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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 30, 1998
REGISTRATION NO. 333-56813
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
BRAND SCAFFOLD SERVICES, INC.
(Exact Name of Registrant as Specified in Its Charter)
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<TABLE>
<S> <C> <C>
DELAWARE 735915 133909681
(State or Other Jurisdiction of (Primary Standard Industrial (IRS Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
15450 SOUTH OUTER HIGHWAY 40, #270
CHESTERFIELD, MISSOURI 63017
(314) 519-1000
(Address and Telephone Number of Registrant's principal executive offices)
JOHN M. MONTER
CHIEF EXECUTIVE OFFICER AND PRESIDENT
15450 SOUTH OUTER HIGHWAY 40, #270
CHESTERFIELD, MISSOURI 63017
(314) 519-1000
(Name, Address and Telephone Number of Agent for Service)
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COPIES TO:
JOSEPH P. HADLEY
DAVIS POLK & WARDWELL
450 LEXINGTON AVENUE
NEW YORK, NEW YORK 10017
(212) 450-4000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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EXPLANATORY NOTE
This Registration Statement contains a prospectus (the "Exchange
Prospectus") relating to the offer (the "Exchange Offer") for all outstanding
14.5% Senior Exchangeable Preferred Stock due 2008, par value $0.01, of Brand
Scaffold Services, Inc. (the "Old Preferred Stock") in exchange for its 14.5%
Senior Exchangeable Preferred Stock due 2008, par value $0.01 (the "New
Preferred Stock"), which has been registered under the Securities Act of 1933,
as amended. In addition, this Registration Statement contains a prospectus (the
"Market-Making Prospectus") relating to certain market-making activities (the
"Market-Making Activities") with respect to the New Preferred Stock which may,
from time to time, be carried out by Donaldson, Lufkin & Jenrette Securities
Corporation ("DLJSC"). The two prospectuses are identical in all material
respects, except that the Market-Making Prospectus (i) has different front and
back cover pages, which describe the Market-Making Activities instead of the
Exchange Offer, (ii) includes a section captioned "Market-Making Activities of
DLJSC," which describes the Market-Making Activities and (iii) does not include
the information included in the Exchange Prospectus under the captions
"Prospectus Summary--Exchange Offer," "Prospectus Summary--Consequences of
Exchanging Old Preferred Stock Pursuant to the Exchange Offer," "Risk
Factors--Consequences of Failure to Exchange," "Risk Factors--Exchange Offer
Procedures," "The Exchange Offer" and "Plan of Distribution." In addition,
certain conforming changes have been made in the Market-Making Prospectus in
order to eliminate references to the Exchange Offer. The Exchange Prospectus
follows immediately after this Explanatory Note and is followed by the
alternative pages for the Market-Making Prospectus.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH
STATE.
SUBJECT TO COMPLETION, DATED JULY 30, 1998
PROSPECTUS
[BRAND SCAFFOLD SERVICES, INC. LOGO]
BRAND SCAFFOLD SERVICES, INC.
OFFER TO EXCHANGE 14.5% SENIOR EXCHANGEABLE PREFERRED STOCK DUE 2008, $0.01 PAR
VALUE PER SHARE WHICH HAS BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, FOR ANY AND ALL OUTSTANDING 14.5% SENIOR EXCHANGEABLE PREFERRED STOCK
DUE 2008, $0.01 PAR VALUE PER SHARE.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON , 1998, UNLESS EXTENDED.
Brand Scaffold Services, Inc., a Delaware corporation (the "Company"),
hereby offers (the "Exchange Offer"), 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"), to exchange one share of
its 14.5% Senior Exchangeable Preferred Stock due 2008, $0.01 par value per
share (the "New Preferred Stock"), which has been registered under the
Securities Act of 1933, as amended (the "Securities Act"), pursuant to a
registration statement of which this Prospectus is a part (including all
amendments, including post-effective amendments, and exhibits thereto, the
"Registration Statement"), for each outstanding share of its 14.5% Senior
Exchangeable Preferred Stock due 2008, $0.01 par value per share (the "Old
Preferred Stock," and together with the New Preferred Stock, the "Preferred
Stock") of which 1,042,460 shares are issued and outstanding as of the date
hereof.
The Company will accept for exchange any and all shares of Old Preferred
Stock that are validly tendered and not withdrawn on or prior to 5:00 P.M., New
York City time, on the date the Exchange Offer expires (the "Expiration Date"),
which will be , 1998, (20 business days following the commencement of the
Exchange Offer), unless the Exchange Offer is extended. Tenders of Old
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 Old Preferred Stock being tendered for exchange.
See "The Exchange Offer."
The form and terms of the New Preferred Stock are substantially identical
in all material respects to the form and terms of the Old Preferred Stock
except that (i) the shares of New Preferred Stock will have been registered
under the Securities Act, and thus will not bear restrictive legends
restricting their transfer pursuant to the Securities Act and (ii) holders of
New Preferred Stock will not be entitled to certain rights of holders of the
Old Preferred Stock under the Registration Rights Agreement (as defined) which
will terminate upon the consummation of the Exchange Offer. See "The Exchange
Offer--Consequences of Failure to Exchange."
Holders of the Preferred Stock are entitled to receive dividends, when, as
and if, declared by the Board (as defined) at a rate of 14.5% per annum on the
liquidation value (initially $25.00 per share). Dividends on the Preferred
Stock accrete to the liquidation value of the Preferred Stock. At March 31,
1998, the liquidation value was $30.95 per share. Subject to certain
conditions, the Company may issue 14.5% Junior Subordinated Exchange Debentures
due 2008 (the "Exchange Debentures") in exchange for any or all outstanding
Preferred Stock, at an exchange ratio of $1.00 of liquidation value of
Preferred Stock for $1.00 principal amount of Exchange Debentures. The Exchange
Debentures, if issued, will be subordinated in right of payment to the prior
payment of all indebtedness of the Company that is not expressly made pari
passu with or junior to the Exchange Debentures. Upon completion of the
Exchange Offer, the Company will have total indebtedness of approximately
$161.0 million. After September 30, 2001, the Company may redeem any or all
outstanding shares of the Preferred Stock at the redemption prices set forth
herein. Subject to certain conditions, in the event of an Equity Offering (as
defined) prior to September 30, 1999, the Company may redeem not less than all
of the outstanding Preferred Stock at a price of 114.5% of liquidation value.
In the event of a Change of Control (as defined in the Certificate of
Designations), the Company is required to make an offer to redeem all shares of
the Preferred Stock at a redemption price equal to 101% of the liquidation
value. The Company is required to redeem all shares of the Preferred Stock on
March 31, 2008 at a price equal to the liquidation value at such date. See
"Description of Preferred Stock."
THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL ARE FIRST BEING MAILED TO
HOLDERS OF OLD PREFERRED STOCK ON OR ABOUT , 1998.
continued on following page
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE PAGE 13, "RISK
FACTORS," FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE PARTICIPANTS IN THE EXCHANGE OFFER.
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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 Old Preferred Stock was originally issued and sold on September 30,
1996 in transactions not registered under the Securities Act, in reliance upon
the exemption provided in Section 4(2) of the Securities Act. Accordingly, the
Old Preferred Stock may not be reoffered, resold or otherwise pledged,
hypothecated or transferred in the United States unless so registered or unless
an applicable exemption from the registration requirements of the Securities
Act is available. Based on interpretations by the staff of the Securities and
Exchange Commission (the "Commission"), as set forth in no-action letters
issued to Exxon Capital Holdings Corporation (available May 13, 1988), Morgan
Stanley & Co. Incorporated (available June 5, 1991), Mary Kay Cosmetics, Inc.
(available June 5, 1991), Warnaco, Inc. (available October 11, 1991) and K-III
Communications Corporation (available May 14, 1993), the Company believes that
a holder who exchanges Old Preferred Stock for New Preferred Stock pursuant to
the Exchange Offer may offer for resale, resell and otherwise transfer such New
Preferred Stock without compliance with the registration and prospectus
delivery requirements of the Securities Act, provided, that (i) such New
Preferred Stock is acquired in the ordinary course of such holder's business,
(ii) such holder is not engaged in, and does not intend to engage in, a
distribution of such New Preferred Stock and has no arrangement with any person
to participate in the distribution of such New Preferred Stock, and (iii) such
holder is not an affiliate of the Company (as defined under Rule 405 of the
Securities Act). However, the staff of the Commission has not considered the
Exchange Offer in the context of a no-action letter and there can be no
assurance that the staff of the Commission would make a similar determination
with respect to the Exchange Offer as in such other circumstances. A holder who
exchanges Old Preferred Stock for New Preferred Stock pursuant to the Exchange
Offer with the intention to participate in a distribution of the New Preferred
Stock may not rely on the staff's position enunciated in the Exxon Capital
Letter, the Morgan Stanley Letter or similar letters and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction.
Each broker-dealer that receives New Preferred Stock for its own account
in exchange for Old Preferred Stock, where such Old 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 New Preferred Stock. See "Plan of
Distribution." The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. This Prospectus, as
it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with resales of New Preferred Stock received in
exchange for Old Preferred Stock where such Old Preferred Stock was acquired by
such broker-dealer as a result of market-making activities or other trading
activities. The Company has agreed that, for a period of 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." EXCEPT
AS DESCRIBED IN THIS PARAGRAPH, THIS PROSPECTUS MAY NOT BE USED FOR ANY OFFER,
SALE OR OTHER TRANSFER OF NEW PREFERRED STOCK.
The New Preferred Stock will constitute a new issue of securities with no
established trading market, and there can be no assurance as to the liquidity
of any markets that may develop for the New Preferred Stock or as to the
ability of or price at which the holders of New Preferred Stock would be able
to sell their New Preferred Stock. Future trading prices of the New Preferred
Stock will depend on many factors, including, among others, the Company's
operating results and the market for similar securities. The Company does not
intend to apply for listing of the New Preferred Stock on any securities
exchange. No assurance can be given that an active public or other market will
develop for the New Preferred Stock or as to the liquidity of or the trading
market for the New Preferred Stock.
THE COMPANY WILL NOT RECEIVE ANY PROCEEDS FROM THIS EXCHANGE OFFER. THE
COMPANY HAS AGREED TO PAY THE EXPENSES OF THE EXCHANGE OFFER. NO UNDERWRITER IS
BEING USED IN CONNECTION WITH THIS EXCHANGE OFFER.
No person has been authorized to give any information or to make any
representations not contained in this Prospectus in connection with the offer
of securities made by this Prospectus and, if given or made, such information
or representations must not be relied upon as having been authorized by the
Company or by any underwriter, dealer or agent. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any of the
securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such offer or solicitation in such jurisdiction. This
Prospectus does not constitute an offer to sell or a solicitation of an offer
to buy any securities other than those to which it relates. Neither the
delivery of this Prospectus nor any sale of, or offer to sell, the securities
offered hereby shall, under any circumstances, create an implication that there
has been no change in the affairs of the Company since the date hereof or that
the information herein is correct as of any time subsequent to its date.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements and
the notes thereto appearing elsewhere in this Prospectus. Unless otherwise
indicated, all references to the "Company" mean (i) Brand Scaffold Services,
Inc. together with its subsidiaries ("Brand") and (ii) prior to the Acquisition
(as defined), Rust Scaffold Services, Inc. together with its subsidiaries
("Rust"). References to industry size and statistics contained herein, unless
otherwise indicated, are derived from information provided by Cook, Holmlund &
Co., Inc.
OVERVIEW
The Company is the largest North American provider of industrial
scaffolding services. The Company's services facilitate access to tall
structures for on-going maintenance, turnarounds (major maintenance projects
which require the complete or partial shutdown of a facility) and capital
projects, principally in the refining, petrochemical, chemical, utility and
pulp and paper industries. The Company estimates that for 1997 it had a 25%
market share of the $575 million North American industrial scaffolding services
market and had industrial scaffolding revenues in excess of three times that of
its largest competitor. The Company's turnkey services include equipment
rental, labor for the erection and dismantlement of scaffolding and scaffolding
design services. The Company delivers its services through an extensive field
service organization of approximately 2,900 employees in 29 field offices
located throughout the United States and two in Canada. The Company also
provides scaffolding services to the commercial market (primarily
nonresidential construction) and sells a small amount of scaffolding. For the
twelve months ended March 31, 1998, the Company generated revenues, Adjusted
EBITDA (as defined) and a net loss of $168.1 million, $31.0 million and $9.6
million, respectively. See "Selected Consolidated Financial Data."
Approximately 84% of the Company's 1997 revenues were attributable to
on-going maintenance and turnarounds of industrial facilities. The Company
typically provides on-going maintenance services under long-term contracts; the
duration of these contracts ranges between one and five years. Turnarounds
occur every one to four years depending on the industry and the type of
turnaround being performed. Although some turnarounds may be postponed for a
period of time, they are a necessary component of maintaining industrial
facilities and are required to ensure the safe and efficient operation of such
facilities. The Company believes that the necessity for on-going maintenance
and turnarounds provides it with a stable, recurring revenue base.
The Company's main customers include major integrated oil companies,
independent refiners, large chemical companies, utilities and large engineering
and construction firms. The Company's ten largest customers in 1997, when
measured by revenue to the Company, were Exxon Corporation, Arco, Mobil
Corporation, Texaco Inc., Phillips, Citgo Petroleum Corporation, Lyondell
Petrochemical Company, Dupont, Houston Lighting & Power Company and Shell Oil.
The Company believes its position as the largest supplier of industrial
scaffolding services provides it with a number of competitive advantages
including (i) the ability to offer national coverage to large customers, (ii)
the ability to provide required personnel and scaffolding to process major
turnarounds and unanticipated plant outages, (iii) higher asset utilization
through the shifting of assets across regions and across its large customer
base, (iv) purchasing leverage with scaffolding manufacturers, and (v)
comprehensive safety training programs which have resulted in the lowest
accident incident rate in the industry (the Company's total Occupational Safety
and Health Administration ("OSHA") recordable injuries per 200,000 man hours
were 2.3 in 1997 compared to an industry average of 12.5 in 1997) and have
enabled the Company to reduce insurance costs and accident-related expenses.
The Company's size also enables it to maintain its own trucking fleet and to
provide a design department that specializes in the custom design of industrial
scaffolding, which the Company uses to minimize the amount of scaffolding used
and to maximize labor efficiency, thereby providing the Company with a
competitive advantage.
THE INDUSTRY
The $1.3 billion scaffolding services industry consists of the industrial
market and the commercial market, each of which requires different types of
scaffolding equipment and levels of expertise. Industrial
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applications generally require systems scaffolding, which is highly versatile,
can be quickly erected and dismantled, is capable of conforming to irregularly
shaped structures and requires a higher level of skill to erect and dismantle.
Commercial applications generally require frame and brace scaffolding which is
not as versatile as systems scaffolding and requires a lower level of
expertise.
Industrial Market. The North American industrial scaffolding market is
approximately $575 million and is serviced predominantly by scaffolding
specialists such as the Company. Although the Company estimates that 30
scaffolding specialists have revenues in excess of $1 million annually, the top
six scaffolding specialists service almost one half of the total industrial
market. Principal end-use industries and their estimated percent of the total
industrial market for 1996 were: (i) refineries--31%; (ii) petrochemical and
chemical plants--30%; (iii) utilities--17%; (iv) pulp and paper mills--11%; and
(v) other industrial users including aerospace, ship building and other
industrial applications--11%. Scaffolding is used by industrial customers for
on-going maintenance, turnarounds and capital projects. Among industrial
applications, maintenance represents approximately 50% and turnarounds
represent approximately 35% of the market. Since turnarounds may require the
complete shutdown of a facility (which may lose up to $1 million of revenues
per day during a turnaround), speed and reliability are key customer
considerations. Safety is another important consideration for industrial
customers as scaffolding contractor accident incidents are counted against a
facility's safety record and may cause increases in both insurance premiums and
attention by OSHA.
Commercial Market. The North American commercial scaffolding market is
approximately $725 million. Commercial scaffolding is used primarily in
nonresidential construction and renovation projects. Commercial applications
are generally characterized by regularly shaped structures with few contoured
or angled surfaces. Due to the simple shapes required, commercial jobs
generally utilize frame and brace scaffolding, a less versatile type of
equipment which is not suited to industrial applications. Commercial
scaffolding requires a less skilled work force and has historically been less
focused on safety issues. These factors combine to make the commercial market
highly fragmented with low barriers to entry.
BUSINESS STRATEGY
The Company has developed a business strategy which it believes will
enable it to profitably increase future revenues and cash flow. The key
components of this strategy are:
Leverage existing strengths. The Company's existing strengths include
longstanding customer relationships, extensive equipment resources, significant
labor capacity and an industry-leading safety record. These strengths have
enabled the Company to gain its current substantial market share and to expand
its business. The Company intends to utilize these strengths to retain its
maintenance contracts and to aggressively pursue turnarounds and capital
projects with its existing customers and to expand scaffolding services to such
customers' other facilities.
Target underpenetrated industrial segments. Due to the Company's leading
market position and extensive service infrastructure, the Company has the
capacity to service several industries in which, due to limited historical
focus, the Company has had a relatively low market share. These include the
chemical, utilities and pulp and paper industries. To increase its penetration
in these markets, the Company has expanded its sales force, initiated incentive
and training programs and created a sales management function to target
opportunities and monitor the effectiveness of the sales force.
Reduce operating costs. In November 1997, the Company implemented a cost
reduction program which is expected to reduce its annual operating overhead and
selling, general and administrative expenses by approximately $5.3 million. The
major initiatives include (i) eliminating 63 administrative and support
positions and consolidating certain administrative functions, (ii)
restructuring and renegotiating benefits programs, (iii) renegotiating the
Company's insurance premiums to reflect continued improvements in its safety
record, (iv) negotiating company-wide procurement contracts in order to take
advantage of volume pricing, and (v) implementing a new management information
system to improve inventory utilization and reduce equipment transportation
expenses.
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Pursue complementary acquisitions. The Company intends to pursue
complementary acquisitions where significant consolidation savings and
economies of scale can be achieved. The scaffolding industry is characterized
by single-office or regional companies, many of which are undercapitalized and
have limited scaffolding inventories. The Company intends to focus its
acquisition strategy on companies which have long-term contracts or an
expertise in a certain industry or scaffolding application.
Expand its commercial scaffolding operations. The Company intends to
utilize its existing infrastructure to expand its position in the commercial
market. To increase its penetration of the commercial market, the Company has
targeted large-scale new construction and renovation projects, which require
relatively complex scaffolding. Further, the Company has opened new offices in
four cities and expanded its sales force and its inventory of frame and brace
scaffolding. The Company believes its industry-leading safety record provides
it with a competitive advantage in pursuing these commercial scaffolding market
opportunities in the future. In November 1996, OSHA enacted stricter
regulations regarding training and safety in the commercial scaffolding
industry. As a result, the Company expects safety to be a key consideration for
commercial customers in the future.
COMPANY HISTORY AND STRUCTURE
On September 30, 1996, DLJ Merchant Banking Partners, L.P. and certain of
its affiliates ("DLJMB") and Carlisle-Brand Investors, L.P. ("Carlisle")
acquired indirectly, through a series of mergers, an 80.1% equity interest (the
"Acquisition") in the Company from WMI Technologies, Inc. ("WMI"). As a result
of the Acquisition, the Company became a wholly owned subsidiary of DLJ Brand
Holdings, Inc. ("Holdings"), in which DLJMB, Carlisle and Rust Industrial
Services Inc. ("Rust Industrial"), a majority owned subsidiary of WMI, hold
equity interests. In connection with the Acquisition, DLJ Capital Funding, Inc.
("DLJ Capital") and Bank of America National Trust and Savings Association
("BofA") provided $190.0 million of financing (the "Bank Facility"), comprised
of three senior secured term loans and a revolving loan facility, to the
Company.
The Company is a Delaware corporation. Its executive offices are located
at 15450 South Outer Highway 40, #270, Chesterfield, Missouri 63017, and its
telephone number is (314) 519-1000.
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EXCHANGE OFFER
NEW PREFERRED STOCK......... Up to 1,042,460 shares of New Preferred Stock.
The terms of the New Preferred Stock and the Old
Preferred Stock are substantially identical in
all material respects, except that the offer of
the New Preferred Stock will have been registered
under the Securities Act and therefore, the New
Preferred Stock will not be subject to certain
transfer restrictions and registration rights
under the Registration Rights Agreement
applicable to the Old Preferred Stock.
EXCHANGE OFFER.............. The Company is offering, upon the terms and
subject to the conditions of the Exchange Offer,
to exchange one share of New Preferred Stock for
each share of Old Preferred Stock. See "The
Exchange Offer" for a description of the
procedures for tendering Old Preferred Stock. In
connection with the Resale Agreement dated March
2, 1998 (the "Resale Agreement"), among DLJMB,
Carlisle, Rust, certain other holders of Old
Preferred Stock, and Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJSC"), the Company
entered into the Registration Rights Agreement
(the "Registration Rights Agreement") dated as of
March 2, 1998 among the Company and DLJSC, which
grants holders of the Old Preferred Stock certain
exchange and registration rights. The Exchange
Offer is intended to satisfy obligations of the
Company under the Registration Rights Agreement.
The date of acceptance for exchange of the New
Preferred Stock will be the first business day
following the Expiration Date.
TENDERS, EXPIRATION DATE;
WITHDRAWAL................. The Exchange Offer will expire at 5:00 p.m.,
New York City time, on , 1998, or such
later date and time to which it is extended. The
tender of Old Preferred Stock pursuant to the
Exchange Offer may be withdrawn at any time prior
to the Expiration Date. Any Old Preferred Stock
not accepted for exchange for any reasons will be
returned without expense to the tendering holder
thereof as promptly as practicable after the
expiration or termination of the Exchange Offer.
ACCOUNTING TREATMENT........ No gain or loss for accounting purposes will be
recognized by the Company upon the consummation
of the Exchange Offer. See "The Exchange
Offer--Accounting Treatment."
FEDERAL INCOME
TAX CONSEQUENCES............ The exchange pursuant to the Exchange Offer will
not result in any income, gain or loss to the
holders of the Preferred Stock or the Company for
federal income tax purposes. See "The Exchange
Offer--United States Federal Income Tax
Consequences of the Exchange Offer."
USE OF PROCEEDS............. There will be no proceeds to the Company from
the issuance of the New Preferred Stock pursuant
to the Exchange Offer.
EXCHANGE AGENT.............. The U.S. Trust Company of Texas, N.A. is
serving as exchange agent (the "Exchange Agent")
in connection with the Exchange Offer.
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CONSEQUENCES OF EXCHANGING OLD PREFERRED STOCK PURSUANT TO THE EXCHANGE OFFER
The Company has not requested, and does not intend to request, an
interpretation by the staff of the Commission with respect to whether the New
Preferred Stock issued pursuant to the Exchange Offer in exchange for the Old
Preferred Stock may be offered for sale, resold or otherwise transferred by any
holder without compliance with the registration and prospectus delivery
provisions of the Securities Act. Based on interpretations by the staff of the
Commission set forth in no-action letters issued to third parties, the Company
believes that New Preferred Stock issued pursuant to the Exchange Offer in
exchange for Old Preferred Stock may be offered for resale, resold and
otherwise transferred by any holder of such New Preferred Stock, other than
broker-dealers which must sell in accordance with the provisions set forth
below and other than any holder that is an "affiliate" of the Company within
the meaning of Rule 405 under the Securities Act, without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that such New Preferred Stock is acquired in the ordinary course of such
holder's business and such holder has no arrangement or understanding with any
person to participate in the distribution of such New Preferred Stock. Any
holder who tenders in the Exchange Offer for the purpose of participating in a
distribution of the New Preferred Stock or who is an affiliate of the Company
may not rely on such interpretations by the staff of the Commission and must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any secondary resale transaction. Each
broker-dealer (whether or not it is also an "affiliate" of the Company) that
receives New Preferred Stock for its own account in exchange for Old Preferred
Stock, where such Old 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 New Preferred Stock. See "Plan of Distribution."
By executing the Letter of Transmittal, each holder of Old Preferred Stock
will represent to the Company that, among other things, (i) the New Preferred
Stock acquired pursuant to the Exchange Offer is being obtained in the ordinary
course of business of the person receiving such New Preferred Stock, whether or
not such person is such holder, (ii) neither the holder of Old Preferred Stock,
nor any such other person has an arrangement or understanding with any person
to participate in the distribution of such New Preferred Stock, (iii) if the
holder is not a broker-dealer, or is a broker-dealer but will not receive New
Preferred Stock for its own account in exchange for Old Preferred Stock,
neither the holder nor any such other person is engaged in or intends to
participate in the distribution of such New Preferred Stock and (iv) neither
the holder nor any such other person is an "affiliate" of the Company within
the meaning of Rule 405 under the Securities Act or, if such holder is an
"affiliate," that such holder will comply with the registration and prospectus
delivery requirements of the Securities Act to the extent applicable. If the
tendering holder is a broker-dealer (whether or not it is also an "affiliate")
that will receive New Preferred Stock for its own account in exchange for Old
Preferred Stock that was acquired as a result of market-making activities or
other trading activities, it will be required to acknowledge that it will
deliver a prospectus in connection with any resale of such New Preferred Stock.
See "Plan of Distribution." To comply with the securities laws of certain
jurisdictions, it may be necessary to qualify for sale or register the New
Preferred Stock prior to offering or selling such New Preferred Stock. The
Company does not currently intend to take any action to register or qualify the
New Preferred Stock for resale in any such jurisdictions.
Following the consummation of the Exchange Offer, holders of Old Preferred
Stock not tendered will not have any future registration rights and the Old
Preferred Stock will continue to be subject to certain restrictions on
transfer. In general, the Old Preferred Stock may not be offered or sold,
unless registered under the Securities Act, except pursuant to an exemption
from, or in a transaction not subject to, the Securities Act and applicable
state securities laws. Failure to comply with such requirements in such
instance may result in such holder incurring liability under the Securities Act
for which such holder is not indemnified by the Company. See "The Exchange
Offer--Consequences of Failure to Exchange."
SUMMARY DESCRIPTION OF THE PREFERRED STOCK AND THE EXCHANGE DEBENTURES
The Exchange Offer applies to 1,042,460 shares of the Old Preferred Stock.
The form and terms of the New Preferred Stock are substantially identical in
all material respects to the form and terms of the Old Preferred Stock except
that the shares of New Preferred Stock will have been registered under the
Securities Act and thus will not be subject to certain transfer restrictions
and registration rights.
7
<PAGE>
THE PREFERRED STOCK
DIVIDENDS................... The holders of the Preferred Stock are entitled
to receive dividends, when, as and if declared by
the Board at the rate of 14.5% per annum on the
liquidation value. Dividends on the Preferred
Stock accrete to the liquidation value of the
Preferred Stock until the Cash Pay Date (as
defined). The Company is restricted from
declaring dividends on other securities and from
redeeming or repurchasing certain junior
securities unless full cumulative dividends have
been paid on the Preferred Stock. See
"Description of Preferred Stock."
LIQUIDATION PREFERENCE...... Liquidation value plus accrued and unpaid
dividends. At March 31, 1998, the liquidation
value was $30.95 per share.
VOTING...................... Holders of the Preferred Stock have no general
voting rights except as provided by law and as
provided in the Certificate of Designations (as
defined) therefor. The holders of Preferred Stock
voting as a class are entitled to elect two
directors if and whenever (i) six consecutive
quarterly dividends after the Fifth Anniversary
(as defined) have not been paid in full, (ii) the
Company has not redeemed the Preferred Stock on
March 31, 2008, (iii) the Company has not offered
to redeem the Preferred Stock in a timely manner
following a change of control event, (iv)
dividends have been paid on other securities or
junior securities have been redeemed or
repurchased while full cumulative dividends have
not been paid on the Preferred Stock or (v) the
Company's Certificate of Incorporation has been
amended in a manner adverse to the holders of
Preferred Stock without such holder's consent.
MANDATORY REDEMPTION........ In the event of a Change of Control (as defined
in the Certificate of Designations), the Company
is required to make an offer to redeem all shares
of Preferred Stock at a redemption price equal to
101% of the liquidation value. However, there can
be no assurance that upon the occurrence of such
a Change of Control, the Company will have
sufficient funds to repurchase the Preferred
Stock. In addition, the Company is required to
redeem all shares of Preferred Stock on March 31,
2008 at a price equal to the liquidation value at
such date.
OPTIONAL REDEMPTION......... In the event that Holdings or any affiliate of
the Company sells equity securities and
contributes the proceeds to the Company (an
"Equity Offering") prior to September 30, 1999,
the Company may, at its option, redeem not less
than all of the outstanding Preferred Stock at a
price of 114.5% of the liquidation value;
provided that the aggregate redemption price of
all the outstanding shares of Preferred Stock
does not exceed the net proceeds received by the
Company from such sale. After September 30, 2001,
the Company may, at its option, redeem any or all
outstanding shares of Preferred Stock at a price
of 107.25% of the liquidation value in 2001
declining annually ratably to 100% in 2004 and
thereafter.
8
<PAGE>
RANKING..................... The Preferred Stock shall, with respect to
dividend rights and rights on liquidation,
dissolution and winding up, rank senior to all
classes or series of equity securities of the
Company, including the Company's common stock,
$0.01 par value ("Common Stock"), and each other
class of capital stock of the Company, the terms
of which provide that such class shall rank
junior to the Preferred Stock or the terms of
which do not specify any rank relative to the
Preferred Stock.
EXCHANGE FEATURE............ Subject to certain conditions, the Company may
issue 14.5% Junior Subordinated Exchange
Debentures in exchange for any or all outstanding
Preferred Stock, at an exchange ratio of $1.00 of
liquidation value of Preferred Stock for $1.00
principal amount of Exchange Debentures.
THE EXCHANGE DEBENTURES
MATURITY DATE............... March 31, 2008
INTEREST RATE............... 14.5% effective annual rate payable quarterly.
Prior to the Cash Pay Date, quarterly interest
will be payable solely in the form of additional
Exchange Debentures. After the Cash Pay Date,
interest will be payable in cash.
OPTIONAL REDEMPTION......... The Securities are redeemable at any time after
September 30, 2001 at the option of the Company,
in whole or in part, at certain redemption prices
set forth herein. In addition, at the option of
the Company, prior to September 30, 1999, the
Company may redeem outstanding Exchange
Debentures, in whole or in part (pro rata from
each holder thereof), at a purchase price equal
to 114.5% of the principal amount of the Exchange
Debentures so redeemed plus accrued and unpaid
cash interest, if any, to the date of redemption
with the proceeds of an Equity Offering.
CHANGE OF CONTROL........... In the event of a Change of Control that
constitutes a Repurchase Event (each, as defined
in the Certificate of Designations), each holder
of Exchange Debentures will have the right to
require the Company to repurchase its Exchange
Debentures at a purchase price equal to 101% of
the principal amount of the Exchange Debentures
so redeemed plus accrued and unpaid interest, if
any. However, the Company's ability to repurchase
the Exchange Debentures upon a Change of Control
may be limited by the terms of then existing
contractual obligations of the Company and its
subsidiaries. Furthermore, under the Bank
Facility, a "Change in Control" (as defined
therein) would constitute an event of default,
causing acceleration of all payments required
thereunder. There can be no assurance that upon
the occurrence of a Change of Control, the
Company will have sufficient funds to repurchase
the Exchange Debentures.
9
<PAGE>
RANKING..................... The Exchange Debentures will be general
unsecured obligations of the Company and will be
subordinated in right of payment to the prior
payment of all indebtedness of the Company that
is not expressly made pari passu with or junior
to the Exchange Debentures. As of March 31, 1998,
the Company had approximately $161.0 million in
aggregate principal amount of senior
Indebtedness, of which approximately $31.0
million was secured Indebtedness. As of March 31,
1998, the Company had the ability to incur up to
$177.2 million in senior indebtedness based upon
the covenants with which it must comply.
CERTAIN COVENANTS........... The Exchange Debentures, if issued, will be
issued pursuant to an indenture which will
contain certain customary covenants which, among
other things, relate to (i) the payment of
principal, premium and interest on the Exchange
Debentures, (ii) the maintenance of an office for
payments, (iii) the appointment of a paying
agent, (iv) lists of Exchange Debenture holders,
(v) the filing of reports, (vi) limitations on
certain payments by the Company and (vii)
limitations on the Company's ability to merge,
consolidate or sell all or substantially all its
assets.
RISK FACTORS
Prospective investors in the New Preferred Stock should carefully consider
the factors discussed in detail elsewhere in this Prospectus under the caption
"Risk Factors."
