PROSPECTUS Filed under Rule 424(b)(2)
Registration No. 333-58233
DIAMOND BRANDS INCORPORATED
OFFER TO EXCHANGE SERIES B 12 7/8% SENIOR DISCOUNT DEBENTURES DUE 2009,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
FOR ANY AND ALL OUTSTANDING SERIES A 12 7/8% SENIOR DISCOUNT DEBENTURES DUE
2009
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
OCTOBER 19, 1998, UNLESS EXTENDED.
Diamond Brands Incorporated, a Minnesota corporation (the "Issuer" or
"Holdings"), 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 12 7/8% Senior Discount Debentures due 2009 of the Issuer (the "New
Debentures") 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 12 7/8% Senior Discount Debentures due 2009 of the Issuer
(the "Old Debentures") and of which $84,000,000 aggregate principal amount at
maturity is outstanding as of the date hereof. The New Debentures and the Old
Debentures are collectively referred to herein as the "Debentures."
Any and all Old Debentures that are validly tendered and not withdrawn on or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 Tenders of Old Debentures may be withdrawn at any time prior to 5:00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 Debentures 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 and Donaldson, Lufkin & Jenrette Securities Corporation and Morgan
Stanley & Co. Incorporated (the "Initial Purchasers") (the "Registration Rights
Agreement"). Old Debentures may only be tendered in integral multiples of
$1,000 of principal amount at maturity. See "The Exchange Offer."
The New Debentures will be entitled to the benefits of the same Indenture (as
defined herein under "Available Information") that governs the Old Debentures
and that will govern the New Debentures. The form and terms of the New
Debentures are the same in all material respects as the form and terms of the
Old Debentures, except that the New Debentures 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 Debentures."
The New Debentures will be represented by permanent global debentures 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 debentures will be shown on,
and transfers thereof will be effected through, records maintained by DTC and
its participants.
(continued on next page)
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)
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 believes that the New Debentures 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 Debentures
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 Debentures
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 Debentures and has no arrangement with any person to participate in a
distribution of such New Debentures. By tendering Old Debentures in exchange
for New Debentures, each holder, other than a broker-dealer, will represent to
the Issuer 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
Debentures acquired for its own account directly from the Issuer; (iii) any
New Debentures 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 Debentures and has no arrangement or understanding
to participate in a distribution of New Debentures. If a holder of Old
Debentures is engaged in or intends to engage in a distribution of New
Debentures or has any arrangement or understanding with respect to the
distribution of New Debentures 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 Debentures 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 Debentures. 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 Debentures
received in exchange for Old Debentures where such Old Debentures 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 has agreed that it 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."
The Issuer will not 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 DEBENTURES 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 Debentures 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 Debentures. If such a market were to develop, the New Debentures could
trade at prices that may be higher or lower than their principal amount. The
Issuer does not intend to apply for listing of the New Debentures on any
securities exchange or for quotation of the New Debentures on The Nasdaq Stock
Market's National Market or otherwise. The Initial Purchasers have previously
made a market in the Old Debentures, and the Issuer has been advised that the
Initial Purchasers currently intend to make a market in the New Debentures, 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 Debentures or the New Debentures 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 Debentures or that any active public market for
the New Debentures will develop or continue. If an active public market does
not develop or continue, the market price and liquidity of the New Debentures
may be adversely affected. See "Risk Factors--Risk Factors Relating to the
Debentures--Absence of Public Market."
<PAGE>
AVAILABLE INFORMATION
The Issuer is not 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 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 Debentures 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 with the Commission, through the Electronic Data Gathering, Analysis and
Retrieval System ("EDGAR"), under the Securities Act, with respect to the New
Debentures 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.
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PROSPECTUS SUMMARY
Prior to the Recapitalization (as defined herein under "--The
Recapitalization"), Holdings and its direct subsidiaries carried on the business
described herein. In connection with the Recapitalization, Holdings organized
Diamond Brands Operating Corp., a Delaware corporation ("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. Unless the context otherwise
requires, the "Company" or "Diamond Brands" refers to Holdings, Operating Corp.,
and its direct and indirect subsidiaries. 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 Issuer
and the Unaudited Pro Forma Consolidated Financial Data (as defined herein under
"Unaudited Pro Forma Consolidated Financial Data") of the Issuer 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 and has not been independently verified. Except as otherwise
set forth herein, references to "pro forma" statement of operations data of the
Issuer for the year ended December 31, 1997 are to such data that give effect to
the Recapitalization, including the issuance of the Debentures and the issuance
of the Holdings Preferred Stock (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 under "--Corporate Information" of
operations data of 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 $5.8 million, which represented an EBITDA margin of 10.0%.
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 (as defined
herein under "--Corporate Information") 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
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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 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,
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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,
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
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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.
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 of October 15, 2009. Holdings has the option, at
any time, to redeem Holdngs Preferred Stock equal to the Liquidation Preference
(as defined herein under" Capital Stock Holdings and Operating Corp.") 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 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. 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 $292.3 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) $45.1 million of gross
proceeds from the offering of the Old Debentures (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) $100.0 million
of gross proceeds from the sale by Operating Corp. of 10 1/8% senior
subordinated notes due 2008 (the "Senior Subordinated Notes") in a separate
offering.
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The Equity Repurchase, the Offering, the Debt Retirement, the issuance and
sale by Holdings of Holdings Preferred Stock and the Warrants, the issuance and
sale by Operating Corp. of the Senior Subordinated Notes and the borrowing by
Operating Corp. of funds under the Bank Facilities (which proceeds were
distributed by Operating Corp. to Holdings) were effected in connection with
the Recapitalization. The Recapitalization was accounted for as a
recapitalization transaction for accounting purposes.
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
Senior Subordinated Notes........................................ 100,000
Debentures offered in the Offering............................... 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 (as defined
herein) and (iii) $50.0 million under the Term B Loan Facility (as defined
herein). See "Description of Other Indebtedness."
(2) Represents cash proceeds associated with Holdings Preferred Stock,
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.
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.
5
<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.
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 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
Agreement.............. The Old Debentures were issued on April 21, 1998 to
the Initial Purchasers. The Initial Purchasers placed
the Old Debentures with institutional investors. In
connection therewith, the Issuer 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 Debentures are being offered in exchange for an
equal principal amount at maturity of Old Debentures.
As of the date hereof, $84,000,000 aggregate principal
amount at maturity of Old Debentures is outstanding.
Old Debentures may be tendered only in integral
multiples of $1,000 of principal amount at maturity.
Resale of New
Debentures............. 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 believes that the New
Debentures 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 Debentures
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 Debentures 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 Debentures and has no
arrangement with any person to participate in a
distribution of such New Debentures. By tendering Old
Debentures in exchange for New Debentures, each
holder, other than a broker-dealer, will represent to
the Issuer 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
Debentures acquired for its own account directly from
the Issuer; (iii) any New Debentures 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
Debentures and has no arrangement or understanding to
participate in a distribution of the New Debentures.
If a holder of Old Debentures is engaged in or
intends to engage in a distribution of New Debentures
or has any arrangement or understanding with respect
to the distribution of New Debentures 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 Debentures 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 Debentures. 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
7
<PAGE>
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 Debentures received in exchange for
Old Debentures where such Old Debentures were
acquired by such Participating Broker-Dealer as a
result of market-making activities or other trading
activities. The Issuer has agreed that it 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
Debentures prior to offering or selling such New
Debentures. The Issuer has agreed, pursuant to the
Registration Rights Agreement and subject to certain
specified limitations therein, to register or qualify
the New Debentures 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
Debentures............. Upon consummation of the Exchange Offer, subject to
certain exceptions, holders of Old Debentures who do
not exchange their Old Debentures for New Debentures
in the Exchange Offer will no longer be entitled to
registration rights and will not be able to offer or
sell their Old Debentures, unless such Old Debentures
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 Debentures--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.
Yield and Interest on
the New Debentures..... 12 7/8% (computed on a semi-annual bond equivalent
basis) calculated from April 21, 1998. The New
Debentures will accrete at a rate of 12 7/8%,
compounded semi-annually, to an aggregate principal
amount at maturity of $84.0 million by April 15, 2003.
Cash interest will not accrue on the New Debentures
prior to April 15, 2003. Beginning on April 15, 2003,
cash interest on the New Debentures will accrue and be
payable, at a rate of 12 7/8% per annum, semi-
annually in arrears on each October 15 and April 15
commencing October 15, 2003.
Conditions to the
Exchange Offer......... The Exchange Offer is not conditioned upon any
minimum principal amount of Old Debentures being
tendered for exchange. However, the Exchange Offer is
subject to certain customary conditions, which may,
under certain circumstances, be waived by the Issuer.
See "The Exchange Offer--Conditions." Except for the
requirements of applicable federal
8
<PAGE>
and state securities laws, there are no federal or
state regulatory requirements to be complied with or
obtained by the Issuer in connection with the
Exchange Offer.
Procedures for
Tendering Old
Debentures............. Each holder of Old Debentures 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
Debentures 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 Debentures 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 Debentures who wish to tender their
Old Debentures and whose Old Debentures are not
immediately available or who cannot deliver their Old
Debentures 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 Debentures
according to the guaranteed delivery procedures set
forth in "The Exchange Offer--Guaranteed Delivery
Procedures."
Withdrawal Rights....... Tenders of Old Debentures 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
Debentures, 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
Debentures and
Delivery of New
Debentures............. Subject to certain conditions, any and all Old
Debentures 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 Debentures 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 Debentures for Old Debentures
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
from the issuance of the New Debentures pursuant to
the Exchange Offer. See "Use of Proceeds."
9
<PAGE>
SUMMARY OF TERMS OF NEW DEBENTURES
The Exchange Offer relates to the exchange of up to $84,000,000 aggregate
principal amount at maturity of Old Debentures for up to an equal aggregate
principal amount at maturity of New Debentures. The New Debentures will be
entitled to the benefits of the same Indenture that governs the Old Debentures
and that will govern the New Debentures. The form and terms of the New
Debentures are the same in all material respects as the form and terms of the
Old Debentures, except that the New Debentures have been registered under the
Securities Act and therefore will not bear legends restricting the transfer
thereof. See "Description of the New Debentures."
Maturity Date........... April 15, 2009.
Interest Rate and
Payment Dates........... 12 7/8% (computed on a semi-annual bond equivalent
basis) calculated from April 21, 1998. The New
Debentures will accrete at a rate of 12 7/8%,
compounded semi-annually, to an aggregate principal
amount at maturity of $84.0 million by April 15,
2003. Cash interest will not accrue on the New
Debentures prior to April 15, 2003. Beginning on
April 15, 2003, cash interest on the New Debentures
will accrue and be payable, at a rate of 12 7/8% per
annum, semi-annually in arrears on each October 15
and April 15, commencing October 15, 2003.
Optional Redemption..... The New 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 set forth herein, plus accrued and unpaid
interest and Liquidated Damages (as defined herein
under "Description of the New Debentures--
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 at maturity of
the New Debentures originally issued at a redemption
price equal to 112.875% of the principal amount
Accreted Value (as defined herein under "Description
of the New Debentures--Certain Definitions") thereof
plus 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 Debentures -- Certain
Definitions"); provided that at least 65% of
the original aggregate principal amount at maturity
of the New Debentures remains outstanding immediately
after each such redemption. See "Description of the
New Debentures--Optional Redemption."
Mandatory Debenture
Redemption.............. On April 15, 2003, Holdings will be required to
redeem New 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
New Debentures then outstanding by (y) $84.0 million,
at a redemption price equal to 100% of the principal
amount at maturity of the New Debentures so redeemed
(the "Mandatory Debenture Redemption").
Ranking.................
The New Debentures will be senior obligations of
Holdings. The New Debentures will rank pari passu in
right of payment with all future senior indebtedness
of Holdings and will rank senior in right of payment
to all future subordinated indebtedness of Holdings.
The New Debentures will be effectively subordinated
to all liabilities of Holdings' subsidiaries. As of
June 30, 1998,
10
<PAGE>
Recapitalization, Holdings had outstanding
approximately $232.3 million of Indebtedness (as
defined herein under "Description of the New
Debentures--Certain Definitions") and Holdings'
subsidiaries had outstanding approximately
$186.1 million of Indebtedness, including
Indebtedness under the Senior Subordinated Notes
and the Bank Facilities.
Change of Control....... Upon the occurrence of a Change of Control, each
holder of New Debentures will have the right to
require Holdings to repurchase any or all of its New
Debentures at a price in cash equal to 101% of the
Accreted Value thereof plus Liquidated Damages, if
any, thereon in the case of any such purchase prior
to April 15, 2003, or 101% of the aggregate principal
amount at maturity thereof, plus accrued and unpaid
interest and Liquidated Damages, if any, thereon in
the case of any such purchase on or after April 15,
2003. See "Description of the New Debentures--
Repurchase at the Option of Holders--Change of
Control."
