PROSPECTUS filed pursuant to Rule 424(b)(2)
Registration No. 333-58223
DIAMOND BRANDS OPERATING CORP.
OFFER TO EXCHANGE SERIES B 10 1/8% SENIOR SUBORDINATED NOTES DUE 2008,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
FOR ANY AND ALL OUTSTANDING SERIES A 10 1/8% SENIOR SUBORDINATED NOTES DUE 2008
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
OCTOBER 19, 1998, UNLESS EXTENDED.
Diamond Brands Operating Corp., a Delaware corporation (the "Issuer"),
hereby offers, upon the terms and subject to the conditions set forth in this
Prospectus and the accompanying letter of transmittal (the "Letter of
Transmittal" and such offer being the "Exchange Offer"), to exchange Series B
10 1/8% Senior Subordinated Notes due 2008 of the Issuer (the "New Notes"),
which are guaranteed by the Issuer's subsidiaries (the "Guarantors") and which
have been registered under the Securities Act of 1933, as amended (the
"Securities Act"), pursuant to a registration statement on Form S-4 together
with all amendments and exhibits, the "Registration Statement") of which this
Prospectus is a part, for an equal principal amount of outstanding Series A 10
1/8% Senior Subordinated Notes due 2008 of the Issuer (the "Old Notes"), which
are jointly and severally guaranteed, fully and unconditionally, by the
Guarantors and of which $100,000,000 aggregate principal amount is outstanding
as of the date hereof. The New Notes and the Old Notes are collectively
referred to herein as the "Notes."
Any and all Old Notes that are validly tendered and not withdrawn on or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, which will be October 19, 1998, unless the Exchange Offer is extended
(such date, including as extended, the "Expiration Date"), will be accepted
for exchange. Tenders of Old Notes may be withdrawn at any time prior to 5:00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 principal amount of Old Notes being tendered for
exchange. However, the Exchange Offer is subject to certain customary
conditions, which may be waived by the Issuer, and to the terms of the
Registration Rights Agreement, dated as of April 21, 1998, by and among the
Issuer, the Guarantors and Donaldson, Lufkin & Jenrette Securities Corporation
and Morgan Stanley & Co. Incorporated (the "Initial Purchasers") (the
"Registration Rights Agreement"). Old Notes may only be tendered in integral
multiples of $1,000. See "The Exchange Offer."
The New Notes will be entitled to the benefits of the same Indenture (as
defined herein under "Available Information") that governs the Old Notes and
that will govern the New Notes. The form and terms of the New Notes are the
same in all material respects as the form and terms of the Old Notes, except
that the New Notes have been registered under the Securities Act and therefore
will not bear legends restricting the transfer thereof. See "The Exchange
Offer" and "Description of the New Notes."
The New Notes will be represented by permanent global notes in fully
registered form and will be deposited with, or on behalf of, The Depository
Trust Company ("DTC") and registered in the name of a nominee of DTC.
Beneficial interests in the permanent global notes will be shown on, and
transfers thereof will be effected through, records maintained by DTC and its
participants.
Based on interpretations by the staff of the Securities and Exchange
Commission (the "Commission"), as set forth in no-action letters issued to
third parties, including Exxon Capital Holdings Corporation, SEC No-Action
Letter (available May 13, 1988), Morgan Stanley & Co. Incorporated, SEC No-
Action Letter (available June 5, 1991), and Shearman & Sterling, SEC No-Action
Letter (available July 2, 1993) (collectively, the "Exchange Offer No-Action
Letters"), the Issuer and the Guarantors believe that the New Notes issued
pursuant to the Exchange Offer may be offered for resale, resold or otherwise
transferred by each holder (other than a broker-dealer who acquires such New
Notes directly from the Issuer for resale pursuant to Rule 144A under the
Securities Act or any other available exemption under the Securities Act and
other than any holder that is an "affiliate" (as defined in Rule 405 under the
Securities Act) of the Issuer) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such New
Notes are acquired in the ordinary course of such holder's business and such
holder is not engaged in, and does not intend to engage in, a distribution of
such New Notes and has no arrangement with any person to participate in a
distribution of such New Notes. By tendering Old Notes in exchange for New
Notes, each holder, other than a broker-dealer, will represent to the Issuer
and the Guarantors that: (i) it is not an affiliate (as defined in Rule 405
under the Securities Act) of the Issuer; (ii) it is not a broker-dealer
tendering Old Notes acquired for its own account directly from the Issuer;
(iii) any New Notes to be received by it will be acquired in the ordinary
course of its business; and (iv) it is not engaged in, and does not intend to
engage in, a distribution of such New Notes and has no arrangement or
understanding to participate in a distribution of New Notes. If a holder of Old
Notes is engaged in or intends to engage in a distribution of New Notes or has
any arrangement or understanding with respect to the distribution of New Notes
to be acquired pursuant to the Exchange Offer, such holder may not rely on the
applicable interpretations of the staff of the Commission and must comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with any secondary resale transaction.
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer (a "Participating Broker-Dealer") must acknowledge that it
will deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of such New Notes. The Letter of Transmittal states
that by so acknowledging 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. This Prospectus, as
(continued on next page)
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FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PARTICIPANTS
IN THE EXCHANGE OFFER, SEE "RISK FACTORS" BEGINNING ON PAGE 15 OF THIS
PROSPECTUS.
----------
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 September 17, 1998
<PAGE>
(continued from cover page)
it may be amended or supplemented from time to time, may be used by a
Participating Broker-Dealer in connection with resales of New Notes received
in exchange for Old Notes where such Old Notes were acquired by such
Participating Broker-Dealer as a result of market-making activities or other
trading activities. Pursuant to the Registration Rights Agreement, the Issuer
and the Guarantors have agreed that they will make this Prospectus available
to any Participating Broker-Dealer for a period of time not to exceed one year
after the date on which the Exchange Offer is consummated for use in
connection with any such resale. See "Plan of Distribution."
Neither the Issuer nor the Guarantors will receive any proceeds from this
offering. The Issuer has agreed to pay the expenses of the Exchange Offer. No
underwriter is being utilized in connection with the Exchange Offer.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE ISSUER ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN
WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE
WITH THE SECURITIES AND BLUE SKY LAWS OF SUCH JURISDICTION.
The Old Notes have been designated as eligible for trading in the Private
Offerings, Resale and Trading through Automated Linkages ("PORTAL") market.
Prior to this Exchange Offer, there has been no public market for the New
Notes. If such a market were to develop, the New Notes could trade at prices
that may be higher or lower than their principal amount. Neither the Issuer
nor any of the Guarantors intends to apply for listing of the New Notes on any
securities exchange or for quotation of the New Notes on The Nasdaq Stock
Market's National Market or otherwise. The Initial Purchasers have previously
made a market in the Old Notes, and the Issuer and the Guarantors have been
advised that the Initial Purchasers currently intend to make a market in the
New Notes, as permitted by applicable laws and regulations, after consummation
of the Exchange Offer. The Initial Purchasers are not obligated, however, to
make a market in the Old Notes or the New Notes and any such market-making
activity may be discontinued at any time without notice at the sole discretion
of the Initial Purchasers. There can be no assurance as to the liquidity of
the public market for the New Notes or that any active public market for the
New Notes will develop or continue. If an active public market does not
develop or continue, the market price and liquidity of the New Notes may be
adversely affected. See "Risk Factors--Risk Factors Relating to the Notes--
Absence of Public Market."
<PAGE>
---------------
AVAILABLE INFORMATION
Neither the Issuer nor any of the Guarantors is currently subject to the
periodic reporting and other informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). The Issuer will become
subject to such requirements upon the effectiveness of the Registration
Statement. Pursuant to the Indenture by and among the Issuer, the Guarantors
and State Street Bank and Trust Company (as trustee), dated as of April 21,
1998 (the "Indenture"), the Issuer has agreed to file with the Commission and
provide to the holders of the Old Notes annual reports and the information,
documents and other reports which are required to be delivered pursuant to
Sections 13 and 15(d) of the Exchange Act.
This Prospectus constitutes a part of the Registration Statement
filed by the Issuer and the Guarantors with the Commission, through the
Electronic Data Gathering, Analysis and Retrieval System ("EDGAR"), under the
Securities Act, with respect to the New Notes offered hereby. This Prospectus
omits certain of the information contained in the Registration Statement, and
reference is hereby made to the Registration Statement for further information
with respect to the Issuer and the securities offered hereby. Although
statements concerning and summaries of certain documents are included herein,
reference is made to the copies of such documents filed as exhibits to the
Registration Statement or otherwise filed with the Commission. These documents
may be inspected without charge at the office of the Commission at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and copies may be
obtained at fees and charges prescribed by the Commission. Copies of such
materials may also be obtained from the Web site that the Commission maintains
at http://www.sec.gov.
---------------
The Guarantors are the subsidiaries guaranteeing the Issuer's
obligations under the Notes and are each wholly-owned
subsidiaries of the Issuer. The guarantee of each Guarantor is
full and unconditional, and joint and several with guarantees of
each other Guarantor. Separate financial statements of the
Guarantors are not set forth in this Prospectus as the Issuer has
determined that they would not be material to investors.
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<PAGE>
PROSPECTUS SUMMARY
Prior to the Recapitalization (as defined herein under "--The
Recapitalization"), Diamond Brands Incorporated ("Holdings") and its direct
subsidiaries carried on the business described herein. In connection with the
Recapitalization, Holdings organized the Issuer and immediately prior to the
consummation of the Recapitalization, Holdings transferred substantially all of
its assets and liabilities to the Issuer. Holdings' current operations are, and
future operations are expected to be, limited to owning the stock of the
Issuer. Unless the context otherwise requires, the "Company" or "Diamond
Brands" refers to Holdings, the Issuer, and its direct and indirect
subsidiaries. The financial statements and other financial data herein are, for
the periods prior to the consummation of the Recapitalization, those of
Holdings. The following summary does not purport to be complete and is
qualified in its entirety by the more detailed information and the audited and
unaudited consolidated financial statements of the Company and the Unaudited
Pro Forma Consolidated Financial Data (as defined herein under "Unaudited Pro
Forma Consolidated Financial Data") of the Company included elsewhere in this
Prospectus. Market data used throughout this Prospectus were obtained from
Information Resources, Inc. ("IRI") as of March 1, 1998 (which data include
only sales reported by grocery stores, drug stores and mass merchandisers),
internal company surveys or industry publications. Although the Company
believes that such sources are reliable, the accuracy and completeness of such
information is not guaranteed and has not been independently verified. Except
as otherwise set forth herein, references to "pro forma" statement of
operations data of the Company and the Issuer for the year ended December 31,
1997 are to such data that give effect to the Recapitalization, including the
issuance of the Notes and the incurrence of indebtedness under the Bank
Facilities (as defined herein under "--The Recapitalization"), and the Empire
Acquisition (as defined herein under "--Corporate Information") as if they had
occurred on January 1, 1997; references to "pro forma" statement of operations
data of the Company and the Issuer for the six months ended June 30, 1998 are
to such data that give effect to the Recapitalization as if it had occurred on
January 1, 1997.
THE COMPANY
OVERVIEW
Diamond Brands is a leading manufacturer and marketer of a broad range of
branded consumer products, including wooden matches and fire starters ("Wooden
Lights"), plastic cutlery and straws ("Cutlery"), scented, citronella and
holiday candles ("Candles"), and toothpicks, clothespins and wooden crafts
("Woodenware"). The Company's products are marketed primarily under the
Diamond, Forster and Empire brand names, which have been in existence since
1881, 1887 and 1950, respectively. The Company believes it has the leading
domestic retail market share in the wooden match, plastic cutlery, toothpick,
clothespin and wooden craft product categories. In each of these product
categories, which in the aggregate represented approximately 63% of 1997 pro
forma gross sales, the Company believes it has achieved a domestic retail
market share of more than double that of its nearest branded competitor. For
the year ended December 31, 1997, the Company generated pro forma net sales of
$120.7 million and pro forma EBITDA (as defined herein under "--Summary
Historical and Pro Forma Consolidated Financial Data") of $31.6 million, which
represented a pro forma EBITDA margin (as defined herein under "--Summary
Historical and Pro Forma Consolidated Financial Data") of 26.2%. For the six
months ended June 30, 1998, the Company generated net sales of $58.6 million
and EBITDA of $11.9 million, which represented an EBITDA margin of 20.4%.
The Company believes it has achieved its leading market shares and strong
profitability by: (i) capitalizing on the Company's strong brand name
recognition, high quality products and category management strategy to secure
and maintain retail shelf space; (ii) expanding its product offerings through
strategic acquisitions, including the Forster Acquisition (as defined herein
under "--Corporate Information") in 1995 and the Empire Acquisition in 1997;
(iii) achieving significant cost savings through the integration of the Forster
and Empire businesses, including headcount reductions and facilities
consolidations; and (iv) focusing on reducing manufacturing and administrative
costs.
The Company's products are sold in substantially all major grocery stores,
drug stores, mass merchandisers and warehouse clubs in the United States.
Diamond Brands also sells certain of its products to institutional and other
customers such as food service and food processing companies and redistributors
("Institutional/Other"). The Company sells its products through a nationwide
sales network consisting primarily of independent broker organizations and also
sells products directly to selected mass merchandisers and warehouse clubs,
including
1
<PAGE>
Wal-Mart and Price Costco. In order to strengthen relationships with its
customers, the Company employs a category management strategy, which includes a
corporate rebate program that provides incentives to grocery retailers to buy
multiple products from the Company.
Diamond Brands produces its products at four automated manufacturing
facilities located in Cloquet, Minnesota, East Wilton, Maine, Strong, Maine,
and Kansas City, Kansas. The Company believes it is a low-cost manufacturer in
most of its product categories. In the United States, Diamond Brands believes
it is the sole manufacturer of wooden matches and the largest manufacturer of
toothpicks and clothespins.
COMPETITIVE STRENGTHS
The Company believes that its stable and diverse product portfolio, strong
brand names, national distribution and cost-efficient manufacturing have
resulted in strong financial performance and provide an attractive platform for
growth. In particular, the Company believes it is distinguished by the
following competitive strengths:
. DIVERSE PRODUCT PORTFOLIO WITH ATTRACTIVE SALES MIX. The Company has a
diverse product portfolio with its 1997 pro forma gross sales consisting
of Wooden Lights (15.9%), Cutlery (26.9%), Candles (21.5%), Woodenware
(23.0%) and Institutional/Other (12.7%). This product portfolio allows the
Company to offer retailers a broad product offering without relying on any
one product category for profitability. Diamond Brands' product mix
includes stable and well-established categories (such as Wooden Lights and
Woodenware), as well as higher-growth categories (such as Cutlery and
Candles). In addition, the Company believes its product mix is attractive
because its product categories tend to be less reliant on new product
introductions than are other consumer product categories. Approximately
98% of the Company's 1997 pro forma gross sales consisted of products
introduced prior to 1994. The Company also believes that its products are
not significantly impacted by changes in overall economic conditions.
. STRONG BRAND NAMES WITH LEADING MARKET SHARES. The Company's three
primary brand names--Diamond, Forster and Empire--have been in existence
since 1881, 1887 and 1950, respectively. The Company believes that strong
brand name recognition and high quality products have contributed to its
leading domestic retail market shares in the wooden match, plastic
cutlery, toothpick, clothespin and wooden craft product categories. In
each of these product categories, which in the aggregate represented
approximately 63% of 1997 pro forma gross sales, the Company believes it
has achieved a domestic retail market share of more than double that of
its nearest branded competitor. The Company believes its strong brand
names and leading market shares provide a competitive advantage in selling
its products to retailers.
. WELL-ESTABLISHED NATIONAL RETAIL DISTRIBUTION. Diamond Brands' products
are sold in substantially all major grocery stores, drug stores, mass
merchandisers and warehouse clubs in the United States. The Company has
established relationships with many of the largest retailers in the United
States such as Wal-Mart, Price Costco, Target, Publix and Kroger. The
Company sells its products through a nationwide sales network consisting
primarily of independent broker organizations and also sells products
directly to selected mass merchandisers and warehouse clubs. The Company
employs a category management strategy which includes a corporate rebate
program that provides incentives to grocery retailers to buy multiple
products from the Company.
. COST-EFFICIENT MANUFACTURING. The Company believes that its four
automated manufacturing facilities position it as a low-cost manufacturer
in most of its product categories. The Company continues to invest in
automation equipment in order to reduce headcount and increase efficiency.
. STRONG CASH FLOW WITH LIMITED MAINTENANCE CAPITAL EXPENDITURES. The
Company's strong EBITDA and EBITDA margin, together with limited
maintenance capital expenditure requirements, provide the Company with
significant cash flow to reduce indebtedness and implement its business
strategy. Over 90% of the Company's capital expenditures in the five years
ended December 31, 1997 have related to productivity improvements and
capacity expansions. The Company currently expects its capital
expenditures for 1998 to be approximately $2.5 million, of which
approximately $1.3 million had been expended in the six months ended
June 30, 1998.
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<PAGE>
. EXPERIENCED MANAGEMENT TEAM. The Company's existing senior management
team possesses extensive industry and product knowledge and has an average
tenure of seven years with the Company. In addition, in connection with
the Recapitalization, Naresh K. Nakra became President, Chief Executive
Officer ("CEO") and a director of Diamond Brands. Dr. Nakra has more than
25 years of experience in the branded consumer products and food
industries, including five years as President and CEO of Gruma
Corporation, whose subsidiaries include Mission Foods Corporation, a
leading manufacturer and marketer of tortilla products, and Azteca
Milling, a leading manufacturer and marketer of corn flour. Based on IRI
data, Gruma Corporation achieved significant increases in sales and market
share during Dr. Nakra's tenure. Dr. Nakra and the Company's existing
senior management team have experience in identifying, consummating and
integrating strategic acquisitions. See "New Chief Executive Officer."
BUSINESS STRATEGY
The Company's business strategy, which is designed to enhance its strong
market positions and increase sales and EBITDA, includes the following
elements:
. CONTINUE TO PRODUCE HIGH QUALITY PRODUCTS. The Company believes that
product quality has been a key factor in its success and intends to
continue manufacturing high quality products in a cost-efficient manner in
each of its product categories. The Company believes that its products are
of superior or equivalent quality compared to those of its competitors,
and that its brand names and "Made in the USA" label distinguish the
Company's products from those of its competitors.
. EXPAND CATEGORY MANAGEMENT STRATEGY TO INCREASE RETAIL SHELF
SPACE. Diamond Brands utilizes a category management strategy to maintain
and increase shelf space for its products at retail outlets. A central
element of this strategy is the Company's corporate rebate program, which
provides incentives to grocery retailers to buy multiple products from the
Company. The Company intends to expand its corporate rebate program to
include additional grocery retailers. The category management strategy
also includes consolidated invoicing and shipping across the Company's
product lines, which allows retailers to lower buying costs and reduce
their number of suppliers.
. ENTER NEW DISTRIBUTION CHANNELS. The Company's products are sold primarily
through grocery stores, drug stores, mass merchandisers and warehouse clubs
in the United States. While the Company has been successful in these
distribution channels, management believes there is potential to increase
sales and EBITDA by: (i) penetrating additional retail outlets including
gift stores and party supply stores; (ii) increasing sales efforts in the
food service industry; and (iii) entering international markets. The Company
has taken initial steps to explore potential international opportunities by
establishing contacts with potential local distributors in Canada and the
Caribbean. The Company expects to explore such potential opportunities
further in the future. The Company intends to utilize its strong brand
names, diverse product portfolio and cost-efficient manufacturing to
facilitate its entry into new distribution channels.
. CAPITALIZE ON STRONG BRAND NAMES AND NATIONAL DISTRIBUTION TO INTRODUCE
NEW PRODUCTS. The Company intends to continue developing new products and
product line extensions designed to capitalize on the Company's strong
brand names and existing distribution and manufacturing capabilities. The
Company intends to use its category management strategy and existing
relationships with retailers to secure retail shelf space for these new
products.
. PURSUE ATTRACTIVE ACQUISITION OPPORTUNITIES. The Company has successfully
completed and integrated three strategic acquisitions in the last seven
years. In 1991, the Company purchased certain assets of Universal Match.
In 1995, the Company strengthened its position in the Woodenware and
Cutlery product categories through the Forster Acquisition and in February
1997, the Company added candles to its product portfolio through the
Empire Acquisition. The Company believes there are additional
opportunities to generate incremental sales and EBITDA through strategic
acquisitions. Although the Company does not currently have any particular
strategic acquisition opportunities identified, it intends to consider
regularly and to pursue strategic acquisitions that: (i) add to or complement
its product portfolio; (ii) leverage its existing distribution and
manufacturing capabilities; or (iii) provide access to new distribution
channels for its products.
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<PAGE>
THE RECAPITALIZATION
Holdings, its then existing stockholders (the "Stockholders"), Seaver Kent-
TPG Partners, L.P., an investment partnership jointly formed by Seaver Kent &
Company, LLC ("Seaver Kent") and Texas Pacific Group ("TPG"), and Seaver Kent I
Parallel, L.P. (collectively, the "Sponsors") entered into a Recapitalization
Agreement dated as of March 3, 1998 (the "Recapitalization Agreement"), which
provided for the recapitalization of Holdings (the "Recapitalization").
Pursuant to the Recapitalization Agreement, the Sponsors and other investors
purchased from Holdings, for an aggregate purchase price of $47.0 million,
shares of pay-in-kind preferred stock of Holdings ("Holdings Preferred Stock"),
together with warrants (the "Warrants") to purchase shares of common stock of
Holdings ("Holdings Common Stock"). The Warrants provide the holders with the
right to subscribe and purchase from Holdings Holdings Common Stock at the
purchase price at $0.01 per share at any time prior to their expiration date in
April 2008. The values assigned to the Warrants and Holdings Preferred Stock
were $12.3 million and $34.7 million, respectively, based upon the sale prices
of comparable preferred stock instruments in the marketplace.Dividends in
respect of Holdings Preferred Stock accumulate at 12% per annum (representing a
15% per annum effective yield) to its mandatory redemption value of $47.0
million on the mandatory redemption date on October 15, 2009. Holdings has the
option, at any time, to redeem Holdings, Preferred Stock at a price equal to
the Liquidation Preference (as defined herein under "Capital Stock of Holdings
and the Issuer") plus all accumulated and unpaid dividends. The shares of
Holdings Common Stock issuable upon the full exercise of the Warrants would
represent 77.5% of the outstanding shares of Holdings Common Stock after giving
effect to such issuance. In addition, Holdings purchased (the "Equity
Repurchase") for $211.4 million, subject to certain working capital
adjustments, from the Stockholders, all outstanding shares of Holdings' capital
stock other than shares (the "Retained Shares") of Holdings Common Stock having
an implied value (based solely on the $13.98 per share price to be paid in the
Equity Repurchase) of $15.0 million (the "Implied Value"), which continue to be
held by certain of the Stockholders. The Equity Repurchase price of $13.98 per
share was determined based upon a competitive process with potential investors
managed by Donaldson, Lufkin & Jenrette Securities Corporation on behalf of the
Company. The Retained Shares would represent 22.5% of the outstanding shares of
Holdings Common Stock after giving effect to the full exercise of the Warrants.
Holdings, the Sponsors and the holders of the Retained Shares also entered into
a Stockholders Agreement pursuant to which, among other things, the Sponsors
have the ability to direct the voting of outstanding shares of Holdings Common
Stock in proportion to their ownership of such shares as if the Warrants were
exercised in full. Accordingly, the Sponsors have voting control of Holdings.
In connection with the Recapitalization, Holdings organized the Issuer and,
immediately prior to the consummation of the Recapitalization, Holdings
transferred substantially all of its assets and liabilities to the Issuer.
Holdings' current operations are, and future operations are expected to be,
limited to owning the stock of the Issuer. The Issuer repaid substantially all
of the Company's funded debt obligations existing immediately before the
consummation of the Recapitalization (the "Debt Retirement")in the amount of
$51.8 million.
Funding requirements for the Recapitalization (which was consummated on April
21, 1998) were $296.5 million (including the Implied Value of the Retained
Shares) and were satisfied through the Retained Shares and the following: (i)
the purchase by the Sponsors and other investors of Holdings Preferred Stock
and the Warrants for $47.0 million ($45.8 million in cash and $1.2 million in
officer notes receivables); (ii) $100.0 million of gross proceeds from the
offering of the Old Notes (the "Offering"); (iii) $80.0 million of borrowings
under senior secured term loan facilities (the "Term Loan Facilities") provided
by a syndicate of lenders (collectively, the "Banks") led by DLJ Capital
Funding, Inc. ("DLJ Capital Funding"), as Syndication Agent, Wells Fargo Bank,
N.A. ("Wells Fargo"), as Administrative Agent, and Morgan Stanley Senior
Funding, Inc. ("Morgan Stanley Senior Funding"), as Documentation Agent; (iv)
$10.6 million of borrowings under a senior secured revolving credit facility
(the "Revolving Credit Facility" and, together with the Term Loan Facilities,
the "Bank Facilities") having availability of up to $25.0 million to be
provided by the Banks, DLJ Capital Funding, Wells Fargo and Morgan Stanley
Senior Funding; and (v) $45.1 million of gross proceeds from the sale by
Holdings of 12 7/8% senior discount debentures due 2009 (the "Holdings Senior
Discount Debentures") in a separate offering.
The Equity Repurchase, the Debt Retirement, the issuance and sale by Holdings
of Holdings Preferred Stock, the Warrants and the Holdings Senior Discount
Debentures and the Offering and the borrowing by the Issuer of funds under the
Bank Facilities (which proceeds were distributed to Holdings) were effected in
connection with the Recapitalization. The Recapitalization was accounted for as
a recapitalization transaction for accounting purposes.
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The following table sets forth the sources and uses of funds in connection
with the Recapitalization:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
SOURCES:
Bank Facilities (1)........................................ $ 90,582
Notes offered in the Offering.............................. 100,000
Holdings Senior Discount Debentures........................ 45,105
Holdings Preferred Stock (2)............................... 45,783
Implied Value of the Retained Shares (3)................... 15,000
--------
Total sources of funds................................... $296,470
========
USES:
Equity Repurchase.......................................... $211,421
Debt Retirement............................................ 51,834
Implied Value of the Retained Shares (3)................... 15,000
Transaction fees and expenses (4).......................... 18,215
--------
Total uses of funds...................................... $296,470
========
</TABLE>
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(1) Represents (i) $10.6 million drawn under the $25.0 million Revolving Credit
Facility, (ii) $30.0 million under the Term A Loan Facility (as defined
herein) and (iii) $50.0 million under the Term B Loan Facility (as defined
herein). See "Description of the Bank Facilities."
(2) Represents cash proceeds associated with the Holdings Preferred Stock and
excluding the $1.2 million officer notes receivable.
(3) Based solely on the purchase price per share to be paid for shares of
Holdings Common Stock in the Equity Repurchase, multiplied by the number of
the Retained Shares. The Implied Value of the Retained Shares does not
represent a purchase, sale or other change in such equity investment for
accounting or tax purposes or any funds or proceeds paid to or used by the
Company in the Recapitalization, and does not necessarily represent a market
valuation for the Retained Shares. Due to significant changes in the capital
structure of Holdings as a result of the Recapitalization, the Implied Value
of the Retained Shares should not be used in comparison to the value assigned
to the Warrants issued in connection with Holdings Preferred Stock.
(4) Includes deferred financing costs of $9.8 million, legal and advisory fees
of $4.7 million, management bonus payments of $1.6 million, bridge financing
fees of $1.0 million, compensation expense related to repurchase of common
stock upon exercise of stock options of $0.6 million, and other
recapitalization expenses of $0.5 million. All costs except for the deferred
financing cost of $9.8 million and $1.3 million in legal and advisory fees
have been expensed by the Company in the period which includes the date of
the Recapitalization.
5
<PAGE>
NEW CHIEF EXECUTIVE OFFICER
In connection with the Recapitalization, Naresh K. Nakra became President,
CEO and a director of Diamond Brands. Dr. Nakra, 52, has more than 25 years of
experience in the branded consumer products and food industries. From 1993 to
1998, Dr. Nakra served as President and CEO of Gruma Corporation, a U.S.
subsidiary of Gruma, S.A., a Mexico-based multinational company. Gruma
Corporation's subsidiaries include Mission Foods Corporation, a leading
manufacturer and marketer of tortilla products, and Azteca Milling, a leading
manufacturer and marketer of corn flour. These businesses sell and distribute
products manufactured in 14 facilities to retail and food service customers in
the United States, Latin America, Europe and the Pacific Rim. Based on IRI
data, Gruma Corporation achieved significant increases in sales and market
share during Dr. Nakra's tenure.
THE SPONSORS
SEAVER KENT & COMPANY, LLC
Seaver Kent is a private equity firm located in Menlo Park, California, that
specializes in private, control investments in middle-market companies. Seaver
Kent was founded in October 1996 by Alexander M. Seaver and Bradley R. Kent,
both of whom were formerly general partners of InterWest Partners, one of the
nation's leading venture capital firms. The principals of Seaver Kent have
successfully partnered with management to build businesses through both
internal growth and strategic acquisitions, and in particular have extensive
experience investing in consumer and household products companies. Portfolio
companies in which funds managed by the principals of Seaver Kent have made
investments include AMX Corporation, Artco-Bell Holding, Bojangles', Cafe
Valley, Favorite Brands International, Heidi's Fine Desserts and MidWest
Folding Products.
TEXAS PACIFIC GROUP
TPG was founded by David Bonderman, James G. Coulter and William S. Price,
III in 1992 to pursue public and private investment opportunities through a
variety of methods, including leveraged buyouts, recapitalizations, joint
ventures, restructurings and strategic public securities investments. The
principals of TPG manage TPG Partners, L.P. and TPG Partners II, L.P., both
Delaware limited partnerships, with aggregate committed capital of over $3.2
billion. Among TPG's other investments are branded consumer products companies
Beringer Wine Estates, Del Monte Foods Company, Ducati Motor, Favorite Brands
International and J. Crew. Other TPG portfolio companies include America West
Airlines, Belden & Blake Corporation, Denbury Resources, Genesis ElderCare,
Paradyne, Virgin Entertainment and Vivra Specialty Partners. In addition, the
principals of TPG led the $9 billion reorganization of Continental Airlines in
1993.
CORPORATE INFORMATION
The Company's predecessor, Diamond Match, was formed in 1881 following the
consolidation of 12 match companies. Holdings was incorporated under the laws
of Minnesota in 1986 when the stockholder group previous to the
Recapitalization purchased certain assets of Diamond Match. In 1991, Diamond
Brands purchased certain assets of Universal Match. In March 1995, Diamond
Brands acquired (the "Forster Acquisition") Forster Holdings, Inc. ("Forster")
and in February 1997, the Company acquired (the "Empire Acquisition") the
business of Empire Manufacturing Company ("Empire"). The Issuer is a wholly-
owned subsidiary of Holdings and was incorporated under the laws of the State
of Delaware in April 1998 as part of the Recapitalization. The principal
executive offices of the Company are located at 1800 Cloquet Avenue, Cloquet,
Minnesota 55720, and its telephone number is (218) 879-6700.
6
<PAGE>
THE EXCHANGE OFFER
Registration Rights The Old Notes were issued on April 21, 1998 (the
Agreement................... "Issue Date") to the Initial Purchasers. The
Initial Purchasers placed the Old Notes with
institutional investors. In connection therewith,
the Issuer, the Guarantors and the Initial
Purchasers entered into the Registration Rights
Agreement, providing, among other things, for the
Exchange Offer. See "The Exchange Offer."
The Exchange Offer.......... New Notes are being offered in exchange for an
equal principal amount of Old Notes. As of the
date hereof, $ 100,000,000 aggregate principal
amount of Old Notes is outstanding. Old Notes may
be tendered only in integral multiples of $1,000.
Resale of New Notes......... Based on interpretations by the staff of the
Commission, as set forth in no-action letters
issued to third parties, including the Exchange
Offer No-Action Letters, the Issuer and the
Guarantors believe that the New Notes issued
pursuant to the Exchange Offer may be offered for
resale, resold or otherwise transferred by each
holder thereof (other than a broker-dealer who
acquires such New Notes directly from the Issuer
for resale pursuant to Rule 144A under the
Securities Act or any other available exemption
under the Securities Act and other than any
holder that is an "affiliate" (as defined under
Rule 405 of the Securities Act) of the Issuer)
without compliance with the registration and
prospectus delivery provisions of the Securities
Act, provided that such New Notes are acquired in
the ordinary course of such holder's business and
such holder is not engaged in, and does not
intend to engage in, a distribution of such New
Notes and has no arrangement with any person to
participate in a distribution of such New Notes.
By tendering Old Notes in exchange for New Notes,
each holder, other than a broker-dealer, will
represent to the Issuer and the Guarantors that:
(i) it is not an affiliate (as defined in Rule
405 under the Securities Act) of the Issuer; (ii)
it is not a broker-dealer tendering Old Notes
acquired for its own account directly from the
Issuer; (iii) any New Notes to be received by it
were acquired in the ordinary course of its
business; and (iv) it is not engaged in, and does
not intend to engage in, a distribution of such
New Notes and has no arrangement or understanding
to participate in a distribution of the New
Notes. If a holder of Old Notes is engaged in or
intends to engage in a distribution of New Notes
or has any arrangement or understanding with
respect to the distribution of New Notes to be
acquired pursuant to the Exchange Offer, such
holder may not rely on the applicable
interpretations of 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 Participating Broker-
Dealer that receives New Notes for its own
account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus
meeting the requirements of the Securities Act in
connection with any resale of such New Notes. The
Letter of Transmittal states that by so
7
<PAGE>
acknowledging 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. This Prospectus,
as it may be amended or supplemented from time to
time, may be used by a Participating Broker-
Dealer in connection with resales of New Notes
received in exchange for Old Notes where such Old
Notes were acquired by such Participating Broker-
Dealer as a result of market-making activities or
other trading activities. The Issuer and the
Guarantors have agreed that they will make this
Prospectus available to any Participating Broker-
Dealer for a period of time not to exceed one
year after the date on which the Exchange Offer
is consummated for use in connection with any
such resale. 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 Notes prior to offering
or selling such New Notes. The Issuer and the
Guarantors have agreed, pursuant to the
Registration Rights Agreement and subject to
certain specified limitations therein, to
register or qualify the New Notes for offer or
sale under the securities or "blue sky" laws of
such jurisdictions as may be necessary to permit
consummation of the Exchange Offer.
Consequences of Failure to
Exchange Old Notes......... Upon consummation of the Exchange Offer, subject
to certain exceptions, holders of Old Notes who
do not exchange their Old Notes for New Notes in
the Exchange Offer will no longer be entitled to
registration rights and will not be able to offer
or sell their Old Notes, unless such Old Notes
are subsequently registered under the Securities
Act (which, subject to certain limited
exceptions, the Issuer will have no obligation to
do), except pursuant to an exemption from, or in
a transaction not subject to, the Securities Act
and applicable state securities laws. See "Risk
Factors--Risk Factors Relating to the Notes--
Consequences of Failure to Exchange" and "The
Exchange Offer--Terms of the Exchange Offer."
Expiration Date............. 5:00 p.m., New York City time, on October 19,
1998, unless the Exchange Offer is extended, in
which case the term "Expiration Date" means the
latest date and time to which the Exchange Offer
is extended.
Interest on the New Notes... The New Notes will accrue interest at the
applicable per annum rate set forth on the cover
page of this Prospectus, from (i) the later of
(A) the last interest payment date on which
interest was paid on the Old Notes surrendered in
exchange therefor or (B) if the Old Notes are
surrendered for exchange on a date subsequent to
the record date for an interest payment date to
occur on or after the date of such exchange and
as to which interest will be paid, the date of
such interest payment or (ii) if no interest has
been paid on the Old Notes, from the Issue Date
of such Old Notes. Interest on the New Notes is
payable on October 15 and April 15 of each year,
commencing October 15, 1998.
8
<PAGE>
Conditions to the Exchange
Offer....................... The Exchange Offer is not conditioned upon any
minimum principal amount of Old Notes being
tendered for exchange. However, the Exchange
Offer is subject to certain customary conditions,
which may, under certain circumstances, be waived
by the Issuer and the Guarantors. See "The
Exchange Offer--Conditions." Except for the
requirements of applicable federal and state
securities laws, there are no federal or state
regulatory requirements to be complied with or
obtained by the Issuer or the Guarantors in
connection with the Exchange Offer.
Procedures for Tendering
Old Notes................... Each holder of Old Notes wishing to accept the
Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein
and therein, and mail or otherwise deliver such
Letter of Transmittal, or such facsimile,
together with the Old Notes to be exchanged and
any other required documentation to the Exchange
Agent (as defined herein) at the address set
forth herein or effect a tender of Old Notes
pursuant to the procedures for book-entry
transfer as provided for herein. See "The
Exchange Offer--Procedures for Tendering" and "--
Book-Entry Transfer."
Guaranteed Delivery
Procedures.................. Holders of Old Notes who wish to tender their Old
Notes and whose Old Notes are not immediately
available or who cannot deliver their Old Notes
and a properly completed Letter of Transmittal or
any other documents required by the Letter of
Transmittal to the Exchange Agent prior to the
Expiration Date may tender their Old Notes
according to the guaranteed delivery procedures
set forth in "The Exchange Offer--Guaranteed
Delivery Procedures."
Withdrawal Rights........... Tenders of Old Notes may be withdrawn at any time
prior to 5:00 p.m., New York City time, on the
Expiration Date. To withdraw a tender of Old
Notes, a written or facsimile transmission notice
of withdrawal must be received by the Exchange
Agent at its address set forth herein under "The
Exchange Offer--Exchange Agent" prior to 5:00
p.m., New York City time, on the Expiration Date.
Acceptance of Old Notes and
Delivery of New Notes...... Subject to certain conditions, any and all Old
Notes that are properly tendered in the Exchange
Offer prior to 5:00 p.m., New York City time, on
the Expiration Date will be accepted for
exchange. The New Notes issued pursuant to the
Exchange Offer will be delivered promptly
following the Expiration Date. See "The Exchange
Offer--Terms of the Exchange Offer."
Certain Tax Considerations.. The exchange of New Notes for Old Notes should
not be considered a sale or exchange or otherwise
a taxable event for federal income tax purposes.
See "Certain United States Federal Income Tax
Considerations."
Exchange Agent.............. State Street Bank and Trust Company is serving as
exchange agent (the "Exchange Agent") in
connection with the Exchange Offer.
Fees and Expenses........... All expenses incident to consummation of the
Exchange Offer and compliance with the
Registration Rights Agreement will be borne by
the Issuer. See "The Exchange Offer--Fees and
Expenses."
Use of Proceeds............. There will be no cash proceeds payable to the
Issuer or the Guarantors from the issuance of the
New Notes pursuant to the Exchange Offer. See
"Use of Proceeds."
9
<PAGE>
SUMMARY OF TERMS OF NEW NOTES
The Exchange Offer relates to the exchange of up to $100,000,000 aggregate
principal amount of Old Notes for up to an equal aggregate principal amount of
New Notes. The New Notes will be entitled to the benefits of the same Indenture
that governs the Old Notes and that will govern the New Notes. The form and
terms of the New Notes are the same in all material respects as the form and
terms of the Old Notes, except that the New Notes have been registered under
the Securities Act and therefore will not bear legends restricting the transfer
thereof. See "Description of the New Notes."
Maturity Date............... April 15, 2008.
Interest Rate and Payment The New Notes will bear interest at a rate of 10
Dates....................... 1/8% per annum. Interest will be payable semi-
annually in arrears on each October 15 and April
15, commencing October 15, 1998.
Guarantee................... The Issuer's payment obligations under the New
Notes are jointly and severally guaranteed, fully
and unconditionally, by the Guarantors.
Optional Redemption......... The New Notes will be redeemable at the option of
the Issuer, in whole or in part, at any time on or
after April 15, 2003, in cash at the redemption
prices set forth herein, plus accrued and unpaid
interest and Liquidated Damages (as defined herein
under "Description of the New Notes--Registration
Rights; Liquidated Damages"), if any, thereon to
the redemption date. In addition, at any time
prior to April 15, 2001, the Issuer may, at its
option, on any one or more occasions, redeem up to
35% of the aggregate principal amount of the New
Notes originally issued at a redemption price
equal to 110.125% of the principal amount thereof,
plus accrued and unpaid interest and Liquidated
Damages, if any, thereon to the redemption date,
with the net cash proceeds of one or more Equity
Offerings (as defined herein under "Description of
the New Notes--Certain Definitions"); provided
that at least 65% of the original aggregate
principal amount of the New Notes remains
outstanding immediately after each such
redemption. See "Description of the New
Notes--Optional Redemption."
Subsidiary Guarantees....... The New Notes will be guaranteed, jointly and
severally, by all of the Issuer's Restricted
Subsidiaries (as defined herein under
"Description of the New Notes--Certain
Definitions") (other than Restricted Subsidiaries
that do not guarantee any indebtedness of the
Issuer or any other Restricted Subsidiary). The
Subsidiary Guarantees (as defined herein under
"Description of the New Notes--Guarantees") may
be released under certain circumstances. See
"Description of the New Notes--Guarantees."
Ranking..................... The New Notes will be general unsecured
obligations of the Issuer and will be subordinated
in right of payment to all existing and future
Senior Debt (as defined herein under "Description
of the New Notes -- Certain Definitions") of the
Issuer, including borrowings under the Bank
Facilities. The Subsidiary Guarantees will be
general unsecured obligations of the Guarantors
and will be subordinated in right of payment to
all existing and future Senior Debt of the
Guarantors, including guarantees of the
Bank Facilities. As of June 30, 1998, the
Issuer and the Guarantors had approximately
$86.1 million of Senior Debt. The Indenture
permits the Issuer and the Guarantors to incur
additional indebtedness,
10
<PAGE>
including Senior Debt, subject to certain
limitations. The Indenture prohibits the
incurrence of any indebtedness by the Issuer and
the Guarantors that is senior to the New Notes
and the Subsidiary Guarantees, as the case may
be, and subordinated to Senior Debt of the Issuer
and the Guarantors, as the case may be. See
"Description of the New Notes--Subordination" and
"--Certain Covenants--Limitation on Layering
Debt."
Repurchase at the Option of
Holders..................... Upon the occurrence of a Change of Control (as
defined herein under "Description of Holdings
Indebtedness") each holder of New Notes will have
the right to require the Company to repurchase all
or any part of such holder's New Notes at a price
in cash equal to 101% of the aggregate principal
amount thereof plus accrued and unpaid interest
and Liquidated Damages thereon. In addition, if
the Issuer or any of its Restricted Subsidiaries
consummates an Asset Sale (as defined herein under
"Description of the New Notes -- Certain
Definitions"), which is permitted in limited
circumstances, and the Issuer or its Restricted
Subsidiaries has Excess Proceeds (as defined
herein under "Description of the New Notes --
Repurchase at the Option of Holders -- Asset
Sales"), from such Asset Sale in an amount
exceeding $7.5 million, the Issuer will be
required to make an offer to all holders of New
Notes and, to the extent required by the terms of
any debt which ranks pari passu with the New Notes
("Pari Passu Indebtedness") to purchase the
maximum principal amount of New Notes and any such
Pari Passu Indebtedness, that may be purchased out
of the Excess Proceeds, at a price in cash equal
to 100% of the principal amount thereof plus
accrued and unpaid interest and Liquidated Damages
thereon, in accordance with the procedures set
forth in the Indenture or such Pari Passu
Indebtedness, as applicable. See "Description of
the New Notes--Repurchase at the Option of
Holders."
Restrictive Covenants....... The Indenture under which the New Notes will be
issued contains certain covenants that limit the
ability of the Issuer and its Restricted
Subsidiaries to, among other things, incur
additional indebtedness, pay dividends or make
certain other restricted payments, consummate
certain asset sales, enter into certain
transactions with affiliates, incur indebtedness
that is subordinate in right of payment to any
Senior Debt and senior in right of payment to the
New Notes, incur liens, impose restrictions on
the ability of a Restricted Subsidiary to
guarantee the payment of any indebtedness of the
Issuer or any indebtedness of any other
Restricted Subsidiary, merge or consolidate with
any other person or sell, assign, transfer,
lease, convey or otherwise dispose of all or
substantially all of the assets of the Issuer.
See "Description of the New Notes--Certain
Covenants."
11
<PAGE>
USE OF PROCEEDS
There will be no cash proceeds payable to the Issuer or the Guarantors from
the issuance of the New Notes pursuant to the Exchange Offer. The proceeds from
the sale of the Old Notes were used to fund the Recapitalization. See "Use of
Proceeds" and "The Recapitalization."
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered in participating in the Exchange Offer.
12
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
The following table sets forth summary historical financial data of the
Company for each of the years in the five-year period ended December 31, 1997,
which have been audited by Arthur Andersen LLP, independent public accountants,
and for the unaudited six months ended June 30, 1997 and 1998. The summary
historical consolidated financial data for the years ended December 31, 1995,
1996 and 1997 are derived from and should be read in conjunction with the
audited consolidated financial statements of Holdings and the related notes
thereto included elsewhere in this Prospectus. The summary historical financial
data for the years ended December 31, 1993 and 1994 are derived from audited
financial statements of Holdings that are not included in this Prospectus. The
summary historical financial data for the six months ended June 30, 1997 and
1998 are derived from unaudited consolidated financial statements for such
periods included elsewhere in this Prospectus.
The unaudited pro forma consolidated statement of operations data of the
Issuer for the year ended December 31, 1997 gives effect to the
Recapitalization and the Empire Acquisition as if they had occurred on January
1, 1997. The unaudited pro forma consolidated statement of operations data of
the Issuer for the six months ended June 30, 1998 gives effect to the
Recapitalization as if it had occurred on January 1, 1997. The unaudited pro
forma consolidated financial data do not purport to represent what the Issuer's
or the Company's financial condition or results of operations would actually
have been had the Recapitalization and the Empire Acquisition in fact occurred
on the assumed dates, nor do they project the Issuer's and/or the Company's
financial condition or results of operations for any future period or date.