10
<PAGE>
SUMMARY FINANCIAL DATA
The following table presents (i) summary historical financial data of
Rust, prior to the Acquisition ("Predecessor") for the year ended December 31,
1995 and for the nine months ended September 30, 1996 and (ii) summary
historical financial data of Brand, after the Acquisition ("Successor"), for
the three months ended December 31, 1996, the year ended December 31, 1997, the
three months ended March 31, 1998 and as of December 31, 1996, December 31,
1997 and March 31, 1998. The summary historical financial data as of and for
the year ended December 31, 1995 and for the nine months ended September 30,
1996 has been derived from the audited financial statements of Predecessor. The
summary historical financial data as of and for the three months ended December
31, 1996 and the year ended December 31, 1997 has been derived from the audited
financial statements of Successor. The summary historical financial data as of
and for the three months ended March 31, 1998 has been derived from the
unaudited financial statements of Successor. The financial data set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's financial
statements and notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
-------------------------------- -----------------------------------------------
YEAR NINE MONTHS THREE MONTHS YEAR THREE MONTHS
ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, DECEMBER 31, DECEMBER 31, MARCH 31,
1995 1996 1996 1997 1998
-------------- --------------- -------------- -------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA: (1)
Revenue ........................ $193,829 $124,769 $44,412 $160,660 $ 50,690
Operating Expenses ............. 138,968 89,073 34,170 122,638 38,814
-------- -------- ------- -------- --------
Gross Profit .................. 54,861 35,696 10,242 38,022 11,876
Selling and Administrative
Expenses ...................... 25,807 15,825 4,743 25,840 5,986
Nonrecurring Start-up
Expenses ...................... -- -- -- 2,498 --
-------- -------- ------- -------- --------
Operating Income ............... 29,054 19,871 5,499 9,684 5,890
Interest Expense ............... 9,444 7,872 4,504 15,422 4,057
Interest Income ................ (1,012) (482) (195) (397) (125)
Other Expense, Net (2) ......... 853 708 -- -- --
-------- -------- ------- -------- --------
Pretax Income (Loss) .......... 19,769 11,773 1,190 (5,341) 1,958
Provision for
Income Tax .................... 8,300 4,813 525 -- --
Extraordinary Loss, Net of
Tax ........................... -- -- -- -- 4,329
-------- -------- ------- -------- --------
Net Income (Loss) .............. $ 11,469 $ 6,960 $ 665 $ (5,341) $ (2,371)
======== ======== ======= ======== ========
OTHER DATA: (1)
EBITDA (3) ..................... $ 36,803 $ 25,832 $ 8,398 $ 24,507 $ 9,009
Adjusted
EBITDA (3) (4) ................ 36,803 25,832 9,387 29,629 10,498
Cash flow from operations 35,587 28,478 4,966 11,983 (171)
Depreciation and
Amortization .................. 8,602 6,669 3,567 13,294 3,334
Cash Interest Expense (5) 9,444 7,872 3,836 14,453 3,842
-------- -------- ------- -------- --------
Ratio of Adjusted
EBITDA to
Cash Interest
Expense (3) (4) (5) ........... 3.9x 3.3x 2.4x 2.1x 2.7x
Capital Expenditures
Maintenance ................... $ 2,755 $ 512 $ 97 $ 3,024 $ 1,795
Expansion ..................... 5,847 1,298 111 6,733 1,952
-------- -------- ------- -------- --------
Total ........................ $ 8,602 $ 1,810 $ 208 $ 9,757 $ 3,747
Ratio of earnings to
combined fixed charges
and preferred stock
dividends (6) ................. 3.0x 2.4x .5x 1.2x
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
SUCCESSOR
----------------------------------------
AT DECEMBER 31,
------------------------ AT MARCH 31,
1996 1997 1998
---------- ----------- -------------
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA: (1)
<S> <C> <C> <C>
Working Capital ................................... $ 12,656 $ 4,207 $ 19,541
Total Assets ...................................... 204,266 197,543 204,148
Debt (including current portion) .................. 158,000 154,250 161,000
14.5% Senior Exchangeable Preferred Stock ......... 25,906 31,140 32,268
Stockholder's Equity (Deficit) .................... 4,247 (5,176) (8,542)
</TABLE>
- ----------
(1) The Acquisition had a significant impact on the Company's financial
position and results of operations. Consequently, the financial data for
and as of dates prior to the Acquisition may not be directly comparable
to corresponding information for and as of dates after the Acquisition.
(2) Since the Acquisition, the Company has not separately classified other
income and expense and has included it in selling and administrative
expenses because such amounts have been immaterial.
(3) EBITDA is defined as earnings before nonrecurring start-up expenses,
interest income, cash interest expense, income taxes, depreciation and
amortization. EBITDA is commonly used to analyze companies on the basis
of operating performance, leverage and liquidity. EBITDA is not intended
to represent cash flows for the period, nor has it been presented as an
alternative to operating income as an indicator of operating performance
and should not be considered in isolation or as a substitute for measures
of performance prepared in accordance with generally accepted accounting
principles.
(4) Adjusted EBITDA reflects the cash impact of two items that are not
reflected in the income statement. First, in connection with the
Acquisition, the Company entered into a Transitional Services Agreement
with WMI and Rust. In consideration of certain services to be rendered by
the Company and the licenses and preferred customer status granted by the
Company, WMI agreed to pay the Company $725,000 per quarter for the
quarter ending December 31, 1996 through the quarter ending September 30,
1999 ($2,900,000 for three years or $8,700,000 in total) (the "WMI
Payments"). For the three months ended December 31, 1996, the year ended
December 31, 1997 and the three months ended March 31, 1998, the WMI
Payments were $725,000, $2,900,000 and $725,000, respectively. The
portion of the WMI Payments directly offsetting expenses of the Company
is recognized in EBITDA. Adjusted EBITDA is increased by the portion of
the WMI Payments not reflected in EBITDA or $362,000, $2,200,000 and
$675,000 for the three months ended December 31, 1996, the year ended
December 31, 1997 and the three months ended March 31, 1998,
respectively. Second, in connection with the Acquisition, WMI assumed
liabilities for all claims arising from accidents which occurred on or
before September 30, 1996. As a result of having no liability for
accidents which occurred prior to the Acquisition, the amounts expensed
by the Company for accident-related claims occurring since the
Acquisition exceed the cash payments for accident-related claims. The
Company recorded claims expense of $1,189,000, $5,927,000 and $1,589,000,
for the three months ended December 31, 1996, the year ended December 31,
1997 and the three months ended March 31, 1998, respectively, but had
cash expenditures related to these items of $562,000, $3,005,000 and
$775,000, respectively. Adjusted EBITDA for the three months ended
December 31, 1996, the year ended December 31, 1997 and the three months
ended March 31, 1998 is therefore increased by the portion of claims
expense not paid in cash, or $627,000, $2,922,000 and $814,000,
respectively. The total of the adjustments for the WMI Payments and the
non-cash claims for the three months ended December 31, 1996, the year
ended December 31, 1997 and the three months ended March 31, 1998 is an
increase of $989,000, $5,122,000 and $1,489,000, respectively.
(5) Cash interest expense represents total interest expense less amortization
of deferred financing fees of $668,000 for the three months ended
December 31, 1996, $969,000 for the year ended December 31, 1997 and
$214,000 for the three months ended March 31, 1998.
(6) For the purposes of calculating the ratio of earnings to combined fixed
charges and preferred stock dividends, earnings represent income (loss)
before income taxes plus fixed charges. Fixed charges consist of interest
expense on all indebtedness plus the interest portion of rental expense
on noncancelable leases, amortization of debt issuance costs, and
preferred stock dividends.
12
<PAGE>
RISK FACTORS
In addition to the other matters described in this Prospectus, prospective
purchasers of the New Preferred Stock offered hereby should consider the
specific factors set forth below.
The information herein contains forward-looking statements that involve a
number of risks and uncertainties. A number of factors could cause actual
results, performance, achievements of the Company, or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. These factors include,
but are not limited to, the competitive environment in the industrial and
commercial scaffolding industry in general and in the Company's specific market
areas; changes in prevailing interest rates and the availability of and terms
of financing to fund the anticipated growth of the Company's business;
inflation; changes in costs of goods and services; economic conditions in
general and in the Company's specific market areas; demographic changes;
changes in or failure to comply with federal, state and/or local government
regulations; liability and other claims asserted against the Company; changes
in operating strategy or development plans; the ability to attract and retain
qualified personnel; the significant indebtedness of the Company; labor
disturbances; changes in the Company's acquisition and capital expenditure
plans; and other factors referenced herein. In addition, such forward-looking
statements are necessarily dependent upon assumptions, estimates and dates that
may be incorrect or imprecise and involve known and unknown risks uncertainties
and other factors. Accordingly, any forward-looking statements included herein
do not purport to be predictions of future events or circumstances and may not
be realized. Forward-looking statements can be identified by, among other
things, the use of forward-looking terminology such as "believes," "expects,"
"may," "will," "should," "seeks," "pro forma," "anticipates," "intends" or the
negative of any thereof, or other variations thereon or comparable terminology,
or by discussions of strategy or intentions. Given these uncertainties,
prospective investors are cautioned not to place undue reliance on such
forward-looking statements. The Company disclaims any obligations to update any
such factors or to publicly announce the results of any revisions to any of the
forward-looking statements contained herein to reflect future events or
developments.
SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE DEBT
The Company is highly leveraged. As of March 31, 1998, the Company's total
long-term debt was $161.0 million, which constitutes the Company's aggregate
amount of senior debt outstanding. The Company's estimated annual payment
obligation for 1998 with respect to its indebtedness is comprised of
approximately $1.5 million of principal payments and $11.4 million of interest
payments. The Company's payment obligation for 1997 consisted of $8.3 million
of principal payments and $14.1 million of interest payments. The degree to
which the Company is leveraged could have important consequences to holders of
the Preferred Stock, including (i) the Company's ability to obtain additional
financing in the future for working capital, capital expenditures,
acquisitions, general corporate purposes or other purposes may be impaired;
(ii) a substantial portion of the Company's cash flow from operations will be
dedicated to the payment of principal and interest on its indebtedness, thereby
reducing the funds available to the Company for its operations and expansion
plans; and (iii) the Company may be more vulnerable to a downturn in general
economic conditions or its business. The Company's borrowings under the Bank
Facility are at floating rates of interest, which could result in higher
interest expense in the event of an increase in interest rates. Further, the
discretion of the Company's management with respect to certain business matters
will be limited by covenants contained in the Indenture (as defined) and the
Bank Facility.
The Company's ability to make scheduled payments or to refinance its
obligations with respect to its indebtedness depends on its financial and
operating performance, which, in turn, is subject to prevailing economic
conditions and to financial, business and other factors beyond its control and
to the ability of the Company to access payments and advances from its
subsidiaries in amounts and at times sufficient to fund its debt obligations.
Further, there can be no assurance that the Company's operating results or
access to payments and advances from its subsidiaries will be sufficient for
payment of the Company's indebtedness.
13
<PAGE>
RESTRICTIVE COVENANTS
Among other things, the covenants contained in the agreements governing
the Company's indebtedness restrict, condition or prohibit the Company from
incurring additional indebtedness, creating liens on its assets, making certain
asset dispositions, entering into transactions with affiliates, merging or
consolidating with any other person or selling, assigning, transferring,
leasing, conveying or otherwise disposing of substantially all assets of the
Company. In addition, the Bank Facility contains financial and operating
covenants and prohibitions, including requirements that the Company maintain
certain financial ratios and use a portion of excess cash flow and proceeds of
assets sales to repay indebtedness under such facility. There can be no
assurance that the Company's leverage and such restrictions will not materially
and adversely affect the Company's ability to finance its future operations or
capital needs or to engage in other business activities. Moreover, a failure to
comply with the obligations contained in the Indenture or any other agreements
with respect to additional financing (including the Bank Facility or any
replacement facility) could result in an event of default under such
agreements, which could permit acceleration of the related debt and
acceleration of debt under future debt agreements that may contain cross
acceleration or cross default provisions. See "Description of Bank Facility"
and "Description of Notes."
Both the Bank Facility and the Notes (as defined) would restrict the
Company's ability to pay cash dividends on or to redeem the Preferred Stock.
As of December 31, 1997, the Company was not in compliance with certain
covenants in the Bank Facility. The Company obtained waivers of such covenant
violations from the lenders under the Bank Facility. The Company also obtained
an amendment to the Bank Facility which became effective upon the consummation
of the Old Note Offering and, among other things, reset the financial ratios
and financial tests required to be met thereunder to levels that are more
consistent with the Company's capital structure following the Old Note Offering
(as defined) and its current and expected financial performance. As of March
31, 1998, the Company was in compliance with the reset financial ratios and
financial tests. Although the Company has not been required to seek additional
waivers from the lenders under the Bank Facility, there can be no assurance
that the Company will not be required to seek waivers in the future or that
such waivers will be granted. See "Description of Bank Facility."
SUBORDINATION; DEPENDENCE ON SUBSIDIARIES
The Preferred Stock and, if issued, the Exchange Debentures will be
effectively subordinated to all current and future senior indebtedness,
including indebtedness under the Bank Facility and the Notes, to the extent of
any pledged assets. The Company's obligations under the Bank Facility are
secured by a pledge of substantially all of the assets of the Company and its
subsidiaries. In the event of a bankruptcy, liquidation or reorganization of
the Company, the assets of the Company would be available to pay obligations on
the Preferred Stock only after all indebtedness under the Bank Facility and all
other senior indebtedness has been paid in full, and there may not be
sufficient assets remaining to pay amounts due on any or all of the shares of
Preferred Stock then outstanding. The Company's U.S. subsidiaries have issued
guarantees under the Bank Facility. As of March 31, 1998, the Company had $31.0
million of senior indebtedness outstanding. In addition, as of March 31, 1998,
the Company had $16.2 million in unused senior secured borrowing capacity under
the Bank Facility.
In addition, the operations of the Company are conducted primarily through
its subsidiaries. Therefore, the Company's ability to make required payments
with respect to the Company's obligations, including the Preferred Stock,
depends on the earnings of its subsidiaries and on its ability to receive funds
from such subsidiaries through dividends or other payments. Since the Preferred
Stock is an obligation of the Company only, the Company's subsidiaries are not
obligated or required to pay any amounts due pursuant to the Preferred Stock or
to make funds available therefor in the form of dividends or advances to the
Company. Furthermore, the Preferred Stock effectively will be subordinated to
all outstanding indebtedness and other liabilities and commitments (including
trade payables and operating lease obligations) of the Company's subsidiaries.
Any right of the Company to receive assets of any of its subsidiaries upon
their liquidation or reorganization (and the consequent right of holders of
Preferred Stock to participate in those assets) effectively will be
subordinated to the claims of that subsidiary's
14
<PAGE>
creditors, except to the extent that the Company itself is recognized as a
creditor of such subsidiary, in which case the claims of the Company would
still be subordinate to any security interest in the assets of such subsidiary
and any indebtedness of such subsidiary senior to that held by the Company. As
of March 31, 1998, the Company's subsidiaries had no indebtedness outstanding
other than intercompany indebtedness and certain capital lease obligations.
EFFECTS OF SEASONALITY AND CYCLICALITY
The market for industrial scaffolding services experiences seasonal
fluctuations in demand. In particular, because of high demand for gasoline for
automobiles during the summer, most refineries prefer to close down for
turnarounds during the spring and fall. Similar patterns are evidenced for
utilities. While the Company may be able to take advantage of differing
seasonal patterns in other industries and, in particular, in the commercial
scaffolding market, seasonality may lead to low inventory utilization during
periods of low demand and an inability to fully service all of the Company's
customers in periods of high demand. In addition, seasonality may lead to price
fluctuations and periods of low cash flow.
Historically, the market for industrial scaffolding services has
experienced a degree of cyclicality. In particular, demand for nonresidential
construction and capital projects is highly cyclical. In addition, when
refining products are in high demand or the price of pulp are high, refineries
and pulp and paper mills often delay turnarounds. It does not appear that any
areas of the Company's business exhibit a significant degree of
counter-cyclicality that would offset these effects. This cyclicality could
have a material adverse effect on the Company.
CONCENTRATION OF CUSTOMERS
The Company's top ten customers accounted for approximately 36% of total
revenues during 1997. The largest customer, Exxon Corporation ("Exxon"),
accounted for approximately 17% of the Company's revenues. The loss of any of
these customers could have a material adverse effect on the Company.
COMPETITION
The Company currently faces competition from other existing scaffolding
services providers, including entities providing substantially similar
services, some of which have significantly greater resources than the Company.
The Company also competes with larger engineering and construction ("E&C")
firms. While the Company believes that it currently has a dominant position in
the industrial scaffolding market, there can be no assurance that the Company
will be able to increase or maintain its market share.
DEPENDENCE ON LABOR
The Company's business has a high labor content and, as a result, the
Company's financial performance is affected by the availability of qualified
personnel and the cost of labor. In recent years, unemployment rates have
reached unusually low levels leading to lower availability of labor and to wage
inflation. In particular, the supply of labor has been low relative to demand
in the Gulf Coast Region, in which the Company has significant operations.
While the Company has been successful in hiring workers for its projects and
does not believe that contraction of the labor market has had a material
adverse effect on its financial performance, there can be no assurance that
sufficient labor will be available in the future or that the cost of labor will
not rise, either of which could have an adverse effect on the Company.
Approximately 25% of the Company's employees are represented by labor
unions. There can be no assurance that strikes or other types of conflicts with
unions or personnel will not arise or that the Company will not become a target
for further union organizing activity. Since the Company's business has a high
labor content, any such activity could have a material adverse effect on the
Company.
DEPENDENCE ON CERTAIN INDUSTRIES
The Company's financial performance is dependent upon the continued
viability and financial stability of its customers, which are in turn
substantially dependent on the viability and financial stability
15
<PAGE>
of the oil, petrochemical, chemical, utilities, pulp and paper and construction
industries. In addition, many of the Company's customers are affected by
general economic conditions. The factors affecting these industries in general,
and the Company's customers in particular, could have a material adverse effect
on the Company.
DEPENDENCE ON KEY PERSONNEL
The Company's continued success depends to a large extent upon the
continued services of its senior management and certain individuals with
critical client relationships. The loss of the services of any such employee
could have a material adverse effect on the Company. The Company does not
maintain "key man" insurance with respect to any such individuals.
ACQUISITION STRATEGY
The Company intends to pursue an acquisition strategy, expanding its
business by acquiring other scaffolding providers. The various risks associated
with pursuing an acquisition strategy of this nature include problems inherent
in integrating new businesses such as potential loss of customers and key
personnel and potential disruption of operations. There also can be no
assurance that suitable acquisition candidates will be available, that
acquisitions can be completed on reasonable terms, that the Company will
successfully integrate the operations of any acquired entities or that the
Company will have access to adequate funds to effect any desired acquisitions.
In addition, acquisitions may be limited by restrictions in the Company's
indebtedness.
POSSIBLE INABILITY TO REPURCHASE PREFERRED STOCK UPON A CHANGE OF CONTROL
Upon a Change of Control, the Company is required to make an offer to
repurchase all of the shares of Preferred Stock or, if issued, Exchange
Debentures then outstanding at a redemption price equal to 101% of the
liquidation value, together with accrued and unpaid cash dividends thereon.
However, the Company's ability to repurchase the Preferred Stock upon a Change
of Control may be limited by the terms of then existing contractual obligations
of the Company and its subsidiaries. Furthermore, under the Bank Facility, a
"Change in Control" (as defined therein) would constitute an event of default,
causing acceleration of all payments required thereunder. In addition, the
Company may not have adequate financial resources to effect such a repurchase,
and there can be no assurance that the Company would be able to obtain such
resources. Pursuant to the Indenture, upon a "Change of Control" (as defined
therein) each holder of the Notes will have the right to require the Company to
repurchase any or all of the Notes owned by such holder at a price equal to
101% of the principal amount thereof, plus accrued and unpaid interest, if any,
to the date of purchase. If the Company fails to repurchase all of the Notes
tendered for purchase upon the occurrence of a Change of Control, such failure
will constitute an event of default under the Indenture. In addition, no funds
would be available for redemption of the Preferred Stock until such repurchase
of Notes is completed.
With respect to the sale of assets referred to in the definition of
"Change of Control" in the Certificate of Designations, the phrase "all or
substantially all" as used in such definition varies according to the facts and
circumstances of the subject transaction, has no clearly established meaning
under the relevant law and is subject to judicial interpretation. Accordingly,
in certain circumstances there may be a degree of uncertainty in ascertaining
whether a particular transaction would involve a disposition of "all or
substantially all" of the assets of a person and therefore it may be unclear
whether a Change of Control has occurred and whether the Preferred Stock is
subject to repurchase.
The Change of Control provision may not necessarily afford the holders
protection in the event of a highly leveraged transaction, including a
reorganization, restructuring, merger or other similar transaction involving
the Company that may adversely affect the holders, because such transactions
may not involve a shift in voting power or beneficial ownership or, even if
they do, may not involve a shift of the magnitude required under the definition
of Change of Control to trigger such provisions.
LACK OF PUBLIC MARKET FOR THE NEW PREFERRED STOCK
The New Preferred Stock will constitute a new issue of securities with no
established trading market, and there can be no assurance as to the liquidity
of any markets that may develop for the New Preferred
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Stock or as to the ability of or price at which the holders of New Preferred
Stock would be able to sell their New Preferred Stock. Future trading prices of
the New Preferred Stock will depend on many factors, including, among others,
the Company's operating results and the market for similar securities. The
Company does not intend to apply for listing of the New Preferred Stock on any
securities exchange. No assurance can be given that an active public or other
market will develop for the New Preferred Stock or as to the liquidity of or
the trading market for the New Preferred Stock.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Preferred Stock who do not exchange their Old Preferred
Stock for New Preferred Stock pursuant to the Exchange Offer will continue to
be subject to the restrictions on transfer of such Old Preferred Stock. In
general, the Old Preferred Stock may not be offered or sold, unless registered
under the Securities Act, except pursuant to an exemption from, or in a
transaction not subject to the Securities Act and applicable state securities
laws. The Company does not intend to register the Old Preferred Stock under the
Securities Act. The Company believes that, based upon interpretations contained
in letters issued to third parties by the staff of the Commission, New
Preferred Stock issued pursuant to the Exchange Offer in exchange for Old
Preferred Stock may be offered for resale, resold or otherwise transferred by
each holder thereof (other than a broker-dealer, as set forth below, and any
such holder which is an "affiliate" of the Company within the meaning of Rule
405 under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act provided that such New
Preferred Stock is acquired in the ordinary course of such holder's business
and such holder has no arrangement or understanding with any person to
participate in the distribution of such New Preferred Stock. Eligible holders
wishing to accept the Exchange Offer must represent to the Company that (i) the
New Preferred Stock acquired pursuant to the Exchange Offer is being obtained
in the ordinary course of business of the person receiving such New Preferred
Stock, whether or not such person is such holder, (ii) neither the holder of
Old Preferred Stock nor any such other person has an arrangement or
understanding with any person to participate in the distribution of such New
Preferred Stock, (iii) if the holder is not a broker-dealer or is a
broker-dealer but will not receive New Preferred Stock for its own account in
exchange for Old Preferred Stock, neither the holder nor any such other person
is engaged in or intends to participate in a distribution of the New Preferred
Stock and (iv) neither the holder nor any such other person is an "affiliate"
of the Company within the meaning of Rule 405 or if such holder is an
"affiliate," that such holder will comply with the registration and prospectus
delivery requirements of the Securities Act to the extent applicable. Each
broker-dealer (whether or not it is also an "affiliate") that receives New
Preferred Stock for its own account pursuant to the Exchange Offer must
represent that the Old Preferred Stock tendered in exchange therefor was
acquired as a result of market-making activities or other trading activities
and must acknowledge that it will deliver a prospectus in connection with any
resale of such New 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 the resales of New
Preferred Stock received in exchange for Old Preferred Stock where such Old
Preferred Stock was acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Company has agreed that, for a
period of 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." However, to comply with the securities laws of certain
jurisdictions, if applicable, the New Preferred Stock may not be offered or
sold unless it has been registered or qualified for sale in such jurisdiction
or an exemption from registration or qualification is available and is complied
with. The Company does not currently intend to take any action to register or
qualify the New Preferred Stock for resale in any such jurisdictions.
In the event the Exchange Offer is consummated, the Company will not be
required to register the transfer of the Old Preferred Stock under the
Securities Act or any applicable securities laws. In such event, holders of Old
Preferred Stock seeking liquidity in their investment would have to rely on
exemptions to the registration requirements under such laws. The Old Preferred
Stock currently may be sold to "Qualified Institutional Buyers" and in offshore
transactions complying with Rule 903 or Rule 904
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of Regulation S under the Securities Act or pursuant to another available
exemption under the Securities Act without registration under the Securities
Act. To the extent that Old Preferred Stock is tendered and accepted in the
Exchange Offer, the reduction in the principal amount of Old Preferred Stock
outstanding could have an adverse effect upon, and increase the volatility of
the market price for, the untendered and tendered but unaccepted Old Preferred
Stock.
EXCHANGE OFFER PROCEDURES
To participate in the Exchange Offer, and avoid the restrictions on Old
Preferred Stock, each holder of Old Preferred Stock must transmit a properly
completed Letter of Transmittal (or acknowledge receipt of and agree to be
bound by such Letter of Transmittal through the Automated Tender Offer Program
(the "ATOP") of the Depository Trust Company ("DTC")) and all other documents
required by such Letter of Transmittal, to the U.S. Trust Company of Texas,
N.A. at the address set forth below under "The Exchange Offer--Exchange Agent"
on or prior to the Expiration Date. In addition, (i) certificates for such Old
Preferred Stock must be received by the Exchange Agent, (ii) a timely
confirmation of a book-entry transfer (a "Book-Entry Confirmation") of such Old
Preferred Stock, if such procedure is available, into the Exchange Agent's
account at DTC pursuant to the procedure for book-entry transfer described
below, must be received by the Exchange Agent prior to the Expiration Date or
(iii) the holder must comply with the guaranteed delivery procedures. See "The
Exchange Offer."
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USE OF PROCEEDS
The Company will not receive any proceeds from the Exchange Offer. The
Company received $26.1 million in net proceeds from the issuance and sale, from
time to time, of the Old Preferred Stock. Approximately $25.0 million of the
net proceeds was used as a portion of the financing for the Acquisition and
approximately $1.1 million of the net proceeds was used for working capital and
other general corporate purposes. The Company has agreed to pay the expenses of
the Exchange Offer. No underwriter is being used in connection with the
Exchange Offer.
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
In connection with the Resale Agreement, the Company entered into the
Registration Rights Agreement, which obligated the Company to (i) file the
Registration Statement of which this Prospectus is a part for the Exchange
Offer within 180 days after March 2, 1998 (the "Resale Date"), (ii) use its
best efforts to cause the Registration Statement to become effective within 240
days after the Resale Date and (iii) cause the Exchange Offer to be consummated
no later than the 30th business day after it is declared effective by the
Commission. A copy of the Registration Rights Agreement has been filed as an
exhibit to the Registration Statement of which this Prospectus is a part. The
Exchange Offer is being made pursuant to the Registration Rights Agreement to
satisfy the Company's obligations thereunder.
Based on interpretations by the staff of the Commission, as set forth in
no-action letters issued to Exxon Capital Holdings Corporation (available May
13, 1988), Morgan Stanley & Co. Incorporated (available June 5, 1991), Mary Kay
Cosmetics, Inc. (available June 5, 1991), Warnaco, Inc. (available October 11,
1991) and K-III Communications Corporation (available May 14, 1993), the
Company believes that a holder who exchanges Old Preferred Stock for New
Preferred Stock pursuant to the Exchange Offer may offer for resale, resell and
otherwise transfer such New Preferred Stock without compliance with the
registration and prospectus delivery requirements of the Securities Act;
provided, that (i) such New Preferred Stock is acquired in the ordinary course
of such holder's business, (ii) such holder is not engaged in, and does not
intend to engage in, a distribution of such New Preferred Stock and has no
arrangement with any person to participate in the distribution of such New
Preferred Stock, and (iii) such holder is not an affiliate of the Company (as
defined under Rule 405 of the Securities Act). However, the staff of the
Commission has not considered the Exchange Offer in the context of a no-action
letter and there can be no assurance that the staff of the Commission would
make a similar determination with respect to the Exchange Offer as in such
other circumstances. A holder who exchanges Old Preferred Stock for New
Preferred Stock pursuant to the Exchange Offer with the intention to
participate in a distribution of the New Preferred Stock may not rely on the
staff's position enunciated in the Exxon Capital Letter, the Morgan Stanley
Letter or similar letters and must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transaction. Each broker-dealer that receives New Preferred Stock for its own
account in exchange for Old Preferred Stock, where such Old 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 New Preferred Stock. See "Plan of
Distribution." The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. This Prospectus, as
it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with resales of New Preferred Stock (other than a
resale of an unsold allotment from the original sale of Old Preferred Stock)
received in exchange for Old Preferred Stock where such Old Preferred Stock was
acquired by such broker-dealer as a result of market-making activities or other
trading activities. The Company has agreed that, for a period of 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."
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal (which together constitute the
Exchange Offer), the Company will accept any and all shares of Old Preferred
Stock validly tendered and not withdrawn prior to 5:00 p.m., New York City
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time, on the Expiration Date. For each share of Old Preferred Stock tendered
pursuant to the Exchange Offer and not withdrawn prior to the Expiration Date,
the Company will issue one share of New Preferred Stock. Holders may tender
some or all of their shares of Old Preferred Stock pursuant to the Exchange
Offer.
The terms of the New Preferred Stock and the Old Preferred Stock are
substantially identical in all material respects, except that (i) the exchange
will be registered under the Securities Act and, therefore, the New Preferred
Stock will not bear legends restricting the transfer of such New Preferred
Stock, and (ii) holders of the New Preferred Stock will not be entitled to any
of the registration rights of holders of Old Preferred Stock under the
Registration Rights Agreement, which rights will terminate upon the
consummation of the Exchange Offer.
As of the date of this Prospectus, 1,042,460 shares of Old Preferred Stock
are outstanding. This Prospectus, together with the Letter of Transmittal, is
being sent to all registered holders of the Old Preferred Stock.
Holders of Old Preferred Stock do not have any appraisal or dissenters'
rights under the Delaware General Corporation Law or the Indenture in
connection with the Exchange Offer. The Company intends to conduct the Exchange
Offer in accordance with the provisions of the Registration Rights Agreement
and the applicable requirements of the Exchange Act, and the rules and
regulations of the Commission thereunder. Shares of Old Preferred Stock which
are not tendered and were not prohibited from being tendered for exchange in
the Exchange Offer will remain outstanding and continue to be subject to
transfer restrictions, but will not be entitled to any rights or benefits under
the Registration Rights Agreement.
Upon satisfaction or waiver of all the conditions to the Exchange Offer,
the Company will accept, promptly after the Expiration Date, each share of Old
Preferred Stock properly tendered and not withdrawn and will issue one share of
New Preferred Stock in exchange therefor promptly after acceptance of the Old
Preferred Stock. For purposes of the Exchange Offer, the Company shall be
deemed to have accepted properly tendered Old Preferred Stock for exchange
when, as and if, the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
for the purposes of receiving the New Preferred Stock from the Company.
In all cases, issuance of New Preferred Stock for Old Preferred Stock that
is accepted for exchange pursuant to the Exchange Offer will be made only after
timely receipt by the Exchange Agent of such Old Preferred Stock, a properly
completed and duly executed Letter of Transmittal (receipt of such Letter of
Transmittal by the Exchange Agent is not necessary if the holder of such Old
Preferred Stock has acknowledged receipt of and agreed to be bound by such
Letter of Transmittal through the ATOP of DTC) and all other required
documents; provided, however, that the Company reserves the absolute right to
waive any defects or irregularities in the tender or conditions of the Exchange
Offer. If any tendered Old Preferred Stock is not accepted for any reason set
forth in the terms and conditions of the Exchange Offer, certificates for any
such unaccepted or nonexchanged Old Preferred Stock will be returned without
expense to the tendering holder thereof as promptly as practicable after the
expiration or termination of the Exchange Offer.
Holders who tender shares of Old Preferred Stock 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 shares of Old Preferred Stock pursuant to the Exchange Offer. The
Company will pay all charges and expenses, other than certain applicable taxes
described below, in connection with the Exchange Offer. See "--Fees and
Expenses."
EXPIRATION DATE; EXTENSION; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
, 1998 (20 business days following the commencement of the Exchange Offer),
unless the Company, in its sole discretion, extends the Exchange Offer, in
which case the term "Expiration Date" will mean the latest date and time to
which the Exchange Offer is extended.
