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FILED PURSUANT TO RULE 424(b)(3)
REGISTRATION NO. 333-56135
PROSPECTUS
RIVER HOLDING CORP.
Offer to Exchange its
11 1/2% Series B Senior Exchangeable PIK Preferred Stock due 2010
(Liquidation Preference $100 per share)
which has been registered under the Securities Act,
for any and all of its outstanding
11 1/2% Senior Exchangeable PIK Preferred Stock due 2010
(Liquidation Preference $100 per share),
exchangeable to the extent set forth herein for securities of
HUDSON RESPIRATORY CARE INC.
The Exchange Offer (as defined below) will expire at 5:00 P.M., New York City
time, on September 25, 1998, unless extended.
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River Holding Corp. ("Holding") hereby offers, upon the terms and subject to
the conditions set forth in this Prospectus (the "Prospectus") and the
accompanying Letter of Transmittal (the "Letter of Transmittal" and together
with this Prospectus, the "Exchange Offer"), to exchange one share of its 11
1/2% Series B Senior Exchangeable PIK Preferred Stock due 2010 (Liquidation
Preference $100 per share) (the "Exchange Preferred Stock") which has been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
pursuant to a Registration Statement on Form S-4 (together with all amendments
thereto, the "Registration Statement") of which this Prospectus is a part, for
one share of its Senior Exchangeable PIK Preferred Stock due 2010 (Liquidation
Preference $100 per share) (the "Holding Preferred Stock"), of which 300,000
shares are outstanding as of the date hereof.
Holding will accept for exchange any and all validly tendered shares of
Holding Preferred Stock prior to 5:00 P.M., New York City time, on
September 25, 1998, unless extended (the "Expiration Date"). Tenders of
shares of Holding Preferred Stock may be withdrawn at any time prior to 5:00
P.M., New York City time, on the Expiration Date. The Exchange Offer is not
conditioned upon any minimum number of shares of Holding Preferred Stock being
tendered for exchange. However, the Exchange Offer is subject to certain
customary conditions. In the event Holding terminates the Exchange Offer and
does not accept for exchange any shares of Holding Preferred Stock, Holding will
promptly return the shares of Holding Preferred Stock to the holders thereof.
Holding will not receive any proceeds from the Exchange Offer. See "The
Exchange Offer."
The Exchange Preferred Stock will be an equity security of Holding evidencing
the same equity interest as the Holding Preferred Stock, and will be entitled to
the rights and preferences set forth in the same Certificate of Designation (the
"Certificate of Designation"). See "Description of Exchange Preferred Stock".
The form and terms of the Exchange Preferred Stock are the same as the form and
terms of the Holding Preferred Stock in all material respects except that the
Exchange Preferred Stock has been registered under the Securities Act and hence
does not include certain rights to registration thereunder and does not contain
transfer restrictions. The Holding Preferred Stock was issued on April 7, 1998
pursuant to an offering exempt from registration under the Securities Act. See
"The Exchange Offer".
(Continued on following page)
THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL ARE FIRST BEING MAILED TO
HOLDERS OF SHARES OF HOLDING PREFERRED STOCK ON August 26, 1998.
SEE "RISK FACTORS" ON PAGE 18 FOR INFORMATION THAT SHOULD BE CONSIDERED IN
CONNECTION WITH THIS 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.
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THE DATE OF THIS PROSPECTUS IS AUGUST 26, 1998.
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(Continuation of cover page)
The Exchange Preferred Stock is being offered hereunder in order to satisfy
certain obligations of Holding under the Registration Agreement, dated as of
April 7, 1998 (the "Exchange Offer Registration Agreement"), by and among
Holding, Hudson Respiratory Care Inc. ("Hudson RCI") and the Salomon Brothers
Inc and BT Alex. Brown Incorporated (the "Initial Purchasers"), a copy of which
has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part. The Exchange Offer is intended to satisfy Holding's
obligations under the Exchange Offer Registration Agreement to register the
Holding Preferred Stock under the Securities Act. Once the Exchange Offer is
consummated, Holding will have no further obligations to register any shares of
the Holding Preferred Stock not tendered by the holders of the Holding Preferred
Stock (the "Holders") for exchange. See "Risk Factors--Consequences to Non-
Tendering Holders of Holding Preferred Stock."
Based on interpretations by the staff of the Securities and Exchange
Commission (the "Commission") set forth in several no-action letters to third
parties, Holding believes that the Exchange Preferred Stock issued pursuant to
the Exchange Offer in exchange for Holding Preferred Stock may be offered for
resale, resold and otherwise transferred by holders thereof without compliance
with the registration and prospectus delivery provisions of the Securities Act.
However, any Holder who is an "affiliate" of Holding or who intended to
participate in the Exchange Offer for the purpose of distributing the Exchange
Preferred Stock (i) cannot rely on the interpretation by the staff of the
Commission set forth in the above referenced no-action letters, (ii) cannot
tender its shares of Holding Preferred Stock in the Exchange Offer, and (iii)
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any sale or transfer of the Holding Preferred
Stock, unless such sale or transfer is made pursuant to an exemption from such
requirements. See "Risk Factors--Consequences to Non-Tendering Holders of
Holding Preferred Stock". In addition, each broker-dealer that receives
Exchange Preferred Stock for its own account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Preferred Stock. 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 Exchange Preferred Stock
received in exchange for Holding Preferred Stock where such Exchange Preferred
Stock was acquired by such broker-dealer as a result of market-making activities
or other trading activities. Hudson RCI and Holding have agreed that for the
180-day period following the consummation of the Exchange Offer they will make
this Prospectus available to any broker-dealer for use in connection with any
such resale. Each broker-dealer that receives Exchange Preferred Stock for its
own account in exchange for Holding Preferred Stock, where such Holding
Preferred Stock was acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Preferred Stock. See
"Plan of Distribution." EXCEPT AS DESCRIBED IN THIS PARAGRAPH, THIS PROSPECTUS
MAY NOT BE USED FOR AN OFFER TO RESELL, RESALE OR OTHER TRANSFER OF EXCHANGE
PREFERRED STOCK.
Holding Preferred Stock was initially represented by one Global Certificate
(the "Global Certificate") in fully registered form, registered in the name of a
nominee of The Depository Trust Company ("DTC"), as depository. The Exchange
Preferred Stock exchanged for Holding Preferred Stock represented by the Global
Certificate may be initially represented by one or more global securities
("Global Exchange Certificate") in fully registered form, each registered in the
name of the nominee of DTC. The Global Exchange Certificate will be
exchangeable for Exchange Preferred Stock in registered form. The Exchange
Preferred Stock in global form will trade in The Depository Trust Company's
Same-Day Funds Settlement System, and secondary market trading activity in such
Exchange Preferred Stock will therefore settle in immediately available funds.
See "Description of Exchange Preferred Stock--Book-Entry System."
Dividends on the Exchange Preferred Stock will accrue from the date of
issuance and will be payable semi-annually in arrears on April 15 and October 15
of each year (each a "Dividend Payment Date"), commencing October 15, 1998, at a
rate per annum of 11 1/2% of the liquidation preference per share. The
liquidation preference of each share of Exchange Preferred Stock will be $100
(the "Liquidation Preference"). Dividends will be payable in cash, except that
on each Dividend Payment Date occurring on or prior to April 15, 2003, dividends
may be paid, at Holding's option, by the issuance of additional shares of
Exchange Preferred Stock having an aggregate liquidation preference equal to the
amount of such dividends. The Exchange Preferred Stock will not be redeemable
prior to April 15, 2003, except that, on or prior to April 15, 2001, Holding
may redeem at its option (i) up to 50%
(Continued on following page)
i
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(Continuation of cover page)
or (ii) all but not less than all of the outstanding shares of Exchange
Preferred Stock with the net proceeds of any underwritten public offering of
common stock of Hudson RCI pursuant to an effective registration statement under
the Securities Act (a "Public Equity Offering"), at a redemption price of
111 1/2% of the Liquidation Preference thereof plus accumulated and unpaid
dividends. On or after April 15, 2003, the Exchange Preferred Stock will be
redeemable at Holding's option in whole or in part, at the prices set forth
herein plus accumulated and unpaid dividends, if any, to the date of redemption.
Holding is required to redeem the Exchange Preferred Stock on April 15, 2010, at
a redemption price equal to 100% of the Liquidation Preference thereof plus
accumulated and unpaid dividends.
Holders whose Holding Preferred Stock is accepted for exchange will receive
accrued dividends thereon to, but not including, the date of issuance of the
Exchange Preferred Stock. Such dividends will be paid with the first dividend
payment on the Exchange Preferred Stock. Dividends on the Holding Preferred
Stock accepted for exchange will cease to accrue interest upon cancellation of
the Holding Preferred Stock and issuance of the Exchange Preferred Stock.
The Exchange Preferred Stock will, with respect to dividend rights and
rights on liquidation, winding up and dissolution, rank (i) senior to all
existing and future classes of common stock of Holding and to each other class
of capital stock or series of preferred stock established hereafter by the Board
of Directors of Holding the terms of which do not expressly provide that it
ranks senior to, or on a parity with, the Exchange Preferred Stock as to
dividend rights and rights on liquidation, winding up and dissolution of Holding
(collectively referred to, together with all classes of common stock of Holding,
as "Junior Stock") and (ii) on a parity with all existing and future classes of
capital stock or series of preferred stock established hereafter by the Board of
Directors of Holding, the terms of which expressly provide that such class or
series will rank on a parity with the Exchange Preferred Stock as to dividend
rights on liquidation, winding up and dissolution (collectively referred to as
"Parity Stock"). The Exchange Preferred Stock will rank junior in right of
payment to all obligations of Holding and its subsidiaries, including Hudson
RCI.
At any time, Holding may, at its option, exchange the Exchange Preferred
Stock, in whole but not in part, for Hudson RCI's 11 1/2% Subordinated Exchange
Debentures due 2010 (the "Company Exchange Debentures") or Hudson RCI's 11 1/2%
Senior Exchangeable PIK Preferred Stock due 2010 (the "Company Preferred Stock"
and collectively with the Company Exchange Debentures, the "Company Exchange
Securities"). The Company Exchange Securities will be registered under the
Securities Act pursuant to the Registration Statement of which this Prospectus
is a part. The Company Exchange Debentures will bear interest at a rate of 11
1/2% per annum, payable semi-annually on April 15 and October 15 of each year,
commencing with the first such date to occur after the date of exchange. The
Company Exchange Debentures will be subordinated in right of payment to all
existing and future Senior Debt (as defined at page 133) of Hudson RCI. The
Company Exchange Debentures will be effectively subordinated in right of payment
to all obligations of Hudson RCI's subsidiaries.
Dividends on the Company Preferred Stock will accrue from the date of
issuance and will be payable semi annually in arrears on April 15 and October 15
of each year commencing with the first such date after the date of exchange, at
a rate per annum of 11 1/2% of the liquidation preference per share. The
liquidation preference of each share of Holding Preferred Stock will be $100.
Dividends will be payable in cash, except that on each dividend payment date
occurring on or prior to April 15, 2003, dividends may be paid, at Hudson RCI's
option, by the issuance of additional shares of Company Preferred Stock
(including fractional shares) having an aggregate liquidation preference equal
to the amount of such dividends. The Company Preferred Stock will rank (i)
senior to all existing and future Junior Stock of Hudson RCI and (ii) on a
parity with all existing and future Parity Stock of Hudson RCI. In addition,
the Company Preferred Stock will rank junior in right of payment to all
obligations of Hudson RCI and its subsidiaries.
Prior to this offering, there has been no public market for the Holding
Preferred Stock. Following completion of the Exchange Offer, Holding does not
intend to list the Exchange Preferred Stock on a national securities exchange or
to seek approval for quotation through the Nasdaq National Market. The Initial
Purchasers have informed Holding that they currently intend to make a market in
the Exchange Preferred Stock. However, the Initial Purchasers are not obligated
to do so and any such market making may be discontinued at any time without
notice. Therefore, no assurance can be given as to whether an active trading
market will develop or be maintained for the Exchange Preferred Stock. As the
Holding Preferred Stock was issued and the Exchange Preferred Stock is being
issued to a limited number of institutions who typically hold similar securities
for investment, Holding does not expect that an active public market for the
Exchange Preferred Stock will develop. In addition, resales by certain holders
of the Holding Preferred Stock or the Exchange Preferred Stock of a substantial
percentage of such shares could constrain the ability of any market maker to
develop or maintain a market for the Exchange Preferred Stock. To the extent
that a market for the
(Continued on following page)
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(Continuation of cover page)
Exchange Preferred Stock should develop, the market value of the Exchange
Preferred Stock will depend on prevailing interest rates, the market for similar
securities and other factors, including the financial condition, performance and
prospects of Holding. See "Risk Factors--Lack of Public Market for the Exchange
Preferred Stock." Holding has agreed to pay the expenses of the Exchange Offer.
THIS PROSPECTUS DESCRIBES CERTAIN DOCUMENTS WHICH ARE NOT PRESENTED HEREIN
OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE UPON REQUEST FROM JAY R.
OGRAM, CHIEF FINANCIAL OFFICER AND SECRETARY, RIVER HOLDING CORP., 599 LEXINGTON
AVENUE, 18TH FLOOR, NEW YORK, NEW YORK 10022, TELEPHONE NUMBER (212) 958-2555.
AVAILABLE INFORMATION
Holding and Hudson RCI (collectively, the "Co-Registrants") have filed with
the Commission a registration statement on Form S-4 (together with all
amendments thereto, the "Registration Statement") under the Securities Act for
the registration of the Exchange Preferred Stock offered hereby and for the
registration of the Company Exchange Securities into which the Exchange
Preferred Stock is exchangeable as set forth herein. As permitted by the rules
and regulations of the Commission, this Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to Holding and the
Exchange Preferred Stock offered hereby and with respect to Hudson RCI and the
Company Exchange Securities, reference is made to the Registration Statement and
to the exhibits and schedules filed therewith. Statements contained in this
Prospectus concerning the contents of any contract or other document are not
necessarily complete. With respect to each such contract or other document filed
with the Commission as an exhibit to the Registration Statement, reference is
made to the exhibit for a more complete description of the matter involved, and
each such statement shall be deemed qualified in its entirety by such reference.
Upon consummation of the Exchange Offer, the Co-Registrants will be
subject to the informational requirements of the Securities Exchange Act of
1934, as amended, and the rules and regulations promulgated thereunder (the
"Exchange Act") for a period following the effectiveness of the Registration
Statement. The Registration Statement, the exhibits and schedules forming a
part thereof and the reports and other information filed by the Co-Registrants
with the Commission in accordance with the Exchange Act may be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and will
also be available for inspection and copying at the regional offices of the
Commission located at 7 World Trade Center, 13th Floor, New York, New York 10048
and at Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material may also be obtained upon written
request from the Public Reference Section of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549 at prescribed rates. The Commission also maintains
a World Wide Web site (http://www.sec.gov) that contains reports, proxy and
other information regarding registrants that file electronically with the SEC.
While any Holding Preferred Stock remains outstanding, Holding will make
available, upon request, to any holder and any prospective purchaser of the
Holding Preferred Stock the information required by Rule 144A(d)(4) under the
Securities Act during any period in which Holding is not subject to Section 13
or 15(d) of the Exchange Act. Any such request should be mailed to River
Holding Corp., 599 Lexington Avenue, 18th Floor, New York, New York 10022.
Telephone requests may be directed to the Corporate Secretary at (212) 958-2555.
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SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements, including the notes thereto,
contained elsewhere in this Prospectus. River Holding Corp. ("Holding") was
formed to effect the recapitalization of Hudson Respiratory Care Inc. ("Hudson
RCI"). Upon consummation of the Recapitalization (as defined at page 3), Hudson
RCI became a subsidiary of Holding, and Holding's sole asset is the capital
stock of Hudson RCI. As used herein and unless the context requires otherwise,
(i) "Holding" refers to River Holding Corp., (ii) the "Company" refers to Hudson
Respiratory Care Inc. and its consolidated subsidiaries prior to the
Recapitalization and refers to Holding, Hudson RCI and Hudson RCI's consolidated
subsidiaries following the Recapitalization and (iii) "Hudson RCI" refers to
Hudson Respiratory Care Inc. and its consolidated subsidiaries. All references
to a fiscal year of the Company refer to a year ending on the last Friday in
December for a stated year (e.g. "fiscal 1997" or "1997" refers to the year
ended December 26, 1997). Unless otherwise indicated, all references to non-
financial data are as of August 1, 1998.
THE COMPANY
The Company is a leading manufacturer and marketer of disposable medical
products utilized in the respiratory care and anesthesia segments of the
domestic and international health care markets. In the United States, the
Company markets its products to a variety of health care providers, including
hospitals and alternate site service providers such as outpatient surgery
centers, long-term care facilities, physician offices and home health care
agencies. Internationally, the Company sells its products to distributors that
market to hospitals and other health care providers. For fiscal 1997, the
Company had net sales of $99.5 million, operating income of $12.6 million and
pro forma EBITDA before provision for the Company's Equity Participation Plan
and provision for retention payments ("EBITDA before EPP and Retention
Payments") of $26.3 million. From 1993 to 1997, the Company's net sales,
operating income and EBITDA before EPP and Retention Payments increased at
compound annual rates of approximately 5.9%, 11.4% and 13.3%, respectively. See
footnote (f) to "--Summary Historical and Pro Forma Financial Information of
Hudson Respiratory Care Inc." for information with respect to EBITDA before EPP
and Retention Payments.
The Company has supplied the disposable respiratory care market for over 50
years and enjoys strong brand name recognition and leading market positions. In
recent years the Company has pursued a number of growth initiatives, including
the expansion of its international and alternate site sales efforts and entry
into the anesthesia market. As a result of such initiatives, in 1997, anesthesia
sales represented approximately 6.5% of the Company's total net sales and
international and alternate site sales represented 19.1% and 14.7%, of the
Company's total net sales, respectively.
The Company offers one of the broadest respiratory care and anesthesia
product lines in the industry, manufacturing and marketing over 1,000
respiratory care and anesthesia products. The Company believes that its broad
product offering represents a competitive advantage over suppliers with more
limited product offerings, as health care providers seek to reduce medical
supply costs and concentrate purchases among fewer vendors. The Company also
benefits competitively from its extensive relationships with leading group
purchasing organizations ("GPOs"), as large purchasing organizations play an
increasingly important role in hospitals' purchasing decisions.
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See "Business-- Gneral" and "-- Industry Overview."
The Company's senior management team has increased net sales and EBITDA
before EPP and Retention Payments by 5.9% and 13.3%, respectively, from 1993 to
1997 compounded annually, despite facing significant pricing pressure as a
result of cost containment trends affecting the health care industry generally.
These results are largely attributable to management's expertise within the
Company's markets and ability to grow the Company's business and improve
profitability margins within a dynamic health care environment. On average,
members of the senior management team have over 18 years of experience in the
health care industry. The senior management team intends to continue to expand
the Company's market position, increase cash flows and capitalize on favorable
demographic trends by pursuing the following initiatives: (i) enhancing market
position in the domestic hospital market, (ii) increasing penetration of the
anesthesia market, (iii) expanding internationally, (iv) increasing its presence
in the alternate site market and (v) developing new markets. See "Business--
Business Strategy."
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THE RECAPITALIZATION
On April 7, 1998, Hudson RCI consummated its recapitalization pursuant to
an Agreement and Plan of Merger (the "Recapitalization Agreement") pursuant to
which River Acquisition Corp., a wholly-owned subsidiary of Holding merged with
and into Hudson RCI, with Hudson RCI surviving as a majority-owned subsidiary of
Holding (the "Merger"). The Company engaged in the Recapitalization in order to
attract additional investors, while allowing the Continuing Shareholder (as
defined below) to retain an equity interest in the Company.
Pursuant to the Recapitalization, Holding contributed approximately $93.0
million in equity capital into Hudson RCI (the "Holding Equity Investment") and
a shareholder of Hudson RCI (the "Continuing Shareholder") retained common stock
of Hudson RCI with a value of approximately $15.0 million (the "Rollover
Equity"), based on the valuation of Hudson RCI used in the Recapitalization. In
the Merger, a portion of the Hudson RCI common stock was converted into the
right to receive approximately $131.1 million in cash and management received
$68.3 million pursuant to the Company's Equity Participation Plan (the "Equity
Participation Plan"). Following the Holding Equity Investment, Holding owned
80.8% of the outstanding common stock of Hudson RCI and the Continuing
Shareholder owned 19.2% of the outstanding common stock of Hudson RCI.
The Holding Equity Investment was comprised of $63.0 million of common
equity (the "Common Stock Investment") and $30.0 million of preferred equity
(the "Preferred Stock Investment"). The Common Stock Investment was funded with
a $55.0 million investment by affiliates of Freeman Spogli & Co. Incorporated
("FS&Co.") and an $8.0 million investment by management of Hudson RCI. The
Preferred Stock Investment was funded with proceeds from the sale of 11 1/2%
Senior Exchangeable PIK Preferred Stock due 2010 (the "Holding Preferred Stock")
with an aggregate liquidation preference of $30.0 million offered by Holding
(the "Preferred Stock Offering"). Immediately following consummation of the
Recapitalization, FS&Co. beneficially owned approximately 87.3% of the
outstanding common stock of Holding and management owned the remaining
12.7%.
In connection with the Recapitalization and concurrently with the Preferred
Stock Offering, Hudson RCI offered $115.0 million aggregate principal amount of
9 1/8% Senior Subordinated Notes due 2008 (the "Subordinated Notes") (the
"Subordinated Notes Offering," and together with the Preferred Stock Offering,
the "Offerings").
On April 7, 1998, Hudson RCI entered into an agreement (the "New Credit
Facility") providing for a $40.0 million secured term loan facility (the "Term
Loan Facility"), which was funded in connection with the consummation of the
Recapitalization, and a $60.0 million revolving loan facility (the "Revolving
Loan Facility") which is available for Hudson RCI's future capital requirements
and to finance acquisitions. See "Description of New Credit Facility."
The Offerings and the application of the net proceeds therefrom, repayment
of existing Hudson RCI debt payments to the Continuing Shareholder under the
Recapitalization Agreement and to management, the Holding Equity Investment and
the related borrowings under the New Credit Facility are collectively referred
to herein as the "Recapitalization."
The following graphic presents the organizational structure of the Company
(a) before the Recapitalization and (b) after the Recapitalization:
[ORGANIZATIONAL STRUCTURE CHART APPEARS HERE]
<TABLE>
<S> <C> <C> <C>
Continuing Holding
Shareholder Continuing
Shareholder
Hudson RCI Hudson RCI
IH Holding LLC
Industrias Hudson Industrias Hudson
Figure (a) Figure (b)
</TABLE>
RISK FACTORS
Holders of the Holding Preferred Stock should consider carefully the
information set forth under the caption "Risk Factors" and all other information
set forth in this Prospectus in evaluating an investment in the Exchange
Preferred Stock.
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THE PREFERRED STOCK OFFERING
THE EXCHANGE PREFERRED STOCK
Issuer................. River Holding Corp.
Securities Offered..... 300,000 shares of 11 1/2% Series B Senior Exchangeable
PIK Preferred Stock due 2010 (the "Exchange Preferred
Stock").
Dividends.............. Dividends on the Exchange Preferred Stock will accrue at
the rate per share of 11 1/2% per annum of the
Liquidation Preference thereof. Dividends will be
payable in cash, except that on each Dividend Payment
Date occurring on or prior to April 15, 2003, dividends
may be paid, at Holding's option, by the issuance of
additional shares of Exchange Preferred Stock (including
fractional shares) having an aggregate Liquidation
Preference equal to the amount of such dividends. It is
not anticipated that Holding will pay any dividends in
cash for any period ending on or prior to April 15,
2003. See "Risk Factors--Holding's Ability to Pay
Dividends; Holding Company Structure."
Dividend Payment Dates. Dividends on the Exchange Preferred Stock will be
payable semi-annually in arrears on April 15 and October
15 of each year (each a "Dividend Payment Date")
commencing October 15, 1998.
Liquidation Preference. $100 per share.
Ranking................ The Exchange Preferred Stock will rank (i) senior to all
existing and future Junior Stock and (ii) on a parity
with all existing and future Parity Stock. In addition,
the Exchange Preferred Stock will rank junior in right
of payment to all obligations of Holding and its
subsidiaries, including Hudson RCI and Industrias
Hudson, S.A. de C.V. ("Industrias Hudson"), Hudson RCI's
principal subsidiary. As of June 26, 1998, Holding had
no Parity Stock or Junior Stock outstanding and had
other liabilities of $38.0 million. Holding's
subsidiaries had total balance sheet liabilities of
$167.1 million, excluding $60.0 million of undrawn
commitments under the New Credit Facility. See
"Description of the Exchange Preferred
Stock--Ranking."
Optional Redemption.... The Exchange Preferred Stock will not be redeemable
prior to April 15, 2003, except that, prior to April 15,
2001, Holding may redeem, at its option, (i) up to 50%
or (ii) all but not less than all of the outstanding
Exchange Preferred Stock with the net proceeds of any
Public Equity Offering by Hudson RCI at a redemption
price of 111 1/2% of the Liquidation Preference thereof
plus accumulated and unpaid dividends. On or after
April 15, 2003, the Exchange Preferred Stock is
redeemable at the option of Holding, in whole or in
part, at the redemption prices set forth herein plus
accumulated and unpaid dividends, if any, to the date of
redemption. See "Description of the Exchange Preferred
Stock--Optional Redemption."
Mandatory Redemption... The Exchange Preferred Stock is subject to mandatory
redemption at its Liquidation Preference, plus
accumulated and unpaid dividends, if any, on April 15,
2010, out of any funds legally available therefor.
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Change of Control...... In the event of a Change of Control (as defined at page
83), Holding will be required to make an offer to
repurchase all or any part of each holder's Exchange
Preferred Stock, at a purchase price equal to 101% of
the aggregate Liquidation Preference thereof, plus
accrued and unpaid dividends, if any, to the date of
purchase. There can be no assurance that Holding will
have sufficient funds available at the time of any
Change of Control to effect the repurchase of Exchange
Preferred Stock tendered by holders pursuant to such
offer. See "Description of the Exchange Preferred
Stock--Certain Definitions--Change of Control."
Voting Rights.......... Holders of the Exchange Preferred Stock will have no
voting rights, except as required by law and except that
holders of the Exchange Preferred Stock, voting together
as a class with the holders of any other series of
preferred stock upon which like rights have been
conferred and are exercisable, will be entitled to elect
two additional members to the Board of Directors of
Holding and the number of members of the Board of
Directors will be immediately and automatically
increased by two if (1) Holding fails to pay dividends
for six or more semi-annual periods (each such semi-
annual period a "Dividend Period"), whether or not
consecutive, (2) Holding fails to satisfy any mandatory
redemption obligation with respect to the Exchange
Preferred Stock, (3) Holding fails to make an offer to
purchase all of the outstanding shares of Exchange
Preferred Stock following a Change of Control, (4)
Holding fails to comply with the covenants set forth in
the Certificate of Designation, (5) a breach or
violation of any of the provisions of the Mirror
Preferred Stock occurs or (6) Holding fails to pay at
final maturity the principal amount of any Debt of
Holding or any Subsidiary of Holding (including Hudson
RCI) or in the event that the stated maturity of any
such Debt is accelerated because of a default and the
total amount of such Debt unpaid or accelerated exceeds
$7.5 million (the foregoing capitalized terms are
defined in "Description of the Exchange Preferred Stock
-- Certain Definitions" at pages 88-91). In addition,
holders of the Exchange Preferred Stock shall have the
right to approve each authorization by Holding of any
class of Senior Stock (as defined herein) or Parity
Stock or the issuance by Holding of additional shares of
Holding Preferred Stock (other than additional shares of
Exchange Preferred Stock to be issued as dividends on
outstanding shares of Exchange Preferred Stock).
However, Holding may create additional classes of stock
or issue series of Junior Stock without the consent of
the holders of Exchange Preferred Stock. See
"Description of the Exchange Preferred Stock--Voting
Rights."
Certain Covenants...... The Certificate of Designation contains limitations on,
among other things: (i) the ability of Holding, Hudson
RCI and any other Restricted Subsidiaries to incur
additional Debt, (ii) the making of certain Restricted
Payments including certain Investments, (iii) the
issuance and sale of Capital Stock of Restricted
Subsidiaries, (iv) payment restrictions affecting
Restricted Subsidiaries, (v) transactions with
Affiliates, (vi) the ability of Holding to engage in any
business or activity other than those relating to
ownership of Capital Stock of Hudson RCI, (vii) the
ability of Holding to dispose of, or amend or
repurchase, Mirror Preferred Stock and (viii) certain
mergers, consolidations and sales of property involving
Holding (the foregoing capitalized terms are defined in
"Description of the Exchange Preferred Stock--Certain
Definitions" at pages 82-91). All of these limitations
will be subject to a number of important qualifications.
See "Description of the Exchange Preferred Stock--
Certain Covenants."
Senior Debt
Restrictions.......... The New Credit Facility prohibits and the indenture
(the "Indenture") governing the 9 1/8% Senior
Subordinated Notes due 2008 (the
- --------------------------------------------------------------------------------
5
<PAGE>
- --------------------------------------------------------------------------------
"Subordinated Notes") of Hudson RCI limits the
redemption or repurchase of the Exchange Preferred
Stock, including upon a Change of Control, and the
payment of cash dividends on the Exchange Preferred
Stock. The New Credit Facility prohibits the exchange
of the Exchange Preferred Stock for Company Preferred
Stock or Company Exchange Debentures and the Indenture
limits the exchange of the Exchange Preferred Stock for
Company Exchange Debentures. See "Risk Factors--
Holding's Ability to Pay Dividends; Holding Company
Structure," "Description of New Credit Facility" and
"Description of the Subordinated Notes."
Exchange Feature....... At any time, Holding may, at its option, exchange all
but not less than all of the shares of Exchange
Preferred Stock then outstanding for Company Exchange
Debentures or Company Preferred Stock in a principal
amount or with a liquidation preference, as the case may
be, equal to the Liquidation Preference of the shares of
Exchange Preferred Stock being exchanged. Holding may
choose to exercise this option to adjust its capital
structure in connection with other capital transactions,
including, among others, an initial public offering of
Hudson RCI common stock.
COMPANY EXCHANGE DEBENTURES
Issuer................. Hudson Respiratory Care Inc.
Securities Offered..... 11 1/2% Subordinated Exchange Debentures due 2010
issuable in exchange for the Exchange Preferred Stock in
an aggregate principal amount equal to the Liquidation
Preference of the Exchange Preferred Stock, plus
accumulated and unpaid dividends to the date of exchange
(the "Company Exchange Debentures").
Maturity Date.......... April 15, 2010.
Interest Rate.......... The Company Exchange Debentures will bear interest at a
rate of 11 1/2% per annum. On or prior to April 15,
2003, interest may, at the option of Hudson RCI, be paid
by issuing additional Company Exchange Debentures with a
principal amount equal to such interest. After April
15, 2003, interest on the Company Exchange Debentures
may be paid only in cash.
Interest Payment Dates. Interest will accrue on the Company Exchange Debentures
from the date of exchange (the "Exchange Date") and will
be payable semi-annually on each April 15 and October 15
commencing with the first of such dates to occur after
the Exchange Date.
Ranking................ The Company Exchange Debentures will be general
unsecured obligations of Hudson RCI, subordinated in
right of payment to all existing and future Senior Debt
of Hudson RCI, including Hudson RCI's obligations under
the New Credit Facility and the Subordinated Notes. The
Company Exchange Debentures will also be effectively
subordinated to all obligations of Hudson RCI's
subsidiaries. As of June 26, 1998, Hudson RCI had Senior
Debt of $153.0 million, excluding $60.0 million of
undrawn commitments under the New Credit Facility, which
when drawn would constitute Senior Debt. See
"Description of Company Exchange Securities--Company
Exchange Debentures--Subordination."
- --------------------------------------------------------------------------------
6
<PAGE>
- --------------------------------------------------------------------------------
Optional Redemption.... The Company Exchange Debentures will not be redeemable
prior to April 15, 2003, except that, prior to April 15,
2001, Hudson RCI may redeem, at its option, (i) up to
50% or (ii) all but not less than all of the aggregate
principal amount of the Company Exchange Debentures with
the net proceeds of any Public Equity Offering by Hudson
RCI at a redemption price of 111 1/2% of the principal
amount thereof plus accrued and unpaid interest. On or
after April 15, 2003, the Company Exchange Debentures
are redeemable at the option of Hudson RCI, in whole or
in part, at the redemption prices set forth herein plus
accrued and unpaid interest, if any, to the date of
redemption.
Change of Control...... In the event of a Change of Control, the Company will be
required to make an offer to repurchase all or any part
of each holder's Company Exchange Debentures at a cash
purchase price equal to 101% of the aggregate principal
amount thereof, plus accrued and unpaid interest, if
any, to the date of purchase. There can be no assurance
that the Company will have sufficient funds available at
the time of any Change of Control to effect the
repurchase of Company Exchange Debentures tendered by
holders pursuant to such offer.
Certain Covenants...... The indenture under which the Company Exchange
Debentures will be issued (the "Company Exchange
Indenture") will contain limitations on, among other
things: (i) the ability of Hudson RCI and any Restricted
Subsidiaries to incur additional Debt, (ii) the making
of certain Restricted Payments including certain
Investments, (iii) the creation of certain Liens, (iv)
the issuance and sale of Capital Stock of Restricted
Subsidiaries, (v) Asset Sales, (vi) payment restrictions
affecting Restricted Subsidiaries, (vii) transactions
with Affiliates, (viii) the ability of Holding to engage
in any business or activity other than those relating to
ownership of Capital Stock of Hudson RCI and (ix)
certain mergers, consolidations and sales of property
involving Hudson RCI (the foregoing capitalized terms
are defined in "Description of Company Exchange
Securities--Certain Definitions" at pages 122-133). All
of these limitations will be subject to a number of
important qualifications. See "Description of Company
Exchange Securities--Company Exchange Debentures--
Certain Covenants."
Senior Debt
Restrictions........... The New Credit Facility prohibits and the Indenture
limits the issuance, redemption or repurchase of the
Company Exchange Debentures. The New Credit Facility
prohibits and the Indenture limits the exchange of
Holding Preferred Stock and Company Preferred Stock for
Company Exchange Debentures.
COMPANY PREFERRED STOCK
Issuer................. Hudson Respiratory Care Inc.
Securities Offered..... 11 1/2% Senior Exchangeable PIK Preferred Stock due 2010
issuable in exchange for the Exchange Preferred Stock
with an aggregate liquidation preference equal to the
aggregate Liquidation Preference of the shares of
Exchange Preferred Stock so exchanged (the "Company
Preferred Stock").
Dividends.............. Dividends on the Company Preferred Stock will accrue at
a rate per share of 11 1/2% per annum of the Liquidation
Preference thereof. Dividends will be payable in cash,
except that on each Dividend Payment Date
- --------------------------------------------------------------------------------
7
<PAGE>
- --------------------------------------------------------------------------------
occurring on or prior to April 15, 2003, dividends may
be paid, at Hudson RCI's option, by the issuance of
additional shares of Company Preferred Stock (including
fractional shares) having an aggregate Liquidation
Preference equal to the amount of such dividends. It is
not anticipated that Hudson RCI will pay any dividends
in cash for any period ending on or prior to April 15,
2003.
Dividend Payment Dates. Dividends on the Company Preferred Stock will be
payable semi-annually in arrears on April 15 and October
15 of each year (each a "Dividend Payment Date")
commencing on the first such date to occur after the
exchange date.
Liquidation Preference. $100 per share.
Ranking................ The Company Preferred Stock will rank (i) senior to all
existing and future Junior Stock and (ii) on a parity
with all existing and future Parity Stock. In addition,
the Company Preferred Stock will rank junior in right of
payment to all obligations of Hudson RCI and its
subsidiaries. As of June 26, 1998, Hudson RCI had total
balance sheet liabilities of $167.1 million, excluding
$60.0 million of undrawn commitments under the New
Credit Facility. See "Description of Company Exchange
Securities--Company Preferred Stock--Ranking."
Optional Redemption.... The Company Preferred Stock will not be redeemable prior
to April 15, 2003, except that, prior to April 15, 2001,
Hudson RCI may redeem, at its option, (i) up to 50% or
(ii) all but not less than all of the outstanding
Company Preferred Stock with the net proceeds of any
Public Equity Offering by Hudson RCI at a redemption
price of 111 1/2% of the Liquidation Preference thereof
plus accumulated and unpaid dividends. On or after
April 15, 2003, the Company Preferred Stock is
redeemable at the option of Hudson RCI, at the
redemption prices set forth herein plus accumulated and
unpaid dividends, if any, to the date of redemption.
See "Description of Company Exchange Securities--Company
Preferred Stock--Optional Redemption."
Mandatory Redemption... The Company Preferred Stock is subject to mandatory
redemption at its Liquidation Preference, plus
accumulated and unpaid dividends, if any, on April 15,
2010, out of any funds legally available therefor.
Change of Control...... In the event of a Change of Control, Hudson RCI will be
required to make an offer to repurchase all or any part
of each holder's Company Preferred Stock, at a purchase
price equal to 101% of the aggregate Liquidation
Preference thereof, plus accumulated and unpaid
dividends, if any, to the date of purchase. There can
be no assurance that the Company will have sufficient
funds available at the time of any Change of Control
to effect the repurchase of Company Preferred Stock
tendered by holders pursuant to such offer.
Voting Rights.......... Holders of the Company Preferred Stock will have no
voting rights, except as required by law and except that
holders of the Company Preferred Stock, voting together
as a class with the holders of any other series of
preferred stock upon which like rights have been
conferred and are exercisable, will be entitled to elect
two additional members to the Board of Directors of
Hudson RCI and the number of members of the Board of
Directors will be immediately and automatically
increased by two upon the failure of Hudson RCI (1) to
pay dividends for six or more
8
<PAGE>
- --------------------------------------------------------------------------------
Dividend Periods, whether or not consecutive, (2) to
satisfy any mandatory redemption obligation with respect
to the Company Preferred Stock, (3) to make an offer to
purchase all of the outstanding shares of Hudson RCI
Preferred Stock following a Change of Control, (4) to
comply with the covenants set forth in the Certificate
of Designation or (5) to pay at final maturity the
principal amount of any Debt of Hudson RCI or any
Subsidiary of Hudson RCI or in the event that the stated
maturity of any such Debt is accelerated because of a
default and the total amount of such Debt unpaid or
accelerated exceeds $7.5 million. In addition, holders
of the Holding Preferred Stock shall have the right to
approve each authorization by Hudson RCI of any class of
Senior Stock or Parity Stock or the issuance by Hudson
RCI of additional shares of Company Preferred Stock
(other than additional shares of Company Preferred Stock
to be issued as dividends on outstanding shares of
Company Preferred Stock). However Hudson RCI may create
additional classes of stock or issue series of a stock
that ranks junior to the Company Preferred Stock without
the consent of the holders of Company Preferred Stock.
See "Description of Company Exchange Securities--Company
Preferred Stock--Voting Rights."
Certain Covenants...... The certificate of determination for the Company
Preferred Stock (the "Company Exchange Certificate of
Determination") will contain limitations on, among other
things: (i) the ability of Hudson RCI and any Restricted
Subsidiaries to incur additional Debt, (ii) the making
of certain Restricted Payments including certain
Investments, (iii) the issuance and sale of Capital
Stock of Restricted Subsidiaries, (iv) payment
restrictions affecting Restricted Subsidiaries, (v)
transactions with Affiliates, (vi) the ability of
Holding to engage in any business or activity other than
those relating to ownership of Capital Stock of Hudson
RCI and (vii) certain mergers, consolidations and sales
of property involving Hudson RCI (the foregoing
capitalized terms are defined in "Description of Company
Exchange Securities--Certain Definitions" at pages 122-
133). All of these limitations will be subject to a
number of important qualifications. See "Description of
Company Exchange Securities--Company Preferred Stock--
Certain Covenants."
Senior Debt
Restrictions........... The New Credit Facility prohibits and the Indenture
limits the redemption or repurchase of the Company
Preferred Stock, including upon a Change of Control, and
the payment of cash dividends on the Company Preferred
Stock. The New Credit Facility prohibits and the
Indenture limits the exchange of the Company Preferred
Stock for Company Exchange Debentures. See "Risk
Factors--Holding's Ability to Pay Dividends; Holding
Company Structure," "Description of New Credit Facility"
and "Description of the Subordinated Notes."
Exchange Feature....... At any time, Hudson RCI may, at its option, exchange all
but not less than all of the shares of Company Preferred
Stock then outstanding for Company Exchange Debentures
in a principal amount equal to the Liquidation
Preference of the shares of Company Preferred Stock
being exchanged. Hudson RCI may choose to exercise this
option to obtain the benefit of deductibility of
interest payments on the Company Exchange
Debentures.
EXCHANGE OFFER;
REGISTRATION RIGHTS Holders of Exchange Preferred Stock are not entitled to
any exchange rights with respect to the Exchange
Preferred Stock. Holders of Holding
- --------------------------------------------------------------------------------
9
<PAGE>
- --------------------------------------------------------------------------------
Preferred Stock are entitled to certain exchange rights
pursuant to the Exchange Offer Registration Agreement.
Under the Exchange Offer Registration Agreement, Holding
is required to offer to exchange the Holding Preferred
Stock for the Exchange Preferred Stock having
substantially identical terms which have been registered
under the Securities Act. This Exchange Offer is
intended to satisfy such obligation. The form and terms
of the Exchange Preferred Stock is the same as the form
and terms of the Holding Preferred Stock in all material
respects except that the Exchange Preferred Stock has
been registered under the Securities Act and hence does
not include certain rights to registration thereunder
and does not contain transfer restrictions. Once the
Exchange Offer is consummated, Holding will have no
further obligations to register the Holding Preferred
Stock not tendered by the Holders for exchange. See
"Risk Factors--Consequences to Non-Tendering Holders of
Holding Preferred Stock".
USE OF PROCEEDS Holding will not receive any proceeds from the Exchange
Offer.
THE EXCHANGE OFFER
The Exchange Offer..... 300,000 shares of Exchange Preferred Stock in exchange
for 300,000 shares of Holding Preferred Stock. As of
the date hereof, 300,000 shares of Holding Preferred
Stock are outstanding. The Company will issue the
Exchange Preferred Stock to Holders on or promptly after
the Expiration Date.
Based on an interpretation by the staff of the
Commission set forth in no-action letters issued to
third parties, Holding believes that Exchange Preferred
Stock issued pursuant to the Exchange Offer in exchange
for Holding Preferred Stock may be offered for resale,
resold and otherwise transferred by Holders thereof
without compliance with the registration and prospectus
delivery provisions of the Securities Act provided that
such Exchange Preferred Stock is acquired in the
ordinary course of such holders' business and such
holders have no arrangement with any person to
participate in the distribution of such Exchange
Preferred Stock. However, Holding does not intend to
request the Commission to consider, and the Commission
has not considered, the Exchange Offer in a no-action
letter and there can be no assurance that the Commission
would make a similar determination with respect to the
Exchange Offer. However, any Holder who is an
"affiliate" of Holding or who intends to participate in
the Exchange Offer for the purpose of distributing the
Exchange Preferred Stock (i) cannot rely on the
interpretation by the staff of the Commission set forth
in the above referenced no-action letters, (ii) cannot
tender its Holding Preferred Stock in the Exchange
Offer, and (iii) must comply with the registration and
prospectus delivery requirements of the Securities Act
in connection with any sale or transfer of the Holding
Preferred Stock, unless such sale or transfer is made
pursuant to an exemption from such requirements. See
"Risk Factors--Consequences to Non-Tendering Holders of
Holding Preferred Stock".
Each broker-dealer that receives Exchange Preferred
Stock for its own account pursuant to the Exchange Offer
must acknowledge that it will
- --------------------------------------------------------------------------------
10
<PAGE>
- --------------------------------------------------------------------------------
deliver a prospectus in connection with any resale of
such Exchange Preferred Stock. 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
Exchange Preferred Stock received in exchange for
Holding Preferred Stock where such Holding Preferred
Stock were acquired by such broker-dealer as a result of
market-making activities or other trading activities and
not acquired directly from Holding. Holding has agreed
that for a period of 180 days after the Expiration Date,
it will make this Prospectus available to any broker-
dealer for use in connection with any such resale. See
"Plan of Distribution."
Expiration Date........ 5:00 p.m., New York City time, on September 25, 1998,
unless the Exchange Offer is extended, in which case the
term "Expiration Date" means the latest date and time to
which the Exchange Offer is extended.
Dividends on the Exchange
Preferred Stock; Accrued
Dividends on the Holding
Preferred Stock........ Dividends will accrue on the Exchange Preferred Stock
from their issuance date. Holders whose Holding
Preferred Stock is accepted for exchange will receive
accrued dividends thereon to, but excluding, the
issuance date of the Exchange Preferred Stock. Such
dividends will be paid with the first dividend payment
on the Exchange Preferred Stock. Dividends on the
Holding Preferred Stock accepted for exchange will cease
to accrue upon cancellation of the Holding Preferred
Stock and issuance of the Exchange Preferred Stock.
Holders of Holding Preferred Stock whose Holding
Preferred Stock is not exchanged will receive the
accrued dividend payable on October 15, 1998 on such
date in accordance with the terms of the Certificate of
Designation.
Condition to the Exchange
Preferred Stock........ The Exchange Offer is subject to certain customary
conditions. The conditions are limited and relate in
general to proceedings which have been instituted or
laws which have been adopted that might impair the
ability of Holding to proceed with the Exchange Offer.
As of August 1, 1998, none of these events had occurred,
and Holding believes their occurrence to be unlikely. If
any such conditions do exist prior to the Expiration
Date, Holding may (i) refuse to accept any Holding
Preferred Stock and return all previously tendered
Holding Preferred Stock, (ii) extend the Exchange Offer
or (iii) waive such conditions. See "The Exchange
Offer--Conditions."
Procedures for Tendering Holding
Preferred Stock........ Each Holder of Holding Preferred Stock wishing to accept
the Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein and
therein, and mail or otherwise deliver such Letter of
Transmittal, or such facsimile, together with such
Holding Preferred Stock to be exchanged and any other
required documentation to United States Trust Company of
New York, as Exchange Agent, at the address set forth
herein and therein or effect a tender of such Holding
Preferred Stock pursuant to the
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11
<PAGE>
- --------------------------------------------------------------------------------
procedures for book-entry transfer as provided for
herein. By executing the Letter of Transmittal, each
Holder will represent to Holding that, among other
things, the Exchange Preferred Stock acquired pursuant
to the Exchange Offer is being obtained in the ordinary
course of business of the person receiving such Exchange
Preferred Stock, whether or not such person is the
Holder, that neither the Holder nor any such other
person has an arrangement or understanding with any
person to participate in the distribution of such
Exchange Preferred Stock and that neither the Holder nor
any such person is an "affiliate," as defined in Rule
405 under the Securities Act, of Holding. Each broker-
dealer that receives Exchange Preferred Stock for its
own account in exchange for Holding Preferred Stock,
where such Holding Preferred Stock was acquired by such
broker-dealer as a result of market-making activities or
other trading activities and not acquired directly from
Holding, must acknowledge that it will deliver a
prospectus in connection with any resale of such
Exchange Preferred Stock. See "The Exchange Offer--
Procedures for Tendering" and "Plan of Distribution."
Special Procedures for
Beneficial Owners...... Any beneficial owner whose Holding Preferred Stock is
registered in the name of a broker, dealer, commercial
bank, trust company or other nominee and who wishes to
tender such Holding Preferred Stock in the Exchange
Offer should contact such registered Holder promptly and
instruct such registered Holder to tender on such
beneficial owner's behalf. If such beneficial owner
wishes to tender on such owner's own behalf, such owner
must, prior to completing and executing the Letter of
Transmittal and delivering its Holding Preferred Stock,
either make appropriate arrangements to register
ownership of the Holding Preferred Stock in such owner's
name or obtain a properly completed bond power from the
registered Holder. The transfer of registered ownership
may take considerable time and may not be able to be
completed prior to the Expiration Date. See "The
Exchange Offer--Procedures for Tendering."
Guaranteed Delivery
Procedures............. Holders of Holding Preferred Stock who wish to tender
their Holding Preferred Stock and whose Holding
Preferred Stock is not immediately available or who
cannot deliver their Holding Preferred Stock, the Letter
of Transmittal or any other documents required by the
Letter of Transmittal to United States Trust Company of
New York, as Exchange Agent, or cannot complete the
procedure for book-entry transfer, prior to the
Expiration Date must tender their Holding Preferred
Stock according to the guaranteed delivery procedures
set forth in "The Exchange Offer--Guaranteed Delivery
Procedures."
Withdrawal Rights...... Tenders may be withdrawn at any time prior to 5:00 p.m.,
New York City time, on the Expiration Date.
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12
<PAGE>
- --------------------------------------------------------------------------------
Acceptance of Holding Preferred
Stock and Delivery of Exchange
Preferred Stock........ Holding will accept for exchange any and all shares of
Holding Preferred Stock which are properly tendered in
the Exchange Offer prior to 5:00 p.m., New York City
time, on the Expiration Date. The Exchange Preferred
Stock issued pursuant to the Exchange Offer will be
delivered promptly following the Expiration Date. Any
Holding Preferred Stock not accepted for exchange will
be returned without expense to the tendering Holder
thereof as promptly as practicable after the expiration
or termination of the Exchange Offer. See "The Exchange
Offer--Terms of the Exchange Offer."
Material Tax
Considerations......... The exchange pursuant to the Exchange Offer will not be
a taxable event for Federal income tax purposes. See
"Material U.S. Federal Income Tax Considerations."
Exchange Agent......... United States Trust Company of New York is serving as
Exchange Agent in connection with the Exchange Offer.
GENERAL
Holding's principal executive offices are located at 599 Lexington Avenue,
18th Floor, New York, New York 10022 and its telephone number is (212) 958-2555.
Hudson RCI's principal executive offices are located at 27711 Diaz Road, P.O.
Box 9020, Temecula, California 92589-9020 and its telephone number is (909) 676-
5611.
ADDITIONAL INFORMATION
For additional information regarding the Exchange Preferred Stock, see
"Description of Exchange Preferred Stock" and "Material U.S. Federal Income Tax
Considerations."
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13
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION OF
RIVER HOLDING CORP. AND SUBSIDIARIES
The following summary fiscal year end historical financial data has been
derived from the audited financial statements of the Company. The summary pro
forma financial data has been derived from the pro forma financial information
included elsewhere in this Prospectus and gives effect to the Recapitalization
as if it had occurred at the beginning of the period presented with respect to
the operating and other financial data, and as of June 26, 1998 with respect to
balance sheet data. The financial data for the six months ended June 27, 1997
and June 26, 1998 and as of June 26, 1998 has been derived from unaudited
financial statements included elsewhere in this Prospectus. The summary pro
forma financial data does not necessarily represent what the Company's or
Holding's financial position and results of operations would have been if these
transactions had actually been completed as of the dates indicated, and is not
intended to project the Company's financial position or results of operations
for any future period. Fiscal 1993 was a 53 week year and fiscal years 1994,
1995, 1996 and 1997 were 52 week years. The information contained in this table
should be read in conjunction with the Company's audited consolidated financial
statements and notes thereto at December 27, 1996 and December 26, 1997 and for
each of the three years in the period ended December 26, 1997, unaudited
financial statements and notes thereto for the six months ended June 27, 1997
and June 26, 1998 and as of June 26, 1998, and the pro forma consolidated
financial statements and notes thereto, included elsewhere in this
Prospectus.
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14
<PAGE>
<TABLE>
<CAPTION>
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HUDSON RESPIRATORY CARE INC.
-------------------------------------------------------------------------------------------------
FISCAL YEAR
-------------------------------------------------------------------------------------------------
PRO FORMA
1993 1994 1995 1996 1997 1997
------------ ------------ ------------ ------------ ------------ ------------
OPERATING DATA: (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net sales.................... $79,111 $82,772 $86,825 $93,842 $99,509 $ 99,509
Cost of sales................ 46,476 47,631 47,582 49,405 51,732 51,732
------- ------- ------- ------- ------- --------
Gross profit................. 32,635 35,141 39,243 44,437 47,777 47,777
Operating expenses:
Selling expenses............. 7,070 7,499 8,283 8,961 9,643 9,643
Distribution expenses........ 4,743 4,543 4,595 4,829 5,240 5,240
General and administrative
expenses.................... 9,732 10,426 9,769 11,277 11,456 10,617(c)
Research and development
expenses.................... 2,880 1,983 2,064 2,253 1,845 1,845
Amortization of goodwill..... -- -- -- -- -- --
Provision for equity
participation plan.......... -- -- 11,415 8,249 6,954 -- (e)
Provision for retention
payments.................... -- -- -- -- -- --
------- ------- ------- ------- ------- --------
Operating income (loss)...... $ 8,210 $10,690 $ 3,117 $ 8,868 $12,639 $ 20,432
======= ======= ======= ======= ======= ========
OTHER FINANCIAL DATA:
Net cash provided by
(used in) operating
activities.................. $12,784 $12,017 $15,939 $16,133 $19,269
Net cash used in investing
activities.................. $(6,073) $(2,607) $(6,088) $(11,354) $(3,673)
Net cash provided by
(used in) financing
activities.................. $(5,910) $(9,653) $(11,880) $(3,668) $(16,398)
EBITDA before EPP and
Retention Payments(g)........ $15,422 $17,354 $21,205 $23,194 $25,440 $ 26,279
EBITDA before EPP and
Retention Payments margin(h). 19.5% 21.0% 24.4% 24.7% 25.6% 26.4%
Operating margin before
EPP and Retention
Payments(i).................. 10.4% 12.9% 16.7% 18.2% 19.7% 20.5%
Depreciation and
amortization(j).............. $ 7,630 $ 7,033 $ 6,820 $ 6,133 $ 5,847 $ 7,190(k)
Capital expenditures.......... $ 9,112 $ 4,898 $ 5,850 $ 6,395 $ 4,659 $ 4,659
Ratio of EBITDA before EPP
and Retention Payments to
cash interest expense(l)..... 6.8x 7.5x 8.7x 10.7x 13.9x 1.9x
Ratio of total debt to EBITDA
before EPP and Retention
Payments..................... 2.3x 1.8x 1.2x 1.2x 0.8x 5.9x
Ratio of earnings to fixed
charges(m)................... 2.7x 3.6x 1.0x 3.7x 6.0x 1.3x
Deficiency in earnings to
cover fixed charges(m).......
Ratio of earnings to fixed
charges and preferred stock
dividends(n)................. 2.7x 3.6x 1.0x 3.7x 6.0x 1.0x
Deficiency in earnings to
cover fixed charges and
preferred stock dividends(n).
BALANCE SHEET DATA:
Working capital.............. $18,187 $18,926 $18,641 $24,188 $ 6,930
Working capital as
adjusted(o)................. 20,423 20,588 22,461 26,768 29,960
Total assets................. 66,870 66,576 64,387 76,910 77,554
Total debt................... 35,167 31,607 25,364 28,146 20,250
Shareholders' equity
(deficit)................... 23,693 25,269 19,112 19,872 22,515
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<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
HUDSON RESPIRATORY CARE INC. RIVER HOLDING CORP.
------------------------------------- ------------------------------------
FISCAL
SIX MONTHS ENDED (UNAUDITED) YEAR THREE MONTHS ENDED
------------------------------------- ------------------------------------
PRO
FORMA
JUNE JUNE JUNE PRO PRO FORMA
27, 26, 26, FORMA JUNE 26, JUNE 26,
1997 1998 1998 1997 (a) 1998 1998
------ ------ ------ -------- -------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net sales.................... $ 49,093 $ 46,697 $ 46,697 $99,509 $ 22,432 $22,432
Cost of sales................ 25,388 25,142(b) 25,142 51,794 12,169 12,279
-------- -------- -------- ------- -------- -------
Gross profit................. 23,705 21,255 21,555 47,715 10,263 10,153
Operating expenses:
Selling expenses............. 4,789 4,691 4,691 9,643 2,398 2,444
Distribution expenses........ 2,547 2,698 2,698 5,240 1,249 1,249
General and administrative
expenses.................... 5,498 5,676(d) 5,504(c) 10,632 2,603 2,603
Research and development
expenses.................... 895 940 940 1,845 466 466
Amortization of goodwill -- -- -- 5,128 1,182 2,364
Provision for equity
participation plan........... 3,654 63,939 --(e) --(e) - -
Provision for retention
payments..................... -- 4,754(f) -- -- - -
-------- -------- -------- ------- -------- -------
Operating income (loss)....... $ 6,322 $(61,143) $ 7,722 $15,227 $ 2,365 $ 1,027
======== ======== ======== ======= ======== =======
OTHER FINANCIAL DATA:
Net cash provided by (used
in) operating activities..... $ 12,273 $ 78,011 $ 10,012
Net cash used in investing
activities................... $ (994) $ (1,646) $(249,345)
Net cash provided by (used
in) financing activities..... $(13,745) $ 84,509 $245,000
EBITDA before EPP and
Retention Payments(g)........ $ 12,846 $ 10,061 $ 10,233 $26,202 $ 4,770 $ 4,613
EBITDA before EPP and
Retention Payments margin(h). 26.2% 21.5% 21.9% 26.3% 21.3% 20.6%
Operating margin before
EPP and Retention
Payments(i)................. 20.3% 16.2% 16.5% 15.3% 10.5% 4.6%
Depreciation and
amortization(j).............. $ 2,901 $ 2,992 $ 3,215 $12,318(k) 2,755 4,289
Capital expenditures.......... $ 2,049 $ 1,646 $ 1,646 $ 4,659 1,345 1,345
Ratio of EBITDA before EPP
and Retention Payments to
cash interest expense(l)..... 1.9x
Ratio of total debt to EBITDA
before EPP and Retention
Payments..................... 6.0x
Ratio of earnings to fixed
charges(m)................... 6.1x 1.0x
Deficiency in earnings to
cover fixed charges(m)....... $(65,037) $ (82) $ (589) $(6,257)
Ratio of earnings to fixed
charges and preferred stock
dividends(n)................. 6.1x
Deficiency in earnings to
cover fixed charges and
preferred stock dividends(n). $(66,330) $ (2,959) $(5,787) $ (1,882) $(9,134)
BALANCE SHEET DATA:
Working capital.............. $ 24,639 $ 23,509 $ 23,744
Working capital as
adjusted(o)................. 26,654 18,842 19,077
Total assets................. 74,828 165,032 258,766
Total debt................... 23,625 153,000 153,000
Shareholders' equity
(deficit)................... 42,531 (31,864) 61,870
footnotes on following page
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</TABLE>
15
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______________
(a) Represents the pro forma financial statements of the Company adjusted to (1)
include the accounts of newly-formed River Holding Corp. and (2) the
purchase accounting effects of the investment by River Holding Corp. See
Note 4 to Pro Forma Financial Statements. An audited balance sheet as of
March 27, 1998 for River Holding Corp. has been included in this Prospectus
and unaudited financial statements as of June 26, 1998 and for the period
from Holding's investment to that date have been provided. River Holding
Corp. was formed subsequent to year end and has minimal separate assets and
no operations.
(b) For a discussion of the change in cost of goods sold, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Results of Operations--Six Months Ended June 26, 1998 Compared to Six
Months Ended June 27, 1997."
(c) Adjustments reflect the elimination of results for OxyAir LLC ("OxyAir"),
the entity that held the Company's corporate aircraft and elimination of
Continuing Shareholder's compensation expense due to the Recapitalization.
See Pro Forma Consolidated Financial Statements.
(d) Includes $0.3 million of legal fees related to patent litigation in which
the Company was granted favorable summary judgment during the six months
ended June 26, 1998. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Results of Operations--Six Months Ended
June 26, 1998 Compared to Six Months Ended June 27, 1997."
(e) Reflects the elimination of the Equity Participation Plan and Retention
Payments. For purposes of compliance with the Indenture, the Company's
Consolidated Net Income (as defined at page 85) and EBITDA will not be
reduced by the amount of any contingent payments made by the Company to
former participants in the Equity Participation Plan. Additional payments to
former plan participants will be expensed as earned by the Company.
Additional payments made by Holding, including amounts to be paid to the
former plan participants, will be including amounts to be paid to the former
plan participants, will be recorded as additional purchase price in the
financial statements of Holding. See "Summary--The Recapitalization" and
"Certain Transactions."
(f) Reflects retention payments made to substantially every employee of the
Company in connection with the Recapitalization. These payments were
intended to ensure the continued employment of all employees after the
Recapitalization and no future payments are anticipated.
(g) EBITDA before EPP and Retention Payments represents income before
depreciation and amortization, interest expense, income tax expense,
Retention Payments made to employees of the Company and charges related to
the Equity Participation Plan, which was terminated upon consummation of the
Recapitalization. The Company has excluded payments under the Equity
Participation Plan to present comparable figures for all historical periods
presented. EBITDA before EPP and Retention Payments is not a measure of
performance under generally accepted accounting principles, and should not
be considered as a substitute for net income, cash flows from operating
activities and other income or cash flow statement data prepared in
accordance with generally accepted accounting principles, or as a measure of
profitability or liquidity. The Company has included information concerning
EBITDA before EPP and Retention Payments as one measure of an issuer's
historical ability to service debt. In addition, certain covenants in the
Indenture are based upon a calculation analogous to EBITDA before EPP and
Retention Payments. EBITDA before EPP and Retention Payments should not be
considered as an alternative to, or more meaningful than, income from
operations or cash flow as an indication of the Company's operating
performance. For purposes of compliance with the Indenture, the Company's
Consolidated Net Income and EBITDA will not be reduced by payments made
pursuant to the Equity Participation Plan or by the amount of any contingent
payments made by the Company to former participants in the Equity
Participation Plan. See "Summary--The Recapitalization" and "Certain
Transactions."
(h) Represents ratio of EBITDA before EPP and Retention Payments to net
sales.
(i) Represents ratio of operating income before EPP and retention payments to
net sales.
(j) Includes amortization of deferred financing fees of $0.4 million in 1993,
$0.4 million in 1994, $0.1 million in 1995 and $0.1 million in 1996, which
should be excluded from depreciation and amortization in calculating EBITDA
before EPP since such fees are reflected below the operating income
line.
(k) Actual 1997 amortization of deferred financing fees has been replaced with
pro forma non-cash amortization of deferred financing fees of approximately
$1.4 million associated with the Recapitalization. Actual amortization for
the quarter ended June 26, 1998 has been replaced by pro forma amortization
of $0.7 million associated with the Recapitalization. For River Holding
Corp., amortization of goodwill is also included.
(l) Excludes approximately $1.4 million of non-cash amortization expense for
1997 relating to deferred debt financing costs relating to the
Recapitalization. This amount is also excluded from the calculation of the
Company's Consolidated Interest Coverage Ratio (as defined at page 84) under
the Indenture.
(m) For the purpose of determining the ratio of earnings to fixed charges,
earnings consist of earnings before income taxes and fixed charges. Fixed
charges consist of interest on indebtedness, the amortization of debt issue
costs and that portion of operating rental expense representative of the
interest factor.
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16
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(n) For the purpose of determining the ratio of earnings to fixed charges and
preferred stock dividends, earnings consist of earnings before income taxes
and fixed charges. Fixed charges consist of interest on indebtedness, the
amortization of debt issue costs and that portion of operating rental
expense representative of the interest factor. Preferred stock dividends
consist of amounts to be paid-in-kind. Preferred stock dividends have been
"grossed up" to a pre-income tax basis to provide comparability to other
components of the ratio.
(o) Working capital as adjusted represents current assets, excluding cash, less
current liabilities, excluding the current portion of long-term debt. Actual
1997 current liabilities excludes the management bonus liability of $20.0
million. See Note 7(c) to Consolidated Financial Statements.
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17
<PAGE>
RISK FACTORS
This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. All
statements other than statements of historical facts included in this
Prospectus, including without limitation, certain statements under the sections
"Summary", "Selected Historical and Pro Forma Consolidated Financial
Information", "Management's Discussion and Analysis of Financial Condition and
Results of Operations", "Business" and Pro Forma Consolidated Financial
Statements and the notes thereto located elsewhere herein regarding the
Company's financial position, business strategy, prospects and other related
matters, may constitute such forward-looking statements. Although the Company
believes that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to be
correct. Actual results could differ materially from the Company's expectations
as a result of a number of factors, including without limitation those set forth
below and those located elsewhere in this Prospectus.
SUBSTANTIAL LEVERAGE; SHAREHOLDERS' DEFICIT
As of June 26, 1998, Hudson RCI had $153.0 million of outstanding
indebtedness and a shareholders' deficit of $31.9 million. See "Capitalization."
This level of indebtedness is substantially higher than the Company's historical
debt levels and may reduce the flexibility of the Company to respond to changing
business and economic conditions. In addition, subject to the restrictions in
the New Credit Facility, the Certificate of Designation and the Indenture, the
Company may incur additional senior or other indebtedness from time to time to
finance acquisitions or capital expenditures or for other general corporate
purposes. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources." The New Credit
Facility, the Certificate of Designation and the Indenture restrict, but do not
prohibit, the payment of dividends by Hudson RCI to Holding to finance the
payment of dividends on the Exchange Preferred Stock. See "Description of the
Exchange Preferred Stock" and "Description of New Credit Facility."
The Company's high degree of leverage may have important consequences for
the Company and the holders of Exchange Preferred Stock including: (i) the
ability of the Company to obtain additional financing for working capital,
capital expenditures, acquisitions or other purposes, if necessary, may be
impaired; (ii) a substantial portion of the Company's cash flow will be
dedicated to the payment of interest and principal on its indebtedness and will
not be available to the Company for its operations and future business
opportunities; (iii) the covenants governing the Exchange Preferred Stock and
those contained in the Indenture and the New Credit Facility will limit the
Company's ability to, among other things, borrow additional funds, dispose of
assets or make investments and may affect the Company's flexibility in planning
for, and reacting to, changes in business conditions; (iv) indebtedness under
the New Credit Facility will be at variable rates of interest, which will cause
the Company to be vulnerable to increases in interest rates; (v) the Certificate
of Designation, the Indenture and the New Credit Facility contain financial and
restrictive covenants, the failure to comply with which may result in an event
of default which, if not cured or waived, could have a material adverse effect
on the Company; (vi) the indebtedness outstanding under the New Credit Facility
is secured and such indebtedness as well as indebtedness of Hudson RCI under the
Subordinated Notes matures prior to the mandatory redemption date or maturity of
the Exchange Preferred Stock; (vii) the Company may be substantially more
leveraged than certain of its competitors, which may place the Company at a
competitive disadvantage; and (viii) the Company's high degree of leverage may
make it more vulnerable to a downturn in its business or the economy generally
or limit its ability to withstand competitive pressures. If the Company is
unable to generate sufficient cash flow from operations in the future to service
its indebtedness, it may be required to refinance all or a portion of its
existing debt or to obtain additional financing. There can be no assurance that
any such actions could be effected on a timely basis or on satisfactory terms or
that these actions would enable the Company to continue to satisfy its capital
requirements. The Company's ability to meet its debt service and preferred
stock dividend and redemption obligations and to reduce its total indebtedness
will be dependent upon the Company's future performance, which will be subject
to general economic conditions and to financial, business and other factors
affecting the operations of the Company, many of which are beyond its control.
The terms of the Company's indebtedness, including the New Credit Facility and
the Indenture, and the terms of the Exchange Preferred Stock also may prohibit
the Company from taking such actions.
18
<PAGE>
HOLDING'S ABILITY TO PAY DIVIDENDS; HOLDING COMPANY STRUCTURE
The ability of Holding to pay any dividends is subject to applicable
provisions of state law and its ability to pay cash dividends on the Exchange
Preferred Stock will be subject to the terms of the New Credit Facility, which
restricts Holding's ability to pay dividends, and any other indebtedness of
Holding then outstanding. Under Delaware law, Holding is permitted to pay
dividends on its capital stock, including the Exchange Preferred Stock, only out
of its surplus, or in the event that it has no surplus, out of its net profits
for the year in which a dividend is declared or for the immediately preceding
fiscal year. Surplus is defined as the excess of a company's total assets over
the sum of its total liabilities plus the par value of its outstanding capital
stock. In order to pay dividends in cash, Holding must have surplus or net
profits equal to the full amount of the cash dividend at the time such dividend
is declared. Holding cannot predict what the value of its assets or the amount
of its liabilities will be in the future and, accordingly, there can be no
assurance that Holding will be able to pay cash dividends on the Exchange
Preferred Stock. In addition, Holding may be subject to Section 2115 of the
California Corporations Code. If so, under California law, certain provisions
of the California Corporations Code will be applicable to Holding, including
those relating to the payment of dividends. These provisions, which are more
restrictive than analogous provisions of Delaware law, would permit Holding to
pay dividends only if the amount of retained earnings immediately prior to the
dividend equals or exceeds the amount of the dividend, or if immediately after
payment of the dividend the sum of Holding's assets is 1 1/4 times its
liabilities and its current assets at least equal its current liabilities (or,
if Holding's average earnings before income taxes and interest expense for the
two preceding fiscal years was less than its average interest expense for those
fiscal years, Holding's current assets must be at least 1 1/4 times its current
liabilities).
Holding is a holding company, and its ability to pay dividends on the
Exchange Preferred Stock is dependent upon the receipt of dividends from its
direct and indirect subsidiaries. Holding has no assets other than the capital
stock of Hudson RCI and the terms of the New Credit Facility, the Indenture and
the Certificate of Designation prohibit Holding from engaging in any business
activity other than owning the capital stock of Hudson RCI. Hudson RCI is a
party to the New Credit Facility and the Indenture, each of which imposes
restrictions on Hudson RCI's ability to pay dividends to Holding.
The New Credit Facility prohibits the Company from paying cash dividends before
April 15, 2003, and any payment of dividends will be subject to the satisfaction
of certain financial conditions set forth in the Indenture. The ability of
Hudson RCI and its subsidiaries to comply with such conditions may be affected
by events that are beyond the control of the Company. The breach of any such
conditions could result in a default under the Indenture and/or the New Credit
Facility, and in the event of any such default, the holders of the Subordinated
Notes or the lenders under the New Credit Facility could elect to accelerate the
maturity of all the Subordinated Notes or the loans under the New Credit
Facility. If the maturity of the Subordinated Notes or the loans under the New
Credit Facility were to be accelerated, all such outstanding debt would be
required to be paid in full before Hudson RCI or its subsidiaries would be
permitted to distribute any assets or cash to Holding. There can be no assurance
that the assets of Hudson RCI would be sufficient to repay all of such
outstanding debt and to meet Holding's obligations under the Exchange Preferred
Stock. Future borrowings by Hudson RCI can be expected to contain restrictions
or prohibitions on the payment of dividends by Hudson RCI and its subsidiaries
to Holding. In addition, under California law, a subsidiary of a company is
permitted to pay dividends on its capital stock only if the amount of the
subsidiary's retained earnings immediately prior to the dividend equals or
exceeds the amount of the dividend or if immediately after payment of the
dividend the sum of the subsidiary's assets is 1 1/4 times its liabilities and
its current assets at least equal its current liabilities (or, if Holding's
average earnings before income taxes and interest expense for the two preceding
fiscal years was less than its average interest expense for those fiscal years,
Holding's current assets must be at least 1 1/4 times its current liabilities).
California law does not permit the board of directors of the subsidiary to
revalue its assets to create retained earnings. As of June 26, 1998, Hudson RCI
had a retained deficit of $94.8 million. In addition, indebtedness outstanding
under the New Credit Facility is secured by substantially all of the assets of
the Company (including the capital stock of Hudson RCI owned by Holding). The
Certificate of Designation permits Holding to pay dividends in additional shares
of Exchange Preferred Stock prior to April 15, 2003. Holding does not expect to
pay cash dividends prior to such time and there can be no assurance that Holding
will have the funds necessary to pay cash dividends on the Exchange Preferred
Stock at any time.
19
<PAGE>
SUBORDINATION OF EXCHANGE PREFERRED STOCK
Holding's obligations with respect to the Exchange Preferred Stock will be
subordinated and junior in right of payment to all present and future
indebtedness of Holding and Hudson RCI and its subsidiaries, including the New
Credit Facility and the Subordinated Notes. The Exchange Preferred Stock will
rank pari passu with all future Parity Stock. See "Description of the Exchange
Preferred Stock." As of June 26, 1998, Holding had no outstanding Parity Stock
or Junior Stock and had indebtedness and other liabilities of $38.0 million, all
of which represented guarantees of Hudson RCI's obligations under the New Credit
Facility. As a result of the holding company structure of Holding, the Exchange
Preferred Stock will be effectively subordinated in right of payment to all
creditors of Holding's subsidiaries. In the event of insolvency, liquidation,
reorganization, dissolution or other winding-up of Holding's subsidiaries,
Holding will not receive any funds available to pay to creditors of the
subsidiaries. As of June 26, 1998, the aggregate amount of indebtedness and
other obligations of Holding's subsidiaries (including trade payables and other
accrued liabilities) was $167.1 million, excluding $60.0 million of undrawn
commitments under the New Credit Facility. In the event of bankruptcy,
liquidation or reorganization of Holding, the assets of Holding will be
available to pay obligations on the Exchange Preferred Stock only after all
indebtedness and other obligations of Holding have been paid, and there may not
be sufficient assets remaining to pay amounts due on any or all of the Exchange
Preferred Stock then outstanding. See "Description of the Exchange Preferred
Stock--Ranking."
While any shares of Exchange Preferred Stock are outstanding, Holding may
not authorize, create or increase the authorized amount of Senior Stock or
Parity Stock without the consent of the holders of 66 2/3% of the outstanding
shares of Exchange Preferred Stock. However, without the consent of any holder
of Exchange Preferred Stock, Holding may create additional classes of stock or
issue a new series of Junior Stock.
SUBORDINATION OF COMPANY EXCHANGE DEBENTURES
The Company Exchange Debentures, if issued, will be subordinated in right
of payment to all existing and future Senior Debt of Hudson RCI, including
Hudson RCI's New Credit Facility and the Subordinated Notes, and will be
effectively subordinated to all obligations of Hudson RCI's subsidiaries. Hudson
RCI's obligations under the New Credit Facility are secured by a pledge of
substantially all of its assets. As of June 26, 1998, Hudson RCI and its
subsidiaries had Senior Debt of $153.0 million, excluding $60.0 million of
undrawn commitments under the New Credit Facility, which if drawn would
constitute Senior Debt. The Indenture and the Exchange Indenture permit the
incurrence by Hudson RCI and its subsidiaries of additional indebtedness, all of
which may constitute Senior Debt under certain circumstances. See "Description
of Company Exchange Securities--Company Exchange Debentures--Subordination.
