<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 29, 1998
REGISTRATION STATEMENT NO. 333-58675
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
KEY COMPONENTS, LLC
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3400 04-3425424
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION IDENTIFICATION NO.)
CODE IDENTIFICATION NO.)
</TABLE>
------------------------
KEY COMPONENTS FINANCE CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3400 14-1805946
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION IDENTIFICATION NO.)
CODE IDENTIFICATION NO.)
</TABLE>
------------------------
B. W. ELLIOTT MANUFACTURING CO., INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
NEW YORK 3400 15-0585760
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION IDENTIFICATION NO.)
CODE IDENTIFICATION NO.)
</TABLE>
------------------------
HUDSON LOCK, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3400 22-2973848
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION IDENTIFICATION NO.)
CODE IDENTIFICATION NO.)
</TABLE>
------------------------
ESP LOCK PRODUCTS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3400 04-3192780
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION IDENTIFICATION NO.)
CODE IDENTIFICATION NO.)
</TABLE>
------------------------
WING ROAD RR1,
BOX 167D
MILLBROOK, NEW YORK 12545
(516) 677-8383
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANTS' PRINCIPAL EXECUTIVE OFFICES)
------------------------
ALAN L. RIVERA
VICE-PRESIDENT
KEY COMPONENTS, INC.
C/O MILLBROOK CAPITAL MANAGEMENT, INC.
152 WEST 57TH STREET
NEW YORK, NEW YORK 10019
(212) 586-4333
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
PAUL A. GAJER, ESQ.
RUBIN BAUM LEVIN CONSTANT & FRIEDMAN
30 ROCKEFELLER PLAZA
NEW YORK, NEW YORK 10112
(212) 698-7700
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of the Registration Statement.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(d) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [ ]
- ---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
- ---------------
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER NOTE(1) OFFERING PRICE(1)(2) REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
10 1/2% Senior Notes Due 2008............ $80,000,000 100% $80,000,000 $23,600.00
- ---------------------------------------------------------------------------------------------------------------------------------
Subsidiary Guarantees of Senior Notes.... $80,000,000 100% $80,000,000 (3)
- ---------------------------------------------------------------------------------------------------------------------------------
Amount Previously Paid.................................................................................... $23,600.00
Amount Owed............................................................................................... $ 0
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purposes of calculating the registration fee.
(2) Calculated pursuant to Rule 457(f) and (o).
(3) No separate registration fee is required pursuant to Rule 457(n).
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED SEPTEMBER 29, 1998
PROSPECTUS
KEY COMPONENTS, LLC
KEY COMPONENTS FINANCE CORP. [KCI LOGO]
OFFER TO EXCHANGE 10 1/2% SENIOR NOTES DUE 2008
FOR ANY AND ALL OUTSTANDING 10 1/2% SENIOR NOTES DUE 2008
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON , 1998 UNLESS EXTENDED.
------------------------
Key Components, LLC, a Delaware limited liability company ("KC LLC"), and
Key Components Finance Corp., a Delaware corporation and a wholly-owned
subsidiary of KC LLC ("Finance Corp." and, together with KC LLC, the "Issuers"),
are jointly offering, upon the terms and subject to the conditions set forth in
this Prospectus (the "Prospectus") and the accompanying related Letter of
Transmittal (the "Letter of Transmittal" which, together with the Prospectus
constitute the "Exchange Offer"), to exchange up to $80,000,000 aggregate
principal amount of 10 1/2% Senior Notes due 2008, (the "New Notes") of the
Issuers for a like principal amount of their issued and outstanding 10 1/2%
Senior Notes due 2008 (the "Old Notes" and, together with the New Notes, the
"Notes"). As of the date of this Prospectus there were outstanding $80,000,000
principal amount of Old Notes. The terms of the New Notes are identical in all
material respects to the Old Notes, except that the New Notes will have been
registered under the Securities Act of 1933 as amended (the "Securities Act")
and, therefore, the New Notes will not be subject to certain transfer
restrictions, registration rights and related provisions applicable to the Old
Notes.
Interest on each New Note issued pursuant to the Exchange Offer will accrue
from the last interest payment date on which interest was paid on the Old Notes
surrendered in exchange therefor or, if no interest has been paid, from the
original date of issuance of the Old Notes.
Interest on the Notes will be payable semi-annually on June 1 and December
1 of each year, commencing on December 1, 1998. The Notes will mature on June 1,
2008 unless previously redeemed. The Notes will be redeemable, in whole or in
part, at the option of the Issuers, at any time and from time to time on or
after June 1, 2003, at the redemption prices set forth herein, plus accrued and
unpaid interest, if any, thereon, to the date of redemption. In addition, at any
time and from time to time on or prior to June 1, 2001, the Issuers may redeem
up to 33 1/3% of the original aggregate principal amount of the Notes with the
Net Cash Proceeds (as defined) of one or more Equity Offerings (as defined) at
the redemption prices set forth herein, plus accrued and unpaid interest, if
any, thereon, to the date of redemption; provided, however, that at least
66 2/3% of the original aggregate principal amount of the Notes remains
outstanding following each such redemption; and provided, further, that such
redemption shall occur within 60 days of the closing of any such Equity
Offering. Upon the occurrence of a Change of Control (as defined) (i) the
Issuers will have the option, at any time prior to June 1, 2003, to redeem the
Notes, in whole, at a redemption price equal to 100% of the principal amount
thereof plus the Applicable Premium (as defined) together with accrued and
unpaid interest, if any, to the date of redemption and (ii) if the Issuers have
not redeemed the Notes, each holder of the Notes may require the Issuers to
repurchase such holder's Notes, in whole or in part, at a repurchase price of
101% of the principal amount thereof, plus accrued and unpaid interest, if any,
thereon, to the date of repurchase. There can be no assurance, however, that
sufficient funds will be available to the Issuers when necessary to make any
required repurchases. See "Description of Notes."
The Notes will be unsecured, senior obligations of the Issuers, will rank
pari passu in right of payment with all other existing and future senior
indebtedness of the Issuers and will rank senior in right of payment to all
existing and future subordinated indebtedness of the Issuers. The Notes will be
fully and unconditionally guaranteed, jointly and severally, on an unsecured,
senior basis, by B.W. Elliott Manufacturing Co., Inc., Hudson Lock, Inc. and ESP
Lock Products, Inc. (the "Subsidiary Guarantors"). The Subsidiary Guarantees (as
defined) will be general, unsecured, senior obligations of the Subsidiary
Guarantors, ranking senior in right of payment to all existing and future
subordinated obligations of the Subsidiary Guarantors and pari passu in right of
payment to all existing and future senior indebtedness of the Subsidiary
Guarantors. As of June 30, 1998, the Issuers had no secured indebtedness and $80
million of senior indebtedness (representing the outstanding Old Notes). As of
the same date, the aggregate principal amount of senior indebtedness of the
Subsidiary Guarantors outstanding (other than the Subsidiary Guarantees) would
have been approximately $1.5 million, all of which is secured indebtedness. The
Indenture relating to the Notes (the "Indenture") permits the Issuers and the
Subsidiary Guarantors to incur additional indebtedness, including secured
indebtedness, subject to certain limitations. See "Description of Notes." As of
June 30, 1998, the Issuers and the Subsidiary Guarantors would have collectively
been able to borrow an additional $50 million, based on the limitations
contained in the Indenture.
(continued on next page)
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 16 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE NOTES.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
THE DATE OF THIS PROSPECTUS IS , 1998
<PAGE> 3
(continued from cover)
The Old Notes were originally issued and sold in a transaction that was
exempt from registration under the Securities Act (the "Initial Offering") and
resold to qualified institutional buyers in reliance on, and subject to the
restrictions imposed pursuant to, Rule 144A under the Securities Act ("Rule
144A") and outside the United States in accordance with Regulation S of the
Securities Act ("Regulation S"). The New Notes are being offered hereunder in
order to satisfy certain obligations of the Issuers under the Exchange and
Registration Rights Agreement, dated May 20, 1998, among the Issuers and the
other signatories thereto (the "Exchange and Registration Rights Agreement"),
relating to the Old Notes. Based upon interpretations by the staff of the
Securities and Exchange Commission (the "Commission"), as set forth in no-action
letters to third parties in other transactions (including Exxon Capital Holdings
Corporation (available May 13, 1988), Morgan Stanley & Co. Incorporated
(available June 5, 1991), K-III Communications Corporation (available May 14,
1993) and Shearman & Sterling (available July 2, 1993)), the Issuers believe
that the New Notes issued pursuant to the Exchange Offer in exchange for Old
Notes may be offered for resale, resold and otherwise transferred by each holder
thereof (other than any such holder which is (i) an "affiliate" of the Issuers
within the meaning of Rule 405 under the Securities Act, (ii) a broker-dealer
who acquired Old Notes directly from Issuers or (iii) a broker-dealer who
acquired Old Notes as a result of market-making or other trading activities
without compliance with the registration and prospectus delivery provisions of
the Securities Act, provided that (a) the New Notes are acquired in the ordinary
course of such holders' business (b) such holder has no arrangement or
understanding with any person to participate in the distribution of such New
Notes and (c) such holder is not engaged in, and does not intend to engage in a
distribution of the New Notes. Any holder who is an "affiliate" of the Issuers,
or any holders of Old Notes which, at the time of the commencement of the
Exchange Offer, are engaged in, intend to engage in, or have an arrangement to
engage in, a distribution of the New Notes may not rely on the applicable
interpretations of the staff of the Commission set forth in the above-mentioned
interpretive letters, will not be permitted or entitled to tender such Old
Notes, and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any secondary resale
transaction unless such sale is made pursuant to any exemption from such
requirements. In addition, since the Commission has not considered the Exchange
Offer in the context of a no-action letter, there can be no assurance that the
staff of the Commission would make a similar determination with respect to the
Exchange Offer as in such other circumstances. Each holder of Old Notes that
desires to participate in the Exchange Offer will be required to make certain
representations described in "The Exchange Offer -- Terms of the Exchange
Offer."
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The Letter of Transmittal states
that by so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from time
to time, may be used by a broker-dealer in connection with resales of New Notes
received in exchange for Old Notes where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities. The Issuers have agreed that, for a period of 90 days after the
Expiration Date (as defined), they will make this Prospectus available to any
broker-dealer for use in connection with any such resale. See "Plan of
Distribution."
The New Notes will be represented by one or more Global Securities (as
defined) registered in the name of a nominee of The Depository Trust Company
("DTC"), as Depositary. Beneficial interest in the Global Securities will be
shown on, and transfers will be effected only through records maintained by the
Depositary and its participants. See "Description of New Notes--Book-Entry,
Delivery and Form."
THE EXCHANGE OFFER IS NOT BEING MADE, NOR WILL THE ISSUERS ACCEPT SURRENDER
FOR EXCHANGE FROM HOLDERS OF OLD NOTES IN ANY JURISDICTION IN WHICH THE EXCHANGE
OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE SECURITIES
AND BLUE SKY LAWS OF SUCH JURISDICTION.
The Exchange Offer is not conditioned upon any minimum principal amount of
Old Notes tendered. The Exchange Offer will expire at 5:00 p.m., New York City
time, on , 1998, unless extended by the Issuers (such time and
date as it may be so extended, the "Expiration Date"). In no event, however,
shall the Expiration Date be later than November 9, 1998. The date of acceptance
for exchange of the Old Notes will be the first business day following the
Expiration Date, upon surrender of the Old Notes. Old Notes tendered pursuant to
the Exchange Offer may be withdrawn at any time prior to the Expiration Date;
otherwise such tenders are irrevocable. New Notes to be issued in exchange for
properly tendered Old Notes will be delivered through the facilities of DTC by
the Exchange Agent (as defined) promptly after the acceptance thereof. The
Issuers will not receive any proceeds from the Exchange Offer. The Issuers will
pay all the expenses incident to the Exchange Offer. Tenders of Old Notes
pursuant to the Exchange Offer may be withdrawn at any time prior to the
Expiration Date. In the event the Issuers terminate the Exchange Offer and do
not accept for exchange any Old Notes, the Issuers will promptly return all
previously tendered Old Notes to the holders thereof. See "The Exchange Offer."
Prior to the Exchange Offer, there has been no public market for the Notes.
The Issuers do not currently intend to list the New Notes on any securities
exchange or to seek approval for quotation through any automated quotation
system. There can be no assurance that an active public market for the New Notes
will develop. To the extent Old Notes are tendered and accepted in the Exchange
Offer, the trading market for untendered and tendered but unaccepted Old Notes
may be adversely affected. See "Risk Factors -- Absence of Public Market;
Adverse Effect on Market for Old Notes."
UNTIL , 1998 (90 DAYS AFTER COMMENCEMENT OF THE EXCHANGE
OFFER), ALL DEALERS EFFECTING TRANSACTIONS IN THE NEW NOTES, WHETHER OR NOT
PARTICIPATING IN THE EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
<PAGE> 4
AVAILABLE INFORMATION
This Prospectus constitutes part of a Registration Statement (which term
includes any amendments thereto, the "Registration Statement") filed by the
Issuers with the Commission on Form S-4 under the Securities Act or 1933, as
amended (the "Securities Act"), with respect to the New Notes offered hereby. As
permitted by the rules and regulations of the Commission, this Prospectus does
not contain all of the information included in the Registration Statement and
the exhibits and schedules thereto. Statements contained in this Prospectus as
to the contents of any contract or other document referred to herein or therein
and filed as an exhibit to the Registration Statement are not necessarily
complete and, in each instance, reference is made to the copy of such contract
or other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. For further
information with respect to the Issuers and the New Notes, reference is hereby
made to the Registration Statement and the exhibits and schedules thereto.
As a result of the Exchange Offer, the Company will become subject of the
periodic reporting and other informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith will file periodic reports and other information with the Commission.
The Issuers have agreed that, whether or not they are required to do so by the
rules and regulations of the Commission, for so long as the Notes remain
outstanding, they will furnish the registered holders of the Notes and, to the
extent permitted by applicable law or regulation, file with the Commission, all
quarterly, and annual reports and the information, documents and other reports
that are specified in Sections 13(a) and 15(d) of the Exchange Act. The
Registration Statement, all exhibits and schedules thereto and all reports,
proxy statements and other information may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549 and at the regional
offices of the Commission located at Seven World Trade Center, 13th Floor, New
York, New York 10048 and Citicorp Center, Suite 1400, 500 West Madison Street,
Chicago, Illinois 60661-2511. Copies of such material can also be obtained at
prescribed rates by writing to the Commission, Public Reference Section, Room
1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549 and such
material is contained on the worldwide web site maintained by the Commission at
http://www/sec/gov.
i
<PAGE> 5
MARKET DATA USED THROUGHOUT THIS PROSPECTUS WAS OBTAINED FROM INTERNAL
COMPANY SOURCES, INDUSTRY PUBLICATIONS AND OTHER CURRENTLY AVAILABLE
INFORMATION. INDUSTRY PUBLICATIONS GENERALLY STATE THAT THE INFORMATION
CONTAINED THEREIN HAS BEEN OBTAINED FROM SOURCES BELIEVED TO BE RELIABLE, BUT
THERE CAN BE NO ASSURANCE AS TO THE ACCURACY AND COMPLETENESS OF SUCH
INFORMATION. THE COMPANY HAS NOT INDEPENDENTLY VERIFIED SUCH MARKET DATA.
SIMILARLY, INTERNAL COMPANY SOURCES, WHILE BELIEVED BY THE COMPANY TO BE
RELIABLE, HAVE NOT BEEN VERIFIED BY ANY INDEPENDENT SOURCES.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
THIS PROSPECTUS INCLUDES "FORWARD-LOOKING STATEMENTS." ALL STATEMENTS OTHER
THAN STATEMENTS OF HISTORICAL FACTS INCLUDED IN THIS PROSPECTUS, INCLUDING
WITHOUT LIMITATION, CERTAIN STATEMENTS UNDER THE CAPTIONS "PROSPECTUS SUMMARY,"
"RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" AND "BUSINESS" AND LOCATED ELSEWHERE HEREIN REGARDING THE
COMPANY'S OPERATIONS, FINANCIAL POSITION AND BUSINESS STRATEGY, MAY CONSTITUTE
FORWARD-LOOKING STATEMENTS. IN ADDITION, FORWARD-LOOKING STATEMENTS GENERALLY
CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY,"
"WILL," "EXPECT," "INTENT," "ESTIMATE," "ANTICIPATE," "BELIEVE," OR "CONTINUE"
OR THE NEGATIVES THEREOF OR VARIATIONS THEREON OR SIMILAR TERMINOLOGY. ALTHOUGH
THE COMPANY BELIEVES THAT THE EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING
STATEMENTS ARE REASONABLE AT THIS TIME, IT CAN GIVE NO ASSURANCE THAT SUCH
EXPECTATIONS WILL PROVE TO HAVE BEEN CORRECT. IMPORTANT FACTORS THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE COMPANY'S EXPECTATIONS ("CAUTIONARY
STATEMENTS") ARE DISCLOSED IN THIS PROSPECTUS, INCLUDING WITHOUT LIMITATION IN
CONJUNCTION WITH THE FORWARD-LOOKING STATEMENTS INCLUDED IN THIS PROSPECTUS AND
UNDER "RISK FACTORS." ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS
ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON ITS BEHALF ARE EXPRESSLY
QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS.
ii
<PAGE> 6
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements and
notes thereto appearing elsewhere in this Prospectus, including information
under "Risk Factors." Unless otherwise indicated, all references to "KCI" or the
"Company" refer collectively, at all times prior to the date of consummation of
the Initial Offering (the "Closing Date"), to Key Components, Inc. and its
predecessors and subsidiaries, and at all times on or after the Closing Date, to
Key Components, LLC, ("KC LLC") and its predecessors and subsidiaries, in each
such case including Key Components Finance Corp. ("Finance Corp."), Hudson Lock,
Inc. ("Hudson"), ESP Lock Products, Inc. ("ESP") and B.W. Elliott Manufacturing
Co., Inc. ("Elliott" which, together with Hudson and ESP are sometimes
collectively referred to herein as the "Operating Subsidiaries").
THE COMPANY
KCI is a leading manufacturer of custom engineered essential componentry
for application in a diverse array of end-use products. The Company targets
original equipment manufacturer ("OEM") markets where KCI believes its
value-added engineering and manufacturing capabilities, along with its timely
delivery, reliability and customer service, enable it to differentiate the
Company from its competitors and enhance profitability. KCI, through its
Operating Subsidiaries, has been designing and manufacturing medium-security
locks and related accessories since 1963 and flexible shaft products since 1932.
The Company's locks and associated hardware are designed to be utilized in a
wide range of end-use markets including the office furniture, point of sale
("POS") terminal and bank and postal accessory markets (the "Specialty Lock
Business"). The Company's flexible shaft products are produced for both rotary
power transmission and remote valve control applications in the industrial,
aerospace and commercial markets (the "Flexible Shaft Business"). The Company
benefits from a diverse customer base, with pro forma sales to approximately
2,200 customers in fiscal 1997 and with the largest customer representing
approximately 7.2% of pro forma consolidated net sales. KCI's products are
critical to the design and function of its customers' products and management
believes the majority of KCI's sales (approximately 62.0% of fiscal 1997 pro
forma consolidated net sales) are to customers for which the Company is the
primary (greater than 70.0% of the customer's total requirements for the
particular product) supplier. For the pro forma year ended December 31, 1997 and
the six months ended June 30, 1998, the Company had net sales of $59.0 million
and $33.0 million, respectively, representing an increase over the pro forma
amounts for the same periods in the previous years of 11.2% and 11.5%,
respectively.
The Specialty Lock Business
The Company, through its wholly-owned subsidiaries, Hudson and ESP, is a
leading domestic designer and manufacturer of medium-security custom and
specialty locks and locking systems. The Specialty Lock Business products are
engineered to meet OEM customers' specifications for use in end products such as
office furniture, electronic cash registers, bank bags, post office boxes and
storage lockers. The Company's expertise in co-engineering product designs with
its customers, substantial manufacturing and testing capabilities and focus on
customer service, have enabled the Company to become the primary supplier to the
majority, in terms of sales, of its Specialty Lock Business customers. Customers
of the Specialty Lock Business include several industry leaders such as Herman
Miller, Inc., International Business Machines Corporation ("IBM"), Steelcase,
Inc. and Knoll, Inc. During fiscal 1997, no single customer represented more
than 9.5% of pro forma segment net sales. For the pro forma year ended December
31, 1997 and the six months ended June 30, 1998, the Specialty Lock Business
generated net sales of $44.8 million and $24.5 million, respectively,
representing an increase over the pro forma amounts for the same periods in the
preceding fiscal year of 13.2% and 10.2%, respectively.
1
<PAGE> 7
KCI management estimates the domestic market for locks to be over $3.0
billion, of which approximately $200 million is estimated to represent is
medium-security locks. The Company targets the medium-security segment where it
believes its value-added design and manufacturing expertise, along with its
timely delivery, reliability and customer service, enable it to differentiate
itself from its competitors and enhance profitability. The office furniture and
POS terminal markets represent the two largest end-user market segments of the
Specialty Lock Business, constituting 43.7% and 7.2%, respectively, of pro forma
fiscal 1997 segment net sales. The office furniture and POS terminal markets
have grown rapidly over the three year period ended December 31, 1997, with a
compounded annual growth rate of approximately 9.1% and 4.8%, respectively.
