(d) each Subsidiary Guarantor, unless it is the other party to the
transaction described above, has by supplemental indenture confirmed that
its Subsidiary Guarantee applies to the Surviving Entity's obligations
under the Indenture and the Notes;
(e) if any of the property or assets of the Company or any of its
Restricted Subsidiaries would thereupon become subject to any Lien, the
provisions of the covenant described above under the caption "-- Liens" are
complied with;
(f) immediately after giving effect to such transaction on a pro forma
basis, the Consolidated Net Worth of the Company (or of the Surviving
Entity if the Company is not the continuing obligor under the Indenture) is
equal to or greater than the Consolidated Net Worth of the Company
immediately prior to such transaction; and
(g) the Company delivers, or causes to be delivered, to the Trustee,
in form and substance reasonably satisfactory to the Trustee, an officers'
certificate and an opinion of counsel, each stating that such transaction
complies with the requirements of the Indenture.
The Indenture will provide that no Subsidiary Guarantor may consolidate
with or merge with or into any other Person or convey, sell, assign, transfer,
lease or otherwise dispose of its properties and assets substantially as an
entirety to any other Person (other than the Company or another Subsidiary
Guarantor) unless: (a) subject to the provisions of the following paragraph, the
Person formed by or surviving such consolidation or merger (if other than such
Subsidiary Guarantor) or to which such properties and assets are transferred
assumes all of the obligations of such Subsidiary Guarantor under the Indenture
and its Subsidiary Guarantee, pursuant to a supplemental indenture in form and
substance satisfactory to the Trustee, (b) immediately after giving effect to
such transaction, no Default or Event of Default has occurred and is continuing
and (c) the Subsidiary Guarantor delivers, or causes to be delivered, to the
Trustee, in form and substance reasonably satisfactory to the Trustee, an
officers' certificate and an opinion of counsel, each stating that such
transaction complies with the requirements of the Indenture.
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For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more Restricted
Subsidiaries, the Capital Stock of which constitutes all or substantially all of
the properties and assets of the Company, shall be deemed to be the transfer of
all or substantially all of the properties and assets of the Company.
In the event of any transaction described in and complying with the
conditions listed in the first paragraph of this covenant in which the Company
is not the continuing obligor under the Indenture, the Surviving Entity will
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Indenture, and thereafter the Company will, except in the
case of a lease, be discharged from all its obligations and covenants under the
Indenture and Notes.
TRANSACTIONS WITH AFFILIATES
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, enter into or suffer to exist any transaction with, or
for the benefit of, any Affiliate of the Company ("Interested Persons"), unless
(a) such transaction is on terms that are no less favorable to the Company or
such Restricted Subsidiary, as the case may be, than those that could have been
obtained in an arm's-length transaction with third parties who are not
Interested Persons and (b) the Company delivers to the Trustee (i) with respect
to any transaction or series of related transactions entered into after the
Closing Date involving aggregate payments in excess of $1.0 million, a
resolution of the Board of Directors of the Company set forth in an officers'
certificate certifying that such transaction or transactions complies with
clause (a) above and that such transaction or transactions have been approved by
the Board of Directors (including a majority of the Disinterested Directors) of
the Company and (ii) with respect to a transaction or series of related
transactions involving aggregate payments equal to or greater than $5 million, a
written opinion as to the fairness to the Company or such Restricted Subsidiary
of such transaction or series of transactions from a financial point of view
issued by an accounting, appraisal or investment banking firm, in each case of
national standing.
The foregoing covenant will not restrict:
(A) transactions among the Company and/or its Restricted Subsidiaries;
(B) the Company from paying reasonable and customary regular
compensation and fees to directors of the Company or any Restricted
Subsidiary who are not employees of the Company or any Restricted
Subsidiary;
(C) maintenance in the ordinary course of business of benefit programs
or arrangements for employees, officers or directors of the Company or any
Subsidiary, including vacation plans, health and life insurance plans,
deferred compensation plans and retirement or savings plans and similar
plans;
(D) payment of management, consulting and advisory fees and related
expenses to the Permitted Holders or their Affiliates not subject to
employment agreements not to exceed $300,000 in any fiscal year of the
Company;
(E) transactions permitted by the provisions of the covenant described
under the caption "Certain Covenants -- Restricted Payments"; or
(F) payment of any amounts under a supply agreement effective as of
February 4, 1998, between the Company and Springs & Wire Design LLC, and
the employment agreement effective as of February 4, 1998 between the
Company and Ariel Gratch, and any amendments to such agreements, provided
that such agreements as so amended are no less favorable in any material
respect to the Company than the agreements in effect on the Closing Date.
LIMITATION ON ISSUANCES AND SALES OF CAPITAL STOCK OF RESTRICTED SUBSIDIARIES
The Company (a) will not permit any Restricted Subsidiary to issue any
Capital Stock (other than to the Company or a Wholly Owned Restricted
Subsidiary) and (b) will not, and will not permit any Restricted
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Subsidiary to, transfer, convey, sell, lease or otherwise dispose of any Capital
Stock of any Restricted Subsidiary to any Person (other than the Company or a
Wholly Owned Restricted Subsidiary); provided, however, that this covenant will
not prohibit (i) the sale or other disposition of all, but not less than all, of
the issued and outstanding Capital Stock of a Restricted Subsidiary owned by the
Company and its Restricted Subsidiaries in compliance with the other provisions
of the Indenture, or (ii) the ownership by directors of director's qualifying
shares or the ownership by foreign nationals of Capital Stock of any Restricted
Subsidiary, to the extent mandated by applicable law.
The Company will not permit any Restricted Subsidiary to issue any
Preferred Stock.
PAYMENTS FOR CONSENT
The Indenture will provide that neither the Company nor any of its
Restricted Subsidiaries will, directly or indirectly, pay or cause to be paid
any consideration, whether by way of interest, fee or otherwise, to any Holder
for or as an inducement to any consent, waiver or amendment of any of the terms
or provisions of the Indenture or the Notes unless such consideration is offered
to be paid or is paid to all Holders that consent, waive or agree to amend in
the time frame set forth in the solicitation documents relating to such consent,
waiver or agreement.
GUARANTEES OF INDEBTEDNESS BY RESTRICTED SUBSIDIARIES
The Company will not permit any Restricted Subsidiary that is not a
Subsidiary Guarantor, directly or indirectly, to guarantee, assume or in any
other manner become liable for the payment of any Indebtedness of the Company or
any Indebtedness of any other Restricted Subsidiary, unless (a) such Restricted
Subsidiary simultaneously executes and delivers a supplemental indenture
providing for a guarantee of payment of the Notes by such Restricted Subsidiary
and (b) with respect to any guarantee of Subordinated Indebtedness by a
Restricted Subsidiary, any such guarantee is subordinated to such Restricted
Subsidiary's guarantee with respect to the Notes at least to the same extent as
such Subordinated Indebtedness is subordinated to the Notes, provided that the
foregoing provision will not be applicable to any guarantee by any Restricted
Subsidiary that existed at the time such Person became a Restricted Subsidiary
and was not incurred in connection with, or in contemplation of, such Person
becoming a Restricted Subsidiary.
Any guarantee by a Restricted Subsidiary of the Notes pursuant to the
preceding paragraph may provide by its terms that it will be automatically and
unconditionally released and discharged upon (i) any sale, exchange or transfer
to any Person not an Affiliate of the Company of all of the Company's and the
Restricted Subsidiaries' Capital Stock in, or all or substantially all the
assets of, such Restricted Subsidiary (which sale, exchange or transfer is not
prohibited by the Indenture) or (ii) the release or discharge of the guarantee
that resulted in the creation of such guarantee of the Notes, except a discharge
or release by or as a result of payment under such guarantee.
ISSUANCES OF GUARANTEES BY NEW RESTRICTED SUBSIDIARIES
The Company will provide to the Trustee, on the date that any Person (other
than a Foreign Subsidiary) becomes a Restricted Subsidiary, a supplemental
indenture to the Indenture, executed by such new Restricted Subsidiary,
providing for a full and unconditional guarantee on a senior subordinated basis
by such new Restricted Subsidiary of the Company's obligations under the Notes
and the Indenture to the same extent as that set forth in the Indenture.
UNRESTRICTED SUBSIDIARIES
(a) The Board of Directors of the Company may designate any Subsidiary
(including any newly acquired or newly formed Subsidiary) to be an Unrestricted
Subsidiary so long as (i) neither the Company nor any Restricted Subsidiary is
directly or indirectly liable for any Indebtedness of such Subsidiary, (ii) no
default with respect to any Indebtedness of such Subsidiary would permit (upon
notice, lapse 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
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stated maturity, (iii) any Investment in such Subsidiary made as a result of
designating such Subsidiary an Unrestricted Subsidiary will not violate the
provisions of the covenant described under the caption "-- Restricted Payments,"
(iv) neither the Company nor any Restricted Subsidiary has a contract,
agreement, arrangement, understanding or obligation of any kind, whether written
or oral, with such Subsidiary other than those that might be obtained at the
time from Persons who are not Affiliates of the Company, (v) neither the Company
nor any Restricted Subsidiary has any obligation to subscribe for additional
shares of Capital Stock or other equity interest in such Subsidiary, or to
maintain or preserve such Subsidiary's financial condition or to cause such
Subsidiary to achieve certain levels of operating results, and (vi) such
Unrestricted Subsidiary has at least one director on its Board of Directors that
is not a director or executive officer of the Company or any of its Restricted
Subsidiaries and has at least one executive officer of the Company or any of its
Restricted Subsidiaries. Notwithstanding the foregoing, the Company may not
designate any of its Subsidiaries existing as of the Closing Date or any
successor to any of them as an Unrestricted Subsidiary and may not sell,
transfer or otherwise dispose of any properties or assets of any such Subsidiary
to an Unrestricted Subsidiary, other than in the ordinary course of business.
(b) The Board of Directors of the Company may designate any Unrestricted
Subsidiary as a Restricted Subsidiary; provided that (i) no Default or Event of
Default has occurred and is continuing following such designation and (ii) the
Company could incur at least $1.00 of additional Indebtedness (other than
Permitted Indebtedness) pursuant to the first paragraph of the covenant
described under the caption "-- Incurrence of Indebtedness and Issuance of
Disqualified Stock" (treating any Indebtedness of such Unrestricted Subsidiary
as the incurrence of Indebtedness by a Restricted Subsidiary).
REPORTS
The Indenture provides that, whether or not required by the rules and
regulations of the Commission, so long as any Notes are outstanding, the Company
will furnish to the Holders of Notes (i) all quarterly and annual financial
information that would be required to be contained in a filing with the
Commission on Forms 10-Q and 10-K if the Company were required to file such
Forms, including a "Management's Discussion and Analysis of Financial Condition
and Results of Operations" that describes the financial condition and results of
operations of the Company and its consolidated Subsidiaries (showing in
reasonable detail, either on the face of the financial statements or in the
footnotes thereto and in Management's Discussion and Analysis of Financial
Condition and Results of Operations, the financial condition and results of
operations of the Company and its Restricted Subsidiaries separate from the
financial condition and results of operation of the Unrestricted Subsidiaries of
the Company) and, with respect to the annual information only, a report thereon
by the Company's certified independent accountants and (ii) all current reports
that would be required to be filed with the Commission on Form 8-K if the
Company were required to file such reports, in each case within the time periods
specified in the Commission's rules and regulations. In addition, following the
consummation of the Exchange Offer contemplated by the Registration Rights
Agreement, whether or not required by the rules and regulations of the
Commission, the Company will file a copy of all such information and reports
with the Commission for public availability within the time periods specified in
the Commission's rules and regulations (unless the Commission will not accept
such a filing) and make such information available to securities analysts and
prospective investors upon request. In addition, the Company and the Guarantors
have agreed that, for so long as any Notes remain outstanding, they will furnish
to the Holders and to prospective investors, upon their request, the information
required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act
other than during any period in which the Company is subject to Section 13 or
15(d) of the Exchange Act and in compliance with the requirements thereof.
EVENTS OF DEFAULT AND REMEDIES
The following will be "Events of Default" under the Indenture:
(a) default in the payment of any interest on any Note when it becomes
due and payable, and continuance of such default for a period of 30 days
(whether or not prohibited by the subordination provisions of the
Indenture);
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(b) default in the payment of the principal of (or premium, if any,
on) any Note when due (whether or not prohibited by the subordination
provisions of the Indenture);
(c) failure to perform or comply with the Indenture provisions
described under the captions "-- Repurchase at the Option of
Holders -- Change of Control," "-- Repurchase at the Option of
Holders -- Asset Sales," or "-- Merger, Consolidation or Sale of Assets";
(d) failure to perform or comply with the Indenture provisions
described under the captions "-- Certain Covenants -- Restricted Payments"
or "-- Incurrence of Indebtedness and Issuance of Disqualified Stock" and
continuance of such default or breach for a period of 30 days after written
notice has been given to the Company by the Trustee or to the Company and
the Trustee by the Holders of at least 25% in aggregate principal amount of
the Notes then outstanding;
(e) default in the performance, or breach, of any covenant or
agreement of the Company or any Subsidiary Guarantor contained in the
Indenture or in any Note or Subsidiary Guarantee (other than a default in
the performance, or breach, of a covenant or agreement that is specifically
dealt with elsewhere herein), and continuance of such default or breach for
a period of 60 days after written notice has been given to the Company by
the Trustee or to the Company and the Trustee by the Holders of at least
25% in aggregate principal amount of the Notes then outstanding;
(f) (i) an event of default has occurred under any mortgage, bond,
indenture, loan agreement or other document evidencing an issue of
Indebtedness of the Company or any Restricted Subsidiary, which issue
individually or in the aggregate has an aggregate outstanding principal
amount of not less than $5 million, and such default has resulted in such
Indebtedness becoming, whether by declaration or otherwise, due and payable
prior to the date on which it would otherwise become due and payable or
(ii) a default in any payment when due at final maturity of any such
Indebtedness;
(g) failure by the Company or any of its Restricted Subsidiaries to
pay one or more final judgments (not subject to appeal) the uninsured
portion of which exceeds in the aggregate $5 million, which judgment or
judgments are not paid, discharged or stayed for a period of 60 days;
(h) any Subsidiary Guarantee ceases to be in full force and effect or
is declared null and void or any such Subsidiary Guarantor denies that it
has any further liability under any Subsidiary Guarantee, or gives notice
to such effect (other than by reason of the termination of the Indenture or
the release of any such Subsidiary Guarantee in accordance with the
Indenture); or
(i) the occurrence of certain events of bankruptcy, insolvency or
reorganization with respect to the Company or any Significant Subsidiary.
If an Event of Default (other than as specified in clause (i) above) occurs
and is continuing, the Trustee or the Holders of not less than 25% in aggregate
principal amount of the Notes then outstanding may, and the Trustee at the
request of such Holders will, declare the principal of, and accrued interest on,
all of the outstanding Notes immediately due and payable and, upon any such
declaration, such principal and such interest will become due and payable
immediately provided, however, that the Notes shall not become due and payable
until the earlier to occur of (i) the acceleration of the maturity of any
Indebtedness under the Credit Agreement or (ii) five business days following
written notice of such declaration to the agent under the Credit Agreement.
If an Event of Default specified in clause (i) above occurs and is
continuing, then the principal of and accrued interest on all of the outstanding
Notes will ipso facto become and be immediately due and payable without any
declaration or other act on the part of the Trustee or any Holder.
At any time after a declaration of acceleration under the Indenture, but
before a judgment or decree for payment of the money due has been obtained by
the Trustee, the holders of a majority in aggregate principal amount of the
outstanding Notes, by written notice to the Company and the Trustee, may rescind
such declaration and its consequences if: (i) the Company has paid or deposited
with the Trustee a sum sufficient to pay (A) all overdue interest on all Notes,
(B) all unpaid principal of (and premium, if any, on) any outstanding Notes that
has become due otherwise than by such declaration of acceleration and interest
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thereon at the rate borne by the Notes, (C) to the extent that payment of such
interest is lawful, interest upon overdue interest and overdue principal at the
rate borne by the Notes and (D) all sums paid or advanced by the Trustee under
the Indenture and the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel; and (ii) all Events of Default,
other than the non-payment of amounts of principal of (or premium, if any, on)
or interest on the Notes that have become due solely by such declaration of
acceleration, have been cured or waived. No such rescission will affect any
subsequent default or impair any right consequent thereon.
No Holder has any right to institute any proceeding with respect to the
Indenture or any remedy thereunder, unless the Holders of at least 25% in
aggregate principal amount of the outstanding Notes have made written request,
and offered reasonable indemnity, to the Trustee to institute such proceeding
within 60 days after receipt of such notice and the Trustee, within such 60-day
period, has not received directions inconsistent with such written request by
Holders of a majority in aggregate principal amount of the outstanding Notes.
Such limitations do not apply, however, to a suit instituted by a Holder for the
enforcement of the payment of the principal of, premium, if any, or interest on
such Note on or after the respective due dates expressed in such Note.
The Holders of not less than a majority in aggregate principal amount of
the outstanding Notes may, on behalf of the Holders of all of the Notes, waive
any past defaults under the Indenture, except a default in the payment of the
principal of (and premium, if any) or interest on any Note, or in respect of a
covenant or provision that under the Indenture cannot be modified or amended
without the consent of the holder of each Note outstanding.
If a Default or an Event of Default occurs and is continuing and is known
to the Trustee, the Trustee will mail to each Holder notice of the Default or
Event of Default within 90 days after the occurrence thereof. Except in the case
of a Default or an Event of Default in payment of principal of (and premium, if
any, on) or interest on any Notes, the Trustee may withhold the notice to the
Holders if a committee of its trust officers in good faith determines that
withholding such notice is in the interests of the Holders.
The Company is required to furnish to the Trustee annual statements as to
the performance by the Company and the Subsidiary Guarantors of their
obligations under the Indenture and as to any default in such performance. The
Company is also required to notify the Trustee within five days of any Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No past, present or future director, officer, employee, incorporator or
stockholder of the Company or any Subsidiary, as such, shall have any liability
for any obligations of the Company or the Subsidiary Guarantors under the Notes,
the Indenture or the Subsidiary Guarantees, as applicable, or any claim based
on, in respect of, or by reason of, such obligations or their creation. Each
Holder by accepting a Note waives and releases all such liability. The waiver
and release are part of the consideration for issuance of the Notes. Such waiver
may not be effective to waive liabilities under the federal securities laws and
it is the view of the Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, terminate the obligations
of the Company and the Subsidiary Guarantors with respect to the outstanding
Notes ("legal defeasance"). Such legal defeasance means that the Company will be
deemed to have paid and discharged the entire Indebtedness represented by the
outstanding Notes, except for (i) the rights of Holders of outstanding Notes to
receive payments in respect of the principal of (and premium, if any, on) and
interest on such Notes when such payments are due, (ii) the Company's
obligations to issue temporary Notes, register the transfer or exchange of any
Notes, replace mutilated, destroyed, lost or stolen Notes, maintain an office or
agency for payments in respect of the Notes and segregate and hold such payments
in trust, (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 and any Subsidiary Guarantor with respect to certain covenants
forth in the Indenture and described under "Certain Covenants" above, and any
omission
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to comply with such obligations would not constitute a Default or an Event of
Default with respect to the Notes ("covenant defeasance").
In order to exercise either legal defeasance or covenant defeasance: (a)
the Company must irrevocably deposit or cause to be deposited with the Trustee,
as trust funds in trust, specifically pledged as security for, and dedicated
solely to, the benefit of the Holders, money in an amount, or U.S. Government
Obligations (as defined in the Indenture) that through the scheduled payment of
principal and interest thereon will provide money in an amount, or a combination
thereof, sufficient, in the opinion of a nationally recognized firm of
independent public accountants, to pay and discharge the principal of (and
premium, if any, on) and interest on the outstanding Notes at maturity (or upon
redemption, if applicable) of such principal or installment of interest; (b) no
Default or Event of Default has occurred and is continuing on the date of such
deposit or, insofar as an event of bankruptcy under clause (i) of "Events of
Default" above is concerned, at any time during the period ending on the 91st
day after the date of such deposit; (c) such legal defeasance or covenant
defeasance may not result in a breach or violation of, or constitute a default
under, the Indenture or any material agreement or instrument to which the
Company or any Subsidiary Guarantor is a party or by which it is bound; (d) in
the case of legal defeasance, the Company must deliver to the Trustee an opinion
of counsel stating that the Company has received from, or there has been
published by, the Internal Revenue Service a ruling, or since the date hereof,
there has been a change in applicable federal income tax law, to the effect, and
based thereon such opinion must confirm that, the Holders of the outstanding
Notes will not recognize income, gain or loss for federal income tax purposes as
a result of such legal defeasance and will be subject to federal income tax on
the same amounts, in the same manner and at the same times as would have been
the case if such legal defeasance had not occurred; (e) in the case of covenant
defeasance, the Company must 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
covenant defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such covenant defeasance had not occurred; and (f) the Company must have
delivered to the Trustee an officers' certificate and an opinion of counsel,
each stating that all conditions precedent provided for relating to either the
legal defeasance or the covenant defeasance, as the case may be, have been
complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer document and the Company may
require a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note for a
period of 15 days before a selection of Notes to be redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Modifications and amendments of the Indenture and any Subsidiary Guarantee
may be made by the Company, any affected Subsidiary Guarantor and the Trustee
with the consent of the Holders of a majority in aggregate outstanding principal
amount of the Notes; provided, however, that no such modification or amendment
may, without the consent of the Holder of each outstanding Note affected
thereby:
(a) change the Stated Maturity of the principal of, or any installment
of interest on, any Note, or reduce the principal amount thereof or the
rate of interest thereon or any premium payable upon the redemption
thereof, or change the coin or currency in which any Note or any premium or
the interest thereon is payable, or impair the right to institute suit for
the enforcement of any such payment after the Stated Maturity thereof (or,
in the case of redemption, on or after the redemption date);
(b) amend, change or modify the obligation of the Company to make and
consummate an Excess Proceeds Offer with respect to any Asset Sale in
accordance with the covenant described under the covenant entitled
"Repurchase at the Option of the Holders -- Asset Sales" or the obligation
of the
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Company to make and consummate a Change of Control offer in the event of a
Change of Control in accordance with the covenant entitled "Repurchase at
the Option of the Holders -- Change of Control," including, in each case,
amending, changing or modifying any definition relating thereto;
(c) reduce the percentage in principal amount of outstanding Notes,
the consent of whose Holders is required for any waiver of compliance with
certain provisions of, or certain defaults and their consequences provided
for under, the Indenture;
(d) waive a default in the payment of principal of, or premium, if
any, or interest on the Notes or reduce the percentage or aggregate
principal amount of outstanding Notes the consent of whose Holders is
necessary for waiver of compliance with certain provisions of the Indenture
or for waiver of certain defaults;
(e) modify the ranking or priority of the Notes or the Subsidiary
Guarantee of any Subsidiary Guarantor; or
(f) release any Subsidiary Guarantor from any of its obligations under
its Subsidiary Guarantee or the Indenture other than in accordance with the
terms of the Indenture.
The Holders of a majority in aggregate principal amount of the Notes
outstanding may waive compliance with certain restrictive covenants and
provisions of the Indenture.
Without the consent of any Holders, the Company and the Trustee, at any
time and from time to time, may enter into one or more indentures supplemental
to the Indenture for any of the following purposes: (1) to evidence the
succession of another Person to the Company and the assumption by any such
successor of the covenants of the Company in the Indenture and in the Notes; or
(2) to add to the covenants of the Company for the benefit of the Holders, or to
surrender any right or power herein conferred upon the Company; or (3) to add
additional Events of Default; or (4) to provide for uncertificated Notes in
addition to or in place of the certificated Notes; or (5) to evidence and
provide for the acceptance of appointment under the Indenture by a successor
Trustee; or (6) to secure the Notes; or (7) to cure any ambiguity, to correct or
supplement any provision in the Indenture that may be defective or inconsistent
with any other provision in the Indenture, or to make any other provisions with
respect to matters or questions arising under the Indenture, provided that such
actions pursuant to this clause do not adversely affect the interests of the
Holders in any material respect; or (8) to comply with any requirements of the
Commission in order to effect and maintain the qualification of the Indenture
under the Trust Indenture Act.
CONCERNING THE TRUSTEE
Norwest Bank Minnesota, National Association, the Trustee under the
Indenture, is the paying agent and registrar for the Notes.
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set forth
in the Indenture. Under the Indenture, the Holders of a majority in outstanding
principal amount of the Notes will have the right to direct the time, method and
place of conducting any proceeding for exercising any remedy available to the
Trustee, subject to certain exceptions. If an Event of Default has occurred and
is continuing, the Trustee will exercise such rights and powers vested in it
under the Indenture and use the same degree of care and skill in its exercise as
a prudent person would exercise under the circumstances in the conduct of such
person's own affairs.
The Indenture and provisions of the Trust Indenture Act, incorporated by
reference therein, contain limitations on the rights of the Trustee thereunder,
should it become a creditor of the Company, to obtain payment of claims in
certain cases or to realize on certain property received by it in respect of any
such claims, as security or otherwise. The Trustee is permitted to engage in
other transactions; provided, however, that, if it acquires any conflicting
interest (as defined), it must eliminate such conflict upon the occurrence of an
Event of Default or else resign.
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BOOK-ENTRY, DELIVERY AND FORM
The New Notes initially will be issued in the form of one or more global
notes (the "Global Notes"). The Global Notes 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 (such nominee being referred to
herein as the "Global Note Holder").
The Depositary is a limited-purpose trust company that was created to hold
securities for its participating organizations (collectively, the "Participants"
or the "Depositary's Participants") and to facilitate the clearance and
settlement of transactions in such securities between Participants through
electronic book-entry changes in accounts of its Participants. The Depositary's
Participants include securities brokers and dealers (including the Initial
Purchasers), banks and trust companies, clearing corporations and certain other
organizations. Access to the Depositary's system is also available to other
entities such as banks, brokers, dealers and trust companies (collectively, the
"Indirect Participants" or the "Depositary's Indirect Participants") that clear
through or maintain a custodial relationship with a Participant, either directly
or indirectly. Persons who are not Participants may beneficially own securities
held by or on behalf of the Depositary only through the Depositary's
Participants or the Depositary's Indirect Participants.
The Company expects that pursuant to procedures established by the
Depositary (i) upon deposit of the Global Notes, the Depositary will credit the
accounts of Participants designated by the Initial Purchaser with portions of
the principal amount of the Global Notes and (ii) ownership of the Notes
evidenced by the Global Notes will be shown on, and the transfer of ownership
thereof will be effected only through, records maintained by the Depositary
(with respect to the interests of the Depositary's Participants), the
Depositary's Participants and the Depositary's Indirect Participants.
Prospective purchasers are advised that the laws of some states require that
certain persons take physical delivery in definitive form of securities that
they own. Consequently, the ability to own, transfer or pledge Notes evidenced
by the Global Notes will be limited to such extent.
So long as the Global Note Holder is the registered owner of any Notes, the
Global Note Holder will be considered the sole Holder under the Indenture of any
Notes evidenced by the Global Note. Beneficial owners of Notes evidenced by the
Global Notes will not be considered the owners or Holders thereof under the
Indenture for any purpose, including with respect to the giving of any
directions, instructions or approvals to the Trustee thereunder. Neither the
Company nor the Trustee will have any responsibility or liability for any aspect
of the records of the Depositary or for maintaining, supervising or reviewing
any records of the Depositary relating to the Notes.
Payments in respect of the principal of, premium, if any, and interest on
any Notes registered in the name of the Global Note Holder on the applicable
record date will be payable by the Trustee to or at the direction of the Global
Note Holder in its capacity as the registered Holder under the Indenture. Under
the terms of the Indenture, the Company and the Trustee may treat the persons in
whose names Notes, including the Global Notes, are registered as the owners
thereof for the purpose of receiving such payments. Consequently, neither the
Company nor the Trustee has or will have any responsibility or liability for the
payment of such amounts to beneficial owners of Notes. The Company believes,
however, that it is currently the policy of the Depositary to immediately credit
the accounts of the relevant Participants with such payments, in amounts
proportionate to their respective holdings of beneficial interests in the
relevant security as shown on the records of the Depositary. Payments by the
Depositary's Participants and the Depositary's Indirect Participants to the
beneficial owners of Notes will be governed by standing instructions and
customary practice and will be the responsibility of the Depositary's
Participants or the Depositary's Indirect Participants.
Transfers between Participants in DTC will be effected in accordance with
DTC rules and will be settled in immediately available funds. If a holder
requires physical delivery of a Certificated Note for any reason, including to
sell Notes to persons in states which require physical delivery of such
securities or to pledge such securities, such holder must transfer its interest
in the Global Notes in accordance with the normal procedures of DTC and in
accordance with the procedures set forth in the Indenture.
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Before the 40th day after the later of the commencement of the Offering and
the Closing Date, transfers by an owner of a beneficial interest in the Offshore
Global Note to a transferee who takes delivery of such interest through the U.S.
Global Note will be made only in accordance with the applicable procedures and
upon receipt by the Trustee of a written certification from the transferor of
the beneficial interest in the form provided in the Indenture to the effect that
such transfer is being made to a person whom the transferor reasonably believes
is a Qualified Institutional Buyer within the meaning of Rule 144A in a
transaction meeting the requirements of Rule 144A or an institutional
"accredited investor."
Transfers by an owner of a beneficial interest in the U.S. Global Note to a
transferee who takes delivery of such interest through the Offshore Global Note,
whether before, on or after the 40th day after the later of the commencement of
the Offering and the Closing Date, will be made only upon receipt by the Trustee
of a certification to the effect that such transfer is being made in accordance
with Regulation S. Transfers of Certificated Notes held by institutional
"accredited investors" to persons who will hold through the U.S. Global Note or
the Offshore Global Note will be subject to certifications provided by the
Trustee.