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In order to extend the Exchange Offer, the Company will notify the
Exchange Agent of any extension by oral or written notice and will mail to the
registered holders an announcement thereof, prior to 9:00 a.m., New York City
time, on the next business day after the then Expiration Date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any shares of Old Preferred Stock, to extend the Exchange Offer or to
terminate the Exchange Offer if any of the conditions set forth below under
"--Conditions" shall not have been satisfied, by giving oral or written notice
of such delay, extension or termination to the Exchange Agent or (ii) to amend
the terms of the Exchange Offer. Any such delay in acceptance, extension,
termination or amendment will be followed as promptly as practicable by oral or
written notice thereof to the registered holders. If the Exchange Offer is
amended in a manner determined by the Company to constitute a material change,
the Company will promptly disclose such amendment in a manner reasonably
calculated to inform the holders of Old Preferred Stock of such amendment.
Without limiting the manner in which the Company may choose to make a
public announcement of any delay, extension, amendment or termination of the
Exchange Offer, the Company shall have no obligation to publish, advertise, or
otherwise communicate any such public announcement, other than by making a
timely release to an appropriate news agency.
DIVIDENDS ON THE NEW PREFERRED STOCK
Holders of the New Preferred Stock shall be entitled to receive, when, as
and if declared by the Board, dividends at the rate of 14.5% per annum on the
liquidation value, which shall be identical to the liquidation value of the Old
Preferred Stock. Dividends shall accrete to the liquidation value of the New
Preferred Stock until the Cash Pay Date. Following the Cash Pay Date, dividends
will be payable in cash.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company will not
be required to exchange any shares of New Preferred Stock for any shares of Old
Preferred Stock, and may terminate or amend the Exchange Offer before the
acceptance of any shares of Old Preferred Stock for exchange, if: (a) any
action or proceeding is instituted or threatened in any court or by or before
any governmental agency with respect to the Exchange Offer which seeks to
restrain or prohibit the Exchange Offer or, in the Company's judgment, would
materially impair the ability of the Company to proceed with the Exchange
Offer, or (b) any law, statute, rule or regulation is proposed, adopted or
enacted, or any existing law, statute, rule, order or regulation is
interpreted, by any government or governmental authority which, in the
Company's judgment, would materially impair the ability of the Company to
proceed with the Exchange Offer, or (c) the Exchange Offer or the consummation
thereof would otherwise violate or be prohibited by applicable law.
If the Company reasonably determines that any of these conditions are not
satisfied, the Company may (i) refuse to accept any shares of Old Preferred
Stock and return all tendered shares of Old Preferred Stock to the tendering
holders, (ii) extend the Exchange Offer and retain all shares of Old Preferred
Stock tendered prior to the expiration of the Exchange Offer, subject, however,
to the rights of holders who tendered such shares of Old Preferred Stock to
withdraw their tendered shares of Old Preferred Stock, or (iii) waive such
unsatisfied conditions with respect to the Exchange Offer and accept all
properly tendered shares of Old Preferred Stock which have not been withdrawn.
Notwithstanding the foregoing, if the Company's waiver constitutes a material
change to the Exchange Offer, the Company will promptly disclose such waiver by
means of a prospectus supplement that will be distributed to the registered
holders, and the Company will extend the Exchange Offer for a period of five to
ten business days, depending upon the significance of the waiver and the manner
of disclosure to the registered holders, if the Exchange Offer would otherwise
expire during such five to ten business day period.
The foregoing conditions are for the sole benefit of the Company and may
be asserted by the Company regardless of the circumstances giving rise to any
such condition or may be waived by the Company in whole or in part at any time
and from time to time based upon reasonable discretion. The Company's failure
at any time to exercise any of the foregoing rights will be deemed a waiver of
any such
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right, and each such right will be deemed an ongoing right which may be
asserted at any time and from time to time. Any determination by the Company
concerning the events described above will be final and binding on all parties.
NO VOTE OF THE COMPANY'S SECURITYHOLDERS IS REQUIRED TO EFFECT THE EXCHANGE
OFFER AND NO SUCH VOTE (OR PROXY THEREFOR) IS BEING SOUGHT HEREBY.
PROCEDURES FOR TENDERING
Only a holder of Old Preferred Stock may tender such Old Preferred Stock
in the Exchange Offer. To tender in the Exchange Offer, a holder must (i)
complete, sign and date the Letter of Transmittal, or a facsimile thereof, have
the signatures thereon guaranteed if required by the Letter of Transmittal, and
mail or otherwise deliver such Letter of Transmittal or such facsimile (unless
such holder acknowledges receipt of and agrees to be bound by such Letter of
Transmittal through the ATOP of DTC), together with the Old Preferred Stock
(unless such tender is being effected pursuant to the procedure for book-entry
transfer described below) and any other required documents, to the Exchange
Agent prior to 5:00 p.m., New York City time, on the Expiration Date, or (ii)
comply with the guaranteed delivery procedures described below. Delivery of all
documents must be made to the Exchange Agent at its address set forth herein.
Each broker-dealer that receives New Preferred Stock for its own account in
exchange for Old Preferred Stock, where such New 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 the resale of such New Preferred Stock. See "Plan of Distribution."
The tender of Old Preferred Stock by a holder as set forth below will
constitute an agreement between such holder and the Company in accordance with
the terms and subject to the conditions set forth in this Prospectus and in the
Letter of Transmittal.
THE METHOD OF DELIVERY OF OLD PREFERRED STOCK AND THE LETTER OF
TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE
ELECTION AND RISK OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED
THAT HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT
BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR OLD PREFERRED STOCK
SHOULD BE SENT TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS,
DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE
TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner(s) whose Old Preferred Stock is registered in the
name of a broker, dealer, commercial bank, trust company or other nominee and
who wishes to tender should contact the registered holder promptly and instruct
such registered holder to tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such owner's own behalf, such owner must,
prior to completing and executing the Letter of Transmittal and delivering such
owner's Old Preferred Stock, either make appropriate arrangement to register
ownership of the Old Preferred Stock in such owner's name or obtain a properly
completed stock power from the registered holder. The transfer of registered
ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal (described
below), as the case may be, must be guaranteed by an "eligible guarantor
institution" (banks, stockbrokers, savings and loan associations and credit
unions with membership in an approved signature guarantee medallion program),
pursuant to Rule 17Ad-15 under the Exchange Act (an "Eligible Institution")
unless the Old Preferred Stock tendered pursuant thereto is tendered (i) by a
registered holder who has not completed the box entitled "Special Issuance
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal
or (ii) for the account of an Eligible Institution.
If a person other than the registered holder of any shares of Old
Preferred Stock listed therein signs the Letter of Transmittal, such shares of
Old Preferred Stock must be endorsed or accompanied by a properly completed
stock power, signed by such registered holder as such registered holder's name
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appears on such shares of Old Preferred Stock, with the signature thereon
guaranteed by an Eligible Institution. If the Letter of Transmittal or any
shares of Old Preferred Stock or stock powers are signed by trustees,
executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
The Company will determine, in its sole discretion, all questions as to
the validity, form, eligibility (including time of receipt), acceptance of
tendered Old Preferred Stock and withdrawal of tendered Old Preferred Stock and
the Company's determination will be final and binding. The Company reserves the
absolute right to reject any and all Old Preferred Stock not properly tendered
or any Old Preferred Stock the Company's acceptance of which would, in the
opinion of counsel for the Company, be unlawful. The Company also reserves the
right to waive any defects, irregularities or conditions of tender as to
particular Old Preferred Stock. The Company'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 Old Preferred Stock
must be cured within such time as the Company shall determine. Although the
Company intends to notify holders of defects or irregularities with respect to
tenders of Old Preferred Stock, neither the Company, the Exchange Agent nor any
other person shall incur any liability for failure to give such notification.
Tenders of Old Preferred Stock will not be deemed to have been made until such
defects or irregularities have been cured or waived. Any shares of Old
Preferred Stock received by the Exchange Agent that are not properly tendered
and as to which the defects or irregularities have not been cured or waived
will be returned by the Exchange Agent to the tendering holders, unless
otherwise provided in the Letter of Transmittal, as soon as practicable
following the Expiration Date.
In addition, the Company reserves the right in its sole discretion to
purchase or make offers for any Old Preferred Stock that remains outstanding
subsequent to the Expiration Date or, as set forth above under "Conditions," to
terminate the Exchange Offer and, to the extent permitted by applicable law, to
purchase Old 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 the Company that, among other
things, (i) the shares of New Preferred Stock to be acquired pursuant to the
Exchange Offer are being obtained in the ordinary course of business of such
holder, (ii) such holder has no arrangement or understanding with any person to
participate in the distribution (within the meaning of the Securities Act) of
the New Preferred Stock and (iii) such holder is not an "affiliate," as defined
in Rule 405 under the Securities Act, of the Company, or that if it is an
"affiliate," it will comply with applicable registration and prospectus
delivery requirements of the Securities Act.
BOOK-ENTRY TRANSFER
Within two business days after the date of this Prospectus, the Exchange
Agent will make a request to establish an account with respect to the Old
Preferred Stock at the book-entry transfer facility for the Old Preferred
Stock, DTC, for purposes of the Exchange Offer. Any financial institution that
is a participant in DTC's systems may make book-entry delivery of Old Preferred
Stock by causing DTC to transfer such Old Preferred Stock into the Exchange
Agent's account with respect to the Old Preferred Stock in accordance with
DTC's procedures for such transfer. Effecting transfers through DTC eliminates
the need to deliver a Letter of Transmittal to the Exchange Agent. Through the
ATOP of DTC, holders can acknowledge receipt of and agree to be bound by such
Letter of Transmittal.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Preferred Stock and (i) whose Old
Preferred Stock is not immediately available, (ii) who cannot deliver their Old
Preferred Stock, the Letter of Transmittal or any other required documents to
the Exchange Agent prior to the Expiration Date or (iii) who cannot complete
the procedures for book-entry transfer of Old Preferred Stock to the Exchange
Agent's account with DTC prior to the Expiration Date, may effect a tender if:
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(a) The tender is made through an Eligible Institution;
(b) On or prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution (by facsimile transmission, mail or hand delivery) a
properly completed and duly executed notice of guaranteed delivery
substantially in the form provided by the Company (the "Notice of Guaranteed
Delivery"), setting forth the name and address of the holder, the certificate
number(s) of such shares of Old Preferred Stock (if possible) and the aggregate
number of shares of Old Preferred Stock tendered, stating that the tender is
being made thereby and guaranteeing that, within five business trading days
after the Expiration Date, (i) the Letter of Transmittal (or facsimile thereof)
together with the certificate(s) representing the shares of Old Preferred Stock
and any other documents required by the Letter of Transmittal will be deposited
by the Eligible Institution with the Exchange Agent, or (ii) that book-entry
transfer of such shares of Old Preferred Stock into the Exchange Agent's
account at DTC will be effected and confirmation of such book-entry transfer
will be delivered to 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
shares of Old Preferred Stock in proper form for transfer and all other
documents required by the Letter of Transmittal, or confirmation of book-entry
transfer of the Old Preferred Stock into the Exchange Agent's account at DTC,
are received by the Exchange Agent within five business trading days after the
Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will
be sent to holders who wish to tender their Old Preferred Stock according to
the guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old 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 Old Preferred Stock in the Exchange Offer, the
Exchange Agent must receive at its address set forth herein a telegram, telex,
facsimile transmission or letter indicating notice of withdrawal 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 tendered the Old Preferred Stock
to be withdrawn (the "Depositor"), (ii) identify the shares of Old Preferred
Stock to be withdrawn (including the certificate number or numbers and
aggregate number of such shares of Old Preferred Stock), (iii) be signed by the
holder in the same manner as the original signature on the Letter of
Transmittal by which such shares of Old Preferred Stock were tendered
(including any required signature guarantees) and (iv) specify the name in
which any such shares of Old Preferred Stock are to be registered, if different
from that of the Depositor. If shares of Old Preferred Stock have been tendered
pursuant to the procedures for book-entry transfer, any notice of withdrawal
must specify the name and number of the account at DTC to be credited with the
withdrawn shares of Old Preferred Stock or otherwise comply with DTC's
procedures. All questions as to the validity, form and eligibility (including
time of receipt) of such notices will be determined by the Company, whose
determination shall be final and binding on all parties. Any Old Preferred
Stock so withdrawn will be deemed not to have been validly tendered for
purposes of the Exchange Offer and no New Preferred Stock will be issued with
respect thereto unless the Old Preferred Stock so withdrawn is validly
retendered. Any shares of Old Preferred Stock which have been tendered but
which are 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 shares of
Old 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.
UNTENDERED OLD PREFERRED STOCK
Holders of Old Preferred Stock whose Old Preferred Stock is not tendered
or is tendered but not accepted in the Exchange Offer will continue to hold
such Old Preferred Stock and will be entitled to all the rights and preferences
and subject to the limitations applicable thereto. Following consummation of
the Exchange Offer, the holders of Old Preferred Stock will continue to be
subject to the existing restrictions upon transfer contained in the legend
thereon. In general, the Old Preferred Stock may not
24
<PAGE>
be offered for resale or resold, unless registered under the Securities Act,
except pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. To the extent that shares
of Old Preferred Stock are tendered and accepted in the Exchange Offer, the
trading market for untendered and tendered but unaccepted shares of Old
Preferred Stock could be adversely affected.
EXCHANGE AGENT
U.S. Trust Company of Texas, N.A., has been appointed as Exchange Agent of
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:
By Mail, Overnight Courier or Hand:
U.S. Trust Company of Texas, N.A.
2001 Ross Avenue, Suite 2700
Dallas, TX 75201
Attention: Corporate Trust Division
(registered or certified mail recommended)
Telephone: (214) 754-1255
Facsimile: (214) 754-1303
Delivery to an address other than as set forth above or transmission of
instructions via facsimile to a number other than as set forth above will not
constitute a valid delivery.
FEES AND EXPENSES
The Company will bear the expenses of soliciting tenders. The principal
solicitation is being made by mail; however, officers and regular employees of
the Company and its affiliates may make additional solicitation by telegraph,
facsimile transmission, telephone or in person.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay
the Exchange Agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses in connection therewith.
The Company will pay the cash expenses to be incurred in connection with
the Exchange Offer. Such expenses include registration fees and expenses of the
Exchange Agent and Trustee, accounting and legal fees and printing costs, among
others.
The Company will pay any and all transfer taxes applicable to the exchange
of Old Preferred Stock pursuant to the Exchange Offer. If, however,
certificates representing New Preferred Stock or Old 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 shares of Old Preferred Stock tendered, or if tendered shares of
Old Preferred Stock are registered in the name of any person other than the
person signing the Letter of Transmittal, or if a transfer tax is imposed for
any reason other than the exchange of Old Preferred Stock pursuant to the
Exchange Offer, satisfactory evidence of the payment of the amount of any such
transfer taxes must be submitted with the Letter of Transmittal (whether
imposed on the registered holder or any other person). Certificates
representing New Preferred Stock will not be issued to such persons until
satisfactory evidence of the payment of such taxes, or an exemption therefrom,
is submitted.
CONSEQUENCES OF FAILURE TO EXCHANGE
Upon consummation of the Exchange Offer, holders that were not prohibited
from participating in the Exchange Offer and did not tender their shares of Old
Preferred Stock will not have any registration rights under the Registration
Rights Agreement with respect to such nontendered shares of Old Preferred
25
<PAGE>
Stock and, accordingly, such shares of Old Preferred Stock will continue to be
subject to the restrictions on transfer contained in the legend thereon as a
consequence of the issuance of the Old Preferred Stock pursuant to exemptions
from or in transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws. In general, the shares of
Old Preferred Stock may not be offered for resale or resold, unless registered
under the Securities Act, except pursuant to an exemption from, or in a
transaction not subject to, the Securities Act and applicable state securities
laws. The Company does not intend to register the Old Preferred Stock under the
Securities Act. Based on interpretations by the staff of the Commission, as set
forth in no-action letters issued to Exxon Capital Holdings Corporation
(available May 13, 1988), Morgan Stanley & Co. Incorporated (available June 5,
1991), Mary Kay Cosmetics, Inc. (available June 5, 1991), Warnaco, Inc.
(available October 11, 1991) and K-III Communications Corporation (available
May 14, 1993) (collectively, the "Exchange Offer No-Action Letters"), the
Company believes that a holder who exchanges Old Preferred Stock for New
Preferred Stock pursuant to the Exchange Offer may offer for resale, resell and
otherwise transfer such New Preferred Stock without compliance with the
registration and prospectus delivery requirements of the Securities Act,
provided, however, that (i) such New Preferred Stock is acquired in the
ordinary course of such holder's business, (ii) such holder is not engaged in,
and does not intend to engage in, a distribution of such New Preferred Stock
and has no arrangement with any person to participate in the distribution of
such New Preferred Stock, and (iii) such holder is not an affiliate of the
Company (as defined under rule 405 of the Securities Act). However, the staff
of the Commission has not considered the Exchange Offer in the context of a
no-action letter and there can be no assurance that the staff of the Commission
would make a similar determination with respect to the Exchange Offer as in
such other circumstances. A holder who exchanges Old Preferred Stock for New
Preferred Stock pursuant to the Exchange Offer with the intention to
participate in a distribution of the New Preferred Stock may not rely on the
staff's position enunciated in the Exchange Offer No-Action Letters or similar
letters and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
Each broker-dealer that receives New Preferred Stock for its own account in
exchange for Old Preferred Stock, where such Old 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 New Preferred Stock. See "Plan of Distribution." The
New Preferred Stock may not be offered or sold unless it has been registered or
qualified for sale under applicable state securities laws or an exemption from
registration or qualification is available and is complied with. The
Registration Rights Agreement requires the Company to register the New
Preferred Stock in any jurisdiction requested by the holders, subject to
certain limitations. To the extent the Old Preferred Stock is tendered and
accepted in the Exchange Offer, the trading market for untendered and tendered
but unaccepted Old Preferred Stock could be adversely affected.
RESALE OF THE NEW PREFERRED STOCK
Under existing interpretations of the staff of the Commission contained in
several no-action letters to third parties, the New Preferred Stock would in
general be freely transferable after the Exchange Offer without further
registration under the Securities Act. However, any purchaser of Old Preferred
Stock who intends to participate in the Exchange Offer for the purpose of
distributing the New Preferred Stock (i) would not be able to rely on the
interpretation of the staff of the Commission, (ii) will not be able to tender
its Old 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 Preferred Stock unless such sale or
transfer is made pursuant to an exemption from such requirements. By executing
the Letter of Transmittal, each holder of the Old Preferred Stock will
represent that (i) it is not an affiliate of the Company or if such Holder is
an "affiliate," that such Holder will comply with the registration and
prospectus delivery requirements of the Securities Act to the extent
applicable, (ii) any shares of New Preferred Stock to be received by it were
acquired in the ordinary course of its business and (iii) at the time of
commencement of the Exchange Offer, it had no arrangement with any person to
participate in the distribution (within the meaning of the Securities Act) of
the New Preferred Stock. In addition, in connection with any resales of New
Preferred Stock, any broker-dealer (a "Participating Broker-Dealer") who
acquired the New Preferred Stock for its own account as a result of
market-making or other trading activities must deliver a prospectus meeting the
requirements of the Securities Act. The
26
<PAGE>
Commission has taken the position that Participating Broker-Dealers may fulfill
their prospectus delivery requirements with respect to the New Preferred Stock
(other than a resale of an unsold allotment from the original sale of the Old
Preferred Stock) with the prospectus contained in the Registration Statement.
Under the Registration Rights Agreement, the Company is required to allow
Participating Broker-Dealers and other persons, if any, subject to similar
prospectus delivery requirements to use this Prospectus as it may be amended or
supplemented from time to time, in connection with the resale of such New
Preferred Stock.
OTHER
PARTICIPATION IN THE EXCHANGE OFFER IS VOLUNTARY AND HOLDERS SHOULD
CAREFULLY CONSIDER WHETHER TO ACCEPT. HOLDERS OF SHARES OF OLD PREFERRED STOCK
ARE URGED TO CONSULT THEIR FINANCIAL AND TAX ADVISORS IN MAKING THEIR OWN
DECISIONS ON WHAT ACTION TO TAKE.
Upon consummation of the Exchange Offer, holders who were not prohibited
from participating in the Exchange Offer and who did not tender their Old
Preferred Stock will not have any registration rights under the Registration
Rights Agreement with respect to such nontendered Old Preferred Stock and such
Old Preferred Stock will continue to be subject to the restrictions on transfer
contained in the legend thereon. Accordingly, such Old Preferred Stock may not
be offered, sold, pledged or otherwise transferred except (i) to a person whom
the seller reasonably believes is a "Qualified Institutional Buyer" within the
meaning of Rule 144A under the Securities Act purchasing for its own account or
for the account of a Qualified Institutional Buyer in a transaction meeting the
requirements of Rule 144A, (ii) in an offshore transaction complying with Rule
904 of Regulation S under the Securities Act, (ii) pursuant to an exemption
from registration under the Securities Act provided by Rule 144 thereunder (if
available), (iv) pursuant to an effective registration statement under the
Securities Act or (v) to the Company and, in each case, in accordance with all
other applicable securities laws.
ACCOUNTING TREATMENT
The Company will recognize no gain or loss for accounting purposes upon
the consummation of the Exchange Offer.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE EXCHANGE OFFER
The exchange of Old Preferred Stock for New Preferred Stock pursuant to
the Exchange Offer will not result in any United States federal income tax
consequences to holders. When a holder exchanges a share of Old Preferred Stock
for a share of New Preferred Stock pursuant to the Exchange Offer, the holder
will have the same adjusted basis and holding period in the share of New
Preferred Stock as in the share of Old Preferred Stock immediately before the
exchange. This summary is based on the Internal Revenue Code of 1986, as
amended, administrative pronouncements, judicial decisions and existing and
proposed Treasury Regulations, changes to any of which subsequent to the date
of this Prospectus may affect the tax consequences described herein. HOLDERS OF
THE OLD PREFERRED STOCK SHOULD CONSULT THEIR TAX ADVISORS AS TO THE FEDERAL,
STATE AND LOCAL INCOME TAX CONSEQUENCES OF THE EXCHANGE OFFER.
27
<PAGE>
CAPITALIZATION
The following table sets forth the unaudited consolidated capitalization
of the Company as of March 31, 1998. This table should be read in conjunction
with the consolidated financial statements, including the notes thereto, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
-----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Long-term Debt (including current portion):
Bank Facility
Term Facilities ............................................ 30,000
Revolving Facility(1) ...................................... 1,000
10 1/4% Senior Notes due 2008 .............................. 130,000
-------
Total Long-term Debt ....................................... 161,000
14.5% Senior Exchangeable Preferred;
1,250,000 shares authorized; 1,042,460 shares issued ......... 32,268
Stockholder's Deficit ......................................... (8,542)
-------
Total Capitalization ....................................... 184,726
=======
</TABLE>
- ----------
(1) The Company has $7.1 million of letters of credit outstanding to cover
insurance commitments for the policy year October 1, 1997 to September
30, 1998 and $0.4 million which allows the beneficiary, Lyondell-Citgo
Refining Company Ltd., to pay all amounts due the Company in full without
withholding a retention amount.
28
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents (i) selected historical financial data of
Predecessor as of and for each of the years ended December 31, 1993, 1994 and
1995 and for the nine months ended September 30, 1996 and (ii) selected
historical financial data of Successor, for the three months ended December 31,
1996, the year ended December 31, 1997 and the three months ended March 31,
1997 and 1998. The selected historical financial data as of and for the years
ended December 31, 1994 and 1995 and for the nine months ended September 30,
1996 has been derived from the audited financial statements of Predecessor. The
selected historical financial data as of and for the year ended December 31,
1993 has been derived from the unaudited financial statements of Predecessor.
The selected historical financial data as of and for the three months ended
December 31, 1996 and the year ended December 31, 1997 has been derived from
the audited financial statements of Successor. The selected historical
financial data as of and for the three months ended March 31, 1997 and 1998 has
been derived from the unaudited financial statements of Successor. The
financial data set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's financial statements and notes thereto included elsewhere in this
Offering Memorandum.
<TABLE>
<CAPTION>
PREDECESSOR
---------------------------------------------------
NINE
MONTHS
YEAR ENDED DECEMBER 31, ENDED
----------------------------------- SEPTEMBER 30,
1993 1994 1995 1996
----------- ----------- ----------- ---------------
(DOLLARS IN THOUSANDS)
INCOME STATEMENT DATA: (1)
<S> <C> <C> <C> <C>
Revenue .................... $188,972 $182,372 $193,829 $124,769
Operating Expenses ......... 133,284 129,045 138,968 89,073
-------- -------- -------- --------
Gross Profit .............. 55,688 53,327 54,861 35,696
Selling and
Administrative
Expenses .................. 22,824 27,111 25,807 15,825
Nonrecurring Start-up
Expenses .................. -- -- -- --
-------- -------- -------- --------
Operating Income ........... 32,864 26,216 29,054 19,871
Interest Expense ........... 8,534 9,655 9,444 7,872
Interest Income ............ (301) (707) (1,012) (482)
Other Expense, Net (2) ..... -- 813 853 708
-------- -------- -------- --------
Pretax Income (Loss)....... 24,631 16,455 19,769 11,773
Provision for Income
Tax ....................... 9,761 7,200 8,300 4,813
Extraordinary Loss,
Net of Tax ............... -- -- -- --
-------- -------- -------- --------
Net Income (Loss) ......... $ 14,870 $ 9,255 $ 11,469 $ 6,960
======== ======== ======== ========
OTHER DATA: (1)
EBITDA (3) ................. $ 41,751 $ 33,956 $ 36,803 $ 25,832
Adjusted
EBITDA (3) (4) ............ 41,751 33,956 36,803 25,832
Cash flow from
operations ................ 17,088 22,234 35,587 28,478
Depreciation and
Amortization .............. 8,887 8,553 8,602 6,669
Cash Interest Expense (5) 8,534 9,655 9,444 7,872
Ratio of Adjusted
EBITDA to Cash
Interest Expense (3)
(4) (5) ................... 4.9x 3.5x 3.9x 3.3x
Capital Expenditures
Maintenance ............... $ 4,494 $ 3,368 $ 2,755 $ 512
Expansion ................. 7,523 7,691 5,847 1,298
-------- -------- -------- --------
Total ..................... $ 12,017 $ 11,059 $ 8,602 $ 1,810
Ratio of Earnings to
Combined Fixed
Charges and Preferred
Stock Dividends (6) ....... 3.8x 2.6x 3.0x 2.4x
<CAPTION>
SUCCESSOR
-----------------------------------------------------
THREE THREE THREE
MONTHS YEAR MONTHS MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1996 1997 1997 1998
-------------- ------------- ----------- ------------
(DOLLARS IN THOUSANDS)
INCOME STATEMENT DATA: (1)
<S> <C> <C> <C> <C>
Revenue .................... $44,412 $160,660 $43,203 $ 50,690
Operating Expenses ......... 34,170 122,638 31,751 38,814
------- -------- ------- --------
Gross Profit .............. 10,242 38,022 11,452 11,876
Selling and
Administrative
Expenses .................. 4,743 25,840 5,927 5,986
Nonrecurring Start-up
Expenses .................. -- 2,498 -- --
------- -------- ------- --------
Operating Income ........... 5,499 9,684 5,525 5,890
Interest Expense ........... 4,504 15,422 3,763 4,057
Interest Income ............ (195) (397) (120) (125)
Other Expense, Net (2) ..... -- -- -- --
------- -------- ------- --------
Pretax Income (Loss)....... 1,190 (5,341) 1,882 1,958
Provision for Income
Tax ....................... 525 -- -- --
Extraordinary Loss,
Net of Tax ............... -- -- -- 4,329
------- -------- ------- --------
Net Income (Loss) ......... $ 665 $ (5,341) $ 1,882 $ (2,371)
======= ======== ======= ========
OTHER DATA: (1)
EBITDA (3) ................. $ 8,398 $ 24,507 $ 8,420 $ 9,009
Adjusted
EBITDA (3) (4) ............ 9,387 29,629 9,101 10,498
Cash flow from
operations ................ 4,966 11,983 560 (171)
Depreciation and
Amortization .............. 3,567 13,294 3,138 3,334
Cash Interest Expense (5) 3,836 14,453 3,520 3,842
Ratio of Adjusted
EBITDA to Cash
Interest Expense (3)
(4) (5) ................... 2.4x 2.1x 2.6x 2.7x
Capital Expenditures
Maintenance ............... $ 97 $ 3,024 $ 1,509 $ 1,795
Expansion ................. 111 6,733 1,640 1,952
------- -------- ------- --------
Total ..................... $ 208 $ 9,757 $ 3,149 $ 3,747
Ratio of Earnings to
Combined Fixed
Charges and Preferred
Stock Dividends (6) ....... .5x 1.2x
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
----------------------------------- ----------
AT DECEMBER 31,
----------------------------------------------
1993 1994 1995 1996
(UNAUDITED) ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA: (1)
Working Capital ........................... $ 28,457 $ 34,155 $ 30,227 $ 12,656
Total Assets .............................. 180,310 180,107 178,201 204,266
Long-Term Debt (including current portion) -- -- -- 158,000
14.5% Senior Exchangeable Preferred Stock . -- -- -- 25,906
Stockholder's Equity (Deficit) ............ 161,005 150,005 141,374 4,247
<CAPTION>
SUCCESSOR
----------------------------------------
AT DECEMBER AT MARCH AT MARCH
31, 31, 31,
----------- -------- --------
1997 1997 1998
----------- -------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA: (1)
Working Capital ........................... $ 4,207 $ 13,855 $ 19,541
Total Assets .............................. 197,543 204,507 204,148
Long-Term Debt (including current portion) 154,250 158,500 161,000
14.5% Senior Exchangeable Preferred Stock . 31,140 26,924 32,268
Stockholder's Equity (Deficit) ............ (5,176) 5,019 (8,542)
</TABLE>
- ----------
(1) The Acquisition had a significant impact on the Company's financial
position and results of operations. Consequently, the financial data for
and as of dates prior to the Acquisition may not be directly comparable
to corresponding information for and as of dates after the Acquisition.
(2) Since the Acquisition, the Company has not separately classified other
income and expense and has included it in selling and administrative
expenses because such amounts have been immaterial.
(3) EBITDA is defined as earnings before nonrecurring start-up expenses,
interest income, cash interest expense, income taxes, depreciation and
amortization. EBITDA is commonly used to analyze companies on the basis
of operating performance, leverage and liquidity. EBITDA is not intended
to represent cash flows for the period, nor has it been presented as an
alternative to operating income as an indicator of operating performance
and should not be considered in isolation or as a substitute for measures
of performance prepared in accordance with generally accepted accounting
principles.
(4) Adjusted EBITDA reflects the cash impact of two items that are not
reflected in the income statement. First, in connection with the
Acquisition, the Company entered into a Transitional Services Agreement
with WMI and Rust. In consideration of certain services to be rendered by
the Company and the licenses and preferred customer status granted by the
Company, WMI agreed to pay the Company $725,000 per quarter for the
quarter ending December 31, 1996 through the quarter ending September 30,
1999 ($2,900,000 for three years or $8,700,000 in total). For the three
months ended December 31, 1996, the year ended December 31, 1997 and the
three months ended March 31, 1997 and 1998, the WMI Payments were
$725,000, $2,900,000, $725,000 and $725,000, respectively. The portion of
the WMI Payments directly offsetting expenses of the Company is
recognized in EBITDA. Adjusted EBITDA is increased by the portion of the
WMI Payments not reflected in EBITDA or $362,000, $2,200,000, $550,000
and $675,000 for the three months ended December 31, 1996, the year ended
December 31, 1997 and the three months ended March 31, 1997 and 1998,
respectively. Second, in connection with the Acquisition, WMI assumed
liabilities for all claims occurring since the Acquisition arising from
accidents which occurred on or before September 30, 1996. As a result of
having no liability for accidents which occurred prior to the
Acquisition, the amounts expensed by the Company for accident-related
claims exceed the cash payments for accident-related claims. The Company
recorded claims expense of $1,189,000, $5,927,000, $1,105,000 and
$1,589,000 for the three months ended December 31, 1996, the year ended
December 31, 1997 and the three months ended March 31, 1997 and 1998,
respectively, but had cash expenditures related to these items of
$562,000, $3,005,000, $975,000 and $775,000, respectively. Adjusted
EBITDA for the three months ended December 31, 1996, the year ended
December 31, 1997 and the three months ended March 31, 1997 and 1998 is
therefore increased by the portion of claims expense not paid in cash, or
$627,000, $2,922,000, $130,000 and $814,000, respectively. The total of
the adjustments for the WMI Payments and the non-cash claim for the three
months ended December 31, 1996, the year ended December 31, 1997 and the
three months ended March 31, 1997 and 1998 is an increase of $989,000,
$5,122,000, $680,000 and $1,489,000, respectively.
(5) Cash interest expense represents total interest expense less amortization
of deferred financing fees of $668,000 for the three months ended
December 31, 1996, $969,000 for the year ended December 31, 1997 and
$242,000 and $214,000 for the three months ended March 31, 1997 and 1998,
respectively.