During the same three year period, Specialty Lock Business net sales to the
office furniture and POS terminal markets grew at a compounded annual growth
rate of approximately 27.9% and 4.4%, respectively. Based on this historical
growth, KCI management anticipates that sales to these markets will continue to
represent the majority of Specialty Lock Business sales and growth for the near
term. See "Business -- Customers and Markets."
The Flexible Shaft Business
The Company, through its wholly-owned subsidiary, Elliott, is the leading
domestic designer and manufacturer of flexible shaft products, which are
engineered to meet the particular design specifications demanded by a variety of
OEM customers. The Company designs and manufactures more than 2,000 flexible
shaft products, all of which utilize wound wire assemblies to transmit rotary
power when applications render rigid shaft technology (such as universal joints)
less efficient or impossible. The Company's flexible shaft technology provides
significant advantages over traditional rigid shaft technology. Use of flexible
shafts improves existing OEM product designs, provides added flexibility in
creating new designs and eliminates the amount of required componentry, which
can lower overall weight and space requirements, reduce a product's
manufacturing costs, improve end product appearance and shorten assembly times.
Product applications are varied and diverse, limited only by the Company's
ability to develop and manufacture new applications. KCI has developed and
introduced over 100 flexible shaft products to the marketplace during the last
three years. The Company's flexible shaft products are currently used in weed
trimmers, lawn tractors, concrete vibrators, plant processing equipment and
aircraft carriers, as well as in aerospace, medical, industrial and other
products. The Company believes that its product innovation, engineering
expertise, proprietary manufacturing process and high standards of quality and
reliability have enabled KCI to differentiate itself from its competitors,
enhance profitability and become the primary supplier of flexible shaft products
to the majority, in terms of sales, of its customers. KCI's Flexible Shaft
Business has over 1,000 customers including Poulan Weed Eater, Inc., Vickers,
Inc., Caterpillar Inc. and John Deere Consumer Products, Inc. ("John Deere"), as
well as several United States Government entities, such as the United States
Navy. Only one customer, Poulan Weed Eater, Inc., represented greater than 10%
of the Flexible Shaft Business net sales for fiscal 1997 and no single customer
represented greater than 12% of Flexible Shaft Business net sales for fiscal
1997. For the year ended December 31, 1997 and the six months ended June 30,
1998, Flexible Shaft Business generated net sales of approximately $14.2 million
and $8.5 million, respectively, representing an increase over net sales for the
same period in the preceding fiscal year of 5.4% and 15.7%, respectively.
Flexible Shaft Business sales to its three largest markets, construction,
lawn and garden power equipment and maritime, represented 25.6%, 21.7% and
13.9%, respectively, of fiscal 1997 segment net sales. According to industry
reports, for the three year period ended December 31, 1997, the construction,
lawn and garden power equipment and maritime markets experienced an average
compounded annual growth rate of approximately 2.1%. During the same three year
period, Flexible Shaft Business sales to these markets experienced similar
growth or remained stable. The fastest growing market segment of the Flexible
Shaft Business has been the commercial aerospace segment, where the Company has
increased market penetration and introduced new product offerings. Over the
three year period ended December 31, 1997, the Company's net sales to this
segment grew at a compounded annual rate of approximately 46.8%. Based on
historical results and the recent or anticipated introduction of new product
offerings, KCI management anticipates the commercial aerospace and lawn and
garden power equipment markets to experience significant growth for the near
term. See "Business -- Customers and Markets."
2
<PAGE> 8
COMPETITIVE STRENGTHS
Based on its experience in the Flexible Shaft and Specialty Lock
industries, the Company believes that its leading position in the markets it
currently serves is primarily attributable to the following competitive
strengths:
Commitment to Quality. The Company believes its specialty lock and
flexible shaft products are well-known among OEM manufacturers for their
durability, high quality and performance. KCI has passed rigorous quality
standard reviews of such customers as Herman Miller, Inc., Steelcase, Inc., John
Deere, the United States Navy and the United States Air Force. The Company has
received International Standards Organization ("ISO") certification in certain
areas and is seeking to obtain further certifications as part of its ongoing
commitment to maintain its high standards of quality.
Strong Management Team. The Company's management team possesses extensive
experience in the manufacturing industry. Its eight senior operating executives
have over 154 years of manufacturing industry experience, including the
Presidents of KCI's Operating Subsidiaries, each of whom has over 20 years
experience in the specific manufacturing market he serves.
Focus on Niche Markets and Value-Added Services. The Company believes that
its strategic focus on niche OEM markets where customers place a premium on
value-added design and manufacturing capabilities, along with timely delivery
and reliable service, provide it with a competitive advantage over (i)
competitors that are a division of a larger corporate entity and which are
frequently less focused on smaller sales volume opportunities and (ii) smaller
competitors that typically are less sophisticated than the Company and therefore
less capable of providing the level of customer service and aftermarket support
provided by the Company.
Product Innovation. The Company's OEM customers seek new products and
applications that enhance productivity and profitability while satisfying their
specific needs. The Company's experienced management and engineering teams are
able to develop, design and manufacture new products and applications that its
OEM customers demand, which the Company believes enables it to provide superior
service to its OEM customers than that offered by its competitors.
Low-Cost Manufacturing Techniques. The Company believes that its highly
automated and vertically integrated manufacturing capabilities have enabled it
to become a low-cost manufacturer of products within the niche markets it
serves. In the Specialty Lock Business, the Company has focused on further
consolidation and automation with each new acquisition. In the Flexible Shaft
Business, the Company has designed and manufactured its own flexible shaft
winding machines, which are not currently available to its competitors, and has
installed wire drawing equipment capable of drawing less refined (and less
expensive) wire into a grade of wire that can be utilized by the Company in its
flexible shaft products.
Long Standing Relationships with OEMs. Nine of the Company's ten largest
OEM customers in both the Flexible Shaft Business and the Specialty Lock
Business have been customers of the Company for over a decade. Due to the
Company's close working relationship with its customers, KCI believes that it
can better determine its customers' needs, thereby enabling the Company to
develop and design new products and improve the performance of existing
products. Additionally, changing the supplier of a custom designed and
manufactured product often requires a delay in the customer's production due to
the time and capital required for a new supplier to appropriately retool its
machinery; therefore, KCI believes that its OEM customers are reluctant to
change suppliers, so long as KCI continues to satisfy their needs. The Company's
sales to customers for which it believes it was the primary supplier represented
approximately 62.0% of fiscal 1997 pro forma net sales.
3
<PAGE> 9
BUSINESS STRATEGY
The Company has developed a business strategy that focuses on maximizing
profitability while achieving growth, both internally and through acquisitions.
Pursuing Selective Acquisitions. The Company continues to seek to
selectively acquire complementary or related light manufacturing businesses in
markets where value-added design and manufacturing capabilities, as well as
timely delivery and reliable service, enable it to differentiate itself from its
competitors and enhance profitability. In its search for potential acquisitions,
KCI focuses on companies that offer strategic value such as economies of scale,
product line extensions, new customer relationships or increased manufacturing
capacity. Specifically, the Company targets manufacturers of essential
components of a larger OEM end product. KCI seeks companies with a strong
presence in their niche markets or which will be complementary to one of its
existing subsidiaries which is already dominant in its market segment. The
Company will also look for acquisitions which will allow the Company to further
vertically integrate its operations and/or which may share common customers or
engineering processes. The Company seeks to integrate new operations into the
Company's existing businesses, which the Company believes will enhance
profitability for KCI through manufacturing consolidation and implementation of
the Company's operating strategies.
Maximizing Profitability. The Company continues to seek to maximize
profitability through its ongoing strategy of controlled growth in the areas of
both acquisitions and product offerings. As part of this strategy, the Company
attempts to determine the achievable profit margins and production volume for
each new product line prior to accepting an order. The Company only undertakes
production of new products which management believes will achieve an acceptable
return on investment. The Company further seeks to maximize profitability
through automation and efficient integration of complementary acquisitions. See
"Unaudited Pro Forma Consolidated Financial Data."
Introducing New Product Lines. The Company seeks to develop new products
in each of its business segments which enhance productivity and profitability
while satisfying OEM customers' evolving needs. The Company's team of
experienced engineers and industry professionals generally work in tandem with
customers to design and manufacture new products and are continually seeking to
expand existing markets, as well as develop new markets. This collaborative
approach has led the Company to the development of proprietary designs,
technology and relationships with customers that the Company expects will create
future sales opportunities. The Company has introduced over 100 new product
offerings during the last three years.
Maintaining a Diverse Customer Base. The Company seeks to maintain a
diverse customer base through (i) development and introduction of new products,
(ii) acquisition of complementary or related businesses, (iii) focus on customer
retention and (iv) innovative sales and marketing techniques designed to attract
new customers. During fiscal 1997, the Company had pro forma sales to
approximately 2,200 customers and its three largest customers accounted for only
7.1%, 6.4% and 4.5%, respectively, of its pro forma consolidated net sales.
Leveraging Customer Relationships. The Company follows a partnership
approach in establishing customer relationships, founded on innovative
co-engineering and manufacturing capabilities with reliable service and timely
delivery. These integral relationships enable the Company to provide insightful
solutions and innovations to end product design specifications. In addition,
several OEM customers have entered into multi-year supply contracts with KCI,
providing a more formal framework for the Company's customer "partnerships."
4
<PAGE> 10
OWNERSHIP AND MANAGEMENT
The Company is a wholly-owned subsidiary of Key Components, Inc., a New
York corporation (the "Parent"). All of the issued and outstanding stock of the
Parent is owned by affiliates of Millbrook Capital Management, Inc.
("Millbrook") and members of KCI management (together with such affiliates of
Millbrook, the "Shareholders"). KC LLC and Millbrook entered into a management
agreement, dated as of May 28, 1998 (the "Management Agreement"), pursuant to
which Millbrook will continue to provide certain executive level services to the
Company. Millbrook is a private investment and management company which provides
executive level services to various companies owned by Millbrook affiliates, of
which KCI is the largest in terms of estimated value. Since its formation in
1981, Millbrook and its affiliates have invested in and managed 21 companies.
See "Certain Transactions."
FORMATION TRANSACTIONS
The Parent was formed on April 30, 1997 as a holding company for Elliott,
which the Shareholders have owned since 1992. Effective May 15, 1997, the
Shareholders exchanged their shares of Elliott's common stock for shares of the
Parent's common stock. Prior to this exchange, the Parent had no operations of
its own. The exchange ratio for the shares of common stock was determined so as
to leave the Shareholders with the same pro rata interests in the Parent as they
had in Elliott.
On May 15, 1997, the Parent acquired all of the issued and outstanding
capital stock of Hudson from Jordan Industries, Inc. and its affiliates
("Jordan"), for a cash purchase price of $39.1 million and assumed liabilities
of $1.2 million. This acquisition was financed through loans made to the Company
under a Credit and Guaranty Agreement, dated as of May 15, 1997, with Societe
Generale, as agent (the "Old Credit Facility"), and through the sale to Societe
Generale Investment Corporation ("SGIC") of $10 million of 11 1/4% Senior
Subordinated Notes due 2005 (the "Original Notes") and certain warrants to
purchase approximately 12.5% of the Parent's common stock (the "Warrants"). Each
of Societe Generale and SGIC are affiliates of Societe Generale Securities
Corporation, the initial purchaser of the Old Notes (as defined) offered in the
Initial Offering (as defined) (the "Initial Purchaser").
On December 10, 1997, the Parent acquired all of the issued and outstanding
capital stock of ESP from certain individual shareholders, including ESP's
current President, August M. Boucher. The purchase price for ESP consisted of
$16.3 million of cash and $10.4 million of assumed liabilities. The Parent
obtained the funds for this purchase from additional borrowings under the Old
Credit Facility (the acquisitions of Hudson and ESP are sometimes collectively
referred to herein as the "Acquisitions").
In April 1998, KC LLC and Finance Corp. were formed to facilitate the
offering of the 10 1/2% Senior Notes due 2008 (the "Old Notes") which were
issued May 28, 1998 to the Initial Purchaser (the "Initial Offering"). KC LLC is
a wholly-owned subsidiary of the Parent and owns 100% of the Operating
Subsidiaries. Finance Corp. is a wholly-owned subsidiary of KC LLC and has no
assets or operations. See "The Issuers," "The Formation" and "Description of
Notes."
In July 1998, the Company entered into a Credit and Guaranty Agreement (the
"Credit Agreement") with certain institutional lenders (the "Lenders") with
respect to a new credit facility (the "New Credit Facility") that provides for
revolving credit borrowings of up to $15.0 million and additional borrowings of
up to $25.0 million for future acquisitions. Among other provisions, the New
Credit Facility provides that (i) availability of revolving credit loans will be
subject to a borrowing base, (ii) availability of acquisition loans will be
subject to various criteria, including pro forma compliance with certain
financial ratios and (iii) the Company will be required to prepay outstanding
balances out of excess cash flow and proceeds from certain asset sales. See
"Risk Factors -- Substantial Leverage; Ability to Service Debt" and "Description
of Certain Indebtedness -- The New Credit Facility."
The principal executive offices of the Issuers and the Operating
Subsidiaries are located at Wing Road RR1, Box 167D, Millbrook, New York 12545,
and the telephone number is (914) 677-8383.
5
<PAGE> 11
THE EXCHANGE OFFER
Issuers.................Key Components, LLC and Key Components Finance Corp.
Securities Offered......Up to $80,000,000 principal amount of 10 1/2% Senior
Notes due 2008 (the "New Notes"). The Old Notes were
issued on May 28, 1998 to the Initial Purchaser. The
Initial Purchaser resold the Old Notes to certain
qualified institutional buyers in reliance on, and
subject to the restrictions imposed pursuant to, Rule
144A of the Securities Act and outside the United States
in accordance with Regulation S of the Securities Act.
In connection therewith, the Issuers and the Initial
Purchaser entered into an Exchange and Registration
Rights Agreement, dated May 20, 1998 (the "Exchange and
Registration Rights Agreement"), providing, among other
things, for the Exchange Offer. The terms of the New
Notes and the terms of the Old Notes are identical in
all material respects, except that the New Notes will
have been registered under the Securities Act and,
therefore will not be subject to certain transfer
restrictions, registration rights and related provisions
applicable to the Old Notes.
The Exchange Offer......New Notes are being offered in exchange for an equal
principal amount of Old Notes. As of the date hereof,
$80,000,000 aggregate principal amount of Old Notes is
outstanding. Old Notes may be tendered only in integral
multiples of $1,000.
Resale of New Notes.....Based on interpretations by the staff of the Commission
as set forth in no-action letters issued to third
parties (including Exxon Capital Holdings Corporation
(available May 13, 1988), Morgan Stanley & Co.
Incorporated (available June 5, 1991), K-III
Communications Corporation (available May 14, 1993) and
Shearman & Sterling (available July 2, 1993)), the
Issuers believe that the New Notes issued pursuant to
the Exchange Offer may be offered for resale, resold or
otherwise transferred by any holder thereof (other than
any such holder that is a broker-dealer or an
"affiliate" of the Issuers within the meaning of Rule
405 under the Securities Act) without compliance with
the registration and prospectus delivery provisions of
the Securities Act, provided that (i) such New Notes are
acquired in the ordinary course of business, (ii) at the
time of the commencement of the Exchange Offer such
holder has no arrangement or understanding with any
person to participate in a distribution of the New Notes
and (iii) such holder is not engaged in, and does not
intend to engage in, a distribution of the New Notes. By
tendering Old Notes in exchange for New Notes each
holder will represent to the Issuers that: (i) it is not
an affiliate of the Issuers, (ii) any New Notes to be
received by it will be acquired in the ordinary course
of business and (iii) at the time of the commencement of
the Exchange Offer it had no arrangement or
understanding with any person to participate in a
distribution of the New Notes, and, if such holder is
not a broker-dealer, it is not engaged in, and does not
intend to engage in, a distribution of New Notes. If a
holder of Old Notes is unable to make the foregoing
representations, such holder may not rely on such
interpretations of the staff of the Commission as set
forth in such no-action letters, will not be permitted
or entitled to tender such Old Notes and must comply
with the registration and prospectus delivery
requirements of the Securities Act in connection with
any secondary resale transaction. See "The Exchange
Offer -- Terms of the Exchange Offer" and "Plan of
Distribution." Each broker-dealer that receives New
Notes for its own account pursuant to the Exchange Offer
in exchange for Old Notes where such Old Notes were
acquired by such broker-dealer as a result of
market-making activities or other trading activities,
must
6
<PAGE> 12
acknowledge that it will deliver a prospectus meeting
the requirements of the Securities Act and that it has
not entered into any arrangement or understanding with
the Issuers or an affiliate of the Issuers to distribute
the New Notes in connection with any resale of such New
Notes. A broker-dealer that acquired Old Notes in a
transaction other than as part of its market-making
activities or other trading activities will not be able
to participate in the Exchange Offer. The Letter of
Transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to time may be
used by a broker-dealer in connection with resales of
New Notes received in exchange for Old Notes where such
Old Notes were acquired by such broker-dealer as a
result of market-making activities or other trading
activities. The Issuers have agreed that, starting on
the Expiration Date, and ending on the close of business
90 days after the Expiration Date, it will make this
Prospectus available to any participating broker-dealer
for use in connection with any such resale. See "Plan of
Distribution."
To comply with the securities laws of certain
jurisdictions, it may be necessary to qualify for sale
or register the New Notes prior to offering or selling
such New Notes. The Issuers have agreed, pursuant to the
Exchange and Registration Rights Agreement and subject
to certain specified limitations therein, to register or
qualify the New Notes for offer or sale under the
securities or "blue sky" laws of such jurisdictions as
may be necessary to permit the holders of New Notes to
trade the New Notes without any material restrictions or
limitations under the securities laws of the several
states of the United States.
Consequences of Failure
to Exchange Old Notes...Upon consummation of the Exchange Offer, subject to
certain limited exceptions, holders of Old Notes
eligible to participate but who do not exchange their
Old Notes for New Notes in the Exchange Offer will no
longer be entitled to registration rights and will not
be able to offer or sell their Old Notes, unless such
Old Notes are subsequently registered under the
Securities Act (which, subject to certain limited
exceptions, the Issuers 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. All untendered and
tendered but unaccepted Old Notes will continue to be
subject to the restrictions on transfer provided in the
Old Notes and the Indenture. See "The Exchange
Offer -- Terms of the Exchange Offer" and
"-- Consequences of Failure to Exchange."
Expiration Date.........5:00 p.m., New York City time, on , 1998
(20 business days following the commencement of the
Exchange Offer), 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. In no event, however, will the Expiration Date
be later than November 9, 1998. See "The Exchange
Offer -- Expiration Date; Extensions; Amendments;
Termination."
Conditions to the
Exchange Offer........The Exchange Offer is not conditioned upon any minimum
principal amount of Old Notes being tendered for
exchange. However, the Exchange Offer is subject to
certain customary conditions, which may be waived by the
Issuers. See "The Exchange Offer -- Conditions." Except
for the requirements of applicable federal and state
securities laws, there are no federal or state
7
<PAGE> 13
regulatory requirements to be complied with or obtained
by the Issuers in connection with the Exchange Offer.
Procedures for Tendering
Old Notes.............Each holder of Old Notes wishing to accept the Exchange
Offer must complete, sign and date the Letter of
Transmittal, or a facsimile thereof, in accordance with
the instructions contained herein and therein, and mail
or otherwise deliver such Letter of Transmittal, or such
facsimile, together with the Old Notes to be exchanged
and any other required documentation to the Exchange
Agent (as defined) at the address set forth herein and
therein or effect a tender of Old Notes pursuant to the
procedures for book-entry transfer as provided for
herein and therein. By executing the Letter of
Transmittal, a holder will make certain representations
to the Issuers. See "The Exchange Offer -- Procedures
for Tendering" and "-- Book Entry Transfer."
Special Procedures for
Beneficial Owners.....Any beneficial owner whose Old Notes are registered in
the name of a broker, dealer, commercial bank, trust
company or other nominee and who wishes to tender should
contact such registered holder to tender on such
beneficial owner's behalf. See "The Exchange
Offer -- Procedures for Tendering."
Shelf Registration
Statement.............If any holder of the Old Notes (other than any such
holder which is an "affiliate" of the Issuers within the
meaning of Rule 405 under the Securities Act) is not
eligible to participate in the Exchange Offer, and such
holder has satisfied certain conditions relating to the
provision of information to the Company for use therein,
the Issuers have agreed to register the Old Notes on a
shelf registration statement (the "Shelf Registration
Statement") and to use its reasonable best efforts to
cause it to be declared effective by the Commission. The
Issuers have also agreed to file a Shelf Registration
Statement under certain other circumstances. The Issuers
have agreed to maintain the effectiveness of the Shelf
Registration Statement for, under certain circumstances,
a maximum of two years to cover resales of the Old Notes
held by any such holders. See "The Exchange
Offer -- Shelf Registration."
Guaranteed Delivery
Procedures............Holders of Old Notes who wish to tender their Old Notes
and who cannot deliver their Old Notes (or complete the
procedure for book-entry transfer) and a properly
completed Letter of Transmittal or any other documents
required by the Letter of Transmittal to the Exchange
Agent prior to the Expiration Date may tender their Old
Notes according to the guaranteed delivery procedures
set forth in "The Exchange Offer -- Guaranteed Delivery
Procedures."