CERTIFICATED NOTES
If (i) the Company notifies the Trustee in writing that the Depositary is
no longer willing or able to act as a depositary and the Company is unable to
locate a qualified successor within 90 days or (ii) the Company, at its option,
notifies the Trustee in writing that it elects to cause the issuance of Notes in
the form of Certificated Securities under the Indenture then, upon surrender by
the Global Note Holder of the Global Notes, Certificated Notes will be issued to
each person that the Global Note Holder and the Depositary identify as being the
beneficial owner of the related Notes.
Neither the Company nor the Trustee will be liable for any delay by the
Global Note Holder or the Depositary in identifying the beneficial owners of
Notes and the Company and the Trustee may conclusively rely on, and will be
protected in relying on, instructions from the Global Note Holder or the
Depositary for all purposes.
SAME-DAY SETTLEMENT AND PAYMENT
The Indenture will require that payments in respect of the Notes
represented by the Global Notes (including principal, premium, if any, and
interest) be made by wire transfer of immediately available funds to the
accounts specified by the Global Note Holder. With respect to Certificated
Notes, the Company will make all payments of principal, premium, if any, and
interest by wire transfer of immediately available funds to the accounts
specified by the Holders thereof or, if no such account is specified, by mailing
a check to each such Holder's registered address. Secondary trading in long-term
notes and debentures of corporate issues is generally settled in clearinghouse
or next-day funds. In contrast, Notes represented by the Global Notes are
expected to be eligible to trade in the PORTAL market and to trade in the
Depositary's Same-Day Funds Settlement System, and any permitted secondary
market trading activity in such Senior Notes will, therefore, be required by the
Depositary to be settled in immediately available funds. The Company expects
that secondary trading in the Certificated Notes will also be settled in
immediately available funds.
Because of time zone differences, the securities account of a Euroclear or
Cedel participant purchasing an interest in a Global Note from a Participant in
DTC will be credited, and any such crediting will be reported to the relevant
Euroclear or Cedel participant, during the securities settlement processing day
(which must be a business day for Euroclear or Cedel) immediately following the
settlement date of DTC. DTC has advised the Company that cash received in
Euroclear or Cedel as a result of sales of interests in a Global Note by or
through a Euroclear or Cedel participant to a Participant in DTC will be
received with value on the settlement date of DTC but will be available in the
relevant Euroclear or Cedel cash account only as of the business day for
Euroclear or Cedel following DTC's settlement date.
REGISTRATION RIGHTS
Holders of the New Notes are not entitled to any registration rights with
respect to the New Notes. Pursuant to the Registration Rights Agreement, (a copy
of which has been filed as an exhibit to the
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registration statement of which this Prospectus is a part), the Company and the
Subsidiary Guarantors agreed, for the benefit of the Holders of the Old Notes,
at the expense of the Company and the Subsidiary Guarantors, to (i) file with
the Commission on or prior to the 90th calendar day following the date of
original issuance of the Old Notes a registration statement (the "Exchange Offer
Registration Statement") with respect to the Exchange Offer. The registration
statement of which this Prospectus is a part constitutes the Exchange Offer
Registration Statement.
Based on existing interpretations of the Securities Act by the staff of the
Commission set forth in several no-action letters to third parties, and subject
to the immediately following sentence, the Company believes that the New Notes
may be offered for resale, resold and otherwise transferred by the Holders
thereof without further compliance with the registration and prospectus delivery
provisions of the Securities Act. However, any Holder of Old Notes who is an
"affiliate" of the Company or who intends to participate in the Exchange Offer
for the purpose of distributing the New Notes (i) will not be able to rely on
the interpretations by the staff of the Commission set forth in the
above-mentioned no-action letters, (ii) will not be able to tender its Old Notes
in the Exchange Offer and (iii) must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any sale or
transfer of Notes unless such sale or transfer is made pursuant to an exemption
from such requirements.
Each Holder of Old Notes who wishes to exchange Old Notes for New Notes in
the Exchange Offer will be required to represent in the Letter of Transmittal
that (i) it is not an affiliate of the Company, (ii) any New Notes to be
received by it were acquired in the ordinary course of its business and (iii) at
the time of commencement of the Exchange Offer, it has no arrangement with any
person to participate in a distribution (within the meaning of the Securities
Act) of the New Notes. In addition, in connection with any resales of New Notes,
any broker-dealer (an "Exchanging Dealer") who acquired Old Notes for its own
account as a result of market-making activities or other trading activities must
deliver a prospectus meeting the requirements of the Securities Act. The
Commission has taken the position that Exchanging Dealers may fulfill their
prospectus delivery requirements with respect to the New Notes (other than a
resale of an unsold allotment from the original sale of the Old Notes) by
delivering a copy of this Prospectus, as the same may be amended or supplemented
from time to time. Under the Registration Rights Agreement, the Company is
required to allow Exchanging Dealers to use this Prospectus, as the same may be
amended or supplemented from time to time in connection with their resales of
New Notes.
In the event that any changes in law or applicable interpretations of the
staff of the Commission do not permit the Company to effect the Exchange Offer,
or if for any reason the Exchange Offer is not consummated within 150 days of
the date of original issuance of the Old Notes or if one or more Holders of Old
Notes are not eligible to participate in the Exchange Offer pursuant to existing
interpretations of the Commission's staff, the Company and the Subsidiary
Guarantors will, at their expense, (i) as promptly as practicable, and in any
event on or prior to 30 days after such filing obligation arises (and within 150
days after the Closing Date), file with the Commission a shelf registration
statement (the "Shelf Registration Statement") covering resales of the Old
Notes, (ii) use their best efforts to cause the Shelf Registration Statement to
be declared effective under the Securities Act on or prior to 45 days after such
filing occurs and (iii) keep effective the Shelf Registration Statement until
two years after its effective date (or such shorter period that will terminate
when all the Notes covered thereby have been sold pursuant thereto or in certain
other circumstances). In the event of the filing of a Shelf Registration
Statement, the Company will provide to each Holder of Old Notes covered by the
Shelf Registration Statement copies of the prospectus that is a part of the
Shelf Registration Statement, notify each such Holder when the Shelf
Registration Statement for the Old Notes has become effective and take certain
other actions as are required to permit unrestricted resales of the Old Notes. A
Holder that sells Old Notes pursuant to the Shelf Registration Statement
generally will be required to be named as a selling securityholder in the
related prospectus and to deliver a prospectus to 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 that are applicable to such Holder (including
certain indemnification obligations). In addition, each Holder will be required
to deliver certain information to be used in connection with the Shelf
Registration Statement in order to have its Notes included in the Shelf
Registration Statement.
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The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is qualified in its entirety by
reference to the Registration Rights Agreement.
CERTAIN DEFINITIONS
"Acquired Indebtedness" means Indebtedness of a Person (a) existing at the
time such Person is merged with or into the Company or becomes a Subsidiary or
(b) assumed in connection with the acquisition of 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 other person that
owns, directly or indirectly, 10% or more of such specified person's Capital
Stock or any executive officer or director of any such specified person or other
person or, with respect to any natural person, any person having a relationship
with such person by blood, marriage or adoption not more remote than first
cousin. For the purposes of this definition, "control," when used with respect
to any specified person, means the power 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.
"Agent Bank" means NationsCredit Commercial Corporation and its successors
under the Credit Agreement, in its capacity as agent.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets (including, without limitation, by way of merger, consolidation or
similar arrangement) (collectively, a "transfer") by the Company or any
Restricted Subsidiary other than in the ordinary course of business and (ii) the
issue or sale by the Company or any of its Restricted Subsidiaries of Shares of
Capital Stock of any of the Company's Restricted Subsidiaries (which shall be
deemed to include the sale, grant or conveyance of any interest in the income,
profits or proceeds therefrom), in the case of either clause (i) or (ii),
whether in a single transaction or a series of related transactions (x) that
have a fair market value in excess of $750,000 or (y) for Net Cash Proceeds in
excess of $750,000. For the purposes of this definition, the term "Asset Sale"
does not include any transfer of properties or assets (i) that is governed by
the provisions of the Indenture described under "-- Certain
Covenants -- Consolidation, Merger and Sale of Assets" or "-- Restricted
Payments," (ii) between or among the Company and its Restricted Subsidiaries
pursuant to transactions that do not violate any other provision of the
Indenture, (iii) representing damaged, worn out, obsolete or permanently retired
equipment and facilities, (iv) that constitutes or would constitute the creation
or grant of a Lien not prohibited by the Indenture or (v) that constitutes or
would constitute the surrender or waiver of contract rights or the settlement,
release or surrender of contract tort or other claims of any kind.
"Attributable Debt" in respect of a sale and leaseback transaction means,
at the time of determination, the present value (discounted at the rate of
interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remainder of the
lease included in such sale and leaseback transaction (including any period for
which such lease has been extended or may, at the option of the lessor, be
extended).
"Banks" means the banks and other financial institutions that from time to
time are lenders under the Credit Agreement.
"Borrowing Base" means, with respect to any Person, as of any date, an
amount equal to the sum of (a) 85% of the face amount of all accounts receivable
owned by such Person and its Subsidiaries (or, in the case of the Company, its
Subsidiary Guarantors) as of such date that are not more than 90 days past due
and (b) 60% of the book value of all inventory owned by such Person and its
Subsidiaries (or, in the case of the Company, its Subsidiary Guarantors) as of
such date, all calculated on a consolidated basis and in accordance with GAAP.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in New York are authorized or
obligated by law or executive order to close.
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"Capital Stock" of any Person means any and all shares, interests,
partnership interests, participations, rights in or other equivalents (however
designated) of such Person's equity interest (however designated), whether now
outstanding or issued after the Closing Date.
"Capitalized Lease Obligation" means, with respect to any Person, an
obligation incurred or assumed under or in connection with any capital lease of
real or personal property that, in accordance with GAAP, has been recorded as a
capitalized lease.
"Change of Control" means the occurrence of any of the following events:
(a) any "person" or "group" (as such terms are used in Sections 13(d)
and 14(d) of the Exchange Act) (other than Permitted Holders) is or becomes
the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of 35% or more of the Voting Stock of the Company
or Parent and such person or group is or becomes, directly or indirectly,
the beneficial owner of a greater percentage of the voting power of the
Voting Stock of the Company or Parent than the percentage beneficially
owned by the Permitted Holders as a group;
(b) the Company consolidates with, or merges with or into, another
person or, sells, assigns, conveys, transfers, leases or otherwise disposes
of, or the Subsidiaries sell, assign, convey, transfer, lease or otherwise
dispose of, all or substantially all of the properties of the Company and
the Subsidiaries, taken as a whole (either in one transaction or a series
of related transactions), including Capital Stock of the Subsidiaries, to
any person (other than the Company or a Restricted Subsidiary) pursuant to
a transaction in which the outstanding Voting Stock of the Company is
converted into or exchanged for cash, securities or other property, other
than any such transaction (i) where the outstanding Voting Stock of the
Company is not converted or exchanged at all (except to the extent
necessary to reflect a change in the jurisdiction of incorporation of the
Company) or is converted into or exchanged for (A) Voting Stock (other than
Disqualified Stock) of the surviving or transferee corporation or (B)
Voting Stock (other than Disqualified Stock) of the surviving or transferee
corporation and cash, securities and other property (other than Capital
Stock of the surviving or transferee corporation) in an amount that could
be paid by the Company as a Restricted Payment as described under the
"Certain Covenants -- Restricted Payments" covenant and (ii) immediately
after such transaction, no "person" or "group" (as such terms are used in
Sections 13(d) and 14(d) of the Exchange Act) (other than Permitted
Holders) is the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of more than 35% of the total
outstanding Voting Stock of the surviving or transferee corporation;
(c) during any consecutive twenty-four month period, individuals who at the
beginning of such period constituted the Board of Directors of the Company or
Parent (together with any new directors whose election by such Board of
Directors or whose nomination for election by the stockholders of the Company or
Parent, as the case may be, was approved by a vote of a majority 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) cease for any reason to constitute a majority of the Board of
Directors of the Company or Parent then in office; or
(d) the Company is liquidated or dissolved or adopts a plan of liquidation
or dissolution, other than in a transaction that complies with the provisions
described under "Certain Covenants -- Consolidation, Merger and Sale of Assets."
"Closing Date" means the date on which the Notes are originally issued
under the Indenture.
"Consolidated EBITDA" means, for any period, the sum of, without
duplication, Consolidated Net Income for such period, plus (or, in the case of
clause (d) below, plus or minus) the following items to the extent included in
computing Consolidated Net Income for such period (a) Fixed Charges for such
period, plus (b) the provision for federal, state, local and foreign income
taxes of the Company and its Restricted Subsidiaries for such period, plus (c)
the aggregate depreciation and amortization expense of the Company and its
Restricted Subsidiaries for such period, plus (d) any other non-cash charges for
such period, and minus non-cash credits for such period, other than non-cash
charges or credits resulting from changes in prepaid assets or accrued
liabilities in the ordinary course of business, provided that fixed charges,
income tax
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expense, depreciation and amortization expense and non-cash charges and credits
of a Restricted Subsidiary will be included in Consolidated EBITDA only to the
extent (and in the same proportion) that the net income of such Subsidiary was
included in calculating Consolidated Net Income for such period.
"Consolidated Net Income" means, for any period, the net income (or net
loss) of the Company and its Restricted Subsidiaries for such period as
determined on a consolidated basis in accordance with GAAP, adjusted to the
extent included in calculating such net income or loss by excluding (a) any net
after-tax extraordinary gains or losses (less all fees and expenses relating
thereto), (b) any net after-tax gains or losses (less all fees and expenses
relating thereto) attributable to Asset Sales, (c) the portion of net income (or
loss) of any Person (other than the Company or a Restricted Subsidiary),
including Unrestricted Subsidiaries, in which the Company or any Restricted
Subsidiary has an ownership interest, except to the extent of the amount of
dividends or other distributions actually paid to the Company or any Restricted
Subsidiary in cash during such period, (d) the net income (or loss) of any
Person combined with the Company or any Restricted Subsidiary on a "pooling of
interests" basis attributable to any period prior to the date of combination,
(e) the net income (but not the net loss) of any Restricted Subsidiary to the
extent that the declaration or payment of dividends or similar distributions by
such Restricted Subsidiary is at the date of determination restricted, directly
or indirectly, except to the extent that such net income is actually paid to the
Company or a Restricted Subsidiary thereof by loans, advances, intercompany
transfers, principal repayments or otherwise; provided that, if any Restricted
Subsidiary is not a Wholly Owned Restricted Subsidiary, Consolidated Net Income
will be reduced (to the extent not otherwise reduced in accordance with GAAP) by
an amount equal to (A) the amount of the Consolidated Net Income otherwise
attributable to such Restricted Subsidiary multiplied by (B) the quotient of (1)
the number of shares of outstanding common stock of such Restricted Subsidiary
not owned on the last day of such period by the Company or any of its Restricted
Subsidiaries divided by (2) the total number of shares of outstanding common
stock of such Restricted Subsidiary on the last day of such period, (f) for any
period ending on or prior to the first year anniversary of the Closing Date, the
aggregate amount of one-time, non-recurring costs, expenses and fees incurred by
the Company or a Restricted Subsidiary in connection with (i) the acquisition by
AFA Acquisition Corp. of AFA Products, Inc. pursuant to the Asset Purchase
Agreement dated as of July 29, 1997, (ii) the financings provided in connection
with the acquisition referred to in clause (i) above pursuant to the Credit
Agreement dated as of July 29, 1997 among AFA Acquisition Corp., Parent, the
lenders referred to therein and NationsCredit Commercial Corporation as agent of
the lenders or any refinancings thereof, (iii) the acquisition by the Company of
the Continental Sprayers International and Contour Cutting divisions and certain
other assets of Contico International, Inc. pursuant to the Asset Purchase
Agreement dated as of January 14, 1998, and the concurrent repayment of certain
indebtedness of AFA Products, Inc., (iv) the financings provided in connection
with the acquisition and repayment of indebtedness referred to in clause (iii)
above pursuant to the Credit Agreement, (v) the acquisition by Dejanu BV of the
capital stock of Polytek pursuant to the Stock Purchase Agreement dated as of
August 6, 1997, and (vi) the financings provided in connection with the
acquisition referred to in clause (v) above pursuant to the Polytek Credit
Agreement and (g) any non-cash charges attributable to (i) the amortization
expense of the Parent associated with any original issue discount attributable
to any warrants owned by NationsCredit Commercial Corporation or Waldock Limited
to purchase respectively 1,750,000 shares of Class B Common Stock, par value
$.01 per share of Parent and 950,000 shares of Class A Common Stock, par value
$.01 per share of Parent or (ii) the interest expense of the Parent incurred in
respect of the Subordinated Parent Notes, to the extent such amortization
expense or interest expense is incurred by the Company as a result of the
Parent's obligations under the warrants or the Subordinated Parent Notes being
accounted for financial reporting purposes as an expense of the Company in
accordance with "push-down" accounting.
"Consolidated Net Worth" means, at any date of determination, stockholders'
equity of the Company and its Restricted Subsidiaries as set forth on the most
recently available quarterly or annual consolidated balance sheet of the Company
and its Restricted Subsidiaries, less any amounts attributable to Disqualified
Stock or any equity security convertible into or exchangeable for Indebtedness,
the cost of treasury stock and the principal amount of any promissory notes
receivable from the sale of the Capital Stock of the Company or any of its
Restricted Subsidiaries and less to the extent included in calculating such
stockholders' equity of the Company and its Restricted Subsidiaries, the
stockholders' equity attributable to Unrestricted Subsidiaries,
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each item to be determined in conformity with GAAP (excluding the effects of
foreign currency adjustments under Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 52).
"Credit Agreement" means the Credit Agreement dated as of February 4, 1998,
among the Company, Parent, the lenders named therein, NationsCredit Commercial
Corporation, as collateral agent and as initial Issuing bank and NationsBridge
LLC, as administrative agent, including any related notes, guarantees,
collateral documents, instruments and agreements executed in connection
therewith, as the same may be amended, restated, supplemented, refinanced or
otherwise modified from time to time.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Designated Senior Indebtedness" means (i) so long as the Senior Bank Debt
is outstanding or any lender has any commitment to extend credit to the Company
under the Credit Agreement, the Senior Bank Debt and (ii) any other Senior
Indebtedness permitted under the Indenture the principal amount of which at the
time of designation is $20 million or more and that has been specifically
designated by the Company, in the instrument creating or evidencing such Senior
Indebtedness or in an officers' certificate delivered to the Trustee, as
"Designated Senior Indebtedness."
"Disinterested Director" means, with respect to any transaction or series
of transactions in respect of which the Board of Directors is required to
deliver a resolution of the Board of Directors, to make a finding or otherwise
take action under the Indenture, a member of the Board of Directors who does not
have any material direct or indirect financial interest in or with respect to
such transaction or series of transactions.
"Disqualified Stock" means any class or series of Capital Stock that,
either by its terms, by the terms of any security into which it is convertible
or exchangeable or by contract or otherwise (i) is or upon the happening of an
event or passage of time would be, required to be redeemed prior to the final
Stated Maturity of the Notes, (ii) is redeemable at the option of the Holder
thereof, at any time prior to such final Stated Maturity or (iii) at the option
of the Holder thereof is convertible into or exchangeable for debt securities at
any time prior to such final Stated Maturity; provided that any Capital Stock
that would not constitute Disqualified Stock but for provisions therein giving
Holders thereof the right to cause the issuer thereof to repurchase or redeem
such Capital Stock upon the occurrence of an "asset sale" or "change of control"
occurring prior to the Stated Maturity of the Notes will not constitute
Disqualified Stock if the "asset sale" or "change of control" provisions
applicable to such Capital Stock are no more favorable to the Holders of such
Capital Stock than the provisions contained in the covenants described under the
captions "Repurchase at the Option of Holders -- Change of Control" and
"-- Asset Sales" described herein and such Capital Stock specifically provides
that the issuer will not repurchase or redeem any such stock pursuant to such
provision prior to the Company's repurchase of such Notes as are required to be
repurchased pursuant to the provisions contained in the covenants described
under the captions "Repurchase at the Option of Holders -- Change of Control"
and "-- Asset Sales."
"Equity Offering" means a public or private offering of Capital Stock
(other than Disqualified Stock) of the Company.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Existing Indebtedness" means the Indebtedness of the Company and its
Restricted Subsidiaries (other than Indebtedness under the Credit Agreement)
outstanding on the date of the Indenture and listed on a schedule to the
Indenture, until such amounts are repaid.
"Fixed Charges" means, for any period, without duplication, the sum of (a)
the amount that, in conformity with GAAP, would be set forth opposite the
caption "interest expense" (or any like caption) on a consolidated statement of
operations of the Company and its Restricted Subsidiaries for such period,
including, without limitation, (i) amortization of debt discount, (ii) the net
cost of interest rate contracts (including amortization of discounts), (iii) the
interest portion of any deferred payment obligation, (iv) amortization of debt
issuance costs, and (v) the interest component of Capitalized Lease Obligations,
plus (b) cash dividends paid on Preferred Stock and Disqualified Stock by the
Company and any Restricted
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Subsidiary (to any Person other than the Company and its Restricted
Subsidiaries), computed on a tax effected basis, plus (c) all interest on any
Indebtedness of any Person guaranteed by the Company or any of its Restricted
Subsidiaries or secured by a lien on the assets of the Company or any of its
Restricted Subsidiaries; provided, however, that Fixed Charges will not include
(i) any gain or loss from extinguishment of debt, including the write-off of
debt issuance costs, and (ii) the fixed charges of a Restricted Subsidiary to
the extent (and in the same proportion) that the net income of such Subsidiary
was excluded in calculating Consolidated Net Income pursuant to clause (e) of
the definition thereof for such period.
"Fixed Charge Coverage Ratio" means, for any period, the ratio of
Consolidated EBITDA for such period to Fixed Charges for such period.
"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.
"Generally Accepted Accounting Principles" or "GAAP" means generally
accepted accounting principles in the United States, consistently applied, that
are in effect on the Closing Date.
"guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person entered into in the ordinary course of business under (i) interest
rate swap agreements, interest rate cap agreements and interest rate collar
agreements and other similar financial agreements or arrangements designed to
protect such Person against, or manage the exposure of such Person to,
fluctuations in interest rates, and (ii) forward exchange agreements, currency
swap, currency option and other similar financial agreements or arrangements
designed to protect such Person against, or manage the exposure of such Person
to, fluctuations in foreign currency exchange rates.
"Holder" means the Person in whose name a Note is, at the time of
determination, registered on the Registrar's books.
"Indebtedness" means (without duplication), with respect to any Person,
whether recourse is to all or a portion of the assets of such Person and whether
or not contingent, (a) every obligation of such Person for money borrowed, (b)
every obligation of such Person evidenced by bonds, debentures, notes or other
similar instruments, (c) every reimbursement obligation of such Person with
respect to letters of credit, bankers' acceptances or similar facilities issued
for the account of such Person, (d) every obligation of such Person issued or
assumed as the deferred purchase price of property or services, (e) the
Attributable Debt of every Capitalized Lease Obligation of such Person, (f) all
Disqualified Stock of such Person valued at its maximum fixed repurchase price,
plus accrued and unpaid dividends, (g) all obligations of such Person under or
in respect of Hedging Obligations, and (h) every obligation of the type referred
to in clauses (a) through (g) of another Person and all dividends of another
Person the payment of which, in either case, such Person has guaranteed. For
purposes of this definition, the "maximum fixed repurchase price" of any
Disqualified Stock that does not have a fixed repurchase price will be
calculated in accordance with the terms of such Disqualified Stock as if such
Disqualified Stock were purchased on any date on which Indebtedness is 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, such fair market
value will be determined in good faith by the board of directors of the issuer
of such Disqualified Stock. Notwithstanding the foregoing, trade accounts
payable and accrued liabilities arising in the ordinary course of business and
any liability for federal, state or local taxes or other taxes owed by such
Person will not be considered Indebtedness for purposes of this definition.
"Investment" in any Person means, (i) directly or indirectly, any advance,
loan or other extension of credit (including, without limitation, by way of
guarantee or similar arrangement) or capital contribution to such Person, the
purchase or other acquisition of any stock, bonds, notes, debentures or other
securities issued by such Person, the acquisition (by purchase or otherwise) of
all or substantially all of the business or assets of such Person, or the making
of any investment in such Person, (ii) the designation of any Restricted
Subsidiary
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as an Unrestricted Subsidiary and (iii) the fair market value of the Capital
Stock (or any other Investment), held by the Company or any of its Restricted
Subsidiaries, of (or in) any Person that has ceased to be a Restricted
Subsidiary. Investments exclude extensions of trade credit on commercially
reasonable terms in accordance with normal trade practices.
"Lien" means any mortgage, charge, pledge, lien (statutory or otherwise),
privilege, security interest, hypothecation, assignment for security, claim, or
preference or priority or other encumbrance upon, or with respect to, any
property of any kind, real or personal, movable or immovable, now owned or
hereafter acquired. A Person will be deemed to own subject to a Lien any
property that such 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.
"Net Cash 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, or stock or other
assets when disposed for, cash or cash equivalents (except to the extent that
such obligations are financed or sold with recourse to the Company or any
Restricted Subsidiary), net of (a) brokerage commissions and other fees and
expenses (including fees and expenses of legal counsel and investment banks)
related to such Asset Sale, (b) provisions for all taxes payable as a result of
such Asset Sale, (c) payments made to retire Indebtedness where such
Indebtedness is secured by the assets that are the subject of such Asset Sale,
(d) amounts required to be paid to any Person (other than the Company or any
Restricted Subsidiary) owning a beneficial interest in the assets that are
subject to the Asset Sale and (e) appropriate amounts to be provided by the
Company or any Restricted 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 seller after such Asset Sale, including pension and other
post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated with
such Asset Sale.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Parent" means Indesco Holdings Co., a Delaware corporation.
"Pari Passu Indebtedness" means (a) with respect to the Notes, Indebtedness
that ranks pari passu in right of payment to the Notes and (b) with respect to
any Subsidiary Guarantee, Indebtedness that ranks pari passu in right of payment
to such Subsidiary Guarantee.
"Permitted Holders" means any one or more of Ariel Gratch ("Gratch") and
Yehochai Schneider ("Schneider"), the estate, spouse, children and grandchildren
of each of Gratch and Schneider, any trust for the benefit solely of Gratch
and/or Schneider and/or members of their respective families, and any Person
controlled, directly or indirectly, by any one or more of the foregoing Persons.
"Permitted Investments" means any of the following:
(a) Investments in (i) securities with a maturity of one year or less
issued or directly and fully guaranteed or insured by the United States or
any agency or instrumentality thereof (provided that the full faith and
credit of the United States is pledged in support thereof); (ii)
certificates of deposit or acceptances with a maturity of one year or less
of any financial institution that is a member of the Federal Reserve System
having combined capital and surplus of not less than $500,000,000; (iii)
any shares of money market mutual or similar funds having assets in excess
of $500,000,000; and (iv) commercial paper with a maturity of one year or
less 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 having a rating (A) from Moody's Investors Service, Inc. of
at least P-1 or (B) from Standard & Poor's Ratings Group of at least A-1;
(b) Investments by the Company or a Restricted Subsidiary in another
Person, if as a result of such Investment (x) such other Person becomes a
Restricted Subsidiary that is a Subsidiary Guarantor, or (y) such other
Person becomes a Restricted Subsidiary that is not a Subsidiary Guarantor
but, at the time of such Investment, is not subject to a consensual
encumbrance or consensual restriction that would
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be prohibited by the covenant described under "Certain
Covenants -- Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries," without regard to the exception described in clauses (i),
(ii) and (iv) thereunder, or (z) such other Person is merged or
consolidated with or into, or transfers or conveys all or substantially all
of its assets to, the Company or a Restricted Subsidiary that, at the time
of such Investment, either is a Subsidiary Guarantor or is not subject to a
consensual encumbrance or consensual restriction that would be prohibited
by the covenant described under "Certain Covenants -- Dividends and Other
Payment Restrictions Affecting Restricted Subsidiaries," without regard to
the exception described in clause (i), (ii) and (iv) thereunder;
(c) Investments by the Company or a Restricted Subsidiary in (x) the
Company or, (y) a Subsidiary Guarantor or (z) a Restricted Subsidiary that
is not a Subsidiary Guarantor but, at the time of such Investment, is not
subject to a consensual encumbrance or consensual restriction that would be
prohibited by the covenant described under "Certain Covenants -- Dividends
and Other Payment Restrictions Affecting Restricted Subsidiaries," without
regard to the exception described in clause (i), (ii) and (iv) thereunder;
(d) Investments in existence on the Closing Date;
(e) promissory notes or other evidence of Indebtedness received as a
result of Asset Sales permitted under the covenant entitled "Repurchase at
the Option of Holders -- Asset Sales;"
(f) loans or advances to officers, directors and employees of the
Company or any of its Restricted Subsidiaries made in the ordinary course
of business after the date of the initial issuance of the Notes in an
amount not to exceed $1 million in the aggregate at any one time
outstanding; and
(g) other Investments that do not exceed $4 million in the aggregate
at any one time outstanding.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any of its Restricted Subsidiaries;
provided that: (i) the principal amount of such Permitted Refinancing
Indebtedness does not exceed the principal amount of the Indebtedness so
extended, refinanced, renewed, replaced, defeased or refunded plus the lesser of
the amount of any premium required to be paid in connection with such
refinancings pursuant to the terms of such indebtedness or the amount of any
premium reasonably determined by the Company as necessary to accomplish such
refinancing (plus the amount of reasonable expenses incurred in connection
therewith); (ii) such Permitted Refinancing Indebtedness has a Weighted Average
Life to Maturity equal to or greater than the Weighted Average Life to Maturity
of, the Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; (iii) if the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded is subordinated in right of payment to the Notes,
such Permitted Refinancing Indebtedness has a final maturity date later than the
final maturity date of, and is subordinated in right of payment to, the Notes on
terms at least as favorable to the Holders of Notes as those contained in the
documentation governing the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded; and (iv) such Indebtedness is incurred either by
the Company or by the Restricted Subsidiary of the Company that is the obligor
on the Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded.