The financial data set forth below should be read in conjunction with the
audited consolidated financial statements and the related notes thereto, the
unaudited consolidated financial statements and the related notes thereto,
"Unaudited Pro Forma Consolidated Financial Data," "Selected Historical and Pro
Forma Consolidated Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," all included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, PRO FORMA ENDED JUNE 30, PRO FORMA
-------------------------------------------- DECEMBER 31, ---------------- JUNE 30,
1993 1994 1995 1996 1997 1997 1997 1998 1998
------- ------- ------- ------- -------- ------------ ------- ------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales............... $33,538 $31,289 $77,659 $90,201 $118,072 $120,714 $54,675 $58,558 $58,558
Gross profit............ 10,730 8,223 21,169 27,169 39,490 40,186 17,045 17,210 17,210
Operating income........ 6,423 4,070 10,417 17,301 26,555 26,781 11,031 9,829 9,829
Net income (1).......... 3,957 3,578 4,102 7,636 20,629 5,151 7,495 4,468 514
Other Data:
Depreciation and
amortization (2)....... $ 1,207 $ 1,250 $ 3,761 $ 4,204 $ 4,668 $ 4,856 $ 2,225 $ 2,105 $ 1,032
Cash flows from
operating activities .. 4,881 4,371 4,453 13,847 21,313 -- 7,831 4,473 --
Cash flows used in
investing activities .. (836) (585) (44,539) (1,979) (28,746) -- (25,946) (1,273) --
Cash flows from (used in)
financing activities .. (1,710) (3,082) 36,652 (11,868) 7,433 -- 18,115 (3,200) --
EBITDA (3).............. 7,630 5,320 14,178 21,505 31,223 31,637 13,286 11,934 11,934
EBITDA margin (4)....... 22.8% 17.0% 18.3% 23.8% 26.4% 26.2% 24.3% 20.4% 20.4%
Capital expenditures.... $ 836 $ 585 $ 1,926 $ 1,979 $ 4,050 $ 4,050 $ 1,250 $1,273 $1,273
CREDIT DATA:
Cash interest expense............................................ $ 16,934 -- -- $8,467
Ratio of EBITDA to cash interest expense......................... 1.9x -- -- 1.4x
Ratio of total debt to EBITDA.................................... 6.8x -- -- N/A
Ratio of earnings to fixed charges (5)........................... 1.5x -- -- 1.1x
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
------------------ ---------------
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital....... $ 5,325 $ 6,483 $ 6,989 $ 5,409 $ 13,247 $ $ 27,313
Total assets.......... 16,720 17,328 69,630 66,503 94,550 106,874
Total debt, including
current maturities... 7,629 7,347 46,713 34,845 49,497 186,125
Stockholders' equity
(deficit)............ 5,246 6,024 10,118 17,754 27,930 (96,547)
</TABLE>
13
<PAGE>
- --------
(1) For the years ended December 31, 1993, 1995 and 1996 and the
period from April 21, 1998 to June 30, 1998, the Company was
a Subchapter C corporation for federal income tax purposes.
For the years ended December 31, 1994 and 1997, the six
months ended June 30, 1997 and the period from January 1,
1998 to April 20, 1998, the Company was a Subchapter S
corporation for federal income tax purposes. See "Selected
Historical and Pro Forma Consolidated Financial Data" for
unaudited pro forma income tax data.
(2) Excludes amortization of deferred financing costs.
(3) EBITDA represents operating income plus depreciation and
amortization (excluding amortization of deferred financing
costs). The Company believes that EBITDA provides useful
information regarding the Company's ability to service its
debt; however, EBITDA does not represent cash flow from
operations as defined by generally accepted accounting
principles and should not be considered as a substitute for
net income as an indicator of the Company's operating
performance or cash flow as a measure of liquidity. Holders
tendering Old Notes in the Exchange Offer should consider
the following factors in evaluating such measures: EBITDA
and related measures (i) should not be considered in
isolation, (ii) are not measures of performance calculated
in accordance with generally accepted accounting principles
("GAAP"), (iii) should not be construed as alternatives or
substitutes for income from operations, net income or cash
flows from operating activities in analyzing the Issuer's
operating performance, financial position or cash flows (in
each case, as determined in accordance with GAAP) and (iv)
should not be used as indicators of the Issuer's operating
performance or measures of its liquidity. Additionally,
because all companies do not calculate EBITDA and related
measures in a uniform fashion, the calculations presented in
this Prospectus may not be comparable to other similarly
titled measures of other companies.
(4) EBITDA margin represents EBITDA as a percentage of net
sales.
(5) The ratio of earnings to fixed charges has been calculated
by dividing income before income taxes and fixed charges by
fixed charges. Fixed charges for this purpose include
interest expense, amortization of deferred financing costs
and one-third of operating lease payments (the portion
deemed to be representative of the interest factor).
14
<PAGE>
RISK FACTORS
Prospective holders of the New Notes should carefully review the information
contained and incorporated by reference in this Prospectus and should
particularly consider the following matters:
RISK FACTORS RELATING TO THE COMPANY
SUBSTANTIAL LEVERAGE; LIQUIDITY; STOCKHOLDERS' DEFICIT
In connection with the Recapitalization, the Company incurred a significant
amount of additional indebtedness, the debt service obligations of which
could, under certain circumstances, have material consequences to security
holders of the Issuer, including holders of the New Notes. As of June 30,
1998, the Issuer and its Guarantors had outstanding approximately $186.1
million of total indebtedness (including approximately $86.1 million of Senior
Debt) and stockholders' deficit of approximately $96.5 million. On April 15,
2003, Holdings will be required to redeem Holdings Senior Discount Debentures
with an aggregate principal amount at maturity equal to (i) $33.2 million
multiplied by (ii) the quotient obtained by dividing (x) the aggregate
principal amount at maturity of the Holdings Senior Discount Debentures then
outstanding by (y) $84.0 million at a redemption price equal to 100% of the
principal amount at maturity of the Holdings Senior Discount Debentures so
redeemed (the "Mandatory Debenture Redemption"). Commencing October 15, 2003,
Holdings will be required to make semi-annual cash payments of interest on the
Holdings Senior Discount Debentures. Subject to the restrictions in the Bank
Facilities and the Indenture, the Company may incur additional senior or other
indebtedness from time to time to finance acquisitions or capital expenditures
or for other general corporate purposes. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources." The Bank Facilities and the Indenture restrict, but do not
prohibit, the payment of dividends by the Issuer to Holdings to finance the
Mandatory Debenture Redemption and the payment of interest on the Holdings
Senior Discount Debentures. See "Description of Holdings Indebtedness,"
"Description of the Bank Facilities" and "Description of the New Notes." There
can be no assurance that the Issuer will be entitled under the terms of the
Bank Facilities and the Indenture to dividend sufficient funds to Holdings to
fund the Mandatory Debenture Redemption or the payments of cash interest on
the Holdings Senior Discount Debentures. Holdings' failure to consummate the
Mandatory Debenture Redemption or to make interest payments on the Holdings
Senior Discount Debentures would cause an Event of Default (as defined
therein) under the Holdings Senior Discount Debentures. See "Description of
Holdings Indebtedness."
The level of the Company's indebtedness could have important consequences to
holders of the Notes, including, but not limited to, the following: (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 significant portion of the Issuer's cash
flow from operations must be dedicated to the payment of principal and interest
on the Company's indebtedness (including its current quarterly principal debt
service requirement of $125,000 under the Bank Facilities), thereby reducing
the funds available to the Issuer for its operations; (iii) significant amounts
of the Company's borrowings will bear interest at variable rates, which could
result in higher interest expense in the event of increases in interest rates;
(iv) the Indenture and the Bank Facilities contain financial and restrictive
covenants, the failure to comply with which may result in an Event of Default
which, if not cured or waived, could have a material adverse effect on the
Company; (v) the indebtedness outstanding under the Bank Facilities is secured
and matures prior to the maturity of the Notes; (vi) the Company may be
substantially more leveraged than certain of its competitors, which may place
the Issuer at a competitive disadvantage; and (vii) the Company's substantial
degree of leverage may limit its flexibility to adjust to changing market
conditions, reduce its ability to withstand competitive pressures and make it
more vulnerable to a downturn in general economic conditions or its business.
See "Description of Holdings Indebtedness," "Description of the Bank
Facilities" and "Description of the New Notes."
The Company's ability to make scheduled payments of principal of, or to pay
the interest or Liquidated Damages, if any, on, or to refinance its
indebtedness (including the Notes), or to fund planned capital or other
expenditures, will depend upon its future financial and operating performance,
which will be affected by
15
<PAGE>
prevailing economic conditions and financial, business and other factors, many
of which are beyond its control. There can be no assurance that the Issuer's
operating results, cash flow and capital resources will be sufficient for
payment of the Company's indebtedness in the future. In the absence of such
operating results and resources, the Issuer could face substantial liquidity
problems and might be required to dispose of material assets or operations to
meet its debt service and other obligations, and there can be no assurance as
to the timing of such sales or the proceeds that the Issuer could realize
therefrom. If the Issuer is unable to service its indebtedness, it may take
actions such as reducing or delaying planned expansion and capital
expenditures, selling assets, restructuring or refinancing its indebtedness or
seeking additional equity capital. There can be no assurance that any of these
actions could be effected on satisfactory terms, if at all, and the failure to
take these actions successfully could have a material adverse effect on the
Company's business, financial condition and operating results. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
COMPETITION; MARKET DATA
The markets for certain of the Company's products are highly competitive.
The Company competes, particularly with respect to its Candles and Cutlery
products, with a number of domestic manufacturers which are larger and have
significantly greater resources than the Company. In addition, the Company
competes with foreign manufacturers, particularly those located in Sweden,
Chile, Brazil, Japan, China and Korea, which may have lower manufacturing
costs than those of the Company. Diamond Brands believes that the barriers to
entry into the Company's business are relatively low, and there can be no
assurance that the Company will not face greater competition from existing or
additional manufacturers in the future. Diamond Brands cannot predict the
pricing or promotional activities of its competitors or their effects on the
Company's ability to market and sell its products. Attempts by existing or new
competitors seeking to gain or retain market share by reducing prices or
through other promotional activities could have a material adverse effect on
the Company's business, financial condition and operating results. In
addition, there can be no assurance that the Company's sales volume or market
shares would not be adversely affected by consumer reaction to higher prices
or that industry manufacturing capacity will not change so as to create an
imbalance of supply and demand in future periods. See "Business--Competition."
Market data used throughout this Prospectus were obtained from IRI (which data
include only sales reported by grocery stores, drug stores and mass
merchandisers), internal company surveys or industry publications. Although the
Company believes that such sources are reliable, the accuracy and completeness
of such information has not been independently verified. In particular, the
Company is not aware of the availability of statistics relating specifically to
Wooden Lights, Candles and Woodenware products. Therefore, management's
estimates with respect to such products are based only on the limited data in
the public domain and the Company's participation in the branded consumer
products industry. Accordingly, prospective holders of the New Notes should not
place undue emphasis on the market data and predictions of future trends
contained in the Prospectus.
RELIANCE ON MAJOR CUSTOMERS
The Company derives its revenue primarily from the sale of its products to
substantially all major grocery stores, drug stores, mass merchandisers and
warehouse clubs in the United States. During the year ended December 31, 1997,
sales to the Company's top 10 customers accounted for approximately 39% of the
Company's pro forma gross sales, with one customer, Wal-Mart and its
subsidiary, Sam's Club, accounting for approximately 19% of pro forma gross
sales. The loss of Wal-Mart or other significant customers or a significant
reduction in their purchases from the Company, could have a material adverse
effect on the Company's business, financial condition and operating results.
See "Business--Customers."
DEPENDENCE ON RAW MATERIAL AVAILABILITY; PRICING
The primary raw materials used by Diamond Brands are generally available
from multiple suppliers, and the Company has not experienced any significant
interruption in the availability of such materials. However, the
16
<PAGE>
price of polystyrene resin, the key raw material from which the Company's
Cutlery products is produced, can be volatile. The polystyrene resin used by
the Company is produced from petrochemical intermediates which are, in turn,
derived from petroleum. Polystyrene resin prices may fluctuate as a result of,
among other things, worldwide changes in natural gas and crude oil prices and
supply, as well as changes in supply and demand for polystyrene resin and
petrochemical intermediates from which it is produced. Among other industries,
the automotive and housing industries are significant users of polystyrene
resin. As a result, significant changes in worldwide capacity and demand in
these and other industries may cause significant fluctuations in the prices of
polystyrene resin. Although the Company has generally passed on these price
changes to customers on a delayed basis, there can be no assurance that the
Company will be able to purchase polystyrene resin at prices that can be
adequately passed on to customers. Although the Company in January 1997
entered into a three-year supply contract with a major supplier of polystyrene
resin, under which the Company believes it receives the lowest price available
to any customer purchasing similar volume, and receives short-term price
protection during periods of rising prices, there can be no assurance that
this transaction would reduce the impact on the Company of changes in
polystyrene resin prices.
Other primary raw materials required by Diamond Brands in its business
include glass and metal containers, wax and fragrances to produce the
Company's Candles products, birch and maple wood to produce the Company's
Woodenware products, and aspen wood and commodity chemicals to produce the
Company's Wooden Lights products. Other major raw materials include paperboard
and corrugated cardboard. Significant increases in the prices of such raw
materials could have a material adverse effect on the Company's business,
financial condition and operating results. Although the Company believes that
sources of its principal raw materials will continue to be adequate to meet
requirements and that alternative sources are available, there can be no
assurance that severe shortages of raw materials will not occur in the future
that could increase the cost or delay the shipment of the Company's products
and have a material adverse effect on the Company's business, financial
condition and operating results. See "Business--Raw Materials."
DEPENDENCE ON NEW MANAGEMENT AND KEY PERSONNEL
In connection with the Recapitalization, Naresh K. Nakra became President, CEO
and a director of Diamond Brands. Although Dr. Nakra has significant experience
in the branded consumer products and food industries, there can be no assurance
that this management transition will not adversely affect the Company's
business, financial condition and operating results. In addition, while the
Company believes that it has developed depth and experience among its key
personnel, there can be no assurance that the Company's business would not be
adversely affected if one or more of these key individuals left the Company. The
Company does not maintain any key-man or similar insurance policy in respect of
Dr. Nakra or any of its other senior management or key personnel. See
"Management."
RISKS RELATING TO THE COMPANY'S ACQUISITION STRATEGY
As part of its business strategy, Diamond Brands intends to pursue strategic
acquisitions. The Company regularly considers the acquisition of other
companies engaged in the manufacture and sale of related products. Future
acquisitions by the Company could result in the incurrence of additional
indebtedness and contingent liabilities, which could have a material adverse
effect on the Company's business, financial condition and operating results.
In addition, the process of integrating acquired operations into the Company's
operations may result in unforeseen operating difficulties, may absorb
significant management attention and may require significant financial
resources that would otherwise be available for the ongoing development or
expansion of the Company's existing operations. There is no assurance that the
Company will be able to identify desirable acquisition candidates or will be
successful in entering into definitive agreements with respect to desirable
acquisitions. Moreover, even if definitive agreements are entered into, there
can be no assurance that any future acquisition will thereafter be completed
or, if completed, that the anticipated benefits of the acquisition will be
realized. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
ENVIRONMENTAL REGULATIONS
The Company's operations are subject to a wide range of general and industry
specific federal, state and local environmental laws and regulations which
impose limitations on the discharge of pollutants into the air and
17
<PAGE>
water and establish standards for the treatment, storage and disposal of solid
and hazardous waste. Under various federal, state and local laws and
regulations, an owner or operator of real estate may be liable for the costs
of removal or remediation of certain hazardous substances on such property.
Although management believes that the Company is in substantial compliance
with all applicable environmental laws and regulations, unforeseen
expenditures to remain in such compliance, or unforeseen environmental
liabilities, could have a material adverse effect on the Company's business,
financial condition and operating results. Additionally, there can be no
assurance that changes in environmental laws and regulations or their
application will not require further expenditures by the Company. See
"Business--General--Legal and Regulatory Matters."
CONTROL OF THE COMPANY
The Sponsors and their affiliates, through their ownership of securities and
through contractual arrangements, control the Company and have the power to
elect a majority of directors of the Company, approve all amendments to the
Company's charter documents and effect fundamental corporate transactions such
as mergers and asset sales. See "The Recapitalization."
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
The information contained 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 following: the competitive
environment in the Company's business 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 ability to control inventory levels; the significant
indebtedness of the Company; labor disturbances; the ability to negotiate
agreements with suppliers on favorable terms; changes in the Company's capital
expenditure plan; 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. Forward-looking statements
regarding sales and EBITDA are particularly subject to a variety of
assumptions, some or all of which may not be realized. 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" or "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
holders of New Notes are cautioned not to place undue reliance on such
forward-looking statements. The Company disclaims any obligations to update
any of these factors or to announce publicly the results of any revisions to
any of the forward-looking statements contained herein to reflect future
events or developments.
RISK FACTORS RELATING TO THE NOTES
SUBORDINATION OF NOTES; ASSET ENCUMBRANCE
The Notes are subordinated in right of payment to all existing and future
Senior Debt of the Issuer, including the Bank Facilities. By reason of such
subordination, in the event of bankruptcy, liquidation, reorganization or
other winding-up of the Issuer or upon a default in payment with respect to,
or the acceleration of, any Senior Debt of the Issuer, the assets of the
Issuer will be available to pay obligations on the Notes only after all Senior
Debt has been paid in full, and there may not be sufficient assets remaining
to pay amounts due on any or all of
18
<PAGE>
the Notes then outstanding. In addition, under certain circumstances, no
payments may be made with respect to principal of or interest on the Notes if
a default exists with respect to Senior Debt. If the Issuer incurs any
additional pari passu debt, the holders of such debt would be entitled to
share ratably with the holders of the Notes in any proceeds distributed in
connection with any insolvency, liquidation, reorganization, dissolution or
other winding-up of the Issuer. This may have the effect of reducing the
amount of proceeds paid to holders of the Notes. In addition, no cash payments
may be made with respect to the Notes during the continuance of a payment
default with respect to the Senior Debt and, under certain circumstances, no
payments may be made with respect to the principal of (and premium, if any) on
the Notes for a period of up to 179 days if a nonpayment default exists with
respect to Senior Debt. The Subsidiary Guarantees are subordinated to the
Guarantor Senior Debt of each Guarantor (which includes the Guarantors'
guarantees under the Bank Facilities) to the same extent that the Notes are
subordinated to Senior Debt of the Issuer, and the ability to collect under
the Subsidiary Guarantees may therefore be similarly limited. See "Description
of the New Notes." In addition, indebtedness outstanding under the Bank
Facilities are secured by substantially all of the assets of the Issuer. As of
June 30, 1998, the Issuer had outstanding approximately $86.1
million of Senior Debt (all of which was secured borrowings) and the
Issuer had approximately $18.8 million of additional revolving borrowing
availability under the Revolving Credit Facility. See "--Restrictive Debt
Covenants," "Description of the Bank Facilities" and "Description of
the New Notes."
RISKS OF INCREASED LEVERAGE; ADDITIONAL SENIOR DEBT
The Indenture and the Bank Facilities, subject to certain significant
restrictive debt covenants contained therein, allow the Issuer to incur
additional Senior Debt from time to time. A highly leveraged transaction in
which the Company incurs significant additional Senior Debt could adversely
affect the holders of the New Notes. Holders of Senior Debt of the Issuer will
be entitled to receive payment in full of all obligations due in respect of such
Senior Debt before holders of the New Notes will be entitled to receive any
payment or distribution of any kind with respect to the New Notes and until all
obligations with respect to Senior Debt are paid in full, any payment or
distribution to which holders of New Notes would be entitled will be made to
holders of Senior Debt. See "--Restrictive Debt Covenants" and "Description of
the New Notes."
RESTRICTIVE DEBT COVENANTS
The Indenture and the Bank Facilities contain a number of significant
covenants that, among other things, restrict the ability of the Issuer and its
subsidiaries to dispose of assets, incur additional indebtedness, prepay
indebtedness (including the Notes) or amend certain debt instruments
(including the Indenture), pay dividends, create liens on assets, enter into
sale and leaseback transactions, make investments, loans or advances, make
acquisitions, engage in mergers or consolidations, change the business
conducted by the Issuer or its subsidiaries, or engage in certain transactions
with affiliates and otherwise restrict certain corporate activities. In
addition, under the Bank Facilities, the Issuer is required to comply with
specified financial ratios and tests, including minimum interest coverage
ratios, leverage ratios and fixed charge coverage ratios below a specified
maximum. See "Description of the Bank Facilities" and "Description of the New
Notes."
The Issuer's ability to comply with these covenants may be affected by
events beyond its control, including prevailing economic, financial and
industry conditions. The breach of any of these covenants or restrictions
could result in a default under the Bank Facilities and/or the Indenture,
which would permit the senior lenders, or holders of Notes, or both, as the
case may be, to declare all amounts borrowed thereunder to be due and payable,
together with accrued and unpaid interest and Liquidated Damages, if any
thereon, and the commitments of the senior lenders to make further extensions
of credit under the Bank Facilities could be terminated. If the Issuer were
unable to repay its indebtedness to its senior lenders, those lenders could
proceed against the collateral securing the indebtedness as described under
"Description of the Bank Facilities." See "--Subordination of Notes; Asset
Encumbrance."
POSSIBLE INABILITY TO REPURCHASE NOTES UPON CHANGE OF CONTROL
The Bank Facilities prohibit the Issuer from purchasing any Notes (except in
certain limited amounts) and also provide that certain change of control
events with respect to the Issuer will constitute a default thereunder. Any
future credit agreements or other agreements relating to Senior Debt to which
the Issuer becomes a party may contain similar restrictions and provisions. In
the event a Change of Control occurs at a time when the Issuer is prohibited
from purchasing the Notes, the Issuer could seek the consent of its lenders to
the purchase of the Notes or could attempt to refinance the borrowings that
contain the prohibition. If the Issuer does not obtain that consent or repay
those borrowings, the Issuer will remain prohibited from purchasing the Notes
by the relevant Senior Debt. In that case, the Issuer's failure to purchase
the tendered Notes would constitute an Event of Default
19
<PAGE>
under the Indenture which would, in turn, constitute a default under the Bank
Facilities and could constitute a default under other Senior Debt. In those
circumstances, the subordination provisions in the Indenture would likely
restrict payments to the holders of the Notes. Furthermore, no assurance can
be given that the Issuer will have sufficient resources to satisfy its
repurchase obligation with respect to the Notes following an occurrence of a
Change of Control. See "Description of the Bank Facilities" and "Description
of the New Notes."
FRAUDULENT TRANSFER STATUTES
Under federal or state fraudulent transfer laws, if a court were to find
that, at the time the Notes and Subsidiary Guarantees were issued, the Issuer
or a Guarantor, as the case may be, (i) issued the Notes or a Subsidiary
Guarantee with the intent of hindering, delaying or defrauding current or
future creditors or (ii) (A) received less than fair consideration or
reasonably equivalent value for incurring the indebtedness represented by the
Notes or a Subsidiary Guarantee, and (B)(1) was insolvent or was rendered
insolvent by reason of the issuance of the Notes or such Subsidiary Guarantee,
(2) was engaged, or about to engage, in a business or transaction for which
its assets were unreasonably small or (3) intended to incur, or believed (or
should have believed) it would incur, debts beyond its ability to pay as such
debts mature (as all of the foregoing terms are defined in or interpreted
under such fraudulent transfer statutes), such court could avoid all or a
portion of the Issuer's or a Guarantor's obligations to holders of the Notes,
subordinate the Issuer's or a Guarantor's obligations to holders of the Notes
to other existing and future indebtedness of the Issuer or such Guarantor, as
the case may be, the effect of which would be to entitle such other creditors
to be paid in full before any payment could be made on the Notes, and take
other action detrimental to holders of the Notes, including in certain
circumstances, invalidating the Notes. In that event, there would be no
assurance that any repayment on the Notes or under the Subsidiary Guarantees
would ever be recovered by holders of the Notes.
The definition of insolvency for purposes of the foregoing considerations
varies among jurisdictions depending upon the federal or state law that is
being applied in any such proceeding. However, the Issuer or a Guarantor
generally would be considered insolvent at the time it incurs the indebtedness
constituting the Notes or a Subsidiary Guarantee, as the case may be, if (i)
the fair market value (or fair saleable value) of its assets is less than the
amount required to pay its total existing debts and liabilities (including the
probable liability on contingent liabilities) as they become absolute or
matured or (ii) it is incurring debts beyond its ability to pay as such debts
mature. There can be no assurance as to what standard a court would apply in
order to determine whether the Issuer or a Guarantor was "insolvent" as of the
date the Notes and Subsidiary Guarantees were issued, or that, regardless of
the method of valuation, a court would not determine that the Issuer or a
Guarantor was insolvent on that date. Nor can there be any assurance that a
court would not determine, regardless of whether the Issuer or a Guarantor was
insolvent on the date the Notes and Subsidiary Guarantees were issued, that
the payments constituted fraudulent transfers on another ground. To the extent
that proceeds from the sale of the Notes are used to repay indebtedness under
the Bank Facilities, or to make a distribution to a stockholder on account of
the ownership of capital stock, a court may find that the Issuer or a
Guarantor did not receive fair consideration or reasonably equivalent value
for the incurrence of the indebtedness represented by the Notes or a
Subsidiary Guarantee, as the case may be.
To the extent any Subsidiary Guarantees were avoided as a fraudulent
conveyance or held unenforceable for any other reason, holders of the Notes
would cease to have any claim in respect of such Guarantor and would be
creditors solely of the Issuer and any Guarantor whose Subsidiary Guarantee
was not avoided or held unenforceable. In such event, the claims of holders of
the Notes against the issuer of an invalid Subsidiary Guarantee would
effectively be subject to the prior payment of all liabilities and preferred
stock claims of such Guarantor. There can be no assurance that, after
providing for all prior claims and preferred stock interests, if any, there
would be sufficient assets to satisfy the claims of holders of the Notes
relating to any voided portions of any of the Subsidiary Guarantees.
Based upon financial and other information currently available to it,
management of the Issuer and each Guarantor believes that the Notes and the
Subsidiary Guarantees are being incurred for proper purposes and in good faith
and that the Issuer and each Guarantor (i) is solvent and will continue to be
solvent after issuing the
20
<PAGE>
Notes or its Subsidiary Guarantees, as the case may be, (ii) will have
sufficient capital for carrying on its business after such issuance, and (iii)
will be able to pay its debts as they mature. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
In addition, if a court were to avoid the Subsidiary Guarantees under
fraudulent conveyance laws or other legal principles, or, by the terms of such
Subsidiary Guarantees, the obligations thereunder were reduced as necessary to
prevent such avoidance, or the Subsidiary Guarantees were released, the claims
of other creditors of the Guarantors, including trade creditors, would to such
extent have priority as to the assets of such Guarantors over the claims of
holders of Notes. The Subsidiary Guarantees of the Notes by any Guarantor will
be released upon the sale of such Guarantor or upon the release by the lenders
under the Bank Facilities of such Guarantor's Subsidiary Guarantee of the
Issuer's obligation under the Bank Facilities. The Indenture limits the
ability of the Issuer and its Restricted Subsidiaries to incur additional
indebtedness and to enter into agreements that would restrict the ability of
any subsidiary to make distributions, loans or other payments to the Issuer.
However, these limitations are subject to certain exceptions. See "Description
of the New Notes."
CONSEQUENCES OF FAILURE TO EXCHANGE
Upon consummation of the Exchange Offers, subject to certain exceptions,
holders of Old Notes who do not exchange their Old Notes for New Notes pursuant
to the Exchange Offer will no longer be entitled to registration rights and
will continue to be subject to the restrictions on transfer of such Old Notes
as set forth in the legend thereon as a consequence of the issuance of the Old
Notes 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 Old Notes may not be offered or sold, unless registered
under the Securities Act (which, subject to certain limited exceptions, the
Issuer will have no obligation to do), except pursuant to an exemption from, or
in a transaction not subject to, the Securities Act and applicable state
securities laws. The Issuer does not currently anticipate that it will register
the Old Notes under the Securities Act. To the extent that Old Notes are
tendered and accepted in the Exchange Offer, the trading market for untendered
and tendered but unaccepted Old Notes could be adversely affected. See "The
Exchange Offer--Terms of the Exchange Offer."
ABSENCE OF PUBLIC MARKET
The Old Notes have been designated as eligible for trading in the PORTAL
market. Prior to this Exchange Offer, there has been no public market for the
New Notes. If such a market were to develop, the New Notes could trade at
prices that may be higher or lower than their principal amount. Neither the
Issuer nor any of the Guarantors intends to apply for listing of the New Notes
on any securities exchange or for quotation of the New Notes on The Nasdaq
Stock Market's National Market or otherwise. The Initial Purchasers have
previously made a market in the Old Notes, and the Issuer and the Guarantors
have been advised that the Initial Purchasers currently intend to make a
market in the New Notes, as permitted by applicable laws and regulations,
after consummation of the Exchange Offer. The Initial Purchasers are not
obligated, however, to make a market in the Old Notes or the New Notes and any
such market-making activity may be discontinued at any time without notice at
the sole discretion of the Initial Purchasers. There can be no assurance as to
the liquidity of the public market for the New Notes or that any active public
market for the New Notes will develop or continue. If an active public market
does not develop or continue, the market price and liquidity of the New Notes
may be adversely affected.
21
<PAGE>
THE RECAPITALIZATION
Holdings, the Stockholders and the Sponsors entered into the Recapitalization
Agreement, which provided for the Recapitalization of Holdings. Pursuant to the
Recapitalization Agreement, the Sponsors and other investors purchased from
Holdings, for an aggregate purchase price of $47.0 million, Holdings Preferred
Stock together with the Warrants to purchase shares of Holdings Common Stock.
The Warrants provide the holders with the right to subscribe and purchase from
Holdings Holdings Common Stock at the purchase price at $0.01 per share at any
time prior to their expiration date in April 2008. The values assigned to the
Warrants and Holdings Preferred Stock were $12.3 million and $34.7 million,
respectively, based upon the sale prices of comparable preferred stock
instruments in the marketplace. Dividends in respect of Holdings Preferred
Stock accumulate at 12% per annum (representing a 15% per annum effective
yield) to its mandatory redemption value of $47.0 million on the mandatory
redemption date of October 15, 2009. Holdings has the option, at any time, to
redeem Holdings Preferred Stock at a price equal to the Liquidation Preference
plus all accumulated and unpaid dividends. The shares of Holdings Common Stock
issuable upon the full exercise of the Warrants would represent 77.5% of the
outstanding shares of Holdings Common Stock after giving effect to such
issuance. In addition, Holdings purchased for $211.4 million, subject to
certain working capital and debt adjustments, from the Stockholders all
outstanding shares of Holdings' capital stock, other than the Retained Shares.
The Retained Shares would represent 22.5% of the outstanding shares of Holdings
Common Stock after giving effect to the full exercise of the Warrants, having
the Implied Value of $15.0 million. The Equity Repurchase price of $13.98 per
share was determined based upon a competitive process with potential investors
managed by Donaldson, Lufkin & Jenrette Securities Corporation on behalf of the
Company. Holdings, the Sponsors and the holders of the Retained Shares also
entered into a Stockholders Agreement pursuant to which, among other things,
the Sponsors have the ability to direct the voting of outstanding shares of
Holdings Common Stock in proportion to their ownership of such shares as if the
Warrants were exercised in full. Accordingly, the Sponsors have voting control
of Holdings.
In connection with the Recapitalization, Holdings organized the Issuer and,
immediately prior to the consummation of the Recapitalization, Holdings
transferred substantially all of its assets and liabilities to the Issuer.
Holdings' current operation are, and future operations are expected to be,
limited to owning the stock of the Issuer. The Issuer repaid substantially
all of the Company's funded debt obligations existing immediately before the
consummation of the Recapitalization in the amount of $51.8 million.
Funding requirements for the Recapitalization (which was consummated on
April 21, 1998) were $296.5 million (including the Implied Value of the
Retained Shares) and were satisfied through the Retained Shares and the
following: (i) the purchase by the Sponsors and other investors of Holdings
Preferred Stock and the Warrants for $47.0 million ($45.8 million in cash and
$1.2 million in officer notes receivables); (ii) $100.0 million of gross
proceeds from the Offering; (iii) $80.0 million of borrowings under the Term
Loan Facilities; (iv) $10.6 million of borrowings under the Revolving Credit
Facility; and (v) $45.1 million of gross proceeds from the sale by Holdings of
the Holdings Senior Discount Debentures in a separate offering.
The Equity Repurchase, the Debt Retirement, the issuance and sale by Holdings
of Holdings Preferred Stock, the Warrants and the Holdings Senior Discount
Debentures and the Offering and the borrowing by the Issuer of funds under the
Bank Facilities (which proceeds were distributed to Holdings) were effected in
connection with the Recapitalization. The Recapitalization was accounted for as
a recapitalization transaction for accounting purposes.
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<PAGE>
The following table sets forth the sources and uses of funds in connection
with the Recapitalization:
<TABLE>
<CAPTION>
(IN
THOUSANDS)
----------
<S> <C>
SOURCES:
Bank Facilities (1)............................................. $ 90,582
Notes offered in the Offering................................... 100,000
Holdings Senior Discount Debentures............................. 45,105
Holdings Preferred Stock (2).................................... 45,783
Implied Value of the Retained Shares (3)........................ 15,000
--------
Total sources of funds........................................ $296,470
========
USES:
Equity Repurchase............................................... $211,421
Debt Retirement................................................. 51,834
Implied Value of the Retained Shares (3)........................ 15,000
Transaction fees and expenses (4)............................... 18,215
--------
Total uses of funds........................................... $296,470
========
</TABLE>
- --------
(1) Represents (i) $10.6 million drawn under the $25.0 million Revolving Credit
Facility, (ii) $30.0 million under the Term A Loan Facility and (iii)
$50.0 million under the Term B Loan Facility. See "Description of the Bank
Facilities."
(2) Represents cash proceeds associated with the Holdings Preferred Stock,
excluding the officer notes receivable of $1.2 million.
(3) Based solely on the purchase price per share to be paid for shares of
Holdings Common Stock in the Equity Repurchase, multiplied by the number
of the Retained Shares. The Implied Value of the Retained Shares does not
represent a purchase, sale or other change in such equity investment for
accounting or tax purposes or any funds or proceeds paid to or used by the
Company in the Recapitalization, and does not necessarily represent a
market valuation for the Retained Shares. Due to significant changes in the
capital structure of Holdings as a result of the Recapitalization, the
Implied Value of the Retained Shares should not be used in comparison to
the value assigned to the Warrants issued in connection with Holdings
Preferred Stock.
(4) Includes deferred financing costs of $9.8 million, legal and advisory fees
of $4.7 million, management bonus payments of $1.6 million, bridge
financing fees of $1.0 million, compensation expense related to repurchase
of common stock upon exercise of stock options of $0.6 million, and other
recapitalization expenses of $0.5 million. All costs except for the
deferred financing cost of $9.8 million and $1.3 million in legal and
advisory fees have been expensed by the Company in the period which
includes the date of the Recapitalization.
NEW CHIEF EXECUTIVE OFFICER
In connection with the Recapitalization, Naresh K. Nakra became President,
CEO and a director of Diamond Brands. Dr. Nakra, 52, has more than 25 years of
experience in the branded consumer products and food industries. From 1993 to
1998, Dr. Nakra served as President and CEO of Gruma Corporation, a U.S.
subsidiary of Gruma, S.A., a Mexico-based multinational company. Gruma
Corporation's subsidiaries include Mission Foods Corporation, a leading
manufacturer and marketer of tortilla products, and Azteca Milling, a leading
manufacturer and marketer of corn flour. These businesses sell and distribute
products manufactured in 14 facilities to retail and food service customers in
the United States, Latin America, Europe and the Pacific Rim. Based on IRI
data, Gruma Corporation achieved significant increases in sales and market
share during Dr. Nakra's tenure.
23
<PAGE>
THE SPONSORS
SEAVER KENT & COMPANY, LLC
Seaver Kent is a private equity firm located in Menlo Park, California, that
specializes in private, control investments in middle-market companies. Seaver
Kent was founded in October 1996 by Alexander M. Seaver and Bradley R. Kent,
both of whom were formerly general partners of InterWest Partners, one of the
nation's leading venture capital firms. The principals of Seaver Kent have
successfully partnered with management to build businesses through both
internal growth and strategic acquisitions, and in particular have extensive
experience investing in consumer and household products companies. Portfolio
companies in which funds managed by the principals of Seaver Kent have made
investments include AMX Corporation, Artco-Bell Holding, Bojangles', Cafe
Valley, Favorite Brands International, Heidi's Fine Desserts and MidWest
Folding Products.
TEXAS PACIFIC GROUP
TPG was founded by David Bonderman, James G. Coulter and William S. Price,
III in 1992 to pursue public and private investment opportunities through a
variety of methods, including leveraged buyouts, recapitalizations, joint
ventures, restructurings and strategic public securities investments. The
principals of TPG manage TPG Partners, L.P. and TPG Partners II, L.P., both
Delaware limited partnerships, with aggregate committed capital of over $3.2
billion. Among TPG's other investments are branded consumer products companies
Beringer Wine Estates, Del Monte Foods Company, Ducati Motor, Favorite Brands
International and J. Crew. Other TPG portfolio companies include America West
Airlines, Belden & Blake Corporation, Denbury Resources, Genesis ElderCare,
Paradyne, Virgin Entertainment and Vivra Specialty Partners. In addition, the
principals of TPG led the $9 billion reorganization of Continental Airlines in
1993.
USE OF PROCEEDS
There will be no cash proceeds payable to the Issuer or the Guarantors from
the issuance of the New Notes pursuant to the Exchange Offer. The proceeds
from the sale of the Old Notes were used for the retirement of debt, to
consummate the other components of the Recapitalization and to pay related
fees and expenses.
CAPITALIZATION
The following table sets forth as of June 30, 1998 the actual capitalization
of the Issuer. See "The Recapitalization," "Use of Proceeds," "Description of
the Bank Facilities" and "Description of the New Notes." This table should be
read in conjunction with the "Selected Historical and Pro Forma Consolidated
Financial Data" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF June 30,
1998
-----------------
(IN THOUSANDS)
<S> <C> <C>
Debt (including current maturities):
Revolving Credit Facility (1).............................. $ 6,250
Term Loan Facilities (2)................................... 79,875
Notes offered in the Offering.............................. 100,000
--------
Total debt............................................... 186,125
Stockholders' equity (deficit):
Common stock, $0.01 par value; 50,000 shares
authorized; 1 share issued and outstanding................. 1
Additional paid in capital................................. -
Accumulated deficit........................................ (96,548)
--------
Total stockholders' deficit.............................. (96,547)
--------
Total capitalization.................................. $ 89,578
========
</TABLE>
- --------
(1) Represents the portion drawn under the $25.0 million Revolving Credit
Facility. Future borrowing under the Revolving Credit Facility will be
available for general corporate purposes. See "Description of the Bank
Facilities."
(2) The Term Loan Facilities have an aggregate capacity of $80.0 million and
are comprised of a $30.0 million Term A Loan Facility and a $50.0 million
Term B Loan Facility. See "Description of the Bank Facilities."
24
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma consolidated financial data of the Issuer
(the "Unaudited Pro Forma Consolidated Financial Data") include the unaudited
pro forma consolidated statement of operations for the year ended December 31,
1997 and for the six months ended June 30, 1998 (the "Unaudited Pro Forma
Consolidated Statements of Operations").
The Unaudited Pro Forma Consolidated Statement of Operations for the year
ended December 31, 1997 is based on the audited consolidated statement of
operations of Holdings, and is adjusted to give effect to the Recapitalization
and the Empire Acquisition as if they had occurred on January 1, 1997. The
Unaudited Pro Forma Consolidated Statement of Operations data for the six
months ended June 30, 1998 is based on the unaudited consolidated statement of
operations of Holdings, and is adjusted to give effect to the Recapitalization
as if it had occurred on January 1, 1997. Pro forma adjustments as applied to
the respective historical consolidated financial information of Holdings
reflect and account for the Recapitalization as a recapitalization.
Accordingly, the historical basis of Holdings' assets and liabilities has not
been impacted by the Recapitalization. The Recapitalization and the Empire
Acquisition and their related adjustments are described in the accompanying
notes. The pro forma adjustments are based upon certain assumptions that
management of the Issuer believes are reasonable in the circumstances. The pro
forma adjustments are preliminary in nature. The Equity Repurchase price is
subject to adjustment based upon the amount of working capital, as defined, as
of April 21, 1998. The final determination of the working capital adjustment is
contingent upon the resolution of a dispute between the Stockholders and
Sponsors in the amount of $1.4 million. In the opinion of management, all
adjustments have been made that are necessary to present fairly the pro forma
data.
The Unaudited Pro Forma Consolidated Financial Data should be read in
conjunction with the notes included herewith, Holdings' audited consolidated
financial statements and notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
in this Prospectus.
The Unaudited Pro Forma Consolidated Financial Data do not purport to
represent what the Issuer's results of operations or financial position would
have been had the Recapitalization and the Empire Acquisition occurred on the
assumed dates, or to project the Issuer's results of operations or financial
position for any future period or date. The Unaudited Pro Forma Consolidated
Statements of Operations do not give effect to non-recurring charges directly
attributable to the Recapitalization.
25
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA ADJUSTMENTS
----------------------- ---------------------------------
EMPIRE
HOLDINGS (1) EMPIRE (2) ACQUISITION RECAPITALIZATION PRO FORMA
------------ ---------- ----------- -------------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales............... $118,072 $2,642 $ -- $ -- $120,714
Cost of sales........... 78,582 1,946 -- -- 80,528
-------- ------ ----- -------- --------
Gross profit.......... 39,490 696 -- -- 40,186
Selling, general and
administrative
expenses............... 11,414 310 -- -- 11,724
Goodwill amortization... 1,521 -- 160 (3) -- 1,681
-------- ------ ----- -------- --------
Operating income
(loss)............... 26,555 386 (160) -- 26,781
Interest expense........ 4,550 64 270 (4) 12,946 (5) 17,830
-------- ------ ----- -------- --------
Income (loss) before
income taxes......... 22,005 322 (430) (12,946) 8,951
Provision for income
taxes.................. 1,376 -- -- 2,424 (6) 3,800
-------- ------ ----- -------- --------
Income (loss)
from continuing
operations before
nonrecurring charges
directly atrributable
to the Recapitali-
zation................ $ 20,629 $ 322 $(430) $(15,370) $ 5,151
======== ====== ===== ======== ========
</TABLE>
FOR THE SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
HISTORICAL RECAPITALIZATION PRO FORMA
---------- ---------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Net sales............................. $58,558 $ -- $58,558
Cost of sales......................... 41,348 -- 41,348
------- ------- -------
Gross profit........................ 17,210 -- 17,210
Selling, general and administrative
expenses............................. 6,540 -- 6,540
Goodwill amortization................. 841 -- 841
------- ------- -------
Operating income.................... 9,829 -- 9,829
Interest expense...................... 6,155 2,760 (5) 8,915
------- ------- -------
Income (loss) before income taxes... 3,674 (2,760) 914
Provision (benefit) for income taxes.. (794) 1,194 (6) 400
------- ------- -------
Income (loss)
from continuing
operations before
nonrecurring charges
directly atrributable
to the Recapitalization............. $ 4,468 $ (3,954) $ 514
======= ======== ======
</TABLE>
See accompanying notes to Unaudited Pro Forma Consolidated Statements of
Operations.
26
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(1) Includes results of operations of Empire for the period from March 1, 1997
to December 31, 1997.
(2) Represents the results of operations of Empire for the period from January
1, 1997 to February 28, 1997.
(3) Reflects the additional amortization of goodwill related to the Empire
Acquisition for the period from January 1, 1997 to February 28, 1997.
(4) Reflects two months of interest expense related to the Empire Acquisition
for the period from January 1, 1997 to February 28, 1997 based on
borrowings of $24.7 million at an annualized interest rate of 8.125% less
the actual interest expense of $0.1 million.
(5) Gives effect to the increase in estimated cash and non-cash interest
expense from the use of borrowings to finance the Recapitalization:
<TABLE>
<CAPTION>
FOR THE SIX
FOR THE YEAR MONTHS ENDED
ENDED DECEMBER 31, JUNE 30,
1997 1998
------------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Interest on the Notes (a)................ $10,125 $5,062
Interest on the Bank Facilities:
Revolving Credit Facility (b).......... 484 242
Term A Loan Facility (b)............... 2,325 1,163
Term B Loan Facility (c)............... 4,000 2,000
----- -----
Total cash interest
expense............................. 16,934 8,467
Amortization of deferred financing costs. 896 448
----- -----
Total pro forma interest expense..... 17,830 8,915
Less: amount in historical statements of
operations
(Holdings and Empire)................... 4,614 6,155
Less: pro forma interest expense
adjustment for Empire................... 270 --
------- ------
Adjustment to interest expense........... $12,946 $2,760
======= ======
</TABLE>
--------
(a) Interest is calculated at an effective interest rate of 10.125%.
(b) Interest is calculated at an effective interest rate of 7.75%.
(c) Interest is calculated at an effective interest rate of 8.00%.
A 1/8% variance in the effective interest rate would have increased/decreased
interest expense by $0.2 million for the year ended December 31, 1997 and
$0.1 million for the six months ended June 30, 1998.
(6) Estimated income tax effects of (i) the Company's election to change its
status from a Subchapter S corporation to a Subchapter C corporation as of
January 1, 1997, in conjunction with the Recapitalization and (ii) pro
forma interest expense and goodwill amortization adjustments.
27
<PAGE>
SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated historical financial
data of the Company, for each of the years in the five-year period ended
December 31, 1997, which have been audited by Arthur Andersen LLP, independent
public accountants, and for the unaudited six months ended June 30, 1997
and 1998. The selected historical consolidated financial data for the years
ended December 31, 1995, 1996 and 1997 are derived from and should be read in
conjunction with the audited consolidated financial statements of Holdings and
the related notes thereto included elsewhere in this Prospectus. The selected
historical consolidated financial data for the years ended December 31, 1993
and 1994 are derived from audited financial statements of Holdings that are
not included in this Prospectus. The selected historical consolidated
financial data for the six months ended June 30, 1997 and 1998 are derived
from unaudited consolidated financial statements for such periods included
elsewhere in this Prospectus.
The unaudited pro forma consolidated statement of operations data of the
Issuer for the year ended December 31, 1997 gives effect to the
Recapitalization and the Empire Acquisition as if they had occurred on January
1, 1997. The unaudited pro forma consolidated statement of operations data of
the Issuer for the six months ended June 30, 1998 gives effect to the
Recapitalization as if it had occurred on January 1, 1997. The unaudited pro
forma consolidated financial data do not purport to represent what the Issuer's
or the Company's financial condition or results of operations would actually
have been had the Recapitalization and the Empire Acquisition in fact occurred
on the assumed dates, nor do they project the Issuer's and/or the Company's
financial condition or results of operations for any future period or date.