Withdrawal Rights.......Tenders of Old Notes may be withdrawn at any time prior
to 5:00 p.m., New York City time, on the Expiration
Date. To withdraw a tender of Old Notes, a written or
facsimile transmission notice of withdrawal must be
received by the Exchange Agent at the address set forth
herein under "The Exchange Offer -- Exchange Agent"
prior to 5:00 p.m., New York City time, on the
Expiration Date.
Acceptance of Old Notes
and Delivery of New
Notes.................Subject to certain conditions, any and all Old Notes
that are properly tendered in the Exchange Offer prior
to 5:00 p.m., New York City time, on the Expiration Date
will be accepted for exchange. The New Notes issued
8
<PAGE> 14
pursuant to the Exchange Offer will be delivered
promptly following the Expiration Date. See "The
Exchange Offer -- Terms of the Exchange Offer."
Certain U.S. Tax
Consequences..........The exchange of Old Notes for New Notes will not
constitute a taxable exchange for U.S. federal income
tax purposes. See "Certain Federal Income Tax
Considerations."
Exchange Agent..........United States Trust Company of New York is serving as
exchange agent for the holders of Old Notes (the
"Exchange Agent") in connection with the Exchange Offer.
The address, telephone number and facsimile number of
the Exchange Agent are set forth in "The Exchange
Offer -- Exchange Agent."
Trustee.................United States Trust Company of New York is serving as
trustee (the "Trustee") for the holders of the Notes.
Fees and Expenses.......All expenses incident to the Issuers' consummation of
the Exchange Offer and compliance with the Exchange and
Registration Rights Agreement will be borne by the
Issuers. See "The Exchange Offer -- Fees and Expenses."
THE NEW NOTES
Maturity Date...........June 1, 2008.
Interest Payment
Dates...................June 1 and December 1 of each year, commencing December
1, 1998.
Optional Redemption.....The Notes will be redeemable, in whole or in part, at
the option of the Issuers, at any time and from time to
time on or after June 1, 2003, at the redemption prices
set forth herein, plus accrued and unpaid interest, if
any, to the date of redemption. In addition, at any time
and from time to time, on or prior to June 1, 2001, the
Issuers may redeem, up to 33 1/3% of the original
aggregate principal amount of the Notes at a redemption
price of 110.50% of the principal amount thereof, plus
accrued and unpaid interest, if any, to the date of
redemption, with the Net Cash Proceeds (as defined) of
one or more Equity Offerings (as defined); provided,
however, that at least 66 2/3% of the original aggregate
principal amount of the Notes remains outstanding
following each such redemption; and provided, further,
that such redemption shall occur within 60 days of the
closing of any such Equity Offering. See "Description of
Notes -- Optional Redemption."
Subsidiary Guarantees...The Notes will be fully and unconditionally guaranteed,
jointly and severally (the "Subsidiary Guarantees"), on
an unsecured, senior basis, by each of the Company's
Operating Subsidiaries existing on the issue date of the
Notes (the "Issue Date") and by each subsidiary of the
Company (other than Unrestricted Subsidiaries and
Foreign subsidiaries (as defined)) created or acquired
thereafter (collectively, the "Subsidiary Guarantors").
See "Description of Notes -- Subsidiary Guarantees."
Ranking.................The Notes will be unsecured, senior obligations of the
Issuers, will rank pari passu in right of payment with
all other existing and future senior indebtedness of the
Issuers and will rank senior in right of payment to all
existing and future subordinated indebtedness of the
Issuers. The Subsidiary Guarantees will be general,
unsecured, senior obligations of the Subsidiary
Guarantors, ranking senior in right of payment to all
existing and future subordinated obligations of the
Subsidiary Guarantors and pari passu in right of payment
to all existing and future senior indebtedness of the
Subsidiary Guarantors. As of June 30, 1998, the Issuers
had no secured indebtedness and $80 million of senior
9
<PAGE> 15
indebtedness (representing the outstanding Old Notes).
As of the same date on such pro forma basis, the
aggregate principal amount of senior indebtedness of the
Subsidiary Guarantors outstanding (other than the
Subsidiary Guarantees) was approximately $1.5 million,
all of which is secured indebtedness. See "Description
of Notes -- Ranking."
Restrictive Covenants...The Indenture under which the Notes will be issued (the
"Indenture") will contain certain covenants pertaining
to the Issuers and the Company's Restricted Subsidiaries
(as defined), including, but not limited to, covenants
with respect to the following matters: (i) limitations
on indebtedness and preferred stock; (ii) limitations on
liens; (iii) limitations on restricted payments; (iv)
limitations on restrictions on distributions from
restricted subsidiaries; (v) limitations on sales of
assets and subsidiary stock; (vi) limitations on
transactions with affiliates; (vii) limitation on lines
of business; (viii) limitation on business activities of
Finance Corp.; and (ix) limitations on mergers,
consolidations and transfers of all or substantially all
assets. However, all of these covenants are subject to a
number of important qualifications and exceptions. See
"Description of Notes -- Certain Covenants."
Change of Control.......Upon the occurrence of a Change of Control (as defined),
(i) the Issuers will have the option, at any time, prior
to June 1, 2003 (but in no event more than 180 days
after the occurrence of such Change in Control), to
redeem the Notes, in whole, at a redemption price equal
to 100% of the principal amount thereof, plus the
Applicable Premium (as defined), together with accrued
and unpaid interest, if any, to the date of redemption,
and (ii) if the Issuers have not redeemed the Notes,
each holder of Notes may require the Issuers to
repurchase any or all outstanding Notes owned by such
holder at 101% of the principal amount thereof, plus
accrued and unpaid interest, if any, thereon, to the
date of repurchase. There can be no assurance, however,
that sufficient funds will be available to the Issuers
when necessary to make any required repurchases. See
"Description of Notes -- Change of Control."
Use of Proceeds.........There will be no proceeds to the Company from the
issuance of the New Notes pursuant to the Exchange
Offer. The Company used the net proceeds of the Initial
Offering (i) to repay all the Company's outstanding
senior indebtedness under the Old Credit Facility and
(ii) to repurchase all the issued and outstanding
Original Notes and Warrants. The Company currently
intends to use the balance of the proceeds from the
Initial Offering for general corporate purposes, which
may include future acquisitions (although there are
currently no contractual obligations in respect
thereof). See "Use of Proceeds."
RISK FACTORS
Prospective purchasers of the Notes should carefully consider the
information set forth under the caption "Risk Factors" and all other information
set forth in this Prospectus before making any investment in the Notes.
10
<PAGE> 16
SUMMARY UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS)
The following table sets forth the consolidated statement of operations and
other consolidated financial data of the Company on a pro forma basis for the
periods shown below. The pro forma consolidated statement of operations data
gives effect to the Acquisitions, the acquisition by ESP of the assets of RAD
Lock, Inc. ("RAD") and related transactions (including the Initial Offering) as
though each had occurred as of January 1, 1997. The unaudited pro forma
consolidated financial data is provided for informational purposes only, is
unaudited and is not necessarily indicative of future results or the operating
results or financial condition of the Company that would have actually been
obtained had such transactions been consummated as of the assumed dates. The
following table should be read in conjunction with "Capitalization," "Unaudited
Pro Forma Consolidated Financial Data," "Selected Historical Consolidated
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," and the Consolidated Financial Statements of the
Company and notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA CONSOLIDATED(A)
--------------------------------------
FISCAL YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1997 JUNE 30, 1998
----------------- ----------------
<S> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales................................................... $58,975 $33,016
Cost of goods sold.......................................... 38,203 20,579
------- -------
Gross profit................................................ 20,772 12,437
Selling, general and administrative expenses................ 11,414 5,646
------- -------
Income from operations...................................... 9,358 6,791
Other income................................................ 79 128
Interest expense(b)......................................... (8,683) (4,364)
------- -------
Income before taxes......................................... 754 2,555
Provision for income taxes.................................. 28 95
------- -------
Net income(c)............................................... $ 726 $ 2,460
======= =======
OTHER DATA:
Adjusted EBITDA(d).......................................... $14,961 $ 9,681
Cash flows provided (used) by:
Operating activities...................................... $ 3,064 $ 4,206
Investing activities...................................... (1,772) (675)
Financing activities...................................... (315) (1,722)
Depreciation and amortization............................... 4,371 2,155
Capital expenditures........................................ 1,993 711
Ratio of Adjusted EBITDA to interest expense(b)............. 1.7x 2.2x
Ratio of earnings to fixed charges(e)....................... 1.1x 1.6x
</TABLE>
11
<PAGE> 17
- ---------------
(a) The Company acquired Hudson on May 15, 1997 and ESP on December 10, 1997.
ESP acquired the assets of RAD on June 22, 1997. For an explanation of the
pro forma adjustments, see "Notes to Unaudited Pro Forma Consolidated
Financial Data." The pro forma adjustments are based upon available
information and certain assumptions that the Company believes are
reasonable.
(b) Interest expense reflects an interest rate of 10.50% on the Notes, plus a
commitment fee of 0.50% per annum on the unutilized commitments under the
New Credit Facility, plus interest on existing indebtedness not being
refinanced. See note 9 to "Notes to Unaudited Pro Forma Consolidated
Statement of Operations." Interest expense excludes amortization of deferred
financing costs.
(c) As a limited liability company, the Company pays no federal income taxes.
The provision for income taxes is for taxes on income applicable to certain
states. See note 10 to "Notes to Unaudited Pro Forma Consolidated Statements
of Operations."
(d) Adjusted EBITDA is defined as net income (loss) plus (i) income tax expense,
(ii) interest expense, (iii) depreciation expense, (iv) amortization
expense, (v) management fees and (vi) nonrecurring and noncash charges.
The following is a reconciliation of pro forma net income to pro forma
Adjusted EBITDA for the periods presented.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1997 JUNE 30, 1998
----------------- ----------------
<S> <C> <C>
Pro forma net income.................................. $ 726 $2,460
Add:
Pro forma interest expense.......................... 8,683 4,364
Pro forma income tax expense........................ 28 95
Pro forma depreciation and amortization............. 4,371 2,155
Pro forma management fees........................... 950 431
Nonrecurring and noncash charges:
Pre acquisition environmental expense............ 40 --
Business relocation and consolidation charges.... 84 100
Donation of land and write off of non-performing
assets......................................... 79 --
------- ------
Pro forma Adjusted EBITDA............................. $14,961 $9,605
======= ======
</TABLE>
Adjusted EBITDA is presented because EBITDA is a widely accepted financial
indicator of a company's ability to service indebtedness. However, EBITDA
should not be considered an alternative to operating income or cash flows
from operating activities (as determined in accordance with generally
accepted accounting principles) and should not be construed as an indication
of a company's operating performance or as a measure of liquidity. Since all
companies and analysts do not necessarily calculate EBITDA in the same
fashion, Adjusted EBITDA as presented in this Prospectus may not be
comparable to similarly titled measures reported by other companies. See
"Certain Transactions" and "Description of Notes."
(e) The ratio of earnings to fixed charges has been calculated by dividing
earnings before income taxes and fixed charges by fixed charges. Fixed
charges include interest expense, amortization of deferred financing costs
and one-third of operating lease payments which are deemed to be
representative of the interest factor.
12
<PAGE> 18
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS)
The following table sets forth summary historical statement of operations
and other financial data of the Company as of December 31, 1996 and December 31,
1997 and for each of the three fiscal years ended December 31, 1997 which have
been derived from, and should be read in conjunction with, the audited
consolidated financial statements of the Company included elsewhere in this
Prospectus. The summary consolidated financial data presented below as of
December 31, 1993, December 31, 1994 and December 31, 1995 and for each of the
two years in the period ended December 31, 1994 have been derived from, and
should be read in conjunction with, the audited consolidated financial
statements of the Company which are not included in this Prospectus. The summary
consolidated financial data presented below as of June 30, 1997 and June 30,
1998 and for the six month periods ended June 30, 1997 and June 30, 1998 have
been derived from, and should be read in conjunction with, the unaudited
consolidated financial statements of the Company included elsewhere in this
Prospectus. The summary consolidated balance sheet data presented below as of
June 30, 1997 have been derived from, and should be read in conjunction with,
the unaudited consolidated financial statements of the Company which are not
included in this Prospectus. The information for the interim periods is
unaudited but has been prepared in the same manner as the audited consolidated
financial statements and, in the opinion of management, contain all adjustments
(consisting of normal recurring adjustments) necessary for a fair presentation
of the results of operations for such periods. The interim results of operations
may not be indicative of the results for the full year. The summary historical
consolidated financial data presented below should be read in conjunction with
"Capitalization," "Selected Historical Consolidated Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of the Company and notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31,(A) JUNE 30,
------------------------------------------------ ------------------
1993 1994 1995 1996 1997 1997(A) 1998
------- ------- ------- ------- -------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales..................................... $12,208 $13,612 $13,185 $13,449 $ 27,318 $ 9,781 $33,016
Cost of goods sold(b)......................... 6,927 7,745 7,356 8,361 15,798 5,253 20,579
------- ------- ------- ------- -------- -------- -------
Gross profit.................................. 5,281 5,867 5,829 5,088 11,520 4,528 12,437
Selling, general and administrative
expenses(b)................................. 3,306 3,987 3,457 4,641 6,405 2,356 5,559
------- ------- ------- ------- -------- -------- -------
Income from operations........................ 1,975 1,880 2,372 447 5,115 2,172 6,878
Other income.................................. 6 24 26 5 31 15 127
Interest expense.............................. (405) (457) (427) (254) (3,007) (645) (3,294)
------- ------- ------- ------- -------- -------- -------
Income before taxes, extraordinary charge and
change in accounting principle.............. 1,576 1,447 1,971 198 2,139 1,542 3,711
Provision for income taxes(c)................. 642 522 724 21 889 828 140
Extraordinary charge -- early repayment of
debt........................................ -- -- -- -- -- -- 4,616
Cumulative effect of change in accounting
principle(d)................................ (22) -- -- (313) -- -- --
------- ------- ------- ------- -------- -------- -------
Net income.................................... $ 956 $ 925 $ 1,247 $ 490 $ 1,250 $ 714 $(1,045)
======= ======= ======= ======= ======== ======== =======
OTHER DATA:
Adjusted EBITDA(e)................................................................... $ 8,352 $ 3,126 $ 9,604
Cash flows provided (used) by:
Operating activities............................................................... 4,028 1,753 5,262
Investing activities............................................................... (56,133) (39,424) (711)
Financing activities............................................................... 53,213 39,539 4,533
Depreciation and amortization........................................................ 1,817 559 2,068
Capital expenditures................................................................. 696 282 711
CONSOLIDATED BALANCE SHEET DATA (AT END OF PERIOD):
Cash.......................................... $ 423 $ 445 $ 821 $ 331 $ 1,440 $ 2,198 $10,525
Working capital............................... 4,164 4,485 4,738 4,702 10,681 7,416 23,135
Total assets.................................. 11,352 11,445 10,709 11,454 79,757 55,148 91,166
Long term debt (including current
maturities)................................. 5,698 5,005 3,608 3,428 66,855 50,105 81,522
Stockholders' equity.......................... 4,311 5,236 6,483 6,974 8,848 7,688 4,626
</TABLE>
13
<PAGE> 19
- ---------------
(a) For the four fiscal years ended December 31, 1996, the financial data set
forth above represents the results and the balance sheet data of Elliott
only. The Company acquired Hudson on May 15, 1997 and ESP on December 10,
1997. The financial data set forth above with respect to the fiscal year
ended December 31, 1997 and for the six months ended June 30, 1998 includes
the results of Hudson and ESP from their respective acquisition dates.
(b) For the fiscal year ended December 31, 1996, cost of goods sold includes a
provision for inventory obsolescence of $431 and selling, general and
administrative expenses include nonrecurring business relocation charges of
$786. For the fiscal year ended December 31, 1997, selling, general and
administrative expenses include miscellaneous nonrecurring and noncash
charges of (i) $340 for a one-time management bonus paid in connection with
the change in control of ESP, (ii) $84 in business relocation charges and
(iii) $55 in charges associated with land donation expenses. For the six
months ended June 30, 1998, cost of goods sold includes charges incurred in
connection with the consolidation of the RAD operations into Hudson. See
note (6) to "Notes to Unaudited Pro Forma Consolidated Statement of
Operations."
(c) The Parent elected to be treated as a subchapter S corporation under the
Internal Revenue Code effective May 31, 1997. As an S corporation, the
Shareholders are personally liable for most taxes on the income of the
Company. Accordingly, subsequent to May 31, 1997, the provision for income
taxes includes only those taxes applicable to certain states. Due to the
change in tax status, the 1997 tax provision includes a charge of $469
representing the write-off of net deferred tax assets.
(d) Effective January 1, 1996, Elliott changed the composition of costs included
in inventory. Accordingly, Elliott recorded an adjustment to inventory cost
at January 1, 1997 as the cumulative effect of a change in accounting
principle. Had the Company applied this new accounting principle in the year
ended December 31, 1995, income before income taxes and net income would not
have been materially affected.
(e) Adjusted EBITDA is defined as net income (loss) plus (i) income tax expense,
(ii) interest expense, (iii) depreciation expense, (iv) amortization
expense, (v) management fees and (vi) nonrecurring and noncash charges.
Adjusted EBITDA is presented because EBITDA is a widely accepted financial
indicator of a company's ability to service indebtedness. However, EBITDA
should not be considered an alternative to operating income or cash flows
from operating activities (as determined in accordance with generally
accepted accounting principles) and should not be construed as an indication
of a company's operating performance or as a measure of liquidity. Since all
companies and analysts do not necessarily calculate EBITDA in the same
fashion, Adjusted EBITDA as presented in this Prospectus may not be
comparable to similarly titled measures reported by other companies. See
footnote (b) above, "Certain Transactions" and "Description of Notes."
14
<PAGE> 20
The following table is a reconciliation of net income to Adjusted EBITDA
for the fiscal year ended December 31, 1997 and the six month periods ended June
30, 1997 and 1998.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, -----------------
1997 1997 1998
------------ ------ -------
<S> <C> <C> <C>
Net income.................................................. $1,250 $ 714 $(1,045)
Add:
Interest expense.......................................... 3,007 645 3,294
Income tax expense........................................ 889 828 140
Depreciation and amortization............................. 1,817 559 2,068
Management fees........................................... 910 355 431
Nonrecurring and noncash charges:
Extraordinary item -- early repayment of debt.......... -- -- 4,616
One time management bonus resulting from change in
control of ESP....................................... 340 -- --
Business relocation and consolidation charges.......... 84 25 100
Donation of land and write off of non-performing
assets............................................... 55 --
------ ------ -------
Historical Adjusted EBITDA.................................. $8,352 $3,126 $ 9,604
====== ====== =======
</TABLE>
15
<PAGE> 21
RISK FACTORS
Prospective investors in the Notes should carefully consider the following
risk factors, in addition to the other information set forth in this Prospectus,
before making an investment in the Notes offered hereby.
HOLDING COMPANY STRUCTURE
The Company is a holding company which conducts all of its operations
through its subsidiaries and currently has no significant operating assets other
than its direct and indirect investments the Operating Subsidiaries. All of the
Company's operating income is generated by the Operating Subsidiaries. The
Company must rely on dividends and other advances and transfers of funds from
its subsidiaries and earnings from its investments in cash and marketable
securities to provide the funds necessary to meet the Issuers' debt service
obligations, including payment of principal and interest on the Notes. Although
the Company is the sole or majority shareholder of each of the Operating
Subsidiaries and therefore able to control their respective declarations of
dividends, applicable laws may prevent the Operating Subsidiaries from being
able to pay such dividends. Dividends may be paid by a New York corporation only
out of its surplus. A Delaware corporation may make dividend payments out of
either its surplus or net profits. Therefore, the Operating Subsidiaries must
have a surplus and/or net profits in order to be legally permitted to make
dividend payments to the Company. In addition, such payments may be restricted
by claims against such subsidiaries by their creditors (such as suppliers,
vendors, lessors, and employees) and by any applicable bankruptcy,
reorganization or similar laws applicable to the Operating Subsidiaries. The
availability of funds, and therefore the ability of the Operating Subsidiaries
to pay dividends or make other payments or advances to the Company, will depend
upon their operating results. The ability of the Operating Subsidiaries to pay
dividends may be subject to restrictions contained in future agreements
governing the indebtedness of such subsidiaries.
The only significant assets of the Company (other than cash and marketable
securities) are its investments in the capital stock of the Operating
Subsidiaries, all of which stock has been pledged as collateral under the New
Credit Facility. In the event the Issuers were unable to pay the principal or
interest on the Notes, the ability of the holders of the Notes to proceed
against the capital stock of the Operating Subsidiaries would be subject to the
prior satisfaction in full of all amounts owing under such loan agreement.
SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE DEBT
The Company is highly leveraged. As of June 30, 1998, on a pro forma basis,
after giving effect to the assumptions described in "Unaudited Pro Forma
Consolidated Financial Data," the Company's total indebtedness would have been
approximately $81.5 million. For the six months ended June 30, 1998, the
Company's ratio of earnings to fixed charges would have been 1.55:1. The Company
may incur additional indebtedness in the future, subject to limitations imposed
by the Indenture and the New Credit Facility. See "Capitalization" and
"Unaudited Pro Forma Consolidated Financial Data."