Limitation on Access to
Subsidiary Cash Flow.... Holdings does not have, and may not in the future
have, any assets other than common stock of Operating
Corp. (which will be pledged to secure Operating
Corp.'s obligations under the Bank Facilities). As a
result, Holdings' ability to consummate the Mandatory
Debenture Redemption, to pay cash interest on the New
Debentures, and to purchase New Debentures upon the
occurrence of a Change of Control will depend upon
the receipt of dividends and other distributions from
its direct and indirect subsidiaries. The Bank
Facilities, the Operating Corp. Indenture (as defined
herein under "Description of Other Indebtedness--
Senior Subordinated Notes") and the Senior
Subordinated Notes restrict Operating Corp. from
making dividends and other distributions to Holdings,
and without such dividends or distributions, Holdings
will likely not have the financial resources to
consummate the Mandatory Debenture Redemption, to pay
cash interest on the New Debentures, or to purchase
New Debentures upon a Change of Control. In addition,
there can be no assurance that Holdings' subsidiaries
will have the resources available to pay any such
dividends or distributions. Holdings' failure to
consummate the Mandatory Debenture Redemption, to pay
cash interest on the New Debentures when due and
payable, or to make a Change of Control Offer when
required or to purchase New Debentures when tendered
pursuant thereto, would constitute an Event of
Default (as defined herein under "Description of the
New Debentures--Certain Covenants--Events of Default
and Remedies") under the Indenture. See "Description
of the New Debentures--Principal, Maturity and
Interest," "--Mandatory Redemption," and "--
Repurchase at Option of Holders--Change of Control."
Original Issue
Discount................ The New Debentures are being offered at an original
issue discount for United States federal income tax
purposes. Thus, although cash interest will not be
payable on the New Debentures prior to October 15,
2003, original issue discount will accrue from the
issue date of the New Debentures and will be included
as interest income periodically (including for
periods ending prior to April 15, 2003) in a holder's
gross income for United States federal income tax
purposes in advance of receipt of the cash payments
to which the income is attributable. See "Certain
United States Federal Income Tax Considerations."
11
<PAGE>
Restrictive Covenants... The Indenture contains certain covenants that limit,
among other things, the ability of Holdings and its
Restricted Subsidiaries (as defined herein) to: (i)
pay dividends, redeem capital stock or make certain
other restricted payments or investments; (ii) incur
additional indebtedness or issue preferred equity
interests; (iii) merge, consolidate or sell all or
substantially all of its assets; (iv) create liens on
assets; and (v) enter into certain transactions with
affiliates or related persons. In addition, under
certain circumstances, Holdings will be required to
offer to purchase New Debentures at a price of 100%
of the principal amount thereof, plus accrued and
unpaid interest and Liquidated Damages, if any,
thereon to the date of purchase with the proceeds of
certain asset sales. See "Description of the New
Debentures--Certain Covenants."
USE OF PROCEEDS
There will be no cash proceeds payable to the Issuer from the issuance of the
New Debentures pursuant to the Exchange Offer. The proceeds from the sale of
the Old Debentures 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
Company 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 Company 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
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 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 3,735 9,829
Net income (loss) (1)... 3,957 3,578 4,102 7,636 20,629 1,463 7,495 (1,071) (1,373)
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 (used
in) operating
activities 4,881 4,371 4,453 13,847 21,313 -- 7,831 78 --
Cash flows from (used
in) investing
activities (836) (585) (44,359) (1,979) (28,746) -- (25,946) (1,273) --
Cash flows from (used
in) financing
activities (1,710) (3,082) 36,562 (11,868) 7,433 -- 18,115 1,195 --
EBITDA (3).............. 7,630 5,320 14,178 21,505 31,223 31,637 13,286 5,840 11,934
EBITDA margin (4)....... 22.8% 17.0% 18.3% 23.8% 26.4% 26.2% 24.3% 10.0% 20.4%
Capital expenditures.... $ 836 $ 585 $ 1,926 $ 1,979 $ 4,050 $ 4,050 $ 1,250 $ 1,273 $ 1,273
CREDIT DATA:
Interest expense (2).... $ 22,927 -- -- $ 11,757
Ratio of EBITDA to
interest expense (2)... 1.4x -- -- 1.0x
Ratio of total debt to
EBITDA................. 7.3x -- -- N/A
Ratio of earnings to
fixed charges (5)...... 1.1x -- -- (6)
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30, 1998
------------------------ -------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
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 94,550 108,983
Total debt, including
current maturities......... 7,629 7,347 46,713 34,845 49,497 232,344
Redeemable preferred
stock...................... -- -- -- -- -- 33,581
Stockholders' equity
(deficit) ................. 5,246 6,024 10,118 17,754 27,930 (174,238)
</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 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).
(6) Earnings were inadequate to cover fixed charges by $2.5 million.
14
<PAGE>
RISK FACTORS
Prospective holders of the New Debentures 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 Debentures. As of June 30,
1998 the Company had approximately $232.3 million of Indebtedness and
stockholders' deficit of approximately $174.2 million. On April 15, 2003,
Holdings will be required to redeem 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
Debentures then outstanding by (y) $84.0 million at a redemption price equal
to 100% of the principal amount of the Debentures so redeemed. Commencing
October 15, 2003, Holdings will be required to make semi-annual cash payments
of interest on the Debentures. Subject to the restrictions in the Bank
Facilities, the Operating Corp. Indenture 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
Operating Corp. Indenture restrict, but do not prohibit, the payment of
dividends by Operating Corp. to Holdings to finance the Mandatory Debenture
Redemption and the payment of interest on the Debentures. See "Description of
Other Indebtedness" and "Description of the New Debentures." There can be no
assurance that Operating Corp. will be entitled under the terms of the Bank
Facilities and the Operating Corp. Indenture to dividend sufficient funds to
Holdings to fund the Mandatory Debenture Redemption or payments of cash
interest on the Debentures. Holdings' failure to consummate the Mandatory
Debenture Redemption or to make interest payments on the Debentures would
cause an Event of Default under the Indenture. See "Description of the New
Debentures."
The level of the Company's indebtedness could have important consequences to
holders of the Debentures, 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 Operating
Corp.'s cash flow from operations must be dedicated to the payment of
principal and interest on the Company's indebtedness, thereby reducing the
funds available to the Company 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, the Operating Corp. 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
Debentures; (vi) the Senior Subordinated Notes mature prior to the maturity of
the Debentures; (vii) the Company may be substantially more leveraged than
certain of its competitors, which may place it at a competitive disadvantage;
and (viii) 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 Other
Indebtedness" and "Description of the New Debentures."
The Company's ability to consummate the Mandatory Debenture Redemption, 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
Debentures), or to fund planned capital or other expenditures, will depend
upon its future financial and operating performance, which will be affected by
prevailing economic conditions and financial, business and other factors, many
of which are beyond its control. There can be no assurance that the Company's
operating
15
<PAGE>
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 Company 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 Company could realize therefrom. If the
Company 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 Debentures
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."
17
<PAGE>
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 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 Debentures 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 DEBENTURES
LIMITATION ON ACCESS TO CASH FLOW OF SUBSIDIARIES; HOLDING COMPANY STRUCTURE
Holdings is a holding company, and its ability to pay interest on the
Debentures and to consummate the Mandatory Debenture Redemption is dependent
upon the receipt of dividends from its direct and indirect subsidiaries.
Holdings does not have, and may not in the future have, any assets other than
the common stock of
18
<PAGE>
Operating Corp. (which will be pledged to secure Operating Corp.'s obligations
under the Bank Facilities). Operating Corp. and its subsidiaries are parties to
the Bank Facilities and the Operating Corp. Indenture, each of which imposes
substantial restrictions on Operating Corp.'s ability to pay dividends to
Holdings. Any payment of dividends will be subject to the satisfaction of
certain limitations and financial conditions set forth in the Operating Corp.
Indenture and the Bank Facilities. The ability of Operating Corp. and its
subsidiaries to comply with such conditions in the Operating Corp. Indenture and
the Bank Facilities may be affected by events that are beyond the control of the
Company. The breach of any such conditions could result in a default under the
Operating Corp. Indenture and the Bank Facilities, and in the event of any such
default, the holders of the Senior Subordinated Notes or the lenders under the
Bank Facilities could elect to accelerate the maturity of all the Senior
Subordinated Notes or the loans under such facilities, as applicable. If the
maturity of the Senior Subordinated Notes or the loans under the Bank Facilities
were to be accelerated, all such outstanding debt would be required to be paid
in full before Operating Corp. or its subsidiaries would be permitted to
distribute any assets or cash to Holdings. There can be no assurance that the
assets of Holdings would be sufficient to repay all of such outstanding debt and
to meet its obligations under the Indenture. Future borrowings by Operating
Corp. can be expected to contain restrictions or prohibitions on the payment of
dividends by Operating Corp. and its subsidiaries to Holdings. In addition,
under Delaware law, a subsidiary of a company is permitted to pay dividends on
its capital stock only out of its surplus or, in the event that it has no
surplus, out of its net profits for the year in which a dividend is declared or
for the immediately preceding fiscal year. Surplus is defined as the excess of a
company's total assets over the sum of its total liabilities plus the par value
of its outstanding capital stock. In order to pay dividends in cash, Operating
Corp. must have surplus or net profits equal to the full amount of the cash
dividend at the time such dividend is declared. In determining Operating Corp.'s
ability to pay dividends, Delaware law permits the Board of Directors of
Operating Corp. to revalue its assets and liabilities from time to time to their
fair market values in order to create surplus. Holdings cannot predict what the
value of its subsidiaries' assets or the amounts of their liabilities will be in
the future and, accordingly, there can be no assurance that Holdings will be
able to pay its debt service obligations on the Debentures. In addition,
indebtedness outstanding under the Bank Facilities will be secured by
substantially all of the assets of the Company (including the common stock of
Operating Corp.)
As a result of the holding company structure, holders of Debentures will be
structurally junior to all creditors of Holdings' subsidiaries, except to the
extent that Holdings is itself recognized as a creditor of any such
subsidiary, in which case the claims of Holdings would still be subordinate to
any security in the assets of such subsidiary and any indebtedness of such
subsidiary senior to that held by Holdings. In the event of insolvency,
liquidation, reorganization, dissolution or other winding-up of Holdings'
subsidiaries, Holdings will not receive any funds available to pay to
creditors of the subsidiaries. As of June 30, 1998, Holdings' subsidiaries
had outstanding approximately $232.3 million of Indebtedness, including $186.1
million of Indebtedness under the Senior Subordinated Notes and the Bank
Facilities.
RISKS OF INCREASED LEVERAGE; ADDITIONAL INDEBTEDNESS
Subject to certain significant restrictive debt covenants contained therein,
the Indenture allows the Issuer and the Issuer's Subsidiaries to incur certain
additional Indebtedness in the future. A highly leveraged transaction in which
the Company incurs significant additional Indebtedness could adversely affect
the holders of the New Debentures. The New Debentures will rank pari passu in
right of payment with all future senior Indebtedness of the Issuer and will rank
senior in right of payment to all future subordinated Indebtedness of the
Issuer. The New Debentures will be effectively subordinated to all liabilities
of the Issuer's Subsidiaries. See "--Restrictive Debt Covenants" and
"Description of the New Debentures."
RESTRICTIVE DEBT COVENANTS
The Indenture, the Operating Corp. Indenture and the Bank Facilities contain
a number of significant covenants that, among other things, restrict the
ability of Holdings and its subsidiaries to dispose of assets, incur
additional indebtedness, prepay indebtedness (including the Debentures) 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 Holdings or its subsidiaries,
or engage in certain transactions with affiliates and otherwise restrict
certain corporate activities. In addition, under the Bank Facilities, Holdings
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 Other Indebtedness" and
"Description of the New Debentures."
Holdings' 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
19
<PAGE>
result in a default under the Bank Facilities, the Operating Corp. Indenture
and/or the Indenture, which would permit the senior lenders, or holders of
Senior Subordinated Notes and/or the Debentures, 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 Holdings 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 Other Indebtedness." See "--Limitation on Access to Cash Flow
of Subsidiaries; Holding Company Structure."
POSSIBLE INABILITY TO REPURCHASE DEBENTURES UPON CHANGE OF CONTROL
The Bank Facilities prohibit Holdings from purchasing any Debentures (except
in certain limited amounts) and also provide that certain change of control
events with respect to Holdings will constitute a default thereunder. Any
future credit agreements or other agreements relating to Senior Debt to which
Holdings becomes a party may contain similar restrictions and provisions. In
the event a Change of Control occurs at a time when Holdings is prohibited
from purchasing the Debentures, Holdings could seek the consent of its lenders
to the purchase of the Debentures or could attempt to refinance the borrowings
that contain the prohibition. If Holdings does not obtain that consent or
repay those borrowings, Holdings will remain prohibited from purchasing the
Debentures by the relevant Senior Debt. In that case, Holdings' failure to
purchase the tendered Debentures would constitute an Event of Default under
the Indenture which would, in turn, constitute a default under the Operating
Corp. Indenture and 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 Debentures.
Furthermore, no assurance can be given that Holdings will have sufficient
resources to satisfy its repurchase obligation with respect to the Debentures
following an occurrence of a Change of Control. See "Description of Other
Indebtedness" and "Description of the New Debentures."