SUBORDINATION OF COMPANY PREFERRED STOCK
Hudson RCI's obligations with respect to the Company Preferred Stock, if
issued, will be subordinated and junior in right to payment of all present and
future indebtedness of Hudson RCI and its subsidiaries, including the New Credit
Facility and the Subordinated Notes. The Company Preferred Stock will rank pari
passu with all future Parity Stock. As of June 26, 1998, Hudson RCI and its
subsidiaries had indebtedness and other liabilities of $167.1 million, excluding
$60.0 million of undrawn commitments under the New Credit Facility. Hudson RCI
and its subsidiaries also have other liabilities, including contingent
liabilities, which could be substantial. In the event of bankruptcy, liquidation
or reorganization of Hudson RCI, the assets of Hudson RCI will be available to
pay obligations on the Company Preferred Stock only after all indebtedness and
other liabilities of Hudson RCI other than Parity Stock or Junior Stock have
been paid, and there may not be sufficient assets remaining to pay amounts due
on any or all of the Company Preferred Stock then outstanding. See "Description
of Company Exchange Securities--Company Preferred Stock--Ranking."
While any shares of Company Preferred Stock are outstanding, Hudson RCI may
not authorize, create or increase the authorized amount of any class or series
of Parity Stock or Senior Stock without the consent of the
20
<PAGE>
holders of 66 2/3% of the outstanding shares of Company Preferred Stock.
However, without the consent of any holder of Company Preferred Stock, Hudson
RCI may create additional classes of stock or issue a new series of Junior
Stock.
FRAUDULENT CONVEYANCE AND DISTRIBUTION LIMITATION CONSIDERATIONS
The payments made in connection with the Recapitalization to shareholders
of the Company, the repayment of the Company's existing indebtedness and the
related incurrence by the Company of indebtedness (including indebtedness under
the Subordinated Notes, the New Credit Facility and, if issued, the Company
Exchange Debentures) or obligations with respect to preferred stock including
obligations under the Exchange Preferred Stock and, if issued, the Company
Preferred Stock, may be subject to review under relevant state and federal
fraudulent conveyance laws, as well as other similar laws regarding creditors
rights generally. Under these laws, if a court were to find that, after giving
effect to the Recapitalization, either (a) Hudson RCI or Holding incurred such
indebtedness or obligations with the intent of hindering, delaying or defrauding
creditors or (b) Hudson RCI or Holding received less than reasonably equivalent
value or consideration for incurring such indebtedness or obligations and (i)
was insolvent or rendered insolvent by reason of such transaction, (ii) was
engaged in a business or transaction for which its remaining assets constituted
unreasonably small capital or (iii) intended to incur, or believed that it would
incur, debts beyond its ability to pay such debts or obligations as they
matured, such court may subordinate the Company Exchange Debentures to presently
existing and future creditors of Holding or Hudson RCI, avoid the issuance of
the Exchange Preferred Stock or, if issued the Company Exchange Debentures or
Company Preferred Stock, and direct the repayment of any amounts paid thereunder
to the Company's creditors or take other action detrimental to the holders of
the Exchange Preferred Stock or the Company Exchange Debentures or Company
Preferred Stock. There can be no assurance that a court would not determine,
regardless of whether the Company was solvent on the date the Exchange Preferred
Stock or, if issued the Company Exchange Debentures or Company Preferred Stock,
were issued, that the payments constituted fraudulent transfers on another
ground. To the extent that proceeds from the sale of the Exchange Preferred
Stock are used to repay indebtedness, or to make a distribution to a stockholder
on account of the ownership of capital stock, a court may find the Company did
not receive fair consideration or reasonably equivalent value for the incurrence
of the obligations represented by the Exchange Preferred Stock. The payments
made in connection with the Recapitalization to shareholders of the Company may
be subject to review under provisions of the California corporations code
limiting dividends and distributions to shareholders. See "Summary--The
Recapitalization." If a court were to find that payments made to such
shareholders in connection with the Recapitalization were subject to these
provisions, such payments would exceed the applicable statutory limitations and,
to the extent that the Company's obligations to its creditors at the time of
such payments were not satisfied, such court could take actions with respect to
the Company Exchange Debentures of the type described above.
The measure of insolvency for purposes of determining whether a transfer is
avoidable as a fraudulent transfer varies depending upon the law of the
jurisdiction which is being applied. Generally, however, a debtor would be
considered insolvent if the sum of all its liabilities, including contingent
liabilities, were greater than the value of all its property at a fair
valuation, or if the present fair saleable value of the debtor's assets were
less than the amount required to repay its probable liabilities on its debts,
including contingent liabilities, as they become absolute and matured.
Based upon financial and other information currently available to it,
management of the Company believes that upon consummation of the
Recapitalization the Company was (i) neither insolvent nor rendered insolvent
thereby, (ii) in possession of sufficient capital to run its business
effectively and (iii) incurring debts within its ability to pay as the same
mature or become due. See "Management's Discussions and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources." In
reaching these conclusions, the Company relied upon various valuations and
estimates of future cash flow that necessarily involve a number of assumptions
and choices of methodology. No assurance can be given, however, that the
assumptions and methodologies chosen by the Company would be adopted by a court
or that a court would concur with the Company's conclusions. There can be no
assurance that a court would not determine, regardless of whether the Company
was solvent on the date the Exchange Preferred Stock was issued, that the
payments constituted fraudulent transfers.
21
<PAGE>
As of June 26, 1998, Hudson RCI had $153.0 million of outstanding
indebtedness, and had a shareholders' deficit of $31.9 million. In addition,
Holding had $38.0 million of indebtedness as a result of guaranteeing a portion
of Hudson RCI's indebtedness. See "Description of New Credit Facility--
Collateral and Guarantees."
MEDICAL COST CONTAINMENT
In recent years, widespread efforts have been made in both the public and
private sectors to control health care costs, including the prices of products
such as those sold by the Company, in the United States and abroad. Cost
containment measures have resulted in increased customer purchasing power,
particularly through the increased presence of GPOs in the marketplace and
increased consolidation of distributors. Health care organizations are
evaluating ways in which costs can be reduced by decreasing the frequency with
which a treatment, device or product is used. Cost containment has also caused
a shift in the decision making function with respect to supply acquisition from
the clinician to the administrator, resulting in a greater emphasis being placed
on price, as opposed to features and clinical benefits. The Company has
encountered significant pricing pressure from customers and believes that it is
likely that efforts by governmental and private payors to contain costs through
managed care and other efforts and to reform health systems will continue and
that such efforts may have an adverse effect on the pricing and demand for the
Company's products. There can be no assurance that current or future reform
initiatives will not have a material adverse effect on the Company's business,
financial conditions or results of operations. See "Business--Industry
Overview."
The Company's products are sold principally to a variety of health care
providers, including hospitals and alternate site providers, that receive
reimbursement for the products and services they provide from various public and
private third party payors, including Medicare, Medicaid and private insurance
programs. As a result, while the Company does not receive payments directly from
such third party payors, the demand for the Company's products in any specific
care setting is dependent in part on the reimbursement policies of the various
payors in that setting. In order to be reimbursed, the products generally must
be found to be reasonable and necessary for the treatment of medical conditions
and must otherwise fall within the payor's list of covered services. In light of
increased controls on Medicare spending, there can be no assurance on the
outcome of future coverage or payment decisions for any of the Company's
products by governmental or private payors. If providers, suppliers and other
users of the Company's products are unable to obtain sufficient reimbursement, a
material adverse impact on the Company's business, financial condition or
operations may result.
The Company expects that the trend toward cost containment that has
impacted the domestic market will also be experienced in international health
care markets, impacting the Company's growth in foreign countries, particularly
where health care is socialized.
INDUSTRY CONSOLIDATION; CUSTOMER CONCENTRATION
Cost containment has resulted in significant consolidation within the
health care industry. A substantial number of the Company's customers,
including group purchasing organizations, hospitals, national nursing home
companies and national home health care agencies, have been affected by this
consolidation. The acquisition of any of the Company's significant customers
could result in the loss of such customers by the Company, thereby negatively
impacting its business, financial condition and results of operations. For
example, in 1996, three GPOs that accounted for aggregate sales of approximately
$11.0 million combined and, as a result of a decision of the combined entity to
enter into a sole distributorship arrangement in 1997 with one of the Company's
competitors, the Company has experienced some decrease in sales and may
experience additional sales decreases in the future. In addition, the
consolidation of health care providers often results in the renegotiation of
terms and in the granting of price concessions. The Company's customer
relationships, including exclusive or preferential provider relationships, are
terminable at will by either party without advance notice or penalty. Because
larger purchasers or groups of purchasers tend to have more leverage in
negotiating prices, this trend has caused the Company to reduce prices and could
have a material adverse effect on the Company's business, financial condition or
results of operations. As GPOs and integrated health care systems increase in
size, each relationship represents a greater concentration of market share and
the adverse consequences of losing a particular relationship increases
considerably. For fiscal 1996, the Company's ten largest group purchasing
arrangements accounted for approximately 40% of the Company's total net sales,
and management believes that such arrangements accounted
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<PAGE>
for a similar percentage of net sales for fiscal 1997. Distributors have also
consolidated in response to cost containment. For fiscal 1997, approximately
30% of the Company's net sales were to a single distributor, Owens & Minor Inc.
("Owens & Minor"). The loss of the Company's relationship with this distributor
would have a material adverse effect on the Company's business, financial
condition and results of operations.
GOVERNMENT REGULATION
The Company and its customers and suppliers are subject to extensive
Federal and state regulation in the United States, as well as regulation by
foreign governments. Most of the Company's products are subject to government
regulation in the United States and other countries. In the United States, the
Federal Food, Drug, and Cosmetic Act, as amended (the "FDC Act"), and other
statutes and regulations govern or influence the testing, manufacture, safety,
labeling, storage, record keeping, marketing, advertising and promotion of such
products. Failure to comply with applicable requirements can result in fines,
recall or seizure of products, total or partial suspension of production,
withdrawal of existing product approvals or clearances, refusal to approve or
clear new applications or notices and criminal prosecution. Under the FDC Act
and similar foreign laws, the Company, as a marketer, distributor and
manufacturer of health care products, is required to obtain the approval of
Federal and foreign governmental agencies, including the Food and Drug
Administration ("FDA"), prior to marketing, distributing and manufacturing
certain of those products, which can be time consuming and expensive. The
Company may also need to obtain FDA clearance before modifying marketed products
or making new promotional claims. Delays in receipt of or failure to receive
required approvals or clearances, the loss of previously received approvals or
clearances, or failures to comply with existing or future regulatory
requirements in the United States or in foreign countries could have a material
adverse effect on the Company's business. Foreign sales are subject to similar
requirements.
The Company is required to comply with the FDA's "Quality System
Regulations for Medical Devices" implementing "Good Manufacturing Practices"
("GMP/QSR Regulations"), which set forth requirements for, among other things,
the Company's manufacturing process, design control and associated record
keeping, including testing and sterility. Further, the Company's plants and
operations are subject to review and inspection by local, state, Federal and
foreign governmental entities. The distribution of the Company's products may
also be subject to state regulation. The impact of FDA regulation on the
Company has increased in recent years as the Company has increased its
manufacturing operations. The Company's suppliers, including sterilizer
facilities, are also subject to similar governmental requirements. There can be
no assurance that changes to current regulations or additional regulations
imposed by the FDA will not have an adverse impact on the Company's business and
financial condition in the future. If the FDA believes that a company is not in
compliance with applicable regulations, it can institute proceedings to detain
or seize products, issue a recall, impose operating restrictions, enjoin future
violations and assess civil and criminal penalties against the company, its
officers or its employees and can recommend criminal prosecution to the
Department of Justice. Other regulatory agencies may have similar powers. In
addition, product approvals could be withdrawn due to the failure to comply with
regulatory standards or the occurrence of unforeseen problems following initial
marketing. The FDA also has the authority to issue special controls for devices
manufactured by the Company, which it has not done to date. In the event that
such special controls were issued, the Company's products would be required to
conform, which could result in significant additional expenditures for the
Company.
The Company is subject to numerous federal, state and local laws and
regulations relating to such matters as safe working conditions, manufacturing
practices, fire hazard control and the handling and disposal of hazardous or
infectious materials or substances and emissions of air pollutants. The Company
owns and leases properties which are subject to environmental laws and
regulations. There can be no assurance that the Company will not be required to
incur significant costs to comply with such laws and regulations in the future
or that such laws or regulations will not have a material adverse effect upon
the Company's business, financial condition or results of operations. In
addition, the Company cannot predict the extent to which future legislative and
regulatory developments concerning its practices and products for the health
care industry may affect the Company. See "Business--Government Regulation and
Environmental Matters."
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<PAGE>
RISKS RELATED TO INTERNATIONAL SALES; FOREIGN OPERATIONS
Sales made outside the United States represented approximately 19.1% of the
Company's 1997 net sales and the Company intends to increase international sales
as a percentage of total net sales. Foreign operations are subject to special
risks that can materially affect the sales, profits, cash flows and financial
position of the Company, including increased regulation, extended payment
periods, competition from firms with more local experience, currency exchange
rate fluctuations and import and export controls. Sales of the Company's
products are denominated in U.S. dollars. The destabilization of the economies
of several Asian countries in 1997 caused a decrease in demand for the Company's
products throughout Southeast Asia, and future sales in that region are
uncertain. In addition, adverse economic conditions in Asia could result in
"dumping" of products similar to those produced by the Company by other
manufacturers, both in Asian and other markets.
The Company also maintains a manufacturing and assembly facility in
Ensenada, Mexico and, as a result, is subject to operational risks such as
changing labor trends and civil unrest in that country. In the event the
Company were required to transfer its Ensenada operations to the United States
or were otherwise unable to benefit from its lower cost Mexican operation, its
business, financial condition and results of operations would be adversely
affected.
PRODUCT LIABILITY
The manufacturing and marketing of medical products entails an inherent
risk of product liability claims. Although the Company has not experienced any
significant losses due to product liability claims and currently maintains
umbrella liability insurance coverage, there can be no assurance that the amount
or scope of the coverage maintained by the Company will be adequate to protect
it in the event a significant product liability claim is successfully asserted
against the Company. In addition, the Company cannot predict the extent to
which future legislative and regulatory developments concerning its practices
and products for the health care industry may affect the Company.
DEPENDENCE ON KEY PERSONNEL; MANAGEMENT OF EXPANDING OPERATIONS
The Company's success will, to a large extent, depend upon the continued
services of its executive officers. The loss of services of any of these
executive officers could materially and adversely affect the Company. While the
Company has employment agreements with it senior management team, these
agreements may be terminated by either party, with or without cause.
The Company's plans to expand its business may place a significant strain
on the Company's operational and financial resources and systems. To manage its
expanding operations, the Company may be required to, among other things,
improve its operational, financial and management information systems. The
Company may also be required to attract, train and retain additional highly
qualified management, technical, sales and marketing and customer support
personnel. The process of locating such personnel with the combination of
skills and attributes required to implement the Company's strategy is often
lengthy. The inability to attract and retain additional qualified personnel
could materially and adversely affect the Company.
COMPETITION
The medical supply industry is characterized by intense competition.
Certain of the Company's competitors have greater financial and other resources
than the Company and may succeed in utilizing these resources to obtain an
advantage over the Company. The general trend toward cost containment in the
health care industry has had the effect of increasing competition among
manufacturers, as health care providers and distributors consolidate and as GPOs
increase in size and importance. The Company competes on the basis of brand
name, product quality, breadth of product line, service and price. See
"Business--Competition."
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<PAGE>
RISKS GENERALLY ASSOCIATED WITH ACQUISITIONS
An element of the Company's business strategy is to pursue strategic
acquisitions that either expand or complement the Company's business.
Acquisitions involve a number of special risks, including the diversion of
management's attention to the assimilation of the operations and the
assimilation and retention of the personnel of the acquired companies, and
potential adverse effects on the Company's operating results. The Company may
require additional debt or equity financing for future acquisitions, which may
not be available on terms favorable to the Company, if at all. In addition, the
New Credit Facility and the Indenture contain certain restrictions regarding
acquisitions. The Indenture restricts acquisitions to those companies in the
same line of business as the Company, and requires that all such acquired
companies be designated Restricted Subsidiaries. The New Credit Facility
restricts all acquisitions with the exception of Permitted Acquisitions (as
defined), and limits, among other things, (i) the sum that may be paid in
connection with any single acquisition to $30.0 million, (ii) the total amount
outstanding of revolving credit indebtedness that can be incurred for
acquisition purposes to $40.0 million, and (iii) the line of business of the
acquired entity or assets. The inability of the Company to successfully finance,
complete and integrate strategic acquisitions in a timely manner could have an
adverse impact on the Company's ability to effect a portion of its growth
strategy. See "Business--Business Strategy," "Description of New Credit
Facility" and "Description of the Subordinated Notes."
PATENTS AND TRADEMARKS
The Company has historically relied primarily on its technological and
engineering abilities and on its design and production capabilities to gain
competitive business advantages, rather than on patents or other intellectual
property rights. However, the Company does file patent applications on concepts
and processes developed by the Company's personnel. The Company has 18 patents
in the U.S. and two patents pending. Many of the U.S. patents have
corresponding patents issued in Canada, Europe and various Asian countries. The
Company is currently preparing several patent applications covering intellectual
property associated with the closed suction catheter product and advanced
humidification devices. The Company's success will depend in part on its
ability to maintain its patents, add to them where appropriate, and to develop
new products and applications without infringing the patent and other
proprietary rights of third parties and without breaching or otherwise losing
rights in technology licenses obtained by the Company for other products. There
can be no assurance that any patent owned by the Company will not be
circumvented or challenged, that the rights granted thereunder will provide
competitive advantages to the Company or that any of the Company's pending or
future patent applications will be issued with claims of the scope sought by the
Company, if at all. If challenged, there can be no assurance that the Company's
patents (or patents under which it licenses technology) will be held valid or
enforceable. In addition, there can be no assurance that the Company's products
or proprietary rights do not infringe the rights of third parties. If such
infringement were established, the Company could be required to pay damages,
enter into royalty or licensing agreements on onerous terms and/or be enjoined
from making, using or selling the infringing product. Any of the foregoing
could have a material adverse effect upon the Company's business, financial
condition or results of operations.
CONTROL OF COMPANY; AFFILIATE TRANSACTIONS
FS&Co. controls approximately 87.3% of the voting securities of Holding.
As a result, FS&Co. will have the ability to control the Company's management,
policies and financing decisions and to elect a majority of Holding's and Hudson
RCI's Boards of Directors. There can be no assurance that any decisions taken
by FS&Co. will be in the interests of holders of the Exchange Preferred Stock.
See "Management" and "Security Ownership of Certain Beneficial Owners." There
are currently no independent members of the Company's Board of Directors. Under
the Certificate of Designation, the Board of Directors of Holding will have
discretion to approve certain transactions involving the Company and the
Restricted Subsidiaries, including transactions with affiliates and certain
asset sales. In particular, the Certificate of Designation permits the Holding
Board of Directors to approve transactions of up to $2.5 million between Hudson
RCI or any Restricted Subsidiary, on the one hand, and any affiliate thereof
(including members of the Hudson RCI Board of Directors), on the other hand
("Affiliate Transactions"). This limit applies to individual transactions only,
and there is no limit on the aggregate value of such affiliate transactions that
may be approved by the Holding Board of Directors. The Certificate of
Designation requires Holding to obtain a fairness opinion with respect to
Affiliate Transactions in excess of $5.0 million.
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<PAGE>
PAYMENT UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of Exchange
Preferred Stock or, if issued, Company Exchange Debentures or Company Preferred
Stock, may require Holding or Hudson RCI, as applicable, to purchase all or a
portion of such holder's Exchange Preferred Stock, Company Exchange Debentures
or Company Preferred Stock at 101% of the Liquidation Preference thereof or the
principal amount of the Company Exchange Debentures, as the case may be,
together with accrued and unpaid dividends or interest, if any, to the date of
purchase. In the case of the Company Exchange Debentures, the Trustee (as
defined at page 94) does not have the authority under the Exchange Indenture to
waive the covenant relating to the holder's right to require the Company to
purchase the Company Exchange Debentures upon the occurrence of a Change of
Control. Prior to any such repurchase of the Exchange Preferred Stock, Company
Exchange Debentures or Company Preferred Stock, Holding or Hudson RCI, as
applicable, may be required to (i) repay all or a portion of indebtedness under
the New Credit Facility or other indebtedness of the Company or (ii) obtain
certain consents to permit the repurchase, including consents under the New
Credit Facility. If the Company is unable to repay all of such indebtedness or
is unable to obtain the necessary consents, Holding or Hudson RCI would be
unable to offer to repurchase the Exchange Preferred Stock, Company Exchange
Debentures or Company Preferred Stock, which would constitute a voting rights
triggering event or an event of default under the Certificate of Designation,
the Exchange Indenture or the Company Exchange Certificate of Determination.
There can be no assurance that Holding or Hudson RCI will have sufficient funds
available at the time of any Change of Control to make any payment (including
repurchases of Exchange Preferred Stock or, if issued, Company Exchange
Debentures or Company Preferred Stock) as described above. See "Description of
the Exchange Preferred Stock--Redemption at the Option of Holders Upon a Change
of Control," "Description of Company Exchange Securities--Company Exchange
Debentures--Repurchase at the Option of Holders Upon a Change of Control" and
"--Company Preferred Stock--Redemption at the Option of Holders Upon a Change of
Control."
The events that constitute a Change of Control under the Certificate of
Designation, the Company Exchange Indenture or the Company Exchange Certificate
of Determination may also be events of default under the New Credit Facility,
the Indenture or other indebtedness of the Company. Such events may permit the
lenders under such debt instruments to accelerate the debt and, if the debt is
not paid, to enforce security interests in, or to commence litigation that could
ultimately result in a sale of, substantially all the assets of the Company,
thereby limiting the Company's ability to raise cash to repurchase the Exchange
Preferred Stock or, if issued, Company Exchange Debentures or Company Preferred
Stock. In such circumstances, the subordination provisions in the Certificate of
Designation, the Company Exchange Indenture or the Company Certificate of
Designation would likely prohibit payments to holders of the Exchange Preferred
Stock or, if issued, Company Exchange Debentures or Company Preferred Stock.
LACK OF A PUBLIC MARKET FOR THE EXCHANGE PREFERRED STOCK
The Exchange Preferred Stock is being offered to the Holders of the
Exchange Preferred Stock. Prior to this Exchange Offer, there has been no
market for the Exchange Preferred Stock. Holding does not intend to apply for
listing of the Exchange Preferred Stock or, if issued, the Company Exchange
Debentures or Company Preferred Stock on any securities exchange or stock
market. Although the Initial Purchasers have informed Holding that they
currently intend to make a market in the Exchange Preferred Stock, the Initial
Purchasers are not obligated to do so, and any such market making may be subject
to certain limitations and may be discontinued at any time without notice. The
liquidity of any market for the Exchange Preferred Stock will depend upon the
number of holders of the Exchange Preferred Stock, the interest of securities
dealers in making a market in the Exchange Preferred Stock and other factors.
Accordingly, there can be no assurance as to the development or liquidity of any
market for the Exchange Preferred Stock. If the Exchange Preferred Stock is
traded after its initial issuance, it may trade at a discount from its initial
offering price, depending on prevailing interest rates, the market for similar
securities, general economic condition and the financial condition of Hudson RCI
and Holding.
S CORPORATION STATUS
The Company elected to be treated as an S corporation for federal and state
income tax purposes for its taxable years beginning on or after January 1, 1987.
Unlike a C corporation, an S corporation is generally not subject to income tax
at the corporate level; instead, the S corporation's income is taxed on the
personal income tax returns of its shareholders. The Company's status as an S
corporation terminated upon consummation of the Recapitalization. If S
corporation status were denied for any periods prior to such termination by
reason of a failure
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<PAGE>
to satisfy the S corporation election or eligibility requirements of the
Internal Revenue Code of 1986, as amended, the Company would be subject to tax
on its income as if it were a C corporation for these periods. Such an
occurrence would have a material adverse effect on the Company's results.
YEAR 2000 COMPLIANCE
The issue surrounding the year 2000 is whether computer systems will
properly recognize date sensitive information when the year changes to 2000, or
"00." Systems that misinterpret the two-digit date "00" as the year 1900
instead of the year 2000 could generate erroneous data or fail. The Company has
upgraded its information system capabilities such that it does not believe that
its systems will encounter any material year 2000 problems, nor will its
operations be materially affected by year 2000 issues. In addition, the
Company's products are not subject to year 2000 problems. The Company also
relies, directly and indirectly on the external systems of various independent
business enterprises, such as its customers, suppliers, creditors, financial
organizations, and of governments, both domestically and internationally, for
the accurate exchange of data and related information. The Company has not
assessed the status of such third-party enterprises' information systems, nor
the materiality, nature or potential impact on the Company of year 2000 issues
confronted by such third parties to the extent the same affect the Company. The
Company has not developed any contingency plans in the event of disruption in
the operation of the various third-party enterprises with which it interacts,
and thus could be adversely affected in the event of any such disruption.
CONSEQUENCES TO NON-TENDERING HOLDERS OF HOLDING PREFERRED STOCK AND
REQUIREMENTS FOR TRANSFER OF HOLDING PREFERRED STOCK
Upon consummation of the Exchange Offer, Holding will have no further
obligation to register the Holding Preferred Stock. Thereafter, any Holder of
Holding Preferred Stock who does not tender its Holding Preferred Stock in the
Exchange Offer, including any Holder which is an "affiliate" (as that term is
defined in Rule 405 of the Securities Act) of the Company which cannot tender
its Holding Preferred Stock in the Exchange Offer, will continue to hold
restricted securities which may not be offered, sold or otherwise transferred,
pledged or hypothecated except pursuant to Rule 144 and Rule 144A under the
Securities Act or pursuant to any other exemption from registration under the
Securities Act relating to the disposition of securities, provided that an
opinion of counsel is furnished to the Company that such an exemption is
available.
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<PAGE>
USE OF PROCEEDS
This Exchange Offer is intended to satisfy certain of Holding's obligations
under the Exchange Offer Registration Agreement. Holding will not receive any
cash proceeds from the issuance of the Exchange Preferred Stock offered in the
Exchange Offer. In consideration for issuing the Exchange Preferred Stock as
contemplated in this Prospectus, Holding will receive in exchange Holding
Preferred Stock in like principal amount, the form and terms of which are the
same in all material respects as the form and terms of the Exchange Preferred
Stock except that the Exchange Preferred Stock has been registered under the
Securities Act. The Holding Preferred Stock surrendered in exchange for
Exchange Preferred Stock will be retired and canceled and cannot be reissued.
Accordingly, issuance of the Exchange Preferred Stock will not result in any
increase in the indebtedness of Holding.
Net proceeds from the Holding Preferred Stock Offering were $30.0 million.
Such proceeds, together with the proceeds of the Holding Equity Investment and
the Subordinated Notes Offering, were used (i) to make a $131.1 million cash
payment to the Continuing Shareholder and payments to management of Hudson RCI
totalling $68.3 million pursuant to the Company's Equity Participation Plan,
(ii) to pay outstanding debt under the Company's existing credit agreement and
(iii) to pay related fees and expenses. The outstanding debt of the Company that
was repaid from the net proceeds of the sale of Subordinated Notes consisted of
$34.2 million of borrowings and accrued interest outstanding under the Company's
credit agreement with a maturity of March 31, 2000 that included term loans that
bore interest at a base rate plus 0.5% or a eurodollar rate plus 2% and a
revolving line of credit that bore interest at a base rate plus 0.25% or a
eurodollar rate plus 1.75%. This amount included $20.0 million of indebtedness
incurred on March 11, 1998 in connection with payments made to certain employees
pursuant to the Company's incentive plans. See "Summary--The Recapitalization."
DIVIDEND POLICY
Neither Holding nor Hudson RCI intends to pay cash dividends with respect
to its capital stock in the foreseeable future. Management anticipates that all
earnings and other cash resources of Holding and Hudson RCI, if any, will be
retained for the operation and expansion of their business and for general
corporate purposes. The payment of any future dividends will be at the
discretion of Holding's and Hudson RCI's Board of Directors and will depend
upon, among other things, their earnings, financial condition, results of
operations, level of indebtedness, capital requirements, general business
conditions and contractual restrictions on payment of dividends, if any, as well
as such other factors as such Board of Directors may deem relevant. Holding and
Hudson RCI will be restricted by the terms of the New Credit Facility and the
Indenture from paying cash dividends on its capital stock and may in the future
enter into loan or other agreements or issue debt securities or preferred stock
that restrict the payment of cash dividends on its capital stock.
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<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of Hudson RCI and Holding
as of June 26, 1998. This table should be read in conjunction with Pro Forma
Financial Statements and the notes thereto, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
consolidated financial statements and the notes thereto included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
Hudson RCI Holding
June 26, 1998(a) June 26, 1998
---------------- -------------
(dollars in thousands)
<S> <C> <C>
Current maturities of long-term debt............................. $ 1,000 $ 1,000
--------- ---------
Long-term debt:
New Credit Facility.............................................. 37,000 37,000
Subordinated Notes............................................... 115,000 115,000
--------- ---------
Total long-term debt........................................ 152,000 152,000
--------- ---------
Mandatorily redeemable PIK preferred
stock, $.01 par value, liquidation
value $100 per share, 600,000 shares
authorized, 300,000 shares issued
and outstanding for both Hudson RCI and
Holding(b).................................................... 29,000 29,000
Accrued preferred stock dividend,
payable-in-kind.............................................. 776 776
--------- ---------
29,776 29,776
--------- ---------
Shareholders' equity (deficit):
Common stock, $.01 par value,
15,000,000 shares authorized,
7,800,000 shares issued and outstanding
for Hudson RCI; 15,000,000
shares authorized, 6,300,000 shares
issued and outstanding for Holding(c)........................ 63,410 63,000
Cumulative translation adjustment............................... (464) -
Retained earnings (deficit)..................................... (94,810) (1,130)
--------- ---------
Total shareholders' equity (deficit)............................ (31,864) 61,870
--------- ---------
Total capitalization......................................... $ 150,912 $ 244,646
========= =========
</TABLE>
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<PAGE>
(a) Does not give effect to the obligation of the Company to pay the Continuing
Shareholder and former participants in the Equity Participation Plan an
aggregate of $5.7 million upon achievement by the Company of certain
operating performance targets in fiscal 1998. See "Certain
Transactions."
(b) The mandatorily redeemable preferred stock provides that, until April 15,
2003, dividends on such preferred stock may be paid, at the election of the
Company, in additional shares of such preferred stock, and thereafter must
be paid in cash.
(c) Reflects an increase in the authorized number of common shares of Hudson RCI
and a stock split of 245:1 effected prior to the Recapitalization.
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THE EXCHANGE OFFER
PURPOSES OF THE EXCHANGE OFFER
The Holding Preferred Stock was issued and sold by Holding on April 7, 1998
to the Initial Purchasers, who subsequently resold the Holding Preferred Stock
to "qualified institutional buyers" (in reliance on Rule 144A under the
Securities Act). In connection with the issuance and sale of the Holding
Preferred Stock, Holding and the Initial Purchasers entered into the Exchange
Offer Registration Agreement pursuant to which Holding agreed to use its best
efforts to cause a registration statement with respect to the Exchange Offer to
become effective within 150 days of April 7, 1998, the date of issuance of the
Holding Preferred Stock. However, in the event that (i) applicable
interpretations of the staff of the Commission do not permit Holding and the
Company to effect such a Registration Statement, (ii) for any other reason the
Registration Statement is not declared effective within 150 days after the date
of the original issuance of the Holding Preferred Stock or the Exchange Offer is
not consummated within 180 days after the original issuance of the Holding
Preferred Stock, (iii) under certain circumstances, if the Initial Purchasers so
request with respect to Holding Preferred Stock not eligible to be exchanged for
Exchange Preferred Stock in the Exchange Offer or (iv) under certain
circumstances, any holder of Holding Preferred Stock (other than an Initial
Purchaser) is not eligible to participate in the Exchange Offer or does not
receive freely tradeable Exchange Preferred Stock in the Exchange Offer other
than by reason of such holder being an affiliate of Holding or the Company (it
being understood that the requirement that a participating broker-dealer deliver
the prospectus contained in the Registration Statement in connection with sales
of Exchange Preferred Stock shall not result in such Exchange Preferred Stock
being not "freely tradeable"), Holding and the Company will, at their cost, (a)
as promptly as practicable, file a shelf registration statement (the "Shelf
Registration Statement") covering resales of the Holding Preferred Stock or the
Exchange Preferred Stock, as the case may be, (b) use their best efforts to
cause the Shelf Registration Statement to be declared effective under the
Securities Act and (c) use their best efforts to keep the Shelf Registration
Statement effective until two years after the later of (x) the Issue Date (as
defined herein) (or until one year after such date if such Shelf Registration
Statement is filed at the request of an Initial Purchaser) or (y) the last date
on which any Affiliate of Holding or the Company, as applicable, was a
beneficial owner of any Holding Preferred Stock.
The Exchange Offer is being made by Holding to satisfy its obligations
pursuant to the Exchange Offer Registration Agreement. The form and terms of the
Exchange Preferred Stock are the same as the form and terms of the Holding
Preferred Stock in all material respects except that the Exchange Preferred
Stock has been registered under the Securities Act and hence does not include
certain rights to registration thereunder and does not contain transfer
restrictions. Once the Exchange Offer is consummated, Holding will have no
further obligations to register any of the Holding Preferred Stock not tendered
by the Holders for exchange. See "Risk Factors--Consequences to Non-Tendering
Holders of Holding Preferred Stock". A copy of the Exchange Offer Registration
Agreement has been filed as an exhibit to the Registration Statement of which
this Prospectus is a part.
Based on interpretations by the staff of the Commission set forth in
several no-action letters issued to third parties, Holding believes that
Exchange Preferred Stock issued pursuant to the Exchange Offer in exchange for
Holding Preferred Stock may be offered for resale, resold and otherwise
transferred by holders thereof without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such
Exchange Preferred Stock is acquired in the ordinary course of such holders'
business and such holders have no such arrangement with any person to
participate in the distribution of such Exchange Preferred Stock. However,
Holding does not intend to request the Commission to consider, and the
Commission has not considered, the Exchange Offer in a no-action letter and
there can be no assurance that the Commission would make a similar determination
with respect to the Exchange Offer. However, any Holder who is an "affiliate"
of Holding or who intends to participate in the Exchange Offer for the purpose
of distributing the Exchange Preferred Stock (i) cannot rely on the
interpretation by the staff of the Commission set forth in the above referenced
no-action letters, (ii) cannot tender its Holding Preferred Stock in the
Exchange Offer, and (iii) must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any sale or
transfer of the Holding Preferred Stock, unless such sale or transfer is made
pursuant to an exemption from such requirements. See "Risk Factors--
Consequences to Non-Tendering Holders of Holding Preferred Stock."
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<PAGE>
In addition, each broker-dealer that receives Exchange Preferred Stock for
its own account in exchange for Holding Preferred Stock, where such Holding
Preferred Stock were acquired by such broker-dealer as a result of market-making
activities or other trading activities and not acquired directly from Holding,
must acknowledge that it will deliver a copy of this Prospectus in connection
with any resale of such Exchange Preferred Stock. See "Plan of Distribution".
Except as aforesaid, this Prospectus may not be used for an offer to
resell, resale or other transfer of Exchange Preferred Stock.
TERMS OF THE EXCHANGE OFFER
General
Upon the terms and subject to the conditions of the Exchange Offer set
forth in this Prospectus and in the Letter of Transmittal, Holding will accept
any and all Holding Preferred Stock validly tendered and not withdrawn prior to
5:00 p.m., New York City time, on the Expiration Date. Holding will issue one
share of Exchange Preferred Stock in exchange for one share of Holding Preferred
Stock accepted in the Exchange Offer. Holders may tender some or all of their
Holding Preferred Stock pursuant to the Exchange Offer.
As of April 7, 1998, there were 300,000 shares of Holding Preferred Stock
outstanding and one registered Holder of Holding Preferred Stock. This
Prospectus, together with the Letter of Transmittal, is being sent to such
registered Holder as of August 26, 1998.
In connection with the issuance of the Holding Preferred Stock, Holding
arranged for the Holding Preferred Stock to be issued and transferable in book-
entry form through the facilities of DTC, acting as depository. The Exchange
Preferred Stock also will be issued and transferable in book-entry form through
DTC. See "Description of Exchange Preferred Stock--Book-Entry System."
Holding shall be deemed to have accepted validly tendered Holding Preferred
Stock when, as and if Holding has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering Holders
of Holding Preferred Stock for the purpose of receiving the Exchange Preferred
Stock from Holding.
If any tendered Holding Preferred Stock is not accepted for exchange
because of an invalid tender, the occurrence of certain other events set forth
herein or otherwise, certificates for any such unaccepted Holding Preferred
Stock will be returned, without expense, to the tendering Holder thereof as
promptly as practicable after the Expiration Date.
Holders of Holding Preferred Stock who tender in the Exchange Offer will
not be required to pay brokerage commissions or fees or, subject to the
instructions in the Letter of Transmittal, transfer taxes with respect to the
exchange of Holding Preferred Stock pursuant to the Exchange Offer. Holding
will pay the expenses, other than certain applicable taxes, of the Exchange
Offer. See "--Fees and Expenses."
Expiration Date; Extensions; Amendments
The term "Expiration Date" shall mean September 25, 1998, unless Holding in
its sole discretion, extends the Exchange Offer, in which case the term
"Expiration Date" shall mean the latest date to which the Exchange Offer is
extended.
In order to extend the Expiration Date, Holding will notify the Exchange
Agent and the record Holders of Holding Preferred Stock of any extension by oral
or written notice, each prior to 9:00 a.m., New York City time, on the next
business day after the previously scheduled expiration date. Such notice may
state that Holding is extending the Exchange Offer for a specified period of
time or on a daily basis until 5:00 p.m., New York City time, on the date on
which a specified percentage of Holding Preferred Stock is tendered.
32
<PAGE>
Holding reserves the right to delay accepting any Holding Preferred Stock,
to extend the Exchange Offer, to amend the Exchange Offer or to terminate the
Exchange Offer and not accept Holding Preferred Stock not previously accepted if
any of the conditions set forth herein under "--Conditions" shall have occurred
and shall not have been waived by Holding by giving oral or written notice of
such delay, extension, amendment or termination to the Exchange Agent. Any such
delay in acceptance, extension, amendment or termination will be followed as
promptly as practicable by oral or written notice thereof. If the Exchange
Offer is amended in a manner determined by Holding to constitute a material
change, Holding will promptly disclose such amendment in a manner reasonably
calculated to inform the Holders of such amendment and Holding will extend the
Exchange Offer for a period of five to 10 business days, depending upon the
significance of the amendment and the manner of disclosure to Holders of the
Holding Preferred Stock, if the Exchange Offer would otherwise expire during
such five to 10 business day period.
Without limiting the manner in which Holding may choose to make public
announcement of any extension, amendment or termination of the Exchange Offer,
Holding shall have no obligation to publish, advertise, or otherwise communicate
any such public announcement, other than by making a timely release to the Dow
Jones News Service.
ACCRUED DIVIDENDS ON THE EXCHANGE PREFERRED STOCK AND THE HOLDING PREFERRED
STOCK
Dividends on the Exchange Preferred Stock will accrue at a rate per share
of 11 1/2% per annum of the Liquidation Preference thereof. Dividends on the
Exchange Preferred Stock will accrue at the rate per share of 11 1/2% per annum
of the Liquidation Preference thereof. Dividends will be payable in cash,
except that on each Dividend Payment Date occurring on or prior to April 15,
2003, dividends may be paid, at Holding's option, by the issuance of additional
shares of Exchange Preferred Stock (including fractional shares) having an
aggregate Liquidation Preference equal to the amount of such dividends. It is
not anticipated that Holding will pay any dividends in cash for any period
ending on or prior to April 15, 2003. Holders whose Holding Preferred Stock is
accepted for exchange will receive accrued dividends thereon to, but excluding,
the date of issuance of the Exchange Preferred Stock. Such dividends will be
paid with the first dividend payment on the Exchange Preferred Stock. Dividends
on the Holding Preferred Stock accepted for exchange will cease to accrue upon
cancellation of the Holding Preferred Stock and issuance of the Exchange
Preferred Stock. Holders of Holding Preferred Stock whose Holding Preferred
Stock is not exchanged will receive the accrued dividend payable on October 15,
1998.
PROCEDURES FOR TENDERING
To tender in the Exchange Offer, a Holder must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by Instruction 4 of the Letter of Transmittal, and mail
or otherwise deliver such Letter of Transmittal or such facsimile, together with
the Holding Preferred Stock and any other required documents, to the Exchange
Agent prior to 5:00 p.m., New York City time, on the Expiration Date.
Any financial institution that is a participant in DTC's Book-Entry
Transfer Facility system may make book-entry delivery of the Holding Preferred
Stock by causing DTC to transfer such Holding Preferred Stock into the Exchange
Agent's account in accordance with DTC's procedure for such transfer. Although
delivery of Holding Preferred Stock may be effected through book-entry transfer
into the Exchange Agent's account at DTC, the Letter of Transmittal (or
facsimile thereof), with any required signature guarantees and any other
required documents, must, in any case, be transmitted to and received or
confirmed by the Exchange Agent at its address set forth in "--Exchange Agent"
below prior to 5:00 p.m., New York City time, on the Expiration Date. DELIVERY
OF DOCUMENTS TO DTC IN ACCORDANCE WITH ITS PROCEDURES DOES NOT CONSTITUTE
DELIVERY TO THE EXCHANGE AGENT.
The tender by a Holder will constitute an agreement between such Holder and
Holding in accordance with the terms and subject to the conditions set forth
herein and in the Letter of Transmittal.
33
<PAGE>
Delivery of all documents must be made to the Exchange Agent at its address
set forth below. Holders may also request their respective brokers, dealers,
commercial banks, trust companies or nominees to effect the above transactions
for such Holders.
The method of delivery of Holding Preferred Stock and the Letter of
Transmittal and all other required documents to the Exchange Agent is at the
election and risk of the Holders. Instead of delivery by mail, it is
recommended that Holders use an overnight or hand delivery service. In all
cases, sufficient time should be allowed to assure timely delivery. No Letter
of Transmittal or Holding Preferred Stock should be sent to Holding.
Only a Holder of Holding Preferred Stock may tender such Holding Preferred
Stock in the Exchange Offer. The term "Holder" with respect to the Exchange
Offer means any person in whose name Holding Preferred Stock is registered on
the books of Holding or any other person who has obtained a properly completed
bond power from the registered Holder.
ANY BENEFICIAL HOLDER WHOSE HOLDING PREFERRED STOCK IS REGISTERED IN THE
NAME OF ITS BROKER, DEALER, COMMERCIAL BANK, TRUST COMPANY OR OTHER NOMINEE AND
WHO WISHES TO TENDER SHOULD CONTACT SUCH REGISTERED HOLDER PROMPTLY AND INSTRUCT
SUCH REGISTERED HOLDER TO CONSENT AND/OR TENDER ON ITS BEHALF. IF SUCH
BENEFICIAL HOLDER WISHES TO TENDER ON ITS OWN BEHALF, SUCH BENEFICIAL HOLDER
MUST, PRIOR TO COMPLETING AND EXECUTING THE LETTER OF TRANSMITTAL AND DELIVERING
ITS HOLDING PREFERRED STOCK, EITHER MAKE APPROPRIATE ARRANGEMENTS TO REGISTER
OWNERSHIP OF THE HOLDING PREFERRED STOCK IN SUCH HOLDER'S NAME OR OBTAIN A
PROPERLY COMPLETED BOND POWER FROM THE REGISTERED HOLDER. THE TRANSFER OF
RECORD OWNERSHIP MAY TAKE CONSIDERABLE TIME.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Holding Preferred Stock tendered pursuant thereto is tendered (i) by
a registered Holder who has not completed the box entitled "Special Payment
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or
(ii) for the account of an Eligible Institution. In the event that signatures
on a Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantee must be by an "Eligible Guarantor
Institution" within the meaning of Rule 17Ad-15 under the Securities Exchange
Act of 1934, as amended, which is a member of one of the following recognized
signature guarantee programs: (i) the Securities Transfer Agents Medallion
Program (STAMP), (ii) the New York Stock Exchange Medallion Signature Program
(MSP) or (iii) the Stock Exchange Medallion Program (SEMP) (an "Eligible
Institution").
If the Letter of Transmittal is signed by a person other than the
registered Holder of any Holding Preferred Stock listed therein, such Holding
Preferred Stock must be endorsed or accompanied by appropriate bond powers
signed as the name of the registered Holder or Holders appears on the Holding
Preferred Stock.
If the Letter of Transmittal or any Holding Preferred Stock or powers of
attorney are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, officers of corporations or others acting in a fiduciary or
representative capacity, such persons should so indicate when signing, and
unless waived by Holding, evidence satisfactory to Holding of their authority to
so act must be submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of tendered Holding Preferred Stock and withdrawal of
tendered Holding Preferred Stock will be determined by Holding in its sole
discretion, which determination will be final and binding. Holding reserves the
absolute right to reject any and all Holding Preferred Stock not properly
tendered or any Holding Preferred Stock Holding's acceptance of which would, in
the opinion of counsel for Holding, be unlawful. Holding also reserves the
right to waive any defects, irregularities or conditions of tender as to
particular Holding Preferred Stock. Holding's interpretation of the terms and
conditions of the Exchange Offer (including the instructions in the Letter of
Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Holding Preferred Stock
must be cured within such time as Holding shall determine. Neither Holding, the
Exchange Agent nor any other person shall be under any duty to give notification
of defects or irregularities with respect to tenders of Holding Preferred Stock,
nor shall any of them incur any liability for failure to give such notification.
Tenders of Holding Preferred Stock will not be deemed to have been made until
such irregularities have been cured or waived. Any Holding Preferred Stock
received by the Exchange Agent that is not properly tendered and as to which the
34
<PAGE>
defects or irregularities have not been cured or waived will be returned by the
Exchange Agent to the tendering Holders of Holding Preferred Stock, unless
otherwise provided in the Letter of Transmittal, as soon as practicable
following the Expiration Date.
In addition, Holding reserves the right in its sole discretion to purchase
or make offers for any Holding Preferred Stock that remains outstanding
subsequent to the Expiration Date or, as set forth under "--Conditions," to
terminate the Exchange Offer and, to the extent permitted by applicable law,
purchase Holding Preferred Stock in the open market, in privately negotiated
transactions or otherwise. The terms of any such purchases or offers could
differ from the terms of the Exchange Offer.
By tendering, each Holder will represent to Holding that, among other
things, the Exchange Preferred Stock acquired pursuant to the Exchange Offer is
being obtained in the ordinary course of such Holder's business, that such
Holder has no arrangement with any person to participate in the distribution of
such Exchange Preferred Stock, and that such Holder is not an "affiliate", as
defined under Rule 405 of the Securities Act, of Holding. If the Holder is a
broker-dealer that will receive Exchange Preferred Stock for its own account in
exchange for Holding Preferred Stock that was acquired as a result of market-
making activities or other trading activities and not acquired directly from
Holding, such Holder by tendering will acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Preferred Stock. See
"Plan of Distribution."
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Holding Preferred Stock and (i) whose
Holding Preferred Stock is not immediately available, or (ii) who cannot deliver
their Holding Preferred Stock, the Letter of Transmittal or any other required
documents to the Exchange Agent prior to the Expiration Date, may effect a
tender if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of Guaranteed
Delivery (the "Notice of Guaranteed Delivery") (by facsimile transmission, mail
or hand delivery) setting forth the name and address of the Holder of the
Holding Preferred Stock, the certificate number or numbers of such Holding
Preferred Stock and the principal amount of Holding Preferred Stock tendered,
stating that the tender is being made thereby and guaranteeing that, within
three New York Stock Exchange trading days after the Expiration Date, the Letter
of Transmittal (or facsimile thereof) together with the certificate(s)
representing the Holding Preferred Stock to be tendered in proper form for
transfer (or a confirmation of a book-entry transfer into the Exchange Agent's
account at DTC of Holding Preferred Stock delivered electronically) and any
other documents required by the Letter of Transmittal will be deposited by the
Eligible Institution with the Exchange Agent; and
(c) Such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all tendered
Holding Preferred Stock in proper form for transfer (or confirmation of a book-
entry transfer into the Exchange Agent's account at DTC of Holding Preferred
Stock delivered electronically) and all other documents required by the Letter
of Transmittal are received by the Exchange Agent within five New York Stock
Exchange trading days after the Expiration Date.
Upon request of the Exchange Agent, a Notice of Guaranteed Delivery will be sent
to Holders who wish to tender their Holding Preferred Stock according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Holding Preferred Stock may
be withdrawn at any time prior to 5:00 p.m., New York City time, on the
Expiration Date. To withdraw a tender of Holding Preferred Stock in the
Exchange Offer, a written or facsimile transmission notice of withdrawal must be
received by the Exchange Agent at its address set forth herein prior to 5:00
p.m., New York City time, on the Expiration Date. Any such notice of withdrawal
must (i) specify the name of the person having deposited the Holding Preferred
Stock to be withdrawn (the "Depositor"), (ii) identify the Holding Preferred
Stock to be withdrawn (including the certificate number or numbers and number of
shares of such Holding Preferred Stock), (iii) be signed by the Holder in the
35
<PAGE>
same manner as the original signature on the Letter of Transmittal by which such
Holding Preferred Stock was tendered (including any required signature
guarantees) or be accompanied by documents of transfer sufficient to have the
Trustee with respect to the Holding Preferred Stock register the transfer of
such Holding Preferred Stock into the name of the person withdrawing the tender,
and (iv) specify the name in which any such Holding Preferred Stock is to be
registered, if different from that of the Depositor. All questions as to the
validity, form and eligibility (including time of receipt) of such notices will
be determined by Holding, whose determination shall be final and binding on all
parties. Any Holding Preferred Stock so withdrawn will be deemed not to have
been validly tendered for purposes of the Exchange Offer and no Exchange
Preferred Stock will be issued with respect thereto unless the Holding Preferred
Stock so withdrawn is validly retendered. Any Holding Preferred Stock which has
been tendered but which is not accepted for payment will be returned to the
Holder thereof without cost to such Holder as soon as practicable after
withdrawal, rejection of tender or termination of the Exchange Offer. Properly
withdrawn Holding Preferred Stock may be retendered by following one of the
procedures described above under "--Procedures for Tendering" at any time prior
to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, Holding will not be
required to accept for exchange, or exchange Exchange Preferred Stock for, any
Holding Preferred Stock not theretofore accepted for exchange, and may terminate
or amend the Exchange Offer as provided herein before the acceptance of such
Holding Preferred Stock, if any of the following conditions exist:
(a) the Exchange Offer, or the making of any exchange by a Holder, violates
applicable law or any applicable interpretation of the Commission; or
(b) any action or proceeding is instituted or threatened in any court or by
or before any governmental agency with respect to the Exchange Offer which, in
the sole judgment of Holding, might impair the ability of Holding to proceed
with the Exchange Offer; or
(c) there shall have been adopted or enacted any law, statute, rule or
regulation which, in the sole judgment of Holding, might materially impair the
ability of Holding to proceed with the Exchange Offer.
If any such conditions exist, Holding may (i) refuse to accept any Holding
Preferred Stock and return all tendered Holding Preferred Stock to exchanging
Holders, (ii) extend the Exchange Offer and retain all Holding Preferred Stock
tendered prior to the expiration of the Exchange Offer, subject, however, to the
rights of Holders to withdraw such Holding Preferred Stock (see "--Withdrawal of
Tenders") or (iii) waive certain of such conditions with respect to the Exchange
Offer and accept all properly tendered Holding Preferred Stock which has not
been withdrawn or revoked. If such waiver constitutes a material change to the
Exchange Offer, Holding will promptly disclose such waiver in a manner
reasonably calculated to inform Holders of Holding Preferred Stock of such
waiver.
The foregoing conditions are for the sole benefit of Holding and may be
asserted by Holding regardless of the circumstances giving rise to any such
condition or may be waived by Holding in whole or in part at any time and from
time to time in its sole discretion. The failure by Holding at any time to
exercise any of the foregoing rights shall not be deemed a waiver of any such
right and each such right shall be deemed an ongoing right which may be asserted
at any time and from time to time.
In addition to the foregoing conditions, if, because of any change in
applicable law or applicable interpretations thereof by the Commission, Holding
is not permitted to complete the Exchange Offer, then Holding shall file a Shelf
Registration Statement. Thereafter, Holding's obligation to consummate the
Exchange Offer shall be terminated.
36
<PAGE>
EXCHANGE AGENT
United States Trust Company of New York has been appointed as Exchange
Agent for the Exchange Offer. Questions and requests for assistance, requests
for additional copies of this Prospectus or of the Letter of Transmittal and
requests for Notices of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
<TABLE>
<S> <C>
By Registered or Certified Mail: By Overnight Courier and By Hand after
4:30 p.m.:
United States Trust Company of New York United States Trust Company of New York
P.O. Box 844 Cooper Station 770 Broadway, 13th Floor
New York, New York 10276 New York, New York 10003
Attention: Corporate Trust Services
By Hand before 4:30 p.m.: By Facsimile:
United States Trust Company of New York (212) 780-0592
111 Broadway Attention: Customer Service
New York, New York 10006
Attention: Lower Level Confirm by telephone:
Corporate Trust Window (800) 548-6565
</TABLE>
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by Holding. The principal
solicitation is being made by mail; however, additional solicitation may be made
by telegraph, telephone or in person by officers and regular employees of
Holding and its affiliates.
Holding will not make any payments to brokers, dealers or others soliciting
acceptances of the Exchange Offer. Holding, however, will pay the Exchange
Agent reasonable and customary fees for its services and will reimburse it for
its reasonable out-of-pocket expenses in connection therewith. Holding may also
pay brokerage houses and other custodians, nominees and fiduciaries the
reasonable out-of-pocket expenses incurred by them in forwarding copies of the
Prospectus and related documents to the beneficial owners of the Holding
Preferred Stock, and in handling or forwarding tenders for exchange.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by Holding, are estimated in the aggregate to be approximately $200,000,
and include fees and expenses of the Exchange Agent and United States Trust
Company of New York (the "Transfer Agent") and accounting and legal fees.
Holding will pay all transfer taxes, if any, applicable to the exchange of
Holding Preferred Stock pursuant to the Exchange Offer. If, however,
certificates representing Exchange Preferred Stock or Holding Preferred Stock
for shares not tendered or accepted for exchange are to be delivered to, or are
to be registered or issued in the name of, any person other than the registered
Holder of the Holding Preferred Stock tendered, or if tendered Holding Preferred
Stock is registered in the name of any person other than the person signing the
Letter of Transmittal, or if a transfer tax is imposed for any reason other than
the exchange of Holding Preferred Stock pursuant to the Exchange Offer, then the
amount of any such transfer taxes (whether imposed on the registered holder or
any other persons) will be payable by the tendering Holder. If satisfactory
evidence of payment of such taxes or exemption therefrom is not submitted with
the Letter of Transmittal, the amount of such transfer taxes will be billed
directly to such tendering Holder.
ACCOUNTING TREATMENT
The Exchange Preferred Stock will be recorded at the same carrying
value as the Holding Preferred Stock, which is face value as reflected in
Holding's accounting records on the date of the exchange. Accordingly, no gain
or loss for accounting purposes will be recognized upon consummation of the
Exchange Offer. The issuance costs incurred in connection with the Exchange
Offer will be capitalized and amortized over the term of the Exchange Preferred
Stock.
37
<PAGE>
SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The selected fiscal year end historical financial data has been derived
from the audited financial statements of the Company. The selected pro forma
financial data has been derived from the pro forma financial statements included
elsewhere in this Prospectus and gives effect to the Recapitalization as if it
had occurred at the beginning of the period presented with respect to the
operating and other financial data, and as of June 26, 1998 with respect to
balance sheet data. The financial data for the six months ended June 27, 1997
and June 26, 1998 and as of June 26, 1998 has been derived from unaudited
financial statements included elsewhere in this prospectus. The selected pro
forma financial data does not necessarily represent what the Company's financial
position and results of operations would have been if these transactions had
actually been completed as of the dates indicated, and is not intended to
project the Company's financial position or results of operations for any future
period. Fiscal years 1993 was a 53 week year and fiscal years 1994, 1995, 1996
and 1997 were 52 week years. The information contained in this table should be
read in conjunction with the Company's audited consolidated financial statements
and notes thereto at December 27, 1996 and December 26, 1997 and for each of the
three years in the period ended December 26, 1997, unaudited financial
statements and notes thereto for the six months ended June 27, 1997 and June 26,
1998 and as of June 26, 1998, and the pro forma consolidated financial
statements and notes thereto, included elsewhere in this Prospectus. Pro forma
1997 financial information relating to Holding is not presented because
Holding's balance sheet and financial results would have been substantially
identical to those of the Company.
38
<PAGE>
<TABLE>
<CAPTION>
HUDSON RESPIRATORY CARE INC.
---------------------------------------------------------------------------------------------
FISCAL YEAR
---------------------------------------------------------------------------------------------
PRO FORMA
1993 1994 1995 1996 1997 1997
------------ ------------ ------------ ------------ ------------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales......................... $ 79,111 $ 82,772 $ 86,825 $ 93,842 $ 99,509 $ 99,509
Cost of sales..................... 46,476 47,631 47,582 49,405 51,732 51,732
-------- -------- -------- -------- -------- --------
Gross profit...................... 32,635 35,141 39,243 44,437 47,777 47,777
Operating expenses:
Selling expenses.................. 7,070 7,499 8,283 8,961 9,643 9,643
Distribution expenses............. 4,743 4,543 4,595 4,829 5,240 5,240
General and administrative
expenses......................... 9,732 10,426 9,769 11,277 11,456 10,617(c)
Research and development
expenses......................... 2,880 1,983 2,064 2,253 1,845 1,845
Amortization of goodwill.......... -- -- -- -- -- --
Provision for equity
participation plan............... -- -- 11,415 8,249 6,954 --(e)
Provision for retention
payments......................... -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Operating income (loss)........... 8,210 10,690 3,117 8,868 12,639 20,432
Other (income) and expenses:
Interest expense.................. 2,253 2,299 2,424 2,177 1,834 15,099(g)
Other (income)/expense............ 600 546 811 (463) (638) (638)
-------- -------- -------- -------- -------- --------
Total other (income) and expenses. 2,853 2,845 3,235 1,714 1,196 14,461
-------- -------- -------- -------- -------- --------
Income (loss) before provision for
income taxes.................... 5,357 7,845 (118) 7,154 11,443 5,971
Provision (benefit) for income
taxes........................... 181 175 280 73 150 2,389(h)
-------- -------- -------- -------- -------- --------
Income (loss) before
extraordinary item............... 5,176 7.670 (398) 7,081 11,293 3,582
Extraordinary item (loss on
extinguishment of debt).......... -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Net income (loss)................. $ 5,176 $ 7,670 $ (398) $ 7,081 $ 11,293 $ 3,582(j)
======== ======== ======== ======== ======== ========
OTHER FINANCIAL DATA:
Net cash provided by (used in)
operating activities............ $ 12,784 $ 12,017 $ 15,939 $ 16,133 $ 19,269
Net cash provided by (used in)
investing activities............ $ (6,073) $ (2,607) $ (6,088) $(11,354) $ (3,673)
Net cash provided by (used in)
financing activities............ $ (5,910) $ (9,653) $(11,880) $ (3,668) $(16,398)
EBITDA before EPP and
Retention Payments(k)........... $ 15,422 $ 17,354 $ 21,205 $ 23,194 $ 25,440 $ 26,279
EBITDA before EPP and
Retention Payments margin(l).... 19.5% 21.0% 24.4% 24.7% 25.6% 26.4%
Operating margin before EPP and
Retention Payments(m)........... 10.4% 12.9% 16.7% 18.2% 19.7% 20.5%
Depreciation and amortization(n). $ 7,630 $ 7,033 $ 6,820 $ 6,133 $ 5,847 $ 7,190(o)
Capital expenditures.............. $ 9,112 $ 4,898 $ 5,850 $ 6,395 $ 4,659 $ 4,659
Ratio of EBITDA before EPP and
Retention Payments to cash
interest expense................ 6.8x 7.5x 8.7x 10.7x 13.9x 1.9x(p)
Ratio of total debt to EBITDA
before EPP and Retention
Payments........................ 2.3x 1.8x 1.2x 1.2x 0.8x 5.9x
Ratio of earnings
to fixed charges(q)............. 2.7x 3.6x 1.0x 3.7x 6.0x 1.3x
Deficiency in earnings to
cover fixed charges(q)..........
Ratio of earnings to fixed
charges and preferred
stock dividends(r).............. 2.7x 3.6x 1.0x 3.7x 6.0x 1.0x
Deficiency in earnings to cover
fixed charges and preferred
stock(r)........................
BALANCE SHEET DATA:
Working capital................... $ 18,187 $ 18,926 $ 18,641 $ 24,188 $ 6,430
Working capital as adjusted(s).... 20,423 20,588 22,461 26,768 29,960
Total assets...................... 66,870 66,576 64,387 76,910 77,554
Total debt........................ 35,167 31,607 25,364 28,146 20,250
Shareholders' equity
(deficit)....................... 23,693 25,269 19,112 19,872 22,515
<CAPTION>
HUDSON RESPIRATORY CARE INC. RIVER HOLDING CORP.
---------------------------------------- --------------------------------------
SIX MONTHS ENDED (UNAUDITED) FISCAL
YEAR THREE MONTHS ENDED
---------------------------------------- --------------------------------------
PRO PRO
FORMA PRO FORMA
JUNE 27, JUNE 26, JUNE 26, FORMA JUNE 26, JUNE 26,
1997 1998 1998 1997(a) 1998 1998
------------ ----------- ----------- ---------- ----------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales...................................... $ 49,093 $ 46,697 $ 46,697 $ 99,509 $ 22,432 $ 22,432
Cost of sales.................................. 25,388 25,142(b) 25,142 51,794 12,169 12,279
-------- -------- -------- -------- -------- --------
Gross profit................................... 23,705 21,255 21,555 47,715 10,263 10,153
Operating expenses:
Selling expenses............................... 4,789 4,691 4,691 9,643 2,398 2,444
Distribution expenses.......................... 2,547 2,698 2,698 5,240 1,249 1,249
General and administrative expenses............ 5,498 5,676(d) 5,504(c) 10,632 2,603 2,603
Research and development expenses.............. 895 940 940 1,845 466 466
Amortization of goodwill....................... -- -- -- 5,128 1,182 2,364
Provision for equity participation plan........ 3,654 63,939 --(e) --(e) -- --
Provision for retention payments............... -- 4,754(f) -- -- -- --
-------- -------- -------- -------- -------- --------
Operating income (loss)........................ 6,322 (61,143) 7,722 15,227 2,365 1,027
Other (income) and expenses:
Interest expense............................... 950 3,640 7,550(g) 15,099 3,220 7,550
Other (income)/expense......................... (645) 254 254 (638) (266) (266)
-------- -------- -------- -------- -------- --------
Total other (income) and expenses.............. 305 3,894 7,804 14,461 2,954 7,284
-------- -------- -------- -------- -------- --------
Income (loss) before provision for income taxes 6,017 (65,037) (82) 766 (589) (6,257)
Provision (benefit) for income taxes........... 260 (76,978) (33)(h) 307(h) (235) (2,502)
-------- -------- -------- -------- -------- --------
Income (loss) before extraordinary item........ 5,757 11,941 (49) 459 (354) (3,755)
Extraordinary item (loss on extinguishment
of debt)..................................... -- 104(i) -- -- -- --
-------- -------- -------- -------- -------- --------
Net income (loss).............................. $ 5,757 $ 11,837 $ (49)(j) $ 459 $ (354) $ (3,755)
======== ======== ======== ======== ======== ========
OTHER FINANCIAL DATA:
Net cash provided by (used in)
operating activities......................... $ 12,273 $(78,011) $ 10,012
Net cash provided by (used in)
investing activities......................... $ (994) $ (1,646) $(249,345)
Net cash provided by (used in)
financing activities......................... $(13,745) $ 84,509 $245,000
EBITDA before EPP and Retention Payments(k).... $ 12,846 $ 10,061 $ 10,233 $ 26,202 $ 4,770 $ 4,613
EBITDA before EPP and Retention Payments
margin(l).................................... 26.2% 21.5% 21.9% 26.3% 21.3% 20.6%
Operating margin before EPP and Retention
Payments(m).................................. 20.3% 16.2% 16.5% 15.3% 10.5% 4.6%
Depreciation and amortization(n)............... $ 2,901 $ 2,992 $ 3,215(o) $ 12,318(o) $ 2,755 $ 4,289
Capital expenditures........................... $ 2,049 $ 1,646 $ 1,646 $ 4,659 1,345 1,345
Ratio of EBITDA before EPP and Retention
Payments to cash interest expense............ 1.9x(p)
Ratio of total debt to EBITDA before EPP and
Retention Payments........................... 6.0x
Ratio of earnings to fixed charges(q).......... 6.1x 1.0x
Deficiency in earnings to
cover fixed charges(q)........................ $(65,037) $ (82) $ (589) $(6,257)
Ratio of earnings to fixed charges
and preferred stock dividends(r).............
Deficiency in earnings to cover
fixed charges and preferred stock(r)......... $(66,330) $(2,959) $ (5,787) $ (1,882) $(9,134)
BALANCE SHEET DATA:
Working capital................................ $ 24,639 $ 23,509 $ 23,744
Working capital as adjusted(s)................. 26,654 18,842 19,077
Total assets................................... 74,828 165,032 258,766
Total debt..................................... 23,625 153,000 153,000
Shareholders' equity (deficit)................. 42,531 (31,864) 61,870
</TABLE>
footnotes on following page
39
<PAGE>
______________________
(a) Represents the pro forma financial statements of the Company adjusted to (1)
include the accounts of River Holding Corp., and (2) the purchase accounting
effects of the investment by River Holding Corp.
(b) For a discussion of the change in cost of goods sold, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Results of Operations--Six Months Ended June 26, 1998 Compared to Six
Months Ended June 27, 1997."
(c) Pro forma general and administrative expense reflects the following (amounts
in thousands):
<TABLE>
<CAPTION>
DECEMBER 26, JUNE 26,
1997 1998
----------- ----------
<S> <C> <C>
Actual general and administrative expense........................ $11,456 $5,676
Elimination of Continuing Shareholder salary, bonus and fringe
benefits(1)..................................................... (455) (87)
Elimination of expenses related to OxyAir(2)..................... (384) (85)
---------- ----------
Total............................................................ $10,617 $5,504
========== ==========
</TABLE>
______________________
(1) The Company will not continue to pay Continuing Shareholder salary,
bonus and related fringe benefits. The adjustment is to eliminate such
expenses.
(2) Reflects the elimination of expense related to OxyAir since OxyAir was
transferred to the Continuing Shareholder.
(d) Includes $0.3 million of legal fees related to patent litigation in which
the Company was granted favorable summary judgment during the six months
ended June 26, 1998. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Results of Operations--Six Months Ended
June 26, 1998 Compared to Six Months Ended June 27, 1997."
(e) Reflects the elimination of the Equity Participation Plan. For purposes of
compliance with the Indenture, the Company's Consolidated Net Income and
EBITDA will not be reduced by the amount of any contingent payments made by
the Company to former participants in the Equity Participation Plan.
Additional payments to former plan participants will be expensed as earned
by the Company. Additional payments made by Holding, including amounts to be
paid to the former plan participants, will be recorded as additional
purchase price in the financial statements of Holding. See "Summary--The
Recapitalization" and "Certain Transactions."
(f) Reflects retention payments made to substantially every employee of the
Company in connection with the Recapitalization. These payments were
intended to ensure the continued employment of all employees after the
Recapitalization and no future payments are anticipated.
(g) Pro forma interest expense, including amortization of deferred financing
fees related to the Recapitalization consists of the following (amounts in
thousands):
<TABLE>
<CAPTION>
DECEMBER 26, JUNE 26,
1997 1998
----------- ---------
<S> <C> <C>
Interest expense on bank facility at an assumed composite interest
rate of 8.00%....................................................... $ 3,200 $1,600
Interest expense on Senior Subordinated Notes at an interest rate
of 9.125%........................................................... 10,494 5,247
Amortization of deferred finance fees(1)............................. 1,405 703
------- ------
Total................................................................ $15,099 $7,550
======= ======
</TABLE>
______________________
(1) Amortization of deferred debt financing costs relating to the
Recapitalization are excluded from the calculation of Hudson RCI's
Consolidated Interest Coverage Ratio under the Indenture.
(h) Reflects the income tax effect of the net changes described above, using an
effective tax rate of 40%.
(i) Reflects the write-off of deferred financing fees related to the payoff of
outstanding debt under the Company's credit agreement existing prior to the
New Credit Facility.
(j) For purposes of compliance with the Indenture, the Company's Consolidated
Net Income will not be reduced by the amount of any contingent payments made
by the Company to former participants in the Equity Participation Plan. See
"Summary--The Recapitalization" and "Certain Transactions."
(k) EBITDA before EPP and Retention Payments represents income before
depreciation and amortization, interest expense, income tax expense and
charges related to the Equity Participation Plan, which was terminated upon
consummation of the Recapitalization. The Company has excluded payments
under the Equity Participation Plan to present comparable figures for all
historical periods presented. EBITDA before EPP and Retention Payments is
not a measure of performance under generally accepted accounting principles,
and should not be considered as a substitute for net income, cash flows from
operating activities and other income or cash flow statement data prepared
in accordance with generally accepted accounting principles, or as a measure
of profitability or liquidity. The Company has included information
concerning EBITDA before EPP and Retention Payments as one measure of an
issuer's historical ability to service debt.
40
<PAGE>
In addition, certain covenants and in the Indenture are based upon a
calculation analogous to EBITDA before EPP and Retention Payments. EBITDA
before EPP and Retention Payments should not be considered as an alternative
to, or more meaningful than, income from operations or cash flow as an
indication of the Hudson RCI's operating performance. For purposes of
compliance with the Indenture, the Company's Consolidated Net Income and
EBITDA will not be reduced by retention payments, payments made pursuant to
the Equity Participation Plan or by the amount of any contingent payments
made by the Company to former participants in the Equity Participation Plan.
See "Summary--The Recapitalization" and "Certain Transactions."
(l) Represents ratio of EBITDA before EPP and retention payments to net
sales.
(m) Represents ratio of Operating income before EPP and retention payments to
net sales.
(n) Includes amortization of deferred financing fees of $0.4 million in 1993,
$0.4 million in 1994, $0.1 million in 1995 and $0.1 million in 1996, which
should be excluded from depreciation and amortization in calculating EBITDA
before EPP and Retention Payments since such fees are reflected below the
operating income line.
(o) Actual 1997 amortization of deferred financing fees has been replaced with
pro forma non-cash amortization of deferred financing fees of approximately
$1.4 million associated with the Recapitalization. Actual amortization for
the quarter ended June 26, 1998 has been replaced by pro forma amortization
of $0.7 million associated with the Recapitalization. For River Holding
Corp., amortization of goodwill is also included.
(p) Excludes approximately $1.4 million of non-cash amortization expense for
1997 related to deferred debt financing costs relating to the
Recapitalization. This amount is also excluded from the calculation of
Hudson RCI's Consolidated Interest Coverage Ratio under the Indenture.
(q) For the purpose of determining the ratio of earnings to fixed charges,
earnings consist of earnings before income taxes and fixed charges. Fixed
charges consist of interest on indebtedness, the amortization of debt issue
costs and that portion of operating rental expense representative of the
interest factor.
(r) For the purpose of determining the ratio of earnings to fixed charges and
preferred stock dividends, earnings consist of earnings before income taxes
and fixed charges. Fixed charges consist of interest on indebtedness, the
amortization of debt issue costs and that portion of operating rental
expense representative of the interest factor. Preferred stock dividends,
consisting of amounts to be paid-in-kind, are also included in the pro forma
fixed charge amounts. Preferred stock dividends have been "grossed up" to a
pre-income tax basis to provide comparability to other components of the
ratio.
(s) Working capital as adjusted represents current assets, excluding cash, less
current liabilities, excluding the current portion of long-term debt. Actual
1997 current liabilities excludes the management bonus liability of $20.0
million. See Note 7(c) to Consolidated Financial Statements.
41
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As Holding is a holding company with no operations, the following
discussion relates to Hudson RCI. The following discussion of the Company's
consolidated historical results of operations and financial condition should be
read in conjunction with the consolidated financial statements of the Company
and the notes thereto included elsewhere in this Prospectus. The following
discussion and analysis covers periods before completion of the
Recapitalization. See "Risk Factors" and Pro Forma Consolidated Financial
Statements for a further discussion relating to the effect that the transactions
described herein may have on the Company.
RECENT DEVELOPMENTS AND OUTLOOK
The Company is a leading manufacturer and marketer of disposable medical
products utilized in the respiratory care and anesthesia segments of the
domestic and international health care markets. The Company's principal
products include oxygen masks, humidification systems, nebulizers, cannulae and
tubing. In the United States, the Company markets its products to a variety of
health care providers, including hospitals and alternate site service providers
such as outpatient surgery centers, long-term care facilities, physician offices
and home health care agencies. Internationally, the Company sells its products
to distributors who market to hospitals and other health care providers. In
1997, 63.6% of the Company's net sales were generated from the domestic hospital
market, 19.1% from the export market, 14.7% from alternate site provider market
and 2.7% from OEM and other markets. The Company's products are sold to over
2,500 distributors and alternate site service providers throughout the United
States and in more than 75 countries worldwide.
The Company has reported increased annual net sales and EBITDA before EPP
and Retention Payments (the calculation used in certain material financial
covenants in the Certificate of Designation, the New Credit Facility and the
Indenture) in each year since 1990. Net sales increased from $79.1 million in
fiscal 1993 to $99.5 million in fiscal 1997, representing a compound annual
growth rate of 5.9%. From fiscal 1993 to 1997, the Company's operating income
increased from $8.2 million to $12.6 million, representing a compound annual
growth rate of 11.4%. From fiscal 1993 to fiscal 1997, the Company's EBITDA
before EPP and Retention Payments increased from $15.4 million to $25.4 million,
representing a compound annual growth rate of 13.3%. The more rapid increase in
operating income and in EBITDA before EPP and Retention Payments relative to net
sales is the result of improvements in operating income as a percentage of net
sales from 10.4% in fiscal 1993 to 12.7% in fiscal 1997 and in EBITDA before EPP
and Retention Payments as a percentage of sales from 19.5% in fiscal 1993 to
25.6% in fiscal 1997. These margin improvements were achieved during a period of
heightened cost containment affecting the health care market generally. See
"Business--Industry Overview." The Company attributes its ability to increase
profit margins to its commitment to cost reduction and operating efficiency. See
"--Liquidity and Capital Resources" for a discussion of certain cash flow
information of the Company.
Consistent with the Company's business strategy, the Company has increased
its net sales and improved its position within the disposable health care
products market in recent years by increasing its respiratory care product
offering, introducing disposable products for the anesthesia health care market,
expanding its presence in international markets and establishing a position in
the growing alternate site market.