(6) For the purposes of calculating the ratio of earnings to combined fixed
charges and preferred stock dividends, earnings represent income (loss)
before income taxes plus fixed charges. Fixed charges consist of interest
expense on all indebtedness plus the interest portion of rental expense
on noncancelable leases, amortization of debt issuance costs, and
preferred stock dividends.
30
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the financial statements and notes thereto included herewith. Financial data
and discussions relating to the year ended December 31, 1996 reflect the
combined results of operations of Rust prior to the Acquisition and Brand after
the Acquisition.
OVERVIEW
The Company is the largest North American provider of industrial
scaffolding services which facilitate access to tall structures for
maintenance, turnarounds and capital projects, principally in the refining,
petrochemical, chemical, utility and pulp and paper industries. The Company
provides turnkey services which include equipment rental, labor for the
erection and dismantlement of the scaffolding and scaffolding design services.
The Company also provides scaffolding services to the commercial market
(primarily nonresidential construction) and sells a small amount of
scaffolding.
Approximately 84% of the Company's 1997 revenues were attributable to
on-going maintenance and turnarounds of industrial facilities. The Company
typically provides on-going maintenance services under long-term contracts; the
duration of these contracts ranges between one and five years. Turnarounds
typically occur every one to four years depending on the industry and the type
of turnaround being performed, but refineries sometimes postpone planned
turnarounds when margins are high, such as in 1996 and 1997. However,
turnarounds are a necessary component of maintaining industrial facilities and
are required to ensure the safe and efficient operation of such facilities.
Thus, as a result of postponements in 1996 and 1997, an unusually high number
of refineries have scheduled turnarounds for the first half of 1998. While the
postponement of scheduled turnarounds causes fluctuations in the Company's
quarterly and annual results, the Company believes the necessity for on-going
maintenance and turnarounds provides a stable, recurring revenue base.
Revenues from capital projects, which represented approximately 4% of 1997
revenues, result from new plant construction, plant expansions and
modifications. Capital projects can and have had material impacts on the
Company's results of operations. For example, the Company provided scaffolding
services for the construction of a new refinery in St. Croix which resulted in
$24.1 million of revenues.
Commercial scaffolding revenues, which represented approximately 11% of
1997 revenues, are related to the level of nonresidential construction and
renovation. Demand for commercial scaffolding services has recently been high
due to the recent strength in the commercial construction industry. In 1997,
the Company increased its penetration of the commercial market, having opened
four new offices, expanded its sales force and invested $7.3 million in frame
and brace scaffolding inventory.
In November 1997, the Company implemented a cost reduction program which
is expected to reduce its annual operating overhead and selling, general and
administrative expenses by approximately $5.3 million. The major initiatives
included (i) eliminating 63 administrative and support positions and
consolidating certain administrative functions, (ii) restructuring and
renegotiating benefits programs, (iii) renegotiating the Company's insurance
premiums to reflect continued improvements in its safety record, (iv)
negotiating company-wide procurement contracts in order to take advantage of
volume pricing, and (v) implementing a new management information system to
improve inventory utilization and reduce equipment transportation expenses. The
Company recorded a one-time expense in the fourth quarter of 1997 of $437,000
to reflect severance and other expenses of the cost reduction program.
In connection with the Acquisition, WMI agreed to pay the Company a
quarterly fee of $725,000 for transition services for three years beginning on
December 31, 1996. Such payments will continue through September 30, 1999. In
addition, WMI agreed to pay for all historical accident-related claims in which
the accident occurred prior to the Acquisition. Because cash expenditures
related to accidents are paid out over time but accident-related expenses are
accrued in the period in which the accident occurs, the Company has a
significant non-cash claims expense ($2.9 million in 1997) which it anticipates
will decline over time.
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<PAGE>
The Company's business is seasonal. End-use industries such as the
refining and utility industries experience increased demand for their products
during the summer months. Consequently, turnarounds are generally scheduled
during the first and fourth quarters of the year.
RESULTS OF OPERATIONS
The following discussion of results of operations is presented for the
fiscal years ended December 31, 1995, 1996 and 1997 and for the three months
ended March 31, 1997 and 1998.
On September 30, 1996, the Company was formed and acquired the net assets
of Rust Scaffold Services, Inc. The acquisition was accounted for as a
purchase. Also on September 30, 1996, the Company entered into a Credit
Agreement pursuant to which $160.0 million was borrowed. As a result of the
acquisition and the borrowings, the periods prior to September 30, 1996 are not
comparable to the periods after September 30, 1996. For purposes of the tables
and discussion that follows, combined 1996 financial data represents the
summation of the results for Predecessor for the nine months ended September
30, 1996 and for Successor for the three months ended December 31, 1996. This
1996 data does not include pro forma adjustments to reflect the acquisition or
the borrowings, which had the effect of increasing amortization and
depreciation expense and interest expense. The combined 1996 revenues,
operating expenses and selling and administrative expenses are presented for
comparative purposes. Other combined 1996 income and expense items are not
presented as the information was not considered meaningful.
The following tables set forth, for the periods indicated, certain
operating data expressed in dollar amounts and as a percentage of revenue:
SUMMARY OF HISTORICAL FINANCIAL RESULTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR COMBINED SUCCESSOR
-------------- -------------- ---------------------------------------
THREE MONTHS
YEAR YEAR YEAR ENDED
ENDED ENDED ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, DECEMBER 31, ------------------------
1995 1996(1) 1997 1997 1998
-------------- -------------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenue ............................... $193,829 $169,181 $160,660 $43,203 $ 50,690
Operating Expenses .................... 138,968 123,243 122,638 31,751 38,814
-------- -------- -------- ------- --------
Gross Profit ......................... 54,861 45,938 38,022 11,452 11,876
Selling and Administrative Expenses.... 25,807 20,568 25,840 5,927 5,986
Nonrecurring Start-up Expenses ........
-- -- 2,498 -- --
-------- -------- -------- ------- --------
Operating Income ...................... 29,054 25,370 9,684 5,525 5,890
Interest Expense ...................... 9,444 15,422 3,763 4,057
Interest Income ....................... (1,012) (397) (120) (125)
Other Expense, Net .................... 853 -- -- --
-------- -------- ------- --------
Pre-Tax Income (Loss) ................ 19,769 (5,341) 1,882 1,958
Provision for Income Tax .............. 8,300 -- -- --
Extraordinary items (net of tax) ..... -- -- -- 4,329
-------- -------- ------- --------
Net Income (Loss) .................... $ 11,469 $ (5,341) $ 1,882 $ (2,371)
======== ======== ======= ========
OTHER DATA:
EBITDA ................................ $ 36,803 $ 24,507 $ 8,420 $ 9,009
Adjusted EBITDA ....................... 36,803 29,629 9,101 10,498
</TABLE>
- ----------
(1) Combined 1996 financial data represents the summation of the results for
Predecessor for the nine months ended September 30, 1996 and for
Successor for the three months ended December 31, 1996 and is not
indicative of the results the Company would have achieved for the full
year had the Acquisition occurred on January 1, 1996.
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<PAGE>
SUMMARY OF HISTORICAL FINANCIAL RESULTS AS A PERCENTAGE OF REVENUE
<TABLE>
<CAPTION>
PREDECESSOR COMBINED SUCCESSOR
-------------- -------------- -----------------------------------------
THREE MONTHS
YEAR YEAR YEAR ENDED
ENDED ENDED ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, DECEMBER 31, -------------------------
1995 1996(1) 1997 1997 1998
-------------- -------------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenue ................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Operating Expenses ..................... 71.7 72.8 76.3 73.5 76.6
----- ----- ----- ----- -----
Gross Profit .......................... 28.3 27.2 23.7 26.5 23.4
Selling and Administrative Expenses..... 13.3 12.2 16.1 13.7 11.8
Nonrecurring Start-up Expenses ......... -- -- 1.6 -- --
----- ----- ----- ----- -----
Operating Income ....................... 15.0 15.0 6.0 12.8 11.6
Interest Expense ....................... 4.9 9.6 8.7 8.0
Interest Income ........................ ( 0.5) ( 0.2) ( 0.3) ( 0.2)
Other Expenses, Net .................... 0.4 -- -- --
----- ----- ----- -----
Pre-Tax Income (Loss) ................. 10.2 ( 3.4) 4.4 3.9
Provision for Income Tax ............... 4.3 -- -- --
Extraordinary items (net of tax) ...... -- -- -- 8.5
----- ----- ----- -----
Net Income (Loss) ..................... 5.9% ( 3.4)% 4.4% ( 4.7)%
===== ===== ===== =====
OTHER DATA:
EBITDA ................................. 19.1% 15.3% 19.5% 17.8%
Adjusted EBITDA ........................ 19.1 18.4 21.1 20.7
</TABLE>
- ----------
(1) Combined 1996 financial data represents the summation of the results for
Predecessor for the nine months ended September 30, 1996 and for
Successor for the three months ended December 31, 1996 and is not
indicative of the results the Company would have achieved for the full
year had the Acquisition occurred on January 1, 1996.
THREE MONTHS ENDED MARCH 31, 1998 AS COMPARED TO THREE MONTHS ENDED
MARCH 31, 1997
Revenues. Revenues for the three months ended March 31, 1998 were $50.7
million as compared to $43.2 million for the three months ended March 31, 1997.
The increase in revenues was primarily attributable to increased activity in
the industrial scaffolding market. Increased turnaround and capital maintenance
activity as well as unplanned utility outages in the gulf coast accounted for
approximately $7.0 million of the positive variance. A majority of the
remaining variance was due to utility plant renovation and maintenance work in
the northern part of the country.
Gross Profit. Gross profit for the three months ended March 31, 1998 was
$11.9 million as compared to $11.5 million for the three months ended March 31,
1997. Gross profit as a percentage of revenues decreased primarily due to a
higher mix of labor and lower profit margins. The drivers of the lower profit
margins on labor include a shift in labor volume from higher profit jobs in the
western part of the country during 1997 to lower profit jobs in the gulf coast
and northern part of the country during 1998.
Selling and Administrative Expenses. Selling and administrative expenses
for the three months ended March 31, 1998 were $6.0 million as compared to $5.9
million for the three months ended March 31, 1997. The decrease in selling and
administrative expenses as a percentage of revenue from 13.7% for the three
months ended March 31, 1997 to 11.8% for the three months ended March 31, 1998
is directly attributable to the cost reduction program which was implemented in
November, 1997. Selling and administrative expenses were also reduced by
$175,000 in 1997 and $50,000 in 1998 as a result of payments by WMI pursuant to
the transition services agreement related to the Acquisition.
Operating Income. Operating income for the three months ended March 31,
1998 was $5.9 million as compared to $5.5 million for the three months ended
March 31, 1997. The increase was attributable to an increase in revenues
combined with an increase in direct costs as a percentage of revenues.
Interest Expense. Interest expense for the three months ended March 31,
1998 was $4.1 million compared to $3.8 million for the three months ended March
31, 1997. The $300,000 increase is due to the
33
<PAGE>
combination of increased activity under the Revolving Facility and a higher
weighted average interest rate on all outstanding debt of 9.4% for the three
months ended March 31, 1998 as compared to 8.7% for the three months ended
March 31, 1997.
Extraordinary Items (net of tax). Extraordinary items for the three months
ended March 31, 1998 were $4.3 million compared to $0 for the three months
ended March 31, 1997. This extraordinary charge represents the write off of the
pro rata share of deferred financing costs related to the portion of the Term
Loans repaid with proceeds of the Old Note Offering.
YEAR ENDED DECEMBER 31, 1997 AS COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues. Revenues for the year ended December 31, 1997 were $160.7
million as compared to $169.2 million for the year ended December 31, 1996. The
decline in revenues is attributable to: (i) the loss of several contracts with
a single customer in 1996 which accounted for approximately $3.4 million loss
in revenues compared to 1996 and (ii) the transfer, in connection with the
Acquisition, of a contract, which generated revenues in excess of $2.0 million
in 1996, to a former sister corporation of the Company. Also contributing to
the decline was lengthened turnaround schedules at refineries due to a strong
operating environment in 1997. These decreases were partially offset by several
new accounts obtained during 1997, including three large accounts which
generated a total of $2.8 million.
Gross Profit. Gross profit for the year ended December 31, 1997 was $38.0
million as compared to $45.9 million for the year ended December 31, 1996. The
$7.9 million decline was due to lower revenue levels and a $3.2 million
increase in depreciation and amortization expenses resulting from the
Acquisition. An increase in gross profit as a percentage of revenues for labor
services and a decrease in insurance claims partially offset the decrease in
gross profit.
Selling and Administrative Expenses. Selling and administrative expenses
for the year ended December 31, 1997 were $25.8 million as compared to $20.6
million for the year ended December 31, 1996. The $5.2 million increase was due
to the hiring of additional sales personnel and the opening of four new
commercial scaffolding offices. During 1997, selling and administrative
expenses were reduced by $700,000 as a result of payments by WMI pursuant to
the transition services agreement relating to the Acquisition.
Nonrecurring Start-up Expenses. In 1997, the Company incurred certain
expenses to establish the Company as a stand-alone entity. These expenses were
comprised of costs related to establishing benefit plans, a treasury
department, strategic planning and cash management.
Operating Income. Operating income for the year ended December 31, 1997
was $9.7 million as compared to $25.4 million for the year ended December 31,
1996. The $15.7 million decrease was attributable primarily to a decrease in
revenues, increased depreciation and, to a lesser extent, to an increase in
direct costs as a percentage of revenues and in nonrecurring start-up expenses
and an increase in selling and administrative expenses.
YEAR ENDED DECEMBER 31, 1996 AS COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenues. Revenues for the year ended December 31, 1996 were $169.2
million as compared to $193.8 million for the year ended December 31, 1995. The
$24.6 million decrease was primarily attributable to two factors. First, 1996
revenues decreased $8.6 million from 1995 due to many customers completing work
in 1995 to comply with clean fuels legislation in California which dictated
that refineries meet stringent environmental requirements by the end of 1995.
Plant modifications to comply with this legislation also caused turnaround
activity to be unusually high during 1995 as customers took advantage of the
opportunity to consolidate the two activities. Second, the Company lost four
contracts with a single major customer which had the impact of reducing the
revenues in the year ended December 31, 1996 by $10.6 million as compared to
the year ended December 31, 1995.
Gross Profit. Gross profit for the year ended December 31, 1996 was $45.9
million as compared to $54.9 million for the year ended December 31, 1995. The
$9.0 million decline was due to a decrease in revenues of 12.9% and a $700,000
increase in depreciation and amortization expenses related to the Acquisition.
Partially offsetting the declines were lower claims expenses due to a better
safety record in 1996.
34
<PAGE>
Selling and Administrative Expenses. Selling and administrative expenses
for the year ended December 31, 1996 were $20.6 million as compared to $25.8
million for the year ended December 31, 1995. The $5.2 million decrease was due
to a restructuring at WMI during the fourth quarter of 1995 which resulted in a
$4.0 million reduction in Company expenses due to the consolidation of the
Company's corporate and regional overhead expenses into the WMI infrastructure.
Also reducing selling and administrative expenses were lower benefit costs
obtained by moving from the Rust plans to the WMI plans, lower allocation
charges from WMI and lower facility expenses created by merging operations.
Offsetting these decreases were higher ($1.2 million) bonus expenses. The
Company received a payment of $725,000 from WMI for transition services, of
which $425,000 was recorded as a reduction of selling and administrative
expenses in 1996.
Operating Income. Operating income for the year ended December 31, 1996
was $25.4 million as compared to $29.1 million for the year ended December 31,
1995. The $3.7 million decrease in operating income is attributable primarily
to a decrease in revenues which was not fully offset by the decrease in direct
costs.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically utilized internal cash flow from operations
and borrowings under the Bank Facility to fund its operations, capital
expenditures, and working capital requirements. As of March 31, 1998, the
Company had working capital of $19.5 million and cash of $1.3 million. The
Company had $1.0 million of borrowings under the revolving portion (the
"Revolving Loan") of the Bank Facility at March 31, 1998.
Historically, the principal uses of cash have been capital expenditures
(primarily scaffolding) and working capital. Since the Acquisition, the Company
has also used cash to repay the Term Loans which payments amounted to $2.0
million in 1996 and $8.3 million in 1997. In February, 1998, $119.8 million of
the Term Loans were repaid with proceeds from the Old Note Offering.
For the three months ended March 31, 1998, the Company utilized cash of
$0.9 million from its December 31, 1997 balance of $2.2 million, and for the
year ended December 31, 1995, the nine months ended September 30, 1996, the
three months ended December 31, 1996, the year ended December 31, 1997 and the
three months ended March 31, 1998 cash provided by (used for) operating
activities was $35.6 million, $28.5 million, $5.0 million, $12.0 million and
$(.2) million, respectively.
The Company's capital expenditure requirements are comprised of
maintenance and expansion expenditures. The Company's maintenance capital
expenditure requirements are approximately $2.5 million to $3.5 million
annually and are generally used for scaffolding planks and other items used in
the business, such as trucks. Expansion capital expenditures are for new
scaffolding, are discretionary and vary annually based on the Company's level
of scaffolding rental activity and management's growth expectations. During the
three months ended March 31, 1998, expansion capital expenditures were $2.0
million, of which approximately $0.7 million was spent on new frame and brace
scaffolding to service the growing demand in the commercial scaffolding market.
Expansion capital expenditures in 1995, 1996 and 1997 were $5.8 million, $1.3
million and $6.7 million, respectively, and were principally used to expand the
Company's inventory of systems scaffolding for use in industrial applications.
Pursuant to a credit agreement dated as of September 30, 1996, the Company
entered into the Bank Facility. The Bank Facility consisted of three term loan
facilities, under which the Company borrowed a total of $160.0 million
immediately upon closing of the Bank Facility, and the $30.0 million Revolving
Facility (as defined). All but $30.0 million of the loans outstanding under the
term facilities was repaid on February 20, 1998 with the proceeds of the Old
Note Offering. Borrowings under the Revolving Facility are governed by a
borrowing base equal to 85% of eligible accounts receivable. A $15.0 million
sub-facility is available for the issuance of letters of credit. As of March
31, 1998, the Company had $1.0 million of outstanding borrowings under the
Revolving Facility, leaving $16.2 million available to the Company. The
interest rate on each facility under the Bank Facility is variable. As of March
31, 1998, the interest rate on loans outstanding under the term facility was an
annual dollar-weighted rate of 9.0%. Total payments for interest and principal
by the Company under the Bank Facility in 1996 were $3.0 million and $2.0
35
<PAGE>
million, respectively, and in 1997 were $14.1 million and $8.3 million,
respectively. During the three months ended March 31, 1998 total payments for
interest were $3.1 million, and $119.8 million of the Term Loans was repaid
with proceeds from the Old Note Offering.
The Bank Facility contains financial and operating covenants, including
among other things, that the Company maintain certain financial ratios and
satisfy certain financial tests, and imposes limitations on the Company's
ability to make capital expenditures, to incur indebtedness and to pay
dividends. As of December 31, 1997, the Company was not in compliance with
certain covenants in the Bank Facility. The Company obtained waivers of such
covenant violations from the lenders under the Bank Facility. The Company also
obtained an amendment (the "Bank Amendment") to the Bank Facility which became
effective upon the consummation of the Old Note Offering and, among other
things, reset the financial ratios and financial tests required to be met
thereunder to levels that are more consistent with the Company's capital
structure following the Old Note Offering and its current and expected
financial performance.
On February 25, 1998, the Company raised $125.6 million from the Old Note
Offering. Substantially all of the net proceeds of the sale of the Notes by the
Company were used to reduce outstanding indebtedness under the Bank Facility.
The Term B Facility (as defined), the Term C Facility (as defined) and the
Revolving Facility were repaid in full, and loans under the Term A Facility (as
defined) were paid down such that the aggregate principal amount of loans
outstanding under the Term A Facility after such prepayment was $30.0 million.
In addition, pursuant to the Bank Amendment, the Bank Facility was reduced to
$60.0 million. Certain provisions contained in the Credit Agreement (as
defined) were amended to eliminate the Cleandown Requirement (as defined in the
Credit Agreement). Also, certain of the covenants contained in the Credit
Agreement were amended to permit the Company to incur certain additional
indebtedness, engage in a broader range of business, make certain additional
investments and capital expenditures and reinvest asset disposition proceeds
within 180 days, rather than prepay the Term Facilities (as defined) with such
proceeds.
NET OPERATING LOSSES
As of December 31, 1997, the Company had estimated net operating loss
carryforwards, resulting primarily from depreciation timing differences, of
approximately $65.9 million for U.S. income tax purposes. As a result of such
loss carryforwards, cash paid for income taxes in 1997 was minimal. The Company
does not expect to expend cash for taxes in the next several years.
EFFECT OF INFLATION; SEASONALITY
Inflation has not generally been a material factor affecting the Company's
business. In recent years, the cost of scaffolding equipment has remained
relatively stable due to competitive pressures within the industry. The
Company's general operating expenses, such as salaries, employee benefits and
facilities costs are subject to normal inflationary pressures.
The operations of the Company are generally subject to seasonal
fluctuations coinciding with the spring and fall turnaround schedules of its
major customers.
36
<PAGE>
BUSINESS
OVERVIEW
The Company is the largest North American provider of industrial
scaffolding rental, erection, dismantlement and design services. The Company's
services facilitate access to tall structures for on-going maintenance,
turnarounds and capital projects, principally in the refining, petrochemical,
chemical, utility and pulp and paper industries. The Company estimates that for
1997 it had a 25% market share of the $575 million North American industrial
scaffolding services market and had industrial scaffolding revenues in excess
of three times that of its largest competitor. The Company's turnkey services
include equipment rental (accounting for approximately 24%, 27%, and 25% of
total revenue for the years 1995, 1996 and 1997, respectively), labor for the
erection and dismantlement of the scaffolding (accounting for approximately
72%, 70% and 70% of total payment for the years 1995, 1996 and 1997,
respectively) and scaffolding design services. The Company delivers its
services through an extensive field service organization of approximately 2,900
employees in 29 field offices located throughout the United States and two in
Canada. The Company also provides scaffolding services to the commercial market
(primarily nonresidential construction) and sells a small amount of
scaffolding. For the twelve months ended March 31, 1998, the Company generated
revenues, Adjusted EBITDA (as defined) and a net loss of $168.1 million, $31.0
million and $9.6 million, respectively. See "Selected Consolidated Financial
Data."
Approximately 84% of the Company's 1997 revenues were attributable to
on-going maintenance and turnarounds of industrial facilities. The Company
typically provides on-going maintenance services under long-term contracts; the
duration of these contracts ranges between one and five years. Turnarounds
occur every one to four years depending on the industry and the type of
turnaround being performed. Although some turnarounds may be postponed for a
period of time, they are a necessary component of maintaining industrial
facilities and are required to ensure the safe and efficient operation of such
facilities. The Company believes that the necessity for on-going maintenance
and turnarounds provides it with a stable, recurring revenue base.
The Company believes its position as the largest supplier of industrial
scaffolding provides it with a number of competitive advantages including (i)
the ability to offer national coverage to large customers, (ii) the ability to
provide required personnel and scaffolding to process major turnarounds and
unanticipated plant outages, (iii) higher asset utilization through the
shifting of assets across regions and across its large customer base, (iv)
purchasing leverage with scaffolding manufacturers, and (v) comprehensive
safety training programs which have resulted in the lowest accident incident
rate in the industry (total OSHA recordable injuries per 200,000 man hours of
2.3 in 1997 compared to the industry average of 12.5 in 1997) and have enabled
the Company to reduce insurance costs and accident-related expenses. The
Company's size also enables it to maintain its own trucking fleet and to
provide a design department that specializes in the custom design of industrial
scaffolding, which the Company uses to minimize the amount of scaffolding used
and to maximize labor efficiency thereby providing the Company with a
competitive advantage.
BUSINESS STRATEGY
The Company has developed a business strategy which it believes will
enable it to profitably grow future revenue and cash flow. The key components
of this strategy are:
Leverage existing strengths. The Company's existing strengths include
longstanding customer relationships, extensive equipment resources, significant
labor capacity and an industry-leading safety record. These strengths have
enabled the Company to gain its current substantial market share and to expand
its business. The Company will utilize these strengths to retain its
maintenance contracts and to aggressively pursue turnarounds and capital
projects with its existing customers and to expand scaffolding services to such
customers' other facilities.
Target underpenetrated industrial segments. Due to the Company's leading
market position and extensive service infrastructure, the Company has the
capacity to service several industries in which, due to limited historical
focus, the Company has had a relatively low market share. These include the
37
<PAGE>
chemical, utilities and pulp and paper industries. To increase its penetration
in these markets, the Company has expanded its sales force, initiated incentive
and training programs and created a sales management function to target
opportunities and monitor the effectiveness of the sales force.
Reduce operating costs. In November 1997, the Company implemented a cost
reduction program which is expected to reduce its annual operating overhead and
selling, general and administrative expenses by approximately $5.3 million. The
major initiatives include (i) eliminating 63 administrative and support
positions and consolidating certain administrative functions, (ii)
restructuring and renegotiating benefits programs, (iii) renegotiating the
Company's insurance premiums to reflect continued improvements in its safety
record, (iv) negotiating company-wide procurement contracts in order to take
advantage of volume pricing, and (v) implementing a new management information
system to improve inventory utilization and reduce equipment transportation
expenses.
Pursue complementary acquisitions. The Company intends to pursue
complementary acquisitions where significant consolidation savings and
economies of scale can be achieved. The scaffolding industry is characterized
by single-office or regional companies, many of which are undercapitalized and
have limited scaffolding inventories. The Company intends to focus its
acquisition strategy on companies which have long-term contracts or an
expertise in a certain industry or scaffolding application.
Expand its commercial scaffolding operations. The Company intends to
utilize its existing infrastructure to expand its position in the commercial
market. To increase its penetration of the commercial market, the Company has
targeted large-scale new construction and renovation projects, which require
relatively complex scaffolding. Further, the Company has opened new offices in
four cities and expanded its sales force and its inventory of frame and brace
scaffolding. The Company believes its industry-leading safety record provides
it with a competitive advantage in pursuing these commercial scaffolding market
opportunities in the future. In November 1996, OSHA enacted stricter
regulations regarding training and safety in the commercial scaffolding
industry. As a result, the Company expects safety to be a key consideration for
commercial customers in the future.
THE INDUSTRIAL SCAFFOLDING MARKET
Overview
The industrial scaffolding market represents approximately $575 million of
the $1.3 billion scaffolding market. Industrial customers generally require
systems scaffolding, which is highly versatile, can be quickly erected and
dismantled, is capable of conforming to irregularly shaped structures and
requires a higher level of skill to erect and dismantle. Principal end-use
industries and their estimated percent of the total industrial market for 1996
were: (i) refineries--31%; (ii) petrochemical and chemical plants--30%; (iii)
utilities--17%; (iv) pulp and paper mills--11%; and (v) other industrial users
including aerospace, ship building and other miscellaneous industrial
applications--11%. Scaffolding is used by industrial customers for on-going
maintenance, turnarounds and capital projects. Since turnarounds may require
the complete shutdown of a facility, speed and reliability are key customer
considerations. Safety is another important consideration for industrial
customers. The industrial scaffolding market is fragmented and is serviced
predominantly by scaffolding specialists such as the Company.
End-Use Industries
The primary end-use industries for both the Company and the industrial
scaffolding market in general are refineries, petrochemical and chemical
plants, utilities, pulp and paper mills and other industries such as the
aerospace, ship building and certain miscellaneous industries.
Refining Industry. The refining industry, the Company's and the industrial
scaffolding market's largest end-use industry, accounted for approximately 31%
of the 1996 industrial scaffolding market and represented approximately 42% of
the Company's revenues for 1997. A maintenance contract at a refinery generates
between $250,000 and $2.0 million of scaffolding revenues annually, depending
on the size of the refinery and the scope of the contract (i.e., rentals and
labor or rental only). A major turnaround typically generates between $2.0 and
$4.0 million of revenues to the scaffolding services provider, while a minor
turnaround typically generates in excess of $1.0 million. Turnarounds are
essential at refineries
38
<PAGE>
as the failure to overhaul equipment may ultimately jeopardize the safe and
efficient operation of a plant. Capital projects include greenfield
construction, plant expansions, restoration of mothballed refineries, upgrading
the heavy crude capability of refineries and compliance with new environmental
regulations. Capital projects have generated as much as $24.1 million in
scaffolding revenues for the Company on a single project.
It is not likely that any refineries will be closed permanently in the
near future, due to high exit barriers caused by strict environmental laws
which make it prohibitively expensive to abandon a refinery. In addition,
refineries are generally run at full capacity due to the high fixed costs, and
therefore maintenance operations are not significantly affected by demand.
Petrochemical and Chemical. The petrochemical and chemical industries
accounted for approximately 30% of domestic industrial scaffolding revenues and
represented approximately 14% of the Company's total revenues for 1997. The
petrochemical and chemical industries also use scaffolding services primarily
for maintenance and turnarounds, as well as capital projects. E&C firms often
provide on-going general maintenance at facilities which they originally
constructed. As part of such maintenance services, E&C firms either erect their
own scaffolding or, to a lesser extent, subcontract such services out to
scaffolding specialists such as the Company. The turnaround schedules of
petrochemical and chemical plants generally are similar to refineries, but
depending on the type of chemical being produced at a plant, turnarounds may be
more frequent. Turnarounds at petrochemical and chemical plants typically
generate revenues between $1.0 and $2.0 million. The petrochemical industry is
currently undergoing expansion and current supply is insufficient to meet high
demand. Based on requests for proposal from a number of petrochemical and
chemical companies, the Company expects a number of new facilities to begin
construction to address this demand in 1998.
Utilities. The utility industry accounted for approximately 17% of
industrial scaffolding revenues and represented approximately 14% of the
Company's revenues for 1997. Since plant maintenance has historically been
incorporated into a utility's rate base, utilities have maintained regular
turnaround schedules. A turnaround at a utility typically generates $75,000 to
$175,000 in scaffolding revenues; however, turnarounds may generate
substantially more revenues depending on the extent of a project. Scaffolding
services for on-going maintenance are often completed in-house.
Pulp and Paper. The pulp and paper industry accounted for approximately
11% of industrial scaffolding revenues and represented approximately 4% of the
Company's revenues for 1997. Scaffolding services for on-going maintenance are
generally provided in-house. A turnaround at a major facility can generate
scaffolding revenues in excess of $1.0 million while a small facility will
typically generate revenues of $50,000 to $100,000. Strong demand for pulp has
generally forced mills to stretch turnaround schedules from 12 months to 18
months.
Industrial Scaffolding Job Types
Industrial uses for scaffolding services include on-going maintenance,
turnarounds and capital projects.
On-going Maintenance. On-going maintenance work is typically performed
under long-term contracts which range between one and five years. On-going
maintenance represented approximately 50% of the total industrial scaffolding
market in 1996. On-going maintenance contracts often cover planned outages,
whereby typically one or a few devices in the plant are taken down for a short
period of time. Performance and customer relationships at all levels are
critical to maintaining these contracts. Having a maintenance contract in place
is an important competitive advantage when seeking future turnaround or
emergency scaffolding jobs.
Turnarounds. Turnarounds are major equipment overhauls which involve
shutting down all or a significant portion of a plant. Turnarounds represented
approximately 35% of the total industrial scaffolding market in 1996.
Turnarounds occur on a regular basis, typically every one to two years for
minor turnarounds and every four years for major turnarounds. However,
turnarounds are often delayed during periods of high operating profit for end
users, but they eventually must be completed. Though
39
<PAGE>
contracts for planned turnarounds are typically bid out, the scaffold
specialist with the maintenance contract is frequently awarded the turnaround
contract. Contracts for emergency outages due to an explosion or natural
disaster are generally handled by the contractor who can mobilize a large
amount of equipment and labor most effectively.
Capital Projects. Capital projects represented approximately 15% of the
industrial scaffolding market in 1996; however, this type of revenue is
cyclical. For instance, a single project has generated $24.1 million in
revenues and certain clean fuel acts resulted in $8.6 million of revenues. The
amount of revenues from capital projects fluctuates from year to year,
depending on the fundamentals of the end users, but can contribute
significantly to the Company's revenues.
A majority of the capital projects in the 1990s have been related to
reactivation of mothballed refineries and compliance with the clean air acts in
California. Plant expansions require two to three years to construct and
generally produce several million dollars of scaffolding revenues. The Company
believes that at least ten companies, including several of its customers, are
currently planning major plant expansions.