FRAUDULENT TRANSFER STATUTES
Under federal or state fraudulent transfer laws, if a court were to find
that, at the time the Debentures were issued, Holdings (i) issued the
Debentures 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
Debentures, and (B)(1) was insolvent or was rendered insolvent by reason of
the issuance of the Debentures, (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 Holdings' obligations to holders of the
Debentures, subordinate Holdings' obligations to holders of the Debentures to
other existing and future indebtedness of Holdings, the effect of which would
be to entitle such other creditors to be paid in full before any payment could
be made on the Debentures, and take other action detrimental to holders of the
Debentures, including in certain circumstances, invalidating the Debentures.
In that event, there would be no assurance that any repayment on the
Debentures would ever be recovered by holders of the Debentures.
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, Holdings generally would be
considered insolvent at the time it incurs the indebtedness constituting the
Debentures, 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 Holdings
was "insolvent" as of the date the Debentures were issued, or that, regardless
of the method of valuation, a court would not determine that Holdings was
insolvent on that date. Nor can there be any assurance that a court would not
determine, regardless of whether Holdings was insolvent on the date the
Debentures were issued, that the
20
<PAGE>
payments constituted fraudulent transfers on another ground. To the extent
that proceeds from the sale of the Debentures 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 Holdings did
not receive fair consideration or reasonably equivalent value for the
incurrence of the indebtedness represented by the Debentures.
Based upon financial and other information currently available to it,
management of Holdings believes that the Debentures are being incurred for
proper purposes and in good faith and that Holdings (i) is solvent and will
continue to be solvent after issuing the Debentures, (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."
The Indenture limits the ability of Holdings 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 Holdings.
However, these limitations are subject to certain exceptions. See "Description
of the New Debentures."
CONSEQUENCES OF FAILURE TO EXCHANGE
Upon consummation of the Exchange Offer, subject to certain exceptions,
holders of Old Debentures who do not exchange their Old Debentures for New
Debentures 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 Debentures as set forth in the legend thereon as a
consequence of the issuance of the Old Debentures 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
Debentures 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.
Holdings does not currently anticipate that it will register the Old Debentures
under the Securities Act. To the extent that Old Debentures are tendered and
accepted in the Exchange Offer, the trading market for untendered and tendered
but unaccepted Old Debentures could be adversely affected. See "The Exchange
Offer--Terms of the Exchange Offer."
ABSENCE OF PUBLIC MARKET
The Old Debentures 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 Debentures. If such a market were to develop, the New Debentures
could trade at prices that may be higher or lower than their principal amount.
Holdings does not intend to apply for listing of the New Debentures on any
securities exchange or for quotation of the New Debentures on The Nasdaq Stock
Market's National Market or otherwise. The Initial Purchasers have previously
made a market in the Old Debentures, and Holdings has been advised that the
Initial Purchasers currently intend to make a market in the New Debentures, 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 Debentures or the New Debentures 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 Debentures or that any active public market for
the New Debentures will develop or continue. If an active public market does
not develop or continue, the market price and liquidity of the New Debentures
may be adversely affected.
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<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 at 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 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 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 operation are, and future operations are expected to be,
limited to owning the stock of Operating Corp. Operating Corp. 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) $45.1 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) $100.0 million of gross proceeds from the sale by Operating
Corp. of the Senior Subordinated Notes in a separate offering.
The Equity Repurchase, the Offering, the Debt Retirement, the issuance and
sale by Holdings of Holdings Preferred Stock and the Warrants, the issuance and
sale by Operating Corp. of Senior Subordinated Notes and the borrowing by
Operating Corp. of funds under the Bank Facilities (which proceeds were
distributed by Operating Corp. 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
Senior Subordinated Notes........................................ 100,000
Debentures offered in the Offering............................... 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 Other
Indebtedness."
(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.
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
23
<PAGE>
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 Holdings from the issuance of the
New Debentures pursuant to the Exchange Offer. The proceeds from the sale of
the Old Debentures 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 Company. See "The Recapitalization," "Use of Proceeds," "Description of
Other Indebtedness" and "Description of the New Debentures." This table should
be read in conjunction with the "Selected Historical and Pro Forma Consolidated
Financial Data" included elsewhere in this Prospectus (in thousands).
<TABLE>
<CAPTION>
<S> <C>
Debt (including current maturities):
Revolving Credit Facility (1).......................... $ 6,250
Term Loan Facilities (2)............................... 79,875
Senior Subordinated Notes.............................. 100,000
Debentures offered hereby.............................. 46,219
-----------
Total debt........................................... 232,344
Holdings Redeemable Preferred Stock (3).................. 33,581
Stockholders' equity (deficit) (3):
Common stock, $0.01 par value; 50,00 shares
authorized; 1,491 shares outstanding................... 15
Warrants............................................... 10,640
Additional paid in capital............................. 1,488
Accumulated deficit.................................... (186,381)
-----------
Total shareholders' deficit.......................... (174,238)
-----------
Total capitalization................................. $ 91,687
===========
</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."
(3) Represents the purchase by the Sponsors and other investors of Holdings
Preferred Stock and the Warrants for an aggregate purchase price of $47.0
million. The net proceeds after reduction for $1.2 million in officer notes
receivable and $1.3 million in issuance costs were allocated to Holdings
Preferred Stock ($32.5 million) and the Warrants ($12.0 million). At
closing of the Recapitalization, Warrants were exercised for the
acquisition of 417,382 shares of Holdings Common Stock.
24
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma consolidated financial data of the Company
(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. The 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 Holdings' results of operations or financial position would
have been had the Recapitalization and the Empire Acquisition occurred on the
assumed dates, or to project Holdings' 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 OPERATING
HOLDINGS (1) EMPIRE (2) ACQUISITION CORP. HOLDINGS PRO FORMA
------------ ---------- ----------- --------- -------- ---------
(IN THOUSANDS)
<S> <C> <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) 6,188 (7) 24,018
-------- ------ ----- -------- ------- --------
Income (loss) before
income taxes......... 22,005 322 (430) (12,946) (6,188) 2,763
Provision (benefit) for
income taxes........... 1,376 -- -- 2,424 (6) (2,500)(6) 1,300
-------- ------ ----- -------- ------- --------
Income (loss) from
continuing operations
before nonrecurring
charges directly
attributable to the
Recapitalization.... $ 20,629 $ 322 $(430) $(15,370) $(3,688) $ 1,463
Preferred stock dividends
and accretion
Income (loss) applicable
tocommon stock before
nonrecurring charges
directly attributable
to the Recapitali-
zation.............. -- -- -- -- 5,202(8) 5,202
-------- ------ ----- -------- ------- --------
$ 20,629 $ 322 $(430) $(15,370) $(8,890) $ (3,739)
======== ====== ===== ======== ======= ========
</TABLE>
FOR THE SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
Pro Forma Adjustments
----------------------------
HISTORICAL OPERATING CORP. HOLDINGS PRO FORMA
---------- -------------- -------- ---------
(IN THOUSANDS)
<S> <C> <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 ad-
ministrative expenses.. 12,634 -- (6,094)(9) 6,540
Goodwill amortization... 841 -- -- 841
------- ------- ------- -------
Operating income...... 3,735 -- 6,094 9,829
Interest expense........ 7,637 2,760 (5) 1,904 (10) 12,302
------- ------- ------- -------
Loss before income
taxes................ (3,902) (2,760) (4,190) (2,473)
Provision (benefit) for
income taxes........... (2,831) 994 (6) 737 (6) (1,100)
------- ------- ------- -------
Income (loss) from
continuing operations
before nonrecurring
charges directly
attributable to the
Recapitalization..... (1,071) $(3,794) $ 3,453 $ (1,373)
Preferred stock
dividends and
accretion.............. 1,046 -- 1,841 (8) 2,887
------- ------- ------- -------
Income (loss)
applicable to common
stock before nonrecurring
charges directly
attributable to the
Recapitalization....... $(2,117) $(3,754) $ 1,612 $(4,260)
======= ======= ======= =======
</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 the two months of interest expense for the Empire Acquisition
at $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 (in
thousands):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE SIX MONTHS
DECEMBER 31, 1997 JUNE 30, 1998
----------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Interest on the Senior Subordinated 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 adjust-
ment 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.
(7) Represents the increase in non-cash interest expense of $6.0 million
relating to the accretion of original issue discount of the Debentures
at an annual rate of 12.875%, compounded semi-annually, and amortization
of deferred financing costs of $0.2 million.
(8) Represents dividends and accretion on the redeemable preferred stock at
an annual effective rate of 15%, compounded semi-annually.
(9) Pro forma adjustments relating to the Recapitalization were as follows:
Legal & advisory fees $ 3,508
Management bonus payments 1,603
payable upon Recapitalization
Compensation expense related 589
to repurchase of common stock
upon exercise of stock options
Other recapitalization expenses 394
--------
Total $ 6,094
========
(10) Represents the increase in non-cash interest expense of $1.8 million,
relating to the accretion of the original discount of the Debentures at
an annual rate of 12.875%, compounded semi-annually, and amortization of
deferred financing costs of $0.1 million.
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 Holdings
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 Holdings 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 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 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
ENDED
YEAR ENDED DECEMBER 31, PRO FORMA JUNE 31, 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 12,634 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 3,735 9,829
Interest expense........ 639 492 3,963 3,858 4,550 24,018 2,160 7,167 12,302
------- ------- ------- ------- -------- -------- ------- ------- -------
Income (loss) before
provision for income
taxes................. 5,784 3,578 6,454 13,443 22,005 2,763 8,871 (3,902) (2,473)
Provision (benefit) for
income taxes........... 1,827 -- 2,352 5,807 1,376 1,300 1,376 (2,831) (1,100)
------- ------- ------- ------- -------- -------- ------- ------- -------
Net income (loss)...... $ 3,957 $ 3,578 $ 4,102 $ 7,636 $ 20,629 $ 1,463 $ 7,495 $(1,071) $(1,373)
======= ======= ======= ======= ======== ======== ======= ======= =======
UNAUDITED PRO FORMA
INCOME TAX DATA:
Income (loss) before
income taxes........... $ 5,784 $ 3,578 $ 6,454 $13,443 $ 22,005 $ 2,763 $ 8,871 $(3,902) $(2,473)
Provision (benefit) for
income taxes(1)........ 2,140 1,324 2,700 5,807 9,000 1,300 3,500 (1,600) (1,100)
------- ------- ------- ------- -------- -------- ------- ------- -------
Pro forma net income
(loss)................. $ 3,644 $ 2,254 $ 3,754 $ 7,636 $ 13,005 $ 1,463 $ 5,371 $(2,302) $(1,373)
======= ======= ======= ======= ======== ======== ======= ======= =======
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 78 --
Cash flows used
in investing
activities............. (836) (585) (44,359) (1,979) (28,746) -- (25,946) (1,273) --
Cash flows from (used
in) financing
activities............. (1,710) (3,082) 36,562 (11,868) 7,433 -- 18,115 1,195 --
EBITDA(3)............... 7,630 5,320 14,178 21,505 31,223 31,637 13,286 5,840 11,934
EBITDA margin(4)........ 22.8% 17.0% 18.3% 23.8% 26.4% 26.2% 24.3% 10.0% 20.4%
Capital expenditures.... $ 836 $ 585 $ 1,926 $ 1,979 $ 4,050 $ 4,050 $ 1,250 $ 1,273 $ 1,273
CREDIT DATA:
Interest expense(2).............................................. $ 22,927 -- -- $ 11,757
Ratio of EBITDA to interest expense(2)........................... 1.4 x -- -- 1.0 x
Ratio of total debt to EBITDA.................................... 7.3 x -- -- N/A
Ratio of earnings to fixed charges(5)............................ 1.1 x -- -- (6)
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30, 1998
------------------------ -------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
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 94,550 108,983
Total debt, including
current maturities......... 7,629 7,347 46,713 34,845 49,497 232,344
Redeemable preferred
stock...................... -- -- -- -- -- 33,581
Shareholders' equity
(deficit) ................. 5,246 6,024 10,118 17,754 27,930 (174,238)
</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).
(6) Earnings were inadequate to cover fixed charges by $2.5 million.
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 MARCH 31,
----------------------------------------- --------------------------
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
allowances............. (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% $58.6 100.0%
===== ===== ===== ===== ====== ===== ===== ===== ===== =====
EBITDA(1)............... $14.2 18.3% $21.5 23.8% $ 31.2 26.4% $13.4 24.5% $ 5.8 9.9%
===== ===== ===== ===== ====== ===== ===== ===== ===== =====
Recapitalization
Expenses(2)............. -- -- 6.1 10.4
----- ----- ----- -----
Adjusted EBITDA (3)..... $13.4 24.5% $11.9 20.3%
===== ===== ===== =====
- --------
(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 Debentures 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 one time costs incurred in connection with the Recapitalization
including brokerage fees ($2.7 million), change in control management
bonuses and option payments ($2.2 million) and legal and professional fees
($1.2 million).
(3) 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.