Through consistent product development efforts, the Company continuously
evolves and improves its product offering to fully serve the respiratory care
market. In addition to the respiratory care market, the Company developed and
introduced disposable products for the anesthesia market starting in 1995.
Since that time, sales of anesthesia products have increased and in 1997
contributed $6.5 million in net sales. Net sales from new respiratory and
anesthesia products introduced since 1992 represented approximately 18% of the
Company's total net sales in fiscal 1997. In 1994, the Company established a
sales force dedicated to sales of the Company's products to international
markets. The international sales effort has focused largely on major and
growing markets for the Company's products. In fiscal 1997, the Company's
products were sold to health care providers and distributors in more than 75
international markets representing $19.0 million in net sales. See Note 8 to
Consolidated Financial Statements. With the increasing trend toward providing
health care outside of traditional hospital settings and the rapid growth of
alternate site health care providers, the Company established in 1995 an
independent sales force dedicated to this market. Sales of products to
alternate site distributors and/or health care providers represented
approximately $14.6 million in net sales in fiscal 1997. The Company has
targeted the international, alternate site and anesthesia markets as key
components for future growth.
The Company's results of operations may fluctuate significantly from
quarter to quarter as a result of a number of factors, including, among others,
the buying patterns of the Company's distributors, GPOs and other
42
<PAGE>
purchasers of the Company's products, forecasts regarding the severity of the
annual cold and flu season, announcements of new product introductions by the
Company or its competitors, changes in the Company's pricing of its products and
the prices offered by the Company's competitors, rate of overhead absorption due
to variability in production levels and variability in the number of shipping
days in a given quarter.
Results for the second quarter of 1998 were adversely impacted because,
among other things, of the decrease in demand from hospitals affiliated with the
Premier GPO, as the Premier contract for respiratory supplies was awarded to a
competitor of the Company, and the discontinuance of a distribution-related
strategic alliance in Germany with an international health care supplier. As a
result, the Company was not in compliance with certain covenants under the New
Credit Facility, so certain of the financial covenants in the New Credit
Facility were amended.
On April 7, 1998, the Company consummated the Recapitalization. The
Recapitalization consisted of (i) the merger of River Acquisition Corp., a
wholly-owned subsidiary of Holding, with and into Hudson RCI, with Hudson RCI
surviving as a majority-owned subsidiary of Holding, (ii) a $93.0 million
investment by Holding in Hudson RCI, made up of the $63.0 million Common Stock
Investment and the $30.0 million Preferred Stock Investment, (iii) the $115.0
million Subordinated Notes Offering, (iv) the $30.0 million Preferred Stock
Offering, and (v) the $100.0 million New Credit Facility. See "Summary--The
Recapitalization." Immediately following consummation of the Recapitalization,
FS&Co. owned approximately 87.3% of the outstanding common stock of Holding. The
Company and the shareholders that received distributions in the Recapitalization
made an election under Section 338(h)(10) of the Internal Revenue Code of 1986,
as amended, to treat the Recapitalization as an asset purchase for tax purposes,
which will have the effect of significantly increasing the basis of the
Company's assets, thus increasing depreciation and amortization expenses and
other deductions for tax purposes and reducing the Company's taxable income in
1998 and subsequent years. For Holding purposes, the acquisition will be
accounted for under the purchase method. Because less than "substantially all"
of the common stock of the Company, as defined in SEC Staff Accounting Bulletin
Topic 5J, was acquired, the purchase price need not be pushed down to the
accounts of the Company. Accordingly, the Recapitalization resulted in no change
in the basis of the Company's assets and liabilities. The effect of the
Recapitalization, as if the transaction had occurred as of certain earlier
dates, is presented in Unaudited Pro Forma Financial Statements.
RESULTS OF OPERATIONS
The following tables set forth, for the periods indicated, certain income
and expense items expressed in dollars and as a percentage of the Company's net
sales.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR (unaudited)
----------------------------- ---------------------------
JUNE 27, JUNE 26,
1995 1996 1997 1997 1998
-------- -------- ---------- ------------- ------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Net sales........................................... $86,825 $93,842 $99,509 $49,093 $46,697
Cost of sales....................................... 47,582 49,405 51,732 25,388 25,142
-------- -------- -------- -------- --------
Gross profit...................................... 39,243 44,437 47,777 23,705 21,555
-------- -------- -------- -------- --------
Selling expenses.................................... 8,283 8,961 9,643 4,789 4,691
Distribution expenses............................... 4,595 4,829 5,240 2,547 2,698
General and administrative expenses................. 9,769 11,277 11,456 5,498 5,676
Research and development expenses................... 2,064 2,253 1,845 895 940
Provision for equity participation plan............. 11,415 8,249 6,954 3,654 63,939
Provision for retention payments.................... - - - - 4,754
-------- -------- -------- -------- --------
Total operating expenses............................ 36,126 35,569 35,138 17,383 82,698
-------- -------- -------- -------- --------
Operating income (loss)............................. 3,117 8,868 12,639 6,322 (61,143)
Add back: Provision for equity participation plan... 11,415 8,249 6,954 3,654 63,939
Add back: Provision for retention payments.......... -- -- -- -- 4,754
-------- -------- -------- -------- --------
Operating income before provision for equity
participation plan and provision for retention
payments........................................... $14,532 $17,117 $19,593 $ 2,668 $ 7,550
======== ======== ======== ======== ========
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR SIX MONTHS ENDED
----------------------------- ---------------------------
JUNE 27, JUNE 26,
1995 1996 1997 1997 1998
-------- -------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Net sales........................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales....................................... 54.8 52.6 52.0 51.7 53.8
-------- -------- ---------- ------------- ------------
Gross profit...................................... 45.2 47.4 48.0 48.3 46.2
-------- -------- ---------- ------------- ------------
Selling expenses.................................... 9.5 9.5 9.7 9.8 10.0
Distribution expenses............................... 5.3 5.1 5.3 5.2 5.8
General and administrative expenses................. 11.3 12.0 11.5 11.2 12.2
Research and development expenses................... 2.4 2.4 1.9 1.8 2.0
Provision for equity participation plan............. 13.1 8.8 7.0 7.4 136.9
Provision for retention payments.................... - - - - 10.2
-------- -------- ---------- ------------- ------------
Total operating expenses............................ 41.6 37.9 35.3 35.4 177.1
-------- -------- ---------- ------------- ------------
Operating income (loss)............................. 3.6 9.4 12.7 12.9 (130.9)
Add back: Provision for equity participation plan... 13.1 8.8 7.0 7.4 136.9
Add back: Provision for retention payments.......... -- -- -- -- 10.2
-------- -------- ---------- ------------- ------------
Operating income before provision for equity
participation plan and provision for retention
payments........................................... 16.7% 18.2% 19.7% 5.4% 16.2%
======== ======== ========== ============= ============
</TABLE>
Six Months Ended June 26, 1998 Compared to Six Months Ended June 27, 1997
Net sales, reported net of accrued rebates, were $46.7 million in the first
six months of 1998, a decrease of $2.4 million or 4.9% from the same period in
1997. Domestic hospital sales declined by $2.9 million or 9.3%, due primarily
to the decrease in demand in hospitals affiliated with the Premier GPO as the
Premier contract for respiratory supplies was awarded to a competitor in
February, 1997. Export sales declined by $0.2 million or 2.2%, primarily due to
loss of sales in southeast Asia as a result of the Asian economic crisis and a
slowdown in shipments to the European market due to delays in availability of CE
labeled product and inventory reduction programs by a large European
distributor. Substantially all of the Company's high volume products are now in
compliance with CE labeling requirements and the shortfall represents a shift of
sales from the second quarter to the third quarter of 1998. These shortfalls
were partially offset by an increase in alternate site sales of $0.7 million or
9.5% as the Company continues focus its sales efforts in this growing
market.
The Company's gross profit for the first half of 1998 was $21.6 million, a
decline of $2.2 million or 9.1% from the first half of 1997. As a percentage of
sales, the Company's gross profit margin was 46.2% in the first half of 1998, as
compared to 48.3% in the first half of 1997. This decline was primarily due to
lower sales volumes in the first half of 1998 as compared to 1997 and due to
the under absorption of overhead resulting from the Company's efforts to reduce
inventory levels in combination with a relatively consistent level of sales
volumes. On an interim basis, the Company allocates actual manufacturing costs
between cost of sales and inventory based on actual production levels. The
Company decreased production and reduced inventories by $1.5 million in the
first half of 1998 as compared to an increase in inventories of $1.6 million in
the first half of 1997. The decline in inventories caused approximately $0.9
million of additional overhead to be charged to cost of sales in the first half
of 1998.
Selling expenses, consisting primarily of sales force salaries, were $4.7
million for the first half of 1998, a decrease of $0.1 million from the first
half of 1997. As a percentage of net sales, selling expenses increased to 10.0%
in the first half of 1998 as compared to 9.8% in the first half of 1997 due to
the lower sales volumes.
Distribution expenses, consisting primarily of freight charges from the
Company's warehouses to its domestic customers, were $2.7 million in the first
half of 1998, an increase of $0.2 million or 5.9% from the first half of 1997.
The increase was primarily due to increased freight rates.
General and administrative expenses consist primarily of salaries and other
expenses for corporate management, finance, accounting, regulatory and human
resources. General and administrative expenses for the first half of 1998 were
$5.7 million, a $0.2 million increase over the first half of 1997. This
increase is due to payment of $300,000 in legal fees relating to the successful
defense of a patent infringement lawsuit.
Research and development expenses for the first half of 1998 were $0.9
million, an increase of $45,000 over the first half of 1997.
The provision for Equity Participation Plan consists of accrued expenses
and payments made to executives under the Equity Participation Plan. In the
first half of 1998, the provision for Equity Participation Plan was $63.9
million, which included approximately $1.3 million in employer payroll taxes
relating to the distribution made under the Equity Participation Plan.
The provision for retention payments, including related employer
payroll
44
<PAGE>
taxes, was $4.8 million in the first half of 1998. These payments were made
to substantially every employee in the Company and were intended to ensure the
continued employment of all employees after the Recapitalization. No future
payments are anticipated.
Interest expense was $3.6 million for the first half of 1998, an increase
of $2.7 million over the first half of 1997. This increase was due to higher
debt levels during the first half of 1998 as a result of the
Recapitalization.
Income tax expense reflects the effects of the termination of the Company's
S corporation status upon the Recapitalization. The Company now provides for
federal and state income taxes as a C corporation, although actual payments are
expected to be substantially less than provided amounts due to the tax bases in
assets provided by the Section 338(h)(10) election.
Year Ended December 26, 1997 Compared to Year Ended December 27, 1996
Net sales for 1997 were $99.5 million, an increase of $5.7 million or 6.0%
over 1996. The increase in net sales was primarily due to increased
international and alternate site sales due to increases in unit volume, which
was partially offset by a slight decrease in average selling price. For the
year, international sales were $19.0 million, an increase of $2.9 million or
18.2% over 1996, and alternate site sales were $14.6 million, an increase of
$1.7 million or 13.1% over 1996. Sales to Southeast Asia were adversely
affected in 1997 due to economic conditions in the region and the outlook for
sales in the region is uncertain in the near term. Approximately 30% of the
Company's 1997 total net sales were to a single distributor.
The Company's gross profit for 1997 was $47.8 million, an increase of $3.3
million or 7.5% over 1996. As a percentage of net sales, the Company's gross
profit increased to 48.0% in 1997 from 47.4% in 1996. The Company has been able
to improve its gross profit margin primarily by transferring additional assembly
operations to its lower cost operation in Ensenada, Mexico, automating and
upgrading the manufacturing process for the Company's products, particularly
oxygen masks, and continued cost containment efforts relating to the Company's
overhead structure.
Selling expense was $9.6 million for 1997, an increase of $0.7 million or
7.6% over 1996. As a percentage of net sales, selling expense increased to 9.7%
in 1997 from 9.5% in 1996. Selling expense increased primarily as a result of
increased employee compensation related to increased sales commissions and
performance compensation in connection with the increase in net sales. In
particular, sales commissions increased in connection with sales of selected
products targeted by the Company's commission incentive program. Selling
expense also increased as a result of fees paid to certain distributors in
connection with special promotional programs.
Distribution expense was $5.2 million for 1997, an increase of $0.4 million
or 8.5% over 1996. This increase was due to increased sales volume. As a
percentage of net sales, distribution expense increased to 5.3% in 1997 from
5.1% in 1996. Freight charges relating to international sales are generally
paid by the distributor.
General and administrative expenses for 1997 were $11.5 million, an
increase of $0.2 million or 1.6% over 1996. As a percentage of net sales,
general and administrative expenses decreased to 11.5% in 1997 from 12.0% in
1996 as a result of the Company's continued cost containment efforts. General
and administrative expenses increased in absolute terms as a result of salary
and facility maintenance expense increases and upgrade of the Company's
management information systems.
Research and development expenses for 1997 were $1.8 million, a decrease of
$0.4 million or 18.1% from 1996. This decrease was the result of reduced head
count and outside consulting fees. The Company's research and development
efforts include expenditures intended to provide improved products to its
customers and to upgrade its manufacturing processes. Management expects 1998
research and development expenses to continue at 1997 levels.
45
<PAGE>
The provision for the EPP consisted of accrued expense of $7.0 million in
1997, as compared with $8.2 million in 1996, reflecting the total termination
liability under the EPP at the end of 1997 and 1996, respectively. The EPP was
terminated upon consummation of the Recapitalization and replaced with an
executive stock purchase plan. See "Management--Stock Purchase Plan."
Interest expense for 1997 was $1.8 million, a decrease of $0.3 million or
15.8% from 1996, primarily as a result of lower average outstanding debt
balances during 1997 as compared to 1996. Following the Recapitalization, the
Company will have substantially higher interest expenses. See "--Liquidity and
Capital Resources" and Pro Forma Consolidated Financial Statements.
Prior to the Recapitalization, the Company was a Subchapter S corporation
and was not subject to federal income tax. Effective with the Recapitalization
the Company terminated S corporation status and is taxed as a Subchapter C
corporation.
Year Ended December 27, 1996 Compared to Year Ended December 29, 1995
Net sales for 1996 were $93.8 million, an increase of $7.0 million or 8.1%
over 1995. The increase in net sales was primarily due to growth in
international sales volume. Net sales were also positively impacted due to the
Company completing its first full year of sales of its anesthesia product line
and increased sales of that product line, which was introduced during 1995.
Unit increases were partially offset by price decreases, largely due to changes
in GPO affiliations among health care providers.
The Company's gross profit for 1996 was $44.4 million, an increase of $5.2
million or 13.2% over 1995. As a percentage of net sales, gross profit
increased to 47.4% in 1996 from 45.2% in 1995. The increase in the Company's
gross profit margin is primarily attributable to increased utilization of the
Company's lower cost manufacturing operations in Ensenada, Mexico, automating
and upgrading the manufacturing processes for the Company's products and cost
containment efforts relating to the Company's overhead structure.
Selling expense for 1996 was $9.0 million, an increase of $0.7 million or
8.2% over 1995, and was unchanged as a percentage of net sales from 1995 to
1996. Selling expense increased primarily as a result of increased employee
compensation related to increased sales commissions and performance compensation
in connection with the increase in net sales.
Distribution expense for 1996 was $4.8 million, an increase of $0.2 million
or 5.1% over 1995 due to increased sales volume. As a percentage of net sales,
distribution expense decreased to 5.1% in 1996 from 5.3% in 1995.
General and administrative expenses for 1996 were $11.3 million, an
increase of $1.5 million or 15.4% over 1995. As a percentage of net sales,
general and administrative expenses increased to 12.0% in 1996 from 11.3% in
1995. General and administrative expenses increased as a result of the
amortization of intangible assets acquired in connection with the acquisition of
a passive humidification product line in 1996. In 1995 the Company's general
and administrative expenses were lowered by a one-time credit of $0.3 million
relating to a workers' compensation program dividend.
Research and development expenses for 1996 were $2.3 million, an increase
of $0.2 million or 9.2% over 1995.
The Company's provision for the EPP consisted of an accrued expense of $8.2
million in 1996 compared to $11.4 million in 1995, reflecting the total
termination liability under the EPP at the end of 1996 and 1995, respectively.
The EPP was amended and restated in 1995 and the expense for 1995 reflected the
full value of the termination liability. In 1996 the expense was due to the
Company's increased net income.
Interest expense for 1996 was $2.2 million, a decrease of $0.2 million or
10.2% from 1995, primarily as a result of lower average outstanding debt
balances during 1996 as compared to 1995.
46
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table presents the unaudited quarterly net sales and EBITDA
before EPP for each of the Company's fiscal quarters in its fiscal years 1996
and 1997. In the opinion of the Company's management, this quarterly information
has been prepared on the same basis as the audited consolidated financial
statements appearing elsewhere in this Prospectus and includes all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the unaudited quarterly results set forth herein. The Company's quarterly
results have in the past been subject to seasonal and other fluctuations, and
thus the operating results for any quarter are not necessarily indicative of
results for any future period.
<TABLE>
<CAPTION>
1996 1997
-------------------------------------------- -----------------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- -------- -------- --------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales........... $24,143 $21,271 $21,566 $26,862 $23,987 $25,106 $21,813 $28,603
Operating
income............ 2,513 840 2,357 3,158 3,384 3,161 2,142 3,953
EBITDA before
EPP and Retention
Payments.......... 6,278 4,449 5,539 6,928 6,526 6,397 5,103 7,414
<CAPTION>
1996 1997
-------------------------------------------- -----------------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- -------- -------- --------- -------- --------
(PERCENT OF ANNUAL TOTAL)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales........... 25.7% 22.7% 23.0% 28.6% 24.1% 25.2% 21.9% 28.8%
Operating
income............ 28.3 9.5 26.6 35.6 26.8 25.0 16.9 31.3
EBITDA before
EPP and Retention
Payments.......... 27.1 19.2 23.9 29.8 25.7 25.1 20.1 29.1
</TABLE>
The Company's results of operations exhibit some measure of seasonality.
Generally, the Company's sales and EBITDA before EPP and Retention Payments are
higher in the first and fourth quarters and lower in the second and third
quarters. This is due primarily to the higher incidence of breathing ailments,
such as colds and flu, during the winter months, which results in increased
hospitalization and respiratory care, especially among higher-risk individuals,
such as infants and the elderly. Fourth quarter sales are generally the
Company's highest, as distributors increase inventory in anticipation of the
cold and flu seasons. First quarter results are generally affected by the length
and severity of flu seasons. Management believes that the fourth quarter of 1996
and the first half of 1997 benefitted from an unusually strong flu season.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are cash flow from operations
and borrowing under its working capital facility. Cash provided by operations
totaled $15.9 million, $16.1 million and $19.3 million in 1995, 1996 and 1997,
respectively, and increased in each year during this period due to the Company's
increased sales volume and improved operating margins. Cash provided by
operations before EPP payments totalled $12.3 million in the six months ended
June 27, 1997 and $12.2 million in the six months ended June 26, 1998. The
Company had operating working capital, excluding cash and short-term debt, of
$22.5 million, $26.8 million and $10.0 million as of the end of fiscal 1995,
1996 and 1997, respectively, and $18.8 million at June 26, 1998. Inventories
were $12.8 million, $14.0 million and $16.6 million as of the end of fiscal
1995, 1996 and 1997, respectively, and $15.1 million at June 26, 1998. In order
to meet the needs of its customers, the Company must maintain inventories
sufficient to permit same-day or next-day filling of most orders. Such
inventories are higher than those that would be required for delayed filling of
orders, thus adversely impacting liquidity. Over time, the Company expects its
level of inventories to increase as the Company's sales in the international
market increase. Accounts receivable, net of allowances, were $17.2 million,
$20.7 million and $21.3 million at the end of fiscal 1995, 1996 and 1997,
respectively, and $17.0 million at June 26, 1998. The average number of days
sales in accounts receivable outstanding was approximately 77 days for 1997,
compared to 74 days for 1996. The Company offers 30 day credit terms to its U.S.
hospital distributors. Alternate site and international customers typically
47
<PAGE>
receive 60 to 90 day terms and, as a result, as the Company's alternate site and
international sales have increased, the amount and aging of its accounts
receivable have increased. As a result, the Company anticipates that the amount
and aging of its accounts receivable will continue to increase. The Company is
exploring the utilization in 1998 or 1999 of a distribution warehouse outside of
the United States. While this will have the effect of increasing the Company's
investment in inventories, it may also result in lower international accounts
receivable than would otherwise be the case because customers will receive
products, and consequently pay for them, more quickly.
In connection with the Recapitalization, the Company made cash payments
under the EPP of $88.3 million in the six months ended June 26, 1998, which it
funded with the proceeds of the debt and equity transactions that were part of
the Recapitalization.
Net cash used in investing activities was $6.1 million, $11.4 million and
$3.7 million in 1995, 1996 and 1997, respectively. Primary uses of these funds
were to finance the acquisition of the passive humidification product line in
1996 and capital expenditures. Capital expenditures, consisting primarily of new
manufacturing equipment purchases and expansion of the Ensenada facility,
totaled $5.9 million, $6.4 million and $4.7 million in 1995, 1996 and 1997,
respectively. The decrease in 1997 resulted from temporary delays in projects
that the Company anticipates will be completed in 1998. During the six months
ended June 27, 1997 net cash provided by investing activities was 1.0 million,
reflecting purchases of property. During the six months ended June 26, 1998, net
cash used in investing activities was 1.6 million, primarily for capital
expenditures. The Company currently estimates that capital expenditures will be
approximately $6.0 million in each of 1998 and 1999, consisting primarily of
additional and replacement manufacturing equipment and new heater
placements.
Net cash used in financing activities was $11.9 million, $3.7 million and
$16.4 million in 1995, 1996 and 1997, respectively, which consisted primarily of
repayment of debt and shareholder distributions principally to pay taxes on
income passed through by the Company. During the six months ended June 27, 1997,
net cash used in financing activities was 13.7 million, consisting primarily of
repayment of debt and shareholder distributions. During the six months ended
June 26, 1998, net cash provided by financing was 84.5 million reflecting net
borrowing by the Company. The Company's long term debt at June 26, 1998
consisted of 153.0 million of bank indebtedness, which was refinanced in
connection with the Recapitalization.
The Company has outstanding $153.0 million of indebtedness, consisting of
$115.0 million of Notes and borrowings of $38.0 million under the New Credit
Facility. The New Credit Facility consists of a $40.0 million Term Loan Facility
(all of which was funded in connection with the Recapitalization) and a $60.0
million Revolving Loan Facility. The Notes bear, and the Exchange Notes will
bear, interest at the rate set forth on the cover hereof, payable semiannually,
and will require no principal repayments until maturity. See "Description of the
Exchange Notes." The Term Loan Facility matures on the sixth anniversary of the
initial borrowing and requires principal repayments of between $3.0 million and
$11.5 million each year until maturity, commencing on June 30, 1999. The
Revolving Loan Facility matures on the sixth anniversary of the initial
borrowing and bears interest based on a spread over either a eurodollar or base
rate. See "Description of New Credit Facility."
In connection with the Recapitalization, Hudson RCI issued 300,000 shares
of its 11 1/2% Senior PIK Preferred Stock due 2010 with an aggregate liquidation
preference of $30.0 million (the "Mirror Preferred Stock") which has terms and
provisions materially similar to those of the Exchange Preferred Stock. At the
election of Hudson RCI, dividends may be paid in kind until April 15, 2003 and
thereafter must be paid in cash. See "Description of the Exchange Preferred
Stock--Mirror Preferred Stock."
Holding is a holding company and will rely on dividends from Hudson RCI as
its primary source of liquidity. Holding does not have and in the future will
not have any assets other than the capital stock of Hudson RCI. The ability of
Hudson RCI to pay cash dividends to Holding when required is restricted by law
and restricted or prohibited under the terms of Hudson RCI's debt instruments,
including the New Credit Facility. No assurance can be made that Hudson RCI
will be able to pay cash dividends to Holding when required on the Mirror
Preferred Stock. See "Risk Factors--Holding's Ability to Pay Dividends; Holding
Company Structure."
The Company believes that, based on current levels of operations and
anticipated growth, its cash from operations, together with other available
sources of liquidity, including borrowings available under the Revolving Loan
Facility, will be sufficient over the next several years to fund anticipated
capital expenditures and acquisitions and to make required payments of principal
and interest on its debt, including payments due on the Subordinated Notes and
obligations under the New Credit Facility. The Company intends to selectively
pursue strategic acquistions, both domestically and internationally, to expand
its product line, improve its market share positions and increase cash flows.
Financing for such acquisitions is available, subject to limitations, under the
New Credit Facility. Any significant acquisition activity by the Company in
excess of such amounts would require additional capital, which could be provided
through capital contributions or debt financing. The Company has no commitments
for such acquisition financing and to the extent financing is unavailable,
acquisitions may be delayed or not completed.
48
<PAGE>
YEAR 2000 COMPLIANCE
The issue surrounding the year 2000 is whether computer systems will
properly recognize date sensitive information when the year changes to 2000, or
"00." Systems that misinterpret the two-digit date "00" as the year 1900
instead of the year 2000 could generate erroneous data or fail. The Company has
upgraded its information system capabilities such that it does not believe that
its systems will encounter any material year 2000 problems, nor will its
operations be materially affected by year 2000 issues. In addition, the
Company's products are not subject to year 2000 problems. The Company also
relies, directly and indirectly on the external systems of various independent
business enterprises, such as its customers, suppliers, creditors, financial
organizations, and of governments, both domestically and internationally, for
the accurate exchange of data and related information. The Company has not
assessed the status of such third-party enterprises' information systems, nor
the materiality, nature or potential impact on the Company of year 2000 issues
confronted by such third parties to the extent the same affect the Company. The
Company has not developed any contingency plans in the event of disruption in
the operation of the various third-party enterprises with which it interacts,
and thus could be adversely affected in the event of any such disruption.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 129 Disclosure of
Information about Capital Structure was issued in February 1997 and was adopted
as of December 26, 1997. SFAS No. 130 Reporting Comprehensive Income and SFAS
No. 131 Disclosures about Segments of an Enterprise and Related Information were
issued in June 1997. SFAS No. 130 was adopted in the first quarter of fiscal
1998. SFAS No. 131 will initially be adopted in the Company's 1998 year-end
financial statements.
49
<PAGE>
BUSINESS
GENERAL
The Company is a leading manufacturer and marketer of disposable medical
products utilized in the respiratory care and anesthesia segments of the
domestic and international health care markets. The Company offers one of the
broadest respiratory care and anesthesia product lines in the industry,
including such products as oxygen masks, humidification systems, nebulizers,
cannulae and tubing. In the United States, the Company markets its products to a
variety of health care providers, including hospitals and alternate site service
providers such as outpatient surgery centers, long-term care facilities,
physician offices and home health care agencies. Internationally, the Company
sells its products to distributors that market to hospitals and other health
care providers. The Company's products are sold to over 2,500 distributors and
alternate site service providers throughout the United States and in more than
75 countries worldwide. For fiscal 1997, the Company had net sales of $99.5
million, operating income of $12.6 million and pro forma EBITDA before EPP and
Retention Payments of $26.3 million. From 1993 to 1997, the Company's net sales,
operating income and EBITDA before EPP and Retention Payments increased at
compound annual rates of approximately 5.9%, 11.4% and 13.3%, respectively.
The Company has supplied the disposable respiratory care market for over 50
years and enjoys strong brand name recognition and leading market positions.
Based on IMS America data regarding the size of the domestic hospital market for
respiratory therapy products, and the Company's estimate of the portion thereof
represented by respiratory products, the Company believes that in 1996 it held a
share of approximately 25% of the domestic hospital market for the disposable
respiratory care products that the Company markets and held number one or two
market share positions in 10 product categories representing approximately 75%
of the Company's 1997 net sales. IMS America does not distinguish between
anesthesia and respiratory products in its market analysis. See "--Industry
Overview." In recent years the Company has pursued a number of growth
initiatives, including the expansion of its international and alternate site
sales efforts and entry into the anesthesia market. The Company established
separate sales forces dedicated to the international and alternate site markets
in 1993 and 1994, respectively. In 1995, the Company entered the anesthesia
market to further leverage its manufacturing platform, distribution channels and
strong brand name recognition. In 1997, anesthesia sales represented
approximately 6.5% of the Company's total net sales and international and
alternate site sales represented 19.1% and 14.7%, of the Company's total net
sales, respectively.
The Company manufactures and markets over 1,000 respiratory care and
anesthesia products. The Company believes that its broad product offering
represents a competitive advantage over suppliers with more limited product
offerings, as health care providers seek to reduce medical supply costs and
concentrate purchases among fewer vendors. The Company also benefits
competitively from its extensive relationships with leading GPOs, as large
purchasing organizations play an increasingly important role in hospitals'
purchasing decisions.
The Company maintains two manufacturing facilities and two distribution
facilities in the United States and an assembly operation in Mexico. The
Company has reduced its manufacturing and assembly costs through cost reduction
programs, process improvement, equipment automation and upgrades and increased
utilization of its Ensenada, Mexico facility for labor-intensive operations.
Over the past five years the Company has spent $22.4 million to upgrade its
manufacturing operations. During this period, the Company's gross margins have
improved from 41.3% to 48.0%, reflecting management's ongoing commitment to cost
reduction.
Hudson Oxygen Therapy Sales Company ("Hudson Oxygen"), Hudson RCI's
predecessor, was founded in 1945. In 1988, Hudson Oxygen formed Industrias
Hudson, a majority-owned subsidiary that oversees the Company's assembly
operation in Mexico. Until the Recapitalization, the Continuing Shareholder
owned the minority interest in Industrias Hudson. In 1989, Hudson Oxygen
merged with Respiratory Care Inc. to form Hudson RCI. In April 1998, the Company
consummated the Recapitalization, pursuant to which it became a majority-owned
subsidiary of Holding, with the Continuing Shareholder retaining a minority
interest. In connection with the transfer of ownership of Industrias Hudson from
the Continuing Shareholder, the Company formed IH Holding LLC, a Delaware
limited liability company, which now holds the minority interest in Industrias
Hudson. Hudson RCI's principal executive offices are located at 27711 Diaz Road,
P.O. Box 9020, Temecula, California 92589, and its telephone number is (909)
676-5611. Holding was incorporated in Delaware in January 1998. Holding's
principal executive offices are located at 599 Lexington Avenue, 18th Floor, New
York, New York 10022, and its telephone number is (212) 758-2555.
50
<PAGE>
INDUSTRY OVERVIEW
The worldwide market for disposable respiratory care and anesthesia
products consists of the domestic hospital market, the alternate site market and
the international market. While no data is available for the size of the
alternate site and international markets, IMS America data indicates that in
1996 domestic hospitals purchased approximately $371 million of the disposable
respiratory care and anesthesia products that the Company markets. The Company
categorizes approximately $208 million (56%) of this amount as respiratory care
and $163 million (44%) as anesthesia. In addition, there is a growing alternate
site service provider market in the United States, as care is increasingly
provided outside of traditional hospital settings. Further, the Company
believes there is a large and growing international market for disposable
respiratory care and anesthesia products. The Company believes that in
countries with higher health care standards, heightened concern regarding cross-
contamination and sterilization costs have resulted in disposable medical
products replacing traditional reusable products. The Company believes that the
trend towards utilizing disposable products is accelerating in developing
countries as health care standards improve.
Respiratory care and anesthesia principally involve the delivery of oxygen
and anesthesia from a gas source, such as a mechanical ventilator or respirator,
to the patient's pulmonary system. The gas is typically delivered to the
patient through specialized tubing connecting to a cannula, mask or endotracheal
tube. In addition, it is often necessary to humidify or medicate the gas. The
market for respiratory care and anesthesia products, including disposable
products, is expected to be positively impacted by demographic trends, both
domestically and internationally. In the United States, changes in
demographics, including an aging population, increased incidence and awareness
of respiratory illnesses and heightened focus on cost-efficient treatment, have
had a positive impact on the domestic respiratory care and anesthesia markets.
There has been an increasing incidence of respiratory illnesses (such as asthma
and emphysema), due in part to an increasingly susceptible aging population,
environmental pollution, smoking-related illnesses and communicable diseases
with significant respiratory impact, such as tuberculosis, HIV and influenza.
The Company believes that the international respiratory care and anesthesia
markets will experience many of the trends currently affecting domestic markets.
In addition, many international markets have high incidences of communicable
respiratory diseases and are becoming increasingly aware of the value of single
use, disposable products.
The market for respiratory care and anesthesia products is also affected by
trends affecting the health care market generally. In particular, the overall
trend towards cost containment has increased the desirability of disposable
products relative to reusable products, and has influenced pricing, distribution
channels, purchasing decisions and health care delivery methods.
Efforts to contain rising health care costs have increased the preference
for disposable medical products that improve the productivity of health care
professionals and reduce overall provider costs. Health care organizations are
evaluating modes of treatment that are less labor and/or technology intensive as
a means of decreasing the cost of care, which can often result in increased
disposable usage. In particular, increased utilization of disposable products
can decrease labor and other costs associated with sterilizing reusable
products. In addition, the risks of transmission of infectious diseases such as
HIV, hepatitis and tuberculosis, and related concerns about the occupational
safety of health care professionals, have also contributed to an increased
preference for disposable single-use medical products.
Cost containment has caused consolidation throughout the health care
product supply channel, which has favored manufacturers with large product
offerings and competitive pricing. In an effort to contain costs, service
providers have consolidated to form GPOs, which take advantage of group buying
power to obtain lower supply prices. This, in turn, has led to consolidation
among distributors, who seek to provide "one-stop shopping" for these large
buying groups. Distributors have also sought to concentrate purchases among
fewer vendors in an effort to reduce supply costs. Since selection as a GPO
provider and strong relationships with distributors are critical to many health
care manufacturers, manufacturers have responded to these trends by providing a
broad range of integrated products, combined with reliable delivery and strong
after-sales support.
Cost containment has also caused a migration of the decision making
function with respect to supply acquisition from the clinician to the
administrator. As clinicians lose influence and purchasing agents, materials
51
<PAGE>
managers and upper level management become more involved in the purchasing
decision, a greater emphasis is placed on price relative to product features and
clinical benefits.
As a result of cost containment, health care is increasingly provided
outside of traditional hospital settings through alternate health care sites,
such as outpatient surgery centers, long-term care facilities, physician offices
and patients' homes. Growth of the alternate site market is also attributable
to advances in technology that have facilitated the delivery of care outside of
the hospital, an increased number of illnesses and diseases considered to be
treatable outside of the hospital and increased acceptance by the medical
community of, and patient preference for, non-hospital treatment.
The Company believes that these industry trends create significant market
opportunities for an efficient, high volume manufacturer of disposable
respiratory care and anesthesia products with an extensive product offering and
strong relationships with leading distributors and GPOs.
BUSINESS STRATEGY
The Company's senior management team has increased net sales and EBITDA
before EPP and Retention Payments by 5.9% and 13.3%, respectively, from 1993 to
1997 compounded annually, despite facing significant pricing pressure as a
result of cost containment trends affecting the health care industry generally.
These results are largely attributable to management's expertise within the
Company's markets and ability to grow the Company's business and improve
profitability margins within a dynamic health care environment. On average,
members of the senior management team have over 18 years of experience in the
health care industry. The senior management team intends to continue to expand
the Company's market position, increase cash flows and capitalize on favorable
demographic trends by pursuing the following strategies:
ENHANCE MARKET POSITION IN DOMESTIC HOSPITAL MARKET. The Company employs a
proactive, consultative sales approach in which the Company works with hospitals
to increase efficiency and address their cost containment needs. The Company
believes that this approach, combined with high levels of customer service and
training, enhances its value as a supplier. The Company has entered into
preferred supplier arrangements with 12 national GPOs and seeks both to increase
sales of disposable respiratory care products to its existing GPO network and to
establish new relationships with additional GPOs.
INCREASE PENETRATION OF ANESTHESIA MARKET. The Company plans to continue
to build its anesthesia product customer base and improve product margins.
Since its entry into the anesthesia market in 1995, the Company has built a
sales base by leveraging its established distribution network and strong brand
name recognition. To minimize start-up costs, the Company initially outsourced
much of the manufacturing of its anesthesia product line. Having validated its
market and product strategy, the Company is internalizing the manufacturing of
its anesthesia products in order to enhance quality and margins. The Company is
also hiring sales personnel with experience in anesthesia and has established a
sales commission structure that emphasizes growth in this market segment.
EXPAND INTERNATIONALLY. The Company intends to further pursue the large
and growing international market for disposable respiratory care and anesthesia
products and believes that the Company, as a high-quality, low cost manufacturer
with a comprehensive product line, is well-positioned to compete in the
international market. The Company has established and is currently expanding
its international sales force to further its penetration of this market. The
Company's manufacturing facilities have received ISO 9000 certification and the
Company anticipates being in full compliance with European CE and Medical Device
Directive laws by the June 1998 deadline.
INCREASE PRESENCE IN ALTERNATE SITE MARKET. The Company has targeted the
alternate site market as a key growth market due to cost containment and other
health care industry trends. The Company provides a broad product line to
patients across multiple care settings through its national distribution
network. In 1994, the Company established a sales force dedicated to the
alternate site market and intends to continue to increase this sales force. In
addition, the Company continually focuses on areas with favorable demographics,
such as Florida, Arizona and southern California, where aging populations are
large recipients of alternate site care.
52
<PAGE>
DEVELOP NEW PRODUCTS. The Company seeks to improve its current market
positions and enter new markets through a continuation of its aggressive new
product development program. The Company's product development effort targets
specific markets in which the Company believes it can favorably compete. As a
result of this targeted approach, products introduced since 1992 accounted for
approximately 18% of the Company's 1997 net sales. In 1995, the Company entered
the disposable anesthesia products market, capitalizing on the Company's
manufacturing expertise, similar process technologies, complementary product
designs and distribution synergies with the existing respiratory care product
line. The Company has also developed new products aimed specifically at the
alternate site market, such as more comfortable cannulae that can be worn for
longer periods of time.
PURSUE STRATEGIC ACQUISITIONS. The Company intends to pursue strategic
acquisitions, both domestically and internationally, to expand its product line,
improve its market share positions and increase cash flows. Management believes
that the Company's business, with its efficient operations, leading distribution
network, well-recognized brand name and experienced management team, provides an
excellent platform to facilitate the Company's expansion strategy, particularly
in the anesthesia and international markets.
PRODUCTS
The Company manufactures and markets products for use in respiratory care
and anesthesia. The products for each market are similar and often overlap, as
do the distribution channels.
The Company groups its products into nine categories: (i) oxygen delivery;
(ii) aerosol therapy; (iii) active and passive humidification; (iv) ventilatory
support; (v) adaptors, connectors and filters; (vi) resuscitation; (vii) airway
management; (viii) electronic monitoring; and (ix) durable equipment.
<TABLE>
<CAPTION>
CATEGORY/PRODUCTS DESCRIPTION
- ------------------------------------------- --------------------------------------------------------
<S> <C>
OXYGEN DELIVERY: Oxygen Masks, Oxygen Used to deliver therapeutic, supplemental oxygen to a
Cannulae, Oxygen Tubing patient. Oxygen masks cover the nose and mouth.
Nasal cannulae fit inside the nostrils. Both masks and
cannulae are connected to an oxygen source via small
diameter tubing through which oxygen flows.
AEROSOL THERAPY: AQUAPAK(R) Large Volume, Used to create and deliver aerosolized particles of
Prefilled Nebulizers; Non-Prefilled Large liquid water, sodium chloride or medication to the
Volume Nebulizer; UPDRAFT(R), UPDRAFT patient's airways to dilute and mobilize secretions
II(R), AVA-NEB(R) and MICRO MIST(R) Small and/or dilate constricted breathing passages. The
Volume, Medication Nebulizers; Aerosol peak flow meter is used to monitor the patient's
Tubing; AQUATHERM(R) and THERMAGARD(R) respiratory status before and after an aerosolized
Nebulizer Heaters; AQUAPAK Prefilled medication treatment.
Ultrasonic Cups; ADDIPAK(R) Prefilled Unit
Dose Solutions; POCKETPEAK(R) Peak Flow
Meter
ACTIVE AND PASSIVE HUMIDIFICATION: Heated humidification systems actively heat and
CONCHATHERM(R) Heated Humidifiers, humidify oxygen/air mixtures or anesthetic gases
AQUA+(R) Hygroscopic Condenser Humidifiers, provided by a mechanical ventilator or anesthesia gas
AQUAPAK Prefilled Humidifiers, Non- machine. Hygroscopic condenser humidifiers passively
Prefilled, Reusable Humidifier, Non-Prefilled conserve the heat and humidity in the patient's exhaled
Disposable Humidifier breath for use during inspiration. Prefilled and non-
prefilled humidifiers are used to add water vapor to
oxygen being provided to a patient via a mask or
cannula.
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
CATEGORY/PRODUCTS DESCRIPTION
- ------------------------------------------- --------------------------------------------------------
<S> <C>
VENTILATORY SUPPORT: Conventional Ventilator Used to convey an oxygen/air mixture and/or anesthetic
Circuits, Heated-Wire Ventilator Circuits, gas from a mechanical ventilator or anesthesia gas
Anesthesia Breathing Circuits, Air Cushion machine to a patient during the temporary or long-term
Anesthesia Masks, Infant CPAP Systems support of ventilation. The infant CPAP system
provides non-invasive respiratory support to premature
infants with under-developed, immature lungs.
ADAPTORS, CONNECTORS AND FILTERS: A wide The adaptors and connectors are frequently used in
variety of adaptors and connectors; Main Flow respiratory care and anesthesia to add accessories,
Bacterial/Viral Filters; Pulmonary Function modify configurations, and/or customize other related
Filter products to meet specific needs. Filters are used to
protect patients, caregivers, and medical equipment
from cross-contamination with bacteria and viruses.
RESUSCITATION: LIFESAVER(R) Reusable and Used during cardiopulmonary resuscitation ("CPR") to
Disposable Resuscitation Bags, Isolation Valves adequately support and/or maintain the patient's
and Kits, LIFESAVER Tubes and Kits ventilatory function.
AIRWAY MANAGEMENT: SOFTECH(R) Cuffed and Assist in securing and maintaining an open airway and
Uncuffed Endotracheal Tubes; CATH-GUIDE(R), unobstructed breathing passage. They also can assure
Color-Coded and DUAL-CHANNEL Oral that the patient's ventilation can be maintained and that
Pharyngeal Airways; BITEGARD(TM) Oral Bite respiratory secretions can be adequately removed from
Block; CATH-GUIDE Closed Suction Catheters the lungs.
ELECTRONIC MONITORING: Replacement oxygen The oxygen sensors, monitors and analyzers are used to
sensors, Oxygen Monitors and Analyzers, analyze and monitor the amount of oxygen being
VENTILARM II(R) Low-Pressure Alarms administered to a patient. The low-pressure alarm is
used to detect a patient disconnect or a leak in the
breathing circuit during mechanical ventilation.
DURABLE EQUIPMENT: Oxygen Regulators; Used to regulate oxygen flow from cylinders, stabilize
Cylinder Carts, Trucks and Stands; Portable or transport oxygen or other gas cylinders, and provide
Oxygen Units a portable oxygen supply for emergency use.
</TABLE>
SALES, MARKETING AND DISTRIBUTION
While substantially all of the Company's domestic hospital sales are made
to distributors, the Company's marketing efforts are focused on the health care
service provider. In the alternate site market, the Company both sells and
markets directly to the service provider. The Company's five largest alternate
site accounts are Apria Healthcare Group Inc., Gulf South Medical Supply, Inc.,
Moore Medical Corp., Redline Healthcare Corp. and VGM & Associates.
Internationally, the Company sells its products to distributors that market to
hospitals and other health care providers. See Note 8 to the Consolidated
Financial Statements for information with respect to international sales. The
Company's sales personnel currently call on approximately 2,800 health care
providers, 50 hospital distributors and 700 alternate site customers. Due to
consolidation and cost pressures among the Company's customer base, the
Company's target call point at the health care provider has been moving away
from the clinician to include a purchasing manager or corporate executive. As
of June 27, 1997 and June 26, 1998, the Company had a backlog of approximately
$1.5 million and $1.4 million, respectively.
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<PAGE>
In the current market environment, GPO relationships are an essential part
of access to the Company's target markets and the Company has entered into
preferred supplier arrangements with 12 national GPOs. The Company is typically
positioned as either a sole supplier of respiratory care disposables to the GPO,
or as one of two suppliers. These arrangements set forth pricing and terms for
various levels of purchasing, although they do not obligate either party to
purchase or sell a specific amount of product. In addition, GPO affiliated
hospitals often purchase products from other suppliers notwithstanding the
existence of sole or dual source GPO arrangements. Further, these arrangements
are terminable at any time, but in practice usually run for two to three years.
The Company enjoys longer terms with two of its major GPOs, VHA, Inc. and
Columbia/HCA Healthcare Corporation. The Company's most significant GPO
relationships are with AmeriNet Inc., Columbia/HCA Healthcare Corporation,
Health Services Corporation of America, MedEcon Medical Services, Purchase
Connection Limited, University HealthSystem Consortium and VHA, Inc.
Health care providers have responded to pressures to reduce their costs by
merging with other members of their industry. The acquisition of a customer of
the Company often results in the renegotiation of contracts, the granting of
price concessions or in the loss of the customer. Alternatively, to the extent
a customer of the Company grows through acquisition activity, the Company may
benefit from increased sales to the larger entity.
The Company markets its products primarily through consultative dialogue
with health care providers, targeted print advertising, trade shows, selective
promotional arrangements with distributors and the Company's heater lease
program. To support sales of the entire line of humidification and ventilation
products, the Company leases heaters to domestic customers without charge. The
revenues from the sale of products used in connection with the operation of the
heaters covers the amortization of the heater cost under the leases. The Company
has heaters with a net book value of approximately $1.1 million placed at
service provider locations under this program.
The Company utilizes a network of over 1,800 hospital distributors, as well
as additional alternate site distributors, to reach its markets. A number of
these distributors carry competing product lines, but many are moving to select
single supply sources for particular product groups. The Company has been
selected as the FOCUS preferred vendor of respiratory disposables for Owens &
Minor, and is seeking similar status with other national vendors. Such status
gives preference to the shipping of the Company's products versus competitive
lines. Owens & Minor is the Company's largest distributor, accounting for
approximately $30.0 million or approximately 30% of total 1997 net sales, and
approximately $7.0 million or approximately 29% of sales in the first quarter of
1998. The Company provides a price list to its distributors which details base
acquisition prices. Distributors receive orders from the service providers and
charge the contract pricing (which is determined by their GPO affiliation or
individual contract price) plus their service margin. As is customary within the
industry, the Company rebates the difference between base acquisition price and
the specific contract price to the distributor. The Company offers select large
health care providers a reward for purchasing a broader selection of the
Company's product lines. The program allows a rebate in the form of merchandise
credit for purchasing minimum volumes from a selected group of products. The
Company's international distributors place their orders directly with dedicated
international customer service representatives based in Temecula. Customer
orders are shipped from one of two warehouse locations. Sales strategies and
marketing plans are tailored to each market with involvement of the distributor.
Region and territory sales managers are responsible for supporting, training and
launching of products into their regions. The Company utilizes a network of 100
international distributors, typically on an exclusive basis within each market.
MANUFACTURING AND ASSEMBLY
The Company operates two manufacturing facilities and two distribution
facilities in the United States and an assembly facility in Ensenada, Mexico.
While the Company believes that it is operating at a high utilization rate for
optimal efficiency, existing facilities could support increased capacity with
additional machinery and workers.
The Company's manufacturing facility in Temecula, California houses 59
injection molding machines, 55 of which are automated. During the past four
years, 28 out of the 59 machines have been replaced, which has increased
capacity, as the new machines are more efficient. Tubing is produced on 8
extrusion lines: 4 corrugated, 3 oxygen or "spaghetti", and 1
repellitizer/regrinder. The Temecula facility uses 10-12 million pounds of over
30 different kinds of resin annually; the most prominent are PVC, polyethylene
and polypropylene. Sterile prefilled
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humidification and nebulization products and electronics are manufactured using
7 blow/fill/seal machines in the Company's facility in Arlington Heights,
Illinois.
The Company's facility located in Ensenada, Mexico is primarily used for
the assembly of certain products molded at the Temecula facility. The facility
is a Maquiladora, and therefore there are minimal tariffs associated with the
transport of products and components across the United States-Mexico border.
The Company occasionally outsources production of certain products while it
establishes its ability to penetrate a target market. Having achieved an
acceptable level of penetration, the Company internalizes the manufacturing
function in order to increase margins and improve quality control.
The Company monitors the quality of its products at the Temecula, Arlington
Heights and Ensenada facilities by statistical sampling and visual and
dimensional inspection. The Company also inspects incoming raw materials for
inconsistencies, rating its vendors on quality and delivery time. The Company
is routinely audited by the FDA and has received no significant regulatory
actions. The Company is in substantial compliance with the GMP/QSR regulations
of the FDA and has qualified for an "advanced notification" program allowing the
Company to be informed of FDA inspections in advance. The Company utilizes
outside facilities for sterilization of products produced in Temecula and
Ensenada. The Arlington Heights products are manufactured in a sterile
environment and are certified sterile as a result of the production process.
The Ensenada and Arlington Heights facilities are certified as ISO 9002
compliant and the Temecula facility is certified as ISO 9001 compliant.
SUPPLIERS AND RAW MATERIALS
The Company's primary raw materials are various resins, which are formed
into the Company's products. The top 10 purchased products in 1997 were Tubing
Grade PVC, Clear PVC, LDPE-EVA, Polypropylene, Aluminum Cylinder, Pre-Cut
Elastic, Non-Tubing Grade PVC, Cannula Blanks, Acrylic Resin and Hose-End Grade
PVC. The Company believes that it is able to purchase materials at a cost no
higher than its competitors. The Company does not have long-term supply
contracts for any of its purchased raw materials. The Company believes that
sufficient availability exists for its raw materials, as they consist of mainly
readily available plastic resins.
RESEARCH AND DEVELOPMENT
The Company's research and development department consists of 15 people,
including nine engineers. The Company's research and development efforts are
split between developing new products and process improvements to its
manufacturing operations. The Company develops new products to expand its
product line in anticipation of changes in demand. The Company has invested
heavily in the anesthesia product line, as the Company continues to penetrate
this market. The Company makes several new product introductions every year.
Significant products introduced in the last five years have been the line of
heat-moisture exchangers, POCKETPEAK peak flow meter, SOFTECH endotracheal
tubes, MICRO MIST small volume nebulizer and CONCHA IV heated humidification
system. The Company constantly works to reduce costs through improved continued
process improvements. Over the past several years, approximately 50% of total
research and development expenses have been to improve operational efficiency.
The Company incurred research and development expenses of approximately $2.0
million, $2.3 million and $1.8 million in 1995, 1996 and 1997, respectively, and
approximately $0.9 million in the six months ended June 26, 1998.
COMPETITION
The medical supply industry is characterized by intense competition. The
Company's primary competitor in the respiratory care sector is Allegiance
Corporation and its primary competitors in the anesthesia sector include
Allegiance Corporation, The Kendall Company, Smiths Industries Medical Systems,
Inc. and Vital Signs, Inc. Many of the products manufactured by the Company are
available from several sources, and many of the Company's customers tend to have
relationships with several manufacturers. The Company competes on the basis of
brand name, product quality, breadth of product line, service and price.
PATENTS AND TRADEMARKS
The Company has historically relied primarily on its technological and
engineering abilities and on its design and production capabilities to gain
competitive business advantages, rather than on patents or other
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<PAGE>
intellectual property rights. However, the Company does file patent
applications on concepts and processes developed by the Company's personnel.
The Company has 18 patents in the U.S. and two patents pending. Many of the
U.S. patents have corresponding patents issued in Canada, Europe and various
Asian countries. The Company is currently preparing several patent applications
covering intellectual property associated with the closed suction catheter
product and advanced humidification devices. The Company's success will depend
in part on its ability to maintain its patents, add to them where appropriate,
and to develop new products and applications without infringing the patent and
other proprietary rights of third parties and without breaching or otherwise
losing rights in technology licenses obtained by the Company for other products.
There can be no assurance that any patent owned by the Company will not be
circumvented or challenged, that the rights granted thereunder will provide
competitive advantages to the Company or that any of the Company's pending or
future patent applications will be issued with claims of the scope sought by the
Company, if at all. If challenged, there can be no assurance that the Company's
patents (or patents under which it licenses technology) will be held valid or
enforceable. In addition, there can be no assurance that the Company's products
or proprietary rights do not infringe the rights of third parties. If such
infringement were established, the Company could be required to pay damages,
enter into royalty or licensing agreements on onerous terms and/or be enjoined
from making, using or selling the infringing product. Any of the foregoing
could have a material adverse effect upon the Company's business, financial
condition or results of operations.
GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS
The Company and its customers and suppliers are subject to extensive
Federal and state regulation in the United States, as well as regulation by
foreign governments, and the Company cannot predict the extent to which future
legislative and regulatory developments concerning its practices and products
for the health care industry may affect the Company. Most of the Company's
products are subject to government regulation in the United States and other
countries. In the United States, the FDC Act and other statutes and regulations
govern or influence the testing, manufacture, safety, labeling, storage, record
keeping, marketing, advertising and promotion of such products. Failure to
comply with applicable requirements can result in fines, recall or seizure of
products, total or partial suspension of production, withdrawal of existing
product approvals or clearances, refusal to approve or clear new applications or
notices and criminal prosecution. Under the FDC Act and similar foreign laws,
the Company, as a marketer, distributor and manufacturer of health care
products, is required to obtain the clearance or approval of Federal and foreign
governmental agencies, including the FDA, prior to marketing, distributing and
manufacturing certain of those products. The Company may also need to obtain
FDA clearance before modifying marketed products or making new promotional
claims. Delays in receipt of or failure to receive required approvals or
clearances, the loss of previously received approvals or clearances, or failures
to comply with existing or future regulatory requirements in the United States
or in foreign countries could have a material adverse effect on the Company's
business. Foreign sales are subject to similar requirements.
The Company is required to comply with the FDA's GMP/QSR Regulations, which
set forth requirements for, among other things, the Company's manufacturing
process, design control and associated record keeping, including testing and
sterility. Further, the Company's plants and operations are subject to review
and inspection by local, state, Federal and foreign governmental entities. The
distribution of the Company's products may also be subject to state regulation.
The impact of FDA regulation on the Company has increased in recent years as the
Company has increased its manufacturing operations. The Company's suppliers,
including the sterilizer facilities, are also subject to similar governmental
requirements. There can be no assurance that changes to current regulations or
additional regulations imposed by the FDA will not have an adverse impact on the
Company's business and financial condition in the future. The FDA also has the
authority to issue special controls for devices manufactured by the Company,
which it has not done to date. In the event that such special controls were
issued, the Company's products would be required to conform, which could result
in significant additional expenditures for the Company.
The Company is also subject to numerous federal, state and local laws and
regulations relating to such matters as safe working conditions, manufacturing
practices, fire hazard control and the handling and disposal of hazardous or
infectious materials or substances and emissions of air pollutants. The Company
owns and leases properties which are subject to environmental laws and
regulations. There can be no assurance that the Company will not be required to
incur significant costs to comply with such laws and regulations in the future
or that such
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<PAGE>
laws or regulations will not have a material adverse effect upon the Company's
business, financial condition or results of operations. In addition, the
Company cannot predict the extent to which future legislative and regulatory
developments concerning its practices and products for the health care industry
may affect the Company. See "Risk Factors--Government Regulation."
LEGAL PROCEEDINGS
The Company is party to lawsuits and other proceedings, including suits
relating to product liability and patent infringement. While the results of
such lawsuits and other proceedings cannot be predicted with certainty,
management does not expect that the ultimate liabilities, if any, will have a
material adverse effect on the financial position or results of operations of
the Company.
PROPERTIES
The Company owns approximately 30 acres of land in Temecula, California on
which its headquarters, one of two principal manufacturing centers and three
other buildings totalling approximately 245,000 square feet are located.
Plastic and vinyl components and corrugated tubing are manufactured in Temecula
and assembled into finished goods at a 77,000 square foot facility in Ensenada,
Mexico. The Company owns the Ensenada facility and the underlying land is held
in a 30-year trust that expires in 2019. The Company leases an 86,000 square
foot manufacturing facility in Arlington Heights, Illinois under a lease that
expires in 2000. Prefilled sterile solutions and electronics are manufactured
in Arlington Heights. The Company also leases a 73,000 square foot distribution
warehouse in Elk Grove, Illinois under a lease that expires in 2000. The
Company believes that its current facilities are adequate for its present level
of operations. Management expects that the Arlington Heights and Elk Grove
leases will be renewed on favorable terms.
EMPLOYEES
As of August 1, 1998, the Company employed 1,126 employees, substantially
all of whom were full-time employees. None of the Company's employees are
represented by unions and the Company considers its employee relations to be
good.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following individuals are the executive officers and directors of
Holding and Hudson RCI:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------- --- -------------------------------------------------
<S> <C> <C>
Richard W. Johansen... 46 President, Chief Executive Officer and Director
Lougene Williams...... 53 Senior Vice President
Jay R. Ogram.......... 43 Chief Financial Officer
Brian W. Morgan....... 58 Vice President, Human Resources
Helen Hudson Lovaas... 59 Director
Jon D. Ralph.......... 33 Director
Charles P. Rullman.... 49 Director
Ronald P. Spogli...... 50 Director
</TABLE>
Richard W. Johansen is President, Chief Executive Officer and Director of
the Company and assumed the same positions with Holding after consummation of
the Recapitalization. Mr. Johansen became President of the Company in 1993 and
assumed the additional responsibilities of Chief Executive Officer in May 1997.
From 1989 to 1993, he served as Vice President, Marketing and Sales for the
Company following the 1989 acquisition of Respiratory Care Inc. by Hudson RCI.
He held the same position with Respiratory Care Inc. as well as prior executive
positions in the area of business development with its parent company, The
Kendall Company.
Lougene Williams is a Senior Vice President of the Company responsible for
its product development, quality assurance and manufacturing operations, having
served in this capacity since 1996, and assumed the same position with Holding
after consummation of the Recapitalization. Prior to 1996, he was the Company's
Vice President, Manufacturing, having held a similar position with Respiratory
Care Inc. From 1976 to 1987, he held manufacturing management positions of
increasing responsibility at various manufacturing plants of The Kendall
Company.
Jay R. Ogram is the Company's Chief Financial Officer, having served in
this capacity since 1996, and assumed the same position with Holding after
consummation of the Recapitalization. From 1984 until his assumption of Chief
Financial Officer responsibilities, Mr. Ogram held prior positions as Accounting
Manager and Vice President and Controller of the Company. Prior to joining the
Company, he had held executive positions in financial management with a major
health care company.
Brian W. Morgan is Vice President, Human Resources, having held this
position since 1989, and assumed the same position with Holding after
consummation of the Recapitalization. Mr. Morgan held similar positions in
human resources at Respiratory Care Inc. since 1978.
Helen Hudson Lovaas is a director of the Company and became a director of
Holding after consummation of the Recapitalization. Mrs. Lovaas began her
career at the Company in 1961. She has been Chairman since 1987, when she
inherited ownership of the Company and served as Chief Executive Officer from
1987 until May 1997. Mrs. Lovaas had served previously as the Vice President of
Administration of Hudson Oxygen for 15 years.
Jon D. Ralph became a director of Hudson RCI and of Holding in connection
with the Recapitalization. Mr. Ralph joined FS&Co. in 1989 and became a
Principal in January 1998. Prior to joining FS&Co., Mr. Ralph spent three years
at Morgan Stanley & Co. Incorporated where he served as an Analyst in the
Investment Banking Division. Mr. Ralph is also a director of EnviroSource, Inc.
and The Pantry, Inc.
Charles P. Rullman became a director of Hudson RCI and of Holding in
connection with the Recapitalization. Mr. Rullman joined FS&Co. as a Principal
in 1995. From 1992 to 1995, Mr. Rullman was a General Partner of Westar
Capital, a private equity investment firm specializing in middle market
transactions.
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Prior to joining Westar, Mr. Rullman spent twenty years at Bankers Trust Company
and its affiliate BT Securities Corporation where he was a Managing Director and
Partner. Mr. Rullman is also a director of The Pantry, Inc.
Ronald P. Spogli became a director of Hudson RCI and of Holding in
connection with the Recapitalization. He is a founding Principal of FS&Co.,
which was founded in 1983. Mr. Spogli is the Chairman of the Board and a
director of EnviroSource, Inc. Mr. Spogli also serves on the Boards of
Directors of Calmar Inc., Buttrey Food and Drug Stores Company, AFC Enterprises,
Inc. and Brylane Inc.
Directors of Hudson RCI and of Holding are elected annually and hold office
until the next annual meeting of stockholders and until their successors are
duly elected and qualified.
EXECUTIVE COMPENSATION
The following table sets forth the compensation earned by the Company's
Chairman and Chief Executive Officer and the four most highly compensated
executive officers who earned salary and bonus in excess of $100,000 for
services rendered in all capacities to the Company and its subsidiaries for the
fiscal year ended December 26, 1997 (collectively, with the exception of Helen
Hudson Lovaas, who resigned in connection with the Recapitalization, the "Named
Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-----------------------------------------
FISCAL OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) COMPENSATION(2)
- ------------------------------------------- ------ ------ ----- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Helen Hudson Lovaas........................ 1997 $286,353 $ 88,601 -- $9,000
Chairman and Chief Executive Officer(3)
Richard W. Johansen........................ 1997 $256,535 $141,101 $1,350,000 $9,000
President and Chief Executive Officer
Lougene Williams........................... 1997 $180,005 $ 70,475 $ 556,000 $9,000
Senior Vice President
Jay R. Ogram............................... 1997 $140,520 $ 48,357 $ 556,000 $8,394
Chief Financial Officer
Brian W. Morgan............................ 1997 $127,368 $ 42,984 $ 238,000 $7,477
Vice President, Human Resources
</TABLE>
_____________________
(1) Reflects amounts earned by the Named Executive Officers during 1997 under
the Equity Participation Plan. During 1997, no executive officer named above
received perquisites and other personal benefits, securities or property in
an aggregate amount in excess of the lesser of $50,000 or 10% of the total
of such officer's salary and bonus nor did any such officer receive any
restricted stock award or stock appreciation right.
(2) Represents payments by the Company under its defined contribution plan.
(3) Resigned as Chief Executive Officer in May 1997.
EXECUTIVE EMPLOYMENT AGREEMENTS
On April 7, 1998, the Company entered into employment agreements with each
of the Named Executive Officers. Each Named Executive Officer receives a base
salary in an amount and on substantially the same terms and conditions as was
being paid by the Company on that date and an annual cash bonus in accordance
with the Company's existing incentive programs. Pursuant to the employment
agreements, in the event that employment is terminated by the Company other than
for cause (as such term is defined in the employment agreements), or if the
Named Executive Officer resigns pursuant to a "qualifying resignation" (as such
term is defined in the employment
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agreements), the Company will be required to pay such Named Executive Officer's
base salary for a period of between 12 and 24 months. The employment agreements
also provide for nondisclosure of confidential information, that the Named
Executive Officer shall not engage in any prohibited activity (as such term is
defined in the employment agreement) during the term of employment and that the
Named Executive Officer will refrain from interfering with the Company's
contractual relationships or soliciting the Company's employees for 12 months
following the Named Executive Officer's termination.
COMPENSATION OF DIRECTORS
Directors of the Company receive no compensation as directors. Directors
are reimbursed for their reasonable expenses in attending meetings.
MANAGEMENT BONUS PLANS
The Company offers two management bonus plans for its executives, one for
senior management and one for executive management. The plan for senior
management is based on a combination of the financial goals of the Company and
goals set for individual employees. The plan has minimum goals of 70%
attainment for operating income before EPP and 75% attainment of the individual
plan. The payout is based 70% on attainment of Company financial performance
and 30% attainment of individual performance goals. The plan for executive
management is based on the financial goals of the Company. The payout to an
individual is based on his or her bonus level and the percentage attainment of
the operating income before EPP goal for the Company. In order to participate,
70% of operating income before EPP must be achieved.
RETIREMENT PLANS
The Company sponsors two programs that assist its employees in planning for
retirement. The Company offers a defined contribution pension plan that is
funded by the Company. Employees must be at least 21 years of age and have
completed two years of service to be eligible to participate in the pension
plan. The Company annually contributes an amount equal to 6% of a participating
employee's base earnings to a participant's account, prorated for any part of a
year that a participant was ineligible for a contribution. The funding also
includes a proportionate share of any increase or decrease in the fair market
value of the assets in the trust fund as of the immediately preceding last day
of the plan year. In addition, employees may contribute to a 401(k) plan that
has no matching contributions by the Company. Employees must have six months of
service to be eligible to participate in the 401(k) plan and may contribute up
to 10% of their annual compensation, or 6% if the employee is a highly
compensated participant.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors of the Company determines the compensation of the
executive officers. During fiscal 1997, Mrs. Lovaas determined the compensation
of the Company's Chief Executive Officer and Mrs. Lovaas and Mr. Johansen
participated in deliberations regarding the compensation of the Company's other
executive officers.
STOCK OPTION PLAN
The Board of Directors of the Company plans to adopt a stock option plan
(the "Option Plan") permitting grants of up to 15% of Hudson RCI's common stock.
The Option Plan and each outstanding option thereunder will be subject to
termination in the event of a change in control of Hudson RCI or Holding, as
more particularly described in the Option Plan. In addition, all options
granted pursuant to the Option Plan will terminate 45 days
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after termination of employment (unless termination was for cause, in which
event an option will terminate immediately) or 180 days in the event of
termination due to death or disability. Shares received upon exercise of
options will be subject to both a right of first refusal and a repurchase right
at stated prices in favor of Hudson RCI and will also be subject to obligations
to sell at the request of FS&Co. and co-sale rights in favor of the optionee.
A portion of the options granted pursuant to the Option Plan ("Time Vesting
Options") will vest over a five-year period in equal annual installments or,
alternatively, will vest in full upon a sale of Hudson RCI or Holding. Time
Vesting Options will terminate on the eight-year anniversary of the closing of
the Recapitalization.
A portion of the options granted pursuant to the Option Plan ("Company
Performance Options") will be earned in installments based upon satisfaction of
annual performance targets over a five-year period. In the event Hudson RCI or
Holding is sold prior to the fifth year following the grant of Company
Performance Options, such options will accelerate proportionately based on
achievement of annual performance targets through the year ended prior to the
sale. In addition, upon a sale of Hudson RCI or Holding, if 90% of the annual
performance targets for all years ended prior to the sale have been achieved,
50% of the options subject to installments for years ended prior to the sale
will be deemed earned (inclusive of installments previously earned). Finally,
to the extent FS&Co. achieves a specific internal rate of return on its
investment in Holding for a sale, Company Performance Options will also be
earned under certain circumstances.
In addition, a portion of the options granted pursuant to the Option Plan
will be earned upon the realization by FS&Co. of a specific internal rate of
return on its investment in Holding.
STOCK SUBSCRIPTION PLANS
In connection with the Recapitalization, Holding adopted an Employee Stock
Subscription Plan and an Executive Stock Subscription Plan (collectively, the
"Stock Subscription Plans") pursuant to which executives of the Company
purchased 800,000 shares of common stock of Holding valued at $10.00 per share.
The Stock Subscription Plans provide for a repurchase option in favor of Holding
upon termination of employment at stated repurchase prices. In addition, the
Stock Subscription Plans provide for restrictions on the transferability of
shares prior to the fifth anniversary of the Recapitalization or Hudson RCI's
initial public offering. The shares are also subject to a right of first refusal
in favor of Holding as well as obligations to sell at the request of FS&Co. and
co-sale rights if FS&Co. sells its shares to a third party.
The following table sets forth, for the Named Executive Officers, the
number of shares purchased pursuant to the Stock Purchase Plans:
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
- ---------------------- ----------------
<S> <C>
Richard W. Johansen 300,000(1)
Lougene Williams...... 100,000
Jay R. Ogram.......... 100,000
Brian W. Morgan....... 15,000
</TABLE>
- ---------------
(1) Represents shares held of record by the Johansen Family Trust U/D/T dated
8/16/91, of which Mr. Johansen and his wife, Barbara L. Johansen, are the
trustees.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
RIVER HOLDING CORP.
The following table sets forth certain information, as of May 31, 1998,
with respect to the beneficial ownership of capital stock of Holding by (i) each
person who beneficially owns more than 5% of such shares, (ii) each of the Named
Executive Officers, (iii) each director of Holding and (iv) all Named Executive
Officers and directors of Holding as a group. The following table should be
read in conjunction with the security ownership table for Hudson RCI.
<TABLE>
<CAPTION>
SHARES OF PERCENT SHARES OF PERCENT
COMMON OF PREFERRED OF
NAME OF BENEFICIAL OWNER STOCK CLASS STOCK CLASS
------------------------ ------ ----- ----- -----
<S> <C> <C> <C> <C>
Freeman Spogli & Co. Incorporated(1)................................... 5,500,000 87.3% -- --
Ronald P. Spogli(1)
Charles P. Rullman(1)
Jon D. Ralph(1)
Richard W. Johansen(2)(3).............................................. 300,000 4.8% -- --
Lougene Williams(3).................................................... 100,000 1.6% -- --
Jay R. Ogram(3)........................................................ 100,000 1.6% -- --
Brian W. Morgan(3)..................................................... 15,000 0.2% -- --
Helen Hudson Lovaas(3)................................................. 0 -- -- --
All Named Executive Officers and directors of Holding as a group 6,015,000 95.5% -- --
(7 individuals).......................................................
__________________
</TABLE>
(1) 1,441,251 shares, 58,749 shares and 4,000,000 shares of common stock will be
held of record by FS Equity Partners III, L.P. ("FSEP III"), FS Equity
Partners International, L.P. ("FSEP International") and FS Equity Partners
IV, L.P. ("FSEP IV"), respectively. As general partner of FS Capital
Partners, L.P. ("FS Capital"), which is general partner of FSEP III, FS
Holdings, Inc. ("FSHI") has the sole power to vote and dispose of the shares
owned by FSEP III. As general partner of FS&Co. International, L.P.
("FS&Co. International"), which is the general partner of FSEP
International, FS International Holdings Limited ("FS International
Holdings") has the sole power to vote and dispose of the shares owned by
FSEP International. As general partner of FSEP IV, FS Capital Partners LLC
("FS Capital LLC") has the sole power to vote and dispose of the shares
owned by FSEP IV. Messrs. Spogli and Rullman and Bradford M. Freeman,
William M. Wardlaw, J. Frederick Simmons and John M. Roth are the sole
directors, officers and shareholders of FSHI, FS International Holdings and
Freeman Spogli & Co. Incorporated and such individuals, in addition to Mr.
Ralph and Todd W. Halloran and Mark J. Doran, are the sole managing members
of FS Capital LLC, and as such may be deemed to be the beneficial owners of
the shares of the common stock and rights to acquire the common stock owned
by FSEP III, FSEP International and FSEP IV. The business address of
Freeman Spogli & Co. Incorporated, FSEP III, FSEP IV, FS Capital, FSHI, FS
Capital LLC, and its sole directors, officers, shareholders and managing
members is 11100 Santa Monica Boulevard, Suite 1900, Los Angeles, California
90025 and the business address of FSEP International, FS&Co. International
and FS International Holdings is c/o Padget-Brown & Company, Ltd., West
Winds Building, Third Floor, Grand Cayman, Cayman Islands, British West
Indies.
(2) Represents shares held of record by the Johansen Family Trust U/D/T dated
8/16/91 (the "Trust"), of which Mr. Johansen and his wife, Barbara L.
Johansen, are the trustees.
(3) The business address of these individuals is River Holding Corp., 599
Lexington Avenue, 18th Floor, New York, New York 10022.
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<PAGE>
HUDSON RCI
The following table sets forth certain information, as of May 31, 1998,
with respect to the beneficial ownership of capital stock of Hudson RCI by (i)
each person who beneficially owns more than 5% of such shares, (ii) each of the
Named Executive Officers, (iii) each director of Hudson RCI and (iv) all Named
Executive Officers and directors of Hudson RCI as a group. The following table
should be read in conjunction with the security ownership table for Hudson RCI.
<TABLE>
<CAPTION>
SHARES OF PERCENT SHARES OF PERCENT
COMMON OF PREFERRED OF
NAME OF BENEFICIAL OWNER STOCK CLASS STOCK CLASS
------------------------ ------ ----- ----- -----
<S> <C> <C> <C> <C>
River Holding Corp.(1)............................................. 6,300,000 80.8% 300,000 100.0%
Jon D. Ralph(1).................................................. -- --
Charles P. Rullman(1)............................................ -- --
Ronald P. Spogli(1).............................................. -- --
Helen Hudson Lovaas(2)............................................. 1,500,000 19.2% --
Richard W. Johansen(3)............................................. -- --
Lougene Williams(3)................................................ -- --
Jay R. Ogram(3).................................................... -- --
Brian W. Morgan(3)................................................. -- --
All Named Executive Officers and directors of the Company as
a group (4 individuals)........................................... 7,800,000 100.0% 300,000 100.0%
__________________________
</TABLE>
(1) As beneficial owner of 87.3% of the common stock of Holding, FS&Co. will
have the power to vote and dispose of the shares held by Holding. See
footnote (1) at "--River Holding Corp." Holding has pledged all shares of
the Company's capital stock held by it to secure its guarantee of the
Company's obligations under the New Credit Facility.
(2) Represents shares held of record by the Helen Lovaas Separate Property Trust
U/D/T dated 7/17/97 (the "Trust"). As sole trustee of the Trust, Mrs.
Lovaas has the sole power to vote and dispose of the shares owned by the
Trust. The address of the Trust is c/o Hudson Respiratory Care Inc., 27711
Diaz Road, P.O. Box 9020, Temecula, California 92589.