The Company's high degree of leverage could have important consequences to
holders of the Notes, including, but not limited to, the following: (i) a
substantial portion of the Company's cash flow from operations will be required
to be dedicated to debt service and will not be available for other purposes;
(ii) the Company's ability to obtain additional financing in the future could be
limited; (iii) certain of the Company's borrowings are at variable rates of
"interest" which could result in higher interest expense in the event of
increases in interest rates; (iv) the Company may be more vulnerable to extended
economic downturns and may be restricted from making acquisitions, introducing
new technologies or exploiting business opportunities, and (v) the Indenture and
the New Credit Facility will contain financial and restrictive covenants that
limit the ability of the Company to, among other things, borrow additional
funds, dispose of assets or pay cash dividends. Failure by the Company to comply
with such covenants could result in an event of default which, if not cured or
waived, could have a material adverse effect on the Company. In addition, the
degree to which the Company is leveraged could prevent it from repurchasing all
Notes tendered to it upon the occurrence of a Change of Control. See
"Description of Notes" and "Certain Indebtedness -- New Credit Facility."
The Company's ability to make scheduled payments or to refinance its
obligations with respect to its indebtedness will depend on its financial and
operating performance, which in turn will be subject to prevailing economic
conditions and to certain financial, business and other factors beyond its
control. If the Company's
16
<PAGE> 22
cash flow and capital resources are insufficient to fund its debt service
obligations, the Company may be forced to reduce or delay planned expansion and
capital expenditures, sell assets, obtain additional equity capital or
restructure its debt. There can be no assurance that the Company's operating
results, cash flow and capital resources will be sufficient for payment of its
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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Description of Notes."
Moreover, the Company has not entered into a definitive agreement with respect
to the New Credit Facility. There can be no assurance that the Company will be
successful in completing the negotiation of the New Credit Facility. Although
the Company has entered into the Commitment Letters, the obligations of the
Lenders thereunder are subject to a number of conditions, including absence of
material adverse changes with respect to the Company and the execution of
definitive documentation. There can be no assurance that such conditions will be
satisfied. See "Description of Certain Indebtedness -- New Credit Facility."
UNSECURED STATUS OF THE NOTES AND SUBSIDIARY GUARANTEES
The Notes and Subsidiary Guarantees are unsecured obligations of the
Issuers and the Subsidiary Guarantors, respectively. The Indenture permits the
Issuers and the Subsidiary Guarantors to incur certain secured indebtedness. The
holders of all existing and future secured indebtedness will have a claim prior
to the holders of the Notes with respect to any assets pledged by the Issuers
and the Subsidiary Guarantors as security for such indebtedness. It is expected
that the New Credit Facility will be secured by a first priority security
interest in (i) substantially all material assets of the Company and all other
assets owned or hereafter acquired; and (ii) all of the capital stock of the
Subsidiary Guarantors and all other direct and indirect subsidiaries owned by
the Company. Upon an event of default under any such future secured indebtedness
of the Issuers, the lenders thereunder would be entitled to foreclose on the
assets of the Issuers and the Subsidiary Guarantors pledged as security for the
indebtedness incurred thereunder. In such event, the assets of the Issuers and
the Subsidiary Guarantors remaining after payment of such secured indebtedness
may be insufficient to satisfy the obligations of the Issuers and the Subsidiary
Guarantors with respect to the Notes and the Subsidiary Guarantees. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Description of Notes." In
addition, the Notes are structurally subordinated to all existing and future
indebtedness of any subsidiary of the Issuers that is not a Subsidiary
Guarantor. As of June 30, 1998, the aggregate principal amount of secured
indebtedness of the Issuers and the Subsidiary Guarantors which would have
effectively ranked senior to the Notes and the Subsidiary Guarantees was
approximately $1.5 million (other than the Subsidiary Guarantees).
RESTRICTIONS IMPOSED BY TERMS OF THE COMPANY'S INDEBTEDNESS
The Indenture contains certain covenants, including, but not limited to,
covenants with respect to the following matters: (i) limitations on indebtedness
and preferred stock; (ii) limitations on liens; (iii) limitations on restricted
payments; (iv) limitations on restrictions on distributions from restricted
subsidiaries; (v) limitations on sale of assets and subsidiary stock; (vi)
limitations on transactions with affiliates; (vii) limitations on lines of
business; (viii) limitation on business activities of Finance Corp.; and (ix)
limitations on mergers, consolidations and transfers of all or substantially all
assets. In addition, future Senior Indebtedness of the Company may also contain
certain other restrictive covenants which are generally more restrictive than
those contained in the Indenture and limit the Company's ability to prepay its
other indebtedness (including the Notes). Future Senior Indebtedness of the
Company may also require the Company to maintain specified consolidated
financial ratios and satisfy certain consolidated financial tests. See
"Description of Certain Indebtedness -- New Credit Facility" and "Description of
Notes."
The Company's ability to comply with the covenants in the Indenture may be
affected by events beyond its control, including prevailing economic, financial,
competitive, legislative, regulatory and other conditions. The breach of any
such covenants or restrictions could result in a default under the Indenture,
which would permit the holders of the Notes and/or the lenders under other
Senior Indebtedness of the Company, as the
17
<PAGE> 23
case may be, to declare all amounts borrowed thereunder to be due and payable,
together with accrued and unpaid interest, and the commitments of the lenders to
make further extensions of credit under the Company's other senior indebtedness
could be terminated. If the Company were unable to repay any of its other
indebtedness, such lenders could proceed against any or all of the collateral
securing any such indebtedness, which collateral may consist of substantially
all of the assets of the Company and the Subsidiary Guarantors. In addition, if
the Company fails to comply with the financial and operating covenants contained
in any such indebtedness, such failure could result in an event of default
thereunder, which could permit the acceleration of the debt incurred thereunder
and, in some cases, cross-acceleration and cross-default of indebtedness
outstanding under other debt instruments of the Company, including the Notes.
See "Description of Notes."
LIMITATION ON CHANGE IN CONTROL
Upon a Change of Control, the holders of the Notes will be entitled to
require the Issuers to purchase their Notes at a price equal to 101% of the
principal amount thereof plus accrued and unpaid interest thereon, if any, to
the date of repurchase. The Company expects that the New Credit Facility will
prohibit the Company from purchasing any Notes and will also provide that change
of control events with respect to the Company or Parent would constitute a
default thereunder. Any future credit agreements or other agreements relating to
Senior Indebtedness to which the Company becomes a party may contain similar
restrictions and provisions. In the event a Change of Control occurs at a time
when the Company is prohibited from purchasing the Notes, the Company could seek
the consent of its lenders to purchase the Notes or could attempt to refinance
or repay the borrowings that contain such prohibition. If the Company does not
obtain such a consent or repay such borrowings, the Company will remain
prohibited from purchasing the Notes. In such case, the Company's failure to
purchase tendered Notes would constitute an Event of Default as defined under
the Indenture which the Company expects would, in turn, constitute a default
under the New Credit Facility. There can be no assurance that the Company will
have the financial ability to purchase the Notes upon the occurrence of a Change
of Control. If, as a result thereof, a default occurs with respect to any other
Senior Indebtedness, payments to the holders of the Notes could be limited.
In addition, the Change of Control provisions may not be waived by the
Board of Directors of the Company or the trustee under the Indenture (the
"Trustee") without the consent of holders of at least a majority in principal
amount of the Notes. As a result, the Change of Control provisions of the Notes
may in certain circumstances discourage or make more difficult a sale or
takeover of the Company and, thus, the removal of incumbent management. See
"Description of Notes -- Change of Control."
FRAUDULENT CONVEYANCE
The issuance of the Notes and the Subsidiary Guarantees may be subject to
review by a court under federal bankruptcy law or comparable provisions of state
fraudulent transfer law. Under federal or state fraudulent transfer laws, if a
court were to find that, at the time the Notes and Subsidiary Guarantees were
issued, the Company or a Subsidiary Guarantor, as the case may be, (i) issued
the Notes or a Subsidiary Guarantee with the intent of hindering, delaying or
defrauding current or future creditors or (ii)(A) received less than fair
consideration or reasonably equivalent value for incurring the indebtedness
represented by the Notes or a Subsidiary Guarantee and (B)(1) was insolvent or
was rendered insolvent by reason of the issuance of the Notes or such Subsidiary
Guarantee, (2) was engaged, or about to engage, in a business or transaction for
which its remaining assets constituted unreasonably small capital or (3)
intended to incur, or believed (or should have believed) it would incur, debts
beyond its ability to pay as such debts mature (as all of the foregoing terms
are defined in or interpreted under such fraudulent transfer statutes), such
court could avoid all or a portion of the Company's or a Subsidiary Guarantor's
obligations to the holders of the Notes or subordinate the Company's or a
Subsidiary Guarantor's obligations to the holders of the Notes to other existing
and future indebtedness of the Company or such Subsidiary Guarantor, as the case
may be, the effect of which would be to entitle such other creditors to be paid
in full before any payment could be made on the Notes, and take other action
detrimental to the holders of the Notes, including in certain circumstances,
invalidating the Notes. In that event, there would be no assurance that any
repayment on the Notes would ever be recovered by the holders of the Notes.
18
<PAGE> 24
The definition of insolvency for purposes of the foregoing considerations
varies among jurisdictions depending upon the federal or state law that is being
applied in any such proceeding. However, the Company or a Subsidiary Guarantor
generally would be considered insolvent at the time it incurs the indebtedness
constituting the Notes or a Subsidiary Guarantee, as the case may be, if (i) the
fair market value (or fair saleable value) of its assets is less than the amount
required to pay its total existing debts and liabilities (including the probable
liability on contingent liabilities) as they become absolute or matured or (ii)
it is incurring debts beyond its ability to pay as such debts mature.
There can be no assurance as to what standard a court would apply in order
to evaluate the parties' intent or to determine whether the Company or a
Subsidiary Guarantor, as the case may be, was insolvent at the time, or rendered
insolvent upon consummation, of the sale of the Notes or the issuance of a
Subsidiary Guarantee or that, regardless of the method of valuation, a court
would not determine that the Company or a Subsidiary Guarantor, as the case may
be, was insolvent at the time, or rendered insolvent upon consummation, of the
Initial Offering. Nor can there be any assurance that a court would not
determine, regardless of whether the Company or a Subsidiary Guarantor was
insolvent on the date the Notes and Subsidiary Guarantees were issued, that the
payments constituted fraudulent transfers on another ground.
In addition, the Subsidiary Guarantees could also be subject to the claim
that, since the Subsidiary Guarantees were incurred for the benefit of the
Company (and only indirectly for the benefit of the Subsidiary Guarantors), the
obligations of the Subsidiary Guarantor thereunder were incurred for less than
reasonably equivalent value or fair consideration. A court could avoid a
Subsidiary Guarantor's obligation under its Subsidiary Guarantee, subordinate
the Subsidiary Guarantee to other indebtedness of such Subsidiary Guarantor or
take other action detrimental to the holders of the Notes.
ABSENCE OF PUBLIC MARKET; ADVERSE EFFECT ON MARKET FOR OLD NOTES
There is no public market for the Old Notes, although the Old Notes are
eligible for trading in PORTAL by "Qualified Institutional Buyers" as defined in
Rule 144A under the Securities Act ("QIBs") until the consummation of the
Exchange Offer. The Initial Purchaser has acted as market maker for the Old
Notes and has advised the Company that it currently intends to make a market in
the New Notes. However, the Initial Purchaser is not obligated to do so and any
market making may be discontinued at any time without notice. In addition, such
market making activity may be limited during the pendency of the Exchange Offer
or the effectiveness of a shelf registration statement in lieu thereof. The
Issuers do not intend to apply for listing of the New Notes on any securities
exchange or for quotation of the New Notes through any automated quotation
system. Accordingly, there can be no assurance that an active public market for
the New Notes will develop or as to the liquidity of any market that may
develop, the ability of holders of New Notes to sell their New Notes or the
price at which such holders would be able to sell their New Notes. In addition,
to the extent that Old Notes are tendered and accepted in the Exchange Offer,
the trading market for the untendered and tendered but unaccepted Old Notes
could be adversely affected. The liquidity of, and trading market for, both the
Old Notes and the New Notes also may be adversely affected by general declines
in the market or by declines in the market for similar securities. Such declines
may adversely affect such liquidity and trading markets independent of the
financial performance of, and prospects for, the Company.
DEPENDENCE ON OEM CUSTOMERS
The Company markets its products in large part to OEM customers that
integrate the Company's products into their own end products. The businesses of
the Company's OEM customers are intensely competitive. The Company is therefore
subject to the risk that the price of or demand for the products sold by its OEM
customers will decline, which could have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
because the Company generally markets its products through OEMs, the Company is
subject to the risk that the ultimate consumers of the products of OEMs will
discontinue using such OEMs' products for reasons unrelated to the quality or
price of or demand for the Company's products, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company is also subject to the risk that its OEM customers will
replace the Company's products with products developed internally by them or
with products from the
19
<PAGE> 25
Company's competitors. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
COMPETITION
Each of the markets served by the Company is highly competitive, with a
number of competitors offering similar products. The Company focuses its efforts
relating to its business segments on the high-end of their respective markets,
where management believes that product design, quality, service and durability
are the primary competitive factors. The Company faces significant price
competition from its competitors in each of its markets and may encounter
competition from new market entrants. In addition, certain of the Company's
customers have significantly greater resources than the Company and there can be
no assurance that these customers will not explore vertical integration
opportunities to manufacture components that are currently purchased from the
Company. In addition, with respect to its Flexible Shaft Business, the Company
may encounter competition from existing rigid shaft technology, new market
entrants or new technology. There can be no assurance that the Company will be
able to compete successfully in its markets in the future. See
"Business -- Competition."
RISK OF CUSTOMER CONSOLIDATION
Certain industries to which the Company markets its products, particularly,
the office furniture industry, have experienced a move towards consolidation.
Further consolidation could result in the combination of one of the Company's
customers with a customer of a competitor of the Company. Such a consolidation
could result in changes in product purchasing or sourcing decisions or price
erosion due to purchasing economies of scale and could result in the loss of all
or a portion of current sales volumes to a customer, which could have a material
adverse effect on the Company's financial condition and results of operations.
There can be no assurance in such circumstances that any such lost sales that
might occur as a result of industry consolidation could be replaced with sales
to new customers. See "Business -- Business Strategy."
LACK OF PATENT PROTECTION; RISK OF TECHNOLOGICAL OBSOLESCENCE
The Company does not, in general, rely on patented technology. There can be
no assurance that other companies will not independently develop manufacturing
or other technology which will enable them to more effectively compete with the
Company or which may lead to patents relating to specific aspects of the
Company's business segments. Although the Company does not believe any of its
markets to be characterized by rapidly changing technology or evolving industry
standards, there can be no assurance that such technological or industry changes
will not occur or that the Company will be able to keep pace with any such
technological demands of the marketplace. In addition, there can be no assurance
that another company will not develop an automatic winding machine similar to
that used by the Company to produce flexible shafts or develop a new technology
that is superior to that used by the Company. The Company believes that the
current unavailability of such machines is a significant barrier to entry into
the production of flexible shafts and any such development could have a material
adverse effect on the Company's financial condition and results of operation.
The Company continually focuses its efforts on product innovation and
design improvements that enhance existing products and stimulate development of
new products. The Company's approach to custom engineered solutions may subject
the Company to claims of patent infringement by competitors. There can be no
assurance that any future successful assertion of patent infringement claims
will not result in material legal, royalty or other costs to the Company.
PRODUCT LIABILITY EXPOSURE
The Company may be exposed to product liability claims in the future
relating to the performance of one of its products or the performance of a
product in which one of the Company's products was a component part. There can
be no assurance that product liability claims will not be brought against the
Company in the future, either by an injured customer of an end product
manufacturer who used a Company product as a component or by a direct purchaser
from the Company. In addition, no assurance can be given that indemnification
from the Company's customers or coverage under insurance policies will be
adequate to cover future product
20
<PAGE> 26
liability claims against the Company. Moreover, liability insurance is
expensive, difficult to maintain and may be unobtainable in the future on
acceptable terms. The amount and scope of any insurance coverage may be
inadequate if a product liability claim is successfully asserted against the
Company. Furthermore, if any significant claims are made against the Company or
any of the Company's suppliers, the Company's business may be adversely affected
by any resulting negative publicity.
COMPANY GROWTH AND STRATEGIC ACQUISITIONS
A key element of the Company's business strategy is to selectively pursue
acquisition opportunities, whether relating to the Specialty Lock Business, the
Flexible Shaft Business, or other complementary or related light manufacturing
businesses. The Company historically has been able to benefit from acquisitions
through efficient integration and implementation of the Company's operating
strategies. However, there can be no assurance that acquisition opportunities
will continue to be available or that if available, such acquisitions could be
consummated on terms acceptable to the Company, or that the Company would be
able to obtain financing on terms that it deems acceptable to consummate any
potential acquisition. In addition, the Company's future performance will
depend, in part, on its ability to manage expanding operations and to adapt its
operational systems to such expansions. The failure of the Company to
effectively manage its growth or successfully integrate acquired companies or
assets into the Company's operations could have a material adverse effect on the
Company's financial condition and results of operations.
RELIANCE ON KEY PERSONNEL; NEED FOR SKILLED LABOR
The Company believes that the breadth of industry experience of key
management personnel is integral to the Company's success in understanding and
serving its customers' needs. The loss of the President of any of the Operating
Subsidiaries could, among other things, have an adverse effect upon the
Company's business and results of operations. In addition, the Company is
dependent on the services of a team of engineers and sales personnel in the
Flexible Shaft Business, consisting of a limited number of persons with highly
specialized technical knowledge. The Company's future results will depend upon
its ability to attract and retain technical, managerial, and marketing
personnel. Given that the Company operates in geographic areas with low
unemployment rates, there can be no assurance that the Company will be
successful in attracting and retaining the personnel required to sustain its
business. Failure to attract and retain such personnel could have a material
adverse effect on the Company's business, financial condition and results of
operation. See "Business -- Employees" and "Management."
YEAR 2000 COMPLIANCE
The Company is heavily dependent upon computer technology to effectively
carry out its day-to-day operations. In addition, the Company is dependent on
suppliers and customers who also use computer technology in the conduct of their
business. While management believes that the Company's computer and information
systems will be able to accommodate the "year 2000" dating changes necessary to
permit correct recording of year dates for 2000 and later years by mid 1999, the
Company's management is currently addressing all year 2000 issues and is in the
process of evaluating and correcting all year 2000 issues. The initial
assessment indicates that the Company does not have a significant year 2000
issue, and management believes that the cost of addressing its year 2000 issues
will not be material. The Company believes it will be able to achieve year 2000
compliance by the end of 1999, and does not anticipate any material disruption
in its operations as the result of any failure by the Company to be in
compliance, although no assurance to such effect can be given. In the event that
any of the Company's significant suppliers or customers do not successfully and
timely achieve year 2000 compliance, the Company's business or operations could
be adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Year 2000."
CONTROL BY PRINCIPAL STOCKHOLDER
John S. Dyson is the Chairman of the Board of Directors and, together with
trusts for the benefit of members of his family, owns approximately 90% of the
outstanding common stock of the Parent, the sole member of KC LLC. Accordingly,
Mr. Dyson will control the Company and have the power to appoint new management
and approve any action requiring the approval of the members, including adopting
amendments
21
<PAGE> 27
to the Company's limited liability company agreement and approving mergers or
sales of substantially all of the Company's assets. There can be no assurance
that the interests of Mr. Dyson will not conflict with the interests of the
holders of the Notes. See "Management" and "Principal Stockholders."
POTENTIAL EXPOSURE TO ENVIRONMENTAL LIABILITIES
The Company is subject to various federal, state and local environmental
laws, ordinances, regulations, permits and other authorizations, including those
governing discharges into the air and water, the storage, handling and disposal
of solid and hazardous wastes, discharges of waste water, the remediation of
soil and groundwater contamination, by hazardous substances, wastes or petroleum
products, the health and safety of employees and other matters ("Environmental
Laws"). Some Environmental Laws impose liability for environmental remediation
costs on property owners and operators without regard to fault. Soil and
groundwater contamination exists, and remediation is required, at certain of the
Company's properties which may be a result of either the Company's operations or
other industrial activities. See "Business -- Environmental Matters." In
connection with its present and past ownership and operation of those and other
properties, the Company may be liable under Environmental Laws for the cost of
remediation of such contamination, as well as certain other related costs,
including governmental penalties and claims by third parties for personal injury
and property damage. While the Company has incurred remedial and related costs
in the past, none to date have been material. Future events, such as new
information, changes in existing Environmental Laws or their interpretation, and
more vigorous enforcement by regulatory authorities, may give rise to additional
expenditures, including capital expenditures, and additional compliance
requirements or liabilities.
PRICE OF RAW MATERIALS
The Company generally does not have supply contracts with its suppliers
which lock in the price of its raw materials. The price of the raw materials
used by the Company can fluctuate materially. In the event of an increase in the
price of raw materials, there can be no assurance that the Company will be
successful in passing along such price increases to its customers. See
"Business -- Raw Materials and Suppliers."