"Person" means any individual, corporation, limited or general partnership,
joint venture, association, joint stock company, trust unincorporated
organization or government or any agency or political subdivision thereof.
"Polytek" means AFA Polytek B.V. and its successors.
"Polytek Credit Agreement" means the credit agreement dated July 24, 1997
between Polytek and ABN AMRO Bank NV, as such credit agreement may be amended,
restated, supplemented, refinanced or otherwise modified from time to time.
"Preferred Stock" means, with respect to any Person, any and all shares,
interests, partnership interests, participation, rights in or other equivalents
(however designated) of such Person's preferred or preference
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stock, whether now outstanding or issued after the Closing Date, and including,
without limitation, all classes and series of preferred or preference stock of
such Person.
"Qualified Equity Interest" means any Qualified Stock and all warrants,
options or other rights to acquire Qualified Stock (but excluding any debt
security that is convertible into or exchangeable for Capital Stock).
"Qualified Stock" of any Person means any and all Capital Stock of such
Person, other than Disqualified Stock.
"Restricted Subsidiary" means any Subsidiary other than an Unrestricted
Subsidiary. Restricted Subsidiaries shall always include AFA Products, Inc., AFA
Polytek B.V., Continental Sprayers International, Inc., Continental Acquisition
(U.K.) Limited and Continental Sprayers de Mexico S.A. de C.V.
"Senior Bank Debt" means the Obligations outstanding under the Credit
Agreement.
"Senior Indebtedness" means (i) the Senior Bank Debt and (ii) all other
Indebtedness of the Company for borrowed money, including principal, premium, if
any, and interest on such Indebtedness, unless the instrument under which such
Indebtedness of the Company for money borrowed is created, incurred, assumed or
guaranteed expressly provides that such Indebtedness for money borrowed is not
senior or superior in right of payment to the Notes, and all renewals,
extensions, modifications, amendments, restatements, or refinancings thereof.
Notwithstanding anything to the contrary in the foregoing, Senior Indebtedness
will not include (i) Indebtedness evidenced by the Notes, (ii) Indebtedness of
the Company that is expressly subordinated in right of payment to any Senior
Indebtedness of the Company or the Notes, (iii) Indebtedness of the Company that
by operation of law is subordinate to any general unsecured obligations of the
Company, (iv) Indebtedness of the Company to the extent incurred in violation of
the Indenture, (v) any liability for federal, state or local taxes or other
taxes, owed or owing by the Company, (vi) trade account payables owed or owing
by the Company, (vii) amounts owed by the Company for compensation to employees
or for services rendered to the Company, (viii) Indebtedness of the Company to
any Restricted Subsidiary or any other Affiliate of the Company, (ix)
Disqualified Stock of the Company and (x) Indebtedness which when incurred and
without respect to any election under Section 1111(b) of Title 11 of the United
States Code is without recourse to the Company or any Restricted Subsidiary.
"Significant Subsidiary" means any Restricted Subsidiary of the Company
that, together with its Subsidiaries, (a) for the most recent fiscal year of the
Company, accounted for more than 10% of the consolidated net sales of the
Company and its Subsidiaries, (b) as of the end of such fiscal year, was the
owner of more than 10% of the consolidated assets of the Company and its
Restricted Subsidiaries, in the case of either (a) or (b), as set forth on the
most recently available consolidated financial statements of the Company for
such fiscal year or (c) was organized or acquired after the beginning of such
fiscal year and would have been a Significant Subsidiary if it had been owned
during such entire fiscal year.
"Stated Maturity" means, when used with respect to any Note or any
installment of interest thereon, the date specified in such Note as the fixed
date on which the principal of such Note or such installment of interest is due
and payable and, when used with respect to any other Indebtedness, means the
date specified in the instrument governing such Indebtedness as the fixed date
on which the principal of such Indebtedness or any installment of interest
thereon is due and payable.
"Subordinated Indebtedness" means Indebtedness of the Company or a
Subsidiary Guarantor that is subordinated in right of payment to the Notes or
the Subsidiary Guarantees issued by such Subsidiary Guarantor, as the case may
be.
"Subordinated Parent Notes" means the unsecured subordinated note issued by
Parent on February 4, 1998 to AFA International Limited in the principal amount
of $1,000,000 (plus interest on such principal amount accrued from July 29, 1997
through February 4, 1998), the unsecured subordinated note issued by Parent on
February 4, 1998 to Waldock Limited in the principal amount of $2,000,000 (plus
interest on such principal amount accrued from July 29, 1997 through February 4,
1998) and the unsecured subordinated notes issued by Parent on the Closing Date
to AFA International Limited and Ariel Gratch in the aggregate principal amount
of $2,500,000.
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"Subsidiary" means any Person a majority of the equity ownership or Voting
Stock of which is at the time owned, directly or indirectly, by the Company
and/or one or more other Subsidiaries of the Company.
"Subsidiary Guarantors" means, collectively, all Restricted Subsidiaries
that are incorporated in the United States or a State thereof or the District of
Columbia; provided that any Person that becomes an Unrestricted Subsidiary in
compliance with the "Restricted Payments" covenant shall not be included in
"Subsidiary Guarantors" after becoming an Unrestricted Subsidiary.
"Unrestricted Subsidiary" means (a) any Subsidiary that is designated by
the Board of Directors of the Company as an Unrestricted Subsidiary in
accordance with the "Unrestricted Subsidiaries" covenant and (b) any Subsidiary
of an Unrestricted Subsidiary.
"Voting Stock" means any class or classes of Capital Stock 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 any Person (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" means, as of the date of determination with respect
to any Indebtedness or Disqualified Stock, the quotient obtained by dividing (a)
the sum of the products of (i) the number of years from the date of
determination to the date or dates of each successive scheduled principal or
liquidation value payment of such Indebtedness or Disqualified Stock,
respectively, multiplied by (ii) the amount of each such principal or
liquidation value payment by (b) the sum of all such principal or liquidation
value payments.
"Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary, all
of the outstanding voting securities (other than directors' qualifying shares or
shares of foreign Restricted Subsidiaries required to be owned by foreign
nationals pursuant to applicable law) of which are owned, directly or
indirectly, by the Company.
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DESCRIPTION OF OTHER INDEBTEDNESS
REVOLVING CREDIT FACILITY
General. The Company is party to a Revolving Credit Facility with
NationsCredit Commercial Corporation, as Collateral Agent and Initial Issuing
Bank ("NationsCredit"), and other lending institutions party thereto (the
"Lenders") providing for $30.0 million of borrowings from time to time.
The following is a summary of the general terms of the Revolving Credit
Facility.
Letters of Credit Subfacility. The Revolving Credit Facility includes a
subfacility for the issuance of letters of credit up to a maximum aggregate
amount at any one time outstanding not to exceed $2,000,000.
Security. Indebtedness of the Company under the Revolving Credit Facility
is guaranteed by the Parent and by each of the Company's domestic subsidiaries
and is secured by: (i) a first priority security interest in substantially all
of the assets and properties (including, without limitation, accounts
receivable, inventory, real property, machinery, equipment, contracts and
contract rights) of the Company and each of its domestic subsidiaries, (ii) a
first priority security interest in the trademarks, copyrights, patents, license
agreements and general intangibles of the Company and each of its domestic
subsidiaries and (iii) a first priority security interest in all of the capital
stock of the Company and of each of the Company's domestic subsidiaries and a
first priority security interest in 66% of the voting common stock of the
Company's foreign subsidiaries.
Interest. Indebtedness under the Revolving Credit Facility bears interest
at a floating rate based (at the Company's option) upon (i) LIBOR for one month,
plus an Applicable Margin ranging from 1.75% to 2.25% or (ii) an Alternate Base
Rate plus an Applicable Margin as described in the Revolving Credit Facility.
Borrowing Base. Advances under the Revolving Credit Facility are
calculated using a Borrowing Base equal to the sum of 85% of eligible accounts
receivable and 60% of eligible inventory. From the date of consummation of the
Offering through April 30, 1999 (or under certain conditions, September 30,
1998) the Revolving Credit Facility will allow for additional availability of up
to $5.0 million in excess of the Borrowing Base (but not to exceed the total
facility amount).
Maturity. The Revolving Credit Facility matures on February 4, 2003.
Covenants. The Revolving Credit Facility requires the Company to meet
certain financial tests at the end of each fiscal quarter, including a minimum
EBITDA test of $28.0 million for the quarter ending June 30, 1998 and increasing
incrementally to $39.0 million for the quarter ending December 31, 2000 and each
fiscal quarter thereafter, a Ratio of Consolidated Free Cash Flow to Total Debt
Service of 1.0:1.0 for the quarter ending June 30, 1998 and increasing
incrementally to 1.4:1.0 for the quarter ending December 31, 2000 and each
fiscal quarter thereafter and a Leverage Ratio of not more than 6.0:1.0 for the
quarter ending June 30, 1998 decreasing incrementally to 4.0:1.0 for the quarter
ending December 31, 2000 and each fiscal quarter thereafter (as those terms are
defined in the Revolving Credit Facility). The Revolving Credit Facility also
contains covenants that include, without limitation; (i) required delivery of
financial statements, other reports and borrowing base certificates; (ii)
notices of default, material litigation and material governmental and
environmental proceedings; (iii) compliance with laws; (iv) payment of taxes;
(v) maintenance of insurance; (vi) limitation on liens; (vii) limitations on
mergers, consolidations and sales of assets; (viii) limitations on incurrence of
debt; (ix) limitations on dividends and stock redemptions and the redemption
and/or prepayment of other debt; (x) limitations on investments; (xi) ERISA (as
defined therein) matters; (xii) limitations on transactions with affiliates; and
(xiii) limitations on capital expenditures. The Company is in compliance with
all the material covenants contained in the Revolving Credit Facility.
Events of Default; Remedies. The Revolving Credit Facility provides for
customary events of default, including, without limitation, (i) the non-payment
of principal, interest or other amounts, (ii) violation of covenants, (iii)
inaccuracy of representations and warranties, (iv) cross-defaults to certain
other indebtedness and material agreements (including the Notes), (v) certain
events of bankruptcy and insolvency, (vi) ERISA, (vii) actual or asserted
invalidity of any loan documents or security interests, and (viii) changes in
control of the ownership of the Company or of the voting control of parent. If
any such event of default
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occurs, the Administrative Agent is entitled, on behalf of the Lenders, to take
all actions permitted to be taken by a secured creditor under the Uniform
Commercial Code and to accelerate the amounts due under the Revolving Credit
Facility and may require all such amounts outstanding thereunder to be
immediately paid in full.
POLYTEK FACILITY
General. On July 24, 1997, Polytek entered into the Polytek Facilities
with ABN AMRO Bank N.V. ("Amro"). The Polytek Facilities consist of $5.5 million
aggregate principal amount of term loans, which include a $4.3 million 10-year
loan subfacility ("Ten-Year Loan") and a $1.2 million 20-year loan subfacility
("Twenty-Year Loan"), as well as a $5.5 million overdraft facility (the
"Overdraft Facility"). Borrowings under the Polytek Facilities are denominated
in Dutch guilders. The facilities amounts set forth above are U.S. dollar
equivalents of guilder amounts based on the Dutch guilder/U.S. dollar exchange
rate in effect on December 31, 1997.
Security. Indebtedness of Polytek under the Polytek Facilities is secured
by two mortgages on Polytek's manufacturing facility in The Netherlands with a
combined principal amount of $5.0 million.
Interest. Borrowings under the Polytek Facilities bear interest at the
following rates: (a) with respect to the Ten-Year Loan, at 6.10% per annum; (b)
with respect to the Twenty-Year Loan, at 5.50% per annum; and (c) with respect
to the Overdraft Facility, at a minimum base rate of 3.25% plus a margin of
1.5%.
Maturity. The Ten-Year Loan will mature on January 11, 2007 and is payable
in quarterly installments. The Twenty-Year Loan will mature on January 1, 2012
and is payable in annual installments.
Prepayments. Polytek is entitled to make early repayments on the Polytek
Facilities subject to the satisfaction of certain conditions described therein.
Early repayments are applied against amounts outstanding in inverse order of
their maturity dates.
Covenants. The Polytek Facilities contain covenants, including, without
limitation (i) required delivery of financial statements and other reports; (ii)
limitations on transfers of or liens on its assets; (iii) limitations on
guarantees in favor of associated companies; (iv) minimum net worth requirements
(a minimum of 10,000,000 guilders); and (v) limitations on dividends. The
Company is in compliance with all the material covenants of the Polytek
Facilities.
Events of Default; Remedies. The Polytek Facilities contain customary
events of default, including, without limitation, (i) the non-payment of
principal, interest or other amounts, (ii) the violation of covenants, (iii)
inaccuracy of information provided to Amro in connection with the Polytek
Facilities, (iv) cross-defaults to other indebtedness, financing arrangements or
guarantees, (iv) certain events of bankruptcy and insolvency, (v) actual or
asserted invalidity of any loan documents or security interests, and (vi)
changes in control of the ownership of Polytek. If any such event of default
occurs, Amro is entitled to demand repayment of the Polytek Facilities and costs
for losses sustained and income lost by Amro as a result of such event of
default.
NEW CREDIT FACILITY
General. The New Credit Facility from First Union, which will replace the
Revolving Credit Facility with NationsCredit, will provide for up to $30.0
million of borrowings from time to time for a term of five years and will
include a subfacility for the issuance of letters of credit up to a maximum
aggregate amount at any one time outstanding not to exceed $2,000,000. The
effectiveness of the New Credit Facility is subject to customary conditions
precedent. First Union will serve as Administrative and Collateral Agent for the
New Credit Facility.
Security. Indebtedness under the New Credit Facility will be secured by a
first priority security interest in all accounts receivable, inventory,
machinery and equipment (including molds) of the Company and each of its
domestic subsidiaries. In addition, the Company and each of its domestic
subsidiaries will grant a negative pledge with respect to certain other assets,
including real property, general intangibles and intellectual property
(including patents).
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Interest. Indebtedness under the New Credit Facility will bear interest at
a floating rate based (at the Company's option) upon (i) LIBOR (for either one,
two, three or six months), plus an Applicable Margin ranging from 1.25% to 2.25%
(initially 1.75%) or (ii) the Base Rate (the greater of the Prime Rate announced
by First Union or the Federal Funds Rate plus 0.50%) plus an Applicable Margin
ranging from 0.00% to 1.00% (initially 0.50%).
Borrowing Base. The availability of borrowings under the New Credit
Facility will be subject to a Borrowing Base equal to the sum of (i) 85% of
eligible accounts receivable, (ii) 60% of eligible inventory, (iii) 75% of the
orderly liquidation value of selected eligible machinery and equipment, (iv) up
to 80% of the cost of certain new machinery and equipment and (v) up to 60% of
the cost of the conversion of certain existing machinery and equipment.
Covenants. The New Credit Facility will require the Company to meet
certain financial tests at the end of each fiscal quarter, including a Maximum
Total Funded Debt to EBITDA Ratio from the closing date through December 31,
1999 of 6.25:1.0 decreasing incrementally to 4.5:1.0 at January 1, 2002 and
thereafter, and a Minimum Fixed Charge Coverage Ratio of not less than 1.0:1.0
for any fiscal period. The New Credit Facility will also contain covenants that
include, without limitation; (i) required delivery of financial statements,
other reports and borrowing base certificates; (ii) limitation on liens; (iii)
limitations on mergers, consolidations and sales of assets; (iv) limitations on
incurrence of debt; (v) limitation of permitted capital expenditures; (vi)
limitations on restricted payments; (vii) limitations on investments and
acquisitions; (viii) limitations on transactions with affiliates; and (ix)
limitations on changes in the Company's line of business.
Events of Default; Remedies. The New Credit Facility will provide for
customary events of default.
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CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following general discussion summarizes certain of the material U.S.
federal income tax aspects of the acquisition, ownership and disposition of the
New Notes. This discussion is a summary for general information only and does
not consider all aspects of U.S. federal income taxation that may be relevant to
the purchase, ownership and disposition of the New Notes by a prospective
investor in light of such investor's personal circumstances. This discussion
also does not address the U.S. federal income tax consequences of ownership of
Exchange Notes not held as capital assets within the meaning of Section 1221 of
the U.S. Internal Revenue Code of 1986, as amended (the "Code"), or the U.S.
federal income tax consequences to investors subject to special treatment under
the U.S. federal income tax laws, such as dealers in securities or foreign
currency, tax-exempt entities, financial institutions, insurance companies,
persons that hold the New Notes as part of a "straddle," a "hedge" or a
"conversion transaction," persons that have a "functional currency" other than
the U.S. dollar, and investors in pass-through entities. This discussion is
generally limited to the tax consequences to holders that purchased Old Notes
for cash at original issuance at the "issue price" and are exchanging those Old
Notes for New Notes pursuant to the Exchange Offer." For this purpose, the
"issue price" of an Old Note is the first price at which a substantial part of
the Old Notes was sold for money (excluding sales to bond houses, brokers, or
similar persons or organizations acting in the capacity of underwriters,
placement agents or wholesalers). In addition, this discussion does not describe
any tax consequences arising under U.S. federal gift and estate taxes (except to
the limited extent set forth below under "Non-U.S. Holders") or under the tax
laws of any state, local or foreign jurisdiction.
This discussion is based upon the Code, existing regulations thereunder,
and current administrative rulings and court decisions. All of the foregoing is
subject to change, possibly on a retroactive basis, and any such change could
affect the continuing validity of this discussion.
U.S. HOLDERS
The following discussion is limited to the U.S. federal income tax
consequences relevant to a Holder of a New Note that is (i) a citizen or
resident (as defined in Section 7701(b)(l) of the Code) of the United States,
(ii) a corporation organized under the laws of the United States or any
political subdivision thereof or therein, (iii) an estate, the income of which
is subject to U.S. federal income tax regardless of the source or (iv) a trust
with respect to which a court within the United States is able to exercise
primary supervision over its administration and one or more United States
persons have the authority to control all of its substantial decisions (a "U.S.
Holder"). Certain U.S. federal income tax consequences relevant to a holder
other than a U.S. Holder are discussed separately below under the heading
"Non-U.S. Holders."
Exchange Offer
The exchange of Old Notes for New Notes pursuant to the Exchange Offer may
be disregarded for U.S. federal income tax purposes. As a result, there should
be no U.S. federal income tax consequences to U.S. Holders exchanging their Old
Notes for New Notes pursuant to the Exchange Offer. Moreover, even if the
exchange were not to be disregarded for U.S. federal income tax purposes, it
should qualify as a tax free recapitalization exchange under Section 368 of the
Code. In that event, U.S. Holders would not recognize any gain or loss and would
have the same tax basis and holding period in the New Notes they received that
they had in the Old Notes they exchanged.
Stated Interest
Interest on a New Note should be taxable to a U.S. Holder as ordinary
interest 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.
Sale, Exchange or Redemption of the New Notes
Upon the sale, exchange or redemption of a New Note, a U.S. Holder
generally will recognize gain or loss equal to the difference between (i) the
amount realized on the disposition (other than amounts attributable to
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accrued interest not yet taken into income) and (ii) the U.S. Holder's tax basis
in the New Note. A U.S. Holder's tax basis in a New Note generally will equal
the cost to the U.S. Holder of the Old Note exchanged for that New Note. Such
gain or loss will generally constitute capital gain or loss.
Recently enacted legislation revised the holding period and tax rates
applicable to certain capital gains. For non-corporate Holders, long term
capital gain from the sale or exchange of a New Note is taxed at different rates
depending upon whether the holding period is more than one year but not more
than 18 months. U.S. Holders are advised to consult their tax advisors
concerning the new provisions on the taxation of capital gains.
Backup Withholding and Information Reporting
Under the Code, a U.S. Holder of a New Note may be subject, under certain
circumstances, to information reporting and/or backup withholding at a 31% rate
on cash payments of interest on, or the gross proceeds from disposition of, the
New Note thereof. This withholding applies only if a U.S. Holder (i) fails to
furnish its social security or other taxpayer identification number ("TIN")
within a reasonable time after it is requested, (ii) furnishes an incorrect TIN,
(iii) fails to report interest or dividends properly, or (iv) fails, under
certain circumstances, to provide a certified statement, signed under penalty of
perjury, that the TIN provided is a correct number and that the Holder is not
subject to backup withholding. Any amount withheld from a payment to a U.S.
Holder under the backup withholding rules is allowable as a credit (and may
entitle such holder to a refund) against such holder's U.S. federal income tax
liability, provided that the required information is furnished to the IRS.
Certain persons are exempt from backup withholding, including corporations and
financial institutions. Holders of Notes should consult their tax advisors as to
their qualification for an exemption from backup withholding and the procedure
for obtaining such an exemption.
NON-U.S. HOLDERS
The following discussion is limited to the U.S. federal income tax
consequences relevant to a Holder of a New Note that is not a U.S. Holder (a
"Non-U.S. Holder"). This discussion does not consider all aspects of U.S.
federal income and estate taxation that may be relevant to the purchase,
ownership or disposition of New Notes by Non-U.S. Holder in light of such
holder's particular circumstances, including holding New Notes through a
partnership. For example, persons who are partners in foreign partnerships or
beneficiaries of foreign trusts or estates and who are subject to U.S. federal
income tax because of their own status, such as U.S. residents or foreign
persons engaged in a trade or business in the United States, may be subject to
U.S. federal income tax even though the foreign partnership, trust or estate is
not itself subject to U.S. Federal income tax on the disposition of its New
Notes. In addition, persons who hold New Notes through hybrid entities (i.e.,
entities that are fiscally transparent for U.S. tax purposes but not for foreign
law purposes) may not be entitled to any applicable treaty benefits. For
purposes of the following discussion, interest and gain on the sale, exchange or
other disposition of a New Note will be considered "U.S. trade or business
income" if such income or gain is (i) effectively connected with the conduct of
a U.S. trade or business or (ii) in the case of a resident of a country with
which the United States has an income tax treaty, attributable to a U.S.
permanent establishment (or to a fixed base) in the United States.
Stated Interest
Generally, any interest paid to a Non-U.S. Holder of a New Note that is not
U.S. trade or business income will not be subject to U.S. federal income tax if
the interest qualifies as "portfolio interest." Interest on the New Notes will
qualify as portfolio interest if the Non-U.S. Holder (i) does not actually or
constructively own 10% or more of the total voting power of all voting stock of
the Company; (ii) is not a "controlled foreign corporation" with respect to
which the Company is a "related person" within the meaning of the Code; (iii) is
not a bank extending credit pursuant to a loan agreement entered into in the
ordinary course of its trade or business; and (iv) the beneficial owner, under
penalty of perjury, certifies that it is not a U.S. person and such certificate
provides the beneficial owner's name and address.
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The gross amount of interest paid to a Non-U.S. Holder of interest that
does not qualify for the portfolio interest exception and that is not U.S. trade
or business income will be subject to U.S. withholding tax at the rate of 30%,
unless a U.S. income tax treaty reduces or eliminates withholding. U.S. trade or
business income is taxed on a net basis at regular U.S. federal income tax rates
rather than the 30% gross rate. To claim the benefit of a tax treaty or to claim
exemption from withholding because the income is U.S. trade or business income,
the Non-U.S. Holder must provide a properly executed Form 1001 or 4224 (or such
successor forms as the IRS designates), as applicable, prior to the payment of
interest. These forms must be periodically updated. Under newly-finalized
regulations, not currently in effect, the Forms 1001 and 4224 will be replaced
by Form W-8. Also under these newly-finalized regulations, a Non-U.S. Holder who
is claiming the benefits of a tax treaty may be required to obtain a U.S.
taxpayer identification number and to provide certain documentary evidence
issued by foreign governmental authorities to prove residence in the foreign
country. Certain special procedures are provided in these newly-finalized
regulations for payments through qualified intermediaries. These newly-finalized
regulations are effective January 1, 2000. However, valid withholding
certificates that are held on December 31, 1999 (including Forms 1001, 4224 and
W-8) will remain valid until the earlier of December 31, 2000 or the expiration
date of the certificate under the rules currently in effect.
NON-U.S. HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE
APPLICATION OF THE CERTIFICATION REQUIREMENTS IN THE NEWLY-FINALIZED
REGULATIONS.
Sale, Exchange or Redemption of New Notes
Except as described below and subject to the discussion of backup
withholding above, any gain realized by a Non-U.S. Holder on the sale, exchange
or redemption of a New Note generally will not be subject to U.S. federal income
tax, unless (i) the gain is U.S. trade or business income, (ii) subject to
certain exceptions, the Non-U.S. Holder is an individual who holds the New Note
as a capital asset and is present in the United States for 183 days or more
during the taxable year of the disposition or (iii) the Non-U.S. Holder is
subject to rules applicable to certain former citizens and residents of the
United States.
Federal Estate Tax
New Notes held (or treated as held) by an individual who is a Non-U.S.
Holder at the time of his or her death will not be subject to U.S. federal
estate tax, provided the individual did not actually or constructively own 10%
or more of the total voting power of all voting stock of the Company and
provided income on the New Notes was not U.S. trade or business income.
Information Reporting and Backup Withholding
The Company must report annually to the IRS and to each Non-U.S. Holder any
interest that is subject to U.S. withholding tax or that is exempt from
withholding pursuant to a tax treaty or the portfolio interest exception. Copies
of these information returns also may be made available under the provisions of
a specific treaty or agreement to the tax authorities of the country in which
the Non-U.S. Holder resides. In the case of interest (including OID) paid to
Non-U.S. Holders, information reporting and backup withholding (at a rate of
31%) does not apply to such payments if the holder makes the requisite
certification or has otherwise established an exemption (provided that neither
the payor nor its paying agent has actual knowledge that the holder is a U.S.
Holder or that the conditions of any other exemption are not, in fact,
satisfied).
Backup withholding and information reporting likewise do not apply to the
Company's payments of principal on the New Notes to a Non-U.S. Holder, if the
holder certifies as to its non-U.S. status under penalty of perjury or otherwise
establishes an exemption (provided that neither the Company nor its paying agent
has actual knowledge that the holder is a U.S. Holder or that the conditions of
any other exemption are not, in fact, satisfied).
The payment of the proceeds from the disposition of New Notes to or through
the U.S. office of any broker, U.S. or foreign, are subject to information
reporting and possible backup withholding unless the owner certifies as to its
non-U.S. status under penalty of perjury or otherwise establishes an exemption,
provided that
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the broker does not have actual knowledge that the holder is a U.S. Holder or
that the conditions of any other exemption are not, in fact, satisfied.
The payment of the proceeds from the disposition of a New Note to or
through a non-U.S. office of a non-U.S. broker that is not a "U.S. related
person" will not be subject to information reporting or backup withholding. For
this purpose, a "U.S. related person" is (i) a "controlled foreign corporation"
for U.S. federal income tax purposes, (ii) a foreign person 50% or more of whose
gross income from all sources for the three-year period ending with the close of
its taxable year preceding the payment (or for such part of the period that the
broker has been in existence) is derived from activities that are effectively
connected with the conduct of a U.S. trade or business, or, (iii) a foreign
partnership with certain connections to the U.S.
In the case of the payment of proceeds from the disposition of New Notes to
or through a non-U.S. office of a broker that is either a U.S. person or a U.S.
related person, the regulations require information reporting on the payment
unless the broker has documentary evidence in its files that the owner is a
Non-U.S. Holder and the broker has no knowledge to the contrary. Backup
withholding does not apply to payments made through foreign offices of a broker
that is not a U.S. person or a U.S. related person (absent actual knowledge that
the payee is a U.S. Holder).
Any amounts withheld from a payment to a Non-U.S. Holder under the backup
withholding rules will be allowed as a refund or a credit against such Non-U.S.
Holder's U.S. federal income tax liability, provided that the requisite
procedures are followed.
THE PRECEDING DISCUSSION OF CERTAIN UNITED STATES FEDERAL INCOME TAX
CONSEQUENCES IS FOR GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. ACCORDINGLY,
EACH INVESTOR SHOULD CONSULT ITS OWN TAX ADVISOR AS TO PARTICULAR TAX
CONSEQUENCES TO IT OF PURCHASING, HOLDING AND DISPOSING OF NEW NOTES, INCLUDING
THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS, AND OF ANY
PROPOSED CHANGES IN APPLICABLE LAWS.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired as a result of market-making activities or other
trading activities. The Company has agreed that, starting on the Expiration Date
and ending on the close of business one year after the Expiration Date, it will
make this Prospectus, as amended or supplemented, available to any broker-dealer
for use in connection with any such resale. In addition, until ,
1998, all dealers effecting transactions in the New Notes may be required to
deliver a prospectus.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices of negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such New Notes. Any broker-dealer that
resells New Notes that were received by it for its own account pursuant to the
Exchange Offer and any broker or dealer that participates in a distribution of
such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of New Notes and any commission
or concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The Letter of Transmittal states that, by
acknowledging that it will deliver and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
LEGAL MATTERS
The validity of the New Notes will be passed upon for the Company by Weil,
Gotshal & Manges LLP, New York, New York.