(3) The business address of these individuals is Hudson Respiratory Care Inc.,
27711 Diaz Road, P.O. Box 9020, Temecula, California 92589.
CERTAIN TRANSACTIONS
SHAREHOLDERS' AGREEMENT
Upon the closing of the Recapitalization Agreement, the Continuing
Shareholder and Holding entered into a Shareholders' Agreement (the
"Shareholders' Agreement"). Under the Shareholders' Agreement, Holding and the
Continuing Shareholder have the right to purchase their pro rata share of
certain new issuances of capital stock by Hudson RCI. In addition, the
Shareholders' Agreement provides that upon certain issuances of common stock of
Holding to employees of the Company, and contribution of the consideration
received for such issuance to Hudson RCI, an equivalent number of shares of
Hudson RCI's common stock will be issued to Holding. The Shareholders'
Agreement provides for restrictions on the transferability of the shares held by
the Continuing Shareholder for a period of two years following the consummation
of the Recapitalization, and provides for a right of first offer on the
Continuing Shareholder's common stock. In addition, the agreement provides that
upon sales by Holding of common stock of Hudson RCI or by FS&Co. of common stock
of Holding, the Continuing Shareholder is obligated to sell all its shares of
common stock at the request of Holding and the Continuing Shareholder has the
right to participate in such sale on a pro rata basis. If Hudson RCI engages in
an initial public offering with respect to its common stock, the Shareholders'
Agreement provides that Holding will exchange all of the common stock of Hudson
RCI it holds for newly issued common stock of Hudson RCI and the Mirror
Preferred
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<PAGE>
Stock (as defined below) will be exchanged, at Holding's option, into Company
Preferred Stock or Company Exchange Debentures, which in turn will be exchanged
for Exchange Preferred Stock. Holding will then liquidate and distribute Hudson
RCI's common stock to its common holders. Hudson RCI will grant unlimited
piggyback registration rights (after an initial public offering) to FS&Co. and
the Continuing Shareholder and, commencing six (6) months after the initial
public offering, three (3) demand registrations to FS&Co., and one demand
registration to the Continuing Shareholder. The Shareholders' Agreement
provides that the parties thereto will vote their shares to elect Helen Hudson
Lovaas to the Board of Directors.
PAYMENTS RELATING TO THE RECAPITALIZATION
In connection with the Recapitalization, two trusts of which Mrs.
Lovaas is the sole trustee received payments of an aggregate of $131.1 million.
Such trusts will also receive payments in an aggregate of approximately $3.3
million if the Company achieves certain operating performance targets for fiscal
1998. In addition, FS&Co. received a transaction fee of $4.0 million. Under
the Equity Participation Plan, upon consummation of the Recapitalization,
certain employees of the Company received an aggregate of $88.3 million, a
substantial portion of which was received by the Named Executive Officers.
Senior management, including the Named Executive Officers, will receive an
additional $2.4 million if the Company achieves certain operating performance
targets for fiscal 1998. For purposes of compliance with the Indenture, the
payment of such $2.4 million by the Company will not reduce Hudson RCI's
Consolidated Net Income or EBITDA.
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<PAGE>
DESCRIPTION OF NEW CREDIT FACILITY
On April 7, 1998, Hudson RCI entered into the New Credit Facility, for
which Salomon Brothers Inc is arranger and syndication agent and Bankers Trust
Company is administrative agent. Pursuant to the New Credit Facility, a
syndicate of lenders ("Lenders") lent to Hudson RCI up to $100.0 million in the
form of senior secured credit facilities, consisting of a $40.0 million term
loan facility (the "Term Loan Facility") and a $60.0 million revolving credit
facility (the "Revolving Credit Facility"). The Revolving Credit Facility has a
letter of credit sublimit of $7.5 million.
Use of Proceeds; Maturity. The entire Term Loan Facility was drawn in
connection with the Recapitalization. The balance of the New Credit Facility
will be made available to Hudson RCI and its subsidiaries (i) for working
capital and general corporate purposes of Hudson RCI, (ii) for acquisitions, and
(iii) for issuing commercial and standby letters of credit. The New Credit
Facility will mature on the sixth anniversary of closing of the
Recapitalization.
Prepayment; Reduction of Commitments. The Term Loan Facility amortizes in
quarterly installments through final maturity. In addition, borrowings under
the New Credit Facility are required to be prepaid, subject to certain
exceptions, with (i) 75% (or 50% for years when Hudson RCI's ratio of Debt to
EBITDA (as defined) is less than 5:1) of Excess Cash Flow (as defined), (ii)
100% of the net cash proceeds of the sale or other disposition of any properties
or assets of Holding and its subsidiaries (subject to certain exceptions), (iii)
100% of the net proceeds of certain issuances of debt obligations of Hudson RCI
and its subsidiaries and (iv) 100% of the net proceeds from insurance recoveries
and condemnations. The Revolving Credit Facility must be prepaid upon payment
in full of the Term Loan Facility.
Voluntary prepayments are permitted in whole or in part, at the option of
Hudson RCI, in minimum principal amounts to be agreed upon, without premium or
penalty, subject to reimbursement of the Lenders' redeployment costs in the case
of prepayment of eurodollar borrowings other than on the last day of the
relevant interest period.
Interest. The interest rate under the New Credit Facility is based, at the
option of Hudson RCI, upon either a eurodollar rate plus 2.25% per annum or a
base rate plus 1.25% per annum. If Hudson RCI achieves performance goals to be
agreed upon, the margins will be reduced in increments to be agreed upon. A
commitment fee of 0.50% per annum will be charged on the unused portion of the
New Credit Facility.
Collateral and Guarantees. The New Credit Facility is guaranteed by
Holding and all existing and subsequently acquired or organized domestic and, to
the extent no adverse tax consequences would result, foreign, subsidiaries of
Hudson RCI. The New Credit Facility is secured by a first priority lien in
substantially all of the properties and assets of Hudson RCI and the Guarantors
now owned or acquired later, including a pledge of all of the capital stock of
Hudson RCI owned by Holding and all of the shares held by Hudson RCI of Hudson
RCI's existing and future subsidiaries; provided, that such pledge is limited to
65% of the shares of any foreign subsidiary to the extent a pledge of a greater
percentage would result in adverse tax consequences to Hudson RCI.
Covenants. The New Credit Facility contains covenants restricting the
ability of Holding, Hudson RCI and Hudson RCI's subsidiaries to, among others,
(i) incur additional debt, (ii) declare dividends or redeem or repurchase
capital stock, (iii) prepay, redeem or purchase debt, (iv) incur liens, (v) make
loans and investments, (vi) make capital expenditures, (vii) engage in mergers,
acquisitions and asset sales, (viii) engage in transactions with affiliates.
Hudson RCI is also required to comply with financial covenants with respect to
(a) limits on annual aggregate capital expenditures, ranging from $6.0 million
in 1998 to $8.0 million in 2004 (with the right to carry over unspent amounts
for one year), (b) a fixed charge coverage ratio as of the end of each four
quarter period of not less than 1.20 to 1.00 (beginning with the fiscal quarter
ending nearest March 31, 1999), (c) a maximum leverage ratio decreasing from
6.75 to 1.00 for the second quarter of 1998 to 3.50 to 1.00 for the fourth
quarter of 2002 and thereafter, (d) a minimum EBITDA test increasing from $26.5
million for 1998 to $39.0 million for 2003 and thereafter, and (e) an interest
coverage ratio increasing from 1.50 to 1.00 for the four quarters ended with the
second quarter of 1998 to 3.00 to 1.00 for the four quarters ending with the
first quarter of 2002 and thereafter.
Events of Default. Events of default under the New Credit Facility include
but are not limited to (i) the Company's failure to pay principal when due or
interest after a grace period, (ii) the Company's material breach of any
covenant, representation or warranty contained in the loan documents, (iii)
customary cross-default provisions, (iv) events of bankruptcy, insolvency or
dissolution of the Company or its subsidiaries, (v) the levy of certain
judgments against the Company, its subsidiaries, or their assets, (vi) the
actual or asserted invalidity of security documents or guarantees of the Company
or its subsidiaries, and (vii) a change of control of the Company.
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<PAGE>
The preceding discussion of certain of the provisions of the New Credit
Facility is not intended to be exhaustive and is qualified in its entirety by
reference to the provisions of the New Credit Facility. Copies of the New
Credit Facility are available upon request from the Company.
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<PAGE>
DESCRIPTION OF THE EXCHANGE PREFERRED STOCK
The following is a summary of certain provisions of the Certificate of
Designation and the Exchange Preferred Stock. A copy of the Certificate of
Designation and the form of Exchange Preferred Stock is available upon request
to Holding at the address set forth under "Available Information." The following
summary of certain provisions of the Certificate of Designation does not purport
to be complete and is subject to, and is qualified in its entirety by reference
to, all the provisions of the Certificate of Designation. For purposes of this
Section, references to "Holding" shall mean River Holding Corp. excluding its
subsidiaries and "the Company" shall mean Hudson Respiratory Care Inc. excluding
its subsidiaries. Other capitalized terms used but not defined herein are
defined in the Certificate of Designation.
General
Holding will issue 300,000 shares of its 11 1/2% Senior Exchangeable PIK
Preferred Stock due 2010, $.01 par value per share, designated as "11 1/2%
Senior Exchangeable PIK Preferred Stock due 2010." Subject to certain
conditions, the Exchange Preferred Stock will be exchangeable, in whole but not
in part, for the Company Exchange Debentures or the Company Preferred Stock at
the option of Holding at any time on or after the date of issuance of the
Exchange Preferred Stock. When issued, the Exchange Preferred Stock will be
validly issued, fully paid and nonassessable. The holders of the Exchange
Preferred Stock will have no preemptive or preferential right to purchase or
subscribe to stock, obligations, warrants, or other securities of Holding of any
class. The Exchange Preferred Stock is eligible for trading in the Portal
Market.
Ranking
The Exchange Preferred Stock will, with respect to dividend rights and
rights on liquidation, winding up and dissolution, rank (i) senior to all
classes of common stock of Holding and to each other class of Capital Stock or
series of Preferred Stock established hereafter by the Board of Directors the
terms of which do not expressly provide that it ranks senior to, or on a parity
with, the Exchange Preferred Stock as to dividend rights and rights on
liquidation, winding-up and dissolution of Holding (collectively referred to,
together with all classes of common stock of Holding, as "Junior Stock") and
(ii) on a parity with each other class of Capital Stock or series of Preferred
Stock established hereafter by the Board of Directors, the terms of which
expressly provide that such class or series will rank on a parity with the
Preferred Stock as to dividend rights and rights on liquidation, winding-up and
dissolution (collectively referred to as "Parity Stock"). As of June 30, 1998,
Holding had issued and outstanding $63.0 million in Junior Stock and no issued
and outstanding Parity Stock or other capital stock which ranked senior to the
Exchange Preferred Stock. Creditors of Holding will have priority over the
Exchange Preferred Stock with respect to claims on the assets of Holding. In
addition, creditors and stockholders of Holding's subsidiaries, including the
Company and Industrias Hudson, will have priority over the Exchange Preferred
Stock with respect to claims on the assets of such subsidiaries, including
claims of Holding with respect to the Mirror Preferred Stock.
While any shares of Exchange Preferred Stock are outstanding, Holding may
not authorize, create or increase the authorized amount of any class or series
of Capital Stock or Preferred Stock, the terms of which expressly provide that
such class or series will rank senior to the Exchange Preferred Stock as to
dividend rights and rights upon liquidation, winding-up and dissolution of
Holding (collectively referred to as "Senior Stock") or Parity Stock without the
consent of the holders of at least 66% of the outstanding shares of Exchange
Preferred Stock. However, without the consent of any holder of Exchange
Preferred Stock, Holding may create additional classes of stock or issue series
of a stock that ranks junior to the Exchange Preferred Stock with respect, in
each case, to the payment of dividends and amounts upon liquidation, dissolution
and winding up. See "--Voting Rights".
All of Holding's income is generated by the Company and its subsidiaries.
As a result, Holding will rely upon distributions or advances from the Company
and its subsidiaries to provide the funds necessary to pay cash dividends on the
Exchange Preferred Stock. The Company and its subsidiaries are subject to
contractual and statutory limitations on their ability to make distributions and
advances to Holding. In particular, the New Credit Facility prohibits and the
Indenture restricts the payment of distributions and advances by Hudson RCI and
its subsidiaries to Holding and future agreements may contain similar
restrictions. See "Risk Factors--Holding's
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<PAGE>
Ability to Pay Dividends; Holding Company Structure," "Description of the
Subordinated Notes--Certain Covenants--Limitation on Restricted Payments" and
"Description of New Credit Facility."
Dividends
The holders of shares of Exchange Preferred Stock will be entitled to
receive, when, as and if dividends are declared by the Board of Directors out of
funds of Holding legally available therefor, cumulative preferential dividends
from the Issue Date of the Exchange Preferred Stock accruing at the rate per
share of 11 1/2% per annum, payable semi-annually in arrears on each of April 15
and October 15 or, if any such date is not a Business Day, on the next
succeeding Business Day (each, a "Dividend Payment Date"), to the holders of
record as of the next preceding April 1 and October 1. Dividends will be
payable in cash, except that on each Dividend Payment Date occurring on or prior
to April 15, 2003, dividends may be paid, at Holding's option, by the issuance
of additional shares of Exchange Preferred Stock (including fractional shares)
having an aggregate Liquidation Preference equal to the amount of such
dividends. The issuance of such additional shares of Exchange Preferred Stock
will constitute "payment" of the related dividend for all purposes of the
Certificate of Designation. Dividends payable on the Exchange Preferred Stock
will be computed on the basis of a 360-day year consisting of twelve 30-day
months and will be deemed to accrue on a daily basis. For a discussion of
certain Federal income tax considerations relevant to the payment of dividends
on the Exchange Preferred Stock, see "Certain U.S. Federal Income Tax
Considerations."
Dividends on the Exchange Preferred Stock will accrue whether or not
Holding has earnings or profits, whether or not there are funds legally
available for the payment of such dividends and whether or not dividends are
declared. Dividends will accumulate to the extent they are not paid on the
Dividend Payment Date for the period to which they relate. The Certificate of
Designation will provide that Holding will take all actions required or
permitted under applicable law to permit the payment of dividends on the
Exchange Preferred Stock, including, without limitation, through the revaluation
of its assets in accordance with the DGCL, to make or keep funds legally
available for the payment of dividends.
No dividend whatsoever shall be declared or paid upon, or any sum set apart
for the payment of dividends upon, any outstanding share of the Exchange
Preferred Stock with respect to any dividend period unless all dividends for all
preceding dividend periods have been declared and paid or declared and a
sufficient sum set apart for the payment of such dividend, upon all outstanding
shares of Exchange Preferred Stock.
Except as provided in the next sentence, no dividend will be declared or
paid on any Parity Stock unless full cumulative dividends have been paid on the
Exchange Preferred Stock for all prior dividend periods. If accrued dividends
on the Exchange Preferred Stock for all prior dividend periods have not been
paid in full then any dividend declared on the Exchange Preferred Stock for any
dividend period and on any Parity Stock will be declared ratably in proportion
to accrued and unpaid dividends on the Exchange Preferred Stock and such Parity
Stock.
No full dividends may be declared or paid or funds set apart for the
payment of dividends on any Parity Stock for any period unless full cumulative
dividends shall have been or contemporaneously are declared and paid in full or
declared and, if payable in cash, a sum in cash set apart for such payment on
the Exchange Preferred Stock. If full dividends are not so paid, the Exchange
Preferred Stock will share dividends pro rata with the Parity Stock. No
dividends may be paid or set apart for such payment on Junior Stock (except
dividends on Junior Stock in additional shares of Junior Stock) and no Junior
Stock or Parity Stock may be repurchased, redeemed or otherwise retired nor may
funds be set apart for payment with respect thereto, if full cumulative
dividends have not been paid on the Exchange Preferred Stock.
Optional Redemption
Except as set forth below, the Exchange Preferred Stock will not be
redeemable at the option of Holding prior to April 15, 2003. Thereafter, the
Exchange Preferred Stock will be redeemable, at Holding's option, in whole or in
part, at any time or from time to time, upon not less than 30 nor more than 60
days' prior notice mailed by first-class mail to each Holder's registered
address, at the following redemption prices (expressed in percentages of the
Liquidation Preference thereof), plus accumulated and unpaid dividends
(including an amount in cash equal
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<PAGE>
to a prorated dividend for any partial dividend period), if redeemed during the
12-month period commencing on of the years set forth below:
<TABLE>
<CAPTION>
Redemption
Period Price
------ ------------
<S> <C>
2003.................................. 105.750%
2004.................................. 104.600%
2005.................................. 103.450%
2006.................................. 102.300%
2007.................................. 101.150%
2008 and thereafter................... 100.000%
</TABLE>
In addition, at any time prior to April 15 , 2001, Holding may redeem at
its option (i) up to 50% or (ii) all but not less than all of the outstanding
shares of Exchange Preferred Stock with the net proceeds of any Public Equity
Offering by the Company at a redemption price (expressed as a percentage of the
Liquidation Preference thereof) of 111.5% plus accumulated and unpaid dividends
(including an amount in cash equal to a prorated dividend for any partial
dividend period). Any such redemption shall be made upon consummation of such
Public Equity Offering upon not less than 30 nor more than 60 days' notice.
Exchange for Company Exchange Debentures or Company Preferred Stock
Holding may, at its option, subject to certain conditions, exchange the
Exchange Preferred Stock, in whole but not in part (including in conjunction
with a redemption of up to 50% of the outstanding shares of Exchange Preferred
Stock with the proceeds of a Public Equity Offering by the Company pursuant to
the second paragraph under "--Optional Redemption" above), at any time, for
either Company Exchange Debentures or Company Preferred Stock; provided,
however, that (i) on the date of such exchange there are no accumulated and
unpaid dividends on the Exchange Preferred Stock (including the dividend payable
on such date) that are not paid contemporaneously with such exchange or other
contractual impediments to such exchange; (ii) such exchange is permitted under
applicable law; (iii) immediately after giving effect to such exchange, no
Default (as defined in the Company Exchange Indenture) or Voting Rights
Triggering Event (as defined in the Company Exchange Certificate of
Determination), as applicable, shall have occurred and be continuing; and (iv)
the Company shall have delivered to the Trustee under the Company Exchange
Indenture or the transfer agent for the Company Preferred Stock, as applicable,
an opinion of counsel with respect to the due authorization and issuance of the
Company Exchange Debentures or Company Preferred Stock, as applicable. The
exchange of the Exchange Preferred Stock for Company Exchange Debentures or
Company Preferred Stock is currently prohibited by the terms of the New Credit
Facility and the exchange of the Exchange Preferred Stock for Company Exchange
Debentures is limited by the Indenture governing the Subordinated Notes. See
"Description of New Credit Facility" and "Description of the Subordinated
Notes."
In order to effect any exchange of the Exchange Preferred Stock for Company
Exchange Debentures or Company Preferred Stock as described in this section,
Holding shall (i) cause the Company (a) to redeem a number of shares of Mirror
Preferred Stock held by Holding having an aggregate liquidation preference equal
to the aggregate Liquidation Preference of the Exchange Preferred Stock to be so
exchanged, (b) to issue to Holding in redemption thereof an aggregate principal
amount of Company Exchange Debentures, or a number of shares of Company
Preferred Stock having an aggregate liquidation preference, as applicable (in
each case subject to the provisions described in this section), equal to the
aggregate Liquidation Preference of the Exchange Preferred Stock subject to such
exchange and (ii) thereafter exchange such Exchange Preferred Stock for Company
Exchange Debentures or Company Preferred Stock.
Upon any exchange of Exchange Preferred Stock for Company Exchange
Debentures as described in this section, each holder of Exchange Preferred Stock
will be entitled to receive, subject to the second succeeding sentence, $1.00
principal amount of Company Exchange Debentures for each $1.00 Liquidation
Preference of Exchange Preferred Stock so exchanged, and an amount in cash equal
to a prorated dividend for any partial dividend period. The Company Exchange
Debentures will be issued in registered form, without coupons. Company
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Exchange Debentures issued in exchange for Exchange Preferred Stock will be
issued in principal amounts of $1,000 and integral multiples thereof to the
extent possible, and will also be issued in principal amounts less than $1,000
so that each holder of Exchange Preferred Stock will receive certificates
representing the entire amount of Company Exchange Debentures to which such
holder's shares of Exchange Preferred Stock entitle such holder; provided,
however, that Holding may pay cash in lieu of issuing a Company Exchange
Debenture in a principal amount less than $1,000.
Upon any exchange of Exchange Preferred Stock for Company Preferred Stock
as described in this section, each holder of Exchange Preferred Stock will be
entitled to receive, subject to the following sentence, shares of Company
Preferred Stock with an aggregate liquidation preference equal to the aggregate
Liquidation Preference of the shares of Exchange Preferred Stock so exchanged,
and an amount in cash equal to a prorated dividend for any partial dividend
period. In lieu of fractional shares of Company Preferred Stock, Holding may
pay an amount in cash equal to the product of (a) the Liquidation Preference of
the Exchange Preferred Stock multiplied by (b) the amount of such fractional
share.
Holding will send a written notice of exchange by mail to each holder of
record of shares of Exchange Preferred Stock not fewer than 30 days nor more
than 60 days before the date fixed for any exchange; provided that, in the event
of any exchange which is intended to occur in conjunction with a Public Equity
Offering by the Company, (i) Holding may provide for an Exchange Date which
relates to the consummation of such Public Equity Offering and (ii) Holding
shall have the right to revoke such written notice in the event that such
related Public Equity Offering is terminated by mailing a subsequent written
notice to such holders within two business days following such termination. On
and after the Exchange Date, dividends will cease to accrue on the outstanding
shares of Exchange Preferred Stock, and all rights of the holders of Exchange
Preferred Stock (except the right to receive the Company Exchange Debentures or
Company Preferred Stock, as applicable, an amount in cash, to the extent
applicable, equal to the accumulated and unpaid dividends to the Exchange Date
and, if Holding so elects, cash in lieu of any Company Exchange Debenture that
is in a principal amount that is not an integral multiple of $1,000 or in lieu
of any fractional share of Company Preferred Stock) will terminate. The person
entitled to receive the Company Exchange Debentures or Company Preferred Stock
issuable upon such exchange will be treated for all purposes as the registered
holder of such Company Exchange Debentures or Company Preferred Stock. See
"Description of Company Exchange Securities--Company Exchange Debentures" and
"--Company Preferred Stock".
Mandatory Redemption
On April 15, 2010, Holding will be required to redeem (subject to the legal
availability of funds therefor) all outstanding shares of Exchange Preferred
Stock at a price in cash equal to the Liquidation Preference thereof, plus
accumulated and unpaid dividends (including an amount in cash equal to a
prorated dividend for any partial dividend period), if any, to the date of
redemption. Holding will not be required to make sinking fund payments with
respect to the Exchange Preferred Stock. The Certificate of Designation will
provide that Holding will take all actions required or permitted under Delaware
law to permit such redemption.
In addition, in the event that the Merger has not been consummated within
three business days following the Issue Date, Holding shall redeem all
outstanding shares of Exchange Preferred Stock at a price in cash equal to the
Liquidation Preference thereof, plus accrued and unpaid dividends (including an
amount in cash equal to a prorated dividend for any partial dividend period), if
any, to the date of redemption.
Liquidation Preference
Upon any voluntary or involuntary liquidation, dissolution or winding-up of
Holding, each holder of Exchange Preferred Stock will be entitled to be paid,
out of the assets of Holding available for distribution to stockholders, an
amount equal to the Liquidation Preference per share of Exchange Preferred Stock
held by such holder, plus accumulated and unpaid dividends thereon to the date
fixed for liquidation, dissolution or winding-up before any distribution is made
on any Junior Stock, including, without limitation, common stock of Holding.
If, upon any voluntary or involuntary liquidation, dissolution or winding-up of
Holding, the amounts payable with respect to the Exchange Preferred Stock and
all other Parity Stock are not paid in full, the holders of the Exchange
Preferred Stock and the Parity Stock will share equally and ratably in any
distribution of assets of Holding in
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proportion to the full liquidation preference and accumulated and unpaid
dividends to which each is entitled. After payment of the full amount of the
Liquidation Preference and accumulated and unpaid dividends to which they are
entitled, the holders of shares of Exchange Preferred Stock will not be entitled
to any further participation in any distribution of assets of Holding. However,
neither the sale, conveyance, exchange or transfer (for cash, shares of stock,
securities or other consideration) of all or substantially all of the property
or assets of Holding nor the consolidation or merger of Holding with one or more
entities shall be deemed to be a liquidation, dissolution or winding-up of
Holding.
The Certificate of Designation will not contain any provision requiring
funds to be set aside to protect the Liquidation Preference of the Exchange
Preferred Stock, although such Liquidation Preference will be substantially in
excess of the par value of such shares of Exchange Preferred Stock. In
addition, Holding is not aware of any provision of Delaware law or any
controlling decision of the courts of the State of Delaware (the state of
incorporation of Holding) that requires a restriction upon the surplus of
Holding solely because the liquidation preference of the Exchange Preferred
Stock will exceed its par value. Consequently, there will be no restriction
upon any surplus of Holding solely because the liquidation preference of the
Exchange Preferred Stock will exceed the par value, and there will be no
remedies available to holders of the Exchange Preferred Stock before or after
the payment of any dividend, other than in connection with the liquidation of
Holding, solely by reason of the fact that such dividend would reduce the
surplus of Holding to an amount less than the difference between the liquidation
preference of the Exchange Preferred Stock and its par value.
Voting Rights
The holders of Exchange Preferred Stock, except as otherwise required under
Delaware law or as provided in the Certificate of Designation, shall not be
entitled or permitted to vote on any matter required or permitted to be voted
upon by the stockholders of Holding.
The Certificate of Designation will provide that if (i) dividends on the
Exchange Preferred Stock are in arrears and unpaid (and, in the case of
dividends payable after April 15, 2003, are not paid in cash) for six or more
Dividend Periods (whether or not consecutive); (ii) Holding fails to redeem the
Exchange Preferred Stock on April 15, 2010, or fails to otherwise discharge any
redemption obligation with respect to the Exchange Preferred Stock; (iii)
Holding fails to make an offer to redeem all of the outstanding shares of
Exchange Preferred Stock following a Change of Control (whether or not Holding
is permitted to do so by the terms of the Indenture, the New Credit Facility or
any other obligation of Holding), (iv) a breach or violation of any of the
provisions described under the caption "--Certain Covenants" occurs and, except
with respect to a breach or violation of the covenant described under "--Certain
Covenants--Mirror Preferred Stock," the breach or violation continues for a
period of 30 days or more after Holding receives notice thereof specifying the
default from the holders of at least 25% of the shares of Exchange Preferred
Stock then outstanding; (v) a breach or violation of any of the provisions of
the Mirror Preferred Stock occurs; or (vi) Holding fails to pay at final
maturity (giving effect to any applicable grace period) the principal amount of
any Debt of Holding or any Subsidiary of Holding or the stated maturity of any
such Debt of Holding or any Subsidiary of Holding is accelerated because of a
default and the total amount of such Debt unpaid or accelerated exceeds $7.5
million, then the holders of the outstanding shares of Exchange Preferred Stock,
voting together as a class with the holders of any other series of Preferred
Stock upon which like rights have been conferred and are exercisable, will be
entitled to elect two additional members to the Board of Directors to serve on
the Board of Directors, and the number of members of the Board of Directors will
be immediately and automatically increased by two. Such voting rights of the
Exchange Preferred Stock will continue until such time as, in the case of a
dividend default, all dividends in arrears on the Exchange Preferred Stock are
paid in full in cash and, in all other cases, any failure, breach or default
giving rise to such voting rights is remedied or waived by the holders of at
least a majority of the shares of Exchange Preferred Stock then outstanding, at
which time the term of office of any directors elected pursuant to the
provisions of this paragraph (subject to the right of holders of any other
Preferred Stock to elect such directors) shall terminate. Each such event
described in clauses (i) through (vi) above is referred to herein as a "Voting
Rights Triggering Event".
The Certificate of Designation will also provide that Holding will not
authorize any class of Senior Stock or Parity Stock without the affirmative vote
or consent of holders of at least 662/3% of the shares of Exchange Preferred
Stock then outstanding, voting or consenting, as the case may be, as one class.
In addition, the Certificate
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of Designation will provide that Holding may not authorize the issuance of any
additional shares of Exchange Preferred Stock (other than additional shares of
Exchange Preferred Stock to be issued as dividends on outstanding shares of
Exchange Preferred Stock) without the affirmative vote or consent of the holders
of at least a majority of the then outstanding shares of Exchange Preferred
Stock, voting or consenting, as the case may be, as one class. The Certificate
of Designation will also provide that, except as set forth above, (a) the
creation, authorization or issuance of any shares of Junior Stock, Parity Stock
or Senior Stock, including the designation of a series thereof within the
existing class of Exchange Preferred Stock, or (b) the increase or decrease in
the amount of authorized Capital Stock of any class, including any Exchange
Preferred Stock, shall not require the consent of the holders of Exchange
Preferred Stock and shall not be deemed to affect adversely the rights,
preferences, privileges or voting rights of shares of Exchange Preferred Stock.
Redemption at the Option of Holders Upon a Change of Control
Upon the occurrence of a Change of Control, each holder of Exchange
Preferred Stock shall have the right to require Holding to redeem all or any
part of such holder's Exchange Preferred Stock pursuant to the offer described
below (the "Change of Control Offer") at a redemption price (the "Change of
Control Redemption Price") equal to 101% of the Liquidation Preference thereof,
plus accrued and unpaid dividends thereon, if any, to the redemption date
(including an amount in cash equal to a pro rated dividend for any partial
dividend period). The Certificate of Designation does not provide for waiver of
the covenant relating to the holder's right to require redemption of the
Exchange Preferred Stock upon the occurrence of a Change of Control. Approval
by the Company's Board of Directors will not prevent a transaction from
constituting a Change of Control if it otherwise falls within the definition
thereof.
Within 30 days following any Change of Control, Holding shall (a) cause a
notice of the Change of Control Offer to be sent at least once to the Dow Jones
News Service or similar business news service in the United States and (b) send,
by first-class mail, with a copy to the transfer agent, to each holder of
Exchange Preferred Stock, at such holder's address appearing in the Security
Register, a notice stating: (i) that a Change of Control has occurred and a
Change of Control Offer is being made pursuant to the covenant entitled
"Redemption at the Option of Holders Upon a Change of Control" and that all
Exchange Preferred Stock timely tendered will be accepted for payment; (ii) the
Change of Control Redemption Price and the redemption date, which shall be,
subject to any contrary requirements of applicable law, a business day no
earlier than 30 days nor later than 60 days from the date such notice is mailed;
(iii) the circumstances and relevant facts regarding the Change of Control
(including information with respect to pro forma historical income, cash flow
and capitalization after giving effect to the Change of Control); and (iv) the
procedures that holders of Exchange Preferred Stock must follow in order to
tender their Exchange Preferred Stock (or portions thereof) for payment, and the
procedures that holders of Exchange Preferred Stock must follow in order to
withdraw an election to tender Exchange Preferred Stock (or portions thereof)
for payment.
Holding will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the redemption of Exchange Preferred Stock pursuant to a
Change of Control Offer. To the extent that the provisions of any securities
laws or regulations conflict with the provisions of the covenant described
hereunder, Holding will comply with the applicable securities laws and
regulations and will not be deemed to have breached its obligations under the
covenant described hereunder by virtue of such compliance.
The Change of Control redemption feature is a result of negotiations
between Holding and the Initial Purchasers. Holding has no present intention to
engage in a transaction involving a Change of Control, although it is possible
that Holding would decide to do so in the future. Subject to certain covenants
described below, Holding could, in the future, enter into certain transactions,
including acquisitions, refinancings or other recapitalizations, that would not
constitute a Change of Control under the Certificate of Designation, but that
could increase the amount of debt outstanding at such time or otherwise affect
Holding's capital structure or credit ratings.
The definition of Change of Control includes a phrase relating to the sale,
transfer, assignment, lease, conveyance or other disposition of "all or
substantially all" of Holding's or the Company's assets. Although there is a
developing body of case law interpreting the phrase "substantially all," there
is no precise established definition of the phrase under applicable law.
Accordingly, the ability of a holder of Exchange Preferred Stock to require
Holding to redeem such Exchange Preferred Stock as a result of a sale, transfer,
assignment, lease, conveyance or other disposition of less than all the assets
of Holding or the Company may be uncertain.
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The New Credit Facility prohibits the Company from paying dividends or
making loans to Holding for use by Holding to purchase or redeem any Exchange
Preferred Stock and also provides that the occurrence of certain of the events
that would constitute a Change of Control would constitute a default thereunder.
Other future debt of Holding may contain prohibitions of certain events which
would constitute a Change of Control or require such debt to be repurchased upon
a Change of Control. Moreover, the exercise by holders of Exchange Preferred
Stock of their right to require Holding to redeem such Exchange Preferred Stock
could cause a default under existing or future debt of Holding or the Company,
even if the Change of Control itself does not, due to the financial effect of
such redemption on Holding. Finally, since the New Credit Facility prohibits
the Company from paying dividends or making loans to Holding, Holding's ability
to pay cash to holders of Exchange Preferred Stock upon a redemption will be
limited by Holding's then existing alternative financial resources. There can
be no assurance that sufficient funds will be available when necessary to make
any required redemptions. Holding's failure to redeem Exchange Preferred Stock
in connection with a Change of Control would result in a breach of the
Certificate of Designation which may constitute a default under debt of the
Company or future debt of Holding and could lead to the acceleration of the
indebtedness thereunder. In any such event, the subordination of the Exchange
Preferred Stock and the security granted in respect of the New Credit Facility
would likely result in the Holders of the Exchange Preferred Stock receiving
less ratably than creditors of Holding.
In addition, the terms of the indenture under which the Subordinated Notes
will be issued include provisions similar to those contained in the Certificate
of Designation enabling holders thereof to require the Company to repurchase all
or any part of such securities under circumstances constituting a Change of
Control. The Indenture also limits the Company's ability to pay dividends or
make loans to Holding to redeem any Exchange Preferred Stock, and limits the
Company's ability to issue the Exchange Debentures. Holding and the Company may
not have sufficient resources to redeem tendered shares of Exchange Preferred
Stock and/or Subordinated Notes and any such failure may constitute a default
under the Certificate of Designation. Again, in any such event, the
subordination of the Exchange Preferred Stock and the security granted in
respect of the New Credit Facility would likely result in the Holders of the
Exchange Preferred Stock receiving less ratably than creditors of Holding.
Certain Covenants
The sole remedy to holders of Exchange Preferred Stock in the event of
Holding's failure to comply with any of the covenants described below and the
sole consequence of any such failure will be the voting rights described above.
Mirror Preferred Stock. Holding shall cause 300,000 shares of Mirror
Preferred Stock having an aggregate liquidation preference of $30.0 million to
be issued to Holding on the Issue Date on the terms described under "--Mirror
Preferred Stock." When issued, such Mirror Preferred Stock will be
validly issued, fully paid and nonassessable. While any shares of Exchange
Preferred Stock are outstanding, Holding shall (i) beneficially own all of the
outstanding shares of Mirror Preferred Stock and (ii) not permit any shares of
the Mirror Preferred Stock to be purchased, repurchased, redeemed, acquired or
retired for value (except as described under "--Exchange for Company Exchange
Debentures or Company Preferred Stock") or the Certificate of Designation
governing the Mirror Preferred Stock to be amended in a manner adverse to the
holders of the Exchange Preferred Stock or any provision thereof to be waived,
in each case without the consent of the holders of at least 66% of the
outstanding shares of Exchange Preferred Stock.
Limitation on Holding Debt. Holding shall not, directly or indirectly,
Incur (as defined herein) any Debt other than Guarantees of the Company's
obligations under the Credit Facility.
Limitation on Restricted Subsidiary Debt. Holding shall not permit any
Restricted Subsidiary to Incur, directly or indirectly, any Debt unless, after
giving pro forma effect to the application of the proceeds thereof, either (a)
after giving effect to the Incurrence of such Debt and the application of the
proceeds thereof, the Consolidated Interest Coverage Ratio would be greater than
1.75 to 1.00 if such Debt is Incurred from the Issue Date through April 15,
2000, and 2.00 to 1.00 if such Debt is Incurred thereafter or (b) such Debt is
Permitted Debt (as defined herein). For purposes of determining compliance with
this covenant, the Consolidated Interest Coverage Ratio, Consolidated Interest
Expense (as defined herein), Consolidated Net Income and EBITDA shall each be
calculated with reference to the Company and its Restricted Subsidiaries.
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The term "Permitted Debt" is defined to include the following:
(a) Debt of the Company evidenced by the Subordinated Notes and of
Subsidiary Guarantors evidenced by Subsidiary Guaranties;
(b)(i) Debt under the Credit Facility; provided that the aggregate
principal amount of all such Debt under the Credit Facility comprised of (A)
term loans at any one time outstanding shall not exceed $40.0 million minus all
principal amounts repaid in respect of such term loans and (B) revolving credit
loans or obligations at any one time outstanding shall not exceed the greater of
(x) $60.0 million and (y) the sum of the amounts equal to (1) 60% of the net
book value of the inventory of the Company and the Restricted Subsidiaries and
(2) 85% of the net book value of the accounts receivable of the Company and the
Restricted Subsidiaries, in each case as of the most recent fiscal quarter
ending at least 45 days prior to the date of determination and (ii) Guarantees
of Debt under the Credit Facility;
(c) Debt in respect of Capital Lease Obligations (as defined herein) and
Purchase Money Debt (as defined herein); provided that (i) the aggregate
principal amount of such Debt does not exceed the Fair Market Value (as defined
herein) (on the date of the Incurrence thereof) of the Property (as defined
herein) acquired, constructed or leased (including costs of installation, taxes
and delivery charges with respect to such acquisition, construction or lease)
and (ii) the aggregate principal amount of all Debt Incurred and then
outstanding pursuant to this clause (c) (together with all Permitted Refinancing
Debt (as defined herein) Incurred in respect of Debt previously Incurred
pursuant to this clause (c) and then outstanding) does not exceed $15.0 million;
(d) Debt of the Company owing to and held by any Wholly Owned Subsidiary
(as defined herein) and Debt of a Wholly Owned Subsidiary owing to and held by
the Company or any Wholly Owned Subsidiary; provided, however, that any
subsequent issue or transfer of Capital Stock (as defined herein) or other event
that results in any such Wholly Owned Subsidiary ceasing to be a Wholly Owned
Subsidiary or any subsequent transfer of any such Debt (except to the Company or
a Wholly Owned Subsidiary) shall be deemed, in each case, to constitute the
Incurrence of such Debt by the issuer thereof;
(e) Debt of a Wholly Owned Subsidiary Incurred and outstanding on or prior
to the date on which such Wholly Owned Restricted Subsidiary was acquired by the
Company or otherwise became a Restricted Subsidiary (other than Debt Incurred as
consideration in, or to provide all or any portion of the funds or credit
support utilized to consummate, the transaction or series of transactions
pursuant to which such Wholly Owned Restricted Subsidiary became a Subsidiary of
the Company or was otherwise acquired by the Company); provided that at the time
such Wholly Owned Restricted Subsidiary was acquired by the Company or otherwise
became a Restricted Subsidiary and after giving pro forma effect to the
Incurrence of such Debt, the Company would have been able to Incur $1.00 of
additional Debt pursuant to clause (a) in the first paragraph of this covenant;
(f) Debt under Interest Rate Agreements (as defined herein) entered into by
the Company or a Restricted Subsidiary for the purpose of limiting interest rate
risk in the ordinary course of the financial management of the Company or such
Restricted Subsidiary and not for speculative purposes, provided that the
obligations under such agreements are directly related to payment obligations on
Debt otherwise permitted by the terms of this covenant;
(g) Debt under Currency Exchange Protection Agreements (as defined herein)
entered into by the Company or a Restricted Subsidiary for the purpose of
limiting currency exchange rate risks directly related to transactions entered
into by the Company or such Restricted Subsidiary in the ordinary course of
business and not for speculative purposes;
(h) Debt in connection with one or more standby letters of credit or
performance bonds issued for the account of the Company or a Restricted
Subsidiary in the ordinary course of business or pursuant to self-insurance
obligations and not in connection with the borrowing of money or the obtaining
of advances;
(i) Debt outstanding on the Issue Date not otherwise described in clauses
(a) through (h) above;
(j) Debt not otherwise described in clauses (a) through (i) above and
clause (l) below in an aggregate principal amount outstanding at any one time
not to exceed $15.0 million;
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(k) Permitted Refinancing Debt Incurred in respect of Debt Incurred
pursuant to clause (a) of the first paragraph of this covenant and clauses (a),
(c), (e) and (i) above, subject, in the case of clause (c) above, to the
limitations set forth in the proviso thereto; and
(l) Debt of the Company under the Company Exchange Debentures.
Limitation on Restricted Payments. Holding shall not make, and shall not
permit any Restricted Subsidiary to make, directly or indirectly, any Restricted
Payment if at the time of, and after giving pro forma effect to, such proposed
Restricted Payment,
(a) a Voting Rights Triggering Event (as defined in the Certificate of
Designation) shall have occurred and be continuing,
(b) the Company could not Incur at least $1.00 of additional Debt pursuant
to clause (a) of the first paragraph of the covenant described under "--
Limitation on Restricted Subsidiary Debt" or
(c) the aggregate amount of such Restricted Payment and all other
Restricted Payments declared or made since the Issue Date (the amount of any
Restricted Payment, if made other than in cash, to be based upon Fair Market
Value) would exceed an amount equal to the sum of:
(i) 50% of the aggregate amount of Consolidated Net Income accrued during
the period (treated as one accounting period) from the beginning of the fiscal
quarter during which the Issue Date occurs to the end of the most recent fiscal
quarter ending at least 45 days prior to the date of such Restricted Payment (or
if the aggregate amount of Consolidated Net Income for such period shall be a
deficit, minus 100% of such deficit),
(ii) Capital Stock Sale Proceeds,
(iii) the amount by which Debt of Holding or the Company Incurred after the
Issue Date is reduced on Holding's balance sheet upon the conversion or exchange
(other than by Holding or a Subsidiary of Holding) subsequent to the Issue Date
of any Debt for Parity Stock or Junior Stock (other than Disqualified Stock) of
Holding (less the amount of any cash or other Property distributed by Holding or
any Restricted Subsidiary upon such conversion or exchange), and
(iv) an amount equal to the sum of (A) the net reduction in Investments (as
defined herein) in any Person (as defined herein) other than Holding or a
Restricted Subsidiary resulting from dividends, repayments of loans or advances
or other transfers of Property, in each case to Holding or any Restricted
Subsidiary from such Person, to the extent such dividends, repayments or
transfers do not increase the amount of Permitted Investments permitted to be
made pursuant to clause (i) of the definition thereof and (B) the portion
(proportionate to Holding's equity interest in such Unrestricted Subsidiary (as
defined herein)) of the Fair Market Value of the net assets of an Unrestricted
Subsidiary at the time such Unrestricted Subsidiary is designated a Restricted
Subsidiary; provided, however, that the foregoing sum shall not exceed, in the
case of any Person, the amount of Investments previously made (and treated as a
Restricted Payment) by Holding or any Restricted Subsidiary in such Person, and
(v) $7.5 million.
Notwithstanding the foregoing limitation, Holding and the Company may:
(a) pay dividends on its Capital Stock within 60 days of the declaration
thereof if, on said declaration date, such dividends could have been paid in
compliance with this covenant; provided, however, that at the time of such
payment of such dividend, no other Voting Rights Triggering Event shall have
occurred and be continuing (or result therefrom); provided further, however,
that such dividend shall be included in the calculation of the amount of
Restricted Payments;
(b) purchase, repurchase, redeem, legally defease, acquire or retire for
value Capital Stock of Holding or the Company in exchange for, or in an amount
not in excess of the proceeds of the substantially concurrent sale of, Parity
Stock or Junior Stock of Holding or the Company (other than Disqualified Stock
(as defined herein) and other than Capital Stock
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issued or sold to a Subsidiary of Holding or an employee stock ownership plan or
trust established by Holding or any of its Subsidiaries for the benefit of their
employees); provided, however, that (i) such purchase, repurchase, redemption,
legal defeasance, acquisition or retirement shall be excluded in the calculation
of the amount of Restricted Payments and (ii) the Capital Stock Sale Proceeds
(as defined herein) from such exchange or sale shall be excluded from the
calculation pursuant to clause (c)(ii) above;
(c) purchase, repurchase, redeem, legally defease, acquire or retire for
value shares of, or options to purchase shares of, common stock of the Company
or Holding from employees or former employees of the Company, Holding or their
Subsidiaries (or their estates or beneficiaries thereof) upon death, disability,
retirement or termination pursuant to the terms of the agreements (including
employment agreements) or plans (or amendments thereto) approved by the Board of
Directors or the Company, as the case may be, under which such individuals
purchase or sell, or are granted the option to purchase or sell, shares of such
common stock (or pay dividends or make loans to Holding for such purpose);
provided, however, that (i) the aggregate amount of such purchases, repurchases,
redemptions, defeasances, acquisitions or retirements shall not exceed $1.0
million in any year or $5.0 million during the term of the Exchange Preferred
Stock, except that (x) such amounts shall be increased by the aggregate net
amount of cash received by Holding or the Company after the Issue Date from the
sale of such shares to, or the exercise of options to purchase such shares by,
employees of the Company, Holding or their Subsidiaries and (y) Holding or the
Company may forgive or return Employee Notes (as defined herein) without regard
to the limitation set forth in clause (c)(i) above and such forgiveness or
return shall not be treated as a Restricted Payment for purposes of determining
compliance with such clause (c)(i) and (ii) such purchases, repurchases,
defeasances, acquisitions or retirements (but not forgiveness or return of
Employee Notes) shall be included in the calculation of the amount of Restricted
Payments; and
(d) make payments to Helen Hudson Lovaas pursuant to the Merger Agreement
(as defined herein) in an aggregate amount not to exceed $1.1 million in any
fiscal year or $3.3 million during the term of the Exchange Preferred Stock
(plus, in each case, interest due on the unpaid portion of such required
payments in accordance with the Merger Agreement); provided, however, that such
payments shall be excluded in the calculation of the amount of Restricted
Payments.
Limitation on Issuance or Sale of Capital Stock of Restricted Subsidiaries.
Holding shall not (a) sell, pledge, hypothecate or otherwise dispose of any
shares of Capital Stock of a Restricted Subsidiary or (b) permit any Restricted
Subsidiary to, directly or indirectly, issue or sell or otherwise dispose of any
shares of its Capital Stock, other than (i) directors' qualifying shares, and
(ii) to Holding or a Wholly Owned Subsidiary. Notwithstanding the foregoing, the
Company may (A) make primary issuances of its common stock (1) in exchange
solely for cash or Employee Notes or (2) as consideration in connection with the
acquisition by the Company of any Person engaged in a Related Business (as
defined herein) and (B) dispose of 100% of the shares of Capital Stock of
another Restricted Subsidiary; provided that (I) in the case of clause (A)(1) or
(B) above, the Net Available Cash (as defined herein) received by the Company
from any such transaction is applied within twelve months from the date of the
receipt of such Net Available Cash to prepay, repay, legally defease or purchase
Debt of Holding or any Restricted Subsidiary (excluding, in any such case,
Disqualified Stock and Debt owed to Holding or an Affiliate of Holding) or to
reinvest in Additional Assets (as defined herein) (including by means of an
Investment in Additional Assets by Holding or a Restricted Subsidiary with Net
Available Cash received by the Company); (II) in the case of clause (B) above,
the Company receives consideration at the time of such disposition at least
equal to the Fair Market Value of such Restricted Subsidiary and at least 75% of
the consideration paid to the Company in connection with such disposition is in
the form of cash or cash equivalents or the assumption by the purchaser of
liabilities of the Company or any other Restricted Subsidiary (other than
liabilities that are by their terms subordinated to the Exchange Preferred
Stock) as a result of which the Company and the other Restricted Subsidiaries
are no longer obligated with respect to such liability, (III) in the case of
clause (A)(2) above, (x) the Company shall remain a Restricted Subsidiary
immediately following such transaction, (y) such acquired Person shall be
designated as a Restricted Subsidiary effective immediately following such
transaction and (z) the aggregate consideration paid by the Company for such
acquired Person shall not be in excess of the Fair Market Value thereof and (IV)
in the case of clause (A)(1) or (A)(2) above, Holding obtains an opinion of
independent counsel of national standing to the effect that such action will not
result in Holding and the Company ceasing to be members of the same affiliated
group (as defined in Section 1504(a) of the Code).
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Limitation on Restrictions on Distributions from Restricted Subsidiaries.
Holding shall not, and shall not permit any Restricted Subsidiary to, directly
or indirectly, create or otherwise cause or suffer to exist any consensual
restriction on the right 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, or pay any Debt or other obligation owed, to the Company or any
other Restricted Subsidiary (except, with respect to restrictions on dividends
of non-cash Property, as permitted pursuant to clause (ii) of the next
sentence), (b) make any loans or advances to Holding or any other Restricted
Subsidiary or (c) transfer any of its Property to Holding or any other
Restricted Subsidiary. The foregoing limitations will not apply (i) with respect
to clauses (a), (b) and (c), to restrictions (A) in effect on the Issue Date,
(B) pursuant to the Credit Facility, (C) relating to Debt of a Restricted
Subsidiary and existing at the time it became a Restricted Subsidiary if such
restriction was not created in connection with or in anticipation of the
transaction or series of transactions pursuant to which such Restricted
Subsidiary became a Restricted Subsidiary or was acquired by the Company or (D)
which result from the Refinancing (as defined herein) of Debt Incurred pursuant
to an agreement referred to in clause (i)(A) or (C) above or in clause (ii)(A)
or (B) below, provided such restriction is no less favorable to the holders of
the Exchange Preferred Stock than those under the agreement evidencing the Debt
so Refinanced, and (ii) with respect to clause (c) only, to restrictions (A)
encumbering Property at the time such Property was acquired by Holding or any
Restricted Subsidiary, so long as such restriction relates solely to the
Property so acquired and was not created in connection with or in anticipation
of such acquisition, (B) resulting from customary provisions restricting
subletting or assignment of leases or customary provisions in other agreements
that restrict assignment of such agreements or rights thereunder or (C)
customary restrictions contained in asset sale agreements limiting the transfer
of such Property pending the closing of such sale.
Limitation on Transactions with Affiliates. Holding shall not, and shall
not permit any Restricted Subsidiary to, directly or indirectly, conduct any
business or enter into or suffer to exist any transaction or series of
transactions (including the purchase, sale, transfer, assignment, lease,
conveyance or exchange of any Property or the rendering of any service) with, or
for the benefit of, any Affiliate of Holding (an "Affiliate Transaction"),
unless (a) the terms of such Affiliate Transaction are (i) set forth in writing,
(ii) in the interest of Holding or such Restricted Subsidiary, as the case may
be, and (iii) no less favorable to Holding or such Restricted Subsidiary, as the
case may be, than those that could be obtained in a comparable arm's-length
transaction with a Person that is not an Affiliate of Holding, (b) if such
Affiliate Transaction involves aggregate payments or value in excess of $2.5
million, the Board of Directors (including a majority of the disinterested
members of the Board of Directors) approves such Affiliate Transaction and, in
its good faith judgment, believes that such Affiliate Transaction complies with
clauses (a) (ii) and (iii) of this paragraph as evidenced by a Board Resolution
promptly delivered to the Trustee and (c) if such Affiliate Transaction involves
aggregate payments or value in excess of $5.0 million, Holding obtains a written
opinion from an Independent Appraiser (as defined herein) to the effect that the
consideration to be paid or received in connection with such Affiliate
Transaction is fair, from a financial point of view, to the Company or such
Restricted Subsidiary, as the case may be.
Notwithstanding the foregoing limitation, Holding or any Restricted
Subsidiary may enter into or suffer to exist the following:
(i) any transaction or series of transactions between Holding and one or
more Restricted Subsidiaries or between two or more Restricted Subsidiaries in
the ordinary course of business; provided that no more than 5% of the total
voting power of the Voting Stock (as defined herein) (on a fully diluted basis)
of any such Restricted Subsidiary is owned by an Affiliate of Holding (other
than a Restricted Subsidiary);
(ii) any Restricted Payment permitted to be made pursuant to the covenant
described under "--Limitation on Restricted Payments";
(iii) the payment of compensation (including amounts paid pursuant to
employee benefit plans) for the personal services of officers, directors and
employees of Holding or any of the Restricted Subsidiaries, so long as the Board
of Directors in good faith shall have approved the terms thereof and deemed the
services theretofore or thereafter to be performed for such compensation to be
fair consideration therefor;
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(iv) loans and advances to employees made in the ordinary course of
business and consistent with the past practices of Holding or any Restricted
Subsidiary, as the case may be; provided that such loans and advances do not
exceed $1.0 million in the aggregate at any one time outstanding;
(v) the payment of fees and expenses in connection with the
Recapitalization pursuant to written agreements in effect on the Issue Date;
(vi) the sale of common stock of Holding or the Company for cash; provided,
that Holding or the Company may receive Employee Notes in an aggregate principal
amount not in excess of $1.0 million at any one time outstanding;
(vii) the payment of dividends in kind in respect of (i) the Mirror
Preferred Stock or (ii) any other Preferred Stock issued in compliance with this
covenant; and
(viii) a proportionate split of, or a common stock dividend payable on, the
common stock of Holding or the Company.
Designation of Restricted and Unrestricted Subsidiaries. The Board of
Directors may designate any Subsidiary of Holding (other than the Company or any
Subsidiary of the Company designated as a Restricted Subsidiary under the
Indenture governing the Subordinated Notes) to be an Unrestricted Subsidiary if
(a) the Subsidiary to be so designated does not own any Capital Stock or Debt
of, or own or hold any Lien on any Property of, Holding or any other Restricted
Subsidiary, (b) the Subsidiary to be so designated is not obligated under any
Debt, Lien (as defined herein) or other obligation that, if in default, would
result (with the passage of time or notice or otherwise) in a default on any
Debt of Holding or of any Restricted Subsidiary and (c) either (i) the
Subsidiary to be so designated has total assets of $1,000 or less or (ii) such
designation is effective immediately upon such entity becoming a Subsidiary of
Holding. Unless so designated as an Unrestricted Subsidiary, any Person that
becomes a Subsidiary of Holding will be classified as a Restricted Subsidiary;
provided, however, that such Subsidiary shall not be designated a Restricted
Subsidiary and shall be automatically classified as an Unrestricted Subsidiary
if the requirement set forth in the immediately following paragraph will not be
satisfied after giving pro forma effect to such classification. Except as
provided in the first sentence of this paragraph, no Restricted Subsidiary may
be redesignated as an Unrestricted Subsidiary.
The Board of Directors may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary if, immediately after giving pro forma effect to such
designation, the Company could Incur at least $1.00 of additional Debt pursuant
to clause (a) of the first paragraph of the covenant described under "--
Limitation on Restricted Subsidiary Debt."
Any such designation or redesignation by the Board of Directors will be
evidenced to the Transfer Agent by filing with the Trustee a resolution of the
Board of Directors (a "Board Resolution") giving effect to such designation or
redesignation and an Officers' Certificate (as defined herein) (a) certifying
that such designation or redesignation complies with the foregoing provisions
and (b) giving the effective date of such designation or redesignation, such
filing with the Transfer Agent to occur within 45 days after the end of the
fiscal quarter of Holding in which such designation or redesignation is made
(or, in the case of a designation or redesignation made during the last fiscal
quarter of Holding's fiscal year, within 90 days after the end of such fiscal
year).
Limitation on Holding's Business. Holding shall not, directly or
indirectly, engage in any business or activity other than the ownership of
Capital Stock of the Company and business activities incidental thereto.
MERGER, CONSOLIDATION AND SALE OF PROPERTY
Holding shall not merge, consolidate or amalgamate with or into any other
Person (other than a merger of a Wholly Owned Subsidiary into Holding) or sell,
transfer, assign, lease, convey or otherwise dispose of all or substantially all
its Property in any one transaction or series of transactions unless: (a)
Holding shall be the surviving Person (the "Surviving Person") or the Surviving
Person (if other than Holding) formed by such merger,
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consolidation or amalgamation or to which such sale, transfer, assignment,
lease, conveyance or disposition is made shall be a corporation organized and
existing under the laws of the United States of America, any State thereof or
the District of Columbia; (b) the Surviving Person (if other than Holding)
expressly assumes all obligations of Holding under the Exchange Preferred Stock
and the Certificate of Designation; (c) in the case of a sale, transfer,
assignment, lease, conveyance or other disposition of all or substantially all
the Property of Holding, such Property shall have been transferred as an
entirety or virtually as an entirety to one Person; (d) immediately before and
after giving effect to such transaction or series of transactions on a pro forma
basis (and treating, for purposes of this clause (d) and clauses (e) and (f)
below, any Debt which becomes, or is anticipated to become, an obligation of the
Surviving Person or any Restricted Subsidiary as a result of such transaction or
series of transactions as having been Incurred by the Surviving Person or such
Restricted Subsidiary at the time of such transaction or series of
transactions), no Voting Rights Triggering Event shall have occurred and be
continuing; (e) immediately after giving effect to such transaction or series of
transactions on a pro forma basis, Holding or the Surviving Person, as the case
may be, would be able to Incur at least $1.00 of additional Debt under clause
(a) of the first paragraph of the covenant described under "--Certain Covenants
- --Limitation on Restricted Subsidiary Debt", determining compliance thereunder
for this purpose based upon the Consolidated Interest Expense, Consolidated Net
Income and EBITDA of Holding or the Surviving Person, as the case may be, and
its Restricted Subsidiaries; provided, however, that this clause (e) shall not
apply to a merger between Holding and a Wholly Owned Subsidiary of Holding
solely for the purpose of reincorporating Holding in another state of the United
States so long as the total amount of Debt of Holding and its Restricted
Subsidiaries is not increased as a result thereof; and (f) Holding shall
deliver, or cause to be delivered, to the Transfer Agent, in form and substance
reasonably satisfactory to the Transfer Agent, an Officers' Certificate and an
Opinion of Counsel (as defined herein), each stating that such transaction and
the supplemental indenture, if any, in respect thereto comply with this covenant
and that all conditions precedent herein provided for relating to such
transaction have been satisfied.
BOOK-ENTRY SYSTEM
The Exchange Preferred Stock may be issued in the form of one or more
global securities (collectively, a "Global Security"). A Global Security will
be deposited with, or on behalf of, the DTC and registered in the name of the
DTC or its nominee. Except as set forth below, a Global Security may be
transferred, in whole and not in part, only to the DTC or another nominee of the
DTC. Investors may hold their beneficial interests in a Global Security
directly through the DTC if they have an account with the DTC or indirectly
through organizations which have accounts with the DTC.
Depository Procedures
Upon the issuance of a Global Security, DTC or its nominee will credit the
accounts of Persons holding through it with the respective number of shares of
the Exchange Preferred Stock represented by such Global Security purchased by
such Persons in the Offering. Such accounts shall be designated by the Initial
Purchasers. Ownership of beneficial interests in a Global Security will be
limited to Persons that have accounts with DTC ("participants") or Persons that
may hold interests through participants. Any Person acquiring an interest in a
Global Security through an offshore transaction in reliance on Regulation S of
the Securities Act may hold such interest through Cedel or Euroclear. Ownership
of beneficial interests in a Global Security will be shown on, and the transfer
of that ownership interest will be effected only through, records maintained by
DTC (with respect to participants' interests) and such participants (with
respect to the owners of beneficial interests in such Global Security other than
participants). The laws of some jurisdictions require that certain purchasers of
securities take physical delivery of such securities in definitive form. Such
limits and such laws may impair the ability to transfer beneficial interests in
a Global Security.
Payment of dividends on Exchange Preferred Stock represented by a Global
Security will be made in immediately available funds to DTC or its nominee, as
the case may be, as the sole registered owner and the sole holder of the
Exchange Preferred Stock represented thereby for all purposes under the
Certificate of Designation. The Company has been advised by DTC that upon
receipt of any payment of principal of or interest on any Global Security, DTC
will immediately credit, on its book-entry registration and transfer system, the
accounts of participants with payments in amounts proportionate to their
respective beneficial interests in the face amount of such Global Security as
shown on the records of DTC. Payments by participants to owners of beneficial
interests in a
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Global Security held through such participants will be governed by standing
instructions and customary practices as is now the case with securities held for
customer accounts registered in "street name" and will be the sole
responsibility of such participants.
A Global Security may not be transferred except as a whole by DTC or a
nominee of DTC to a nominee of DTC or to DTC. A Global Security is exchangeable
for certificated Exchange Preferred Stock only if (a) DTC notifies the Company
that it is unwilling or unable to continue as a depositary for such Global
Security or if at any time DTC ceases to be a clearing agency registered under
the Exchange Act, (b) the Company in its discretion at any time determines not
to have all the Exchange Preferred Stock represented by such Global Security or
(c) there shall have occurred and be continuing a Default or an Event of Default
with respect to the Exchange Preferred Stock represented by such Global
Security. Any Global Security that is exchangeable for certificated Exchange
Preferred Stock pursuant to the preceding sentence will be exchanged for
certificated Exchange Preferred Stock in authorized denominations and registered
in such names as DTC or any successor depositary holding such Global Security
may direct. Subject to the foregoing, a Global Security is not exchangeable,
except for a Global Security of like denomination to be registered in the name
of DTC or any successor depositary or its nominee. In the event that a Global
Security becomes exchangeable for certificated Exchange Preferred Stock, (a)
certificated Exchange Preferred Stock will be issued only in fully registered
form, (b) payment of dividends on the certificated Exchange Preferred Stock will
be payable, and the transfer of the certificated Exchange Preferred Stock will
be registerable, at the office or agency of the Company maintained for such
purposes and (c) no service charge will be made for any registration of transfer
or exchange of the certificated Exchange Preferred Stock, although the Company
may require payment of a sum sufficient to cover any tax or governmental charge
imposed in connection therewith.
So long as DTC or any successor depositary for a Global Security, or any
nominee, is the registered owner of such Global Security, DTC or such successor
depositary or nominee, as the case may be, will be considered the sole owner or
holder of the Exchange Preferred Stock represented by such Global Security for
all purposes under the Indenture and the Exchange Preferred Stock. Except as set
forth above, owners of beneficial interests in a Global Security will not be
entitled to have the Exchange Preferred Stock represented by such Global
Security registered in their names, will not receive or be entitled to receive
physical delivery of certificated Exchange Preferred Stock in definitive form
and will not be considered to be the owners or holders of any Exchange Preferred
Stock under such Global Security. Accordingly, each Person owning a beneficial
interest in a Global Security must rely on the procedures of DTC or any
successor depositary, and, if such Person is not a participant, on the
procedures of the participant through which such Person owns its interest, to
exercise any rights of a holder under the Certificate of Designation. The
Company understands that under existing industry practices, in the event that
the Company requests any action of holders or that an owner of a beneficial
interest in a Global Security desires to give or take any action which a holder
is entitled to give or take under the Certificate of Designation, DTC or any
successor depositary would authorize the participants holding the relevant
beneficial interest to give or take such action and such participants would
authorize beneficial owners owning through such participants to give or take
such action or would otherwise act upon the instructions of beneficial owners
owning through them.
DTC has advised the Company that DTC is a limited-purpose trust company
organized under the Banking Law of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the New
York Uniform Commercial Code and a "clearing agency" registered under the
Exchange Act. DTC was created to hold the securities of its participants and to
facilitate the clearance and settlement of securities transactions among its
participants in such securities through electronic book-entry changes in
accounts of the participants, thereby eliminating the need for physical movement
of securities certificates. DTC's participants include securities brokers and
dealers (which may include the Initial Purchasers), banks, trust companies,
clearing corporations and certain other organizations some of whom (or their
representatives) own DTC. Access to DTC's book-entry system is also available to
others, such as banks, brokers, dealers and trust companies, that clear through
or maintain a custodial relationship with a participant, either directly or
indirectly.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in Global Securities among participants of DTC, it is
under no obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. None of the Company, the Trustee or
the Initial Purchasers will have any responsibility for the performance by DTC
or its participants or indirect participants of their respective obligations
under the rules and procedures governing their operations.
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CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Certificate of Designation. Reference is made to the Certificate of Designation
for the full definition of all such terms as well as any other capitalized terms
used herein for which no definition is provided.
"Additional Assets" means (a) any Property (other than cash, cash
equivalents and securities) to be owned by the Company or any Restricted
Subsidiary and used in a Related Business; or (b) Capital Stock of a Person that
becomes a Restricted Subsidiary as a result of the acquisition of such Capital
Stock by the Company or another Restricted Subsidiary from any Person other than
an Affiliate of the Company; provided, however, that, in the case of clause (b),
such Restricted Subsidiary is primarily engaged in a Related Business.
"Affiliate" of any specified Person means (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 who is a director or
officer of (i) such specified Person, (ii) any Subsidiary of such specified
Person or (iii) any Person described in clause (a) above. For the purposes of
this definition, "control" when used with respect to any 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. For purposes of the covenant described under "--Certain Covenants--
Limitation on Transactions with Affiliates" only, "Affiliate" shall also mean
any beneficial owner of shares representing 5% or more of the total voting power
of the Voting Stock (on a fully diluted basis) of Holding or of rights or
warrants to purchase such Voting Stock (whether or not currently exercisable)
and any Person who would be an Affiliate of any such beneficial owner pursuant
to the first sentence hereof.
"Asset Sale" means any sale, lease, transfer, issuance or other disposition
(or series of related sales, leases, transfers, issuances or dispositions) by
Holding or any Restricted Subsidiary, including any disposition by means of a
merger, consolidation or similar transaction (each referred to for the purposes
of this definition as a "disposition"), of (a) any shares of Capital Stock of a
Restricted Subsidiary (other than directors' qualifying shares) or (b) any other
assets of Holding or any Restricted Subsidiary outside of the ordinary course of
business of Holding or such Restricted Subsidiary (other than, in the case of
clauses (a) and (b) above, (i) any disposition by a Restricted Subsidiary to
Holding or by Holding or a Restricted Subsidiary to a Wholly Owned Subsidiary,
(ii) any disposition effected in compliance with the first paragraph of the
covenant described under "--Merger, Consolidation and Sale of Property", (iii)
any Sale and Leaseback Transaction (as defined herein) completed within 180 days
following the original acquisition of the subject assets where such Sale and
Leaseback Transaction represents the intended financing of Property acquired
after the Issue Date and (iv) any disposition or series of related dispositions
of assets having a Fair Market Value and sale price of less than $500,000.
"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 remaining term
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).
"Average Life" means, as of any date of determination, with respect to any
Debt or Preferred Stock, the quotient obtained by dividing (a) the sum of the
product of the numbers of years (rounded to the nearest one-twelfth of one year)
from the date of determination to the dates of each successive scheduled
principal payment of such Debt or redemption or similar payment with respect to
such Preferred Stock multiplied by the amount of such payment by (b) the sum of
all such payments.
"Board of Directors" means the Board of Directors of Holding or the
Company, as applicable, or any committee thereof duly authorized to act on
behalf of such Board.
"Capital Lease Obligations" means any obligation under a lease that is
required to be capitalized for financial reporting purposes in accordance with
GAAP; and the amount of Debt represented by such obligation shall be the
capitalized amount of such obligations determined in accordance with GAAP; and
the Stated Maturity (as defined herein) thereof
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shall be the date of the last payment of rent or any other amount due under such
lease prior to the first date upon which such lease may be terminated by the
lessee without payment of a penalty.
"Capital Stock" means, with respect to any Person, any shares or other
equivalents (however designated) of corporate stock, partnership interests or
any other participations, rights, warrants, options or other interests in the
nature of an equity interest in such Person, including Preferred Stock, but
excluding any debt security convertible or exchangeable into such equity
interest.
"Capital Stock Sale Proceeds" means the aggregate cash proceeds received by
Holding from the issuance or sale (other than to a Subsidiary of Holding or an
employee stock ownership plan or trust established by Holding or any of its
Subsidiaries for the benefit of their employees) by Holding of any class of its
Parity Stock and Junior Stock (other than Disqualified Stock) after the Issue
Date, net of attorneys' fees, accountants' fees, underwriters' or placement
agents' fees, discounts or commissions and brokerage, consultant and other fees
actually incurred in connection with such issuance or sale and net of taxes paid
or payable as a result thereof.
"Change of Control" means the occurrence of any of the following events:
(a) prior to the first Public Equity Offering of common stock of Holding or
the Company, the Permitted Holders (as defined herein) cease to be the
"beneficial owners" (as defined in Rule 13d-3 under the Exchange Act, except
that a Person will be deemed to have "beneficial ownership" of all shares that
any such Person has the right to acquire, whether such right is exercisable
immediately or only after the passage of time), directly or indirectly, of a
majority of the voting power of the Voting Stock of Holding or the Company,
whether as a result of the issuance of securities of Holding or the Company, any
merger, consolidation, liquidation or dissolution of Holding or the Company, any
direct or indirect transfer of securities by the Permitted Holders or otherwise
(for purposes of this clause (a), the Permitted Holders will be deemed to
beneficially own any Voting Stock of a corporation (the "specified corporation")
held by any other corporation (the "parent corporation") so long as the
Permitted Holders beneficially own, directly or indirectly, in the aggregate a
majority of the voting power of the Voting Stock of such parent corporation);
or
(b) after the first Public Equity Offering of common stock of Holding or
the Company, any "Person" or "group" (as such terms are used in Sections
13(d)(3) and 14(d)(2) of the Exchange Act or any successor provisions to either
of the foregoing), including any group acting for the purpose of acquiring,
holding, voting or disposing of securities within the meaning of Rule 13d-
5(b)(1) under the Exchange Act, other than any one or more of the Permitted
Holders, becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act, except that a Person will be deemed to have "beneficial ownership"
of all shares that any such Person has the right to acquire, whether such right
is exercisable immediately or only after the passage of time), directly or
indirectly, of 35% or more of the voting power of the Voting Stock of Holding or
the Company; provided, however, that the Permitted Holders are the "beneficial
owners" (as defined in Rule 13d-3 under the Exchange Act, except that a Person
will be deemed to have "beneficial ownership" of all shares that any such Person
has the right to acquire, whether such right is exercisable immediately or only
after the passage of time), directly or indirectly, in the aggregate of a lesser
percentage of the total voting power of all classes of the Voting Stock of
Holding or the Company than such other Person or group (for purposes of this
clause (b), such Person or group shall be deemed to beneficially own any Voting
Stock of a specified corporation held by a parent corporation so long as such
Person or group beneficially owns, directly or indirectly, in the aggregate a
majority of the voting power of the Voting Stock of such parent corporation); or
(c) the sale, transfer, assignment, lease, conveyance or other disposition,
directly or indirectly, of all or substantially all the assets of Holding and
the Restricted Subsidiaries, considered as a whole (other than a disposition of
such assets as an entirety or virtually as an entirety to a Wholly Owned
Subsidiary or one or more Permitted Holders) shall have occurred, or Holding
merges, consolidates or amalgamates with or into any other Person (other than
one or more Permitted Holders) or any other Person (other than one or more
Permitted Holders) merges, consolidates or amalgamates with or into Holding, in
any such event pursuant to a transaction in which the outstanding Voting Stock
of Holding is reclassified into or exchanged for cash, securities or other
Property, other than any such transaction where (i) the outstanding Voting Stock
of Holding is reclassified into or exchanged for Voting Stock of the surviving
corporation and (ii) the holders of the Voting Stock of Holding immediately
prior to
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such transaction own, directly or indirectly, not less than a majority of the
Voting Stock of the surviving corporation immediately after such transaction and
in substantially the same proportion as before the transaction; or
(d) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors of Holding or the
board of directors of the Company (together with any new directors whose
election or appointment by the applicable board or whose nomination for election
by the shareholders of Holding or the Company was approved by a vote of 66-2/3%
of the applicable 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
members of such board then in office; or
(e) the shareholders of Holding or the Company shall have approved any plan
of liquidation or dissolution of Holding or the Company.
Approval by the Board of Directors will not prevent a transaction from
constituting a Change of Control if it otherwise falls within the definition
hereof.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Interest Coverage Ratio" means, as of any date of
determination, the ratio of (a) the aggregate amount of EBITDA for the most
recent four consecutive fiscal quarters ending at least 45 days prior to such
determination date to (b) Consolidated Interest Expense for such four fiscal
quarters; provided, however, that (i) if Holding or any Restricted Subsidiary
has Incurred any Debt since the beginning of such period that remains
outstanding or if the transaction giving rise to the need to calculate the
Consolidated Interest Coverage Ratio is an Incurrence of Debt, or both,
Consolidated Interest Expense for such period shall be calculated after giving
effect on a pro forma basis to such Debt as if such Debt had been Incurred on
the first day of such period and the discharge of any other Debt repaid,
repurchased, defeased or otherwise discharged with the proceeds of such new Debt
as if such discharge had occurred on the first day of such period, (ii) if since
the beginning of such period Holding or any Restricted Subsidiary shall have
repaid, repurchased, legally defeased or otherwise discharged any Debt with
Capital Stock Sale Proceeds, Consolidated Interest Expense for such period shall
be calculated after giving effect on a pro forma basis to such discharge as if
such discharge had occurred on the first day of such period, (iii) if since the
beginning of such period Holding or any Restricted Subsidiary shall have made
any Asset Sale or if the transaction giving rise to the need to calculate the
Consolidated Interest Coverage Ratio is an Asset Sale, or both, EBITDA for such
period shall be reduced by an amount equal to the EBITDA (if positive) directly
attributable to the Property which is the subject of such Asset Sale for such
period, or increased by an amount equal to the EBITDA (if negative) directly
attributable thereto for such period, in either case as if such Asset Sale had
occurred on the first day of such period and Consolidated Interest Expense for
such period shall be reduced by an amount equal to the Consolidated Interest
Expense directly attributable to any Debt of Holding or any Restricted
Subsidiary repaid, repurchased, defeased or otherwise discharged with respect to
Holding and its continuing Restricted Subsidiaries in connection with such Asset
Sale, as if such Asset Sale had occurred on the first day of such period (or, if
the Capital Stock of any Restricted Subsidiary is sold, by an amount equal to
the Consolidated Interest Expense for such period directly attributable to the
Debt of such Restricted Subsidiary to the extent Holding and its continuing
Restricted Subsidiaries are no longer liable for such Debt after such sale),
(iv) if since the beginning of such period Holding or any Restricted Subsidiary
(by merger or otherwise) shall have made an Investment in any Restricted
Subsidiary (or any Person which becomes a Restricted Subsidiary) or an
acquisition of Property, including any acquisition of Property occurring in
connection with a transaction causing a calculation to be made hereunder, which
constitutes all or substantially all of an operating unit of a business, EBITDA
and Consolidated Interest Expense for such period shall be calculated after
giving pro forma effect thereto (including the Incurrence of any Debt) as if
such Investment or acquisition occurred on the first day of such period and (v)
if since the beginning of such period any Person (that subsequently became a
Restricted Subsidiary or was merged with or into Holding or any Restricted
Subsidiary since the beginning of such period) shall have made any Asset Sale,
Investment or acquisition of Property that would have required an adjustment
pursuant to clause (iii) or (iv) above if made by Holding or a Restricted
Subsidiary during such period, EBITDA and Consolidated Interest Expense for such
period shall be calculated after giving pro forma effect thereto as if such
Asset Sale, Investment or acquisition occurred on the first day of such period.
For purposes of this definition, pro forma calculations shall be determined in
good faith by a responsible financial or accounting Officer of Holding and as
further contemplated by the definition of the term "pro forma". If any Debt
bears a floating rate of interest and is being given pro forma effect, the
interest expense on such Debt shall be calculated as if the rate in effect on
the date of determination had been the applicable
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rate for the entire period (taking into account any Interest Rate Agreement
applicable to such Debt if such Interest Rate Agreement has a remaining term in
excess of 12 months).