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED MARCH 31,
------------------------------------------- ---------------------------
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
administrative
expenses............... 10.1 13.0 9.2 10.2 11.4 9.6 5.3 9.7 6.5 11.1
Recapitalization
expenses............... -- -- -- -- -- -- -- -- 6.1 10.4
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 3.8 6.5
Interest expense........ 4.0 5.1 3.9 4.3 4.6 3.9 2.2 4.0 7.6 13.0
----- ----- ----- ----- ------ ----- ----- ----- ----- -----
Income (loss) before
provision for income
taxes................. $ 6.5 8.4% $13.4 14.9% $ 22.0 18.6% $ 8.8 16.1% $(3.8) (6.5%)
===== ===== ===== ===== ====== ===== ===== ===== ===== =====
</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 allowance. Gross sales of Cutlery products increased 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 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 other than 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%.
32
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses as a percentage of net sales 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 nonrecurring 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.
RECAPITALIZATION EXPENSES. One time charges of $6.1 million associated with
the Recapitalization were expensed, including brokerage fees
of $2.7 million, change of control management bonuses and option payments of
$2.2 million and legal, professional and accounting fees of $1.2 million.
GOODWILL AMORTIZATION. Goodwill amortization in the six months ended June 30,
1998 $0.8 million, from $0.7 million in 1997 as the result of the Empire
Acquisition.
INTEREST EXPENSE. Interest expense for the six months ending June 30, 1998
increased to $7.6 million from $2.2 million for the six months ended
June 30, 1997. This increase is the result 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.
33
<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
34
<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 were $1.2 million compared to $1.3 million for the six
months ended March 31, 1998. 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 aggregate principal amount of Senior Subordinated 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; $84.0
million aggregate principal amount at maturity of Debentures, of which $45.1
million was received in gross proceeds and $47.0 million of Holdings Preferred
Stock. In April 2003, the Company will be required to redeem a certain amount
of Debentures equal to (i) $33.2 million multiplied by (ii) the quotient
obtained by dividing (x) the aggregate principal amount at maturity of
Debentures then outstanding by (y) $84.0 million, at a redemption price equal
to 100% of the principal amount of Debentures so redeemed. See "Capital Stock
of Holdings and Operating Corp." and "Description of Other Indebtedness."
Commencing October 15, 2003, the Company will be required to make semi-annual
cash payments of interest on the Debentures. Holdings' ability to make the
foregoing payments will depend upon the ability of Operating Corp. to
distribute funds to Holdings, which in turn will be subject to certain
restrictions contained in the Operating Corp. Indenture and the Bank
Facilities. See "Risk Factors--Risk Factors Relating to the
Debentures--Limitation on Access to Cash Flow of Subsidiaries; Holding Company
Structure."
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 the 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 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 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
35
<PAGE>
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.
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 to have an adverse material effect on the Company's results of
operations.
36
<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 $5.8 million, which represented an EBITDA margin of
10.0%
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.
37
<PAGE>
. 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.
. 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
38
<PAGE>
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. 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 acqusition 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.
39
<PAGE>
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 ENDED ENDED ENDED
DECEMBER 31, JUNE 30, DECEMBER 31, 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 31.1
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 $ 59.6 $ 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.
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.
40
<PAGE>
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 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.
41
<PAGE>
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 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.
42
<PAGE>
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.
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.
43
<PAGE>
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.
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.
44
<PAGE>
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.
PROPERTIES
The following table sets forth certain information regarding the Company's
facilities:
<TABLE>
<CAPTION>
SIZE LEASE
LOCATION PRIMARY USE (SQUARE FEET) TITLE EXPIRATION
- -------- ----------- ------------- ------ -----------
<S> <C> <C> <C> <C>
Cloquet, Minnesota...... Manufacturing of matches, toothpicks 290,000 Owned --
and ice cream and corn dog sticks;
warehouse; administration
Minneapolis, Minnesota.. Sales and marketing 5,000 Leased April 2000
East Wilton, Maine...... Manufacturing of plastic cutlery and 75,000 Owned --
plastic clothespin; administration
East Wilton, Maine...... Warehouse 150,000 Owned --
East Wilton, Maine...... Printing; warehouse 240,000 Owned --
Strong, Maine........... Manufacturing of toothpicks,clothespins 62,000 Owned --
and wooden crafts
Kansas City, Kansas..... Manufacturing of candles;warehouse; 282,000 Leased July 2000(1)
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.
45
<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 and Operating
Corp. Each director of Holdings and Operating Corp. will hold office until the
next annual meeting of stockholders or until his or her successor has been
elected and qualified. Officers of Holdings and Operating Corp. 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 and Operating
Corp. 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 and Operating Corp. 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 and Operating Corp. 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.
46
<PAGE>
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
47
<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 and Operating Corp. have approved the
formation of an audit committee ("Audit Committee") and a compensation
committee ("Compensation Committee"). Mr. Seaver and Mr. Kent are the only
members of the Audit and Compensation Committees. No other Audit or
Compensation Committee members have been appointed, but the Board of Directors
of Holdings and Operating Corp. 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 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.
47
<PAGE>
DIRECTOR COMPENSATION
Members of the Board of Directors of Holdings and Operating Corp. 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 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 SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS UNDERLYING OPTIONS COMPENSATION
- --------------------------- ---- -------- -------- -------------------- ------------
<S> <C> <C> <C> <C> <C>
Edward A. Michael....... 1997 $225,000 $118,102 -- $13,021(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 1996 -- -- -- --
Officer, Empire Candle, 1995 -- -- -- --
Inc.
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(6)
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(9)
Operations--Maine 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
$6,087 to the profit sharing plan.
48
<PAGE>
The option grants in 1997 for the named executive officers are shown in the
following table.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
OF STOCK PRICE
APPRECIATION
FOR OPTION TERM
---------------------------
NUMBER OF
SECURITIES EXERCISE OF
UNDERLYING OPTION BASE PRICE
NAME AND PRINCIPAL POSITION GRANTED ($/SHARE) EXPIRATION 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, 2006 244,334 389,061
Vice President of
Operations--Minnesota
Thomas W. Knuesel....... 20,000 7.50 December 31, 2006 244,334 389,061
Vice President of
Finance and Chief
Finance Officer
Richard S. Campbell..... 20,000 7.50 December 31, 2006 244,334 389,061
Vice President of
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
NUMBER OF UNDERLYING UNEXERCISED IN-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
Financial Officer
Richard S. Campbell..... 0 0 6,667/13,333 72,204/144,396
Vice President of
Operations--Maine
</TABLE>
49
<PAGE>
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 under "Certain Relationships and Related Transactions"), the Company
also 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.
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 rights also apply that 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 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
50
<PAGE>
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.
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 is
$137,000, $137,000, $152,000 and $137,000, respectively.
The Company maintains a bonus program pursuant to which each of
Messrs. Knuesel, Mathews, Young and Campbell has the opportunity
to earn an annual bonus based upon annual target EBIDTA, 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 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 recommendation of the President and CEO determined the level
of officer bonuses. A compensation committee was formed 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.
51
<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 pursuant to
which Seaver Kent is entitled 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 Company 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 Company
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 of $13.98 per share 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, 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."
52
<PAGE>
CAPITAL STOCK OF HOLDINGS AND OPERATING CORP.
GENERAL
Holdings is authorized by the terms of its Articles of Incorporation to
issue an aggregate total of 50,000,000 shares of capital stock. Holdings
currently has outstanding 1,490,650 shares of common stock and 47,000 shares
of Holdings Preferred Stock.
Operating Corp.'s Certificate of Incorporation authorizes Operating Corp. to
issue 1,000 shares of common stock, par value $.01 per share. Operating Corp.
has issued and outstanding 1,000 shares of common stock, each share is which
is entitled to one vote. Holdings owns all of the issued and outstanding stock
of Operating Corp. Holdings does not have any material assets other than the
common stock of Operating Corp.
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 Operating Corp.
Indenture, the Bank Facilities, the New Debentures offered hereby and other
documents relating to the Company'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 Operating Corp.
Indenture, the Bank Facilities, the New Debentures offered hereby and other
documents relating to the Company'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
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME AND ADDRESS TITLE OF BENEFICIAL OWNERSHIP PERCENT OF
OF BENEFICIAL OWNER CLASS (NUMBER OF SHARES) CLASS
------------------- --------------------- -------------------- ----------
<S> <C> <C> <C>
Seaver Kent-TPG
Partners, L.P.......... Holdings Common Stock 2,659,320(1) 55.75%(3)
3000 Sand Hill Road,
Suite 230
Menlo Park, California
94025
Seaver Kent I
Parallel, L.P.......... Holdings Common Stock 265,217(2) 5.56%(4)
3000 Sand Hill Road,
Suite 230
Menlo Park, California
94025
Alexander M. Seaver..... -- -- (5) --
Bradley R. Kent......... -- -- (6) --
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
Edward A. Michael....... Holdings Common Stock 97,272 2.04%
4901 Golf Share Blvd.
Suite #201
Naples, Florida 34103
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME AND ADDRESS TITLE OF BENEFICIAL OWNERSHIP PERCENT OF
OF BENEFICIAL OWNER CLASS (NUMBER OF SHARES) CLASS
------------------- --------------------- -------------------- ----------
<S> <C> <C> <C>
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) 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) Includes 49.45% represented by unexercised, issuable Warrants as described
in note (1) above.
(4) Includes 4.93% represented by unexercised, issuable Warrants as described
in note (2) above.
(5) 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.
(6) 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.
54
<PAGE>
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....... 92,272 -- 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>
- --------
(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.
55
<PAGE>
(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.
56
<PAGE>
DESCRIPTION OF OTHER INDEBTEDNESS
THE BANK FACILITIES
On the closing date of the Recapitalization (the "Closing Date"), Operating
Corp. entered into the Bank Facilities among Operating Corp., 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 Operating Corp. 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 Operating Corp.'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 Operating Corp.
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
Operating Corp.'s obligations under the Bank Facilities are guaranteed by
each of its 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 Operating Corp. and
each of its existing and future direct and indirect domestic subsidiaries,
(ii) all of the capital stock of Operating Corp. and (iii) all of the capital
stock (or similar equity interests) of Operating Corp.'s existing and future
direct and indirect domestic subsidiaries.
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INTEREST; MATURITY
At Operating Corp.'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
Operating Corp. 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. Operating
Corp. 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),
Operating Corp. and its subsidiaries to dispose of assets, incur additional
indebtedness, prepay other indebtedness (including the Senior Subordinated
Notes) or amend certain debt instruments (including the Operating Corp.
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 Operating
Corp. 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, Operating Corp. 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. Operating Corp. 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
Operating Corp. 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
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
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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 Senior Subordinated Notes and the Debentures), certain events of
bankruptcy and insolvency, material judgments against Operating Corp.,
invalidity of any guarantee or security interest and a change of control of
Operating Corp. in certain circumstances as set forth therein.
SENIOR SUBORDINATED NOTES
The Senior Subordinated Notes were issued in an aggregate principal amount
of $100.0 million and will mature on April 15, 2008. The Senior Subordinated
Notes were issued under an Indenture dated as of April 21, 1998 (the
"Operating Corp. Indenture") among Operating Corp., as issuer, each of
Operating Corp.'s direct and indirect subsidiaries (other than such
subsidiaries that do not guarantee any indebtedness of Operating Corp. or any
other subsidiary), as guarantors, and State Street Bank and Trust Company, as
trustee, and are senior subordinated unsecured obligations of Operating Corp.
The Senior Subordinated Notes will bear interest at the rate of 10 1/8% per
annum, payable semi-annually on October 15 and April 15, commencing October
15, 1998, to the holders of record on the immediately preceding October 1 and
April 1, respectively.
On or after April 15, 2003, the Senior Subordinated Notes may be redeemed at
the option of Operating Corp., in whole or in part, at any time, at the
redemption price (expressed as percentages of the principal amount) set forth
below, plus accrued and unpaid interest and Liquidated Damages, if any,
thereon to the redemption date, if redeemed during the twelve-month period
commencing on April 15 in the years set forth below:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
---- ----------------
<S> <C>
2003...................................................... 105.063%
2004...................................................... 103.375%
2005...................................................... 101.688%
2006 and thereafter....................................... 100.000%
</TABLE>
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Notwithstanding the foregoing, at any time prior to April 15, 2001,
Operating Corp. may redeem up to 35% of the aggregate principal amount of the
Senior Subordinated 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 therein); provided that
at least 65% of the original aggregate principal amount of the Senior
Subordinated Notes remains outstanding immediately after such redemption.
In the event of a Change of Control (as defined in the Operating Corp.