THE COMMERCIAL SCAFFOLDING MARKET
The $725 million commercial scaffolding market is characterized by few
national and many regional competitors. Commercial scaffolding is used
primarily in nonresidential construction and renovation. Commercial
applications are generally characterized by regularly shaped structures with
few contoured or angled surfaces. Due to the simple shapes required, commercial
jobs generally utilize frame and brace scaffolding, a less versatile type of
equipment which is not suited to industrial applications. Commercial
scaffolding requires a less skilled work force and has historically been less
focused on safety issues. These factors combine to make the commercial market
highly fragmented with low barriers to entry. In November 1996, OSHA enacted
stricter regulations regarding training and safety in the commercial
scaffolding industry. As a result, the Company expects safety to be a key
consideration for commercial customers in the future.
EQUIPMENT
The Company maintains a substantial inventory of scaffolding at its 31
field offices as well as at customer sites throughout the United States and in
Canada. In order to maximize profitability, the Company monitors asset
utilization daily and can quickly move scaffolding between sites. The Company's
size and national coverage gives it a significant advantage in this respect.
The type of scaffolding used by the Company for a project depends on a number
of factors, including the preference of local tradespeople based on their
familiarity with a particular type of scaffolding and the availability in the
customer's inventory of a particular kind of scaffolding which the client has
requested that the Company utilize. The Company utilizes three types of
scaffolding: systems, tube and clamp and frame and brace. The Company also
offers Sky Climber motorized scaffolding.
Systems scaffolding consists of interlocking horizontal, vertical and
platform pieces which can be assembled and dismantled quickly and with less
labor than the other types of scaffolding. Systems scaffolding is very
versatile because its pieces can be connected in a variety of ways to conform
to the contours of the area in which the scaffolding is required. For this
reason, systems scaffolding is particularly well-suited for refineries which
contain pipes and vessels around which the scaffolding must be erected.
Tube and clamp scaffolding offers similar versatility to systems
scaffolding and thus can be used in similar applications. However, tube and
clamp scaffolding must be bolted together with clamps and is therefore more
difficult and time consuming to assemble. Tube and clamp scaffolding was the
predecessor to and is generally being superceded by systems scaffolding.
Frame and brace scaffolding generally uses pre-constructed pieces
consisting of vertical supports and platforms and is predominantly used for
commercial projects. Frame and brace scaffolding may be assembled and
dismantled quickly but does not offer the versatility of systems or tube and
clamp scaffolding.
40
<PAGE>
Motorized scaffolding consists of motors, platforms and rigging equipment
and the rigging is performed by either the Company or the customer. The Company
sells, rents and provides maintenance services for motorized scaffolding under
the "Sky Climber" brand name. The majority of Sky Climber customers are
commercial users such as painters, window washers, waterproofers, building
restorers and construction companies.
COMPETITION
The Company is the largest North American provider of industrial
scaffolding services with an approximately 25% market share and 1997 industrial
scaffolding revenues that were larger than the industrial scaffolding revenues
for its three largest competitors combined. In 1996, the next five largest
scaffolding specialists after the Company, Aluma Systems USA, Inc., Safway
Steel Products, Patent Construction Systems, Interstate Scaffolding Inc. and
BET, accounted for approximately 27% of the total market, E&C firms account for
approximately 23% and numerous small, thinly capitalized, local competitors
account for approximately 24%. E&C firms often subcontract scaffolding services
to scaffolding specialists including the Company.
SAFETY
Safety is an important consideration in the selection and continued
employment of a scaffolding services provider. The Company maintains workforce
expertise through extensive internal and external training and safety programs.
The Company believes that its highly skilled workforce translates into lower
accident rates that benefit both the Company and its customers through lower
insurance and accident-related expenses. The Company has the best safety record
of any scaffolding company in the United States. The Company's rate of total
OSHA recordable injuries per 200,000 man hours was 2.3 for the year ended
December 31, 1997 and 1.5 for the three months ended March 31, 1998 as compared
to an industry average (according to National Safety Council 1997 accident
statistics) for the year ended December 31, 1997 of 12.5. Compensation plans
for the Company's project managers have been designed to include incentives to
reduce the numbers of accidents, lost work days and lost time rates.
SALES AND MARKETING
The Company's selling organization consists of 38 sales team members.
These individuals are located throughout the Company's network of service
locations. Each sales team member reports to the respective Division Manager,
who is responsible for managing day-to-day sales activities.
The Company's sales force is charged with identifying and pursuing target
accounts, estimating and bidding on work, closing the sale and coordinating the
initial work relationship with the Company's broader operating team. During
1997, the Company established a National Sales Manager position, which is
charged with the development and implementation of an overall sales reporting
program.
As identified through its strategic planning process, the Company has
developed a comprehensive database of all potential scaffolding opportunities
and a sales plan for each of its Divisions. Using this customer database as a
foundation, the most promising target accounts are then assigned to individual
sales team members. The sales plans consist of two interactive elements. The
broader element is an assessment of the market segments that exist within a
given territory and the identification of those segments that offer the best
opportunity for growth in the territory. The more focused element is the
identification of the individual customer accounts that make up the local
population of each of the target market segments. Annual incremental revenue
goals are established for each sales team member, and actual sales results will
be tracked using the several databases that are being installed.
CUSTOMERS
Brand's primary customers include large oil refineries and petrochemical
plants. The Company's top ten customers account for over one third of 1997
revenues. The Company's ten largest customers, when measured by 1997 revenue to
the Company, were Exxon Corporation, Arco, Mobil Corporation, Texaco Inc.,
Phillips, Citgo Petroleum Corporation, Lyondell Petrochemical Company, Dupont,
Houston Lighting & Power Company and Shell Oil. Exxon, the Company's largest
customer, accounted for
41
<PAGE>
approximately 17% of the Company's 1997 revenues. The Company has contractual
relationships with all of its primary customers. Each of these contracts
contains terms and conditions specific to each customer and are cancellable by
either party by 30 day written notification. Because the contracts are entered
into on a project-by-project basis and typically have a defined scope of work,
they do not have minimum purchase requirements. The percentage of total Company
revenues accounted for by each customer varies greatly from year to year.
MANAGEMENT INFORMATION SYSTEMS
In 1997, the Company began an analysis of its management information
systems capabilities. It has committed to developing a data communications
backbone and data server that will be used as the foundation for an integrated
operating system. During the first quarter of 1998, two new programs began to
operate: a rental billing module, which gives the Company a centralized ability
to analyze price structures, and a revenue and inventory planning module, which
allows the Company to track the company-wide utilization of inventory and to
plan better for future inventory needs. The Company plans to upgrade its
financial software in the second half of 1998 to increase both data base
informational capabilities and to prepare the Company to be year 2000 compliant
by June, 1999.
PROPERTY
The Company operates facilities in 32 locations. The Company owns two
locations in Canada, two in Texas, one in Alabama and one in Louisiana. The
Company leases its remaining 25 facilities as well as one site used for its
corporate headquarters. The Company's facilities typically include a small
office, warehouse and yard and range in size from 2,000 to 40,000 square feet
under roof with yards from half an acre to more than four acres. The Company's
headquarters are located in a 9,500 square foot facility in Chesterfield,
Missouri. The Company's facilities are concentrated near its customers to
minimize transportation costs, to shorten lead times and to strengthen
oversight and project management abilities.
EMPLOYEES
As of March 31, 1998, the Company had approximately 2,900 employees of
which approximately 733 were union employees. The Company maintains both union
and non-union workforces to meet the demands of its customers. The Company
primarily contracts with the local offices of the Carpenters Union and the
Laborers Union. The Company believes it has good relationships with both unions
and with its employees generally.
INSURANCE
The Company maintains standard insurance for commercial general liability,
workers compensation and automobile liability, as well as, specialty insurance
coverage for directors' and officers' liability, wrongful employment practices,
commercial crime, architects' and engineers' liability and an umbrella
liability through several insurers.
LITIGATION
The Company is not party to litigation which, in the opinion of the
Company's management, could have a material adverse effect on the Company's
financial position, results of operations or liquidity.
42
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to
directors and executive officers of the Company. Each director and officer
holds office until a successor is elected and qualified or until his earlier
death, resignation or removal.
<TABLE>
<CAPTION>
NAME AGE POSITION AND OFFICES
- ---- --- --------------------
<S> <C> <C>
David L. Jaffe 39 Chairman of the Board
John M. Monter 50 Chief Executive Officer, President and Director
Ian R. Alexander 51 Chief Financial Officer, Vice President, Finance and Secretary
David R. Cichy 47 Vice President, Operations -- Northern Region
Raymond L. Edwards 44 Vice President, Administration
Guy S. Huelat 36 Vice President, Resource Management
Otto K. Knoll 44 Vice President, Operations -- Western Region
James "Marty" McGee 42 Vice President, Operations -- Southeast Region
Scott M. Robinson 50 Vice President, Operations -- Central Region
Robert Bonczek 53 Director
James S. Carlisle 56 Director
Vincent Langone 55 Director
D.P. "Pat" Payne 55 Director
Karl R. Wyss 57 Director
</TABLE>
DAVID L. JAFFE, CHAIRMAN OF THE BOARD: Mr. Jaffe has been a Managing
Director of DLJ Merchant Banking, Inc. ("DLJMB, Inc.") since 1995 and has been
Chairman of the Board of the Company since the Acquisition. Prior to serving in
his current position with DLJMB, Inc., Mr. Jaffe was a Senior Vice President at
DLJMB, Inc. He serves on the boards of EZ Buy & EZ Sell Recycler Corporation,
OSF Holdings, Inc., Terra Nova Group, OHA Financial, Inc., Pharmaceutical Fine
Chemicals S.A. and Duane Reade Inc. Mr. Jaffe also serves as a director of the
Creative Arts Workshop for Kids, Inc. of New York.
JOHN M. MONTER, CHIEF EXECUTIVE OFFICER, PRESIDENT AND DIRECTOR : Mr.
Monter has served as a director, Chief Executive Officer and President since
the Acquisition. Prior to joining the Company at the time of the Acquisition,
Mr. Monter held a variety of corporate and operating assignments at Cooper
Industries, Inc. ("Cooper") where he began his career in 1977. Mr. Monter was
President of the Bussmann Division of Cooper, which manufactures electrical
overcurrent fuses, from 1992 to 1996.
IAN R. ALEXANDER, CHIEF FINANCIAL OFFICER, VICE PRESIDENT, FINANCE AND
SECRETARY : Prior to joining the Company as Chief Financial Officer, Vice
President, Finance and Secretary in April 1998, Mr. Alexander had a variety of
assignments with BP Oil Company from 1973 until 1993 in Europe, Africa and the
U.S.A. He then became Chief Financial Officer and Executive Vice President of
Purina Mills, Inc. until it was sold to Koch Industries in March, 1998.
DAVID R. CICHY, VICE PRESIDENT, OPERATIONS -- NORTHERN REGION: Mr. Cichy
was appointed Vice President, Operations--Northern Region in 1996. Beginning in
1978, Mr. Cichy served in various construction management functions with Rust
Industrial including Vice President, Resource Management from 1993 to 1996.
RAYMOND L. EDWARDS, VICE PRESIDENT, ADMINISTRATION: Mr. Edwards joined the
Company in his current role in November 1996. Prior to joining the Company, he
held a variety of management positions, most recently, with Cooper from 1984 to
1996, including Vice President, Human Resources from 1990 to 1996.
GUY S. HUELAT, VICE PRESIDENT, RESOURCE MANAGEMENT: Mr. Huelat joined the
Company in January 1997 in his current position. Prior to joining the Company,
Mr. Huelat was a Plant Manager from 1989 to 1994 and a Materials Manager from
1994 to 1996 at Cooper. From 1996 to 1997, he was Director of Logistics for
Planning and Customer Service for Kimble Glass, Inc.
43
<PAGE>
OTTO K. KNOLL, VICE PRESIDENT, OPERATIONS -- WESTERN REGION: Mr. Knoll
has held his current position since the Acquisition. From 1994 until the
Acquisition, Mr. Knoll served as Western Region Vice President of Rust
Industrial. From 1991 to 1994, Mr. Knoll was a Vice President,
Operations--Western Region for Serv-Tech, Inc.
JAMES "MARTY" MCGEE, VICE PRESIDENT, OPERATIONS -- SOUTHEAST REGION: Mr.
McGee has held his current position since the Acquisition. From 1993 until the
Acquisition, Mr. McGee held various Region Management positions with Rust
Industrial and WMI. Mr. McGee has been with the Company in various management
positions since 1981 including President, Southern Regional Scaffolding in
1993, Southern Region Manager in 1994 and Vice President, Southern Operations
from 1995 to 1996.
SCOTT M. ROBINSON, VICE PRESIDENT, OPERATIONS -- CENTRAL REGION: Mr.
Robinson joined the Company as Vice President, Marketing in March 1997 and
assumed his present position in November 1997. Prior to joining the Company,
Mr. Robinson held various positions at Cooper, including Vice President, Sales
from 1993 to 1997 and Vice President, Marketing from 1987 to 1993.
ROBERT BONCZEK, DIRECTOR : Mr. Bonczek has been President and a director
of Aspentree Capital, a private money management firm since 1991, and has been
a director of the Company since the Acquisition. He is a legal consultant to
Wilmer, Cutler and Pickering. Mr. Bonczek is a director of DCV, Inc.
JAMES S. CARLISLE, DIRECTOR : Mr. Carlisle has been Chief Executive of
Carlisle Enterprises, LLC, a firm engaged in the acquisition and management of
leveraged buyout companies since 1989, and has been a director of the Company
since the Acquisition.
VINCENT P. LANGONE, DIRECTOR : Mr. Langone has been a director of the
Company since the Acquisition. Mr. Langone has been Chairman, President and
Chief Executive Officer of Formica Corporation since May 1998. From 1995 to
1997, Mr. Langone served as President and Chief Operating Officer of Interbuild
International, Inc., which participates in and manages leveraged buyouts and
provides operational management and general consulting services. Mr. Langone is
a director of United Retail Group and Summit Bank. From 1989 to 1995, Mr.
Langone served as Chairman, President and Chief Executive Officer of Formica
Corporation.
D.P. "PAT" PAYNE, DIRECTOR : Mr. Payne has been Senior Vice President for
WMI since 1995, and has been a director of the Company since February 1998.
Prior to serving in his current position with WMI, Mr. Payne served as
President and Chief Executive Officer of Chemical Waste Management, Inc. from
1991 to 1995.
KARL R. WYSS, DIRECTOR : Mr. Wyss is a Managing Director of DLJMB, Inc.
and has been a director of the Company since the Acquisition. Prior to joining
DLJMB, Inc. in 1993, he was Chairman and Chief Executive Officer of Lear
Siegler Inc., where he served as President and Chief Operating Officer from
1989 to 1993. He serves on the boards of CommVault Systems, Inc., EZ Buy & EZ
Sell Recycler Corp., Localiza Rent A Car S.A., OSF, Inc., Mallory Limitada,
Pharmaceutical Fine Chemicals, S.A. and Von Hoffman Press, Inc.
COMPENSATION OF DIRECTORS
Directors of the Company do not receive cash compensation for serving as
directors; however, in March 1997, pursuant to Holdings' Stock Option Plan for
Outside Directors, directors who were not employees of Holdings, the Company or
any of their institutional shareholders, were each awarded options (the
"Director Options") to purchase 40,000 shares of the common stock of Holdings,
which options will vest in March 1999.
COMPENSATION COMMITTEE AND INSIDER INTERLOCKS
Compensation of the Company's management is determined by a committee
comprised of Messrs. Jaffe, Monter and Wyss. Mr. Monter is the Chief Executive
Officer and President of the Company. In March 1997, Mr. Monter purchased
386,406 newly-issued shares of the common stock of Holdings and 17,500
newly-issued shares of Old Preferred Stock for an aggregate purchase price of
$823,905. In
44
<PAGE>
connection with such purchase, Holdings extended Mr. Monter a recourse loan of
$167,000, which matures in March 2002 (subject to prepayment in the event any
shares are disposed of prior to such time) and bears interest at a rate of
7.03% per annum. The loan is secured by a pledge of the shares purchased.
Messrs. Jaffe and Wyss are Managing Directors of DLJMB, Inc., the general
partner of DLJMB. Pursuant to a Shareholders Agreement dated as of September
30, 1996 between DLJMB, Carlisle, Rust, the Company, Holdings and certain other
individuals (the "Shareholders Agreement"), Holdings' board consists of seven
members, five of whom are nominated by DLJMB. In addition, the Shareholders
Agreement provides for certain rights of first refusal in favor of DLJMB,
certain rights and obligations on the part of shareholders to participate in
transfers of shares by DLJMB and preemptive rights for DLJMB under certain
circumstances. The Shareholders Agreement further provides that DLJMB has the
right, subject to certain conditions, to request that Holdings register
securities that they own under the Securities Act, and to participate in other
registrations of Holdings' and the Company's securities, in each case at
Holdings' expense.
In addition, the Shareholders Agreement provides for certain advisory
relationships and the payment of management advisory fees. For five years after
the date of the agreement, DLJSC, an affiliate of DLJMB, Inc., is engaged as
the exclusive financial and investment banking advisor for Holdings, on
customary terms. Pursuant to the Shareholders Agreement, DLJMB, Inc. receives
an annual advisory fee of $250,000 from Holdings. DLJSC received customary fees
in connection with the underwriting, purchase and placement of the Notes.
DLJ Capital, the Syndication Agent and a lender under the Bank Facility,
is an affiliate of DLJMB. For a description of the Bank Facility, see
"Description of Bank Facility." The proceeds from the sale of the Notes was
used to repay indebtedness under the Bank Facility, $1.6 million of which was
owed to DLJ Capital on the date of the Old Note Offering. In connection with an
amendment to the existing Bank Facility, the Company will pay customary fees to
DLJ Capital, as the Syndication Agent and as a Lender under the Bank Facility.
EXECUTIVE COMPENSATION
The following table sets forth the compensation earned by the Chief
Executive Officer and the six other most highly paid executive officers for
services rendered in 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
------------------------------
ANNUAL COMPENSATION AWARDS
-------------------------------------- ------------
SECURITIES
UNDERLYING ALL
OTHER OPTIONS OTHER
SALARY BONUS COMPENSATION /SARS COMPENSATION
NAME AND PRINCIPAL POSITION ($) ($) ($) (#) ($)
- -------------------------------- --------- --------- -------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
John M. Monter 350,000 -- 8,400 437,500 828(1)
Chief Executive Officer
Herman Thibodeaux (2) 123,386 73,950 40,000 94,613(3)
James "Marty" McGee 124,845 121,200 -- 40,000 401(1)
Vice President,
Operations-Southeast Region
Ronald W. Moore (4) 121,145 109,077 -- 40,000 823(1)
Otto K. Knoll 139,870 73,942 1,938 40,000 1,600(1)
Vice President,
Operations-Western Region
Gerald B. Curran (5) 150,000 49,131 -- 40,000 1,442(1)
Raymond L. Edwards 135,000 30,000 -- 40,000 156(1)
Vice President, Administration
</TABLE>
45
<PAGE>
- ----------
(1) Represents the Company's matching 401(k) contributions.
(2) Mr. Thibodeaux retired from his position as Vice President, Marketing and
Sales on October 1, 1997.
(3) Payment pursuant to an employment agreement with WMI upon transition due
to disability status.
(4) Mr. Moore was reassigned from his position as Vice President, Operations
-- Central Region on December 1, 1997 to Division Manager of the
Company's Houston Division.
(5) Mr. Curran resigned from his position as Chief Financial Officer, Vice
President, Finance and Secretary on May 1, 1998. Mr. Curran's severance
agreement includes additional 1998 bonus payments of $32,946, one year at
continued base salary of $150,000 and one year's continued coverage under
the Company's medical and dental plan.
Stock Option Grants in Last Fiscal Year.
The following table sets forth certain information concerning grants of
stock options made to the persons named in the Summary Compensation Table
during the year ended December 31, 1997. Such grants are exercisable for shares
of the common stock of Holdings. No stock appreciation rights were granted.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE AT
ASSUMED ANNUAL
RATES OF
STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM (2)
---------------------------------------------------------------------- ------------------
% OF TOTAL
OPTIONS
NUMBER OF SECURITIES GRANTED TO EXERCISE OR
UNDERLYING OPTIONS EMPLOYEES IN BASE PRICE
NAME GRANTED (#) (1) FISCAL YEAR ($/SH) EXPIRATION DATE 5% ($) 10% ($)
- --------------------- ---------------------- -------------- ------------ ----------------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
John M. Monter 437,500 45.7 1.00 12/31/06 275,141 697,262
Herman Thibodeaux 40,000 4.2 1.00 12/31/06 25,156 63,750
James "Marty" McGee 40,000 4.2 1.00 12/31/06 25,156 63,750
Ronald W. Moore 40,000 4.2 1.00 12/31/06 25,156 63,750
Otto K. Knoll 40,000 4.2 1.00 12/31/06 25,156 63,750
Gerald B. Curran 40,000 4.2 1.00 12/31/06 25,156 63,750
Raymond L. Edwards 40,000 4.2 1.00 12/31/06 25,156 63,750
</TABLE>
- ----------
(1) Options vest in five equal annual installments beginning January 1, 1998
provided certain performance criteria are met. Unvested options are
subject to forfeiture, and any shares acquired upon exercise are subject
to repurchase rights of the Company, upon termination of employment. Upon
a change of control all unvested options will vest.
(2) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These
gains are based on assumed rates of stock price appreciation for the
underlying stock of 5% and 10% compounded annually from the date that the
respective options were granted through their expiration date. This table
does not take into account any appreciation in the price of the
underlying stock to date. Actual gains, if any, on stock option exercises
will depend on the future performance of the underlying stock and the
date at which the options are exercised.
46
<PAGE>
The following table summarizes option exercises during the last fiscal
year and the amount and value of options for persons named in the Summary
Compensation Table.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
DECEMBER 31, DECEMBER 31,
1997 (#) 1997 ($) (1)
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE (#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE
- ---- --------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
John M. Monter -- -- 0/437,500 0/0
Herman Thibodeaux -- -- 0/ 40,000 0/0
James "Marty" McGee -- -- 0/ 40,000 0/0
Ronald W. Moore -- -- 0/ 40,000 0/0
Otto K. Knoll -- -- 0/ 40,000 0/0
Gerald B. Curran -- -- 0/ 40,000 0/0
Raymond L. Edwards -- -- 0/ 40,000 0/0
</TABLE>
EMPLOYMENT AGREEMENTS
Mr. Monter entered into an employment agreement with the Company on
October 1, 1996 pursuant to which he serves as President and Chief Executive
Officer. The employment agreement terminates on March 31, 1999 and provides for
an annual salary of not less than $350,000. Mr. Monter is also eligible for a
bonus of up to 100% of his base salary and an additional bonus of up to
$50,000. The Company undertakes to pay up to $1,500 of premiums annually under
Mr. Monter's life insurance policy. In the event the Company terminates Mr.
Monter's employment without cause or he becomes disabled, he is entitled to his
(i) base salary until the later to occur of the one year anniversary or March
31, 1999 (the "Severance Period"), (ii) continued coverage under the Company's
welfare benefits for up to the end of the Severance Period, and (iii) in the
case of termination without cause, a bonus equal to $12,500 multiplied by the
number of months remaining in the Severance Period. Any unvested stock options
held by Mr. Monter shall vest upon a change in control of the Company. As a
part of the employment agreement, Mr. Monter has entered into covenants
prohibiting him from competing with the Company, working for any of the
Company's competitors or using proprietary information for a twelve month
period following his departure from the Company.
Each of Messrs. McGee, Moore and Knoll is party to an employment agreement
with the Company. Each agreement terminates on 31, 1998. Each provides for (i)
a minimum annual salary and bonus, (ii) a completion bonus (equal to 35% of
bonuses earned in 1996 and 1997) if such individual remains employed by the
Company on July 31, 1998 and (iii) a change of control payment (equal to two
months salary) in the event of a sale of the Company to an unrelated entity. In
the event of termination of any such individual's employment without cause, he
is entitled to certain payments which may exceed the total payments otherwise
required under his applicable agreement. As a part of their respective
employment agreements, such individuals have entered into covenants generally
prohibiting each of them from competing with the Company, working for any of
the Company's competitors or using proprietary information.
47
<PAGE>
PRINCIPAL STOCKHOLDERS
All of the issued and outstanding common stock of the Company is held by
Holdings (and pledged to secure the Bank Facility). The following table sets
forth certain information with respect to the beneficial ownership of the
common stock of Holdings as of March 31, 1998 by (i) each person or group known
to the Company who beneficially owns more than five percent of the common stock
of Holdings and (ii) all directors and executive officers of the Company as a
group:
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE
SHARES OF OF
NAME AND ADDRESS OF BENEFICIAL OWNER COMMON STOCK CLASS
- ------------------------------------ ------------ -----
<S> <C> <C>
DLJ Merchant Banking Partners, L.P. and related investors (1) ......... 8,762,500 65.5%
Rust Industrial Services, Inc.(2)
3003 Butterfield Road
Oakbrook, IL 60521 ................................................... 2,487,500(4) 18.6%
Carlisle-Brand Investors, L.P.(3)
7777 Fay Avenue
La Jolla, California 92037 ........................................... 1,250,000 9.3%
David L. Jaffe(5)
DLJ Merchant Banking Partners, Inc.
277 Park Avenue
New York, New York 10172 ............................................. -- --
Karl R. Wyss(5)
DLJ Merchant Banking Partners, Inc.
277 Park Avenue
New York, New York 10172 ............................................. -- --
James S. Carlisle(6)
Carlisle Enterprises
7777 Fay Avenue
La Jolla, California 92037 ........................................... -- --
All directors and officers as a group(5)(6) ........................... 788,876(7) 5.9%
</TABLE>
- ----------
(1) Consists of shares held by DLJMB, DLJ Offshore Partners, C.V.
("Offshore"), DLJ Merchant Banking Funding, Inc. ("Funding") and DLJ
International Partners, C.V. ("International"), each of which is
affiliated with DLJSC. See "Certain Relationships and Related
Transactions" and "Plan of Distribution." The address of each of DLJMB
and Funding is 277 Park Avenue, New York, New York 10172. The address of
each of Offshore and International is John B. Gorsivaweg 6, Willemstad,
Curacao, Netherland Antilles. As a general partner of DLJMB, Offshore and
International, DLJMB, Inc. may be deemed to beneficially own indirectly
all of the shares held by DLJMB, Offshore and International, and as the
parent of each of DLJ Merchant Banking, Inc. and Funding, Donaldson,
Lufkin & Jenrette, Inc. may be deemed to beneficially own indirectly all
of the shares held by DLJMB, Offshore, International and Funding.
Donaldson, Lufkin & Jenrette, Inc. is a majority owned subsidiary of The
Equitable Companies Incorporated. The address of DLJ Merchant Banking,
Inc. and Donaldson, Lufkin & Jenrette, Inc. is 277 Park Avenue, New York,
New York 10172.
(2) Rust Industrial is a wholly owned subsidiary of Rust International, Inc.
("RII") which is majority owned by WMI. As a result, WMI and RII may be
deemed to beneficially own all of the shares held by Rust Industrial. The
address for each of WMI and RII is 3003 Butterfield Road, Oakbrook,
Illinois 60521.
48
<PAGE>
(3) As the general partner of Carlisle, Carlisle Group, L.P. ("Carlisle
Group") may be deemed to beneficially own indirectly all of the shares
held by Carlisle. As the general partner of Carlisle Group, Carlisle
Enterprises, LLC may be deemed to beneficially own indirectly all of the
shares held by Carlisle. The address of Carlisle Group and Carlisle
Enterprises, LLC is 7777 Fay Avenue, La Jolla, California 92037.
(4) Does not include (i) 47,500 shares issuable upon the exercise of
currently exercisable options held by Carlisle Group and (ii) up to
871,250 shares issuable upon exercise of options held by Carlisle Group,
which options are not currently exercisable and will not be exercisable
within 60 days of the date of this Prospectus.
(5) Messrs. Jaffe and Wyss are officers of DLJ Merchant Banking, Inc., an
affiliate of DLJMB and the Initial Purchaser. Share data shown for such
individuals excludes shares shown as held by DLJMB and related investors,
as to which such individuals disclaim beneficial ownership.
(6) Mr. Carlisle is a managing partner of Carlisle Enterprises, LLC, the sole
general partner of the sole general partner of Carlisle. Share data shown
for Mr. Carlisle excludes shares shown as held by Carlisle, as to which
Mr. Carlisle disclaims beneficial ownership.
(7) Does not include shares which may be purchased upon exercise of Director
Options or options awarded pursuant to the Company's employee benefit
plans, none of which are vested or will be exercisable within 60 days of
the date of the Prospectus.
49
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to the Shareholders Agreement, Holdings' board consists of seven
members: five nominated by DLJMB, one nominated by Carlisle and one nominated
by Rust Industrial. The Shareholders Agreement also provides for certain
restrictions on transfers of Holdings' common stock. In addition, the
Shareholders Agreement provides for certain rights of first refusal in favor of
DLJMB, certain rights and obligations on the part of shareholders to
participate in transfers of shares by DLJMB and preemptive rights for DLJMB,
Carlisle and Rust Industrial under certain circumstances. The Shareholders
Agreement further provides that DLJMB, Carlisle and Rust Industrial each have
the right, subject to certain conditions, to request that Holdings register
securities that they own under the Securities Act, and to participate in other
registrations of Holdings' and the Company's securities, in each case at
Holdings' expense.
The Shareholders Agreement provides for certain advisory relationships and
the payment of management advisory fees. For five years after the date of the
agreement, DLJSC is engaged as the exclusive financial and investment banking
advisor for Holdings, on customary terms. Pursuant to the Shareholders
Agreement, DLJMB, Inc., the sole general partner of DLJMB, and Carlisle Group,
the sole general partner of Carlisle, each receive an annual advisory fee of
$250,000 from Holdings. DLJSC received customary fees in connection with the
underwriting, purchase and placement of the Notes.
Holdings has entered into a Stock Option Agreement (the "Option") with
Carlisle Group. The Option gives Carlisle Group the right to acquire up to
918,750 shares of the common stock of Holdings for $1.00 per share. The exact
number of shares that may be acquired pursuant to the Option depends upon
Holdings' financial performance, equity financings by Holdings and other
factors. Carlisle Group's rights under the Option vest progressively throughout
the term of the Option. The Option will terminate on or, under certain
circumstances, before September 30, 2006.
DLJ Capital, the Syndication Agent and a lender under the Bank Facility,
is an affiliate of DLJMB and DLJSC. For a description of the Bank Facility, see
"Description of Bank Facility." The proceeds from the sale of the Notes were
used to repay indebtedness under the Bank Facility, $1.6 million of which was
owed to DLJ Capital. In connection with an amendment to the existing Bank
Facility, the Company paid customary fees to DLJ Capital, as the Syndication
Agent and as a Lender under the Bank Facility.
In connection with the Acquisition, WMI and the Company entered into a
transition services agreement. Pursuant to such agreement, WMI pays the Company
a fee for transition services of $725,000 quarterly. The first such payment was
made on December 31, 1996 and such payments will continue through September 30,
1999. In addition, the Company provides computer support to WMI Industrial
Cleaning Services, Inc., a subsidiary of WMI and receives a payment of $62,500
per month for such service.
In March 1997, certain officers and employees of the Company purchased a
total of 878,364 newly-issued shares of Holdings' common stock for $1 per share
and 42,832 shares of Old Preferred Stock for $25 per share. In connection with
such purchases, Holdings extended recourse loans to executive officers in the
aggregate amount of $341,000. Each of the loans matures in March 2002 (subject
to prepayment in the event any shares are disposed of prior to such time), with
interest payable at the rate of 7.03% per annum. The loans are secured by a
pledge of the shares purchased.
WMI provides trash hauling services to the Company for which the Company
paid WMI approximately $90,000 in 1997.
50
<PAGE>
DESCRIPTION OF BANK FACILITY
Although all of the material elements of the Credit Agreement are stated
herein, the following summary does not purport to be complete and is qualified
in its entirety by the Credit Agreement, copies of which may be obtained upon
request from the Company.
The Company entered into a credit agreement (the "Credit Agreement")
relating to the Bank Facility, with DLJ Capital, as Syndication Agent, and
BofA, as Administrative Agent, on September 30, 1996, which Credit Agreement
was amended on November 26, 1997 and February 20, 1998. As so amended, the Bank
Facility includes $60.0 million of senior secured credit facilities. A six-year
$30.0 million senior secured revolving loan facility (the "Revolving Facility")
is available to the Company for working capital and other general corporate
purposes. Borrowings under the Revolving Facility are governed by a borrowing
base equal to 85% of eligible accounts receivable. A $15.0 million sub-facility
of the Revolving Facility is available for the issuance of letters of credit.
The issuance of letters of credit constitutes usage under the Revolving
Facility and reduces availability of the Revolving Facility dollar for dollar.