"Consolidated Interest Expense" means, for any period, the total interest
expense of Holding and its consolidated Restricted Subsidiaries, plus, to the
extent not included in such total interest expense, and to the extent Incurred
by Holding or its Restricted Subsidiaries, (a) interest expense attributable to
capital leases, (b) amortization of debt discount and debt issuance cost,
including commitment fees, other than with respect to Debt Incurred in
connection with the Recapitalization, (c) capitalized interest, (d) non-cash
interest expenses, (e) commissions, discounts and other fees and charges owed
with respect to letters of credit and bankers' acceptance financing, (f) net
costs associated with Hedging Obligations (as defined herein) (including
amortization of fees), (g) Disqualified Dividends (as defined herein) other than
Disqualified Dividends paid with shares of Parity Stock or Junior Stock of
Holding which is not Disqualified Stock, (h) Preferred Stock dividends in
respect of all Preferred Stock of Restricted Subsidiaries held by Persons other
than Holding or a Wholly Owned Subsidiary, (i) interest Incurred in connection
with Investments in discontinued operations, (j) interest accruing on any Debt
of any other Person to the extent such Debt is Guaranteed by Holding or any
Restricted Subsidiary and (k) the cash contributions to any employee stock
ownership plan or similar trust to the extent such contributions are used by
such plan or trust to pay interest or fees to any Person (other than Holding) in
connection with Debt Incurred by such plan or trust.
"Consolidated Net Income" means, for any period, the net income (loss) of
Holding and its consolidated Subsidiaries; provided, however, that there shall
not be included in such Consolidated Net Income (a) any net income (loss) of any
Person (other than Holding) if such Person is not a Restricted Subsidiary,
except that (i) subject to the exclusion contained in clause (d) below,
Holding's equity in the net income of any such Person for such period shall be
included in such Consolidated Net Income up to the aggregate amount of cash
distributed by such Person during such period to Holding or a Restricted
Subsidiary as a dividend or other distribution (subject, in the case of a
dividend or other distribution to a Restricted Subsidiary, to the limitations
contained in clause (c) below) and (ii) Holding's equity in a net loss of any
such Person other than an Unrestricted Subsidiary for such period shall be
included in determining such Consolidated Net Income, (b) for the purposes of
the covenant described under "--Certain Covenants--Limitation on Restricted
Payments" only, any net income (loss) of any Person acquired by Holding or any
of its consolidated Subsidiaries in a pooling of interests transaction for any
period prior to the date of such acquisition, (c) any net income (but not loss)
of any Restricted Subsidiary if such Restricted Subsidiary is subject to
restrictions, directly or indirectly, on the payment of dividends or the making
of distributions, directly or indirectly, to Holding, except that subject to the
exclusion contained in clause (d) below, Holding's equity in the net income of
any such Restricted Subsidiary for such period shall be included in such
Consolidated Net Income up to the aggregate amount of cash distributed by such
Restricted Subsidiary during such period to Holding or another Restricted
Subsidiary as a dividend or other distribution (subject, in the case of a
dividend or other distribution to another Restricted Subsidiary, to the
limitation contained in this clause), (d) any gain (or, for purposes of the
covenants described under "--Certain Covenants--Limitation on Restricted
Subsidiary Debt" and "--Merger, Consolidation and Sale of Property" only, loss)
realized upon the sale or other disposition of any Property of Holding or any of
its consolidated Subsidiaries (including pursuant to any Sale and Leaseback
Transaction) which is not sold or otherwise disposed of in the ordinary course
of business, provided, that any tax benefit or tax liability resulting therefrom
shall be excluded in such Consolidated Net Income, (e) any extraordinary gain or
loss, provided, that any tax benefit or tax liability resulting therefrom shall
be excluded in such Consolidated Net Income, (f) the cumulative effect of a
change in accounting principles and (g) (i) any non-cash compensation expense
realized for grants of performance shares, stock options or other stock awards
to officers, directors and employees of Holding or any Restricted Subsidiary or
(ii) compensation expense realized with respect to periods prior to the Issue
Date in respect of payments under the Company's 1994 Amended and Restated Equity
Participation Plan or compensation expense, to the extent accrued in 1998,
related to contingent payments to existing managers of the Company pursuant to
the Merger Agreement in an aggregate amount not in excess of $2.4 million.
Notwithstanding the foregoing, for the purposes of the covenant described under
"--Certain Covenants--Limitation on Restricted Payments" only, there shall be
excluded from Consolidated Net Income any dividends, repayments of loans or
advances or other transfers of assets from Unrestricted Subsidiaries to Holding
or a Restricted Subsidiary to the extent such dividends, repayments or transfers
increase the amount of Restricted Payments permitted under such covenant
pursuant to clause (c)(iv) thereof.
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"Credit Facility" means, with respect to the Company or any Restricted
Subsidiary, one or more debt or commercial paper facilities with banks or other
institutional lenders (including the New Credit Facility) providing for
revolving credit loans, term loans, receivables or inventory financing
(including through the sale of receivables or inventory to such lenders or to
special purpose, bankruptcy remote entities formed to borrow from such lenders
against such receivables or inventory) or trade letters of credit, in each case
together with any amendments, supplements, modifications (including by any
extension of the maturity thereof), refinancings or replacements thereof by a
lender or syndicate of lenders in one or more successive transactions (including
any such transaction that changes the amount available thereunder, replaces such
agreement or document, or provides for other agents or lenders).
"Currency Exchange Protection Agreement" means, in respect of a Person, any
foreign exchange contract, currency swap agreement, currency option or other
similar agreement or arrangement designed to protect such Person against
fluctuations in currency exchange rates.
"Debt" means, with respect to any Person on any date of determination
(without duplication), (a) the principal of and premium (if any) in respect of
(i) debt of such Person for money borrowed and (ii) debt evidenced by notes,
debentures, bonds or other similar instruments for the payment of which such
Person is responsible or liable; (b) all Capital Lease Obligations of such
Person and all Attributable Debt in respect of Sale and Leaseback Transactions
entered into by such Person; (c) all obligations of such Person issued or
assumed as the deferred purchase price of Property, all conditional sale
obligations of such Person and all obligations of such Person under any title
retention agreement (but excluding trade accounts payable arising in the
ordinary course of business); (d) all obligations of such Person for the
reimbursement of any obligor on any letter of credit, banker's acceptance or
similar credit transaction (other than obligations with respect to letters of
credit securing obligations (other than obligations described in (a) through (c)
above) entered into in the ordinary course of business of such Person to the
extent such letters of credit are not drawn upon or, if and to the extent drawn
upon, such drawing is reimbursed no later than the third Business Day (as
defined) following receipt by such Person of a demand for reimbursement
following payment on the letter of credit); (e) the amount of all obligations of
such Person with respect to the redemption, repayment or other repurchase of any
Disqualified Stock or, with respect to any Subsidiary of such Person, any
Preferred Stock (but excluding, in each case, any accrued dividends); (f) all
obligations of the type referred to in clauses (a) through (e) of other Persons
and all dividends of other Persons for the payment of which, in either case,
such Person is responsible or liable, directly or indirectly, as obligor,
guarantor or otherwise, including by means of any Guarantee (as defined herein);
(g) all obligations of the type referred to in clauses (a) through (f) of other
Persons secured by any Lien on any Property of such Person (whether or not such
obligation is assumed by such Person), the amount of such obligation being
deemed to be the lesser of the value of such Property or the amount of the
obligation so secured; and (h) to the extent not otherwise included in this
definition, Hedging Obligations of such Person. The amount of Debt of any Person
at any date shall be the outstanding balance at such date of all unconditional
obligations as described above and the maximum liability, upon the occurrence of
the contingency giving rise to the obligation, of any contingent obligations at
such date; provided that the amount outstanding at any time of any Debt issued
with original issue discount is the face amount of such Debt less the remaining
unamortized portion of the original issue discount of such Debt at such time as
determined in accordance with GAAP.
"Disqualified Dividends" means, for any dividend with respect to
Disqualified Stock, the quotient of the dividend divided by the difference
between one and the maximum statutory federal income tax rate (expressed as a
decimal number between 1 and 0) then applicable to the issuer of such
Disqualified Stock.
"Disqualified Stock" means, with respect to any Person, Redeemable Stock
(as defined herein) of such Person as to which (i) the maturity, (ii) mandatory
redemption or (iii) redemption, repurchase, conversion or exchange at the option
of the holder thereof occurs, or may occur, on or prior to the first anniversary
of the Stated Maturity of the Subordinated Notes; provided, however, that
Redeemable Stock of such Person that would not otherwise be characterized as
Disqualified Stock under this definition shall not constitute Disqualified Stock
(a) if such Redeemable Stock is convertible or exchangeable into Debt or
Disqualified Stock solely at the option of the issuer thereof or (b) solely as a
result of provisions thereof giving holders thereof the right to require such
Person to repurchase or redeem such Redeemable Stock upon the occurrence of a
"change of control" occurring prior to the first anniversary of the Stated
Maturity of the Exchange Preferred Stock, if (x) such repurchase obligation may
not be triggered in respect of such Redeemable Stock unless a corresponding
obligation also arises with respect to the
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Exchange Preferred Stock and (y) no such repurchase or redemption is permitted
to be consummated unless and until such Person shall have satisfied all
repurchase or redemption obligations with respect to any required purchase offer
made with respect to the Exchange Preferred Stock.
"EBITDA" means, for any period, an amount equal to, for Holding and its
consolidated Restricted Subsidiaries, (a) the sum of Consolidated Net Income for
such period, plus the following to the extent reducing Consolidated Net Income
for such period: (i) the provision for taxes based on income or profits or
utilized in computing net loss, (ii) Consolidated Interest Expense, (iii)
depreciation, (iv) amortization expense and (v) any other non-cash items (other
than any such non-cash item to the extent that it represents an accrual of or
reserve for cash expenditures in any future period), minus (b) all non-cash
items increasing Consolidated Net Income for such period (other than any such
non-cash item to the extent that it will result in the receipt of cash payments
in any future period). Notwithstanding the foregoing, the provision for taxes
based on the income or profits of, and the depreciation and amortization of, a
Restricted Subsidiary shall be added to Consolidated Net Income to compute
EBITDA only to the extent (and in the same proportion) that the net income of
such Restricted Subsidiary was included in calculating Consolidated Net Income
and only if a corresponding amount would be permitted at the date of
determination to be dividended to Holding by such Restricted Subsidiary without
prior approval (that has not been obtained), pursuant to the terms of its
charter and all agreements, instruments, judgments, decrees, orders, statutes,
rules and governmental regulations applicable to such Restricted Subsidiary or
its shareholders.
"Employee Notes" means promissory notes of employees of Holding, the
Company or any of their Subsidiaries payable to Holding or the Company and
received in connection with the substantially concurrent purchase of common
stock Holding or of the Company by such employees.
"Exchange Act" means the Securities Exchange Act of 1934.
"Fair Market Value" means, with respect to any Property, the price which
could be negotiated in an arm's-length free market transaction, for cash,
between a willing seller and a willing buyer, neither of whom is under undue
pressure or compulsion to complete the transaction. Fair Market Value will be
determined, except as otherwise provided, (a) if such Property has a Fair Market
Value equal to or less than $2.5 million, by any Officer of Holding or (b) if
such Property has a Fair Market Value in excess of $2.5 million, by a majority
of the Board of Directors and evidenced by a Board Resolution, dated within 30
days of the relevant transaction, delivered to the Transfer Agent.
"GAAP" means United States generally accepted accounting principles as in
effect on the Issue Date, including those set forth (a) in the opinions and
pronouncements of the Accounting Principles Board of the American Institute of
Certified Public Accountants, (b) in the statements and pronouncements of the
Financial Accounting Standards Board, (c) in such other statements by such other
entity as approved by a significant segment of the accounting profession and (d)
the rules and regulations of the Commission governing the inclusion of financial
statements (including pro forma financial statements) in periodic reports
required to be filed pursuant to Section 13 of the Exchange Act, including
opinions and pronouncements in staff accounting bulletins and similar written
statements from the accounting staff of the Commission.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Debt of any other Person and any
obligation, direct or indirect, contingent or otherwise, of such Person (a) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Debt of such other Person (whether arising by virtue of partnership
arrangements, or by agreements to keep-well, to purchase assets, goods,
securities or services, to take-or-pay or to maintain financial statement
conditions or otherwise) or (b) entered into for the purpose of assuring in any
other manner the obligee against loss in respect thereof (in whole or in part);
provided, however, that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning. The term "Guarantor" shall mean any
Person Guaranteeing any obligation.
"Hedging Obligation" of any Person means any obligation of such Person
pursuant to any Interest Rate Agreement, Currency Exchange Protection Agreement
or any other similar agreement or arrangement.
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"Incur" means, with respect to any Debt or other obligation of any Person,
to create, issue, incur (by merger, conversion, exchange or otherwise), extend,
assume, Guarantee or become liable in respect of such Debt or other obligation
or the recording, as required pursuant to GAAP or otherwise, of any such Debt or
obligation on the balance sheet of such Person (and "Incurrence" and "Incurred"
shall have meanings correlative to the foregoing); provided, however, that a
change in GAAP that results in an obligation of such Person that exists at such
time, and is not theretofore classified as Debt, becoming Debt shall not be
deemed an Incurrence of such Debt; provided further, however, that solely for
purposes of determining compliance with "--Certain Covenants--Limitation on
Holding Debt" and "--Certain Covenants--Limitation on Restricted Subsidiary
Debt", amortization of debt discount shall not be deemed to be the Incurrence of
Debt, provided that in the case of Debt sold at a discount, the amount of such
Debt Incurred shall at all times be the aggregate principal amount at Stated
Maturity.
"Indenture" means the Indenture dated as of the Issue Date among Holding,
the Company and the United States Trust Company of New York, as Trustee,
governing the Subordinated Notes.
"Independent Appraiser" means an investment banking firm of national
standing or any third party appraiser of national standing, provided that such
firm or appraiser is not an Affiliate of Holding.
"Industrias Hudson" means Industrias Hudson S.A. de C.V.
"Interest Rate Agreement" means, for any Person, any interest rate swap
agreement, interest rate cap agreement, interest rate collar agreement or other
similar agreement designed to protect against fluctuations in interest rates.
"Investment" by any Person means any direct or indirect loan (other than
advances to customers in the ordinary course of business that are recorded as
accounts receivable on the balance sheet of such Person), advance or other
extension of credit or capital contribution (by means of transfers of cash or
other Property to others or payments for Property or services for the account or
use of others, or otherwise) to, or Incurrence of a Guarantee of any obligation
of, or purchase or acquisition of Capital Stock, bonds, notes, debentures or
other securities or evidence of Debt issued by, any other Person. For purposes
of the covenants described under "--Certain Covenants--Limitation on Restricted
Payments", "--Designation of Restricted and Unrestricted Subsidiaries" and the
definition of "Restricted Payment" and "Investment" shall include the portion
(proportionate to Holding's equity interest in such Subsidiary) of the Fair
Market Value of the net assets of any Subsidiary of Holding at the time that
such Subsidiary is designated an Unrestricted Subsidiary; provided, however,
that upon a redesignation of such Subsidiary as a Restricted Subsidiary, Holding
shall be deemed to continue to have a permanent "Investment" in an Unrestricted
Subsidiary equal to an amount (if positive) equal to (a) Holding's "Investment"
in such Subsidiary at the time of such redesignation less (b) the portion
(proportionate to Holding's equity interest in such Subsidiary) of the Fair
Market Value of the net assets of such Subsidiary at the time of such
redesignation. In determining the amount of any Investment made by transfer of
any Property other than cash, such Property shall be valued at its Fair Market
Value at the time of such Investment.
"Issue Date" means the date on which the Exchange Preferred Stock is
initially issued.
"Lien" means, with respect to any Property of any Person, any mortgage or
deed of trust, pledge, hypothecation, assignment, deposit arrangement, security
interest, lien, charge, easement (other than any easement not materially
impairing usefulness or marketability), encumbrance, preference, priority or
other security agreement or preferential arrangement of any kind or nature
whatsoever on or with respect to such Property (including any Capital Lease
Obligation, conditional sale or other title retention agreement having
substantially the same economic effect as any of the foregoing or any Sale and
Leaseback Transaction).
"Merger Agreement" means the Amended and Restated Merger Agreement between
Holding, River Acquisition Corp., the Company and shareholders of the Company
dated as of March 15, 1998, as in effect on the Issue Date.
"Mirror Preferred Stock" means the 11 1/2% Senior PIK Preferred Stock due
2010 of the Company.
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"Moody's" means Moody's Investors Service, Inc. or any successor to the
rating agency business thereof.
"Net Available Cash" from any Asset Sale or other transaction subject to
the covenant described under "--Certain Covenants--Limitation on Issuance or
Sale of Capital Stock of Restricted Subsidiaries" means cash payments received
therefrom (including any cash payments received by way of deferred payment of
principal pursuant to a note or installment receivable or otherwise, but only as
and when received, but excluding any other consideration received in the form of
assumption by the acquiring Person of Debt or other obligations relating to the
Property that is the subject of such transaction or received in any other non-
cash form), in each case net of (a) all legal, title and recording tax expenses,
commissions and other fees and expenses incurred, and all Federal, state,
provincial, foreign and local taxes required to be accrued as a liability under
GAAP, as a consequence of such transaction, (b) all payments made on any Debt
which is secured by any Property subject to such transaction, in accordance with
the terms of any Lien upon or other security agreement of any kind with respect
to such Property, or which must by its terms, or in order to obtain a necessary
consent to such transaction, or by applicable law, be repaid out of the proceeds
from such transaction, (c) all distributions and other payments required to be
made to minority interest holders in Subsidiaries or joint ventures as a result
of such transaction and (d) the deduction of appropriate amounts provided by the
seller as a reserve, in accordance with GAAP, against any liabilities associated
with the Property disposed in such transaction and retained by the Company or
any Restricted Subsidiary after such transaction.
"Officer" means the Chief Executive Officer, the President, the Chief
Financial Officer or any Executive Vice President of Holding.
"Officers' Certificate" means a certificate signed by two Officers of
Holding, at least one of whom shall be the principal executive officer or
principal financial officer of Holding, and delivered to the Transfer Agent.
"Opinion of Counsel" means a written opinion from legal counsel who is
acceptable to the Transfer Agent. The counsel may be an employee of or counsel
to Holding or the Trustee.
"Permitted Holders" means Helen Hudson Lovaas, any member of the senior
management of the Company or Holding on the Issue Date and Freeman Spogli & Co.
Incorporated or any successor entity thereof controlled by the principals of
Freeman Spogli & Co. Incorporated or any entity controlled by, or under common
control with, Freeman Spogli & Co. Incorporated.
"Permitted Investment" means any Investment by Holding or a Restricted
Subsidiary in (a) any Restricted Subsidiary or any Person that will, upon the
making of such Investment, become a Restricted Subsidiary; provided that the
primary business of such Restricted Subsidiary is a Related Business; (b) any
Person if as a result of such Investment such Person is merged or consolidated
with or into, or transfers or conveys all or substantially all its Property to,
Holding or a Restricted Subsidiary; provided that such Person's primary business
is a Related Business; (c) Temporary Cash Investments; (d) receivables owing to
Holding or a Restricted Subsidiary, if created or acquired in the ordinary
course of business and payable or dischargeable in accordance with customary
trade terms; provided, however, that such trade terms may include such
concessionary trade terms as Holding or such Restricted Subsidiary deems
reasonable under the circumstances; (e) payroll, travel and similar advances to
cover matters that are expected at the time of such advances ultimately to be
treated as expenses for accounting purposes and that are made in the ordinary
course of business; (f) (i) loans and advances to employees made in the ordinary
course of business consistent with past practices of Holding or such Restricted
Subsidiary, as the case may be; provided that such loans and advances do not
exceed $1.0 million at any one time outstanding and (ii) loans and advances to,
or the receipt of Employee Notes from, employees of Holding, the Company or any
of their Subsidiaries made or received in connection with the substantially
concurrent purchase of common stock of Holding or the Company by such employees;
provided that the aggregate principal amount of such loans, advances and notes
payable shall not exceed $1.0 million at any one time outstanding; (g) stock,
obligations or other securities received in settlement of debts created in the
ordinary course of business and owing to Holding or a Restricted Subsidiary or
in satisfaction of judgments; (h) any Person to the extent such Investment
represents the non-cash portion of the consideration received in connection with
a disposition of assets; and (i) Investments in Persons engaged in a Related
Business not to exceed $20.0 million at any one time outstanding (it being
agreed that an Investment shall cease to be outstanding to the extent of
dividends, repayments of loans or advances or other transfers of Property
received by
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Holding or any Restricted Subsidiary from such Persons, provided that such
amounts do not increase the amount of Restricted Payments which Holding and the
Restricted Subsidiaries may make pursuant to clause (c)(iv)(A) of the covenant
described under "Certain Covenants--Limitation on Restricted Payments").
"Permitted Refinancing Debt" means any Debt that Refinances any other Debt,
including any successive Refinancings, so long as (a) such Debt is in an
aggregate principal amount (or if Incurred with original issue discount, an
aggregate issue price) not in excess of the sum of (i) the aggregate principal
amount (or if Incurred with original issue discount, the aggregate accreted
value) then outstanding of the Debt being Refinanced and (ii) an amount
necessary to pay any fees and expenses, including premiums and defeasance costs,
related to such Refinancing, (b) the Average Life of such Debt is equal to or
greater than the Average Life of the Debt being Refinanced and (c) the Stated
Maturity of such Debt is no earlier than the Stated Maturity of the Debt being
Refinanced; provided , however, that Permitted Refinancing Debt shall not
include (x) Debt of a Subsidiary that Refinances Debt of Holding or the Company
or (y) Debt of Holding or the Company or a Restricted Subsidiary that Refinances
Debt of an Unrestricted Subsidiary.
"Person" means any individual, corporation, company (including any limited
liability company), partnership, joint venture, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.
"Preferred Stock" means any Capital Stock of a Person, however designated,
which entitles the holder thereof to a preference with respect to the payment of
dividends, or as to the distribution of assets upon any voluntary or involuntary
liquidation or dissolution of such Person, over shares of any other class of
Capital Stock issued by such Person.
"pro forma" means, with respect to any calculation made or required to be
made pursuant to the terms hereof, a calculation performed in accordance with
Article 11 of Regulation S-X promulgated under the Securities Act, as
interpreted in good faith by the Board of Directors after consultation with the
independent certified public accountants of Holding, or otherwise a calculation
made in good faith by the Board of Directors after consultation with the
independent certified public accountants of Holding, as the case may be.
"Property" means, with respect to any Person, any interest of such Person
in any kind of property or asset, whether real, personal or mixed, or tangible
or intangible, including Capital Stock in, and other securities of, any other
Person.
"Public Equity Offering" means an underwritten public offering of common
stock of Holding or the Company, as applicable, pursuant to an effective
registration statement under the Securities Act.
"Purchase Money Debt" means Debt (a) consisting of the deferred purchase
price of property, conditional sale obligations, obligations under any title
retention agreement, other purchase money obligations and obligations in respect
of industrial revenue bonds, in each case where the maturity of such Debt does
not exceed the anticipated useful life of the asset being financed, and (b)
Incurred to finance the acquisition or construction by Holding or a Restricted
Subsidiary of such asset, including remodelling thereof and additions and
improvements thereto; provided, however, that such Debt is Incurred within 180
days after such acquisition of such asset by Holding or a Restricted Subsidiary
or completion of such construction, remodelling, addition or improvement, as the
case may be.
"Redeemable Stock" means, with respect to any Person, any Capital Stock
that by its terms (or by the terms of any security into which it is convertible
or for which it is exchangeable, in either case at the option of the holder
thereof) or otherwise (a) matures or is mandatorily redeemable pursuant to a
sinking fund obligation or otherwise, (b) is or may become redeemable or
repurchaseable at the option of the holder thereof, in whole or in part, or (c)
is convertible or exchangeable, in either case at the option of the holder
thereof, for Debt or Disqualified Stock.
"Refinance" means, in respect of any Debt, to refinance, extend, renew,
refund, repay, prepay, redeem, defease or retire, or to issue other Debt, in
exchange or replacement for, such Debt. "Refinanced" and "Refinancing" shall
have correlative meanings.
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"Related Business" means any business that is related, ancillary or
complementary to the businesses of the Company and the Restricted Subsidiaries
on the Issue Date.
"Restricted Payment" means (a) any dividend or distribution (whether made
in cash, securities or other Property) declared or paid on or with respect to
any shares of Parity Stock or Junior Stock of Holding or any Capital Stock of
any Restricted Subsidiary (including any payment in connection with any merger
or consolidation with or into Holding or any Restricted Subsidiary), except for
any dividend or distribution which is made solely to Holding or a Restricted
Subsidiary (and, if such Restricted Subsidiary is not a Wholly Owned Subsidiary,
to the other shareholders of such Restricted Subsidiary on a pro rata basis or
on a basis that results in the receipt by Holding or a Restricted Subsidiary of
dividends or distributions of greater value than it would receive on a pro rata
basis) or any dividend or distribution payable solely in shares of Junior Stock
(other than Disqualified Stock) of Holding; (b) the purchase, repurchase,
redemption, acquisition or retirement for value of any Parity Stock or Junior
Stock of Holding or any Capital Stock of any Affiliate of Holding (other than
from Holding or a Restricted Subsidiary) or any securities exchangeable for or
convertible into any such Parity Stock, Junior Stock or Capital Stock, including
the exercise of any option to exchange any such Parity Stock, Junior Stock or
Capital Stock (other than for or into Capital Stock that is not Disqualified
Stock); or (c) any Investment (other than Permitted Investments) in any Person.
"Restricted Subsidiary" means (a) any Subsidiary of Holding unless such
Subsidiary shall have been designated an Unrestricted Subsidiary as permitted or
required pursuant to the covenant described under "--Certain Covenants--
Designation of Restricted and Unrestricted Subsidiaries" and (b) an Unrestricted
Subsidiary which is redesignated as a Restricted Subsidiary as permitted
pursuant to the covenant described under "--Certain Covenants--Designation of
Restricted and Unrestricted Subsidiaries".
"S&P" means Standard & Poor's Ratings Service or any successor to the
rating agency business thereof.
"Sale and Leaseback Transaction" means any arrangement relating to Property
now owned or hereafter acquired whereby Holding or a Restricted Subsidiary
transfers such Property to another Person and the Company or a Restricted
Subsidiary leases it from such Person.
"Securities Act" means the Securities Act of 1933.
"Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency beyond the control of the issuer unless such contingency has
occurred).
"Subordinated Notes" means the 9 1/8% Senior Subordinated Notes due 2008 of
the Company.
"Subsidiary" means, in respect of any Person, any corporation, company,
association, partnership, joint venture or other business entity of which more
than 50% of the total voting power of shares of Capital Stock or other interests
(including partnership interests) entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled directly or indirectly, by (a) such
Person, (b) such Person and one or more Subsidiaries of such Person or (c) one
or more Subsidiaries of such Person.
"Subsidiary Guarantor" means each Subsidiary of the Company that becomes a
Subsidiary Guarantor pursuant to the terms of the Subordinated Notes.
"Subsidiary Guaranty" means a Guarantee of the Subordinated Notes on the
terms set forth in the Indenture by a Subsidiary Guarantor of the Company's
obligations with respect to the Subordinated Notes.
"Temporary Cash Investments" means any of the following: (a) Investments in
U.S. Government Obligations; (b) Investments in time deposit accounts,
certificates of deposit and money market deposits maturing
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within 90 days of the date of acquisition thereof issued by a bank or trust
company which is organized under the laws of the United States of America or any
state thereof having capital, surplus and undivided profits aggregating in
excess of $500.0 million and whose long-term debt is rate "A-3" or "A-" or
higher according to Moody's or S&P (or such similar equivalent rating by at
least one "nationally recognized statistical rating organization" (as defined in
Rule 436 under the Securities Act)); (c) repurchase obligations with a term of
not more than 30 days for underlying securities of the types described in clause
(a) entered into with a bank meeting the qualifications described in clause (b)
above; (d) Investments in commercial paper, maturing not more than 90 days after
the date of acquisition, issued by a corporation (other than an Affiliate of
Holding) organized and in existence under the laws of the United States of
America with a rating at the time as of which any Investment therein is made of
"P-1" (or higher) according to Moody's or "A-1" (or higher) according to S&P (or
such similar equivalent rating by at least one "nationally recognized
statistical rating organization" (as defined in Rule 436 under the Securities
Act)); (e) direct obligations (or certificates representing an ownership
interest in such obligations) of any state of the United States of America
(including any agency or instrumentality thereof) for the payment of which the
full faith and credit of such state is pledged and which are not callable or
redeemable at the issuer's option, provided that (i) the long-term debt of such
state is rated "A-3" or "A-" or higher according to Moody's or S&P (or such
similar equivalent rating by at least one "nationally recognized statistical
rating organization" (as defined in Rule 436 under the Securities Act)) and (ii)
such obligations mature within 180 days of the date of acquisition thereof; and
(f) investments in money market funds which invest substantially all their
assets in securities of the types described in clauses (a) through (e) above.
"Unrestricted Subsidiary" means (a) any Subsidiary of Holding in existence
on the Issue Date that is not a Restricted Subsidiary; (b) any Subsidiary of an
Unrestricted Subsidiary; and (c) any Subsidiary of Holding that is designated
after the Issue Date as an Unrestricted Subsidiary as permitted or required
pursuant to the covenant described under "--Certain Covenants--Designation of
Restricted and Unrestricted Subsidiaries" and not thereafter redesignated as a
Restricted Subsidiary as permitted pursuant thereto.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable or redeemable at the issuer's option.
"Voting Stock" of a corporation means all classes of Capital Stock of such
corporation then outstanding and normally entitled (without regard to the
occurrence of any contingency) to vote in the election of directors, managers or
trustees thereof.
"Wholly Owned Subsidiary" means, at any time, a Restricted Subsidiary all
the Voting Stock of which (except directors' qualifying shares) is at such time
owned, directly or indirectly, by Holding and its other Wholly Owned
Subsidiaries.
MIRROR PREFERRED STOCK
In connection with the Recapitalization, Holding acquired 300,000 shares of
Hudson RCI's 11 1/2% Senior PIK Preferred Stock due 2010 (the "Mirror Preferred
Stock") having an aggregate liquidation preference of $30.0 million. Dividends
on the Mirror Preferred Stock accrued from the date of issuance and are payable
semi-annually in arrears on April 15 and October 15 of each year (each a
"Dividend Payment Date"), commencing October 15, 1998, at a rate per annum of 11
1/2% of the liquidation preference per share. The liquidation preference of
each share of Mirror Preferred Stock is $100 (the "Liquidation Preference").
Dividends are payable in cash, except that on each Dividend Payment Date
occurring on or prior to April 15, 2003, dividends may be paid, at Hudson RCI's
option, by the issuance of additional shares of Mirror Preferred Stock
(including fractional shares) having an aggregate liquidation preference equal
to the amount of such dividends. Hudson RCI is required to redeem the Mirror
Preferred Stock on April 15, 2010, at a redemption price equal to 100% of the
liquidation preference thereof plus accumulated and unpaid dividends, if any, to
the date of redemption.
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The Mirror Preferred Stock ranks (i) senior to all existing and future
Junior Stock (as defined) and (ii) on a parity with all existing and future
Parity Stock (as defined). In addition, the Mirror Preferred Stock ranks junior
in right of payment to all obligations of Hudson RCI and its subsidiaries,
including Industrias Hudson. The Mirror Preferred Stock is entitled to one half
a vote per share on all matters submitted to Hudson RCI's common shareholders
and votes as a class with the Common Stock. Upon consummation of the
Recapitalization, the Company amended the Mirror Preferred Stock to contain
additional provisions substantially similar to the Exchange Preferred Stock,
except that the Mirror Preferred Stock is not exchangeable.
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DESCRIPTION OF COMPANY EXCHANGE SECURITIES
COMPANY EXCHANGE DEBENTURES
The Company Exchange Debentures, if issued, will be issued under the
Exchange Indenture, between the Company and a financial institution with a
combined capital and surplus of at least $100.0 million, as Trustee (the
"Trustee"). The following is a summary of certain provisions of the Exchange
Indenture and the Company Exchange Debentures. A copy of the form of the
Exchange Indenture and the form of the Company Exchange Debentures are available
upon request to the Company at the Company's address set forth under "Available
Information." The following summary of certain provisions of the Exchange
Indenture does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all the provisions of the Exchange Indenture,
including those terms made a part thereof by the Trust Indenture Act of 1939, as
amended. For purposes of this Section, references to "the Company" shall mean
Hudson Respiratory Care Inc. excluding its subsidiaries. Certain other
capitalized terms used but not defined in the following summary are set forth
under "--Certain Definitions." Other capitalized terms used but not defined
herein and not otherwise defined under "--Certain Definitions" are defined in
the Exchange Indenture. The terms of the New Credit Facility and the Indenture
governing the Subordinated Notes limit the Company's ability to issue the
Company Exchange Debentures. See "Description of New Credit Facility" and
"Description of the Subordinated Notes."
The Company Exchange Debentures will mature on April 15, 2010 and will be
limited in aggregate principal amount to the liquidation preference of the
Exchange Preferred Stock, plus without duplication, accumulated and unpaid
dividends on the Exchange Date of the Exchange Preferred Stock into Company
Exchange Debentures (plus any additional Company Exchange Debentures issued in
lieu of cash interest as described herein). The Company Exchange Debentures
will be issued only in fully registered form, without coupons, in denominations
of $1,000 and any integral multiple of $1,000 (other than as described in
"Description of the Exchange Preferred Stock--Exchange for Company Exchange
Debentures or Company Preferred Stock" or with respect to additional Company
Exchange Debentures issued in lieu of cash interest as described herein).
The Company Exchange Debentures will bear interest at the rate of 11 1/2%
per annum from the most recent date on which interest has been paid or, if no
interest has been paid from the Exchange Date, payable semiannually in cash (or,
on or prior to April 15, 2003, in additional Company Exchange Debentures, at the
option of Company) in arrears on each April 15 and October 15, beginning on the
first such date after the Exchange Date, to the Persons who are registered
holders of the Company Exchange Debentures at the close of business on the
preceding April 1 or October 1 as the case may be. Interest will be computed on
the basis of a 360-day year comprised of twelve 30-day months.
Principal of, and premium, if any, and interest on, the Company Exchange
Debentures will be payable and the Company Exchange Debentures will be
exchangeable and transferable, at an office or agency of the Company, one of
which will be maintained for such purpose in The City of New York (which
initially will be the corporate trust office of the Trustee); provided, however,
that payment of interest may be made at the option of the Company by check
mailed to the Person entitled thereto as shown on the Security Register. The
Company Exchange Debentures will be issued only in fully registered form without
coupons, in denominations of $1,000 or any integral multiple thereof. No
service charge will be made for any registration of transfer or exchange of
Company Exchange Debentures, except for any tax or other governmental charge
that may be imposed in connection therewith.
Optional Redemption
Except as set forth below, the Company Exchange Debentures will not be
redeemable at the option of Company prior to April 15, 2003. Thereafter, the
Company Exchange Debentures will be redeemable, at the Company's option, in
whole or in part, at any time or from time to time, upon not less than 30 nor
more than 60 days' prior notice mailed by first-class mail to each holder's
registered address, at the following redemption prices (expressed in percentages
of principal amount), plus accrued interest to the redemption date (subject to
the right of holders of record on the relevant record date to receive interest
due on the relevant interest payment date), if redeemed during the 12-month
period commencing on April 15 of the years set forth below:
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<TABLE>
<CAPTION>
Redemption
Period Price
------ ----------
<S> <C>
2003................... 105.750%
2004................... 104.600%
2005................... 103.450%
2006................... 102.300%
2007................... 101.150%
2008 and thereafter.... 100.000%
</TABLE>
In addition, at any time prior to April 15, 2001, the Company may redeem at
its option (i) up to 50% or (ii) all but not less than all of the outstanding
Company Exchange Debentures with the net proceeds of any Public Equity Offering
by the Company at a redemption price (expressed as a percentage of principal
amount) of 111.5% plus accrued interest to the redemption date (subject to the
right of holders of record on the relevant record date to receive interest due
on the relevant interest payment date). Any such redemption shall be made upon
consummation of such Public Equity Offering upon not less than 30 nor more than
60 days' notice.
Subordination
The Company Exchange Debentures will be subordinated, unsecured obligations
of the Company. The payment of the principal of, and premium, if any, and
interest on, the Company Exchange Debentures will be subordinated in right of
payment to the payment when due of all Senior Debt (including senior
subordinated indebtedness) of the Company, including obligations of the Company
under the Subordinated Notes. The Company Exchange Debentures will rank pari
passu in right of payment with any future Subordinated Debt of the Company.
As of December 26, 1997, after giving effect to the Recapitalization, the
Company would have had approximately $155.0 million of Senior Debt. The Company
would also have had $60.0 million of undrawn commitments available under the New
Credit Facility, which if drawn would constitute Senior Debt. The Company would
not have had any outstanding Subordinated Debt.
The Company Exchange Debentures will be effectively subordinated to
creditors (including trade creditors) and preferred stockholders, if any, of
Subsidiaries of the Company. Since a portion of the operations of the Company
are conducted through Subsidiaries, the Company's ability to service its debt,
including the Company Exchange Debentures , is partially dependent upon the
earnings of any such Subsidiaries and the distribution of those earnings to, or
upon loans or other payments of funds by those Subsidiaries to, the Company.
The payment of dividends and the making of loans and advances to the Company by
such Subsidiaries are subject to statutory restrictions. As of December 26,
1997, after giving effect to the Recapitalization, Industrias Hudson, the
Company's principal Subsidiary, would have had balance sheet liabilities of $0.1
million.
The Company may not pay principal of, or premium, if any, or interest on,
the Company Exchange Debentures, or make any deposit pursuant to the provisions
described under "--Events of Default --Defeasance", and may not repurchase,
redeem or otherwise retire any Company Exchange Debentures (collectively, "pay
the Company Exchange Debentures"), if (a) any principal, premium or interest in
respect of any Senior Debt is not paid within any applicable grace period
(including at maturity) or (b) any other default on Senior Debt occurs and the
maturity of such Senior Debt is accelerated in accordance with its terms unless,
in either case, (i) the default has been cured or waived and any such
acceleration has been rescinded or (ii) such Senior Debt has been paid in full
in cash; provided, however, that the Company may pay the Company Exchange
Debentures without regard to the foregoing if the Company and the Trustee
receive written notice approving such payment from the Representative (as
defined herein) of each issue of Designated Senior Debt (as defined herein).
During the continuance of any default (other than a default described in clause
(a) or (b) of the preceding sentence) with respect to any Designated Senior Debt
pursuant to which the maturity thereof may be accelerated immediately without
further notice (except notice required to effect the acceleration) or the
expiration of any applicable grace period, the Company may not pay the Company
Exchange Debentures for a period (a "Payment Blockage Period") commencing upon
the receipt by the Company and the Trustee of written notice of such default
from the Representative of the holders of such Designated Senior Debt
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specifying an election to effect a Payment Blockage Period (a "Payment Blockage
Notice") and ending 179 days thereafter (unless such Payment Blockage Period is
earlier terminated (a) by written notice to the Trustee and the Company from the
Representative which gave such Payment Blockage Notice, (b) because such default
is no longer continuing or (c) because such Designated Senior Debt has been
repaid in full in cash). Unless the holders of such Designated Senior Debt or
the Representative of such holders have accelerated the maturity of such
Designated Senior Debt and not rescinded such acceleration, the Company may
(unless otherwise prohibited as described in the first sentence of this
paragraph) resume payments on the Company Exchange Debentures after the end of
such Payment Blockage Period. Not more than one Payment Blockage Notice with
respect to all issues of Designated Senior Debt may be given in any consecutive
360-day period, irrespective of the number of defaults with respect to one or
more issues of Designated Senior Debt during such period.
Upon any payment or distribution of the assets of the Company upon a total
or partial liquidation, dissolution or winding up of the Company or in a
bankruptcy, reorganization, insolvency, receivership or similar proceeding
relating to the Company or its Property, the holders of Senior Debt will be
entitled to receive payment in full in cash before the holders of the Company
Exchange Debentures are entitled to receive any payment of principal of or
interest on the Company Exchange Debentures, except that holders of Company
Exchange Debentures may receive and retain shares of stock and any debt
securities that are subordinated to Senior Debt to at least the same extent as
the Company Exchange Debentures. Until the Senior Debt is paid in full in cash,
any distribution to which holders of the Company Exchange Debentures would be
entitled but for the subordination provisions of the Indenture will be made to
holders of the Senior Debt. If a payment or distribution is made to holders of
Company Exchange Debentures that, due to the subordination provisions, should
not have been made to them, such holders are required to hold it in trust for
the holders of Senior Debt and pay it over to them as their interests may
appear.
If payment of the Company Exchange Debentures is accelerated when any
Designated Senior Debt is outstanding, the Company may not pay the Company
Exchange Debentures until three business days after the Representatives of all
issues of Designated Senior Debt receive notice of such acceleration and,
thereafter, may pay the Company Exchange Debentures only if the Exchange
Indenture otherwise permits payment at that time.
By reason of the subordination provisions contained in the Exchange
Indenture, in the event of bankruptcy or similar proceedings relating to the
Company, holders of Senior Debt and other creditors (including trade creditors)
of the Company may recover more ratably, even if the Company Exchange Debentures
are pari passu with their claims, than the holders of the Company Exchange
Debentures. In such event, there may be insufficient assets or no assets
remaining to pay the principal of or interest on the Company Exchange
Debentures.
Payment from the money or the proceeds of U.S. Government Obligations held
in any defeasance trust pursuant to the provisions described under "--
Defeasance" will not be subject to the subordination provisions described above.
See "Risk Factors--Subordination of Company Exchange Debentures," "--
Fraudulent Conveyance and Distribution Limitation Considerations," "--
Substantial Leverage; Shareholders' Deficit," "Description of the Subordinated
Notes" and "Description of New Credit Facility."
The terms of the subordination provisions described above will not apply to
payments from money or the proceeds of U.S. Government Obligations held in trust
by the Trustee for the payment of principal of and interest on the Company
Exchange Debentures pursuant to the provisions described under "--Defeasance".
Book-Entry System
The Company Exchange Debentures may be issued in the form of one or more
global securities (collectively, a "Global Security"). A Global Security will
be deposited with, or on behalf of, the DTC and registered in the name of the
DTC or its nominee. Except as set forth below, a Global Security may be
transferred, in whole and not in part, only to the DTC or another nominee of the
DTC. Investors may hold their beneficial interests in a Global Security
directly through the DTC if they have an account with the DTC or indirectly
through organizations which have accounts with the DTC.
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Depository Procedures. Upon the issuance of a Global Security, DTC or its
nominee will credit the accounts of Persons holding through it with the
respective principal amounts of the Company Exchange Debentures represented by
such Global Security purchased by such Persons in the Offering. Such accounts
shall be designated by the Initial Purchasers. Ownership of beneficial interests
in a Global Security will be limited to Persons that have accounts with DTC
("participants") or Persons that may hold interests through participants. Any
Person acquiring an interest in a Global Security through an offshore
transaction in reliance on Regulation S of the Securities Act may hold such
interest through Cedel or Euroclear. Ownership of beneficial interests in a
Global Security will be shown on, and the transfer of that ownership interest
will be effected only through, records maintained by DTC (with respect to
participants' interests) and such participants (with respect to the owners of
beneficial interests in such Global Security other than participants). The laws
of some jurisdictions require that certain purchasers of securities take
physical delivery of such securities in definitive form. Such limits and such
laws may impair the ability to transfer beneficial interests in a Global
Security.
Payment of principal of and interest on Company Exchange Debentures
represented by a Global Security will be made in immediately available funds to
DTC or its nominee, as the case may be, as the sole registered owner and the
sole holder of the Company Exchange Debentures represented thereby for all
purposes under the Exchange Indenture. The Company has been advised by DTC that
upon receipt of any payment of principal of or interest on any Global Security,
DTC will immediately credit, on its book-entry registration and transfer system,
the accounts of participants with payments in amounts proportionate to their
respective beneficial interests in the principal or face amount of such Global
Security as shown on the records of DTC. Payments by participants to owners of
beneficial interests in a Global Security held through such participants will be
governed by standing instructions and customary practices as is now the case
with securities held for customer accounts registered in "street name" and will
be the sole responsibility of such participants.
A Global Security may not be transferred except as a whole by DTC or a
nominee of DTC to a nominee of DTC or to DTC. A Global Security is exchangeable
for certificated Company Exchange Debentures only if (a) DTC notifies the
Company that it is unwilling or unable to continue as a depositary for such
Global Security or if at any time DTC ceases to be a clearing agency registered
under the Exchange Act, (b) the Company in its discretion at any time determines
not to have all the Company Exchange Debentures represented by such Global
Security or (c) there shall have occurred and be continuing a Default or an
Event of Default with respect to the Company Exchange Debentures represented by
such Global Security. Any Global Security that is exchangeable for certificated
Company Exchange Debentures pursuant to the preceding sentence will be exchanged
for certificated Company Exchange Debentures in authorized denominations and
registered in such names as DTC or any successor depositary holding such Global
Security may direct. Subject to the foregoing, a Global Security is not
exchangeable, except for a Global Security of like denomination to be registered
in the name of DTC or any successor depositary or its nominee. In the event that
a Global Security becomes exchangeable for certificated Company Exchange
Debentures, (a) certificated Company Exchange Debentures will be issued only in
fully registered form in denominations of $1,000 or integral multiples thereof,
(b) payment of principal of, and premium, if any, and interest on, the
certificated Company Exchange Debentures will be payable, and the transfer of
the certificated Company Exchange Debentures will be registerable, at the office
or agency of the Company maintained for such purposes and (c) no service charge
will be made for any registration of transfer or exchange of the certificated
Company Exchange Debentures, although the Company may require payment of a sum
sufficient to cover any tax or governmental charge imposed in connection
therewith.
So long as DTC or any successor depositary for a Global Security, or any
nominee, is the registered owner of such Global Security, DTC or such successor
depositary or nominee, as the case may be, will be considered the sole owner or
holder of the Company Exchange Debentures represented by such Global Security
for all purposes under the Exchange Indenture and the Company Exchange
Debentures. Except as set forth above, owners of beneficial interests in a
Global Security will not be entitled to have the Company Exchange Debentures
represented by such Global Security registered in their names, will not receive
or be entitled to receive physical delivery of certificated Company Exchange
Debentures in definitive form and will not be considered to be the owners or
holders of any Company Exchange Debentures under such Global Security.
Accordingly, each Person owning a beneficial interest in a Global Security must
rely on the procedures of DTC or any successor depositary, and, if such Person
is not a participant, on the procedures of the participant through which such
Person owns its interest, to exercise any rights of a holder under the Exchange
Indenture. The Company understands that
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under existing industry practices, in the event that the Company requests any
action of holders or that an owner of a beneficial interest in a Global Security
desires to give or take any action which a holder is entitled to give or take
under the Company Exchange Indenture, DTC or any successor depositary would
authorize the participants holding the relevant beneficial interest to give or
take such action and such participants would authorize beneficial owners owning
through such participants to give or take such action or would otherwise act
upon the instructions of beneficial owners owning through them.
DTC has advised the Company that DTC is a limited-purpose trust company
organized under the Banking Law of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the New
York Uniform Commercial Code and a "clearing agency" registered under the
Exchange Act. DTC was created to hold the securities of its participants and to
facilitate the clearance and settlement of securities transactions among its
participants in such securities through electronic book-entry changes in
accounts of the participants, thereby eliminating the need for physical movement
of securities certificates. DTC's participants include securities brokers and
dealers (which may include the Initial Purchasers), banks, trust companies,
clearing corporations and certain other organizations some of whom (or their
representatives) own DTC. Access to DTC's book-entry system is also available to
others, such as banks, brokers, dealers and trust companies, that clear through
or maintain a custodial relationship with a participant, either directly or
indirectly.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in Global Securities among participants of DTC, it is
under no obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. None of the Company, the Trustee or
the Initial Purchasers will have any responsibility for the performance by DTC
or its participants or indirect participants of their respective obligations
under the rules and procedures governing their operations.
Repurchase at the Option of the Holders Upon a Change of Control
Upon the occurrence of a Change of Control, each holder of Company Exchange
Debentures shall have the right to require the Company to repurchase all or any
part of such holder's Company Exchange Debentures pursuant to the offer
described below (the "Change of Control Offer") at a purchase price (the "Change
of Control Purchase Price") equal to 101% of the principal amount thereof, plus
accrued and unpaid interest thereon, if any, to the purchase date (subject to
the right of holders of record on the relevant record date to receive interest
due on the relevant interest payment date). The Trustee does not have the
authority under the Exchange Indenture to waive the covenant relating to the
holder's right to require redemption of the Company Exchange Debentures upon the
occurrence of a Change of Control.
Within 30 days following any Change of Control, the Company shall (a) cause
a notice of the Change of Control Offer to be sent at least once to the Dow
Jones News Service or similar business news service in the United States and (b)
send, by first-class mail, with a copy to the Trustee, to each holder of Company
Exchange Debentures, at such holder's address appearing in the Security
Register, a notice stating: (i) that a Change of Control has occurred and a
Change of Control Offer is being made pursuant to the covenant entitled
"Repurchase at the Option of Holders Upon a Change of Control" and that all
Company Exchange Debentures timely tendered will be accepted for payment; (ii)
the Change of Control Purchase Price and the purchase date, which shall be,
subject to any contrary requirements of applicable law, a business day no
earlier than 30 days nor later than 60 days from the date such notice is mailed;
(iii) the circumstances and relevant facts regarding the Change of Control
(including information with respect to pro forma historical income, cash flow
and capitalization after giving effect to the Change of Control); and (iv) the
procedures that holders of Company Exchange Debentures must follow in order to
tender their Company Exchange Debentures (or portions thereof) for payment, and
the procedures that holders of Company Exchange Debentures must follow in order
to withdraw an election to tender Company Exchange Debentures (or portions
thereof) for payment.
The Company will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Company Exchange Debentures pursuant to a
Change of Control Offer. To the extent that the provisions of any securities
laws or regulations conflict with the provisions of the covenant described
hereunder, the Company will comply with the applicable securities laws and
regulations and will not be deemed to have breached its obligations under the
covenant described hereunder by virtue of such compliance.
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The Change of Control repurchase feature is a result of negotiations
between the Company and the Initial Purchasers. Management has no present
intention to engage in a transaction involving a Change of Control, although it
is possible that the Company would decide to do so in the future. Subject to
certain covenants described below, the Company could, in the future, enter into
certain transactions, including acquisitions, refinancings or other
recapitalizations, that would not constitute a Change of Control under the
Exchange Indenture, but that could increase the amount of debt outstanding at
such time or otherwise affect the Company's capital structure or credit
ratings.
The definition of Change of Control includes a phrase relating to the sale,
transfer, assignment, lease, conveyance or other disposition of "all or
substantially all" the Company's assets. Although there is a developing body of
case law interpreting the phrase "substantially all," there is no precise
established definition of the phrase under applicable law. Accordingly, the
ability of a holder of Company Exchange Debentures to require the Company to
repurchase such Company Exchange Debentures as a result of a sale, transfer,
assignment, lease, conveyance or other disposition of less than all the assets
of the Company may be uncertain.
The New Credit Facility prohibits and the Exchange Indenture limits the
repurchase by the Company of any Company Exchange Debentures. In addition, the
occurrence of certain of the events that would constitute a Change of Control
would constitute a default under the New Credit Facility and would require the
Company to make an offer to purchase Subordinated Notes pursuant to the Exchange
Indenture. Other future debt of the Company may contain prohibitions of certain
events which would constitute a Change of Control or require such debt to be
repurchased upon a Change of Control. Moreover, the exercise by holders of
Company Exchange Debentures of their right to require the Company to repurchase
such Company Exchange Debentures could cause a default under existing or future
debt of the Company, even if the Change of Control itself does not, due to the
financial effect of such repurchase on the Company. Finally, the Company's
ability to pay cash to holders of Company Exchange Debentures upon a repurchase
may be limited by the Company's then existing financial resources. There can be
no assurance that sufficient funds will be available when necessary to make any
required repurchases. The Company's failure to purchase Company Exchange
Debentures in connection with a Change of Control would result in a default
under the Exchange Indenture which would, in turn, constitute a default under
existing (and may constitute a default under future) debt of the Company. If
such debt constitutes Designated Senior Debt, the subordination provisions in
the Exchange Indenture would likely restrict payment to holders of Company
Exchange Debentures. The provisions under the Exchange Indenture relative to the
Company's obligation to make an offer to repurchase the Company Exchange
Debentures as a result of a Change of Control may be waived or modified (at any
time prior to the occurrence of such Change of Control) with the written consent
of the holders of a majority in principal amount of the Company Exchange
Debentures.
Certain Covenants
The Company Exchange Indenture contains covenants including, among others,
the following:
Limitation on Debt. The Company shall not, and shall not permit any
Restricted Subsidiary to, Incur, directly or indirectly, any Debt unless, after
giving pro forma effect to the application of the proceeds thereof, no Default
or Event of Default would occur as a consequence of such Incurrence or be
continuing following such Incurrence and either (a) after giving effect to the
Incurrence of such Debt and the application of the proceeds thereof, the
Consolidated Interest Coverage Ratio would be greater than 1.75 to 1.00 if such
Debt is Incurred from the Issue Date through April 15, 2000, and 2.00 to 1.00 if
such Debt is Incurred thereafter or (b) such Debt is Permitted Debt.
The term "Permitted Debt" is defined to include the following:
(a) Debt evidenced by the Company Exchange Debentures and the Subordinated
Notes and Subsidiary Guaranties of the Subordinated Notes;
(b)(i) Debt under the Credit Facility; provided that the aggregate
principal amount of all such Debt under the Credit Facility comprised of (A)
term loans at any one time outstanding shall not exceed $40.0 million minus all
principal amounts repaid in respect of such term loans and (B) revolving credit
loans and obligations at any one
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time outstanding shall not exceed the greater of (x) $60.0 million and (y) the
sum of the amounts equal to (1) 60% of the net book value of the inventory of
the Company and the Restricted Subsidiaries and (2) 85% of the net book value of
the accounts receivable of the Company and the Restricted Subsidiaries, in each
case as of the most recent fiscal quarter ending at least 45 days prior to the
date of determination and (ii) Guarantees of Debt under the Credit Facility;
(c) Debt in respect of Capital Lease Obligations and Purchase Money Debt;
provided that (i) the aggregate principal amount of such Debt does not exceed
the Fair Market Value (on the date of the Incurrence thereof) of the Property
acquired, constructed or leased (including costs of installation, taxes and
delivery charges with respect to such acquisition, construction or lease) and
(ii) the aggregate principal amount of all Debt Incurred and then outstanding
pursuant to this clause (c) (together with all Permitted Refinancing Debt
Incurred in respect of Debt previously Incurred pursuant to this clause (c) and
then outstanding) does not exceed $15.0 million;
(d) Debt of the Company owing to and held by any Wholly Owned Subsidiary
and Debt of a Wholly Owned Subsidiary owing to and held by the Company or any
Wholly Owned Subsidiary; provided, however, that any subsequent issue or
transfer of Capital Stock or other event that results in any such Wholly Owned
Subsidiary ceasing to be a Wholly Owned Subsidiary or any subsequent transfer of
any such Debt (except to the Company or a Wholly Owned Subsidiary) shall be
deemed, in each case, to constitute the Incurrence of such Debt by the issuer
thereof;
(e) Debt of a Wholly Owned Subsidiary Incurred and outstanding on or prior
to the date on which such Wholly Owned Restricted Subsidiary was acquired by the
Company or otherwise became a Restricted Subsidiary (other than Debt Incurred as
consideration in, or to provide all or any portion of the funds or credit
support utilized to consummate, the transaction or series of transactions
pursuant to which such Wholly Owned Restricted Subsidiary became a Subsidiary of
the Company or was otherwise acquired by the Company); provided that at the time
such Wholly Owned Restricted Subsidiary was acquired by the Company or otherwise
became a Restricted Subsidiary and after giving pro forma effect to the
Incurrence of such Debt, the Company would have been able to Incur $1.00 of
additional Debt pursuant to clause (a) in the first paragraph of this covenant;
(f) Debt under Interest Rate Agreements entered into by the Company or a
Restricted Subsidiary for the purpose of limiting interest rate risk in the
ordinary course of the financial management of the Company or such Restricted
Subsidiary and not for speculative purposes, provided that the obligations under
such agreements are directly related to payment obligations on Debt otherwise
permitted by the terms of this covenant;
(g) Debt under Currency Exchange Protection Agreements entered into by the
Company or a Restricted Subsidiary for the purpose of limiting currency exchange
rate risks directly related to transactions entered into by the Company or such
Restricted Subsidiary in the ordinary course of business and not for speculative
purposes;
(h) Debt in connection with one or more standby letters of credit or
performance bonds issued for the account of the Company or any Restricted
Subsidiary in the ordinary course of business or pursuant to self-insurance
obligations and not in connection with the borrowing of money or the obtaining
of advances;
(i) Debt outstanding on the Issue Date not otherwise described in clauses
(a) through (h) above;
(j) Debt not otherwise described in clauses (a) through (i) above in an
aggregate principal amount outstanding at any one time not to exceed $15.0
million; and
(k) Permitted Refinancing Debt Incurred in respect of Debt Incurred
pursuant to clause (a) of the first paragraph of this covenant and clauses (a),
(c), (e) and (i) above, subject, in the case of clause (c) above, to the
limitations set forth in the proviso thereto.
Notwithstanding the immediately foregoing two paragraphs, (a) the Company
shall not, and shall not permit any Restricted Subsidiary to, Incur any Debt
pursuant to such paragraphs if the proceeds thereof are used, directly or
indirectly, to Refinance any Subordinated Obligations unless such Debt shall be
subordinated to the Company Exchange Debentures to at least the same extent as
such Subordinated Obligations.
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Limitation on Restricted Payments. The Company shall not make, and shall
not permit any Restricted Subsidiary to make, directly or indirectly, any
Restricted Payment if at the time of, and after giving pro forma effect to, such
proposed Restricted Payment,
(a) a Default or Event of Default shall have occurred and be continuing,
(b) the Company could not Incur at least $1.00 of additional Debt pursuant
to clause (a) of the first paragraph of the covenant described under "--
Limitation on Debt" or
(c) the aggregate amount of such Restricted Payment and all other
Restricted Payments declared or made since the Issue Date (the amount of any
Restricted Payment, if made other than in cash, to be based upon Fair Market
Value) would exceed an amount equal to the sum of:
(i) 50% of the aggregate amount of Consolidated Net Income accrued during
the period (treated as one accounting period) from the beginning of the fiscal
quarter during which the Issue Date occurs to the end of the most recent fiscal
quarter ending at least 45 days prior to the date of such Restricted Payment (or
if the aggregate amount of Consolidated Net Income for such period shall be a
deficit, minus 100% of such deficit),
(ii) Capital Stock Sale Proceeds,
(iii) the amount by which Debt of the Company Incurred after the Issue Date
is reduced on the Company's balance sheet upon the conversion or exchange (other
than by the Company or a Subsidiary of the Company) subsequent to the Issue Date
of any Debt (other than Subordinated Obligations) of the Company for Capital
Stock (other than Disqualified Stock) of the Company (less the amount of any
cash or other Property distributed by the Company or any Restricted Subsidiary
upon such conversion or exchange), and
(iv) an amount equal to the sum of (A) the net reduction in Investments in
any Person other than the Company or a Restricted Subsidiary resulting from
dividends, repayments of loans or advances or other transfers of Property, in
each case to the Company or any Restricted Subsidiary from such Person, to the
extent such dividends, repayments or transfers do not increase the amount of
Permitted Investments permitted to be made pursuant to clause (i) of the
definition thereof and (B) the portion (proportionate to the Company's equity
interest in such Unrestricted Subsidiary) of the Fair Market Value of the net
assets of an Unrestricted Subsidiary at the time such Unrestricted Subsidiary is
designated a Restricted Subsidiary; provided, however, that the foregoing sum
shall not exceed, in the case of any Person, the amount of Investments
previously made (and treated as a Restricted Payment) by the Company or any
Restricted Subsidiary in such Person, and
(v) $7.5 million.
Notwithstanding the foregoing limitation, the Company may:
(a) pay dividends on its Capital Stock within 60 days of the declaration
thereof if, on said declaration date, such dividends could have been paid in
compliance with the Indenture; provided, however, that at the time of such
payment of such dividend, no other Default or Event of Default shall have
occurred and be continuing (or result therefrom); provided further, however,
that such dividend shall be included in the calculation of the amount of
Restricted Payments;
(b) purchase, repurchase, redeem, legally defease, acquire or retire for
value Capital Stock of the Company or Subordinated Obligations in exchange for,
or in an amount not in excess of the proceeds of the substantially concurrent
sale of, Capital Stock of the Company (other than Disqualified Stock and other
than Capital Stock issued or sold to a Subsidiary of the Company or an employee
stock ownership plan or trust established by the Company or any of its
Subsidiaries for the benefit of their employees); provided, however, that (i)
such purchase, repurchase, redemption, legal defeasance, acquisition or
retirement shall be excluded in the calculation of the amount of Restricted
Payments and (ii) the Capital Stock Sale Proceeds from such exchange or sale
shall be excluded from the calculation pursuant to clause (c)(ii) above;
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(c) purchase, repurchase, redeem, legally defease, acquire or retire for
value any Subordinated Obligations in exchange for, or in an amount not in
excess of the proceeds of the substantially concurrent sale of, Permitted
Refinancing Debt; provided, however, that such purchase, repurchase, redemption,
legal defeasance, acquisition or retirement shall be excluded in the calculation
of the amount of Restricted Payments;
(d) purchase, repurchase, redeem, legally defease, acquire or retire for
value, or pay dividends or make loans to Holding to enable Holding substantially
concurrently therewith to purchase, repurchase, redeem, legally defease, acquire
or retire for value, shares of, or options to purchase shares of, common stock
of the Company or Holding from employees or former employees of the Company,
Holding or any of their Subsidiaries (or their estates or beneficiaries thereof)
upon death, disability, retirement or termination pursuant to the terms of the
agreements (including employment agreements) or plans (or amendments thereto)
approved by the Board or Directors or the board of directors of Holding, as the
case may be, under which such individuals purchase or sell, or are granted the
option to purchase or sell, shares of such common stock; provided, however, that
(i) the aggregate amount of such purchases, repurchases, redemptions,
defeasances, acquisitions or retirements shall not exceed $1.0 million in any
year or $5.0 million during the term of the Company Exchange Debentures, except
that (x) such amounts shall be increased by the aggregate net amount of cash
received by the Company after the Issue Date from the sale of such shares to, or
the exercise of options to purchase such shares by, employees of the Company,
Holding or any of their Subsidiaries and (y) the Company may forgive or return
Employee Notes without regard to the limitation set forth in clause (d)(i) above
and such forgiveness or return shall not be treated as a Restricted Payment for
purpose of determining compliance with such clause (d)(i) and (ii) such
purchases, repurchases, defeasances, acquisitions or retirements (but not
forgiveness or return of Employee Notes) shall be included in the calculation of
the amount of Restricted Payments;
(e) purchase or redeem Subordinated Obligations pursuant to asset sale or
change of control provisions contained in the governing instrument relating
thereto; provided, however, that (i) no offer or purchase obligation may be
triggered in respect of any such Subordinated Obligation unless a corresponding
obligation also arises with respect to the Company Exchange Debentures and (ii)
in any event, no repurchase or redemption of any such Subordinated Obligation
may be consummated unless and until the Company shall have satisfied all
repurchase obligations with respect to any required purchase offer made with
respect to the Company Exchange Debentures; provided, however, that such
purchases or redemptions shall be included in the calculation of the amount of
Restricted Payments; and
(f) make payments to Helen Hudson Lovaas pursuant to the Merger Agreement
in an aggregate amount not to exceed $1.1 million in any fiscal year or $3.3
million during the term of the Subordinated Notes (plus, in each case, interest
due on the unpaid portion of such required payments in accordance with the
Merger Agreement); provided, however, that such payments shall be excluded in
the calculation of the amount of Restricted Payments.
Limitation on Liens. The Company shall not, and shall not permit any
Restricted Subsidiary to, directly or indirectly, Incur or suffer to exist, any
Lien (other than Permitted Liens (as defined herein)) upon any of its Property
(including Capital Stock of a Restricted Subsidiary), whether owned at the Issue
Date or thereafter acquired, or any interest therein or any income or profits
therefrom, unless (i) if such Lien secures Subordinated Debt, the Company
Exchange Debentures are secured on an equal and ratable basis with such Debt and
(ii) if such Lien secures Subordinated Obligations, such Lien shall be
subordinated to a Lien securing the Company Exchange Debentures in the same
Property as that securing such Lien to the same extent as such Subordinated
Obligations are subordinated to the Company Exchange Debentures.
Limitation on Issuance or Sale of Capital Stock of Restricted Subsidiaries.
The Company shall not (a) sell, pledge, hypothecate or otherwise dispose of any
shares of Capital Stock of a Restricted Subsidiary or (b) permit any Restricted
Subsidiary to, directly or indirectly, issue or sell or otherwise dispose of any
shares of its Capital Stock, other than (i) directors' qualifying shares, (ii)
to the Company or a Wholly Owned Subsidiary or (iii) a disposition of 100% of
the shares of Capital Stock of a Restricted Subsidiary that complies with the
covenant described under "--Limitation on Asset Sales."
Limitation on Asset Sales. The Company shall not, and shall not permit any
Restricted Subsidiary to, directly or indirectly, consummate any Asset Sale
unless (a) the Company or such Restricted Subsidiary receives
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consideration at the time of such Asset Sale at least equal to the Fair Market
Value of the Property subject to such Asset Sale; (b) at least 75% of the
consideration paid to the Company or such Restricted Subsidiary in connection
with such Asset Sale is in the form of cash or cash equivalents or the
assumption by the purchaser of liabilities of the Company or any Restricted
Subsidiary (other than liabilities that are by their terms subordinated to the
Company Exchange Debentures) as a result of which the Company and the Restricted
Subsidiaries are no longer obligated with respect to such liabilities; and (c)
the Company delivers an Officers' Certificate to the Trustee certifying that
such Asset Sale complies with the foregoing clauses (a) and (b).
The Net Available Cash (or any portion thereof) from Asset Sales may be
applied by the Company or a Restricted Subsidiary, to the extent the Company or
such Restricted Subsidiary elects (or is required by the terms of any Debt): (a)
to prepay, repay, legally defease or purchase Senior Debt of the Company or any
Restricted Subsidiary (excluding, in any such case, Disqualified Stock and Debt
owed to the Company or an Affiliate of the Company); or (b) to reinvest in
Additional Assets (including by means of an Investment in Additional Assets by a
Restricted Subsidiary with Net Available Cash received by the Company or another
Restricted Subsidiary); provided, however, that in connection with any
prepayment, repayment, legal defeasance or purchase of Debt pursuant to clause
(a) above, the Company or such Restricted Subsidiary shall retire such Debt and
shall cause the related loan commitment (if any) to be permanently reduced by an
amount equal to the principal amount so prepaid, repaid, legally defeased or
purchased.
Any Net Available Cash from an Asset Sale not applied in accordance with
the preceding paragraph within twelve months from the date of the receipt of
such Net Available Cash shall constitute "Excess Proceeds." When the aggregate
amount of Excess Proceeds exceeds $10.0 million (taking into account income
earned on such Excess Proceeds, if any), the Company will be required to make an
offer to purchase (the "Prepayment Offer") the Company Exchange Debentures which
offer shall be in the amount of the Excess Proceeds, on a pro rata basis
according to principal amount, at a purchase price equal to 100% of the
principal amount thereof plus accrued and unpaid interest thereon, if any, to
the purchase date (subject to the right of holders of record on the relevant
record date to receive interest due on the relevant interest payment date) in
accordance with the procedures (including prorating in the event of
oversubscription) set forth in the Exchange Indenture. To the extent that any
portion of the amount of Net Available Cash remains after compliance with the
preceding sentence and provided that all holders of Company Exchange Debentures
have been given the opportunity to tender their Company Exchange Debentures for
purchase in accordance with the Exchange Indenture, the Company or such
Restricted Subsidiary may use such remaining amount for any purpose permitted by
the Exchange Indenture and the amount of Excess Proceeds will be reset to
zero.
Within five business days after the Company is obligated to make a
Prepayment Offer as described in the preceding paragraph, the Company shall send
a written notice, by first-class mail, to the holders of Company Exchange
Debentures, accompanied by such information regarding the Company and its
Subsidiaries as the Company in good faith believes will enable such holders to
make an informed decision with respect to such Prepayment Offer. Such notice
shall state, among other things, the purchase price and the purchase date, which
shall be, subject to any contrary requirements of applicable law, a business day
no earlier than 30 days nor later than 60 days from the date such notice is
mailed.
The Company will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Company Exchange Debentures pursuant to the
covenant described hereunder. To the extent that the provisions of any
securities laws or regulations conflict with provisions of the covenant
described hereunder, the Company will comply with the applicable securities laws
and regulations and will not be deemed to have breached its obligations under
the covenant described hereunder by virtue thereof.
Limitation on Restrictions on Distributions from Restricted Subsidiaries.
The Company shall not, and shall not permit any Restricted Subsidiary to,
directly or indirectly, create or otherwise cause or suffer to exist any
consensual restriction on the right 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, or pay any Debt or other obligation owed, to the
Company or any other Restricted Subsidiary (except, with respect to restrictions
on dividends of non-cash Property, as permitted pursuant to clause (ii) of the
next sentence), (b) make any loans or advances to the Company or any
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other Restricted Subsidiary or (c) transfer any of its Property to the Company
or any other Restricted Subsidiary. The foregoing limitations will not apply
(i) with respect to clauses (a), (b) and (c), to restrictions (A) in effect on
the Issue Date, (B) relating to Debt of a Restricted Subsidiary and existing at
the time it became a Restricted Subsidiary if such restriction was not created
in connection with or in anticipation of the transaction or series of
transactions pursuant to which such Restricted Subsidiary became a Restricted
Subsidiary or was acquired by the Company or (C) which result from the
Refinancing of Debt Incurred pursuant to an agreement referred to in clause
(i)(A) or (B) above or in clause (ii)(A) or (B) below, provided such restriction
is no less favorable to the holders of Company Exchange Debentures than those
under the agreement evidencing the Debt so Refinanced, and (ii) with respect to
clause (c) only, to restrictions (A) relating to Debt that is permitted to be
Incurred and secured without also securing the Company Exchange Debentures equal
and ratable treatment pursuant to the covenants described under "--Limitation on
Debt" and "--Limitation on Liens" that limit the right of the debtor to dispose
of the Property securing such Debt, (B) encumbering Property at the time such
Property was acquired by the Company or any Restricted Subsidiary, so long as
such restriction relates solely to the Property so acquired and was not created
in connection with or in anticipation of such acquisition, (C) resulting from
customary provisions restricting subletting or assignment of leases or customary
provisions in other agreements that restrict assignment of such agreements or
rights thereunder or (D) customary restrictions contained in asset sale
agreements limiting the transfer of such Property pending the closing of such
sale.
Limitation on Transactions with Affiliates. The Company shall not, and
shall not permit any Restricted Subsidiary to, directly or indirectly, conduct
any business or enter into or suffer to exist any transaction or series of
transactions (including the purchase, sale, transfer, assignment, lease,
conveyance or exchange of any Property or the rendering of any service) with, or
for the benefit of, any Affiliate of the Company (an "Affiliate Transaction"),
unless (a) the terms of such Affiliate Transaction are (i) set forth in writing,
(ii) in the interest of the Company or such Restricted Subsidiary, as the case
may be, and (iii) no less favorable to the Company or such Restricted
Subsidiary, as the case may be, than those that could be obtained in a
comparable arm's-length transaction with a Person that is not an Affiliate of
the Company, (b) if such Affiliate Transaction involves aggregate payments or
value in excess of $2.5 million, the Board of Directors (including a majority of
the disinterested members of the Board of Directors) approves such Affiliate
Transaction and, in its good faith judgment, believes that such Affiliate
Transaction complies with clauses (a) (ii) and (iii) of this paragraph as
evidenced by a Board Resolution promptly delivered to the Trustee and (c) if
such Affiliate Transaction involves aggregate payments or value in excess of
$5.0 million, the Company obtains a written opinion from an Independent
Appraiser to the effect that the consideration to be paid or received in
connection with such Affiliate Transaction is fair, from a financial point of
view, to the Company or such Restricted Subsidiary, as the case may be.
Notwithstanding the foregoing limitation, the Company or any Restricted
Subsidiary may enter into or suffer to exist the following:
(i) any transaction or series of transactions between the Company and one
or more Restricted Subsidiaries or between two or more Restricted Subsidiaries
in the ordinary course of business; provided that no more than 5% of the total
voting power of the Voting Stock (on a fully diluted basis) of any such
Restricted Subsidiary is owned by an Affiliate of the Company (other than a
Restricted Subsidiary);
(ii) any Restricted Payment permitted to be made pursuant to the covenant
described under "--Limitation on Restricted Payments";
(iii) the payment of compensation (including amounts paid pursuant to
employee benefit plans) for the personal services of officers, directors and
employees of the Company or any of the Restricted Subsidiaries, so long as the
Board of Directors in good faith shall have approved the terms thereof and
deemed the services theretofore or thereafter to be performed for such
compensation to be fair consideration therefor;
(iv) loans and advances to employees made in the ordinary course of
business and consistent with the past practices of the Company or such
Restricted Subsidiary, as the case may be; provided that such loans and advances
do not exceed $1.0 million in the aggregate at any one time outstanding;
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(v) the payment of fees and expenses in connection with the
Recapitalization pursuant to written agreements in effect on the Issue Date;
(vi) the sale of common stock of the Company for cash; provided, that the
Company may receive Employee Subordinated Notes in an aggregate principal amount
not in excess of $1.0 million at any one time outstanding;
(vii) the payment of dividends in kind in respect of (i) the Company
Preferred Stock or (ii) any other Preferred Stock issued in compliance with this
covenant; and
(viii) a proportionate split of, or a common stock divided payable on, the
common stock of the Company.
Designation of Restricted and Unrestricted Subsidiaries. The Board of
Directors may designate any Subsidiary of the Company (other than Industrias
Hudson) to be an Unrestricted Subsidiary if (a) the Subsidiary to be so
designated does not own any Capital Stock or Debt of, or own or hold any Lien on
any Property of, the Company or any other Restricted Subsidiary, (b) the
Subsidiary to be so designated is not obligated under any Debt, Lien or other
obligation that, if in default, would result (with the passage of time or notice
or otherwise) in a default on any Debt of the Company or of any Restricted
Subsidiary and (c) either (i) the Subsidiary to be so designated has total
assets of $1,000 or less or (ii) such designation is effective immediately upon
such entity becoming a Subsidiary of the Company. Unless so designated as an
Unrestricted Subsidiary, any Person that becomes a Subsidiary of the Company
will be classified as a Restricted Subsidiary; provided, however, that such
Subsidiary shall not be designated a Restricted Subsidiary and shall be
automatically classified as an Unrestricted Subsidiary if either of the
requirements set forth in clauses (x) and (y) of the immediately following
paragraph will not be satisfied after giving pro forma effect to such
classification. Except as provided in the first sentence of this paragraph, no
Restricted Subsidiary may be redesignated as an Unrestricted Subsidiary.