Indenture), each holder of Senior Subordinated Notes has the right to require
the repurchase of such holder's Senior Subordinated Notes in cash 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 Operating Corp. Indenture contains covenants that will limit, among
other things, the ability of Operating Corp. and its Restricted Subsidiaries
(as defined therein) to: (i) pay dividends, redeem capital stock or make
certain other restricted payments or investments; (ii) incur additional
indebtedness or issue preferred equity interests; (iii) merge, consolidate or
sell all or substantially all of its assets; (iv) create liens on assets; and
(v) enter into certain transactions with affiliates or related persons. In
addition, under certain circumstances Operating Corp. will be required to make
an offer to purchase Senior Subordinated Notes at a price equal to 100% of the
principal amount thereof, plus accrued and unpaid interest and Liquidated
Damages, if any, thereon to the date of purchase with the proceeds of certain
Asset Sales (as defined therein). The Operating Corp. Indenture contains
certain customary events of default, which include the failure to pay interest
and principal, the failure to comply with certain covenants in the Senior
Subordinated Notes or such Operating Corp. Indenture, a default under certain
indebtedness, the imposition of certain final judgments or warrants of
attachment and certain events occurring under bankruptcy laws. See "Risk
Factors--Risk Factors Relating to the Debentures--Limitation on Access to Cash
Flow of Subsidiaries; Holding Company Structure."
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THE EXCHANGE OFFER
The following is a summary of the material provisions of the Registration
Rights Agreement. The 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 Debentures pursuant to a Purchase
Agreement dated as of April 15, 1998, by and among the Issuer 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 is 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 Debentures. Under the Registration Rights Agreement, the Issuer
is required to (i) use its best efforts to cause such Exchange Offer
Registration Statement to become effective within 150 days after the Closing
Date, (ii) use its best efforts to keep the Exchange Offer open for at least 20
business days (or longer if required by applicable law), (iii) use its best
efforts to consummate the Exchange Offer within 195 days after the Closing Date
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 Debentures 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 Debentures of the same class will be issued
in exchange for an equal principal amount at maturity of outstanding Old
Debentures accepted in the Exchange Offer. Old Debentures may be tendered only
in integral multiples of $1,000 of principal amount at maturity. 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 at maturity of Old Debentures
being tendered in exchange. However, the obligation to accept Old Debentures for
exchange pursuant to the Exchange Offer is subject to certain conditions as set
forth herein under "--Conditions."
Old Debentures 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 Debentures for the purposes of receiving the New Debentures and
delivering New Debentures 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 believes that the New Debentures 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
Debentures 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
Debentures 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 Debentures and has no arrangement with any person to
participate in a distribution of such New Debentures. By tendering the Old
Debentures in exchange for New Debentures, each holder, other than a
Participating Broker-Dealer, will represent to the Issuer 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 Debentures acquired for its own
account directly from the Issuer; (iii) any New Debentures to be received by
it
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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
Debentures and has no arrangement or understanding to participate in a
distribution of the New Debentures. If a holder of New Debentures is engaged
in or intends to engage in a distribution of the New Debentures or has any
arrangement or understanding with respect to the distribution of the New
Debentures 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 Debentures 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 Debentures. 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 Debentures
received in exchange for Old Debentures where such Old Debentures were
acquired by such Participating Broker-Dealer as a result of market-making
activities or other trading activities. The Issuer has agreed that it 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 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 Debentures 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 Debentures
acquired directly from the Issuer or one of its affiliates, then the Issuer 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 its 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 will use its 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 (as defined below) 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 Debenture, until the earliest to occur of (a) the
date on which such Old Debenture 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
Debenture has been disposed of in accordance with a Shelf Registration
Statement, (c) the date on which such Old Debenture 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 Debenture 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
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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 has agreed 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 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 Debentures 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 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 Debentures who do not exchange their Old Debentures for New
Debentures in the Exchange Offer will no longer be entitled to registration
rights and will not be able to offer or sell their Old Debentures, unless such
Old Debentures 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 Debentures--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 expects that the Exchange Offer would be extended only to
allow holders of the Old Debentures 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 Debentures.
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 Debentures 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 reserves the right (i) to delay acceptance of any Old Debentures,
to extend the Exchange Offer or to terminate the Exchange Offer and not permit
acceptance of Old Debentures not previously accepted if any of the conditions
set forth herein under "--Conditions" has occurred and has not been waived by
the Issuer, 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
Debentures. 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
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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 Debentures of such amendment.
YIELD AND INTEREST ON THE NEW DEBENTURES
12 7/8% (computed on a semi-annual bond equivalent basis) calculated from
April 21, 1998. The New Debentures will accrete at a rate of 12 7/8%, compounded
semi-annually, to an aggregate principal amount at maturity of $84.0 million by
April 15, 2003. Cash interest will not accrue on the New Debentures prior to
April 15, 2003. Beginning on April 15, 2003, cash interest on the New Debentures
will accrue and be payable, at a rate of 12 7/8% per annum, semi-annually in
arrears on each October 15 and April 15 commencing October 15, 2003.
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 Debentures 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 Debentures, 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 DEBENTURES, LETTERS OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS OF OLD
DEBENTURES. 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 DEBENTURES 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 Debentures 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 Debentures 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 Debentures may tender such Old Debentures in the
Exchange Offer. The term "holder" with respect to the Exchange Offer means any
person in whose name Old Debentures 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 Debentures 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 Debentures, either
make appropriate arrangements to register ownership of the Old Debentures 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 Debentures tendered pursuant thereto are tendered (i) by a registered
holder who has
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not completed the box entitled "Special Issuance Instructions" or "Special
Delivery Instructions" on the Letter of Transmittal or (ii) for the account of
an Eligible Institution.
If the Letter of Transmittal is signed by a person other than the registered
holder of any Old Debentures listed therein, such Old Debentures must be
endorsed or accompanied by bond powers and a proxy which authorizes such
person to tender the Old Debentures on behalf of the registered holder, in
each case as the name of the registered holder or holders appears on the Old
Debentures.
If the Letter of Transmittal or any Old Debentures 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 Debentures 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
Debentures not properly tendered or any Old Debentures 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 Debentures. 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
Debentures must be cured within such time as the Issuer will determine.
Neither the Issuer, 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 Debentures, nor will any of them incur any liability for failure to
give such notification. Tenders of Old Debentures will not be deemed to have
been made until such irregularities have been cured or waived. Any Old
Debentures 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 Debentures, 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
Debentures 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 Debentures 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 DEBENTURES FOR EXCHANGE; DELIVERY OF NEW DEBENTURES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
all Old Debentures properly tendered will be accepted, promptly after the
Expiration Date, and the New Debentures will be issued promptly after
acceptance of the Old Debentures. See "--Conditions" below. For purposes of
the Exchange Offer, Old Debentures 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 Debentures for Old Debentures 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 Debentures
or a timely Book-Entry Confirmation of such Old Debentures 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 Debentures are not accepted for any reason set forth in the terms
and conditions of the Exchange Offer or if Old Debentures are submitted for a
greater principal amount than the holder desires to exchange, such unaccepted
or nonexchanged Old Debentures will be returned without expense to the
tendering holder thereof (or, in the case of Old Debentures tendered by book-
entry transfer procedures described below, such nonexchanged Old Debentures
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 Debentures 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 Debentures by causing
the Book-Entry Transfer Facility to transfer such Old Debentures 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 Debentures 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 Debentures desires to tender such Old
Debentures, and the Old Debentures are not immediately available, or time will
not permit such holder's Old Debentures 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
Debentures and the amount of Old Debentures 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
Debentures, 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 Debentures, 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 Debentures 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 Debentures to be withdrawn, identify the Old
Debentures to be withdrawn (including the principal amount of such Old
Debentures) and (where certificates for Old Debentures have been transmitted)
specify the name in which such Old Debentures are registered, if different
from that of the withdrawing holder. If certificates for Old Debentures 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 Debentures 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
Debentures 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 Debentures so withdrawn will be
deemed not to have been validly tendered for exchange for purposes of the
Exchange Offer. Any Old Debentures which have been tendered for exchange but
which are not exchanged for
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any reason will be returned to the holder thereof without cost to such holder
(or, in the case of Old Debentures tendered by book-entry transfer into the
Exchange Agent's account at the Book-Entry Transfer Facility pursuant to the
book-entry transfer procedures described above, such Old Debentures will be
credited to an account maintained with such Book-Entry Transfer Facility for
the Old Debentures) as soon as practicable after withdrawal, rejection of
tender or termination of the Exchange Offer. Properly withdrawn Old Debentures
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 Debentures will not
be required to be accepted for exchange, nor will New Debentures be issued in
exchange for any Old Debentures, and the Issuer may terminate or amend the
Exchange Offer as provided herein before the acceptance of such Old Debentures,
if because of any change in law, or applicable interpretations thereof by the
Commission, the Issuer determines that it is not permitted to effect the
Exchange Offer. The Issuer has no obligation to, and will not knowingly, permit
acceptance of tenders of Old Debentures from affiliates (within the meaning of
Rule 405 under the Securities Act) of the Issuer 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
Debentures to be received by such holder or holders of Old Debentures 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 Attention: Corporate Trust
Department 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
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services and will reimburse the Exchange Agent for its reasonable out-of-
pocket expenses in connection 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 Debentures, 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 Debentures pursuant to the Exchange Offer. If, however, certificates
representing New Debentures or Old Debentures 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 New the Old Debentures tendered, or if tendered Old Debentures 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 Debentures 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 DEBENTURES
GENERAL
The Old Debentures were issued, and the New Debentures offered hereby will be
issued pursuant to the Indenture dated as of April 21, 1998 between the Issuer
and State Street Bank and Trust Company, as trustee (the "Trustee")." The terms
of the New Debentures 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 Debentures will be subject to all
such terms, and prospective holders of New Debentures 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 Debentures will be general unsecured obligations of the Issuer and
will be pari passu in right of payment to all current and future unsubordinated
Indebtedness of the Issuer and senior in right of payment to all subordinated
Indebtedness of the Issuer. The operations of the Issuer are conducted entirely
through its Subsidiaries and, therefore, the Issuer is substantially dependent
upon the cash flow of its Subsidiaries to meet its obligations, including its
obligations under the New Debentures. See "Risk Factors--Risk Factors Relating
to the Debentures--Limitation on Access to Cash Flow of Subsidiaries; Holding
Company Structure." The Bank Facilities and the Senior Subordinated Notes will
restrict Operating Corp. from paying any dividends or making any other
distributions to the Issuer. The ability of Operating Corp. to comply with the
conditions in the Senior Subordinated Notes may be affected by certain events
that are beyond the Issuer's control. The New Debentures will be effectively
subordinated to all Indebtedness and other liabilities (including, without
limitation, to Operating Corp.'s obligations under the Bank Facilities and the
Senior Subordinated Notes). Any right of the Issuer to receive assets of any of
its Subsidiaries upon such Subsidiary's liquidation or reorganization (and the
consequent right of holders of the Senior Subordinated Notes to participate in
those assets) will be effectively subordinated to the claims of that
Subsidiary's creditors except to the extent that the Issuer itself is
recognized as a creditor of such Subsidiary, in which case the claims of the
Issuer would still be subordinate to the claims of such creditors who hold
security in the assets of such Subsidiary and to the claims of such creditors
who hold Indebtedness of such Subsidiary senior to that held by the Issuer. As
of June 30, 1998, the Issuer had Indebtedness of approximately $232.3 million
(all of which would have been attributable to the Old Debentures) and the
Company's Subsidiaries would have had outstanding approximately $186.1 million
of Indebtedness, including Indebtedness under the Senior Subordinated Notes and
the Bank Facilities. The Indenture will permit the incurrence of certain
additional Indebtedness of the Issuer and the Issuer's Subsidiaries in the
future. See "--Certain Covenants-- Incurrence of Indebtedness and Issuance of
Preferred Stock."
As of the Issue Date, all of the Issuer's subsidiaries will be 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.
PRINCIPAL, MATURITY AND INTEREST
New Debentures in an aggregate principal amount at maturity of up to $84.0
million will be issued in the Exchange Offer. The New Debentures will mature
on April 15, 2009. The Debentures will be issued at a substantial discount
from their aggregate principal amount at maturity. Until April 15, 2003, no
cash interest will accrue or be payable on the New Debentures, but the
Accreted Value will increase (representing amortization of original issue
discount) between the date of original issuance and April 15, 2003, on a semi-
annual bond equivalent basis using a 360-day year comprised of twelve 30-day
months, such that the Accreted Value shall be equal to the full principal
amount at maturity of the New Debentures on April 15, 2003. Beginning on April
15,
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2003, interest on the New Debentures will accrue at the rate of 12 7/8% per
annum and will be payable semi-annually in arrears on October 15 and April 15,
commencing October 15, 2003, to holders of record on the immediately preceding
October 1 and April 1, respectively. Interest on the New Debentures will
accrue from the most recent date to which interest has been paid or, if no
interest has been paid, from April 15, 2003. 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 Debentures
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 New Debentures at their respective addresses set
forth in the register of holders of New Debentures; provided that all payments
of principal, premium, interest and Liquidated Damages with respect to New
Debentures represented by one or more permanent global debentures ("Global
Debentures") 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
Debentures will be issued in denominations of $1,000 of principal amount at
maturity and integral multiples thereof.