ADVERSE CONSEQUENCES OF FAILURE TO ADHERE TO EXCHANGE OFFER PROCEDURES
Issuance of the New Notes in exchange for Old Notes pursuant to the
Exchange Offer will be made only after a timely receipt by the Exchange Agent of
such Old Notes, a properly completed and duly executed Letter of Transmittal and
all other required documents. Therefore, holders of Old Notes desiring to tender
such Old Notes in exchange for New Notes should allow sufficient time to ensure
timely delivery. Neither the Issuers nor the Exchange Agent is under any duty to
give notification of defects or irregularities with respect to the tender of Old
Notes for exchange. Old Notes that are not tendered or are tendered but not
accepted will, following the consummation of the Exchange Offer, continue to be
subject to the existing restrictions upon transfer thereof and, upon
consummation of the Exchange Offer, certain registration rights under the
Exchange and Registration Rights Agreements will terminate.
RECEIPT OF RESTRICTED SECURITIES UNDER CERTAIN CIRCUMSTANCES
Any holder of Old Notes who tenders in the Exchange Offer for the purpose
of participating in a distribution of the New Notes may be deemed to have
received restricted securities and, if so, will be required to comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. See "The Exchange Offer -- Consequences
of Failure to Exchange."
22
<PAGE> 28
THE ISSUERS
KEY COMPONENTS, LLC
KC LLC is a Delaware limited liability company recently formed as a
wholly-owned subsidiary of the Parent to hold and operate the Operating
Subsidiaries. KC LLC, together with Finance Corp., was formed to facilitate the
Initial Offering.
KEY COMPONENTS FINANCE CORP.
Finance Corp., a wholly-owned subsidiary of KC LLC, was recently
incorporated in Delaware for the purpose of serving as a co-issuer of the Old
Notes in order to facilitate the Initial Offering. The Company believes that
certain prospective purchasers of Notes may be restricted in their ability to
purchase debt securities of limited liability companies, such as the Company,
unless such debt securities are jointly issued by a corporation. Finance Corp.
will not have any operations or assets and will not have any sales. As a result,
prospective purchasers of the Notes should not expect Finance Corp. to
participate in servicing the interest and principal obligations of the Notes.
The Indenture imposes substantial restrictions on the activities of Finance
Corp. See "Description of Notes -- Certain Covenants -- Limitation on Business
Activities of Finance Corp."
The principal executive offices of the Issuers are located at Wing Road
RR1, Box 167D, Millbrook, New York 12545, and the telephone number is (914)
677-8383.
23
<PAGE> 29
THE FORMATION
Concurrently with the closing of the sale of the Old Notes, KC LLC acquired
all of the assets and was assigned all of the liabilities of the Parent,
including all right, title and interest of Parent in and to all of the
outstanding equity securities of Elliott, Hudson and ESP, which were then held
by the Parent (the "Formation"). See "Principal Stockholders." As a result of
the Formation, Elliott, Hudson and ESP became, together with Finance Corp., the
sole subsidiaries of the Company.
The following chart depicts the organization of the Company.
[KEY COMPONENTS FLOW CHART]
(1) The Parent, which is classified as a subchapter S corporation, has no assets
except for its membership interests in KC LLC.
(2) KC LLC has no material tangible assets except for its ownership of all the
capital stock of its subsidiaries. The terms of the indenture restrict the
operations of the Company in certain respects. KC LLC is also the borrower
under the New Credit Facility, the terms of which also restrict the
operations of the Company in certain respects. See "Risk Factors -- Holding
Company Structure; -- Restrictions Imposed by Terms of the Company's
Indebtedness" and "Description of Certain Indebtedness -- New Credit
Facility."
(3) Finance Corp. has no assets or operations. The terms of the Indenture
significantly restrict the operations of Finance Corp.
24
<PAGE> 30
USE OF PROCEEDS
The Exchange Offer is intended to satisfy certain of the Issuers'
obligations under the Exchange and Registration Rights Agreement. The Issuers
will not receive any cash proceeds from the issuance of the New Notes offered
hereby. In consideration for issuing the New Notes contemplated in this
Prospectus, the Issuers will receive Old Notes in like principal amount, the
form and terms of which are identical to the form and terms of the New Notes
(which replace the Old Notes), except as otherwise described herein. The Old
Notes surrendered in exchange for New Notes will be retired and canceled and
cannot be reissued. Accordingly, issuance of the New Notes will not result in
any increase or decrease in the indebtedness of the Issuers.
The net proceeds to the Issuers from the Initial Offering were
approximately $76.7 million. The Issuers used the proceeds from the Initial
Offering to repay approximately $70.1 million of indebtedness, approximately
$3.6 million of which was related to costs associated with the repayment of such
indebtedness and the repurchase of outstanding warrants. The Issuers currently
intend to use the balance of the proceeds ($6.6 million) from the Initial
Offering, for working capital and other general corporate purposes of the
Company and its Subsidiaries which may include future acquisitions. Pending
utilization of the remaining proceeds from the Initial Offering, the Issuers
currently intend to invest such proceeds in short-term investments earning
interest at rates which are substantially lower than the rate borne by the
Notes.
25
<PAGE> 31
CAPITALIZATION
The following table sets forth the historical capitalization of the Company
at June 30, 1998. This table should be read in conjunction with "Use of
Proceeds," "Unaudited Pro Forma Consolidated Financial Data," "Selected
Historical Consolidated Financial Data," "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Company's audited and
unaudited consolidated financial statements and notes thereto included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
AS OF
JUNE 30, 1998
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Cash and cash equivalents................................... $10,525
=======
Long-term debt (including current portion):
New Credit Facility(1).................................... $ --
The Old Notes............................................. 80,000
Other long term debt(2)................................... 1,522
-------
Total long-term debt, including current portion........ 81,522
-------
Stockholders' Equity:
Capital stock............................................. 1,536
Retained earnings......................................... 3,090
-------
Total stockholders' equity............................. 4,626
-------
Total capitalization.............................. $86,148
=======
</TABLE>
- ---------------
(1) The Company has entered into the Credit Agreement for the New Credit
Facility which provides for a (i) $15,000 revolving facility and (ii)
$25,000 acquisition facility. Borrowings under the New Credit Facility are
subject to the satisfaction of certain conditions. See "Description of
Certain Indebtedness -- New Credit Facility."
(2) Represents $632 for an obligation related to a lease for a vacated facility,
$490 for an obligation under a licensing agreement, $228 for capital lease
obligations and $172 for an obligation under a covenant not to compete.
26
<PAGE> 32
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following Unaudited Pro Forma Consolidated Balance Sheet as of June 30,
1998 and the Unaudited Pro Forma Consolidated Statements of Operations for the
year ended December 31, 1997 and the six months ended June 30, 1998 have been
prepared to give effect to (i) the acquisition by the Company of all of the
capital stock of Hudson on May 15, 1997 and ESP on December 10, 1997 (the
"Acquisitions"), (ii) the acquisition by ESP of all of the assets of RAD on June
22, 1997, (iii) the Initial Offering and the application of the net proceeds
therefrom, (iv) the conversion of the Parent from a C corporation to a
subchapter S corporation on May 31, 1997, (v) the Formation, and (vi) the New
Credit Facility. The Company's balance sheet at June 30, 1998 includes the
effect of the Acquisitions and the transactions described in clauses (iii) and
(v) above, which had occurred prior to such date. The Unaudited Pro Forma
Consolidated Balance Sheet gives effect to the transaction described in clause
(vi) above as if it were consummated on June 30, 1998. The Unaudited Pro Forma
Consolidated Statements of Operations give effect to the Acquisitions and other
transactions described above as if each had occurred as of January 1, 1997. The
Unaudited Pro Forma Consolidated Financial Data has been derived by the Company
by the application of pro forma adjustments to (i) the audited financial
statements of the Company for the year ended December 31, 1997 and the audited
financial statements of Hudson for the 138 day period ended May 15, 1997 and of
ESP for the 344 day period ended December 10, 1997, their respective dates of
acquisition by the Company, and of RAD for the 83 day period ended June 22,
1997, its date of acquisition by ESP, and (ii) the unaudited financial
statements of the Company for the six month period ended and as of June 30,
1998.
The Company has accounted for the Acquisitions using the purchase method of
accounting, under which tangible and identifiable intangible assets acquired and
liabilities assumed are recorded at their respective fair values. Allocations of
the purchase price in the Acquisitions have been determined based on estimates
of fair value and, therefore, are subject to change. Differences between the
amounts included herein and the final allocations are not expected to be
material.
The Unaudited Pro Forma Consolidated Financial Data is unaudited and does
not purport to be indicative of the financial position or results of operations
which would actually have been attained had the Acquisitions, the Offering and
the other transactions been consummated on the dates indicated or which may be
attained in the future. The pro forma adjustments, as described in the Notes to
the Unaudited Pro Forma Consolidated Balance Sheet and the Notes to the
Unaudited Pro Forma Consolidated Statement of Operations, are based on available
information and upon certain assumptions which management believes are
reasonable. These pro forma statements should be read in conjunction with
"Summary Historical Consolidated Financial Data," "The Formation," "Use of
Proceeds," "Selected Historical Consolidated Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
the historical financial statements and notes thereto of the Company, Hudson,
ESP and RAD, included elsewhere in this Prospectus.
27
<PAGE> 33
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA PRO FORMA
THE COMPANY ADJUSTMENTS THE COMPANY
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS:
Cash................................................ $10,525 $ (200)(1) $10,325
Accounts receivable, net............................ 9,055 -- 9,055
Inventories......................................... 8,544 -- 8,544
Prepaid expenses and other current assets........... 528 -- 528
------- ------- -------
Total current assets............................. 28,652 (200) 28,452
Property, plant and equipment, net.................. 11,866 -- 11,866
Goodwill............................................ 44,639 -- 44,639
Deferred financing costs............................ 4,264 200(1) 4,464
Intangibles......................................... 1,672 -- 1,672
Other assets........................................ 73 -- 73
------- ------- -------
Total assets..................................... $91,166 $ -- $91,166
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current portion of long term debt................... $ -- $ -- $ --
Current portion of other long term obligations...... 499 -- 499
Accounts payable.................................... 2,026 -- 2,026
Accrued expenses and other liabilities.............. 2,993 -- 2,993
------- ------- -------
Total current liabilities........................ 5,518 -- 5,518
Long term debt...................................... 80,000 -- 80,000
Other long term obligations......................... 1,023 -- 1,023
------- ------- -------
Total liabilities................................ 86,541 -- 86,541
------- ------- -------
Capital stock....................................... 1,536 -- 1,536
Retained earnings................................... 3,089 -- 3,089
------- ------- -------
Total stockholder's equity....................... 4,625 -- 4,625
------- ------- -------
Total liabilities and stockholder's equity....... $91,166 $ -- $91,166
======= ======= =======
</TABLE>
- ---------------
(1) Represents a commitment fee for the New Credit Facility of $200.
28
<PAGE> 34
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
----------------------------------------------------------------
FISCAL YEAR 138 DAYS 344 DAYS 173 DAYS PRO FORMA
ENDED ENDED ENDED ENDED FISCAL YEAR ENDED
DECEMBER 31, MAY 15, DECEMBER 10, JUNE 22, DECEMBER 31,
1997 1997 1997 1997 PRO FORMA 1997
THE COMPANY HUDSON ESP RAD CONSOLIDATED ADJUSTMENTS THE COMPANY
------------ -------- ------------ -------- ------------ ----------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $27,318 $6,809 $23,260 $1,588 $58,975 $ -- $58,975
Cost of goods sold...... 15,798 3,877 17,299 1,154 38,128 -- 38,203
75(1)
------- ------ ------- ------ ------- ------- -------
Gross profit............ 11,520 2,932 5,961 434 20,847 (75) 20,772
Selling, general and
administrative
expenses.............. 6,321 1,217 3,558 258 11,354 -- 11,330
(110)(2)
702(3)
(39)(4)
(277)(5)
(340)(6)
40(7)
Non-recurring business
consolidation
charges............... 84 -- -- -- 84 -- 84
------- ------ ------- ------ ------- ------- -------
Income from
operations............ 5,115 1,715 2,403 176 9,409 (51) 9,358
Other income (expense):
Other income
(expense)........... 31 -- 52 (4) 79 -- 79
Interest expense...... (3,007) (663) (615) (79) (4,364) (4,319)(8) (8,683)
------- ------ ------- ------ ------- ------- -------
Earnings before taxes... 2,139 1,052 1,840 93 5,124 (4,570) 754
Provision for income
taxes................. 889 460 773 -- 2,122 (2,094)(9) 28
------- ------ ------- ------ ------- ------- -------
Net income.............. $ 1,250 $ 592 $ 1,067 $ 93 $ 3,002 $(2,276) $ 726
======= ====== ======= ====== ======= ======= =======
SUPPLEMENTARY DATA:
Depreciation and
amortization.......... $ 1,817 $ 249 $ 1,586 $ 91 $ 3,743 $ 628 $ 4,371
</TABLE>
29
<PAGE> 35
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1998 PRO FORMA JUNE 30, 1998
THE COMPANY ADJUSTMENTS THE COMPANY
------------- ----------- -------------
<S> <C> <C> <C>
Net sales............................................. $33,016 $ -- $33,016
Cost of goods sold.................................... 20,579 -- 20,579
------- ------- -------
Gross profit.......................................... 12,437 -- 12,437
Selling, general and administrative expenses.......... 5,559 87(4) 5,646
------- ------- -------
Income from operations................................ 6,878 (87) 6,791
Other income (expense):
Other income........................................ 128 -- 128
Interest expense.................................... (3,295) (1,069)(8) (4,364)
------- ------- -------
Earnings before taxes and extraordinary charge........ 3,711 (1,156) 2,555
Provision for income taxes............................ 140 (45)(9) 95
Extraordinary charge -- early repayment of debt....... 4,616 (4,616) --
------- ------- -------
Net income............................................ $(1,045) $(3,505) $ 2,460
======= ======= =======
SUPPLEMENTARY DATA:
Depreciation and amortization......................... $ 2,068 $ 87 $ 2,155
</TABLE>
30
<PAGE> 36
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(1) As required by purchase accounting in connection with the Hudson
acquisition, the Company recorded a net increase of $2,389 to production
related equipment reflecting the difference between book values and fair
values. A pro forma adjustment has been made to reflect additional
depreciation included in cost of goods sold based on the fair value of
assets acquired, as if the acquisition had occurred as of January 1, 1997.
No adjustment was required for the six months ended June 30, 1998.
(2) As required by purchase accounting in connection with the Hudson
acquisition, the Company recorded a net decrease of $3,019 to selling,
general and administrative related fixed assets reflecting the difference
between book values and fair values. A pro forma adjustment has been made to
reflect depreciation included in selling, general and administrative
expenses based on the fair value of assets acquired, as if the acquisition
had occurred as of January 1, 1997. No adjustment was required for the six
months ended June 30, 1998.
(3) As required by purchase accounting in connection with the Acquisitions, the
Company recorded goodwill and other intangibles of $46,912 and eliminated
$6,699 of goodwill previously recorded on the books of the acquired
companies. The Unaudited Pro Forma Consolidated Statements of Operations
assume that the Acquisitions occurred as of January 1, 1997. Accordingly, a
net goodwill and intangible amortization adjustment was included in selling,
general and administrative expenses and is comprised of the following:
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED
DECEMBER 31, 1997
-----------------
<S> <C>
Full year amortization of acquisition goodwill and
intangibles............................................... $ 1,383
Amortization included in historical statements of the
Company and acquired companies............................ (681)
-------
Net adjustment.............................................. $ 702
=======
</TABLE>
No pro forma adjustment was required for the six months ended June 30,
1998.
(4) Represents the net adjustment related to the following changes in the
amortization of debt financing costs, assuming the Initial Offering occurred
as of January 1, 1997:
<TABLE>
<CAPTION>
FISCAL YEAR SIX MONTHS
ENDED ENDED
DECEMBER 31, 1997 JUNE 30, 1998
----------------- -------------
<S> <C> <C>
Amortization of debt financing costs related to the
Notes and the New Credit Facility(a)................. $ 463 $ 232
Amortization included in historical statements of the
Company and acquired companies....................... -- (35)
Elimination of amortization of debt financing costs
associated with the Old Notes and the Old Credit
Facility(b).......................................... (174) (110)
Elimination of amortization of debt financing costs
associated with debt repaid from the proceeds of the
Original Notes and the Old Credit Facility........... (328) --
------ -----
Net adjustment......................................... $ (39) $ 87
====== =====
</TABLE>
31
<PAGE> 37
- ---------------
(a) Debt financing costs associated with the Notes and the New Credit
Facility are estimated to be $4,500 and include the initial purchase
discount of $2,400 payable in connection with the Initial Offering.
These costs are being amortized on a straight line basis over the
respective lives of the new agreements.
(b) The write-off of the debt financing costs related to the Original Notes
and the Old Credit Facility was recorded as an extraordinary charge
during the six months ended June 30, 1998 and is not included in the
Unaudited Pro Forma Consolidated Statements of Operations.
(5) The adjustment of $277 for the year ended December 31, 1997, represents the
elimination of fees paid to Jordan, the former owner of Hudson, for general
management consulting services prior to its acquisition by the Company.
Since the consummation of the acquisition of Hudson, such services have been
provided by existing management of the Company and Millbrook. No such fees
are included in the six months ended June 30, 1998.
(6) In December 1997, a one-time management bonus of $340 was paid under an
agreement related to the purchase and change in control of ESP to a former
employee and stockholder of ESP who is now employed by the Company.
Management believes it is a nonrecurring charge. Any future bonus that may
be paid is at the sole discretion of the Company. See
"Management -- Employment Agreements and Executive Compensation." No
provision has been made in the Unaudited Pro Forma Consolidated Statements
of Operations for any such bonus to such employee. No pro forma adjustment
was required for the six months ended June 30, 1998, as estimated management
bonuses are included in historical statements of the Company.
(7) Represents the adjustment of Millbrook's management compensation as a result
of a new management agreement effective with the consummation of the
Formation. See "Certain Transactions."
(8) Represents the net adjustment related to the following changes in interest
expense, assuming the Initial Offering occurred as of January 1, 1997:
<TABLE>
<CAPTION>
FISCAL YEAR SIX MONTHS
ENDED ENDED
DECEMBER 31, 1997 JUNE 30, 1998
----------------- -------------
<S> <C> <C>
Interest expense related to the Notes and the New
Credit Facility(a)................................... $ 8,600 $ 4,300
Interest included in historical statements of the
Company.............................................. -- (770)
Elimination of interest expense associated with the
Original Notes and the Old Credit Facility........... (2,878) (2,461)
Elimination of interest expense associated with debt
repaid from proceeds of the Original Notes and the
Old Credit Facility.................................. (1,403) --
------- -------
Net adjustment......................................... $ 4,319 $ 1,069
======= =======
</TABLE>
- ---------------
(a) Interest expense reflects an interest rate of 10.50% on the Notes plus
a commitment fee of 0.50% per annum on the unused commitments under the
New Credit Facility. Interest expense excludes amortization of deferred
financing costs. The outstanding borrowings under the Notes and unused
commitments under the New Credit Facility are assumed to remain at
$80,000 and $40,000, respectively, throughout the period.
(9) As a limited liability company, the Company pays no federal income taxes and
the Shareholders are personally liable for taxes on the income of the
Company. Accordingly, the provision for income taxes recorded in the
historical financial statements has been adjusted in the Unaudited Pro Forma
Consolidated Statements of Operations to reflect income taxes applicable
only to certain states. The Indenture will permit the Company to make cash
distributions in an amount equal to the income tax liability of the
Shareholders in respect of the taxable income of the Company. See
"Description of Notes -- Limitation on Restricted Payments."