The financial data set forth below should be read in conjunction with the
audited consolidated financial statements and the related notes thereto,
"Unaudited Pro Forma Consolidated Financial Data" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations," all included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, PRO FORMA ENDED JUNE 30, PRO FORMA
-------------------------------------------- DECEMBER 31, ---------------- JUNE 30,
1993 1994 1995 1996 1997 1997 1997 1998 1998
------- ------- ------- ------- -------- ------------ ------- ------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales............... $33,538 $31,289 $77,659 $90,201 $118,072 $120,714 $54,675 $58,558 $58,558
Cost of sales........... 22,808 23,066 56,490 63,032 78,582 80,528 37,630 41,348 41,348
------- ------- ------- ------- -------- -------- ------- ------- -------
Gross profit........... 10,730 8,223 21,169 27,169 39,490 40,186 17,045 17,210 17,210
Selling, general and
administrative
expenses............... 4,307 4,153 10,152 9,148 11,414 11,724 5,334 6,540 6,540
Goodwill amortization... -- -- 600 720 1,521 1,681 680 841 841
------- ------- ------- ------- -------- -------- ------- ------- -------
Operating income....... 6,423 4,070 10,417 17,301 26,555 26,781 11,031 9,829 9,829
Interest expense........ 639 492 3,963 3,858 4,550 17,830 2,160 6,155 8,915
------- ------- ------- ------- -------- -------- ------- ------- -------
Income before provision
for income taxes...... 5,784 3,578 6,454 13,443 22,005 8,951 8,871 3,674 914
Provision for income
taxes.................. 1,827 -- 2,352 5,807 1,376 3,800 1,376 (794) 400
------- ------- ------- ------- -------- -------- ------- ------- -------
Net income............. $ 3,957 $ 3,578 $ 4,102 $ 7,636 $ 20,629 $ 5,151 $ 7,495 $ 4,468 $ 514
======= ======= ======= ======= ======== ======== ======= ======= =======
UNAUDITED PRO FORMA
INCOME TAX DATA:
Income before income
taxes.................. $ 5,784 $ 3,578 $ 6,454 $13,443 $ 22,005 $ 8,951 $ 8,871 $ 3,674 $ 914
Provision for income
taxes(1)............... 2,140 1,324 2,700 5,807 9,000 3,800 3,500 1,500 400
------- ------- ------- ------- -------- -------- ------- ------- -------
Pro forma net income.... $ 3,644 $ 2,254 $ 3,754 $ 7,636 $ 13,005 $ 5,151 $ 5,371 $ 2,174 $ 514
======= ======= ======= ======= ======== ======== ======= ======= =======
OTHER DATA:
Depreciation and
amortization (2)....... $ 1,207 $ 1,250 $ 3,761 $ 4,204 $ 4,668 $ 4,856 $ 2,255 $ 2,105 $ 2,105
Cash flows from
operating activities .. 4,881 4,371 4,453 13,847 21,313 -- 7,831 4,473 --
Cash flows used in
investing activities .. (836) (585) (44,539) (1,979) (28,746) -- (25,946) (1,273) --
Cash flows from (used in)
financing activities .. (1,710) (3,082) 36,652 (11,868) 7,433 -- 18,115 (3,200) --
EBITDA (3).............. 7,630 5,320 14,178 21,505 31,223 31,637 13,286 11,934 11,934
EBITDA margin (4)....... 22.8% 17.0% 18.3% 23.8% 26.4% 26.2% 24.3% 20.4% 20.4%
Capital expenditures.... $ 836 $ 585 $ 1,926 $ 1,979 $ 4,050 $ 4,050 $ 1,250 $1,273 $ 1,273
28
<PAGE>
CREDIT DATA:
Pro Forma Pro Forma
December 31, June 30,
1997 1998
------------ ---------
Cash interest expense............................................ $ 16,934 -- -- $ 8,467
Ratio of EBITDA to cash interest expense......................... 1.9x -- -- 1.4x
Ratio of total debt to EBITDA.................................... 5.8x -- -- N/A
Ratio of earnings to fixed charges (5)........................... 1.5x -- -- 1.1x
As of
As of December 31, June 30
---------------------------------------------------- -------
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ----
(in thousands)
Balance Sheet Data:
Working capital ........ $ 5,325 $ 6,483 $ 6,989 $ 5,409 $13,247 $ 27,313
Total assets ........... 16,720 17,328 69,630 66,503 94,550 106,874
Total debt, including
current maturities ... 7,629 7,347 46,713 34,845 49,497 186,125
Stockholders' equity
(deficit) ............ 5,246 6,024 10,118 17,754 27,930 (96,547)
</TABLE>
- --------
(1) For the years ended December 31, 1993, 1995 and 1996 and the
period from April 21, 1998 to June 30, 1998, the Company was
a Subchapter C corporation for federal income tax purposes.
For the years ended December 31, 1994 and 1997, the six
months ended June 30, 1997 and the period from January 1,
1998 to April 20, 1998, the Company was a Subchapter S
corporation for federal income tax purposes. See "Selected
Historical and Pro Forma Consolidated Financial Data" for
unaudited pro forma income tax data.
(2) Excludes amortization of deferred financing costs.
(3) EBITDA represents operating income plus depreciation and
amortization (excluding amortization of deferred financing
costs). The Company believes that EBITDA provides useful
information regarding the Company's ability to service its
debt; however, EBITDA does not represent cash flow from
operations as defined by generally accepted accounting
principles and should not be considered as a substitute for
net income as an indicator of the Company's operating
performance or cash flow as a measure of liquidity. Holders
tendering Old Notes in the Exchange Offer should consider
the following factors in evaluating such measures: EBITDA
and related measures (i) should not be considered in
isolation, (ii) are not measures of performance calculated
in accordance with GAAP, (iii) should not be construed as
alternatives or substitutes for income from operations, net
income or cash flows from operating activities in analyzing
the Issuer's operating performance, financial position or
cash flows (in each case, as determined in accordance with
GAAP) and (iv) should not be used as indicators of the
Issuer's operating performance or measures of its liquidity.
Additionally, because all companies do not calculate EBITDA
and related measures in a uniform fashion, the calculations
presented in this Prospectus may not be comparable to other
similarly titled measures of other companies.
(4) EBITDA margin represents EBITDA as a percentage of net
sales.
(5) The ratio of earnings to fixed charges has been calculated
by dividing income before income taxes and fixed charges by
fixed charges. Fixed charges for this purpose include
interest expense, amortization of deferred financing costs
and one-third of operating lease payments (the portion
deemed to be representative of the interest factor).
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with, and
is qualified in its entirety by, "Selected Historical and Pro Forma
Consolidated Financial Data," the audited consolidated financial statements of
Holdings for the three-year period ended December 31, 1997 and the notes
thereto, and the unaudited consolidated financial statements of Holdings for
the six months ended June 30, 1997 and 1998 and the notes thereto included
elsewhere in this Prospectus.
GENERAL
The Company is a leading manufacturer and marketer of a broad range of
consumer products, including Wooden Lights, Cutlery, Candles and Woodenware.
The Company's products are marketed primarily under the nationally recognized
Diamond, Forster and Empire brand names, which have been in existence since
1881, 1887 and 1950, respectively.
The Company derives its revenue primarily from the sale of its products to
substantially all major grocery stores, drug stores, mass merchandisers and
warehouse clubs in the United States. During the year ended December 31, 1997,
sales to the Company's top 10 customers accounted for approximately 39% of the
Company's pro forma gross sales, with one customer, Wal-Mart and its
subsidiary, Sam's Club, accounting for approximately 19% of the Company's pro
forma gross sales. The Company's ability to maintain and increase its sales
depends on a variety of factors including its competitive position in such
areas as price, quality, brand identity, distribution and customer service.
See "Risk Factors." The Company's products are manufactured at its four
automated manufacturing facilities located in Cloquet, Minnesota, East Wilton,
Maine, Strong, Maine, and Kansas City, Kansas.
Net sales, as calculated by the Company, are determined by subtracting
discounts and allowances from gross sales. Discounts and allowances consist of
price promotions, cash discounts, corporate rebates, slotting fees, consumer
coupons, co-op advertising and unsaleables. The Company's cost of sales and
its resulting gross margin (defined as gross profit as a percentage of net
sales) are principally determined by the cost of raw materials, the cost of
the labor to manufacture its products, the overhead expenses of its
manufacturing facilities, warehouse costs and freight expenses to its
customers. In recent years, the Company has focused on improving its gross
margin by seeking to: (i) consolidate manufacturing operations; (ii) reduce
headcount and expenses in manufacturing; and (iii) increase operating
efficiencies through capital projects with rapid returns on investment.
Polystyrene resin, a commodity whose market price fluctuates with supply and
demand, is a significant component of cost of sales in the Company's Cutlery
products. In order to mitigate the impact of changing polystyrene resin
prices, the Company in January 1997 entered into a three-year supply contract
with a major supplier of polystyrene resin, under which the Company believes
it receives the lowest price available to any customer purchasing similar
volume, and receives short-term price protection during periods of rising
prices. During periods of rising prices, the Company generally has been able
to pass through the majority of the polystyrene resin price increases to its
customers on a delayed basis. During periods of declining polystyrene resin
prices, the Company generally has reduced prices to its customers.
Selling, general and administrative expenses consist primarily of selling
expenses, broker commissions and administrative costs. Broker commissions and
certain selling expenses generally vary with sales volume while administrative
costs are relatively fixed in nature.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, gross sales and
gross sales as a percentage of the Company's aggregate net sales for the
Company's major product groups, as well as the Company's aggregate net sales,
EBITDA and EBITDA margin.
30
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------------------------- ---------------------------
1995 1996 1997 1997 1998
------------ ------------ ------------- ----------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Wooden Lights........... $17.6 22.6% $19.8 22.0% $ 20.9 17.7% $ 9.6 17.6% $ 9.8 16.7%
Cutlery................. 27.9 35.9 32.6 36.1 35.4 30.0 18.7 34.2 20.3 34.6
Candles................. -- -- -- -- 25.5 21.6 6.7 12.3 11.1 18.9
Woodenware.............. 25.7 33.1 28.7 31.8 30.2 25.6 15.6 28.6 15.8 27.0
Institutional/Other..... 13.8 17.8 17.5 19.4 16.7 14.1 9.0 16.3 8.3 14.2
----- ----- ----- ----- ------ ----- ---- ---- ---- ----
Total gross sales...... 85.0 109.4 98.6 109.3 128.7 109.0 59.6 109.0 65.3 111.4
Discounts and allow-
ances.................. (7.3) (9.4) (8.4) (9.3) (10.6) (9.0) (4.9) 9.0 (6.7) (11.4)
----- ----- ----- ----- ------ ----- ---- ---- ---- ----
Net sales.............. $77.7 100.0% $90.2 100.0% $118.1 100.0% $ 54.7 100.0% $ 58.6 100%
===== ===== ===== ===== ====== ===== ==== ==== ==== ====
EBITDA (1).............. $14.2 18.3% $21.5 23.8% $ 31.2 26.4% $ 13.4 24.5% $ 5.8 9.9%
===== ===== ===== ===== ====== ======
Adjusted EBITDA (2) .... $ 13.4 24.5% $ 11.9 20.3%
==== ==== ==== ====
</TABLE>
- --------
(1) EBITDA represents operating income plus depreciation and amortization
(excluding amortization of deferred financing costs). The Company believes
that EBITDA provides useful information regarding the Company's ability to
service its debt; however, EBITDA does not represent cash flow from
operations as defined by generally accepted accounting principles and should
not be considered as a substitute for net income as an indicator of the
Company's operating performance or cash flow as a measure of liquidity.
Holders tendering Old Notes in the Exchange Offer should consider the
following factors in evaluating such measures: EBITDA and related measures
(i) should not be considered in isolation, (ii) are not measures of
performance calculated in accordance with GAAP, (iii) should not be
construed as alternatives or substitutes for income from operations, net
income or cash flows from operating activities in analyzing the Issuer's
operating performance, financial position or cash flows (in each case, as
determined in accordance with GAAP) and (iv) should not be used as
indicators of the Issuer's operating performance or measures of its
liquidity. Additionally, because all companies do not calculate EBITDA and
related measures in a uniform fashion, the calculations presented in this
Prospectus may not be comparable to other similarly titled measures of other
companies.
(2) Represents EBITDA excluding Recapitalization Expenses.
The following table sets forth, for the periods indicated, certain
historical statement of operations data and such data as a percentage of net
sales for the Company.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------- ---------------------------
1995 1996 1997 1997 1998
----------- ------------ ------------ ----------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $77.7 100.0% $ 90.2 100.0% $118.1 100.0% $54.7 100.0% $58.6 100.0%
Cost of sales........... 56.5 72.7 63.0 69.8 78.6 66.6 37.7 68.9 41.4 70.6%
----- ----- ------ ----- ------ ----- ----- ----- ----- -----
Gross profit............ 21.2 27.3 27.2 30.2 39.5 33.4 17.0 31.1 17.2 29.4
Selling, general and
administra-
tive expenses.......... 10.1 13.0 9.2 10.2 11.4 9.6 5.3 9.7 6.5 11.1
Goodwill amortization... 0.6 0.8 0.7 0.8 1.5 1.3 0.7 1.3 0.8 1.4
----- ----- ------ ----- ------ ----- ----- ----- ----- -----
Operating income(loss).. 10.5 13.5 17.3 19.2 26.6 22.5 11.0 20.1 9.8 16.7
Interest expense........ 4.0 5.1 3.9 4.3 4.6 3.9 2.2 4.0 6.2 10.6
----- ----- ------ ----- ------ ----- ----- ----- ----- -----
Income (loss)
before provision
for income taxes....... $ 6.5 8.4% $ 13.4 14.9% $ 22.0 18.6% $ 8.8 16.1% $(3.7) (6.3%)
===== ===== ====== ===== ====== ===== ===== ===== ===== =====
</TABLE>
31
<PAGE>
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
NET SALES. Net sales for the six months ended June 30, 1998, increased 7.1%
to $58.6 million from $54.7 million for the six months ended June 30 1997,
primarily due to the Empire Acquisition which added net sales of $3.0 million.
The remaining increase in 1998 net sales resulted from the continued growth in
Cutlery, and the introduction of Reflections candles into the grocery trade,
which added $2.0 million in gross sales. The increase in gross sales was
offset somewhat by increased promotional and slotting allowance spending of
$1.8 million, primarily for Cutlery and Candles, including $0.3 million of
Candle allowances. Gross sales of Cutlery products increased from 8.6% to $20.3
million, primarily as a result of growth in both branded and private label
products.
GROSS PROFIT. Gross profit increased $0.2 million to $17.2 million for the
six months ended June 30, 1998 from the six months ended June 30, 1997, while
gross margin declined from 31.1% to 29.4%. The increased gross profit reflects
the impact of the Empire Acquisition ($0.8 million) and the increased volume of
sales reflected above, offset by certain inventory and production problems
incurred with the candle product line. The Company has made a claim against the
former shareholders under the Recapitalization Agreement to recover these costs.
Management believes these inventory problems were one time and nonrecurring in
nature and that the production problems are being addressed. In addition, the
Company incurred a devaluation of inventory to actual cost in its Maine
facilities of $0.5 million. Excluding the effects of these factors, gross
margin would have been 31.9%
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses as a percentage of net sales increased to 11.1% for the
six months ended June 30, 1998 from 9.7% in the six months ended June 30, 1997.
The Company had non-recurring costs relating to the severance of the Chief
Operating Officer of the Candle division ($0.1 million), the write-off of
receivables as a result of the Venture Stores bankruptcy ($0.1 million) and
expensing of recruiting and relocation costs ($0.2 million) to strengthen the
management team. In addition, the Company incurred higher expenses to support
the introduction of Reflections candles into the grocery trade.
GOODWILL AMORTIZATION. Goodwill amortization in the six months ended June 30,
1998 increased to $0.8 million, from $0.7 million in the six months ended June
30, 1997 as the result of the Empire Acquisition.
INTEREST EXPENSE. Interest expense for the six months ending June 30, 1998
increased to $6.2 million from $2.2 million for the six months ended June 30,
1997. This increase is the result of increased debt load and deferred financing
costs associated with the Recapitalization.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
NET SALES. Net sales in 1997 increased 30.9% to $118.1 million from $90.2
million in 1996. This increase primarily reflected the impact of the Empire
Acquisition in February 1997, which contributed net sales of $24.0 million.
Without giving effect to the Empire Acquisition, net sales in 1997 increased
4.3% to $94.1 million. The remaining increase in 1997 net sales principally
resulted from continued growth in gross sales of Wooden Lights, Cutlery and
Woodenware products, partially offset by a slight decline in gross sales of
Institutional/Other products (reflecting a $0.9 million one-time order of
advertising matches in 1996) and increased discounts and allowances resulting
from additional sales volume. Gross sales of Cutlery products increased 8.6%
to $35.4 million, primarily as a result of growth in private label sales.
Gross sales of Woodenware and Wooden Lights increased 5.2% and 5.6% to $30.2
million and $20.9 million, respectively, principally as a result of adding new
customers.
GROSS PROFIT. Gross profit in 1997 increased 45.2% to $39.5 million from
$27.2 million in 1996. Gross margin increased to 33.4% in 1997 from 30.2% in
1996. The increase in gross profit primarily reflected the impact of the
Empire Acquisition, which contributed gross profit of $6.2 million. Without
giving effect to the Empire Acquisition, gross profit increased 22.4% to $33.3
million, and gross margin increased to 35.4%. Gross margin was significantly
impacted by: (i) reduced clothespin manufacturing costs as a result of lower
headcount and raw material costs and higher manufacturing yields; (ii) reduced
Cutlery manufacturing costs as a result of lower polystyrene resin prices;
(iii) operating efficiencies achieved through capital projects with rapid
returns on investment; (iv) increased sales volume in the Company's Wooden
Lights, Cutlery and Woodenware products; and (v) the lower gross margins
associated with the Candles operations of Empire.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses as a percentage of net sales decreased to 9.6% in 1997
from 10.2% in 1996. The decrease in selling, general and administrative
expenses as a percentage of net sales resulted primarily from spreading
certain fixed and semi-fixed costs over a larger sales base, and a continued
emphasis by the Company on reducing administrative costs. Excluding the Empire
Acquisition, selling, general and administrative expenses decreased to 9.9% of
net sales in 1997.
GOODWILL AMORTIZATION. Goodwill amortization in 1997 increased to $1.5
million from $0.7 million in 1996 as a result of the Empire Acquisition.
INTEREST EXPENSE. Interest expense in 1997 increased to $4.6 million from
$3.9 million in 1996. The increase was due primarily to additional borrowings
under the Company's existing bank credit facilities in connection with the
Empire Acquisition in February 1997.
32
<PAGE>
PROVISION FOR INCOME TAXES. As of January 1, 1997, the Company changed its
status from a Subchapter C corporation to a Subchapter S corporation for
federal income tax purposes. As a Subchapter S corporation, the Company's
stockholders were primarily responsible for income taxes with respect to the
Company's income. The effective income tax rate of 6.2% for the year ended
December 31, 1997 resulted from the removal of the deferred tax assets and
liabilities as of December 31, 1996 due to the election of Subchapter S
corporation status. The effective income tax rate of 43.2% for the year ended
December 31, 1996 varied from the federal statutory rate primarily as a result
of non-deductible goodwill amortization and state income taxes.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
NET SALES. Net sales in 1996 increased 16.1% to $90.2 million from $77.7
million in 1995. This increase primarily reflected: (i) a full year of Forster
operations in 1996 as compared to approximately 10 months in 1995; (ii)
continued growth in the sales volume of Cutlery products; (iii) increased
sales of Wooden Lights products as a result of increases in unit volumes and
prices; (iv) a 3% unit price increase in toothpick products; and (v) a $0.9
million one-time order of advertising matches.
GROSS PROFIT. Gross profit in 1996 increased 28.3% to $27.2 million from
$21.2 million in 1995. Gross margin increased to 30.2% in 1996 from 27.3% in
1995. The increases in gross profit and gross margin principally resulted
from: (i) increased sales volume achieved in connection with the Forster
Acquisition; (ii) cost savings achieved in connection with the consolidation
of the manufacturing of the toothpick and clothespin products into a single
facility; (iii) increased sales volume of higher-margin Wooden Lights
products; (iv) declining polystyrene resin prices; and (v) reduced Cutlery
manufacturing costs through investments in automated equipment that lowered
headcount and increased efficiency.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses as a percentage of net sales decreased to 10.2% in
1996 from 13.0% in 1995. The decrease in selling, general and administrative
expenses was due primarily to cost savings achieved in connection with the
Forster Acquisition, as well as spreading certain fixed and semi-fixed costs
over a larger sales base and a continued emphasis by the Company on reducing
administrative costs.
GOODWILL AMORTIZATION. Goodwill amortization in 1996 increased to $0.7
million from $0.6 million in 1995 as a result of a full year of goodwill
amortization in connection with the Forster Acquisition.
INTEREST EXPENSE. Interest expense in 1996 decreased to $3.9 million from
$4.0 million in 1995. This decrease was due primarily to the Company's
payments on indebtedness incurred in the Forster Acquisition in March 1995 and
lower variable interest rates associated with the Company's term note and
revolving line of credit during 1996 compared to 1995.
PROVISION FOR INCOME TAXES. The effective income tax rate increased to 43.2%
for the year ended December 31, 1996 from 36.4% for the year ended December
31, 1995. The 1995 effective tax rate decreased due to the recognition of a
net deferred tax asset of $0.3 million as a result of the Company's election
to change its status from a Subchapter S corporation to a Subchapter C
corporation for federal income tax purposes effective January 1, 1995. The
1995 and 1996 effective income tax rates varied from the federal statutory
rate primarily as a result of non-deductible goodwill amortization and state
income taxes.
LIQUIDITY AND CAPITAL RESOURCES
HISTORICAL
Cash provided by operating activities was $7.8 million and $4.5 million for
the six months ended June 30, 1997 and 1998, respectively. Cash provided by
operating activities was $4.5 million, $13.8 million and $21.3 million for the
years ended December 31, 1995, 1996 and 1997, respectively. The Company's
primary cash requirements have been to fund working capital, maintenance
capital expenditures and acquisitions. The
33
<PAGE>
Company has generally used internally generated funds and amounts available
under its existing revolving credit facility as its primary sources of
liquidity, with borrowings being utilized principally to fund acquisitions. In
1997, the Company invested $24.7 million in the Empire Acquisition, and in
1995 the Company invested $42.4 million in the Forster Acquisition. These
acquisitions were funded from borrowings under senior bank credit facilities.
Capital expenditures (excluding acquisition costs) for the six months ended
June 30, 1997 and 1998 were $1.3 million. Capital expenditures (excluding
acquisition costs) for the year ended December 31, 1997 were $4.1 million
compared to $2.0 million for the year ended December 31, 1996 and $1.9 million
for the year ended December 31, 1995. This higher level of capital spending in
1997 was primarily attributed to facility consolidation and investments in new
candle lines at the Company's Kansas City facility. The Company's historical
capital expenditures have been primarily used to expand capacity and improve
manufacturing efficiencies. The Company currently expects its capital
expenditures for 1998 to be approximately $2.5 million.
AFTER THE RECAPITALIZATION
Holdings, the Stockholders and the Sponsors entered into the
Recapitalization Agreement, which provided for the Recapitalization of
Holdings. Pursuant to the Recapitalization Agreement, the Sponsors and other
investors purchased from Holdings, for an aggregate purchase price of $47.0
million, Holdings Preferred Stock together with the Warrants. In addition,
Holdings purchased for $211.4 million, subject to certain working capital and
debt adjustments, from the Stockholders, all outstanding shares of Holdings
capital stock other than the Retained Shares.
As a result of the Recapitalization, the Company's capital structure changed
substantially. As of June 30, 1998, the Company's capital structure consisted
of $100.0 million of Old Notes; $80.0 million of Term Loan Facilities; the
Revolving Credit Facility, of which approximately $10.6 million was used to
consummate the Recapitalization and of which approximately $6.3 million was
drawn as of such date; and $84.0 million Holdings Senior Discount Debentures,
of which $45.1 million was received in gross proceeds and $47.0 million of
Holdings Preferrred Stock. In April 2003, the Company will be required to
redeem a certain amount of Holdings Senior Discount Debentures equal to (i)
$33.2 million multiplied by (ii) the quotient obtained by dividing (x) the
aggregate principal amount at maturity of Holdings Senior Discount Debentures
then outstanding by (y) $84.0 million, at a redemption price equal to 100% of
the principal amount of Holdings Senior Discount Debentures so redeemed.
Commencing October 15, 2003, the Company will be required to make semi-annual
cash payments of interest on the Holdings Senior Discount Debentures.
The Company's ability to make scheduled payments of the principal of, or to
pay the interest or Liquidated Damages, if any, on, or to refinance, its
indebtedness (including Holdings Senior Discount Debentures), or to fund
planned capital or other expenditures will depend on its future financial or
operating performance, which will be affected by prevailing economic
conditions and financial, business, and other factors, many of which are
beyond its control. Based upon the current level of operations, management
believes that cash flow from operations and available borrowings under the
Revolving Credit Facility will be adequate to meet the Company's anticipated
future requirements for working capital, budgeted capital and other
expenditures and scheduled payments of principal and interest on its
indebtedness, including Holdings Senior Discount Debentures, for the next
several years. There can be no assurance that the Company's business will
generate sufficient cash flow from operations or that future borrowings will
be available under the Revolving Credit Facility in an amount sufficient to
enable the Company to service its indebtedness, including Holdings Senior
Discount Debentures, or to make anticipated capital and other expenditures.
Following the Recapitalization, the Company's primary sources of liquidity
are cash flow from operations and borrowing under the Revolving Credit
Facility. The Company's primary uses of cash are debt service requirements,
capital expenditures and working capital. The Company expects that continuing
requirements for debt service, capital expenditures and working capital will
be funded from operating cash flow and borrowings under the Revolving Credit
Facility.
34
<PAGE>
RECENTLY ISSUED ACCOUNTING STANDARDS
Financial Accounting Standards Board Statement ("SFAS") No. 131,
"Disclosures About Segments of an Enterprise and Related Information," issued
in June 1997 and effective for fiscal years beginning after December 15, 1997,
redefines how operating segments are determined and requires expanded
quantitative and qualitative disclosures relating to a company's operating
segments. The Company believes that the effect on it of adopting SFAS No. 131
will not be significant.
INFLATION AND ECONOMIC TRENDS
Although its operations are affected by general economic trends, the Company
does not believe that inflation has had a material impact on its results of
operations.
YEAR 2000
Many computer systems and software applications, including most of those used
by the Company, identify dates using only the last two digits of the year.
These systems are unable to distinguish between dates in the year 2000 and
dates in the year 1900. That inability (referred to as the "Year 2000" issue),
if not addressed, could cause certain systems or applications to fail or
provide incorrect information after December 31, 1999 or when using dates after
December 31, 1999. This in turn, could have an adverse effect on the Company,
due to the Company's direct dependence on its own system and applications and
indirect dependence on those of other entities with which the Company must
interact.
The Company has implemented a process to either replace or modify all of the
Company's current computer systems and software applications to become Year
2000 compliant. In connection with this process, the Company has retained two
information technology consulting groups. The Company is dependent on these
consulting groups to assess the impact of the Year 2000 issue and to recommend
any necessary corrective action. The core of the new computer systems and
software applications which are Year 2000 complaint have already been installed
and by the end of the year 1998, these systems and applications are expected to
be functioning, with only enhancing features to be added in 1999. The Company
expects to complete the process by June 1999.
The Company currently estimates that its costs incurred in 1997 and through
the year 2000 to enhance its information systems may cost approximately $0.9
million. These costs include estimates for employee compensation on the project
team, consultants, hardware and software. At June 30, 1998, the Comapny had
spent approximately $168,000. The Company does not anticipate incurring any
additional expenses in connection with the Year 2000 issue.
As a result of the implementation of the new computer systems and software
applications, the Company is not likely to initiate other major systems
projects in connection with the Year 2000 issue. Although there can be no
assurance that the Company will not experience cost overruns or delays in
connection with its plan for replacing or modifying its information systems,
the Company does not intend to develop contingency plans. In the event that the
Company is unsuccessful in its efforts to enhance its computer systems and
software applications to be Year 2000 compliant, it could experience cost
overruns stemming from customer billing and collection problems. These problems
are not likely, however, to have an adverse material effect on the Company's
results of operations.
35
<PAGE>
BUSINESS
OVERVIEW
Diamond Brands is a leading manufacturer and marketer of a broad range
of branded consumer products, including Wooden Lights, Cutlery, Candles and
Woodenware. The Company's products are marketed primarily under the Diamond,
Forster and Empire brand names, which have been in existence since 1881, 1887
and 1950, respectively. The Company believes it has the leading domestic retail
market share in the wooden match, plastic cutlery, toothpick, clothespin and
wooden craft product categories. In each of these product categories, which in
the aggregate represented approximately 63% of 1997 pro forma gross sales, the
Company believes it has achieved a domestic retail market share of more than
double that of its nearest branded competitor. For the year ended December 31,
1997, the Company generated pro forma net sales of $120.7 million and pro forma
EBITDA of $31.6 million, which represented a pro forma EBITDA margin of 26.2%.
For the six months ended June 30, 1998, the Company generated net sales of
$58.6 million and EBITDA of $11.9 million, which represented an EBITDA margin of
20.4%
The Company believes it has achieved its leading market shares and strong
profitability by: (i) capitalizing on the Company's strong brand name
recognition, high quality products and category management strategy to secure
and maintain retail shelf space; (ii) expanding its product offerings through
strategic acquisitions, including the Forster Acquisition in 1995 and the
Empire Acquisition in 1997; (iii) achieving significant cost savings through
the integration of the Forster and Empire businesses, including headcount
reductions and facilities consolidations; and (iv) focusing on reducing
manufacturing and administrative costs.
The Company's products are sold in substantially all major grocery stores,
drug stores, mass merchandisers and warehouse clubs in the United States.
Diamond Brands also sells certain of its products to institutional and other
customers such as food service and food processing companies and
redistributors. The Company sells its products through a nationwide sales
network consisting primarily of independent broker organizations and also
sells products directly to selected mass merchandisers and warehouse clubs,
including Wal-Mart and Price Costco. In order to strengthen relationships with
its customers, the Company employs a category management strategy, which
includes a corporate rebate program that provides incentives to grocery
retailers to buy multiple products from the Company.
Diamond Brands produces its products at four automated manufacturing
facilities located in Cloquet, Minnesota, East Wilton, Maine, Strong, Maine,
and Kansas City, Kansas. The Company believes it is a low-cost manufacturer in
most of its product categories. In the United States, Diamond Brands believes
it is the sole manufacturer of wooden matches and the largest manufacturer of
toothpicks and clothespins.
COMPETITIVE STRENGTHS
The Company believes that its stable and diverse product portfolio, strong
brand names, national distribution and cost-efficient manufacturing have
resulted in strong financial performance and provide an attractive platform
for growth. In particular, the Company believes it is distinguished by the
following competitive strengths:
. DIVERSE PRODUCT PORTFOLIO WITH ATTRACTIVE SALES MIX. The Company has a
diverse product portfolio with its 1997 pro forma gross sales consisting
of Wooden Lights (15.9%), Cutlery (26.9%), Candles (21.5%), Woodenware
(23.0%) and Institutional/Other (12.7%). This product portfolio allows
the Company to offer retailers a broad product offering without relying
on any one product category for profitability. Diamond Brands' product
mix includes stable and well-established categories (such as Wooden
Lights and Woodenware), as well as higher-growth categories (such as
Cutlery and Candles). In addition, the Company believes its product mix
is attractive because its product categories tend to be less reliant on
new product introductions than are other consumer product categories.
Approximately 98% of the Company's 1997 pro forma gross sales consisted
of products introduced prior to 1994. The Company also believes that its
products are not significantly impacted by changes in overall economic
conditions.
. STRONG BRAND NAMES WITH LEADING MARKET SHARES. The Company's three primary
brand names--Diamond, Forster and Empire--have been in existence since
1881, 1887 and 1950, respectively. The Company believes that strong brand
name recognition and high quality products have contributed to its
36
<PAGE>
leading domestic retail market shares in the wooden match, plastic
cutlery, toothpick, clothespin and wooden craft product categories. In
each of these product categories, which in the aggregate represented
approximately 63% of 1997 pro forma gross sales, the Company believes it
has achieved a domestic retail market share of more than double that of
its nearest branded competitor. The Company believes its strong brand
names and leading market shares provide a competitive advantage in
selling its products to retailers.
. WELL-ESTABLISHED NATIONAL RETAIL DISTRIBUTION. Diamond Brands' products
are sold in substantially all major grocery stores, drug stores, mass
merchandisers and warehouse clubs in the United States. The Company has
established relationships with many of the largest retailers in the
United States such as Wal-Mart, Price Costco, Target, Publix and Kroger.
The Company sells its products through a nationwide sales network
consisting primarily of independent broker organizations and also sells
products directly to selected mass merchandisers and warehouse clubs. The
Company employs a category management strategy which includes a corporate
rebate program that provides incentives to grocery retailers to buy
multiple products from the Company.
. COST-EFFICIENT MANUFACTURING. The Company believes that its four automated
manufacturing facilities position it as a low-cost manufacturer in most
of its product categories. The Company continues to invest in automation
equipment in order to reduce headcount and increase efficiency.
. STRONG CASH FLOW WITH LIMITED MAINTENANCE CAPITAL EXPENDITURES. The
Company's strong EBITDA and EBITDA margin, together with limited
maintenance capital expenditure requirements, provide the Company with
significant cash flow to reduce indebtedness and implement its business
strategy. Over 90% of the Company's capital expenditures in the five
years ended December 31, 1997 have related to productivity improvements
and capacity expansions. The Company currently expects its capital
expenditures for 1998 to be approximately $2.5 million, of which
approximately $1.3 million had been expended in the six months ended
June 30, 1998.
. EXPERIENCED MANAGEMENT TEAM. The Company's existing senior management team
possesses extensive industry and product knowledge and has an average
tenure of seven years with the Company. In addition, in connection with
the Recapitalization, Naresh K. Nakra became President, CEO and a
director of Diamond Brands. Dr. Nakra has more than 25 years of
experience in the branded consumer products and food industries,
including five years as President and CEO of Gruma Corporation, whose
subsidiaries include Mission Foods Corporation, a leading manufacturer
and marketer of tortilla products, and Azteca Milling, a leading
manufacturer and marketer of corn flour. Based on IRI data, Gruma
Corporation achieved significant increases in sales and market share
during Dr. Nakra's tenure. Dr. Nakra and the Company's existing senior
management team have experience in identifying, consummating and
integrating strategic acquisitions. See "New Chief Executive Officer."
BUSINESS STRATEGY
The Company's business strategy, which is designed to enhance its strong
market positions and increase sales and EBITDA, includes the following
elements:
. CONTINUE TO PRODUCE HIGH QUALITY PRODUCTS. The Company believes that
product quality has been a key factor in its success and intends to
continue manufacturing high quality products in a cost-efficient manner
in each of its product categories. The Company believes that its products
are of superior or equivalent quality compared to those of its
competitors, and that its brand names and "Made in the USA" label
distinguish the Company's products from those of its competitors.
. EXPAND CATEGORY MANAGEMENT STRATEGY TO INCREASE RETAIL SHELF
SPACE. Diamond Brands utilizes a category management strategy to maintain
and increase shelf space for its products at retail outlets. A central
element of this strategy is the Company's corporate rebate program, which
provides incentives to grocery retailers to buy multiple products from
the Company. The Company intends to expand its corporate rebate program
to include additional grocery retailers. The category management strategy
also includes consolidated invoicing and shipping across the Company's
product lines, which allows retailers to lower buying costs and reduce
their number of suppliers.
37
<PAGE>
. ENTER NEW DISTRIBUTION CHANNELS. The Company's products are sold primarily
through grocery stores, drug stores, mass merchandisers and warehouse
clubs in the United States. While the Company has been successful in these
distribution channels, management believes there is potential to increase
sales and EBITDA by: (i) penetrating additional retail outlets including
gift stores and party supply stores; (ii) increasing sales efforts in the
food service industry; and (iii) entering international markets. The
Company has taken initial steps to explore potential international
opportunities by establishing contacts with potential local distributors
in Canada and the Caribbean. The Company expects to explore such potential
opportunities further in the future. The Company intends to utilize its
strong brand names, diverse product portfolio and cost- efficient
manufacturing to facilitate its entry into new distribution channels.
. CAPITALIZE ON STRONG BRAND NAMES AND NATIONAL DISTRIBUTION TO INTRODUCE
NEW PRODUCTS. The Company intends to continue developing new products and
product line extensions designed to capitalize on the Company's strong
brand names and existing distribution and manufacturing capabilities. The
Company intends to use its category management strategy and existing
relationships with retailers to secure retail shelf space for these new
products.
. PURSUE ATTRACTIVE ACQUISITION OPPORTUNITIES. The Company has successfully
completed and integrated three strategic acquisitions in the last seven
years. In 1991, the Company purchased certain assets of Universal Match.
In 1995, the Company strengthened its position in the Woodenware and
Cutlery product categories through the Forster Acquisition and in February
1997, the Company added candles to its product portfolio through the
Empire Acquisition. The Company believes there are additional
opportunities to generate incremental sales and EBITDA through strategic
acquisitions. At any given time, the Company may be in various stages of
considering such opportunities. Although the Company does not currently
have any particular strategic acquisition opportunities identified, it
intends to consider regularly and to pursue strategic acquisitions that:
(i) add to or complement its product portfolio; (ii) leverage its existing
distribution and manufacturing capabilities; or (iii) provide access to
new distribution channels for its products.
PRODUCTS
The following table sets forth the Company's gross sales and percentage of
total gross sales by product category.
<TABLE>
<CAPTION>
GROSS SALES PERCENTAGE OF GROSS SALES
------------------------------------------ -----------------------------------------
FISCAL YEAR SIX MONTHS FISCAL YEAR SIX MONTHS
ENDED DECEMBER 31, ENDED JUNE 30, ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------- --------------- ---------------------------- -----------------
PRO PRO
FORMA FORMA
1995 1996 1997 1997(1) 1997 1998 1995 1996 1997 1997(1) 1997 1998
----- ----- ------ ------- ------- ------- ----- ----- ----- ------- ----- -----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Wooden Lights........... $17.6 $19.8 $ 20.9 $ 20.9 $ 9.6 $ 9.8 20.7% 20.1% 16.2% 15.9% 16.2% 15.0%
Cutlery................. 27.9 32.6 35.4 35.4 18.7 20.3 32.8 33.1 27.5 26.9 31.3 31.3
Candles................. -- -- 25.5 28.3 6.7 11.1 -- -- 19.8 21.5 11.3 17.0
Woodenware.............. 25.7 28.7 30.2 30.2 15.6 15.8 30.2 29.1 23.5 23.0 26.2 24.2
Institutional/Other..... 13.8 17.5 16.7 16.7 9.0 8.3 16.3 17.7 13.0 12.7 15.0 12.7
----- ----- ------ ------ ------- ------- ----- ----- ----- ----- ----- -----
Total................ $85.0 $98.6 $128.7 $131.5 $ 59.0 $ 65.3 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ====== ====== ======= ======= ===== ===== ===== ===== ===== =====
</TABLE>
(1) The pro forma gross sales data for the year ended December 31, 1997 give
effect to the Empire Acquisition as though it had occurred on January 1,
1997.
38
<PAGE>
WOODEN LIGHTS
The Company's Wooden Lights products include kitchen matches, penny matches
(smaller wooden matches), fireplace matches and fire starter products. The
Company focuses on the retail consumer market, which it believes offers higher
margins and less competition than the institutional market. The Company sells
its wooden match products primarily under the Diamond, Ohio Blue Tip and Fire
Chief names and its fire starter products under the SuperMatch and Superstart
names. Diamond Brands' Wooden Lights products are primarily sold through
grocery stores, drug stores and mass merchandisers. The Company manufactures
its Wooden Lights products at its Cloquet, Minnesota facility.
The Company believes it is the sole manufacturer of wooden matches in the
United States and that it holds the leading domestic retail market share in the
wooden match category with a market share of more than double that of its
nearest branded competitor. The Company competes in the domestic retail wooden
match market with foreign manufacturers, particularly from Sweden, Chile, China
and Korea. The wooden match market is mature, and the Company has maintained
relatively stable sales and attractive gross margins. Although the market for
penny match and kitchen match products is affected by smoking patterns, the
Company believes that its wooden match product mix makes it somewhat less
dependent on smoking patterns than manufacturers of book matches and disposable
lighters. The market for fire starter products, which are used by consumers in
both household and camping applications, is growing in the United States, and
the Company competes with First Brands, Duraflame and Pine Mountain, each of
which the Company believes has a greater market share than that of the Company.
Diamond Brands' kitchen match products are sold primarily in 250 count boxes
in both the "strike anywhere" and "strike on box" format. Penny matches are
sold in 32 and 40 count boxes in both strike formats. The Company's fireplace
matches are imported. Retail prices for the Company's wooden matches generally
range from $0.59 to $1.99. Retail prices for the Company's fire starter
products generally range from $1.29 to $4.99.
The Company's strategy in Wooden Lights focuses on maintaining and
increasing retail shelf space. In addition, the Company plans to focus on
increasing its presence in the fire starter category by expanding consumer and
trade promotions.
CUTLERY
The Company offers a wide range of plastic cutlery and straws. The Company
focuses on the retail consumer market which it believes offers higher margins
and less competition than the institutional market. The Company significantly
expanded its Cutlery business through the Forster Acquisition in March 1995.
In 1997, Diamond Brands entered the retail plastic straw market to offer its
customers a more complete product line. The Company's Cutlery products are
sold under both the Diamond and Forster brand names. The Company is also a
major supplier of private label plastic cutlery to retailers. Diamond Brands'
Cutlery products are primarily sold through grocery stores, drug stores and
mass merchandisers. The Company manufactures its Cutlery products at its East
Wilton, Maine facility.
The retail plastic cutlery market includes four major branded participants
(Diamond Brands, OWD, Maryland Plastic and Envirodyne Inc.'s Clear Shield
division) and a sizable private label component. The Company believes that it
holds the leading domestic retail market share in the plastic cutlery category
with a market share of more than double that of its nearest branded
competitor. The Company also believes that private label sales will continue
to represent an attractive growth area. Consumer demand for convenience and
the growing popularity of prepared foods are positively impacting the
Company's Cutlery product growth.
The Company produces its plastic cutlery products in various weights (heavy
duty, full size and lightweight), colors (including holiday themes) and
packages (boxes and bags of 24, 48, 72, 100 and 288 pieces). The Company also
manufactures seasonal products for Christmas and Halloween. Heavy duty cutlery
is the Company's largest plastic cutlery product line, followed by full-size
cutlery, which is marketed as dinnerware. Servingware consists of large
plastic serving spoons and forks. Retail prices for the Company's Cutlery
products generally range from $0.59 to $1.49.
The Company's strategy in the Cutlery segment focuses on: (i) expanding on
the Company's current category management strategy in grocery stores by
emphasizing the corporate rebate program; (ii) providing consumer promotions
such as coupon inserts and "buy one, get one free" promotions; (iii)
increasing private label sales to better utilize the Company's manufacturing
capabilities; and (iv) supporting newly introduced plastic straw products
through cross-promotions with plastic cutlery.
CANDLES
The Company's candle products include scented candles, outdoor citronella
candles, holiday candles, luminaries and related products. The Company entered
the candle business through the Empire Acquisition in February 1997. The
Company sells its Candles primarily under the Empire, Richly Scented Candle,
Patty-O-Candle, Diamond Reflections and Concord names. The Company
manufactures its candle products at its Kansas City, Kansas facility.
The Company believes the U.S. candle market exceeds $1 billion in annual
sales and is highly fragmented, with the majority of manufacturers generating
annual sales of less than $15 million each. The candle market is
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<PAGE>
divided into holiday products (approximately one-third) and non-holiday
products (approximately two-thirds), with the fastest growing segment being
scented candles. The Company's principal competitors in the candle business
include Blyth Industries, Inc., the industry leader with a broad portfolio and
extensive distribution, Dial Corporation, Lancaster Colony Corporation, S.C.
Johnson, Lamplight Farms and The Yankee Candle Company. From time to time
during the year-end holiday season, the Company experiences competition from
foreign manufacturers of candles.
The Company currently manufactures poured candles and imports holiday
candles, tapers, pillars and votives. The Company offers its candle products
in various containers, sizes (ranging from 4 ounces to 23 ounces) and
fragrances. Citronella candles' popularity has grown in recent years due to
their effectiveness as a natural insect repellent. The Company sells
citronella candles in a variety of decorative container types, including
pails, glass jars, pottery, terra cotta bowls and planters, and bamboo
torches. Imported holiday candles are sold under the Concord name. Retail
prices for the Company's candle products generally range from $0.99 to $9.99.
The Company's Candles are sold primarily through mass merchandisers,
warehouse clubs and grocery stores. Part of Diamond Brands' rationale for the
Empire Acquisition was a plan to increase the Company's sales of candle
products to grocery stores by capitalizing on the Company's network of
independent broker organizations. As part of this strategy, the Company
recently introduced Diamond Reflections to compete in grocery stores at a
discount to the market leaders. The Company also intends to leverage its
distribution capabilities and further enhance its product line by beginning to
manufacture votive, pillar and taper candles over the next three years. In
addition, the Company believes that the recently completed consolidation of
its candle manufacturing facility in Kansas City, Kansas will further lower
its candle manufacturing costs and improve product quality.
WOODENWARE
The Company's Woodenware products include toothpicks, clothespins,
clothesline and wooden crafts (small wooden shapes). Diamond Brands
strengthened its leadership position in these product lines with the Forster
Acquisition in March 1995. The Company focuses on the retail consumer market,
which it believes offers higher margins and less competition than the
institutional market. Diamond Brands' Woodenware products, with the exception
of wooden crafts, are sold through grocery stores, mass merchandisers,
warehouse clubs and drug stores. Wooden crafts are sold primarily through Wal-
Mart and craft retail stores. All of the Company's Woodenware products, with
the exception of clothesline and wooden crafts, are sold both under the
Diamond and Forster brand names. The Company manufactures its Woodenware
products at its facilities in Cloquet, Minnesota (toothpicks), East Wilton,
Maine (plastic clothespins), and Strong, Maine (toothpicks, clothespins and
wooden crafts).
The Company believes it holds the leading domestic retail market share in
the clothespins, toothpick, and wooden craft categories with a market share of
more than double that of its nearest branded competitor in each of these
product categories. The toothpick market is a mature market and the Company
faces competition from two domestic toothpick companies and imports from
China, Brazil and Canada. The clothespin market is a mature market, and the
Company faces competition from Magla/Seymour and imports from China.
The Company sells a variety of toothpick stock-keeping units ("SKUs") under
both the Diamond and Forster brand names. The majority of its square, round
and flat toothpicks are sold in 250 count boxes, while specialty and colored
toothpick SKUs are sold in 100, 120 or 250 count plastic containers. Retail
prices on the Company's toothpicks generally range from $0.39 to $1.99. The
Company also sells both wooden and plastic clothespins under the Diamond and
Forster names. The Company sells clothespins in 18, 24, 36, 50 and 100 count
bags. Retail prices for the Company's clothespins generally range from $0.99
to $3.49. The Company's wooden craft products are used for creative play and
to build structures, including houses and figurines, and comprise a large
number of SKUs. Retail prices for the Company's wooden craft products
generally range from $0.39 to $1.99.
The Company's Woodenware strategy focuses on maintaining and increasing
shelf space. For both its toothpick and clothespin products, the Company
utilizes a "Made in the USA" label on the package to differentiate its
products from imports. The Company believes that Woodenware products
manufactured in the
40
<PAGE>
United States are regarded by consumers as having higher quality levels than
foreign brands. Diamond Brands also cross-markets clothespins and clothesline.