Interest on loans under the Revolving Facility is determined by a
leverage-based pricing grid. A commitment fee is payable on the unused portion
of the Revolving Facility at a rate also determined by a leverage-based pricing
grid.
In addition, the Bank Facility, as amended, includes a term facility (the
"Term Facility"). The Term Facility was fully drawn at the closing of the bank
facility (the "Bank Closing") in the amount of $160.0 million to partially fund
the Acquisition. $130.0 million of such Term Facility was repaid with the
proceeds of the Old Note Offering, leaving $30.0 of loans outstanding under the
Term Facility. Interest on loans under the Term Facility is determined by a
leverage-based pricing grid. The portion of the Term Facility that remained
outstanding after such repayment had an average life of 3.05 years at the Bank
Closing Date. The Term Facility amortizes quarterly in amounts aggregating $1.5
million in 1998, $5.0 million in 1999, $6.0 million in 2000, $8.5 million in
2001 and $9.0 million in 2002, with a final maturity of September 30, 2002.
Loans outstanding under the Bank Facility are required to be prepaid from
100% of the net proceeds from debt issuances, 100% of the net proceeds from
certain asset sales that are not reinvested in the Company's business within a
specified period, 50% of the net proceeds from certain issuances of equity
securities and 75% of the Company's consolidated annual excess cash flow.
The Bank Facility is secured by (i) a first priority perfected lien on all
material tangible and intangible assets of the Company and its U.S.
subsidiaries, (ii) a first priority pledge of all notes evidencing intercompany
indebtedness owed to the Company or its U.S. subsidiaries and (iii) a first
priority pledge of 100% of the capital stock of the Company and all of its U.S.
subsidiaries and 65% of the capital stock of all of its non-U.S. subsidiaries.
The Bank Facility is also supported by guarantees from Holdings and all U.S.
subsidiaries of the Company.
The Credit Agreement contains the following financial covenants, which are
computed quarterly on a rolling four-quarter basis: (i) maximum leverage
(ranging from 6.10:1 as of September 30, 1998, decreasing thereafter to 4.50:1
on December 31, 2001 and thereafter); (ii) minimum interest coverage (ranging
from 1.70:1 as of September 30, 1998, increasing thereafter up to 2.10:1 at
December 31, 2001 and thereafter); (iii) minimum fixed charge coverage (ranging
from 0.90:1 as of September 30, 1998, increasing thereafter up to 1.10:1 at
December 31, 2001 and thereafter); (iv) minimum net worth (equal to $20 million
plus an amount equal to 50% of cumulative positive net income from January 1,
1998 to the end of the fiscal quarter most recently ended on or prior to such
date of determination); and (v) maximum capital expenditures (not in excess of
$10.0 million in any fiscal year, with the ability to carry forward up to $5.0
million to the next succeeding fiscal year to the extent the amount of capital
expenditures permitted to be made in any fiscal year exceeds the amount
actually made in such fiscal year, in addition to an aggregate amount not in
excess of $5.0 million in any fiscal year used to acquire industrial
scaffolding, with the ability to carry forward up to $2.5 million to the next
succeeding fiscal year to the extent the amount of capital expenditures
permitted to be made in any fiscal year to acquire industrial scaffolding
exceeds the amount actually made in such fiscal year). In addition, the Credit
Agreement restricts the Company's ability, among other things, to (i) incur
debt, sale-leasebacks and contingent
51
<PAGE>
liabilities; (ii) pay dividends, make distributions or repurchase stock; (iii)
incur liens; (iv) sell assets other than in the ordinary course of business;
(v) make investments or acquisitions; (vi) consummate mergers, consolidations
or combinations; or (vii) engage in transactions with affiliates. As of
December 31, 1997 the Company was not in compliance with certain covenants
under the Credit Agreement. The Company sought and obtained waivers of such
non-compliance from the lenders under the Bank Facility.
The Company obtained an amendment to the Bank Facility which became
effective upon the closing of the Old Note Offering, substantially all of the
net proceeds of which Old Note Offering were used to repay loans outstanding
under the Bank Facility. Under such amendment, the terms and required levels
under the financial covenants were reset at levels that are more consistent
with the Company's capital structure following the Old Note Offering and its
current and expected financial performance and certain other amendments to the
Bank Facility were effected.
52
<PAGE>
DESCRIPTION OF PREFERRED STOCK
The Company is authorized to issue 1,250,000 shares of the 14.5% Senior
Exchangeable Preferred Stock due 2008, par value $0.01, of which 1,042,460 are
issued and outstanding. The following is a summary of the principal terms of
the Preferred Stock, which is governed by the Certificate of Designations,
Preferences and Rights relating thereto (the "Certificate of Designations").
Each share of Preferred Stock had an initial liquidation preference of
$25.00 per share, plus accrued and unpaid dividends. The Preferred Stock ranks
senior to all classes or series of equity securities of the Company. The
holders of the Preferred Stock are entitled to receive dividends, when, as and
if declared by the Board at the rate of 14.5% per annum on the liquidation
value. Dividends on the Preferred Stock accrete to the liquidation value of the
Preferred Stock until the later of (i) September 30, 2001 (the "Fifth
Anniversary") and (ii) the first date on which dividends on the Preferred Stock
would be permitted to be paid in cash pursuant to the terms of the Company's
then outstanding indebtedness (such later date, the "Cash Pay Date"). The
Company is restricted from declaring dividends on other securities and from
redeeming or repurchasing certain junior securities unless full cumulative
dividends have been paid on the Preferred Stock.
In the event of an Equity Offering prior to September 30, 1999, the
Company may, at its option, redeem not less than all of the outstanding
Preferred Stock at a price of 114.5% of the liquidation value; provided that
the aggregate redemption price of all the outstanding shares of Preferred Stock
do not exceed the net proceeds received by the Company from such Equity
Offering. After September 30, 2001, the Company may, at its option, redeem any
or all outstanding shares of Preferred Stock at a price of 107.25% of the
liquidation value in 2001 declining annually ratably to 100% in 2004 and
thereafter. In the event of a Change of Control (as defined in the Certificate
of Designations), the Company is required to make an offer to redeem all shares
of Preferred Stock at a redemption price equal to 101% of the liquidation
value. In addition, the Company is required to redeem all shares of Preferred
Stock on March 31, 2008 at a price equal to the liquidation value at such date.
There is no restriction on the repurchase or redemption of shares of Preferred
Stock by the Company while there is an arrearage in the payment of dividends.
The holders of Preferred Stock voting as a class are entitled to elect two
directors if and whenever (i) six consecutive quarterly dividends after the
Fifth Anniversary have not been paid in full, (ii) the Company has not redeemed
the Preferred Stock on March 31, 2008, (iii) the Company has not offered to
redeem the Preferred Stock in a timely manner following a change of control
event, (iv) dividends have been paid on other securities or junior securities
have been redeemed or repurchased while full cumulative dividends have not been
paid on the Preferred Stock or (v) the Company's Certificate of Incorporation
has been amended in a manner adverse to the holders of Preferred Stock without
such holder's consent.
EXCHANGE DEBENTURES
Subject to certain conditions, the Company may, at its option, issue 14.5%
Junior Subordinated Exchange Debentures due 2008 in exchange for any or all
outstanding shares of Preferred Stock, at an exchange ratio of $1.00 of
liquidation value of Preferred Stock for $1.00 principal amount of Exchange
Debentures. On and after the date of any exchange, dividends will cease to
accrue on the Preferred Stock and all rights of holders of the Preferred Stock
shall cease.
The Exchange Debentures, if issued, will be issued pursuant to an
indenture (the "Exchange Indenture") and will be limited in amount to the
aggregate liquidation value of the Preferred Stock outstanding at the time of
the exchange. The Exchange Debentures will mature on March 31, 2008. The
Exchange Debentures will pay interest at an effective annual rate of 14.5%,
payable quarterly. Prior to the Cash Pay Date, interest will be payable in
additional Exchange Debentures.
The Exchange Debentures will be general unsecured obligations of the
Company and will be subordinated in right of payment to the prior payment of
all indebtedness of the Company that is not expressly made pari passu with or
junior to the Exchange Debentures.
53
<PAGE>
In the event of an Equity Offering prior to September 30, 1999, the
Company would be allowed, at its option, to redeem any or all outstanding
Exchange Debentures, at a purchase price equal to 114.5% of the principal
amount thereof, plus accrued and unpaid interest thereon. After September 30,
2001, the Company would be allowed, at its option, to redeem any or all
outstanding Exchange Debentures at a price of 107.25%, in 2001, of the
principal amount thereof, plus accrued and unpaid interest, declining annually
ratably to 100% in 2004 and thereafter. In the event of a Change of Control,
the Company would be required to make an offer to redeem all of the Exchange
Debentures at a redemption price equal to 101% of the principal amount thereof,
plus accrued and unpaid interest thereon.
The Exchange Indenture would contain covenants that, among other things,
would limit the ability of the Company to make certain payments and to merge,
consolidate or sell substantially all of its assets.
54
<PAGE>
DESCRIPTION OF NOTES
The Company issued $130.0 million aggregate principal amount of 10 1/4%
Senior Notes due 2008 (the "Notes") under an indenture, dated as of February
25, 1998 (the "Indenture") by and between the Company and U.S. Trust Company of
Texas, N.A., as trustee under the Indenture (the "Trustee"). The offering of
the Notes (the "Old Note Offering") generated net proceeds of approximately
$125.6 million.
The Notes represent general senior unsecured obligations of the Company
and rank pari passu with all existing and future senior unsecured indebtedness
and other obligations of the Company. The Notes are effectively subordinated to
all existing and future liabilities of the Company's subsidiaries, including
trade payables. In addition, the Notes are effectively subordinated to existing
and future senior secured indebtedness, including the Bank Facility, which is
secured by a pledge of substantially all of the assets of the Company and its
subsidiaries and is also guaranteed by the Company's U.S. subsidiaries.
The Notes mature on February 15, 2008, and bear interest at 10 1/4% per
annum from February 25, 1998 (the "Note Issue Date") or from the most recent
interest payment date to which interest has been paid or provided for. Interest
on the Notes is payable semi-annually in arrears on February 15 and August 15
of each year, commencing August 15, 1998.
Except as provided in the next paragraph, the Notes are not redeemable at
the option of the Company prior to February 15, 2003. On or after such date,
the Notes will be redeemable at the option of the Company, in whole at any time
or in part from time to time, at the following prices (expressed in percentages
of the principal amount), if redeemed during the 12 months beginning February
15 of the years indicated below, in each case together with interest accrued 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) plus
Liquidated Damages (as defined), if any:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---- ----------
<S> <C>
2003 ......................... 105.125%
2004 ......................... 103.417%
2005 ......................... 101.708%
2006 and thereafter .......... 100.000%
</TABLE>
Notwithstanding the foregoing, at any time during the first 36 months
after the Note Issue Date, the Company may, at its option, redeem up to a
maximum of 35% of the aggregate principal amount of the Notes with the net cash
proceeds of one or more offerings of capital stock of the Company at a
redemption price equal to 110 1/4% of the principal amount thereof, plus
accrued and unpaid interest thereon to the redemption date plus Liquidated
Damages, if any; provided, that each such redemption shall occur within 90 days
of the closing of the such offering.
Upon the occurrence of a Change of Control (as defined in the Indenture),
each holder will have the right to require the Company to repurchase all of
such holder's Notes in whole or in part at a purchase price in cash equal to
101% of the aggregate principal amount thereof, plus accrued and unpaid
interest thereon and Liquidated Damages, if any, to the repurchase date.
The Indenture contains covenants limiting the ability of the Company and
its Subsidiaries to, among other things, pay dividends or make certain other
payments, make certain investments, incur additional indebtedness, permit
liens, incur dividend and other payment restrictions affecting its
subsidiaries, enter into consolidation, merger, conveyance, lease or transfer
transactions, make asset sales, enter into transactions with its affiliates and
engage in unrelated lines of business. In addition, the Indenture imposes
restrictions on the ability of the Company's subsidiaries to issue guarantees.
In connection with the Old Note Offering, the Company entered into a
Registration Rights Agreement (the "Notes Registration Rights Agreement"). Upon
the failure to comply with certain provisions of the Notes Registration Rights
Agreement, the Company is obligated to pay holders of the Notes liquidated
damages ("Liquidated Damages").
PLAN OF DISTRIBUTION
Each broker-dealer that receives New 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 New Preferred Stock. This
Prospectus, as it may be amended or supplemented from time to time, may be used
55
<PAGE>
by a Participating Broker-Dealer in connection with resales of New Preferred
Stock received in exchange for Old Preferred Stock where such Old Preferred
Stock was acquired as a result of market-making activities or other trading
activities. The Company has agreed that, for a period of 180 days after the
Expiration Date, it will make this Prospectus, as amended or supplemented,
available to any Participating Broker-Dealer for use in connection with any
such resale. In addition, until , 1998 (90 days after the date of this
Prospectus), all dealers effecting transactions in the New Preferred Stock may
be required to deliver a prospectus.
The Company will not receive any proceeds from any sale of New Preferred
Stock by Participating Broker-Dealers. New Preferred Stock received by
Participating Broker-Dealers for their own account pursuant to the Exchange
Offer may be sold from time to time in one or more transactions in the
over-the-counter market, in negotiated transactions, through the writing of
options on the New 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
Participating Broker-Dealer or the purchasers of any such New Preferred Stock.
Any Participating Broker-Dealer that resells New 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 New Preferred
Stock may be deemed to be an "underwriter" within the meaning of the Securities
Act and any profit on any such resale of New Preferred Stock and any commission
or concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The Letter of Transmittal states that,
by acknowledging that it will deliver and by delivering a prospectus, a
Participating 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 after the Expiration Date the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any Participating Broker-Dealer that requests
such documents in the Letter of Transmittal. The Company has agreed to pay all
expenses incident to the Exchange Offer (including the reasonable expenses of
one counsel for the holders of the Preferred Stock) other than commissions or
concessions of any brokers or dealers and will indemnify the holders of the
Preferred Stock (including any broker-dealers) against certain liabilities,
including liabilities under the Securities Act.
LEGAL MATTERS
The validity of the New Preferred Stock offered hereby will be passed upon
for the Company by Davis Polk & Wardwell.
INDEPENDENT PUBLIC ACCOUNTANTS
The consolidated financial statements of Brand as of December 31, 1996 and
1997 and for the three months ended December 31, 1996 and the year ended
December 31, 1997 and the consolidated statements of operations, stockholder's
equity and cash flows of Rust for the year ended December 31, 1995 and the nine
months ended September 30, 1996 included in this Prospectus, have been audited
by Arthur Andersen LLP, independent public accountants, as stated in their
reports appearing herein.
AVAILABLE INFORMATION
The Company has filed the Registration Statement on Form S-1 (of which
this Prospectus is a part) with the Commission under the Securities Act with
respect to the New Preferred Stock. This Prospectus does not contain all the
information set forth in the Registration Statement, certain portions of which
have been omitted as permitted by the rules and regulations of the Commission.
The Registration Statement and the exhibits and schedules forming a part
thereof can be inspected and copies obtained at the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Commission maintains a web site (http://www.sec.gov) that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission.
56
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS FOR RUST SCAFFOLD SERVICES INC. AND SUBSIDIARIES:
Report of Independent Public Accountants ............................................ F-2
Consolidated Statements of Operations for the Year Ended December 31, 1995 and
the Nine Months Ended September 30, 1996 ........................................... F-3
Consolidated Statements of Cash Flows for the Year Ended December 31, 1995 and
the Nine Months Ended September 30, 1996 ........................................... F-4
Consolidated Statements of Stockholder's Equity for the Year Ended December 31,
1995 and the Nine Months Ended September 30, 1996 .................................. F-5
Notes to Consolidated Financial Statements .......................................... F-6
CONSOLIDATED FINANCIAL STATEMENTS FOR BRAND SCAFFOLD SERVICES, INC. AND SUBSIDIARIES:
Report of Independent Public Accountants ............................................ F-10
Consolidated Statements of Operations for the Three Months Ended December 31,
1996, the Year Ended December 31, 1997 and the Three Months Ended March 31,
1997 (unaudited) and 1998 (unaudited) .............................................. F-11
Consolidated Balance Sheets as of December 31, 1996, 1997 and March 31, 1998
(unaudited) ........................................................................ F-12
Consolidated Statements of Cash Flows for the Three Months Ended December 31,
1996, the Year Ended December 31, 1997 and the Three Months Ended March 31,
1997 (unaudited) and 1998 (unaudited) .............................................. F-14
Consolidated Statements of Stockholder's Equity (Deficit) for the Three Months
Ended December 31, 1996, the Year Ended December 31, 1997 and the Three
Months Ended March 31, 1998 (unaudited) ............................................ F-15
Notes to Consolidated Financial Statements .......................................... F-16
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Rust Scaffold Services Inc.:
We have audited the accompanying consolidated statements of operations,
stockholder's equity and cash flows of Rust Scaffold Services Inc. and
Subsidiaries (a Delaware corporation) for the year ended December 31, 1995 and
the nine months ended September 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Rust
Scaffold Services, Inc. and subsidiaries for the year ended December 31, 1995,
and the nine months ended September 30, 1996, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
March 19, 1997
F-2
<PAGE>
RUST SCAFFOLD SERVICES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(000'S OMITTED)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1995 SEPTEMBER 30, 1996
------------------- -------------------
<S> <C> <C>
Revenue ..................................... $193,829 $124,769
Operating expenses .......................... 138,968 89,073
-------- --------
Gross profit ................................ 54,861 35,696
Selling and administrative expenses ......... 25,807 15,825
-------- --------
Operating income ......................... 29,054 19,871
Interest expense ............................ 9,444 7,872
Interest income ............................. (1,012) (482)
Other expense, net .......................... 853 708
-------- --------
Pretax income ............................ 19,769 11,773
Provision for income taxes .................. 8,300 4,813
-------- --------
Net income .................................. $ 11,469 $ 6,960
======== ========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-3
<PAGE>
RUST SCAFFOLD SERVICES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000'S OMITTED)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1995 SEPTEMBER 30, 1996
----------------- ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................ $ 11,469 $ 6,960
Adjustments to reconcile net income to net cash provided by
operating activities --
Deferred tax provision .................................. 4,348 2,427
Depreciation and amortization ........................... 8,602 6,669
Changes in operating assets and liabilities --
Trade accounts receivable, net ......................... 3,979 4,416
Costs and estimated earnings in excess of billings on
uncompleted contracts ................................ (1,398) 1,701
Notes receivable ....................................... 2,306 4,797
Scaffolding ............................................ 4,484 2,846
Accounts payable ....................................... 660 (727)
Accrued expenses ....................................... 1,795 2,173
Billings in excess of costs and estimated earnings on
uncompleted contracts ................................ 261 (504)
Other .................................................. (919) (2,280)
--------- ---------
Net cash provided by operating activities ............ 35,587 28,478
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ....................... (13,550) (5,770)
Proceeds from sales of property and equipment other than
scaffolding ............................................. 101 64
--------- ---------
Net cash used for investing activities ............... (13,449) (5,706)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments to Rust Industrial Services Inc., net ........... (20,440) (26,962)
--------- ---------
Net cash used for financing activities ............... (20,440) (26,962)
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ............................................... 1,698 (4,190)
CASH AND CASH EQUIVALENTS, beginning of year ............... 2,618 4,316
--------- ---------
CASH AND CASH EQUIVALENTS, end of year ..................... $ 4,316 $ 126
========= =========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-4
<PAGE>
RUST SCAFFOLD SERVICES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(000'S OMITTED)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1995 SEPTEMBER 30, 1996
----------------- ------------------
<S> <C> <C>
STOCKHOLDER'S EQUITY -- NET INVESTMENT BY RUST
INDUSTRIAL SERVICES INC., beginning balance ............ $ 150,005 $ 141,374
Comprehensive Income:
Net income ........................................... 11,469 6,960
Translation adjustment ............................... 340 26
--------- ---------
Comprehensive income ................................ 11,809 6,986
Payments to Rust Industrial Services Inc., net ......... (20,440) (26,962)
--------- ---------
STOCKHOLDER'S EQUITY -- NET INVESTMENT
BY RUST INDUSTRIAL SERVICES INC.,
ending balance ......................................... $ 141,374 $ 121,398
========= =========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-5
<PAGE>
RUST SCAFFOLD SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000'S OMITTED)
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization
Rust Scaffold Services Inc. and its Subsidiaries ("RSS" or the "Company")
was a Delaware Corporation and was 100% owned by Rust Industrial Services, Inc.
("RIS") which is 100% owned by Rust International Inc. ("RII"). RII is a 60%
owned subsidiary of Waste Management Inc. ("WMI") and a 40% owned subsidiary of
Wheelabrator Technologies Inc. ("WTI"). On September 30, 1996, a company (the
"Newco") formed by DLJ Merchant Banking Partners, L.P. ("DLJMB") and on behalf
of DLJMB one or more of its affiliates or other related entities and Carlisle
Brand Investors, L.P. (the "Investors") acquired the outstanding securities of
the Company. The purchase price of the business was approximately $190 million,
which RIS was paid through a combination of cash, notes payable, preferred
stock and a 19.9% interest in Newco. Newco operates under the name DLJ Brand
Holdings, Inc. ("Holdings").
The Company provided scaffolding services primarily to refining, chemical,
petrochemical and utility industries, and to a lesser extent, pulp and paper
plants, nuclear facilities and general commercial clients. In most cases, the
Company's scaffolding services were provided in connection with periodic,
routine cleaning and maintenance of refineries, chemical plants and utilities,
and such services were also performed in connection with new construction
projects, plants, nuclear facilities and general commercial clients. The
Company provided personnel to erect, modify, move and dismantle scaffolding
structures, transport scaffolding to project sites and supervised and managed
such activities. In addition, the Company rents, and in some cases, sold
scaffolding. The Company maintained a substantial inventory of scaffolding at
several locations in various cities in the United States and Canada.
The Company's services were not rendered to or dependent on any single
customer within the industrial or commercial markets and therefore the Company
did not believe that a material concentration of credit risk existed, except
that one customer accounted for 14% and 21% of revenue for the year ended
December 31, 1995 and nine months ended September 30, 1996, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
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.
As a result of the Company's relationship with WMI and RII, the financial
position and results of operations are not necessarily indicative of what they
would have been had these relationships not existed. Additionally, these
financial statements are not necessarily indicative of the future operations or
future financial position of the Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements are prepared on a consolidated basis
and include those assets, liabilities, revenues and expenses directly
attributable to the operations of the Company. All significant intercompany
balances and transactions have been eliminated. The consolidated statements of
income reflect substantially all of the Company's costs associated with the
normal cost of business. These costs include direct expenses and certain
overhead and other expenses incurred by WMI and RII on the Company's behalf.
The expenses allocated to the Company and the method of allocation are further
discussed in Note 3, "Transactions with Affiliates."
F-6
<PAGE>
RUST SCAFFOLD SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Revenue Recognition
The Company recognizes contract revenue on the percentage-of-completion
basis with losses recognized in full when identified. Changes in project
performance and conditions, estimated profitability and final contract
settlements may result in future revisions to costs and income. Substantially
all of the Company's contracts are completed in less than six months. Other
revenues are recognized when the services are performed.
Foreign Currency
The assets and liabilities of the Company's foreign subsidiaries, Rust
Scaffold Services of Canada, LTD. and JLG Scaffolding, Inc., are translated at
the rates of exchange in effect on the balance sheet date while income
statement accounts are translated at the average exchange rate in effect during
the period. The resulting translation adjustments are charged or credited
directly to the Net Investment by Rust Industrial Services Inc. account, as
settlement of such intercompany balance is not planned or anticipated in the
foreseeable future.
Cash and Cash Equivalents
The Company considers all short-term deposits purchased with original
maturities of three months or less to be cash equivalents.
Property and Equipment
Property and equipment (including major repairs and improvements) are
capitalized and stated at cost. Items of an ordinary maintenance or repair
nature are charged directly to operations. The cost of property and equipment
is depreciated over the estimated useful lives on the straight-line method as
follows:
<TABLE>
<S> <C>
Buildings ............................ 10 to 40 years
Scaffolding equipment ................ 7 to 25 years
Vehicles and other equipment ......... 3 to 20 years
Leasehold improvements ............... Life of the applicable lease or life of the
improvement, whichever is shorter
</TABLE>
Depreciation expense for the year ended December 31, 1995 and nine months
ended September 30, 1996 is $7,759 and $5,958, respectively.
Intangible Assets
Intangible assets relating to acquired businesses consist primarily of the
cost of purchased businesses in excess of the market value of net assets
acquired ("goodwill") and other covenants. Goodwill is amortized on a
straight-line basis over a period not exceeding 40 years. Amortization expense
related to intangibles in 1995 and the nine months ended September 30, 1996
amounted to approximately $843 and $711, respectively.
Impairment of Long-Lived Assets
During 1995, the Financial Accounting Standards Board (FASB) issued
Financial Accounting Standard No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of ("FAS 121"). When
such events or circumstances indicate the carrying value of an asset may be
impaired, the Company recognizes an impairment loss.
Additionally, the Company measures the realizability of goodwill by the
ability of the acquired business to generate current and expected future
operating income in excess of annual amortization. If such realizability is in
doubt, an adjustment is made to reduce the carrying value of the goodwill.
F-7
<PAGE>
RUST SCAFFOLD SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Management has not recognized and does not believe any material impairment
losses exist for the year ended December 31, 1995 or the nine months ended
September 30, 1996.
Income Taxes
The Company is included in the federal income tax return of RII. The
deferred tax liabilities in the accompanying balance sheets are calculated as
if the Company filed a separate tax return. Income taxes are paid by RII on
behalf of the Company, and charges for taxes currently payable are allocated to
the Company.
Operating Leases
The Company leases various operating and office facilities for various
terms. Rents charged to costs and expenses in the statements of income amount
to approximately $1,435 for 1995 and $927 for the nine months ended September
30, 1996.
3. TRANSACTIONS WITH AFFILIATES
WMI, RII and RIS have furnished the services of financial, administrative,
legal and certain other corporate staff personnel to the Company. Additionally,
RII provides certain retirement and post-retirement benefits to eligible
employees of the Company. The costs of such services and benefits are allocated
to the Company ratably on the basis of its revenues. The Company believes that
the charges for such services and benefits have been calculated on a reasonable
basis and that the total amount of costs recognized in the statements of income
approximate what its actual costs would have been as a stand alone entity. In
1995 and during the nine months ended September 30, 1996, certain RSS employees
participated in a 401(k) Plan and a stock option plan administered by WMI. Such
charges for these services and benefits were $1,633 and $1,057 in 1995 and the
nine months ended September 30, 1996, respectively, and are included in selling
and administrative expenses in the statements of income.
RIS allocates a portion of its interest expense to the Company based on
the ratio which cumulative net cash advances to the Company bears to RIS's
cumulative net cash advances to all of its subsidiaries and the value of net
tangible assets. Management believes that the allocation of interest expense is
representative of financing costs attributable to the Company and that the
methodology used to allocate interest expense is reasonable. Intercompany
interest expense of $9,444 and $7,872 was allocated to RSS in 1995 and the nine
months ended September 30, 1996, respectively.
RIS also provides worker's compensation and medical insurance coverage to
the Company. The Company is allocated charges, which management deems
reasonable, for such coverage and at any point in time is fully insured by RIS.
The Company paid and provided expense in the amounts of $10,064 and $5,897 for
such coverage in the year ended December 31, 1995 and the nine months ended
September 30, 1996, respectively.
4. INCOME TAXES
The domestic operations of the Company were included in the consolidated
federal income tax return of RII. The Canadian operations of the Company are
included in the tax returns of Rust Scaffold Services of Canada, LTD. and JLG
Scaffolding, Inc. Income taxes relating to the Company were paid by RII. No tax
sharing agreement existed between the Company and RII. Income taxes have been
provided in accordance with Statement of Financial Accounting Standard No. 109,
"Accounting for Income Taxes" ("FAS 109"). In accordance with FAS 109, deferred
income taxes are provided when tax laws and financial accounting standards
differ with respect to the amount of income calculated in a given year and the
bases of assets and liabilities. Deferred income taxes are not provided on
undistributed earnings of foreign affiliates because those earnings are
considered to be permanently invested. If the reinvested earnings were to be
remitted, the U.S. income taxes under current law would be immaterial.
F-8
<PAGE>
RUST SCAFFOLD SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Following is a summary of the Company's income tax provision:
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
1995 SEPTEMBER 30, 1996
---- ------------------
<S> <C> <C>
Currently payable:
Federal ................ $3,422 $1,615
State .................. 530 243
------ ------
3,952 1,858
Deferred:
Federal ................ 3,131 2,110
State .................. 467 317
------ ------
3,598 2,427
Foreign ................. 750 528
------ ------
Total provision ......... $8,300 $4,813
====== ======
</TABLE>
The reconciliation of the statutory federal income tax rate to the
effective income tax rate for the year ended December 31, 1995 and the nine
months ended September 30, 1996 is as follows:
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
1995 SEPTEMBER 30, 1996
---- ------------------
<S> <C> <C>
Statutory federal income tax
rate ........................ 35.00% 35.00%
State and local taxes, net of
federal benefit ............. 3.25 3.09
Amortization of intangible
assets relating to acquired
businesses .................. 0.80 1.05
Other ....................... 2.93 1.74
----- -----
Effective tax rate .......... 41.98% 40.88%
===== =====
</TABLE>
5. STOCKHOLDER'S EQUITY -- NET INVESTMENT BY RIS
The Company participates in a centralized cash management program
administered by RIS. Cash collected from U.S. operations is remitted to RIS and
advances are made by RIS, as needed, to cover the Company's operating expenses
and capital requirements. Cash remittances and advances have been recorded to
the "Stockholder's Equity -- Net Investment by Rust Industrial Services Inc."
account in the accompanying Consolidated Statements of Stockholder's Equity.
6. COMMITMENTS AND CONTINGENCIES
In the ordinary course of conducting its business, the Company becomes
involved in various pending claims and lawsuits. These primarily relate to
employee matters. The outcome of these matters is not presently determinable,
but in the opinion of management, based on the advice of legal counsel, the
resolution of these matters is not anticipated to have a material adverse
effect on the financial position or results of operations of the Company.
F-9
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Brand Scaffold Services, Inc.:
We have audited the accompanying consolidated balance sheets of Brand
Scaffold Services, Inc. and Subsidiaries (a Delaware corporation) as of
December 31, 1996 and 1997 and the related statements of operations,
stockholder's equity (deficit) and cash flows for the three months ended
December 31, 1996 and the year ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Brand Scaffold Services,
Inc. and Subsidiaries as of December 31, 1996 and 1997, and the results of
their operations and their cash flows for the three months ended December 31,
1996 and the year ended December 31, 1997 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
St. Louis, Missouri
March 17, 1998
F-10
<PAGE>
BRAND SCAFFOLD SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(000'S OMITTED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS THREE MONTHS
ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1996 1997 1997 1998
-------------- -------------- -------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenue ............................................. $44,412 $160,660 $ 43,203 $ 50,690
Operating expenses .................................. 34,170 122,638 31,751 38,814
------- -------- -------- --------
Gross profit ....................................... 10,242 38,022 11,452 11,876
Selling and administrative expenses ................. 4,743 25,840 5,927 5,986
Nonrecurring start-up expenses ...................... -- 2,498 -- --
------- -------- -------- --------
Operating income ................................... 5,499 9,684 5,525 5,890
Interest expense .................................... 4,504 15,422 3,763 4,057
Interest income ..................................... (195) (397) (120) (125)
------- -------- -------- --------
Pretax income (loss) ............................... 1,190 (5,341) 1,882 1,958
Provision for income tax ............................ 525 -- -- --
------- -------- -------- --------
Income (loss) before extraordinary loss ............ 665 (5,341) 1,882 1,958
Extraordinary loss on debt extinguishment, net of
tax of $0 .......................................... -- -- -- 4,329
------- -------- -------- --------
Net income (loss) .................................. 665 (5,341) 1,882 (2,371)
Less accretion of preferred stock dividends ......... (906) (4,172) (1,017) (1,128)
------- -------- -------- --------
Net income (loss) applicable to common stock ....... $ (241) $ (9,513) $ 865 $ (3,499)
======= ======== ======== ========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-11
<PAGE>
BRAND SCAFFOLD SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(000'S OMITTED EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1997 MARCH 31, 1998
----------------- ----------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................. $ 4,881 $ 2,217 $ 1,317
Trade accounts receivable, net of allowance for doubtful
accounts of $925 in 1996, $1,000 in 1997 and $1,175 in
1998. ................................................... 22,581 23,672 31,568
Costs and estimated earnings in excess of billings on
uncompleted contracts ................................... 2,254 2,145 1,531
Notes receivable, current portion ......................... 837 388 425
Note receivable from WMI, current portion ................. 2,200 2,700 2,750
Other current assets ...................................... 1,949 2,374 3,044
-------- -------- --------
Total current assets .................................... 34,702 33,496 40,635
PROPERTY AND EQUIPMENT:
Land ...................................................... 1,633 1,633 1,633
Buildings ................................................. 1,890 2,097 2,101
Vehicles and other equipment .............................. 3,576 5,383 6,167
Scaffolding equipment ..................................... 151,289 160,576 163,136
Leasehold improvements .................................... 497 790 796
-------- -------- --------
Total property and equipment, at cost ...................... 158,885 170,479 173,833
Less -- Accumulated depreciation and amortization ......... 2,684 14,938 17,886
-------- -------- --------
Total property and equipment, net ....................... 156,201 155,541 155,947
-------- -------- --------
OTHER ASSETS:
Deferred financing costs, net ............................. 6,544 5,575 5,440
Note receivable from WMI, net of current portion .......... 4,875 2,175 1,450
Notes receivable, net of current portion .................. 1,944 756 676
-------- -------- --------
Total other assets ...................................... 13,363 8,506 7,566
-------- -------- --------
TOTAL ASSETS ............................................... $204,266 $197,543 $204,148
======== ======== ========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-12
<PAGE>
BRAND SCAFFOLD SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(000'S OMITTED EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1997 MARCH 31, 1998
----------------- ----------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDER'S
EQUITY (DEFICIT)
CURRENT LIABILITIES:
Revolving loan .................................................. $ -- $ 4,500 $ 1,000
Current maturities of long term debt ............................ 8,250 9,500 2,750
Accounts payable ................................................ 2,562 4,186 3,603
Accrued expenses --
Payroll and related accruals .................................. 5,291 3,945 4,379
Workers compensation and health benefit liabilities ........... 795 3,717 4,531
Other ......................................................... 4,512 2,696 4,140
Billings in excess of costs and estimated earnings on
uncompleted contracts ......................................... 636 745 691
--------- --------- ---------
Total current liabilities .................................... 22,046 29,289 21,094
--------- --------- ---------
LONG-TERM DEBT ................................................... 149,750 140,250 157,250
--------- --------- ---------
DEFERRED INCOME TAXES ............................................ 2,317 2,040 2,078
--------- --------- ---------
COMMITMENTS AND CONTINGENCIES ....................................