EXPERTS
The balance sheet of Indesco International, Inc. as of December 31, 1997
and the financial statements of AFA Holdings Co. and Subsidiaries as of December
31, 1997 and for the five-month period then ended, WTI, Inc. and Subsidiaries as
of July 31, 1997 and December 31, 1996 and for the seven-month period ended July
31, 1997 and for the years ended December 31, 1996 and 1995, and of Continental
Sprayers and Affiliates as of May 31, 1997 and 1996 and for each of the three
years in the period ended May 31, 1997, included elsewhere in this Prospectus,
have been included herein in reliance on the reports of Coopers & Lybrand
L.L.P., given on the authority of that firm as experts in accounting and
auditing.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
AFA HOLDINGS CO. AND SUBSIDIARIES
Report of Independent Accountants......................... F-2
Combined Balance Sheet as of December 31, 1997............ F-3
Combined Statement of Operations for the five month period
ended December 31, 1997................................ F-4
Combined Statement of Stockholders' Equity for the five
month period ended December 31, 1997................... F-5
Combined Statement of Cash Flows for the five month period
ended December 31, 1997................................ F-6
Notes to Combined Financial Statements.................... F-7
WTI, INC. AND SUBSIDIARIES
Report of Independent Accountants......................... F-20
Consolidated Balance Sheets as of July 31, 1997 and
December 31, 1996...................................... F-21
Consolidated Statements of Operations for the seven month
period ended July 31, 1997 and the years ended December
31, 1996 and 1995...................................... F-22
Consolidated Statements of Stockholders' Equity for the
seven months ended July 31, 1997 and for the years
ended December 31, 1996 and 1995....................... F-23
Consolidated Statements of Cash Flows for the seven month
period ended July 31, 1997 and for the years ended
December 31, 1996 and 1995............................. F-24
Notes to Consolidated Financial Statements................ F-25
CONTINENTAL SPRAYERS AND AFFILIATES
Report of Independent Accountants......................... F-43
Combined Balance Sheets as of May 31, 1997 and 1996....... F-44
Combined Statements of Operations for the years ended May
31, 1997, 1996 and 1995................................ F-45
Combined Statements of Divisional Equity for the years
ended May 31, 1997, 1996 and 1995...................... F-46
Combined Statements of Cash Flows for the years ended May
31, 1997, 1996 and 1995................................ F-47
Notes to Combined Financial Statements.................... F-48
CONTINENTAL SPRAYERS AND AFFILIATES
Unaudited Combined Balance Sheet as of January 31, 1998... F-52
Unaudited Combined Statements of Operations for the eight
months ended January 31, 1998 and 1997................. F-53
Unaudited Statements of Cash Flows for the eight months
ended January 31, 1998 and 1997........................ F-54
Notes to Financial Statements............................. F-55
INDESCO INTERNATIONAL, INC.
Report of Independent Accountants......................... F-57
Balance Sheet as of December 31, 1997..................... F-58
Notes to Financial Statement.............................. F-59
INDESCO INTERNATIONAL, INC.
Unaudited Condensed Consolidated Balance Sheet as of April
5, 1998................................................ F-60
Unaudited Condensed Consolidated Statements of Operations
for the three months ended April 5, 1998 and April 6,
1997................................................... F-61
Unaudited Condensed Consolidated Statements of Cash Flows
for the three months ended April 5, 1998 and April 6,
1997................................................... F-62
Notes to Unaudited Condensed Consolidated Financial
Statements............................................. F-63
</TABLE>
F-1
<PAGE> 100
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
AFA Holdings Co. and Subsidiaries:
We have audited the accompanying combined balance sheet of AFA Holdings Co.
and Subsidiaries (the "Company," see Note 1) as of December 31, 1997, and the
related combined statements of operations, stockholders' equity, and cash flows
for the five month period then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of AFA Holdings Co. and
Subsidiaries as of December 31, 1997 and the combined results of their
operations and their cash flows for the five month period then ended, in
conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Charlotte, North Carolina
March 5, 1998, except as to the first paragraph of Note 12 for which the date is
April 23, 1998.
F-2
<PAGE> 101
AFA HOLDINGS CO. AND SUBSIDIARIES
COMBINED BALANCE SHEET
DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
ASSETS:
Current assets:
Cash and cash equivalents................................. $ 1,051
Accounts receivable, net of allowances of $28............. 6,821
Inventories............................................... 9,918
Prepaid expenses and other................................ 605
-------
Total current assets.............................. 18,395
Property, plant and equipment............................... 28,009
Excess of cost over fair value of net assets acquired,
net....................................................... 6,365
Patents and other intangibles, net.......................... 5,834
Deferred financing costs.................................... 1,628
Other assets................................................ 656
-------
Total assets...................................... $60,887
=======
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current portion of long-term debt......................... $ 2,379
Notes payable............................................. 4,762
Accounts and drafts payable............................... 2,410
Other accrued expenses.................................... 3,334
-------
Total current liabilities......................... 12,885
Subordinated debt........................................... 3,000
Long-term debt.............................................. 41,154
Deferred income taxes....................................... 632
-------
Total liabilities................................. 57,671
-------
Commitments and contingencies
Stockholders' equity:
Common stock.............................................. 242
Additional paid-in capital................................ 4,320
Accumulated deficit....................................... (1,374)
Accumulated other comprehensive income.................... 28
-------
Total stockholders' equity........................ 3,216
-------
Total liabilities and stockholders' equity........ $60,887
=======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE> 102
AFA HOLDINGS CO. AND SUBSIDIARIES
COMBINED STATEMENT OF OPERATIONS
FOR THE FIVE MONTH PERIOD ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
Net sales................................................... $20,108
Cost of sales............................................... 16,595
-------
Gross profit...................................... 3,513
Selling, general and administrative expenses................ 2,862
-------
Income from operations............................ 651
Other expense (income):
Interest.................................................. 2,231
Other..................................................... (54)
-------
Total other expense............................... 2,177
-------
Loss before income tax benefit.............................. (1,526)
Income tax benefit.......................................... (152)
-------
Net loss.......................................... $(1,374)
=======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE> 103
AFA HOLDINGS CO. AND SUBSIDIARIES
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE FIVE MONTH PERIOD ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ACCUMULATED
------------------ ADDITIONAL OTHER TOTAL
AFA PAID-IN ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
POLYTEK HOLDINGS CAPITAL DEFICIT INCOME EQUITY
------- -------- ---------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, August 1, 1997.......... $242 $ $4,320 $ 4,562
-------
Net loss......................... $(1,374) (1,374)
Translation adjustment........... $28 28
-------
Comprehensive income............. (1,346)
---- -- ------ ------- --- -------
Balance, December 31, 1997....... $242 $ $4,320 $(1,374) $28 $ 3,216
==== == ====== ======= === =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE> 104
AFA HOLDINGS CO. AND SUBSIDIARIES
COMBINED STATEMENT OF CASH FLOWS
FOR THE FIVE MONTH PERIOD ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss.................................................. $(1,374)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation........................................... 1,605
Amortization........................................... 256
Deferred income taxes.................................. (180)
Changes in assets and liabilities:
Accounts receivable.................................. (248)
Inventories.......................................... 1,434
Prepaid expenses and other........................... 31
Accounts and drafts payable.......................... (600)
Other accrued expenses............................... 524
-------
Net cash provided by operating activities......... 1,448
-------
Cash flows from investing activities:
Expenditures for property, plant and equipment............ (661)
-------
Net cash used in investing activities............. (661)
-------
Cash flows from financing activities:
Repayment of debt......................................... (770)
-------
Net cash used in financing activities............. (770)
-------
Effect of exchange rate changes on cash..................... 34
-------
Net increase in cash and cash equivalents................... 51
Cash and cash equivalents at beginning of period............ 1,000
-------
Cash and cash equivalents at end of period........ $ 1,051
=======
Cash paid during the period for:
Interest.................................................. $ 1,378
Income taxes.............................................. 0
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE> 105
AFA HOLDINGS CO. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS)
1. ORGANIZATION:
AFA HOLDINGS CO.
AFA Holdings Co. ("AFA") manufactures and sells finger activated liquid
dispensing devices ("trigger sprayers"). AFA was formed in July 1997 to acquire,
through a wholly-owned subsidiary, the assets and liabilities of AFA Products,
Inc. ("Products"), located in Forest City, North Carolina. Concurrent with this
transaction, Dejanu B.V., acquired the outstanding capital stock of AFA Polytek
B.V. ("Polytek") based in The Netherlands. AFA and Polytek are collectively
referred to herein as the "Company." Products and Polytek were formerly
operating subsidiaries of W.T.I., Inc. ("WTI"). AFA and Dejanu B.V. are under
common control and have been presented on a combined basis.
The acquisition of Products for an aggregate purchase price of $46,938
(including expenses of $1,926), and the acquisition of Polytek for approximately
$800 and refinancing of debt of approximately $7,900, resulted in the following
changes in financial position:
<TABLE>
<CAPTION>
ASSETS: LIABILITIES AND EQUITY:
<S> <C> <C> <C>
Cash and receivables........... $7,526 Current liabilities............ $5,620
Inventories.................... 11,223 Bank debt...................... 48,771
Fixed assets................... 28,646 Subordinated debt.............. 3,000
Patents........................ 6,000 Other liabilities.............. 942
Other assets................... 2,885 Equity......................... 4,562
Goodwill....................... 6,615
------- -------
$62,895 $62,895
======= =======
</TABLE>
The WTI businesses were acquired through U.S. dollar bank debt of $38,000,
subordinated debt from shareholders of $3,000, an equity investment of $3,752,
issuance of warrants with a value of $810 to various lenders and borrowings
under lines of credit.
The acquisitions have been accounted for using the purchase method of
accounting and, accordingly, the purchase price has been allocated to the assets
purchased and liabilities assumed based upon the fair values at the date of
acquisition.
ACQUISITION OF CONTINENTAL SPRAYERS AND AFFILIATES
Effective February 1, 1998, AFA acquired certain assets and liabilities of
Continental Sprayers and Affiliates ("CSI"), a division of Contico
International, Inc. CSI also manufactures and sells trigger sprayers. AFA
acquired CSI for $92,947 in cash, paid outstanding debt of Products of $39,567
and paid fees of $4,980. Such amounts were paid through the issuance of term
loans of $135,000 and borrowings under a revolving credit facility.
The assets acquired and liabilities assumed of CSI based on the December
31, 1997 value thereof are as follows:
<TABLE>
<S> <C>
Cash and receivables....................................... $ 767
Inventory.................................................. 5,309
Fixed assets............................................... 27,789
Other assets............................................... 1,135
Goodwill................................................... 60,639
Payables................................................... (2,692)
-------
Purchase price................................... $92,947
=======
</TABLE>
F-7
<PAGE> 106
AFA HOLDINGS CO. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
The acquisitions have been accounted for using the purchase method of
accounting. The Company has increased the value of inventory by $850 in
accordance with Accounting Principles Board Opinion No. 16 and has recorded
fixed assets and identifiable intangibles at their net historical book value,
pending completion of appraisals. Differences, if any, between these amounts and
the amounts resulting from appraisals and valuations of these assets, which have
not yet been completed, will be reflected as adjustments to goodwill, which may
increase or decrease related depreciation and amortization charges.
Concurrent with the acquisition of CSI, Polytek became an indirect
wholly-owned subsidiary of AFA. AFA agreed to issue to AFA International Limited
and Warcop Investments Ltd. (a company affiliated with a shareholder), 820,500
shares and 273,500 shares, respectively, of a new class of Preferred Stock
having a liquidation and redemption value of $10 per share and providing for
dividends at an annual rate of 7% of the liquidation value thereof. As a result
of the common control of AFA and Polytek this transaction has been recorded at
its historical cost basis.
Condensed pro forma unaudited combined results of operations of AFA, CSI
and Polytek for the years ended December 31, 1997 and 1996 as if the
transactions had occurred on January 1, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1997 1996
---------- ----------
<S> <C> <C>
Net sales............................................ $114,531 $113,139
======== ========
Net income........................................... $ 1,424 $ 493
======== ========
</TABLE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF COMBINATION
The combined financial statements include the accounts of AFA and Polytek
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated.
REVENUE RECOGNITION
The Company recognizes revenue upon shipment of its products.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
on the first-in, first-out (FIFO) basis.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided
primarily on a straight-line basis over the estimated useful lives of the
assets. Maintenance and repairs are charged to income as incurred and
betterments that extend the useful life are capitalized. Upon retirement or
sale, the cost and accumulated depreciation are eliminated from the respective
accounts, and the gain or loss, if any, is included in income.
If events or changes in circumstances indicate that the carrying amount of
a long-lived asset may not be recoverable, the Company estimates the future cash
flows expected to result from the use of the asset and its eventual disposition.
If the sum of the expected future cash flows (undiscounted and without interest
charges) is less than the carrying amount of the long-lived asset, an impairment
loss is recognized. To date, no impairment losses have been recognized.
RESEARCH AND DEVELOPMENT
The cost of research and development expenditures is expensed as incurred.
F-8
<PAGE> 107
AFA HOLDINGS CO. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant
estimates in the financial statements relate to the allowance for uncollectible
accounts receivable, the allowance for slow-moving and obsolete inventories, the
allowance for sales returns and the valuation allowance for deferred tax assets.
INCOME TAXES
The Company uses the asset and liability approach to financial accounting
and reporting for income taxes. Deferred income tax assets and liabilities are
computed annually for differences between the financial statement and tax bases
of assets and liabilities that will result in taxable or deductible amounts in
the future. Such deferred income tax asset and liability computations are based
on enacted tax laws and rates applicable to periods in which the differences are
expected to affect taxable income. A valuation allowance is established when
necessary to reduce deferred tax assets to the amount expected to be realized.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of Polytek are translated at exchange rates in
effect at the balance sheet date ($.4935 per guilder at December 31, 1997).
Items of revenue and expense are translated at average exchange rates during the
period ($.4990 per guilder for the five months of 1997 presented). Translation
adjustments, resulting from translating Polytek's financial statements into
dollars, are reported in the equity section of the accompanying balance sheet
under the caption "cumulative translation adjustment."
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED
Net excess of cost over fair value of net assets acquired is being
amortized on a straight-line basis over a period of thirty years. Accumulated
amortization was $90 as of December 31, 1997. The Company assesses the
recoverability of this intangible asset by determining whether the amortization
of the goodwill balance over its remaining life can be recovered through
forecasted future operations. Impairment is evaluated by comparing future cash
flows (undiscounted and without interest charges) expected to result from the
use or sale of the asset and its eventual disposition, to the carrying amount of
the asset. To date, no impairment losses have been recognized.
PATENTS AND OTHER INTANGIBLE ASSETS
The cost of patents acquired and other intangible assets, consisting
primarily of an exclusive sales agreement and royalty agreements, are being
amortized using the straight-line method over the estimated useful lives of
fifteen years. Accumulated amortization was $166 at December 31, 1997.
DEFERRED FINANCING FEE
Costs incurred to obtain financing are amortized using the straight-line
method (which approximates the interest method) over the term of the related
debt.
F-9
<PAGE> 108
AFA HOLDINGS CO. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
DEFERRED TOOLING
From time to time, the Company purchases certain molds and equipment
(tooling) to meet specific customer product requirements. These tooling costs
are capitalized by the Company and are amortized into operations over the
estimated life of the sales contract period.
CASH EQUIVALENTS
The Company considers demand deposits and time deposits with original
maturities of three months or less as equivalent to cash.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Company has adopted Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income. This statement requires that an enterprise
classify items of other comprehensive income by their nature in the financial
statements and display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of the balance sheet.
Statement of Financial Accounting Standards No. 131, Disclosure About
Segments of an Enterprise and Related information, is effective for years
beginning after December 15, 1997. This statement requires that a public
business enterprise report financial and descriptive information about its
reportable business segments. Management of the Company believes that the future
adoption of this statement will not have a significant impact on the Company's
combined financial position, results of operations or cash flows, but will
result in additional disclosure.
3. INVENTORIES:
The components of inventories as of December 31, 1997 are summarized below:
<TABLE>
<S> <C>
Raw material................................................ $2,172
Work-in-process............................................. 3,346
Finished goods.............................................. 4,400
------
$9,918
======
</TABLE>
F-10
<PAGE> 109
AFA HOLDINGS CO. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment, summarized by major classification and
estimated useful lives for depreciation purposes, is as follows:
<TABLE>
<CAPTION>
USEFUL DECEMBER 31,
LIVES (YEARS) 1997
------------- ------------
<S> <C> <C>
Land.................................................... $ 1,293
Buildings............................................... 30 - 40 7,940
Machinery and equipment................................. 5 - 7 10,095
Molds................................................... 7 8,469
Furniture and fixtures.................................. 5 - 7 1,582
Vehicles................................................ 5 3
Construction in progress................................ -- 225
-------
29,607
Less accumulated depreciation........................... (1,598)
-------
Property, plant and equipment, net...................... $28,009
=======
</TABLE>
Construction in progress primarily consists of additions and improvements
to buildings, molds and machinery.
5. DEBT:
Debt consists of the following as of December 31, 1997:
<TABLE>
<S> <C>
WORKING CAPITAL BORROWINGS(A):
Working capital line of credit -- dollar denominated,
bearing interest at 9.22% at December 31, 1997......... $ 2,541
Working capital line of credit -- guilder denominated,
bearing interest at 4.75% at December 31, 1997......... 2,221
-------
Total working capital borrowings.................. $ 4,762
=======
LONG-TERM DEBT:
Senior mortgage note -- dollar denominated, bearing
interest at 9.72% at December 31, 1997(b).............. 28,000
Senior mortgage note -- dollar denominated, bearing
interest at 10.97% at December 31, 1997(c)............. 6,000
Senior mortgage note -- dollar denominated, bearing
interest at 11.86% at December 31, 1997(d)............. 4,000
Subordinated note payable -- dollar denominated, bearing
interest at 11.5% at December 31, 1997(e).............. 2,000
Subordinated note payable -- dollar denominated, bearing
interest at 11.5% at December 31, 1997(f).............. 1,000
ABN/AMRO loan -- guilder denominated, bearing interest at
6.1% at December 31, 1997(g)........................... 4,090
Senior mortgage note -- guilder denominated, payable in
quarterly principal installments of $86,363 (175,000
guilders), bearing interest at 5.5% at December 31,
1997(h)................................................ 1,209
Installment notes payable -- guilder denominated, bearing
interest at rates ranging from 7.1% to 7.75%........... 234
-------
46,533
Less current portion........................................ 2,379
-------
Total long-term debt.............................. $44,154
=======
</TABLE>
F-11
<PAGE> 110
AFA HOLDINGS CO. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
(a) WORKING CAPITAL BORROWINGS:
At December 31, 1997, the Company had loan and security agreements (the
"Agreements" or "Term Loans") with a U.S. lender and Dutch bank that provided
for working capital lines of credit, denominated in both dollars and guilders.
Borrowings under the dollar denominated working capital line of credit,
which had a maximum amount of $7,000 were limited to 85% of eligible accounts
receivable (as defined), and 60% of eligible inventories (as defined).
Borrowings under the guilder denominated line of credit had a maximum amount of
11,000 guilders ($5,429 at December 31, 1997.)
Interest payments on the dollar denominated working capital line of credit
are due monthly, beginning September 1, 1997 at a rate of LIBOR plus 3.25%. The
due date of the dollar denominated working capital line of credit is July 29,
2004. The dollar denominated working capital line of credit agreement contained
certain covenants, the most restrictive of which limit capital expenditures, set
forth maximum leverage ratios and set forth minimum debt coverage ratios and
earnings requirements.
Interest payments on the guilder denominated line of credit are due
quarterly. Borrowings under this line of credit are collateralized by a lien on
the facility. This line of credit contains certain prohibitions, the most
significant of which relate to minimum net worth requirements.
LONG-TERM DEBT
(b) TERM LOAN -- TRANCHE A -- DOLLAR DENOMINATED
At December 31, 1997, the Company had a Term Loan payable of $28,000 to a
bank. Quarterly installments of varying amounts are due beginning April 1998
through July 2004. Interest payments are due monthly, beginning September 1,
1997 at a rate of LIBOR plus 3.75%. The Term Loan agreement contained certain
covenants, the most restrictive of which limit capital expenditures, set forth
maximum leverage ratios and set forth minimum debt coverage ratios and earnings
requirements.
(c) TERM LOAN -- TRANCHE B -- DOLLAR DENOMINATED
At December 31, 1997, the Company had a Term Loan of $6,000 to a bank.
Quarterly installments of $1,500 are due beginning July 2003 through July 2004.
The Term Loan agreement contains a clause requiring quarterly payments to begin
upon repayment in full of the Term Loan described in (b) above. Interest
payments are due monthly, beginning September 1, 1997 at a rate of LIBOR plus
5.00%. The Term Loan agreement contains certain covenants, the most restrictive
of which limit capital expenditures, set forth maximum leverage ratios and set
forth minimum debt coverage ratios and earnings requirements.
(d) TERM LOAN -- TRANCHE C -- DOLLAR DENOMINATED
At December 31, 1997, the Company had a Term Loan payable of $4,000 to a
bank. Quarterly installments of $1,000 are due beginning July 2004 through July
2005. The Term Loan agreement contains a clause requiring quarterly payments to
begin upon repayment in full of the Term Loan described in (b) and (c) above.
Interest payments are due monthly, beginning September 1, 1997 at a rate of
LIBOR plus 5.90%. The Term Loan agreement contains certain covenants the most
restrictive of which limit capital expenditures, set forth maximum leverage
ratios and set forth minimum debt coverage ratios and earnings requirements.
Warrants, with a value of $525, were issued in conjunction with execution
of this Term Loan and are recorded as deferred financing costs. Under the terms
of these warrants, the bank was granted the option to purchase 175 shares of
Class B Common Stock at an exercise price of $.01 per share. These warrants
expire on July 29, 2007. No options have been exercised under these warrants as
of December 31, 1997.
F-12
<PAGE> 111
AFA HOLDINGS CO. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
(e) SUBORDINATED NOTE PAYABLE -- DOLLAR DENOMINATED
On July 29, 1997, the Company borrowed $2,000, with interest at 11.5%, from
Waldock Limited, an entity affiliated with a shareholder of AFA. The principal
amount of the loan is due the earlier of July 30, 2005 or the date on which the
Term Loan has been paid in full. In accordance with certain covenants contained
in the Term Loan agreements, interest payments have been deferred. Accrued
interest payable on this obligation amounted to $98.
Warrants, with a value of $285, were issued in conjunction with execution
of this note and are recorded as deferred financing costs. Under the terms of
these warrants, Waldock Limited was granted the option to purchase 95 shares of
Class A Common Stock at an exercise price of $.01 per share. These warrants
expire on July 29, 2007. No options have been exercised under these warrants as
of December 31, 1997.
(f) SUBORDINATED NOTE PAYABLE -- DOLLAR DENOMINATED
On July 29, 1997, the Company borrowed $1,000, with interest at 11.5%, from
AFA International Limited, an entity affiliated with a shareholder of AFA. The
principal amount of the loan is due the earlier of July 30, 2005 or the date on
which the Term Loans have been paid in full. In accordance with certain
covenants contained in the Term Loan agreements, interest payments have been
deferred. Accrued interest payable on this obligation amounted to $49.
(g) ABN/AMRO LOAN
Polytek has a credit facility with the ABN AMRO Bank, The Netherlands. This
credit facility includes a loan of $4,195 (8,500 guilders) requiring quarterly
payments of $105 (213 guilders) through 2007. This note is collateralized by a
lien on the facility. This note contains certain prohibitions, the most
significant of which relate to minimum net worth requirements.
(h) SENIOR MORTGAGE NOTE
In connection with the construction of a manufacturing facility in 1991,
Polytek obtained a 3,500 guilder mortgage from ABN Bank, The Netherlands.
Borrowings under this mortgage agreement are collateralized by a lien on the
facility.
In connection with the acquisition of CSI, the Company refinanced its
dollar denominated bank debt ((a), (b), (c) and (d) above) with a new credit
facility which provides for up to $135,000 of term loans and a $30,000 revolving
credit facility, that have various interest rates based upon type and level of
borrowings. The facility contains certain covenants, the most restrictive of
which limits capital expenditures, sets forth maximum leverage ratios, debt
coverage and income ratios.
COLLATERAL AND DEBT COVENANTS UNDER LOAN AGREEMENTS OUTSTANDING AT DECEMBER 31,
1997
Under the terms of the various financing arrangements described above at
December 31, 1997, substantially all of the Company's assets are pledged as
collateral, including, but not limited to, the stock of the various
subsidiaries. In addition, the various agreements contained restrictive
covenants, as defined therein, including limits on capital expenditures and
transactions with related parties, maintenance of certain minimum levels of cash
flow earnings and leverage ratios, among others.
F-13
<PAGE> 112
AFA HOLDINGS CO. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
AGGREGATE ANNUAL MATURITIES
Aggregate annual maturities of debt after December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998....................................................... $ 2,379
1999....................................................... 3,616
2000....................................................... 3,756
2001....................................................... 4,756
2002....................................................... 5,756
Thereafter................................................. 26,270
-------
$46,533
=======
</TABLE>
6. INCOME TAXES:
Pre-tax loss, for the five months ended December 31, 1997, consists of:
<TABLE>
<S> <C>
United States.............................................. $(1,159)
Foreign.................................................... (367)
-------
Total pre-tax loss............................... (1,526)
=======
Current expense............................................ $ 28
Deferred benefit........................................... (180)
-------
$ (152)
=======
</TABLE>
The income tax provision differs from the amount computed by applying the
U.S. federal statutory income tax rate of 34% to the pre-tax loss. The computed
amount, for the five months ended December 31, 1997, is reconciled to the income
tax benefit as follows:
<TABLE>
<S> <C>
Tax at federal statutory rate............................... $(519)
Increase in valuation allowance............................. 417
Other....................................................... (50)
-----
Income tax benefit................................ $(152)
=====
</TABLE>
The approximate tax effect of temporary differences that gave rise to the
Company's deferred income tax assets and liabilities at December 31, 1997 is as
follows:
<TABLE>
<CAPTION>
ASSETS LIABILITIES TOTAL
------ ----------- -------
<S> <C> <C> <C>
Property, plant and equipment.......................... $(1,008) $(1,008)
Intangible assets...................................... (91) (91)
Net operating loss credit carryforward................. $ 775 775
Accrued management fees................................ 49 49
Accrued incentive...................................... 53 53
Other.................................................. 7 7
----- ------- -------
Total before valuation allowance....................... 884 (1,099) (215)
----- ------- -------
Valuation allowance.................................... (417) (417)
----- ------- -------
Total deferred taxes......................... $ 467 $(1,099) $ (632)
===== ======= =======
</TABLE>
F-14
<PAGE> 113
AFA HOLDINGS CO. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
The deferred tax assets and liabilities are broken down between current and
noncurrent amounts in the accompanying balance sheets according to the
classification of the related asset and liability or in the case of tax loss
carryforwards, based on their expected utilization date.
7. EQUITY:
AFA HOLDINGS
Class A -- Class A common stock has 100% of the voting rights and is
convertible (at the option of the stockholder) into Class B stock on a share per
share basis. As of December 31, 1997, there were 730 shares of Class A common
stock outstanding and 5,000 shares authorized, with a par value of $.01.
Class B -- Class B common stock is non-voting and is convertible (at the
option of the stockholder) into Class A stock on a share per share basis. There
are no Class B shares outstanding and 3,000 shares authorized, with a par value
of $.01 per share.
POLYTEK
Common stock -- As of December 31, 1997, there were 980 shares of common
stock outstanding and 2,000 shares authorized with a par value of $247 per
share.
8. OPERATING LEASES:
The Company is obligated under noncancelable operating leases for certain
machinery and equipment and telephone equipment. Minimum annual rental payments
are as follows:
<TABLE>
<S> <C>
1998........................................................ $298
1999........................................................ 269
2000........................................................ 181
2001........................................................ 80
2002........................................................ 53
----
$881
====
</TABLE>
Rent expense was approximately $180 for the five month period ended
December 31, 1997.
9. RELATED PARTY TRANSACTIONS:
INTEREST ON SUBORDINATED DEBT
Included in interest expense for the five month period ended December 31,
1997 is approximately $147 relating to debt owed to shareholders. As of December
31, 1997, accrued interest of $147 on this obligation has been classified as a
noncurrent liability in the accompanying balance sheet.
MANAGEMENT FEES
Included in operating expenses for the five month period ended December
1997 are approximately $291 for management fees and certain expenses paid or
payable to entities affiliated with the shareholders. As of December 31, 1997,
the balance of unpaid fees, which has been included in other accrued expenses in
the accompanying balance sheet, approximated $125.
Effective February 4, 1998, the Company entered into a new management
agreement with an affiliate of one of the shareholders that provides for annual
payments of $300,000 and expires on July 29, 2008, subject to renewal for
successive five-year periods.
F-15
<PAGE> 114
AFA HOLDINGS CO. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
TRANSACTIONS WITH AFFILIATE
The Company has a 41% ownership in an affiliate, which is accounted for
using the equity method. Earnings of the affiliate are not material to the
operations of the Company. During the 1997 period presented, the Company
purchased molds from the affiliate for approximately $283. During the five month
period ended December 31, 1997 the affiliate provided certain repairs and
maintenance at a cost to the Company of approximately $70. Included in accounts
payable in the accompanying balance sheet at December 31, 1997 is approximately
$81 relating to these assets and services provided by the affiliate.
PROFESSIONAL SERVICES
The law firm of Gratch, Jacobs & Brozman, P.C., of which one of the
shareholders is a senior member, provides legal services on an ongoing basis to
the Company and its subsidiaries. During fiscal 1997, the Company paid fees of
approximately $364,000 to Gratch, Jacobs & Brozman, P.C.
10. EMPLOYEE BENEFITS PLANS:
401(k) PLAN
Effective July 1, 1996, AFA Products adopted an employee savings plan under
Section 401(k) of the Internal Revenue Code. The plan covers substantially all
full-time employees and the Company matches five percent of each employee's
contributions up to six percent of annual compensation. During the five month
period ended December 31, 1997, the Company expensed $10 in matching
contributions.
RETIREMENT PLAN
Polytek has various pension plans covering substantially all employees.
Polytek funds all costs through insurance contracts which provide for retiree
benefits. Under the terms of the plans, there are no unfunded or overfunded
benefit obligations. Pension expense for the period ended December 31, 1997 was
approximately $309.
11. FOREIGN OPERATIONS:
Information regarding the Company's operations in The Netherlands for the
five months ended December 31, 1997 is as follows:
<TABLE>
<S> <C>
Sales...................................................... $ 8,198
Net income................................................. (215)
Total assets............................................... 12,074
</TABLE>
12. SUPPLEMENTAL CONDENSED COMBINING FINANCIAL STATEMENTS
On April 21, 1998, AFA issued $145,000 aggregate principal amount of 9 3/4%
Senior Subordinated Notes (the "Notes") due 2008, the proceeds of which were
used to pay down debt incurred in various acquisitions (see Note 1). The Notes
are fully and unconditionally guaranteed, jointly and severally, on an
unsecured, senior subordinated basis by Products. Polytek is a nonguarantor
subsidiary.