INSTITUTIONAL/OTHER
The Company's Institutional/Other product group consists of
institutional/food service products (such as wrapped toothpicks, heavy duty
reusable plastic cutlery, bulk cutlery, coffee stirrers, skewers and steak
markers) and industrial woodenware products (such as ice cream sticks and corn
dog sticks), which are sold primarily to food service and food processing
customers. The Company's Institutional/Other products also include resale book
matches, which are sold primarily to retailers, and advertising matches, which
are primarily sold to redistributors. Diamond Brands is the primary supplier
of wooden advertising matches to the two leading redistributors of advertising
matches in North America and is also the largest producer of corn dog sticks
in North America. Advertising matches are penny matches packaged in boxes
carrying an advertising logo and are principally utilized as promotional tools
by restaurants, bars and hotels.
The Company offers certain products in the institutional market, largely to
utilize available production capabilities. Although the Company has not
focused on competing generally in the institutional market, management
believes there is potential to increase sales and EBITDA by increasing its
presence in the institutional market.
SALES AND MARKETING
The Company sells its products in substantially all major grocery stores,
drug stores, mass merchandisers and warehouse clubs in the United States.
Diamond Brands also sells certain of its products to institutional and other
customers such as food service and food processing companies and
redistributors. The Company has established strong relationships with many of
the largest retailers in the United States (such as Wal-Mart, Price Costco,
Target, Publix and Kroger). The Company sells its products through a
nationwide sales network consisting primarily of independent broker
organizations and also sells products directly to selected mass merchandisers
and warehouse clubs, including Wal-Mart and Price Costco.
The Company utilizes a category management strategy designed to maintain and
increase shelf space at retail outlets. A central element of this strategy is
the Company's corporate rebate program, which provides incentives to grocery
retailers to buy multiple products from the Company. The Company intends to
expand its corporate rebate program to include additional grocery retailers.
The category management strategy also includes consolidated invoicing and
shipping across the Company's product lines, which allows retailers to lower
buying costs and reduce their number of suppliers.
The Company cross-markets its products through the use of product packaging
which include coupons or promotional offers for other Company products. The
Company offers price promotions and cash discounts to retailers as a means of
increasing sales volume from time to time. In addition, the Company employs
consumer promotion programs to increase sales, including coupon inserts, "buy
one, get one free" promotions, bonus packs and shipper displays.
41
<PAGE>
PRODUCT DEVELOPMENT
The Company has an active program of product development, focusing on
product line extensions (such as specialty toothpicks, fireplace matches and
plastic servingware) and new products in related areas (such as plastic
straws, SuperMatch and clothesline). The Company believes its products mix is
attractive because its product categories tend to be less reliant on new
product introductions than are other consumer product categories.
CUSTOMERS
The Company derives its revenue primarily from the sale of its products to
substantially all major grocery stores, drug stores, mass merchandisers and
warehouse clubs in the United States. During the year ended December 31, 1997,
sales to the Company's top 10 customers accounted for approximately 39% of the
Company's pro forma gross sales, with one customer, Wal-Mart and its
subsidiary, Sam's Club, accounting for approximately 19% of pro forma gross
sales.
MANUFACTURING
Diamond Brands operates four automated manufacturing facilities located in
Cloquet, Minnesota (round and flat toothpicks, matches, ice cream and corn dog
sticks), East Wilton, Maine (Cutlery and plastic clothespins), Strong, Maine
(clothespins, square toothpicks and wooden crafts), and Kansas City, Kansas
(Candles). The Company believes that its four automated manufacturing
facilities position it as a low-cost manufacturer in most of its product
categories. The Company has continued to invest in automation equipment in
order to reduce headcount and increase efficiency. For example, Diamond
Brands' automated cutlery operations consist of combination modules which
include an injection molding machine, molds and robotic packaging machinery,
which allows the Company to automatically package cutlery in boxes and bags
suitable for retail distribution. The Company believes that these operations
provide it with a competitive advantage over other retail plastic cutlery
manufacturers. The Company believes it has sufficient manufacturing capacity
to satisfy its foreseeable production requirements.
Following the Empire Acquisition in February 1997, Diamond Brands
consolidated its two Candles manufacturing facilities to one location in
Kansas City, Kansas. In addition, the layout of the new facility has increased
efficiencies and reduced handling significantly. The Company believes that the
consolidation of its candle manufacturing facility will significantly reduce
its candle manufacturing costs in 1998.
The Company is currently outsourcing the production of certain products,
including resale book and fireplace matches, specialty toothpicks, holiday
candles and plastic straws. In the aggregate, sales of outsourced products
amounted to less than 10% of the Company's 1997 pro forma gross sales.
COMPETITION
The markets for certain of the Company's products are highly competitive.
The Company competes, particularly with respect to its Candles and Cutlery
products, with a number of domestic manufacturers which are larger and have
significantly greater resources than the Company. In addition, the Company
competes with foreign manufacturers, particularly those located in China,
Sweden, Brazil, Chile, Japan and Korea. Although the barriers to entry into
the Company's businesses are relatively low, the Company believes that it has
a number of competitive advantages over potential new market entrants
(including strong brand names, established national distribution and existing
cost-efficient manufacturing operations) and that the relatively small market
size for certain of the Company's products may make those markets economically
less attractive to potential competitors.
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<PAGE>
RAW MATERIALS
The primary raw materials used by Diamond Brands are generally available
from multiple suppliers, and the Company has not experienced any significant
interruption in the availability of such materials. However, the price of
polystyrene resin, the key raw material from which the Company's Cutlery
products is produced, can be volatile. The polystyrene resin used by the
Company is produced from petrochemical intermediates which are, in turn,
derived from petroleum. Polystyrene resin prices may fluctuate as a result of,
among other things, worldwide changes in natural gas and crude oil prices and
supply, as well as changes in supply and demand for polystyrene resin and
petrochemical intermediates from which it is produced. Among other industries,
the automotive and housing industries are significant users of polystyrene
resin. As a result, significant changes in worldwide capacity and demand in
these and other industries may cause significant fluctuations in the prices of
polystyrene resin. In an attempt to mitigate the impact of changing
polystyrene resin prices, the Company in January 1997 entered into a three-
year supply contract with a major supplier of polystyrene resin, under which
the Company believes it receives the lowest price available to any customer
purchasing similar volume, and receives short-term price protection during
periods of rising prices. During periods of rising prices, the Company
generally has been able to pass through the majority of the polystyrene resin
price increases to its customers on a delayed basis. During periods of
declining polystyrene resin prices, the Company generally has reduced prices
to its customers.
Other primary raw materials required by Diamond Brands in its business
include glass and metal containers, wax and fragrances to produce the
Company's Candles products, birch and maple wood to produce the Company's
Woodenware products, and aspen wood and commodity chemicals to produce the
Company's Wooden Lights products. Other major raw materials include paperboard
and corrugated cardboard.
GENERAL
TRADEMARKS
The Company owns over 30 United States trademark registrations with respect
to certain of its products. All of the Company's United States trademark
registrations can be maintained and renewed provided that the trademarks are
still in use for the goods and services covered by such registrations. The
Company regards its trademarks and tradenames as valuable assets.
EMPLOYEES
At June 30, 1998, the Company had 743 full-time employees of which 208 of the
Company's employees are represented by the United Paper Workers International
Union. In August 1997, the Company signed a six-year labor agreement with the
United Paper Workers International Union, which included a 3.0% annual wage
increase. Five of the Company's employees are represented by the International
Union of Operating Engineers. In 1997, the Company extended its labor agreement
with the International Union of Operating Engineers for six additional years.
The Company has not had a work stoppage at any of its current facilities in the
last 25 years and believes its relations with its employees are good.
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<PAGE>
PROPERTIES
The following table sets forth certain information regarding the Company's
facilities:
<TABLE>
<CAPTION>
SIZE
(SQUARE LEASE
LOCATION PRIMARY USE FEET) TITLE EXPIRATION
-------- ----------------------------- ------- ------ ----------
<C> <S> <C> <C> <C>
Cloquet,
Minnesota........ Manufacturing of matches, 290,000 Owned --
toothpicks and ice cream and
corn dog sticks; warehouse;
administration
Minneapolis, 5,000 Leased April 2000
Minnesota........ Sales and marketing
East Wilton,
Maine............ Manufacturing of plastic 75,000 Owned --
cutlery and plastic
clothespin; administration
East Wilton, 150,000 Owned --
Maine............ Warehouse
East Wilton, 240,000 Owned --
Maine............ Printing; warehouse
Strong, Maine..... Manufacturing of toothpicks, 62,000 Owned --
clothespins and wooden crafts
Kansas City,
Kansas........... Manufacturing of candles; 282,000 Leased July 2000(1)
warehouse; administration
</TABLE>
- --------
(1) Option to renew lease until July 2002.
LEGAL AND REGULATORY MATTERS
The Company is a defendant in several lawsuits, including product liability
lawsuits, arising in the ordinary course of business. Although the amount of
any liability that could arise with respect to any such lawsuit cannot be
accurately predicted, in the opinion of management, the resolution of these
matters is not expected to have a material adverse effect on the financial
position or results of operations of the Company. A predecessor to the Company
and certain other match producers are parties to a 1946 consent decree under
which the parties thereto are prohibited from engaging in anticompetitive acts
or participating in specified commercial relationships with one another.
The Company's operations are subject to a wide range of general and industry
specific federal, state and local environmental laws and regulations which
impose limitations on the discharge of pollutants into the air and water and
establish standards for the treatment, storage and disposal of solid and
hazardous waste. Under various federal, state and local laws and regulations,
an owner or operator of real estate may be liable for the costs of removal or
remediation of certain hazardous substances on such property. Although
management believes that the Company is in substantial compliance with all
applicable environmental laws and regulations, unforeseen expenditures to
remain in such compliance, or unforeseen environmental liabilities, could have
a material adverse affect on its business and financial positions.
Additionally, there can be no assurance that changes in environmental laws and
regulations or their application will not require further expenditures by the
Company.
44
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the name, age and position of individuals who
are serving as the directors and executive officers of Holdings, the Issuer and
the Guarantors. Each director of the Issuer or any of the Guarantors will hold
office until the next annual meeting of stockholders or until his or her
successor has been elected and qualified. Officers of the Issuer and each of
the Guarantors are elected by their respective Boards of Directors and serve
at the discretion of such Boards.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------ --- -----------------------------------------------------
<S> <C> <C>
Naresh K. Nakra......... 52 President, CEO and Director
Alexander M. Seaver..... 39 Director
Bradley R. Kent......... 34 Director
Alfred Aragona.......... 57 Director
Richard S. Campbell..... 45 Vice President of Supply Chain
Thomas W. Knuesel....... 50 Vice President of Finance and Chief Financial Officer
Christopher A. Mathews.. 43 Vice President of Manufacturing
John F. Young........... 56 Vice President of Sales and Marketing
</TABLE>
NARESH K. NAKRA
PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR
Dr. Nakra has been President, CEO and a director of Holdings, the Issuer and
the Guarantors since April 1998. From January 1993 to March 1998, he served as
President and CEO of Gruma Corporation, a U.S. subsidiary of Gruma, S.A.
ALEXANDER M. SEAVER
DIRECTOR
Mr. Seaver has been a director of Holdings, the Issuer and the Guarantors
since April 1998. Mr. Seaver is a principal and founding member of Seaver
Kent. Prior to forming Seaver Kent in October 1996, Mr. Seaver was with
InterWest Partners from 1987 to 1996, where he was a general partner. At
InterWest Partners, Mr. Seaver focused on non-technology acquisitions,
recapitalizations and late-stage venture capital investments. Mr. Seaver has
served on the board of directors of a variety of companies including Favorite
Brands International, Bojangles', Cafe Valley, Heidi's Fine Desserts, Java
City and Pacific Grain Products.
BRADLEY R. KENT
DIRECTOR
Mr. Kent has been a director of Holdings, the Issuer and the Guarantors
since April 1998. Mr. Kent is a principal and founding member of Seaver Kent.
Prior to forming Seaver Kent in October 1996, Mr. Kent was with InterWest
Partners from 1993 to 1996, where he was a general partner. At InterWest, Mr.
Kent focused on non-technology acquisitions, recapitalizations and late-stage
venture capital investments. Mr. Kent has served on the board of directors of
Cafe Valley, Artco-Bell Holding and MidWest Folding Products.
ALFRED ARAGONA
DIRECTOR
Mr. Aragona has been a director of Holdings, the Issuer and the Guarantors
since July 1998. Since April 1998, Mr. Aragona has served as Chairman and CEO
of Cafe Valley, a national baked goods company. Since 1996, Mr. Aragona also
has served as Chairman of Pacific Grain Products, Inc., an international grain
company. Mr. Aragona served as Chairman, CEO and President of Pacific Grain
Products, Inc. from 1992 to 1996. From 1986 to 1992 Mr. Aragona served as
President and CEO of Uncle Ben's, Inc.
RICHARD S. CAMPBELL
VICE PRESIDENT OF SUPPLY CHAIN
Mr. Campbell joined the Company in 1992 and served as the Vice President of
Operations--Maine. In June 1998, Mr. Campbell was appointed Vice President of
Supply Chain for all facilities. Prior to joining the Company, Mr. Campbell
served as the Director of Engineering at Parker Brothers from 1984 to 1992.
THOMAS W. KNUESEL
VICE PRESIDENT OF FINANCE AND CHIEF FINANCIAL OFFICER
Mr. Knuesel rejoined the Company in 1995 as the Vice President of Finance
and Chief Financial Officer. Prior to rejoining the Company, Mr. Knuesel
served as the Vice President of Finance of VEE Corporation from
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<PAGE>
1989 to 1995. He served as the Vice President and Corporate Controller of the
Company from 1986 to 1989 and as the Vice President and Controller of Carter-
Day Co. from 1984 to 1986.
CHRISTOPHER A. MATHEWS
VICE PRESIDENT OF MANUFACTURING
Mr. Mathews joined the Company in 1986 and served as the Vice President of
Operations--Minnesota. In June 1998, Mr. Mathews was appointed Vice President
of Manufacturing for all facilities. Prior to joining the Company, Mr. Mathews
served as the General Manager of Northern Mining Equipment Corporation from
1981 to 1986 and as the Mill Engineer of United States Steel from 1979 to
1981.
JOHN F. YOUNG
VICE PRESIDENT OF SALES AND MARKETING
Mr. Young joined the Company in 1991 as the Vice President of Sales and
Marketing. Prior to joining the Company, Mr. Young served as an Independent
Master Broker/Sales Agent from 1989 to 1991 and as the Executive Vice
President of Minnetonka, Inc. from 1979 to 1989.
BOARD COMMITTEES
The Board of Directors of Holdings, the Issuer and the Guarantors have each
approved the formation of an audit committee (the "Audit Committee") and a
compensation committee (the "Compensation Committee"). Mr. Seaver and Mr. Kent
are the only members of each of the Audit and Compensation Committees. No other
Audit and Compensation Committee members have been appointed, but the Board of
Directors of Holdings, the Issuer and the Guarantors may appoint additional
members in the future. The Audit Committee will recommend to the Board of
Directors the accounting firm to be selected as independent auditors and
reviews matters relating to public disclosure, corporate practices, regulatory
and financial reporting, accounting procedures and policies, financial and
accounting controls, and transactions involving conflicts of interest. The
Audit Committee also will review the planned scope and results of audits, the
annual reports of the stockholders, the proxy statement and will make
recommendations regarding approval to the Board of Directors.
The Compensation Committee of Holdings, the Issuer and the Guarantors will
review and make recommendations to the Board of Directors from time to time
regarding compensation of officers and non-employee directors. The Compensation
Committee will also administer the Company's stock-based compensation and
incentive plans and make decisions regarding the grant of stock options and
other awards to officers and employees thereunder. Mr. Seaver also serves on the
compensation committees of the boards of directors of Favorite Brands
International, Inc., Java City and Pacific Grain Product.
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<PAGE>
Director Compensation
Members of the Board of Directors of Holdings, the Issuer and the Guarantors
are not currently compensated for their services as directors. Outside
directors may in the future be compensated in a form and amount to be decided
by the Compensation Committee and the Board of Directors of each of the
respective companies.
EXECUTIVE COMPENSATION
The following table sets forth compensation paid by the Company for fiscal
year 1995, 1996 and 1997 to its CEO during fiscal 1997 and to each of the four
other most highly compensated executive officers of the Company as of the end of
fiscal 1997 (collectively, the "named executives").
<TABLE>
<CAPTION>
NUMBER OF
NAME AND PRINCIPAL SECURITIES UNDERLYING ALL OTHER
POSITION YEAR SALARY BONUS OPTIONS COMPENSATION
- ------------------------ ---- -------- -------- --------------------- ------------
<S> <C> <C> <C> <C> <C>
EDWARD A. MICHAEL....... 1997 $225,000 $118,102 -- $13,022(1)
Chief Executive Officer 1996 210,000 115,000 -- 10,023(2)
and President 1995 160,000 80,000 -- 9. 915(3)
A. DRUMMOND CREWS....... 1997 214,113 -- -- 8,542(4)
Chief Operating Officer, 1996 -- -- --
Empire Candle, Inc. 1995 -- -- --
CHRISTOPHER A. MATHEWS.. 1997 128,000 81,957 20,000 13,022(1)
Vice President of 1996 115,000 45,840 -- 10,023(2)
Operations--Minnesota 1995 97,781 40,000 -- 7,699(5)
THOMAS W. KNUESEL....... 1997 128,000 72,728 20,000 13,022(1)
Vice President of 1996 120,000 44,904 -- 52,084(7)
Finance and Chief 1995 85,039 33,000 -- 5,545(7)
Financial Officer
RICHARD S. CAMPBELL..... 1997 123,000 66,900 20,000 12,275(8)
Vice President of 1996 115,000 40,365 -- 8,015
Operations--Minnesota 1995 105,000 20,000 -- 7,370(10)
</TABLE>
- --------
(1) This amount includes the Company's contribution of $4,750 to 401K and
$8,272 to the profit sharing plan.
(2) This amount includes the Company's contribution of $4,500 to 401K and
$5,523 to the profit sharing plan.
(3) This amount includes the Company's contribution of $4,500 to 401K and
$5,415 to the profit sharing plan.
(4) This amount includes the Company's contribution of $4,750 to 401K and
$3,792 to the profit sharing plan.
(5) This amount includes the Company's contribution of $3,494 to 401K and
$4,205 to the profit sharing plan.
(6) This amount includes the Company's contribution of $4,500 to 401K and
$5,523 to the profit sharing plan and $42,061 of reimbursement for moving
expenses.
(7) This amount includes the Company's contribution of $2,475 to 401K and
$3,070 to the profit sharing plan.
(8) This amount includes the Company's contribution of $2,892 to 401K and
$9,383 to the profit sharing plan.
(9) This amount includes the Company's contribution of $1,350 to 401K and
$6,665 to the profit sharing plan.
(10) This amount includes the Company's contribution of $1,283 to 401K and
$6,087 to the profit sharing plan.
47
<PAGE>
The option grants in 1997 for the named executive officers are shown in the
following table.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF
STOCK PRICE APPRECIATION FOR
NUMBER OF OPTION TERM
SECURITIES EXERCISE OF -----------------------------
NAME AND PRINCIPAL UNDERLYING OPTION BASE PRICE EXPIRATION
POSITION GRANTED ($/SHARE) DATE 5% 10%
------------------ ----------------- ----------- ------------ -------------- ---------------
<S> <C> <C> <C> <C> <C>
EDWARD A. MICHAEL....... -- -- -- $ -- $ --
Chief Executive Officer
and President
A. DRUMMOND CREWS....... -- -- -- -- --
Chief Operating
Officer, Empire
Candle, Inc.
CHRISTOPHER A. MATHEWS.. 20,000 7.50 December 31, 244,334 389.061
Vice President of 2006
Operations--Minnesota
THOMAS W. KNUESEL....... 20,000 7.50 December 31, 244,334 389,061
Vice President of 2006
Finance and Chief
Finance Officer
RICHARD S. CAMPBELL..... 20,000 7.50 December 31, 244,334 389,061
Vice President of 2006
Operations--Maine
</TABLE>
The number of options held and their value at year end of fiscal 1997 for
the named executive officers are shown on the following table.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-
NUMBER OF UNDERLYING UNEXERCISED THE-MONEY OPTIONS AT
SHARES ACQUIRED VALUE OPTIONS AT FISCAL YEAR-END FISCAL YEAR-END
NAME AND PRINCIPAL POSITION ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- --------------------------- --------------- -------- -------------------------- -------------------------
<S> <C> <C> <C> <C>
EDWARD A. MICHAEL........ -- $-- -- $ --
Chief Executive Officer
and President
A. DRUMMOND CREWS........ -- -- -- --
Chief Operating Officer,
Empire Candle, Inc.
CHRISTOPHER A. MATHEWS... 0 0 6,667/13,333 72,204/144,396
Vice President of
Operations--Minnesota
THOMAS W. KNUESEL........ 0 0 6,667/13,333 72,204/144,396
Vice President of
Finance and Chief
Finance Officer
RICHARD S. CAMPBELL...... 0 0 6,667/13,333 72,204/144,396
Vice President of
Operations--Maine
</TABLE>
EMPLOYMENT AGREEMENTS AND OTHER COMPENSATION ARRANGEMENTS
The Company and Dr. Nakra entered into an employment agreement, dated April
21, 1998, which provides that in consideration for Dr. Nakra's service as
President, CEO and a director of the Company, Dr. Nakra will receive an annual
base salary of $375,000 and an annual target bonus based on certain performance
objectives of the Company. Pursuant to the Transaction Advisory Agreement (as
defined herein under "Certain Relationships and Related Transactions"), the
Company paid Dr. Nakra a transaction advisory fee of $250,000, representing
10% of the aggregate fees paid to equity investors with respect to the
Recapitalization, and will pay him bonuses equal to 10% of the aggregate fees
paid to equity investors with respect to any subsequent acquisitions by the
Company. Dr. Nakra is also entitled to various executive benefits and
perquisites under the employment agreement. Dr. Nakra's employment agreement
provides that in the event Dr. Nakra's employment is terminated by the Company
without cause, or by Dr. Nakra for good reason, the Company will continue to
pay Dr. Nakra his base salary for a one-year period.
Upon consummation of the Recapitalization, Dr. Nakra, pursuant to his
employment agreement, purchased $1.0 million of Holdings Preferred Stock with
Warrants for a purchase price equal to the per share price that the Sponsors
paid for Holdings Preferred Stock with Warrants in connection with the
Recapitalization (the "Preferred Share Price"). Pursuant to his employment
agreement, Dr. Nakra provided for $666,000 of such purchase price through a
full-recourse five-year promissory note, which will be accelerated upon change
of control of the Company, bearing an annual interest rate of 6.75%. The
balance of the purchase price was paid by Dr. Nakra in cash.
48
<PAGE>
In addition, the Company provides Dr. Nakra a 10-year option to purchase
additional shares of Holdings Common Stock which represent: (i) 6% of the total
outstanding shares of Holdings Common Stock after giving effect to the full
exercise of the Warrants at an exercise price equal to the Implied Value of
Holdings Common Stock of $13.98 per share and (ii) 2% of the total outstanding
shares of Holdings Common Stock after giving effect to the full exercise of the
Warrants and other management options at the time of Recapitalization at an
exercise price equal to two times the Implied Value of Holdings Common Stock.
On the 180th day after the commencement of Dr. Nakra's employment, one-quarter
of such options will vest and become exercisable, and on the first day of each
of the subsequent 30 consecutive calendar months, one-thirtieth of the balance
of such options will vest and become exercisable.
In the event Holdings sells stock to provide funds for future acquisitions,
Holdings will grant Dr. Nakra a 10-year option to purchase: (i) 4% of such
newly issued stock at a price equal to that paid by other investors; and (ii)
1% of such newly issued stock at a price equal to two times that paid by other
investors. Dr. Nakra's right to exercise these options will fully vest in 48
equal portions over the 48-month period following grant of such options.
All non-vested options, however, will become fully-vested and exercisable in
the event of the death or disability of Dr. Nakra or a change in control of
the Issuer (except in connection with initial public offering). All non-vested
options will be forfeited upon termination of Dr. Nakra's employment with the
Issuer and all vested options will be exercisable for a period of 30 days
following the termination date.
The shares of Holdings Common Stock acquired by Dr. Nakra pursuant to the
foregoing will be subject to a stockholders agreement providing for certain
transfer restrictions and registration rights. Such shares are also subject to
customary tag-along and bring- along provisions which give Dr. Nakra the right
to sell an equal proportion of his shares of Holdings Common Stock in the event
that the Sponsors sell more than 10% of their shares of Holdings Common Stock,
and that require Dr. Nakra to sell (at the Sponsors' election) all of his shares
of Holdings Common Stock in the event that the Sponsors receive a bona fide
offer to sell all of their shares of Holdings Common Stock.
Holdings also provides 10-year non-qualified stock options to Messrs.
Campbell, Knuesel, Mathews and Young to purchase shares of Holdings Common
Stock which represent up to an aggregate of 166,953 shares at an exercise
price of $13.98 per share. On the first anniversary of the date of the
Recapitalization, one-quarter of such options will vest and become
exercisable, and at the end of each of the subsequent 36 consecutive calendar
months, one thirty-sixth of the balance of such options will vest and become
exercisable.
Prior to the Recapitalization, Holdings was a party to certain 10-year non-
qualified stock option agreements, dated January 1, 1997, with these
executives and Mr. Beach that provided the right to purchase up to an
aggregate of 90,000 shares of Holdings Common Stock at an exercise price of
$7.50 per share. One-third of the options became exercisable immediately upon
entering into such agreements, one-third vested and became exercisable on
January 1, 1998, and the remainder were to vest and become exercisable on
January 1, 1999. Upon consummation of the Recapitalization, the Company
accelerated the exercisability of any part of such options which were not then
exercisable. The cash-out payment for such compensation arrangement was
$518,132. In addition, the Company made a severance payment to Mr. Crews in
the amount of $125,000 upon consummation of the Recapitalization, to be paid
over a six-month period.
Upon consummation of the Recapitalization, the Company awarded bonus
payments in an aggregate amount equal to approximately $1.2 million to Messrs.
Campbell, Knuesel, Mathews, Young and Crews pursuant to their respective change
of control agreements. The bonus payments were provided for by the Company from
the proceeds payable to the Stockholders in the Equity Repurchase.
49
<PAGE>
The Company and Mr. Campbell are parties to an employment agreement, dated
May 26, 1992, and amended April 27, 1994. Mr. Campbell's agreement provides for
an initial two-year term and then renews automatically for successive one-year
terms unless either party gives notice of its intent not to renew at least 90
days prior to expiration of the current term. In addition to a base salary, Mr.
Campbell is also entitled to a performance bonus as described below. In the
event that the employment of Mr. Campbell is terminated by the Company other
than for cause, death, retirement or voluntary resignation, the Company will
pay Mr. Campbell a severance payment in an amount equal to Mr. Campbell's
then-current base salary.
The Company has entered into change of control agreements with each of
Mr. Knuesel, Mr. Mathews, and Mr. Young (collectively, the "Executives"). The
agreements provide that each Executive's employment may be terminated by such
Executive or by the Company for any reason or no reason at all. If the Company
terminates such Executive's employment for other than cause or the Executive
terminates his employment for good reason, such Executive is entitled to his
full base salary through the time his notice of termination of employment is
given and a severance payment equal to his annual base salary plus an amount
equal to his annual target bonus. The total severance payment will not exceed
130% of such Executive's annual base salary. The severance payment will be
offset, however, by any compensation received by such Executive under new
employment during the 12-month period after leaving the Company. In addition,
for 12 months after termination of his employment the Executive is entitled to
continue participation in the health insurance plan of the Company as if he were
an executive of the Company. The change of control employment agreements also
provide a prohibition on disclosing confidential information and a non-compete
provision which prohibits the Executives from engaging in certain competitive
activities under certain circumstances for one year after termination of each
Executive's employment. Other than the change of control agreements, none of the
Executives has any employment agreement with the Company.
In 1997, the annual base salary for Messrs. Knuesel, Mathews, Young and
Campbell was $128,000, $128,000, $133,000 and $123,000, respectively. In 1998,
the annual base salary for Messrs. Knuesel, Mathews, Young and Campbell was
$137,000, $137,000, $152,000 and $137,000, respectively.
The Company maintains a bonus program pursuant to which each of Messrs.
Knuesel, Matthews, Young and Campbell has the opportunity to earn an annual
bonus based upon annual target EBITDA, return on invested capital and other
mutually agreed upon individual performance goals. The amount of each
executive's annual bonus under the bonus program ranges from 0% to 60% of the
respective executive's annual salary, with the target bonus set at 30% if such
performance objectives are achieved and a maximum of 60% if such objectives are
exceeded. Until July 1998, the Board of Directors, upon recommendations of the
President and CEO, determined officer bonuses. A Compensation Committee was
formed in July 1998 and future compensation decisions are expected to be made
by the Compensation Committee and recommended to the Board of Directors for
approval.
The Company does not maintain any key-man or similar insurance policy in
respect of Dr. Nakra or any of its other senior management or key personnel.
However, the purchase of key-man life insurance may be considered in the future
by the Compensation Committee of the Board of Directors.
50
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the Recapitalization, the Company entered into a ten-year
agreement (the "Management Advisory Agreement") with Seaver Kent to which
entitled Seaver Kent to receive from the Company (but, at its discretion, may
waive) an annual fee for management advisory services equal to the greater of
$200,000 and 0.05% of the budgeted consolidated net sales of the Company. In
addition, the Company agreed to indemnify Seaver Kent, its affiliates and
shareholders, and their respective directors, officers, agents, employees and
affiliates from and against all claims, actions, proceedings, demands,
liabilities, damages, judgments, assessments, losses and costs, including fees
and expenses, arising out of or in connection with the services rendered by
Seaver Kent thereunder. The Management Advisory Agreement makes available the
resources of Seaver Kent concerning a variety of financial and operational
matters. The services provided by Seaver Kent cannot otherwise be obtained by
the Issuer without the addition of personnel or the engagement of outside
professional advisors.
In connection with the Recapitalization, the Issuer also entered into an
agreement (the "Transaction Advisory Agreement") with Seaver Kent pursuant to
which Seaver Kent received a cash financial advisory fee of approximately
$2.75 million upon the closing of the Recapitalization as compensation for its
services as financial advisor for the Recapitalization. Seaver Kent is also
entitled to receive (but, at its discretion, may waive) fees of up to 1.5% of
the "transaction value" for each subsequent transaction in which the Issuer is
involved. The term "transaction value" means the total value of any subsequent
transaction, including, without limitation, the aggregate amount of the funds
required to complete the subsequent transaction (excluding any fees payable
pursuant to the Transaction Advisory Agreement and fees, if any, paid to any
other person or entity for financial advisory, investment banking, brokerage
or any other similar services rendered in connection with such transaction)
including the amount of any indebtedness, preferred stock or similar items
assumed (or remaining outstanding).
The Stockholders bore (from the proceeds of the Equity Repurchase) certain
other financial advisory, legal and accounting fees and expenses incurred by
the Company in connection with the Recapitalization.
In addition, the Sponsors and Andrew M. Hunter, III entered into a letter
agreement dated March 3, 1998 which stated the Sponsors' intent to grant Mr.
Hunter an option to purchase Holdings Common Stock in an amount representing
2.73% of the fully diluted outstanding shares of Holdings Common Stock as of
the date of grant, with an exercise price equal to the Implied Value of
Holdings Common Stock of $13.98 per share, in consideration of certain
consulting services to be provided by Mr. Hunter on a mutually acceptable basis
after the consummation of the Recapitalization.
Holdings and its subsidiaries entered into a tax sharing agreement
providing, among other things, that each of the subsidiaries will reimburse
Holdings for its share of income taxes determined as if such subsidiary had
filed its tax returns separately from Holdings.
Immediately following the consummation of the Recapitalization, certain of
the Stockholders held 22.5% of outstanding shares of Holdings Common Stock
after giving effect to the full exercise of the Warrants. See "The
Recapitalization."
51
<PAGE>
DESCRIPTION OF HOLDINGS INDEBTEDNESS
The Holdings Senior Discount Debentures were issued at a discount to their
aggregate principal amount at maturity to generate gross proceeds to Holdings
of approximately $45.1 million. The yield to maturity of the Holdings Senior
Discount Debentures is 12 7/8% (computed on a semi-annual bond equivalent
basis), calculated from April 21, 1998. The Holdings Senior Discount
Debentures were issued under an indenture dated as of April 21, 1998 (the
"Holdings Indenture") between Holdings and State Street Bank and Trust
Company, as trustee, and are senior unsecured obligations of Holdings. Cash
interest will not accrue or be payable on the Holdings Senior Discount
Debentures prior to April 15, 2003. Thereafter, cash interest on the Holdings
Senior Discount Debentures will accrue at a rate of 12 7/8% per annum and will
be payable in arrears on October 15 and April 15 of each year, commencing
October 15, 2003. The Holdings Senior Discount Debentures will mature on April
15, 2009.
On April 15, 2003, Holdings will be required to redeem Holdings Senior
Discount Debentures with an aggregate principal amount at maturity equal to (i)
$33.2 million multiplied by (ii) the quotient obtained by dividing (x) the
aggregate principal amount at maturity of the Holdings Senior Discount
Debentures then outstanding by (y) $84.0 million, at a redemption price equal to
100% of the principal amount at maturity of the Holdings Senior Discount
Debentures so redeemed. The Holdings Senior Discount Debentures will be
redeemable at the option of Holdings, in whole or in part, at any time on or
after April 15, 2003, in cash at the redemption prices (expressed as a
percentage of principal amount) set forth below, plus accrued and unpaid
interest and liquidated damages, if any, thereon to the date of redemption, if
redeemed during the twelve-month period commencing April 15 in the years set
forth below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2003.......................... 106.438%
2004.......................... 104.292%
2005.......................... 102.146%
2006 and thereafter........... 100.000%
</TABLE>
Notwithstanding the foregoing, at any time on or prior to April 15, 2001
Holdings may (but shall not have the obliagation to) redeem, on one or more
occasions, up to 35% of principal amount at maturity of the Holdings Senior
Discount Debentures originally issued at a redemption price equal to 112.875% of
the Accreted Value (as defined in the Holdings Indenture) thereof plus accrued
and unpaid interest and Liquidated Damages (as defined in the Holdings
Indenture), if any, thereon to the redemption date, with net cash proceeds of
one or more Equity Offerings (as defined in the Holdings Indenture); provided
that at least 65% of the original aggregate principal amount at maturity of the
Holding Senior Discount Debentures remains outstanding immediately after each
such redemption and provided further, that such redemption will occur within 90
days of the date of the closing of such Equity Offering.
In the event of a Change of Control (as defined in the Holdings Indenture),
each holder of Holdings Senior Discount Debentures has the right to
require the repurchase of such holder's Holdings Senior Discount Debentures at
a purchase price equal to 101% of the principal amount thereof, plus accrued
and unpaid interest and Liquidated Damages, if any, thereon to the purchase
date.
The Holdings Indenture contains covenants that, among other things, limit
the ability of Holdings to enter into certain mergers or consolidations or
incur certain liens and of Holdings and its subsidiaries to incur additional
indebtedness, pay dividends, redeem capital stock or make certain other
restricted payments and engage in certain transactions with affiliates. Under
certain circumstances, Holdings will be required to make an offer to purchase
the Holdings Senior Discount Debentures at a price equal to 100% of the
principal amount thereof, plus accrued interest to the date of purchase with
the proceeds of certain asset sales. The Holdings Indenture contains certain
customary events of defaults, which include the failure to pay interest and
principal, the failure to comply with certain covenants in the Holdings Senior
Discount Debentures or the Holdings Indenture, a default under certain
indebtedness, the imposition of certain final judgments or warrants of
attachment and certain events occurring under bankruptcy laws.
52
<PAGE>
CAPITAL STOCK OF HOLDINGS AND THE ISSUER
GENERAL
The Issuer is authorized by the terms of its Certificate of Incorporation to
issue 1,000 shares of common stock, par value $.01 per share. The Issuer has
issued and outstanding 1,000 shares of common stock, each share of which is
entitled to one vote. Holdings owns all of the issued and outstanding capital
stock of the Issuer. Holdings does not have any material assets other than the
common stock of the Issuer.
Holdings' Articles of Incorporation authorizes Holdings to issue an
aggregate total of 50,000,000 shares of common stock. Holdings currently has
outstanding 1,490,650 shares of common stock and 47,000 shares of Holdings
Preferred Stock.
Holdings Preferred Stock has a liquidation preference of $1,000 per
share (the "Liquidation Preference") and will accumulate dividends at the rate
of 12.0% of the Liquidation Preference per annum (representing a 15% per annum
effective yield), payable semi-annually to the mandatory redemption value of
$47.0 million on the mandatory redemption date of October 15, 2009. Dividends
will compound to the extent not paid. Shares of Holdings Preferred Stock may be
redeemed at the option of Holdings, at any time, in whole or in part, at a
redemption price per share equal to the Liquidation Preference per share plus an
amount equal to all accumulated and unpaid dividends. The pay-in-kind feature of
Holdings Preferred Stock also permits Holdings the option to pay dividends by
the issuance of additional shares of Holdings Preferred Stock having an
aggregate liquidation preference equal to the amount of dividend being paid,
rather than by cash dividends.
Optional redemption of Holdings Preferred Stock is subject to, and expressly
conditioned upon, certain limitations under the Indenture, the Holdings
Indenture, the Bank Facilities, the New Notes offered hereby and other documents
relating to Holdings' or the Issuer's indebtedness. Holdings may also be
required to redeem shares of Holdings Preferred Stock in certain other
circumstances, including the occurrence of a change of control of Holdings, in
each case subject to the terms of the Indenture, the Holdings Indenture, the
Bank Facilities, the New Notes offered hereby and other documents relating to
Holdings' or the Issuer's indebtedness. Holders of Holdings Preferred Stock do
not have any voting rights with respect thereto, except for such rights as are
provided under applicable law, the right to elect, as a class, one director of
Holdings in the event that Holdings fails to comply with its redemption
obligations and class voting rights with respect to transactions adversely
affecting the rights, preferences or powers of the Holdings Preferred Stock.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Beneficial Owners of More Than 5% of the Issuer's
Voting Securities(1)
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL OWNERSHIP
BENEFICIAL OWNER TITLE OF CLASS (NUMBER OF SHARES) PERCENT OF CLASS
- ------------------- --------------------- -------------------- ----------------
<S> <C> <C> <C>
Seaver Kent-TPG
Partners, L.P.......... Holdings Common Stock 2,659,320(2) 55.75%(4)
3000 Sand Hill Road,
Suite 230
Menlo Park, California
94025
Seaver Kent I
Parallel, L.P.......... Holdings Common Stock 265,217(3) 5.56%(5)
3000 Sand Hill Road,
Suite 230
Menlo Park, California
94025
Alexander M. Seaver..... -- -- (6) --
Bradley R. Kent......... -- -- (7) --
Andrew M. Hunter, III... Holdings Common Stock 289,736 19.44%
537 Herrington Road
Wayzata, Minnesota 55391
John L. Morrison........ Holdings Common Stock 109,350 7.34%
234 S. Edgewood Avenue
Wayzata, Minnesota 55391
</TABLE>
- --------
53
<PAGE>
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL OWNERSHIP
BENEFICIAL OWNER TITLE OF CLASS (NUMBER OF SHARES) PERCENT OF CLASS
- ------------------- --------------------- -------------------- ----------------
<S> <C> <C> <C>
Edward A. Michael....... Holdings Common Stock 97,272 2.04%
4901 Golf Shore Blvd.,
Suite 201
Naples, Florida 34103
Alan S. McDowell........ Holdings Common Stock 87,751 5.88%
Box 25152
Jackson, Wyoming 83001
Robert J. Keith, Jr..... Holdings Common Stock 86,206 5.78%
100 Bushaway Road
Wayzata, Minnesota 55391
</TABLE>
- --------
(1) Because the Issuer is a wholly-owned subsidiary of Holdings, this chart
identifies beneficial owners of more than 5% of the voting securities of
Holdings.
(2) Includes 300,216 shares acquired through the exercise of Warrants, 215
shares utilized for cashless exercise, and 2,358,889 shares issuable upon
exercise of Warrants.
(3) Includes 29,813 shares acquired through the exercise of Warrants, 22 shares
utilized for cashless exercise, and 235,382 shares issuable upon exercise
of Warrants.
(4) Includes 49.25% represented by unexercised, issuable Warrants as described
in note (2) above.
(5) Includes 4.93% represented by unexercised, issuable Warrants as described
in note (3) above.
(6) Seaver Kent - TPG Partners, L.P. is an entity affiliated with Alexander M.
Seaver. Mr. Seaver disclaims beneficial ownership of all shares owned by
such entity.
(7) Seaver Kent - TPG Partners, L.P. is an entity affiliated with Bradley R.
Kent. Mr. Kent disclaims beneficial ownership of all shares owned by such
entity.
SECURITY OWNERSHIP OF MANAGEMENT
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP (NUMBER
OF SHARES) PERCENT OF CLASS
----------------------------- ----------------------------
HOLDINGS HOLDINGS HOLDINGS HOLDINGS
NAME OF BENEFICIAL OWNER COMMON STOCK PREFERRED STOCK COMMON STOCK PREFERRED STOCK
- ------------------------ ------------ --------------- ------------ ---------------
<S> <C> <C> <C> <C>
Seaver Kent--TPG
Partners, L.P.......... 2,659,320(1) 22,636 55.75%(10) 48.16%
Seaver Kent I Parallel,
L.P.................... 265,217(2) 2,264 5.56%(11) 4.82%
Alexander M. Seaver..... --(3) -- -- --
Bradley R. Kent......... --(4) -- -- --
Alfred Aragona.......... -- -- -- --
Naresh K. Nakra ........ 117,344(5) 1,000 2.46%(12) 2.13%
Edward A. Michael....... 97,272 -- 2.04% --
A. Drummond Crews....... -- -- -- --
Christopher A. Mathews.. 50,721(6) 400 1.06%(13) 0.85%
Thomas W. Knuesel....... 11,925(7) 100 0.25%(14) 0.21%
Richard S. Campbell..... 47,224(8) 400 0.99%(15) 0.85%
John F. Young........... 14,589(9) 100 0.31%(16) 0.21%
All Executive Officers
and Directors
(nine persons)......... 3,263,612(17) 26,900 68.42% 57.23%
</TABLE>
54
<PAGE>
- --------
(1) Includes 300,216 shares acquired through the exercise of Warrants, 215
shares utilized for cashless exercise, and 2,358,889 shares issuable upon
exercise of Warrants.
(2) Includes 29,813 shares acquired through the exercise of Warrants, 22 shares
utilized for cashless exercise, and 235,382 shares issuable upon exercise
of Warrants.
(3) Seaver Kent-TPG Partners, L.P. and Seaver Kent I Parallel, L.P. are
entities affiliated with Alexander M. Seaver. Mr. Seaver disclaims
beneficial ownership of all shares owned by such entities.
(4) Seaver Kent-TPG Partners, L.P. and Seaver Kent I Parallel, L.P. are
entities affiliated with Bradley R. Kent. Mr. Kent disclaims beneficial
ownership of all shares owned by such entities.
(5) Includes 13,267 shares acquired through the exercise of Warrants, 10 shares
utilized for cashless exercise, and 104,067 shares issuable upon exercise
of Warrants.
(6) Includes 3,497 shares owned prior to the Recapitalization, 5,366 shares
acquired through the exercise of Warrants, 4 shares utilized for cashless
exercise, and 41,854 shares issuable upon exercise of Warrants.
(7) Includes 1,342 shares acquired through the exercise of Warrants, 1 share
utilized for cashless exercise, and 10,582 shares issuable upon exercise of
Warrants.
(8) Includes 5,366 shares acquired through the exercise of Warrants, 4 shares
utilized for cashless exercise, and 41,854 shares issuable upon exercise of
Warrants.
(9) Includes 2,664 shares owned prior to the Recapitalization, 1,342 shares
acquired through the exercise of Warrants, 1 share utilized for cashless
exercise, and 10,582 shares issuable upon exercise of Warrants.
(10) Includes 49.45% represented by unexercised, issuable shares as described in
note (1) above.
(11) Includes 4.93% represented by unexercised, issuable shares as described in
note (2) above.
(12) Includes 2.18% represented by unexercised, issuable shares as described in
note (5) above.
(13) Includes 0.88% represented by unexercised, issuable shares as described in
note (6) above.
(14) Includes 0.22% represented by unexercised, issuable shares as described in
note (7) above.
(15) Includes 0.88% represented by unexercised, issuable shares as described in
note (8) above.
(16) Includes 0.22% represented by unexercised, issuable shares as described in
note (9) above.
(17) Includes all shares currently held and exercisable by entities affiliated
with a director as described in notes (1) and (2) above and all shares
currently held and issuable as described in notes (5) through (9) above.
55
<PAGE>
DESCRIPTION OF THE BANK FACILITIES
On the closing date of the Recapitalization (the "Closing Date"), the
Issuer entered into the Bank Facilities among the Issuer, the Banks, DLJ Capital
Funding, as Syndication Agent, Wells Fargo, as Administrative Agent, and Morgan
Stanley Senior Funding, as Documentation Agent. DLJ Capital Funding is a lender
under the Bank Facilities. The following is a summary description of the
principal terms of the Bank Facilities. The description set forth below does not
purport to be complete and is qualified in its entirety by reference to certain
agreements setting forth the principal terms and conditions of the Bank
Facilities, which are available upon request from the Company.
STRUCTURE
The Banks provided the Issuer with loans of (i) $30.0 million under a senior
secured term loan facility (the "Term A Loan Facility"), (ii) $50.0 million
under a senior secured term loan facility (the "Term B Loan Facility") and
(iii) up to $25.0 million under the Revolving Credit Facility.
The full amount of the Term A Loan Facility, the Term B Loan Facility
and approximately $7.0 million of the Revolving Credit Facility were borrowed on
the Closing Date under the Bank Facilities to: (i) partially finance the
Recapitalization, including the Debt Retirement, (ii) pay certain fees and
expenses related to the Recapitalization and (iii) fund working capital
requirements. See "Use of Proceeds." The Revolving Credit Facility may be
utilized to fund the Issuer's working capital requirements, including issuance
of stand-by and trade letters of credit, and for other general corporate
purposes.
The Term A Loan Facility is comprised of a single tranche term facility of
$30.0 million, and the Term B Loan Facility is comprised of a single tranche
term facility of $50.0 million. Loans and letters of credit under the
Revolving Credit Facility will be available at any time during its six-year
term subject to the fulfillment of customary conditions precedent including
the absence of a material adverse change in the condition of the Issuer and
the absence of a default under the Bank Facilities.
The Company is required to repay loans outstanding under the Term Loan
Facilities in accordance with the following amortization schedule:
<TABLE>
<CAPTION>
AMOUNT
AMORTIZED
---------------
FISCAL YEAR TERM A TERM B
----------- ------- -------
(IN THOUSANDS)
<S> <C> <C>
1998....................................................... $ -- $ 375
1999....................................................... 2,250 500
2000....................................................... 4,125 500
2001....................................................... 4,500 500
2002....................................................... 5,625 500
2003....................................................... 6,000 500
2004....................................................... 6,000 500
2005....................................................... 1,500 35,000
2006....................................................... -- 11,625
------- -------
Total.................................................... $30,000 $50,000
======= =======
</TABLE>
SECURITY; GUARANTY
The Issuer's obligations under the Bank Facilities are guaranteed by each of
the Issuer's direct and indirect domestic subsidiaries. The Bank Facilities
and the guarantees thereof are secured by (i) a first priority perfected lien
on all the property and assets (tangible and intangible) of the Issuer and
each of its existing and future direct and indirect domestic subsidiaries,
(ii) all of the capital stock of the Issuer and (iii) all of the capital stock
(or similar equity interests) of the Issuer's existing and future direct and
indirect domestic subsidiaries.