32
<PAGE> 38
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
THE COMPANY
(DOLLARS IN THOUSANDS)
The following table sets forth the historical statement of operations and
other financial data as of December 31, 1996 and December 31, 1997, and for each
of the three years ending December 31, 1997 which have been derived from, and
are qualified by reference to, the audited consolidated financial statements of
the Company included elsewhere in this Prospectus. The selected consolidated
financial data presented below as of December 31, 1993, December 31, 1994 and
December 31, 1995 and for each of the two years in the period ended December 31,
1994 have been derived from, and should be read in conjunction with, the audited
consolidated financial statements of the Company which are not included in this
Prospectus. The selected consolidated financial data presented below as of June
30, 1997 and June 30, 1998 and for the six month periods ended June 30, 1997 and
June 30, 1998 have been derived from, and should be read in conjunction with,
the unaudited consolidated financial statements of the Company included
elsewhere in this Prospectus. The summary consolidated balance sheet data
presented below as of June 30, 1998 have been derived from, and should be read
in conjunction with, the unaudited consolidated financial statements of the
Company which are not included in this Prospectus. The information for the
interim periods is unaudited but has been prepared in the same manner as the
audited consolidated financial statements and, in the opinion of management,
contains all adjustments (consisting of normal recurring adjustments) necessary
for a fair presentation of the results of operations for such periods. The
interim results of operations may not be indicative of the results for the full
year. The Selected Historical Consolidated Financial Data presented below should
be read in conjunction with "Capitalization," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements of the Company and Notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31,(A) JUNE 30,
----------------------------------------------- ------------------
1993 1994 1995 1996 1997 1997(A) 1998
------- ------- ------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales............................................ $12,208 $13,612 $13,185 $13,449 $27,318 $ 9,781 $33,016
Cost of goods sold(b)................................ 6,927 7,745 7,356 8,361 15,798 5,253 20,579
------- ------- ------- ------- ------- ------- -------
Gross profit......................................... 5,281 5,867 5,829 5,088 11,520 4,528 12,437
Selling, general and administrative expenses(b)...... 3,306 3,987 3,457 4,641 6,405 2,356 5,559
------- ------- ------- ------- ------- ------- -------
Income from operations............................... 1,975 1,880 2,372 447 5,115 2,172 6,878
Other income (expense)............................... 6 24 26 5 31 15 127
Interest expense..................................... (405) (457) (427) (254) (3,007) (645) (3,294)
------- ------- ------- ------- ------- ------- -------
Income before taxes, extraordinary charge and change
in accounting principle............................ 1,576 1,447 1,971 198 2,139 1,542 3,711
Provision for income taxes(c)........................ 642 522 724 21 889 828 140
Extraordinary charge -- early repayment of debt...... -- -- -- -- -- -- 4,616
Cumulative effect of change in accounting
principle(d)....................................... (22) -- -- (313) -- -- --
------- ------- ------- ------- ------- ------- -------
Net income........................................... $ 956 $ 925 $ 1,247 $ 490 $ 1,250 $ 714 $(1,045)
======= ======= ======= ======= ======= ======= =======
OTHER DATA:
Adjusted EBITDA(e)................................... $ 2,928 $ 3,006 $ 3,521 $ 3,203 $ 8,352 $ 3,126 $ 9,604
Cash flows provided (used) by:
Operating activities...................................................................... 4,028 1,753 5,262
Investing activities...................................................................... (56,133) (39,424) (711)
Financing activities...................................................................... 53,213 39,539 4,533
Depreciation and amortization........................ 603 692 713 741 1,817 559 2,068
Capital expenditures................................. 501 389 345 1,298 696 282 711
Ratio of earnings to fixed charges(f)................ 4.1x 3.6x 4.7x 1.5x 1.7x 3.2x 2.1x
CONSOLIDATED BALANCE SHEET DATA (AS OF THE END OF
PERIOD):
Cash................................................. $ 423 $ 445 $ 821 $ 331 $ 1,440 2,198 $10,525
Working capital...................................... 4,164 4,485 4,738 4,702 10,681 7,416 23,135
Total assets......................................... 11,352 11,445 10,709 11,454 79,757 55,148 91,166
Long term debt (including current maturities)........ 5,698 5,005 3,608 3,428 66,855 50,105 81,522
Stockholders' equity................................. 4,311 5,236 6,483 6,974 8,848 7,688 4,626
</TABLE>
33
<PAGE> 39
- ---------------
(a) For each of the four fiscal years ended December 31, 1996 and the six months
ended June 30, 1997, the financial data set forth above represents the
results and balance sheet data of Elliott only. The Company acquired Hudson
on May 15, 1997 and ESP on December 10, 1997. The financial data set forth
above with respect to the fiscal year ended December 31, 1997 and for the
six months ended June 30, 1998 includes the results of Hudson and ESP from
their respective acquisition dates.
(b) For the fiscal year ended December 31, 1996, cost of goods sold includes a
provision for inventory obsolescence of $431 and selling, general and
administrative expenses include a nonrecurring business relocation charge of
$786. For the fiscal year ended December 31, 1997, selling, general and
administrative expenses include miscellaneous nonrecurring and noncash
charges of (i) $340 for a one-time management bonus paid in connection with
the change in control of ESP (ii) $84 in business relocation charges and
(iii) $55 in charges associated with land donation expenses. For the six
months ended June 30, 1998, cost of goods sold includes charges incurred in
connection with the consolidation of the RAD operations into Hudson. See
note (6) to "Notes to Unaudited Pro Forma Consolidated Statement of
Operations."
(c) The Parent elected to be treated as a subchapter S corporation under the
Internal Revenue Code effective May 31, 1997. As an S corporation, the
shareholders are personally liable for most taxes on the income of the
Company. Accordingly, subsequent to May 31, 1997 the provision for income
taxes includes only those taxes applicable to certain states. Due to the
change in tax status, the 1997 tax provision includes a charge of $469
representing the write-off of net deferred tax assets.
(d) Effective January 1, 1996, Elliott changed the composition of costs included
in inventory. Accordingly, Elliott recorded an adjustment to inventory cost
at January 1, 1997 as the cumulative effect of a change in accounting
principle. Had the Company applied this new accounting principle in the year
ended December 31, 1995, income before income taxes and net income would not
have been materially affected.
(e) Adjusted EBITDA is defined as net income (loss) plus (i) income tax expense,
(ii) interest expense, (iii) depreciation expense, (iv) amortization
expense, (v) management fees and (v) nonrecurring and noncash charges. See
footnote (b) above. Adjusted EBITDA is presented because EBITDA is a widely
accepted financial indicator of a company's ability to service indebtedness.
However, EBITDA should not be considered an alternative to operating income
or cash flows from operating activities (as determined in accordance with
generally accepted accounting principles) and should not be construed as an
indication of a company's operating performance or as a measure of
liquidity. Since all companies and analysts do not necessarily calculate
EBITDA in the same fashion, Adjusted EBITDA as presented in this Prospectus
may not be comparable to similarly titled measures reported by other
companies. See "Certain Transactions" and "Description of Notes."
The following table is a reconciliation of net income to Adjusted EBITDA
for the fiscal year ended December 31, 1997 and the six month periods ended
June 30, 1997 and 1998.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, -----------------
1997 1997 1998
------------ ------ -------
<S> <C> <C> <C>
Net income.............................................. $1,250 $ 714 $(1,045)
Add:
Interest expense...................................... 3,007 645 3,294
Income tax expense.................................... 889 828 140
Depreciation and amortization......................... 1,817 559 2,068
Management fees....................................... 910 355 431
Nonrecurring and noncash charges:
Extraordinary item -- early repayment of debt....... -- -- 4,616
One time management bonus resulting from change in
control of ESP................................... 340 -- --
Business relocation and consolidation charges....... 84 25 100
Donation of land and write off of non-performing
assets........................................... 55 --
------ ------ -------
Historical Adjusted EBITDA.............................. $8,352 $3,126 $ 9,604
====== ====== =======
</TABLE>
(f) The ratio of earnings to fixed charges has been calculated by dividing
earnings before income taxes and fixed charges by fixed charges. Fixed
charges include interest expense, amortization of deferred financing costs
and one-third of operating lease payments which are deemed to be
representative of the interest factor.
34
<PAGE> 40
SELECTED HISTORICAL FINANCIAL DATA
HUDSON LOCK, INC.
(DOLLARS IN THOUSANDS)
The following table sets forth the historical financial statement of
operations and other financial data as of December 30, 1995 and December 28,
1996 and for the fiscal year then ended of Hudson prior to its acquisition by
the Company, which have been derived from, and should be read in conjunction
with the audited statements of Hudson included elsewhere in this Prospectus. The
selected financial data presented below as of May 15, 1997 and for the 138 day
period ended May 15, 1997 have been derived from, and should be read in
conjunction with, the audited financial statements of Hudson included elsewhere
in this Prospectus. The selected financial data presented below as of June 1,
1996 and for the 154 day period ended June 1, 1996 is unaudited but has been
prepared in the same manner as the audited selected historical financial data of
Hudson and in the opinion of management contains all adjustments (consisting of
normal recurring adjustments) necessary for a fair presentation of the results
of operations for such period. The interim results of operations may not be
indicative of the results for the full year. The Selected Historical Financial
Data presented below should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Hudson"
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------- 154 DAYS ENDED 138 DAYS ENDED
DECEMBER 30, 1995 DECEMBER 28, 1996 JUNE 1, 1996 MAY 15, 1997
----------------- ----------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.................... $ 16,150 $ 15,402 $ 6,213 $ 6,809
Cost of goods sold........... 9,195 9,230 3,750 3,877
-------- -------- -------- -------
Gross profit................. 6,955 6,172 2,463 2,932
Selling, general and
administrative
expenses(a)................ 2,763 2,584 1,131 1,217
-------- -------- -------- -------
Income from operations....... 4,192 3,588 1,332 1,715
Other income (expense)....... -- (12) -- --
Interest expense............. (2,268) (2,015) (855) (663)
-------- -------- -------- -------
Income before taxes(b)....... $ 1,924 $ 1,561 $ 477 $ 1,052
======== ======== ======== =======
OTHER DATA:
Depreciation and
amortization............... 758 819 338 249
Capital expenditures......... 539 316 293 225
BALANCE SHEET DATA (AS OF THE END OF PERIOD):
Total assets................. $ 14,090 $ 13,628 $ 14,246 $13,878
Long term debt (including
current maturities)........ -- -- -- --
</TABLE>
- ---------------
(a) Selling, general and administrative expenses include miscellaneous
nonrecurring and noncash charges of $297, $325, $50 and $64 for the fiscal
years ended December 31, 1995 and 1996, the 154 days ended June 1, 1996 and
the 138 days ended May 15, 1997, respectively.
(b) As a limited liability company the Company pays no federal income taxes.
Accordingly, the provision for income taxes has been excluded from the above
Selected Historical Financial Data as KCI management believes it is not
relevant.
35
<PAGE> 41
SELECTED HISTORICAL FINANCIAL DATA
ESP LOCK PRODUCTS, INC.
(DOLLARS IN THOUSANDS)
The following table sets forth the historical financial statement of
operations and other financial data of ESP prior to its acquisition by the
Company. The selected financial data presented below as of December 31, 1995 and
December 31, 1996 and for each of the two years in the period ended December 31,
1996, and the selected financial data presented below as of December 10, 1997,
and for the 344 day period ended December 10, 1997, have been derived from, and
should be read in conjunction with, the audited financial statements of ESP
included elsewhere in this Prospectus. The Selected Historical Financial Data
presented below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- ESP" included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
DECEMBER 31,
------------------ 344 DAYS ENDED
1995 1996 December 10, 1997(a)
------- ------- --------------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.......................................... $20,288 $21,265 $23,260
Cost of goods sold................................. 15,489 16,473 17,299
------- ------- -------
Gross profit....................................... 4,799 4,792 5,961
Selling, general and administrative expenses....... 2,840 3,004 3,558
------- ------- -------
Income from operations............................. 1,959 1,788 2,403
Other income (expense)............................. (11) 35 52
Interest expense................................... (1,015) (702) (615)
------- ------- -------
Income before taxes(b)............................. $ 933 $ 1,121 $ 1,840
======= ======= =======
OTHER DATA:
Depreciation and amortization...................... 1,098 1,138 1,586
Capital expenditures............................... 539 341 1,037
BALANCE SHEET DATA (AS OF THE END OF PERIOD):
Total assets....................................... $10,468 $ 9,540 $14,250
Long term debt (including current maturities)...... 6,169 4,792 8,195
</TABLE>
- ---------------
(a) ESP acquired RAD on June 22, 1997.
(b) As a limited liability company the Company pays no federal income taxes.
Accordingly the provision for income taxes has been excluded from the above
Selected Historical Financial Data as KCI management believes it is not
relevant.
36
<PAGE> 42
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Historical Consolidated Financial Data" and the financial statements
and notes thereto included elsewhere in this Prospectus. This Prospectus
contains forward-looking statements that involve risks and uncertainties, such
as statements of the Company's plans, objectives, expectations and intentions.
The cautionary statements made in this Prospectus should be read as being
applicable to all related forward-looking statements wherever they appear in
this Prospectus.
OVERVIEW
KCI is a leading manufacturer of custom engineered essential componentry
for application in a diverse array of end-use products. The Company targets OEM
markets where KCI believes its value-added engineering and manufacturing
capabilities, along with its timely delivery, reliability and customer service,
enable it to differentiate the Company from its competitors and enhance
profitability. KCI, through its Operating Subsidiaries, has been designing and
manufacturing medium-security locks and related accessories since 1963 and
flexible shaft products since 1932.
The Company designs and manufactures medium-security custom and specialty
locks and locking systems to meet OEM customers' specifications. The Company's
locks and associated hardware are designed to be utilized in a wide range of
end-use markets including the office furniture, POS terminal and bank and postal
accessory markets for use in products such as office furniture, electronic cash
registers, bank bags, post office boxes and storage lockers.
The Company's flexible shaft products are produced for both rotary power
transmission and remote valve control applications in the industrial, aerospace
and commercial markets. The Company designs and manufactures more than 2,000
flexible shaft products, all of which utilize wound wire assemblies to transmit
rotary power when applications render rigid shaft technology (such as universal
joints) less efficient or impossible. The Company's flexible shaft technology
provides significant advantages over traditional rigid shaft technology. The
Company's flexible shaft products are currently used in weed trimmers, lawn
tractors, concrete vibrators, plant processing equipment and aircraft carriers,
as well as in aerospace, medical, industrial and other products.
On May 15, 1997, KCI acquired all of the issued and outstanding capital
stock of Hudson from Jordan for a cash purchase price of $39.1 million and
assumed liabilities of $1.2 million. On December 10, 1997, KCI acquired all of
the issued and outstanding capital stock of ESP, which on June 22, 1997 had
acquired the assets of RAD, from certain individual shareholders for a cash
purchase price of $16.3 million and assumed liabilities of approximately $10.4
million.
In April 1998, KC LLC and Finance Corp. were formed to facilitate the
Initial Offering. KC LLC is a wholly-owned subsidiary of the Parent and owns
100% of the Operating Subsidiaries. Finance Corp. is a wholly-owned subsidiary
of KC LLC and has no assets or operations. See "The Formation."
In July 1998, the Company entered into the New Credit Facility, which
provides for borrowing availability, subject to certain conditions, of an
outstanding principal amount of up to $40 million. See "Certain Indebtedness."
37
<PAGE> 43
RESULTS OF OPERATIONS -- THE COMPANY
The following table sets forth, for the periods indicated, consolidated
statement of operations data for the Company expressed in dollar amounts (in
thousands) and as a percentage of net sales. The results of operations of Hudson
and ESP are included only from the date of their acquisition, May 15, 1997 and
December 10, 1997, respectively. Such acquisitions have been accounted for as
purchases. For a discussion of the results of operations of Hudson and ESP for
periods prior to their respective acquisition dates, see "-- Results of
Operations -- Hudson" and "-- Results of Operations -- ESP."
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------------------------------
1997 1998
---------------------- -----------------------
PERCENTAGE OF PERCENTAGE OF
AMOUNT NET SALES AMOUNT NET SALES
------ ------------- ------- -------------
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales................................................... $9,781 100.0% $33,016 100.0%
Cost of goods sold.......................................... 5,253 53.7 20,579 62.3
------ -------
Gross profit................................................ 4,528 46.3 12,437 37.7
Selling, general and administrative expenses(a)............. 2,356 24.1 5,559 16.8
------ -------
Income from operations...................................... 2,172 22.2 6,878 20.8
Other income................................................ 15 0.0 127 0.4
Interest expense............................................ (645) 0.7 (3,294) 10.0
------ -------
Income before taxes, extraordinary charge and change in
accounting principal...................................... 1,542 15.8 3,711 11.2
Provision for income taxes.................................. (828) 8.5 140 0.4
------ -------
Extraordinary charge -- early repayment of debt............. -- -- 4,616 14.0
Net income.................................................. $ 714 7.3% $(1,045) 3.2%
====== =======
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------
1995 1996 1997
----------------------- ----------------------- -----------------------
PERCENTAGE OF PERCENTAGE OF PERCENTAGE OF
AMOUNT NET SALES AMOUNT NET SALES AMOUNT NET SALES
------- ------------- ------- ------------- ------- -------------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Net sales............................... $13,185 100.0% $13,449 100.0% $27,318 100.0%
Cost of goods sold...................... 7,356 55.8 8,361 62.2 15,798 57.8
------- ------- -------
Gross profit............................ 5,829 44.2 5,088 37.8 11,520 42.2
Selling, general and administrative
expenses(a)........................... 3,457 26.2 4,641 34.5 6,405 23.4
------- ------- -------
Income from operations.................. 2,372 18.0 447 3.3 5,115 18.7
Other income............................ 26 0.2 5 0.0 31 0.1
Interest expense........................ (427) 3.2 (254) 1.9 (3,007) 11.0
------- ------- -------
Income before taxes and change in
accounting principle.................. 1,971 14.9 198 1.5 2,139 7.8
Provision for income taxes.............. (724) 5.5 (21) 0.2 (889) 3.3
Cumulative effect of change in
accounting principle.................. -- -- 313 2.3 -- --
------- ------- -------
Net income.............................. $ 1,247 9.5% $ 490 3.6% $ 1,250 4.6%
======= ======= =======
</TABLE>
- ---------------
(a) Selling, general and administrative expenses include salaries and other
compensation of customer service, sales, marketing, finance and
administrative personnel, as well as amortization of goodwill and deferred
financing costs, and other fees and expenses related to the management and
administration of the Company.
Six Months Ended June 30, 1998 compared to Six Months Ended June 30, 1997
Net Sales: Net sales increased by approximately $23.2 million, or 237.5%,
from approximately $9.8 million for the six months ended June 30, 1997 to
approximately $33.0 million for the six months ended June 30, 1998. For the six
months ended June 30, 1998, net sales included approximately $24.5 million
attributable to the Specialty Lock Business. For the six months ended June 30,
1997, net sales included approximately $2.4 million attributable to Hudson,
which was acquired on May 15, 1998.
38
<PAGE> 44
Net sales of the Flexible Shaft Business increased by approximately $1.1
million, or 15.7%, from approximately $7.4 million for the six months ended June
30, 1997 to approximately $8.5 million for the six months ended June 30, 1998.
Such net sales growth was primarily attributable to (i) overall growth in the
construction market, (ii) customer consolidation, increased market penetration
and new product acceptance in the lawn and garden power equipment market and
(iii) greater product acceptance in the maritime and aerospace markets.
Gross Profit: Gross profit increased by approximately $7.9 million, or
174.7%, from approximately $4.5 million for the six months ended June 30, 1997
to approximately $12.4 million for the six months ended June 30, 1998. Gross
profit for the six months ended June 30, 1998 included approximately $9.0
million attributable to the Specialty Lock Business compared to approximately
$1.3 million for the comparable period in 1997. The remainder of the increase in
gross profit was generated by the Flexible Shaft Business. Gross profit as a
percentage of net sales decreased from approximately 46.3% for the six months
ended June 30, 1997, to approximately 37.7% for the six months ended June 30,
1998, primarily due to the inclusion, for the full six month period in 1998, of
the Specialty Lock Business, which historically has produced a lower gross
margin than the Flexible Shaft Business. Gross profit from the Specialty Lock
Business as a percentage of such segment's net sales was 36.6% for the six
months ended June 30, 1998. Gross profit from the Flexible Shaft Business as a
percentage of such segment's net sales, decreased from approximately 44.4% for
the six months ended June 30, 1997 to approximately 40.9% for the six months
ended June 30, 1998. This decrease in gross profit as a percentage of net
segment sales was the result of a substantial increase in unit orders for a
particular lower margin product from customers in the lawn and garden power
equipment market.
Selling, General and Administrative Expenses ("SG&A"): SG&A increased by
approximately $3.2 million, or 135.9%, from approximately $2.4 million for the
six months ended June 30, 1997 to approximately $5.6 million for the six months
ended June 30, 1998. Included in SG&A for the six months ended June 30, 1998 is
$1.2 million of amortization of goodwill and other intangibles related to the
Acquisitions. The comparable amortization for the same period in 1997 was
$256,000. Of the remaining increase, $2.0 million is attributable to the SG&A of
the Specialty Lock Business which was not included in the results of the
comparable period in 1997 and approximately $267,000 is due to increased
corporate expenses as a result of adding professional staff, the incurrence of
corporate level professional fees and an increase in management fees in
accordance with the management agreement entered into as of May 28, 1998. SG&A
as a percentage of net sales decreased from approximately 24.1% for the six
months ended June 30, 1997 to approximately 16.8% for the six months ended June
30, 1998. This decrease is primarily attributable to the inclusion, for the full
six month period in 1998, of the Specialty Lock Business, which has lower SG&A
expenses as a percentage of net sales. SG&A of the Specialty Lock Business as a
percentage of such segment's net sales was 13.3% for the six months ended June
30, 1998. SG&A of the Flexible Shaft Business as a percentage of such segment's
net sales decreased from approximately 23.5% for the six months ended June 30,
1997 to approximately 20.5% for the comparable period in 1998. This decrease is
primarily attributable to growth in Flexible Shaft Business net sales which
exceeded growth in such segment's SG&A expenses.
Income from Operations: Income from operations increased by approximately
$4.7 million, or 216.7%, from approximately $2.2 million for the six months
ended June 30, 1997 to approximately $6.9 million for the six months ended June
30, 1998. Operating income of the Specialty Lock Business increased by $4.8
million due to its inclusion in the results for the full six month period in
1998 and its inclusion in only a portion of the comparable period in 1997.
Income from operations of the Flexible Shaft Business increased by $197,000, or
12.8%, from $1.5 million for the six months ended June 30, 1997 to $1.7 million
for the six months ended June 30, 1998, due to the factors discussed above. The
increases in income from operations, discussed above, were partially offset by
the $267,000 increase in corporate expenses, also discussed above.