The Board of Directors may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary if, immediately after giving pro forma effect to such
designation, (x) the Company could Incur at least $1.00 of additional Debt
pursuant to clause (a) of the first paragraph of the covenant described under "-
- -Limitation on Debt" and (y) no Default or Event of Default shall have occurred
and be continuing or would result therefrom.
Any such designation or redesignation by the Board of Directors will be
evidenced to the Trustee by filing with the Trustee a Board Resolution giving
effect to such designation or redesignation and an Officers' Certificate (a)
certifying that such designation or redesignation complies with the foregoing
provisions and (b) giving the effective date of such designation or
redesignation, such filing with the Trustee to occur within 45 days after the
end of the fiscal quarter of the Company in which such designation or
redesignation is made (or, in the case of a designation or redesignation made
during the last fiscal quarter of the Company's fiscal year, within 90 days
after the end of such fiscal year).
Limitation on Holding's Business. Holding shall not, directly or
indirectly, engage in any business or activity other than the ownership of
Capital Stock of the Company and business activities incidental thereto.
Merger, Consolidation and Sale of Property
The Company shall not merge, consolidate or amalgamate with or into any
other Person (other than a merger of a Wholly Owned Subsidiary into the Company)
or sell, transfer, assign, lease, convey or otherwise dispose of all or
substantially all its Property in any one transaction or series of transactions
unless: (a) the Company shall be the surviving Person (the "Surviving Person")
or the Surviving Person (if other than the Company) formed by such merger,
consolidation or amalgamation or to which such sale, transfer, assignment,
lease, conveyance or disposition is made shall be a corporation organized and
existing under the laws of the United States of America, any State thereof or
the District of Columbia; (b) the Surviving Person (if other than the Company)
expressly assumes, by supplemental indenture in form satisfactory to the
Trustee, executed and delivered to the Trustee by such Surviving Person, the due
and punctual payment of the principal of, and premium, if any, and interest on,
all the Company Exchange Debentures, according to their tenor, and the due and
punctual performance and observance of all the covenants and conditions of the
Company Exchange Indenture to be performed by the Company; (c) in
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the case of a sale, transfer, assignment, lease, conveyance or other disposition
of all or substantially all the Property of the Company, such Property shall
have been transferred as an entirety or virtually as an entirety to one Person;
(d) immediately before and after giving effect to such transaction or series of
transactions on a pro forma basis (and treating, for purposes of this clause (d)
and clauses (e) and (f) below, any Debt which becomes, or is anticipated to
become, an obligation of the Surviving Person or any Restricted Subsidiary as a
result of such transaction or series of transactions as having been Incurred by
the Surviving Person or such Restricted Subsidiary at the time of such
transaction or series of transactions), no Default or Event of Default shall
have occurred and be continuing; (e) immediately after giving effect to such
transaction or series of transactions on a pro forma basis, the Company or the
Surviving Person, as the case may be, would be able to Incur at least $1.00 of
additional Debt under clause (a) of the first paragraph of the covenant
described under "--Certain Covenants--Limitation on Debt"; provided, however,
that this clause (e) shall not apply to a merger between the Company and a
Wholly Owned Subsidiary of the Company Holding incorporated in another state of
the United States solely for the purpose of reincorporating the Company as long
as the total amount of Debt of the Company and its Restricted Subsidiaries is
not increased as a result thereof; and (f) the Company shall deliver, or cause
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 and the supplemental indenture, if any, in respect thereto
comply with this covenant and that all conditions precedent herein provided for
relating to such transaction have been satisfied.
The Surviving Person shall succeed to, and be substituted for, and may
exercise every right and power of the Company under the Exchange Indenture, but
the predecessor Company in the case of a sale, transfer, assignment, lease,
conveyance or other disposition shall not be released from the obligation to pay
the principal of, and premium, if any, and interest on, the Company Exchange
Debentures.
Events of Default
Events of Default in respect of the Company Exchange Debentures as set
forth in the Exchange Indenture include: (a) failure to make the payment of any
interest on the Company Exchange Debentures when the same becomes due and
payable, and such failure continues for a period of 30 days; (b) failure to make
the payment of any principal of, or premium, if any, on, any of the Company
Exchange Debentures when the same becomes due and payable at its Stated
Maturity, upon acceleration, redemption, optional redemption, required
repurchase or otherwise; (c) failure to comply with the covenant described above
under "--Merger, Consolidation and Sale of Property"; (d) failure to comply with
any other covenant or agreement in the Company Exchange Debentures or in the
Exchange Indenture (other than a failure which is the subject of the foregoing
clause (a), (b) or (c)) and such failure continues for 30 days after written
notice is given to the Company as provided below; (e) a default under any Debt
by the Company or any Restricted Subsidiary which results in acceleration of the
stated maturity of such Debt, or failure to pay any such Debt at final maturity,
in an aggregate amount greater than $7.5 million (or its foreign currency
equivalent at the time) (the "cross acceleration provisions"); (f) any judgment
or judgments for the payment of money in an aggregate amount in excess of $7.5
million (or its foreign currency equivalent at the time) shall be rendered
against the Company or any Restricted Subsidiary and shall not be waived,
satisfied or discharged for any period of 30 consecutive days during which a
stay of enforcement shall not be in effect (the "judgment default provisions");
and (g) certain events involving bankruptcy, insolvency or reorganization of the
Company or any Significant Subsidiary (as defined herein) (the "bankruptcy
provisions").
A Default under clause (d) is not an Event of Default until the Trustee or
the holders of not less than 25% in aggregate principal amount of the
Subordinated Notes then outstanding notify the Company of the Default and the
Company does not cure such Default within the time specified after receipt of
such notice. Such notice must specify the Default, demand that it be remedied
and state that such notice is a "Notice of Default".
The Company shall deliver to the Trustee, within 30 days after the
occurrence thereof, written notice in the form of an Officers' Certificate of
any event which with the giving of notice and the lapse of time would become an
Event of Default, its status and what action the Company is taking or proposes
to take with respect thereto.
The Exchange Indenture provides that if an Event of Default with respect to
the Company Exchange Debentures (other than an Event of Default resulting from
certain events involving bankruptcy, insolvency
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or reorganization with respect to the Company or any Significant Subsidiary)
shall have occurred and be continuing, the Trustee or the registered holders of
not less than 25% in aggregate principal amount of the Company Exchange
Debentures then outstanding may declare to be immediately due and payable the
principal amount of all the Company Exchange Debentures then outstanding, plus
accrued but unpaid interest to the date of acceleration. In case an Event of
Default resulting from certain events of bankruptcy, insolvency or
reorganization with respect to the Company or any Significant Subsidiary shall
occur, such amount with respect to all the Company Exchange Debentures shall be
due and payable immediately without any declaration or other act on the part of
the Trustee or the holders of the Company Exchange Debentures. After any such
acceleration, but before a judgment or decree based on acceleration is obtained
by the Trustee, the registered holders of a majority in aggregate principal
amount of the Company Exchange Debentures then outstanding may, under certain
circumstances, rescind and annul such acceleration if all Events of Default,
other than the nonpayment of accelerated principal, premium or interest, have
been cured or waived as provided in the Exchange Indenture.
Subject to the provisions of the Exchange Indenture relating to the duties
of the Trustee, in case an Event of Default shall occur and be continuing, the
Trustee will be under no obligation to exercise any of its rights or powers
under the Exchange Indenture at the request or direction of any of the holders
of the Company Exchange Debentures, unless such holders shall have offered to
the Trustee reasonable indemnity. Subject to such provisions for the
indemnification of the Trustee, the holders of a majority in aggregate principal
amount of the Company Exchange Debentures then outstanding will have the right
to direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee with respect to the Subordinated Notes.
No holder of Company Exchange Debentures will have any right to institute
any proceeding with respect to the Exchange Indenture, or for the appointment of
a receiver or trustee, or for any remedy thereunder, unless (a) such holder has
previously given to the Trustee written notice of a continuing Event of Default,
(b) the registered holders of at least 25% in aggregate principal amount of the
Company Exchange Debentures then outstanding have made written request and
offered reasonable indemnity to the Trustee to institute such proceeding as
trustee and (c) the Trustee shall not have received from the registered holders
of a majority in aggregate principal amount of the Company Exchange Debentures
then outstanding a direction inconsistent with such request and shall have
failed to institute such proceeding within 60 days. However, such limitations do
not apply to a suit instituted by a holder of any Company Exchange Debenture for
enforcement of payment of the principal of, and premium, if any, or interest on,
such Company Exchange Debenture on or after the respective due dates expressed
in such Company Exchange Debenture.
Amendments and Waivers
Subject to certain exceptions, the Exchange Indenture may be amended with
the consent of the registered holders of a majority in aggregate principal
amount of the Company Exchange Debentures then outstanding (including consents
obtained in connection with a tender offer or exchange offer for the Company
Exchange Debentures) and any past default or compliance with any provisions may
also be waived (except a default in the payment of principal, premium or
interest and certain covenants and provisions of the Exchange Indenture which
cannot be amended without the consent of each holder of an outstanding Company
Exchange Debenture) with the consent of the registered holders of at least a
majority in aggregate principal amount of the Company Exchange Debentures then
outstanding. However, without the consent of each holder of an outstanding
Company Exchange Debenture, no amendment may, among other things, (a) reduce the
amount of Company Exchange Debentures whose holders must consent to an amendment
or waiver, (b) reduce the rate of or extend the time for payment of interest on
any Company Exchange Debenture, (c) reduce the principal of or extend the Stated
Maturity of any Company Exchange Debenture, (d) make any Company Exchange
Debenture payable in money other than that stated in the Company Exchange
Debenture, (e) impair the right of any holder of the Company Exchange Debentures
to receive payment of principal of and interest on such holder's Company
Exchange Debentures on or after the due dates therefor or to institute suit for
the enforcement of any payment on or with respect to such holder's Company
Exchange Debentures, (f) release any security interest that may have been
granted in favor of the holders of the Company Exchange Debentures, (g) reduce
the premium payable upon the redemption or repurchase of any Company Exchange
Debenture, or change the time at which any Company Exchange Debenture may be
redeemed, as described under "--Optional Redemption", (h) reduce the premium
payable upon
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a Change of Control or, at any time after a Change of Control or Asset Sale has
occurred, change the time at which the Change of Control Offer or Prepayment
Offer relating thereto must be made or at which the Company Exchange Debentures
must be repurchased pursuant to such Change of Control Offer or (i) make any
change to the subordination provisions of the Exchange Indenture that would
adversely affect the holders of the Company Exchange Debentures .
Without the consent of any holder of the Company Exchange Debentures, the
Company and the Trustee may amend the Exchange Indenture to cure any ambiguity,
omission, defect or inconsistency, to provide for the assumption by a successor
corporation of the obligations of the Company under the Exchange Indenture, to
provide for uncertificated Company Exchange Debentures in addition to or in
place of certificated Company Exchange Debentures (provided that the
uncertificated Company Exchange Debentures are issued in registered form for
purposes of Section 163(f) of the Code, or in a manner such that the
uncertificated Company Exchange Debentures are described in Section 163(f)(2)(B)
of the Code), to secure the Company Exchange Debentures, to add to the covenants
of the Company for the benefit of the holders of the Company Exchange Debentures
or to surrender any right or power conferred upon the Company, to make any
change that does not adversely affect the rights of any holder of the Company
Exchange Debentures in any material respect, to make any change to the
subordination provisions of the Exchange Indenture that would limit or terminate
the benefits available to any holder of Senior Debt under such provisions or to
comply with any requirement of the Commission in connection with the
qualification of the Exchange Indenture under the Trust Indenture Act.
No amendment may be made to the subordination provisions of the Exchange
Indenture that adversely affects the rights of any holder of Senior Debt then
outstanding unless the holders of such Senior Debt (or their Representative)
consent to such change. The consent of the holders of the Company Exchange
Debentures is not necessary under the Exchange Indenture to approve the
particular form of any proposed amendment. It is sufficient if such consent
approves the substance of the proposed amendment. After an amendment under the
Exchange Indenture becomes effective, the Company is required to mail to each
registered holder of the Company Exchange Debentures at such holder's address
appearing in the Security Register a notice briefly describing such amendment.
However, the failure to give such notice to all holders of the Company Exchange
Debentures, or any defect therein, will not impair or affect the validity of the
amendment.
Defeasance
The Company at any time may terminate all its obligations under the Company
Exchange Debentures and the Exchange Indenture ("legal defeasance"), except for
certain obligations, including those respecting the defeasance trust and
obligations to register the transfer or exchange of the Company Exchange
Debentures, to replace mutilated, destroyed, lost or stolen Company Exchange
Debentures and to maintain a registrar and paying agent in respect of the
Company Exchange Debentures. The Company at any time may terminate its
obligations under the covenants described under "--Repurchase at the Option of
Holders Upon a Change of Control" and "--Certain Covenants", the operation of
the cross acceleration provisions, the judgment default provisions, the
bankruptcy provisions with respect to Significant Subsidiaries and the
limitations contained in clauses (e) and (f) under the first paragraph of "--
Merger, Consolidation and Sale of Property" above ("covenant defeasance"). The
Company may exercise its legal defeasance option notwithstanding its prior
exercise of its covenant defeasance option.
If the Company exercises its legal defeasance option, payment of the
Company Exchange Debentures may not be accelerated because of an Event of
Default with respect thereto. If the Company exercises its covenant defeasance
option, payment of the Company Exchange Debentures may not be accelerated
because of an Event of Default specified in clause (d) (with respect to the
covenants described under "--Certain Covenants"), (e), (f), (g) (with respect
only to Significant Subsidiaries) or (h) under "--Events of Default" above or
because of the failure of the Company to comply with clauses (e) and (f) under
the first paragraph of "--Merger, Consolidation and Sale of Property" above.
In order to exercise either defeasance option, the Company must, among
other things, irrevocably deposit in trust (the "defeasance trust") with the
Trustee money or U.S. Government Obligations for the payment of principal and
interest on the Company Exchange Debentures to maturity or redemption, as the
case may be, and
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must comply with certain other conditions, including delivery to the Trustee of
an Opinion of Counsel to the effect that holders of the Company Exchange
Debentures will not recognize income, gain or loss for Federal income tax
purposes as a result of such deposit and defeasance and will be subject to
Federal income tax on the same amounts and in the same manner and at the same
times as would have been the case if such deposit and defeasance had not
occurred (and, in the case of legal defeasance only, such Opinion of Counsel
must be based on a ruling of the Internal Revenue Service or other change in
applicable Federal income tax law).
Governing Law
The Exchange Indenture and the Company Exchange Debentures are governed by
the internal laws of the State of New York without reference to principles of
conflicts of law.
The Trustee
Prior to entering into the Exchange Indenture, the Company will appoint a
trustee which will satisfy the requirements of Sections 310(a)(1) and 310(a)(5)
of the Trust Indenture Act of 1939, as amended, which will have a combined
capital and surplus of at least $100.0 million as set forth on its most recently
published report of condition and will have a corporate trust office located in
the City of New York.
The Exchange 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 Exchange Indenture. During the existence of an Event of
Default, the Trustee will exercise such of the rights and powers vested in it
under the Exchange 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.
COMPANY PREFERRED STOCK
The following is a summary of certain provisions of the Company Exchange
Certificate of Determination and the Company Preferred Stock. A copy of the
Company Exchange Certificate of Determination and the form of Company Preferred
Stock is available upon request to the Company at the Company's address set
forth under "Available Information." The following summary of certain provisions
of the Company Exchange Certificate of Determination does not purport to be
complete and is subject to, and is qualified in its entirety by reference to,
all the provisions of the Company Exchange Certificate of Determination. For
purposes of this Section, references to "the Company" shall mean Hudson
Respiratory Care Inc. excluding its subsidiaries. Other capitalized terms used
but not defined herein are defined in the Company Exchange Certificate of
Determination.
General
At the consummation of the Offerings, the Company will authorize its 11
1/2% Senior Exchangeable PIK Preferred Stock due 2010, $100 par value per share,
designated as "11 1/2% Senior Exchangeable PIK Preferred Stock due 2010."
Subject to certain conditions, the Company Preferred Stock will be exchangeable,
in whole but not in part, for the Company Exchange Debentures at the option of
the Company at any time. When issued, the Company Preferred Stock will be
validly issued, fully paid and nonassessable. The holders of the Company
Preferred Stock will have no preemptive or preferential right to purchase or
subscribe to stock, obligations, warrants, or other securities of the Company of
any class. The Company Preferred Stock will be eligible for trading in the
Portal Market.
Ranking
The Company Preferred Stock will, with respect to dividend rights and
rights on liquidation, winding up and dissolution, rank (i) senior to all
classes of common stock of the Company and to each other class of Capital Stock
or series of Preferred Stock established hereafter by the Board of Directors the
terms of which do not expressly provide that it ranks senior to, or on a parity
with, the Company Preferred Stock as to dividend rights
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and rights on liquidation, winding-up and dissolution of the Company
(collectively referred to, together with all classes of common stock of the
Company, as "Junior Stock") and (ii) on a parity with each other class of
Capital Stock or series of Preferred Stock established hereafter by the Board of
Directors, the terms of which expressly provide that such class or series will
rank on a parity with the Company Preferred Stock as to dividend rights and
rights on liquidation, winding-up and dissolution (collectively referred to as
"Parity Stock"). As of June 30, 1998, the Company had issued and outstanding
$78.0 million in Junior Stock, $30.0 million in Parity Stock and no other issued
and outstanding capital stock which ranked senior to the Company Preferred
Stock. Creditors of the Company will have priority over the Company Preferred
Stock with respect to claims on the assets of the Company. In addition,
creditors and stockholders of the Company's subsidiaries, including Industrias
Hudson, will have priority over the Company Preferred Stock with respect to
claims on the assets of such subsidiaries.
While any shares of Company Preferred Stock are outstanding, the Company
may not authorize, create or increase the authorized amount of any class or
series of Capital Stock or Preferred Stock, the terms of which expressly provide
that such class or series will rank senior to the Company Preferred Stock as to
dividend rights and rights upon liquidation, winding-up and dissolution of the
Company (collectively referred to as "Senior Stock") or Parity Stock without the
consent of the holders of at least 66 2/3% of the outstanding shares of the
Company Preferred Stock. However, without the consent of any holder of Company
Preferred Stock, the Company may create additional classes of stock or issue
series of a stock that ranks junior to the Company Preferred Stock with respect,
in each case, to the payment of dividends and amounts upon liquidation,
dissolution and winding up. See "--Voting Rights."
Dividends
The holders of shares of Company Preferred Stock will be entitled to
receive, when, as and if dividends are declared by the Board of Directors out of
funds of the Company legally available therefor, cumulative preferential
dividends from the Issue Date of the Company Preferred Stock accruing at the
rate per share of 11 1/2% per annum, payable semi-annually in arrears on each of
April 15 and October 15 or, if any such date is not a Business Day, on the next
succeeding Business Day (each, a "Dividend Payment Date"), to the holders of
record as of the next preceding April 1 and October 1. Dividends will be
payable in cash, except that on each Dividend Payment Date occurring on or prior
to April 15, 2003, dividends may be paid, at the Company's option, by the
issuance of additional shares of Company Preferred Stock (including fractional
shares) having an aggregate Liquidation Preference equal to the amount of such
dividends. The issuance of such additional shares of Company Preferred Stock
will constitute "payment" of the related dividend for all purposes of the
Company Exchange Certificate of Determination. Dividends payable on the Company
Preferred Stock will be computed on the basis of a 360-day year consisting of
twelve 30-day months and will be deemed to accrue on a daily basis. For a
discussion of certain Federal income tax considerations relevant to the payment
of dividends on the Company Preferred Stock, see "Certain U.S. Federal Income
Tax Considerations."
Dividends on the Company Preferred Stock will accrue whether or not the
Company has earnings or profits, whether or not there are funds legally
available for the payment of such dividends and whether or not dividends are
declared. Dividends will accumulate to the extent they are not paid on the
Dividend Payment Date for the period to which they relate. California law
restricts the ability of Hudson RCI to pay cash dividends with respect to the
Company Preferred Stock. See "Risk Factors--Holding's Ability to Pay Dividends;
Holding Company Structure."
No dividend whatsoever shall be declared or paid upon, or any sum set apart
for the payment of dividends upon, any outstanding share of the Company
Preferred Stock with respect to any dividend period unless all dividends for all
preceding dividend periods have been declared and paid or declared and a
sufficient sum set apart for the payment of such dividend, upon all outstanding
shares of Company Preferred Stock.
Except as provided in the next sentence, no dividend will be declared or
paid on any Parity Stock unless full cumulative dividends have been paid on the
Company Preferred Stock for all prior dividend periods. If accrued dividends on
the Company Preferred Stock for all prior dividend periods have not been paid in
full then any dividend declared on the Company Preferred Stock for any dividend
period and on any Parity Stock will be declared ratably in proportion to accrued
and unpaid dividends on the Company Preferred Stock and such Parity Stock.
No full dividends may be declared or paid or funds set apart for the
payment of dividends on any Parity Stock for any period unless full cumulative
dividends shall have been or contemporaneously are declared and paid
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in full or declared and, if payable in cash, a sum in cash set apart for such
payment on the Company Preferred Stock. If full dividends are not so paid, the
Company Preferred Stock will share dividends pro rata with the Parity Stock. No
dividends may be paid or set apart for such payment on Junior Stock (except
dividends on Junior Stock in additional shares of Junior Stock) and no Junior
Stock or Parity Stock may be repurchased, redeemed or otherwise retired nor may
funds be set apart for payment with respect thereto, if full cumulative
dividends have not been paid on the Company Preferred Stock.
Optional Redemption
Except as set forth below, the Company Preferred Stock will not be
redeemable at the option of the Company prior to April 15, 2003. Thereafter,
the Company Preferred Stock will be redeemable, at the Company's option, in
whole or in part, at any time or from time to time, upon not less than 30 nor
more than 60 days' prior notice mailed by first-class mail to each holder's
registered address, at the following redemption prices (expressed in percentages
of the Liquidation Preference thereof), plus accumulated and unpaid dividends
(including an amount in cash equal to a prorated dividend for any partial
dividend period), if redeemed during the 12-month period commencing on of the
years set forth below:
<TABLE>
<CAPTION>
Redemption
Period Price
------ ---------
<S> <C> <C>
2003.......................... 105.750%
2004.......................... 104.600%
2005.......................... 103.450%
2006.......................... 102.300%
2007.......................... 101.150%
2008 and thereafter........... 100.000%
</TABLE>
In addition, at any time prior to April 15, 2001, the Company may redeem at
its option (i) up to 50% or (ii) all but not less than all of the outstanding
shares of Company Preferred Stock with the net proceeds of any Public Equity
Offering by the Company at a redemption price (expressed as a percentage of the
Liquidation Preference thereof) of 111.5% plus accumulated and unpaid dividends
(including an amount in cash equal to a prorated dividend for any partial
dividend period). Any such redemption shall be made upon consummation of such
Public Equity Offering upon not less than 30 nor more than 60 days' notice.
Exchange for Company Exchange Debentures
The Company may, at its option, subject to certain conditions, exchange the
Company Preferred Stock, in whole but not in part, at any time, for Company
Exchange Debentures; provided , however, that (i) on the date of such exchange
there are no accumulated and unpaid dividends on the Company Preferred Stock
(including the dividend payable on such date) that are not paid
contemporaneously with such exchange or other contractual impediments to such
exchange; (ii) such exchange is permitted under applicable law; (iii)
immediately after giving effect to such exchange, no Default (as defined in the
Exchange Indenture) shall have occurred and be continuing; and (iv) the Company
shall have delivered to the Trustee under the Exchange Indenture an opinion of
counsel with respect to the due authorization and issuance of the Company
Exchange Debentures. The exchange of the Company Preferred Stock for Company
Exchange Debentures is currently prohibited by the terms of the New Credit
Facility and limited by the Indenture governing the Subordinated Notes. See
"Description of New Credit Facility" and "Description of the Subordinated
Notes."
Upon any exchange of Company Preferred Stock for Company Exchange
Debentures pursuant to this section, holders of outstanding shares of Company
Preferred Stock will be entitled to receive, subject to the second succeeding
sentence, $1.00 principal amount of Company Exchange Debentures for each $1.00
liquidation
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preference of Company Preferred Stock held by them, and an amount in cash equal
to a prorated dividend for any partial dividend period. The Company Exchange
Debentures will be issued in registered form, without coupons. Company Exchange
Debentures issued in exchange for Company Preferred Stock will be issued in
principal amounts of $1,000 and integral multiples thereof to the extent
possible, and will also be issued in principal amounts less than $1,000 so that
each holder of Company Preferred Stock will receive certificates representing
the entire amount of Company Exchange Debentures to which such holder's shares
of Company Preferred Stock entitle such holder; provided, however, that the
Company may pay cash in lieu of issuing a Company Exchange Debenture in a
principal amount less than $1,000.
The Company will send a written notice of exchange by mail to each holder
of record of shares of Company Preferred Stock not fewer than 30 days nor more
than 60 days before the date fixed for any exchange. On and after the Exchange
Date, dividends will cease to accrue on the outstanding shares of Company
Preferred Stock, and all rights of the holders of Company Preferred Stock
(except the right to receive the Company Exchange Debentures, an amount in cash,
to the extent applicable, equal to the accumulated and unpaid dividends to the
exchange date and, if Company so elects, cash in lieu of any Company Exchange
Debenture that is in a principal amount that is not an integral multiple of
$1,000) will terminate. The person entitled to receive the Company Exchange
Debentures issuable upon such exchange will be treated for all purposes as the
registered holder of such Company Exchange Debentures.
Mandatory Redemption
On April 15, 2010, the Company will be required to redeem (subject to the
legal availability of funds therefor) all outstanding shares of Company
Preferred Stock at a price in cash equal to the Liquidation Preference thereof,
plus accumulated and unpaid dividends (including an amount in cash equal to a
prorated dividend for any partial dividend period), if any, to the date of
redemption. The Company will not be required to make sinking fund payments with
respect to the Company Preferred Stock. The Company Exchange Certificate of
Determination will provide that the Company will take all actions required or
permitted under California law to permit such redemption.
Liquidation Preference
Upon any voluntary or involuntary liquidation, dissolution or winding-up of
the Company, each holder of Company Preferred Stock will be entitled to be paid,
out of the assets of the Company available for distribution to stockholders, an
amount equal to the Liquidation Preference per share of Company Preferred Stock
held by such holder, plus accumulated and unpaid dividends thereon to the date
fixed for liquidation, dissolution or winding-up before any distribution is made
on any Junior Stock, including, without limitation, common stock of the Company.
If, upon any voluntary or involuntary liquidation, dissolution or winding-up of
the Company, the amounts payable with respect to the Company Preferred Stock and
all other Parity Stock are not paid in full, the holders of the Company
Preferred Stock and the Parity Stock will share equally and ratably in any
distribution of assets of the Company in proportion to the full liquidation
preference and accumulated and unpaid dividends to which each is entitled.
After payment of the full amount of the Liquidation Preference and accumulated
and unpaid dividends to which they are entitled, the holders of shares of
Company Preferred Stock will not be entitled to any further participation in any
distribution of assets of the Company. However, neither the sale, conveyance,
exchange or transfer (for cash, shares of stock, securities or other
consideration) of all or substantially all of the property or assets of the
Company nor the consolidation or merger of the Company with one or more entities
shall be deemed to be a liquidation, dissolution or winding-up of the Company.
The Company Exchange Certificate of Determination will not contain any
provision requiring funds to be set aside to protect the Liquidation Preference
of the Company Preferred Stock, although such Liquidation Preference will be
substantially in excess of the par value of such shares of Company Preferred
Stock.
Voting Rights
The holders of Company Preferred Stock, except as otherwise required under
California law or as provided in the Company Exchange Certificate of
Determination, shall not be entitled or permitted to vote on any matter required
or permitted to be voted upon by the stockholders of the Company.
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The Company Exchange Certificate of Determination will provide that if (i)
dividends on the Company Preferred Stock are in arrears and unpaid (and, in the
case of dividends payable after April 15, 2003, are not paid in cash) for six or
more Dividend Periods (whether or not consecutive); (ii) the Company fails to
redeem the Company Preferred Stock on April 15, 2010, or fails to otherwise
discharge any redemption obligation with respect to the Company Preferred Stock;
(iii) Company fails to make an offer to purchase all of the outstanding shares
of Company Preferred Stock following a Change of Control (whether or not the
Company is permitted to do so by the terms of the Indenture, the New Credit
Facility or any other obligation of the Company), (iv) a breach or violation of
any of the provisions described under the caption "--Certain Covenants" occurs
and the breach or violation continues for a period of 30 days or more after the
Company receives notice thereof specifying the default from the holders of at
least 25% of the shares of Company Preferred Stock then outstanding; or (v) the
Company fails to pay at final maturity (giving effect to any applicable grace
period) the principal amount of any Debt of the Company or any Subsidiary of the
Company or the stated maturity of any such Debt of the Company or any Subsidiary
of the Company is accelerated because of a default and the total amount of such
Debt unpaid or accelerated exceeds $7.5 million, then the holders of the
outstanding shares of Company Preferred Stock, voting together as a class with
the holders of any other series of Preferred Stock upon which like rights have
been conferred and are exercisable, will be entitled to elect two additional
members to the Board of Directors to serve on the Board of Directors, and the
number of members of the Board of Directors will be immediately and
automatically increased by two. Such voting rights of the Company Preferred
Stock will continue until such time as, in the case of a dividend default, all
dividends in arrears on the Company Preferred Stock are paid in full in cash
and, in all other cases, any failure, breach or default giving rise to such
voting rights is remedied or waived by the holders of at least a majority of the
shares of Company Preferred Stock then outstanding, at which time the term of
any directors elected pursuant to the provisions of this paragraph (subject to
the right of holders of any other Preferred Stock to elect such directors) shall
terminate. Each such event described in clauses (i) through (vi) above is
referred to herein as a "Voting Rights Triggering Event."
The Company Exchange Certificate of Determination will also provide that
the Company will not authorize any class of Senior Stock or Parity Stock without
the affirmative vote or consent of holders of at least 66 2/3% of the shares of
Company Preferred Stock then outstanding, voting or consenting, as the case may
be, as one class. In addition, the Company Exchange Certificate of Determination
will provide that the Company may not authorize the issuance of any additional
shares of Company Preferred Stock (other than additional shares of Company
Preferred Stock to be issued as dividends on outstanding shares of Company
Preferred Stock) without the affirmative vote or consent of the holders of at
least a majority of the then outstanding shares of Company Preferred Stock,
voting or consenting, as the case may be, as one class. The Company Exchange
Certificate of Determination will also provide that, except as set forth above,
(a) the creation, authorization or issuance of any shares of Junior Stock,
Parity Stock or Senior Stock, including the designation of a series thereof
within the existing class of Company Preferred Stock, or (b) the increase or
decrease in the amount of authorized Capital Stock of any class, including any
Company Preferred Stock, shall not require the consent of the holders of Company
Preferred Stock and shall not be deemed to affect adversely the rights,
preferences, privileges or voting rights of shares of Company Preferred
Stock.
Redemption at the Option of Holders Upon a Change of Control
Upon the occurrence of a Change of Control, each holder of Company
Preferred Stock shall have the right to require the Company to redemption all or
any part of such holder's Company Preferred Stock pursuant to the offer
described below (the "Change of Control Offer") at a redemption price (the
"Change of Control Redemption Price") equal to 101% of the Liquidation
Preference thereof, plus accrued and unpaid dividends thereon, if any, to the
redemption date (including an amount in cash equal to a pro rated dividend for
any partial dividend period). The Certificate of Determination does not provide
for waiver of the covenant relating to the holder's right to require redemption
of the Company Preferred Stock upon the occurrence of a Change of Control.
Within 30 days following any Change of Control, the Company shall (a) cause
a notice of the Change of Control Offer to be sent at least once to the Dow
Jones News Service or similar business news service in the United States and (b)
send, by first-class mail, with a copy to the transfer agent, to each holder of
Company Preferred Stock, at such holder's address appearing in the Security
Register, a notice stating: (i) that a Change of Control has occurred and a
Change of Control Offer is being made pursuant to the covenant entitled
"Redemption at the Option of Holders Upon a Change of Control" and that all
Company Preferred Stock timely tendered will be accepted for payment; (ii) the
Change of Control Redemption Price and the redemption date, which shall be,
subject to any contrary requirements of applicable law, a business day no
earlier than 30 days nor later than 60 days from the date
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such notice is mailed; (iii) the circumstances and relevant facts regarding the
Change of Control (including information with respect to pro forma historical
income, cash flow and capitalization after giving effect to the Change of
Control); and (iv) the procedures that holders of Company Preferred Stock must
follow in order to tender their Company Preferred Stock (or portions thereof)
for payment, and the procedures that holders of Company Preferred Stock must
follow in order to withdraw an election to tender Company Preferred Stock (or
portions thereof) for payment.
The Company will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the redemption of Company Preferred Stock pursuant to a
Change of Control Offer. To the extent that the provisions of any securities
laws or regulations conflict with the provisions of the covenant described
hereunder, the Company will comply with the applicable securities laws and
regulations and will not be deemed to have breached its obligations under the
covenant described hereunder by virtue of such compliance.
The Change of Control redemption feature is a result of negotiations
between the Company and the Initial Purchasers. The Company has no present
intention to engage in a transaction involving a Change of Control, although it
is possible that the Company would decide to do so in the future. Subject to
certain covenants described below, the Company could, in the future, enter into
certain transactions, including acquisitions, refinancings or other
recapitalizations, that would not constitute a Change of Control under the
Company Exchange Certificate of Determination, but that could increase the
amount of debt outstanding at such time or otherwise affect the Company's
capital structure or credit ratings.
The definition of Change of Control includes a phrase relating to the sale,
transfer, assignment, lease, conveyance or other disposition of "all or
substantially all" of the Company's assets. Although there is a developing body
of case law interpreting the phrase "substantially all," there is no precise
established definition of the phrase under applicable law. Accordingly, the
ability of a holder of Company Preferred Stock to require the Company to redeem
such Company Preferred Stock as a result of a sale, transfer, assignment, lease,
conveyance or other disposition of less than all the assets of the Company may
be uncertain.
The New Credit Facility currently prohibits the Company from purchasing or
redeeming any Company Preferred Stock and also provides that the occurrence of
certain of the events that would constitute a Change of Control would constitute
a default under such existing debt. The Subordinated Notes also limit the
Company's ability to redeem the Company Preferred Stock. Other future debt of
the Company may contain prohibitions of certain events which would constitute a
Change of Control or require such debt to be repurchased upon a Change of
Control. Moreover, the exercise by holders of Company Preferred Stock of their
right to require the Company to redeem such Company Preferred Stock could cause
a default under existing or future debt of the Company, even if the Change of
Control itself does not, due to the financial effect of such redemption on the
Company. Finally, the Company's ability to pay cash to holders of Company
Preferred Stock upon a redemption may be limited by the Company's then existing
financial resources. There can be no assurance that sufficient funds will be
available when necessary to make any required redemptions. The Company's
failure to purchase Company Preferred Stock in connection with a Change of
Control would result in a breach of the Certificate of Designation which would,
in turn, constitute a default under the New Credit Facility and may constitute a
default under future debt of the Company and could lead to the acceleration of
the indebtedness thereunder. In any such event, the subordination of the
Company Preferred Stock and the security granted in respect of the New Credit
Facility would likely result in the Holders of the Company Preferred Stock
receiving less ratably than creditors of the Company.
In addition, the terms of the Subordinated Notes include provisions similar
to those contained in the Company Exchange Certificate of Determination enabling
holders thereof to require the Company to redeem all or any part of such
securities under circumstances constituting a Change of Control. However, the
Company may not have sufficient resources to redeem tendered shares of Company
Preferred Stock and/or Subordinated Notes and any such failure may constitute a
default under the terms of the New Credit Facility, the Subordinated Notes, and
the Certificate of Designation. Again, in any such event, the subordination of
the Company Preferred Stock and the security granted in respect of the New
Credit Facility would likely result in the Holders of the Company Preferred
Stock receiving less ratably than creditors of the Company.
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Certain Covenants
The Company Exchange Certificate of Determination contains covenants
including, among others, the following:
Limitation on Restricted Subsidiary Debt. The Company shall not, and shall
not permit any Restricted Subsidiary to, Incur, directly or indirectly, any Debt
unless, after giving pro forma effect to the application of the proceeds
thereof, no Voting Rights Triggering Event would occur as a consequence of such
Incurrence or be continuing following such Incurrence and either (a) after
giving effect to the Incurrence of such Debt and the application of the proceeds
thereof, the Consolidated Interest Coverage Ratio would be greater than 1.75 to
1.00 if such Debt is Incurred from the Issue Date through April 15, 2000, and
2.00 to 1.00 if such Debt is Incurred thereafter or (b) such Debt is Permitted
Debt.
The term "Permitted Debt" is defined to include the following:
(a) Debt of the Company evidenced by the Subordinated Notes and of
Subsidiary Guarantors evidenced by Subsidiary Guaranties;
(b) (i) Debt under the Credit Facility; provided that the aggregate
principal amount of all such Debt under the Credit Facility comprised of (A)
term loans at any one time outstanding shall not exceed $40.0 million minus all
principal amounts repaid in respect of such term loans and (B) revolving credit
loans and obligations at any one time outstanding shall not exceed the greater
of (x) $60.0 million and (y) the sum of the amounts equal to (1) 60% of the net
book value of the inventory of the Company and the Restricted Subsidiaries and
(2) 85% of the net book value of the accounts receivable of the Company and the
Restricted Subsidiaries, in each case as of the most recent fiscal quarter
ending at least 45 days prior to the date of determination and (ii) Guarantees
of Debt under the Credit Facility;
(c) Debt in respect of Capital Lease Obligations and Purchase Money Debt;
provided that (i) the aggregate principal amount of such Debt does not exceed
the Fair Market Value (on the date of the Incurrence thereof) of the Property
acquired, constructed or leased (including costs of installation, taxes and
delivery charges with respect to such acquisition, construction or lease) and
(ii) the aggregate principal amount of all Debt Incurred and then outstanding
pursuant to this clause (c) (together with all Permitted Refinancing Debt
Incurred in respect of Debt previously Incurred pursuant to this clause (c) and
then outstanding) does not exceed $15.0 million;
(d) Debt of the Company owing to and held by any Wholly Owned Subsidiary
and Debt of a Wholly Owned Subsidiary owing to and held by the Company or any
Wholly Owned Subsidiary; provided, however, that any subsequent issue or
transfer of Capital Stock or other event that results in any such Wholly Owned
Subsidiary ceasing to be a Wholly Owned Subsidiary or any subsequent transfer of
any such Debt (except to the Company or a Wholly Owned Subsidiary) shall be
deemed, in each case, to constitute the Incurrence of such Debt by the issuer
thereof;
(e) Debt of a Wholly Owned Subsidiary Incurred and outstanding on or prior
to the date on which such Wholly Owned Restricted Subsidiary was acquired by the
Company or otherwise became a Restricted Subsidiary (other than Debt Incurred as
consideration in, or to provide all or any portion of the funds or credit
support utilized to consummate, the transaction or series of transactions
pursuant to which such Wholly Owned Restricted Subsidiary became a Subsidiary of
the Company or was otherwise acquired by the Company); provided that at the time
such Wholly Owned Restricted Subsidiary was acquired by the Company or otherwise
became a Restricted Subsidiary and after giving pro forma effect to the
Incurrence of such Debt, the Company would have been able to Incur $1.00 of
additional Debt pursuant to clause (a) in the first paragraph of this covenant;
(f) Debt under Interest Rate Agreements entered into by the Company or a
Restricted Subsidiary for the purpose of limiting interest rate risk in the
ordinary course of the financial management of the Company or such Restricted
Subsidiary and not for speculative purposes, provided that the obligations under
such agreements are directly related to payment obligations on Debt otherwise
permitted by the terms of this covenant;
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(g) Debt under Currency Exchange Protection Agreements entered into by the
Company or a Restricted Subsidiary for the purpose of limiting currency exchange
rate risks directly related to transactions entered into by the Company or such
Restricted Subsidiary in the ordinary course of business and not for speculative
purposes;
(h) Debt in connection with one or more standby letters of credit or
performance bonds issued for the account of the Company or any Restricted
Subsidiary in the ordinary course of business or pursuant to self-insurance
obligations and not in connection with the borrowing of money or the obtaining
of advances;
(i) Debt outstanding on the Issue Date not otherwise described in clauses
(a) through (h) above;
(j) Debt not otherwise described in clauses (a) through (i) above in an
aggregate principal amount outstanding at any one time not to exceed $15.0
million and clause (l) below;
(k) Permitted Refinancing Debt Incurred in respect of Debt Incurred
pursuant to clause (a) of the first paragraph of this covenant and clauses (a),
(c), (e) and (i) above, subject, in the case of clause (c) above, to the
limitations set forth in the proviso thereto; and
(l) Debt of the Company under the Company Exchange Debentures.
Limitation on Restricted Payments. The Company shall not make, and shall
not permit any Restricted Subsidiary to make, directly or indirectly, any
Restricted Payment if at the time of, and after giving pro forma effect to, such
proposed Restricted Payment,
(a) a Voting Rights Triggering Event shall have occurred and be continuing,
(b) the Company could not Incur at least $1.00 of additional Debt pursuant
to clause (a) of the first paragraph of the covenant described under "--
Limitation on Restricted Subsidiary Debt" or
(c) the aggregate amount of such Restricted Payment and all other
Restricted Payments declared or made since the Issue Date (the amount of any
Restricted Payment, if made other than in cash, to be based upon Fair Market
Value) would exceed an amount equal to the sum of:
(i) 50% of the aggregate amount of Consolidated Net Income accrued during
the period (treated as one accounting period) from the beginning of the fiscal
quarter during which the Issue Date occurs to the end of the most recent fiscal
quarter ending at least 45 days prior to the date of such Restricted Payment (or
if the aggregate amount of Consolidated Net Income for such period shall be a
deficit, minus 100% of such deficit),
(ii) the aggregate cash proceeds received by the Company from the issuance
or sale (other than to a Subsidiary of the Company or an employee stock
ownership plan or trust established by the Company or any of its Subsidiaries
for the benefit of their employees) by the Company of any class of its Parity
Stock and Junior Stock (other than Disqualified Stock) after the Issue Date, net
of attorneys' fees, accountants' fees, underwriters' or placement agents' fees,
discounts or commissions and brokerage, consultant and other fees actually
incurred in connection with such issuance or sale and net of taxes paid or
payable as a result thereof,
(iii) the amount by which Debt of the Company Incurred after the Issue Date
is reduced on the Company's balance sheet upon the conversion or exchange (other
than by the Company or a Subsidiary of the Company) subsequent to the Issue Date
of any Debt for Parity Stock or Junior Stock (other than Disqualified Stock) of
the Company (less the amount of any cash or other Property distributed by the
Company or any Restricted Subsidiary upon such conversion or exchange), and
(iv) an amount equal to the sum of (A) the net reduction in Investments in
any Person other than the Company or a Restricted Subsidiary resulting from
dividends, repayments of loans or advances or other transfers of Property, in
each case to the Company or any Restricted Subsidiary from such Person, to the
extent such dividends, repayments or transfers do not increase the amount of
Permitted Investments permitted to be made pursuant to clause (i) of the
definition thereof and (B) the portion (proportionate to the Company's equity
interest
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in such Unrestricted Subsidiary) of the Fair Market Value of the net assets of
an Unrestricted Subsidiary at the time such Unrestricted Subsidiary is
designated a Restricted Subsidiary; provided, however, that the foregoing sum
shall not exceed, in the case of any Person, the amount of Investments
previously made (and treated as a Restricted Payment) by the Company or any
Restricted Subsidiary in such Person, and
(v) $7.5 million.
Notwithstanding the foregoing limitation, the Company may:
(a) pay dividends on its Capital Stock within 60 days of the declaration
thereof if, on said declaration date, such dividends could have been paid in
compliance with this covenant; provided, however, that at the time of such
payment of such dividend, no other Voting Rights Triggering Event shall have
occurred and be continuing (or result therefrom); provided further, however,
that such dividend shall be included in the calculation of the amount of
Restricted Payments;
(b) purchase, repurchase, redeem, legally defease, acquire or retire for
value Capital Stock of the Company in exchange for, or in an amount not in
excess of the proceeds of the substantially concurrent sale of, Parity Stock or
Junior Stock of the Company (other than Disqualified Stock and other than
Capital Stock issued or sold to a Subsidiary of the Company or an employee stock
ownership plan or trust established by the Company or any of its Subsidiaries
for the benefit of their employees); provided, however, that (i) such purchase,
repurchase, redemption, legal defeasance, acquisition or retirement shall be
excluded in the calculation of the amount of Restricted Payments and (ii) the
Capital Stock Sale Proceeds from such exchange or sale shall be excluded from
the calculation pursuant to clause (c)(ii) above;
(c) purchase, repurchase, redeem, legally defease, acquire or retire for
value shares of, or options to purchase shares of, common stock of the Company
from employees or former employees of the Company, Holding or any of their
Subsidiaries (or their estates or beneficiaries thereof) upon death, disability,
retirement or termination pursuant to the terms of the agreements (including
employment agreements) or plans (or amendments thereto) approved by the Board of
Directors under which such individuals purchase or sell, or are granted the
option to purchase or sell, shares of such common stock (or pay dividends or
make loans to Holding for such purpose); provided, however, that (i) the
aggregate amount of such purchases, repurchases, redemptions, defeasances,
acquisitions or retirements shall not exceed $1.0 million in any year or $5.0
million during the term of the Company Preferred Stock, except that (x) such
amounts shall be increased by the aggregate net amount of cash received by the
Company after the Issue Date from the sale of such shares to, or the exercise of
options to purchase such shares by, employees of Holding, the Company or any of
their Subsidiaries and (y) the Company may forgive or return Employee Notes
without regard to the limitation set forth in clause (d)(i) above and such
forgiveness or return shall not be treated as a Restricted Payment for purpose
of determining compliance with such clause (d)(i) and (ii) such purchases,
repurchases, defeasances, acquisitions or retirements (but not forgiveness or
return of Employee Notes) shall be included in the calculation of the amount of
Restricted Payments; and
(d) make payments to Helen Hudson Lovaas pursuant to the Merger Agreement
in an aggregate amount not to exceed $1.1 million in any fiscal year or $3.3
million during the term of the Company Preferred Stock (plus, in each case,
interest due on the unpaid portion of such required payments in accordance with
the Merger Agreement); provided, however, that such payments shall be excluded
in the calculation of the amount of Restricted Payments.
Limitation on Issuance or Sale of Capital Stock of Restricted Subsidiaries.
The Company shall not (a) sell, pledge, hypothecate or otherwise dispose of any
shares of Capital Stock of a Restricted Subsidiary or (b) permit any Restricted
Subsidiary to, directly or indirectly, issue or sell or otherwise dispose of any
shares of its Capital Stock, other than (i) directors' qualifying shares, (ii)
to the Company or a Wholly Owned Subsidiary or (iii) the disposition of 100% of
the Capital Stock of a Restricted Subsidiary; provided that (x) the Company
receives consideration at the time of such disposition at least equal to the
Fair Market Value of such Restricted Subsidiary, (y) at least 75% of the
consideration paid to the Company in connection with such disposition is in the
form of cash or cash equivalents or the assumption by the purchaser of
liabilities of the Company or any Restricted Subsidiary (other than liabilities
that are by their terms subordinated to the Company Preferred Stock) as a result
of which the Company
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and the Restricted Subsidiaries are no longer obligated with respect to such
liabilities, and (z) the Net Available Cash received by the Company from such
disposition is applied within twelve months from the date of the receipt of such
Net Available Cash to prepay, repay, legally defease or purchase Debt of the
Company or any Restricted Subsidiary (excluding, in any such case, Disqualified
Stock and Debt owed to the Company or an Affiliate of the Company) or to
reinvest in Additional Assets (including by means of an Investment in Additional
Assets by the Company or a Restricted Subsidiary with Net Available Cash
received by the Company).
Limitation on Restrictions on Distributions from Restricted Subsidiaries.
The Company shall not, and shall not permit any Restricted Subsidiary to,
directly or indirectly, create or otherwise cause or suffer to exist any
consensual restriction on the right 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, or pay any Debt or other obligation owed, to the
Company or any other Restricted Subsidiary (except, with respect to restrictions
on dividends of non-cash Property, as permitted pursuant to clause (ii) of the
next sentence), (b) make any loans or advances to the Company or any other
Restricted Subsidiary or (c) transfer any of its Property to the Company or any
other Restricted Subsidiary. The foregoing limitations will not apply (i) with
respect to clauses (a), (b) and (c), to restrictions (A) in effect on the Issue
Date, (B) relating to Debt of a Restricted Subsidiary and existing at the time
it became a Restricted Subsidiary if such restriction was not created in
connection with or in anticipation of the transaction or series of transactions
pursuant to which such Restricted Subsidiary became a Restricted Subsidiary or
was acquired by the Company or (C) which result from the Refinancing of Debt
Incurred pursuant to an agreement referred to in clause (i)(A) or (B) above or
in clause (ii)(A) or (B) below, provided such restriction is no less favorable
to the holders of the Company Preferred Stock than those under the agreement
evidencing the Debt so Refinanced, and (ii) with respect to clause (c) only, to
restrictions (A) encumbering Property at the time such Property was acquired by
the Company or any Restricted Subsidiary, so long as such restriction relates
solely to the Property so acquired and was not created in connection with or in
anticipation of such acquisition, (B) resulting from customary provisions
restricting subletting or assignment of leases or customary provisions in other
agreements that restrict assignment of such agreements or rights thereunder or
(C) customary restrictions contained in asset sale agreements limiting the
transfer of such Property pending the closing of such sale.
Limitation on Transactions with Affiliates. The Company shall not, and
shall not permit any Restricted Subsidiary to, directly or indirectly, conduct
any business or enter into or suffer to exist any transaction or series of
transactions (including the purchase, sale, transfer, assignment, lease,
conveyance or exchange of any Property or the rendering of any service) with, or
for the benefit of, any Affiliate of the Company (an "Affiliate Transaction"),
unless (a) the terms of such Affiliate Transaction are (i) set forth in writing,
(ii) in the interest of the Company or such Restricted Subsidiary, as the case
may be, and (iii) no less favorable to the Company or such Restricted
Subsidiary, as the case may be, than those that could be obtained in a
comparable arm's-length transaction with a Person that is not an Affiliate of
the Company, (b) if such Affiliate Transaction involves aggregate payments or
value in excess of $2.5 million, the Board of Directors (including a majority of
the disinterested members of the Board of Directors) approves such Affiliate
Transaction and, in its good faith judgment, believes that such Affiliate
Transaction complies with clauses (a) (ii) and (iii) of this paragraph as
evidenced by a Board Resolution promptly delivered to the Trustee and (c) if
such Affiliate Transaction involves aggregate payments or value in excess of
$5.0 million, the Company obtains a written opinion from an Independent
Appraiser to the effect that the consideration to be paid or received in
connection with such Affiliate Transaction is fair, from a financial point of
view, to the Company or such Restricted Subsidiary, as the case may be.
Notwithstanding the foregoing limitation, the Company or any Restricted
Subsidiary may enter into or suffer to exist the following:
(i) any transaction or series of transactions between the Company and one
or more Restricted Subsidiaries or between two or more Restricted Subsidiaries
in the ordinary course of business; provided that no more than 5% of the total
voting power of the Voting Stock (on a fully diluted basis) of any such
Restricted Subsidiary is owned by an Affiliate of the Company (other than a
Restricted Subsidiary);
(ii) any Restricted Payment permitted to be made pursuant to the covenant
described under "--Limitation on Restricted Payments";
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(iii) the payment of compensation (including amounts paid pursuant to
employee benefit plans) for the personal services of officers, directors and
employees of the Company or any of the Restricted Subsidiaries, so long as the
Board of Directors in good faith shall have approved the terms thereof and
deemed the services theretofore or thereafter to be performed for such
compensation to be fair consideration therefor;
(iv) loans and advances to employees made in the ordinary course of
business and consistent with the past practices of the Company or such
Restricted Subsidiary, as the case may be; provided that such loans and advances
do not exceed $1.0 million in the aggregate at any one time outstanding;
(v) the payment of fees and expenses in connection with the
Recapitalization pursuant to written agreements in effect on the Issue Date;
(vi) the sale of common stock of the Company for cash; provided, that the
Company may receive Employee Subordinated Notes in an aggregate principal amount
not in excess of $1.0 million at any one time outstanding;
(vii) the payment of dividends in kind in respect of (i) the Mirror
Preferred Stock or (ii) any other Preferred Stock issued in compliance with this
covenant; and
(viii) a proportionate split of, or a common stock dividend payable on, the
common stock of the Company.
Designation of Restricted and Unrestricted Subsidiaries. The Board of
Directors may designate any Subsidiary of the Company (other than Industrias
Hudson) to be an Unrestricted Subsidiary if (a) the Subsidiary to be so
designated does not own any Capital Stock or Debt of, or own or hold any Lien on
any Property of, the Company or any other Restricted Subsidiary, (b) the
Subsidiary to be so designated is not obligated under any Debt, Lien or other
obligation that, if in default, would result (with the passage of time or notice
or otherwise) in a default on any Debt of the Company or of any Restricted
Subsidiary and (c) either (i) the Subsidiary to be so designated has total
assets of $1,000 or less or (ii) such designation is effective immediately upon
such entity becoming a Subsidiary of the Company. Unless so designated as an
Unrestricted Subsidiary, any Person that becomes a Subsidiary of the Company
will be classified as a Restricted Subsidiary; provided, however, that such
Subsidiary shall not be designated a Restricted Subsidiary and shall be
automatically classified as an Unrestricted Subsidiary if either of the
requirements set forth in clauses (x) and (y) of the immediately following
paragraph will not be satisfied after giving pro forma effect to such
classification. Except as provided in the first sentence of this paragraph, no
Restricted Subsidiary may be redesignated as an Unrestricted Subsidiary.
The Board of Directors may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary if, immediately after giving pro forma effect to such
designation, (x) the Company could Incur at least $1.00 of additional Debt
pursuant to clause (a) of the first paragraph of the covenant described under
"--Limitation on Restricted Subsidiary Debt" and (y) no Voting Rights Triggering
Event shall have occurred and be continuing or would result therefrom.
Any such designation or redesignation by the Board of Directors will be
evidenced to the Trustee by filing with the Transfer Agent a Board Resolution
giving effect to such designation or redesignation and an Officers' Certificate
(a) certifying that such designation or redesignation complies with the
foregoing provisions and (b) giving the effective date of such designation or
redesignation, such filing with the Transfer Agent to occur within 45 days after
the end of the fiscal quarter of the Company in which such designation or
redesignation is made (or, in the case of a designation or redesignation made
during the last fiscal quarter of the Company's fiscal year, within 90 days
after the end of such fiscal year).
Merger, Consolidation and Sale of Property
The Company shall not merge, consolidate or amalgamate with or into any
other Person (other than a merger of a Wholly Owned Subsidiary into the Company)
or sell, transfer, assign, lease, convey or otherwise dispose of all or
substantially all its Property in any one transaction or series of transactions
unless: (a) the Company shall be the surviving Person (the "Surviving Person")
or the Surviving Person (if other than the Company) formed
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by such merger, consolidation or amalgamation or to which such sale, transfer,
assignment, lease, conveyance or disposition is made shall be a corporation
organized and existing under the laws of the United States of America, any State
thereof or the District of Columbia; (b) the Surviving Person (if other than the
Company) expressly assumes all obligations of the Company under the Company
Preferred Stock and the Company Exchange Certificate of Determination; (c) in
the case of a sale, transfer, assignment, lease, conveyance or other disposition
of all or substantially all the Property of the Company, such Property shall
have been transferred as an entirety or virtually as an entirety to one Person;
(d) immediately before and after giving effect to such transaction or series of
transactions on a pro forma basis (and treating, for purposes of this clause (d)
and clauses (e) and (f) below, any Debt which becomes, or is anticipated to
become, an obligation of the Surviving Person or any Restricted Subsidiary as a
result of such transaction or series of transactions as having been Incurred by
the Surviving Person or such Restricted Subsidiary at the time of such
transaction or series of transactions), no Voting Rights Triggering Event shall
have occurred and be continuing; (e) immediately after giving effect to such
transaction or series of transactions on a pro forma basis, the Company or the
Surviving Person, as the case may be, would be able to Incur at least $1.00 of
additional Debt under clause (a) of the first paragraph of the covenant
described under "--Certain Covenants--Limitation on Restricted Subsidiary Debt";
provided, however, that this clause (e) shall not apply to a merger between the
Company and a Wholly Owned Subsidiary of Holding or the Company incorporated in
another state of the United States solely for the purpose of reincorporating the
Company so long as the total amount of Debt of the Company and its
Restricted Subsidiaries is not increased as a result thereof; and (f) the
Company shall deliver, or cause to be delivered, to the Transfer Agent, in form
and substance reasonably satisfactory to the Transfer Agent, an Officers'
Certificate and an Opinion of Counsel, each stating that such transaction and
the supplemental indenture, if any, in respect thereto comply with this covenant
and that all conditions precedent herein provided for relating to such
transaction have been satisfied.
Book-Entry System
The Company Preferred Stock may be issued in the form of one or more global
securities (collectively, a "Global Security"). A Global Security will be
deposited with, or on behalf of, the DTC and registered in the name of the DTC
or its nominee. Except as set forth below, a Global Security may be
transferred, in whole and not in part, only to the DTC or another nominee of the
DTC. Investors may hold their beneficial interests in a Global Security
directly through the DTC if they have an account with the DTC or indirectly
through organizations which have accounts with the DTC.
Depository Procedures. Upon the issuance of a Global Security, DTC or its
nominee will credit the accounts of Persons holding through it with the
respective number of shares of the Company Preferred Stock represented by such
Global Security purchased by such Persons in the Offering. Such accounts shall
be designated by the Initial Purchasers. Ownership of beneficial interests in a
Global Security will be limited to Persons that have accounts with DTC
("participants") or Persons that may hold interests through participants. Any
Person acquiring an interest in a Global Security through an offshore
transaction in reliance on Regulation S of the Securities Act may hold such
interest through Cedel or Euroclear. Ownership of beneficial interests in a
Global Security will be shown on, and the transfer of that ownership interest
will be effected only through, records maintained by DTC (with respect to
participants' interests) and such participants (with respect to the owners of
beneficial interests in such Global Security other than participants). The laws
of some jurisdictions require that certain purchasers of securities take
physical delivery of such securities in definitive form. Such limits and such
laws may impair the ability to transfer beneficial interests in a Global
Security.
Payment of dividends on Company Preferred Stock represented by a Global
Security will be made in immediately available funds to DTC or its nominee, as
the case may be, as the sole registered owner and the sole holder of the Company
Preferred Stock represented thereby for all purposes under the Certificate of
Determination. The Company has been advised by DTC that upon receipt of any
payment of principal of or interest on any Global Security, DTC will immediately
credit, on its book-entry registration and transfer system, the accounts of
participants with payments in amounts proportionate to their respective
beneficial interests in the face amount of such Global Security as shown on the
records of DTC. Payments by participants to owners of beneficial interests in a
Global Security held through such participants will be governed by standing
instructions and customary practices as is now the case with securities held for
customer accounts registered in "street name" and will be the sole
responsibility of such participants.
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A Global Security may not be transferred except as a whole by DTC or a
nominee of DTC to a nominee of DTC or to DTC. A Global Security is exchangeable
for certificated Company Preferred Stock only if (a) DTC notifies the Company
that it is unwilling or unable to continue as a depositary for such Global
Security or if at any time DTC ceases to be a clearing agency registered under
the Exchange Act, (b) the Company in its discretion at any time determines not
to have all the Company Preferred Stock represented by such Global Security or
(c) there shall have occurred and be continuing a Default or an Event of Default
with respect to the Company Preferred Stock represented by such Global Security.
Any Global Security that is exchangeable for certificated Company Preferred
Stock pursuant to the preceding sentence will be exchanged for certificated
Company Preferred Stock in authorized denominations and registered in such names
as DTC or any successor depositary holding such Global Security may direct.
Subject to the foregoing, a Global Security is not exchangeable, except for a
Global Security of like denomination to be registered in the name of DTC or any
successor depositary or its nominee. In the event that a Global Security becomes
exchangeable for certificated Company Preferred Stock, (a) certificated Company
Preferred Stock will be issued only in fully registered form, (b) payment of
dividends on the certificated Company Preferred Stock will be payable, and the
transfer of the certificated Company Preferred Stock will be registerable, at
the office or agency of the Company maintained for such purposes and (c) no
service charge will be made for any registration of transfer or exchange of the
certificated Company Preferred Stock, although the Company may require payment
of a sum sufficient to cover any tax or governmental charge imposed in
connection therewith.
So long as DTC or any successor depositary for a Global Security, or any
nominee, is the registered owner of such Global Security, DTC or such successor
depositary or nominee, as the case may be, will be considered the sole owner or
holder of the Company Preferred Stock represented by such Global Security for
all purposes under the Indenture and the Company Preferred Stock. Except as set
forth above, owners of beneficial interests in a Global Security will not be
entitled to have the Company Preferred Stock represented by such Global Security
registered in their names, will not receive or be entitled to receive physical
delivery of certificated Company Preferred Stock in definitive form and will not
be considered to be the owners or holders of any Company Preferred Stock under
such Global Security. Accordingly, each Person owning a beneficial interest in a
Global Security must rely on the procedures of DTC or any successor depositary,
and, if such Person is not a participant, on the procedures of the participant
through which such Person owns its interest, to exercise any rights of a holder
under the Certificate of Determination. The Company understands that under
existing industry practices, in the event that the Company requests any action
of holders or that an owner of a beneficial interest in a Global Security
desires to give or take any action which a holder is entitled to give or take
under the Certificate of Determination, DTC or any successor depositary would
authorize the participants holding the relevant beneficial interest to give or
take such action and such participants would authorize beneficial owners owning
through such participants to give or take such action or would otherwise act
upon the instructions of beneficial owners owning through them.
DTC has advised the Company that DTC is a limited-purpose trust company
organized under the Banking Law of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the New
York Uniform Commercial Code and a "clearing agency" registered under the
Exchange Act. DTC was created to hold the securities of its participants and to
facilitate the clearance and settlement of securities transactions among its
participants in such securities through electronic book-entry changes in
accounts of the participants, thereby eliminating the need for physical movement
of securities certificates. DTC's participants include securities brokers and
dealers (which may include the Initial Purchasers), banks, trust companies,
clearing corporations and certain other organizations some of whom (or their
representatives) own DTC. Access to DTC's book-entry system is also available to
others, such as banks, brokers, dealers and trust companies, that clear through
or maintain a custodial relationship with a participant, either directly or
indirectly.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in Global Securities among participants of DTC, it is
under no obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. None of the Company, the Trustee or
the Initial Purchasers will have any responsibility for the performance by DTC
or its participants or indirect participants of their respective obligations
under the rules and procedures governing their operations.
Certain Definitions
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Set forth below is a summary of certain of the defined terms used in the
Exchange Indenture. Reference is made to the Exchange Indenture
for the full definition of all such terms as well as any other capitalized terms
used herein for which no definition is provided.
"Additional Assets" means (a) any Property (other than cash, cash
equivalents and securities) to be owned by the Company or any Restricted
Subsidiary and used in a Related Business; or (b) Capital Stock of a Person that
becomes a Restricted Subsidiary as a result of the acquisition of such Capital
Stock by the Company or another Restricted Subsidiary from any Person other than
an Affiliate of the Company; provided, however, that, in the case of clause (b),
such Restricted Subsidiary is primarily engaged in a Related Business.
"Affiliate" of any specified Person means (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 who is a director or
officer of (i) such specified Person, (ii) any Subsidiary of such specified
Person or (iii) any Person described in clause (a) above. For the purposes of
this definition, "control" when used with respect to any 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. For purposes of the covenant described under "--Certain Covenants--
Limitation on Transactions with Affiliates", "--Limitation on Asset Sales" and
the definition of "Additional Assets" only, "Affiliate" shall also mean any
beneficial owner of shares representing 5% or more of the total voting power of
the Voting Stock (on a fully diluted basis) of the Company or of rights or
warrants to purchase such Voting Stock (whether or not currently exercisable)
and any Person who would be an Affiliate of any such beneficial owner pursuant
to the first sentence hereof.
"Asset Sale" means any sale, lease, transfer, issuance or other disposition
(or series of related sales, leases, transfers, issuances or dispositions) by
the Company or any Restricted Subsidiary, including any disposition by means of
a merger, consolidation or similar transaction (each referred to for the
purposes of this definition as a "disposition"), of (a) any shares of Capital
Stock of a Restricted Subsidiary (other than directors' qualifying shares) or
(b) any other assets of the Company or any Restricted Subsidiary outside of the
ordinary course of business of the Company or such Restricted Subsidiary (other
than, in the case of clauses (a) and (b) above, (i) any disposition by a
Restricted Subsidiary to the Company or by the Company or a Restricted
Subsidiary to a Wholly Owned Subsidiary, (ii) for purposes of the covenant
described under "--Certain Covenants--Limitation on Asset Sales" only, any
disposition that constitutes a Permitted Investment or Restricted Payment
permitted by the covenant described under "--Certain Covenants--Limitation on
Restricted Payments", (iii) any disposition effected in compliance with the
first paragraph of the covenant described under "--Merger, Consolidation and
Sale of Property")), (iv) any Sale and Leaseback Transaction completed within
180 days following the original acquisition of the subject assets where such
Sale and Leaseback Transaction represents the intended financing of Property
acquired after the Issue Date and (v) any disposition or series of related
dispositions of assets having a Fair Market Value and sale price of less than
$500,000.
"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 remaining term
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).
"Average Life" means, as of any date of determination, with respect to any
Debt or Preferred Stock, the quotient obtained by dividing (a) the sum of the
product of the numbers of years (rounded to the nearest one-twelfth of one year)
from the date of determination to the dates of each successive scheduled
principal payment of such Debt or redemption or similar payment with respect to
such Preferred Stock multiplied by the amount of such payment by (b) the sum of
all such payments.
"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board.
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"Capital Lease Obligations" means any obligation under a lease that is
required to be capitalized for financial reporting purposes in accordance with
GAAP; and the amount of Debt represented by such obligation shall be the
capitalized amount of such obligations determined in accordance with GAAP; and
the Stated Maturity thereof shall be the date of the last payment of rent or any
other amount due under such lease prior to the first date upon which such lease
may be terminated by the lessee without payment of a penalty. For purposes of
"--Certain Covenants--Limitation on Liens", a Capital Lease Obligation shall be
deemed secured by a Lien on the Property being leased.
"Capital Stock" means, with respect to any Person, any shares or other
equivalents (however designated) of corporate stock, partnership interests or
any other participations, rights, warrants, options or other interests in the
nature of an equity interest in such Person, including Preferred Stock, but
excluding any debt security convertible or exchangeable into such equity
interest.
"Capital Stock Sale Proceeds" means the aggregate cash proceeds received by
the Company from the issuance or sale (other than to a Subsidiary of the Company
or an employee stock ownership plan or trust established by the Company or any
of its Subsidiaries for the benefit of their employees) by the Company of any
class of its Capital Stock (other than Disqualified Stock) after the Issue Date,
net of attorneys' fees, accountants' fees, underwriters' or placement agents'
fees, discounts or commissions and brokerage, consultant and other fees actually
incurred in connection with such issuance or sale and net of taxes paid or
payable as a result thereof.
"Change of Control" means the occurrence of any of the following events:
(a) prior to the first Public Equity Offering, the Permitted Holders cease
to be the "beneficial owners" (as defined in Rule 13d-3 under the Exchange Act,
except that a Person will be deemed to have "beneficial ownership" of all shares
that any such Person has the right to acquire, whether such right is exercisable
immediately or only after the passage of time), directly or indirectly, of a
majority of the voting power of the Voting Stock of the Company, whether as a
result of the issuance of securities of the Company, any merger, consolidation,
liquidation or dissolution of the Company, any direct or indirect transfer of
securities by the Permitted Holders or otherwise (for purposes of this clause
(a), the Permitted Holders will be deemed to beneficially own any Voting Stock
of a corporation (the "specified corporation") held by any other corporation
(the "parent corporation") so long as the Permitted Holders beneficially own,
directly or indirectly, in the aggregate a majority of the voting power of the
Voting Stock of such parent corporation); or
(b) after the first Public Equity Offering, any "Person" or "group" (as
such terms are used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act or any
successor provisions to either of the foregoing), including any group acting for
the purpose of acquiring, holding, voting or disposing of securities within the
meaning of Rule 13d-5(b)(1) under the Exchange Act, other than any one or more
of the Permitted Holders, becomes the "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act, except that a Person will be deemed to have
"beneficial ownership" of all shares that any such Person has the right to
acquire, whether such right is exercisable immediately or only after the passage
of time), directly or indirectly, of 35% or more of the voting power of the
Voting Stock of the Company; provided, however, that the Permitted Holders are
the "beneficial owners" (as defined in Rule 13d-3 under the Exchange Act, except
that a Person will be deemed to have "beneficial ownership" of all shares that
any such Person has the right to acquire, whether such right is exercisable
immediately or only after the passage of time), directly or indirectly, in the
aggregate of a lesser percentage of the total voting power of all classes of the
Voting Stock of the Company than such other Person or group (for purposes of
this clause (b), such Person or group shall be deemed to beneficially own any
Voting Stock of a specified corporation held by a parent corporation so long as
such Person or group beneficially owns, directly or indirectly, in the aggregate
a majority of the voting power of the Voting Stock of such parent corporation);
or
(c) the sale, transfer, assignment, lease, conveyance or other disposition,
directly or indirectly, of all or substantially all the assets of the Company
and the Restricted Subsidiaries, considered as a whole (other than a disposition
of such assets as an entirety or virtually as an entirety to a Wholly Owned
Subsidiary or one or more Permitted Holders) shall have occurred, or the Company
merges, consolidates or amalgamates with or into any other Person (other than
one or more Permitted Holders) or any other Person (other than one or more
Permitted Holders) merges, consolidates or amalgamates with or into the Company,
in any such event pursuant to a transaction in which
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the outstanding Voting Stock of the Company is reclassified into or exchanged
for cash, securities or other Property, other than any such transaction where
(i) the outstanding Voting Stock of the Company is reclassified into or
exchanged for Voting Stock of the surviving corporation and (ii) the holders of
the Voting Stock of the Company immediately prior to such transaction own,
directly or indirectly, not less than a majority of the Voting Stock of the
surviving corporation immediately after such transaction and in substantially
the same proportion as before the transaction; or
(d) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors (together with any
new directors whose election or appointment by such Board or whose nomination
for election by the shareholders of the Company was approved by a vote of 662/3%
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 members of the
Board of Directors then in office; or
(e) the shareholders of the Company shall have approved any plan of
liquidation or dissolution of the Company.
Approval by the Board of Directors will not prevent a transaction from
constituting a Change of Control if it otherwise falls within the definition
hereof.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Interest Coverage Ratio" means, as of any date of
determination, the ratio of (a) the aggregate amount of EBITDA for the most
recent four consecutive fiscal quarters ending at least 45 days prior to such
determination date to (b) Consolidated Interest Expense for such four fiscal
quarters; provided, however, that (i) if the Company or any Restricted
Subsidiary has Incurred any Debt since the beginning of such period that remains
outstanding or if the transaction giving rise to the need to calculate the
Consolidated Interest Coverage Ratio is an Incurrence of Debt, or both,
Consolidated Interest Expense for such period shall be calculated after giving
effect on a pro forma basis to such Debt as if such Debt had been Incurred on
the first day of such period and the discharge of any other Debt repaid,
repurchased, defeased or otherwise discharged with the proceeds of such new Debt
as if such discharge had occurred on the first day of such period, (ii) if since
the beginning of such period the Company or any Restricted Subsidiary shall have
repaid, repurchased, legally defeased or otherwise discharged any Debt with
Capital Stock Sale Proceeds, Consolidated Interest Expense for such period shall
be calculated after giving effect on a pro forma basis to such discharge as if
such discharge had occurred on the first day of such period, (iii) if since the
beginning of such period the Company or any Restricted Subsidiary shall have
made any Asset Sale or if the transaction giving rise to the need to calculate
the Consolidated Interest Coverage Ratio is an Asset Sale, or both, EBITDA for
such period shall be reduced by an amount equal to the EBITDA (if positive)
directly attributable to the Property which is the subject of such Asset Sale
for such period, or increased by an amount equal to the EBITDA (if negative)
directly attributable thereto for such period, in either case as if such Asset
Sale had occurred on the first day of such period and Consolidated Interest
Expense for such period shall be reduced by an amount equal to the Consolidated
Interest Expense directly attributable to any Debt of the Company or any
Restricted Subsidiary repaid, repurchased, defeased or otherwise discharged with
respect to the Company and its continuing Restricted Subsidiaries in connection
with such Asset Sale, as if such Asset Sale had occurred on the first day of
such period (or, if the Capital Stock of any Restricted Subsidiary is sold, by
an amount equal to the Consolidated Interest Expense for such period directly
attributable to the Debt of such Restricted Subsidiary to the extent the Company
and its continuing Restricted Subsidiaries are no longer liable for such Debt
after such sale), (iv) if since the beginning of such period the Company or any
Restricted Subsidiary (by merger or otherwise) shall have made an Investment in
any Restricted Subsidiary (or any Person which becomes a Restricted Subsidiary)
or an acquisition of Property, including any acquisition of Property occurring
in connection with a transaction causing a calculation to be made hereunder,
which constitutes all or substantially all of an operating unit of a business,
EBITDA and Consolidated Interest Expense for such period shall be calculated
after giving pro forma effect thereto (including the Incurrence of any Debt) as
if such Investment or acquisition occurred on the first day of such period and
(v) if since the beginning of such period any Person (that subsequently became a
Restricted Subsidiary or was merged with or into the Company or any Restricted
Subsidiary since the beginning of such period) shall have made any Asset Sale,
Investment or acquisition of Property that would have required an adjustment
pursuant to clause (iii) or (iv) above if made by the Company or a Restricted
Subsidiary during such period, EBITDA and Consolidated Interest Expense for such
period shall be calculated after giving pro forma effect thereto as if such
Asset Sale, Investment or acquisition occurred on the first day of such period.