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INTEREST; MATURITY
At the Issuer's option, borrowings under the Bank Facilities bear interest
at (i) the Administrative Agent's base rate or (ii) the Administrative Agent's
Adjusted Eurodollar Rate, plus applicable margins as set forth under the Bank
Facilities. The Term A Loan Facility will mature seven years after the Closing
Date. The Term B Loan Facility will mature eight years after the Closing Date,
and the Revolving Credit Facility will terminate six years after the Closing
Date.
FEES
The Issuer is required to pay the Banks, on a quarterly basis, an annual
commitment fee based on the daily average unused portion of the Revolving
Credit Facility which has accrued from the Closing Date. The Issuer is also
obligated to pay (i) a quarterly letter of credit fee on the aggregate amount
of outstanding letters of credit and (ii) a fronting bank fee for the letter
of credit issuing bank.
COVENANTS
The Bank Facilities contain a number of covenants that, among other things,
restrict the ability of Holdings (other than the financial covenants), the
Issuer and its subsidiaries to dispose of assets, incur additional
indebtedness, prepay other indebtedness (including the Notes) or amend certain
debt instruments (including the Indenture), pay dividends, create liens on
assets, enter into sale and leaseback transactions, make investments, loans or
advances, make acquisitions, engage in mergers or consolidations, change the
business conducted by the Issuer or its subsidiaries, make capital expenditures
or engage in certain transactions with affiliates and otherwise restrict
certain corporate activities. In addition, under the Bank Facilities, the
Issuer is required to maintain, on a consolidated basis, specified financial
ratios and tests, including minimum fixed charge coverage ratios, leverage
ratios below a specified maximum and interest coverage ratios. The Company is
currently in compliance with all financial covenants, tests and ratios to which
it is subject under the Bank Facilities.
The following is a summary of certain financial tests which apply to the
Company under the Bank Facilities (capitalized terms have the meanings set
forth in the Bank Facilities):
Minimum Fixed Charge Coverage Ratio. The Minimum Fixed Charge Coverage Ratio
(a ratio of EBITDA to certain interest expense, capital expenditure expense,
scheduled principal payments under the Bank Facilities and dividends) for any
computation period shall not be less than the ratio set forth below opposite
the period in which such computation period ends:
Period Ending Ratio
------------- -----
March 31, 1999 - March 31, 2001 1.2
June 30, 2001 - March 31, 2002 1.3
June 30, 2002 - December 31, 2002 1.4
March 31, 2003 - September 30, 2003 1.3
March 31, 2005 - March 31, 2006 0.5
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Maximum Leverage Ratio. The Maximum Leverage Ratio (a ratio of total
indebtedness to EBITDA) on any computation period shall not exceed the ratio
set forth below opposite the period in which such computation period ends:
Period Ending Ratio
------------- -----
June 30, 1998 - December 31, 1998 6.6
March 31, 1999 - June 30, 1999 6.5
September 30, 1999 6.3
March 31, 2000 6.0
June 30, 2000 5.9
September 30, 2000 5.7
March 31, 2001 5.4
June 30, 2001 5.3
September 30, 2001 5.1
March 31, 2002 4.9
June 30, 2002 4.7
September 30, 2002 4.6
March 31, 2003 4.4
June 30, 2003 4.3
September 30, 2003 4.2
March 31, 2004 - March 31, 2006 4.0
Interest Coverage Ratio. The Interest Coverage Ratio (a ratio of EBITDA to
certain interest expense under the Bank Facilities) for any consecutive
four-fiscal quarter period ending on the dates set forth below to be less than
the correlative ratio indicated:
Period Ending Ratio
------------- -----
March 31, 1999 - June 30, 1999 1.60
September 30, 1999 - March 31, 2000 1.70
June 30, 2000 - September 30, 2000 1.80
December 31, 2000 - March 31, 2001 1.90
June 30, 2001 - September 30, 2001 2.00
March 31, 2002 - June 30, 2002 2.20
September 30, 2002 2.30
March 31, 2003 2.50
June 30, 2003 2.60
September 30, 2003 2.70
March 31, 2004 - March 31, 2006 2.75
EVENTS OF DEFAULT
The Bank Facilities contain customary events of default, including nonpayment
of principal, interest or fees, material inaccuracy of representations and
warranties, violation of covenants, cross-default to certain other indebtedness
(including the Notes and the Senior Discount Debentures), certain events of
bankruptcy and insolvency, material judgments against the Issuer, invalidity of
any guarantee or security interest and a change of control of the Issuer in
certain circumstances as set forth therein.
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THE EXCHANGE OFFER
The following is a summary of the material provisions of the Registration
Rights Agreement. This summary does not purport to summarize all of the
provisions of the Registration Rights Agreement, and reference also is made
to the provisions of the Registration Rights Agreement, which has been filed as
an exhibit to the Registration Statement and a copy of which is available as set
forth under the heading "Available Information."
TERMS OF THE EXCHANGE OFFER
In connection with the issuance of the Old Notes pursuant to a Purchase
Agreement dated as of April 15, 1998, by and among the Issuer, the Guarantors
and the Initial Purchasers, the Initial Purchasers and their respective
assignees became entitled to the benefits of the Registration Rights
Agreement.
Under the Registration Rights Agreement, the Issuer and the Guarantors are
required to file within 75 days after April 21, 1998 (the date the Registration
Rights Agreement was entered into and the Closing Date) a registration
statement (the "Exchange Offer Registration Statement") for a registered
exchange offer with respect to an issue of New Notes. Under the Registration
Rights Agreement, the Issuer and the Guarantors are also required to (i) use
their respective best efforts to cause such Exchange Offer Registration
Statement to become effective within 150 days after the Closing Date, (ii) use
their respective best efforts to keep the Exchange Offer open for at least 20
business days (or longer if required by applicable law), (iii) use their
respective best efforts to consummate the Exchange Offer within 45 days
following the date on which the Exchange Offer Registration Statement is
declared effective by the Commission and (iv) cause the Exchange Offer to
comply with all applicable federal and state securities laws. The Exchange
Offer being made hereby, if commenced and consummated within the time periods
described in this paragraph, will satisfy those requirements under the
Registration Rights Agreement.
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, all Old Notes validly tendered and not
withdrawn prior to 5:00 p.m., New York City time, on the Expiration Date will
be accepted for exchange. New Notes of the same class will be issued in
exchange for an equal principal amount of outstanding Old Notes accepted in
the Exchange Offer. Old Notes may be tendered only in integral multiples of
$1,000. This Prospectus, together with the Letter of Transmittal, is being
sent to all registered holders as of September 15, 1998. The Exchange Offer is
not conditioned upon any minimum principal amount of Old Notes being tendered
in exchange. However, the obligation to accept Old Notes for exchange pursuant
to the Exchange Offer is subject to certain conditions as set forth herein
under "--Conditions."
Old Notes will be deemed to have been accepted as validly tendered when, as
and if the Trustee has given oral or written notice thereof to the Exchange
Agent. The Exchange Agent will act as agent for the tendering holders of Old
Notes for the purposes of receiving the New Notes and delivering New Notes to
such holders.
Based on interpretations by the staff of the Commission, as set forth in no-
action letters issued to third parties, including the Exchange Offer No-Action
Letters, the Issuer and the Guarantors believe that the New Notes issued
pursuant to the Exchange Offer may be offered for resale, resold or otherwise
transferred by each holder thereof (other than a broker-dealer who acquires
such New Notes directly from the Issuer for resale pursuant to Rule 144A under
the Securities Act or any other available exemption under the Securities Act
and other than any holder that is an "affiliate" (as defined in Rule 405 under
the Securities Act) of the Issuer without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such New
Notes are acquired in the ordinary course of such holder's business and such
holder is not engaged in, and does not intend to engage in, a distribution of
such New Notes and has no arrangement with any person to participate in a
distribution of such New Notes. By tendering the Old Notes in exchange for New
Notes, each holder, other than a Participating Broker-Dealer, will represent
to the Issuer and the Guarantors that: (i) it is not an affiliate (as defined
in Rule 405 under the Securities Act) of the Issuer; (ii) it is not a broker-
dealer tendering Old Notes acquired for its own account directly from the
Issuer; (iii) any New Notes to be received by it will be acquired in the
ordinary course of its business; and (iv) it is not engaged in, and does not
intend to engage in, a distribution of such New Notes and has no arrangement
or understanding to participate in a distribution of the New Notes. If a
holder of New Notes is engaged in or intends to engage in a distribution of
the New Notes or has any arrangement or understanding with respect to the
distribution of the New Notes to be acquired pursuant to the
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Exchange Offer, such holder may not rely on the applicable interpretations of
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 Participating Broker-Dealer that receives
New Notes for its own account pursuant to the Exchange Offer must acknowledge
that it will deliver a prospectus in connection with any resale of such New
Notes. The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a Participating 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 Participating Broker-Dealer in connection with resales of New
Notes received in exchange for Old Notes where such Old Notes were acquired by
such Participating Broker-Dealer as a result of market-making activities or
other trading activities. The Issuer and the Guarantors have agreed that they
will make this Prospectus available to any Participating Broker-Dealer for a
period of time not to exceed one year after the date on which the Exchange
Offer is consummated for use in connection with any such resale. See "Plan of
Distribution."
In the event that (i) any changes in law or the applicable interpretations of
the staff of the Commission do not permit the Issuer and the Guarantors to
effect the Exchange Offer, or (ii) if any holder of Transfer Restricted
Securities (as defined herein) notifies the Issuer within 20 business days
following the consummation of the Exchange Offer that (A) such holder was
prohibited by law or Commission policy from participating in the Exchange Offer
or (B) such holder may not resell the New Notes acquired by it in the Exchange
Offer to the public without delivering a prospectus and the prospectus contained
in the Exchange Offer Registration Statement is not appropriate or available for
such resales by such holder or (C) such holder is a broker-dealer and holds Old
Notes acquired directly from the Issuer or one of its affiliates, then the
Issuer and the Guarantors will (x) cause to be filed a shelf registration
statement pursuant to Rule 415 under the Act (the "Shelf Registration
Statement") on or prior to 30 days after the date on which the Issuer determines
that it is not required to file the Exchange Offer Registration Statement
pursuant to clause (i) above or 60 days after the date on which the Issuer
receives the notice specified in clause (ii) above and will (y) use their
respective best efforts to cause such Shelf Registration Statement to become
effective within 150 days after the date on which the Issuer becomes obligated
to file such Shelf Registration Statement. If, after the Issuer has filed an
Exchange Offer Registration Statement, the Issuer is required to file and make
effective a Shelf Registration Statement solely because the Exchange Offer will
not be permitted under applicable federal law, then the filing of the Exchange
Offer Registration Statement will be deemed to satisfy the requirements of
clause (x) above. Such an event will have no effect on the requirements of
clause (y) above. The Issuer and the Guarantors will use their respective best
efforts to keep the Shelf Registration Statement continuously effective,
supplemented and amended to the extent necessary to ensure that it is available
for sales of Transfer Restricted Securities by the holders thereof for a period
of at least two years following the date on which such Shelf Registration
Statement first becomes effective under the Securities Act. The term "Transfer
Restricted Securities" means each Old Note, until the earliest to occur of (a)
the date on which such Old Note is exchanged in the Exchange Offer and entitled
to be resold to the public by the holder thereof without complying with the
prospectus delivery requirements of the Act, (b) the date on which such Old Note
has been disposed of in accordance with a Shelf Registration Statement, (c) the
date on which such Old Note is disposed of by a broker-dealer pursuant to the
"Plan of Distribution" contemplated by the Exchange Offer Registration Statement
(including delivery of the prospectus contained therein) or (d) the date on
which such Old Note is distributed to the public pursuant to Rule 144 under the
Act.
If (i) the Exchange Offer Registration Statement or the Shelf Registration
Statement is not filed with the Commission on or prior to the date specified
in the Registration Rights Agreement, (ii) any such Registration Statement has
not been declared effective by the Commission on or prior to the date
specified for such effectiveness in the Registration Rights Agreement, (iii)
the Exchange Offer has not been consummated within 195 days after the Closing
Date or (iv) any Registration Statement required by the Registration Rights
Agreement is filed and declared effective but will thereafter cease to be
effective or fail to be usable for its intended purpose without being
succeeded immediately by a post-effective amendment to such Registration
Statement that cures such failure and that is itself declared effective
immediately (each such event referred to in clauses (i) through (iv), a
"Registration Default"), then the Issuer and the Guarantors hereby jointly and
severally agree to pay Liquidated Damages to each holder of New Transfer
Restricted Securities. With respect to the first 90-day period immediately
following the occurrence of such Registration Default the Liquidated Damages
will equal $.05 per
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week per $1,000 principal amount of Transfer Restricted Securities held by
such holder for each week or portion thereof that the Registration Default
continues. The amount of the Liquidated Damages will increase by an additional
$.05 per week per $1,000 in principal amount of Transfer Restricted Securities
with respect to each subsequent 90-day period until all Registration Defaults
have been cured, up to a maximum amount of Liquidated Damages of $.30 per week
per $1,000 principal amount of Transfer Restricted Securities. Notwithstanding
anything to the contrary set forth herein, (1) upon filing of the Exchange
Offer Registration Statement (and/or, if applicable, the Shelf Registration
Statement), in the case of (i) above, (2) upon the effectiveness of the
Exchange Offer Registration Statement (and/or, if applicable, the Shelf
Registration Statement), in the case of (ii) above, (3) upon consummation of
the Exchange Offer, in the case of (iii) above, or (4) upon the filing of a
post-effective amendment to the Registration Statement or an additional
Registration Statement that causes the Exchange Offer Registration Statement
(and/or, if applicable, the Shelf Registration Statement) to again be declared
effective or made usable in the case of (iv) above, the Liquidated Damages
payable with respect to the Transfer Restricted Securities a result of such
clause (i), (ii), (iii) or (iv), as applicable, will cease.
All accrued Liquidated Damages will be paid to the holder of the global
notes representing the Old Notes by wire transfer of immediately available
funds or by federal funds check and to holders of certificated securities by
mailing checks to their registered addresses on each October 15 and April 15.
All obligations of the Issuer and the Guarantors set forth in the preceding
paragraph that are outstanding with respect to any Transfer Restricted
Security at the time such security ceases to be a Transfer Restricted Security
will survive until such time as all such obligations with respect to such
security will have been satisfied in full.
Upon consummation of the Exchange Offer, subject to certain exceptions,
holders of Old Notes who do not exchange their Old Notes for New Notes in the
Exchange Offer will no longer be entitled to registration rights and will not
be able to offer or sell their Old Notes, unless such Old Notes are
subsequently registered under the Securities Act (which, subject to certain
limited exceptions, the Issuer will have no obligation to do), except pursuant
to an exemption from, or in a transaction not subject to, the Securities Act
and applicable state securities laws. See "Risk Factors--Risk Factors Relating
to the Notes--Consequences of Failure to Exchange."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS; TERMINATION
The term "Expiration Date" will mean October 19, 1998, unless the Exchange
Offer is extended, if and as required by applicable law, in which case the
term "Expiration Date" will mean the latest date to which the Exchange Offer
is extended. The Issuer and the Guarantors expect that the Exchange Offer
would be extended only to allow holders of the Old Notes who may not have
taken note of the Expiration Date additional time in which to tender and thus
avoid the loss of the benefits of receiving New Notes.
In order to extend the Expiration Date, the Issuer will notify the Exchange
Agent of any extension by oral or written notice and will notify the holders
of the Old Notes by means of a press release or other public announcement
prior to 9:00 a.m., New York City time, on the next business day after the
previously scheduled Expiration Date.
The Issuer and the Guarantors reserve the right (i) to delay acceptance of
any Old Notes, to extend the Exchange Offer or to terminate the Exchange Offer
and not permit acceptance of Old Notes not previously accepted if any of the
conditions set forth herein under "--Conditions" has occurred and has not been
waived by the Issuer and the Guarantors, by giving oral or written notice of
such delay, extension or termination to the Exchange Agent, or (ii) to amend
the terms of the Exchange Offer in any manner deemed by it to be advantageous
to the holders of the Old Notes. Any such delay in acceptance, extension,
termination or amendment will be followed as promptly as practicable by oral
or written notice thereof to the Exchange Agent. If the Exchange Offer is
amended in a manner determined by the Issuer to constitute a material change,
the Issuer will promptly disclose such amendment in a manner reasonably
calculated to inform the holders of the Old Notes of such amendment.
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INTEREST ON THE NEW NOTES
The New Notes will accrue interest at the applicable per annum rate set forth
on the cover page of this Prospectus, from (i) the later of (A) the last
interest payment date on which interest was paid on the Old Notes surrendered
in exchange therefor or (B) if the Old Notes are surrendered for exchange on a
date subsequent to the record date for an interest payment date to occur on or
after the date of such exchange and as to which interest will be paid, the date
of such interest payment or (ii) if no interest has been paid on the Old Notes,
from the Issue Date. Interest on the New Notes is payable on October 15 and
April 15 of each year commencing October 15, 1998.
PROCEDURES FOR TENDERING
To tender in the Exchange Offer, a holder must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by the Letter of Transmittal, and mail or otherwise
deliver such Letter of Transmittal or such facsimile, together with any other
required documents, to the Exchange Agent prior to 5:00 p.m., New York City
time, on the Expiration Date. In addition, either (i) certificates for such Old
Notes must be received by the Exchange Agent along with the Letter of
Transmittal, (ii) a timely confirmation of a book-entry transfer (a "Book- Entry
Confirmation") of such Old Notes, if such procedure is available, into the
Exchange Agent's account at DTC (the "Book-Entry Transfer Facility") pursuant to
the procedure for book-entry transfer described below, must be received by the
Exchange Agent prior to the Expiration Date or (iii) the holder must comply with
the guaranteed delivery procedures described below. THE METHOD OF DELIVERY OF
OLD NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE
ELECTION AND RISK OF THE HOLDERS OF OLD NOTES. IF SUCH DELIVERY IS BY MAIL, IT
IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT
REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE
TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE
ISSUER. Delivery of all documents must be made to the Exchange Agent at its
address set forth below. Holders of Old Notes may also request their respective
brokers, dealers, commercial banks, trust companies or nominees to effect such
tender for such holders.
The tender by a holder of Old Notes will constitute an agreement between
such holder and the Issuer in accordance with the terms and subject to the
conditions set forth herein and in the Letter of Transmittal.
Only a holder of Old Notes may tender such Old Notes in the Exchange Offer.
The term "holder" with respect to the Exchange Offer means any person in whose
name Old Notes are registered on the books of the Issuer or any other person
who has obtained a properly completed bond power from the registered holder.
Any beneficial owner whose Old Notes are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee and who wishes to
tender should contact such registered holder promptly and instruct such
registered holder to tender on his behalf. If such beneficial owner wishes to
tender on his own behalf, such beneficial owner must, prior to completing and
executing the Letter of Transmittal and delivering his Old Notes, either make
appropriate arrangements to register ownership of the Old Notes in such
owner's name or obtain a properly completed bond power from the registered
holder. The transfer of registered ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by any member firm of a registered national
securities exchange or of the National Association of Securities Dealers,
Inc., a commercial bank or trust company having an office or correspondent in
the United States or an "eligible guarantor" institution within the meaning of
Rule 17Ad-15 under the Exchange Act (each an "Eligible Institution") unless
the Old Notes tendered pursuant thereto are tendered (i) by a registered
holder who has not completed the box entitled "Special Issuance Instructions"
or "Special Delivery Instructions" on the Letter of Transmittal or (ii) for
the account of an Eligible Institution.
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If the Letter of Transmittal is signed by a person other than the registered
holder of any Old Notes listed therein, such Old Notes must be endorsed or
accompanied by bond powers and a proxy which authorizes such person to tender
the Old Notes on behalf of the registered holder, in each case as the name of
the registered holder or holders appears on the Old Notes.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Issuer,
evidence satisfactory to the Issuer of their authority to so act must be
submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt) and withdrawal of the tendered Old Notes will be determined by the
Issuer in its sole discretion, which determination will be final and binding.
The Issuer reserves the absolute right to reject any and all Old Notes not
properly tendered or any Old Notes which, if accepted, would, in the opinion
of counsel for the Issuer, be unlawful. The Issuer also reserves the absolute
right to waive any irregularities or conditions of tender as to particular Old
Notes. The Issuer'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 Notes must be cured within such time as the
Issuer will determine. Neither the Issuer, the Guarantors, the Exchange Agent
nor any other person will be under any duty to give notification of defects or
irregularities with respect to tenders of Old Notes, nor will any of them
incur any liability for failure to give such notification. Tenders of Old
Notes will not be deemed to have been made until such irregularities have been
cured or waived. Any Old Notes received by the Exchange Agent that are not
properly tendered and as to which the defects or irregularities have not been
cured or waived will be returned without cost to such holder by the Exchange
Agent to the tendering holders of Old Notes, unless otherwise provided in the
Letter of Transmittal, as soon as practicable following the Expiration Date.
In addition, the Issuer reserves the right in its sole discretion, subject
to the provisions of the Indenture, to (i) purchase or make offers for any Old
Notes that remain outstanding subsequent to the Expiration Date or, as set
forth under "--Conditions," (ii) to terminate the Exchange Offer in accordance
with the terms of the Registration Rights Agreement and (iii) to the extent
permitted by applicable law, purchase Old Notes 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.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
all Old Notes properly tendered will be accepted, promptly after the
Expiration Date, and the New Notes will be issued promptly after acceptance of
the Old Notes. See "--Conditions" below. For purposes of the Exchange Offer,
Old Notes will be deemed to have been accepted as validly tendered for
exchange when, as and if the Issuer has given oral or written notice thereof
to the Exchange Agent.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of certificates for such Old Notes or a timely Book-
Entry Confirmation of such Old Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility, a properly completed and duly executed Letter of
Transmittal and all other required documents. If any tendered Old Notes are
not accepted for any reason set forth in the terms and conditions of the
Exchange Offer or if Old Notes are submitted for a greater principal amount
than the holder desires to exchange, such unaccepted or nonexchanged Old Notes
will be returned without expense to the tendering holder thereof (or, in the
case of Old Notes tendered by book-entry transfer procedures described below,
such nonexchanged Old Notes will be credited to an account maintained with
such Book-Entry Transfer Facility) as promptly as practicable after the
expiration or termination of the Exchange Offer.
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BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus. Any
financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Old Notes by causing the
Book-Entry Transfer Facility to transfer such Old Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility in accordance with such
Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Old Notes may be effected through book-entry transfer at the Book-
Entry Transfer Facility, the Letter of Transmittal or facsimile thereof with
any required signature guarantees and any other required documents must, in
any case, be transmitted to and received by the Exchange Agent at one of the
addresses set forth below under "--Exchange Agent" on or prior to the
Expiration Date or the guaranteed delivery procedures described below must be
complied with.
GUARANTEED DELIVERY PROCEDURES
If a registered holder of New the Old Notes desires to tender such Old
Notes, and the Old Notes are not immediately available, or time will not
permit such holder's Old Notes or other required documents to reach the
Exchange Agent before the Expiration Date, or the procedures for book-entry
transfer cannot be completed on a timely basis, a tender may be effected if
(i) the tender is made through an Eligible Institution, (ii) prior to the
Expiration Date, the Exchange Agent receives from such Eligible Institution a
properly completed and duly executed Letter of Transmittal and Notice of
Guaranteed Delivery, substantially in the form provided by the Issuer (by mail
or hand delivery), setting forth the name and address of the holder of New Old
Notes and the amount of Old Notes tendered, stating that the tender is being
made thereby and guaranteeing that within three New York Stock Exchange
("NYSE") trading days after the date of execution of the Notice of Guaranteed
Delivery, the certificates for all physically tendered Old Notes, in proper
form for transfer, or a Book-Entry Confirmation, as the case may be, and any
other documents required by the Letter of Transmittal will be deposited by the
Eligible Institution with the Exchange Agent and (iii) the certificates for
all physically tendered Old Notes, in proper form for transfer, or a Book-
Entry Confirmation, as the case may be, and all other documents required by
the Letter of Transmittal are received by the Exchange Agent within three NYSE
trading days after the date of execution of the Notice of Guaranteed Delivery.
WITHDRAWAL OF TENDERS
Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New
York City time on the Expiration Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent prior to 5:00 p.m., New York City time on the
Expiration Date at one of the addresses set forth below under "--Exchange
Agent." Any such notice of withdrawal must specify the name of the person
having tendered the Old Notes to be withdrawn, identify the Old Notes to be
withdrawn (including the principal amount of such Old Notes) and (where
certificates for Old Notes have been transmitted) specify the name in which
such Old Notes are registered, if different from that of the withdrawing
holder. If certificates for Old Notes have been delivered or otherwise
identified to the Exchange Agent, then, prior to the release of such
certificates, the withdrawing holder must also submit the serial numbers of
the particular certificates to be withdrawn and a signed notice of withdrawal
with signatures guaranteed by an Eligible Institution unless such holder is an
Eligible Institution. If Old Notes have been tendered pursuant to the
procedure for book-entry transfer described above, any notice of withdrawal
must specify the name and number of the account at the Book-Entry Transfer
Facility to be credited with the withdrawn Old Notes and otherwise comply with
the procedures of such facility. All questions as to the validity, form and
eligibility (including time of receipt) of such notices will be determined by
the Issuer, whose determination will be final and binding on all parties. Any
Old Notes so withdrawn will be deemed not to have been validly tendered for
exchange for purposes of the Exchange Offer. Any Old Notes which have been
tendered for exchange but which are not exchanged for any reason will be
returned to the holder thereof without cost to such holder (or, in the case of
Old Notes tendered by book-entry transfer into the Exchange Agent's
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account at the Book-Entry Transfer Facility pursuant to the book-entry
transfer procedures described above, such Old Notes will be credited to an
account maintained with such Book-Entry Transfer Facility for the Old Notes)
as soon as practicable after withdrawal, rejection of tender or termination of
the Exchange Offer. Properly withdrawn Old Notes may be retendered by
following one of the procedures described under "-- Procedures for Tendering"
and "--Book-Entry Transfer" above at any time on or prior to the Expiration
Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, Old Notes will
not be required to be accepted for exchange, nor will New Notes be issued in
exchange for any Old Notes, and the Issuer and the Guarantors may terminate or
amend the Exchange Offer as provided herein before the acceptance of such Old
Notes, if because of any change in law, or applicable interpretations thereof by
the Commission, the Issuer and the Guarantors determine that they are not
permitted to effect the Exchange Offer. The Issuer and the Guarantors have no
obligation to, and will not knowingly, permit acceptance of tenders of Old Notes
from affiliates (within the meaning of Rule 405 under the Securities Act) of the
Issuer or the Guarantors or from any other holder or holders who are not
eligible to participate in the Exchange Offer under applicable law or
interpretations thereof by the Commission, or if the New Notes to be received by
such holder or holders of Old Notes in the Exchange Offer, upon receipt, will
not be tradable by such holder without restriction under the Securities Act and
the Exchange Act and without material restrictions under the "blue sky" or
securities laws of substantially all of the states of the United States.
EXCHANGE AGENT
State Street Bank and Trust Company has been appointed as Exchange Agent for
the Exchange Offer. Questions and requests for assistance and requests for
additional copies of this Prospectus or of the Letter of Transmittal should be
directed to the Exchange Agent addressed as follows:
By Mail: By Overnight Mail or Courier:
P.O. Box 778 Two International Place
Boston, Massachusetts 02102 Boston, Massachusetts 02102
Attention: Corporate Trust Department Attention: Corporate Trust Department
Kellie Mullen Kellie Mullen
By Hand in New York to 5:00 p.m. By Hand in Boston to 5:00 p.m.:
(as drop agent): Two International Place
61 Broadway Fourth Floor
15th Floor Corporation Trust
Corporate Trust Window Boston, Massachusetts 02110
New York, New York 10006
For information call:
(617) 664-5587
FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by the Issuer. The principal solicitation for tenders pursuant to the
Exchange Offer is being made by mail; however, additional solicitations may be
made by telegraph, telephone, telecopy or in person by officers and regular
employees of the Company.
The Issuer will not make any payments to brokers, dealers or other persons
soliciting acceptances of the Exchange Offer. The Issuer, however, will pay
the Exchange Agent reasonable and customary fees for its services and will
reimburse the Exchange Agent for its reasonable out-of-pocket expenses in
connection
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therewith. The Issuer may also pay brokerage houses and other custodians,
nominees and fiduciaries the reasonable out-of-pocket expenses incurred by
them in forwarding copies of the Prospectus and related documents to the
beneficial owners of the Old Notes, and in handling or forwarding tenders for
exchange.
The expenses to be incurred in connection with the Exchange Offer will be
paid by the Issuer, including fees and expenses of the Exchange Agent and
Trustee and accounting, legal, printing and related fees and expenses.
The Issuer will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, certificates
representing New Notes or Old Notes for principal amounts 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
Old Notes tendered, or if tendered Old Notes are registered in the name of any
person other than the person signing the Letter of Transmittal, or if a
transfer tax is imposed for any reason other than the exchange of Old Notes
pursuant to the Exchange Offer, then the amount of any such transfer taxes
(whether imposed on the registered holder or any other persons) will be
payable by the tendering holder. If satisfactory evidence of payment of such
taxes or exemption therefrom is not submitted with the Letter of Transmittal,
the amount of such transfer taxes will be billed directly to such tendering
holder.
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DESCRIPTION OF THE NEW NOTES
GENERAL
The Old Notes were issued, and the New Notes offered hereby will be
issued, pursuant to the Indenture dated as of April 21, 1998 among the Issuer,
the Guarantors and State Street Bank and Trust Company, as trustee (the
"Trustee"). The terms of the New Notes will include those stated in the
Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"). The New Notes
will be subject to all such terms, and perspective holders of New Notes are
referred to the Indenture and the Trust Indenture Act for a statement thereof.
The following summary of the material provisions of the Indenture does not
purport to be complete and is qualified in its entirety by reference to the
Indenture, including the definitions therein, of certain terms used below.
Copies of the proposed form of Indenture and Registration Rights Agreement are
available as set forth herein under "--Additional Information." The definitions
of certain terms used in the following summary are set forth below under "--
Certain Definitions."
The New Notes will be general unsecured obligations of the Issuer and will be
subordinated in right of payment to all current and future Senior Debt. The
operations of the Issuer are conducted in part through its Subsidiaries and,
therefore, the Issuer is dependent in part upon the cash flow of its
Subsidiaries to meet its obligations under the New Notes on a senior
subordinated unsecured basis. See "Risk Factors--Risk Factors Relating to the
Notes--Fraudulent Transfer Statutes." As of the Issue Date, all of the Issuer's
subsidiaries were Restricted Subsidiaries. However, under certain
circumstances, the Issuer will be able to designate current or future
Subsidiaries as Unrestricted Subsidiaries. Unrestricted Subsidiaries will not
be subject to many of the restrictive covenants set forth in the Indenture. As
of June 30, 1998, the Issuer had Senior Debt of approximately $86.1 million.
The Indenture permits the incurrence of additional Senior Debt in the future.
PRINCIPAL, MATURITY AND INTEREST
The New Notes in an aggregate principal amount of up to $100.0 million will
be issued in the Exchange Offer. The New Notes will mature on April 15, 2008.
Interest on the New Notes will accrue at the rate of 10 1/8% per annum and will
be payable semi-annually in arrears on October 15 and April 15, commencing
October 15, 1998, to holders of record on the immediately preceding October 1
and April 1, respectively. Interest on the New Notes will accrue from the most
recent date to which interest has been paid or, if no interest has been paid,
from the Issue Date. Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months. Principal, premium, if any, and interest
and Liquidated Damages, if any, on the New Notes will be payable at the office
or agency of the Issuer maintained for such purpose within the City and State
of New York or, at the option of the Issuer, payment of principal, premium,
interest and Liquidated Damages may be made by check mailed to holders of the
New Notes at their respective addresses set forth in the register of holders
of the New Notes; provided that all payments of principal, premium, interest
and Liquidated Damages with respect to New Notes represented by one or more
permanent global notes ("Global Notes") will be required to be made by wire
transfer of immediately available funds to the accounts of DTC or any
successor thereto. Until otherwise designated by the Issuer, the Issuer's
office or agency in New York will be the office of the Trustee maintained for
such purpose. The New Notes will be issued in denominations of $1,000 and
integral multiples thereof.
GUARANTEES
The Issuer's payment obligations under the New Notes are jointly and
severally guaranteed, fully and unconditionally, by the Guarantors (the
"Subsidiary Guarantees"). The Subsidiary Guarantee of each Guarantor will be
subordinated to the prior payment in full of all Senior Debt of such Guarantor,
which would include approximately $86.1 million of Senior Debt outstanding as
of June 30, 1998, and the amounts for which the Guarantors will be liable under
the guarantees issued from time to time with respect to Senior Debt. The
obligations of each Guarantor under its Subsidiary Guarantee will be limited so
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as not to constitute a fraudulent conveyance under applicable law. See "Risk
Factors--Risk Factors Relating to the Notes--Fraudulent Transfer Statutes."
The Indenture provides that no Guarantor may consolidate with or merge with
or into (whether or not such Guarantor is the surviving Person), another
corporation, Person or entity whether or not affiliated with such Guarantor
unless (i) subject to the provisions of the following paragraph, the Person
formed by or surviving any such consolidation or merger (if other than such
Guarantor) assumes all the obligations of such Guarantor, pursuant to a
supplemental indenture in form and substance reasonably satisfactory to the
Trustee, under the Indenture and the Subsidiary Guarantees; and (ii)
immediately after giving effect to such transaction, no Default or Event of
Default exists.
The Indenture provides that in the event of a sale or other disposition of
all of the assets of any Guarantor, by way of merger, consolidation or
otherwise, or a sale or other disposition of all of the capital stock of any
Guarantor, then such Guarantor (in the event of a sale or other disposition,
by way of such a merger, consolidation or otherwise, of all of the capital
stock of such Guarantor) or the corporation acquiring the property (in the
event of a sale or other disposition of all or substantially all of the assets
of such Guarantor) will be released and relieved of any obligations under its
Subsidiary Guarantee. In addition, the Indenture provides that, in the event
the Company designates a Restricted Subsidiary to be an Unrestricted
Subsidiary in accordance with the Indenture, then such Restricted Subsidiary
will be released from its obligations under its Subsidiary Guarantee. See "--
Repurchase at the Option of Holders--Asset Sales."
SUBORDINATION
The payment of Obligations in respect of the New Notes is subordinated in
right of payment, as set forth in the Indenture, to the prior payment in full
of all Obligations in respect of Senior Debt, whether outstanding on the date
of the Indenture or thereafter incurred.
Upon any payment or distribution to creditors of the Issuer of any kind,
whether in cash, property or securities in a liquidation or dissolution of the
Issuer or in a bankruptcy, reorganization, insolvency, receivership or similar
proceeding relating to the Issuer or its property, an assignment for the
benefit of creditors or any marshaling of the Issuer's assets and liabilities,
whether voluntary or involuntary, the holders of Senior Debt of the Issuer
will be entitled to receive payment in full in cash of all Obligations due in
respect of such Senior Debt (including interest after the commencement of any
such proceeding at the rate specified in the applicable Senior Debt whether or
not allowable as a claim in any such proceeding) before holders of New Notes
will be entitled to receive any payment or distribution of any kind with
respect to the New Notes, and until all Obligations with respect to Senior
Debt are paid in full, any payment or distribution to which holders of New
Notes would be entitled will be made to the holders of Senior Debt (except
that holders of New Notes may receive and retain Permitted Junior Securities
and payments made from the trust described under "--Legal Defeasance and
Covenant Defeasance").
The Issuer also may not make any payment upon or in respect of the New Notes
(except in Permitted Junior Securities or from the trust described under "--
Legal Defeasance and Covenant Defeasance") if (i) a default in the payment of
the principal of, premium, if any, or interest on Designated Senior Debt
occurs and is continuing or (ii) any other default occurs and is continuing
with respect to Designated Senior Debt that permits holders of the Designated
Senior Debt as to which such default relates to accelerate its maturity, in
the case of this clause (ii) only, and the Trustee receives a notice of such
default invoking the provisions described in this paragraph (a "Payment
Blockage Notice") from the holders of any Designated Senior Debt or any agent
or trustee therefor. Payments on the New Notes may and will be resumed (a) in
the case of a payment default, upon the date on which such default is cured or
waived and (b) in case of a nonpayment default, the earlier of the date on
which such nonpayment default is cured or waived or 179 days after the date on
which the applicable Payment Blockage Notice is received, unless a payment
default has occurred and is continuing (as a result of nonpayment of a
scheduled principal repayment upon Designated Senior Debt, nonpayment of
principal upon the stated maturity of any Designated Senior Debt or the
acceleration of the maturity of any Designated Senior Debt). No
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new period of payment blockage (other than for a payment default) may be
commenced unless and until 360 days have elapsed since the effectiveness of
the immediately prior Payment Blockage Notice. No nonpayment default that
existed or was continuing on the date of delivery of any Payment Blockage
Notice to the Trustee will be, or be made, the basis for a subsequent Payment
Blockage Notice unless such default will have been cured or waived for a
period of not less than 90 days. Whenever the Issuer is prohibited from making
any payment in respect of the New Notes, the Issuer also will be prohibited
from making, directly or indirectly, any payment of any kind on account of the
purchase or other acquisition of the New Notes. If any holder of New Notes
receives any payment or distribution that such holder of New Notes is not
entitled to receive with respect to the New Notes, such holder of New Notes
will be required to pay the same over to the holders of Senior Debt.
The Indenture further requires that the Company promptly notify holders of
Senior Debt if payment of the New Notes is accelerated because of an Event of
Default.
As a result of the subordination provisions described above, in the event of
a liquidation or insolvency, holders of New Notes may recover less ratably
than creditors of the Issuer who are holders of Senior Debt. As of March 31,
1998, on a pro forma basis after giving effect to the Recapitalization, the
Issuer and its Guarantors would have had outstanding approximately $84.8
million in aggregate principal amount of Senior Debt. The Indenture limits,
subject to certain financial tests, the amount of additional Indebtedness,
including Senior Debt, that the Issuer and its Subsidiaries can incur. See "--
Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred
Stock."
OPTIONAL REDEMPTION
Except as described below, the New Notes will not be redeemable at the
Issuer's option prior to April 15, 2003. Thereafter, the New Notes will be
subject to redemption at any time at the option of the Issuer, in whole or in
part, upon not less than 30 nor more than 60 days' notice, at the redemption
prices (expressed as percentages of principal amount) set forth below plus
accrued and unpaid interest and Liquidated Damages, if any, thereon to the
applicable redemption date, if redeemed during the twelve-month period
beginning on April 15 of the years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2003........................................ 105.063%
2004........................................ 103.375%
2005........................................ 101.688%
2006 and thereafter......................... 100.000%
</TABLE>
Notwithstanding the foregoing, at any time on or prior to April 15, 2001,
the Issuer may (but will not have the obligation to) redeem, on one or more
occasions, up to an aggregate of 35% of the principal amount of New Notes
originally issued at a redemption price equal to 110.125% of the principal
amount thereof, plus accrued and unpaid interest and Liquidated Damages, if
any, thereon to the redemption date, with the net cash proceeds of one or more
Equity Offerings; provided that at least 65% in aggregate principal amount of
the New Notes originally issued remains outstanding immediately after the
occurrence of such redemption; and provided further, that such redemption
occurs within 90 days of the date of the closing of such Equity Offering.
MANDATORY REDEMPTION
Except as set forth under "--Repurchase at the Option of Holders," the
Issuer is not required to make mandatory redemption or sinking fund payments
with respect to the New Notes.
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REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of New Notes will
have the right to require the Issuer to repurchase all or any part (equal to
$1,000 or an integral multiple thereof) of such holder's New Notes pursuant to
the offer described below (the "Change of Control Offer") at an offer price in
cash equal to 101% of the aggregate principal amount thereof plus accrued and
unpaid interest and Liquidated Damages thereon, if any, to the date of
purchase (the "Change of Control Payment"). Within 30 days following any
Change of Control, the Issuer will mail a notice to each holder describing the
transaction or transactions that constitute the Change of Control and offering
to repurchase New Notes on the date specified in such notice, which date will
be no earlier than 30 days (or such shorter time period as may be permitted
under applicable law, rules and regulations) and no later than 60 days from
the date such notice is mailed (the "Change of Control Payment Date"),
pursuant to the procedures required by the Indenture and described in such
notice. The Issuer will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the New Notes as a result of a Change of Control. To the extent
that the provisions of any securities laws or regulations conflict with the
provisions of the Indenture relating to such Change of Control Offer, the
Issuer will comply with the applicable securities laws and regulations and
will not be deemed to have breached its obligations described in the Indenture
by virtue thereof.
On the Change of Control Payment Date, the Issuer will, to the extent
lawful, (1) accept for payment all New Notes or portions thereof properly
tendered pursuant to the Change of Control Offer, (2) deposit with the office
or agency where the New Notes may be presented for payment (the "Paying
Agent") an amount equal to the Change of Control Payment in respect of all New
Notes or portions thereof so tendered and (3) deliver or cause to be delivered
to the Trustee the New Notes so accepted together with an officer's
certificate stating the aggregate principal amount of New Notes or portions
thereof being purchased by the Issuer. The Paying Agent will promptly mail to
each holder of New Notes so tendered the Change of Control Payment for such
New Notes, and the Trustee will promptly authenticate and mail (or cause to be
transferred by book entry) to each holder a new New Note equal in principal
amount to any unpurchased portion of the New Notes surrendered, if any;
provided that each such new New Note will be in a principal amount of $1,000
or an integral multiple thereof. The Indenture provides that, prior to
complying with the provisions of this covenant, but in any event within 90
days following a Change of Control, the Issuer will either repay all
outstanding Senior Debt or obtain the requisite consents, if any, under all
agreements governing outstanding Senior Debt to permit the repurchase of New
Notes required by this covenant. The Issuer will not be required to purchase
any New Notes until it has complied with the preceding sentence, but failure
to comply with the preceding sentence will constitute an Event of Default. The
Issuer will publicly announce the results of the Change of Control Offer on or
as soon as practicable after the Change of Control Payment Date.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. Except as
described above with respect to a Change of Control, the Indenture does not
contain provisions that permit holders of New Notes to require that the Issuer
repurchase or redeem the New Notes in the event of a takeover,
recapitalization or similar transaction.
The Bank Facilities prohibit the Issuer from purchasing any New Notes and
provides that certain change of control events with respect to the Issuer
would constitute a default thereunder. Any future credit agreements or other
agreements relating to Senior Debt to which the Issuer becomes a party may
contain similar restrictions and provisions. In the event a Change of Control
occurs at a time when the Issuer is prohibited from purchasing New Notes, the
Issuer could seek the consent of its lenders to the purchase of New Notes or
could attempt to refinance the borrowings that contain such prohibition. If
the Issuer does not obtain such a consent or repay such borrowings, the Issuer
will remain prohibited from purchasing New Notes. In such case, the Issuer's
failure to purchase tendered New Notes would constitute an Event of Default
under the Indenture which would, in turn, constitute a default under the Bank
Facilities. In such circumstances, the subordination provisions in the
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Indenture would likely restrict payments to holders of New Notes. In addition,
the exercise by holders of New Notes of their right to require the Issuer to
repurchase the New Notes could cause a default under such Senior Debt, even if
the Change of Control itself does not, due to the financial effect of such
repurchases on the Issuer. Finally, the Issuer's ability to pay cash to
holders of New Notes upon a repurchase may be limited by the Issuer's then
existing financial resources.
The Issuer will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set
forth in the Indenture applicable to a Change of Control Offer made by the
Issuer and purchases all New Notes validly tendered and not withdrawn under
such Change of Control Offer.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Issuer and its Subsidiaries taken as a whole. Although
there is a developing body of case law interpreting the phrase "substantially
all," there is no precise established definition of the phrase under
applicable law. Accordingly, the ability of a holder of New Notes to require
the Issuer to repurchase such New Notes as a result of a sale, lease,
transfer, conveyance or other disposition of less than all of the assets of
the Issuer and its Subsidiaries taken as a whole to another Person or group
may be uncertain.
ASSET SALES
The Indenture provides that the Issuer will not, and will not permit any of
its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the Issuer
(or the Restricted Subsidiary, as the case may be) receives consideration at
the time of such Asset Sale at least equal to the fair market value (evidenced
by a resolution of the Board of Directors set forth in an officer's
certificate delivered to the Trustee) of the assets or Equity Interests issued
or sold or otherwise disposed of and (ii) at least 75% of the consideration
therefor received by the Issuer or such Restricted Subsidiary is in the form
of cash or Cash Equivalents, provided that the amount of (x) any liabilities
(as shown on the Issuer's or such Restricted Subsidiary's most recent balance
sheet) of the Issuer or any Restricted Subsidiary (other than contingent
liabilities and liabilities that are by their terms subordinated to the New
Notes or any guarantee thereof) that are assumed by the transferee of any such
assets pursuant to a customary novation agreement that releases the Issuer or
such Restricted Subsidiary from further liability and (y) any securities,
notes or other obligations received by the Issuer or any such Restricted
Subsidiary from such transferee that are converted by the Issuer or such
Restricted Subsidiary into cash (to extent of the cash received) within 180
days following the closing of such Asset Sale will be deemed to be cash for
purposes of this provision.
Within 360 days after the receipt of any Net Proceeds from an Asset Sale,
the Issuer or the Restricted Subsidiaries may apply such Net Proceeds, at its
option, (a) to repay Senior Debt, or (b) to the investment in, or the making
of a capital expenditure or the acquisition of other long-term assets, in each
case used or useable in a Permitted Business, from a party other than the
Issuer or a Restricted Subsidiary, or (c) the acquisition of Capital Stock of
any Person primarily engaged in a Permitted Business if, as a result of the
acquisition by the Issuer or any Restricted Subsidiary thereof, such Person
becomes a Restricted Subsidiary, or (d) a combination of the uses described in
clauses (a), (b) and (c). Pending the final application of any such Net
Proceeds, the Issuer or its Restricted Subsidiaries may temporarily reduce
Senior Debt or otherwise invest such Net Proceeds in any manner that is not
prohibited by the Indenture. Any Net Proceeds from Asset Sales that are not
applied or invested as provided in the first sentence of this paragraph will
be deemed to constitute "Excess Proceeds." When the aggregate amount of Excess
Proceeds exceeds $7.5 million, the Issuer will be required to make an offer to
all holders of New Notes and, to the extent required by the terms of any Pari
Passu Indebtedness, all holders of such Pari Passu Indebtedness (an "Asset
Sale Offer"), to purchase the maximum principal amount of New Notes and any
such Pari Passu Indebtedness that may be purchased out of the Excess Proceeds,
at an offer price in cash in an amount equal to 100% of the principal amount
thereof plus accrued and unpaid interest and Liquidated Damages thereon, if
any, to the date of purchase, in accordance with the procedures set forth in
the Indenture or such Pari Passu Indebtedness, as applicable. To the extent
any Excess Proceeds remain after consummation of
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the Asset Sale Offer, the Issuer may use such Excess Proceeds for any purpose
not otherwise prohibited by the Indenture. If the aggregate principal amount
of New Notes and any such Pari Passu Indebtedness tendered pursuant to an
Asset Sale Offer exceeds the amount of Excess Proceeds, the Trustee will
select the New Notes to be purchased on a pro rata basis. Upon completion of
such Asset Sale Offer, the amount of Excess Proceeds will be reset at zero.