OPTIONAL REDEMPTION
Except as described below, the New Debentures will not be redeemable at the
Issuer's option prior to April 15, 2003. Thereafter, the New Debentures 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>
YEAR REDEMPTION 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, the
Issuer may (but shall not have the obligation to) redeem, on one or more
occasions, up to an aggregate of 35% of the principal amount at maturity of New
Debentures originally issued at a redemption price equal to 112.875% of the
Accreted Value thereof plus 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% of the aggregate principal amount at maturity of the
New Debentures originally issued remains outstanding immediately after the
occurrence of such redemption; and provided further, that such redemption will
occur within 90 days of the date of the closing of such Equity Offering.
MANDATORY REDEMPTION
Except as described herein, the Issuer may not redeem the New Debentures prior
to April 15, 2003. On April 15, 2003, the Issuer will be required to redeem New
Debentures with an aggregate principal amount at maturity equal to (i) $33.2
million multiplied by (ii) the quotient obtained (other than New Debentures then
held by the Issuer or its Subsidiaries or entities with respect to which the
Issuer is a direct or indirect subsidiary) by dividing (x) the aggregate
principal amount at maturity of New Debentures then outstanding by (y) $84.0
million, at a redemption price equal to 100% of the principal amount at maturity
of the New Debentures so redeemed. The Operating Corp. Indenture, the Bank
Facilities and the Senior Subordinated Notes restrict Operating Corp. from
paying any dividends or making any other distributions to the Issuer. If the
Issuer is unable to obtain dividends from Operating Corp. sufficient to permit
the Mandatory Debenture Redemption, the Issuer will likely not have the
financial resources to consummate the Mandatory Debenture Redemption. In any
event, there can be no assurance that the Issuer's Subsidiaries will have the
resources available to pay any such dividend or make any such distribution. The
Issuer's failure to consummate the Mandatory Debenture Redemption when required
would constitute an Event
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of Default under the Indenture. See "Risk Factors--Risk Factors Relating to
the Company--Substantial Leverage; Liquidity; Stockholders' Deficit" and "--
Risk Factors Relating to the Debentures--Limitation on Access to Cash Flow of
Subsidiaries; Holding Company Structure."
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of New Debentures will
have the right to require the Issuer to repurchase all or any part (equal to the
principal amount at maturity of $1,000 or an integral multiple thereof) of such
holder's New Debentures 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 at maturity thereof plus accrued and unpaid interest and
Liquidated Damages, if any, thereon to the date of purchase or, in the case of
repurchases of New Debentures prior to April 15, 2003, at a purchase price equal
to 101% of the Accreted Value thereof as of the date of repurchase (the "Change
of Control Payment"). Within 65 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 Debentures
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 New Debentures 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 Debentures or portions thereof properly
tendered pursuant to the Change of Control Offer, (2) deposit with the Paying
Agent an amount equal to the Change of Control Payment in respect of all New
Debentures or portions thereof so tendered and (3) deliver or cause to be
delivered to the Trustee the New Debentures so accepted together with an
Officers' Certificate stating the aggregate principal amount of New Debentures
or portions thereof being purchased by the Issuer. The Paying Agent will
promptly mail to each holder of New Debentures so tendered the Change of
Control Payment for such New Debentures, and the Trustee will promptly
authenticate and mail (or cause to be transferred by book entry) to each
holder a new New Debenture equal in principal amount to any unpurchased
portion of the New Debentures surrendered, if any; provided that each such New
Debenture will be in a principal amount at maturity of $1,000 or an integral
multiple thereof. 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 the holders of New Debentures to require that
the Issuer repurchase or redeem the New Debentures in the event of a takeover,
recapitalization or similar transaction.
The Operating Corp. Indenture, the Bank Facilities and the Senior Subordinated
Notes restrict Operating Corp. from paying any dividends or making any other
distributions to the Issuer. If the Issuer is unable to obtain dividends from
Operating Corp. sufficient to permit the repurchase of the New Debentures or
does not refinance such Indebtedness, the Issuer will likely not have the
financial resources to repurchase the New Debentures. In any event, there can be
no assurance that the Issuer's Subsidiaries will have the resources available to
pay any such dividend or make any such distribution. Prior to complying with the
provisions of the preceding paragraphs, but in any event within 90 days
following a Change of Control, the Issuer will either repay all outstanding
Indebtedness of its Subsidiaries or obtain the requisite consents, if any, under
the Bank Facilities and the Senior Subordinated Notes to permit the repurchase
of the New Debentures required by this covenant. See "Risk Factors--Risk Factors
Relating to
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the Company--Substantial Leverage; Liquidity; Stockholders' Deficit" and "--
Risk Factors Relating to the Debentures--Limitation on Access to Cash Flow of
Subsidiaries; Holding Company Structure."
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 Debentures 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 Debentures to
require the Issuer to repurchase such New Debentures 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 Officers'
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
Debentures) 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 395 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 Indebtedness of a Restricted Subsidiary of the Issuer, 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) to 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) to 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 Indebtedness of a Restricted
Subsidiary of the Issuer 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 Debentures and, to the extent required by the terms
of any Pari Passu Indebtedness, to all holders of such Pari Passu Indebtedness
(an "Asset Sale Offer"), to purchase the maximum principal amount at maturity of
Debentures 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 at maturity thereof plus accrued and unpaid interest and
Liquidated Damages thereon, if any, to the date of purchase (or, in the case of
repurchases of Debentures prior to April 15, 2003, at a purchase price equal to
100% of the Accreted Value thereof plus Liquidated Damages, as of the date of
repurchase), in accordance with the procedures set forth in the Indenture or
such Pari Passu Indebtedness, as
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applicable. To the extent any Excess Proceeds remain after consummation of 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 at
maturity (or Accreted Value, as the case may be) of New Debentures and any
such Pari Passu Indebtedness surrendered by holders thereof exceeds the amount
of Excess Proceeds, the Trustee shall select the New Debentures to be
purchased on a pro rata basis. Upon completion of such Asset Sale Offer, the
amount of Excess Proceeds shall be reset at zero.
The Operating Corp. Indenture, the Bank Facilities and the Senior Subordinated
Notes restrict Operating Corp. from paying any dividends or making any other
distributions to the Issuer. If the Issuer is unable to obtain dividends from
Operating Corp. sufficient to permit the repurchase of the New Debentures or
does not refinance such Indebtedness, the Issuer will likely not have the
financial resources to purchase New Debentures. In any event, there can be no
assurance that the Issuer's Subsidiaries will have the resources available to
pay any such dividend or make any such distribution. The Issuer's failure to
make an Asset Sale Offer when required or to purchase tendered New Debentures
when tendered would constitute an Event of Default under the Indenture. See
"Risk Factors--Risk Factors Relating to the Company--Substantial Leverage;
Liquidity; Stockholders' Deficit" and "--Risk Factors Relating to the
Debentures--Limitation on Access to Cash Flow of Subsidiaries; Holding Company
Structure."
SELECTION AND NOTICE
If less than all of the New Debentures are to be redeemed or repurchased in
an offer to purchase at any time, selection of New Debentures 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
Debentures are listed, or, if the New Debentures 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 Debentures redeemed pursuant to the Mandatory
Debenture Redemption, purchased pursuant to an Asset Sale Offer or redeemed
with the proceeds of an Equity Offering shall be selected on a pro rata basis;
provided further that, except for New Debentures redeemed pursuant to the
Mandatory Debenture Redemption, no New Debentures of $1,000 of principal
amount at maturity or less shall be redeemed or repurchased in part. Notices
of redemption may not be conditional. Notices of redemption or repurchase must
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 Debentures to be
redeemed or repurchased at its registered address. If any New Debenture is to
be redeemed or repurchased in part only, the notice of redemption or
repurchase that relates to such New Debenture must state the portion of the
principal amount thereof to be redeemed or repurchased. A new New Debenture 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 Debenture. On and after the redemption or repurchase date, interest and
Liquidated Damages will cease to accrue on New Debentures 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 in connection
with any merger or consolidation involving the Issuer or any Restricted
Subsidiary), 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 Debentures, except a
payment of interest or a
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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 has occurred and is 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 Payments
permitted by clauses (ii), (iii), (iv) and (vi) 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
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
shall 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
shall have occurred and is continuing, the repurchase, redemption or other
acquisition or retirement for value of any Equity Interests of the Issuer, or
any Restricted Subsidiary of the Issuer, held by any member of the Issuer's
(or any of its Restricted 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 shall 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 the Issuer to members of management of the Issuer and its
Subsidiaries (provided that the cash proceeds referred to in this clause (B)
shall be excluded from clause (c)(ii)
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of the preceding paragraph); (vi) distributions made by the Issuer on the date
of the Indenture, the proceeds of which are utilized solely to consummate the
Recapitalization; and (vii) 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 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."
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) shall be the
fair market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued by the Issuer or such
Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment
and (ii) Qualified Proceeds (other than cash) shall 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
shall be determined by the Board of Directors whose resolution with respect
thereto shall be delivered to the Trustee, such determination to be based upon
an opinion or appraisal issued by an accounting, appraisal or investment
banking firm of national standing if such fair market value exceeds $10.0
million. Not later than the date of making any Restricted Payment, the Issuer
shall deliver to the Trustee an Officers' Certificate stating that such
Restricted Payment is permitted and setting forth the basis upon which the
calculations required by the covenant described under "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 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) and that the Issuer will not issue any
Disqualified Stock and will not permit any of its Restricted Subsidiaries to
issue any shares of preferred stock; provided, however, that the Issuer or any
of its Restricted Subsidiaries 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 1.75 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 Indenture also provides that the Issuer will not incur any Indebtedness
that is contractually subordinated in right of payment to any other
Indebtedness of the Issuer unless such Indebtedness is also contractually
subordinated in right of payment to the Debentures on substantially identical
terms; provided, however, that no Indebtedness of the Issuer shall be deemed
to be contractually subordinated in right of payment to any other Indebtedness
of the Issuer solely by virtue of being unsecured.
The provisions of the first paragraph of this covenant will not apply to the
incurrence of any of the following items of Indebtedness (collectively,
"Permitted Debt"):
(i) Indebtedness of the Issuer and its Restricted Subsidiaries under
Credit Facilities; provided that the aggregate principal amount of all
Indebtedness (with letters of credit being deemed to have a principal
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amount equal to the maximum potential liability of the Issuer and its
Restricted Subsidiaries 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 of Indebtedness represented by the
Debentures and the incurrence by Operating Corp. and its Subsidiaries of
Indebtedness represented by the Senior Subordinated Notes and any guarantee
thereof;
(iii) the incurrence by the Issuer or any of its Restricted Subsidiaries
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 Restricted Subsidiary, 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 Debentures 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 its Restricted Subsidiaries
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 Restricted Subsidiary 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 any Restricted Subsidiary of the Issuer of
Indebtedness of any Restricted Subsidiary of the Issuer 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;
(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
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(xiii) the incurrence by the Issuer or any Restricted Subsidiary 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 $20.0 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 Debentures, the New Debentures 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 Debentures) and (y) in all other cases, the New Debentures
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, or (iii) 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 and the Senior Subordinated Notes, 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 or the Senior Subordinated Notes, as
the case may be, as in effect on the date of the Indenture, (b) the Indenture
and the Debentures, (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, 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 (iii) 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.
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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 shall 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 Issuer) or the Person to
which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made assumes all the obligations of the Issuer under the New
Debentures 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 shall have been
made 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, shall 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 the Issuer
created for the purpose of holding the Capital Stock of the Issuer, (b) a
merger between the Issuer and a Wholly Owned Restricted Subsidiary of the
Issuer or (c) a merger between the Issuer and an Affiliate incorporated solely
for the purpose of reincorporating the Issuer in another State of the United
States so long as, in the case of each of clause (a), (b) and (c), 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 Officers' 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 shall 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,"
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(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.
BUSINESS ACTIVITIES
The Issuer will not, and will not permit any Restricted Subsidiary to,
engage in any business other than Permitted Businesses.
REPORTS
The Indenture provides that, whether or not required by the rules and
regulations of the Commission, so long as any New Debentures are outstanding,
the Issuer will furnish to holders of New Debentures (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 has agreed
that, for so long as any New Debentures 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.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default ("Event of Default"): (i) default for 30 days in the payment when due
of interest on, or Liquidated Damages with respect to, the New Debentures;
(ii) default in payment when due, upon redemption or otherwise, of the
principal of or premium, if any, on the New Debentures; (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 Debentures
then outstanding to comply with the provisions described under the captions
"--Repurchase at the Option of Holders--Change of Control" or "--Asset Sales"
or "--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 Debentures then outstanding to
comply with any of its other agreements in the Indenture or the New
Debentures; (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
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judgments aggregating in excess of $10.0 million (net of any amounts with
respect to which a reputable and creditworthy insurance company has
acknowledged liabilities in writing), which judgments are not paid, discharged
or stayed for a period of 60 days; and (vii) 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 Debentures may
declare all the New Debentures 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 Debentures will become due and
payable without further action or notice. Upon any acceleration of maturity of
the New Debentures, all principal of and accrued interest and Liquidated
Damages, if any, on (if on or after April 15, 2003) or Accreted Value of and
Liquidated Damages, if any, on (if prior to April 15, 2003) the New Debentures
shall be due and payable immediately. Holders of the New Debentures may not
enforce the Indenture or the New Debentures except as provided in the
Indenture. Subject to certain limitations, holders of a majority in principal
amount of the then outstanding New Debentures may direct the Trustee in its
exercise of any trust or power. The Trustee may withhold from holders of the
New Debentures 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 Debentures 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 Debentures 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 Debentures 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 Debentures that becomes due solely because of the acceleration of the New
Debentures, have been cured or waived.