For purposes of this definition, pro forma
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calculations shall be determined in good faith by a responsible financial or
accounting Officer of the Company and as further contemplated by the definition
of the term "pro forma". If any Debt bears a floating rate of interest and is
being given pro forma effect, the interest expense on such Debt shall 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 Interest Rate
Agreement applicable to such Debt if such Interest Rate Agreement has a
remaining term in excess of 12 months).
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its consolidated Restricted Subsidiaries, plus, to
the extent not included in such total interest expense, and to the extent
Incurred by the Company or its Restricted Subsidiaries, (a) interest expense
attributable to capital leases, (b) amortization of debt discount and debt
issuance cost, including commitment fees, other than with respect to Debt
Incurred in connection with the Recapitalization, (c) capitalized interest, (d)
non-cash interest expenses, (e) commissions, discounts and other fees and
charges owed with respect to letters of credit and bankers' acceptance
financing, (f) net costs associated with Hedging Obligations (including
amortization of fees), (g) Disqualified Dividends other than Disqualified
Dividends paid with shares of Capital Stock of the Company which is not
Disqualified Stock, (h) Preferred Stock dividends in respect of all Preferred
Stock of Restricted Subsidiaries held by Persons other than the Company or a
Wholly Owned Subsidiary, (i) interest Incurred in connection with Investments in
discontinued operations, (j) interest accruing on any Debt of any other Person
to the extent such Debt is Guaranteed by the Company or any Restricted
Subsidiary and (k) the cash contributions to any employee stock ownership plan
or similar trust to the extent such contributions are used by such plan or trust
to pay interest or fees to any Person (other than the Company) in connection
with Debt Incurred by such plan or trust.
"Consolidated Net Income" means, for any period, the net income (loss) of
the Company and its consolidated Subsidiaries; provided, however, that there
shall not be included in such Consolidated Net Income (a) any net income (loss)
of any Person (other than the Company) if such Person is not a Restricted
Subsidiary, except that (i) subject to the exclusion contained in clause (d)
below, the Company's equity in the net income of any such Person for such period
shall be included in such Consolidated Net Income up to the aggregate amount of
cash distributed by such Person during such period to the Company or a
Restricted Subsidiary as a dividend or other distribution (subject, in the case
of a dividend or other distribution to a Restricted Subsidiary, to the
limitations contained in clause (c) below) and (ii) the Company's equity in a
net loss of any such Person other than an Unrestricted Subsidiary for such
period shall be included in determining such Consolidated Net Income, (b) for
the purposes of the covenant described under "--Certain Covenants--Limitation on
Restricted Payments" only, any net income (loss) of any Person acquired by the
Company or any of its consolidated Subsidiaries in a pooling of interests
transaction for any period prior to the date of such acquisition, (c) any net
income (but not loss) of any Restricted Subsidiary if such Restricted Subsidiary
is subject to restrictions, directly or indirectly, on the payment of dividends
or the making of distributions, directly or indirectly, to the Company, except
that subject to the exclusion contained in clause (d) below, the Company's
equity in the net income of any such Restricted Subsidiary for such period shall
be included in such Consolidated Net Income up to the aggregate amount of cash
distributed by such Restricted Subsidiary during such period to the Company or
another Restricted Subsidiary as a dividend or other distribution (subject, in
the case of a dividend or other distribution to another Restricted Subsidiary,
to the limitation contained in this clause), (d) any gain (or, for purposes of
the covenants described under "--Certain Covenants--Limitation on Company and
Subsidiary Guarantor Debt" or "--Merger, Consolidation and Sale of Property"
only, loss) realized upon the sale or other disposition of any Property of the
Company or any of its consolidated Subsidiaries (including pursuant to any Sale
and Leaseback Transaction) which is not sold or otherwise disposed of in the
ordinary course of business, provided, that any tax benefit or tax liability
resulting therefrom shall be excluded in such Consolidated Net Income, (e) any
extraordinary gain or loss, provided, that any tax benefit or tax liability
resulting therefrom shall be excluded in such Consolidated Net Income, (f) the
cumulative effect of a change in accounting principles and (g) (i) any non-cash
compensation expense realized for grants of performance shares, stock options or
other stock awards to officers, directors and employees of the Company or any
Restricted Subsidiary or (ii) compensation expense realized with respect to
periods prior to the Issue Date in respect of payments under the Company's 1994
Amended and Restated Equity Participation Plan or compensation expense, to the
extent accrued in 1998, related to contingent payments to existing managers of
the Company pursuant to the Merger Agreement in an aggregate amount not in
excess of $2.4 million. Notwithstanding the foregoing, for the purposes of the
covenant described under "--Certain Covenants--Limitation on Restricted
Payments" only, there shall be excluded from Consolidated Net Income any
dividends, repayments of loans or advances or other transfers of assets from
Unrestricted Subsidiaries to the Company or a Restricted Subsidiary to the
extent such dividends,
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repayments or transfers increase the amount of Restricted Payments permitted
under such covenant pursuant to clause (c)(iv) thereof.
"Credit Facility" means, with respect to the Company or any Restricted
Subsidiary, one or more debt or commercial paper facilities with banks or other
institutional lenders (including the New Credit Facility) providing for
revolving credit loans, term loans, receivables or inventory financing
(including through the sale of receivables or inventory to such lenders or to
special purpose, bankruptcy remote entities formed to borrow from such lenders
against such receivables or inventory) or trade letters of credit, in each case
together with any amendments, supplements, modifications (including by any
extension of the maturity thereof), refinancings or replacements thereof by a
lender or syndicate of lenders in one or more successive transactions (including
any such transaction that changes the amount available thereunder, replaces such
agreement or document, or provides for other agents or lenders).
"Currency Exchange Protection Agreement" means, in respect of a Person, any
foreign exchange contract, currency swap agreement, currency option or other
similar agreement or arrangement designed to protect such Person against
fluctuations in currency exchange rates.
"Debt" means, with respect to any Person on any date of determination
(without duplication), (a) the principal of and premium (if any) in respect of
(i) debt of such Person for money borrowed and (ii) debt evidenced by notes,
debentures, bonds or other similar instruments for the payment of which such
Person is responsible or liable; (b) all Capital Lease Obligations of such
Person and all Attributable Debt in respect of Sale and Leaseback Transactions
entered into by such Person; (c) all obligations of such Person issued or
assumed as the deferred purchase price of Property, all conditional sale
obligations of such Person and all obligations of such Person under any title
retention agreement (but excluding trade accounts payable arising in the
ordinary course of business); (d) all obligations of such Person for the
reimbursement of any obligor on any letter of credit, banker's acceptance or
similar credit transaction (other than obligations with respect to letters of
credit securing obligations (other than obligations described in (a) through (c)
above) entered into in the ordinary course of business of such Person to the
extent such letters of credit are not drawn upon or, if and to the extent drawn
upon, such drawing is reimbursed no later than the third Business Day following
receipt by such Person of a demand for reimbursement following payment on the
letter of credit); (e) the amount of all obligations of such Person with respect
to the redemption, repayment or other repurchase of any Disqualified Stock or,
with respect to any Subsidiary of such Person, any Preferred Stock (but
excluding, in each case, any accrued dividends); (f) all obligations of the type
referred to in clauses (a) through (e) of other Persons and all dividends of
other Persons for the payment of which, in either case, such Person is
responsible or liable, directly or indirectly, as obligor, guarantor or
otherwise, including by means of any Guarantee; (g) all obligations of the type
referred to in clauses (a) through (f) of other Persons secured by any Lien on
any Property of such Person (whether or not such obligation is assumed by such
Person), the amount of such obligation being deemed to be the lesser of the
value of such Property or the amount of the obligation so secured; and (h) to
the extent not otherwise included in this definition, Hedging Obligations of
such Person. The amount of Debt of any Person at any date shall be the
outstanding balance at such date of all unconditional obligations as described
above and the maximum liability, upon the occurrence of the contingency giving
rise to the obligation, of any contingent obligations at such date; provided
that the amount outstanding at any time of any Debt issued with original issue
discount is the face amount of such Debt less the remaining unamortized portion
of the original issue discount of such Debt at such time as determined in
accordance with GAAP.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Designated Senior Debt" means any Senior Debt which has, at the time of
determination, an aggregate principal amount outstanding of at least $10.0
million (including the amount of all undrawn commitments and matured and
contingent reimbursement obligations pursuant to letters of credit thereunder)
that is specifically designated in the instrument evidencing such Senior Debt
and is designated in a notice delivered by the Company to the holders or a
Representative of the holders of such Senior Debt and in an Officers'
Certificate delivered to the Trustee as "Designated Senior Debt" of the Company
for purposes of the Indenture; provided that the New Credit Facility shall be
deemed to be Designated Senior Debt under the Exchange Indenture.
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"Disqualified Dividends" means, for any dividend with respect to
Disqualified Stock, the quotient of the dividend divided by the difference
between one and the maximum statutory federal income tax rate (expressed as a
decimal number between 1 and 0) then applicable to the issuer of such
Disqualified Stock.
"Disqualified Stock" means, with respect to any Person, Redeemable Stock of
such Person as to which (i) the maturity, (ii) mandatory redemption or (iii)
redemption, repurchase, conversion or exchange at the option of the holder
thereof occurs, or may occur, on or prior to the first anniversary of the Stated
Maturity of the Company Exchange Debentures; provided, however, that Redeemable
Stock of such Person that would not otherwise be characterized as Disqualified
Stock under this definition shall not constitute Disqualified Stock (a) if such
Redeemable Stock is convertible or exchangeable into Debt or Disqualified Stock
solely at the option of the issuer thereof or (b) solely as a result of
provisions thereof giving holders thereof the right to require such Person to
repurchase or redeem such Redeemable Stock upon the occurrence of a "change of
control" occurring prior to the first anniversary of the Stated Maturity of the
Company Exchange Debentures, if (x) such repurchase obligation may not be
triggered in respect of such Redeemable Stock unless a corresponding obligation
also arises with respect to the Company Exchange Debentures and (y) no such
repurchase or redemption is permitted to be consummated unless and until such
Person shall have satisfied all repurchase or redemption obligations with
respect to any required purchase offer made with respect to the Company Exchange
Debentures.
"EBITDA" means, for any period, an amount equal to, for the Company and its
consolidated Restricted Subsidiaries, (a) the sum of Consolidated Net Income for
such period, plus the following to the extent reducing Consolidated Net Income
for such period: (i) the provision for taxes based on income or profits or
utilized in computing net loss, (ii) Consolidated Interest Expense, (iii)
depreciation, (iv) amortization expense and (v) any other non-cash items (other
than any such non-cash item to the extent that it represents an accrual of or
reserve for cash expenditures in any future period), minus (b) all non-cash
items increasing Consolidated Net Income for such period (other than any such
non-cash item to the extent that it will result in the receipt of cash payments
in any future period). Notwithstanding the foregoing, the provision for taxes
based on the income or profits of, and the depreciation and amortization of, a
Restricted Subsidiary shall be added to Consolidated Net Income to compute
EBITDA only to the extent (and in the same proportion) that the net income of
such Restricted Subsidiary was included in calculating Consolidated Net Income
and only if a corresponding amount would be permitted at the date of
determination to be dividended to the Company by such Restricted Subsidiary
without prior approval (that has not been obtained), pursuant to the terms of
its charter and all agreements, instruments, judgments, decrees, orders,
statutes, rules and governmental regulations applicable to such Restricted
Subsidiary or its shareholders.
"Employee Notes" means promissory notes of employees of Holding, the
Company or any of their Subsidiaries payable to the Company or Holding and
received in connection with the substantially concurrent purchase of common
stock of the Company or Holding by such employees.
"Event of Default" has the meaning set forth under "--Events of Default".
"Exchange Act" means the Securities Exchange Act of 1934.
"Fair Market Value" means, with respect to any Property, the price which
could be negotiated in an arm's-length free market transaction, for cash,
between a willing seller and a willing buyer, neither of whom is under undue
pressure or compulsion to complete the transaction. Fair Market Value will be
determined, except as otherwise provided, (a) if such Property has a Fair Market
Value equal to or less than $2.5 million, by any Officer of the Company or (b)
if such Property has a Fair Market Value in excess of $2.5 million, by a
majority of the Board of Directors and evidenced by a Board Resolution, dated
within 30 days of the relevant transaction, delivered to the Trustee.
"GAAP" means United States generally accepted accounting principles as in
effect on the Issue Date, including those set forth (a) in the opinions and
pronouncements of the Accounting Principles Board of the American Institute of
Certified Public Accountants, (b) in the statements and pronouncements of the
Financial Accounting Standards Board, (c) in such other statements by such other
entity as approved by a significant segment of the accounting profession and (d)
the rules and regulations of the Commission governing the inclusion of financial
statements (including pro forma financial statements) in periodic reports
required to be filed pursuant to Section 13
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of the Exchange Act, including opinions and pronouncements in staff accounting
bulletins and similar written statements from the accounting staff of the
Commission.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Debt of any other Person and any
obligation, direct or indirect, contingent or otherwise, of such Person (a) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Debt of such other Person (whether arising by virtue of partnership
arrangements, or by agreements to keep-well, to purchase assets, goods,
securities or services, to take-or-pay or to maintain financial statement
conditions or otherwise) or (b) entered into for the purpose of assuring in any
other manner the obligee against loss in respect thereof (in whole or in part);
provided, however, that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning. The term "Guarantor" shall mean any
Person Guaranteeing any obligation.
"Hedging Obligation" of any Person means any obligation of such Person
pursuant to any Interest Rate Agreement, Currency Exchange Protection Agreement
or any other similar agreement or arrangement.
"Holding" means River Holding Corp., the corporate parent of the Company,
and any successor thereto.
"Incur" means, with respect to any Debt or other obligation of any Person,
to create, issue, incur (by merger, conversion, exchange or otherwise), extend,
assume, Guarantee or become liable in respect of such Debt or other obligation
or the recording, as required pursuant to GAAP or otherwise, of any such Debt or
obligation on the balance sheet of such Person (and "Incurrence" and "Incurred"
shall have meanings correlative to the foregoing); provided, however, that a
change in GAAP that results in an obligation of such Person that exists at such
time, and is not theretofore classified as Debt, becoming Debt shall not be
deemed an Incurrence of such Debt; provided further, however, that solely for
purposes of determining compliance with "--Certain Covenants--Limitation on
Restricted Subsidiary Debt", amortization of debt discount shall not be deemed
to be the Incurrence of Debt, provided that in the case of Debt sold at a
discount, the amount of such Debt Incurred shall at all times be the aggregate
principal amount at Stated Maturity.
"Indenture" means the Indenture dated as of the Issue Date among Holding,
the Company and the United States Trust Company of New York, as Trustee,
governing the Subordinated Notes.
"Independent Appraiser" means an investment banking firm of national
standing or any third party appraiser of national standing, provided that such
firm or appraiser is not an Affiliate of the Company.
"Industrias Hudson" means Industrias Hudson S.A. de C.V.
"Interest Rate Agreement" means, for any Person, any interest rate swap
agreement, interest rate cap agreement, interest rate collar agreement or other
similar agreement designed to protect against fluctuations in interest rates.
"Investment" by any Person means any direct or indirect loan (other than
advances to customers in the ordinary course of business that are recorded as
accounts receivable on the balance sheet of such Person), advance or other
extension of credit or capital contribution (by means of transfers of cash or
other Property to others or payments for Property or services for the account or
use of others, or otherwise) to, or Incurrence of a Guarantee of any obligation
of, or purchase or acquisition of Capital Stock, bonds, notes, debentures or
other securities or evidence of Debt issued by, any other Person. For purposes
of the covenant described under "--Certain Covenants--Limitation on Restricted
Payments", "--Designation of Restricted and Unrestricted Subsidiaries" and the
definition of "Restricted Payment", "Investment" shall include the portion
(proportionate to the Company's equity interest in such Subsidiary) of the Fair
Market Value of the net assets of any Subsidiary of the Company at the time that
such Subsidiary is designated an Unrestricted Subsidiary; provided, however,
that upon a redesignation of such Subsidiary as a Restricted Subsidiary, the
Company shall be deemed to continue to have a permanent "Investment" in an
Unrestricted Subsidiary equal to an amount (if positive) equal to (a) the
Company's "Investment" in such Subsidiary at the time of such redesignation less
(b) the portion (proportionate to the Company's equity interest in such
Subsidiary) of the Fair Market Value of the net assets of such Subsidiary at the
time of such
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redesignation. In determining the amount of any Investment made by transfer of
any Property other than cash, such Property shall be valued at its Fair Market
Value at the time of such Investment.
"Issue Date" means the date on which the Holding Preferred Stock is
initially issued.
"Lien" means, with respect to any Property of any Person, any mortgage or
deed of trust, pledge, hypothecation, assignment, deposit arrangement, security
interest, lien, charge, easement (other than any easement not materially
impairing usefulness or marketability), encumbrance, preference, priority or
other security agreement or preferential arrangement of any kind or nature
whatsoever on or with respect to such Property (including any Capital Lease
Obligation, conditional sale or other title retention agreement having
substantially the same economic effect as any of the foregoing or any Sale and
Leaseback Transaction).
"Merger Agreement" means the Amended and Restated Merger Agreement between
Holding, River Acquisition Corp., the Company and shareholders of the Company
dated as of March 15, 1998, as in effect on the Issue Date.
"Mirror Preferred Stock" means the 11 1/2% Senior PIK Preferred Stock due
2010 of the Company.
"Moody's" means Moody's Investors Service, Inc. or any successor to the
rating agency business thereof.
"Net Available Cash" from any Asset Sale or other transaction subject to
the covenant described under "--Company Preferred Stock--Certain Covenants--
Limitation on Issuance or Sale of Capital Stock of Restricted Subsidiaries"
means cash payments received therefrom (including any cash payments received by
way of deferred payment of principal pursuant to a note or installment
receivable or otherwise, but only as and when received, but excluding any other
consideration received in the form of assumption by the acquiring Person of Debt
or other obligations relating to the Property that is the subject of such
transaction or received in any other noncash form), in each case net of (a) all
legal, title and recording tax expenses, commissions and other fees and expenses
incurred, and all Federal, state, provincial, foreign and local taxes required
to be accrued as a liability under GAAP, as a consequence of such transaction,
(b) all payments made on any Debt which is secured by any Property subject to
such transaction, in accordance with the terms of any Lien upon or other
security agreement of any kind with respect to such Property, or which must by
its terms, or in order to obtain a necessary consent to such transaction, or by
applicable law, be repaid out of the proceeds from such transaction, (c) all
distributions and other payments required to be made to minority interest
holders in Subsidiaries or joint ventures as a result of such transaction and
(d) the deduction of appropriate amounts provided by the seller as a reserve, in
accordance with GAAP, against any liabilities associated with the Property
disposed in such transaction and retained by the Company or any Restricted
Subsidiary after such transaction.
"New Credit Facility" means the credit facilities made available pursuant
to the Senior Secured Credit Agreement dated as of the Issue Date among the
Company, Holding, the lenders party thereto, Salomon Smith Barney Inc, as
Arranger, Advisor and Syndication Agent and Bankers Trust Company, as
Administrative Agent.
"Officer" means the Chief Executive Officer, the President, the Chief
Financial Officer or any Executive Vice President of the Company.
"Officers' Certificate" means a certificate signed by two Officers of the
Company, at least one of whom shall be the principal executive officer or
principal financial officer of the Company, and delivered to the Trustee.
"Opinion of Counsel" means a written opinion from legal counsel who is
acceptable to the Trustee. The counsel may be an employee of or counsel to the
Company or the Trustee.
"Permitted Holders" means Helen Hudson Lovaas, any member of the senior
management of the Company or Holding on the Issue Date and Freeman Spogli & Co.
Incorporated or any successor entity thereof controlled by the principals of
Freeman Spogli & Co. Incorporated or any entity controlled by, or under common
control with, Freeman Spogli & Co. Incorporated.
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"Permitted Investment" means any Investment by the Company or a Restricted
Subsidiary in (a) any Restricted Subsidiary or any Person that will, upon the
making of such Investment, become a Restricted Subsidiary; provided that the
primary business of such Restricted Subsidiary is a Related Business; (b) any
Person if as a result of such Investment such Person is merged or consolidated
with or into, or transfers or conveys all or substantially all its Property to,
the Company or a Restricted Subsidiary; provided that such Person's primary
business is a Related Business; (c) Temporary Cash Investments; (d) receivables
owing to the Company or a Restricted Subsidiary, if created or acquired in the
ordinary course of business and payable or dischargeable in accordance with
customary trade terms; provided, however, that such trade terms may include such
concessionary trade terms as the Company or such Restricted Subsidiary deems
reasonable under the circumstances; (e) payroll, travel and similar advances to
cover matters that are expected at the time of such advances ultimately to be
treated as expenses for accounting purposes and that are made in the ordinary
course of business; (f) (i) loans and advances to employees made in the ordinary
course of business consistent with past practices of the Company or such
Restricted Subsidiary, as the case may be; provided that such loans and advances
do not exceed $1.0 million at any one time outstanding and (ii) loans and
advances to, or the receipt of Employee Notes from, employees of Holding, the
Company or any of their Subsidiaries made or received in connection with the
substantially concurrent purchase of common stock of the Company or Holding by
such employees; provided that the aggregate principal amount of such loans,
advances and notes payable shall not exceed $1.0 million at any one time
outstanding; (g) stock, obligations or other securities received in settlement
of debts created in the ordinary course of business and owing to the Company or
a Restricted Subsidiary or in satisfaction of judgments; (h) any Person to the
extent such Investment represents the non-cash portion of the consideration
received in connection with an Asset Sale consummated in compliance with the
covenant described under "--Certain Covenants--Limitation on Asset Sales"; and
(i) Investments in Persons engaged in a Related Business not to exceed $10.0
million at any one time outstanding (it being agreed that an Investment shall
cease to be outstanding to the extent of dividends, repayments of loans or
advances or other transfers of Property received by the Company or any
Restricted Subsidiary from such Persons, provided that such amounts do not
increase the amount of Restricted Payments which the Company and the Restricted
Subsidiaries may make pursuant to clause (c)(iv)(A) of the covenant described
under "--Certain Covenants--Limitation on Restricted Payments").
"Permitted Liens" means:
(a) Liens securing Senior Debt of the Company or any Subsidiary Guarantor;
(b) Liens for taxes, assessments or governmental charges or levies on the
Property of the Company or any Restricted Subsidiary if the same shall not at
the time be delinquent or thereafter can be paid without penalty, or are being
contested in good faith and by appropriate proceedings;
(c) Liens imposed by law, such as carriers', warehousemen's and mechanics'
Liens, on the Property of the Company or any Restricted Subsidiary arising in
the ordinary course of business and securing payment of obligations which are
not more than 60 days past due or are being contested in good faith and by
appropriate proceedings;
(d) Liens on the Property of the Company or any Restricted Subsidiary
Incurred in the ordinary course of business to secure performance of obligations
with respect to statutory or regulatory requirements, performance or return-of-
money bonds, surety or indemnity bonds or other obligations of a like nature and
Incurred in a manner consistent with industry practice, in each case which are
not Incurred in connection with the borrowing of money, the obtaining of
advances or credit or the payment of the deferred purchase price of Property and
which do not in the aggregate impair in any material respect the use of Property
in the operation of the business of the Company and the Restricted Subsidiaries
taken as a whole;
(e) Liens on Property at the time the Company or any Restricted Subsidiary
acquired such Property, including any acquisition by means of a merger or
consolidation with or into the Company or any Restricted Subsidiary; provided,
however, that any such Lien may not extend to any other Property of the Company
or any Restricted Subsidiary; provided further, however, that such Liens shall
not have been Incurred in anticipation of or in connection with the transaction
or series of transactions pursuant to which such Property was acquired by the
Company or any Restricted Subsidiary;
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(f) Liens on the Property of a Person at the time such Person becomes a
Restricted Subsidiary; provided, however, that any such Lien may not extend to
any other Property of the Company or any other Restricted Subsidiary which is
not a direct Subsidiary of such Person; provided further, however, that any such
Lien was not Incurred in anticipation of or in connection with the transaction
or series of transactions pursuant to which such Person became a Restricted
Subsidiary;
(g) pledges or deposits by the Company or any Restricted Subsidiary under
workmen's compensation laws, unemployment insurance laws or similar legislation,
or good faith deposits in connection with bids, tenders, contracts (other than
for the payment of Debt) or leases to which the Company or any Restricted
Subsidiary is party, or deposits to secure public or statutory obligations of
the Company, or deposits for the payment of rent, in each case Incurred in the
ordinary course of business;
(h) utility easements, building restrictions and such other encumbrances or
charges against real Property as are of a nature generally existing with respect
to properties of a similar character;
(i) judgment and attachment Liens in connection with (A) judgments that do
not constitute an Event of Default so long as the judgment creditor is not
seeking enforcement thereof and reserves have been established to the extent
required by GAAP as in effect at such time and (B) litigation and legal
proceedings that are being contested in good faith by appropriate proceedings so
long as reserves have been established to the extent required GAAP as in effect
at such time and so long as such Liens do not encumber assets by an aggregate
amount (together with the amount of any unstayed judgments against the Company
or any Restricted Subsidiary) in excess of $7.5 million;
(j) Liens existing on the Issue Date not otherwise described in clauses (a)
through (i) above; and
(k) Liens on the Property of the Company or any Restricted Subsidiary to
secure any Refinancing, in whole or in part, of any Debt secured by Liens
referred to in clause (a), (e), (f) or (j) above; provided, however, that any
such Lien shall be limited to all or part of the same Property that secured the
original Lien (together with improvements and accessions to such Property) and
the aggregate principal amount of Debt that is secured by such Lien shall not be
increased to an amount greater than the sum of (i) the outstanding principal
amount, or, if greater, the committed amount, of the Debt secured by Liens
described under clause (a), (e), (f) or (j) above, as the case may be, at the
time the original Lien became a Permitted Lien under the Indenture and (ii) an
amount necessary to pay any fees and expenses, including premiums and defeasance
costs, Incurred by the Company or such Restricted Subsidiary in connection with
such Refinancing.
"Permitted Refinancing Debt" means any Debt that Refinances any other Debt,
including any successive Refinancings, so long as (a) such Debt is in an
aggregate principal amount (or if Incurred with original issue discount, an
aggregate issue price) not in excess of the sum of (i) the aggregate principal
amount (or if Incurred with original issue discount, the aggregate accreted
value) then outstanding of the Debt being Refinanced and (ii) an amount
necessary to pay any fees and expenses, including premiums and defeasance costs,
related to such Refinancing, (b) the Average Life of such Debt is equal to or
greater than the Average Life of the Debt being Refinanced, (c) the Stated
Maturity of such Debt is no earlier than the Stated Maturity of the Debt being
Refinanced and (d) such Debt is subordinated in right of payment to Senior Debt
and the Subordinated Notes to at least the same extent, if any, as the Debt
being Refinanced; provided, however, that Permitted Refinancing Debt shall not
include (x) Debt of a Subsidiary that Refinances Debt of the Company or (y) Debt
of the Company or a Restricted Subsidiary that Refinances Debt of an
Unrestricted Subsidiary.
"Person" means any individual, corporation, company (including any limited
liability company), partnership, joint venture, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.
"Preferred Stock" means any Capital Stock of a Person, however designated,
which entitles the holder thereof to a preference with respect to the payment of
dividends, or as to the distribution of assets upon any voluntary or involuntary
liquidation or dissolution of such Person, over shares of any other class of
Capital Stock issued by such Person.
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"pro forma" means, with respect to any calculation made or required to be
made pursuant to the terms hereof, a calculation performed in accordance with
Article 11 of Regulation S-X promulgated under the Securities Act, as
interpreted in good faith by the Board of Directors after consultation with the
independent certified public accountants of the Company, or otherwise a
calculation made in good faith by the Board of Directors after consultation with
the independent certified public accountants of the Company, as the case may be.
"Property" means, with respect to any Person, any interest of such Person
in any kind of property or asset, whether real, personal or mixed, or tangible
or intangible, including Capital Stock in, and other securities of, any other
Person.
"Public Equity Offering" means an underwritten public offering of common
stock of the Company pursuant to an effective registration statement under the
Securities Act.
"Purchase Money Debt" means Debt (a) consisting of the deferred purchase
price of property, conditional sale obligations, obligations under any title
retention agreement, other purchase money obligations and obligations in respect
of industrial revenue bonds, in each case where the maturity of such Debt does
not exceed the anticipated useful life of the asset being financed, and (b)
Incurred to finance the acquisition or construction by the Company or a
Restricted Subsidiary of such asset, including remodelling thereof and additions
and improvements thereto; provided, however, that such Debt is Incurred within
180 days after such acquisition of such asset by the Company or a Restricted
Subsidiary or completion of such construction, remodelling, addition or
improvement, as the case may be.
"Redeemable Stock" means, with respect to any Person, any Capital Stock
that by its terms (or by the terms of any security into which it is convertible
or for which it is exchangeable, in either case at the option of the holder
thereof) or otherwise (a) matures or is mandatorily redeemable pursuant to a
sinking fund obligation or otherwise, (b) is or may become redeemable or
repurchaseable at the option of the holder thereof, in whole or in part, or (c)
is convertible or exchangeable, in either case at the option of the holder
thereof, for Debt or Disqualified Stock.
"Refinance" means, in respect of any Debt, to refinance, extend, renew,
refund, repay, prepay, redeem, defease or retire, or to issue other Debt, in
exchange or replacement for, such Debt. "Refinanced" and "Refinancing" shall
have correlative meanings.
"Related Business" means any business that is related, ancillary or
complementary to the businesses of the Company and the Restricted Subsidiaries
on the Issue Date.
"Representative" means the trustee, agent or representative expressly
authorized to act in such capacity, if any, for an issue of Senior Debt.
"Restricted Payment" means (a) any dividend or distribution (whether made
in cash, securities or other Property) declared or paid on or with respect to
any shares of Capital Stock of the Company or any Restricted Subsidiary
(including any payment in connection with any merger or consolidation with or
into the Company or any Restricted Subsidiary), except for any dividend or
distribution which is made solely to the Company or a Restricted Subsidiary
(and, if such Restricted Subsidiary is not a Wholly Owned Subsidiary, to the
other shareholders of such Restricted Subsidiary on a pro rata basis or on a
basis that results in the receipt by the Company or a Restricted Subsidiary of
dividends or distributions of greater value than it would receive on a pro rata
basis) or any dividend or distribution payable solely in shares of Capital Stock
(other than Disqualified Stock) of the Company; (b) the purchase, repurchase,
redemption, acquisition or retirement for value of any Capital Stock of the
Company or any Affiliate of the Company (other than from the Company or a
Restricted Subsidiary) or any securities exchangeable for or convertible into
any such Capital Stock, including the exercise of any option to exchange any
Capital Stock (other than for or into Capital Stock of the Company that is not
Disqualified Stock); (c) the purchase, repurchase, redemption, acquisition or
retirement for value, prior to any scheduled maturity, scheduled sinking fund or
mandatory redemption payment, any Subordinated Obligation (other than the
purchase, repurchase or other acquisition of any Subordinated Obligation
purchased in anticipation of satisfying a sinking fund obligation, principal
installment or final maturity, in each case due within one year of the date of
acquisition); or (d) any Investment (other than Permitted Investments) in any
Person.
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"Restricted Subsidiary" means (a) any Subsidiary of the Company unless such
Subsidiary shall have been designated an Unrestricted Subsidiary as permitted or
required pursuant to the covenant described under "--Certain Covenants--
Designation of Restricted and Unrestricted Subsidiaries" and (b) an Unrestricted
Subsidiary which is redesignated as a Restricted Subsidiary as permitted
pursuant to the covenant described under "--Certain Covenants--Designation of
Restricted and Unrestricted Subsidiaries".
"S&P" means Standard & Poor's Ratings Service or any successor to the
rating agency business thereof.
"Sale and Leaseback Transaction" means any arrangement relating to Property
now owned or hereafter acquired whereby the Company or a Restricted Subsidiary
transfers such Property to another Person and the Company or a Restricted
Subsidiary leases it from such Person.
"Securities Act" means the Securities Act of 1933.
"Senior Debt" of the Company means (a) all obligations consisting of the
principal, premium, if any, and accrued and unpaid interest (including interest
accruing on or after the filing of any petition in bankruptcy or for
reorganization relating to the Company to the extent post-filing interest is
allowed in such proceeding) in respect of (i) Debt of the Company for borrowed
money and (ii) Debt of the Company evidenced by notes, debentures, bonds or
other similar instruments permitted under the Exchange Indenture for the payment
of which the Company is responsible or liable; (b) all Capital Lease Obligations
of the Company; (c) all obligations of the Company (i) for the reimbursement of
any obligor on any letter of credit, bankers' acceptance or similar credit
transaction, (ii) under Hedging Obligations or (iii) issued or assumed as the
deferred purchase price of Property and all conditional sale obligations of the
Company and all obligations under any title retention agreement permitted under
the Exchange Indenture; and (d) all obligations of other Persons of the type
referred to in clauses (a), (b) and (c) for the payment of which the Company is
responsible or liable as Guarantor; provided, however, that Senior Debt shall
not include (A) Debt of the Company that is by its terms subordinate or pari
passu in right of payment to the Company Exchange Debentures, including any
Subordinated Obligations; (B) any Debt Incurred in violation of the provisions
of the Exchange Indenture; (C) accounts payable or any other obligations of the
Company to trade creditors created or assumed by the Company in the ordinary
course of business in connection with the obtaining of materials or services
(including Guarantees thereof or instruments evidencing such liabilities); (D)
any liability for Federal, state, local or other taxes owed or owing by the
Company; (E) any obligation of the Company to any Subsidiary; or (F) any
obligations with respect to any Capital Stock.
"Significant Subsidiary" means any Subsidiary that would be a "Significant
Subsidiary" of the Company within the meaning of Rule 1-02 under Regulation S-X
promulgated by the Commission.
"Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency beyond the control of the issuer unless such contingency has
occurred).
"Subordinated Debt" means the Company Exchange Debentures and any other
Debt of the Company that specifically provides that such Debt is to rank pari
passu with the Company Exchange Debentures in right of payment and is not
subordinated by its terms to any Debt or other obligation of the Company which
is not Senior Debt.
"Subordinated Notes" means the 9 1/8 % Senior Subordinated Notes due 2008
of the Company.
"Subordinated Obligation" means any Debt of the Company (whether
outstanding on the Issue Date or thereafter Incurred) that specifically provides
that such Debt is to be subordinate or junior in right of payment to Company
Exchange Debentures.
"Subsidiary" means, in respect of any Person, any corporation, company,
association, partnership, joint venture or other business entity of which more
than 50% of the total voting power of shares of Capital Stock or
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other interests (including partnership interests) entitled (without regard to
the occurrence of any contingency) to vote in the election of directors,
managers or trustees thereof is at the time owned or controlled directly or
indirectly, by (a) such Person, (b) such Person and one or more Subsidiaries of
such Person or (c) one or more Subsidiaries of such Person.
"Temporary Cash Investments" means any of the following: (a) Investments in
U.S. Government Obligations; (b) Investments in time deposit accounts,
certificates of deposit and money market deposits maturing within 90 days of the
date of acquisition thereof issued by a bank or trust company which is organized
under the laws of the United States of America or any state thereof having
capital, surplus and undivided profits aggregating in excess of $500 million and
whose long-term debt is rate "A-3" or "A-" or higher according to Moody's or S&P
(or such similar equivalent rating by at least one "nationally recognized
statistical rating organization" (as defined in Rule 436 under the Securities
Act)); (c) repurchase obligations with a term of not more than 30 days for
underlying securities of the types described in clause (a) entered into with a
bank meeting the qualifications described in clause (b) above; (d) Investments
in commercial paper, maturing not more than 90 days after the date of
acquisition, issued by a corporation (other than an Affiliate of the Company)
organized and in existence under the laws of the United States of America with a
rating at the time as of which any Investment therein is made of "P-1" (or
higher) according to Moody's or "A-1" (or higher) according to S&P (or such
similar equivalent rating by at least one "nationally recognized statistical
rating organization" (as defined in Rule 436 under the Securities Act)); (e)
direct obligations (or certificates representing an ownership interest in such
obligations) of any state of the United States of America (including any agency
or instrumentality thereof) for the payment of which the full faith and credit
of such state is pledged and which are not callable or redeemable at the
issuer's option, provided that (i) the long-term debt of such state is rated "A-
3" or "A-" or higher according to Moody's or S&P (or such similar equivalent
rating by at least one "nationally recognized statistical rating organization"
(as defined in Rule 436 under the Securities Act)) and (ii) such obligations
mature within 180 days of the date of acquisition thereof; and (f) investments
in money market funds which invest substantially all their assets in securities
of the types described in clauses (a) through (e) above.
"Unrestricted Subsidiary" means (a) any Subsidiary of the Company in
existence on the Issue Date that is not a Restricted Subsidiary; (b) any
Subsidiary of an Unrestricted Subsidiary; and (c) any Subsidiary of the Company
that is designated after the Issue Date as an Unrestricted Subsidiary as
permitted or required pursuant to the covenant described under "--Certain
Covenants--Designation of Restricted and Unrestricted Subsidiaries" and not
thereafter redesignated as a Restricted Subsidiary as permitted pursuant
thereto.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable or redeemable at the issuer's option.
"Voting Stock" of a corporation means all classes of Capital Stock of such
corporation then outstanding and normally entitled (without regard to the
occurrence of any contingency) to vote in the election of directors, managers or
trustees thereof.
"Wholly Owned Subsidiary" means, at any time, a Restricted Subsidiary all
the Voting Stock of which (except directors' qualifying shares) is at such time
owned, directly or indirectly, by the Company and its other Wholly Owned
Subsidiaries.
EXCHANGE OFFER
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In the event that for any reason the shares of Company Preferred Stock or
the Company Exchange Debentures received by Holders in exchange for Exchange
Preferred Stock following the filing of this Registration Statement are not
freely tradeable, the Company will (i) as promptly as practicable (but in no
event more than 30 days after so required or requested) prepare and file a
registration statement with the Commission with respect to a registered offer to
exchange such Company Preferred Stock or Company Exchange Debentures, as the
case may be, for new Company Preferred Stock or new Company Exchange Debentures
and (ii) use its best efforts to cause such registration statement to become
effective under the Act as soon as practicable, but in any event within 90 days
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after the date of such filing. Upon the effectiveness of such registration
statement, the Company shall promptly commence such exchange offer. If, (i)
because of any change in law or applicable interpretations thereof by the
Commission's staff, the Company is not permitted to effect such registered
exchange offer, (ii) for any other reason such exchange offer registration
statement is not declared effective within 120 days after such exchange or such
registered exchange offer is not consummated within 150 days after such
exchange, (iii) any Initial Purchaser so requests with respect to Company
Preferred Stock or Company Exchange Debentures not eligible to be exchanged for
new Company Preferred Stock or new Company Exchange Debentures in such
registered exchange offer or, in the case of any Initial Purchaser that
participates in such registered exchange offer, such Initial Purchaser does not
receive freely tradable New Securities, (iv) any holder (other than an Initial
Purchaser) is not eligible to participate in such registered exchange offer or
(v) in the case of any such holder that participates in such registered exchange
offer, such holder does not receive freely tradable New Securities in exchange
for tendered securities, other than by reason of such holder being an Affiliate
of the Company within the meaning of the Act, the Company shall as promptly as
practicable (but in no event more than 30 days after so required or requested)
file with the Commission and thereafter shall use its best efforts to cause to
be declared effective under the Act a shelf registration statement relating to
the offer and sale of the Company Preferred Stock or Company Exchange
Debentures. The Company shall use its best efforts to keep such shelf
registration statement continuously effective for a period of two years from the
date of issuance of the Company Preferred Stock or Company Exchange Debentures,
as applicable, or such shorter period that will terminate when all securities
covered thereby have been sold pursuant thereto. Additional dividends or
interest will accrue on the Company Exchange Debentures or Company Preferred
Stock, as the case may be, in the event that the Company does not comply with
the provisions of this paragraph. Such additional dividends or interest will
accrue at a rate of 0.25% per annum during the 90-day period immediately
following such failure and shall increase by 0.25% per annum at the end of each
subsequent 90-day period, but in no event shall such rate exceed 1.00% per
annum.
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MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS
Riordan & McKinzie, a Professional Law Corporation, counsel to the
Company, has rendered its opinion that the following general discussion
accurately summarizes the material U.S. federal income tax consequences expected
to result to holders whose Holding Preferred Stock is exchanged for Exchange
Preferred Stock in the Exchange Offer. This discussion is based on the Internal
Revenue Code of 1986, as amended (the "Code"), regulations of the Treasury
Department, administrative rulings and pronouncements of the Internal Revenue
Service ("IRS") and judicial decisions, all of which are subject to change,
possibly with retroactive effect. This discussion does not purport to address
all the U.S. federal income tax consequences that may be applicable to
particular holders, including dealers in securities, financial institutions,
insurance companies and tax-exempt organizations. In addition, the discussion
does not consider the effect of any foreign, state, local, gift, estate or other
tax laws that may be applicable to a particular holder. Except as provided below
with respect to Non-U.S. Holders (as such term is defined below), this
discussion is limited to U.S. Holders who hold their Holding Preferred Stock and
who will hold the Exchange Preferred Stock and the Company Exchange Debentures
or the Company Preferred Stock, as the case may be, as a "capital asset" within
the meaning of Section 1221 of the Code. For purposes of this discussion, a
"U.S. Holder" means any person or entity which is (i) a citizen or resident of
the United States, (ii) a corporation or other entity taxable as a corporation
created or organized in or under the laws of the United States or any political
subdivision thereof, (iii) an estate or trust that is described in Section
7701(a)(30) of the Code or (iv) a person whose worldwide income or gain is
otherwise subject to U.S. federal income tax on a net income basis, and a "Non-
U.S. Holder" means any holder of the Exchange Preferred Stock and the Company
Exchange Debentures or the Company Preferred Stock, as the case may be, that is
not a U.S. Holder. HOLDERS CONSIDERING THE EXCHANGE OF HOLDING PREFERRED STOCK
FOR EXCHANGE PREFERRED STOCK SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO ANY
FEDERAL, STATE, LOCAL, FOREIGN OR OTHER TAX CONSEQUENCES TO THEM OF RECEIVING,
OWNING AND DISPOSING OF EXCHANGE PREFERRED STOCK AND OF RECEIVING, OWNING AND
DISPOSING OF THE COMPANY EXCHANGE DEBENTURES OR THE COMPANY PREFERRED STOCK, AS
THE CASE MAY BE.
TAXATION OF THE EXCHANGE PREFERRED STOCK AND COMPANY PREFERRED STOCK
Unless otherwise stated, for purposes of the following discussion, the
term "Exchange Preferred Stock" shall mean the Exchange Preferred Stock and any
additional shares of Exchange Preferred Stock ("Additional Preferred Shares,"
and each, individually, an "Additional Preferred Share") that shall have been
issued with respect thereto and "Company Preferred Stock" shall mean the Company
Preferred Stock and any additional shares of Company Preferred Stock
("Additional Company Preferred Shares," and each, individually, an "Additional
Company Share") that shall have been issued with respect thereto.
Exchange Offer
The exchange of Holding Preferred Stock for Exchange Preferred Stock
will not constitute a recognition event for federal income tax purposes.
Consequently, no gain or loss will be recognized by a holder on the exchange.
Immediately after the exchange, a holder's adjusted tax basis in the Exchange
Preferred Stock will be the same as the holder's adjusted tax basis in the
Holding Preferred Stock. A holder will be considered to have held the Exchange
Preferred Stock from the time the holder originally acquired the Holding
Preferred Stock.
Upon failure to comply with certain of their obligations under the
Exchange Offer Registration Agreement, Holding and Company would be required to
pay additional amounts on the Exchange Preferred Stock or Company Preferred
Stock, as the case may be. Although the matter is not free from doubt, if such
additional amounts become payable, such amounts should be treated in the same
manner as dividends described below in "Dividends and Dividends Received
Deduction."
Dividends and Dividends Received Deduction
Distributions with respect to the Exchange Preferred Stock or the
Company Preferred Stock will be treated as dividends (taxable as ordinary
income) to the extent of the current and accumulated earnings and profits of
Holding or the Company, respectively. To the extent that the amount of a
distribution with respect to the Exchange Preferred Stock or the Company
Preferred Stock, as the case may be, exceeds the current and accumulated
earnings and profits of Holding or the Company, as the case may be, it will be
treated, first, as a tax-free return of capital to the extent of the holder's
tax basis in the Exchange Preferred Stock or the Company Preferred Stock, as the
case may be, and then as capital gain from the sale or exchange of the Exchange
Preferred Stock or the Company Preferred Stock, as the case may be. Neither
Holding nor the Company can predict whether it will have current or accumulated
earnings and profits at the time of any distribution on the Exchange Preferred
Stock or the Company Preferred Stock.
If a distribution with respect to the Exchange Preferred Stock or the
Company Preferred Stock is paid in the form of additional shares of Exchange
Preferred Stock or Company Preferred Stock, respectively, (i) the amount of the
distribution will be the fair market value of the additional shares as of the
date of the distribution, and (ii) the distribution will be treated as described
above. Such holder's holding period will begin on the day following the
distribution date.
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A holder that is a corporation otherwise entitled to the dividends
received deduction as provided in Section 243 of the Code will be entitled to
such deduction (generally at a 70% rate) with respect to amounts treated as
dividends on the Exchange Preferred Stock or the Company Preferred Stock, as the
case may be, but will not be entitled to such deduction with respect to amounts
treated as a return of capital or capital gain, as described above. In addition,
the benefit of a dividends received deduction may be reduced by the corporate
alternative minimum tax.
In determining entitlement to the dividends received deduction,
corporate holders should also consider the provisions of Sections 246(c), 246A
and 1059 of the Code and Treasury Regulations promulgated thereunder, and IRS
rulings and administrative pronouncements relating to such Code provisions.
Section 246(c) of the Code disallows the dividends received deduction in its
entirety if (i) the holder does not satisfy the applicable holding period
requirement for the dividend-paying stock for a period immediately before or
immediately after such holder becomes entitled to receive each dividend on the
stock or (ii) the holder is under an obligation to make related payments with
respect to positions in substantially similar or related property. Code Section
246(c)(4) provides that a holder may not count toward the minimum holding period
any period in which the holder (i) has, among other things, an option to sell,
(ii) is under a contractual obligation to sell, (iii) has made (and not closed)
a short sale of substantially identical stock or securities, or (iv) has
diminished its risk of loss by holding one or more positions with respect to
substantially similar or related property. Section 246A of the Code provides
the "debt-financed portfolio stock" rules, under which the dividends received
deduction could be reduced to the extent that the holder incurs indebtedness
directly attributable to its investment in the Exchange Preferred Stock or the
Company Preferred Stock, as the case may be. With respect to stock that a
corporate holder has held for two years or less before the dividend announcement
date, Section 1059 of the Code (i) reduces the tax basis of such stock by a
portion of any "extraordinary dividends" that are eligible for the dividends
received deduction and (ii), to the extent that the basis reduction would
otherwise reduce the tax basis of the Exchange Preferred Stock or the Company
Preferred Stock, as the case may be, below zero, requires immediate recognition
of gain, which is treated as gain from the sale or exchange of the stock. In
the case of preferred stock, an "extraordinary dividend" is a dividend that (i)
equals or exceeds five percent of either (A) the holder's adjusted tax basis in
the stock (taking into account any prior reduction in basis under Section 1059
as a result of any prior dividend) or (B), at the holder's election, the fair
market value of the stock as of the day before the ex-dividend date if such
value can be established to the satisfaction of the IRS, in each case treating
all dividends having ex-dividend dates within an 85-day period as one dividend
or (ii) exceeds 20 percent of either (A) the holder's adjusted tax basis in the
stock or (B), at the holder's election, the fair market value of the stock as of
the day before the ex-dividend date if such value can be established to the
satisfaction of the IRS, in each case treating all dividends having ex-dividend
dates within a 365-day period as one dividend. An extraordinary dividend would
also include any amount treated as a dividend with respect to a redemption that
is not pro rata to all holders (or meets certain other requirements), without
regard to either the relative amount of the dividend or the holder's holding
period for the Exchange Preferred Stock or the Company Preferred Stock, as the
case may be. However, with respect to "qualified preferred dividends" with
respect to any share of stock, (i) Section 1059 of the Code will not apply to
such dividends if the holder holds such stock for more than five years and (ii)
if the holder disposes of such stock before it has been held for more than five
years, the aggregate reduction in the holder's tax basis in such stock with
respect to such dividends will not be greater than the excess of the qualified
preferred dividends paid with respect to such stock during the period the holder
held such stock over the qualified preferred dividends which would have been
paid during such period based on the annual rate of the qualified preferred
dividends payable with respect to such stock. "Qualified preferred dividends"
means any fixed dividend payable with respect to any share of stock which (i)
provides for fixed preferred dividends payable at least annually and (ii) is not
in arrears as to dividends at the time the holder acquires such stock.
If Holding does not have any current or accumulated earnings and
profits, distributions on the Exchange Preferred Stock will constitute, first,
tax-free returns of capital (to the extent of the holder's basis in the Exchange
Preferred Stock) and then capital gain, and will not be eligible for the
dividends received deduction. It is presently not determinable whether Holding
will have any current or accumulated earnings and profits at the time of any
distribution on the Exchange Preferred Stock.
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Redemption of Exchange Preferred Stock or Company Preferred Stock
Gain or loss recognized by a holder on a redemption of the Exchange
Preferred Stock or the Company Preferred Stock, as the case may be, will be
treated as gain or loss from the sale or exchange of the Exchange Preferred
Stock or the Company Preferred Stock, as the case may be, if, taking into
account stock that is actually or constructively owned under the constructive
ownership rules of Code Section 318 by such holder, either (i) the holder's
stock interest in Holding or the Company, as the case may be, is completely
terminated as a result of the redemption or (ii) the redemption is "not
essentially equivalent to a dividend." Under Section 318 of the Code, a person
will generally be treated as the owner of stock of Holding or the Company, as
the case may be, owned by certain related parties or certain entities in which
the person owns an interest and stock of Holding or the Company, as the case may
be, that a holder could acquire through exercise of an option. Whether a
redemption is not essentially equivalent to a dividend depends on each holder's
facts and circumstances, but, in any event, requires a "meaningful reduction" in
such holder's equity interest in Holding or the Company, as the case may be. A
holder of the Exchange Preferred Stock or the Company Preferred Stock, as the
case may be, who sells some or all of the stock of Holding or the Company, as
the case may be, owned by such holder may be able to take such sales into
account, if necessary, to satisfy one of the foregoing conditions, but such a
holder should consult his, her or its own tax advisor. Conversely, a holder who
purchases additional shares of stock of Holding or the Company, as the case may
be, may be required to take such shares into account in determining whether any
of the foregoing conditions are satisfied.
If none of the above conditions is satisfied, the entire amount of the
cash payment received on a redemption will be treated as a distribution (without
offset by the holder's tax basis in the redeemed shares), which will be taxable
as a dividend to the extent of Holding's or the Company's, as the case may be,
current and accumulated earnings and profits. In such case, the holder's tax
basis in the redeemed Exchange Preferred Stock or Company Preferred Stock, as
the case may be, would be transferred to the holder's remaining shares of
Holding stock or Company stock, as the case may be, if any. If the holder does
not retain any shares of Holding stock or Company stock, such basis may be
entirely lost.
Redemption Premium
Under Section 305 of the Code and the applicable Treasury Regulations,
if the redemption price of the Exchange Preferred Stock or the Company Preferred
Stock, as the case may be, exceeds its issue price (i.e., its fair market value
at its date of original issue) by more than a de minimis amount, then such
excess will be treated as a series of constructive distributions over the life
of the preferred stock under a constant interest (economic yield) method that
takes into account the compounding of the yield. The amount of each such
constructive distribution will be treated in the same manner as actual dividends
as described above under "Dividends and Dividends Received Deduction."
If the liquidation preference of an Additional Preferred Share or an
Additional Company Preferred Share, as the case may be, exceeds the issue price
of such share by more than a de minimis amount, then a holder thereof would be
required to treat such excess as a series of constructive distributions over the
term of the Additional Preferred Share or the Additional Company Preferred
Share, as the case may be (as described above), which distributions would be
treated in the same manner as distributions described above under "Dividends and
Dividends Received Deduction." Because Additional Preferred Shares or Additional
Company Preferred Shares, as the case may be, may be issued at different times
prior to April 15, 2003 (and possibly thereafter), it is possible that a holder
would own Additional Preferred Shares or Additional Company Preferred Shares, as
the case may be, with different issue prices. Consequently, if Holding or
Company, as the case may be, had current or accumulated earnings and profits in
such a case, a holder would be treated as having received constructive dividends
on its Additional Preferred Shares or Additional Company Preferred Shares, as
the case may be, in differing amounts depending on the issue price of each
Additional Preferred Share or Additional Company Preferred Share, as the case
may be, and those shares would not be fungible with each other or with either
Exchange Preferred Stock received pursuant to the Exchange Offer or Company
Preferred Stock received pursuant to the exchange right due to their differing
U.S. federal income tax characteristics. As a result, Holding or Company, as the
case may be, might not be able to determine the proper amount of income to be
accrued for any particular share of Exchange Preferred Stock or Company
Preferred Stock, as the case may be.
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Exchange of Exchange Preferred Stock for Company Exchange Debentures
An exchange of the Exchange Preferred Stock for Company Exchange
Debentures pursuant to the terms of the Exchange Preferred Stock exchange right
will be subject to the same general rules as a redemption for cash (as described
above, see "Redemption of Exchange Preferred Stock or Company Preferred Stock"),
except that, the amount of the redemption proceeds will be determined based upon
the issue price of the Company Exchange Debentures. The issue price of such
Company Exchange Debentures will generally be the fair market value of such
Company Exchange Debentures on their issue date, provided that such Company
Exchange Debentures are traded on an established securities market within thirty
days either prior to or following such issue date. If the Exchange Preferred
Stock, but not the Company Exchange Debentures issued therefor, is traded on an
established securities market within either thirty days prior to or following
the issue date of the Company Exchange Debentures, then the issue price of such
Company Exchange Debentures will be the fair market value of the Exchange
Preferred Stock exchanged therefor. In the event that neither the Exchange
Preferred Stock nor the Company Exchange Debentures is traded on an established
securities market within the applicable period, the issue price of the Company
Exchange Debentures will be their stated principal amount--generally their face
value--unless the Company Exchange Debentures do not bear "adequate stated
interest" within the meaning of Section 1274 of the Code, in which case, the
issue price of such Company Exchange Debentures generally will be an amount
equal to the sum of the present values of all payments due under the Company
Exchange Debentures, determined using a discount rate equal to the applicable
federal rate ("AFR") (as discussed below under "Applicable High-Yield Discount
Obligations").
Exchange of Exchange Preferred Stock for Company Preferred Stock
An exchange of Exchange Preferred Stock for Company Preferred Stock
may be either a tax-free or taxable exchange for United States federal income
tax purposes depending on the circumstances of such exchange. Holding intends
to structure any such exchange as part of a tax-free reorganization; however, no
assurance can be given that the transaction will be so structured.
If the exchange of the Exchange Preferred Stock for Company Preferred
Stock is part of a valid tax-free reorganization, then a holder will recognize
neither gain nor loss for United States federal income tax purposes with respect
to such exchange (except for any cash received in lieu of fractional shares). A
holder will have the same tax basis in the Company Preferred Stock as it had in
the Exchange Preferred Stock. A holder's holding period for the Company
Preferred Stock will include the period that the holder held the Exchange
Preferred Stock.
If the exchange of Exchange Preferred Stock for Company Preferred
Stock is a taxable exchange, for United States federal income tax purposes, then
the exchange will be subject to the same general rules as a redemption of
Exchange Preferred Stock for cash, as described above (see "--Redemption of
Exchange Preferred Stock or Company Preferred Stock"), except that the amount of
redemption proceeds will be based on the fair market value of Company Preferred
Stock received. In such case, a holder's tax basis in Company Preferred Stock
received therefor will be its fair market value on the date of the exchange and
the holding period for the Company Preferred Stock will not include the period
during which the holder held the Exchange Preferred Stock.
HOLDERS OF EXCHANGE PREFERRED STOCK ARE URGED TO CONSULT WITH THEIR
OWN TAX ADVISORS WITH RESPECT TO THE POTENTIAL CONSEQUENCES OF AN EXCHANGE OF
EXCHANGE PREFERRED STOCK FOR COMPANY PREFERRED STOCK.
Sale, Exchange or Other Disposition of Exchange Preferred Stock or
Company Preferred Stock
Upon a sale, exchange or other disposition of the Exchange Preferred
Stock (other than an exchange of Exchange Preferred Stock for Company Exchange
Debentures or Company Preferred Stock, as the case may be) or the Company
Preferred Stock, as the case may be, (in each case subject to the discussion of
redemption above), a holder will generally recognize gain or loss for U.S.
federal income tax purposes in an amount equal to the difference between (i) the
sum of the amount of cash and the fair market value of any property received
upon such sale or other taxable disposition and (ii) the holder's
adjusted tax basis in the Exchange Preferred Stock or the Company Preferred
Stock, as the case may be.
A holder's initial tax basis in the Company Preferred Stock (other
than Additional Company Preferred Shares) will depend on whether the exchange is
taxable or tax-free as described above in "--Exchange of Exchange Preferred
Stock for Company Preferred Stock." A holder's initial tax basis in an
Additional Preferred Share or an Additional Company Preferred Share, as the case
may be, will be the fair market value of such Additional Preferred Share or such
Additional Company Preferred Share, as the case may be, on the distribution
date. Thereafter, the initial tax basis in an Additional Preferred Share or
Additional Company Preferred Share, as the case may be, will be (i) increased by
the amount (if any) of any constructive distributions the holder is treated as
having received pursuant to the rules described above under "Redemption Premium"
and (ii) decreased by the portion of any distribution (actual or constructive)
that is treated as a tax-free recovery of basis as described above under
"Dividends and Dividends Received Deduction."
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TAXATION OF THE COMPANY EXCHANGE DEBENTURES
Unless otherwise stated, for purposes of the following discussion, the
term "Company Exchange Debentures" shall mean the Company Exchange Debentures
and any additional Company Exchange Debentures ("Additional Company Exchange
Debentures," each, individually, an "Additional Company Exchange Debenture")
that shall have been issued with respect thereto.
Interest on the Company Exchange Debentures
With respect to any Company Exchange Debenture issued after April 15,
2003, a holder of a Company Exchange Debenture will be required to report stated
interest earned on the Company Exchange Debenture as ordinary interest income
for U.S. federal income tax purposes in accordance with such holder's method of
tax accounting.
Original Issue Discount
Some or all of the Company Exchange Debentures may be considered
issued with original issue discount for U.S. federal income tax purposes. In
general, original issue discount on the Company Exchange Debentures, defined as
the excess of "stated redemption price at maturity" over "issue price," must be
included in a holder's gross income in advance of the receipt of cash
representing that income (regardless of whether the holder is a cash or accrual
method taxpayer).
The "issue price" of a Company Exchange Debenture (other than an
Additional Company Exchange Debenture) will depend on whether the Company
Exchange Debenture or the Exchange Preferred Stock is traded on an established
securities market as discussed above under "Exchange of Exchange Preferred Stock
for Company Exchange Debentures or Company Preferred Stock." The "stated
redemption price at maturity" of the Company Exchange Debentures will equal
their principal amount at maturity plus, in the case of a Company Exchange
Debenture issued on or prior to April 15, 2003, the aggregate amount of the
stated interest payable on such Company Exchange Debentures. For this purpose
(and for purposes of determining the yield to maturity of a Company Exchange
Debenture as discussed below), it will be assumed that the Company will elect to
pay interest in the form of Additional Company Exchange Debentures if such
election will reduce the yield to maturity of the underlying Company Exchange
Debenture (determined as if the cash interest and principal payable with respect
to the Additional Company Exchange Debentures was payable with regard to the
underlying Company Exchange Debenture).
Thus, Additional Company Exchange Debentures issued with respect to a
Company Exchange Debenture will not be considered as a payment of interest and
instead will be aggregated with the Company Exchange Debenture for purposes of
computing and accruing original issue discount on, and determining a holder's
tax basis in, the Company Exchange Debenture and the related Additional Company
Exchange Debentures. At the time an Additional Company Exchange Debenture is
issued, the adjusted issue price of the underlying Company Exchange Debenture
will be allocated between the Company Exchange Debenture and the Additional
Company Exchange Debenture proportionately to their respective principal
amounts, such that the Company Exchange Debenture and the related Additional
Company Exchange Debenture are treated as having the same adjusted issue price
and inherent amount of original issue discount per dollar of principal amount.
The Company Exchange Debenture and the related Additional Company Exchange
Debenture would also be treated as having the same yield to maturity.
Corresponding rules apply to the payment of Additional Company Exchange
Debentures with respect to Additional Company Exchange Debentures.
If it is assumed (under the rules described above) that the Company
will instead elect to pay interest on the underlying Company Exchange Debenture
in the form of cash, and the Company instead actually issues Additional Company
Exchange Debentures in payment of interest thereon, then the underlying Company
Exchange Debenture will be deemed to be reissued on the date such Additional
Company Exchange Debenture is issued at a price equal to the adjusted issue
price of the Company Exchange Debenture on such date.
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Conversely, if it is assumed (under the rules described above) that
the Company will elect to issue Additional Company Exchange Debentures in
payment of interest with respect to the underlying Company Exchange Debenture
and the Company instead elects to pay interest on such underlying Company
Exchange Debenture in the form of cash rather than Additional Company Exchange
Debentures, such a cash payment will result in a pro rata prepayment of the
underlying Company Exchange Debenture (or, as applicable, underlying Additional
Company Exchange Debentures), and may result in gain or loss to the holder.
The Company will report annually to the IRS and to record holders of
the Company Exchange Debentures information with respect to original issue
discount accruing during the calendar year.
A holder of a Company Exchange Debenture will be required to include
in gross income for U.S. federal income tax purposes the sum of the "daily
portions" of original issue discount with respect to the Company Exchange
Debenture for each day of the taxable year during which such holder holds the
Company Exchange Debenture. The daily portions of original issue discount with
respect to a Company Exchange Debenture are determined by allocating to each day
in any "accrual period" a ratable portion of the original issue discount
allocable to such accrual period. Accrual periods with respect to a Company
Exchange Debenture may be any set of periods (which may be of varying lengths)
selected by a holder provided that (i) no accrual period is longer than one year
and (ii) each scheduled payment of interest or principal on the Company Exchange
Debenture occurs on either the first or final day of an accrual period.
The amount of original issue discount allocable to each accrual period
equals the amount determined by multiplying the "adjusted issue price" of the
Company Exchange Debenture at the beginning of the accrual period by the yield
to maturity of the Company Exchange Debenture (i.e., the discount rate that,
when applied to all payments under the Company Exchange Debenture, including
payments of stated interest or principal, results in a present value equal to
the issue price). The "adjusted issue price" at the beginning of any accrual
period is the issue price of the Company Exchange Debenture, plus the amount of
original issue discount taken into account for all prior accrual periods, minus
the amount of all cash payments previously made on the Company Exchange
Debenture (other than payments of stated interest on Company Exchange Debentures
issued after April 15, 2003). This constant yield method of determining the
amount of original issue discount included in income for any period will require
a holder of a Company Exchange Debenture to include increasing amounts of
original issue discount in income in successive accrual periods. The holder
will not be required to recognize as additional income payments of interest with
respect to Company Exchange Debentures issued on or prior to April 15, 2003.
Bond Premium
If the holder's tax basis in Company Exchange Debentures exceeds the
remaining stated redemption premium at maturity, such excess will be deductible
by the holder of the Company Exchange Debentures as amortizable bond premium
over the term of the Company Exchange Debentures under a yield-to-maturity
formula if the holder makes or has already made an election under Section 171 of
the Code. An election under Section 171 of the Code (i) is available only if
the Company Exchange Debentures are held as capital assets, (ii) is revocable
only with the consent of the IRS and (iii) applies to all obligations owned or
subsequently acquired by the holder on or after the first day of the taxable
year in which such election applies. To the extent that the excess is deducted
as amortizable bond premium, the holder's adjusted tax basis in the Company
Exchange Debentures will be reduced. Current Treasury Regulations under Section
171 of the Code provide that any such deduction will offset interest income on
the Company Exchange Debentures and will not be treated as a separate deduction
item. Moreover, such regulations generally conform the treatment of amortizable
bond premium to the treatment of original issue discount as discussed above.
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Sale or Redemption
A holder generally will recognize taxable gain or loss upon the sale,
exchange, retirement or other taxable disposition of a Company Exchange
Debenture equal to the difference between the amount realized upon such
disposition (other than amounts attributable to stated interest on Company
Exchange Debentures issued after April 15, 2003) and its adjusted tax basis in
the Company Exchange Debenture. A holder's adjusted tax basis in a Company
Exchange Debenture and any related Additional Company Exchange Debentures will
equal the issue price of such Company Exchange Debentures, increased by accrued
original issue discount previously included in the holder's gross income with
respect to the Company Exchange Debenture, and decreased by any cash payments
(other than payments of stated interest on Company Exchange Debentures issued
after April 15, 2003) made with respect thereto. Such adjusted tax basis will
be allocated among the Company Exchange Debentures and the related Additional
Company Exchange Debentures in proportion to their respective principal amounts.
Applicable High-Yield Discount Obligations
The original issue discount on any obligation that constitutes an
"applicable high yield discount obligation" is not deductible until paid. An
"applicable high yield discount obligation" is any debt instrument that (i) has
a maturity date which is more than five years from the date of issue, (ii) has a
yield to maturity which equals or exceeds the AFR (as set forth in Section
1274(d) of the Code) for the calendar month in which the obligation is issued
plus five percentage points and (iii) has "significant original issue discount."
The AFR is an interest rate, announced monthly by the IRS, that is based on the
yield of debt obligations issued by the U.S. Treasury. A debt instrument
generally has "significant original issue discount" if the aggregate amount
(including original issue discount) that would be includable in gross income
with respect to the debt instrument for periods before the close of any accrual
period that ends more than five years after the date of issue exceeds the sum of
(i) the aggregate amount of interest to be paid on the instrument before the
close of such accrual period and (ii) the product of the issue price of the
instrument and its yield to maturity. Because, for this purpose, any payment
under the Company Exchange Debentures will be assumed to be made on the last day
permitted under the Company Exchange Debentures, the Company believes that the
Company Exchange Debentures issued on or prior to April 15, 2003 will have
significant original issue discount. Moreover, if the debt instrument's yield to
maturity exceeds the AFR plus six percentage points, a ratable portion of the
issuing corporation's deduction for original issue discount (the "Disqualified
Original Issue Discount") (based on the portion of the yield to maturity that
exceeds the AFR plus six percentage points) will be permanently disallowed. In
the case of corporate holders, the Disqualified Original Issue Discount will be
treated as a dividend, eligible for the dividends received deduction, to the
extent it would have been so treated had such amount been distributed by the
Company with respect to its stock. Whether the Company Exchange Debentures will
constitute applicable high yield debt obligations will depend upon the facts and
circumstances existing at the time of their issuance.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Under Section 3406 of the Code and applicable Treasury Regulations, a
noncorporate U.S. Holder of the Exchange Preferred Stock, the Company Exchange
Debentures or the Company Preferred Stock, as the case may be, who is not
otherwise exempt from backup withholding may be subject to backup withholding at
the rate of 31% with respect to, in the case of Exchange Preferred Stock or
Company Preferred Stock, actual or constructive dividends paid with respect
thereto, or, in the case of Company Exchange Debentures, interest paid thereon,
or the proceeds of a sale, exchange or redemption of the Exchange Preferred
Stock, the Company Exchange Debentures or the Company Preferred Stock, as the
case may be. Generally, backup withholding applies only when the taxpayer (i)
fails to furnish or certify his correct taxpayer identification number to the
payor in the manner required, (ii) is notified by the IRS that he has failed to
report payments of interest or dividends properly or (iii) under certain
circumstances, fails to certify that he has not been notified by the IRS that he
is subject to backup withholding for failure to report interest or dividend
payments. Holders of Exchange Preferred Stock, Company Preferred Stock and
Company Exchange Debentures should consult their own tax advisors regarding
their qualification for exemption from backup withholding and the procedures for
obtaining any applicable exemption. Any amounts withheld under the backup
withholding rules from a payment to a holder will be allowed as a refund or a
credit against such holder's U.S. federal income tax liability, provided that
the required information is furnished to the IRS.
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SPECIAL TAX RULES APPLICABLE TO NON-U.S. HOLDERS
Dividends and Interest in General
Dividends on the Exchange Preferred Stock or the Company Preferred
Stock, as the case may be, (including dividends in the form of additional shares
and constructive dividends) actually or deemed paid to a Non-U.S. Holder that
are not effectively connected with a trade or business carried on by such Non-
U.S. Holder in the United States are generally subject to a 30% United States
withholding tax. The rate of withholding may be reduced to the extent provided
by a tax treaty to which the United States is a party if the recipient of the
dividends is entitled to the benefits of the treaty. Non-U.S. Holders seeking a
reduction in the rate of withholding under an income tax treaty and Non-U.S.
Holders seeking an exemption from withholding tax on dividends effectively
connected with a trade or business carried on by such Non-U.S. Holder in the
United States (as described below) will be required to comply with certain
certification and other requirements. A Non-U.S. Holder that is eligible for a
reduced rate of United States withholding tax pursuant to a tax treaty but who
does not comply with the certification and other requirements at the time such
dividends are paid may obtain a refund of any excess amounts withheld by filing
a tax return with the IRS that establishes such holder's eligibility for treaty
benefits.
Subject to the discussion below under "United States Information
Reporting Requirements and Backup Withholding Tax for Non-U.S. Holders,"
payments of principal (and premium, if any) and interest (including original
issue discount) by the Company or any agent of the Company (acting in capacity
as such) to a Non-U.S. Holder of a Company Exchange Debenture will not be
subject to U.S. federal withholding tax, provided, in the case of interest
(including original issue discount) that (i) the Non-U.S. Holder does not
actually or constructively own 10% or more of the total combined voting power of
all classes of stock of the Company entitled to vote, (ii) the Non-U.S. Holder
is not a controlled foreign corporation for U.S. tax purposes that is related to
the Company (directly or indirectly) through stock ownership and (iii) either
(A) the Non-U.S. Holder certifies to the Company or its agent under penalties of
perjury that it is not a U.S. person and provides its name and address or (B) a
securities clearing organization, bank or other financial institution that holds
customers' securities in the ordinary course of its trade or business (a
"financial institution") and holds the Company Exchange Debentures certifies to
the Company or its agent under penalties of perjury that such statement has been
received from the Non-U.S. Holder by it or by another financial institution and
furnishes the payor with a copy thereof. Subject to the discussion of
effectively connected income below, a Non-U.S. Holder that does not qualify for
exemption from withholding under the preceding sentence generally will be
subject to withholding of U.S. federal income tax at the rate of 30% (or lower
applicable treaty rate) on payments of interest (including original issue
discount) on the Company Exchange Debentures.
If the dividends on the Exchange Preferred Stock or the Company
Preferred Stock or the interest (including original issue discount) on the
Company Exchange Debentures are effectively connected with a trade or business
carried on in the United States by a Non-U.S. Holder, or, alternatively, if a
tax treaty applies, attributable to a United States permanent establishment
maintained by the Non-U.S. Holder, such dividends or interest will be subject to
tax at the rates and in the manner applicable to U.S. Holders. Effectively
connected dividends or interest, or dividends or interest attributable to a
United States permanent establishment, as the case may be, received by a
corporate Non-U.S. Holder may also, under certain circumstances, be subject to
an additional "branch profits tax" at a 30% rate or such lower rate as may be
specified by law or an applicable income tax treaty. Non-U.S. Holders seeking a
reduced rate of tax pursuant to an income tax treaty must comply with certain
certification and other requirements.
143
<PAGE>
Gain on Disposition of Exchange Preferred Stock, Company Exchange
Debentures or Company Preferred Stock
Subject to the discussion below under "United States Information
Reporting Requirements and Backup Withholding Tax for Non-U.S. Holders," Non-
U.S. Holders generally will not be subject to U.S. federal income tax in respect
of gain recognized on a sale, exchange or other disposition (including a
redemption that is not treated as a dividend) of the Exchange Preferred Stock or
the Company Exchange Debentures or the Company Preferred Stock, as the case may
be, unless (i) the gain is effectively connected with a trade or business
conducted by the Non-U.S. Holder within the United States or, alternatively, if
a tax treaty applies, attributable to a United States permanent establishment
maintained by the Non-U.S. Holder (in which cases such gain will be subject to
tax at the rates and in the manner applicable to U.S. persons and, if the holder
is a foreign corporation, the branch profits tax described above may also
apply), (ii) in the case of an individual Non-U.S. Holder, such holder is
present in the United States for 183 or more days in the taxable year of the
disposition and meets certain other requirements, (iii) the Non-U.S. Holder is
subject to tax pursuant to the provisions of the United States federal income
tax laws applicable to certain United States expatriates, or (iv) in the case of
the disposition of Exchange Preferred Stock, Holding, or, in the case of the
disposition of Company Preferred Stock, the Company is or has been during
certain periods preceding the disposition a "U.S. real property holding
corporation" for U.S. federal income tax purposes (which neither Holding nor the
Company believes it is or is likely to become).
United States Information Reporting Requirements and Backup
Withholding Tax for Non-U.S. Holders
Under current law, backup withholding will not apply to actual or
constructive dividends paid or deemed paid before January 1, 2000, with respect
to the Exchange Preferred Stock or the Company Preferred Stock to a Non-U.S.
Holder, that are either (i) subject to withholding at the 30% rate (or at a
reduced rate under an applicable treaty) or (ii) paid at an address outside the
United States. However, dividends paid or deemed paid after December 31, 1999,
will generally be subject to information reporting and backup withholding unless
the Non-U.S. Holder provides a valid Form W-8 (or substitute form) and meets
other applicable certification requirements establishing such holder's foreign
status or the Non-U.S. Holder is a corporation or other exempt recipient and
certain conditions are met. Similarly, a Non-U.S. Holder of a Company Exchange
Debenture generally will be exempt from backup withholding and information
reporting requirements with respect to payments of principal or interest
(including original issue discount), but will be required to comply with certain
certification and identification procedures (as described above in the second
paragraph of "Distributions in General") in order to obtain such exemption. The
Company must report annually to the IRS and to each Non-U.S. Holder any interest
(including original issue discount) that is subject to U.S. withholding tax or
that is exempt from withholding pursuant to a treaty or other exemption.