SELECTION AND NOTICE
If less than all of the New Notes are to be redeemed or repurchased in an
offer to purchase at any time, selection of New Notes for redemption or
repurchase will be made by the Trustee in compliance with the requirements of
the principal national securities exchange, if any, on which the New Notes are
listed, or, if the New Notes are not so listed, on a pro rata basis, by lot or
by such other method as the Trustee deems fair and appropriate; provided that
New Notes purchased pursuant to an Asset Sale Offer or to be redeemed with the
proceeds of an Equity Offering will be selected on a pro rata basis; provided
further that no New Notes of $1,000 or less will be redeemed or repurchased in
part. Notices of redemption may not be conditional. Notices of redemption or
repurchase will be mailed by first class mail at least 30 but not more than 60
days before the redemption date or repurchase date to each holder of New Notes
to be redeemed or repurchased at its registered address. If any New Note is to
be redeemed or repurchased in part only, the notice of redemption or
repurchase that relates to such New Note will state the portion of the
principal amount thereof to be redeemed or repurchased. A new New Note in
principal amount equal to the unredeemed or unrepurchased portion thereof will
be issued in the name of the holder thereof upon cancellation of the original
New Note. On and after the redemption or repurchase date, interest and
Liquidated Damages will cease to accrue on New Notes or portions of them
called for redemption or repurchase.
CERTAIN COVENANTS
RESTRICTED PAYMENTS
The Indenture provides that the Issuer will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay any
dividend or make any other payment or distribution on account of the Issuer's
or any of its Restricted Subsidiaries' Equity Interests (including, without
limitation, any such dividend, distribution or other payment made in
connection with any merger or consolidation involving the Issuer or any of its
Restricted Subsidiaries), other than dividends or distributions payable in
Equity Interests (other than Disqualified Stock) of the Issuer or dividends or
distributions payable to the Issuer or any Wholly Owned Subsidiary of the
Issuer; (ii) purchase, redeem or otherwise acquire or retire for value
(including, without limitation, any such purchase, redemption, or other
acquisition or retirement for value made as a payment in connection with any
merger or consolidation involving the Issuer) any Equity Interests of the
Issuer or any Restricted Subsidiary (other than any such Equity Interests
owned by the Issuer or any Restricted Subsidiary of the Issuer); (iii) make
any payment on or with respect to, or purchase, redeem, defease or otherwise
acquire or retire for value, any Indebtedness that is subordinated to the New
Notes, except a payment of interest or a payment of principal at Stated
Maturity; or (iv) make any Restricted Investment (all such payments and other
actions set forth in clauses (i) through (iv) above being collectively
referred to as "Restricted Payments"), unless, at the time of and immediately
after giving effect to such Restricted Payment:
(a) no Default or Event of Default will have occurred and be continuing;
and
(b) the Issuer would, at the time of such Restricted Payment, and after
giving pro forma effect thereto as if any Indebtedness incurred in order to
make such Restricted Payment had been incurred at the beginning of the
applicable four quarter period, have been permitted to incur at least $1.00
of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test
set forth in the first paragraph of the covenant described below under
caption "--Incurrence of Indebtedness and Issuance of Preferred Stock;" and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Issuer and its Restricted
Subsidiaries after the date of the Indenture (excluding Restricted
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Payments permitted by clauses (ii), (iii), (iv), (vi), (vii), (viii) and
(x) of the next succeeding paragraph), is less than the sum (without
duplication) of (i) 50% of the Consolidated Net Income of the Issuer for
the period (taken as one accounting period) from the beginning of the first
fiscal quarter commencing after the date of the Indenture to the end of the
Issuer's most recently ended fiscal quarter for which internal financial
statements are available at the time of such Restricted Payment (or, if
such Consolidated Net Income for such period is a deficit, less 100% of
such deficit), plus (ii) 100% of the aggregate Qualified Proceeds received
by the Issuer from contributions to the Issuer's capital or the issue or
sale subsequent to the date of the Indenture of Equity Interests of the
Issuer (other than Disqualified Stock) or of Disqualified Stock or debt
securities of the Issuer that have been converted into such Equity
Interests (other than Equity Interests (or Disqualified Stock or
convertible debt securities) sold to a Subsidiary of the Issuer and other
than Disqualified Stock or convertible debt securities that have been
converted into Disqualified Stock), plus (iii) to the extent that any
Restricted Investment that was made after the date of the Indenture is sold
for Qualified Proceeds or otherwise liquidated or repaid (including,
without limitation, by way of a dividend or other distribution, a repayment
of a loan or advance or other transfer of assets) for in whole or in part,
the lesser of (A) the Qualified Proceeds with respect to such Restricted
Investment (less the cost of disposition, if any) and (B) the initial
amount of such Restricted Investment, plus (iv) upon the redesignation of
an Unrestricted Subsidiary as a Restricted Subsidiary, the lesser of (x)
the fair market value of such Subsidiary or (y) the aggregate amount of all
Investments made in such Subsidiary subsequent to the Issue Date by the
Issuer and its Restricted Subsidiaries, plus (v) $2.0 million.
The foregoing provisions will not prohibit (i) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the
Indenture; (ii) the redemption, repurchase, retirement, defeasance or other
acquisition of any subordinated Indebtedness or Equity Interests of the Issuer
or any Guarantor in exchange for, or out of the net cash proceeds of the
substantially concurrent sale (other than to a Restricted Subsidiary of the
Issuer) of, other Equity Interests of the Issuer (other than any Disqualified
Stock); provided that the amount of any such net cash proceeds that are
utilized for any such redemption, repurchase, retirement, defeasance or other
acquisition will be excluded from clause (c) (ii) of the preceding paragraph;
(iii) the defeasance, redemption, repurchase, retirement or other acquisition
of subordinated Indebtedness in exchange for, or with the net cash proceeds
from, an incurrence of Permitted Refinancing Indebtedness; (iv) the payment of
any dividend (or the making of a similar distribution or redemption) by a
Restricted Subsidiary of the Issuer to the holders of its common Equity
Interests on a pro rata basis; (v) so long as no Default or Event of Default
has occurred and is continuing, the repurchase, redemption or other
acquisition or retirement for value of any Equity Interests of the Issuer,
Holdings or any Restricted Subsidiary of the Issuer, held by any member of the
Issuer's (or any of its Subsidiaries') management, employees or consultants
pursuant to any management, employee or consultant equity subscription
agreement or stock option agreement in effect as of the date of the Indenture;
provided that the aggregate price paid for all such repurchased, redeemed,
acquired or retired Equity Interests must not exceed (1) $1.5 million in any
twelve-month period and (2) in the aggregate, the sum of (A) $7.0 million and
(B) the aggregate cash proceeds received by the Issuer from any reissuance of
Equity Interests by Holdings or the Issuer to members of management of the
Issuer and its Subsidiaries (provided that the cash proceeds referred to in
this clause (B) will be excluded from clause (c)(ii) of the preceding
paragraph); (vi) payments required to be made under the Tax Sharing Agreement;
(vii) distributions made by the Issuer on the date of the Indenture, the
proceeds of which were utilized solely to consummate the Recapitalization;
(viii) the payment of dividends or the making of loans or advances by the
Issuer to Holdings not to exceed $1.5 million in any fiscal year for costs and
expenses incurred by Holdings in its capacity as a holding Issuer or for
services rendered by Holdings on behalf of the Issuer; (ix) so long as no
Default or Event of Default has occurred and is continuing, the declaration
and payment of dividends to holders of any class or series of Disqualified
Stock of the Issuer or any Guarantor issued after the date of the Indenture in
accordance with the covenant described below under the caption "--Incurrence
of Indebtedness and Issuance of Preferred Stock"; and (x) so long as (A) no
Default or Event of Default has occurred and is continuing and (B) immediately
before and immediately after giving effect thereto, the Issuer would have been
permitted to incur at least $1.00 of additional Indebtedness pursuant to the
Fixed Charge Coverage Ratio test set forth in the first paragraph described
under the caption "--Incurrence of Indebtedness and Preferred Stock," (I) from
and after
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April 15, 2003, payments of cash dividends to Holdings in an amount sufficient
to enable Holdings to make payments of interest required to be made in respect
of the Holdings Senior Discount Debentures in accordance with the terms
thereof in effect on the date of the Indenture, provided that such interest
payments are made with the proceeds of such dividends, and (II) a $16.0
million cash dividend that the Issuer will be entitled to declare and pay to
Holdings on April 15, 2003 to enable Holdings to redeem $33.2 million
aggregate principal amount at maturity of the Holdings Senior Discount
Debentures as required by the terms of the Holdings Senior Discount Debentures
in accordance with such terms in effect on the date of the Indenture, provided
that such redemption is made with the proceeds of such dividend.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default or an
Event of Default. For purposes of making such determination, all outstanding
Investments by the Issuer and its Restricted Subsidiaries (except to the
extent repaid in cash) in the Subsidiary so designated will be deemed to be
Restricted Payments at the time of such designation and will reduce the amount
available for Restricted Payments under the first paragraph of this covenant.
All such outstanding Investments will be deemed to constitute Investments in
an amount equal to the greater of (i) the net book value of such Investments
at the time of such designation and (ii) the fair market value of such
Investments at the time of such designation. Such designation will only be
permitted if such Restricted Payment would be permitted at such time and if
such Restricted Subsidiary otherwise meets the definition of an Unrestricted
Subsidiary.
The amount of all (i) Restricted Payments (other than cash) will be the fair
market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued by the Issuer or such
Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment
and (ii) Qualified Proceeds (other than cash) will be the fair market value on
the date of receipt thereof by the Issuer of such Qualified Proceeds. The fair
market value of any non-cash Restricted Payment and Qualified Proceeds will be
determined by the Board of Directors whose resolution with respect thereto
will be delivered to the Trustee, such determination to be based upon an
opinion or appraisal issued by an accounting, appraisal or investment banking
firm of national standing, if such fair market value exceeds $10.0 million.
Not later than the date of making any Restricted Payment, the Issuer will
deliver to the Trustee an Officers' Certificate stating that such Restricted
Payment is permitted and setting forth the basis upon which the calculations
required by the covenant "--Restricted Payments" were computed, together with
a copy of any fairness opinion or appraisal required by the Indenture.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
The Indenture provides that: (i) the Issuer will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, create, incur,
issue, assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, "incur") any
Indebtedness (including Acquired Debt); (ii) that neither the Issuer nor any
Guarantor will issue any Disqualified Stock; and (iii) that the Issuer will
not permit any of its Restricted Subsidiaries that are not Guarantors to issue
any shares of preferred stock; provided, however, that the Issuer or any
Guarantor may incur Indebtedness (including Acquired Debt) or issue shares of
Disqualified Stock if the Fixed Charge Coverage Ratio for the Issuer's most
recently ended four full fiscal quarters for which internal financial
statements are available immediately preceding the date on which such
additional Indebtedness is incurred or such Disqualified Stock is issued would
have been at least 2.0 to 1.0, determined on a pro forma basis (including a
pro forma application of the net proceeds therefrom), as if the additional
Indebtedness had been incurred, or the Disqualified Stock had been issued, as
the case may be, at the beginning of such four-quarter period.
The provisions of the first paragraph of this covenant do not apply to the
incurrence of any of the following items of Indebtedness (collectively,
"Permitted Debt"):
(i) the incurrence by the Issuer (and the guarantee thereof by the
Guarantors) of Indebtedness under Credit Facilities; provided that the
aggregate principal amount of all Indebtedness (with letters of credit
being deemed to have a principal amount equal to the maximum potential
liability of the Issuer and the
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Guarantors thereunder) outstanding under all Credit Facilities after giving
effect to such incurrence, including all Indebtedness incurred to refund,
refinance or replace any Indebtedness incurred pursuant to this clause (i),
does not exceed an amount equal to $105.0 million less the aggregate amount
of all principal repayments (optional and mandatory) thereunder
constituting permanent reductions of such Indebtedness pursuant to and in
accordance with the covenant described under "--Repurchase at the Option of
Holders--Asset Sales";
(ii) the incurrence by the Issuer and the Guarantors of Indebtedness
represented by the New Notes and the Subsidiary Guarantees;
(iii) the incurrence by the Issuer or any of the Guarantors of
Indebtedness represented by Capital Lease Obligations, mortgage financings
or purchase money obligations, in each case incurred for the purpose of
financing all or any part of the purchase price or cost of construction or
improvements of property used in the business of the Issuer or such
Guarantor, in an aggregate principal amount not to exceed $5.0 million at
any time outstanding;
(iv) other Indebtedness of the Issuer and its Restricted Subsidiaries
outstanding on the Issue Date (other than Indebtedness to be repaid in
connection with the Recapitalization);
(v) the incurrence by the Issuer or any of its Restricted Subsidiaries of
Permitted Refinancing Indebtedness in exchange for, or the net proceeds of
which are used to refund, refinance or replace Indebtedness (other than
intercompany Indebtedness) that was permitted by the Indenture to exist or
be incurred;
(vi) the incurrence of intercompany Indebtedness (A) between or among the
Issuer and any Wholly Owned Restricted Subsidiaries of the Issuer or (B) by
a Restricted Subsidiary that is not a Wholly Owned Restricted Subsidiary of
the Issuer or a Wholly Owned Restricted Subsidiary; provided, however, that
(i) if the Issuer is the obligor on such Indebtedness, such Indebtedness is
expressly subordinated to the prior payment in full in cash of all
Obligations with respect to the New Notes, and if a Guarantor incurs such
Indebtedness to a Restricted Subsidiary that is not a Guarantor, such
Indebtedness is subordinate in right of payment to the Subsidiary Guarantee
of such Guarantor; and (ii)(A) any subsequent issuance or transfer of
Equity Interests that results in any such Indebtedness being held by a
Person other than the Issuer or a Wholly Owned Restricted Subsidiary of the
Issuer and (B) any sale or other transfer of any such Indebtedness to a
Person that is not either the Issuer or a Wholly Owned Restricted
Subsidiary of the Issuer will be deemed, in each case, to constitute an
incurrence of such Indebtedness by the Issuer or such Subsidiary, as the
case may be, not permitted by this clause (vi);
(vii) the incurrence by the Issuer or any of the Guarantors of Hedging
Obligations that are incurred for the purpose of fixing or hedging (i)
interest rate risk with respect to any floating rate Indebtedness that is
permitted by the terms of this Indenture to be outstanding, (ii) the value
of foreign currencies purchased or received by the Issuer in the ordinary
course of business or (iii) the price of raw materials used by the Issuer
or its Restricted Subsidiaries in a Permitted Business;
(viii) Indebtedness incurred in respect of workers' compensation claims,
self insurance obligations and performance, surety and similar bonds
provided by the Issuer or a Guarantor in the ordinary course of business;
(ix) Indebtedness arising from agreements of the Issuer or a Restricted
Subsidiary providing for indemnification, adjustment of purchase price or
similar obligations, in each case, incurred or assumed in connection with
the disposition of any business, assets or Capital Stock of a Restricted
Subsidiary;
(x) the guarantee by the Issuer or any of the Guarantors of Indebtedness
of the Issuer or a Guarantor that was permitted to be incurred by another
provision of this covenant;
(xi) the incurrence by the Issuer or any of its Restricted Subsidiaries
of Acquired Debt in an aggregate principal amount at any time outstanding
not to exceed $17.0 million;
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(xii) Indebtedness arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument inadvertently (except
in the case of daylight overdrafts) drawn against insufficient funds in the
ordinary course of business; provided, however, that such Indebtedness is
extinguished within five business days of incurrence; and
(xiii) the incurrence by the Issuer or any Guarantor of additional
Indebtedness (which may be Indebtedness under Credit Facilities) in an
aggregate principal amount (or accreted value, as applicable) at any time
outstanding, including all Indebtedness incurred to refund, refinance or
replace any Indebtedness incurred pursuant to this clause (xiii), not to
exceed $10.0 million.
For purposes of determining compliance with this covenant, in the event that
an item of Indebtedness meets the criteria of more than one of the categories
of Permitted Debt described in clauses (i) through (xiii) above or is entitled
to be incurred pursuant to the first paragraph of this covenant, the Issuer
will, in its sole discretion, classify such item of Indebtedness in any manner
that complies with this covenant and such item of Indebtedness will be treated
as having been incurred pursuant to only one of such clauses or pursuant to
the first paragraph hereof. Accrual of interest, the accretion of accreted
value and the payment of interest in the form of additional Indebtedness will
not be deemed to be an incurrence of Indebtedness for purposes of this
covenant.
LIENS
The Indenture provides that the Issuer will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create, incur, assume
or suffer to exist any Lien securing Indebtedness or trade payables on any
asset now owned or hereafter acquired, or any income or profits therefrom or
assign or convey any right to receive income therefrom for purposes of
security, except Permitted Liens unless (x) in the case of Liens securing
Indebtedness that is expressly subordinate or junior in right of payment to
the New Notes, the New Notes are secured by a Lien on such property, assets or
proceeds that is senior in priority to such Liens, (with the same relative
priority as such subordinate or junior Indebtedness will have with respect to
the New Notes and Subsidiary Guarantees) and (y) in all other cases, the New
Notes are secured by such Lien on an equal and ratable basis.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
The Indenture provides that the Issuer will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any encumbrance or restriction on
the ability of any Restricted Subsidiary to (i)(a) pay dividends or make any
other distributions to the Issuer or any of its Restricted Subsidiaries (1) on
its Capital Stock or (2) with respect to any other interest or participation
in, or measured by, its profits, or (b) pay any Indebtedness owed to the
Issuer or any of its Restricted Subsidiaries, (ii) make loans or advances to
the Issuer or any of its Restricted Subsidiaries; (iii) guarantee any
Indebtedness of the Issuer or any Restricted Subsidiary of the Issuer
(provided that this clause (iii) will apply only to Restricted Subsidiaries
that are Guarantors); or (iv) transfer any of its properties or assets to the
Issuer or any of its Restricted Subsidiaries, except for such encumbrances or
restrictions existing under or by reason of (a) the Bank Facilities as in
effect as of the date of the Indenture, and any amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements or
refinancings thereof, provided that such amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements or
refinancings are no more restrictive with respect to such dividend and other
payment restrictions than those contained in the Bank Facilities as in effect
on the date of the Indenture, (b) the Indenture and the New Notes, (c)
applicable law or any applicable rule, regulation or order, (d) any agreement
or instrument governing Indebtedness or Capital Stock of a Person acquired by
the Issuer or any of its Restricted Subsidiaries as in effect at the time of
such acquisition (except to the extent such agreement or instrument was
created or entered into in connection with or in contemplation of such
acquisition), which encumbrance or restriction is not applicable to any
Person, or the properties or assets of any Person, other than the Person, or
the property or assets of the Person, so acquired, provided that, in the case
of Indebtedness, such Indebtedness was permitted to be incurred under the
terms of the Indenture, (e) customary non- assignment provisions in leases,
licenses, encumbrances,
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contracts or similar assets entered into in the ordinary course of business
and consistent with past practices, (f) purchase money obligations for
property acquired in the ordinary course of business that impose restrictions
of the nature described in clause (iv) above on the property so acquired, (g)
Permitted Refinancing Indebtedness, provided that the restrictions contained
in the agreements governing such Permitted Refinancing Indebtedness are no
more restrictive than those contained in the agreements governing the
Indebtedness being refinanced and (h) contracts for the sale of assets
containing customary restrictions with respect to a Subsidiary pursuant to an
agreement that has been entered into for the sale or disposition of all or
substantially all of the Capital Stock or assets of such Subsidiary.
MERGER, CONSOLIDATION OR SALE OF ASSETS
The Indenture provides that the Issuer may not consolidate or merge with or
into (whether or not the Issuer is the surviving corporation), or, sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially
all of its properties or assets in one or more related transactions, to
another Person unless (i) the Issuer is the surviving corporation or the
Person formed by or surviving any such consolidation or merger (if other than
the Issuer) or to which such sale, assignment, transfer, lease, conveyance or
other disposition have been made is a corporation or limited liability company
organized or existing under the laws of the United States, any state thereof
or the District of Columbia; (ii) the Person formed by or surviving any such
consolidation or merger (if other than the Company) or the Person to which
such sale, assignment, transfer, lease, conveyance or other disposition have
been made assumes all the obligations of the Issuer under the New Notes and
the Indenture pursuant to a supplemental indenture in a form reasonably
satisfactory to the Trustee; (iii) immediately after such transaction no
Default or Event of Default exists; and (iv) except in the case of a merger of
the Issuer with or into a Wholly Owned Restricted Subsidiary of the Issuer,
the Issuer or the entity or Person formed by or surviving any such
consolidation or merger (if other than the Issuer), or to which such sale,
assignment, transfer, lease, conveyance or other disposition have been made
will, at the time of such transaction and after giving pro forma effect
thereto as if such transaction had occurred at the beginning of the applicable
four-quarter period, be permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the
first paragraph of the covenant described above under the caption "--
Incurrence of Indebtedness and Issuance of Preferred Stock." For purposes of
this covenant, the sale, lease, conveyance, assignment, transfer, or other
disposition of all or substantially all of the properties and assets of one or
more Subsidiaries of the Issuer, which properties and assets, if held by the
Issuer instead of such Subsidiaries, would constitute all or substantially all
of the properties and assets of the Issuer on a consolidated basis, will be
deemed to be the transfer of all or substantially all of the properties and
assets of the Issuer. The foregoing clause (iv) will not prohibit (a) a merger
between the Issuer and a Wholly Owned Restricted Subsidiary of Holdings
created for the purpose of holding the Capital Stock of the Issuer or (b) a
merger between the Issuer and a Wholly Owned Restricted Subsidiary of the
Issuer so long as, in the case of each of clause (a) and (b), the amount of
Indebtedness of the Issuer and its Restricted Subsidiaries is not increased
thereby.
TRANSACTIONS WITH AFFILIATES
The Indenture provides that the Issuer will not, and will not permit any of
its Restricted Subsidiaries to, make any payment to or Investment in, or sell,
lease, transfer or otherwise dispose of any of its properties or assets to, or
purchase any property or assets from, or enter into or make or amend any
transaction, contract, agreement, understanding, loan, advance or guarantee
with, or for the benefit of, any Affiliate (each of the foregoing, an
"Affiliate Transaction"), unless (i) such Affiliate Transaction is on terms
that are no less favorable to the Issuer or the relevant Restricted Subsidiary
than those that would have been obtained in a comparable transaction by the
Issuer or such Restricted Subsidiary with an unrelated Person and (ii) the
Issuer delivers to the Trustee (a) with respect to any Affiliate Transaction
or series of related Affiliate Transactions involving aggregate consideration
in excess of $1.0 million, a resolution of the Board of Directors set forth in
an officer's certificate certifying that such Affiliate Transaction complies
with clause (i) above and that such Affiliate Transaction has been approved by
a majority of the disinterested members of the Board of Directors and (b) with
respect to any Affiliate Transaction or series of related Affiliate
Transactions involving aggregate consideration in excess of
$10.0 million, an opinion as to the fairness to the holders of such Affiliate
Transaction from a financial point of view issued by an accounting, appraisal
or investment banking firm of national standing; provided that the following
will not be deemed to be Affiliate Transactions: (1) any employment
agreements, stock option or other compensation agreements or plans (and the
payment of amounts or the issuance of securities thereunder) and other
reasonable fees, compensation, benefits and indemnities paid or entered into
by the Issuer or any of its Restricted Subsidiaries in the ordinary course of
business of the Issuer or such Restricted Subsidiary to or with the officers,
directors or employees of the Issuer or its Restricted Subsidiaries, (2)
transactions between or among the Issuer and/or its Restricted Subsidiaries,
(3) Restricted Payments (other than Restricted Investments) that are permitted
by the provisions of the Indenture described above under the caption
"Restricted Payments," (4) customary advisory and investment banking fees paid
to Seaver Kent and its Affiliates, and (5) transactions with suppliers or
customers, in each case in the ordinary course of business (including, without
limitation, pursuant to joint venture agreements) and otherwise in accordance
with the terms of the Indenture, which are fair to the Issuer in the good
faith determination of the Board of Directors of the Issuer and are on terms
at least as favorable as might reasonably have been obtained at such time from
an unaffiliated party.
LIMITATION ON LAYERING DEBT
The Indenture provides that (i) the Issuer will not incur, create, issue,
assume, guarantee or otherwise become liable for any Indebtedness that is
subordinate or junior in right of payment to any Senior Debt and senior in any
respect in right of payment to the New Notes, and (ii) no Guarantor will
incur, create, issue, assume, guarantee or otherwise become liable for any
Indebtedness that is subordinate or junior in right of payment to Senior Debt
of such Guarantor and senior in any respect in right of payment to such
Guarantor's Subsidiary Guarantee.
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BUSINESS ACTIVITIES
The Issuer will not, and will not permit any Restricted Subsidiary to,
engage in any business other than Permitted Businesses.
ADDITIONAL SUBSIDIARY GUARANTEES
The Indenture provides that the Issuer will not permit any Restricted
Subsidiary to guarantee the payment of any Indebtedness of the Issuer or any
Indebtedness of any other Restricted Subsidiary (in each case, the "Guaranteed
Debt"), unless (i) if such Restricted Subsidiary is not a Guarantor, such
Restricted Subsidiary simultaneously executes and delivers a supplemental
indenture to the Indenture providing for a Subsidiary Guarantee of payment of
the New Notes by such Restricted Subsidiary, (ii) if the New Notes or the
Subsidiary Guarantee (if any) of such Restricted Subsidiary are subordinated
in right of payment to the Guaranteed Debt, the Subsidiary Guarantee under the
supplemental indenture will be subordinated to such Restricted Subsidiary's
guarantee with respect to the Guaranteed Debt substantially to the same extent
as the New Notes or the Subsidiary Guarantee are subordinated to the
Guaranteed Debt under the Indenture, (iii) if the Guaranteed Debt is by its
express terms subordinated in right of payment to the New Notes or the
Subsidiary Guarantee (if any) of such Restricted Subsidiary, any such
guarantee of such Restricted Subsidiary with respect to the Guaranteed Debt
will be subordinated in right of payment to such Restricted Subsidiary's
Subsidiary Guarantee with respect to the New Notes substantially to the same
extent as the Guaranteed Debt is subordinated to the New Notes or the
Subsidiary Guarantee (if any) of such Restricted Subsidiary, (iv) such
Restricted Subsidiary subordinates rights of reimbursement, indemnity or
subrogation or any other rights against the Issuer or any other Restricted
Subsidiary as a result of any payment by such Restricted Subsidiary under its
Subsidiary Guarantee to its obligation under its Subsidiary Guarantee, and (v)
such Restricted Subsidiary delivers to the Trustee an opinion of counsel to
the effect that (A) such Subsidiary Guarantee of the New Notes has been duly
authorized, executed and delivered, and (B) such Subsidiary Guarantee of the
New Notes constitutes a valid, binding and enforceable obligation of such
Restricted Subsidiary, except insofar as enforcement thereof may be limited by
bankruptcy, insolvency or similar laws (including, without limitation, all
laws relating to fraudulent transfers) and except insofar as enforcement
thereof is subject to general principles of equity.
REPORTS
The Indenture provides that, whether or not required by the rules and
regulations of the Commission, so long as any New Notes are outstanding, the
Issuer will furnish to holders of New Notes (i) all quarterly and annual
financial information that would be required to be contained in a filing with
the Commission on Forms 10-Q and 10-K if the Issuer were required to file such
Forms, including a "Management's Discussion and Analysis of Financial
Condition and Results of Operations" that describes the financial condition
and results of operations of the Issuer and its consolidated Subsidiaries and,
with respect to the annual information only, a report thereon by the Issuer's
certified independent accountants and (ii) all current reports that would be
required to be filed with the Commission on Form 8-K if the Issuer were
required to file such reports, in each case within the time periods set forth
in the Commission's rules and regulations. In addition, whether or not
required by the rules and regulations of the Commission, at any time after the
consummation of the Exchange Offer contemplated by the Registration Rights
Agreement (or, if the Exchange Offer is not consummated, after the
effectiveness of the Shelf Registration Statement), the Issuer will file a
copy of all such information and reports with the Commission for public
availability within the time periods set forth in the Commission's rules and
regulations (unless the Commission will not accept such a filing) and make
such information available to securities analysts and prospective investors
upon request. In addition, at all times that the Commission does not accept
the filings provided for in the preceding sentence, the Issuer and the
Guarantors have agreed that, for so long as any New Notes remain outstanding,
they will furnish to holders and to securities analysts and prospective
investors, upon their request, the information required to be delivered
pursuant to Rule 144A(d)(4) under the Securities Act.
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EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default (each, an "Event of Default"): (i) default for 30 days in the payment
when due of interest on, or Liquidated Damages with respect to, the New Notes
(whether or not prohibited by the subordination provisions of the Indenture);
(ii) default in payment when due of the principal of or premium, if any, on
the New Notes (whether or not prohibited by the subordination provisions of
the Indenture); (iii) failure by the Issuer or any of its Restricted
Subsidiaries for 30 days after notice by the Trustee or by holders of at least
25% in principal amount of New Notes then outstanding to comply with the
provisions described under the captions "--Repurchase at the Option of Holders--
Change of Control" or "--Asset Sales," "--Certain Covenants--Restricted
Payments" or "--Incurrence of Indebtedness and Issuance of Preferred Stock";
(iv) failure by the Issuer or any of its Restricted Subsidiaries for 60 days
after notice by the Trustee or by holders of at least 25% in principal amount
of New Notes then outstanding to comply with any of its other agreements in
the Indenture or the New Notes; (v) default under any mortgage, indenture or
instrument under which there may be issued or by which there may be secured or
evidenced any Indebtedness for money borrowed by the Issuer or any of its
Restricted Subsidiaries (or the payment of which is guaranteed by the Issuer
or any of its Restricted Subsidiaries) whether such Indebtedness or guarantee
now exists, or is created after the date of the Indenture, which default (a)
is caused by a failure to pay principal of such Indebtedness after giving
effect to any grace period provided in such Indebtedness (a "Payment Default")
or (b) results in the acceleration of such Indebtedness prior to its stated
maturity and, in each case, the principal amount of any such Indebtedness,
together with the principal amount of any other such Indebtedness under which
there has been a Payment Default or the maturity of which has been so
accelerated, aggregates $10.0 million or more; (vi) failure by the Issuer or
any of its Restricted Subsidiaries to pay final non-appealable judgments
aggregating in excess of $10.0 million (net of any amounts with respect to
which a reputable and creditworthy insurance Issuer has acknowledged liability
in writing), which judgments are not paid, discharged or stayed for a period
of 60 days; (vii) except as permitted by the Indenture, any Subsidiary
Guarantee is held in any judicial proceeding to be unenforceable or invalid or
ceases for any reason to be in full force and effect or any Guarantor, or any
Person acting on behalf of any Guarantor, denies or disaffirms its obligations
under its Subsidiary Guarantee; and (viii) certain events of bankruptcy or
insolvency with respect to the Issuer or any of its Significant Subsidiaries.
If any Event of Default occurs and is continuing, the Trustee or holders of
at least 25% in principal amount of the then outstanding New Notes may declare
all the New Notes to be due and payable immediately. Notwithstanding the
foregoing, in the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to the Issuer or any Significant
Subsidiary, all outstanding New Notes will become due and payable without
further action or notice. Holders of the New Notes may not enforce the
Indenture or the New Notes except as provided in the Indenture. Subject to
certain limitations, holders of a majority in principal amount of the then
outstanding New Notes may direct the Trustee in its exercise of any trust or
power. The Trustee may withhold from holders of New Notes notice of any
continuing Default or Event of Default (except a Default or Event of Default
relating to the payment of principal or interest) if it determines that
withholding notice is in their interest. In the event of a declaration of
acceleration of the New Notes because an Event of Default has occurred and is
continuing as a result of the acceleration of any Indebtedness described in
clause (v) of the preceding paragraph, the declaration of acceleration of the
New Notes will be automatically annulled if the holders of any Indebtedness
described in clause (v) of the preceding paragraph have rescinded the
declaration of acceleration in respect of such Indebtedness within 30 days of
the date of such declaration and if (a) the annulment of the acceleration of
New Notes would not conflict with any judgment or decree of a court of
competent jurisdiction and (b) all existing Events of Default, except
nonpayment of principal or interest on the New Notes that became due solely
because of the acceleration of the New Notes, have been cured or waived.
The holders of a majority in aggregate principal amount of the New Notes
then outstanding by notice to the Trustee may on behalf of holders of all New
Notes waive any existing Default or Event of Default and its consequences
under the Indenture except a continuing Default or Event of Default in the
payment of interest on, or the principal of, the New Notes.
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The Issuer is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Issuer is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Issuer,
as such, will have any liability for any obligations of the Issuer under the
New Notes, the Indenture or the Subsidiary Guarantees or for any claim based
on, in respect of, or by reason of, such obligations or their creation. Each
holder of New Notes by accepting a New Note waives and releases all such
liability. The waiver and release are part of the consideration for issuance
of the New Notes. Such waiver may not be effective to waive liabilities under
the federal securities laws and it is the view of the Commission that such a
waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Issuer may, at its option and at any time, elect to have all of its
obligations and the obligations of the Guarantors discharged with respect to
the outstanding New Notes ("Legal Defeasance") except for (i) the rights of
holders of outstanding New Notes to receive payments in respect of the
principal of, premium, if any, and interest and Liquidated Damages on such New
Notes when such payments are due from the trust referred to below, (ii) the
Issuer's obligations with respect to the New Notes concerning issuing
temporary New Notes, registration of New Notes, mutilated, destroyed, lost or
stolen New Notes and the maintenance of an office or agency for payment and
money for security payments held in trust, (iii) the rights, powers, trusts,
duties and immunities of the Trustee, and the Issuer's obligations in
connection therewith and (iv) the Legal Defeasance provisions of the
Indenture. In addition, the Issuer may, at its option and at any time, elect
to have the obligations of the Issuer released with respect to certain
covenants that are described in the Indenture ("Covenant Defeasance") and
thereafter any omission to comply with such obligations will not constitute a
Default or Event of Default with respect to the New Notes. In the event
Covenant Defeasance occurs, certain events (not including non-payment,
bankruptcy, receivership, rehabilitation and insolvency events) described
under "--Events of Default and Remedies" will no longer constitute an Event of
Default with respect to the New Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Issuer must irrevocably deposit with the Trustee, in trust, for the benefit of
holders of New Notes, cash in U.S. dollars, non-callable Government
Securities, or a combination thereof, in such amounts as will be sufficient,
in the opinion of a nationally recognized firm of independent public
accountants, to pay the principal of, premium, if any, and interest and
Liquidated Damages on the outstanding New Notes on the stated maturity or on
the applicable redemption date, as the case may be, and the Issuer must
specify whether the New Notes are being defeased to maturity or to a
particular redemption date; (ii) in the case of Legal Defeasance, the Issuer
must have delivered to the Trustee an opinion of counsel in the United States
reasonably acceptable to the Trustee confirming that (A) the Issuer has
received from, or there has been published by, the Internal Revenue Service a
ruling or (B) since the date of the Indenture, there has been a change in the
applicable federal income tax law, in either case to the effect that, and
based thereon such opinion of counsel must confirm that, subject to customary
assumptions and exclusions, holders of the outstanding New Notes will not
recognize income, gain or loss for federal income tax purposes as a result of
such Legal Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case
if such Legal Defeasance had not occurred; (iii) in the case of Covenant
Defeasance, the Issuer must have delivered to the Trustee an opinion of
counsel in the United States reasonably acceptable to the Trustee confirming
that, subject to customary assumptions and exclusions, holders of the
outstanding New Notes will not recognize income, gain or loss for federal
income tax purposes as a result of such Covenant Defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at
the same times as would have been the case if such Covenant Defeasance had not
occurred; (iv) no Default or Event of Default has occurred and be continuing
on the date of such deposit (other than a Default or Event of Default
resulting from the financing of amounts to be applied to such deposit) or
insofar as Events of Default from bankruptcy or insolvency events are
concerned, at any time in the period ending on the 91st day after the date of
deposit; (v) such Legal Defeasance or Covenant Defeasance will not result in a
breach or violation of, or constitute a default under any material agreement
or instrument (other than the Indenture) to which the Issuer or any of its
Subsidiaries is a party or by which the Issuer or any of its Subsidiaries is
bound; (vi) the Issuer must have delivered to the Trustee an opinion of
counsel to the effect that, subject to customary assumptions and exclusions
(which assumptions and exclusion must not relate to the operation of Section
547 of the United States Bankruptcy Code or any analogous New York State law
provision), after the 91st day following the deposit, the trust funds will not
be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally; (vii)
the Issuer must deliver to the Trustee an Officers' Certificate stating that
the deposit was not made by the Issuer with the intent of preferring holders
of New Notes over the other creditors of the Issuer with the intent of
defeating, hindering, delaying or defrauding creditors of the Issuer or
others; and (viii) the Issuer must deliver to the Trustee an Officers'
Certificate and an opinion of counsel, each stating that all conditions
precedent provided for relating to the Legal Defeasance or the Covenant
Defeasance have been complied with.
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TRANSFER AND EXCHANGE
A holder may transfer or exchange New Notes in accordance with the
Indenture. The Registrar and the Trustee may require a holder, among other
things, to furnish appropriate endorsements and transfer documents and the
Issuer may require a holder to pay any taxes and fees required by law or
permitted by the Indenture. The Issuer is not required to transfer or exchange
any New Note selected for redemption. Also, the Issuer is not required to
transfer or exchange any New Note for a period of 15 days before a selection
of New Notes to be redeemed.
The registered holder of a New Note will be treated as the owner of it for
all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture, the
Subsidiary Guarantees or the New Notes may be amended or supplemented with the
consent of holders of at least a majority in principal amount of the New Notes
then outstanding (including, without limitation, consents obtained in
connection with
a purchase of, or tender offer or exchange offer for, New Notes), and any
existing default or compliance with any provision of the Indenture, the
Subsidiary Guarantees or the New Notes may be waived with the consent of
holders of a majority in principal amount of the then outstanding New Notes
(including consents obtained in connection with a purchase of, or tender offer
or exchange offer for, New Notes).
Without the consent of each holder affected, an amendment or waiver may not
(with respect to any New Notes held by a non-consenting holder): (i) reduce
the principal amount of New Notes whose holders must consent to an amendment,
supplement or waiver, (ii) reduce the principal of or change the fixed
maturity of any Note or alter the provisions with respect to the redemption of
the New Notes (other than provisions relating to the covenants described above
under the caption "--Repurchase at the Option of Holders"), (iii) reduce the
rate of or change the time for payment of interest on any New Note, (iv) waive
a Default or Event of Default in the payment of principal of or premium, if
any, or interest on the New Notes (except a rescission of acceleration of the
New Notes by holders of at least a majority in aggregate principal amount of
the New Notes and a waiver of the payment default that resulted from such
acceleration), (v) make any New Note payable in money other than that stated
in the New Notes, (vi) make any change in the provisions of the Indenture
relating to waivers of past Defaults or the rights of holders of New Notes to
receive payments of principal of or premium, if any, or interest on the New
Notes, (vii) waive a redemption payment with respect to any New Note (other
than a payment required by one of the covenants described above under the
caption "--Repurchase at the Option of Holders"), (viii) except as otherwise
permitted by the Indenture release any Guarantor from any of its obligations
under its Subsidiary Guarantee or the Indenture, or amend the provisions of
the Indenture relating to the release of Guarantors, or (ix) make any change
in the foregoing amendment and waiver provisions. In addition, any amendment
to the provisions of Article 10 of the Indenture (which relate to
subordination) or the related definitions will require the consent of holders
of at least 75% in aggregate principal amount of the New Notes then
outstanding if such amendment would adversely affect the rights of holders of
New Notes.
Notwithstanding the foregoing, without the consent of any holder of New
Notes, the Issuer and the Trustee may amend or supplement the Indenture, the
Subsidiary Guarantees or the New Notes to cure any ambiguity, defect or
inconsistency, to provide for uncertificated New Notes in addition to or in
place of certificated New Notes, to provide for the assumption of the Issuer's
or a Guarantor's obligations to holders of New Notes in the case of a merger
or consolidation, to make any change that would provide any additional rights
or benefits to holders of New Notes or that does not adversely affect the
legal rights under the Indenture of any such holder, to comply with
requirements of the Commission in order to effect or maintain the
qualification of the Indenture under the Trust Indenture Act or to allow any
Restricted Subsidiary to guarantee the New Notes.
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CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Issuer, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee will be permitted to engage
in other transactions; however, if it acquires any conflicting interest it
must eliminate such conflict within 90 days, apply to the Commission for
permission to continue or resign.
Holders of a majority in principal amount of the then outstanding New Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
occurs (which are not cured), the Trustee will be required, in the exercise of
its power, to use the degree of care of a prudent man in the conduct of his
own affairs. Subject to such provisions, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request of any holder of New Notes, unless such holder will have offered to
the Trustee security and indemnity satisfactory to it against any loss,
liability or expense.
BOOK-ENTRY, DELIVERY AND FORM
New Notes will be issued in registered, global form in minimum denominations
of $1,000 and integral multiples of $1,000 in excess thereof.
Except as set forth below, the Global Notes may be transferred, in whole and
not in part, only to another nominee of DTC or to a successor of DTC or its
nominee. Beneficial interests in the Global Notes may not be exchanged for New
Notes in certificated form except in the limited circumstances described
below. See "--Exchange of Book-Entry New Notes for Certificated New Notes."
In addition, transfer of beneficial interests in the Global Notes will be
subject to the applicable rules and procedures of DTC and its direct or
indirect participants (including, if applicable, those of Euroclear and
CEDEL), which may change from time to time.
Initially, the Trustee will act as Paying Agent and Registrar. The New Notes
may be presented for registration of transfer and exchange at the offices of
the Registrar.
DEPOSITORY PROCEDURES
DTC has advised the Issuer that DTC is a limited-purpose trust Issuer
created to hold securities for its participating organizations (collectively,
the "Participants") and to facilitate the clearance and settlement of
transactions in those securities between Participants through electronic book-
entry changes in accounts of its Participants. The Participants include
securities brokers and dealers (including the Initial Purchasers), banks,
trust companies, clearing corporations and certain other organizations. Access
to DTC's system is also available to other entities such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly (collectively,
the "Indirect Participants"). Persons who are not Participants may
beneficially own securities held by or on behalf of DTC only through the
Participants or the Indirect Participants. The ownership interests and
transfer of ownership interests of each actual purchaser of each security held
by or on behalf of DTC are recorded on the records of the Participants and
Indirect Participants.
DTC has also advised the Issuer that, pursuant to procedures established by
it, (i) upon deposit of the Global Notes, DTC will credit the accounts of
Participants tendering Old Notes with portions of the principal amount of the
Global Notes and (ii) ownership of such interests in the Global Notes will be
shown on, and the transfer of ownership thereof will be effected only through,
records maintained by DTC (with respect to the Participants) or by the
Participants and the Indirect Participants (with respect to other owners of
beneficial interest in the Global Notes).
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Investors in the Global Notes may hold their interests therein directly
through DTC, if they are participants in such system, or indirectly through
organizations (including Euroclear and CEDEL) which are participants in such
system. Euroclear and CEDEL would hold interests in the Global Notes on behalf
of their participants through customers' securities accounts in their respective
names on the books of their respective depositaries, which are Morgan Guaranty
Trust Company of New York, Brussels office, as operator of Euroclear, and
Citibank, N.A., as operator of CEDEL. The depositaries, in turn, would hold such
interests in the Global Notes in customers' securities accounts in the
depositaries' names on the books of DTC. All interests in a Global Note,
including those held through Euroclear or CEDEL, may be subject to the
procedures and requirements of DTC. Those interests held through Euroclear or
CEDEL may also be subject to the procedures and requirements of such systems.
The laws of some states require that certain persons take physical delivery in
definitive form of securities that they own. Consequently, the ability to
transfer beneficial interests in a Global Note to such persons will be limited
to that extent. Because DTC can act only on behalf of Participants, which in
turn act on behalf of Indirect Participants and certain banks, the ability of a
person having beneficial interests in a Global Note to pledge such interests to
persons or entities that do not participate in the DTC system, or otherwise take
actions in respect of such interests, may be affected by the lack of a physical
certificate evidencing such interests. For certain other restrictions on the
transferability of the New Notes, see "-- Exchange of Book-Entry New Notes for
Certificated New Notes," "--Exchange of Certificated New Notes for Book-Entry
New Notes."
EXCEPT AS DESCRIBED BELOW, OWNERS OF INTERESTS IN THE GLOBAL NOTES WILL NOT
HAVE NEW NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY
OF NEW NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED
OWNERS OR HOLDERS THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.
Payments in respect of the principal of and premium and Liquidated Damages,
if any, and interest on a Global Note registered in the name of DTC or its
nominee will be payable by the Trustee to DTC in its capacity as the
registered holder under the Indenture. Under the terms of the Indenture, the
Issuer and the Trustee will treat the persons in whose names the New Notes,
including the Global Notes, are registered as the owners thereof for the
purpose of receiving such payments and for any and all other purposes
whatsoever. Consequently, neither the Issuer, the Trustee nor any agent of the
Issuer or the Trustee has or will have any responsibility or liability for (i)
any aspect of DTC's records or any Participant's or Indirect Participant's
records relating to or payments made on account of beneficial ownership
interest in the Global Notes, or for maintaining, supervising or reviewing any
of DTC's records or any Participant's or Indirect Participant's records
relating to the beneficial ownership interests in the Global Notes or (ii) any
other matter relating to the actions and practices of DTC or any of its
Participants or Indirect Participants. DTC has advised the Issuer that its
current practice, upon receipt of any payment in respect of securities such as
the New Notes (including principal and interest), is to credit the accounts of
the relevant Participants with the payment on the payment date, in amounts
proportionate to their respective holdings in the principal amount of
beneficial interest in the relevant security as shown on the records of DTC
unless DTC has reason to believe it will not receive payment on such payment
date. Payments by the Participants and the Indirect Participants to the
beneficial owners of New Notes will be governed by standing instructions and
customary practices and will be the responsibility of the Participants or the
Indirect Participants and will not be the responsibility of DTC, the Trustee
or the Issuer. Neither the Issuer nor the Trustee will be liable for any delay
by DTC or any of its Participants in identifying the beneficial owners of the
New Notes, and the Issuer and the Trustee may conclusively rely on and will be
protected in relying on instructions from DTC or its nominee for all purposes.