The following condensed, combining financial statements include the
accounts of AFA and its wholly owned subsidiaries Products and Polytek. Given
the size of Polytek relative to AFA on a combined basis, separate financial
statements of the guarantor are not presented because management has determined
that such information is not material.
F-16
<PAGE> 115
SUPPLEMENTAL CONDENSED COMBINING BALANCE SHEET
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AFA AFA
AFA PRODUCTS, INC. POLYTEK
HOLDINGS CO. (GUARANTOR) (NON-GUARANTOR) ELIMINATIONS COMBINED
ASSETS ------------ -------------- --------------- ------------ --------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents........ $ $ 142 $ 909 $ 1,051
Accounts receivable.............. 4,089 2,796 (64) 6,821
Inventories...................... 6,723 3,195 9,918
Prepaid expenses and other....... 130 475 605
------ ------- ------- ------- -------
Total current assets..... 11,084 7,375 (64) 18,395
Property, plant and equipment,
net.............................. 19,295 8,714 28,009
Intangibles, net................... 16,805 (4,607) 12,199
Investment in subsidiary........... 2,651 (2,651)
Other assets....................... 1,692 592 2,284
------ ------- ------- ------- -------
Total assets:...................... $2,651 $48,877 $12,074 ($2,715) $60,887
====== ======= ======= ======= =======
Liabilities and Stockholders'
equity
Current liabilities:............... $
Current portion of long-term
debt.......................... $ $ 1,750 $ 629 $ 2,379
Revolving credit facility........ 2,542 2,220 4,762
Accounts payable................. 1,134 1,275 1 2,410
Other Accrued expenses........... 1,550 1,849 (65) 3,334
------ ------- ------- ------- -------
Total current
liabilities............ 6,976 5,973 (64) 12,885
Revolving credit facilities........ 36,250 4,904 41,154
Subordinated debt.................. 3,000 3,000
Deferred income taxes.............. 632 632
------ ------- ------- ------- -------
Total liabilities........ 48,226 11,509 (64) 57,671
------ ------- ------- ------- -------
STOCKHOLDERS' EQUITY
Common stock..................... 242 242
Additional paid-in capital....... 3,810 3,810 510 (3,810) 4,320
Retained earnings (deficit)...... (1,159) (1,159) (215) 1,159 (1,374)
Cumulative translation
adjustment.................... 28 28
Total stockholders'
equity................. 2,651 2,651 565 (2,651) 3,216
------ ------- ------- ------- -------
Total liabilities and stockholders'
equity........................... $2,651 $48,877 $12,074 ($2,715) $60,887
====== ======= ======= ======= =======
</TABLE>
F-17
<PAGE> 116
SUPPLEMENTAL CONDENSED COMBINING STATEMENT OF OPERATIONS
FIVE MONTHS ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AFA
AFA POLYTEK
AFA CO. PRODUCTS, INC. (NON-
HOLDINGS (GUARANTOR) GUARANTOR) ELIMINATIONS COMBINED
-------- -------------- ---------- ------------ --------
<S> <C> <C> <C> <C> <C>
Net sales...................... $ $ 12,011 $ 8,198 $ (101) $ 20,108
Cost of sales.................. 9,897 6,799 (101) 16,595
------------- ------------- ------------- ------------- -------------
Gross profit.............. 2,114 1,399 3,513
Selling and administrative
expenses..................... 1,712 1,150 2,862
Income from operations.... 402 249 651
Other expense (income):
Interest.................. 2,020 211 2,231
Other..................... (459) 405 (54)
------------- ------------- ------------- ------------- -------------
Total other
expense............ 1,561 616 2,177
Loss before income tax
provision.................... (1,159) (367) (1,526)
Tax benefit.................... (152) (152)
------------- ------------- ------------- ------------- -------------
Loss before equity in loss of
consolidated subsidiary...... (1,159) (215) (1,374)
Equity in loss of consolidated
subsidiary................... (1,159) 1,159
------------- ------------- ------------- ------------- -------------
Net income..................... $ (1,159) $ (1,159) $ (215) $ 1,159 $ (1,374)
============= ============= ============= ============= =============
</TABLE>
F-18
<PAGE> 117
SUPPLEMENTAL CONDENSED COMBINING STATEMENT OF CASH FLOWS
FIVE MONTHS ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AFA AFA
AFA PRODUCTS, INC. POLYTEK
HOLDINGS CO. (GUARANTOR) (NON-GUARANTOR) COMBINED
------------ -------------- --------------- --------
<S> <C> <C> <C> <C>
Cash flows from operating
activities...................... $ $ 456 $ 992 $ 1,448
Cash flows from investing
activities:
Capital expenditures......... (258) (403) (661)
----------- ----------- ----------- -----------
Net cash used in investing
activities................. (258) (403) (661)
Cash flows from financing
activities:
Change in line of credit..... (85) (85)
Repayment of long term
debt....................... (685) (685)
----------- ----------- ----------- -----------
Net cash from financing
activities................. (85) (685) (770)
Effect of exchange rate changes on
cash............................ 34 34
----------- ----------- ----------- -----------
Change in cash and cash
equivalents..................... 113 (62) 51
Cash and cash equivalents,
beginning of period............. 29 971 1,000
----------- ----------- ----------- -----------
Cash and cash equivalents, end of
period.......................... $ 142 $ 909 $ 1,051
=========== =========== =========== ===========
</TABLE>
F-19
<PAGE> 118
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
WTI, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of WTI, Inc.
and Subsidiaries (the "Company") as of July 31, 1997 and December 31, 1996, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for the seven month period ended July 31, 1997 and for the years
ended December 31, 1996 and 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of WTI, Inc. and
Subsidiaries as of July 31, 1997 and December 31, 1996, and the consolidated
results of their operations and their cash flows for the seven month period
ended July 31, 1997 and for the years ended December 31, 1996 and 1995 in
conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Charlotte, North Carolina
March 5, 1998.
F-20
<PAGE> 119
WTI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31, 1997 AND DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
JULY 31, DECEMBER 31,
1997 1996
-------- ------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents................................. $ 2,391 $ 837
Accounts receivable, net of allowances of $43 and $29,
respectively........................................... 5,909 6,499
Inventories............................................... 9,496 10,314
Prepaid expenses and other................................ 359 608
------- -------
Total current assets.............................. 18,155 18,258
Property, plant and equipment............................... 15,022 16,004
Excess of cost over fair value of net assets acquired, net
of accumulated amortization............................... 1,321 1,761
Patents, net of accumulated amortization.................... 4,236 4,734
Deferred income taxes....................................... 3,224 1,285
Other assets................................................ 2,407 2,759
------- -------
Total assets...................................... $44,365 $44,801
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current portion of long-term debt......................... $ 4,944 $ 8,066
Accounts and drafts payable............................... 2,811 2,201
Income taxes payable...................................... 1,975 988
Other accrued expenses.................................... 5,490 6,058
------- -------
Total current liabilities......................... 15,220 17,313
Long-term debt.............................................. 15,176 16,045
Accrued interest to stockholder............................. 10,352 9,030
------- -------
Total liabilities................................. 40,748 42,388
------- -------
Commitments and contingencies
Stockholders' equity:
Class A common stock, $1 par value; 123,000 shares, issued
and outstanding........................................ 123 123
Class B common stock, convertible, $1,000 par value, no
shares issued..........................................
Additional paid-in capital................................ 9,047 9,047
Accumulated deficit....................................... (2,771) (5,844)
Cumulative translation adjustment......................... (2,782) (913)
------- -------
Total stockholders' equity........................ 3,617 2,413
------- -------
Total liabilities and stockholders' equity........ $44,365 $44,801
======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-21
<PAGE> 120
WTI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEVEN MONTH YEAR ENDED
PERIOD ENDED DECEMBER 31,
JULY 31, ------------------
1997 1996 1995
------------ ------- -------
<S> <C> <C> <C>
Net sales................................................... $32,988 $54,133 $55,238
Cost of sales............................................... 23,864 39,868 41,971
------- ------- -------
Gross profit...................................... 9,124 14,265 13,267
Selling, general and administrative expense................. 4,205 7,389 7,877
------- ------- -------
Income from operations............................ 4,919 6,876 5,390
Other expense (income):
Interest expense.......................................... 2,295 4,275 4,489
Foreign currency (gain) loss.............................. (545) (230) 170
Royalty income............................................ (133) (178) (165)
Other..................................................... (125) 133 (256)
------- ------- -------
Total............................................. 1,492 4,000 4,238
------- ------- -------
Income before provision for income taxes.................... 3,427 2,876 1,152
Provision for income taxes.................................. 354 354 880
------- ------- -------
Net income........................................ $ 3,073 $ 2,522 $ 272
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-22
<PAGE> 121
WTI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE SEVEN MONTH PERIOD ENDED JULY 31, 1997
AND THE YEARS ENDED DECEMBER 31, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
CLASS A ADDITIONAL CUMULATIVE TOTAL
COMMON PAID-IN ACCUMULATED TRANSLATION STOCKHOLDERS'
STOCK CAPITAL DEFICIT ADJUSTMENT EQUITY
------- ---------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1995.................. $123 $9,047 $(8,638) $ (42) $ 490
Net income................................ 272 272
---- ------ ------- ------- -------
Balance, December 31, 1995................ 123 9,047 (8,366) (42) 762
Net income................................ 2,522 2,522
Translation adjustment.................... (871) (871)
---- ------ ------- ------- -------
Balance, December 31, 1996................ 123 9,047 (5,844) (913) 2,413
Net income................................ 3,073 3,073
Translation adjustment.................... (1,869) (1,869)
---- ------ ------- ------- -------
Balance, July 31, 1997.................... $123 $9,047 $(2,771) $(2,782) $ 3,617
==== ====== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-23
<PAGE> 122
WTI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEVEN MONTH YEAR ENDED
PERIOD ENDED DECEMBER 31,
JULY 31, -----------------
1997 1996 1995
------------ ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 3,073 $ 2,522 $ 272
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation........................................... 1,926 3,153 3,103
Amortization........................................... 594 1,317 1,333
Deferred income taxes.................................. (1,939) (1,441) (5)
Other, net............................................. (118) (54) (47)
Loss (gain) on sale of property, plant and equipment... (21) 3 (39)
Foreign currency transaction (gain) loss............... (545) (230) 170
Changes in assets and liabilities:
Accounts receivable.................................. 694 (83) 677
Inventories.......................................... 172 53 (270)
Prepaid expenses and other........................... 293 706 208
Accounts and drafts payable.......................... 891 (1,402) (694)
Other accrued expenses............................... (581) 1,202 2,676
Other, net........................................... 36
Income taxes payable or refundable................... 1,389 391 (679)
------- ------- -------
Net cash provided by operating activities......... 5,828 6,173 6,705
------- ------- -------
Cash flows from investing activities:
Expenditures for property, plant and equipment............ (2,498) (2,218) (3,604)
Proceeds from disposal of property, plant and equipment... 23 2 49
Investment in affiliate................................... 2
Expenditures for tooling.................................. (69) (84) (1,010)
------- ------- -------
Net cash used in investing activities............. (2,544) (2,300) (4,563)
------- ------- -------
Cash flows from financing activities:
Net (repayment) borrowings under revolving lines of
credit................................................. (1,775) (2,864) 1,162
Proceeds from long-term debt borrowing.................... 1,321 2,978 600
Repayment of debt......................................... (1,174) (4,110) (3,968)
Payment of bank financing fees............................ (162) (35)
------- ------- -------
Net cash used in financing activities............. (1,628) (4,158) (2,241)
------- ------- -------
Effect of exchange rate changes on cash..................... (102) (62) 89
------- ------- -------
Net increase (decrease) in cash and cash equivalents........ 1,554 (347) (10)
Cash and cash equivalents at beginning of period............ 837 1,184 1,194
------- ------- -------
Cash and cash equivalents at end of period........ $ 2,391 $ 837 $ 1,184
======= ======= =======
Cash paid during the period for:
Interest.................................................. $ 580 $ 1,513 $ 1,961
Income taxes.............................................. 2,817 1,040 1,564
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-24
<PAGE> 123
WTI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS)
1. DESCRIPTION OF THE COMPANY AND CURRENT BUSINESS OPERATIONS:
WTI, Inc. (the "Company") was formed in 1988 by Waynesboro Textiles, Inc.
("Waynesboro"), Berkshire Partners and affiliates ("Berkshire") and AIG
Insurance Company and affiliates ("AIG").
WTI, Inc. has a wholly-owned subsidiary, AFA Products, Inc., based in
Forest City, North Carolina, which in turn has a wholly-owned subsidiary, WTI
Holding B.V. ("WTI Holding"), based in Helmond, The Netherlands. WTI Holding
also has a subsidiary, AFA Polytek B.V. ("Polytek"), which is also based in
Helmond, The Netherlands.
The Company's primary business is the manufacture and sale of activated
liquid dispensing devices ("trigger sprayers"). Manufacturing is primarily
conducted in facilities located in Forest City, North Carolina, and Helmond, The
Netherlands.
SALE OF ASSETS
On July 31, 1997, the Company sold substantially all of its assets and
operations to AFA Holdings Co. Proceeds from the sale were used to retire
liabilities not assumed by the purchaser with the remainder distributed to
shareholders of the Company. These consolidated financial statements were
prepared immediately prior to the sale using the historical basis of accounting
followed by the Company and do not reflect the sale transaction.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated.
REVENUE RECOGNITION
The Company recognizes revenue upon shipment of its products.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
on the first-in, first-out (FIFO) basis.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided
primarily on a straight-line basis over the estimated useful lives of the
assets. Maintenance and repairs are charged to income as incurred and
betterments that extend the useful life are capitalized. Upon retirement or
sale, the cost and accumulated depreciation are eliminated from the respective
accounts, and the gain or loss, if any, is included in income.
If events or changes in circumstances indicate that the carrying amount of
a long-lived asset may not be recoverable, the Company estimates the future cash
flows expected to result from the use of the asset and its eventual disposition.
If the sum of the expected future cash flows (undiscounted and without interest
charges) is less than the carrying amount of the long-lived asset, an impairment
loss is recognized. To date, no impairment losses have been recognized.
RESEARCH AND DEVELOPMENT
The cost of research and development expenditures is expensed as incurred.
F-25
<PAGE> 124
WTI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant
estimates in the financial statements relate to the allowance for uncollectible
accounts receivable, the allowance for slow-moving and obsolete inventories, the
allowance for sales returns and the valuation allowance for deferred tax assets.
INCOME TAXES
The Company uses the asset and liability approach to financial accounting
and reporting for income taxes. Deferred income tax assets and liabilities are
computed annually for differences between the financial statement and tax bases
of assets and liabilities that will result in taxable or deductible amounts in
the future. Such deferred income tax asset and liability computations are based
on enacted tax laws and rates applicable to periods in which the differences are
expected to affect taxable income. A valuation allowance is established when
necessary to reduce deferred tax assets to the amount expected to be realized.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of WTI Holding are translated at exchange rates in
effect at the balance sheet dates ($.4767 and $.5744 per guilder at July 31,
1997 and December 31, 1996, respectively). Items of revenue and expense are
translated at average exchange rates during the periods ($.5211, $.5919 and
$.6236 per guilder for the 1997, 1996 and 1995 periods presented, respectively).
Translation adjustments, resulting from translating WTI Holding's financial
statements into dollars, are reported in the equity section of the accompanying
balance sheets under the caption "cumulative translation adjustment."
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED
Excess of cost over fair value of net assets acquired is being amortized on
a straight-line basis over a period of fifteen years. Accumulated amortization
was $2,283 and $2,581 as of July 31, 1997 and December 31, 1996, respectively.
The Company assesses the recoverability of this intangible asset by determining
whether the amortization of the goodwill balance over its remaining life can be
recovered through forecasted future operations. Impairment is evaluated by
comparing future cash flows (undiscounted and without interest charges) expected
to result from the use or sale of the asset and its eventual disposition, to the
carrying amount of the asset. To date, no impairment losses have been
recognized.
PATENTS
The cost of patents acquired is being amortized using the straight-line
method over the estimated useful lives of the patents, which range from
approximately fourteen to seventeen years. The cost of patents developed are
expensed as incurred because the economic lives are indeterminable.
Accumulated amortization was $8,096 and $7,599 at July 31, 1997 and
December 31, 1996, respectively.
DEFERRED FINANCING FEES
Costs incurred to obtain financing are amortized using the straight-line
method (which approximates the interest method) over the term of the related
debt.
F-26
<PAGE> 125
WTI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
DEFERRED TOOLING
From time to time, the Company purchases certain molds and equipment
(tooling) to meet specific customer product requirements. These tooling costs
are capitalized by the Company and are amortized into operations over the
estimated life of the sales contract period.
OTHER INTANGIBLE ASSETS
Other intangible assets, consisting primarily of an exclusive sales
agreement and royalty agreements, are being amortized using the straight-line
method over the related lives of the agreements, which range from five to
fifteen years.
CASH EQUIVALENTS
The Company considers demand deposits and time deposits with original
maturities of three months or less as equivalent to cash.
RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income, is effective for years beginning after December 15, 1997.
This statement requires that an enterprise classify items of other comprehensive
income by their nature in the financial statements and display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of the balance sheets.
Statement of Financial Accounting Standards No. 131, Disclosure About
Segments of an Enterprise and Related information, is effective for years
beginning after December 15, 1997. This statement requires that a public
business enterprise report financial and descriptive information about its
reportable business segments.
Management of the Company believes that the future adoption of these
statements will not have a significant impact on the Company's combined
financial position, results of operations or cash flows, but will result in
additional disclosure.
3. INVENTORIES:
The components of inventories are summarized below:
<TABLE>
<CAPTION>
JULY 31, DECEMBER 31,
1997 1996
-------- ------------
<S> <C> <C>
Raw material........................................... $2,089 $ 2,429
Work-in-process........................................ 3,102 3,084
Finished goods......................................... 4,305 4,801
------ -------
$9,496 $10,314
====== =======
</TABLE>
F-27
<PAGE> 126
WTI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment, summarized by major classification and
estimated useful lives for depreciation purposes, is as follows:
<TABLE>
<CAPTION>
USEFUL JULY 31, DECEMBER 31,
LIVES (YEARS) 1997 1996
------------- -------- ------------
<S> <C> <C> <C>
Land............................................ $ 825 $ 947
Buildings....................................... 20 - 25 8,439 9,546
Machinery and equipment......................... 4 - 7 19,700 22,133
Molds........................................... 5 15,628 13,728
Furniture and fixtures.......................... 3 - 5 1,156 1,271
Vehicles........................................ 3 43 43
Construction in progress........................ -- 825 891
-------- --------
46,616 48,559
Less accumulated depreciation................... (31,594) (32,555)
-------- --------
Property, plant and equipment, net.............. $ 15,022 $ 16,004
======== ========
</TABLE>
Construction in progress primarily consists of additions and improvements
to buildings, molds and machinery.
5. OTHER NONCURRENT ASSETS:
Other noncurrent assets consists of the following:
<TABLE>
<CAPTION>
JULY 31, DECEMBER 31,
1997 1996
-------- ------------
<S> <C> <C>
Deferred financing fees................................ $ 122 $ 241
Royalty agreement...................................... 917 1014
Investment in affiliate................................ 568 554
Lease deposit.......................................... 75 75
Deferred tooling....................................... 725 875
------ ------
$2,407 $2,759
====== ======
</TABLE>
F-28
<PAGE> 127
WTI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
6. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JULY 31, DECEMBER 31,
1997 1996
-------- ------------
<S> <C> <C>
WORKING CAPITAL BORROWINGS(A):
Working capital line of credit -- dollar
denominated, bearing interest at 10% at December
31, 1996......................................... -- $ 1,411
Working capital line of credit -- guilder
denominated, bearing interest at 9.8% and 7.39%,
at July 31, 1997 and December 31, 1997
respectively..................................... $ 1,223 1,875
------- -------
Total working capital borrowings............ 1,223 3,286
------- -------
OTHER LONG-TERM DEBT:
Senior note -- dollar denominated................... 500 1,500
Senior mortgage note -- guilder denominated, payable
in quarterly principal installments of $25,204,
bearing interest at rates varying with the Dutch
prime rate (5.95% at July 31, 1997 and December
31, 1996(b)...................................... 1,188 1,508
Junior subordinated debt -- dollar denominated,
stockholder, bearing interest at 14% (Note
10)(c)........................................... 3,500 3,500
Subordinated note payable -- dollar denominated,
bearing interest at 13.5%(d)..................... 1,907 2,298
Senior subordinated debt -- dollar denominated,
stockholder, bearing interest at 13.5%(e)........ 10,000 10,000
Installment notes payable -- guilder denominated,
bearing interest at rates ranging from 7.1% to
7.75%............................................ 282 499
Promissory note payable -- dollar denominated,
affiliate, bearing interest at 14% (Note
10)(f)........................................... 320 320
Promissory note payable -- dollar denominated,
affiliate, bearing interest at 10.25% (Note
10)(f)........................................... 1,200 1,200
------- -------
Total other long-term debt.................. 18,897 20,825
------- -------
Total....................................... 20,120 24,111
Less current portion.................................. (4,944) (8,066)
------- -------
Total long-term debt........................ $15,176 $16,045
======= =======
</TABLE>
(a) WORKING CAPITAL BORROWINGS:
At July 31, 1997 and December 31, 1996, the Company had loan and security
agreements (the "Agreements") with the Bank of Boston that provided for two
working capital lines of credit, denominated in both dollars and guilders.
Borrowings under the dollar denominated working capital line of credit,
which had a maximum amount of $4,700, were limited to 80% of eligible accounts
receivable (as defined), and 50% of eligible raw material and finished goods
inventories (as defined). Borrowings under the guilder denominated line of
credit had a maximum amount of 4,754 guilders ($2,266 at July 31, 1997) and were
limited to 70% of eligible accounts receivable (as defined) and 25% of eligible
raw materials and finished goods inventories (as defined).
On December 2, 1996, AFA Products, Inc. entered into the third amendment of
its dollar denominated working capital line of credit with the Bank of Boston.
The amendment extended the due date of the working
F-29
<PAGE> 128
WTI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
capital line of credit until November 30, 1997. The third amendment also
provided a new $1,500 term loan to be used to make an installment payment on the
$5,000 junior subordinated note payable to stockholder (AIG). Interest on the
extended line of credit and the new 1996 term loan is payable quarterly in
arrears beginning January 1, 1997. The 1996 term loan was due to be repaid in
1997. The amendment modifies certain financial covenants contained in the
original agreement and waives all violations of all loan covenants contained in
the original agreement through the effective date of the amendment. At December
31, 1996, the Company was in violation of the covenant limiting capital
expenditures. A waiver for this covenant violation was obtained from the bank.
Also on December 2, 1996, AFA Polytek B.V. entered into the third amendment
of its guilder denominated working capital line of credit with the Bank of
Boston. The amendment extended the due date of the working capital line of
credit until November 30, 1997. Interest on the extended line of credit is
payable quarterly in arrears beginning January 1, 1997. The amendment modifies
certain financial covenants contained in the original agreement and waives all
violations of all loan covenants contained in the original agreement through the
effective date of the amendment.
Substantially all of these bank borrowings were paid simultaneously with
the sale of substantially all of the Company's assets.
OTHER LONG-TERM DEBT
(b) Senior Mortgage Note -- Guilder Denominated
In connection with the construction of a manufacturing facility in 1991,
Polytek obtained a 3,500 guilder mortgage from ABN Bank, Netherlands. Borrowings
under this mortgage agreement are collateralized by a lien on the facility. The
mortgage agreement contains certain prohibitions, the most significant of which
prohibit payments of dividends which would result in the net worth of Polytek
falling below 10,000 guilders ($4,767 and $5,774 at July 31, 1997 and December
31, 1996).
(c) JUNIOR SUBORDINATED DEBT
The junior subordinated debt is payable to AIG and has principal payments
of $1,500 due December 31, 1997 and a $2,000 principal payment due December 31,
1998.
(d) SUBORDINATED NOTE PAYABLE
On December 30, 1991, WTI borrowed 4,000 guilders from Parkhill Holdings
Limited, an unaffiliated entity. The loan is collateralized by a secondary
pledge of the shares of Polytek. Effective February 5, 1993, this guilder
denominated debt was converted to a dollar denominated obligation, and interest
rates were adjusted to a U.S. prime rate (8.5% at July 31, 1997 and December 31,
1996) plus 5%. In November 1996, the original maturity on the debt was extended
to December 31, 1998.
(e) SENIOR SUBORDINATED DEBT
The senior subordinated debt is payable to Waynesboro or its stockholders.
In November 1996, the maturity schedule for principal repayment was amended,
resulting in principal payments of $4,000 due December 31, 1998 and $6,000 due
December 31, 1999. In accordance with certain covenants contained in senior loan
agreements, interest payments on this obligation were deferred. Accrued interest
payable on this obligation amounted to $10,352 and $9,030 at July 31, 1997 and
December 31, 1996, respectively.
F-30
<PAGE> 129
WTI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
(f) PROMISSORY NOTES PAYABLE
The promissory notes payable represent borrowings from a partnership
controlled by certain shareholders of the Company. The obligations are
unsecured.
COLLATERAL AND DEBT COVENANTS UNDER LOAN AGREEMENTS OUTSTANDING AT JULY 31, 1997
Under the terms of the various financing arrangements described above at
July 31, 1997, substantially all of the Company's assets are pledged as
collateral, including, but not limited to, the stock of the various
subsidiaries. In addition, the various agreements contained restrictive
covenants, as defined, including limits on capital expenditures and transactions
with related parties, maintenance of certain minimum levels of cash flow
earnings and leverage ratios, among others.
AGGREGATE ANNUAL MATURITIES
Aggregate annual maturities of long-term debt after July 31, 1997 are as
follows:
<TABLE>
<S> <C>
1998....................................................... $ 4,944
1999....................................................... 8,091
2000....................................................... 6,147
2001....................................................... 83
2002....................................................... 83
Thereafter................................................. 772
-------
$20,120
=======
</TABLE>
7. INCOME TAXES:
Pre-tax income (loss) consists of:
<TABLE>
<CAPTION>
SEVEN MONTHS YEAR ENDED
ENDED DECEMBER 31,
JULY 31, ------------------
1997 1996 1995
------------ ------- -------
<S> <C> <C> <C>
United States.............................. $ 2,451 $ 2,145 $(1,044)
Foreign.................................... 976 731 2,196
------- ------- -------
Total pre-tax income............. $ 3,427 $ 2,876 $ 1,152
======= ======= =======
Current expense............................ 2,293 1,795 885
Deferred benefit........................... (1,939) (1,441) (5)
------- ------- -------
$ 354 $ 354 $ 880
======= ======= =======
</TABLE>
F-31
<PAGE> 130
WTI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
The income tax provision differs from the amount computed by applying the
U.S. federal statutory income tax rate of 34% to the pre-tax income. The
computed amount is reconciled to the total provision for income taxes as
follows:
<TABLE>
<CAPTION>
SEVEN MONTHS YEAR ENDED
ENDED DECEMBER 31,
JULY 31, -------------
1997 1996 1995
------------ ----- ----
<S> <C> <C> <C>
Tax at federal statutory rate.................. $ 1,165 $ 978 $392
Tax effect of nondeductible expenses........... 55 118 126
Foreign taxes at rates other than U.S.
statutory rate............................... 17 10 16
State taxes (net of federal benefit)........... 186 119
Increase (reduction) in valuation allowance.... (1,098) (848) 355
Other.......................................... 29 (23) (9)
------- ----- ----
Income tax provision................. $ 354 $ 354 $880
======= ===== ====
</TABLE>
The approximate tax effect of temporary differences that gave rise to the
Company's deferred income tax assets and liabilities at July 31, 1997 and
December 31, 1996 is as follows:
<TABLE>
<CAPTION>
JULY 31, 1997
-------------------------------
ASSETS LIABILITIES TOTAL
------ ----------- ------
<S> <C> <C> <C>
Property, plant and equipment................... $ $ (983) $ (983)
Intangible assets............................... (463) (463)
Patents......................................... 434 434
Accrued interest................................ 3,374 3,374
Accrued rent.................................... 264 264
AMT credit carryforward......................... 447 447
Other........................................... 151 151
------ ------- ------
Total deferred taxes.................. $4,670 $(1,446) $3,224
====== ======= ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------
ASSETS LIABILITIES TOTAL
------- ----------- -------
<S> <C> <C> <C>
Property, plant and equipment................. $ $(1,140) $(1,140)
Intangible assets............................. (525) (525)
Patents....................................... 440 440
Accrued interest.............................. 2,823 2,823
Accrued rent.................................. 229 229
AMT credit carryforward....................... 447 447
Other......................................... 109 109
------- ------- -------
Total before valuation allowance.... 4,048 (1,665) 2,383
------- ------- -------
Valuation allowance........................... (1,098) (1,098)
------- ------- -------
Total deferred taxes................ $ 2,950 $(1,665) $ 1,285
======= ======= =======
</TABLE>
The deferred tax assets and liabilities are broken down between current and
noncurrent amounts in the accompanying balance sheets according to the
classification of the related asset and liability or in the case of tax loss or
AMT credit carryforwards, based on their expected utilization date.
F-32
<PAGE> 131
WTI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
During 1996, the Company reduced its valuation allowance by $848 and during
the period ended July 31, 1997, the allowance was reduced by $1,098.
8. COMMON STOCK:
CLASS A -- Class A common stock has 100% of the voting rights with the
exception of rights to certain matters as described below. As of July 31, 1997
and December 31, 1996, there were 123,000 shares of Class A common stock
outstanding and 150,000 shares authorized, with a par value of $1.
CLASS B -- Class B common stock limits voting rights to certain specified
matters. Class B stock is convertible (at the option of the stockholder) into
Class A stock on a share per share basis. There are no Class B shares
outstanding and 150,000 shares authorized, with a par value of $1,000 per share.