14.5% SENIOR EXCHANGEABLE PREFERRED STOCK,
$0.01 par value, 1,250,000 shares authorized, 1,042,460
issued and outstanding .......................................... 25,906 31,140 32,268
--------- --------- ---------
STOCKHOLDER'S EQUITY (DEFICIT):
Common Stock, $0.01 par value, 100 shares authorized,
issued and outstanding ........................................ -- -- --
Paid-in capital ................................................. 17,604 18,477 18,477
Receivable from sale of Holdings' Common Stock .................. -- (336) (336)
Predecessor basis adjustment .................................... (13,038) (13,038) (13,038)
Cumulative translation adjustment ............................... (78) (525) (392)
Accumulated deficit ............................................. (241) (9,754) (13,253)
--------- --------- ---------
Total stockholder's equity (deficit) ............................ 4,247 (5,176) (8,542)
--------- --------- ---------
Total liabilities and stockholder's equity (deficit) ......... $ 204,266 $ 197,543 $ 204,148
========= ========= =========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-13
<PAGE>
BRAND SCAFFOLD SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000'S OMITTED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS THREE MONTHS
ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1996 1997 1997 1998
-------------- -------------- -------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) ........................................... $ 665 $ (5,341) $ 1,882 $ (2,371)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities --
Deferred tax provision .................................... 420 (167) -- --
Depreciation and amortization ............................. 3,567 13,294 3,137 3,334
Extraordinary loss ........................................ -- -- -- 4,329
Changes in operating assets and liabilities --
Trade accounts receivable, net ............................ 1,960 (1,513) (3,281) (7,895)
Costs and estimated earnings in excess of billings on
uncompleted contracts .................................... (1,643) 109 (47) 614
Notes receivable .......................................... 176 1,973 125 38
Scaffolding ............................................... 868 4,540 1,009 938
Accounts payable .......................................... 737 1,624 1,033 (583)
Accrued expenses .......................................... (1,182) (1,609) (3,163) 3,278
Billings in excess of costs and estimated earnings on
uncompleted contracts .................................... (562) 109 208 (54)
Other ..................................................... (40) (1,036) (343) (1,799)
-------- --------- -------- ----------
Net cash provided by (used for) operating
activities ............................................ 4,966 11,983 560 (171)
-------- --------- -------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment .......................... (1,642) (14,733) (3,149) (3,747)
Receipts on note receivable from WMI ........................ 363 2,200 550 675
Proceeds from sales of property and equipment other
than scaffolding .......................................... (17) 37 5 1
-------- --------- -------- ----------
Net cash used for investing activities .................. (1,296) (12,496) (2,594) (3,071)
-------- --------- -------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt ................................ -- -- -- 130,000
Payments of long-term debt .................................. (2,000) (8,250) (2,000) (119,750)
Borrowings/(Payments) of revolving loans .................... -- 4,500 2,500 (3,500)
Debt issuance financing costs ............................... -- -- -- (4,408)
Issuance of preferred stock ................................. -- 1,062 -- --
Capital contribution from Holdings .......................... -- 873 -- --
Receivable from sale of Holdings' common stock .............. -- (336) -- --
-------- --------- -------- ----------
Net cash (used for) provided by financing activities (2,000) (2,151) 500 2,342
-------- --------- -------- ----------
INCREASE/(DECREASE) IN CASH AND CASH
EQUIVALENTS ................................................. 1,670 (2,664) (1,534) (900)
CASH AND CASH EQUIVALENTS, beginning of period 3,212 4,881 4,881 2,217
-------- --------- -------- ----------
CASH AND CASH EQUIVALENTS, end of period ..................... $ 4,881 $ 2,217 $ 3,347 $ 1,317
======== ========= ======== ==========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid ............................................... $ 3,016 $ 14,138 $ 3,478 $ 3,113
Income taxes paid ........................................... -- 113 -- --
======== ========= ======== ==========
NONCASH TRANSACTIONS:
Paid in-kind accretion of preferred stock dividends ......... $ 906 $ 4,172 $ 1,017 $ 1,128
Receipt of scaffolding as payment in lieu of cash on
accounts receivable ....................................... -- 422 -- --
======== ========= ======== ==========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-14
<PAGE>
BRAND SCAFFOLD SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(000'S OMITTED EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK RECEIVABLES
------------------ ADDITIONAL FROM SALE
PAID- OF HOLDING'S
SHARES DOLLARS IN CAPITAL COMMON STOCK
-------- --------- ------------ --------------
<S> <C> <C> <C> <C>
Balance, October 1, 1996 ...... 100 $ -- $17,604 $ --
Comprehensive Income:
Net income ...................
Translation Adjustment .......
Comprehensive income .........
Paid-in-kind accretion of
preferred dividends .......... ------ ------ ------- ------
Balance, December 31, 1996..... 100 -- 17,604 --
Comprehensive Income:
Net income (loss) ............
Translation Adjustment .......
Comprehensive income .........
Paid-in-kind accretion of
preferred dividends ..........
Capital contribution from
DLJ Brand Holdings, Inc. ..... 873
Issuance of prommissory
notes from officers and
employees .................... (336)
------ ------ ------- ------
Balance, December 31, 1997..... 100 -- 18,477 (336)
Comprehensive Income/Loss:
Net income (loss) ............
Translation Adjustment .......
Comprehensive income .........
Paid-in-kind accretion of
preferred dividends ..........
Balance, March 31, 1998
(unaudited) .................. 100 $ -- $18,477 $ (336)
=== ==== ======= ======
<CAPTION>
PREDECESSOR COMPRE- CUMULATIVE
BASIS HENSIVE ACCUMULATED TRANSLATION
ADJUSTMENT INCOME/LOSS DEFICIT ADJUSTMENT TOTAL
------------- ------------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Balance, October 1, 1996 ...... $ (13,038) $ -- $ -- $ 4,566
Comprehensive Income:
Net income ................... $ 665 665 665
Translation Adjustment ....... (78) (78) (78)
--------
Comprehensive income ......... $ 587
========
Paid-in-kind accretion of
preferred dividends .......... (906) (906)
-------- --------
Balance, December 31, 1996..... (13,038) (241) (78) 4,247
Comprehensive Income:
Net income (loss) ............ $ (5,341) (5,341) (5,341)
Translation Adjustment ....... (447) (447) (447)
--------
Comprehensive income ......... $ (5,788)
========
Paid-in-kind accretion of
preferred dividends .......... (4,172) (4,172)
Capital contribution from
DLJ Brand Holdings, Inc. ..... 873
Issuance of prommissory
notes from officers and
employees .................... (336)
--------- --------- --------- ------ --------
Balance, December 31, 1997..... (13,038) (9,754) (525) (5,176)
Comprehensive Income/Loss:
Net income (loss) ............ $ (2,371) (2,371) (2,371)
Translation Adjustment ....... 133 133 133
--------
Comprehensive income ......... $ (2,238)
========
Paid-in-kind accretion of
preferred dividends .......... (1,128) (1,128)
--------- --------- --------- ------ --------
Balance, March 31, 1998
(unaudited) .................. $ (13,038) $ (13,253) $ (392) $ (8,542)
========= ========= ========= ====== ========
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
F-15
<PAGE>
BRAND SCAFFOLD SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The financial statements included herein for the periods ended March 31,
1997 and 1998 have been prepared by the Company without audit. In the opinion
of management, all adjustments have been made which are of a normal recurring
nature necessary to present fairly the Company's financial position as of March
31, 1997 and March 31, 1998 and the results of operations, changes in
stockholder's equity and cash flows for the three months then ended. Certain
information and footnote disclosures have been condensed or omitted for these
periods. The results for interim periods are not necessarily indicative of
results for the entire year.
1. ORGANIZATION AND BUSINESS
Brand Scaffold Services, Inc. (a Delaware corporation) and its
subsidiaries (the "Company") are 100% owned by DLJ Brand Holdings, Inc.
("Holdings"). Holdings is owned 65.5% by Donaldson, Lufkin & Jenrette, Inc.
("DLJ"), 9.3% by Carlisle Enterprises, L.P. ("Carlisle"), 18.6% by Rust
International Inc. ("Rust") through its wholly owned subsidiary Rust Industrial
Services Inc. ("RIS") and 6.5% by the directors, officers and employees of the
Company. Rust is a subsidiary of Waste Management, Inc. ("WMI").
The Company believes it operates in one segment. The Company provides
scaffolding services primarily to refining, chemical, petrochemical and utility
industries, and to a lesser extent, pulp and paper plants, nuclear facilities
and general commercial clients. Scaffolding services are typically provided in
connection with periodic, routine cleaning and maintenance of refineries,
chemical plants and utilities, as well as for new construction projects. The
Company provides personnel to erect and dismantle scaffolding structures,
transport scaffolding to project sites and supervise and manage such
activities. In addition, the Company rents and occasionally sells scaffolding
that is classified as property and equipment on the consolidated balance sheet.
The Company maintains a substantial inventory of scaffolding in the United
States and Canada.
The Company's services are not rendered to or dependent on any single
customer within the industrial or commercial markets and therefore the Company
does not believe that a material concentration of credit risk exists, except
that one customer accounted for 18.0% and 16.9% of revenues for the three
months ended December 31, 1996, and for the year ended December 31, 1997,
respectively.
2. PURCHASE TRANSACTION
On September 30, 1996, the Company, a newly formed entity created by the
merchant banking group of DLJ, purchased the net assets of Rust Scaffold
Services, Inc. and its subsidiaries, which were direct and indirect
subsidiaries of Rust (the "Acquisition"). The purchase price approximated the
fair values of the net tangible assets acquired. The Company paid Rust the
following, at fair values (in thousands):
<TABLE>
<S> <C>
Cash ................................................................ $178,038
199,000 shares of senior exchangeable preferred stock (see Note 9) .. 4,975
2,487,500 shares of common stock of Holdings (see Note 11) .......... 2,487
Subordinated note (see Note 6) ...................................... 4,800
--------
$190,300
========
</TABLE>
To fund the Acquisition, on September 30, 1996, the Company entered into a
$190 million credit agreement (the "Credit Agreement") with Bank of America
Illinois and DLJ Capital Funding pursuant to which the Company borrowed $160
million. On November 21, 1996, in accordance with the Credit Agreement, such
borrowings were placed with various financial institutions. The Acquisition was
F-16
<PAGE>
BRAND SCAFFOLD SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
accounted for using the purchase method. As a result, the assets and
liabilities of the Company were recorded at their approximate fair values as of
October 1, 1996. As part of the Acquisition, Rust retained liability for
certain tax, legal, environmental and other contingencies related to periods
prior to October 1, 1996.
The Company recorded a liability of approximately $1,200,000 on October 1,
1996, as part of the acquisition cost in connection with management's decision
to exit and relocate certain offices and to involuntarily terminate or relocate
certain employees. The Company substantially completed its restructuring
activities in 1997. Charges to the liability were $900,000 for the year ended
December 31, 1997. As of December 31, 1997, the balance of the liability was
$100,000.
As indicated above, on the date of the purchase, Rust retained a 19.9%
interest in the Company. Accordingly, a "Predecessor Basis Adjustment" of
$13,038,000 was recorded to the acquired assets and stockholder's equity
reflecting Rust's historical carrying value of its retained ownership interest
in the sold assets.
The following table presents pro forma information for the Company for the
year ended December 31, 1996 assuming the acquisition had taken place on
January 1, 1996 (in thousands).
<TABLE>
<CAPTION>
UNAUDITED
<S> <C>
Revenue ............. $169,181
Net Income .......... 3,352
</TABLE>
The pro forma amounts have been derived from the results for Rust Scaffold
Services, Inc. for the nine months ended September 30, 1996 and for the Company
for the three months ended December 31, 1996 plus certain adjustments: an
increase of interest expense of $3,470,000 and an increase in depreciation and
amortization of $4,218,000, as well as the related tax impact. These amounts
are not necessarily indicative of the results the Company would have achieved
for the full year had the Acquisition occurred on January 1, 1996.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements are prepared on a consolidated basis
and include those assets, liabilities, revenues and expenses directly
attributable to the operations of the Company. All significant intercompany
balances and transactions have been eliminated.
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, the
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.
REVENUE RECOGNITION
The Company recognizes contract revenue on the percentage-of-completion
basis with losses recognized in full when identified. Changes in project
performance and conditions, estimated profitability and final contract
settlements may result in future revisions to costs and income. Substantially
all of the Company's contracts are completed in less than six months. Other
revenues are recognized when the services are performed.
F-17
<PAGE>
BRAND SCAFFOLD SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
RENTAL AND SALES OF SCAFFOLDING
For the three months ended December 31, 1996 and the year ended December
31, 1997, revenues from the rental of scaffolding were $11,230,000 and
$40,847,000, respectively. For the three months ended March 31, 1997 and March
31, 1998, such revenues were $10,152,000 (unaudited) and $12,089,000
(unaudited), respectively.
The Company periodically sells scaffolding to third parties, primarily to
its rental customers. The Company recognizes revenue for the proceeds of such
sales and records as operating expense the net book value of the scaffolding.
Net book value is determined, assuming the oldest scaffolding is sold first, as
the Company maintains inventory records on a group basis. Revenues and gross
profit from sales of scaffolding were $1,395,000 and $567,000, respectively,
for the three months ended December 31, 1996; $7,714,000 and $3,174,000,
respectively for the year ended December 31, 1997; $1,576,000 (unaudited) and
$566,000 (unaudited) for the three months ended March 31, 1997 and $1,513,000
(unaudited) and $576,000 (unaudited), respectively, for the three months ended
March 31, 1998.
CASH AND CASH EQUIVALENTS
The Company considers all short-term deposits purchased with original
maturities of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment (including major repairs and improvements that
extend the useful life of the asset) are capitalized and stated at cost.
Ordinary maintenance and repairs of equipment are charged to expense. The cost
of property and equipment is depreciated over the estimated useful lives on the
straight-line method as follows:
<TABLE>
<S> <C>
Buildings ............................ 10 to 40 years
Vehicles and other equipment ......... 3 to 20 years
Scaffolding equipment ................ 3 to 25 years
Leasehold improvements ............... Life of the applicable lease or life of the
improvement, whichever is shorter
</TABLE>
For the three months ended December 31, 1996 and the year ended December
31, 1997, depreciation expense was $2,899,000 and $12,325,000, respectively.
For the three months ended March 31, 1997 and March 31, 1998, such expense was
$2,896,000 (unaudited) and $3,119,000 (unaudited), respectively.
DEFERRED FINANCING COSTS
In connection with the Acquisition, the Company deferred financing costs
totaling $7,212,000. Of this amount, $588,000 was allocated to borrowings for
the period October 1, 1996, to November 21, 1996, and was charged to expense
during that period. The remaining $6,624,000 was allocated to the borrowings
described in Note 6 and are being amortized over the life of the Credit
Agreement. In 1998, the Company recorded an extraordinary loss of $4.3 million
to write off deferred financing costs related to the early extinguishment of
debt (see Note 6). For the three months ended December 31, 1996 and the year
ended December 31, 1997, amortization of deferred financing costs, included in
interest expense, was $668,000 and $969,000, respectively. For the three months
ended March 31, 1997 and March 31, 1998, such amortization expense was $242,000
(unaudited) and $214,000 (unaudited), respectively. Accumulated amortization
was $969,000 and $1,637,000 as of December 31, 1996 and December 31, 1997,
respectively. In connection with the February 1998 issuance of senior notes,
the Company paid financing fees and expenses of $4.4 million, which were
deferred and are being amortized over 10 years. Of these fees, $3.9 million
related to commissions.
F-18
<PAGE>
BRAND SCAFFOLD SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DERIVATIVE FINANCIAL INSTRUMENTS
Through February 1998, the Company used an interest rate collar to hedge
its exposure to interest rate fluctuations. The collar has the effect of
establishing a maximum and a minimum interest rate on a portion of the
Company's underlying variable rate debt obligations. The maximum and minimum
interest rates associated with the interest rate collar are 8.50% and 5.69%,
respectively, and the notional amount at December 31, 1997 was $75 million. In
1997, the existence of this hedge had no impact on the financial position,
results of operations or cash flows of the Company.
ASSET IMPAIRMENT
If facts and circumstances suggest that a long-lived asset may be
impaired, the carrying value is reviewed. If this review indicates that the
value of the asset will not be recoverable, as determined based on projected
undiscounted cash flows related to the asset over its remaining life, the
carrying value of the asset is reduced to its estimated fair value.
FOREIGN OPERATIONS
The assets and liabilities of the Company's wholly owned foreign
subsidiary, Brand Scaffold Services of Canada, Inc. are translated at the rates
of exchange in effect on the balance sheet date while income statement accounts
are translated at the average exchange rate in effect during the period. The
resulting translation adjustments are charged or credited to the cumulative
translation adjustment account. Revenues from the Canadian operation and
scaffolding equipment in Canada are less than 10% of the consolidated totals
for the Company.
RECLASSIFICATIONS
Certain reclassifications have been made to the December 31, 1996
financial statements to conform with the December 31, 1997 presentation.
4. NOTES RECEIVABLE
Notes receivable result from scaffolding sales. As of December 31, 1996
and December 31, 1997, approximately $2,781,000 and $991,000 of such notes
maturing in 3-5 years were outstanding with interest rates ranging from 9.75%
to 11.00% and 8% to 10.25%, respectively.
5. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Deferred income taxes
are not provided on undistributed earnings of the Company's foreign subsidiary
because those earnings are considered to be permanently invested. If the
reinvested earnings were to be remitted, the U. S. income taxes under current
law would be immaterial.
For the three months ended December 31, 1996, the Company's income tax
provision consisted of deferred domestic taxes of $420,000 and current foreign
taxes of $105,000. For the year ended December 31, 1997, such provision
consisted of a deferred domestic tax benefit of $287,000, current foreign tax
expense of $167,000 and deferred foreign tax expense of $120,000.
F-19
<PAGE>
BRAND SCAFFOLD SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The reconciliation of the statutory federal income tax (benefit) expense
on the Company's pretax income (loss) to the actual provision for income taxes
for the three months ended December 31, 1996 and the year ended December 31,
1997, are as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
Statutory federal income taxes ................ $417 $ (1,869)
State and local taxes, net of federal ......... 45 (174)
Foreign taxes ................................. 35 287
Valuation allowance ........................... -- 1,918
Other ......................................... 28 (162)
---- --------
Provision for income taxes ................... $525 $ --
==== ========
</TABLE>
The components of the net deferred tax liability as of December 31, 1996
and 1997, are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997
----------- -------------
<S> <C> <C>
DEFERRED TAX ASSETS--
Accrued liabilities ..................... $ 2,061 $ 3,152
Property and equipment .................. 1,641 --
Net operating loss carryforward ......... 1,989 26,371
Valuation allowance ..................... (5,178) (7,096)
-------- ---------
Deferred tax assets .................... $ 513 $ 22,427
======== =========
DEFERRED TAX LIABILITIES--
Note receivable from WMI ................ $ (2,830) $ (1,950)
Property and equipment .................. -- (22,517)
-------- ---------
Deferred tax liabilities ............... $ (2,830) $ (24,467)
======== =========
</TABLE>
The Company is required to record a valuation allowance when it is more likely
than not that some portion or all of the deferred tax assets will not be
realized. As of December 31, 1997, a valuation allowance of $7,096,000 was
recorded, which increased $1,918,000 for the year ended December 31, 1997.
At December 31, 1996 and December 31, 1997, the Company had net operating
loss carryforwards for federal income tax purposes of $4,972,000 and
$65,928,000 which expire in 2012 and 2013, respectively.
6. DEBT AND BORROWING ARRANGEMENTS
At December 31, 1996, December 31, 1997 and March 31, 1998, long term debt
consisted of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
DECEMBER 31, DECEMBER 31, 1998
1996 1997 (UNAUDITED)
-------------- -------------- ------------
<S> <C> <C> <C>
Term Loans ..................... $158,000 $149,750 $ 30,000
10 1/4% Senior Notes ........... -- -- 130,000
Less Current Portion ......... 8,250 9,500 2,750
-------- -------- --------
Long-Term Debt ................. $149,750 $140,250 $157,250
======== ======== ========
</TABLE>
In 1996, in connection with the Acquisition, the Company entered into a
Credit Agreement which provides for Term Loan Commitments under Senior Secured
Credit facilities totaling $160 million, and a Revolving Loan Commitment
totaling $30 million. In February 1998, the Company issued $130 million of 10
1/4% Senior Notes due February 2008. The offering was underwritten by DLJ. The
proceeds of this offering were used to repay $120 million of the Term Loans
outstanding under the Credit Agreement. In
F-20
<PAGE>
BRAND SCAFFOLD SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
addition, in February 1998, the Company amended the Credit Agreement to reduce
the total facility to $60 million. This amendment included revisions to certain
covenant requirements. In connection with the Credit Agreement, the Company
incurred administrative and commitment fees for the three months ended December
31, 1996 and for the year ended December 31, 1997, such costs, included in
interest expense, were $60,000 and $216,000, respectively. Long-term debt
outstanding as Term Loans as of March 31, 1998 (unaudited) are due in quarterly
installments which total in each year as follows (in thousands):
<TABLE>
<CAPTION>
1998
------------
(UNAUDITED)
<S> <C>
1998 (Nine Months) ......... $ 1,500
1999 ....................... 5,000
2000 ....................... 6,000
2001 ....................... 8,500
2002 ....................... 9,000
-------
$30,000
=======
</TABLE>
Interest rates are determinable under the Credit Agreement based upon
certain market "Base Rates" or LIBOR, plus an "Applicable Margin" of between
1.75% to 3.5%. The Applicable Margins for Tranche B and Tranche C loans are
fixed while those for Tranche A loans ($58,250,000 and $51,000,000 as of
December 31, 1996 and December 31, 1997, respectively) vary based, generally,
on earnings performance. The average interest rate under Term Loans in effect
during the three months ended December 31, 1996 and the year ended December 31,
1997 was 9.59% and 8.90%, respectively. Such rates at March 31, 1997 and March
31, 1998 were 8.7% (unaudited) and 9.02% (unaudited), respectively. Interest
expense on the Term Loans for the three months ended December 31, 1996 and for
the year ended December 31, 1997 was $3,836,000 and $13,984,000, respectively.
Revolving loan commitents equal an amount based upon an eligible borrowing
base, as defined, with a maximum available limit of $30 million. The loan
expires September 30, 2002, and interest rates are based on certain market
"Base Rate" or LIBOR plus a margin of between 1.75% and 3.5% (generally based
on earnings performance). At December 31, 1996 and December 31, 1997, the
available borrowing base (which is net of outstanding borrowings) was
$6,842,000 and $13,136,000, respectively. At March 31, 1997 and March 31, 1998,
such base was $16,487,000 (unaudited) and $16,206,000 (unaudited),
respectively. As of December 31, 1996 and December 31, 1997, amounts borrowed
under the revolving loan commitments were $0 and $4,500,000, respectively. As
of March 31, 1997 and March 31, 1998, such amounts were $2,500,000 (unaudited)
and $1,000,000 (unaudited), respectively. Any borrowings under the revolving
loan commitment in excess of $10 million must be repaid once per year, in
accordance with the Credit Agreement. Interest expense on the revolving loan
for the three months ended December 31, 1996 and the year ended December 31,
1997, was $0 and $119,000, respectively. For the three months ended March 31,
1997 and March 31, 1998, such interest expense was $0 (unaudited) and $128,000
(unaudited), respectively.
Substantially all assets of the Company are pledged as collateral for the
facilities described above. In addition, the Company is required to comply with
various affirmative and negative covenants, including financial covenants
requiring certain levels of net worth to be maintained and the achievement of
certain financial ratios. The Company was not in compliance with certain
covenants under the Credit Agreement for the quarter ended December 31, 1997.
Waivers have been obtained from the lenders for such violations. The waivers
related to financial covenants contained in the Credit Agreement which, as of
December 31, 1997, required the Company to maintain (i) a Leverage Ratio (as
defined in the Credit Agreement) no greater than 4.60:1, (ii) an Interest
Coverage Ratio (as defined in the Credit Agreement) of at least 2.25:1 and
(iii) a Fixed Charge Coverage Ratio (as defined in the Credit Agreement) of at
least
F-21
<PAGE>
BRAND SCAFFOLD SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1.15:1. The waivers became effective upon the execution by the Company and the
Required Lenders. In order to induce the Lenders to grant the waivers, (a) the
Company certified that the representations and warranties set forth in Article
VI of the Credit Agreement and in the Loan Documents were true and correct as
of the date of the waivers and (b) the Company represented and warranted that,
after giving effect to the waivers, no default or event of default had occurred
or was continuing as of the date of the waivers.
As part of the Acquisition, the Company issued a Subordinated Note (the
Subordinated Note) to Rust totaling $14.5 million due 2008. The Subordinated
Note was recorded at its fair value of $4.8 million, assuming an effective
interest rate of 18% per annum. On September 30, 1996, Holdings assumed all
obligations under the Subordinated Note by making a capital contribution to the
Company of $4.8 million, which is included in paid-in capital of the Company.
Because Holdings has no revenue generating activities, other than its ownership
of the Company, it is likely that the Company's cash flows will service all or
part of Holding's obligation under the Subordinated Note. Subject to certain
conditions, Holdings has the option of paying interest, calculated annually,
through the issuance of additional Subordinated Notes in lieu of cash.
Additionally, based on Holdings' financial performance, the Subordinated Note's
interest and principal payments may be delayed or accelerated. As a result of
interest accretion, Holding's carrying amount of the Subordinated Note is
approximately $5,965,000 and $5,055,000 as of December 31, 1997 and 1996,
respectively. No principal or interest cash payments have been made during
1997.
7. LEASE OBLIGATIONS
The Company leases a portion of its operating and office facilities under
operating leases. For the three months ended December 31, 1996 and the year
ended December 31, 1997, rent expense was approximately $271,000 and
$1,334,000, respectively. The non-cancelable rental obligations as of December
31, 1997, are as follows:
<TABLE>
<CAPTION>
1997
<S> <C>
1998 ................ $1,529
1999 ................ 1,166
2000 ................ 831
2001 ................ 703
2002 ................ 508
Thereafter .......... 692
------
Total ............. $5,429
======
</TABLE>
8. COMMITMENTS AND CONTINGENCIES
In the ordinary course of conducting its business, the Company becomes
involved in various pending claims and lawsuits. These primarily relate to
employee matters. The outcome of these matters is not presently determinable,
however, in the opinion of management, based on the advice of legal counsel,
the resolution of these matters is not anticipated to have a material adverse
effect on the financial position or results of operations of the Company.
The Company has available Letter of Credit Commitments in an amount not to
exceed $15 million, of which $3,651,000 and $6,751,000 was outstanding with
Bank of America at December 31, 1996 and December 31, 1997, respectively. At
March 31, 1997 and March 31, 1998, such amounts were $3,651,000 (unaudited) and
$7,101,000 (unaudited), respectively. For the three months ended December 31,
1996 and the year ended December 31, 1997, the Company paid fees related to
such commitments (included in interest expense) of $20,000 and $134,000,
respectively. For the three months ended March 31, 1997 and March 31, 1998,
such fees were $27,000 (unaudited) and $51,000 (unaudited), respectively.
F-22
<PAGE>
BRAND SCAFFOLD SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SENIOR EXCHANGEABLE PREFERRED STOCK
The Company has authorized 1,250,000 shares and has issued and outstanding
1,042,460 of Senior Exchangeable Preferred Stock (the "Senior Preferred
Stock"). The Senior Preferred Stock is mandatorily redeemable on September 30,
2007, at a redemption price equal to aggregate liquidation value plus unpaid
dividends. The liquidation value of each share of Senior Preferred Stock is $25
at issuance. Dividends are calculated quarterly on the liquidation value of
such shares at 14.5% annually. For the five-year period ended September 30,
2001, such dividends accrete on a compounded basis and increase the liquidation
value. Dividends are payable in cash subsequent to this date. For the three
months ended December 31, 1996 and the year ended December 31, 1997, dividends
of $906,250 and $4,172,000 were accreted. For the three months ended March 31,
1997 and March 31, 1998, such accreted amounts were $1,017,000 (unaudited) and
$1,142,000 (unaudited), respectively. As a result, the loss attributable to
common stockholders for the three months ended December 31, 1996 and the year
ended December 31, 1997 was $241,000 and $9,513,000, respectively. For the
three months ended March 31, 1997 and March 31, 1998, such income (loss) was
$865,000 (unaudited) and $(3,499,000) (unaudited), respectively.
The Senior Preferred Stock carries no voting rights, but its holders have
certain defined rights upon certain events occurring. In the event of a change
in control of the Company, each holder of Senior Preferred Stock will have the
right to require the Company to repurchase its shares at 101% of the
liquidation value. The Company may redeem the Senior Preferred Stock at certain
premiums to the liquidation value at any time after September 30, 2001 or upon
the occurrence of an initial public offering of the Company's common stock
prior to September 30, 1999. Additionally, at the option of the Company, the
Senior Preferred Stock is exchangeable into 14.5% Subordinated Exchange
Debentures due 2007, under certain conditions.
10. STOCKHOLDER'S EQUITY
The Company has authorized, issued and outstanding 100 shares of $.01 par
common stock. All of the common stock of the Company is owned by Holdings.
11. PARENT COMPANY TRANSACTIONS
Holdings has authorized 15,000,000 shares and issued and outstanding
13,373,356 shares of $.01 par common stock.
As part of the Acquisition, on September 30, 1996, Holdings and Carlisle
agreed upon a grant of options to Carlisle (the "Carlisle Options") to acquire
918,750 shares of Holdings' common stock. The Carlisle Options fall into three
categories, each with different vesting terms: time based, performance based,
and path dependent (for which vesting is contingent upon certain measurements
of the value of the Company). Substantially all of the value of the Carlisle
Options was considered a cost of the Acquisition and pushed down to the
Company's financial statements.
In 1997, Holdings made a capital contribution to the Company of $873,356,
representing cash and notes received by the Company from the sale of Holdings'
common stock to certain directors, officers and employees of the Company. At
December 31, 1997, certain officers and employees of the Company have
outstanding promissory notes in the aggregate amount of $336,000, which were
issued to the Company as consideration for a portion of the above Holdings'
common stock. Such outstanding amounts were $336,000 (unaudited) at March 31,
1997 and March 31, 1998, respectively. The notes earn interest at 7.03% and
mature on 2002. These notes are secured by shares owned by such officers and
employees.