Except for trades involving only Euroclear and CEDEL participants, interest
in the Global Notes are expected to be eligible to trade in DTC's Same-Day
Funds Settlement System and secondary market trading activity in such
interests will therefore settle in immediately available funds, subject in all
cases to the rules and procedures of DTC and its participants. See "--Same-Day
Settlement and Payment."
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Transfers between Participants in DTC will be effected in accordance with
DTC's procedures, and will be settled in same-day funds, and transfers between
participants in Euroclear and CEDEL will be effected in the ordinary way in
accordance with their respective rules and operating procedures.
Cross-market transfers between the Participants in DTC, on the one hand, and
Euroclear or CEDEL participants, on the other hand, will be effected through
DTC in accordance with DTC's rules on behalf of Euroclear or CEDEL, as the
case may be, by its respective depositary; however, such cross-market
transactions will require delivery of instructions to Euroclear or CEDEL, as
the case may be, by the counterparty in such system in accordance with the
rules and procedures and within the established deadlines (Brussels time) of
such system. Euroclear or CEDEL, as the case may be, will, if the transaction
meets its settlement requirements, deliver instructions to its respective
depositary to take action to effect final settlement on its behalf by
delivering or receiving interests in the relevant Global Note in DTC, and
making or receiving payment in accordance with normal procedures for same-day
funds settlement applicable to DTC. Euroclear participants and CEDEL
participants may not deliver instructions directly to the depositaries for
Euroclear or CEDEL.
Because of time zone differences, the securities account of a Euroclear or
CEDEL participant purchasing an interest in a Global Note from a Participant
in DTC will be credited, and any such crediting will be reported to the
relevant Euroclear or CEDEL participant, during the securities settlement
processing day (which must be a business day for Euroclear and CEDEL)
immediately following the settlement date of DTC. DTC has advised
the Issuer that cash received in Euroclear or CEDEL as a result of sales of
interests in a Global Note by or through a Euroclear or CEDEL participant to a
Participant in DTC will be received with value on the settlement date of DTC
but will be available in the relevant Euroclear or CEDEL cash account only as
of the business day for Euroclear or CEDEL following DTC's settlement date.
DTC has advised the Issuer that it will take any action permitted to be
taken by holders of New Notes only at the direction of one or more
Participants to whose account with DTC interests in the Global Notes are
credited and only in respect of such portion of the aggregate principal amount
of the New Notes as to which such Participant or Participants has or have
given such direction. However, if there is an Event of Default under the New
Notes, DTC reserves the right to exchange the Global Notes for legended New
Notes in certificated form, and to distribute such New Notes to its
Participants.
The information in this section concerning DTC, Euroclear and CEDEL and
their book-entry systems has been obtained from sources that the Issuer
believes to be reliable, but the Issuer takes no responsibility for the
accuracy thereof.
Although DTC, Euroclear and CEDEL have agreed to the foregoing procedures to
facilitate transfers of interests in the Global Notes among Participants in
DTC, Euroclear and CEDEL, they are under no obligation to perform or to
continue to perform such procedures, and such procedures may be discontinued
at any time. Neither the Issuer nor the Trustee will have any responsibility
for the performance by DTC, Euroclear or CEDEL or their respective
participants or indirect participants of their respective obligations under
the rules and procedures governing their operations.
EXCHANGE OF BOOK-ENTRY NEW NOTES FOR CERTIFICATED NEW NOTES
A Global Note is exchangeable for definitive New Notes in registered
certificated form if (i) DTC (x) notifies the Issuer that it is unwilling or
unable to continue as depositary for the Global Notes and the Issuer thereupon
fails to appoint a successor depositary or (y) has ceased to be a clearing
agency registered under the Exchange Act, (ii) the Issuer, at its option,
notifies the Trustee in writing that it elects to cause the issuance of the
New Notes in certificated form or (iii) there has occurred and be continuing
an Event of Default or any event which after notice or lapse of time or both
would be an Event of Default with respect to the New Notes. In addition,
beneficial interests in a Global Note may be exchanged for certificated New
Notes upon request but only upon at least 20 days prior written notice given
to the Trustee by or on behalf of DTC in accordance with its customary
procedures. In all cases, certificated New Notes delivered in exchange for any
Global Note or beneficial interests therein will be registered in the names,
and issued in any approved denominations, requested by or on behalf of the
depositary (in accordance with its customary procedures) and will bear the
applicable restrictive legend referred to in "Notice to Investors," unless the
Issuer determines otherwise in compliance with applicable law.
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SAME-DAY SETTLEMENT AND PAYMENT
The Indenture requires that payments in respect of the New Notes represented
by the Global Notes (including principal, premium, if any, and interest and
Liquidated Damages, if any) be made by wire transfer of immediately available
funds to the accounts specified by the Global Note holder. With respect to New
Notes in certificated form, the Issuer will make all payments of principal,
premium, if any, interest and Liquidated Damages, if any, by wire transfer of
immediately available funds to the accounts specified by the holders thereof
or, if no such account is specified, by mailing a check to each such holder's
registered address. The New Notes represented by the Global Notes are expected
to be eligible to trade in the PORTAL market and to trade in the Depositary's
Same-Day Funds Settlement System, and any permitted secondary market trading
activity in such New Notes will, therefore, be required by the Depositary to
be settled in immediately available funds. The Issuer expects that secondary
trading in any certificated New Notes will also be settled in immediately
available funds.
Because of time zone differences, the securities account of a Euroclear or
CEDEL participant purchasing an interest in a Global Note from a Participant
in DTC will be credited, and any such crediting will be reported to the
relevant Euroclear or CEDEL participant, during the securities settlement
processing day (which must be a business day for Euroclear and CEDEL)
immediately following the settlement date of DTC. DTC has advised the Issuer
that cash received in Euroclear or CEDEL as a result of sales of interests in
a Global Note by or through a Euroclear or CEDEL participant to a Participant
in DTC will be received with value on the settlement date of DTC but will be
available in the relevant Euroclear or CEDEL cash account only as of the
business day for Euroclear or CEDEL following DTC's settlement date.
REGISTRATION RIGHTS; LIQUIDATED DAMAGES
Pursuant to the Registration Rights Agreement, the Issuer agreed to file
with the Commission the Exchange Offer Registration Statement on the
appropriate form under the Securities Act with respect to the New Notes. Upon
the effectiveness of the Exchange Offer Registration Statement, the Issuer
will offer to the holders of Transfer Restricted Securities (as defined
herein) pursuant to the Exchange Offer who are able to make certain
representations the opportunity to exchange their Transfer Restricted
Securities for New Notes. If (i) the Issuer is not required to file the
Exchange Offer Registration Statement or permitted to consummate the Exchange
Offer because the Exchange Offer is not permitted by applicable law or
Commission policy or (ii) any holder of Transfer Restricted Securities
notifies the Issuer within the specified time period that (A) it is prohibited
by law or Commission policy from participating in the Exchange Offer (other
than due solely to the status of such holder as an affiliate of the Issuer
within the meaning of the Securities Act) or (B) that it may not resell the
New Notes acquired by it in the Exchange Offer to the public without
delivering a prospectus and the prospectus contained in the Exchange Offer
Registration Statement is not appropriate or available for such resales or (C)
that it is a broker-dealer and owns New Notes acquired directly from the
Issuer or an affiliate of the Issuer, the Issuer will file with the Commission
a Shelf Registration Statement to cover resales of the Transfer Restricted
Securities by the holders thereof who satisfy certain conditions relating to
the provision of information in connection with the Shelf Registration
Statement. The Issuer will use its best efforts to cause the applicable
registration statement to be declared effective as promptly as possible by the
Commission. For purposes of the foregoing, "Transfer Restricted Securities"
means each Note until (i) the date on which such Note has been exchanged by a
person other than a broker-dealer for a New Note in the Exchange Offer, (ii)
following the exchange by a broker-dealer in the Exchange Offer of a Note for
a New Note, the date on which such New Note is sold to a purchaser who
receives from such broker-dealer on or prior to the date of such sale a copy
of the prospectus contained in the Exchange Offer Registration Statement,
(iii) the date on which such Note has been effectively registered under the
Securities Act and disposed of in accordance with the Shelf Registration
Statement or (iv) the date on which such Note is distributed to the public
pursuant to Rule 144 under the Securities Act.
The Registration Rights Agreement provides that (i) the Issuer will file an
Exchange Offer Registration Statement with the Commission on or prior to 75
days after the Closing, (ii) the Issuer will use its best efforts to have the
Exchange Offer Registration Statement declared effective by the Commission on
or prior to 150 days after the Closing, (iii) unless the Exchange Offer would
not be permitted by applicable law or Commission policy, the Issuer will
commence the Exchange Offer and use its best efforts to issue within 195 days
after the Issue Date New Notes in exchange for all Old Notes tendered prior
thereto in the Exchange Offer and (iv) if obligated to file the Shelf
Registration Statement, the Issuer will use its best efforts to file the Shelf
Registration Statement with the Commission on or prior to 75 days after such
filing obligation arises and to cause the Shelf Registration Statement to be
declared effective by the Commission on or prior to 150 days after such
obligation arises. If (a) the Issuer fails to file any of the Registration
Statements required by the Registration Rights Agreement on or before the date
specified for such filing, (b) any of such Registration Statement is not
declared effective by the Commission on or prior to the date specified for
such effectiveness (the "Effectiveness Target Date"), or (c) the Issuer fails
to consummate the Exchange Offer within 195 days after the Issue Date, or (d)
the Shelf Registration Statement or the Exchange Offer Registration Statement
is declared effective but thereafter ceases to be effective or usable in
connection with resales of Transfer Restricted Securities during the periods
specified in the Registration Rights Agreement (each such event referred to in
clauses (a) through (d) above a
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"Registration Default"), then the Issuer will pay liquidated damages
("Liquidated Damages") as follows: to each holder of Transfer Restricted
Securities, with respect to such 90-day period immediately following the
occurrence of the first Registration Default in an amount equal to $0.05 per
week per $1,000 principal amount of Transfer Restricted Securities held by
such holder. The amount of the Liquidated Damages will increase by an
additional $0.05 per week per $1,000 principal amount of Transfer Restricted
Securities with respect to each subsequent 90-day period until all
Registration Defaults have been cured, up to a maximum amount of Liquidated
Damages of $0.30 per week per $1,000 principal amount of Transfer Restricted
Securities. All accrued Liquidated Damages will be paid by the Issuer to the
Global Note holder by wire transfer of immediately available funds or by
federal funds check and to holders of Certificated Securities by wire transfer
to the accounts specified by them or by mailing checks to their registered
addresses if no such accounts have been specified. Following the cure of all
Registration Defaults, the accrual of Liquidated Damages will cease.
Holders of Transfer Restricted Securities will be required to make certain
representations to the Issuer (as described in the Registration Rights
Agreement) in order to participate in the Exchange Offer and will be required
to deliver information to be used in connection with the Shelf Registration
Statement and to provide comments on the Shelf Registration Statement within
the time periods set forth in the Registration Rights Agreement in order to
have their New Notes included in the Shelf Registration Statement and benefit
from the provisions regarding Liquidated Damages set forth above.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, and (ii)
Indebtedness secured by a Lien encumbering any asset acquired by such
specified Person or assumed in connection with the acquisition of any asset
used or useful in a Permitted Business acquired by such specified Person;
provided that such Indebtedness was not incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, or such acquisition, as the case may be.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled
by" and "under common control with"), as used with respect to any Person,
shall mean the possession, directly or indirectly, of the power to direct or
cause the direction of the management or policies of such Person, whether
through the ownership of voting securities, by agreement or otherwise;
provided that beneficial ownership of 10% or more of the voting securities of
a Person shall be deemed to be control.
"Asset Sale" means (i) the sale, lease (other than an operating lease
entered into in the ordinary course of business), conveyance or other
disposition of any assets or rights (including, without limitation, by way of
a sale and leaseback) other than sales of inventory in the ordinary course of
business consistent with past practices (provided that the sale, lease,
conveyance or other disposition of all or substantially all of the assets of
the Issuer and its Restricted Subsidiaries taken as a whole will be governed
by the provisions of the Indenture described above under the caption "--
Repurchase at the Option of Holders--Change of Control" and/or the provisions
described above under the caption "--Certain Covenants--Merger, Consolidation
or Sale of Assets" and not by the provisions of the covenant described under
the caption "--Certain Covenants--Asset Sales"), and (ii) the sale by the
Issuer and the issue or sale by any of the Restricted Subsidiaries of the
Issuer of Equity Interests of any of the Issuer's Subsidiaries, in the case of
either clause (i) or (ii), whether in a single transaction or a series of
related transactions that have a fair market value (as determined in good
faith by the Board of Directors) in excess of $1.0 million or for net cash
proceeds in excess of $1.0 million. Notwithstanding the foregoing, the
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following shall not be deemed to be Asset Sales: (i) a transfer of assets by
the Issuer to a Wholly Owned Restricted Subsidiary of the Issuer or by a
Wholly Owned Restricted Subsidiary of the Issuer to the Issuer or to a Wholly
Owned Restricted Subsidiary of the Issuer, (ii) an issuance of Equity
Interests by a Restricted Subsidiary of the Issuer to the Issuer or to a
Wholly Owned Restricted Subsidiary of the Issuer, (iii) a Restricted Payment
that is permitted by the covenant described above under the caption "--Certain
Covenants--Restricted Payments," (iv) the sale and leaseback of any assets
within 90 days of the acquisition of such assets, provided that the sale price
of such assets is not materially less than the acquisition price of such
assets, and (v) the periodic clearance of aged inventory.
"Bank Facilities" means that certain credit facility, dated as of April 21,
1998, by and among the Issuer, DLJ Capital Funding, as Syndication Agent, Wells
Fargo, as Administrative Agent, Morgan Stanley Senior Funding, as Documentation
Agent, the Lenders party thereto and Donaldson, Lufkin & Jenrette Securities
Corporation ("DLJ"), as Arranger, providing for up to $105.0 million of
borrowings, including any related notes, guarantees, collateral documents,
instruments and agreements executed in connection therewith, and in each case as
amended, extended, modified, renewed, refunded, replaced or refinanced in whole
or in part from time to time, including any agreement restructuring or adding
Subsidiaries of the Issuer as additional borrowers or guarantors thereunder and
whether by the same or any other agent, lender or group of lenders.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized on a balance sheet in
accordance with GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of,
the issuing Person.
"Cash Equivalents" means (i) securities issued or unconditionally and fully
guaranteed or insured by the full faith and credit of the United States
government or any agency or instrumentality thereof having maturities of not
more than one year from the date of acquisition, (ii) obligations issued or
fully guaranteed by any state of the United States of America or any political
subdivision of any such state or any public instrumentality thereof maturing
within one year from the date of acquisition thereof and, at the time of
acquisition, having one of the two highest ratings obtainable from either
Standard & Poor's Ratings Group ("S&P") or Moody's Investors Service, Inc.
("Moody's"), (iii) certificates of deposit and eurodollar time deposits with
maturities of one year or less from the date of acquisition, bankers'
acceptances with maturities not exceeding one year and overnight bank
deposits, in each case with any lender party to the Bank Facilities or with
any domestic commercial bank having capital and surplus in excess of $250.0
million, (iv) repurchase obligations with a term of not more than seven days
for underlying securities of the types described in clauses (i) and (iii),
above entered into with any financial institution meeting the qualifications
specified in clause (iii) above, (v) commercial paper having one of the two of
the highest ratings obtainable from either Moody's or S&P and in each case
maturing within one year after the date of acquisition and (vi) investments in
funds investing exclusively in investments of the types described in clauses
(i) through (v) above.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all
or substantially all of the assets of the Issuer and its Subsidiaries taken as
a whole to any "person" (as such term is used in Section 13(d)(3) of the
Exchange Act), other than the Principals and their Related Parties, (ii) the
adoption of a plan relating to the liquidation or dissolution of the Issuer,
(iii) the consummation of any transaction (including, without limitation, any
merger or consolidation) the result of which is that (A) any "person" (as
defined above), other than the Principals and their Related Parties, becomes
the "beneficial owner" (as such term is defined in Rule 13d-3 and Rule 13d-5
under the Exchange Act), directly or indirectly, of 40% or more of the Voting
Stock of the Issuer (measured by voting power rather than number of shares)
and (B) the Principals
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and their Related Parties beneficially own, directly or indirectly, in the
aggregate a lesser percentage of the Voting Stock of the Issuer than such
other "person", (iv) the first day on which a majority of the members of the
Board of Directors of the Issuer are not Continuing Directors or (v) the
Issuer consolidates with, or merges with or into, any Person, or any Person
consolidates with, or merges with or into, the Issuer, in any such event
pursuant to a transaction in which any of the outstanding Voting Stock of the
Issuer is converted into or exchanged for cash, securities or other property,
other than any such transaction where (A) the Voting Stock of the Issuer
outstanding immediately prior to such transaction is converted into or
exchanged for Voting Stock (other than Disqualified Stock) of the surviving or
transferee Person and (B) either (1) the "beneficial owners" (as defined
above) of the Voting Stock of the Issuer immediately prior to such transaction
own, directly or indirectly through one or more subsidiaries, not less than a
majority of the total Voting Stock of the surviving or transferee corporation
immediately after such transaction or (2) if, immediately prior to such
transaction the Issuer is a direct or indirect subsidiary of any other Person
(such other Person, the "Holding Company"), then the "beneficial owners" (as
defined above) of the Voting Stock of such Holding Company immediately prior
to such transaction own, directly or indirectly through one or more
subsidiaries, not less than a majority of the Voting Stock of the surviving or
transferee corporation immediately after such transaction.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus (i) an amount
equal to any extraordinary loss plus any net loss realized in connection with
an Asset Sale (to the extent such losses were deducted in computing such
Consolidated Net Income of such Person and its Restricted Subsidiaries), plus
(ii) provision for taxes based on income or profits of such Person and its
Restricted Subsidiaries for such period, to the extent that such provision for
taxes was included in computing such Consolidated Net Income, plus (iii)
consolidated interest expense of such Person and its Restricted Subsidiaries
for such period, whether paid or accrued and whether or not capitalized
(including, without limitation, amortization of debt issuance costs and
original issue discount, non-cash interest payments, the interest component of
any deferred payment obligations, the interest component of all payments
associated with Capital Lease Obligations, commissions, discounts and other
fees and charges incurred in respect of letter of credit or bankers'
acceptance financings, and net payments (if any) pursuant to Hedging
Obligations), to the extent that any such expense was deducted in computing
such Consolidated Net Income, plus (iv) depreciation and amortization
(including amortization of goodwill and other intangibles but excluding
amortization of prepaid cash expenses that were paid in a prior period) and
other non-cash charges (excluding any such non-cash charge to the extent that
it represents an accrual of or reserve for cash charges in any future period
or amortization of a prepaid cash charge that was paid in a prior period) of
such Person and its Subsidiaries for such period to the extent that such
depreciation, amortization and other non-cash charges were deducted in
computing such Consolidated Net Income, minus (v) non-cash items increasing
such Consolidated Net Income for such period, in each case, on a consolidated
basis and determined in accordance with GAAP. Notwithstanding the foregoing,
the provision for taxes based on the income or profits of, and the
depreciation and amortization and other noncash charges of, a Restricted
Subsidiary of a Person shall be added to Consolidated Net Income to compute
Consolidated Cash Flow only to the extent (and in the same proportion) that
the Net Income of such Restricted Subsidiary was included in calculating the
Consolidated Net Income of such Person.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Subsidiaries for such
period, on a consolidated basis, determined in accordance with GAAP, provided
that (i) the Net Income (but not loss) of any Person that is not a Restricted
Subsidiary or that is accounted for by the equity method of accounting shall
be included only to the extent of the amount of dividends or distributions
paid in cash to the referent Person or a Restricted Subsidiary thereof, (ii)
the Net Income of any Restricted Subsidiary shall be excluded to the extent
that the declaration or payment of dividends or similar distributions by that
Restricted Subsidiary of that Net Income is not at the date of determination
permitted without any prior governmental approval (that has not been obtained)
or, directly or indirectly, by operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to that Restricted Subsidiary or its stockholders, (iii)
the Net Income of any Person acquired in a pooling of interests transaction
for any period prior to the date of such acquisition shall be excluded, and
(iv) the cumulative effect of a change in accounting principles shall be
excluded.
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"Continuing Directors" means, as of any date of determination, any member of
the Board of Directors of the Issuer or Holdings who (i) was a member of such
Board of Directors on the date of the Indenture immediately after consummation
of the Recapitalization or (ii) was nominated for election or elected to such
Board of Directors with the approval of a majority of the Continuing Directors
who were either members of such Board at the time of such nomination or
election or are successor Continuing Directors appointed by such Continuing
Directors (or their successors).
"Credit Facilities" means, with respect to the Issuer, one or more debt
facilities (including, without limitation, the Bank Facilities) or commercial
paper facilities with banks or other institutional lenders providing for
revolving credit loans, term loans, receivables financing (including through
the sale of receivables to such lenders or to special purpose entities formed
to borrow from such lenders against such receivables) or letters of credit, in
each case, as amended, restated, modified, renewed, refunded, replaced or
refinanced in whole or in part from time to time. Indebtedness under Credit
Facilities outstanding on the Issue Date shall be deemed to have been incurred
on such date in reliance on the exceptions provided by clause (i) of the
definition of Permitted Debt.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Designated Senior Debt" means (i) any Senior Debt outstanding under the
Bank Facilities and (ii) any other Senior Debt permitted under the Indenture
the principal amount of which is $25.0 million or more and that has been
designated by the Issuer as "Designated Senior Debt."
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable at the option of the holder thereof), or upon the happening of
any event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or redeemable at the option of the holder thereof, in
whole or in part, on or prior to the date that is 91 days after the date on
which the New Notes mature; provided, however, that a class of Capital Stock
shall not be Disqualified Stock hereunder solely as the result of any maturity
or redemption that is conditioned upon, and subject to, compliance with the
covenant described above under the caption "--Certain Covenants--Restricted
Payments"; and provided further, that Capital Stock issued to any plan for the
benefit of employees of the Issuer or its subsidiaries or by any such plan to
such employees shall not constitute Disqualified Stock solely because it may
be required to be repurchased by the Issuer in order to satisfy applicable
statutory or regulatory obligations.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Equity Offering" means an offering of common stock (other than Disqualified
Stock) of the Issuer or Holdings, pursuant to an effective registration
statement filed with the Commission in accordance with the Securities Act,
other than an offering pursuant to Form S-8 (or any successor thereto)
provided that in the case of an Equity Offering by Holdings, Holdings
contributes to the common equity of the Issuer the portion of the net cash
proceeds thereof necessary to pay the aggregate redemption price of the Notes
to be redeemed in connection therewith.
"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of (i) the consolidated interest expense of such Person
and its Restricted Subsidiaries for such period, whether paid or accrued
(including, without limitation, amortization of debt issuance costs and
original issue discount, non-cash interest payments, the interest component of
any deferred payment obligations, the interest component of all payments
associated with Capital Lease Obligations, commissions, discounts and other
fees and charges incurred in respect of letter of credit or bankers'
acceptance financings, and net payments (if any) pursuant to Hedging
Obligations; provided, however, that in no event shall any amortization of
deferred financing costs incurred in connection with the Recapitalization be
included in Fixed Charges), (ii) the consolidated interest expense of such
Person and its Restricted Subsidiaries that was capitalized during such
period, and (iii) any interest expense on
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Indebtedness of another Person that is Guaranteed by such Person or one of its
Restricted Subsidiaries or secured by a Lien on assets of such Person or one
of its Restricted Subsidiaries (whether or not such Guarantee or Lien is
called upon) and (iv) the product of (a) (without duplication) (1) all
dividends paid or accrued in respect of Disqualified Stock which are not
treated as interest for tax purposes for such period and (2) all cash dividend
payments on any series of preferred stock of such Person or any of its
Restricted Subsidiaries, other than dividend payments on Equity Interests
payable solely in Equity Interests (other than Disqualified Stock) of the
Company, times (b) a fraction, the numerator of which is one and the
denominator of which is one minus the then current combined federal, state and
local statutory tax rate of such Person, expressed as a decimal, in each case,
on a consolidated basis and in accordance with GAAP.
"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person and its
Restricted Subsidiaries for such period to the Fixed Charges of such Person
and its Restricted Subsidiaries for such period. In the event that the Issuer
or any of its Restricted Subsidiaries incurs, assumes, Guarantees, repays or
redeems any Indebtedness (other than revolving credit borrowings) or issues or
redeems preferred stock subsequent to the commencement of the period for which
the Fixed Charge Coverage Ratio is being calculated but prior to the date on
which the event for which the calculation of the Fixed Charge Coverage Ratio
is made (the "Calculation Date"), then the Fixed Charge Coverage Ratio shall
be calculated giving pro forma effect to such incurrence, assumption,
Guarantee, repayment or redemption of Indebtedness, or such issuance or
redemption of preferred stock, as if the same had occurred at the beginning of
the applicable four-quarter reference period. In addition, for purposes of
making the computation referred to above, (i) acquisitions that have been made
by the Issuer or any of its Restricted Subsidiaries, including through mergers
or consolidations and including any related financing transactions, during the
four-quarter reference period or subsequent to such reference period and on or
prior to the Calculation Date shall be deemed to have occurred on the first
day of the four-quarter reference period and Consolidated Cash Flow for such
reference period shall be calculated without giving effect to clause (iii) of
the proviso set forth in the definition of Consolidated Net Income and shall
reflect any pro forma expense and cost reductions attributable to such
acquisitions (to the extent such expense and cost reduction would be permitted
by the Commission to be reflected in pro forma financial statements included
in a registration statement filed with the Commission), and (ii) the
Consolidated Cash Flow attributable to discontinued operations, as determined
in accordance with GAAP, and operations or businesses disposed of prior to the
Calculation Date, shall be excluded and Consolidated Cash Flow shall reflect
any pro forma expense or cost reductions relating to such discontinuance or
disposition (to the extent such expense or cost reductions would be permitted
by the Commission to be reflected in pro forma financial statements included
in a registration statement filed with the Commission), and (iii) the Fixed
Charges attributable to discontinued operations, as determined in accordance
with GAAP, and operations or businesses disposed of prior to the Calculation
Date, shall be excluded, but only to the extent that the obligations giving
rise to such Fixed Charges will not be obligations of the referent Person or
any of its Subsidiaries following the Calculation Date.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the date of the Indenture provided,
however, that all reports and other financial information provided by the
Company to the holders, the Trustee and/or the Commission shall be prepared in
accordance with GAAP, as in effect on the date of such report or other
financial information.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Guarantors" means, initially, each Subsidiary of the Issuer on the Issue
Date and thereafter each of the Subsidiaries of the Issuer that executes a
Subsidiary Guarantee in accordance with the provisions of the Indenture, and
their respective successors and assigns.
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"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates or the value of foreign currencies.
"Holdings" means Diamond Brands Incorporated, a Minnesota corporation, the
corporate parent of the Issuer, or its successors.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced
by bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of
the purchase price of any property or representing any Hedging Obligations,
except any such balance that constitutes an accrued expense or trade payable,
if and to the extent any of the foregoing indebtedness (other than letters of
credit and Hedging Obligations) would appear as a liability upon a balance
sheet of such Person prepared in accordance with GAAP, as well as all
indebtedness of others secured by a Lien on any asset of such Person (whether
or not such indebtedness is assumed by such Person) and, to the extent not
otherwise included, the Guarantee by such Person of any indebtedness of any
other Person. The amount of any Indebtedness outstanding as of any date shall
be (i) the accreted value thereof, in the case of any Indebtedness that does
not require current payments of interest, and (ii) the principal amount
thereof in the case of any other Indebtedness.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP.
If the Issuer or any Restricted Subsidiary of the Issuer sells or otherwise
disposes of any Equity Interests of any direct or indirect Restricted
Subsidiary of the Issuer such that, after giving effect to any such sale or
disposition, such Person is no longer a Restricted Subsidiary of the Issuer,
the Issuer shall be deemed to have made an Investment on the date of any such
sale or disposition equal to the fair market value of the Equity Interests of
such Restricted Subsidiary not sold or disposed of in an amount determined as
provided in the final paragraph of the covenant described above under the
caption "--Certain Covenants--Restricted Payments."
"Issue Date" means the date on which Notes are first issued and
authenticated under the Indenture.
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the
nature thereof, and any option or other agreement to sell or give a security
interest therein).
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but
not loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b)
the extinguishment of any Indebtedness of such Person or any of its
Subsidiaries and (ii) any extraordinary or nonrecurring gain (but not loss),
together with any related provision for taxes on such extraordinary or
nonrecurring gain (but not loss).
"Net Proceeds" means the aggregate cash proceeds received by the Issuer or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of
any non-cash consideration received in any Asset Sale), net of the direct
costs relating to such Asset Sale (including, without limitation, legal,
accounting and investment banking fees, and sales commissions)
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and any relocation expenses incurred as a result thereof, taxes paid or
payable as a result thereof (after taking into account any available tax
credits or deductions and any tax sharing arrangements), amounts required to
be applied to the repayment of Indebtedness (other than Indebtedness under the
Credit Facilities) secured by a Lien on the asset or assets that were the
subject of such Asset Sale and any reserve for adjustment in respect of the
sale price of such asset or assets established in accordance with GAAP.
"Non-Recourse Debt" means Indebtedness (i) as to which neither the Issuer
nor any of its Restricted Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness), or (b) is directly or indirectly liable (as a guarantor or
otherwise) and (ii) as to which the lenders have been notified in writing that
they will not have any recourse to the stock or assets of the Issuer or any of
its Restricted Subsidiaries, including the stock of such Unrestricted
Subsidiary.
"Obligations" means, with respect to any Indebtedness, any principal,
interest, penalties, fees, indemnifications, reimbursements, damages and other
liabilities payable under the documentation governing any Indebtedness.
"Pari Passu Indebtedness" means Indebtedness that ranks pari passu in right
of payment to the Notes.
"Permitted Business" means the design, manufacture, importing, exporting,
distribution, marketing, licensing and wholesale and retail sale of household
and consumer goods, molded plastic goods and woodenware, and businesses
reasonably related thereto.
"Permitted Investments" means (a) any Investment in the Issuer or in a
Restricted Subsidiary of the Issuer; (b) any Investment in Cash and Cash
Equivalents; (c) any Investment by the Issuer or any Restricted Subsidiary in
a Person, if as a result of such Investment (i) such Person becomes a
Restricted Subsidiary of the Issuer or (ii) such Person is merged,
consolidated or amalgamated with or into, or transfers or conveys
substantially all of its assets to, or is liquidated into, the Issuer or a
Restricted Subsidiary of the Issuer; (d) any Restricted Investment made as a
result of the receipt of non-cash consideration from an Asset Sale that was
made pursuant to and in compliance with the covenant described above under the
caption "--Repurchase at the Option of Holders--Asset Sales" or any
transaction not constituting an Asset Sale by reason of the $1.0 million
threshold contained in the definition thereof; (e) any acquisition of assets
solely in exchange for the issuance of Equity Interests (other than
Disqualified Stock) of the Issuer; (f) Hedging Obligations entered into in the
ordinary course of the Issuer's or its Restricted Subsidiaries' Businesses and
otherwise in compliance with the Indenture; (g) loans and advances to
employees and officers of the Issuer and its Restricted Subsidiaries in the
ordinary course of business for bona fide business purposes not in excess of
$2.0 million at any one time outstanding; (h) additional Investments not to
exceed $8.0 million at any one time outstanding; and (i) Investments in
securities of trade creditors or customers received in settlement of
obligations or pursuant to any plan of reorganization or similar arrangement
upon the bankruptcy or insolvency of such trade creditors or customers.
"Permitted Junior Securities" means Equity Interests in the Issuer or debt
securities that are subordinated to all Senior Debt (and any debt securities
issued in exchange for Senior Debt) to substantially the same extent as, or to
a greater extent than, the Notes are subordinated to Senior Debt pursuant to
Article 10 of the Indenture, that have a final maturity date and a weighted
average life to maturity which is the same as or greater than the New Notes
and that are not secured by any collateral.
"Permitted Liens" means (i) Liens existing as of the Issue Date to the
extent and in the manner such Liens are in effect on the Issue Date (other
than Liens to be extinguished in connection with the Recapitalization); (ii)
Liens securing Senior Debt and Liens on assets of Restricted Subsidiaries
securing Guarantees of Senior Debt permitted to be incurred under the
Indenture; (iii) Liens securing the New Notes and the Subsidiary Guarantees;
(iv) Liens of the Issuer or a Wholly Owned Restricted Subsidiary on assets of
any Restricted Subsidiary of the Issuer; (v) Liens securing Permitted
Refinancing Indebtedness which is incurred to refinance any Indebtedness which
has been secured by a Lien permitted under the Indenture and which has been
incurred in accordance with the provisions of the Indenture; provided,
however, that such Liens (A) are not materially less favorable to
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holders and are not materially more favorable to the lienholders with respect
to such Liens than the Liens in respect of the Indebtedness being refinanced
and (B) do not extend to or cover any property or assets of the Issuer or any
of its Restricted Subsidiaries not securing the Indebtedness so refinanced;
(vi) Liens for taxes, assessments or governmental charges or claims that are
either (A) not delinquent or (B) being contested in good faith by appropriate
proceedings and as to which the Issuer or its Restricted Subsidiaries shall
have set aside on its books such reserves as may be required pursuant to GAAP;
(vii) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, supplies, materialmen, repairmen and other Liens imposed by law
incurred in the ordinary course of business for sums not yet delinquent for a
period of more than 60 days or being contested in good faith, if such reserve
or other appropriate provision, if any, as shall be required by GAAP shall
have been made in respect thereof; (viii) Liens incurred or deposits made in
the ordinary course of business in connection with workers' compensation,
unemployment insurance an other types of social security or similar
obligations, including any Lien securing letters of credit issued in the
ordinary course of business consistent with past practice in connection
therewith, or to secure the performance of tenders, statutory obligations,
surety and appeal bonds, bids, leases, government contracts, performance and
return-of-money bonds and other similar obligations (exclusive of obligations
for the payment of borrowed money); (ix) judgment Liens not giving rise to an
Event of Default so long as such Lien is adequately bonded and any appropriate
legal proceedings which may have been duly initiated for the review of such
judgment shall not have been finally terminated or the period within which
such proceedings may be initiated shall not have expired; (x) easements,
rights-of-way, zoning restrictions and other similar charges or encumbrances
in respect of real property not interfering in any material respect with the
ordinary conduct of the business of the Issuer or any of its Restricted
Subsidiaries; (xi) any interest or title of a lessor under any lease, whether
or not characterized as capital or operating; provided that such Liens do not
extend to any property or assets which is not leased property subject to such
lease; (xii) Liens securing Capital Lease Obligations and purchase money
Indebtedness incurred in accordance with the covenant described under "--
Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred
Stock;" provided, however, that (A) the Indebtedness shall not exceed the cost
of such property or assets being acquired or constructed and shall not be
secured by any property or assets of the Issuer or any Restricted Subsidiary
of the Issuer other than the property or assets of the Issuer or any
Restricted Subsidiary of the Issuer other than the property and assets being
acquired or constructed and (B) the Lien securing such Indebtedness shall be
created within 90 days of such acquisition or construction; (xiii) Liens upon
specific items of inventory or other goods and proceeds of any Person securing
such Person's obligations in respect of bankers' acceptances issued or created
for the account of such Person to facilitate the purchase, shipment or storage
of such inventory or other goods; (xiv) Liens securing reimbursement
obligations with respect to letters of credit which encumber documents and
other property relating to such letters of credit and products and proceeds
thereof; (xv) Liens encumbering deposits made to secure obligations arising
from statutory, regulatory, contractual, or warranty requirements of the
Issuer or any of its Restricted Subsidiaries, including rights of offset an
set-off; (xvi) Liens securing Hedging Obligations which Hedging Obligations
relate to Indebtedness that is otherwise permitted under the Indenture; (xvii)
Liens securing Acquired Debt incurred in accordance with the covenant
described under "--Certain Covenants--Incurrence of Indebtedness and Issuance
of Preferred Stock"; provided that (A) such Liens secured such Acquired Debt
at the time of and prior to the incurrence of such Acquired Debt by the Issuer
or a Restricted Subsidiary of the Issuer and were not granted in connection
with, or in anticipation of, the incurrence of such Acquired Debt by the
Issuer or a Restricted Subsidiary of the Issuer and (B) such Liens do not
extend to or cover any property or assets of the Issuer or any of its
Restricted Subsidiaries other than the property or assets that secured the
Acquired Debt prior to the time such Indebtedness became Acquired Debt of the
Issuer or a Restricted Subsidiary of the Issuer and are not more favorable to
the lienholders than those securing the Acquired Debt prior to the incurrence
of such Acquired Debt by the Issuer or a Restricted Subsidiary of the Issuer;
and (xviii) leases or subleases granted to others not interfering in any
material respect with the business of the Issuer or its Restricted
Subsidiaries.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Issuer or
any of its Subsidiaries issued in exchange for, or the net proceeds of which
are used to extend, refinance, prepay, retire, renew, replace, defease or
refund Indebtedness of the Issuer or any of its Subsidiaries (other than such
Indebtedness described in clauses (i), (vi), (vii), (viii), (ix), (x), (xii)
and (xiii) of the covenant described above under the caption "--
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<PAGE>
Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred
Stock"); provided that: (i) the principal amount (or accreted value, if
applicable) of such Permitted Refinancing Indebtedness does not exceed the
principal amount of (or accreted value, if applicable), plus accrued interest
on, the Indebtedness so extended, refinanced, renewed, prepaid, retired,
replaced, defeased or refunded (plus the amount of reasonable expenses
incurred in connection therewith including premiums paid, if any, to the
holders thereof); (ii) such Permitted Refinancing Indebtedness has a final
maturity date at or later than the final maturity date of, and has a Weighted
Average Life to Maturity equal to or greater than the Weighted Average Life to
Maturity of, the Indebtedness being extended, refinanced, renewed, prepaid,
retired, replaced, defeased or refunded; (iii) if the Indebtedness being
extended, refinanced, renewed, prepaid, retired, replaced, defeased or
refunded is subordinated in right of payment to the New Notes, such Permitted
Refinancing Indebtedness has a final maturity date later than the final
maturity date of, and is subordinated in right of payment to, the New Notes on
terms at least as favorable to the holders of New Notes as those contained in
the documentation governing the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded; and (iv) such Indebtedness is
incurred either by the Issuer or by the Restricted Subsidiary who is the
obligor on the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded.
"Person" means any individual, partnership, corporation, limited liability
company, unincorporated organization, trust or joint venture, or a
governmental agency or political subdivision thereof.
"Principals" means Seaver Kent--TPG Partners, L.P. and Seaver Kent I
Parallel, L.P.
"Qualified Proceeds" means any of the following or any combination of the
following: (i) cash, (ii) Cash Equivalents, (iii) long-term assets that are
used or useful in a Permitted Business and (iv) the Capital Stock of any
Person engaged primarily in a Permitted Business if, in connection with the
receipt by the Issuer or any Restricted Subsidiary of the Issuer of such
Capital Stock, (a) such Person becomes a Wholly Owned Restricted Subsidiary
and a Guarantor or (b) such Person is merged, consolidated or amalgamated with
or into, or transfers or conveys substantially all of its assets to, or is
liquidated into, the Issuer or any Wholly Owned Restricted Subsidiary of the
Issuer that is a Guarantor.
"Related Party" with respect to any Principal means (A) any controlling
stockholder or a majority of (or more) owned Subsidiary of such Principal or,
in the case of an individual, any spouse or immediate family member of such
Principal, or (B) any trust, corporation, partnership or other entity, the
beneficiaries, stockholders, partners, owners or Persons beneficially holding
a majority (or more) controlling interest of which consist of such Principal
and/or such other Persons referred to in the immediately preceding clause (A).
Without limiting the generality of the foregoing, each of SKC GenPar LLC, TPG
Advisors II, Inc. and their respective Affiliates shall be deemed to be
Related Parties of the Principals.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" means any Subsidiary of the Issuer other than an
Unrestricted Subsidiary.
"Senior Debt" means (i) all Indebtedness of the Issuer or any Guarantor
outstanding under Credit Facilities and all Hedging Obligations with respect
thereto, (ii) other Indebtedness of the Issuer or any of its Guarantors
permitted to be incurred under the terms of the Indenture, unless the
instrument under which such Indebtedness is incurred expressly provides that
it is on a parity with or subordinated in right of payment to the New Notes
and (iii) all Obligations with respect to the foregoing. Notwithstanding
anything to the contrary in the foregoing, Senior Debt will not include (w)
any liability for federal, state, local or other taxes owed or owing by the
Issuer, (x) any Indebtedness of the Issuer to any of its Subsidiaries or other
Affiliates, (y) any trade payables or (z) any Indebtedness that is incurred in
violation of the Indenture.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Act, as such Regulation is in effect on the date of the
Indenture.
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"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations
to repay, redeem or repurchase any such interest or principal prior to the
date originally scheduled for the payment thereof.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total
Voting Stock thereof is at the time owned or controlled, directly or
indirectly, by such Person or one or more of the other Subsidiaries of that
Person (or a combination thereof) and (ii) any partnership (a) the sole
general partner or the managing general partner of which is such Person or a
Subsidiary of such Person or (b) the only general partners of which are such
Person or of one or more Subsidiaries of such Person (or any combination
thereof).
"Tax Sharing Agreement" means, the tax sharing agreement among Holdings, the
Issuer and any one or more of Holdings' subsidiaries, as amended from time to
time, so long as the method of calculating the amount of the Issuer's (or any
Restricted Subsidiary's) payments, if any, to be made thereunder is not less
favorable to the Issuer than as provided in such agreement as in effect on the
Issue Date, as determined in good faith by the Board of Directors of the
Issuer.
"Unrestricted Subsidiary" means any Subsidiary (other than the Subsidiary
Guarantors as of the date of the Indenture or any successor to any of them) of
the Issuer that is designated by the Board of Directors as an Unrestricted
Subsidiary pursuant to a Board Resolution, but only to the extent that such
Subsidiary: (a) has no Indebtedness other than Non-Recourse Debt; (b) is not
party to any agreement, contract, arrangement or understanding with the Issuer
or any Restricted Subsidiary unless the terms of any such agreement, contract,
arrangement or understanding are no less favorable to the Issuer or such
Restricted Subsidiary than those that might be obtained at the time from
Persons who are not Affiliates of the Issuer; (c) is a Person with respect to
which neither the Issuer nor any of its Restricted Subsidiaries has any direct
or indirect obligation (x) to subscribe for additional Equity Interests or (y)
to maintain or preserve such Person's financial condition or to cause such
Person to achieve any specified levels of operating results; (d) has not
guaranteed or otherwise directly or indirectly provided credit support for any
Indebtedness of the Issuer or any of its Restricted Subsidiaries; and (e) has
at least one director on its board of directors that is not a director or
executive officer of the Issuer or any of its Restricted Subsidiaries and has
at least one executive officer that is not a director or executive officer of
the Issuer or any of its Restricted Subsidiaries. Any such designation by the
Board of Directors shall be evidenced to the Trustee by filing with the
Trustee a certified copy of the Board Resolution giving effect to such
designation and an Officers' Certificate certifying that such designation
complied with the foregoing conditions and was permitted by the covenant
described above under the caption "--Certain Covenants--Restricted Payments."
If, at any time, any Unrestricted Subsidiary would fail to meet the foregoing
requirements as an Unrestricted Subsidiary, it shall thereafter cease to be an
Unrestricted Subsidiary for purposes of the Indenture and any Indebtedness of
such Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of
the Issuer as of such date. The Board of Directors of the Issuer may at any
time designate any Unrestricted Subsidiary to be a Restricted Subsidiary;
provided that such designation shall be deemed to be an incurrence of
Indebtedness and issuance of preferred stock by a Restricted Subsidiary of the
Issuer of any outstanding Indebtedness or outstanding issue of preferred stock
of such Unrestricted Subsidiary and such designation shall only be permitted
if (i) such Indebtedness and preferred stock is permitted under the covenant
described under the caption "--Certain Covenants--Incurrence of Indebtedness
and Issuance of Preferred Stock" calculated on a pro forma basis as if such
designation had occurred at the beginning of the four quarter reference
period, (ii) such Subsidiary becomes a Subsidiary Guarantor, and (iii) no
Default or Event of Default would exist following such designation.
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment, by (ii) the then outstanding
principal amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall
at the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person or by such Person and one or more "Wholly Owned
Restricted Subsidiaries of such Person."
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a general summary of the material United States federal
income tax consequences of the ownership and disposition of the New Notes and
the exchange of Old Notes for New Notes that may be relevant to a holder of an
Old Note or New Note. This summary is based on laws, regulations, rulings and
decisions now in effect, all of which are subject to change (possibly with
retroactive effect) and to differing interpretations. This summary deals only
with holders that will acquire their New Notes at original issuance and will
hold New Notes as capital assets, and does not address tax considerations
applicable to investors that may be subject to special tax rules, such as banks,
tax-exempt entities, insurance companies or dealers in securities or currencies,
persons that will hold New Notes as a position in a "straddle" or conversion
transaction, or as part of a "synthetic security" or other integrated financial
transaction or persons that have a "functional currency" other than the U.S.
dollar.
As used herein, the term "United States holder" means a beneficial owner of
a New Note that is a United States person or that otherwise is subject to
United States federal income taxation on a net income basis in respect of the
New Notes. The term "United States person" means a holder of a New Note who is
a citizen or resident of the United States, or that is a corporation,
partnership or other entity created or organized in or under the laws of the
United States or any political subdivision thereof, an estate the income of
which is subject to United States federal income taxation regardless of its
source or a trust if: (i) a U.S. court is able to exercise primary supervision
over the trust's administration and (ii) one or more United States persons
have the authority to control all of the trust's substantial decisions. The
term "United States" means the United States of America (including the States
and the District of Columbia), its possessions, territories and other areas
subject to its jurisdiction.
EXCHANGE OF OLD NOTES FOR NEW NOTES
The exchange of Old Notes for New Notes (the "Exchange") pursuant to the
Exchange Offer will not be a taxable event for U.S. federal income tax
purposes. As a result, no material U.S. federal income tax consequences will
result to United States holders exchanging Old Notes for New Notes. A
tendering holder's tax basis in the New Notes will be the same as such
holder's tax basis in its Old Notes. A tendering holder's holding period for
the New Notes received pursuant to the Exchange Offer will include its holding
period for the Old Notes surrendered therefor.
ALL HOLDERS OF OLD NOTES ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS
REGARDING THE U.S. FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THE
EXCHANGE OF OLD NOTES FOR NEW NOTES AND OF THE OWNERSHIP AND DISPOSITION OF
NEW NOTES RECEIVED IN THE EXCHANGE OFFER IN VIEW OF THEIR OWN PARTICULAR
CIRCUMSTANCES.