VOTING RIGHTS ON CERTAIN MATTERS -- In accordance with the articles of
incorporation, the affirmative vote of at least two-thirds of the aggregate
outstanding Class A and Class B common stock is required for certain specified
transactions, including, but not limited to, the merger of the Company with or
into another entity; the sale, lease or other disposition of a substantial
portion of the Company's assets; an initial public offering of equity
securities; and incurrence of additional indebtedness (as defined therein).
9. OPERATING LEASES:
The Company is obligated under noncancelable operating leases for certain
machinery and equipment and telephone equipment. Minimum annual rental payments
are as follows:
<TABLE>
<CAPTION>
PAYABLE TO
RELATED PAYABLE TO
PARTIES OTHERS TOTAL
---------- ---------- ------
<S> <C> <C> <C>
1998.......................................... $121 $ 353 $ 474
1999.......................................... 340 340
2000.......................................... 261 261
2001.......................................... 87 87
2002.......................................... 22 22
---- ------ ------
$121 $1,063 $1,184
==== ====== ======
</TABLE>
Rent expense approximated $381, $713 and $438 for the seven months ended
July 31, 1997 and the years ended December 31, 1996 and 1995, respectively,
including approximately $145 in 1997 and $249 for both 1996 and 1995 for rent
paid to an entity controlled by the stockholders of Waynesboro.
10. RELATED PARTY TRANSACTIONS:
INTEREST ON SENIOR SUBORDINATED DEBT
Included in interest expense for the seven month period ended July 31, 1997
and the years ended December 31, 1996 and 1995 is approximately $1,322, $2,156
and $1,969, respectively, relating to debt owed to Waynesboro or its
stockholders. As of July 31, 1997 and December 31, 1996, accrued interest of
$10,352 and $9,030, respectively, on this obligation has been classified as a
noncurrent liability in the accompanying balance sheet.
F-33
<PAGE> 132
WTI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
INTEREST ON JUNIOR SUBORDINATED DEBT
Included in interest expense for the 1997 period presented is $278 and for
both 1996 and 1995 is $700 relating to debt owed to AIG. As of July 31, 1997 and
December 31, 1996, accrued interest of $80 and $63 on this obligation has been
included in other accrued expenses in the accompanying balance sheets.
MANAGEMENT FEES
Included in operating expenses for the periods ended July 31, 1997 and
December 1996 and 1995 are approximately $295, $556 and $533, respectively, for
management fees and certain expenses paid or payable to entities affiliated with
Waynesboro or Berkshire. As of July 31, 1997 and December 31, 1996, the balance
of unpaid fees, which has been included in other accrued expenses in the
accompanying balance sheets, approximated $482 and $445, respectively.
TRANSACTIONS WITH AFFILIATE
The Company has a 41% ownership in an affiliate, which is accounted for
using the equity method. Earnings of the affiliate are not material to the
operations of the Company. During the 1997, 1996 and 1995 periods presented, the
Company purchased molds from the affiliate for approximately $160, $43 and $487,
respectively. During 1997, 1996 and 1995, the affiliate provided certain repairs
and maintenance at a cost to the Company of approximately $117, $203 and $135,
respectively. Included in accounts payable in the accompanying balance sheets at
July 31, 1997 and December 31, 1996, respectively, are approximately $22 and $40
relating to these assets and services provided by the affiliate.
ACCRUED RENT EXPENSE
As of July 31, 1997 and December 31, 1996, other accrued expenses includes
rent expense of $583 and $586, respectively, payable to a related party relating
to an operating lease for certain molding machines.
INTEREST ON PROMISSORY NOTE PAYABLE
Included in interest expense for the seven month period ended July 31, 1997
and the years ended December 31, 1996 and 1995 is approximately $100, $168 and
$66, respectively, relating to interest on funds advanced to the Company from an
affiliate. Accrued interest, which is computed at the rates of 10.25% and 14%
from the date of the advances, approximated $381 and $290 at July 31, 1997 and
December 31, 1996, respectively, and is included in accrued expenses on the
accompanying balance sheets.
11. OTHER INCOME (EXPENSE):
Other income consisted primarily of royalty income. In prior years, the
Company became involved in litigation with one or more of its competitors
regarding alleged patent infringements and ultimately reached out-of-court
settlements with those competitors. Royalty payments under two different
settlement agreements of $50 were received by the Company in 1996 and 1995, and
are recorded in other income in the accompanying consolidated statements of
operations.
12. EMPLOYEE BENEFITS PLANS:
RETIREMENT PLANS
Polytek has various pension plans covering substantially all employees.
Polytek funds all costs through insurance contracts which provide for retiree
benefits. Under the terms of the plans, there are no unfunded or
F-34
<PAGE> 133
WTI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
overfunded benefit obligations. Pension expense for July 31, 1997 and the years
ended December 31, 1996 and 1995 was approximately $241, $441 and $461,
respectively.
401(k) PLAN
Effective July 1, 1996, AFA Products adopted an employee savings plan under
Section 401(k) of the Internal Revenue Code. The plan covers substantially all
full-time employees and the Company matches five percent of each employee's
contributions up to six percent of annual compensation. During 1997 and 1996,
the Company expensed $20 and $9 in matching contributions.
13. CONTINGENCIES:
The Company is a defendant and plaintiff in several disputes and legal
actions in the normal course of business. In the opinion of management, the
resolution of these matters will not have a material adverse impact on the
financial condition or the future results of operations of the Company.
14. FOREIGN OPERATIONS:
Information regarding the Company's operations in The Netherlands is as
follows:
<TABLE>
<CAPTION>
SEVEN MONTHS YEAR ENDED
ENDED DECEMBER 31,
JULY 31, ------------------
1997 1996 1995
------------ ------- -------
<S> <C> <C> <C>
Sales...................................... $13,401 $23,698 $30,675
Net income................................. 1,172 1,328 2,483
Total assets............................... 15,734 19,172 21,866
</TABLE>
15. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL DATA:
The following summarizes the Company's consolidating balance sheet as of
December 31, 1996 and consolidating results of operations and cash flows for the
years ended December 31, 1995 and 1996 and the seven month period ended July 31,
1997.
F-35
<PAGE> 134
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
SEVEN MONTHS ENDED JULY 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AFA
WTI, INC. AFA POLYTEK
(PREDECESSOR PRODUCTS, INC. (NON-
TO AFA) (GUARANTOR) GUARANTOR) ELIMINATIONS CONSOLIDATED
------------ -------------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales...................... $ $ 19,626 $ 13,401 $ (39) $ 32,988
Cost of sales.................. 13,708 10,195 (39) 23,864
------------- ------------- ------------- ------------- -------------
Gross profit.............. 5,918 3,206 9,124
Selling, general and
administrative expenses...... 134 2,643 1,428 4,205
------------- ------------- ------------- ------------- -------------
Income from operations.... (134) 3,275 1,778 4,919
------------- ------------- ------------- ------------- -------------
Other expense (income):
Interest.................. (24) 2,089 230 2,295
Other..................... (1,374) 571 (803)
------------- ------------- ------------- ------------- -------------
Total other
expense............ (24) 715 801 1,492
------------- ------------- ------------- ------------- -------------
Income before income tax
provision.................... (110) 2,560 977 3,427
Tax provision.................. 354 354
------------- ------------- ------------- ------------- -------------
Income before equity in income
of consolidated subsidiary... (110) 2,560 623 3,073
Equity in income of
consolidated subsidiary...... 3,183 623 (3,806)
------------- ------------- ------------- ------------- -------------
Net income..................... $ 3,073 $ 3,183 $ 623 $ (3,806) $ 3,073
============= ============= ============= ============= =============
</TABLE>
F-36
<PAGE> 135
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SEVEN MONTHS ENDED JULY 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AFA AFA
WTI, INC. PRODUCTS, INC. POLYTEK
(PREDECESSOR TO AFA) (GUARANTOR) (NON-GUARANTOR) CONSOLIDATED
-------------------- -------------- --------------- ------------
<S> <C> <C> <C> <C>
Cash flows from operating
activities.......................... $ $ 4,237 $1,591 $ 5,828
Cash flows from investing activities:
Capital expenditures................ (1,649) (849) (2,498)
Other............................... (46) (46)
Net cash used in investing
activities....................... (1,695) (849) (2,544)
Cash flows from financing activities:
Change in line of credit............ (1,410) (365) (1,775)
Proceeds from long term debt........ 1,321 1,321
Repayment of long term debt......... (1,000) (174) (1,174)
------- ------- ------ -------
Net cash from financing
activities....................... (1,089) (539) (1,628)
Effect of exchange rate changes on
cash................................ (102) (102)
------- ------- ------ -------
Change in cash and cash equivalents... 1,453 101 1,554
Cash and cash equivalents, beginning
of period........................... 337 500 837
------- ------- ------ -------
Cash and cash equivalents, end of
period.............................. $ 1,790 $ 601 $ 2,391
======= ======= ====== =======
</TABLE>
F-37
<PAGE> 136
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
WTI, INC. AFA AFA
(PREDECESSOR TO PRODUCTS, INC. POLYTEK
AFA) (GUARANTOR) (NON-GUARANTOR) ELIMINATIONS CONSOLIDATED
--------------- -------------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Assets
Current Assets:
Cash and cash
equivalents......... $ 337 $ 500 $ 837
Accounts receivable... $ 1,870 4,236 3,374 ($ 2,981) 6,499
Inventories........... 6,394 3,920 10,314
Prepaid expenses and
other current
assets.............. 64 544 608
------------- ------------- ------------- ------------- -------------
Total current
assets......... 1,870 11,031 8,338 (2,981) 18,258
Property, plant and
equipment, net...... 7,360 8,644 16,004
Intangibles, net...... 4,734 1,761 6,495
Investment in
subsidiary.......... 2,307 10,679 (12,986)
Deferred income
taxes............... 1,285 1,285
Other assets.......... 2,287 2,187 3,243 (4,958) 2,759
------------- ------------- ------------- ------------- -------------
Total assets..... $ 6,464 $ 37,276 $ 21,986 ($ 20,925) $ 44,801
============= ============= ============= ============= =============
Liabilities and
Stockholders' Equity
Current Liabilities:
Current portion of
long-term debt...... $ 1,500 $ 5,931 $ 2,135 ($ 1,500) $ 8,066
Accounts payable...... 14 1,359 857 (29) 2,201
Income taxes
payable............. 988 988
Other accrued
expenses............ 537 2,855 4,118 (1,452) 6,058
------------- ------------- ------------- ------------- -------------
Total current
liabilities.... 2,051 11,133 7,110 (2,981) 17,313
Long-term debt:
Credit facilities.....
Subordinated debt..... 2,000 14,957 4,046 (4,958) 16,045
Accrued interest of
stockholders........ 8,879 151 9,030
------------- ------------- ------------- ------------- -------------
Total
liabilities.... 4,051 34,969 11,307 (7,939) 42,388
------------- ------------- ------------- ------------- -------------
Stockholders' Equity
Common stock.......... 123 8,878 9,462 (18,340) 123
Additional
paid-in-capital..... 9,047 179 (179) 9,047
Retained earnings
(deficit)........... (6,757) (6,571) 1,951 5,533 (5,844)
Cumulative translation
adjustment.......... (913) (913)
Total
stockholders'
equity......... 2,413 2,307 10,679 (12,986) 2,413
------------- ------------- ------------- ------------- -------------
Total liabilities and
stockholders' equity..... $ 6,464 $ 37,276 $ 21,986 ($ 20,925) $ 44,801
============= ============= ============= ============= =============
</TABLE>
F-38
<PAGE> 137
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
WTI, INC. AFA AFA
(PREDECESSOR TO PRODUCTS, INC. POLYTEK
AFA) (GUARANTOR) (NON-GUARANTOR) ELIMINATIONS
--------------- -------------- --------------- ------------
<S> <C> <C> <C> <C>
Net sales.......................... $ $ 30,673 $ 23,698 $ (238)
Cost of sales...................... 21,715 18,140 13
------------- ------------- ------------- ---------------
Gross profit.................. 8,958 5,558 (251)
Selling, general and
administrative expense...... 200 3,239 2,879 1,071
Income from operations........ (200) 5,719 2,679 (1,322)
Other expense (income):
Interest...................... (35) 3,717 574 19
Other......................... 4 (312) 1,374 (1,341)
------------- ------------- ------------- ---------------
Total other expense...... (31) 3,405 1,948 (1,322)
Income (loss) before provision
(benefit) for income taxes....... (169) 2,314 731
------------- ------------- ------------- ---------------
Tax provision (benefit)............ 354
------------- ------------- ------------- ---------------
Income (loss) before equity in
income of consolidated
subsidiary....................... (169) 2,314 377
Equity in income of consolidated
subsidiaries..................... 2,691 377 (3,068)
------------- ------------- ------------- ---------------
Net income......................... $ 2,522 $ 2,691 $ 377 $ (3,068)
============= ============= ============= ===============
<CAPTION>
CONSOLIDATED
------------
<S> <C>
Net sales.......................... $ 54,133
Cost of sales...................... 39,868
-------------
Gross profit.................. 14,265
Selling, general and
administrative expense...... 7,389
Income from operations........ 6,876
Other expense (income):
Interest...................... 4,275
Other......................... (275)
-------------
Total other expense...... 4,000
Income (loss) before provision
(benefit) for income taxes....... 2,876
-------------
Tax provision (benefit)............ 354
-------------
Income (loss) before equity in
income of consolidated
subsidiary....................... 2,522
Equity in income of consolidated
subsidiaries.....................
-------------
Net income......................... $ 2,522
=============
</TABLE>
F-39
<PAGE> 138
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
WTI, INC. AFA AFA
(PREDECESSOR TO PRODUCTS, INC. POLYTEK
AFA) (GUARANTOR) (NON-GUARANTOR) CONSOLIDATED
--------------- -------------- --------------- ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities.... $ $ 3,691 $ 2,482 $ 6,173
Cash flows from investing activities:
Capital expenditures............... (406) (1,812) (2,218)
Other.............................. (84) 2 (82)
------------- ------------- ------------- -------------
Net cash used in investing
activities....................... (490) (1,810) (2,300)
------------- ------------- ------------- -------------
Cash flows from financing activities:
Change in line of credit........... (2,657) (207) (2,864)
Repayment of long term debt........ (1,500) (1,633) (977) (4,110)
Intercompany advances.............. 1,500 (1,399) (101)
Proceeds from long term debt....... 2,594 222 2,816
------------- ------------- ------------- -------------
Net cash from financing
activities....................... (3,095) (1,063) (4,158)
------------- ------------- ------------- -------------
Effect of exchange rate changes on
cash.................................. (62) (62)
------------- ------------- ------------- -------------
Change in cash and cash equivalents..... 106 (453) (347)
Cash and cash equivalents, beginning of
period................................ 232 952 1,184
------------- ------------- ------------- -------------
Cash and cash equivalents, end of
period................................ $ 338 $ 499 $ 837
============= ============= ============= =============
</TABLE>
F-40
<PAGE> 139
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
WTI, INC. AFA AFA
(PREDECESSOR TO PRODUCTS, INC. POLYTEK
AFA) (GUARANTOR) (NON-GUARANTOR) ELIMINATIONS CONSOLIDATED
--------------- -------------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales.................. $ $ 24,734 $ 30,675 $ (171) $ 55,238
Cost of sales.............. 19,327 22,738 (94) 41,971
------------- ------------- ------------- ------------- -------------
Gross profit.......... 5,407 7,937 (77) 13,267
Selling, general and
administrative expense... 179 2,783 3,581 1,334 7,877
------------- ------------- ------------- ------------- -------------
Income from
operations.......... (179) 2,624 4,356 (1,411) 5,390
Other expense (income):
Interest.............. (35) 3,832 664 28 4,489
Other................. 5 (313) 1,496 (1,439) (251)
------------- ------------- ------------- ------------- -------------
Total other
expense........ (30) 3,519 2,160 (1,411) 4,238
Income (loss) before
provision (benefit) for
income taxes............. (149) (895) 2,196 1,152
Tax provision.............. 880 880
------------- ------------- ------------- ------------- -------------
Income (loss) before equity
in income of
consolidating
subsidiary............... (149) (895) 1,316 272
Equity in income of
consolidated
subsidiaries............. 421 1,316 (1,737)
------------- ------------- ------------- ------------- -------------
Net income (loss).......... $ 272 $ 421 $ 1,316 $ (1,737) $ 272
============= ============= ============= ============= =============
</TABLE>
F-41
<PAGE> 140
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
WTI, INC. AFA AFA
(PREDECESSOR TO PRODUCTS, INC. POLYTEK
AFA) (GUARANTOR) (NON-GUARANTOR) CONSOLIDATED
--------------- -------------- --------------- ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities.... $ $ 4,098 $ 2,607 $ 6,705
------------- ------------- ------------- -------------
Cash flows from investing activities:
Capital expenditures............... (2,140) (1,464) (3,604)
Other.............................. (982) 23 (959)
------------- ------------- ------------- -------------
Net cash used in investing
activities....................... (3,122) (1,441) (4,563)
------------- ------------- ------------- -------------
Cash flows from financing activities:
Change in line of credit........... 913 249 1,162
Repayment of long term debt........ (2,828) (1,140) (3,968)
Intercompany advances.............. 519 (519)
Proceeds from long term debt....... 565 565
------------- ------------- ------------- -------------
Net cash from financing
activities....................... (831) (1,410) (2,241)
------------- ------------- ------------- -------------
Effect of exchange rate changes on
cash.................................. 89 89
------------- ------------- ------------- -------------
Change in cash and cash equivalents..... 145 (155) (10)
Cash and cash equivalents, beginning of
period................................ 88 1,106 1,194
------------- ------------- ------------- -------------
Cash and cash equivalents, end of
period................................ $ $ 233 $ 951 $ 1,184
============= ============= ============= =============
</TABLE>
F-42
<PAGE> 141
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Contico International, Inc.:
We have audited the accompanying combined balance sheets of Continental
Sprayers and Affiliates (the "Company") as of May 31, 1997 and 1996, and the
related combined statements of operations, divisional equity and cash flows for
each of the three years in the period ended May 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Continental
Sprayers and Affiliates as of May 31, 1997 and 1996, and the combined results of
their operations and their cash flows for each of the three years in the period
ended May 31, 1997 in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
St. Louis, Missouri
March 12, 1998
F-43
<PAGE> 142
CONTINENTAL SPRAYERS AND AFFILIATES
COMBINED BALANCE SHEETS
MAY 31, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 21 $ 39
Trade receivables from Contico............................ 585 279
Trade receivables, less allowance for doubtful accounts of
$63 and $67............................................ 8,194 8,029
Inventories............................................... 5,768 6,847
Other current assets...................................... 287 589
------- -------
Total current assets.............................. 14,855 15,783
Property, plant and equipment............................... 30,588 32,464
Other assets................................................ 485 384
------- -------
Total assets...................................... $45,928 $48,631
======= =======
LIABILITIES AND DIVISIONAL EQUITY
Current liabilities:
Accounts payable.......................................... $ 2,441 $ 4,257
Accrued expenses.......................................... 1,958 2,286
Uncleared checks.......................................... 1,519 1,216
------- -------
Total current liabilities......................... 5,918 7,759
Advances from Contico....................................... 5,712 8,813
Minority interest in affiliate.............................. 120 119
------- -------
Total liabilities................................. 11,750 16,691
------- -------
Divisional equity........................................... 34,178 31,940
------- -------
Total liabilities and divisional equity........... $45,928 $48,631
======= =======
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-44
<PAGE> 143
CONTINENTAL SPRAYERS AND AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MAY 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Net sales to third parties.................................. $58,600 $54,086 $54,658
Net sales to Contico........................................ 3,649 3,018 3,662
------- ------- -------
62,249 57,104 58,320
Cost of sales............................................... 48,901 44,614 42,491
------- ------- -------
Gross profit...................................... 13,348 12,490 15,829
Selling, general and administrative expenses................ 6,286 6,335 6,214
------- ------- -------
Income from operations............................ 7,062 6,155 9,615
------- ------- -------
Other expense (income):
Interest expense from Contico............................. 616 983 1,355
Other, net................................................ 28 142 (181)
------- ------- -------
644 1,125 1,174
------- ------- -------
Income before provision for income taxes.......... 6,418 5,030 8,441
Provision for income taxes.................................. 361 258 260
------- ------- -------
Net income........................................ $ 6,057 $ 4,772 $ 8,181
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-45
<PAGE> 144
CONTINENTAL SPRAYERS AND AFFILIATES
COMBINED STATEMENTS OF DIVISIONAL EQUITY
FOR THE YEARS ENDED MAY 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<S> <C>
Balance, June 1, 1994....................................... $27,068
Net income.................................................. 8,181
Dividends................................................... (5,065)
Foreign currency translation adjustment..................... 19
-------
Balance, May 31, 1995....................................... 30,203
Net income.................................................. 4,772
Dividends................................................... (3,018)
Foreign currency translation adjustment..................... (17)
-------
Balance, May 31, 1996....................................... 31,940
Net income.................................................. 6,057
Dividends................................................... (3,851)
Foreign currency translation adjustment..................... 32
-------
Balance, May 31, 1997....................................... $34,178
=======
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-46
<PAGE> 145
CONTINENTAL SPRAYERS AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MAY 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 6,057 $ 4,772 $ 8,181
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation........................................... 6,526 6,173 5,562
Net gain on disposal of assets......................... (89) (6) 15
Decrease (increase) in receivable from Contico, net.... (355) 482 (19)
Decrease (increase) in trade receivable, less
reserves............................................. (117) (2,316) 922
Decrease (increase) in inventories..................... 1,119 1,589 (81)
Decrease (increase) in other current assets............ 311 (387) (141)
Increase (decrease) in accounts payable................ (1,822) 2,685 (606)
Increase (decrease) in accrued expenses................ (331) (286) 14
------- ------- -------
Net cash provided by operating activities......... 11,299 12,706 13,847
------- ------- -------
Cash flows from investing activities:
Purchases of property, plant and equipment................ (4,477) (3,337) (5,301)
Proceeds from disposal of assets.......................... 106 10 18
Purchases of other long-term assets....................... (238) (232) (131)
------- ------- -------
Net cash used in investing activities............. (4,609) (3,559) (5,414)
------- ------- -------
Cash flows from financing activities:
Payment of dividends to Contico........................... (3,851) (3,018) (5,065)
Net decrease in advances from Contico..................... (3,151) (6,490) (3,199)
Increase (decrease) in uncleared checks................... 303 363 (220)
------- ------- -------
Net cash used in financing activities............. (6,699) (9,145) (8,484)
------- ------- -------
Effect of exchange rate changes on cash........... (9) 4 (13)
------- ------- -------
Increase (decrease) in cash....................... (18) 6 (64)
Cash, beginning of period................................... 39 33 97
------- ------- -------
Cash, end of period......................................... $ 21 $ 39 $ 33
======= ======= =======
Cash paid during the period for:
Interest.................................................. $ 616 $ 983 $ 1,355
======= ======= =======
Taxes..................................................... $ 396 $ 178 $ 333
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-47
<PAGE> 146
CONTINENTAL SPRAYERS AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
A. COMBINED ENTITIES AND BASIS OF PRESENTATION: The combined financial
statements of Continental Sprayers and affiliates (the "Company") include the
accounts of Continental Sprayers and Contour Cutting, divisions of Contico
International, Inc. ("Contico"), a Missouri corporation, of Continental Sprayers
de Mexico S.A. de C.V. (a majority owned Mexican subsidiary of Contico) and of
Continental Sprayers & Equipment (a United Kingdom division of Contico).
The purpose of the combined financial statements is to present the
financial position, results of operations and cash flows of Contico's liquid
dispenser business activities. The combined financial statements have been
prepared as if the Company had operated as a stand-alone entity for all periods
presented, and include those assets, liabilities, revenues, expenses and cash
flows directly attributable to the operations of the Company. The combined
financial statements have been presented using consolidation principles.
Minority interest in affiliate represents the minority stockholder's
proportionate share of net equity. As a result of the matters discussed above,
no separate components of equity are presented in the combined financial
statements. All significant intercompany accounts and transactions have been
eliminated.
Contico provides certain services to, and incurs certain costs on behalf
of, its subsidiaries and divisions. These costs, which include general overhead
and treasury services are billed to Contico's subsidiaries, including the
Company, based upon an analysis of the allocated resources required to perform
such services. Such costs are presented in the accompanying combined statements
of operations as administrative expenses (see Note 5).
Contico's management believes the method used to allocate expenses to the
Company is reasonable and appropriate. However, allocated expenses are not
necessarily indicative of the expenses which would have resulted had the Company
operated as a separate entity. The Company has relied upon Contico to fund
working capital needs and provide equity. The financial information included
herein is based on the operation of the Company as a division of Contico and
should not necessarily be considered indicative of future operating results of
the Company on a stand-alone basis.
B. RECENTLY ISSUED ACCOUNTING STANDARDS: Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income, is effective for
years beginning after December 15, 1997. This statement requires that an
enterprise classify items of other comprehensive income by their nature in the
financial statements and display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital in the
equity section of the statement of position.
Statement of Financial Accounting Standards No. 131, Disclosure About
Segments of an Enterprise and Related Information, is effective for years
beginning after December 15, 1997. This statement requires that a public
business enterprise report financial and descriptive information about its
reportable business segments.
Management of the Company believes that the future adoption of these
statements will not have a significant impact on the Company's combined
financial position, results of operations or cash flows, but will result in
additional disclosure.
C. INVENTORIES: Inventories are stated at the lower of cost or market.
Cost is determined on the first-in, first-out (FIFO) basis.
D. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment is stated
at cost. Depreciation is provided primarily on a straight-line basis over the
estimated useful lives of the assets. The estimated lives utilized in
calculating depreciation are as follows: building -- 39 years; building
improvements -- 10 to 39 years; machinery and equipment -- 3 to 10 years; molds,
dies and tooling -- 5 years; and furniture and fixtures -- 5 to 10 years.
Leasehold improvements are amortized over the shorter of the life of the lease
or of the improvement. Maintenance and repairs are charged to income as incurred
and betterments that extend the
F-48
<PAGE> 147
CONTINENTAL SPRAYERS AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
useful life are capitalized. Upon retirement or sale, the cost and accumulated
depreciation are eliminated from the respective accounts, and the gain or loss,
if any, is included in income.
If events or changes in circumstances indicate that the carrying amount of
a long-lived asset may not be recoverable, the Company estimates the future cash
flows expected to result from the use of the asset and its eventual disposition.
If the sum of the expected future cash flows (undiscounted and without interest
charges) is less than the carrying amount of the long-lived asset, an impairment
loss is recognized. To date, no impairment losses have been recognized.
E. FOREIGN CURRENCY TRANSLATION: The functional currency of Continental
Sprayers de Mexico S.A. de C.V. is the U.S. dollar. The functional currency of
Continental Sprayers & Equipment is British pounds sterling. Assets and
liabilities of Continental Sprayers & Equipment are translated into U.S. dollars
at current exchange rates, and profit and loss accounts are translated at
average annual exchange rates. Resulting translation gains and losses are
included as a separate component in divisional equity. As of May 31, 1997 and
1996, the cumulative translation adjustment included in divisional equity was
$33 and $1, respectively. Foreign exchange transaction gains and losses are
included in the results of operations. Such amounts for the years presented were
insignificant.
F. REVENUE RECOGNITION: Sales and related costs of goods sold are
included in income when goods are shipped and title has passed to customers.
G. RESEARCH AND DEVELOPMENT: The cost of research and development is
expensed as incurred. Research and development costs for the periods were not
significant.
H. INCOME TAXES: Contico is a Subchapter S corporation for federal and
Missouri state tax purposes. Under this election, the United States taxable
income of the Company is included in the personal taxable income of the
stockholders of Contico. The provision for income taxes includes certain state
taxes and taxes provided for foreign affiliates and divisions.
I. USE OF ESTIMATES: The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
2. INVENTORIES:
Inventories are comprised of the following:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Raw materials.............................................. $1,293 $1,562
Work in process............................................ 2,303 3,355
Finished goods............................................. 2,172 1,930
------ ------
$5,768 $6,847
====== ======
</TABLE>
F-49
<PAGE> 148
CONTINENTAL SPRAYERS AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Land, buildings and improvements....................... $ 7,897 $ 7,852
Machinery and equipment................................ 40,160 39,320
Molds, dies and tooling................................ 21,936 19,694
Furniture and fixtures................................. 1,216 989
Construction in progress............................... 669 608
-------- --------
71,878 68,463
Less accumulated depreciation..................... (41,290) (35,999)
-------- --------
$ 30,588 $ 32,464
======== ========
</TABLE>
4. ACCRUED EXPENSES:
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Accrued compensation....................................... $1,156 $1,248
Accrued workers' compensation.............................. 400 673
Other accrued expenses..................................... 402 365
------ ------
$1,958 $2,286
====== ======
</TABLE>
5. INTERENTITY TRANSACTIONS:
Net sales to Contico result from a wholesale distribution agreement whereby
the Company provides Contico's entire domestic requirements of liquid
dispensers. The agreement is renewable annually as mutually agreed by the
parties.
The Company has an agreement to purchase certain operating, administrative
and corporate services from Contico. The agreement, which is subject to certain
conditions, is renewable annually as mutually agreed by the parties. The Company
paid $285, $285 and $270 for services rendered during the years ended May 31,
1997, 1996 and 1995, respectively (see Note 1).
Contico advances funds to the Company as needed to meet the Company's
operating requirements. The Company is charged interest on these advances at
7.5% and 8.3% at May 31, 1997 and 1996, respectively. Interest expense on these
advances was $616, $983 and $1,355 for the years ended May 31, 1997, 1996 and
1995, respectively. The Company's domestic, as well as Contico's, assets are
pledged as collateral under Contico's bank financing agreements.
The Company paid dividends to Contico of $3,851, $3,018 and $5,065
representing 60% of the Company's income before provision for income taxes for
the years ended May 31, 1997, 1996 and 1995, respectively.