144
<PAGE>
The payment of the proceeds of a sale of Exchange Preferred Stock,
Company Exchange Debentures or Company Preferred Stock (including a redemption
that is not treated as a dividend) to or through the United States office of a
broker is subject to information reporting and backup withholding at a rate of
31% unless either (i) the Non-U.S. Holder is a corporation or other exempt
recipient that meets certain requirements or (ii) the Non-U.S. Holder provides a
valid Form W-8 (or substitute form). The payment of the proceeds of a sale of
Exchange Preferred Stock, Company Exchange Debentures or Company Preferred Stock
(including a redemption that is not treated as a dividend) before January 1,
2000, to or through the foreign office of a broker generally will not be subject
to backup withholding. After December 31, 1999, backup withholding will apply
if information reporting is required. Information reporting requirements will
apply to a payment of proceeds from the disposition of Exchange Preferred Stock,
Company Exchange Debentures or Company Preferred Stock (including a redemption
that is not treated as a dividend) through a foreign office of a broker that is
a U.S. person or a "U.S. related person," unless the broker has documentary
evidence in its files that the owner is a Non-U.S. Holder and the broker has no
actual knowledge to the contrary. 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
certain periods is effectively connected with the conduct of a United States
trade or business or (iii) after December 31, 1959, a foreign partnership of
which either (A) more than 50% of the income or capital interest is owned by
U.S. Holdings or (B) with certain connections to the United States.
After December 31, 1999, payment made through a foreign intermediary
satisfying certain requirements will not be subject to either backup withholding
or information reporting. Holders should consult with their own tax advisors
regarding these rules.
Backup withholding is not an additional tax. Any amounts withheld
under the backup withholding rules may be allowed as a refund or a credit
against such holder's United States federal income tax liability, provided the
required information is furnished to the IRS.
THE FOREGOING SUMMARY IS INCLUDED HEREIN FOR GENERAL INFORMATION ONLY.
ACCORDINGLY, HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO ANY FEDERAL,
STATE, LOCAL, FOREIGN OR OTHER TAX CONSEQUENCES TO THEM OF RECEIVING, OWNING AND
DISPOSING OF EXCHANGE PREFERRED STOCK AND OF RECEIVING, OWNING AND DISPOSING OF
THE COMPANY EXCHANGE DEBENTURES OR THE COMPANY PREFERRED STOCK, AS THE CASE MAY
BE.
145
<PAGE>
DESCRIPTION OF THE SUBORDINATED NOTES
The Subordinated Notes were issued in an aggregate principal amount at
maturity of $115.0 million and will mature on April 15, 2008. The Subordinated
Notes were issued under an Indenture dated as of April 7, 1998 (the "Indenture")
between Holding, Hudson RCI and United States Trust Company of New York, as
trustee, and constitute general unsecured obligations of Hudson RCI. Interest
on the Subordinated Notes will accrue at the rate of 9 1/8% per annum and will
be payable semiannually in arrears on each April 15 and October 15 of each year,
commencing April 15, 2003, to the holders of record on the immediately preceding
April 1 and October 1, respectively.
On or after April 15, 2003, the Subordinated Notes may be redeemed at the
option of Hudson RCI, in whole or in part, at a redemption price equal to the
applicable percentage of the principal amount thereof set forth below, plus
accrued and unpaid interest, if any, to the redemption date, if redeemed during
the twelve-month period commencing on April 15 in the years set forth below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2003..................................................... 104.563%
2004..................................................... 103.042%
2005..................................................... 101.521%
2006 and thereafter...................................... 100.000%
</TABLE>
Notwithstanding the foregoing, at any time on or prior to April 15, 2001,
Hudson RCI may use the net proceeds of one or more Equity Offerings (as defined
in the Indenture) to redeem up to 35% of the Subordinated Notes at a redemption
price equal to 109 1/8% of the principal amount thereof plus accrued and unpaid
interest, to the redemption date; provided, however, that after any such
redemption the aggregate principal amount of the Subordinated Notes outstanding
must equal at least 65% of the aggregate principal amount of the Subordinated
Notes originally issued; and provided further, that such redemption shall occur
within 60 days of the date of the closing of the Equity Offering.
In the event of a Change of Control (as defined in the Indenture), each
holder of Subordinated Notes has the right to require the repurchase of such
holder's Subordinated Notes at a purchase price equal to 101% of the principal
amount thereof, plus accrued and unpaid interest, if any, to the purchase date.
The Indenture contains covenants that, among other things, (i) the
ability of Hudson RCI, any Subsidiary Guarantors and other Restricted
Subsidiaries to incur additional Debt, (ii) the making of certain Restricted
Payments including Investments, (iii) the creation of certain Liens, (iv) the
issuance and sale of Capital Stock of Restricted Subsidiaries, (v) Asset Sales,
(vi) payment restrictions affecting Restricted Subsidiaries, (vii) transactions
with Affiliates, (viii) the ability of Hudson RCI and any Subsidiary Guarantor
to incur layered Debt, (ix) the ability of Holding to engage in any business or
activity other than those relating to ownership of Capital Stock of Hudson RCI
and (x) certain mergers, consolidations and transfers of assets by or involving
the Company (the foregoing capitalized terms are defined in the Indenture). All
of these limitations are subject to a number of important qualifications, as set
forth in the Indenture.
146
<PAGE>
DESCRIPTION OF CAPITAL STOCK
RIVER HOLDING CORP.
Holding's authorized capital stock consists of 15,000,000 shares of common
stock, $.01 par value, and 2,000,000 shares of preferred stock, $.01 par value.
Common Stock
Holders of common stock of Holding are entitled to one vote for each share
held of record on all matters submitted to a vote of stockholders. There is no
cumulative voting for the election of directors, which means that the holders of
a majority of the shares of common stock voted in the election of directors will
be able to elect all of the directors they nominate for election. Subject to
preferences that may be applicable to any outstanding preferred stock, holders
of common stock are entitled to receive ratably such dividends as may be
declared by the Board of Directors out of funds legally available therefor. In
the event of a liquidation, dissolution or winding up of Holding, holders of
common stock are entitled to share ratably in all assets remaining after payment
to all creditors and payments required to be made in respect of any outstanding
preferred stock.
Preferred Stock
Holding's Certificate of Incorporation authorizes the issuance in series of
up to 2,000,000 shares of preferred stock and permits Holding's Board of
Directors to establish the voting rights, designations, powers, preferences and
relative and other special rights and the qualifications, limitations and
restrictions of each of such series. The Board has established such
designations and preferences for the Exchange Preferred Stock. See "Description
of the Exchange Preferred Stock" for a description of the terms of the Exchange
Preferred Stock.
Delaware Anti-Takeover Law
Holding is a Delaware corporation and is, therefore, subject to Section 203
of the Delaware General Corporation Law. In general, Section 203 prevents an
"interested stockholder" (defined generally as a person owning 15% or more of a
corporation's outstanding voting stock) from engaging in a "business
combination" (as defined in Section 203) with a Delaware corporation for three
years following the date such person became an interested stockholder unless (i)
before such person became an interested stockholder the board of directors of
the corporation approved either the business combination or the transaction in
which the interested stockholder became an interested stockholder; (ii) upon
consummation of the transaction that resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced (excluding stock held by directors who are also officers of the
corporation and by employee stock plans that do not provide employees with the
right to determine confidentially whether shares held subject to the plan will
be tendered in a tender or exchange offer); or (iii) on or subsequent to the
date such person became an interested stockholder, the business combination was
approved by the board of directors of the corporation and authorized at a
meeting of stockholders by the affirmative vote of the holders of two-thirds of
the outstanding voting stock of the corporation not owned by the interested
stockholder. Under Section 203, the restrictions described above also do not
apply to certain business combinations proposed by an interested stockholder
following the announcement or notification of one of certain extraordinary
transactions involving the corporation and a person who had not been an
interested stockholder during the previous three years or who became an
interested stockholder with the approval of a majority of the corporation's
directors.
Limitations on Directors' Liability and Indemnification
Holding's Certificate of Incorporation provides that a director of Holding
shall not be personally liable to Holding or its stockholders for monetary
damages for breach of fiduciary duty as a director except for liability (i) for
any breach of the director's duty of loyalty to Holding or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the
Delaware General Corporation Law or (iv) for any transaction from which the
director derived an improper personal benefit. Holding's Certificate of
Incorporation further provides that if the Delaware General Corporation Law is
amended
147
<PAGE>
to authorize further elimination or limitation of the liability of directors,
then the liability of a director of Holding shall be limited to the fullest
extent permitted by the amended Delaware law. Holding has entered into separate
indemnification agreements with each of its directors. These agreements
generally require Holding to indemnify the directors against liabilities that
may arise by reason of their status or service as directors, officers, employees
or agents of Holding.
At present, there is no pending litigation or proceeding involving a
director or officer of Holding where indemnification will be required or
permitted, and Holding is not aware of any threatened litigation or proceeding
which may result in a claim for such indemnification.
Applicability of California Law
Holding may be subject to Section 2115 of the California Corporations Code.
If so, under California law, certain provisions of the California Corporations
Code will be applicable to Holding, including those relating to the payment of
dividends. These provisions, which are more restrictive than analogous
provisions of Delaware law, would permit Holding to pay dividends only if the
amount of retained earnings immediately prior to the dividend equals or exceeds
the amount of the dividend, or if immediately after payment of the dividend the
sum of Holding's assets is 1 1/4 times its liabilities and its current assets
at least equal its current liabilities (or, if Holding's average earnings before
income taxes and interest expense for the two preceding fiscal years was less
than its average interest expense for those fiscal years, Holding's current
assets must be at least 1 1/4 times its current liabilities).
HUDSON RCI
Hudson RCI's authorized capital stock consists of 15,000,000 shares of
common stock, $.01 par value, and 2,000,000 shares of preferred stock, $.01 par
value.
Common Stock
Holders of common stock of Hudson RCI are entitled to one vote for each
share held of record on all matters submitted to a vote of stockholders. There
is cumulative voting under California law for the election of Directors.
Subject to preferences that may be applicable to any outstanding preferred
stock, holders of common stock are entitled to receive ratably such dividends as
may be declared by the Board of Directors out of funds legally available
therefor, although the agreements governing Hudson RCI's indebtedness contain
provisions which limit Hudson RCI's ability to pay dividends on its common
stock. In the event of a liquidation, dissolution or winding up of Hudson RCI,
holders of common stock are entitled to share ratably in all assets remaining
after payment to all creditors and payments required to be made in respect of
any outstanding preferred stock.
Preferred Stock
Hudson RCI's Articles of Incorporation authorize the issuance in series of
up to 2,000,000 shares of preferred stock and permit Hudson RCI's Board of
Directors to establish the voting rights, designations, powers, preferences and
relative and other special rights and the qualifications, limitations and
restrictions of each of such series. Hudson RCI's Board of Directors has
established such designations and preferences for the Mirror Preferred Stock,
300,000 shares of which were issued upon the consummation of the
Recapitalization. See "Description of Exchange Preferred Stock--Mirror
Preferred Stock." In addition, Hudson RCI's Board of Directors has established
such designations and preferences for the Company Preferred Stock, no shares of
which have been issued. See "Description of the Company Exchange Securities--
Company Exchange Stock."
148
<PAGE>
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Preferred Stock for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Preferred Stock. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of Exchange Preferred Stock
received in exchange for Holding Preferred Stock where such Holding Preferred
Stock was acquired as a result of market-making activities or other trading
activities and not acquired directly from Holding. Holding and the Company have
agreed that for a period of 180 days after the Expiration Date they will make
this Prospectus, as amended or supplemented, available to any broker-dealer for
use in connection with any such resale. In addition, until November 24, 1998,
all dealers effecting transactions in the Exchange Preferred Stock may be
required to deliver a prospectus.
Holding will not receive any proceeds from any sale of Exchange Preferred
Stock by broker-dealers. Exchange Preferred Stock received by broker-dealers
for their own account pursuant to the Exchange Offer may be sold from time to
time in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the Exchange Preferred Stock or
a combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or purchasers of any such Exchange
Preferred Stock. Any broker-dealer that resells Exchange Preferred Stock that
was received by it for its own account pursuant to the Exchange Offer and any
broker or dealer that participates in a distribution of such Exchange Preferred
Stock may be deemed to be an "underwriter" within the meaning of the Securities
Act, and any profit on any such resale of Exchange Preferred Stock and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 180 days following the consummation of the Exchange Offer,
Holding or the Company will promptly send additional copies of this Prospectus
and any amendment or supplement to this Prospectus to any broker-dealer that
requests such documents in the Letter of Transmittal. Holding and the Company
have agreed to pay the expenses incident to the Exchange Offer (including the
expenses of one counsel for the holders of the Holding Preferred Stock) other
than commissions or concessions of any brokers or dealers and will indemnify
the Holders of the Holding Preferred Stock (including any broker-dealers)
against certain liabilities, including liabilities under the Securities Act, in
connection with the Exchange Offer. Insofar as indemnification for liabilities
arising under the Securities Act may be permitted to directors, officers and
persons controlling Holding pursuant to the foregoing provisions, or otherwise,
Holding has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
EXPERTS
The audited financial statements and schedules included in this
Registration Statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm in giving said
reports.
LEGAL MATTERS
Certain legal matters with respect to the legality of the Exchange
Preferred Stock offered hereby will be passed upon for the Company by Riordan &
McKinzie, a Professional Corporation, Los Angeles, California. Certain
principals and employees of Riordan & McKinzie are limited partners in a
partnership which is a limited partner of an FS&Co. investment fund that owns a
majority of Holding's (and indirectly the Company's) equity interests. See
"Security Ownership of Certain Beneficial Owners."
149
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FINANCIAL STATEMENTS--HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
Report of Independent Public Accountants.................................. F-2
Consolidated Balance Sheets as of December 27, 1996 and December 26, 1997. F-3
Consolidated Statements of Operations for the Years Ended December 29,
1995, December 27, 1996 and December 26, 1997............................ F-4
Consolidated Statements of Stockholders' Equity for Years Ended December
29, 1995 and December 27, 1996 and December 26, 1997..................... F-5
Consolidated Statements of Cash Flows for Years Ended December 29, 1995,
December 27, 1996 and December 26, 1997.................................. F-6
Notes to Consolidated Financial Statements................................ F-7
Consolidated Balance Sheet as of June 26, 1998 (unaudited)................ F-14
Consolidated Statements of Operations for the Six Months Ended June 27,
1997 and June 26, 1998 (unaudited)....................................... F-15
Consolidated Statements of Cash Flows for the Six Months Ended June 27,
1997 and June 26, 1998 (unaudited)....................................... F-16
Notes to Consolidated Financial Statements................................ F-17
FINANCIAL STATEMENTS--RIVER HOLDING CORP.
Report of Independent Public Accountant................................... F-19
Balance Sheet as of March 27, 1998........................................ F-20
Note to Balance Sheet..................................................... F-21
Consolidated Balance Sheet as of June 26, 1998............................ F-22
Consolidated Statements of Operations for the Three Months Ended June 26,
1998..................................................................... F-23
Consolidated Statements of Cash Flows for the Three Months Ended June 26,
1998..................................................................... F-24
Notes to Consolidated Financial Statements................................ F-25
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
Pro Forma Consolidated Statement of Operations for the Year Ended December
26, 1997 and the Six Months Ended June 26, 1998.......................... P-1
Notes to the Pro Forma Consolidated Financial Statements.................. P-3
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Hudson Respiratory Care Inc.:
We have audited the accompanying consolidated balance sheets of HUDSON
RESPIRATORY CARE INC. (a California corporation) and subsidiaries as of
December 26, 1997 and December 27, 1996, and the related consolidated
statements of operations, stockholder's equity and cash flows for the years
ended December 26, 1997, December 27, 1996, and December 29, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Hudson Respiratory Care
Inc. and subsidiaries as of December 26, 1997 and December 27, 1996, and the
results of their operations and their cash flows for the years ended December
26, 1997, December 27, 1996 and December 29, 1995 in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Orange County, California
February 27, 1998 (except with respect to the matter discussed in Note 11, as
to which the date is April 7, 1998)
F-2
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 27, 1996 AND DECEMBER 26, 1997
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS 1996 1997
------ ------- -------
<S> <C> <C>
CURRENT ASSETS:
Cash and short-term investments............................ $ 1,420 $ 470
Accounts receivable, less allowance for doubtful accounts
of $111 and $258 at December 27, 1996 and December 26,
1997, respectively........................................ 20,732 21,282
Inventories................................................ 14,017 16,613
Other assets............................................... 1,247 1,151
------- -------
Total current assets...................................... 37,416 39,516
------- -------
PROPERTY, PLANT AND EQUIPMENT, at cost:
Land....................................................... 2,172 2,044
Buildings.................................................. 13,284 13,369
Leasehold improvements..................................... 1,315 1,322
Machinery and equipment.................................... 54,751 61,316
Furniture and fixtures..................................... 1,941 2,128
Construction in progress................................... 5,457 1,592
------- -------
78,920 81,771
Less--Accumulated depreciation and amortization............ 45,453 48,728
------- -------
33,467 33,043
------- -------
OTHER ASSETS:
Intangible assets, net..................................... 5,640 4,436
Other assets............................................... 387 559
------- -------
6,027 4,995
------- -------
$76,910 $77,554
======= =======
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Notes payable to bank...................................... $ 4,000 $ 4,000
Accounts payable........................................... 3,854 3,842
Accrued liabilities........................................ 5,374 5,244
Management bonus........................................... -- 20,000
------- -------
Total current liabilities................................. 13,228 33,086
------- -------
NOTES PAYABLE TO BANK, net of current portion................ 24,146 16,250
------- -------
ACCRUED EQUITY PARTICIPATION PLAN............................ 19,664 5,703
------- -------
COMMITMENTS AND CONTINGENCIES (Note 4)
STOCKHOLDER'S EQUITY:
Common stock, no par value:
Authorized--15,000,000 shares
Issued and outstanding--14,468,720 shares
at December 27, 1996 and December 26, 1997................ 3,789 3,789
Cumulative translation adjustment.......................... (197) (345)
Retained earnings.......................................... 16,280 19,071
------- -------
19,872 22,515
------- -------
$76,910 $77,554
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 29, 1995, DECEMBER 27, 1996 AND DECEMBER 26, 1997
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996 1997
-------- ------- -------
<S> <C> <C> <C>
NET SALES......................................... $ 86,825 $93,842 $99,509
COST OF SALES..................................... 47,582 49,405 51,732
-------- ------- -------
Gross profit...................................... 39,243 44,437 47,777
-------- ------- -------
OPERATING EXPENSES:
Selling......................................... 8,283 8,961 9,643
Distribution.................................... 4,595 4,829 5,240
General and administrative...................... 9,769 11,277 11,456
Research and development........................ 2,064 2,253 1,845
PROVISION FOR EQUITY PARTICIPATION PLAN AND
BONUSES.......................................... (11,415) (8,249) (6,954)
-------- ------- -------
Income from operations............................ 3,117 8,868 12,639
-------- ------- -------
OTHER INCOME AND (EXPENSES):
Interest expense................................ (2,424) (2,177) (1,834)
Other, net...................................... (811) 463 638
-------- ------- -------
(3,235) (1,714) (1,196)
-------- ------- -------
Income (loss) before provision for income taxes... (118) 7,154 11,443
PROVISION FOR STATE INCOME TAXES.................. 280 73 150
-------- ------- -------
Net income (loss)................................. $ (398) $ 7,081 $11,293
======== ======= =======
Pro forma net income (loss) assuming conversion to
C corporation for income tax purposes (Note 5)... $ (111) $ 4,292 $ 6,866
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 29, 1995, DECEMBER 27, 1996 AND DECEMBER 26, 1997
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
----------------- CUMULATIVE
NUMBER TRANSLATION RETAINED
OF SHARES AMOUNT ADJUSTMENT EARNINGS TOTAL
---------- ------ ----------- -------- -------
<S> <C> <C> <C> <C> <C>
BALANCE, December 30, 1994..... 14,468,720 $3,789 $(204) $21,684 $25,269
Stockholder distributions.... -- -- -- (5,637) (5,637)
Foreign currency translation
loss (Note 1)............... -- -- (122) -- (122)
Net loss..................... -- -- -- (398) (398)
---------- ------ ----- ------- -------
BALANCE, December 29, 1995..... 14,468,720 3,789 (326) 15,649 19,112
Stockholder distributions.... -- -- -- (6,450) (6,450)
Foreign currency translation
gain (Note 1)............... -- -- 129 -- 129
Net income................... -- -- -- 7,081 7,081
---------- ------ ----- ------- -------
BALANCE, December 27, 1996..... 14,468,720 3,789 (197) 16,280 19,872
Stockholder distributions.... -- -- -- (8,502) (8,502)
Foreign currency translation
loss (Note 1)............... -- -- (148) -- (148)
Net income................... -- -- -- 11,293 11,293
---------- ------ ----- ------- -------
BALANCE, December 26, 1997..... 14,468,720 $3,789 $(345) $19,071 $22,515
========== ====== ===== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 29, 1995, DECEMBER 27, 1996 AND DECEMBER 26, 1997
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).............................. $ (398) $ 7,081 $ 11,293
Adjustments to reconcile net income (loss) to
net cash provided by operating activities--
Depreciation and amortization................ 6,820 6,133 5,847
Gain on disposal of equipment................ (20) (872) (618)
Increase in accounts receivable.............. (2,430) (3,503) (550)
(Increase) decrease in inventories........... 1,777 (1,223) (2,596)
(Increase) decrease in other current assets.. 1 (311) 96
Increase in other assets..................... (23) (152) (100)
Increase (decrease) in accounts payable...... (283) 564 (12)
Increase (decrease) in accrued liabilities... (920) 167 (130)
Increase (decrease) in accrued equity
participation plan.......................... 11,415 8,249 (13,961)
Increase in management bonus accrual......... -- -- 20,000
-------- -------- --------
Net cash provided by operating activities.. 15,939 16,133 19,269
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment..... (5,850) (6,395) (4,659)
Proceeds from sale of property, plant and
equipment..................................... 33 1,058 1,068
Increase in notes receivable................... (18) (2) (67)
Increase in cash surrender value of life
insurance..................................... (5) (5) (5)
Additions of intangible assets................. (248) (10) (10)
Purchase of Artema (Note 9).................... -- (6,000) --
-------- -------- --------
Net cash used in investing activities...... (6,088) (11,354) (3,673)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable to bank............. (6,743) (4,000) (14,396)
Borrowings on notes payable to bank............ 500 6,782 6,500
Stockholder distributions...................... (5,637) (6,450) (8,502)
-------- -------- --------
Net cash used in financing activities...... (11,880) (3,668) (16,398)
-------- -------- --------
Effect of exchange rate changes on cash.......... (122) 129 (148)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND SHORT-TERM
INVESTMENTS..................................... (2,151) 1,240 (950)
CASH AND SHORT-TERM INVESTMENTS, beginning of
year............................................ 2,331 180 1,420
-------- -------- --------
CASH AND SHORT-TERM INVESTMENTS, end of year..... $ 180 $ 1,420 $ 470
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for--
Interest..................................... $ 2,441 $ 1,688 $ 1,969
======== ======== ========
Income taxes................................. $ 155 $ 94 $ 243
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 26, 1997
1. COMPANY BACKGROUND
Hudson Respiratory Care Inc. (Hudson or the Company), founded in 1945, is a
manufacturer and marketer of disposable medical products utilized in the
respiratory care and anesthesia segments of the domestic and international
health care markets. The Company's respiratory care and anesthesia product
lines include such products as oxygen masks, humidification systems,
nebulizers, cannulae and tubing. In the United States, the Company markets its
products to a variety of health care providers, including hospitals and
alternate site service providers such as outpatient surgery centers, long-term
care facilities, physician offices and home health care agencies.
Internationally, the Company sells its products to distributors that market to
hospitals and other health care providers. The Company's products are sold to
distributors and alternate site service providers throughout the United States
and internationally. The Company's operations are conducted from its primary
facility in Temecula, California, facilities in Arlington Heights and Elk
Grove, Illinois, and a facility in Ensenada, Mexico.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Principles of Consolidation
The consolidated financial statements include the accounts of Hudson and
subsidiaries, Industrias Hudson and Oxy Air LLC (Oxy). Hudson owns 79 percent
and 99 percent of Industrias Hudson and Oxy, respectively. Hudson's sole
stockholder owns the remaining 21 percent and 1 percent of Industrias Hudson
and Oxy, respectively. Accordingly, the accompanying financial statements have
been prepared on a consolidated basis assuming 100 percent ownership, since
all of the issued and outstanding common shares are owned either directly or
indirectly by the same stockholder. The minority interests in Industrias
Hudson and Oxy not owned by Hudson are not material to the consolidated
financial position or results of operations of the Company.
All significant intercompany accounts and transactions have been eliminated.
Hudson and subsidiaries are collectively referred to herein as the Company.
b. Use of Estimates in the Financial Statements
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.
c. Revenue Recognition
Revenue is recognized upon shipment of product and satisfaction of any other
performance requirements. The Company provides in the period that the related
revenue is recognized, allowances for returns and rebates based upon
historical experience and analysis of other factors.
d. Cash and Short-Term Investments
The Company's policy is to invest cash in excess of operating requirements
in income-producing short-term instruments. Short-term investments are stated
at cost plus accrued interest, which approximates market value. For purposes
of the consolidated statements of cash flows, the Company considers all highly
liquid debt instruments purchased with an original maturity of three months or
less to be cash equivalents.
e. Inventories
Inventories are stated at the lower of cost or market. Effective January 1,
1996, the Company changed its method of pricing inventory from the last-in,
first-out (LIFO) method to the first-in, first-out (FIFO) method. In
accordance with APB Opinion No. 20, the Company has restated all prior periods
to reflect the conversion to the
F-7
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FIFO method. The effect of the change was not material to the balance sheet or
statement of operations. The change in method was made to improve
comparability of the Company's financial statements and report inventory
balances that more closely reflect the inventory's current cost.
At December 27, 1996 and December 26, 1997, inventories consisted of the
following (amounts in thousands):
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Raw materials.............................................. $ 3,962 $ 4,802
Work-in-process............................................ 4,531 4,681
Finished goods............................................. 5,524 7,130
------- -------
$14,017 $16,613
======= =======
</TABLE>
Work-in-process and finished goods include raw materials, labor and
overhead. Certain finished goods are purchased for resale and are not
manufactured.
f. Depreciation and Amortization Methods
Depreciation of property, plant and equipment is provided using both the
straight-line and declining-balance methods over the following estimated
useful lives:
<TABLE>
<S> <C>
Buildings..................................................... 31.5 years
Leasehold improvements........................................ 31.5 years
Machinery and equipment....................................... 5 to 7 years
Furniture and fixtures........................................ 7 years
Heaters....................................................... 5 years
</TABLE>
Upon retirement or disposal of depreciable assets, the cost and related
accumulated depreciation are removed and the resulting gain or loss is
reflected in income from operations. Major renewals and betterments are
capitalized while maintenance costs and repairs are expensed in the year
incurred.
g. Intangible Assets
Amortization of intangible assets is provided using the straight-line method
over the applicable amortization period. The following is a summary of the
components of intangible assets as of fiscal 1996 and 1997 (amounts in
thousands):
<TABLE>
<CAPTION>
AMORTIZATION
PERIOD 1996 1997
-------------- ------- -------
<S> <C> <C> <C>
Covenant not-to-compete................... 5 to 7 years $ 6,525 $ 3,500
Patents................................... 10 years 3,183 3,183
Loan acquisition costs.................... Loan term 258 268
Goodwill.................................. 15 to 20 years 1,920 1,920
Other..................................... 5 to 20 years 233 133
-------------- ------- -------
12,119 9,004
Less--Accumulated amortization............ (6,479) (4,568)
------- -------
$ 5,640 $ 4,436
======= =======
</TABLE>
h. Foreign Currency Translation
The Company follows the principles of Statement of Financial Accounting
Standards (SFAS) No. 52, "Foreign Currency Translation", using the local
currency as the functional currency of its operating subsidiaries.
F-8
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Accordingly, all assets and liabilities outside the United States are
translated into U.S. dollars at the rate of exchange in effect at the balance
sheet date. Income and expense items are translated at the weighted average
exchange rate prevailing during the period. Since January 1, 1997, Mexico's
currency has been considered highly inflationary, and Industrias Hudson
continues to use the Mexican peso, not the U.S. dollar, as its functional
currency. This approach has an immaterial impact on the Company's financial
statements versus using the U.S. dollar as the functional currency of
Industrias Hudson.
i. Fiscal Year-End
The Company reports its operations on a 52-53 week fiscal year ending on the
Friday closest to December 31. The fiscal years ended December 29, 1995,
December 27, 1996, and December 26, 1997, were all comprised of 52 week years.
j. Post-employment and Post-retirement Benefits
The Company does not provide post-employment or post-retirement benefits to
employees. Accordingly, SFAS No. 112, "Employers' Accounting for Post-
employment Benefits", and SFAS No. 106, "Employers' Accounting for Post-
retirement Benefits", have no impact on the Company's financial statements.
k. Long-Lived Assets
The Company adopted SFAS No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed of", on January 1, 1996.
This standard requires that long-lived assets and certain identifiable
intangibles held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. The adoption of this standard did not have a
material effect on the consolidated financial statements.
l. New Accounting Pronouncements
In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income".
This Statement requires that all items that meet the definition of components
of comprehensive income be reported in a financial statement for the period in
which they are recognized. Components of comprehensive income include
revenues, expenses, gains, and losses that under generally accepted accounting
principles are included in comprehensive income but excluded from net income.
This Statement is effective for fiscal years beginning after December 15,
1997. Management believes that adoption of this Statement will not have a
material effect on the Company's consolidated financial statements.
In June 1997, FASB also issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information". This Statement requires that a public
business enterprise report financial and descriptive information about its
reportable operating segments. Financial information is required to be
reported on the same basis that it is used internally for evaluating segment
performance and deciding how to allocate resources to segments. This Statement
is effective for fiscal years beginning after December 15, 1997. Management
believes that the adoption of this Statement will not have a material effect
on the Company's consolidated financial statements.
m. Reclassifications
Certain reclassifications have been made in the 1995 and 1996 statements to
conform with the 1997 presentation.
F-9
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. NOTES PAYABLE TO BANK
The Company has a credit agreement with a bank which provides for borrowings
of up to approximately $37,250,000. Total borrowings as of fiscal 1995, 1996
and 1997 were approximately $25,364,000, $28,146,000 and, $20,250,000
respectively. This agreement consists of two separate facilities which are
summarized as follows:
Revolving line of credit--maximum borrowings of $15,000,000 limited to 85
percent of qualified accounts receivable and 50 percent of qualified
inventories, maturing on March 31, 2000. The agreement provides for the
issuance of letters of credit, not to exceed the maximum borrowings nor to
expire later than the maturity date, to beneficiaries designated by the
Company, limited to $2,000,000 and a one year term. Interest on outstanding
borrowings is at the Company's option of the bank's base rate plus one-
quarter of one percent (8.75 percent at December 26, 1997) or a eurodollar
rate plus one and three-quarters percent (7.47 percent at December 26,
1997). The agreement, as amended, also provides for a one-half of one
percent per year facility fee on the difference of the maximum borrowings
and the sum of the daily averages of the outstanding revolving credit loan
and the issued and outstanding letters of credit during the period.
Term loan--maximum borrowings of $22,250,000, maturing on March 31, 2000.
The agreement, as amended, calls for quarterly principal payments of
$1,000,000 with a final payment of $5,500,000 or the aggregate outstanding
balance on March 31, 2000. Interest on the borrowings is at the bank's base
rate plus one-half of one percent or a eurodollar rate plus two percent
(7.72 percent at December 26, 1997).
The agreement gives the bank a first security interest in all assets of the
Company. The agreement also requires the Company to maintain certain financial
ratios and financial covenants, as defined in the amendment, the most
restrictive of which prohibit additional indebtedness and limits payments to
the Company's stockholder, other than for income tax payments. As of December
26, 1997 the Company was in compliance with all covenants.
As of December 26, 1997, future minimum principal payments on the
aforementioned debt, in accordance with the amended agreement, are as follows
(amounts in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
ENDING
-----------
<S> <C>
1998............................................................ $ 4,000
1999............................................................ 5,000
2000............................................................ 11,250
-------
$20,250
=======
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities, automobiles and office equipment
under noncancellable leases, with the majority of the automobile leases having
a term of one year with annual renewal provisions. All of these leases have
been classified as operating leases. As of December 26, 1997, the Company had
future obligations under operating leases as follows (amounts in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
ENDING
-----------
<S> <C>
1998............................................................ $ 941
1999............................................................ 921
2000............................................................ 335
------
$2,197
======
</TABLE>
F-10
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Rental expense for all leases classified as operating leases was
approximately $1,065,000, $1,106,000 and $1,132,000 in fiscal 1995, 1996 and
1997, respectively.
The Company self-insures the majority of its medical benefit programs.
Reserves for losses are established currently based upon estimated
obligations. The Company maintains excess coverage on an aggregate claim
basis.
The Company is party to lawsuits and other proceedings, including suits
relating to product liability and patent infringement. While the results of
such lawsuits and other proceedings cannot be predicted with certainty,
management does not expect that the ultimate liabilities, if any, will have a
material adverse effect on the financial position or results of operations of
the Company.
5. INCOME TAXES
Effective November 1, 1987, the stockholder of Hudson elected S corporation
status under the Internal Revenue Code, such that income of the Company is
taxed directly to the stockholder for both federal and state income tax
purposes. Hudson and Industrias Hudson will file separate federal income tax
returns for 1997.
Under the S corporation election, the stockholder of Hudson includes her
share of Hudson's taxable income on her individual federal and state income
tax returns. Hudson's provision for income taxes and income taxes payable is
limited to the California S corporation tax of 2.5 percent for 1995, and 1.5
percent for both 1996 and 1997.
The provision for state income taxes consists of the following (amounts in
thousands):
<TABLE>
<CAPTION>
1995 1996 1997
---- ----- ----
<S> <C> <C> <C>
Current................................................... $280 $ 200 $ 74
Deferred.................................................. -- (127) 76
---- ----- ----
$280 $ 73 $150
==== ===== ====
</TABLE>
As of December 26, 1997, the Company has recorded a net deferred tax asset
of $76,000 primarily related to its Equity Participation Plan (see Note 7),
which in management's opinion is more likely than not to be realized.
The Company will become a C corporation upon consummation of the transaction
discussed in Note 10. Accordingly, the Company has presented pro forma net
income (loss) amounts to reflect a provision for income taxes at a combined
effective rate of approximately 40%, after consideration of permanent
differences between financial reporting and income tax amounts. The pro forma
amounts presented do not include the one-time effect of conversion to C
corporation status which will be reflected in the 1998 financial statements.
6. RELATED-PARTY TRANSACTIONS
Amounts included in the consolidated financial statements with respect to
transactions with companies controlled by officers, the stockholder or members
of their immediate families are as follows (amounts in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
------ ---- ------
<S> <C> <C> <C>
Purchases............................................... $1,524 $557 $1,465
====== ==== ======
Notes receivable........................................ $ 88 $ 91 $ 157
====== ==== ======
</TABLE>
F-11
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. DEFERRED COMPENSATION AND BENEFIT PLANS
a. Pension Plan
The Company has a defined-contribution pension plan covering substantially
all its employees. Amounts charged to expense relating to this plan totaled
approximately $810,000, $767,000 and $836,000 for the fiscal years ended 1995,
1996 and 1997, respectively.
b. Deferred Compensation
Effective December 1, 1994, the Company established a deferred compensation
plan for certain key employees. As of December 27, 1996 and December 26, 1997
no material amount of compensation has been deferred.
c. Equity Participation Plan
Effective January 1, 1994, the Company's Board of Directors adopted the
Equity Participation Plan, as amended (the Plan). This Plan provides certain
key employees and independent contractors deferred compensation based upon the
Company's value, as defined in the agreement. Benefits earned by participants
are based upon a formula with a specified minimum benefit accruing each year
for each participant. Benefits are accrued and charged to compensation in the
year earned. Payments are subject to an installment period of five years with
an annual maximum limit of $1,000,000. As of fiscal year ended 1995, 1996 and
1997 the Company has recorded $11,415,000, $19,664,000 and $5,703,000,
respectively, related to accrued amounts earned by the Plan participants.
In fiscal 1997, the Company declared bonuses totaling $20 million which will
result in a corresponding decrease in amounts payable under the Plan. The
effect of the bonuses is to accelerate the timing of payments to the
participants. This management bonus accrual is included in current liabilities
on the accompanying balance sheet.
8. MAJOR CUSTOMERS AND SALES BY GEOGRAPHIC REGION
The Company sells respiratory care products to distributors and medical
facilities throughout the United States and internationally. During 1995, 1996
and 1997, the Company had foreign sales of approximately $12,843,000,
$16,077,000 and $19,008,000, respectively, which constituted approximately 15
percent, 17 percent and 19 percent of total sales, respectively. The Company's
percentage of sales by geographic region for the fiscal years ended 1995, 1996
and 1997 were as follows:
<TABLE>
<CAPTION>
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Domestic............................................. 85.2% 82.8% 80.9%
Europe............................................... 5.6 6.6 7.5
Pacific Rim (Japan, Southeast Asia, Australia/New
Zealand)............................................ 4.6 5.7 5.7
Canada............................................... 2.3 1.9 1.8
Other international.................................. 2.3 3.0 4.1
----- ----- -----
Total.............................................. 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
For the fiscal years ended 1995, 1996 and 1997, the Company had sales of 31
percent, 32 percent and 30 percent, respectively, to one distributor.
F-12
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. ACQUISITION
During 1996, the Company acquired substantially all the assets of the Artema
Medical AB corporation ("Artema") for a purchase price of $6,000,000. Artema
engaged primarily in the business of manufacturing, marketing, and selling
hygroscopic condenser humidifiers. The acquisition was accounted for as a
purchase and the purchase price was allocated as follows (amounts in
thousands):
<TABLE>
<S> <C>
Covenant not-to-compete............................................ $3,500
Goodwill........................................................... 1,743
Machinery and equipment............................................ 757
------
$6,000
======
</TABLE>
10. SUBSEQUENT EVENTS (UNAUDITED)
In February 1998, the Company announced the intent to sell a majority of the
Company pursuant to an agreement and plan of merger (the Recapitalization).
Key components of the Recapitalization include:
(1) common and preferred equity investments in consideration for an 80.8%
ownership in the Company's common stock and preferred stock with an initial
liquidation preference of $30.0 million
(2) issuance of senior subordinated notes
(3) execution of a new term loan facility and revolving loan facility
(4) repayment of existing indebtedness
(5) payment of amounts due under the Equity Participation Plan
(6) payment for common shares acquired from the existing shareholder; this
shareholder will retain a 19.2% interest in the common shares outstanding.
(7) Potential contingent payments based on 1998 performance, payable to the
Continuing Shareholder and former participants in the Equity Participation
Plan.
The Company will also terminate the Equity Participation Plan and adopt a
stock option plan and a stock purchase plan. Additionally, Hudson's sole
shareholder, who owns the remaining 21 percent of Industrias Hudson, will
transfer this interest to the Company in consideration of one dollar.
11. SUBSEQUENT EVENT--STOCK SPLIT
The Company effected a 245:1 stock split concurrent with the
Recapitalization. The stock split has been reflected in the stock amounts
shown herein.
F-13
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 26, 1998
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<S> <C>
ASSETS
------
CURRENT ASSETS:
Cash and short-term investments.................................... $ 5,667
Accounts receivable, less allowance for doubtful accounts of $347.. 16,957
Inventories........................................................ 15,125
Other assets....................................................... 880
--------
Total current assets.............................................. 38,629
--------
PROPERTY, PLANT AND EQUIPMENT, at cost:
Land............................................................... 2,044
Buildings.......................................................... 13,369
Leasehold improvements............................................. 1,322
Machinery and equipment............................................ 60,922
Furniture and fixtures............................................. 2,223
Construction in progress........................................... 1,620
--------
81,500
Less--Accumulated depreciation and amortization.................... 49,583
--------
31,917
--------
OTHER ASSETS:
Deferred tax asset................................................. 78,526
Deferred financing costs, net...................................... 11,436
Intangible assets, net............................................. 4,186
Other assets....................................................... 338
--------
94,486
--------
$165,032
========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
CURRENT LIABILITIES:
Notes payable to bank.............................................. $ 1,000
Accounts payable................................................... 4,401
Accrued liabilities................................................ 9,719
Management bonus................................................... --
--------
Total current liabilities......................................... 15,120
--------
SENIOR SUBORDINATED NOTES PAYABLE.................................... 115,000
--------
NOTES PAYABLE TO BANK, net of current portion........................ 37,000
--------
ACCRUED EQUITY PARTICIPATION PLAN COSTS.............................. --
--------
Total liabilities................................................. 167,120
--------
MANDATORILY REDEEMABLE PREFERRED STOCK, $.01 par value: Authorized--
600,000 shares;issued and outstanding--300,000 shares; liquidation
preference: $100 per share.......................................... 29,000
Accrued preferred stock dividend, payable-in-kind.................... 776
--------
29,776
--------
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $.01 par value:
Authorized--15,000,000 shares, issued and outstanding--7,800,000
shares........................................................... 63,410
Cumulative translation adjustment.................................. (464)
Retained deficit................................................... (94,810)
--------
(31,864)
--------
$165,032
========
</TABLE>
The accompanying notes are an integral part of this consolidated balance sheet.
F-14
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-----------------
JUNE
JUNE 26, 27,
1998 1997
-------- -------
(UNAUDITED)
<S> <C> <C>
NET SALES................................................... $ 46,697 $49,093
COST OF SALES............................................... 25,142 25,388
-------- -------
Gross profit................................................ 21,555 23,705
-------- -------
OPERATING EXPENSES:
Selling................................................... 4,691 4,789
Distribution.............................................. 2,698 2,547
General and administrative................................ 5,676 5,498
Research and development.................................. 940 895
PROVISION FOR EQUITY PARTICIPATION PLAN .................... 63,939 3,654
PROVISION FOR RETENTION PAYMENTS............................ 4,754 --
-------- -------
Income (loss) from operations............................... (61,143) 6,322
-------- -------
OTHER INCOME AND (EXPENSES):
Interest expense.......................................... (3,640) (950)
Other, net................................................ (254) 645
-------- -------
(3,894) (305)
-------- -------
Income (loss) before provision (benefit) for income taxes... (65,037) 6,017
PROVISION (BENEFIT) FOR INCOME TAXES (Note 5)............... (76,978) 260
-------- -------
Income before extraordinary items........................... 11,941 5,757
EXTRAORDINARY ITEM--loss on extinguishment of debt (Note 7). 104 --
-------- -------
Net income.................................................. 11,837 5,757
Preferred stock dividends................................... 776 --
-------- -------
Net income available to common shareholders................. $ 11,061 $ 5,757
======== =======
Pro forma net income (loss) assuming C corporation status
for income tax purposes (Note 5)........................... $(39,556) $ 3,610
======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-15
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------
JUNE 26, JUNE 27,
1998 1997
--------- --------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................. $ 11,837 $ 5,937
Adjustments to reconcile net income to net cash provided
by (used in) operating activities--
Depreciation and amortization......................... 2,992 2,901
Writeoff of deferred financing fees................... 104 --
Gain on disposal of equipment......................... (54) (630)
Deferred tax asset benefit............................ (78,450) --
Provision for equity participation plan (EPP)......... 63,939 3,654
(Increase) decrease in accounts receivable............ 4,325 3,763
(Increase) decrease in inventories.................... 1,488 (1,571)
Decrease in other current assets...................... 195 61
(Increase) decrease in other assets................... 221 (192)
Increase (decrease) in accounts payable............... 559 (787)
Increase (decrease) in accrued liabilities............ 4,475 (863)
Payments of EPP liabilities........................... (89,642) --
--------- --------
Net cash provided by (used in) operating activities. (78,011) 12,273
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment.............. (1,646) (2,049)
Proceeds from sale of property, plant and equipment..... -- 1,060
Increase in cash surrender value of life insurance...... -- (5)
--------- --------
Net cash used in investing activities............... (1,646) (994)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable to bank...................... (43,250) (6,602)
Proceeds from borrowings on bank credit facility........ 61,000 --
Additions to deferred financing costs................... (11,920) --
Redemption of stockholder interest...................... (128,321) --
Shareholder distributions............................... -- (7,143)
Proceeds from senior subordinated debt.................. 115,000 --
Sale of common and preferred stock, net of transaction
costs.................................................. 92,000 --
--------- --------
Net cash provided by (used in) financing activities. 84,509 (13,745)
--------- --------
Effect of exchange rate changes on cash................... 345 7
--------- --------
NET INCREASE (DECREASE) IN CASH AND SHORT-TERM
INVESTMENTS.............................................. 5,197 (2,459)
CASH AND SHORT-TERM INVESTMENTS, beginning of period...... 470 1,419
--------- --------
CASH AND SHORT-TERM INVESTMENTS, end of quarter........... $ 5,667 $ (1,040)
========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the quarter for:
Interest................................................ $ 1,399 $ 1,053
========= ========
Income taxes............................................ $ 66 $ 117
========= ========
</TABLE>
F-16
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 26, 1998
(UNAUDITED)
1. FINANCIAL STATEMENTS
The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, and include all adjustments which are,
in the opinion of management, necessary for a fair presentation of the
financial position at June 26, 1998, the results of operations for the six-
month periods ended June 27, 1997 and June 26, 1998, and the cash flows for
the six-month periods ended June 27, 1997 and June 26, 1998 pursuant to the
rules and regulations of the Securities and Exchange Commission (SEC). All
such adjustments are of a normal recurring nature. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations. Although the Company
believes that the disclosures in such financial statements are adequate to
make the information presented not misleading, these consolidated financial
statements should be read in conjunction with the Company's 1997 audited
financial statements and the notes thereto included in its Form S-4 filed with
the SEC. The results of operations for the six-month periods ended June 27,
1997 and June 26, 1998 are not necessarily indicative of the results for a
full year.
2. RECAPITALIZATION
In April 1998, the Company consummated a plan pursuant to which a majority
of the Company was sold in accordance with an agreement and plan of merger
(the Recapitalization).
Key components of the Recapitalization include:
(1) common and preferred equity investments in consideration for an 80.8%
ownership in the Company's common stock and preferred stock with an initial
liquidation preference of $30.0 million
(2) issuance of 9 1/8% senior subordinated notes with a par value of
$115.0 million, maturing in 2008 (see Note 8)
(3) execution of a new term loan facility and revolving loan facility
(see Note 8)
(4) repayment of existing indebtedness (5) payment of amounts due under
the Equity Participation Plan (see Note 6)
(6) payment for common shares acquired from the existing shareholder;
this shareholder retained a 19.2% interest in the common shares
outstanding.
(7) potential contingent payments based on 1998 performance, payable to
the continuing shareholder and former participants in the Equity
Participation Plan.
The Company has terminated the Equity Participation Plan and has adopted a
stock purchase plan. The Company also plans to adopt a stock option plan.
Additionally, Hudson's sole shareholder, who owned the remaining 21 percent of
Industrias Hudson, transferred this interest to the Company in consideration
of one dollar. Because of the commonality of ownership, the 21 percent
minority interest has been included in the financial statements for all
periods presented.
The Company effected a 245:1 stock split concurrent with the
Recapitalization. The stock split has been reflected in the stock amounts
shown herein.
The Recapitalization resulted in no change to the carrying amounts of the
Company's assets and liabilities.
F-17
<PAGE>
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. INVENTORIES
Inventories consisted of the following (amounts in thousands):
<TABLE>
<CAPTION>
JUNE
26,
1998
-------
<S> <C>
Raw materials.................................................... $ 3,602
Work-in-process.................................................. 3,819
Finished goods................................................... 7,704
-------
$15,125
=======
</TABLE>
4. COMPREHENSIVE INCOME
In June 1997, FASB issued Statement of Financial Accounting Standards (SFAS)
No. 130, "Reporting Comprehensive Income". This Statement requires that all
items that meet the definition of components of comprehensive income be
reported in a financial statement for the period in which they are recognized.
This Statement is effective for fiscal years beginning after December 15, 1997
and was adopted by the Company in the quarter ended March 27, 1998.
The Company had comprehensive income for the six-month periods ended June
27, 1997 and June 26, 1998 as follows (amounts in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-----------------
JUNE
26, JUNE 27,
1998 1997
------- --------
<S> <C> <C>
Net income................................................ $11,837 $5,757
Other comprehensive income:
Foreign currency translation gain (loss)................ (119) 7
------- ------
Comprehensive income...................................... $11,718 $5,764
======= ======
</TABLE>
5. INCOME TAXES
The Company became a C corporation upon consummation of the transaction
discussed in Note 2. Accordingly, the Company has presented pro forma net
income (loss) amounts to reflect a provision for income taxes at a combined
effective rate of approximately 40%, after consideration of permanent
differences between financial reporting and income tax amounts. The pro forma
amounts presented do not include the one-time effect of the conversion to C
corporation status reflected in the June 1998 financial statements.
The actual provision for income taxes for the six-month period in 1998
reflect that the Company was a C corporation for a portion of the period
presented. The conversion from S corporation to C corporation resulted in a
one-time benefit of $78,526,000 in the six months ended June 26, 1998.
The tax provision (benefit) for the six-month period ended June 26, 1998
consists of the following (amounts in thousands):
<TABLE>
<S> <C>
Income taxes at combined statutory rate of 40 percent........... $(26,370)
Effect of earnings during S corporation period and S corporation
state income tax liability arising from Section 338(h)(10)
election....................................................... 27,918
Benefit of recordation of deferred tax asset upon conversion to
C corporation status........................................... (78,526)
--------
$(76,978)
========
</TABLE>
F-18
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
River Holding Corp.:
We have audited the accompanying balance sheet of RIVER HOLDING CORP. (a
Delaware corporation) as of March 27, 1998. This financial statement is the
responsibility of the Company's management. Our responsibility is to express
an opinion on this balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of River Holding Corp. as of March
27, 1998, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Orange County, California
May 8, 1998
F-19
<PAGE>
RIVER HOLDING CORP.
BALANCE SHEET
MARCH 27, 1998
<TABLE>
<S> <C>
CASH...................................................................... $100
====
COMMON STOCK, $.01 par value, authorized: 1,000 shares, issued and
outstanding: 10 shares................................................... $100
====
</TABLE>
See accompanying note to balance sheet.
F-20
<PAGE>
RIVER HOLDING CORP.
NOTE TO BALANCE SHEET
MARCH 27, 1998
1. ORGANIZATION
River Holding Corp., a Delaware corporation, was incorporated on January 27,
1998. The Company is currently wholly-owned by FS Equity Partners III, L.P.
("FSEP"). Subsequent to the Recapitalization, Freeman Spogli & Co.
Incorporated and affiliates will own approximately 87.3% of the outstanding
common stock of Holding.
The Company was formed for the purpose of consummating an investment in
Hudson Respiratory Care Inc. ("Hudson"), a California corporation, through a
wholly-owned subsidiary. The Company obtained equity capital from affiliates
of FSEP and management of Hudson Respiratory Care Inc. totaling $93.0 million
in order to finance its investment in Hudson. In April 1998, the acquisition
was consummated.
F-21
<PAGE>
RIVER HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET--JUNE 26, 1998
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 26
1998
-----------
(UNAUDITED)
<S> <C>
ASSETS
------
CURRENT ASSETS:
Cash and short-term investments................................. $ 5,667
Accounts receivable, less allowance for doubtful accounts of
$347........................................................... 16,957
Inventories..................................................... 15,125
Other assets.................................................... 1,115
--------
Total current assets.......................................... 38,864
--------
PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation and
amortization..................................................... 47,698
--------
OTHER ASSETS:
Deferred tax asset.............................................. 15,076
Deferred financing costs, net................................... 11,436
Intangible assets, net.......................................... 4,186
Other assets.................................................... 338
Goodwill, net................................................... 141,168
--------
172,204
--------
$258,766
========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
CURRENT LIABILITIES:
Notes payable to bank........................................... $ 1,000
Accounts payable................................................ 4,401
Accrued liabilities............................................. 9,719
--------
Total current liabilities..................................... 15,120
--------
SENIOR SUBORDINATED NOTES PAYABLE................................. 115,000
--------
NOTES PAYABLE TO BANK, net of current portion..................... 37,000
--------
Total liabilities............................................. 167,120
--------
MINORITY INTEREST................................................. --
MANDATORILY REDEEMABLE PREFERRED STOCK, $100 par value:
Authorized--300,000 shares, issued and outstanding--300,000
shares; liquidation preference: $30,000.......................... 29,000
Accrued preferred stock dividend, payable-in-kind............... 776
--------
29,776
--------
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, no par value: Authorized--15,000,000 shares,
issued and outstanding--6,300,000 shares....................... 63,000
Retained earnings............................................... (1,130)
--------
61,870
--------
$258,766
========
</TABLE>
The accompanying notes are an integral part of this consolidated balance sheet.
F-22
<PAGE>
RIVER HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 26, 1998
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 26,
1998
-----------
(UNAUDITED)
<S> <C>
NET SALES........................................................... $22,432
COST OF SALES....................................................... 12,169
-------
Gross profit........................................................ 10,263
-------
OPERATING EXPENSES:
Selling........................................................... 2,398
Distribution...................................................... 1,249
General and administrative........................................ 2,603
Research and development.......................................... 466
Amortization of goodwill.......................................... 1,182
-------
7,898
-------
Income from operations.............................................. 2,365
-------
OTHER INCOME AND (EXPENSES):
Interest expense.................................................. (3,220)
Other, net........................................................ 266
-------
(2,954)
-------
Loss before benefit for income taxes................................ (589)
BENEFIT FOR INCOME TAXES (Note 5)................................... 235
-------
Net loss............................................................ (354)
Preferred stock dividends........................................... 776
-------
Net loss available to common shareholders .......................... $(1,130)
=======
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
F-23
<PAGE>
RIVER HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 26, 1998
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 26,
1998
-----------
(UNAUDITED)
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss......................................................... $ (354)
Adjustments to reconcile net income to net cash provided by (used
in) operating activities-- Depreciation and amortization...... 2,755
Changes in assets and liabilities, net of amounts acquired or
assumed:
Decrease in accounts receivable................................ 1,784
Decrease in inventories........................................ 813
Increase in other current assets............................... (195)
Increase in other assets....................................... (333)
Increase in accounts payable................................... 1,319
Increase in accrued liabilities................................ 4,223
---------
Net cash provided by operating activities.................... 10,012
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Hudson Respiratory Care Inc....................... (248,000)
Purchases of property, plant and equipment....................... (1,345)
---------
Net cash used in investing activities........................ (249,345)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable to bank............................... (2,000)
Proceeds from senior subordinated notes.......................... 115,000
Proceeds from borrowing of bank credit facility.................. 40,000
Sale of common and preferred stock, net of transaction costs..... 92,000
---------
Net cash provided by financing activities.................... 245,000
---------
NET INCREASE IN CASH AND SHORT-TERM INVESTMENTS.................... 5,667
CASH AND SHORT-TERM INVESTMENTS, beginning of quarter.............. --
---------
CASH AND SHORT-TERM INVESTMENTS, end of quarter.................... $ 5,667
---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the quarter for:
Interest....................................................... $ 709
=========
Income taxes................................................... $ 66
=========
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
F-24
<PAGE>
RIVER HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 26, 1998
(UNAUDITED)
1. FINANCIAL STATEMENTS
The condensed consolidated financial statements included herein have been
prepared by River Holding Corp. (Holding) and Hudson Respiratory Care, Inc.
(the Company), without audit, and include all adjustments which are, in the
opinion of management, necessary for a fair presentation of the financial
position at June 26, 1998, the results of operations for the three-month
period ended June 26, 1998, and the cash flows for the three-month period
ended June 26, 1998 pursuant to the rules and regulations of the Securities
and Exchange Commission (SEC). All such adjustments are of a normal recurring
nature. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. Although Holding believes that the disclosures in such financial
statements are adequate to make the information presented not misleading,
these consolidated financial statements should be read in conjunction with the
consolidated balance sheet of Holding as of March 27, 1998 and with the
Company's 1997 audited financial statements and the notes thereto included in
Holding's Form S-4 filed with the SEC. The results of operations for the
period presented are not necessarily indicative of the results for a full
year.
2. RECAPITALIZATION
In April 1998, the Company consummated a plan pursuant to which a majority
of the Company was sold to Holding in accordance with an agreement and plan of
merger (the Recapitalization).
Key components of the Recapitalization include:
(1) common and preferred equity investments by Holding in consideration
for an 80.8% ownership in the Company's common stock and preferred stock
with an initial liquidation preference of $30.0 million
(2) issuance by the Company of 9 1/8% senior subordinated notes with a
par value of $115.0 million, maturing in 2008 (see Note 7)
(3) execution by the Company of a new term loan facility and revolving
loan facility (see Note 7)
(4) repayment of existing indebtedness
(5) payment of amounts due under the Equity Participation Plan (see Note
6)
(6) payment for common shares acquired from the existing shareholder;
this shareholder retained a 19.2% interest in the common shares
outstanding.
(7) potential contingent payments based on 1998 performance, payable to
the continuing shareholder and former participants in the Equity
Participation Plan.
The Company has terminated the Equity Participation Plan and has adopted a
stock purchase plan. The Company also plans to adopt a stock option plan
Additionally, Hudson's sole shareholder, who owned the remaining 21 percent of
Industrias Hudson, transferred this interest to the Company in consideration
of one dollar. Because of the commonality of ownership, the 21 percent
minority interest has been included in the financial statements for all
periods presented.
F-25
<PAGE>
RIVER HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The investment by Holding was accounted for as a purchase and the purchase
price has been tentatively allocated as follows (amounts in thousands):
<TABLE>
<S> <C>
Assets:
Current assets and other....................................... $ 37,647
Property, plant and equipment.................................. 48,251
Deferred tax asset............................................. 15,076
Deferred financing costs....................................... 11,920
Goodwill....................................................... 142,350
--------
255,244
Less liabilities:
Current liabilities............................................ 7,244
--------
Total purchase price paid.................................... $248,000
========
</TABLE>
The purchase price allocation is tentative pending further analysis of the
relative fair values of the assets acquired and liabilities assumed, and
analysis of the deferred tax asset. Goodwill is being amortized using a
30-year life.
Holding has no operations apart from those conducted through the Company and
its subsidiaries. Accordingly, the results of operations of Holding include
activities only from the date of investment through June 26, 1998. For this
purpose, the operations for the Company's second quarter commencing March 27,
1998 have been included. The effect of including the period from March 27,
1998 to the acquisition is, in the opinion of management, not material to the
results of operations.
The minority interest in the Company was initially recorded at zero and the
Company's losses for the period ended June 26, 1998 have been solely allocated
to Holding.
3. INVENTORIES
Inventories consisted of the following (amounts in thousands):
<TABLE>
<CAPTION>
JUNE
26,
1998
-------
<S> <C>
Raw materials...................................................... $ 3,602
Work-in-process.................................................... 3,819
Finished goods..................................................... 7,704
-------
$15,125
=======
</TABLE>
F-26
<PAGE>
RIVER HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. COMPREHENSIVE INCOME
In June 1997, FASB issued Statement of Financial Accounting Standards (SFAS)
No. 130, "Reporting Comprehensive Income". This Statement requires that all
items that meet the definition of components of comprehensive income be
reported in a financial statement for the period in which they are recognized.
This Statement is effective for fiscal years beginning after December 15, 1997
and was adopted by Holding.
The Company had no comprehensive income adjustments for the period ended
June 26, 1998.
5. INCOME TAXES
Holding is a C corporation and the Company became a C corporation upon the
occurrence of the Recapitalization discussed in Note 2. The deferred tax asset
results from different tax bases for financial reporting and income tax
purposes, primarily arising from the Recapitalization.
The effective income tax rate for the period ended June 26, 1998
approximates the effective combined federal and state statutory rates.
6. EQUITY PARTICIPATION PLAN
In conjunction with the Recapitalization discussed in Note 2 the Company
paid additional amounts pursuant to the EPP. This plan has now been
terminated.
7. LONG-TERM DEBT
New Credit Facility
In connection with the Recapitalization, the Company entered into a new
credit agreement with a bank which provides for borrowings of up to
$100,000,000. This agreement consists of two separate facilities as follows:
Revolving credit-maximum borrowings of $60,000,000 with a letter of
credit sublimit of $7,500,000. This facility must be prepaid upon payment
in full of the Term Loan facility.
Term loan-maximum borrowings of $40,000,000, with quarterly installments
to be made through maturity.
Interest on the New Credit Facility is based, at the option of the Company,
upon either a eurodollar rate plus 2.25 percent, or a base rate plus 1.25
percent per annum. A commitment fee of 0.50 percent per annum will be charged
on the unused portion of the New Credit Facility.
The agreement provides the bank a first security interest in substantially
all of the properties and assets of the Company and a pledge of 65% of the
stock of Industrias Hudson, the Company's principal subsidiary. The agreement
also requires the Company to maintain certain financial ratios and financial
covenants, as defined in the agreement, the most restrictive of which prohibit
additional indebtedness and limit dividend payments to the Company's
stockholders. Total borrowings as of June 26, 1998 were $38,000,000 under the
Term Loan Facility and bear interest at 7.875 percent per annum.
The New Credit Facility will mature on the sixth anniversary of the closing
of the Recapitalization.
As of June 26, 1998, the Company was not in compliance with certain
financial covenants of the New Credit Facility. The Company and lenders have
subsequently amended the applicable covenants.
F-27
<PAGE>
RIVER HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Senior Subordinated Notes
Also related to the Recapitalization, the Company issued under an Indenture
$115,000,000 of senior subordinated notes (the Notes). The Notes are fully
transferable and will be general unsecured obligations of the Company,
subordinated in right of payment to all existing and future Senior Debt of the
Company.
Interest on the Notes will bear interest at a rate equal to 9 1/8 percent
per annum from their date of issuance. Interest is payable semi-annually on
April 15 and October 15 of each year, commencing October 15, 1998. The Notes
will mature on April 15, 2008 and will be redeemable at the option of the
Company, in whole or in part, on or after April 15, 2003.
8. PREFERRED STOCK
Upon consummation of the Recapitalization, Holding issued 300,000 shares of
Series B Senior Exchangeable Payable-In-Kind (PIK) Preferred Stock subject to
mandatory redemption at a liquidation preference of $100 per share, plus
accumulated and unpaid dividends, if any, on April 15, 2010.
Dividends on the preferred stock will accrue at the rate per share of 11 1/2
percent per annum. Amounts due will be payable in cash, except that on each
dividend payment date occurring on or prior to April 15, 2003, dividends may
be paid at Holding's option, by the issuance of additional shares of preferred
stock (including fractional shares). Dividends will be payable semi-annually
on April 15 and October 15 of each year commencing October 15, 1998. The
preferred stock will rank junior in right of payment to all obligations of
Holding and its subsidiaries.
9. STOCKHOLDERS' EQUITY (DEFICIT)
Stockholders' equity (deficit) reflects the following (dollar amounts only
in thousands):
<TABLE>
<CAPTION>
COMMON STOCK
------------
NUMBER OF RETAINED
SHARES AMOUNT EARNINGS TOTAL
------------ ------- -------- --------
<S> <C> <C> <C> <C>
BALANCE, beginning............... -- $ -- $ -- $ --
Sale of common stock............. 6,300,000 63,000 -- 63,000
Net loss......................... -- -- (1,130) (1,130)
--------- ------- ------- --------
BALANCE, June 26, 1998........... 6,300,000 $63,000 $(1,130) $(61,870)
========= ======= ======= ========
</TABLE>
F-28
<PAGE>
RIVER HOLDING CORP. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 26, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
HUDSON RCI HOLDING
----------------------------------------------------------------------- ---------------------
ADJUSTMENTS (NOTE 2)
-----------------------------------------------------
ADJUSTMENTS PRO
ACTUAL RECAPITALIZATION OTHER PRO FORMA (NOTE 3) FORMA
----------------------------------------------------------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales........................ $99,509 $ -- $ -- $99,509 $ -- $99,509
Cost of sales.................... 51,732 -- -- 51,732 62 51,794
------- -------- -------- ------- -------- -------
Gross profit................... 47,777 -- -- 47,777 (62) 47,715
Operating expenses:
Selling expenses................ 9,643 -- -- 9,643 -- 9,643
Distribution expenses........... 5,240 -- -- 5,240 -- 5,240
General and administrative
expenses....................... 11,456 -- (839)(c) 10,617 15 10,632
Research and development
expenses....................... 1,845 -- -- 1,845 -- 1,845
Amortization of goodwill........ -- -- -- -- 5,128 5,128
Provision (benefit) for equity
participation plan.............. 6,954 (6,954)(a) -- -- -- --
------- -------- --------- ------- -------- -------
Operating income............... 12,639 6,954 839 20,432 (5,205) 15,227
------- -------- --------- ------- -------- -------
Other (income) and expenses:
Interest expense................ 1,834 13,265(b) -- 15,099 -- 15,099
Other (income)/expense.......... (638) -- -- (638) -- (638)
------- -------- --------- ------- -------- -------
Total other (income) and
expenses...................... 1,196 13,265 -- 14,461 -- 14,461
------- -------- --------- ------- -------- -------
Income (loss) before
provision for income taxes.... 11,443 (6,311) 839 5,971 (5,205) 766
Provision (benefit) for state
income taxes.................... 150 1,903(d) 336(d) 2,389 (2,082) 307
------- -------- --------- ------- -------- -------
Net income (loss)............... 11,293 (8,214) 503 3,582 (3,123) 459
------- -------- --------- ------- -------- -------
Preferred Stock Dividends........ -- 3,549(e) -- 3,549 -- 3,549
------- -------- --------- ------- -------- -------
Net income (loss) available to
common stock................... $11,293 $(11,763) $ 503 $ 33 $(3,123) $(3,090)
======= ======== ========= ======= ======== =======
</TABLE>
The accompanying notes are an integral part of this financial statement.
P-1
<PAGE>
RIVER HOLDING CORP. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 26, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
HOLDING
---------------------------------------------
PRO
FORMA
JUNE 26, ADJUSTMENTS JUNE 26,
1988 (NOTE 2) 1998
---- -------- ----
<S> <C> <C> <C>
Net sales.................................. $ 22,432 $ -- $ 22,432
Cost of sales.............................. 12,169 110 12,279
------- -------- --------
Gross profit............................. 10,263 (110) 10,153
------- -------- --------
Operating expenses:
Selling expenses.......................... 2,398 46 2,444
Distribution expenses..................... 1,249 -- 1,249
General and administrative
expenses................................. 2,603 -- 2,603
Research and development
expenses................................. 466 -- 466
Amortization of goodwill 1,182 1,182 2,364
------- -------- --------
Total operating expenses 7,898 1,228 9,126
------- -------- --------
Operating income......................... 2,365 (1,338) 1,027
------- -------- --------
Other (income) and expenses:
Interest expense.......................... 3,220 4,330 (b) 7,550
Other (income)/expense.................... (266) -- (266)
------- -------- --------
Total other (income) and
expenses................................ 2,954 4,330 7,284
------- -------- --------
Income (loss) before provision
for income taxes........................ (589) (5,668) (6,257)
Provision (benefit) for
income taxes.............................. (235) (2,267)(d) (2,502)
------- -------- --------
Net income (loss)........................ (354) (3,401) (3,755)
Preferred Stock Dividends.................. 776 949 (e) 1,725
------- -------- --------
Net income (loss) available
to common shareholders.................. $(1,130) $ (4,350) $ (5,480)
======= ======== ========
</TABLE>
P-2
<PAGE>
RIVER HOLDING CORP. AND SUBSIDIARIES
------------------------------------
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------
JUNE 26, 1998
-------------
1. Transaction
-----------
Hudson Respiratory Care Inc. (the "Company") consummated a recapitalization
pursuant to an Agreement and Plan of Merger (the "Recapitalization") in April
1998. Under the terms of the Recapitalization, River Acquisition Corp., a
wholly-owned subsidiary of River Holding Corp. ("Holding"), merged with and into
the Company, with the Company surviving as a majority-owned subsidiary of
Holding. In connection with the Recapitalization, the Company completed an
offering to sell $115,000,000 Senior Subordinated Notes due 2008, and Holding
completed an offering of 300,000 shares of its 11 1/2% exchangeable mandatorily
redeemable preferred stock due 2010 (the "Offerings"). The preferred stock is
exchangeable into subordinated debentures of the Company upon the occurrence of
certain events. The Company issued to Holding preferred stock with
substantially identical terms as the Holding preferred stock, except for the
exchange feature.
Affiliates of Freeman Spogli & Co. Incorporated ("FS&Co.") invested $55
million and management of the Company invested $8.0 million of cash in common
stock of Holding, while mandatorily redeemable, payment-in-kind preferred stock
of Holding ("Holding Preferred Stock") with a liquidation preference of $30.0
million was sold pursuant to a preferred stock offering (collectively, the
"Holding Investment"). Upon consummation of the Recapitalization, FS&Co. and
affiliates own approximately 87.3% of the outstanding common stock of Holding.
As part of the Recapitalization, common stock of the Company with a value of
approximately $15.0 million (based on the valuation of the Company used in the
Recapitalization) was retained by a current shareholder of the Company,
representing approximately 19.2% of the outstanding common stock of the Company.
Preferred stock of the Company provides for dividends payable in cash commencing
on the fifth anniversary of issuance and is redeemable at the option of the
holders thereof upon the occurrence of certain events constituting change in
control of the Company. In addition, in connection with the Recapitalization,
the Company made payments to its employees of $88.3 million under certain of its
incentive plans.
The Company also entered into an agreement (the "New Credit Facility") that
provided a $40 million secured term loan facility (the "Term Loan Facility"),
which was funded in connection with the consummation of the Recapitalization,
and a $60 million revolving loan facility (the "Revolving Loan Facility") which
is available for the Company's future capital requirements and to finance
acquisitions.
The Pro Forma Consolidated Financial Statements give effect to the
investment by Holding in the Company and the purchase accounting effects
thereof, the Offerings and the Recapitalization as if these transactions
occurred as of the beginning of the period presented for purposes of the
consolidated statements of operations. The Pro Forma Consolidated Financial
Statements do not give effect to any transactions other than the Offerings, the
Recapitalization and those discussed in the accompanying notes. The objective of
this pro forma financial information is to show what the significant effects on
the historical financial information might have been had the transaction
occurred at an earlier date. However, the Pro Forma Consolidated Financial
Statements are not necessarily indicative of the results of operations or
related effects on financial position that would have been attained had the
above-mentioned transactions actually occurred earlier.
The Recapitalization also provides for additional payments of up to an
aggregate of $5.7 million payable to the Selling Shareholder and participants in
the Equity Participation Plan upon attainment of an operating cash flow target
in 1998. This amount will be recorded when and if earned. No recognition of
the contingent payments is provided in these pro forma financial statements.
The historical Consolidated Financial Statements and accompanying notes
included elsewhere in this Prospectus should be read in conjunction with these
financial statements and the accompanying notes thereto.
P-3
<PAGE>
RIVER HOLDING CORP.
2. Pro Forma Consolidated Statement of Operations Assumptions for the Company
--------------------------------------------------------------------------
The pro forma adjustments reflecting the transaction described in Note 1,
and the application of those adjustments to the historical amounts, were made
under the following assumptions:
P-4
<PAGE>
RIVER HOLDING CORP.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
JUNE 26, 1998
(a) An additional compensation charge of approximately $60.6 million will be
recorded in fiscal 1998 pursuant to the Equity Participation Plan and
concurrent with the Recapitalization. The net adjustment reflects the
elimination of the Equity Participation Plan since the Plan terminated upon
the Recapitalization. See "Management--Equity Participation Plan."
(b) The pro forma adjustments to interest expense and amortization of deferred
financing fees reflect the following (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 26, JUNE 26,
1997 1998
----------- ---------
<S> <C> <C>
Elimination of interest expense on existing debt............................... $(1,834) $(3,220)
Interest expense on bank facility at an assumed composite interest
rate of 8.00%................................................................. 3,200 1,600
Interest expense on Senior Subordinated Notes at an assumed
interest rate of 9.125%................................................. 10,494 5,247
Amortization of deferred finance fees.......................................... 1,405 703
------- -------
Total.......................................................................... $13,265 $ 4,330
======= ======
</TABLE>
(c) The pro forma adjustments to general and administrative expense reflect the
following (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 26,
1997
-----------
<S> <C>
Elimination of Continuing Shareholder salary, bonus and fringe $(455)
benefits (1)....................................................
Elimination of expenses related to OxyAir (2).................... (384)
-----
Total............................................................ $(839)
=====
</TABLE>
(1) The Company will not continue to pay Continuing Shareholder
salary, bonus and related fringe benefits. The adjustment is to
eliminate such expenses.
(2) Reflects the elimination of expense related to OxyAir since
OxyAir will be transferred to the Continuing Shareholder.
(d) Reflects the income tax effect of the net changes described above, using an
effective rate of 40%. Concurrent with the Recapitalization, the Company
will become a corporation for income tax purposes.
(e) Reflects pay-in-kind preferred stock dividends at 11.50% due semi-annually.
3. Pro Forma Assumptions for River Holding Corp.
---------------------------------------------
The purchase price consists of an investment in common stock of the Company
of $63.0 million plus transaction costs. Minority interest is valued at zero.
The purchase price has been assigned to individual assets and liabilities based
on relative fair values. For purposes of the pro forma statement of income,
goodwill is assumed to have a 30 year life. The tentative purchase price
allocation is subject to adjustment based upon further analysis of the relative
fair values of the assets acquired and liabilities assumed.
4. Use of Estimates in the Pro Forma Financial Statements
------------------------------------------------------
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
P-5
<PAGE>
RIVER HOLDING CORP.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
JUNE 26, 1998
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.
P-6
<PAGE>
================================================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY HOLDING. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE EXCHANGE
PREFERRED STOCK BY ANYONE IN ANY JURISDICTION IN WHICH THE PERSON MAKING THE
OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF HOLDING SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF. UNTIL NOVEMBER 24, 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE
EXCHANGE PREFERRED STOCK, 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.
----------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary....................................... 1
Risk Factors.................................. 18
Use of Proceeds............................... 28
Dividend Policy............................... 28
Capitalization................................ 29
The Exchange Offer............................ 31
Selected Historical and Pro Forma
Consolidated Financial Information............ 38
Management's Discussion and Analysis
of Financial Condition and
Results of Operations......................... 42
Business...................................... 50
Management.................................... 59
Security Ownership of Certain
Beneficial Owners............................ 63
Certain Transactions.......................... 64
Description of New Credit Facility............ 66
Description of the Exchange Preferred Stock... 68
Description of Exchange Securities............ 94
Material U.S. Federal Income Tax
Considerations............................... 136
Description of the Subordinated Notes......... 146
Description of Capital Stock.................. 147
Plan of Distribution.......................... 149
Experts....................................... 149
Legal Matters................................. 149
Index to Consolidated Financial Statements.... F-1
Pro Forma Consolidated Financial
Statements................................... P-1
</TABLE>
================================================================================
================================================================================
300,000 SHARES
RIVER HOLDING CORP.
11 1/2% SENIOR EXCHANGEABLE
PIK PREFERRED STOCK
DUE 2010
DATED AUGUST 26, 1998
================================================================================