UNITED STATES HOLDERS
PAYMENTS OF INTEREST
Payments of interest on a New Note will be taxable to a United States holder
as ordinary interest income at the time that such payments are accrued or are
received (in accordance with the United States holder's method of tax
accounting).
LIQUIDATED DAMAGES
Any Liquidated Damages (described herein under "Description of the New
Notes--Registration Rights; Liquidated Damages") will be taxable to a United
States holder as ordinary income in accordance with such United States
holder's method of tax accounting.
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PURCHASE, SALE AND RETIREMENT OF NEW NOTES
A United States holder's tax basis in a New Note received in the Exchange
for an Old Note generally will be equal to the United States holder's tax
basis in the Old Note.
Upon the sale, exchange, or retirement of a New Note, a United States holder
generally will recognize gain or loss equal to the difference between the
amount realized on the sale, exchange or retirement (less any accrued interest,
which will be taxable as such) and the United States holder's tax basis in such
New Note. Gain or loss realized by a United States holder on the sale, exchange
or retirement of a New Note generally will be long-term capital gain or loss
if, at the time of the disposition, the United States holder's holding period
for such New Note is more than one year. Under recently enacted legislation,
long-term capital gain recognized by an individual holder in respect of New
Notes with a holding period of more than one year at the time of disposition
generally will be subject to a maximum rate of 20 percent, effective for
amounts properly taken into account on or after January 1, 1998.
INFORMATION REPORTING AND BACKUP WITHHOLDING
A noncorporate United States holder may be subject to information reporting
and to backup withholding at a rate of 31 percent with respect to payments of
principal and interest made on a New Note, or on proceeds of disposition of a
New Note before maturity, unless such United States holder provides proof of
an applicable exemption or a correct taxpayer identification number, and
otherwise complies with applicable requirements of the information reporting
and backup withholding rules.
Any amounts withheld under the backup withholding rules will be allowed as a
refund or credit against the United States person's United States income tax
liability provided that the required information is furnished to the Internal
Revenue Service ("IRS").
NON-UNITED STATES HOLDERS
Under current United States federal income tax law: (i) payment of interest
to a holder who is not a United States holder (a "non-United States holder")
will not be subject to withholding of United States federal income tax,
provided that (a) the holder does not actually or constructively own 10
percent or more of the combined voting power of all classes of stock of the
Company and is not a controlled foreign corporation related to the Company
through stock ownership and (b) the beneficial owner provides a statement
signed under penalties of perjury that includes its name and address and
certifies that it is a non-United States holder in compliance with applicable
requirements or, with respect to payments made after December 31, 1999,
satisfies certain documentary evidence requirements for establishing that it
is a non-United States holder; and (ii) a non-United States holder will not be
subject to United States federal income tax on gain realized on the
disposition of a New Note. Notwithstanding the above, a non-United States
holder that is subject to United States federal income taxation on a net
income basis with respect to its income from a New Note generally will be
subject to the same rules to which a United States holder is subject with
respect to the accrual of interest on a New Note and with respect to gain or
loss realized or recognized on the disposition of a New Note. Special rules
might also apply to a non-United States holder that is a qualified resident of
a country with which the United States has an income tax treaty. A New Note
held by an individual non-United States holder who at the time of death is a
nonresident alien will not be subject to United States federal estate tax,
provided that such holder did not at the time of death actually or
constructively own 10 percent or more of the combined voting power of all
classes of stock in the Company.
INFORMATION REPORTING AND BACKUP WITHHOLDING
United States information reporting requirements and backup withholding tax
will not apply to payments on, or proceeds from the disposition of, a New Note
if the beneficial owner certifies its non-United States status under penalties
of perjury (or, with respect to payments made after December 31, 1999,
satisfies certain documentary evidence requirements for establishing that it
is a non-United States holder) or otherwise establishes an exemption; provided
that neither the Company nor its payment agent has actual knowledge that the
person is a United States person or that the conditions of any other exemption
are not in fact satisfied.
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Any amounts withheld under the backup withholding rules will be allowed as a
refund or credit against the non-United States person's United States income
tax liability, provided that the required information is furnished to the IRS.
On October 7, 1997, the U.S. Treasury Department issued final Treasury
regulations (and subsequently released guidance regarding the effective date
of such Treasury regulations) (the "Treasury Regulations") governing
information reporting and the certification procedures regarding withholding
and backup withholding on certain amounts paid to non-United States persons
after December 31, 1999. Such regulations, among other things, may change the
certification procedures relating to the receipt by intermediaries of payments
on behalf of a beneficial owner of a New Note. Prospective investors should
consult their tax advisors regarding the effect, if any, of such new Treasury
Regulations on an investment in the New Notes.
With respect to payments made after December 31, 1999, for purposes of
applying the rules set forth in the four preceding paragraphs to an entity
that is treated as fiscally transparent (e.g., a partnership or certain
trusts) for United States federal income taxation purposes, the beneficial
owner means each of the ultimate beneficial owners of the entity.
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<PAGE>
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus meeting
the requirements of the Securities Act in connection with any resale of such
New Notes. This Prospectus, as it may be amended or supplemented from time to
time, may be used by a broker-dealer in connection with resales of New Notes
received in exchange for Old Notes where such Old Notes were acquired as a
result of market-making activities or other trading activities. The Issuer and
the Guarantors have agreed that they will make this Prospectus available to
any Participating Broker-Dealer for a period of time not to exceed one year
after the date on which the Exchange Offer is consummated for use in
connection with any such resale. In addition, until such date, all broker-
dealers effecting transactions in the New Notes may be required to deliver a
prospectus.
Neither the Issuer nor the Guarantors will receive any proceeds from any
sale of New Notes by broker-dealers. New Notes received by broker-dealers for
their own account pursuant to the Exchange Offer may be sold from time to time
in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the New Notes or a combination
of such methods of resale, at market prices prevailing at the time of resale,
at prices related to such prevailing market prices or negotiated prices. Any
such resale may be made directly to purchasers or to or through brokers or
dealers who may receive compensation in the form of commissions or concessions
from any such broker-dealer and/or the purchasers of any such New Notes. Any
broker-dealer that resells New Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such New Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of New Notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that by acknowledging that it
will deliver and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.
Starting on the Expiration Date, the Issuer and the Guarantors will promptly
send additional copies of this Prospectus and any amendment or supplement to
this Prospectus to any broker-dealer that requests such documents in the
Letter of Transmittal. The Issuer has agreed to pay all expenses incident to
the Exchange Offer (including the expenses of one counsel for the holders of
the Old Notes) other than commissions or concessions of any brokers or dealers
and will indemnify the holders of the Old Notes (including any broker-dealers)
against certain liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
The validity of the New Notes has been passed upon for the Issuer by Cleary,
Gottlieb, Steen & Hamilton, New York, New York.
EXPERTS
The audited consolidated financial statements and schedules of Diamond
Brands Incorporated and subsidiaries in this Prospectus and elsewhere in the
Registration Statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
accounting and auditing in giving said reports.
99
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DIAMOND BRANDS INCORPORATED AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1996 AND 1997 AND
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997:
Report of Independent Public Accountants .............................. F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997 .......... F-3
Consolidated Statements of Operations for the Years Ended December 31,
1995, 1996 and 1997 .................................................. F-4
Consolidated Statements of Stockholders' Equity ....................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1995, 1996 and 1997 .................................................. F-6
Notes to Consolidated Financial Statements ............................ F-7
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1997
AND JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND
JUNE 30, 1998:
Unaudited Consolidated Balance Sheet as of December 31, 1997 and June
30, 1998 ............................................................. F-16
Unaudited Consolidated Statements of Operations for the Six
Months Ended June 30, 1997 and 1998 .................................. F-17
Unaudited Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1997 and 1998 ......................................... F-18
Notes to Unaudited Consolidated Financial Statements .................. F-19
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Diamond Brands Incorporated:
We have audited the accompanying consolidated balance sheets of Diamond
Brands Incorporated (a Minnesota corporation) and Subsidiaries as of December
31, 1996 and 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Diamond
Brands Incorporated and Subsidiaries as of December 31, 1996 and 1997, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Minneapolis, Minnesota,
February 6, 1998, except
as to Note 8, which is as
of April 21, 1998
F-2
<PAGE>
DIAMOND BRANDS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
AS OF DECEMBER
31,
----------------
1996 1997
------- -------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Accounts receivable, net of allowances of $639 and $1,195,
respectively.............................................. $ 9,868 $15,526
Inventories................................................ 11,790 20,744
Deferred income taxes...................................... 1,875 --
Prepaid expenses........................................... 303 406
------- -------
Total current assets..................................... 23,836 36,676
------- -------
PROPERTY, PLANT AND EQUIPMENT:
Land....................................................... 558 558
Buildings and improvements................................. 5,896 5,955
Machinery and equipment.................................... 22,344 27,664
------- -------
Property, plant and equipment............................ 28,798 34,177
Less--Accumulated depreciation........................... (13,528) (16,633)
------- -------
Property, plant and equipment, net....................... 15,270 17,544
GOODWILL..................................................... 26,540 39,454
DEFERRED FINANCING COSTS..................................... 857 876
------- -------
Total assets............................................. $66,503 $94,550
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt....................... $ 6,573 $ 7,892
Accounts payable........................................... 3,834 4,500
Accrued expenses........................................... 8,020 11,037
------- -------
Total current liabilities................................ 18,427 23,429
POSTRETIREMENT BENEFIT OBLIGATIONS........................... 1,551 1,586
DEFERRED INCOME TAXES........................................ 499 --
LONG-TERM DEBT, net of current maturities.................... 28,272 41,605
------- -------
Total liabilities........................................ 48,749 66,620
------- -------
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value; 50,000 shares
authorized; 16,112 shares issued and outstanding.......... 161 161
Additional paid-in capital................................. 774 774
Retained earnings.......................................... 16,819 26,995
------- -------
Total stockholders' equity............................... 17,754 27,930
------- -------
Total liabilities and stockholders' equity............... $66,503 $94,550
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
DIAMOND BRANDS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1996 1997
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
NET SALES............................................. $77,659 $90,201 $118,072
COST OF SALES......................................... 56,490 63,032 78,582
------- ------- --------
Gross profit........................................ 21,169 27,169 39,490
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.......... 10,152 9,148 11,414
GOODWILL AMORTIZATION................................. 600 720 1,521
------- ------- --------
Operating income.................................... 10,417 17,301 26,555
INTEREST EXPENSE...................................... 3,963 3,858 4,550
------- ------- --------
Income before provision for income taxes............ 6,454 13,443 22,005
PROVISION FOR INCOME TAXES (Note 5)................... 2,352 5,807 1,376
------- ------- --------
Net income.......................................... $ 4,102 $ 7,636 $ 20,629
======= ======= ========
UNAUDITED PRO FORMA NET INCOME:
Income before provision for income taxes............ $ 6,454 $13,443 $ 22,005
Pro forma income tax expense (Note 5)............... 2,700 5,807 9,000
------- ------- --------
Pro forma net income................................ $ 3,754 $ 7,636 $ 13,005
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
DIAMOND BRANDS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
---------------
ADDITIONAL
NUMBER OF PAR PAID-IN RETAINED
SHARES VALUE CAPITAL EARNINGS TOTAL
--------- ----- ---------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994......... 16,133 $161 $782 $ 5,081 $ 6,024
Retirement of common stock....... (20) -- (8) -- (8)
Net income....................... -- -- -- 4,102 4,102
------ ---- ---- ------- -------
BALANCE, December 31, 1995......... 16,113 161 774 9,183 10,118
Net income....................... -- -- -- 7,636 7,636
------ ---- ---- ------- -------
BALANCE, December 31, 1996......... 16,113 161 774 16,819 17,754
Distribution to stockholders..... -- -- -- (10,453) (10,453)
------ ---- ---- ------- -------
Net income....................... -- -- -- 20,629 20,629
------ ---- ---- ------- -------
BALANCE, December 31, 1997......... 16,113 $161 $774 $26,995 $27,930
====== ==== ==== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
DIAMOND BRANDS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1996 1997
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income........................................ $ 4,102 $ 7,636 $20,629
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization................... 4,073 4,553 5,008
Deferred income taxes........................... (611) 160 1,376
Change in operating assets and liabilities, net
of effects of acquisitions:
Accounts receivable........................... (1,798) 434 (2,773)
Inventories................................... 1,352 (555) (1,727)
Prepaid expenses.............................. 212 438 23
Accounts payable.............................. (1,413) (402) (594)
Accrued expenses.............................. (1,338) 1,533 (664)
Other liabilities............................. (126) 50 35
------- ------- -------
Net cash provided by operating activities..... 4,453 13,847 21,313
------- ------- -------
INVESTING ACTIVITIES:
Acquisitions, net of cash received................ (42,433) -- (24,696)
Purchases of property, plant and equipment........ (1,926) (1,979) (4,050)
------- ------- -------
Net cash used for investing activities........ (44,359) (1,979) (28,746)
------- ------- -------
FINANCING ACTIVITIES:
Borrowings under revolving line of credit......... 18,600 20,300 30,300
Repayments under revolving line of credit......... (9,600) (25,500) (29,100)
Long-term borrowings.............................. 32,000 -- 21,000
Repayments of long-term borrowings................ (3,010) (6,668) (7,548)
Distribution paid to stockholders................. -- -- (6,849)
Retirement of common stock........................ (8) -- --
Debt issuance costs............................... (1,420) -- (370)
------- ------- -------
Net cash provided by (used for) financing ac-
tivities..................................... 36,562 (11,868) 7,433
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVA-
LENTS.............................................. (3,344) -- --
CASH AND CASH EQUIVALENTS, beginning of year........ 3,344 -- --
------- ------- -------
CASH AND CASH EQUIVALENTS, end of year.............. $ -- $ -- $ --
======= ======= =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for--
Interest........................................ $ 3,658 $ 3,882 $ 4,206
======= ======= =======
Income taxes.................................... $ 3,196 $ 4,504 $ 283
======= ======= =======
SUPPLEMENTAL NONCASH FINANCING ACTIVITIES:
Distribution to stockholders declared but not yet
paid............................................. $ -- $ -- $ 3,604
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
DIAMOND BRANDS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
1. BUSINESS DESCRIPTION
Diamond Brands Incorporated ("Holdings") and its wholly-owned subsidiary,
Forster, Inc. ("Forster"), are engaged in the development, production and
distribution of household and consumer products throughout the United States
primarily to grocery stores and mass merchandisers. Their products include
plastic cutlery, wooden matches, toothpicks, clothespins and other wood
products. Holding's wholly-owned subsidiary, Empire Candle, Inc. ("Empire"),
formerly Empire Manufacturing Company, is a manufacturer of scented and
citronella candles which are distributed throughout the United States and
Canada. During 1995, 1996 and 1997, one customer accounted for 17%, 18% and
18% of net sales, respectively.
2. ACQUISITIONS
On March 5, 1995, Holdings acquired all of the outstanding common shares of
Forster for $42,589,000 (the "Forster Acquisition"). The Company accounted for
the acquisition under the purchase method of accounting. Accordingly, the
purchase price has been allocated to the assets acquired and the liabilities
assumed based on their estimated fair values at the date of acquisition. The
excess of the purchase price over the prior carrying amount of Forster's net
assets as of March 5, 1995 of $25,200,000, was allocated as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Goodwill.................................................... $27,862
Deferred financing costs.................................... (603)
Accrued expenses............................................ (2,059)
-------
$25,200
=======
</TABLE>
On February 28, 1997, Holdings acquired Empire (the "Empire Acquisition").
Certain assets were acquired and liabilities assumed by Holdings for
$26,000,000, subject to postclosing adjustments. The Company accounted for the
acquisition under the purchase method of accounting. The excess of the purchase
price over the prior carrying amount of Empire's net assets as of February 28,
1997 of $14,819,000, was allocated as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Goodwill.................................................... $14,436
Property, plant and equipment............................... 383
-------
$14,819
=======
</TABLE>
Pro forma results of operations of the Company (unaudited) for the years
ended December 31, 1996 and 1997 as though Empire had been acquired on January
1, 1996 are as follows:
<TABLE>
<CAPTION>
1996 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Net sales................................................ $113,926 $120,714
======== ========
Net income............................................... $ 10,050 $ 20,521
======== ========
</TABLE>
F-7
<PAGE>
DIAMOND BRANDS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND 1997
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Diamond Brands
Incorporated and its subsidiaries (the "Company"), all of which are wholly-
owned. All significant intercompany accounts and transactions have been
eliminated in consolidation.
RECLASSIFICATIONS
Certain reclassifications have been made in the 1995 and 1996 financial
statements to conform with the 1997 presentation. Such reclassifications had
no effect on previously reported results of operations or stockholders'
equity.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Ultimate results reporting could differ from those
estimates.
RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures
About Segments of an Enterprise and Related Information," issued in June 1997
and effective for financial statements beginning after December 15, 1997,
redefines how operating segments are determined and requires expanded
quantitative and qualitative disclosures relating to a company's operating
segments. The Company anticipates that the effect of adopting SFAS No. 131
will not be significant.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the consolidated balance sheets at December
31, 1997 and 1996 for accounts receivable and payable approximate fair value
because of the immediate or short-term maturity of these financial
instruments. As the interest rate on the term note and revolving line of
credit is reset monthly based on current market rates, the carrying value of
the term note and revolving line of credit approximates fair value. The fair
value of the stockholder notes payable, industrial development revenue bonds
and other debt as of December 31, 1996 and 1997, based on current market
rates, were $7,856,000 and $7,489,000, respectively.
INVENTORIES
Inventories are stated at the lower of first-in, first-out cost or market
and include materials, labor and overhead.
Inventories consisted of the following as of December 31:
<TABLE>
<CAPTION>
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Raw materials............................................ $ 3,777 $ 8,111
Work in process.......................................... 526 433
Finished goods........................................... 7,487 12,200
------- -------
Total.................................................. $11,790 $20,744
======= =======
</TABLE>
F-8
<PAGE>
DIAMOND BRANDS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND 1997
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation for financial
reporting purposes is provided on the straight-line method over estimated
useful lives of 5 to 29 years for buildings and improvements and 3 to 10 years
for machinery and equipment. Maintenance and repairs are charged to expense as
incurred.
GOODWILL
Goodwill represents the costs of acquisitions in excess of the fair value of
the net assets and is amortized using the straight-line method over periods of
15 to 40 years. Accumulated amortization as of December 31, 1996 and 1997 was
$1,320,000 and $2,841,000, respectively.
The Company periodically evaluates whether events and circumstances have
occurred that may affect the realizable nature of goodwill and other long-
lived assets. If such events or circumstances were to indicate that the
carrying amount of these assets would not be recoverable, an impairment loss
would be recognized. No such impairment has been recognized for the year ended
December 31, 1997.
DEFERRED FINANCING COSTS
Deferred financing costs consist of debt structuring costs and are being
amortized over the lives of the underlying debt agreements.
REVENUE RECOGNITION
Revenue for products sold is recognized at the time of shipment.
OTHER COMPREHENSIVE INCOME
The Company has no significant items of other comprehensive income.
4. LONG-TERM DEBT
Long-term debt consists of the following as of December 31:
<TABLE>
<CAPTION>
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Term note, interest at LIBOR (6.125% as of December 31,
1997) plus 2.00% through 2002.......................... $23,250 $37,075
Revolving line of credit, interest at LIBOR (6.125% as
of December 31, 1997) plus 2.00%....................... 3,800 5,000
Stockholder notes payable, interest at rates of 8.125%
to 11.125%............................................. 5,894 5,894
Industrial development revenue bonds, due in varying
amounts through 2002, interest at 7.5% to 9.0%......... 807 688
Other................................................... 1,094 840
------- -------
Total debt............................................ 34,845 49,497
Less-Current maturities................................. (6,573) (7,892)
------- -------
Total long-term debt.................................. $28,272 $41,605
======= =======
</TABLE>
In connection with the Forster Acquisition (see Note 2), the Company entered
into a bank credit agreement that provided for a $15,000,000 revolving credit
facility through March 1998 and a $32,000,000 term loan
F-9
<PAGE>
DIAMOND BRANDS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND 1997
through September 2000. This agreement replaced the existing $3,000,000
revolving credit facility which was due to expire in April 1995. In 1996, the
Issuer increased the revolving credit facility to $18,000,000.
In connection with the Empire Acquisition (see Note 2), the Company amended
its bank credit agreement to a $23,000,000 revolving credit facility through
February 2000 and a $44,250,000 term loan through December 2002. Borrowings
under the term note and revolving credit agreement are collateralized by all
assets of the Issuer. The Company's agreement contains covenants which, among
other matters, require the Company to maintain certain financial ratios and
prohibit principal payments on debt to stockholders until the credit
facilities are paid in full. As of December 31, 1997, the Company was in
compliance with these covenants.
Revolving line of credit (revolver) data is as follows for the years ended
December 31:
<TABLE>
<CAPTION>
1995 1996 1997
------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Revolver borrowings at year-end.................. $ 9,000 $3,800 $ 5,000
Average daily revolver borrowings................ 8,152 6,011 7,015
Highest total revolver borrowings................ 12,800 9,900 10,700
Weighted average interest rates:
Based on average daily borrowings................ 8.78% 8.38% 8.14%
</TABLE>
Future maturities of long-term debt were as follows as of December 31, 1997:
<TABLE>
<CAPTION>
FISCAL YEAR (IN THOUSANDS)
----------- -------------
<S> <C>
1998................................... $ 7,892
1999................................... 7,930
2000................................... 12,941
2001................................... 7,627
2002................................... 13,107
-------
$49,497
=======
</TABLE>
5. INCOME TAXES:
Effective January 1, 1995, the Company converted from an S corporation to a
C corporation as a result of the Forster Acquisition (see Note 2) and began
accounting for income taxes using the liability method. Under this method,
deferred income taxes were recognized for temporary differences between the
tax and financial reporting bases of the Company's assets and liabilities
using enacted tax rates in effect for the year in which the differences are
expected to reverse.
Effective January 1, 1997, the Company elected S corporation status due to a
change in the tax laws allowing entities with subsidiaries to elect this
status. Deferred tax assets and liabilities as of December 31, 1996 are
reflected as a charge in the 1997 consolidated statement of operations. The
Company would be subject to a tax on built-in gains if certain assets are sold
within ten years of election of S corporation status.
The taxable income or loss of the Company for years ended after December 31,
1996 is included in the individual returns of stockholders for federal tax
purposes and, to the extent allowed and elected, for state tax purposes.
Accordingly, there is no provision for current income taxes in 1997.
F-10
<PAGE>
DIAMOND BRANDS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND 1997
The Company's income tax provision for the years ended December 31 consisted
of the following:
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal........................................... $2,518 $4,703 $ --
State............................................. 445 944 --
Deferred............................................ (611) 160 1,376
------ ------ ------
$2,352 $5,807 $1,376
====== ====== ======
</TABLE>
A reconciliation from the federal statutory tax rate to the effective tax
rate is as follows:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Federal statutory tax rate.................................... 34.0% 35.0%
Goodwill amortization......................................... 3.2 2.0
State income taxes, net of federal benefit.................... 4.6 4.7
Other items, net.............................................. (5.4) 1.5
---- ----
Effective income tax rate..................................... 36.4% 43.2%
==== ====
</TABLE>
Components of deferred income taxes are as follows as of December 31, 1996:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Net current deferred income tax asset:
Workers' compensation.................................... $ 535
Inventory reserves....................................... 480
Postretirement benefits.................................. 589
Allowances for doubtful accounts......................... 188
Other.................................................... 686
------
Net current deferred income tax asset.................. $2,478
======
Net noncurrent deferred income tax liability:
Depreciation............................................. $1,102
------
Net noncurrent deferred income tax liability........... $1,102
======
</TABLE>
The unaudited pro forma income tax expense is presented assuming the Company
had been a C corporation since January 1, 1995 using an effective income tax
rate of 42%, 43% and 41% for the years ended December 31, 1995, 1996 and 1997.
6. EMPLOYEE BENEFITS:
DEFINED BENEFIT PENSION PLAN AND DEFINED CONTRIBUTION RETIREMENT PLAN (THE
DEFINED PLANS)
The Company has a defined benefit pension plan to cover certain hourly
employees, which was suspended as of October 1, 1994. Participants will
continue to vest in nonvested benefits existing at October 1, 1994. The
Company will continue to pay accrued benefits and has no intention to
terminate the plan. Plan assets approximate the actuarially determined vested
and accumulated benefit obligation as of December 31, 1996 and 1997.
F-11
<PAGE>
DIAMOND BRANDS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND 1997
The Company also has a defined contribution retirement plan for certain
union employees. The Company makes contributions to the plan based on hours
worked. Total expense related to the Defined Plans was $294,000 in 1995,
$240,000 in 1996 and $267,000 in 1997.
401(K) SAVINGS AND PROFIT-SHARING PLANS (THE PLANS)
The Company has two 401(k) savings and profit-sharing plans for certain
nonunion employees. The Plans are qualified defined contribution plans in
accordance with Section 401(k) of the Internal Revenue Code. In 1997, the
Company changed the policy for Forster participants from a 35% match of the
first 2% and 15% of the second 2% of participants' contributions to be
consistent with the DBI and Empire plan participants. The Company's policy in
1997 for all eligible participants is to match 50% of employee contributions
up to a maximum of 3% of compensation. Additionally, the Company makes
discretionary profit-sharing contributions that are determined by the board of
directors. Total expense related to the Plans was $557,000 in 1995, $725,000
in 1996 and $736,000 in 1997.
POSTRETIREMENT MEDICAL BENEFITS (THE POSTRETIREMENT PLANS)
The Company provides certain postretirement health and life insurance
benefits for all Holdings bargaining unit employees who retire with ten or more
years of service. The Company also provides certain postretirement life
insurance benefits to eligible Forster employees who retire and have attained
age 55 with 20 or more years of service. The cost of postretirement benefits is
accrued during an employee's active career. The Company does not fund these
benefits prior to the time they are paid. Postretirement data were computed
based on a discount rate of 7.0% to 7.5%, a rate of increase in future life
insurance premiums of 2.0%, and a rate of increase in life insurance benefits
of 2.5% for the years ended December 31, 1995, 1996 and 1997.
Components of the net periodic postretirement benefit cost for the years
ended December 31, 1995, 1996 and 1997 and the accumulated postretirement
benefit obligation as of December 31, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Net periodic postretirement benefit cost:
Service cost (benefits earned during the period)...... $ 36 $ 33 $ 39
Interest cost......................................... 85 96 110
---- ------ ------
Net periodic postretirement benefit cost.............. $121 $ 129 $ 149
==== ====== ======
Accumulated postretirement benefit obligation:
Retirees.............................................. $ 822 $ 928
Fully-eligible active plan participants............... 528 618
Other active plan participants........................ 201 40
------ ------
Accumulated postretirement benefit liability............ $1,551 $1,586
====== ======
</TABLE>
The accumulated postretirement benefit obligation was determined using a
discount rate of 7.5% and 7.0% for the years ended December 31, 1996 and 1997,
respectively.
The postretirement medical benefit is a union negotiated commitment. The
fixed amounts are paid annually and do not change due to inflationary or health
care cost trends.
STOCK OPTIONS
During 1997, the Company adopted a stock option plan (the "1997 Plan") that
authorized the grant of stock options to key executives. Options representing
90,000 common shares have been granted as of December 31,
F-12
<PAGE>
DIAMOND BRANDS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND 1997
1997 at an exercise price of $7.50 per share. Options generally expire 10
years from the date of grant or at an earlier date as determined by the board
of directors. Options granted under the plans are exercisable 33 1/3% each
year for three years from the date of grant. In the event of a change of
control, as defined in the 1997 Plan, the options become 100% exercisable.
Stock option activity was as follows for the year ended December 31, 1997:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARE
SHARES PRICE
------ --------
<S> <C> <C>
Outstanding, January 1, 1997.............................. -- $ --
Granted................................................. 90,000 7.50
Exercised............................................... -- --
Cancelled............................................... -- --
------ -----
Outstanding, December 31, 1997............................ 90,000 $7.50
====== =====
Options exercisable at December 31, 1997.................. 30,000
======
Weighted average fair value of options granted during
1997..................................................... $ 1.23
======
</TABLE>
The Company follows Accounting Principles Board Opinion No. 25, under which
no compensation cost has been recognized in connection with stock option
grants pursuant to the stock option plans. Had compensation cost been
determined consistent with SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's pro forma net income would have been as follows
for the year ended December 31, 1997:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Net income:
As reported........................... $20,629
Pro forma............................. 20,592
</TABLE>
In determining compensation cost pursuant to SFAS 123, the fair value of
each option grant is estimated on the date of grant using the Black-Scholes
option pricing model with the following weighted average assumptions used for
grants during 1997: a risk-free interest rate of 6.13%; expected life of three
years; and expected volatility of 0%.
7. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is subject to asserted and unasserted claims encountered in the
normal course of business. In the opinion of management and its legal counsel,
disposition of these matters will not have a material effect on the Company's
financial condition or results of operations.
F-13
<PAGE>
DIAMOND BRANDS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND 1997
OPERATING LEASES
The Company leases office space and equipment with various expiration dates
through 2002. Total rent expense was $226,000 in 1995, $340,000 in 1996 and
$664,000 in 1997. Future minimum payments for all operating leases with
initial or remaining terms of one year or more subsequent to December 31, 1997
are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR (IN THOUSANDS)
----------- -------------
<S> <C>
1998................................... $715
1999................................... 703
2000................................... 438
2001................................... 152
2002................................... 114
Thereafter............................. 79
</TABLE>
8. SUBSEQUENT EVENT:
Holdings, its then existing stockholders (the "Stockholders"), Seaver
Kent-TPG Partners, L.P., an investment partnership jointly formed by Seaver
Kent & Company, LLC ("Seaver Kent") and Texas Pacific Group ("TPG"), and Seaver
Kent I Parallel, L.P. (collectively, the "Sponsors") entered into a
Recapitalization Agreement dated as of March 3, 1998 (the "Recapitalization
Agreement"), which provided for the recapitalization of Holdings (the
"Recapitalization"). Pursuant to the Recapitalization Agreement, the Sponsors
and other investors purchased from Holdings, for an aggregate purchase price of
$47.0 million, shares of pay-in-kind preferred stock of Holdings ("Holdings
Preferred Stock"), together with warrants (the "Warrants") to purchase shares
of common stock of Holdings ("Holdings Common Stock") for $0.01 per share. The
shares of Holdings Common Stock issuable upon the full exercise of the Warrants
would represent 77.5% of the outstanding shares of Holdings Common Stock after
giving effect to such issuance. In addition, Holdings purchased (the "Equity
Repurchase") for $211.4 million, subject to certain working capital
adjustments, from the Stockholders, all outstanding shares of Holdings' capital
stock other than 1,073,268 shares (the "Retained Shares") of Holdings Common
Stock which continue to be held by certain of the Stockholders. The Retained
Shares would represent 22.5% of the outstanding shares of Holdings Common Stock
after giving effect to the full exercise of the Warrants. Holdings, the
Sponsors and the holders of the Retained Shares also entered into a
Stockholders Agreement pursuant to which, among other things, the Sponsors have
the ability to direct the voting of outstanding shares of Holdings Common Stock
in proportion to their ownership of such shares as if the Warrants were
exercised in full. Accordingly, the Sponsors have voting control of Holdings.
The Recapitalization was accounted for as a recapitalization transaction
for accounting purposes. In connection with the Recapitalization, the Company
converted from an S corporation to a C corporation.
In connection with the Recapitalization, Holdings organized Diamond
Brands Operating Corp. ("Operating Corp") and, immediately prior to the
consummation of the Recapitalization, Holdings transferred substantially all of
its assets and liabilities to Operating Corp. Holdings' current operations are,
and future operations are expected to be, limited to owning the stock of
Operating Corp., preferred stock, and senior discount debentures. Operating
Corp. repaid substantially all of the Company's funded debt obligations
existing immediately before the consummation of the Recapitalization (the "Debt
Retirement") in the amount of $51.8 million.
Funding requirements for the Recapitalization (which was consummated on
April 21, 1998) were satisfied through the Retained Shares and the following:
(i) the purchase by the Sponsors and other investors of Holdings Preferred
Stock and the Warrants for $47.0 million ($45.8 million in cash and $1.2
million in officer notes receivables); (ii) $45.1 million of gross proceeds
from the offering of the 12 7/8% Holdings senior discount debentures; (iii)
$80.0 million of borrowings under senior secured term loan facilities (the
"Term Loan Facilities"); (iv) borrowings under a senior secured revolving
credit facility having availability of up to $25.0 million and (v) $100.0
million of gross proceeds from the offering of the 10 1/8% senior subordinated
notes.
The senior subordinated notes are fully and unconditionally guaranteed on
a senior subordinated basis, jointly and severally, by all of Operating Corp.'s
direct and indirect subsidiaries (the "Subsidiary Guarantors"). The Subsidiary
Guarantors are Forster, Inc. and Empire Candle, Inc. Separate financial
statements of the subsidiary Guarantors are not presented because management
has determined that they are not material to investors. In lieu of the separate
guarantor financial statements, summarized combined financial information of
Holdings/Operating Corp. and the Subsidiary Guarantors are presented below:
F-14
<TABLE>
<CAPTION>
(In Thousands)
1995 1996 1997
------------------------------------- ------------------------------------- ------------------------------------
Guar- Guar- Guar-
Oper- antor Consol- Oper- antor Consol- Oper- antor Consol-
ating Subsi- Elimi- idated ating Subsi- Elimi- idated ating Subsi- Elimi- idated
Balance Sheet Corp. diaries nations Total Corp. diaries nations Total Corp. diaries nations Total
Data: ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Current Assets $15,171 $ 9,218 $ - $24,389 $15,438 $ 8,398 $ - $23,836 $13,673 $23,003 $ - $36,676
Noncurrent
Assets 54,764 10,157 (19,680) 45,241 58,620 9,173 (25,126) 42,667 97,929 25,423 (65,478) 57,874
Current
Liabilities 19,531 5,500 (7,631) 17,400 27,655 3,909 (13,137) 18,427 42,148 6,624 (25,343) 23,429
Noncurrent
Liabilities 40,286 1,826 42,112 28,649 1,673 30,322 41,524 1,667 43,191
Stockholders'
Equity 10,118 12,049 (12,049) 10,118 17,754 11,989 (11,989) 17,754 27,930 40,135 (40,135) 27,930
Statement of
Operations
Data:
Net Sales 32,712 44,947 77,659 36,118 54,083 90,201 36,346 81,726 118,072
Gross Profit 9,291 11,878 21,169 9,783 17,386 27,169 10,940 28,550 39,490
Operating
income 4,415 6,002 10,417 5,400 11,901 17,301 6,706 19,849 26,555
Equity in
earnings of
subsidiaries 2,357 - (2,357) - 5,446 - (5,446) - 15,656 - (15,656) -
Net Income 4,102 2,357 (2,357) 4,102 7,636 5,446 (5,446) 7,638 20,629 15,656 (15,656) 20,629
</TABLE>
F-15
<PAGE>
DIAMOND BRANDS OPERATING CORP.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
--------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Accounts receivable, net of allowances of $689 and
$1,195............................................... $17,525 $15,526
Inventories........................................... 21,347 20,744
Deferred tax asset.................................. 2,709 --
Prepaid expenses...................................... 1,957 406
------- -------
Total current assets................................ 43,538 36,676
------- -------
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation of $17,202 and $16,715.................... 17,554 17,544
GOODWILL................................................ 38,612 39,454
DEFERRED FINANCING COSTS................................ 7,170 876
------- -------
Total assets........................................ $106,874 $94,550
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt.................. $ 1,250 $ 7,892
Accounts payable...................................... 5,161 4,500
Accrued expenses...................................... 9,814 11,037
------- -------
Total current liabilities............................. 16,225 23,429
------- -------
DEFERRED INCOME TAXES......................... 735 --
POSTRETIREMENT BENEFIT OBLIGATIONS.................... 1,586 1,586
LONG-TERM DEBT, net of current maturities............. 184,875 41,605
------- -------
Total liabilities..................................... 203,421 66,620
------- -------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $.01 par value; 50,000 shares
authorized; 1 and 16,112 shares issued
and outstanding...................................... 1 161
Additional paid in capital............................ -- 774
Retained earnings (accumulated deficit)............... (96,548) 26,995
------- -------
Total stockholders' equity (deficit).................. (96,547) 27,930
------- -------
$106,874 $94,550
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets
F-16
<PAGE>
DIAMOND BRANDS OPERATING CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
-----------------
1997 1998
------- -------
<S> <C> <C>
NET SALES...................................................... $54,675 $58,558
COST OF SALES.................................................. 37,630 41,348
------- -------
Gross Profit................................................. 17,045 17,210
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................... 5,344 6,540
GOODWILL AMORTIZATION.......................................... 680 841
------- -------
Operating income............................................. 11,031 9,829
INTEREST EXPENSE............................................... 2,160 6,155
------- -------
Income before provision (benefit) for income taxes........... 8,871 3,674
PROVISION (BENEFIT) FOR INCOME TAXES........................... 1,376 (794)
------- -------
Net income................................................... $ 7,495 $ 4,468
======= =======
PRO FORMA NET INCOME:
Income before provision for income taxes...................... $ 8,871 $ 3,674
Pro forma income tax expense (Note 2)......................... 3,500 1,500
------- -------
Pro forma net income.......................................... $ 5,371 $ 2,174
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-17
<PAGE>
DIAMOND BRANDS OPERATING CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
-----------------
1997 1998
------ -------
<S> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $7,495 $ 4,468
Adjustments to reconcile net income to cash provided
by operating activities
Depreciation and amortization............................. 2,432 3,092
Deferred income taxes..................................... 1,376 (1,974)
Change in operating assets and liabilities, net of effects
of acquisition
Accounts receivable..................................... (5,201) (1,999)
Inventories............................................. (1,417) (603)
Prepaid expenses........................................ 259 (1,551)
Accounts payable........................................ 1,078 661
Accrued expenses........................................ 1,809 2,379
------ -------
Net cash provided by operating activities............... 7,831 4,473
------ -------
INVESTING ACTIVITIES
Acquisition of Empire, net of cash received...............(24,696) --
Purchases of property, plant and equipment................ (1,250) (1,273)
------ -------
Net cash used for investing activities..................(25,946) (1,273)
------ -------
FINANCING ACTIVITIES
Borrowings from bank revolving line of credit............... 21,200 23,700
Repayments to bank revolving line of credit.................(16,100) (22,450)
Borrowings on long-term debt................................ 21,000 180,000
Repayments of long-term debt................................ (3,572) (44,622)
S-Corp distributions to shareholders........................ (4,043) (5,488)
Distributions to parent company............................. -- (127,059)
Debt issuance costs......................................... (370) (7,281)
------ -------
Net cash provided by (used for) financing activities...... 18,115 (3,200)
------ -------
NET INCREASE IN CASH AND CASH EQUIVALENTS..................... -- --
CASH AND CASH EQUIVALENTS, beginning of period................ -- --
CASH AND CASH EQUIVALENTS, end of period...................... $ -- $ --
====== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-18
<PAGE>
DIAMOND BRANDS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Diamond Brands Operating Corp. ("Operating Corp") and Operating Corp.'s
wholly owned subsidiaries, Forster, Inc. and Empire Candle, Inc. after
elimination of all material intercompany balances and transactions.
Operating Corp. and its subsidiaries are collectively referred to as "the
Company". The Company is a leading manufacturer and marketer of a broad
range of consumer products, including wooden matches and firestarters,
plastic cutlery and straws, scented, citronella and holiday candles, and
toothpicks, clothespins and wooden crafts. The Company's products are
marketed primarily in the United States and Canada under the nationally
recognized Diamond, Forster and empire brand names.
The interim consolidated financial statements of the Company are unaudited;
however, in the opinion of management, all adjustments necessary for a fair
presentation of such consolidated financial statements have been reflected
in the interim periods presented. The significant accounting policies and
certain financial information which are normally included in financial
statements prepared in accordance with generally accepted accounting
principles, but which are not required for interim reporting purposes, have
been condensed or omitted. The accompanying consolidated financial
statements of the Company should be read in conjunction with the
consolidated financial statements and related notes included in the
Company's audited financial statements for the year ended December 31, 1997.
2. RECAPITALIZATION
On March 3, 1998, the stockholders of the Company entered into a
recapitalization agreement (the "Recapitalization Agreement") with Seaver
Kent -- TPG Partners, L.P. and Seaver Kent I Parallel, L.P. (collectively
"the sponsors"), which provided for the recapitalization of the Company.
Pursuant to the Recapitalization Agreement, in April 1998, Operating Corp.'s
parent, Diamond Brands Incorporated (Holdings) purchased from the existing
stockholders 15,129,232 shares of the Company's common stock for $211.4
million by Operating Corp. (i) issuing $100.0 million of senior subordinated
notes and (ii) entering into a bank credit agreement which provided for
$80.0 million in term loan facilities and a $25.0 million revolving credit
facility. The proceeds of such were used to partially fund the
Recapitalization.
3. LONG TERM DEBT
In April 1998, the Company completed offerings of $100.0 million of 10 1/8%
senior subordinated notes due 2008. The net proceeds to the Company for the
offerings, after discounts, commissions and other offering costs were $95.4
million and were used to repay existing indebtedness and purchase common
stock of the Company.
The senior subordinated notes are fully and unconditionally guaranteed on a
senior subordinated basis, jointly and severally, by all of Operating
Corp.'s direct and indirect subsidiaries (the "Subsidiary Guarantors"). The
Subsidiary Guarantors are Forster, Inc. and Empire Candle, Inc. Separate
financial statements of the subsidiary Guarantors are not presented because
management has determined that they are not material to investors. In lieu
of the separate guarantor financial statements, summarized combined
financial information of Holdings/Operating Corp. and the Subsidiary
Guarantors are presented below:
(in Thousands)
<TABLE>
<CAPTION>
December 31, 1997 June 30, 1998
------------------------------------- -------------------------------------
Guar- Guar-
Oper- antor Consol- Oper- antor Consol-
ating Subsi- Elimi- idated ating Subsi- Elimi- idated
Balance Sheet Corp. diaries nations Total Corp. diaries nations Total
Data: ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Current Assets $13,673 $23,003 $ - $36,676 $23,017 $20,521 $ - $43,538
Noncurrent
Assets 97,929 25,423 (65,478) 57,874 107,552 24,936 (69,152) 63,336
Current
Liabilities 42,148 6,624 (25,343) 23,429 41,042 4,304 (29,121) 16,225
Noncurrent
Liabilities 41,524 1,667 - 43,191 186,074 1,122 - 187,196
Stockholders'
Equity 27,930 40,135 (40,135) 27,930 (96,547) 40,031 (40,031) (96,547)
Six Months Ended December 31, 1997 Six Months Ended June 30, 1998
------------------------------------- -------------------------------------
Statement of
Operations
Data:
Net Sales 18,174 40,384 - 58,558 14,691 39,984 - 54,675
Gross Profit 4,283 12,927 - 17,210 3,784 13,261 - 17,045
Operating
income 1,893 7,936 - 9,829 1,991 9,040 - 11,031
Equity in
earnings of
subsidiaries 4,489 - (4,489) - 6,271 - (6,271) -
Net Income 4,468 4,489 (4,489) 4,468 7,495 6,271 (6,271) 7,495
</TABLE>
The Company also entered into a bank credit agreement which provides for
$80.0 million in term loan facilities with interest rates from LIBOR (5.69%
at June 30, 1998) plus 2.0% to LIBOR plus 2.25% due in installments through
March, 2006 and $25.0 million revolving credit facility of LIBOR plus 2.0%.
As of June 30, 1998, the Company was in compliance with the provisions of
its debt covenants.
4. INCOME TAXES
Effective January 1, 1997, the Company converted from a C corporation to an
S corporation due to a change in the tax laws allowing entities with
subsidiaries to elect this status. Deferred tax assets and liabilities as of
December 31, 1996 are reflected as a charge in the consolidated statement of
operations for the six months ended June 30, 1997. The Company would be
subject to a tax on built-in gains if certain assets were sold within ten
years of election of S corporation status.
The taxable income or loss of the Company for the years ended after December
31, 1996 and prior to the recapitalization is included in the individual
returns of the stockholders for federal tax purposes and, to the extent
allowed and elected, for state tax purposes. Accordingly, there is no
provision for current income taxes for the period from January 1, 1998 to
April 20, 1998 and the six months ended June 30, 1997. Effective with the
recapitalization in April 1998, the Company elected C corporation status and
recognized deferred income taxes for temporary differences between the tax
and financial reporting bases of the Company.
The unaudited pro forma income tax expense is presented assuming the Company
had been a C corporation since January 1, 1997 for the six months ended June
30, 1998 and 1997.
5. NEW ACCOUNTING PRONOUNCEMENTS
Financial Accounting Standards board Statement (SFAS) No. 131, "Disclosures
About Segments of an Enterprise and Related Information," issued in June
1997 and effective for fiscal years beginning after December 15, 1997,
redefines how operating segments are determined and requires expanded
quantitative and qualitative disclosure relating to the company's operating
segments. The Company believes that the effect on it of adopting SFAS No.
131 will not be significant.
F-19
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN
THIS PROSPECTUS AND THE ACCOMPANYING LETTER OF TRANSMITTAL AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR THE EXCHANGE AGENT. NEITHER THIS PROSPECTUS
NOR THE ACCOMPANYING LETTER OF TRANSMITTAL, OR BOTH TOGETHER, CONSTITUTE AN
OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SECURITIES IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS, NOR THE ACCOMPANYING
LETTER OF TRANSMITTAL, OR BOTH TOGETHER, NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE
IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AT ANY TIME SUBSEQUENT TO THE DATE
HEREOF OR THEREOF. UNTIL DECEMBER 16, 1998 (90 DAYS AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE NEW DEBENTURES, WHETHER
OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF THE DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... i
Prospectus Summary........................................................ 1
Risk Factors.............................................................. 15
The Recapitalization...................................................... 22
New Chief Executive Officer............................................... 23
The Sponsors.............................................................. 23
Use of Proceeds........................................................... 24
Capitalization............................................................ 24
Unaudited Pro Forma Consolidated Financial Data........................... 25
Selected Historical and Pro Forma Consolidated Financial Data............. 28
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 30
Business.................................................................. 36
Management................................................................ 45
Certain Relationships and Related Transactions............................ 51
Description of Holdings Indebtedness...................................... 52
Capital Stock of Holdings and the Issuer.................................. 53
Description of the Bank Facilities........................................ 56
The Exchange Offer........................................................ 59
Description of the New Notes.............................................. 67
Certain United States Federal Income Tax Considerations................... 96
Plan of Distribution...................................................... 99
Legal Matters............................................................. 99
Experts................................................................... 99
Index to Consolidated Financial Statements................................ F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
DIAMOND BRANDS OPERATING CORP.
OFFER TO EXCHANGE
SERIES B 10 1/8% SENIOR SUBORDINATED NOTES DUE 2008, WHICH HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, FOR ANY AND ALL
OUTSTANDING 10 1/8% SENIOR SUBORDINATED NOTES DUE 2008
---------------
PROSPECTUS
---------------
September 17, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