In 1997, the Board of Directors of Holdings approved a stock option plan
for key employees of the Company. During 1997, Holdings granted certain
employees options to acquire 957,000 shares of Holding's common stock. The
options were granted with an exercise price of $1.00 per share which
F-23
<PAGE>
BRAND SCAFFOLD SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
management believes approximated the fair value of Holdings' common stock at
the date of grant. The options vest over a maximum of ten years or a minimum of
five years provided certain performance criteria are met. Unvested options are
subject to forfeiture, upon employee termination, as defined. Additionally, any
shares acquired upon exercise are subject to repurchase rights of the Company
upon termination of employment, as defined. Upon a change of control, as
defined, all unvested options will vest. In 1997, no options were canceled or
exercised. The Company adopted the disclosure-only option under SFAS 123
"Accounting for Stock Based Compensation" ("SFAS 123"). The Company accounts
for employee stock options under APB Opinion 25, as permitted under generally
accepted accounting principles. Accordingly, no compensation cost has been
recognized in the accompanying financial statements related to these options.
Had compensation cost for these options been determined consistent with SFAS
123, the Company's net loss would reflect the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
-----------------
<S> <C>
Net loss
As reported ......... $ (5,341)
Pro forma ........... (5,384)
</TABLE>
The fair value of each option is estimated on the date of grant based
using the Black-Scholes option pricing model with the following
weighted-average assumptions: a risk-free interest rate of 6.5%; a 0% dividend
yield; an average expected life of seven years. The fair value of options
granted during 1997 was calculated to be $0.45 per option.
In accordance with the Shareholder's Agreement of Holdings, in the event
any shareholder desires to transfer any shares of Holdings to a third party
prior to September 30, 2001, such shareholders must first offer such shares to
the other shareholders. Also, certain shareholders engaged in a transfer of
shares to a third party have the right to compel the other shareholders to sell
a proportionate share of their holdings to the third party, as defined.
12. RELATED PARTY TRANSACTIONS
Certain shareholders of Holdings receive a quarterly Management Advisory
Fee in return for management, advisory and other services rendered. Such fees
totaled $125,000 and $500,000 for the three months ended December 31, 1996 and
the year ended December 31, 1997, respectively.
In connection with the Acquisition, the Company entered into a
Transitional Services Agreement with WMI and Rust. In consideration of certain
services to be rendered by the Company and the licenses and preferred customer
status granted by the Company, WMI shall pay to the Company $725,000 per
quarter through September 30, 1999 ($8.7 million in total). The Company
recorded $7,437,500 as a note receivable from WMI in purchase accounting. The
balance of $1,262,500 is being accounted for as a reduction to the Company's
operating expenses in the period the aforementioned services are provided. For
the three months ended December 31, 1996 and the year ended December 31, 1997,
the Company received $725,000 and $2,900,000 respectively in cash and reduced
its note receivable by $362,000 and $2,200,000 respectively. For the three
months ended December 31, 1996 and the year ended December 31, 1997, operating
expenses were reduced by $362,000 and $700,000, respectively. For the three
months ended March 31, 1997 and March 31, 1998, such reductions were $175,000
(unaudited) and $50,000 (unaudited), respectively.
13. EMPLOYEE BENEFIT PLAN
In 1997, the Company established the Brandshare 401(k) Savings Plan and
Profit Sharing Plan. Substantially all employees are eligible to participate in
the Plan. Participants may elect to defer 2% to
F-24
<PAGE>
BRAND SCAFFOLD SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10% of their salary. The Company, at its sole discretion, may make matching
contributions to the Plan. For the year ended December 31, 1997 and the three
months ended March 31, 1998, the Company contributed $318,000 and $94,000
(unaudited) to the Plan.
14. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS--The carrying amounts approximate fair value.
NOTES RECEIVABLE--The fair value of notes receivable are based on
discounted future cash flows at current interest rates.
REVOLVING LOAN AND LONG-TERM DEBT--The carrying amounts of the Company's
borrowings under the Credit Agreement approximate their fair value because
such borrowings carry variable interest rates.
INTEREST RATE HEDGE--The fair values of interest rate collars are the
amounts at which they could be settled, based on estimates obtained from
dealers.
14.5% SENIOR EXCHANGEABLE PREFERRED STOCK--The liquidation amounts plus
accreted dividends approximate fair value.
The carrying amounts and fair values of the Company's financial
instruments at December 31, 1996 and 1997, are as follows:
<TABLE>
<CAPTION>
1996 1997
---------------------------- ----------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Cash and cash equivalents ......... $ 4,881 $ 4,881 $ 2,217 $ 2,217
Notes receivable .................. 2,781 3,021 1,144 1,192
Revolving loan .................... -- -- (4,500) (4,500)
Long-term debt .................... (158,000) (158,000) (149,750) (149,750)
Interest rate hedge ............... -- -- -- (298)
14.5% Senior Exchangeable Preferred
Stock ........................... 25,906 25,906 31,140 31,140
</TABLE>
F-25
<PAGE>
===============================================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS OR THE
ACCOMPANYING LETTER OF TRANSMITTAL, IN CONNECTION WITH THE OFFERING MADE
HEREBY, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OTHER PERSON.
NEITHER THE DELIVERY OF THIS PROSPECTUS OR THE ACCOMPANYING LETTER OF
TRANSMITTAL NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE
ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN OR THEREIN IS CORRECT AS
OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN
THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF. NEITHER THIS PROSPECTUS NOR THE ACCOMPANYING LETTER OF
TRANSMITTAL CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY
ANY SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER
OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH AN OFFER OR SOLICITATION.
-------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary ............................ 3
Risk Factors .................................. 13
Use of Proceeds ............................... 19
The Exchange Offer ............................ 19
Capitalization ................................ 28
Selected Consolidated Financial Data .......... 29
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ................................. 31
Business ...................................... 37
Management .................................... 43
Principal Stockholders ........................ 48
Certain Relationships and Related
Transactions ............................... 50
Description of Bank Facility .................. 51
Description of Preferred Stock ................ 53
Description of Notes .......................... 55
Plan of Distribution .......................... 55
Legal Matters ................................. 56
Independent Public Accountants ................ 56
Available Information ......................... 56
Index to Consolidated Financial
Statements ................................. F-1
</TABLE>
===============================================================================
===============================================================================
[BRAND SCAFFOLD SERVICES, INC. LOGO]
BRAND SCAFFOLD
SERVICES, INC.
OFFER TO EXCHANGE 14.5% SENIOR EXCHANGEABLE
PREFERRED STOCK DUE 2008, $0.01 PAR VALUE
PER SHARE WHICH HAS BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED,
FOR ANY AND ALL OF ITS OUTSTANDING
14.5% SENIOR EXCHANGEABLE PREFERRED STOCK
DUE 2008, $0.01 PAR VALUE PER SHARE
------------------
PROSPECTUS
------------------
, 1998
===============================================================================
<PAGE>
[Alternate Front Cover]
PROSPECTUS
[BRAND SCAFFOLD SERVICES, INC. LOGO]
BRAND SCAFFOLD SERVICES, INC.
14.5% SENIOR EXCHANGEABLE PREFERRED STOCK DUE 2008, $0.01 PAR VALUE PER SHARE
The 14.5% Senior Exchangeable Preferred Stock due 2008, $0.01 par value
per share (the "New Preferred Stock"), which has been registered under the
Securities Act of 1933, as amended (the "Securities Act"), was issued in
exchange for the 14.5% Senior Exchangeable Preferred Stock due 2008, $0.01 par
value per share (the "Old Preferred Stock," and together with the New Preferred
Stock, the "Preferred Stock") by Brand Scaffold Services, Inc., a Delaware
corporation (the "Company").
Holders of the Preferred Stock are entitled to receive dividends, when, as
and if, declared by the Board (as defined) at a rate of 14.5% per annum on the
liquidation value (initially $25.00 per share). Dividends on the Preferred
Stock accrete to the liquidation value of the Preferred Stock. At March 31,
1998, the liquidation value was $30.95 per share. Subject to certain
conditions, the Company may issue 14.5% Junior Subordinated Exchange Debentures
due 2008 (the "Exchange Debentures") in exchange for any or all outstanding
Preferred Stock, at an exchange ratio of $1.00 of liquidation value of
Preferred Stock for $1.00 principal amount of Exchange Debentures. The Exchange
Debentures, if issued, will be subordinated in right of payment to the prior
payment of all indebtedness of the Company that is not expressly made pari
passu with or junior to the Exchange Debentures. After September 30, 2001, the
Company may redeem any or all outstanding shares of the Preferred Stock at the
redemption prices set forth herein. Subject to certain conditions, in the event
of an Equity Offering (as defined) prior to September 30, 1999, the Company may
redeem not less than all of the outstanding Preferred Stock at a price of
114.5% of liquidation value. In the event of a Change of Control (as defined in
the Certificate of Designations), the Company is required to make an offer to
redeem all shares of the Preferred Stock at a redemption price equal to 101% of
the liquidation value. The Company is required to redeem all shares of the
Preferred Stock on March 31, 2008 at a price equal to the liquidation value at
such date. See "Description of Preferred Stock."
This Prospectus is to be used by Donaldson, Lufkin & Jenrette Securities
Corporation ("DLJSC") in connection with offers and sales in market-making
transactions at negotiated prices related to prevailing market prices at the
time of sale. DLJSC may act as principal or agent in such transactions and has
no obligation to make a market in the New Preferred Stock, and may discontinue
its market-making activities any time without notice, at its sole discretion.
If DLJSC conducts any market-making activities, it may be required to deliver a
"market-making prospectus" when effecting offers and sales in the Notes because
of the equity ownership of affiliates of DLJSC. Certain affiliates of DLJSC
hold in the aggregate a 65.5% equity interest in the Company. The Company will
receive no portion of the proceeds of the sale of such New Preferred Stock and
will bear expenses incident to the registration thereof.
No person has been authorized to give any information or to make any
representations not contained in this Prospectus in connection with the offer
of securities made by this Prospectus and, if given or made, such information
or representations must not be relied upon as having been authorized by the
Company or by any underwriter, dealer or agent. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any of the
securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such offer or solicitation in such jurisdiction. This
Prospectus does not constitute an offer to sell or a solicitation of an offer
to buy any securities other than those to which it relates. Neither the
delivery of this Prospectus nor any sale of, or offer to sell, the securities
offered hereby shall, under any circumstances, create an implication that there
has been no change in the affairs of the Company since the date hereof or that
the information herein is correct as of any time subsequent to its date.
continued on following page
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE PAGE , "RISK
FACTORS," FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE PARTICIPANTS IN THE EXCHANGE OFFER.
--------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
The date of this Prospectus is , 1998
A-1
<PAGE>
[Alternate Page]
THE OLD PREFERRED STOCK
OLD PREFERRED STOCK......... The Old Preferred Stock was originally issued
and sold on September 30, 1996 in transactions
not registered under the Securities Act, in
reliance upon the exemption provided in Section
4(2) of the Securities Act. Accordingly, the Old
Preferred Stock may not be reoffered, resold or
otherwise pledged, hypothecated or transferred in
the United States unless so registered or unless
an applicable exemption from the registration
requirements of the Securities Act is available.
SUMMARY DESCRIPTION OF THE PREFERRED STOCK AND EXCHANGE DEBENTURES
THE PREFERRED STOCK
DIVIDENDS................... The holders of the Preferred Stock are entitled
to receive dividends, when, as and if declared by
the Board at the rate of 14.5% per annum on the
liquidation value. Dividends on the Preferred
Stock accrete to the liquidation value of the
Preferred Stock until the Cash Pay Date (as
defined). The Company is restricted from
declaring dividends on other securities and from
redeeming or repurchasing certain junior
securities unless full cumulative dividends have
been paid on the Preferred Stock. See
"Description of Preferred Stock."
LIQUIDATION PREFERENCE...... Liquidation value plus accrued and unpaid
dividends. At March 31, 1998, the liquidation
value was $30.95 per share.
VOTING...................... Holders of the Preferred Stock have no general
voting rights except as provided by law and as
provided in the Certificate of Designations (as
defined) therefor. The holders of Preferred Stock
voting as a class are entitled to elect two
directors if and whenever (i) six consecutive
quarterly dividends after the Fifth Anniversary
(as defined) have not been paid in full, (ii) the
Company has not redeemed the Preferred Stock on
March 31, 2008, (iii) the Company has not offered
to redeem the Preferred Stock in a timely manner
following a change of control event, (iv)
dividends have been paid on other securities or
junior securities have been redeemed or
repurchased while full cumulative dividends have
not been paid on the Preferred Stock or (v) the
Company's Certificate of Incorporation has been
amended in a manner adverse to the holders of
Preferred Stock without such holder's consent.
MANDATORY REDEMPTION........ In the event of a Change of Control (as defined
in the Certificate of Designations), the Company
is required to make an offer to redeem all shares
of Preferred Stock at a redemption price equal to
101% of the liquidation value. However, there can
be no assurance that upon the occurrence of such
a Change in Control, the Company will have
sufficient funds to repurchase the Preferred
Stock. In addition, the Company is required to
redeem all shares of Preferred Stock on March 31,
2008 at a price equal to the liquidation value at
such date.
A-2
<PAGE>
[Alternate Page]
OPTIONAL REDEMPTION......... In the event that Holdings or any affiliate of
the Company sells equity securities and
contributes the proceeds to the Company (an
"Equity Offering") prior to September 30, 1999,
the Company may, at its option, redeem not less
than all of the outstanding Preferred Stock at a
price of 114.5% of the liquidation value;
provided that the aggregate redemption price of
all the outstanding shares of Preferred Stock
does not exceed the net proceeds received by the
Company from such sale. After September 30, 2001,
the Company may, at its option, redeem any or all
outstanding shares of Preferred Stock at a price
of 107.25% of the liquidation value in 2001
declining annually ratably to 100% in 2004 and
thereafter.
RANKING..................... The Preferred Stock shall, with respect to
dividend rights and rights on liquidation,
dissolution and winding up, rank senior to all
classes or series of equity securities of the
Company, including the Company's common stock,
$0.01 par value ("Common Stock"), and each other
class of capital stock of the Company, the terms
of which provide that such class shall rank
junior to the Preferred Stock or the terms of
which do not specify any rank relative to the
Preferred Stock.
EXCHANGE FEATURE............ Subject to certain conditions, the Company may
issue 14.5% Junior Subordinated Exchange
Debentures in exchange for any or all outstanding
Preferred Stock, at an exchange ratio of $1.00 of
liquidation value of Preferred Stock for $1.00
principal amount of Exchange Debentures.
THE EXCHANGE DEBENTURES
MATURITY DATE............... March 31, 2008
INTEREST RATE............... 14.5% effective annual rate payable quarterly.
Prior to the Cash Pay Date, quarterly interest
will be payable solely in the form of additional
Exchange Debentures. After the Cash Pay Date,
interest will be payable in cash.
OPTIONAL REDEMPTION......... The Securities are redeemable at any time after
September 30, 2001 at the option of the Company,
in whole or in part, at certain redemption prices
set forth herein. In addition, at the option of
the Company, prior to September 30, 1999, the
Company may redeem outstanding Exchange
Debentures, in whole or in part (pro rata from
each holder thereof), at a purchase price equal
to 114.5% of the principal amount of the Exchange
Debentures so redeemed plus accrued and unpaid
cash interest, if any, to the date of redemption
with the proceeds of an Equity Offering.
CHANGE OF CONTROL........... In the event of a Change of Control that
constitutes a Repurchase Event (each, as defined
in the Certificate of Designations), each holder
of Exchange Debentures will have the right to
require the Company to repurchase its Exchange
Debentures
A-3
<PAGE>
[Alternate Page]
at a purchase price equal to 101% of the
principal amount of the Exchange Debentures so
redeemed plus accrued and unpaid interest, if
any. However, the Company's ability to
repurchase the Exchange Debentures upon a Change
of Control may be limited by the terms of then
existing contractual obligations of the Company
and its subsidiaries. Furthermore, under the
Bank Facility, a "Change in Control" (as defined
therein) would constitute an event of default,
causing acceleration of all payments required
thereunder. There can be no assurance that upon
the occurrence of a Change of Control, the
Company will have sufficient funds to repurchase
the Exchange Debentures.
RANKING..................... The Exchange Debentures will be general
unsecured obligations of the Company and will be
subordinated in right of payment to the prior
payment of all indebtedness of the Company that
is not expressly made pari passu with or junior
to the Exchange Debentures. As of March 31, 1998,
the Company had approximately $161.0 million in
aggregate principal amount of senior
Indebtedness, of which approximately $31.0
million was secured Indebtedness. As of March 31,
1998, the Company had the ability to incur up to
$177.2 million in senior indebtedness based upon
the covenants with which it must comply.
CERTAIN COVENANTS........... The Exchange Debentures, if issued, will be
issued pursuant to an indenture which will
contain certain customary covenants which, among
other things, relate to (i) the payment of
principal, premium and interest on the Exchange
Debentures, (ii) the maintenance of an office for
payments, (iii) the appointment of a paying
agent, (iv) lists of Exchange Debenture holders,
(v) the filing of reports, (vi) limitations on
certain payments by the Company and (vii)
limitations on the Company's ability to merge,
consolidate or sell all or substantially all its
assets.
RISK FACTORS
Prospective investors in the Preferred Stock should carefully consider the
factors discussed in detail elsewhere in this Prospectus under the caption
"Risk Factors."
A-4
<PAGE>
[Alternate Page]
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of Preferred Stock
offered pursuant to this Prospectus.
A-5
<PAGE>
[Alternate Page]
MARKET-MAKING ACTIVITIES OF DLJSC
This Prospectus is to be used by DLJSC in connection with offers and sales
of the New Preferred Stock in market-making transactions at negotiated prices
related to prevailing market prices at the time of sale. DLJSC may act as
principal or agent in such transactions. There can be no assurance that DLJSC
will continue to act in such capacities. DLJSC has no obligation to make a
market in the New Preferred Stock, and may discontinue its market-making
activities at any time without notice, at its sole discretion.
DLJMB, an affiliate of DLJSC, holds together with its affiliates, in the
aggregate, a 65.5% equity interest in the Company. DLJSC acted as an
intermediate purchase of the Old Preferred Stock pursuant to the Resale
Agreement.
The Company will receive no portion of the proceeds of the sales of the
New Preferred Stock and will bear the expenses incident to the registration
thereof. The Company has agreed to indemnify DLJSC against certain liabilities,
including civil liabilities under the Securities Act or to contribute to
payments DLJSC may be required to make in respect thereof.
A-6
<PAGE>
[Alternate Back Cover]
===============================================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR
THAT THERE HAS BEEN NO CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH AN OFFER OR SOLICITATION.
-------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary ............................
Risk Factors ..................................
Use of Proceeds ...............................
Capitalization ................................
Selected Consolidated Financial Data ..........
Management's Discussion and Analysis of
Financial Condition and Results of
Operations .................................
Business ......................................
Management ....................................
Principal Stockholders ........................
Certain Relationships and Related
Transactions ...............................
Description of Bank Facility ..................
Description of Preferred Stock ................
Description of Notes ..........................
Legal Matters .................................
Independent Public Accountants ................
Market Making Activities of DLJSC .............
Available Information .........................
Index to Consolidated Financial
Statements ................................. F-1
</TABLE>
===============================================================================
===============================================================================
[BRAND SCAFFOLD SERVICES, INC. LOGO]
BRAND SCAFFOLD
SERVICES, INC.
14.5% SENIOR EXCHANGEABLE PREFERRED
STOCK DUE 2008
------------------
PROSPECTUS
------------------
, 1998
===============================================================================
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under the Delaware General Corporation Law (the "DGCL"), directors,
officers, employees and other individuals may be indemnified against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement in
connection with specified actions, suits or proceedings, whether civil,
criminal, administrative or investigative (other than a derivative action) if
they acted in good faith and in a manner they reasonably believed to be in or
not opposed to the best interests of the Company and, with respect to any
criminal action or proceeding, had no reasonable cause to believe their conduct
was unlawful. A similar standard of care is applicable in the case of a
derivative action, except that indemnification only extends to expenses
(including attorneys' fees) incurred in connection with the defense or
settlement of such an action, and the DGCL requires court approval before there
can be any indemnification of expenses where the person seeking indemnification
has been found liable to the Company.
The Company's Certificate of Incorporation, as amended, provides in effect
for the indemnification of the Company of each director and officer of the
Company to the fullest extent permitted by applicable law.
If the DGCL is amended to further expand the indemnification permitted to
directors, officers, employees or agents of the Company, then the Company shall
indemnify such persons to the fullest extent permitted by the DGCL, as so
amended.
ITEM 21. EXHIBITS
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
*3.1 -- Certificate of Incorporation of the Registrant
*3.2 -- Certificate of Amendment of Certificate of Incorporation of the Registrant
*3.3 -- Amended and Restated By-Laws of Brand Scaffold Services, Inc.
*4.1 -- Amended and Restated Certificate of Designations, Preferences and Rights of 14.5%
Senior Exchangeable Preferred Stock due 2008 (the "Preferred Stock")
*4.2 -- Amended and Restated Shareholders Agreement dated as of September 30, 1996
among DLJ Merchant Banking Partners, L.P., DLJ International Partners, C.V.,
DLJ Offshore Partners, C.V., DLJ Merchant Banking Funding, Inc., Carlisle-Brand
Investors, L.P., Rust Industrial Services Inc., DLJ Brand Holdings, Inc. ("Holdings"),
Brand Scaffold Services, Inc. and Certain Individuals
*4.3 -- Stock Option Agreement dated as of March 4, 1997 between Holdings and Carlisle
Group, L.P.
*4.4 -- Indenture dated as of February 25, 1998 between the Company, and U.S. Trust
Company of Texas, N.A., as Trustee, relating to the Company's 10 1/4% Senior Notes
due 2008 (the "Notes")
*4.5 -- Registration Rights Agreement, dated as of February 25, 1998, between the Company
and Donaldson Lufkin & Jenrette Securities Corporation ("DLJSC"), as initial
purchaser, relating to the Notes
*4.6 -- Registration Rights Agreement dated as of March 2, 1998 by and between the
Company and DLJSC, relating to the Preferred Stock
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
5 -- Opinion of Davis Polk & Wardwell, Counsel of the Registrant, regarding the validity of
the securities being registered
*10.1 -- Credit Agreement dated as of September 30, 1996, among Brand Scaffold Services,
Inc., the Banks party thereto, DLJ Capital, as Syndication Agent, and Bank of
America, as Administrative Agent
*10.2 -- Purhcase Agreement dated as of February 25, 1998, by and between the Company and
DLJSC, as initial purchaser, relating to the Notes
*10.3 -- The Amended and Restated Transaction Agreement dated as of September 18, 1996
among DLJ Merchant Banking Partners, L.P., DLJ International Partners, C.V.,
DLJ Offshore Partners, C.V., DLJ Merchant Banking Funding, Inc., Carlisle
Enterprises, L.P., Holdings, the Company, Brand Scaffold Builders, Inc., Brand Scaffold
Rental & Erection, Inc. 702569 Alberta Ltd., Rust International Inc., Rust Industrial
Services Inc., Rust Scaffold Services Inc., Rust Scaffold Builders Inc., and Rust Scaffold
& Erection Inc.
*10.4 -- Employment Agreement dated as of October 1, 1996 between the Company and
John M. Monter
*10.5 -- Employment Agreement dated as of July 29, 1996 between the Company and
James "Marty" McGee
*10.6 -- Employment Agreement dated as of July 29, 1996 between the Company and
Ronald W. Moore
*10.7 -- Employment Agreement dated as of July 29, 1996 between the Company and
Otto K. Knoll
*10.8 -- Offer Letter dated as of March 30, 1998 between the Company and Ian R. Alexander
**12 -- Statement of Computation of Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividends
*21 -- Subsidiaries of the Registrant
23.1 -- Consent of Arthur Andersen LLP, independent public accountants
23.2 -- Consent of Davis Polk & Wardwell, counsel to the Registrant (included in Exhibit 5)
**24 -- Powers of Attorney
*27 -- Financial Data Schedule
**99.1 -- Form of Letter of Transmittal
**99.2 -- Form of Notice of Guaranteed Delivery
**99.3 -- Form of Instruction to Registered Holder and/or Book-Entry Transfer Facility
Participant from Owner of Old Notes
**99.4 -- Form of Letter to Clients of Depository Trust Company Participants
**99.5 -- Form of Letter to Registered Holders and Depository Trust Company Participants
</TABLE>
- ----------
* Incorporated herein by reference to exhibit of the same number in the
Registrant's Registration Statement on Form S-1, Registration Number
333-56817.
** Previously filed with the SEC.
II-2
<PAGE>
(b) Schedules
All supplementary schedules relating to the Registration Statement are
omitted because they are not required or because the required information,
where material, is contained in the Financial Statements.
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of
whether such indemnification by it is against public policy as expressed in the
Act and will be governed by the final adjudication of such issue.
(c) The undersigned registrant hereby undertakes to file an application
for the purpose of determining the eligibility of the Trustee to act under
subsection (a) of Section 310 of the Trust Indenture Act ("Act") in accordance
with the rules and regulations prescribed by the Commission under Section
305(b)(2) of the Act.
(d) The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus pursuant
to Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt
of such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
(e) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT ON FORM S-1 TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED IN THE CITY OF
CHESTERFIELD, STATE OF MISSOURI, JULY 28, 1998.
BRAND SCAFFOLD SERVICES, INC.
July 28, 1998
By: /s/ Ian R. Alexander
-------------------------------------
Ian R. Alexander
Chief Financial Officer,
Vice President, Finance and Secretary
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT ON FORM S-1 HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN
THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ John M. Monter Director, Chief Executive Officer and July 28, 1998
- ----------------------------- President (Principal Executive
John M. Monter Officer)
/s/ Ian R. Alexander Chief Financial Officer, Vice July 28, 1998
- ----------------------------- President, Finance and Secretary
Ian R. Alexander (Principal Financial Officer and
Principal Accounting Officer)
* Chairman of the Board July 28, 1998
- -----------------------------
David L. Jaffe
* Director July 28, 1998
- -----------------------------
Robert Bonczek
* Director July 28, 1998
- -----------------------------
James S. Carlisle
* Director July 28, 1998
- -----------------------------
Vincent Langone
* Director July 28, 1998
- -----------------------------
D.P. "Pat" Payne
* Director July 28, 1998
- -----------------------------
Karl R. Wyss
*By:/s/ Ian R. Alexander July 28, 1998
----------------------
Ian R. Alexander
as Attorney-in-fact
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
*3.1 -- Certificate of Incorporation of the Registrant
*3.2 -- Certificate of Amendment of Certificate of Incorporation of the Registrant
*3.3 -- Amended and Restated By-Laws of Brand Scaffold Services, Inc.
*4.1 -- Amended and Restated Certificate of Designations, Preferences and Rights of 14.5%
Senior Exchangeable Preferred Stock due 2008 (the "Preferred Stock")
*4.2 -- Amended and Restated Shareholders Agreement dated as of September 30, 1996
among DLJ Merchant Banking Partners, L.P., DLJ International Partners, C.V.,
DLJ Offshore Partners, C.V., DLJ Merchant Banking Funding, Inc., Carlisle-Brand
Investors, L.P., Rust Industrial Services Inc., DLJ Brand Holdings, Inc. ("Holdings"),
Brand Scaffold Services, Inc. and Certain Individuals
*4.3 -- Stock Option Agreement dated as of March 4, 1997 between Holdings and Carlisle
Group, L.P.
*4.4 -- Indenture dated as of February 25, 1998 between the Company, and U.S. Trust
Company of Texas, N.A., as Trustee, relating to the Company's 10 1/4% Senior Notes
due 2008 (the "Notes")
*4.5 -- Registration Rights Agreement, dated as of February 25, 1998, between the Company
and Donaldson Lufkin & Jenrette Securities Corporation ("DLJSC"), as initial
purchaser, relating to the Notes
*4.6 -- Registration Rights Agreement dated as of March 2, 1998 by and between the
Company and DLJSC, relating to the Preferred Stock
5 -- Opinion of Davis Polk & Wardwell, Counsel of the Registrant, regarding the validity of
the securities being registered
*10.1 -- Credit Agreement dated as of September 30, 1996, among Brand Scaffold Services,
Inc., the Banks party thereto, DLJ Capital, as Syndication Agent, and Bank of
America, as Administrative Agent
*10.2 -- Purhcase Agreement dated as of February 25, 1998, by and between the Company and
DLJSC, as initial purchaser, relating to the Notes
*10.3 -- The Amended and Restated Transaction Agreement dated as of September 18, 1996
among DLJ Merchant Banking Partners, L.P., DLJ International Partners, C.V.,
DLJ Offshore Partners, C.V., DLJ Merchant Banking Funding, Inc., Carlisle
Enterprises, L.P., Holdings, the Company, Brand Scaffold Builders, Inc., Brand Scaffold
Rental & Erection, Inc. 702569 Alberta Ltd., Rust International Inc., Rust Industrial
Services Inc., Rust Scaffold Services Inc., Rust Scaffold Builders Inc., and Rust Scaffold
& Erection Inc.
*10.4 -- Employment Agreement dated as of October 1, 1996 between the Company and
John M. Monter
*10.5 -- Employment Agreement dated as of July 29, 1996 between the Company and
James "Marty" McGee
*10.6 -- Employment Agreement dated as of July 29, 1996 between the Company and
Ronald W. Moore
</TABLE>
E-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
*10.7 -- Employment Agreement dated as of July 29, 1996 between the Company and
Otto K. Knoll
*10.8 -- Offer Letter dated as of March 30, 1998 between the Company and Ian R. Alexander
**12 -- Statement of Computation of Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividends
*21 -- Subsidiaries of the Registrant
23.1 -- Consent of Arthur Andersen LLP, independent public accountants
23.2 -- Consent of Davis Polk & Wardwell, counsel to the Registrant (included in Exhibit 5)
**24 -- Powers of Attorney
*27 -- Financial Data Schedule
**99.1 -- Form of Letter of Transmittal
**99.2 -- Form of Notice of Guaranteed Delivery
**99.3 -- Form of Instruction to Registered Holder and/or Book-Entry Transfer Facility
Participant from Owner of Old Notes
**99.4 -- Form of Letter to Clients of Depository Trust Company Participants
**99.5 -- Form of Letter to Registered Holders and Depository Trust Company Participants
</TABLE>
- ----------
* Incorporated herein by reference to exhibit of the same number in the
Registrant's Registration Statement on Form S-1, Registration Number
333-56817.
** Previously filed with the SEC.
E-2
<PAGE>
[Davis Polk & Wardwell Letterhead]
July , 1998
Brand Scaffold Services, Inc.
15450 South Outer Highway 40, #270
Chesterfield, Missouri 63017
Ladies and Gentlemen:
We have acted as special counsel to Brand Scaffold Services, Inc. (the
"Company") in connection with (i) the Company's offer (the "Exchange Offer") to
exchange one share of its 14.5% Senior Exchangeable Preferred Stock due 2008,
$0.01 par value per share (the "New Preferred Stock"), which has been
registered under the Securities Act of 1933, as amended, for each outstanding
share of its 14.5% Senior Exchangeable Preferred Stock due 2008, $0.01 par
value per share (the "Old Preferred Stock" and together with the New Preferred
Stock, the "Preferred Stock") and (ii) the registration of $134,081,362
aggregate principal amount of the Company's 14.5% Junior Subordinated Exchange
Debentures due 2008 (the "Exchange Debentures") issuable upon exchange of the
Preferred Stock.
We have examined originals or copies, certified or otherwise
identified to our satisfaction, of such documents, corporate records,
certificates of public officials and other instruments as we have deemed
necessary or advisable for the purpose of rendering this opinion.
Upon the basis of the foregoing we are of the opinion that:
1. The New Preferred Stock has been duly and validly authorized
by the Company for issuance and when delivered in exchange
for the Old Preferred Stock in accordance with the Exchange
Offer, will be validly issued, fully paid and non-assessable.
<PAGE>
Brand Scaffold Service, Inc. 2 July_, 1998
2. The Exchange Debentures issuable upon exchange of the Preferred
Stock, when issued in accordance with the terms of the
Certificate of Designations and validly executed, authorized and
delivered in exchange for the Preferred Stock, will be valid and
binding obligations of the Company enforceable against the
Company in accordance with their terms, subject to applicable
bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance or similar laws affecting creditors' rights generally
and equitable principles of general applicability.
We are members of the Bar of the State of New York and the foregoing
opinion is limited to the laws of the State of New York, the federal laws of
the United States of America and Delaware corporate law.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement relating to the Exchange Offer. We also consent to the
reference to us under the caption "Legal Matters" in the Prospectus contained
in such Registration Statement.
Very truly yours,
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
for Rust Scaffold Services Inc. and Subsidiaries and Brand Scaffold Services
Inc. and Subsidiaries (and to all references to our Firm) included in or made a
part of this registration statement.
ARTHUR ANDERSEN LLP
St. Louis, Missouri
June 30, 1998