Interest Expense: Interest expense increased from $645,000 for the six
months ended June 30, 1997 to approximately $3.3 million for the six months
ended June 30, 1998. This increase is primarily due to the incurrence of debt
issued in connection with the acquisition of the Specialty Lock Business.
Provision for Income Taxes: Effective May 31, 1997, the Company elected to
be treated as a subchapter S corporation which causes the Shareholders to be
personally liable for taxes due on the income of
39
<PAGE> 45
the Company. The provision for income taxes for the six months ended June 30,
1998 is for taxes on income due in certain states.
Net Income: Net income decreased from $714,000 for the six months ended
June 30, 1997 to a net loss of approximately $1 million for the six months ended
June 30, 1998 after an extraordinary charge of $4.6 million which resulted from
the early repayment of debt. Net income before the extraordinary charge
increased by approximately $2.9 million, from $714,000 for the six months ended
June 30, 1997 to approximately $3.6 million for the six months ended June 30,
1998. Of the total increase, $2.7 million is attributable to inclusion of the
Specialty Lock Business in the results for the full six month period in 1998 and
only a portion of the comparable period in 1997. Net income of the Flexible
Shaft Business, before the extraordinary charge increased by approximately
$500,000 due to factors discussed above and a decrease in the provision for
income taxes of approximately $800,000. Partially offsetting the aforementioned
increases was an increase in corporate expenses and income taxes totaling
approximately $400,000 for the six months ended June 30, 1998 from the
comparable period in 1997.
Year Ended December 31, 1997 compared to Year Ended December 31, 1996
Net Sales: Net sales increased by approximately $13.9 million, or 103.1%,
from approximately $13.4 million for fiscal 1996 to approximately $27.3 million
for fiscal 1997. Of this increase, approximately $13.1 million resulted from the
inclusion of net sales from the Specialty Lock Business from the dates of its
acquisition. Net sales for the Flexible Shaft Business increased by $724,000, or
5.4%, from $13.4 million for fiscal 1996 to $14.2 million for fiscal 1997. This
increase is primarily attributable to overall growth in the construction market
and greater product acceptance in the commercial segment of the aerospace
market. Increases in sales to customers in these markets were partially offset
by a decline in sales to the lawn and garden power equipment market due to the
temporary loss of a particular customer.
Gross Profit: Gross profit increased by approximately $6.4 million, or
126.4%, from approximately $5.1 million for fiscal 1996 to approximately $11.5
million for fiscal 1997. Approximately $5.2 million of this increase is
attributable to the inclusion of the Specialty Lock Business from the dates of
its acquisition. The additional increase of approximately $1.2 million was
attributable to the Flexible Shaft Business. Gross profit as a percentage of net
sales increased from approximately 37.8% for fiscal 1996 to approximately 42.2%
for fiscal 1997 due to increased margins in the Flexible Shaft Business, which
were slightly offset by the inclusion of the Specialty Lock Business which has
historically produced a lower gross margin. Gross profit from the Specialty Lock
Business as a percentage of such segment's, net sales was 39.6% for fiscal 1997.
Gross profit as a percentage of net sales for the Flexible Shaft Business
increased from approximately 37.8% for fiscal 1996 to approximately 44.6% for
fiscal 1997. This improvement in gross profit as a percentage of net sales was
due to (i) a write-off of obsolete inventory in fiscal 1996, (ii) changes in
product mix and (iii) improved efficiencies due to consolidation and vertical
integration.
Selling, General and Administrative Expenses: SG&A increased by
approximately $1.8 million, or 38.0%, from approximately $4.6 million for fiscal
1996 to approximately $6.4 million for fiscal 1997. Of this increase, $665,000
is attributable to the amortization of goodwill and other intangibles associated
with the acquisition of the Specialty Lock Business and approximately $1.5
million is attributable to the SG&A of the Specialty Lock Business since the
dates of its acquisition. SG&A of the Flexible Shaft Business decreased by
$379,000, or 8.2%, from $4.6 million for fiscal 1996 to approximately $4.3
million for fiscal 1997, primarily due to a $702,000 reduction in nonrecurring
business consolidation charges, partially offset by a $130,000 increase in
occupancy costs. SG&A as a percentage of net sales decreased from approximately
34.5% in fiscal 1996 to approximately 23.5% for fiscal 1997, primarily due to
the inclusion of the Specialty Lock Business which has historically had lower
SG&A expenses as a percentage of net sales. SG&A of the Specialty Lock Business
as a percentage of such segment's net sales was 16.3% for fiscal 1997. SG&A as a
percentage of Flexible Shaft Business net sales decreased from approximately
34.5% for fiscal 1996 to approximately 30.1% for fiscal 1997, due to the factors
discussed above.
Income from Operations: Income from operations increased by approximately
$4.7 million, or 1,044.0% from $447,000 for fiscal 1996 to approximately $5.1
million for fiscal 1997. Approximately $3.1 million of this
40
<PAGE> 46
increase is attributable to the inclusion of the Specialty Lock Business from
the dates of its acquisition. Income from operations of the Flexible Shaft
Business increased by approximately $1.6 million, or 360.4%, from $447,000 for
fiscal 1996 to approximately $2.1 million for fiscal 1997, due to the factors
discussed above.
Interest Expense: Interest expense increased from $254,000 for fiscal 1996
to approximately $3.0 million for fiscal 1997. This increase is primarily due to
the incurrence of debt issued in connection with the acquisition of the
Specialty Lock Business.
Provision for Income Taxes: Provision for income taxes increased from
$21,000 in fiscal 1996 to $889,000 in fiscal 1997. Effective May 31, 1997, the
Parent elected to be treated as a subchapter S corporation. Therefore, the
Company ceased accruing a provision for federal income taxes as of such date and
wrote off a net deferred tax asset in the amount of $469,000 in fiscal 1997, as
no future benefit will be derived therefrom.
Net Income: Net income increased from $490,000 for fiscal 1996 to
approximately $1.3 million for fiscal 1997, due to the factors discussed above,
and net of a $313,000 credit for the cumulative effect of a change in accounting
principle in fiscal 1996 relating to the allocation of costs to inventory.
Year Ended December 31, 1996 compared to Year Ended December 31, 1995
Net sales: Net sales increased by $264,000, or 2.0%, from approximately
$13.2 million in fiscal 1995 to approximately $13.4 million in fiscal 1996. This
increase is primarily attributable to new product acceptance in the commercial
segment of the aerospace market and greater product acceptance in the maritime
market, partially offset by a voluntary reduction in sales of certain low margin
products to the maritime market. Net sales in the Company's other market
categories for fiscal 1996 remained relatively stable from fiscal 1995.
Gross Profit: Gross profit decreased by $741,000, or 12.7%, from
approximately $5.8 million for fiscal 1995 to approximately $5.1 million for
fiscal 1996. In addition, gross profit as a percentage of net sales decreased
from approximately 44.2% for fiscal 1995 to approximately 37.8% for fiscal 1996.
Of this decrease, $431,000 is attributable to a write-down of obsolete inventory
for fiscal 1996. The remaining decrease in gross profit was due to a change in
overall product mix and customer pricing pressures in the lawn and garden power
equipment market where the Company faces the most competition from other
flexible shaft manufacturers.
Selling, General and Administrative Expenses: SG&A increased by
approximately $1.2 million, or 34.2%, from approximately $3.5 million for fiscal
1995 to approximately $4.6 million for fiscal 1996. This increase in SG&A is
primarily attributable to nonrecurring business consolidation charges of
$786,000, which were incurred in 1996 in connection with relocating operations
to a new facility and an increase in management fees paid to an affiliated
management company. SG&A as a percentage of net sales increased from
approximately 26.2% for fiscal 1995 to approximately 34.5% for fiscal 1996, due
to the factors discussed above.
Income from Operations: Income from operations decreased by approximately
$1.9 million, or 81.2%, from approximately $2.4 million for fiscal 1995 to
$447,000 for fiscal 1996, due to the factors discussed above.
Interest Expense: Interest expense decreased by $173,000, or 40.5%, from
$427,000 for fiscal 1995 to $254,000 for fiscal 1996, due to the refinancing of
a credit facility in March 1996.
Provision for Income Taxes: Provision for income taxes decreased from
$724,000 in fiscal 1995 to $21,000 in fiscal 1996. This decrease was
attributable to a state income tax credit and an adjustment to the provision for
income taxes pertaining to prior years. The effective tax rate for fiscal 1996
was 10.7%, as compared to an effective tax rate for 1995 of 36.7%.
Net Income: Net income decreased by $757,000, or 60.7%, from approximately
$1.2 million for fiscal 1995 to $490,000 for fiscal 1996, due to the factors
discussed above, partially offset by a change in accounting principle in fiscal
1996 of $313,000 relating to the allocation of costs to inventory.
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<PAGE> 47
RESULTS OF OPERATIONS -- HUDSON
The following table sets forth, for the periods indicated, statement of
operations data for Hudson expressed in dollar amounts (in thousands) and as a
percentage of net sales. The 138 days ended May 15, 1997 is the portion of
fiscal 1997 preceding the acquisition of Hudson by the Company. For purposes of
this discussion, this period is compared to the 154 days ended June 1, 1996.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------- 154 DAYS ENDED 138 DAYS ENDED
DECEMBER 30, 1995 DECEMBER 28, 1996 JUNE 1, 1996 MAY 15, 1997
-------------------- -------------------- ------------------- -------------------
PERCENTAGE PERCENTAGE PERCENTAGE PERCENTAGE
OF OF OF OF
AMOUNT NET SALES AMOUNT NET SALES AMOUNT NET SALES AMOUNT NET SALES
------- ---------- ------- ---------- ------ ---------- ------ ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................... $16,150 100.0% $15,402 100.0% $6,213 100.0% $6,809 100.0%
Cost of goods sold.................. 9,195 57.0 9,230 59.9 3,750 60.4 3,877 56.9
------- ------- ------ ------
Gross profit........................ 6,955 43.0 6,172 40.1 2,463 39.6 2,932 43.1
Selling, general and administrative
expenses(a)....................... 2,763 17.1 2,584 16.8 1,131 18.2 1,217 17.9
------- ------- ------ ------
Income from operations.............. 4,192 25.9 3,588 23.3 1,332 21.4 1,715 25.2
Other income (expense).............. -- -- (12) 0.1 -- -- -- --
Interest expense.................... (2,268) 14.0 (2,015) 13.1 (855) 13.8 (663) 9.7
------- ------- ------ ------
Income before taxes(b).............. $ 1,924 11.9% $ 1,561 10.1% $ 477 7.7% $1,052 15.5%
======= ======= ====== ======
</TABLE>
- ---------------
(a) Selling, general and administrative expenses include salaries and other
compensation of customer service, sales, marketing, finance and
administrative personnel, as well as amortization of goodwill and deferred
financing costs, and other fees and expenses related to the management and
administration of the Company.
(b) As a limited liability company the Company pays no federal income taxes.
Accordingly, the provision for income taxes has been excluded from the above
table as KCI management believes it is not relevant.
138 Days Ended May 15, 1997 compared to 154 Days Ended June 1, 1996
Net Sales: Net sales increased by $596,000, or 9.6%, from approximately
$6.2 million for the 154 days ended June 1, 1996 to approximately $6.8 million
for the 138 day period ended May 15, 1997. This increase in net sales primarily
resulted from overall market growth and increased market penetration in the
office furniture market. This increase was partially offset by a voluntary
decrease in sales to various miscellaneous markets.
Gross Profit: Gross profit increased by $469,000, or 19.0%, from
approximately $2.5 million for the 154 day period ended June 1, 1996 to
approximately $2.9 million for the comparable period in 1997. Gross profit as a
percentage of net sales increased from 39.6% for the 154 day period ended June
1, 1996 to 43.1% for the comparable period in 1997. The increase as a percentage
of net sales is attributable to (i) operating leverage as a result of increased
sales, (ii) lower prices for certain raw materials and (iii) overall product
mix.
Selling, General and Administrative Expenses: SG&A increased by $86,000,
or 7.6%, from approximately $1.1 million for the 154 day period ended June 1,
1996 to approximately $1.2 million for the 138 day period ended May 15, 1997.
This increase in SG&A is primarily attributable to a write off of $24,000 in
non-performing assets and a one time charge of $40,000 for environmental
evaluation services. SG&A as a percentage of net sales decreased from
approximately 18.2% for the 154 day period ended June 1, 1996 to approximately
17.9% for the comparable period in 1998, due to operating leverage resulting
from the increased sales.
Income from Operations: Income from operations increased by $383,000, or
28.8%, from approximately $1.3 million for the 154 day period ended June 1, 1996
to approximately $1.7 million for the 138 day period ended May 15, 1997, due to
the factors discussed above.
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<PAGE> 48
Interest Expense: Interest expense decreased from $855,000 for the 154 day
period ended June 1, 1996 to $663,000 for the 138 day period ended May 15, 1997.
This decrease was attributable to reductions in the principal balance of
indebtedness through regular amortization payments.
Income before Taxes: Income before taxes increased from $477,000, for the
154 day period ended June 1, 1996 to approximately $1.1 million for the 138 day
period ended May 15, 1997, due to the factors discussed above.
Year Ended December 28, 1996 compared to Year Ended December 30, 1995
Net Sales: Net sales decreased by $748,000, or 4.6%, from approximately
$16.2 million for fiscal 1995, to approximately $15.4 million in fiscal 1996.
This decrease was primarily attributable to decreased demand for certain of the
Company's products sold to the POS terminal market as customers phased out their
redundant product offerings. In addition, sales decreased due to the voluntary
reduction in sales to various miscellaneous markets.
Gross Profit: Gross profit decreased by $783,000, or 11.3%, from
approximately $7.0 million for fiscal 1995 to approximately $6.2 million for
fiscal 1996. Gross profit as a percentage of net sales decreased from
approximately 43.0% for fiscal 1995 to approximately 40.1% for fiscal 1996.
These decreases were primarily attributable to decreased net sales without a
corresponding reduction in fixed manufacturing costs.
Selling, General and Administrative Expenses: SG&A remained relatively
stable from fiscal 1995 to fiscal 1996. As a percentage of net sales, SG&A
decreased from approximately 17.1% in fiscal 1995 to approximately 16.8% in
fiscal 1996.
Income from Operations: Income from operations decreased by $604,000, or
14.4%, from $4.2 million for fiscal 1995 to approximately $3.6 million for
fiscal 1996, due to the factors discussed above.
Interest Expense: Interest expense decreased by $253,000, from $2.3
million for fiscal 1995 to approximately $2.0 million for fiscal 1996. This
decrease was attributable to reductions in outstanding indebtedness through
regular amortization payments.
Income before Taxes: Income before taxes decreased by $363,000 from
approximately $1.9 million for fiscal 1995 to approximately $1.6 million for
fiscal 1996, due to the factors discussed above.
RESULTS OF OPERATIONS -- ESP
The following table sets forth, for the periods indicated, statement of
operations data for ESP expressed in dollar amounts (in thousands) and as a
percentage of net sales. The 344 days ended December 10, 1997 is the portion of
fiscal 1997 preceding the acquisition of ESP by the Company. For purposes of
this discussion, that period is compared to the year ended December 31, 1996.
43
<PAGE> 49
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
-------------------------------------------- 344 DAYS ENDED
1995 1996 DECEMBER 10, 1997
-------------------- -------------------- --------------------
PERCENTAGE PERCENTAGE PERCENTAGE
OF OF OF
AMOUNT NET SALES AMOUNT NET SALES AMOUNT NET SALES
------- ---------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................... $20,288 100.0% $21,265 100.0% $23,260 100.0%
Cost of goods sold.......................... 15,489 76.3 16,473 77.5 17,299 74.4
------- ------- -------
Gross profit................................ 4,799 23.7 4,792 22.5 5,961 25.6
Selling, general and administrative
expenses(a)............................... 2,840 14.0 3,004 14.1 3,558 15.3
------- ------- -------
Income from operations...................... 1,959 9.7 1,788 8.4 2,403 10.3
Other income (expense)...................... (11) 0.1 35 0.2 52 0.2
Interest expense............................ (1,015) 5.0 (702) 3.3 (615) 2.6
------- ------- -------
Income before taxes(b)...................... $ 933 4.6% $ 1,121 5.3% $ 1,840 7.9%
======= ======= =======
</TABLE>
- ---------------
(a) Selling, general and administrative expenses include salaries and other
compensation of customer service, sales, marketing, finance and
administrative personnel, as well as amortization of goodwill and deferred
financing costs, and other fees and expenses related to the management and
administration of ESP.
(b) As a limited liability company the Company pays no federal income taxes.
Accordingly, the provision for income taxes has been excluded from the above
table as KCI management believes it is not relevant.
344 Days Ended December 10, 1997 Compared to Year Ended December 31, 1996
Net Sales: Net sales increased by approximately $2.0 million, or 9.4%,
from approximately $21.3 million for fiscal 1996 to approximately $23.3 million
for the 344 day period ended December 10, 1997. This increase in net sales
primarily resulted from overall market growth and increased market penetration
in the office furniture market. In addition, on June 22, 1997, ESP acquired RAD
which contributed approximately $1.7 million of incremental sales to ESP.
Offsetting the increases in office furniture sales and the increase due to the
acquisition of RAD, was a voluntary decrease in sales to locksmiths and
distributors, an historically lower margin segment.
Gross Profit: Gross profit increased by approximately $1.2 million, from
approximately $4.8 million in fiscal 1996 to approximately $6.0 million for the
344 days ended December 10, 1997. Of this increase, $602,000, or approximately
51.5% of the total increase, was due to the inclusion of RAD sales and
operations from the date of its acquisition. As a percentage of net sales, gross
profit increased from approximately 22.5% in fiscal 1996 to approximately 25.6%
for the comparable period in 1997. This increase is primarily due to the
inclusion of RAD sales, which carry a higher gross margin, and to a change in
the product mix.
Selling, General and Administrative Expenses: SG&A increased by $554,000,
or 18.4%, from approximately $3.0 million for fiscal 1996 to approximately $3.6
million for the 344 day period ended December 10, 1997. Of this increase
$233,000 represented the write-off of deferred financing costs in connection
with a refinancing for the acquisition of RAD. In addition, $196,000 of the
increase resulted from the inclusion of RAD in ESP's results from the date of
its acquisition. SG&A, as a percentage of sales, increased from 14.1% in fiscal
1996 to 15.3% for the comparable period in 1997. This increase was due to the
write-off discussed above.
Income from Operations: Income from operations increased by $615,000, or
34.4%, from approximately $1.8 million for fiscal 1996 to approximately $2.4
million for the 344 day period ended December 10, 1997, due to the factors
discussed above.
Interest Expense: Interest expense decreased by $87,000 from $702,000 for
fiscal 1996 to $615,000 for the 344 day period ended December 10, 1997. This
decrease was the result of a reduction in indebtedness, prior to the RAD
acquisition, through voluntary repayments.
44
<PAGE> 50
Income before Taxes: Income before taxes increased by $719,000, or 64.1%,
from approximately $1.1 million in fiscal 1996 to approximately $1.8 million for
the comparable period in 1997, due to the factors discussed above.
Year Ended December 31, 1996 compared to Year Ended December 31, 1995
Net Sales: Net sales increased by $977,000, or 4.8%, from approximately
$20.3 million for fiscal 1995 to approximately $21.3 million for fiscal 1996.
This increase is primarily attributable to overall industry growth and increased
market share in the office furniture market.
Gross Profit: Gross profit remained relatively unchanged for fiscal 1996
as compared to fiscal 1995. Gross profit as a percentage of net sales decreased
from approximately 23.7% for fiscal 1995 to approximately 22.5% for fiscal 1996.
This decrease was primarily attributable to product mix.
Selling, General and Administrative Expenses: SG&A increased by $164,000,
or 5.8%, from approximately $2.8 million for fiscal 1995 to approximately $3.0
million for fiscal 1996. This increase is primarily attributable to bonuses
granted to key management personnel and increased advertising expenditures. SG&A
as a percentage of net sales remained relatively unchanged in fiscal 1996 as
compared to fiscal 1995.
Income from Operations: Income from operations decreased by $171,000, or
8.7%, from approximately $2.0 million for fiscal 1995 to approximately $1.8
million for fiscal 1996, due to the factors discussed above.
Interest Expense: Interest expense decreased by $313,000, or 30.8%, from
approximately $1.0 million for fiscal 1995 to $702,000 for fiscal 1996, due to a
reduction in indebtedness through voluntary repayments.
Income before Taxes: Income before taxes increased by $188,000, or 20.2%,
from $933,000 in fiscal 1995 to approximately $1.1 million in fiscal 1996, due
to the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Historical
The Company has historically generated funds from its operations and its
working capital requirements generally do not fluctuate from quarter to quarter.
Cash flow provided by operating activities was approximately $5.2 million
and $1.8 million for the six months ended June 30, 1998 and 1997, respectively.
The operating activities of the Company for 1997 and 1998 include the operations
of the Specialty Lock Business from the dates of its acquisition.
For the six months ended June 30, 1998 and 1997, net cash used in investing
activities was $675,000 and $39.4 million, respectively. Investing activities
for the six months ended June 30, 1998 consisted of expenditures for property,
plant and equipment. For the six months ended June 30, 1997, investing
activities consisted of the acquisition of Hudson for $39.1 million and
expenditures for property, plant and equipment for $282,000.