Holders of a majority in aggregate principal amount of the New Debentures
then outstanding by notice to the Trustee may on behalf of holders of all New
Debentures 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 Debentures.
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, shall have any liability for any obligations of the Issuer under the
New Debentures or the Indenture or for any claim based on, in respect of, or
by reason of, such obligations or their creation. Each holder of New
Debentures by accepting a New Debenture waives and releases all such
liability. The waiver and release are part of the consideration for issuance
of the New Debentures. 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 discharged with respect to the outstanding New Debentures ("Legal
Defeasance") except for (i) the rights of holders of outstanding New
Debentures to receive payments in respect of the principal of, premium, if
any, and interest and Liquidated Damages on such New Debentures when such
payments are due from the trust referred to below, (ii) the Issuer's
obligations with respect to the New Debentures concerning issuing temporary
New Debentures, registration of New Debentures, mutilated, destroyed, lost or
stolen New Debentures and the maintenance of an office or agency
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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 Debentures. 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 Debentures.
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 the New Debentures, 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 amount at maturity of or Accreted Value (as
applicable) of, premium, if any, and interest and Liquidated Damages on the
outstanding New Debentures on the stated maturity or on the applicable
redemption date, as the case may be, and the Issuer must specify whether the
New Debentures 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 Debentures 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 shall 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 Debentures 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 shall have 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
exclusions 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 Debentures 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.
TRANSFER AND EXCHANGE
A holder may transfer or exchange New Debentures 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 Debentures selected for redemption. Also,
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the Issuer is not required to transfer or exchange any New Debentures for a
period of 15 days before a selection of Debentures to be redeemed.
The registered holder of a New Debenture 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 or
the New Debentures may be amended or supplemented with the consent of holders
of at least a majority in principal amount at maturity of the New Debentures
then outstanding (including, without limitation, consents obtained in
connection with a purchase of, or tender offer or exchange offer for, New
Debentures), and any existing default or compliance with any provision of the
Indenture or the New Debentures may be waived with the consent of holders of a
majority in principal amount of the then outstanding New Debentures (including
consents obtained in connection with a purchase of, or tender offer or
exchange offer for, New Debentures).
Without the consent of each holder affected, an amendment or waiver may not
(with respect to any New Debentures held by a non-consenting holder): (i)
reduce the principal amount of New Debentures whose holders must consent to an
amendment, supplement or waiver, (ii) reduce the principal of or change the
fixed maturity of any New Debentures or alter the provisions with respect to
the redemption of the New Debentures (other than provisions relating to the
covenants described above under the caption "--Repurchase at the Option of
Holders") or amend or modify the calculation of the Accreted Value so as to
reduce the amount of the Accreted Value of the New Debentures, (iii) reduce
the rate of or change the time for payment of interest on any New Debenture,
(iv) waive a Default or Event of Default in the payment of principal of or
premium, if any, or interest on the New Debentures (except a rescission of
acceleration of the New Debentures by the holders of at least a majority in
aggregate principal amount at maturity of the New Debentures and a waiver of
the payment default that resulted from such acceleration), (v) make any New
Debenture payable in money other than that stated in the New Debentures, (vi)
make any change in the provisions of the Indenture relating to waivers of past
Defaults or the rights of holders of New Debentures to receive payments of
principal of or premium, if any, or interest on the New Debentures, (vii)
waive a redemption payment with respect to any New Debenture (other than a
payment required by one of the covenants described above under the caption "--
Repurchase at the Option of Holders"), or (viii) make any change in the
foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any holder of New
Debentures, the Issuer and the Trustee may amend or supplement the Indenture
or the New Debentures to cure any ambiguity, defect or inconsistency, to
provide for uncertificated New Debentures in addition to or in place of
certificated New Debentures, to provide for the assumption of the Issuer's
obligations to holders of New Debentures in the case of a merger or
consolidation, to make any change that would provide any additional rights or
benefits to holders of New Debentures 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.
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 at maturity of the then
outstanding New Debentures 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 shall occur (which shall not be cured), the Trustee will be
required, in the exercise of its power, to use the degree of care of
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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 Debentures,
unless such holder shall have offered to the Trustee security and indemnity
satisfactory to it against any loss, liability or expense.
BOOK-ENTRY, DELIVERY AND FORM
The Old Debentures were offered and sold to qualified institutional buyers
in reliance on Rule 144A. New Debentures will be issued in registered, global
form in minimum denominations of $1,000 principle amount at maturity and
integral multiples of $1,000 in excess thereof.
The Global Debentures will be deposited upon issuance with the Trustee as
custodian for DTC, in New York, New York, and registered in the name of DTC or
its nominee, in each case for credit to an account of a direct or indirect
participant in DTC as described below.
Except as set forth below, the Global Debentures 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 Debentures may not be
exchanged for New Debentures in certificated form except in the limited
circumstances described below. See "--Exchange of Book-Entry Debentures for
Certificated Debentures."
In addition, transfer of beneficial interests in the Global Debentures 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 with respect
to the New Debentures. The New Debentures 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 company
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 Debentures, DTC will credit the accounts of
Participants tendering Old Debentures with portions of the applicable Global
Debentures and (ii) ownership of such interests in the Global Debentures 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 Debentures).
Investors in the Global Debentures 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 or CEDEL will hold interests in the Global Debentures 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, will hold such interests in the Global
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Debentures in customers' securities accounts in the depositaries' names on the
books of DTC. All interests in a Global Debenture, 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 Debenture 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 Debenture 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 Debentures, see "--Exchange of Book-Entry
Debentures for Certificated Debentures" and "--Exchange of Certificated
Debentures for Book-Entry Debentures."
EXCEPT AS DESCRIBED BELOW, OWNERS OF INTERESTS IN THE GLOBAL DEBENTURES WILL
NOT HAVE NEW DEBENTURES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL
DELIVERY OF NEW DEBENTURES 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, premium, if any, interest and
Liquidated Damages, if any, on a Global Debenture 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
Debentures, including the Global Debentures, 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 nor 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 Debentures, 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 Debentures 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 Debentures
(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
Debentures 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
Debentures, 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, interests
in the Global Debentures 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."
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
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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 Debentures 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 Global Debentures 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 Debenture 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 a holder of New Debentures only at the direction of one or more
Participants to whose account with DTC interests in the Global Debentures are
credited and only in respect of such portion of the aggregate principal amount
of the New Debentures as to which such Participant or Participants has or have
given such direction. However, if there is an Event of Default under the New
Debentures, DTC reserves the right to exchange the Global Debentures for
legended New Debentures in certificated form, and to distribute such New
Debentures 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 Debentures 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 DEBENTURES FOR CERTIFICATED DEBENTURES
A Global Debenture is exchangeable for definitive New Debentures in
registered certificated form if (i) DTC (x) notifies the Issuer that it is
unwilling or unable to continue as depositary for the Global Debentures 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 Debentures in certificated form or (iii) there shall have
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
Debentures. In addition, beneficial interests in a Global Debenture may be
exchanged for certificated New Debentures 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
Debentures delivered in exchange for any Global Debenture 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.
SAME-DAY SETTLEMENT AND PAYMENT
The Indenture requires that payments in respect of the New Debentures
represented by the Global Debentures (including principal, premium, if any,
and interest and Liquidated Damages, if any) be made by wire
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transfer of immediately available funds to the accounts specified by the
Global Debenture holder. With respect to New Debentures 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 Debentures represented by the Global Debentures 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 Debentures will, therefore, be required by the Depositary
to be settled in immediately available funds. The Issuer expects that
secondary trading in any certificated New Debentures 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 Debenture 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 Debenture 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 Debentures. Upon the
effectiveness of the Exchange Offer Registration Statement, the Issuer will
offer to holders of Transfer Restricted Securities pursuant to the Exchange
Offer who are able to make certain representations the opportunity to exchange
their Transfer Restricted Securities for New Debentures. 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 Debentures 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 Debentures 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 Debentures by 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.
The Registration Rights Agreement will provide 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 Debentures in exchange for all Debentures tendered
prior thereto in the Exchange Offer and
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(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 "Registration Default"), then the Issuer will pay
liquidated damages ("Liquidated Damages") to each holder of Debentures, 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 at maturity of Debentures held by such Holder. The amount of
the Liquidated Damages will increase by an additional $0.05 per week per $1,000
principal amount at maturity of Debentures 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 at
maturity of Debentures. All accrued Liquidated Damages will be paid by the
Issuer to the Global Debenture holder by wire transfer of immediately available
funds or by federal funds check and to holders of Certificated Debentures 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 Debentures 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 Debentures
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.
"Accreted Value" means, as of any date of determination prior to April 15,
2003, with respect to any Debenture, the sum of (a) the initial offering price
(which shall be calculated by discounting the aggregate principal amount at
maturity of such Debenture at a rate of 12 7/8% per annum, compounded semi-
annually on each October 15 and April 15 from April 15, 2003 to the date of
issuance) of such Debenture and (b) the portion of the excess of the principal
amount of such Debenture over such initial offering price which shall have
been accreted thereon through such date, such amount to be so accreted on a
daily basis at a rate of 12 7/8% per annum of the initial offering price of
such Debenture, compounded semi-annually on each October 15 and April 15 from
the date of issuance of the Debentures through the date of determination,
computed on the basis of a 360-day year of twelve 30-day months.
"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.
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"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
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 "--
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 Operating Corp., 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 whole or in part
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
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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 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) 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.
"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,
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the provision for taxes based on the income or profits of, and the
depreciation and amortization and other non-cash 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 Person acquired in a pooling of interests transaction
for any period prior to the date of such acquisition shall be excluded, and
(iii) the cumulative effect of a change in accounting principles shall be
excluded.
"Continuing Directors" means, as of any date of determination, any member of
the Board of Directors of the Issuer or any holding company of the Issuer 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.
"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 Debentures 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, 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).
"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
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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 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 included in the interest expense of such
Person 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 Issuer, 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 (ii) 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
Issuer to 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.
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"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person 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.
"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 Debentures 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
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Asset Sale (including, without limitation, legal, accounting and investment
banking fees, and sales commissions) 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 Debentures.
"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 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 on assets of Restricted Subsidiaries securing Indebtedness of Restricted
Subsidiaries permitted to be incurred under the Indenture; (iii) Liens
securing the Debentures; (iv) Liens securing the Issuer's obligations under
the Bank Facilities; (v) Liens of the Issuer or a Wholly Owned Restricted
Subsidiary on assets of any Restricted Subsidiary of the Issuer; (vi) 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 the 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; (vii) 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
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shall have set aside on its books such reserves as may be required pursuant to
GAAP; (viii) 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; (ix) 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); (x) 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; (xi) 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; (xii) 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; (xiii) 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; (xiv) 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; (xv) 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; (xvi) 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; (xvii) Liens securing Hedging Obligations which Hedging Obligations
relate to Indebtedness that is otherwise permitted under the Indenture;
(xviii) 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 (xix) 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 "--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
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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 Debentures, 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 Debentures on terms at least as favorable to the
holders of Debentures 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 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.
"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.
"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.
"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).
"Unrestricted Subsidiary" means any Subsidiary (other than the Subsidiaries
of the Issuer 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
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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, and (ii) 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.
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"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 Debentures
and the exchange of Old Debentures for New Debentures that may be relevant to a
holder of an Old Debenture or New Debenture. 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 Debentures at
original issuance and will hold New Debentures 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 Debentures 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 Debenture 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 Debentures. The term "United States person" means a holder of a New
Debenture 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 DEBENTURES FOR NEW DEBENTURES
The exchange of Old Debentures for New Debentures (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 Debentures for New Debentures.
A tendering holder's tax basis in the New Debentures will be the same as such
holder's tax basis in its Old Debentures. A tendering holder's holding period
for the New Debentures received pursuant to the Exchange Offer will include
its holding period for the Old Debentures surrendered therefor. For purposes
of original issue discount, the issue price of the New Debentures will be the
same as the issue price of the Old Debentures surrendered therefor, and the
adjusted issue price of the New Debentures on the day of the Exchange will be
the same as the adjusted issue price of the Old Debentures for which they are
exchanged on that day.
ALL HOLDERS OF OLD DEBENTURES ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS
REGARDING THE U.S. FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THE
EXCHANGE OF OLD DEBENTURES FOR NEW DEBENTURES AND OF THE OWNERSHIP AND
DISPOSITION OF NEW DEBENTURES RECEIVED IN THE EXCHANGE OFFER IN VIEW OF THEIR
OWN PARTICULAR CIRCUMSTANCES.