6. RETIREMENT BENEFITS:
The Company offers a 401(k) plan to substantially all domestic nonunion
employees. The Company's contributions under this plan were $83, $91 and $110
for the years ended May 31, 1997, 1996 and 1995, respectively.
F-50
<PAGE> 149
CONTINENTAL SPRAYERS AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
7. MAJOR CUSTOMERS:
Two customers accounted for approximately 30%, 34% and 24% of total net
sales for the years ended May 31, 1997, 1996 and 1995, respectively.
In January 1998, following the sale of certain of its product lines to S.C.
Johnson, Dow Brands, CSI's largest customer, notified CSI that it would be
terminating its contract with CSI effective April 23, 1998. Dow Brands purchases
from CSI for each of the three years in the period ended May 31, 1997 was 18.2%,
22.2% and 15.1%, respectively. The loss of the Dow Brands business could
adversely impact the Company's future results of operations. Following its
acquisition of the Dow Brands product lines, S.C. Johnson resold certain of the
acquired product lines to a third party. Management believes that the Company
will continue through the end of 1998 to supply trigger sprayers for those
product lines, which accounted for approximately one-half of CSI's unit sales to
Dow Brands, as well as for certain of the product lines retained by S.C.
Johnson. However, there can be no assurance of the extent to which the Company
will continue to supply trigger sprayers for any of these product lines or the
length of time it will continue to supply them.
8. GEOGRAPHIC SEGMENT INFORMATION:
The Company operates in one business segment -- the manufacture and sale of
liquid dispensers. The Company's operations can be grouped into two geographical
segments. Total revenue by segment includes both sales to customers and
intersegment sales, which are accounted for at prices charged to customers and
eliminated in consolidation. Pertinent financial data by major geographic
segment is as follows:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
North America:
Net sales...................................... $60,582 $56,856 $59,844
Operating income............................... 6,026 5,537 8,992
Identifiable assets............................ 41,672 47,259
Europe:
Net sales...................................... $ 7,643 $ 4,110 $ 4,117
Operating income............................... 1,284 546 656
Identifiable assets............................ 5,566 4,009
Eliminations:
Net sales...................................... $(5,976) $(3,862) $(5,641)
Operating (loss) income........................ (248) 72 (33)
Identifiable assets............................ (1,310) (2,637)
Total:
Net sales...................................... $62,249 $57,104 $58,320
Operating income............................... 7,062 6,155 9,615
Identifiable assets............................ 45,928 48,631
</TABLE>
9. SUBSEQUENT EVENT -- SALE OF OPERATIONS:
Effective February 1, 1998, Contico sold certain of the assets, liabilities
and operations of the Company to Continental Acquisition Corp., for a net cash
sale price of approximately $91 million plus approximately $2 million,
contingently payable in the future based on the Company achieving certain
agreed-upon sales levels through 2005. No adjustments have been recorded in the
accompanying historical combined financial statements of the Company as a result
of this transaction.
F-51
<PAGE> 150
CONTINENTAL SPRAYERS AND AFFILIATES
COMBINED BALANCE SHEET
JANUARY 31, 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash...................................................... $ 16
Trade receivables from Contico............................ 503
Trade receivables, less allowance for doubtful accounts of
$129................................................... 7,379
Inventories............................................... 4,818
Other current assets...................................... 196
-------
Total current assets.............................. 12,912
Property, plant and equipment............................... 28,149
Other assets................................................ 599
-------
Total assets...................................... $41,660
=======
LIABILITIES AND DIVISIONAL EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,861
Accrued expenses.......................................... 2,751
Uncleared checks.......................................... 598
-------
Total current liabilities......................... 5,210
Advances from Contico....................................... 1,058
Minority interest in affiliate.............................. 116
-------
Total liabilities................................. 6,384
Divisional equity........................................... 35,276
-------
Total liabilities and divisional equity........... $41,660
=======
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-52
<PAGE> 151
CONTINENTAL SPRAYERS AND AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
FOR THE EIGHT MONTHS ENDED JANUARY 31, 1998 AND 1997
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Net sales to third parties.................................. $38,366 $36,612
Net sales to Contico........................................ 2,606 2,633
------- -------
40,972 39,245
Cost of sales............................................... 31,294 31,782
------- -------
Gross profit...................................... 9,678 7,463
Selling, general and administrative expenses................ 3,917 4,213
------- -------
Income from operations............................ 5,761 3,250
------- -------
Other expense:
Interest expense from Contico............................. 147 429
Other, net................................................ 57 53
------- -------
204 482
------- -------
Income before provision for income taxes.......... 5,557 2,768
Provision for income taxes.................................. 253 164
------- -------
Net income........................................ $ 5,304 $ 2,604
======= =======
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-53
<PAGE> 152
CONTINENTAL SPRAYERS AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
FOR THE EIGHT MONTHS ENDED JANUARY 31, 1998 AND 1997
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 5,304 $ 2,604
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation........................................... 4,382 4,813
Net gain on disposal of assets......................... (8) (10)
Decrease (increase) in receivable from Contico, net.... 247 (226)
Decrease (increase) in trade receivables, less
reserves.............................................. 842 1,983
Decrease (increase) in inventories..................... 978 (1,047)
Decrease (increase) in other current assets............ 92 297
Decrease in accounts payable........................... (583) (1,630)
Increase in accrued expenses........................... 790 140
------- -------
Net cash provided by operating activities......... 12,044 6,924
------- -------
Cash flows from investing activities:
Purchases of property, plant and equipment................ (1,816) (3,378)
Proceeds from disposal of assets.......................... 17 32
Purchases of other long-term assets....................... (217) (166)
------- -------
Net cash used in investing activities............. (2,016) (3,512)
------- -------
Cash flows from financing activities:
Payment of dividends to Contico........................... (4,241) (1,661)
Net decrease in advances from Contico..................... (4,856) (1,499)
Increase (decrease) in uncleared checks................... (921) (278)
------- -------
Net cash used in financing activities............. (10,018) (3,438)
------- -------
Effect of exchange rate changes on cash........... (15) 12
------- -------
Decrease in cash.................................. (5) (14)
Cash, beginning of period................................... 21 39
------- -------
Cash, end of period......................................... $ 16 $ 25
======= =======
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-54
<PAGE> 153
CONTINENTAL SPRAYERS AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS)
(UNAUDITED)
1. COMBINED ENTITIES AND BASIS OF PRESENTATION:
The combined financial statements of Continental Sprayers and Affiliates
(the "Company") include the accounts of Continental Sprayers and Contour
Cutting, divisions of Contico International, Inc. ("Contico"), a Missouri
corporation, of Continental Sprayers de Mexico S.A. de C.V. (a majority-owned
Mexican subsidiary of Contico) and of Continental Sprayers & Equipment (a United
Kingdom division of Contico).
The purpose of the combined financial statements is to present financial
position, results of operations and cash flows of Contico's liquid dispenser
business activities. The combined financial statements have been prepared as if
the Company had operated as a stand-alone entity for all periods presented, and
include those assets, liabilities, revenues, expenses and cash flows directly
attributable to the operations of the Company. The combined financial statements
have been presented using consolidation principles. Minority interest in
affiliate represents the minority stockholder's proportionate share of net
equity. As a result of the matters discussed above, no separate components of
equity are presented in the combined financial statements. All significant
interentity transactions have been eliminated.
The unaudited combined balance sheet as of January 31, 1998 and the
unaudited combined statements of operations and cash flows for the eight months
ended January 31, 1998 and 1997, in the opinion of management, have been
prepared on the same basis as the Company's audited combined financial
statements and include all significant adjustments, consisting only of normal
recurring adjustments, necessary for the fair presentation of the results of the
interim periods. The data disclosed in these notes to the financial statements
for these periods are also unaudited. Certain information and footnote
disclosure normally included in the Company's annual financial statements have
been condensed or omitted. The combined financial statements and notes thereto
should be read in conjunction with the combined financial statement and notes
thereto as of May 31, 1997 and 1996, and for the years ended May 31, 1997, 1996
and 1995. Results for the eight months ended January 31, 1998 are not
necessarily indicative of the results that may be expected for the entire year
ending May 31, 1998.
Contico provides certain services to, and incurs certain costs on behalf of
its subsidiaries and divisions. These costs, which include general overhead and
treasury services are billed to Contico's subsidiaries, including the Company,
based upon an analysis of the allocated resources required to perform such
services. Such costs are presented in the accompanying combined statements of
operations as administrative expenses (see Note 3).
Contico's management believes the method used to allocate expenses to the
Company is reasonable and appropriate. However, allocated expenses are not
necessarily indicative of the expenses which would have resulted had the Company
operated as a separate entity. The Company has relied upon Contico to fund
working capital needs and provide equity. The financial information included
herein is based on the operation of the Company as a division of Contico and
should not necessarily be considered indicative of future operating results of
the Company on a stand-alone basis.
2. INVENTORIES:
Inventories at January 31, 1998 are comprised of the following:
<TABLE>
<S> <C>
Raw materials............................................... $1,450
Work in process............................................. 1,912
Finished goods.............................................. 1,456
------
$4,818
======
</TABLE>
F-55
<PAGE> 154
CONTINENTAL SPRAYERS AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. INTERENTITY TRANSACTIONS:
Net sales to Contico result from a wholesale distribution agreement whereby
the Company provides Contico's entire domestic requirements of liquid
dispensers. The agreement is renewable annually as mutually agreed by the
parties.
The Company has an agreement to purchase certain operating, administrative
and corporate services from Contico. The agreement, which is subject to certain
conditions, is renewable annually as mutually agreed by the parties. The Company
paid $196 for services rendered during the periods ended January 31, 1998 and
1997 (see Note 1).
Contico advances funds to the Company as needed to meet the Company's
operating requirements. The Company is charged interest on these advances at
7.7% at January 31, 1998. Interest expense on these advances was $208 and $429
for the periods ended January 31, 1998 and 1997, respectively. The Company's
domestic, as well as Contico's, assets are pledged as collateral under Contico's
bank financing agreements.
The Company paid dividends to Contico of $4,241 and $1,661 representing 76%
and 60% of the Company's income before provision for income taxes for the
periods ended January 31, 1998 and 1997, respectively.
4. SUBSEQUENT EVENTS:
Effective February 1, 1998, Contico sold certain of the assets, liabilities
and operations of the Company to Continental Acquisition Corp., for a net cash
sale price of approximately $91 million plus approximately $2 million,
contingently payable in the future based on the Company achieving certain
agreed-upon sales levels through 2005. No adjustments have been recorded in the
accompanying historical combined financial statements of the Company as a result
of this transaction.
In September 1997, at the request of a customer, the Company implemented
certain design changes to a trigger sprayer, which changes were approved by the
customer. In October 1997, without informing the Company, the customer made
changes to the formulation of its product that were incompatible with the
revised design of the Company's trigger sprayer, resulting in malfunction of the
trigger sprayer when used with that product. The Company has provided certain
allowances to the customer of $1,210, which includes the replacement costs of
such products.
F-56
<PAGE> 155
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Indesco International, Inc.
We have audited the accompanying balance sheet of Indesco International,
Inc. as of December 31, 1997. This financial statement is the responsibility of
the Company's management. Our responsibility is to express an opinion on this
financial statement 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 balance sheet presentation. We
believe that our audit of the balance sheet provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of the Company at December 31, 1997,
in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
New York, New York
March 16, 1998
F-57
<PAGE> 156
INDESCO INTERNATIONAL INC.
BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<S> <C>
STOCKHOLDER'S EQUITY
Common Stock -- authorized 3,000 shares of $.01 par value
each; 200 shares issued and outstanding................... $ 2
-----
Subscription Receivable..................................... (2)
TOTAL............................................. $ --
=====
</TABLE>
See accompanying notes to this financial statement.
F-58
<PAGE> 157
INDESCO INTERNATIONAL, INC.
NOTE TO FINANCIAL STATEMENT
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
1. ORGANIZATION:
Indesco International, Inc. (the "Company") is a wholly owned subsidiary of
AFA Holdings Co. ("Parent"). Parent was formed in July 1997 to acquire, through
a wholly-owned subsidiary, the assets and liabilities of AFA Products, Inc.
("AFA"), located in Forest City, North Carolina. Concurrent with this
transaction, Dejanu B.V. acquired the outstanding common stock of AFA Polytek
B.V. ("Polytek") based in the Netherlands. AFA and Polytek were formerly
operating subsidiaries of W.T.I., Inc. ("WTI").
ACQUISITION OF CONTINENTAL SPRAYERS AND AFFILIATES
Effective February 1, 1998, a subsidiary of the Parent acquired certain
assets and liabilities of Continental Sprayers and Affiliates ("CSI"), a
division of Contico International, Inc. CSI also manufactures and sells trigger
sprayers. Parent acquired CSI for $92,947 in cash, paid outstanding debt of
Parent of $39,567 and paid fees of $4,980. Such amounts were paid through
borrowings under a credit facility.
The assets acquired and liabilities assumed of CSI based on the December
31, 1997 value thereof are as follows:
<TABLE>
<S> <C>
Cash and receivables....................................... $ 767
Inventory.................................................. 5,309
Fixed assets............................................... 27,789
Other assets............................................... 1,135
Goodwill................................................... 60,639
Payables................................................... (2,692)
-------
Purchase price................................... $92,947
=======
</TABLE>
The acquisitions have been accounted for using the purchase method of
accounting. The Company has increased the value of inventory by $850 in
accordance with Accounting Principles Board Opinion No. 16 and has recorded
fixed assets and identifiable intangibles at their net historical book value,
pending completion of appraisals. However, management does not expect the final
valuations resulting from the appraisals to differ materially from the recorded
amounts. Differences, if any, between these amounts and the amounts resulting
from appraisals and valuations of these assets, which have not yet been
completed, will be reflected as adjustments to goodwill, which may increase or
decrease related depreciation and amortization charges.
Concurrent with the acquisition, Polytek became an indirect wholly-owned
subsidiary of the Parent.
Condensed unaudited pro forma combined results of operations of AFA, CSI
and Polytek for the years ended December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Net Sales............................................ $114,531 $113,139
======== ========
Net Income........................................... $ 1,424 $ 493
======== ========
</TABLE>
The financial information above assumes the Company has completed its
offering of $145,000 of debt securities. Subsequent to the completion of the CSI
Acquisition, the Parent contributed its investment in AFA and Polytek to the
Company.
F-59
<PAGE> 158
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
APRIL 5, 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Current assets:
Cash and cash equivalents................................. $ 2,675
Accounts receivable, net of allowances of $28 and $79,
respectively........................................... 17,062
Inventories............................................... 14,507
Prepaid expenses and other assets......................... 914
--------
Total current assets.............................. 35,158
Property and equipment, net................................. 56,082
Excess cost over fair value of net assets acquired, net..... 70,496
Patents and other intangibles, net.......................... 5,065
Deferred financing costs.................................... 5,258
Other assets................................................ 637
--------
Total assets...................................... $172,696
========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current portion of long-term debt......................... $ 3,374
Notes payable............................................. 14,703
Accounts and drafts payable............................... 4,521
Income taxes payable...................................... 427
Other accrued expenses.................................... 8,201
--------
Total current liabilities......................... 31,226
Long-term debt.............................................. 136,873
Deferred income taxes....................................... 576
--------
Total liabilities................................. 168,675
Commitments and Contingencies
Stockholders' equity:
Common stock, authorized 3,000 shares of $.01 par value;
200 shares issued and outstanding in 1998..............
Additional paid-in capital................................ 7,562
Accumulated deficit....................................... (3,552)
Accumulated other comprehensive income.................... 11
--------
Total stockholders' equity........................ 4,021
--------
Total liabilities and stockholders' equity........ $172,696
========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-60
<PAGE> 159
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE QUARTERS ENDED APRIL 5, 1998 AND APRIL 6, 1997
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
WTI, INC. AND
INDESCO SUBSIDIARIES
INTERNATIONAL, INC. (PREDECESSOR TO
AND SUBSIDIARIES INDESCO HOLDINGS CO.)
APRIL 5, 1998 APRIL 6, 1997
------------------- ---------------------
<S> <C> <C>
Net sales................................................. $25,016 $15,149
Cost of sales............................................. 17,925 10,885
------- -------
Gross profit............................................ 7,091 4,264
Operating expenses:
Selling, general and administrative expenses............ 3,236 1,943
------- -------
Total operating expenses............................. 3,236 1,943
------- -------
Income from operations............................. 3,855 2,321
Other expense (income):
Interest................................................ 3,375 1,006
Other................................................... 49 (254)
------- -------
Total other expense, net............................. 3,424 752
------- -------
Income before extraordinary item and provision for
income taxes.................................... 431 1,569
Provision for income taxes (foreign)...................... 171 166
------- -------
Income before extraordinary item........................ 260 1,403
Extraordinary item -- loss on early extinguishment of
debt.................................................... 2,438
------- -------
Net income (loss)....................................... $(2,178) $ 1,403
======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-61
<PAGE> 160
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE QUARTER ENDED APRIL 5, 1998 AND APRIL 6, 1997
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
WTI, INC. AND
INDESCO SUBSIDIARIES
INTERNATIONAL, INC. (PREDECESSOR TO
AND SUBSIDIARIES INDESCO HOLDINGS CO.)
APRIL 5, 1998 APRIL 6, 1997
------------------- ---------------------
<S> <C> <C>
Net cash provided (used) by operating activities......... $ (5,788) $ 1,482
Cash flows from investing activities:
Acquisition of CSI, net of cash acquired............... (92,931) --
Expenditures for property, plant and equipment......... (1,028) (1,278)
Disposal of property, plant and equipment.............. 14
Other investing activities............................. (39)
--------- -------
Net cash used in investing activities............... (93,984) (1,278)
--------- -------
Cash flows from financing activities:
Proceeds from long-term debt........................... 135,000 577
Repayment of long-term debt............................ (40,690) (120)
Payments of deferred financing cost.................... (5,439)
Net (repayment) borrowings under revolving credit
agreement........................................... 12,545 (120)
--------- -------
Net cash provided by financing activities........... 101,416 337
--------- -------
Effect of exchange rate changes on cash.................. (20) (59)
--------- -------
Net increase in cash and cash equivalents........... 1,624 482
Cash and cash equivalents at beginning of year........... 1,051 838
--------- -------
Cash and cash equivalents at end of period.......... $ 2,675 $ 1,320
========= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest............................................ $ 908 $ 145
========= =======
Income Taxes........................................ $ 10 $ 1,154
========= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-62
<PAGE> 161
INDESCO INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS)
(1) ORGANIZATION AND BASIS OF PRESENTATION
Indesco International, Inc. (the "Company"), is a wholly-owned subsidiary
of Indesco Holdings Co., formerly Afa Holdings Co. ("Parent"). The Company
manufactures and sells finger activated liquid dispensing devices ("trigger
sprayers"). The Parent was formed in July, 1997 to acquire, through a wholly-
owned subsidiary, the assets and liabilities of AFA Products, Inc. ("Afa"),
located in Forest City, North Carolina. Concurrent with this transaction, a
stockholder of the Parent and affiliate of another stockholder of the Parent
acquired the outstanding capital stock of AFA Polytek B.V. ("Polytek") based in
The Netherlands. Afa and Polytek were formerly operating subsidiaries of W.T.I.,
Inc. ("WTI or Predecessor"). In addition, effective February 1, 1998, the
Company acquired Continental Sprayer and Affiliates ("CSI"), a division of
Contico International, Inc. for approximately $93 million (see Note 3).
Concurrent with the CSI acquisition, Polytek became a wholly-owned subsidiary of
the Company. Concurrent with the acquisition of CSI, Polytek became an indirect
wholly-owned subsidiary of the Parent. The Parent agreed to issue to AFA
International Limited and Warcop Investments Ltd. (a company affiliated with a
shareholder), 820,500 shares and 273,500 shares, respectively, of a new class of
Preferred Stock having a liquidation and redemption value of $10 per share and
providing for dividends at an annual rate of 7% of the liquidation value
thereof. As a result of the common control of AFA and Polytek this transaction
has been recorded at its historical cost basis.
Upon completion of the acquisition of CSI, the Parent contributed its
investment in AFA and Polytek to the Company.
The accompanying condensed consolidated balance sheet as of April 5, 1998
includes the accounts of Indesco International, Inc. and its subsidiaries (AFA,
Polytek and CSI).
The accompanying condensed consolidated statement of operations of Indesco
International, Inc. includes the accounts of Indesco International, Inc. and its
subsidiaries, Afa and Polytek, for the quarter ended April 5, 1998 and the
results of operations of CSI from February 1, 1998 through April 5, 1998. The
condensed consolidated statement of operations reflect the financial results of
WTI for the quarter ended April 6, 1997, which include the results of operations
of AFA and Polytek.
As a result of the inclusion of the assets and liabilities of CSI and its
results of operations for the 1998 periods indicated, the Company's balance
sheet, statements of operations and cash flows for 1998 are not directly
comparable to those of its Predecessor for the corresponding 1997 periods.
The unaudited condensed consolidated balance sheet as of April 5, 1998 and
the condensed consolidated statements of operations and cash flows for the
quarter ended April 5, 1998 and April 6, 1997, in the opinion of management,
have been prepared on the same basis as the related company's audited financial
statements and include all significant adjustments, consisting only of normal
recurring adjustments, necessary for the fair presentation of the results of the
interim periods. The data disclosed in the notes to the financial statements for
these periods are also unaudited. Certain information and footnote disclosure
normally included in the Company's annual financial statements have been
condensed or omitted. The condensed consolidated financial statements and notes
thereto should be read in conjunction with the related annual audited financial
statements and notes thereto. Results for the quarter ended April 5, 1998 are
not necessarily indicative of the results that may be expected for the entire
year ending January 3, 1999.
(2) SIGNIFICANT ACCOUNTING POLICIES
The condensed consolidated financial statements have been prepared using
the accounting policies disclosed in the audited year-end financial statements.
F-63
<PAGE> 162
Foreign Currency Translation
Assets and liabilities of Polytek are translated at exchange rates in
effect at the balance sheet date ($.4809 per guilder at April 5, 1998). Items of
revenue and expense are translated at average exchange rates during the periods
($.4849 per guilder and $.5427 per guilder for the three months ended 1998 and
1997, respectively). Translation adjustments, resulting from translating
Polytek's financial statements into dollars, are reported in the equity section
of the accompanying balance sheet under the caption "Cumulative Translation
Gains or Losses Adjustment." The impact of the translation gains or losses of
the Company's United Kingdom operations was not significant.
Recently Issued Accounting Standards
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income, is effective for years beginning after December 15, 1997.
This statement requires that an enterprise classify items of other comprehensive
income by their nature in the financial statements and display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of the balance sheet.
Comprehensive loss for the quarter ended April 5, 1998 includes the net loss of
$2,178, plus $17 related to the change in the cumulative translation adjustment
resulting in a comprehensive loss of $2,195 for the period.
Statement of Financial Accounting Standards No. 131, Disclosure About
Segments of an Enterprise and Related Information, is effective for years
beginning after December 15, 1997. This statement requires that a public
business enterprise report financial and descriptive information about its
reportable business segments.
Management of the Company believes that the future adoption of these
statements will not have a significant impact on the Company's consolidated
financial position, results of operations or cash flows, but will result in
additional disclosures.
(3) ACQUISITIONS
(a) Afa and Polytek
The acquisition of AFA for an aggregate purchase price of $46,938
(including expenses of $1,926), and the acquisition of Polytek for approximately
$800 and refinancing of debt of approximately $7,900, resulted in the following
changes in financial position:
<TABLE>
<S> <C>
ASSETS
Cash and Receivables........................................ $ 7,526
Inventories................................................. 11,223
Fixed Assets................................................ 28,646
Patents..................................................... 6,000
Other Assets................................................ 2,885
Goodwill.................................................... 6,615
-------
$62,895
=======
LIABILITIES AND EQUITY
Current Liabilities......................................... $ 5,620
Bank Debt................................................... 48,771
Subordinated Debt........................................... 3,000
Other Liabilities........................................... 942
Equity...................................................... 4,562
-------
$62,895
=======
</TABLE>
The acquisitions have been accounted for using the purchase method of
accounting, and accordingly, the purchase price has been allocated to the assets
purchased and liabilities assumed based upon the fair values at the date of
acquisition.
F-64
<PAGE> 163
(b) Acquisition of Continental Sprayers and Affiliates
Effective February 1, 1998, the Parent acquired CSI for $92,947 in cash,
paid outstanding debt of AFA of $39,567 and paid fees of $5,439. Such amounts
were paid through the issuance of term loans of $135,000 and borrowings under a
revolving credit facility.
The assets acquired and liabilities assumed of CSI are as follows:
<TABLE>
<S> <C>
Cash....................................................... $ 16
Inventory.................................................. 5,035
Fixed Assets............................................... 28,776
Other Assets............................................... 1,115
Goodwill................................................... 62,478
Payables................................................... (4,473)
-------
Purchase Price........................................ $92,947
=======
</TABLE>
The acquisitions have been accounted for using the purchase method of
accounting. The Company increased the value of inventory $850 in accordance with
Accounting Principles Board Opinion No. 16 and has recorded fixed assets and
identifiable intangibles at their net historical book value, pending completion
of appraisals. However, management does not expect the final valuations
resulting from the appraisals to differ materially from the recorded amounts.
Differences, if any, between these amounts and the amounts resulting from
appraisals and valuation of these assets, which have not yet been completed,
will be reflected as adjustments to goodwill, which may increase or decrease
related depreciation and amortization charges.
Condensed proforma unaudited combined results of operations of the Company
for the quarters ended April 5, 1998 and April 6, 1997 as if the transactions
had occurred on January 1, 1996 are as follows:
<TABLE>
<CAPTION>
THREE-MONTH PERIODS ENDED
------------------------------
APRIL 6, 1997 APRIL 5, 1998
------------- -------------
<S> <C> <C>
Net Sales........................................... $30,349 $28,652
======= =======
Net Income (Loss)................................... $ 314 $(8,323)
======= =======
</TABLE>
(4) INVENTORIES
The components of inventories as of December 31, 1997 and April 5, 1998 are
summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 APRIL 5, 1998
----------------- -------------
<S> <C> <C>
Raw Material.................................... $2,172 $ 3,121
Work-in-Process................................. 3,346 5,393
Finished Goods.................................. 4,400 5,993
------ -------
$9,918 $14,507
====== =======
</TABLE>
(5) DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
APRIL 5, 1998
-------------
<S> <C>
Total Working Capital Borrowings(a)......................... $14,703
=======
</TABLE>
F-65
<PAGE> 164
LONG-TERM DEBT
<TABLE>
<S> <C>
Senior mortgage note, dollar denominated, bearing interest
at 11.25 percent at April 5, 1998(b). .................... $ 70,000
Senior mortgage note, dollar denominated, bearing interest
at 13.00 percent at April 5, 1998(b). .................... 65,000
ABN/AMRO loan, guilder denominated, bearing interest at 6.10
percent at
April 5, 1998(c). ........................................ 3,883
Senior mortgage note, guilder denominated, payable in
quarterly principal installments (175,000 guilders per
annum), bearing interest at 5.50 percent at April 5,
1998(d). ................................................. 1,094
Installment notes payable, guilder denominated, bearing
interest at rates ranging from 7.10 percent to 7.75
percent at April 5, 1998. ................................ 270
--------
140,247
Less: Current Portion....................................... 3,374
--------
Total Long-Term Debt.............................. $136,873
========
</TABLE>
(a) Working Capital Borrowings
At December 31, 1997, the Company had loans (the "Agreements" and "Term
Loans") with a U.S. lender and a Dutch bank that provided for working capital
lines of credit (the "Agreement"), denominated in both dollars and guilders.
Borrowings under the dollar denominated working capital line of credit,
which had a maximum amount of $7,000 were limited to 85 percent of eligible
accounts receivable (as defined), and 60 percent of eligible inventories (as
defined). In February, 1998, the Company entered into a new revolving credit
facility and retired the U.S. working capital line of credit, which was in place
at December 31, 1997. Borrowings under the guilder denominated line of credit
had a maximum amount of 11,000 guilders ($5,290 at April 5, 1998 and $5,429 at
December 31, 1997).
Interest payments on the retired dollar denominated working capital line of
credit were due monthly, beginning September 1, 1997 at a rate of LIBOR, plus
3.25 percent. The original due date under the line of credit was July 29, 2004.
Interest payments on the new dollar denominated working capital line of
credit, obtained in February 1998, are required monthly, beginning February 28,
1998 at a rate of LIBOR, plus 3.00 percent. This dollar denominated working
capital contains certain covenants, the most restrictive of which limit capital
expenditures, set forth maximum leverage ratios and set forth minimum debt
coverage ratios and earnings requirements.
Interest payments on the guilder denominated line of credit are due
quarterly. Borrowings under the guilder line of credit are collateralized by a
lien on the facility. This line of credit contains certain prohibitions, the
most significant of which related to minimum net worth requirements.
LONG-TERM DEBT
(b) Term Loans -- Tranche A & B -- Dollar Denominated
Effective February 1, 1998, the Company consummated the CSI acquisition,
refinanced the Afa debt of approximately $40 million in its entirety and
acquired all of the capital stock of Polytek. Funds used for the CSI acquisition
and the refinancing of the Afa debt were provided by (a) the Term Loans, which
consisted of (i) a $70.0 million principal amount Tranche A Term Loan, bearing
interest at LIBOR, plus 3.75 percent; and (ii) a $65.0 million Tranche B Term
Loan, bearing interest at LIBOR, plus 5.50 percent, and (b) $2.5 million of
advances under the Revolving Credit Facility, bearing interest at LIBOR, plus
3.00 percent. The Tranche A and Tranche B loans required quarterly principal
amortization payments beginning in June 1998 and were scheduled to mature on
December 31, 2003 and February 4, 2005, respectively. These loans were
refinanced
F-66
<PAGE> 165
on April 23, 1998 with the proceeds from the issuance of $145,000 of 9.75
percent Senior Subordinated Notes due in 2008 (see Note 10).
(c) ABN/AMRO Loan
Polytek has a credit facility with the ABN AMRO Bank, The Netherlands. This
credit facility includes a loan of $4,088 as of April 5, 1998 and $4,195 as of
December 31, 1997 (8,500 guilders) requiring quarterly payments of $102 at April
5, 1998 and $105 (213 guilders) as of December 31, 1997 through 2007. This Note
is collateralized by a lien on The Netherlands facility. This Note contains
certain prohibitions, the most significant of which relate to minimum net worth
requirements.
(d) Senior Mortgage Note
In connection with the construction of a manufacturing facility in Polytek
obtained a 3,500 guilder mortgage from ABN Bank, The Netherlands. Borrowings
under this mortgage agreement are collateralized by a lien on the facility.
(6) EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT
As previously mentioned, in February 1998, in conjunction with the
acquisition of CSI, the Company repaid outstanding debt of approximately $40
million. As a result, the Company expensed $1,487 of deferred financing costs
and $951 of prepayment penalties as an extraordinary loss.
(7) INCOME TAXES
Pre-tax loss for the three months ended April 5, 1998 consists of:
<TABLE>
<CAPTION>
1998
-------
<S> <C>
United States.............................................. $(2,415)
Foreign.................................................... 408
-------
Total Pre-Tax Loss............................... $(2,007)
=======
</TABLE>
The condensed consolidated statement of operations includes income taxes on
foreign subsidiary income. The Company has recorded a full valuation allowance
related to the potential tax benefit of the net operating loss carryforward.
(8) RELATED PARTY TRANSACTIONS
Interest on Subordinated Debts
Included in interest expense for the three-month period ended April 5, 1998
is approximately $29 relating to debt owed to shareholders. The subordinated
debts of $3,000 were assumed by the Parent at February 1, 1998. As of April 5,
1998, accrued interest of $176 on this obligation has been included in other
accrued expenses.
Management Fees
Included in operating expenses for the three-month period ended April 5,
1998 are approximately $270 for management fees and certain expenses paid or
payable to entities affiliated with the shareholders. As of April 5, 1998, the
balance of unpaid fees, which has been included in other accrued expenses in the
accompanying balance sheet approximated $267.
Effective February 4, 1998, the Company entered into a new management
agreement with an affiliate of one of the shareholders that provides for annual
payments of $300,000 and expires on July 29, 2008, subject to renewal for
successive five-year periods.
F-67
<PAGE> 166
Transactions with Affiliates
The Company has a 41 percent ownership in an affiliate, which is accounted
for using the equity method. Earnings of the affiliate are not material to the
operations of the Company. During the 1997 period presented, the Company
purchased molds from the affiliate for approximately $283. During the quarter
ended April 5, 1998, the affiliate provided certain repairs and maintenance at a
cost to the Company of approximately $30. Included in accounts payable in the
accompanying balance sheet at April 5, 1998 is approximately $35, relating to
these assets and services provided by the affiliate.
Professional Services
The law firm of Gratch, Jacobs Brozman, P.C., of which one of the
shareholders is a senior member, provides legal services on an ongoing basis to
the Company and its subsidiaries. For the quarter ended April 5, 1998, the
Company paid fees of approximately $340 to Gratch, Jacobs Brozman, P.C.
(9) FOREIGN OPERATIONS
Information regarding the Company's operations in The Netherlands and the
United Kingdom for the three months ended April 6, 1997 and April 5, 1998 are as
follows:
<TABLE>
<CAPTION>
1997
--------------------------------
NETHERLANDS U.K. TOTAL
----------- ------ -------
<S> <C> <C> <C>
Sales................................................ $ 6,649 $ -0- $ 6,649
Net income........................................... 230 -0- 230
Total Assets......................................... 12,074 -0- 12,074
1998
--------------------------------
Sales................................................ $ 6,034 $1,073 $ 7,107
Net Income........................................... 186 51 237
Total Assets......................................... 12,792 3,419 16,211
</TABLE>
(10) SUBSEQUENT EVENT
On April 23, 1998, the Company issued $145,000 of 9.75 percent Senior
Subordinated Notes due in 2008 (the "Notes"). The net proceeds were used by the
Company to refinance U.S. indebtedness, including borrowings incurred in
connection with the acquisition in February 1998 of substantially all of the
assets of CSI, as previously mentioned in Note (1). The Notes mature on April
15, 2008, unless previously redeemed. Interest on the Notes is payable
semi-annually on April 15 and October 15, commencing October 15, 1998. The Notes
will be redeemable at the option of the Company, in whole or in part, on or
after April 15, 2003, at certain specified redemption prices, plus accrued and
unpaid interest thereon to the redemption date. In addition, at any time on or
before April 15, 2001, the Company may redeem up to 35 percent of the initial
aggregate principal amount of the Notes with the net proceeds of one or more
equity offerings at a redemption price equal to 109.75 percent of the principal
amount thereof, plus accrued and unpaid interest, if any, to the date of
redemption; provided that at least 65 percent of the initial aggregate principal
amount of the Notes remains outstanding. Upon a change of control, the Company
would be required to make an offer to purchase all outstanding Notes at 101
percent of the principal amount thereof, plus accrued and unpaid interest to the
date of purchase.
The Notes will be unsecured senior subordinated obligations of the Company
and will be subordinated in right of payment to all existing and future Senior
Indebtedness of the Company, including indebtedness under its Revolving Credit
Facility. The Notes will rank pari passu with all existing and future senior
subordinated indebtedness of the Company and will rank senior to all other
existing and future Subordinated Indebtedness of the Company. The Notes will be
fully and unconditionally guaranteed, jointly and severally, on an unsecured
senior subordinated basis by each of the Company's existing and future U.S.
subsidiaries. The Notes will also be effectively subordinated to all existing
and future Senior Indebtedness of the Company's subsidiaries.
F-68
<PAGE> 167
The Company and the former Managing Director of Polytek are currently
involved in a legal proceeding relating to the former Managing Director's
employment. The Company and its Dutch legal counsel believe that no amount is
owed to such former director. However, Dutch legal counsel believes it is likely
that the court will award the former director an amount ranging from $500 to
$1,000. The Company recorded a $500 reserve in connection with this
preacquisition contingency.
(11) SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
On April 21, 1998, Indesco International, Inc. issued $145,000 aggregate
principal amount of 9 3/4% Senior Subordinated Notes (the "Notes") due 2008, the
proceeds of which were used to pay down debt incurred in various acquisitions
(see Note 5). The Notes are fully and unconditionally guaranteed, jointly and
severally, on an unsecured, senior subordinated basis by AFA Products and CSI.
Polytek is a nonguarantor subsidiary.
The following condensed, consolidating financial statements include the
accounts of Indesco and its wholly owned subsidiaries Products, Polytek and CSI.
Given the size of Polytek relative to Indesco on a consolidated basis, separate
financial statements of the guarantor are not presented because management has
determined that such information is not material.
F-69
<PAGE> 168
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
APRIL 5, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
INDESCO AFA AFA
INTERNATIONAL, INC. PRODUCTS, INC. CSI POLYTEK
ASSETS (GUARANTOR) (GUARANTOR) (GUARANTOR) (NON-GUARANTOR) ELIMINATIONS CONSOLIDATED
------ ------------------- -------------- ----------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents... $ 377 $ 808 $ 1,088 $ 402 $ $ 2,675
Accounts receivable, net.... 2,198 3,957 8,270 5,002 (2,365) 17,062
Inventories................. 6,460 5,090 2,963 (6) 14,507
Prepaid expenses and
other..................... 303 35 445 131 914
------- ------- -------- ------- -------- --------
Total current
assets............. 2,878 11,260 14,893 8,498 (2,371) 35,158
Property, plant and equipment,
net......................... 18,775 29,139 8,168 56,082
Excess cost over fair value of
net assets acquired, net.... 12,324 62,623 (4,451) 70,496
Patents and other intangibles,
net......................... 4,456 609 5,065
Deferred financing costs...... 5,258 5,258
Other assets, including
investment in subsidiary.... 91,837 59 1 577 (91,837) 637
------- ------- -------- ------- -------- --------
Total assets.................. $99,973 $46,874 $107,265 $12,792 $(94,208) $172,696
======= ======= ======== ======= ======== ========
Liabilities and Stockholders'
equity
Current liabilities:..........
Current portion of long-term
debt...................... $ 2,500 $ $ $ 874 $ $ 3,374
Notes payable............... 11,818 2,885 14,703
Accounts payable and drafts
payable................... 196 1,156 3,816 1,551 (2,198) 4,521
Income taxes payable........ 52 375 427
Other accrued expenses...... 503 1,897 4,520 1,281 8,201
------- ------- -------- ------- -------- --------
Total current
liabilities........ 15,017 3,053 8,388 6,966 (2,198) 31,226
Long-term debt................ 132,500 4,373 136,873
Intercompany payable
(receivable)................ (45,372) 39,395 98,948 143 (93,114)
Deferred income taxes......... 576 576
------- ------- -------- ------- -------- --------
Total liabilities.... 102,145 42,448 107,336 12,058 (95,312) 168,675
------- ------- -------- ------- -------- --------
STOCKHOLDERS' EQUITY
Common stock................
Additional paid-in
capital................... 6,810 752 7,562
Accumulated deficit......... (2,172) (2,384) (71) (29) 1,104 (3,552)
Accumulated other
comprehensive income...... 11 11
------- ------- -------- ------- -------- --------
Total stockholders'
equity............. (2,172) 4,426 (71) 734 1,104 4,021
------- ------- -------- ------- -------- --------
Total liabilities and
stockholders' equity........ $99,973 $46,874 $107,265 $12,792 $(94,208) $172,696
======= ======= ======== ======= ======== ========
</TABLE>
F-70
<PAGE> 169
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED APRIL 5, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
INDESCO
INTERNATIONAL, AFA
INC. PRODUCTS, INC. CSI
(GUARANTOR) (GUARANTOR) (GUARANTOR) POLYTEK ELIMINATIONS
-------------- -------------- ----------- ARANTOR ------------
<S> <C> <C> <C> <C> <C>
Net sales............... $ $ 8,583 $ 10,427 $ 6,034 $ (28)
Cost of sales........... 5,839 7,518 4,590 (22)
------------- ------------- ------------- -------------
Gross profit....... 2,744 2,909 1,444 (6)
Selling, general and
administrative
expenses.............. 470 437 1,344 985
------------- ------------- ------------- ------------- -------------
Income from
operations....... (470) 2,307 1,565 459 (6)
Other expense (income):
Interest........... 1,702 1,094 1,573 116 (1,110)
Other.............. 5 44
------------- ------------- ------------- ------------- -------------
Total other
expense,
net......... 1,702 1,094 1,578 160 (1,110)
------------- ------------- ------------- ------------- -------------
Income before
extraordinary item and
provision for income
taxes................. (2,172) 1,213 (13) 299 1,104
Provision for income
taxes-foreign......... 58 113
------------- ------------- ------------- ------------- -------------
Income before
extraordinary item.... (2,172) 1,213 (71) 186 1,104
Extraordinary
item -- loss on early
extinguishment of
debt.................. 2,438
------------- ------------- ------------- ------------- -------------
Net income (loss)....... $ (2,172) $ (1,225) $ (71) $ 186 $ 1,104
============= ============= ============= ============= =============
<CAPTION>
CONSOLIDATED
------------
<S> <C>
Net sales............... $ 25,016
Cost of sales........... 17,925
-------------
Gross profit....... 7,091
Selling, general and
administrative
expenses.............. 3,236
-------------
Income from
operations....... 3,855
Other expense (income):
Interest........... 3,375
Other.............. 49
-------------
Total other
expense,
net......... 3,424
-------------
Income before
extraordinary item and
provision for income
taxes................. 431
Provision for income
taxes-foreign......... 171
-------------
Income before
extraordinary item.... 260
Extraordinary
item -- loss on early
extinguishment of
debt.................. 2,438
-------------
Net income (loss)....... $ (2,178)
=============
</TABLE>
F-71
<PAGE> 170
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE QUARTER ENDED APRIL 5, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
INDESCO AFA AFA
INTERNATIONAL, PRODUCTS, POLYTEK
INC. INC. CSI (NON-
(GUARANTOR) (GUARANTOR) (GUARANTOR) GUARANTOR) CONSOLIDATED
-------------- ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities... $ (2,683) $ 1,909 $ (3,986) $ (1,028) $ (5,788)
Cash flows from investing activities:
Capital expenditures.............. (72) (943) (38) (1,053)
Acquisition of CSI................ (92,947) 16 (92,931)
Net cash used in investing
activities...................... (92,947) (72) (927) (38) (93,984)
------------- ----------- ------------- ------------- -------------
Cash flows from financing activities:
Other debt........................ (33,554) (1,171) 6,001 579 (28,145)
Borrowing of long term debt....... 129,561 129,561
Net cash from financing
activities...................... 96,007 (1,171) 6,001 579 101,416
------------- ----------- ------------- ------------- -------------
Effect of exchange rate changes on
cash................................. (20) (20)
Change in cash and cash equivalents.... 377 666 1,088 (507) 1,624
Cash and cash equivalents, beginning of
period............................... 142 909 1,051
------------- ----------- ------------- ------------- -------------
Cash and cash equivalents, end of
period............................... $ 377 $ 808 $ 1088 $ 402 $ 2,675
============= =========== ============= ============= =============
</TABLE>
F-72
<PAGE> 171
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED APRIL 6, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AFA AFA
WTI, INC. PRODUCTS, INC. POLYTEK
(PREDECESSOR TO AFA) (GUARANTOR) (NON-GUARANTOR) ELIMINATIONS CONSOLIDATED
-------------------- -------------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales................... $ $ 8,508 $ 6,649 $ (8) $ 15,149
Cost of sales............... 5,914 4,979 (8) 10,885
----------- ----------- ----------- ------------- -------------
Gross profit........... 2,594 1,670 4,264
Selling, general and
administrative expenses... 45 792 1,106 1,943
----------- ----------- ----------- ------------- -------------
Income (loss) from
operations........... (45) 1,802 564 2,321
Other expense (income):
Interest............... 122 868 169 (153) 1,006
Other.................. (130) (276) (1) 153 (254)
----------- ----------- ----------- ------------- -------------
Total other
expense......... (8) 592 168 752
Income (loss) before income
tax provision............. (37) 1,210 396 1,569
Tax provision............... 166 166
----------- ----------- ----------- ------------- -------------
Income (loss) before equity
in income of consolidated
subsidiary................ (37) 1,210 230 1,403
Equity in income of
consolidated subsidiary... 1,440 230 (1,670)
----------- ----------- ----------- ------------- -------------
Net income (loss)........... $ 1,403 $ 1,440 $ 230 $ (1,670) $ 1,403
=========== =========== =========== ============= =============
</TABLE>
F-73
<PAGE> 172
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE QUARTER ENDED APRIL 6, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AFA AFA
WTI, INC. PRODUCTS, INC. POLYTEK
(PREDECESSOR TO AFA) (GUARANTOR) (NON-GUARANTOR) CONSOLIDATED
-------------------- -------------- --------------- ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities... $(1) $ 604 $ 879 $ 1,482
Cash flows from investing activities:
Capital expenditures.............. (1,153) (125) (1,278)
--- ----------- ----------- -----------
Net cash used in investing
activities...................... (1,153) (125) (1,278)
--- ----------- ----------- -----------
Cash flows from financing activities:
Proceeds from long-term debt...... 577 577
Repayment of long term debt....... (120) (120)
--- ----------- ----------- -----------
Net repayment under revolving
credit agreement................ (120) (120)
Net cash from financing
activities...................... 457 (120) 337
--- ----------- ----------- -----------
Effect of exchange rate changes on
cash................................. (59) (59)
--- ----------- ----------- -----------
Change in cash and cash equivalents.... (1) (92) 575 482
Cash and cash equivalents, beginning of
period............................... 1 337 500 838
--- ----------- ----------- -----------
Cash and cash equivalents, end of
period............................... $ $ 245 $ 1,075 $ 1,320
=== =========== =========== ===========
</TABLE>
F-74
<PAGE> 173
- ---------------------------------------------------
- ---------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE EXCHANGE OFFER DESCRIBED IN THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY
IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN
SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THIS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................... 1
Risk Factors......................... 12
Use of Proceeds...................... 18
Pro Forma Capitalization............. 19
Unaudited Pro Forma Consolidated
Financial Statements............... 20
Selected Historical Financial Data... 26
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 29
Business............................. 38
Management........................... 45
Security Ownership of Certain
Beneficial Owners and Management... 47
Certain Transactions................. 48
The Exchange Offer................... 49
Description of the Notes............. 55
Description of Other Indebtedness.... 87
Certain U.S. Federal Income Tax
Considerations..................... 90
Plan of Distribution................. 94
Legal Matters........................ 94
Experts.............................. 94
Index to Financial Statements........ F-1
</TABLE>
- ---------------------------------------------------
- ---------------------------------------------------
- ---------------------------------------------------
- ---------------------------------------------------
[AFA/INDESCO LOGO]
$145,000,000
9 3/4% Senior Subordinated Notes
due 2008
PROSPECTUS
, 1998
- ---------------------------------------------------
- ---------------------------------------------------
<PAGE> 174
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Indesco International, Inc., Continental Sprayers International, Inc. and
AFA Products, Inc. (the "Registrants") are Delaware corporations. Subsection
(b)(7) of Section 102 of the Delaware General Corporation Law (the "DGCL"),
enables a corporation in its original certificate of incorporation or an
amendment thereto to eliminate or limit the personal liability of a director to
the corporation or its stockholders for monetary damages for violations of the
director's fiduciary duty, except (i) for any breach of the director's duty of
loyalty to the corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) pursuant to Section 174 of the DGCL (providing for liability of
directors for unlawful payment of dividends or unlawful stock purchases or
redemptions) or (iv) for any transaction from which a director derived an
improper personal benefit. The Certificate of Incorporation of each of the
Registrants includes a provision that has eliminated the personal liability of
its directors to the fullest extent permitted by law.
Subsection (a) of Section 145 of the DGCL empowers a corporation to
indemnify any director or officer, or former director or officer, who was or is
a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that such person is or was a director or officer of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred in connection with such action, suit or proceeding provided that such
director or officer acted in good faith 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, provided further that such director or
officer had no reasonable cause to believe his conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any
director or officer, or former director or officer, who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that such person acted in any of the capacities set forth
above, against expenses (including attorneys' fees) actually and reasonably
incurred in connection with the defense or settlement of such action or suit
provided that such director or officer acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
corporation, except that no indemnification may be made in respect of any claim,
issue or matter as to which such director or officer shall have been adjudged to
be liable to the corporation unless and only to the extent that the Court of
Chancery or other court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
of the circumstances of the case, such director or officer is fairly and
reasonably entitled to indemnity for such expenses which the Court of Chancery
or such other court shall deem proper.
Section 145 further provides that to the extent a director or officer of a
corporation has been successful in the defense of any action, suit or proceeding
referred to in subsections (a) or (b) or in the defense of any claim, issue or
matter therein, he shall be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection therewith; that
indemnification and advancement of expenses provided for, by, or granted
pursuant to, Section 145 shall not be deemed exclusive of any rights to which
the indemnified party may be entitled; and empowers the corporation to purchase
and maintain insurance on behalf of any person who is or was a director or
officer of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against him or incurred by him in any such capacity, or arising out of
his status as such, whether or not the corporation would have the power to
indemnify him against such liabilities under Section 145.
II-1
<PAGE> 175
The Certificate of Incorporation of each of the Registrants states that
such corporation shall, to the fullest extent permitted by the DGCL, as amended
from time to time, indemnify all persons whom it may indemnify pursuant thereto.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
3.1(a) -- Certificate of Incorporation of Indesco International,
Inc., as amended.*
(b) -- Certificate of Incorporation of Continental Sprayers
International, Inc., as amended.*
(c) -- Certificate of Incorporation of AFA Products, Inc., as
amended.*
3.2(a) -- By-laws of Indesco International, Inc.*
(b) -- By-laws of Continental Sprayers International, Inc.*
(c) -- By-laws of AFA Products, Inc.*
4.1 -- Indenture, dated as of April 23, 1998, between Indesco
International, Inc., AFA Products, Inc. and Continental
Sprayers International, Inc., as subsidiary guarantors,
and Norwest Bank Minnesota, National Association, as
trustee.*
4.2 -- Form of Notes (included in Exhibit 4.1).
4.3 -- Form of Subsidiary Guarantees (included in Exhibit 4.1).
4.4 -- Registration Rights Agreement, dated as of April 23,
1998, between Indesco International, Inc., AFA Products,
Inc. and Continental Sprayers International, Inc., as
subsidiary guarantors, and NationsBanc Montgomery
Securities LLC.*
5 -- Opinion of Weil, Gotshal & Manges LLP.*
10.1 -- Credit Agreement, dated as of February 4, 1998, among
Indesco International, Inc. (f/k/a APC Holding, Inc.),
NationsCredit Commercial Corporation, as Collateral Agent
and Initial Issuing Bank, NationsBridge L.L.C., as
Administrative Agent, and the Initial Lenders named
therein, as amended.*
10.2 -- Guaranty of AFA Products, Inc. and Continental Sprayers
International, Inc. (f/k/a Continental Acquisition Corp.)
dated as of February 4, 1998 in favor of Nations Credit
Commercial Corporation, as Collateral Agent and Initial
Issuing Bank, Nations Bridge L.L.C., as Administrative
Agent, and Initial Lenders named therein.*
10.3 -- Security Agreement, dated as of February 4, 1998, among
Indesco International, Inc. (f/k/a APC Holding, Inc.),
Indesco Holdings Co. (f/k/a AFA Holdings Co.), AFA
Products, Inc., Continental Sprayers International, Inc.
(f/k/a Continental Acquisition Corp.) and NationsCredit
Commercial Corporation.*
10.4 -- Intellectual Property Security Agreement, dated as of
February 4, 1998, among Indesco International, Inc.
(f/k/a APC Holding Inc.) Indesco Holdings Co. (f/k/a AFA
Holdings Co.), AFA Products, Inc., Continental Sprayers
International, Inc. (f/k/a Continental Acquisition Corp.)
and NationsCredit Commercial Corporation.*
10.5 -- Management Agreement, dated as of February 4, 1998,
between Indesco International, Inc. and Gadraz, Inc.*
10.6 -- Employment Agreement, dated as of February 4, 1998,
between Indesco International, Inc. and Ariel Gratch.*
10.7 -- Tax Sharing Agreement, dated as of August 1, 1997, among
Indesco International, Inc., Continental Sprayers
International, Inc. and AFA Products, Inc.*
10.8 -- Supply Agreement, dated as of April 23, 1998, Spring &
Wire Designs LLC and Indesco International, Inc.*
</TABLE>
II-2
<PAGE> 176
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
12 -- Computation of Ratio of Earnings to Fixed Charges.*
21 -- Subsidiaries of Indesco International, Inc.*
23.1 -- Consent of PricewaterhouseCoopers LLP**
23.2 -- Consent of PricewaterhouseCoopers LLP**
23.3 -- Consent of PricewaterhouseCoopers LLP**
23.4 -- Consent of Weil, Gotshal & Manges LLP (included in
exhibit 5).
24 -- Power of Attorney (included on signature pages to
Registration Statement).
25 -- Form T-1 Statement of Eligibility under the Trust
Indenture Act of 1939, as amended, of Norwest Bank
Minnesota, National Association, as Trustee under the
Indenture.*
99.1 -- Form of Letter of Transmittal.*
99.2 -- Form of Notice of Guaranteed Delivery.*
</TABLE>
- ---------------
* Previously filed.
** Filed herewith.
(b) SCHEDULES
All schedules are omitted as the required information is presented in the
Registrant's consolidated financial statements or related notes or such
schedules are not applicable.
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933.
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at the time shall be deemed to
be the initial bona fide offering thereof;
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-3
<PAGE> 177
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrants pursuant to the provisions, or otherwise, the registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by a registrant
of expenses incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act of 1933 and will be
governed by the final adjudication of such issue.
(d) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(e) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-4
<PAGE> 178
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
each of the Registrants named below has duly caused this Amendment to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City and State of New York, this 14th day of August,
1998.
INDESCO INTERNATIONAL, INC.
CONTINENTAL SPRAYERS
INTERNATIONAL, INC.
AFA PRODUCTS, INC.
By: /s/ ARIEL GRATCH
-----------------------------------
Ariel Gratch
Vice Chairman
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment to the Registration Statement and the foregoing Power of Attorney
has been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ ARIEL GRATCH Vice Chairman of the Board of August 14, 1998
- --------------------------------------------------- Directors (Principal Executive
Ariel Gratch Officer)
* Chairman of the Board of August 14, 1998
- --------------------------------------------------- Directors
Yehochai Schneider
* Vice President, Treasurer, Chief August 14, 1998
- --------------------------------------------------- Financial Officer, Secretary
Louis H. Dixey, Jr. and a Director (Principal
Financial and Accounting
Officer)
* /s/ ARIEL GRATCH
- ---------------------------------------------------
Ariel Gratch
Attorney-in-Fact
</TABLE>
II-5
<PAGE> 179
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------- ------------
<S> <C> <C>
3.1(a) -- Certificate of Incorporation of Indesco International,
Inc., as amended.*
(b) -- Certificate of Incorporation of Continental Sprayers
International, Inc., as amended.*
(c) -- Certificate of Incorporation of AFA Products, Inc., as
amended.*
3.2(a) -- By-laws of Indesco International, Inc.*
(b) -- By-laws of Continental Sprayers International, Inc.*
(c) -- By-laws of AFA Products, Inc.*
4.1 -- Indenture, dated as of April 23, 1998, between Indesco
International, Inc., AFA Products, Inc. and Continental
Sprayers International, Inc., as subsidiary guarantors,
and Norwest Bank Minnesota, National Association, as
trustee.*
4.2 -- Form of Notes (included in Exhibit 4.1).
4.3 -- Form of Subsidiary Guarantees (included in Exhibit 4.1).
4.4 -- Registration Rights Agreement, dated as of April 23,
1998, between Indesco International, Inc., AFA Products,
Inc. and Continental Sprayers International, Inc., as
subsidiary guarantors, and NationsBanc Montgomery
Securities LLC.*
5 -- Opinion of Weil, Gotshal & Manges LLP.*
10.1 -- Credit Agreement, dated as of February 4, 1998, among
Indesco International, Inc. (f/k/a APC Holding, Inc.),
NationsCredit Commercial Corporation, as Collateral Agent
and Initial Issuing Bank, NationsBridge L.L.C., as
Administrative Agent, and the Initial Lenders named
therein, as amended.*
10.2 -- Guaranty of AFA Products, Inc. and Continental Sprayers
International, Inc. (f/k/a Continental Acquisition Corp.)
dated as of February 4, 1998 in favor of Nations Credit
Commercial Corporation, as Collateral Agent and Initial
Issuing Bank, Nations Bridge L.L.C., as Administrative
Agent, and Initial Lenders named therein.*
10.3 -- Security Agreement, dated as of February 4, 1998, among
Indesco International, Inc. (f/k/a APC Holding, Inc.),
Indesco Holdings Co. (f/k/a AFA Holdings Co.), AFA
Products, Inc., Continental Sprayers International, Inc.
(f/k/a Continental Acquisition Corp.) and NationsCredit
Commercial Corporation.*
10.4 -- Intellectual Property Security Agreement, dated as of
February 4, 1998, among Indesco International, Inc.
(f/k/a APC Holding Inc.) Indesco Holdings Co. (f/k/a AFA
Holdings Co.), AFA Products, Inc., Continental Sprayers
International, Inc. (f/k/a Continental Acquisition Corp.)
and NationsCredit Commercial Corporation.*
10.5 -- Management Agreement, dated as of February 4, 1998,
between Indesco International, Inc. and Gadraz, Inc.*
10.6 -- Employment Agreement, dated as of February 4, 1998,
between Indesco International, Inc. and Ariel Gratch.*
10.7 -- Tax Sharing Agreement, dated as of August 1, 1997, among
Indesco International, Inc., Continental Sprayers
International, Inc. and AFA Products, Inc.*
10.8 -- Supply Agreement, dated as of April 23, 1998, Spring &
Wire Designs LLC and Indesco International, Inc.*
12 -- Computation of Ratio of Earnings to Fixed Charges.*
21 -- Subsidiaries of Indesco International, Inc.*
23.1 -- Consent of PricewaterhouseCoopers LLP**
23.2 -- Consent of PricewaterhouseCoopers LLP**
</TABLE>
<PAGE> 180
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------- ------------
<S> <C> <C>
23.3 -- Consent of PricewaterhouseCoopers LLP**
23.4 -- Consent of Weil, Gotshal & Manges LLP (included in
exhibit 5).
24 -- Power of Attorney (included on signature pages to
Registration Statement).
25 -- Form T-1 Statement of Eligibility under the Trust
Indenture Act of 1939, as amended, of Norwest Bank
Minnesota, National Association, as Trustee under the
Indenture.*
99.1 -- Form of Letter of Transmittal.*
99.2 -- Form of Notice of Guaranteed Delivery.*
</TABLE>
- ---------------
* Previously filed.
** Filed herewith.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-4 of
our report dated March 5, 1998, except as to the first paragraph of Note 12 for
which the date is April 20, 1998, on our audits of the financial statements of
AFA Holdings Co. and Subsidiaries, and our report dated March 5, 1998, on our
audits of the financial statements of W.T.I., Inc. and Subsidiaries. We also
consent to the reference to our Firm under the caption "Experts."
PricewaterhouseCoopers LLP
Charlotte, North Carolina
August 13, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-4 of
our report dated March 16, 1998, on our audits of the balance sheet of Indesco
International, Inc. We also consent to the reference to our Firm under the
caption "Experts."
PricewaterhouseCoopers LLP
New York, New York
August 13, 1998
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-4 of
our report dated March 12, 1998, on our audits of the financial statements of
Continental Sprayers and Affiliates. We also consent to the reference to our
Firm under the caption "Experts."
PricewaterhouseCoopers LLP
St. Louis, Missouri
August 13, 1998