UNITED STATES HOLDERS
ORIGINAL ISSUE DISCOUNT
For purposes of the following discussion, it is assumed that the New
Debentures will constitute debt for federal income tax purposes. The New
Debentures will be issued with original issue discount for federal income tax
purposes. Accordingly, each holder of New Debentures generally will be
required to include original issue discount in income as it accrues under a
constant yield method in advance of cash payments attributable to such income
(regardless of whether the holder is a cash or accrual basis taxpayer). The
amount of original issue discount with respect to a New Debenture will be the
excess of the stated redemption price at maturity of such New Debenture over
its issue price. The issue price of a New Debenture will be equal to the issue
price of an Old Debenture. The stated redemption price at maturity will
include all cash payments required to be made on the Old Debentures and New
Debentures whether denominated as principal or interest.
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Holdings will report annually to the Internal Revenue Service ("IRS") and to
record holders of the New Debentures information with respect to original
issue discount accruing during the calendar year.
Each United States holder of a New Debenture will be required to include in
gross income an amount equal to the sum of the daily portions of original
issue discount for each day during a taxable year in which the New Debenture
is held without regard to when the cash or other payments attributable to such
income are received. The daily portions of original issue discount will be
determined by allocating the pro rata portion of the original issue discount
that is allocable to the accrual period to each day in an accrual period. The
amount of original issue discount that is allocable to an accrual period is
generally equal to the product of the adjusted issue price of the New
Debentures at the beginning of the accrual period (the adjusted issue price of
the New Debentures determined as described above, generally increased by all
prior accruals of original issue discount and reduced by any cash payments on
the New Debentures) and the yield-to-maturity of the New Debentures (the
discount rate, which, when applied to all payments under the Old Debentures
and New Debentures, results in a present value equal to the issue price of the
Old Debentures). In the case of the final accrual period, the allocable
original issue discount is the difference between the amount payable at
maturity and the adjusted issue price at the beginning of the accrual period.
Each payment made under a New Debenture will be treated first as a payment of
any accrued original issue discount that has not been allocated to prior
payments and second as a payment of principal (which is not includable in
income).
Holdings does not intend to treat the possibility of an optional redemption
of the New Debentures as giving rise to any additional accrual of original
issue discount or recognition of ordinary income upon redemption, sale or
exchange of a New Debenture.
Generally, any sale, redemption or other taxable disposition of a New
Debenture by a United States holder will result in taxable gain or loss equal
to the difference between: (i) the sum of the amount of cash and the fair
market value of other property received with respect to such taxable sale,
redemption or other distribution and (ii) the United States holder's adjusted
tax basis in the New Debenture. A United States holder's adjusted tax basis for
such New Debenture will equal the tax basis of such New Debenture on the day it
is received in the Exchange, increased by any accrued original issue discount
includable in such United States holder's gross income and decreased by any
cash payments received by such United States holder with respect to the New
Debenture regardless of whether such payments are denominated as principal or
interest. Any gain or loss upon a sale or other disposition of a New Debenture
will generally be capital gain or loss, which will be long term if the holding
period for the New Debenture is more than one year. Under recently enacted
legislation, long-term capital gain recognized by an individual holder in
respect of New Debentures 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.
LIQUIDATED DAMAGES
Any Liquidated Damages (described above under "Description of the New
Debentures--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 accounting for tax purposes.
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 on,
or proceeds from a disposition of, a New Debenture, 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 federal
income tax liability, provided that the required information is furnished to
the IRS.
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NON-UNITED STATES HOLDERS
Under current United States federal income tax law: (i) a payment of
interest (including original issue discount) 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 taxation, 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 taxation on gain realized on the disposition of a
New Debenture. 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 Debenture generally will be subject to the
same rules to which a United States holder is subject with respect to the
accrual of interest (including original issue discount) on a New Debenture and
with respect to gain or loss realized or recognized on the disposition of a
New Debenture. 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 Debenture 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
U.S. information reporting requirements and backup withholding tax will not
apply to payments on, or proceeds from the disposition of, a New Debenture 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.
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 Debenture. Prospective investors
should consult their tax advisors regarding the effect, if any, of such new
Treasury Regulations on an investment in the New Debentures.
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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PLAN OF DISTRIBUTION
Each broker-dealer that receives New Debentures 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 Debentures. 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 Debentures received in exchange for Old Debentures where such Old
Debentures were acquired as a result of market-making activities or other
trading activities. The Issuer has agreed that it 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 Debentures may be required to
deliver a prospectus.
The Issuer will not receive any proceeds from any sale of New Debentures by
broker-dealers. New Debentures 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 Debentures 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 Debentures. Any
broker-dealer that resells New Debentures 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 Debentures may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of New Debentures 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 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 Debentures) other than commissions or concessions of any brokers or
dealers and will indemnify the holders of the Old Debentures (including any
broker-dealers) against certain liabilities, including liabilities under the
Securities Act.
LEGAL MATTERS
The validity of the New Debentures 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.
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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
March 31, 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-15
Unaudited Consolidated Statements of Operations for the
Six Months Ended June 30, 1997 and 1998............................... F-16
Unaudited Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1997 and 1998.......................................... F-17
Notes to Unaudited Consolidated Financial Statements................... F-18
</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
-------------------
NUMBER OF ADDITIONAL PAID-IN
SHARES PAR VALUE CAPITAL RETAINED 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
activities................................ 36,562 (11,868) 7,433
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents..................................... (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. Holdings' 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 Issuer 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)
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)
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)
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
Company 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 Company. 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)
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)
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, 1997 at an exercise
price of $7.50 per share. Options generally expire 10 years from the date of
grant or at an
F-12
<PAGE>
DIAMOND BRANDS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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>
F-13
<PAGE>
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.
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 $100.0 million senior subordinated notes
are guaranteed fully and unconditionally on a joint and several
basis by the subsidiaries of Operating Corp.
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.
F-14
<PAGE>
DIAMOND BRANDS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE DECEMBER
30, 31,
1998 1997
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<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....................................... 9,279 876
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Total assets............................................... $108,983 $94,550
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY(DEFICIT)
CURRENT LIABILITIES:
Current maturities of long-term debt......................... $ 1,250 $ 7,892
Accounts payable............................................. 5,161 4,500
Accrued expenses............................................. 9,814 11,037
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Total current liabilities.................................. 16,225 23,429
======= =======
POSTRETIREMENT BENEFIT OBLIGATIONS........................... 1,586 1,586
DEFERRED INCOME TAXES........................................ 735 --
LONG-TERM DEBT, net of current maturities.................... 231,094 41,605
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Total liabilities.......................................... 249,640 66,620
======= =======
COMMITMENTS AND CONTINGENCIES
Redeemable preferred stock, $0.1 par value;
1,000 shares authorized ; 47 shares
issued and oustanding, net of
subscription receivable of $1,217 .......................... 33,581 --
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $.01 par value; 50,000 shares authorized 1,491
and 16,112 shares issued and outstanding.................... 15 161
Warrants..................................................... 1,488 --
Additional paid in capital................................... 10,640 774
Retained earnings (accumulated deficit)...................... (186,381) 28,995
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Total stockholders' equity (deficit)....................... (174,238) 27,930
------- -------
$108,983 $94,550
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-15
<PAGE>
DIAMOND BRANDS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS)
SIX MONTHS
ENDED JUNE 30,
---------------
1997 1998
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NET SALES..................................................... $54,675 $58,658
COST OF SALES................................................. 37,630 41,348
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Gross Profit................................................ 17,045 17,210
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.................. 5,334 12,634
GOODWILL AMORTIZATION......................................... 680 841
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Operating income (loss)..................................... 11,031 3,735
INTEREST EXPENSE.............................................. 2,160 7,637
------- -------
Income (Loss) before provision for income taxes............. 8,871 (3,902)
PROVISION FOR INCOME TAXES.................................... 1,376 (2,831)
------- -------
Net income (loss)........................................... 7,495 (1,071)
Preferred Stock dividend and accretion .................... -- 1,046
------- -------
Net loss applicable to common stock ....................... $(7,549)$(2,117)
======= =======
PRO FORMA NET INCOME:
Income (loss) before provision for income taxes............. $ 8,871 ($3,902)
Pro forma income tax expense (benefit)(Note 2).............. 3,500 (1,600)
------- -------
Pro forma net income (loss) ................................ $ 5,371 ($2,302)
The accompanying notes are an integral part of these consolidated financial
statements.
F-16
<PAGE>
DIAMOND BRANDS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
-----------------
1997 1998
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<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss).......................................... $ 7,495 $(1,071)
Adjustments to reconcile net income (loss) to cash
provided by operating activities
Depreciation and amortization............................. 2,432 3,122
Deferred income taxes..................................... 1,376 (1,974)
Accretion of debentures................................... -- 1,114
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 78
-------- -------
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)
Net proceeds from preferred stock and warrants............. -- 44,529
Borrowings on long-term debt............................... 21,000 225,105
Repurchase of common stock................................. -- (211,421)
Repayments of long-term debt............................... (3,572) (44,622)
Exercise of warrants....................................... -- 4
Exercise of options........................................ -- 1,258
Distributions to stockholders.............................. (4,043) (5,488)
Debt issuance costs........................................ (370) (9,420)
-------- -------
Net cash provided by financing activities............... 18,115 1,195
-------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... -- --
CASH AND CASH EQUIVALENTS, beginning of year................ -- --
-------- -------
CASH AND CASH EQUIVALENTS, end of year...................... $ -- $ --
======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-17
<PAGE>
DIAMOND BRANDS INCORPORATED (HOLDINGS) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Diamond Brands Incorporated ("Holdings") and its wholly owned subsidiary,
Diamond Brands operating Corp. ("Operating Corp") and Operating Corp.'s
wholly subsidiaries, Forster, Inc. and Empire Candle, Inc. after elimination
of all material intercompany balances and transactions. Holdings and
Operating Corp. 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, the Company
purchased from the existing stockholders 15,129,232 shares of the Company's
common stock for $211.4 million by (i) issuing $100.0 million of senior
subordinated notes and $45.1 million senior discount debentures, (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, and
(iii) selling redeemable preferred stock with warrants to the Sponsors and
other investors for $47.0 million. The Sponsors and other investors
exercised warrants for 417,382 shares of common stock at closing. The
Recapitalization was accounted for as a recapitalization transaction for
accounting purposes.
3. REDEEMABLE CUMULATIVE PREFERRED STOCK
Pursuant to the Recapitalization Agreement, the Company issued $47.0 million
($45.8 million in cash and $1.2 million in notes receivable) of redeemable
cumulative preferred stock (the Preferred Stock) and common stock warrants
(the Warrants). The Warrants are exercisable at $0.01 per share of common
stock and expire in April 2008. The Preferred Stock ranks senior to all
classes of common stock of the Company and is entitled to receive cash
dividends equal to 12% of the liquidation preference of $1,000 per share
($47.0 million) plus all unpaid dividends until the mandatory redemption
date of October 15, 2009. The Company has the option at any time to redeem
the Preferred Stock at a price equal to liquidation preference plus all
unpaid dividends.
The net proceeds form the issuance of the Preferred Stock and Warrants are
allocated based on the relative fair values of the securities issued. The
value assigned to the Warrants of $12.3 million has been reflected as a
discount to the Preferred Stock which is being accreted to its mandatory
redemption value using the effective interest method (15% effective yield).
4. LONG TERM DEBT
In April 1998, the Company completed offerings of $100.0 million of 10 1/8%
senior subordinated notes due to 2008 and $84 million of 12 7/8% senior
discount debentures due 2009 with an original issue discount of $38.9
million. The net proceeds to the Company for the offerings, after discounts,
commissions and other offering costs were $138.4 million and were used to
repay existing indebtedness and purchase common stock of the Company.
The Company also entered into a bank credit agreement which provides for
$80.0 million in term loan facilities with interest rates from LIBOR
(5.68759% 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.
5. 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 elect 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.
6. 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-18
<PAGE>
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS 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 AU-
THORIZED 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 COM-
PANY SINCE THE DATE HEREOF OR THEREOF OR THAT THE INFORMATION CONTAINED HEREIN
IS CORRECT AT ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THEREOF.
---------------
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.......... 29
Management's Discussion and Analysis of Financial Condition and Results
of Operations......................................................... 30
Business............................................................... 37
Management............................................................. 46
Certain Relationships and Related Transactions......................... 52
Capital Stock of Holdings and the Operating Corp....................... 53
Description of Other Indebtedness...................................... 57
The Exchange Offer..................................................... 61
Description of the New Debentures...................................... 69
Certain United States Federal Income Tax Considerations................ 97
Plan of Distribution................................................... 100
Legal Matters.......................................................... 100
Experts................................................................ 100
Index to Consolidated Financial Statements............................. F-1
</TABLE>
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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.
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DIAMOND BRANDS INCORPORATED
OFFER TO EXCHANGE
SERIES B 12 7/8% SENIOR DISCOUNT DEBENTURES DUE 2009,
WHICH HAVE BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED,
FOR ANY AND ALL OUTSTANDING
12 7/8% SENIOR DISCOUNT DEBENTURES DUE 2009
---------------
PROSPECTUS
---------------
September 17, 1998
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