Financing activities provided net cash of approximately $4.5 million for
the six months ended June 30, 1998 and $39.5 million for the same period of
1997. For the six months ended June 30, 1997, financing activities were
primarily related to the acquisition of the Specialty Lock Business.
Prospective
As of June 30, 1998, the Company had a cash balance of approximately $10.5
million. In addition, in July 1998 the Company entered into the New Credit
Facility, which provides for revolving credit borrowings of up to $15.0 million
and additional borrowings of up to $25.0 million for future acquisitions. Among
other provisions, the New Credit Facility provides that (i) availability of
revolving credit loans will be subject to a borrowing base, (ii) availability of
acquisition loans will be subject to various criteria, including pro forma
compliance with certain financial ratios and (iii) the Company will be required
to prepay outstanding balances out of excess cash flow and proceeds from certain
asset sales.
45
<PAGE> 51
With the consummation of the Initial Offering, the Company became required
to make semiannual interest payments on the Old Notes, together with interest
and principal payments on other existing indebtedness including indebtedness
under the New Credit Facility, if any.
The Company's remaining liquidity demands will be for capital expenditures
and other general corporate purposes. As of June 30, 1998, the Company had
outstanding commitments for capital expenditures of approximately $700,000 and
anticipates further capital expenditures of approximately $700,000 during the
remainder of 1998 and approximately $2.0 million for 1999, primarily to maintain
its facilities, expand its production capacity in order to take advantage of
profitable market opportunities and to further automate its production processes
to maximize profitability. The Company expects that capital expenditure
requirements will decrease subsequent to 1999. To the extent cash flow from
operations is insufficient to cover the Company's capital expenditures, debt
service, and other general requirements, the Company would seek to utilize its
borrowing availability under the New Credit Facility.
Management believes that the Company's cash flow from operations, together
with borrowing availability under the New Credit Facility, will be adequate to
meet its anticipated capital requirements for the forseeable future.
INFLATION
Inflation has not been material to the Company's operations for the periods
presented.
BACKLOG
The Company's backlog of orders as of June 30, 1998 and 1997 was
approximately $10.3 million and $8.6 million, respectively. The Company includes
in its backlog only those orders for which it has accepted purchase orders.
However, backlog is not necessarily indicative of future sales. A substantial
portion of the Company's sales have a three to eight week lead time and,
therefore, only a small portion of orders, in relation to the annual sales of
the Company, are in backlog at any point in time. In addition, purchase orders
can generally be cancelled at any time without penalty.
YEAR 2000
The Year 2000 Problem
The Company is heavily dependent upon computer technology to effectively
carry out its day-to-day operations. In addition, the Company is dependent on
suppliers and customers who also use computer technology in the conduct of their
business. The terms "Year 2000 issues" or "Year 2000 problems," or words of a
similar nature, refer to the potential for failure of computer applications as a
result of the failure of programs to properly recognize and handle dates beyond
the year 1999. In the case of the Company, such computer applications may
include customer order processing, inventory management, shipment of products,
manufacturing process controllers, internal financial systems and other
information systems, among others.
Readiness
The Company's assessment of the possible consequences of Year 2000 issues
on its business, results of operations, or financial conditions is not complete,
but is continuing in accordance with a Year 2000 compliance plan (the "Year 2000
Plan"). The Year 2000 Plan includes (1) upgrading the Company's information
technology software and all applicable software and embedded technology
applications in its manufacturing equipment and systems to become year 2000
compliant, (2) assessing the Year 2000 readiness of suppliers and customers, and
(3) developing contingency plans, if practicable, for critical systems and
processes. Implementation of the Year 2000 Plan has been undertaken at the
Company's three operating subsidiaries and with respect to various operating and
information systems in varying degrees to date. The Year 2000 Plan is expected
to be fully implemented at all locations and with respect to all critical
information systems in 1999.
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<PAGE> 52
Progress to date includes the purchase of upgraded hardware and software
packages and reprogramming of existing systems. All internal systems are
expected to be Year 2000 compliant by mid 1999. Because the Company is dependent
on its suppliers and customers to successfully and profitably operate its
business, the Year 2000 Plan includes an assessment process with respect to
those vendors and customers deemed most critical to the operations and business
of the Company. To date, the Company has contacted certain vendors and
anticipates completing its vendor assessment process by the end of the first
quarter of 1999. The initial steps of a select analysis of the Company's
significant customers to determine the potential effect of Year 2000 issues on
these customers is expected to begin in the fourth quarter of 1998 with expected
completion by mid 1999. The Year 2000 Plan requires continued assessment
throughout 1999 in these areas.
Costs
The costs of the Year 2000 Plan include the purchase price of computer
hardware and software packages, fees for contract programmers and the cost of
internal information technology resources. The costs of achieving Year 2000
compliance have not been material to date and are not expected to be material.
Risks
The Company expects no material adverse effect on its results of
operations, liquidity, or financial condition as a result of problems
encountered in its own business as a result of Year 2000 issues or as a result
of the impact of Year 2000 problems on its vendors or customers. However, the
risks to the Company associated with Year 2000 issues could be significant.
While the Company is undertaking its own evaluation and testing of its
information technology and non-information technology systems, it is dependent
to some extent on the assurances and guidance provided by suppliers of
technology and programming services as to Year 2000 compliance readiness.
Similarly, the Company's Year 2000 Plan calls for an ongoing analysis of
the possible effects of Year 2000 problems on its suppliers of materials and
non-information technology goods and services as well as its customers and the
demands for its products. The Company has limited ability to independently
verify the possible effects of Year 2000 issues on its customers and suppliers.
Therefore, the Company's assumptions concerning the effect of Year 2000 issues
on its results of operations, liquidity, and financial condition relies on its
ability to analyze the business and operations of each of its critical vendors
or customers. This process, by the nature of the problem, is limited to such
persons' public statements, their responses to the Company's inquiries, and the
information available to the Company from third parties concerning the
industries or particular vendors or customers involved.
Risk also exists that despite the Company's best efforts, critical systems
may malfunction due to Year 2000 problems and disrupt its operations. The
Company is unable to determine at this time the nature or length of time for
such possible disruption and therefore the potential materiality thereof to its
business or profitability.
Interruptions of communication services or power supply due to Year 2000
problems can cause affected locations to cease or curtail production or receipt
and shipment of materials and products. The Company is dependent on the
suppliers of power and communication services that no such disruptions occur.
Contingency Plans
As part of its Year 2000 Plan, the Company will continue to identify and
evaluate risks and possible alternatives should various contingencies arise. The
Company has prioritized remediation of its most critical information systems and
believes that they will be Year 2000 compliant by the end of the first quarter
of 1999. Should unforeseen circumstances result in substantial delay that may
lead to disruption of business, the Company will develop contingency plans where
possible and not cost prohibitive. To some extent the Company may not be able to
develop contingency plans, such as in the case of communication services or the
supply of power.
47
<PAGE> 53
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This statement requires companies to record derivatives
on the balance sheet as assets and liabilities, measured at fair value. Gains
and losses resulting from changes in the values of those derivatives would be
accounted for depending on the use of the derivative and whether it qualifies
for hedge accounting. This statement is not expected to have a material impact
on the Company's consolidated financial statements. This statement is effective
for fiscal years beginning after June 15, 1999, with earlier adoption
encouraged.
48
<PAGE> 54
BUSINESS
GENERAL
KCI is a leading manufacturer of custom engineered essential componentry
for application in a diverse array of end-use products. The Company targets OEM
markets where KCI believes its value-added engineering and manufacturing
capabilities, along with its timely delivery, reliability and customer service,
enable it to differentiate the Company from its competitors and enhance
profitability. KCI, through its Operating Subsidiaries, has been designing and
manufacturing medium-security locks and related accessories since 1963 and
flexible shaft products since 1932. The Company's locks and associated hardware
are designed to be utilized in a wide range of end-use markets including the
office furniture, POS terminal and bank and postal accessory markets. The
Company's flexible shaft products are produced for both rotary power
transmission and remote valve control applications in the industrial, aerospace
and commercial markets. The Company benefits from a diverse customer base, with
pro forma sales to approximately 2,200 customers in fiscal 1997 and with the
largest customer representing approximately 7.2% of pro forma consolidated net
sales. KCI's products are critical to the design and function of its customers'
products and management believes the majority of KCI's sales (approximately
62.0% of fiscal 1997 pro forma consolidated net sales) are to customers for
which the Company is the primary (greater than 70.0% of the customer's total
requirements for the particular product) supplier. For the pro forma year ended
December 31, 1997 and the six months ended June 30, 1998, the Company had net
sales of $59.0 million and $33.0 million, respectively, representing an increase
over the pro forma amounts for the same periods in the previous years of 11.2%
and 11.5%, respectively.
The Specialty Lock Business
The Company, through its wholly-owned subsidiaries, Hudson and ESP, is a
leading domestic designer and manufacturer of medium-security custom and
specialty locks and locking systems. Specialty Lock Business products are
engineered to meet OEM customers' specifications for use in end products such as
office furniture, electronic cash registers, bank bags, post office boxes and
storage lockers. The Company's expertise in co-engineering product designs with
its customers, substantial manufacturing and testing capabilities and focus on
customer service, have enabled the Company to become the primary supplier to the
majority, in terms of sales, of its Specialty Lock Business customers. Customers
of the Specialty Lock Business include several industry leaders such as Herman
Miller, Inc., IBM, Steelcase, Inc. and Knoll, Inc. During fiscal 1997, no single
customer represented more than 9.5% of pro forma segment net sales. For the pro
forma year ended December 31, 1997 and the six months ended June 30, 1998, the
Specialty Lock Business generated net sales of $44.8 million and $24.5 million,
respectively, representing an increase over the pro forma amounts for the same
periods in the preceding fiscal year of 13.2% and 10.2%, respectively.
KCI management estimates the domestic market for locks to be over $3.0
billion, of which approximately $200 million is estimated to represent
medium-security locks. The Company targets the medium-security segment where it
believes its value-added design and manufacturing expertise, along with its
timely delivery, reliability and customer service, enable it to differentiate
itself from its competitors and enhance profitability. The office furniture and
POS terminal markets represent the two largest end-user market segments of the
Specialty Lock Business, constituting 43.7% and 7.2%, respectively, of pro forma
fiscal 1997 segment net sales. The office furniture and POS terminal markets
have grown rapidly over the three year period ended December 31, 1997, with a
compounded annual growth rate of approximately 9.1% and 4.8%, respectively.
During the same three year period, Specialty Lock Business net sales to the
office furniture and POS terminal markets grew at a compounded annual growth
rate of approximately 27.9% and 4.4%, respectively. Based on this historical
growth, KCI management anticipates that sales to these markets will continue to
represent the majority of Specialty Lock Business sales and growth for the near
term. See "Business -- Customers and Markets."
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<PAGE> 55
The Flexible Shaft Business
The Company, through its wholly-owned subsidiary, Elliott, is the leading
domestic designer and manufacturer of flexible shaft products, which are
engineered to meet the particular design specifications demanded by a variety of
OEM products. The Company designs and manufactures more than 2,000 flexible
shaft products, all of which utilize wound wire assemblies to transmit rotary
power when applications render rigid shaft technology (such as universal joints)
less efficient or impossible. The Company's flexible shaft technology provides
significant advantages over traditional rigid shaft technology. Use of flexible
shafts improves existing OEM product designs, provides added flexibility in
creating new designs and eliminates the amount of required componentry, which
can lower overall weight and space requirements, reduce a product's
manufacturing costs, improve end product appearance and shorten assembly times.
Product applications are varied and diverse, limited only by the Company's
ability to develop and manufacture new applications. KCI has developed and
introduced over 100 flexible shaft products to the marketplace during the last
three years. The Company's flexible shaft products are currently used in weed
trimmers, lawn tractors, concrete vibrators, plant processing equipment and
aircraft carriers, as well as in aerospace, medical, industrial and other
products. The Company believes that its product innovation, engineering
expertise, proprietary manufacturing process and high standards of quality and
reliability have enabled KCI to differentiate itself from its competitors,
enhance profitability and become the primary supplier of flexible shaft products
to the majority, in terms of sales, of its customers. KCI's Flexible Shaft
Business has over 1,000 customers including Poulan Weed Eater, Inc., Vickers,
Inc., Caterpillar Inc. and John Deere, as well as several United States
Government entities, such as the United States Navy. Only one customer, Poulan
Weed Eater, Inc., represented greater than 10% of Flexible Shaft Business net
sales for fiscal 1997, and no single customer represented greater than 12.0% of
net sales for fiscal 1997. For the year ended December 31, 1997 and the six
months ended June 30, 1998, the Flexible Shaft Business generated net sales of
approximately $14.2 million and $8.5 million, respectively, representing an
increase over net sales for the same period in the preceding fiscal year of 5.4%
and 15.7%, respectively.
Flexible Shaft Business sales to its three largest markets, construction,
lawn and garden power equipment and maritime, represented 25.6%, 21.7% and
13.9%, respectively, of fiscal 1997 segment net sales. According to industry
reports, for the three year period ended December 31, 1997, the construction,
lawn and garden power equipment and maritime markets experienced an average
compounded annual growth rate of 2.1%. During the same three year period,
Flexible Shaft Business sales to these markets experienced similar growth or
remained stable. The fastest growing market segment of the Flexible Shaft
Business has been the commercial aerospace segment, where the Company has
increased market penetration and introduced new product offerings. Over the
three year period ended December 31, 1997, the Company's net sales to this
segment grew at a compounded annual rate of approximately 46.8%. Based on
historical results and the recent or anticipated introduction of new product
offerings, KCI management anticipates the commercial aerospace and lawn and
garden power equipment markets to experience significant growth for the near
term. See "Business -- Customers and Markets."
COMPETITIVE STRENGTHS
Based on its experience in the Flexible Shaft and Specialty Lock
industries, the Company believes that its leading position in the markets it
currently serves is primarily attributable to the following competitive
strengths:
Commitment to Quality. The Company believes its specialty lock and
flexible shaft products are well-known among OEM manufacturers for their
durability, high quality and performance. KCI has passed rigorous quality
standard reviews of such customers as Herman Miller, Inc., Steelcase, Inc., John
Deere, the United States Navy and the United States Air Force. The Company has
received ISO certification in certain areas and is seeking to obtain further
certifications as part of its ongoing commitment to maintain its high standards
of quality.
Strong Management Team. The Company's management team possesses extensive
experience in the manufacturing industry. Its eight senior operating executives
have over 154 years of manufacturing industry
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<PAGE> 56
experience, including the Presidents of KCI's Operating Subsidiaries, each of
whom has over 20 years experience in the specific manufacturing market he
serves.
Focus on Niche Markets and Value-Added Services. The Company believes that
its strategic focus on niche OEM markets where customers place a premium on
value-added design and manufacturing capabilities, along with timely delivery
and reliable service, provide it with a competitive advantage over (i)
competitors that are a division of a larger corporate entity and which are
frequently less focused on smaller sales volume opportunities and (ii) smaller
competitors that typically are less sophisticated than the Company, and
therefore less capable of providing the level of customer service and
aftermarket support provided by the Company.
Product Innovation. The Company's OEM customers seek new products and
applications that enhance productivity and profitability while satisfying their
specific needs. The Company's experienced management and engineering teams are
able to develop, design and manufacture new products and applications that its
OEM customers demand, which the Company believes enables it to provide superior
service to its OEM customers than that offered by its competitors.
Low-Cost Manufacturing Techniques. The Company believes that its highly
automated and vertically integrated manufacturing capabilities have enabled it
to become a low-cost manufacturer of products within the niche markets it
serves. In the Specialty Lock Business, the Company has focused on further
consolidation and automation with each new acquisition. In the Flexible Shaft
Business, the Company has designed and manufactured its own flexible shaft
winding machines, which are not currently available to its competitors, and has
installed wire drawing equipment capable of drawing less refined (and less
expensive) wire into a grade of wire that can be utilized by the Company in its
flexible shaft products.
Long Standing Relationships with OEMs. Nine of the Company's ten largest
OEM customers in both the Flexible Shaft Business and the Specialty Lock
Business have been customers of the Company for over a decade. Due to the
Company's close working relationship with its customers, KCI believes that it
can better determine its customers' needs, thereby enabling the Company to
develop and design new products and improve the performance of existing
products. Additionally, changing the supplier of a custom designed and
manufactured product often requires a delay in the customer's production due to
the time and capital required for a new supplier to appropriately retool its
machinery; therefore, KCI believes that its OEM customers are reluctant to
change suppliers, so long as KCI continues to satisfy their needs. The Company's
sales to customers for which it believes it was the primary supplier represented
approximately 62.0% of fiscal 1997 pro forma net sales.
BUSINESS STRATEGY
The Company has developed a business strategy that focuses on maximizing
profitability while achieving growth, both internally and through acquisitions.
Pursuing Selective Acquisitions. The Company continues to seek to
selectively acquire complementary or related light manufacturing businesses in
markets where value-added design and manufacturing capabilities, as well as
timely delivery and reliable service, enable it to differentiate itself from its
competitors and enhance profitability. In its search for potential acquisitions,
KCI focuses on companies that offer strategic value such as economies of scale,
product line extensions, new customer relationships or increased manufacturing
capacity. Specifically, the Company targets manufacturers of essential
components of a larger OEM end product. KCI seeks companies with a strong
presence in their niche markets or which will be complementary to one of its
existing subsidiaries which is already dominant in its market segment. The
Company will also look for acquisitions which will allow the Company to further
vertically integrate its operations and/or which may share common customers or
engineering processes. The Company seeks to integrate new operations into the
Company's existing businesses, which the Company believes will enhance
profitability for KCI through manufacturing consolidation and implementation of
the Company's operating strategies.
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<PAGE> 57
Maximizing Profitability. The Company continues to seek to maximize
profitability through its ongoing strategy of controlled growth in the areas of
both acquisitions and product offerings. As part of this strategy, the Company
attempts to determine the achievable profit margins and production volume for
each new product line prior to accepting an order. The Company only undertakes
production of new products which management believes will achieve an acceptable
return on investment. The Company further seeks to maximize profitability
through automation and efficient integration of complementary acquisitions. See
"Unaudited Pro Forma Consolidated Financial Data."
Introducing New Product Lines. The Company seeks to develop new products
in each of its business segments which enhance productivity and profitability
while satisfying OEM customers' evolving needs. The Company's team of
experienced engineers and industry professionals generally work in tandem with
customers to design and manufacture new products and are continually seeking to
expand existing markets, as well as develop new markets. This collaborative
approach has led the Company to the development of proprietary designs,
technology and relationships with customers that the Company expects will create
future sales opportunities. The Company has introduced over 100 new product
offerings during the last three years.
Maintaining a Diverse Customer Base. The Company seeks to maintain a
diverse customer base through (i) development and introduction of new products,
(ii) acquisition of complementary or related businesses, (iii) focus on customer
retention and (iv) innovative sales and marketing techniques designed to attract
new customers. During fiscal 1997, the Company had pro forma sales to
approximately 2,200 customers and its three largest customers accounted for only
7.1%, 6.4% and 4.5%, respectively, of its pro forma consolidated net sales.
Leveraging Customer Relationships. The Company follows a partnership
approach in establishing customer relationships, founded on innovative
co-engineering and manufacturing capabilities with reliable service and timely
delivery. These integral relationships enable the Company to provide insightful
solutions and innovations to end product design specifications. In addition,
several OEM customers have entered into multi-year supply contracts with KCI,
providing a more formal framework for the Company's customer "partnerships."
ACQUISITION HISTORY
In 1992, KCI's management began an acquisition program to acquire small to
medium size manufacturers of essential niche components for use in various OEM
customer products. The 1992 acquisition of Elliott from certain individual
shareholders, including the current President of Elliott, George M. Scherer,
marked the first of such acquisitions. In 1993, the Company acquired the
flexible shaft division of Stow Manufacturing Company, Inc. as a consolidation
opportunity for Elliott. On May 15, 1997, the Company acquired all of the issued
and outstanding capital stock of Hudson from Jordan for a cash purchase price of
$39.1 million and assumed liabilities of $1.2 million. The acquisition of Hudson
marked the Company's entree into the medium-security lock business. Such
acquisition was financed through loans made to the Parent under the Old Credit
Facility and the proceeds from the sale of the Old Notes and the Warrants. On
December 10, 1997, the Company acquired all of the issued and outstanding
capital stock of ESP from certain individual shareholders, including the current
President of ESP, August M. Boucher, as a consolidation opportunity for Hudson.
The ESP acquisition price consisted of $16.3 million of cash and $10.4 million
of assumed liabilities, and such acquisition was financed through additional
borrowings under the Old Credit Facility.
The Company has historically acquired complementary or related
manufacturing businesses and sought to integrate them into existing operations.
Following an acquisition, management seeks to rationalize operations, reduce
overhead costs, develop additional cross-selling opportunities and establish new
customer relationships. As a result of its integration efforts and internal
growth, the Company's consolidated net sales have increased from approximately
$9.1 million in fiscal year 1992 to approximately $59.0 million on a pro forma
basis for fiscal 1997.
The Company continues to seek to make selective acquisitions of light
industrial manufacturing companies, but there are no written agreements
regarding any such acquisitions existing as of the date hereof.
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<PAGE> 58
Priority will be given to consolidation opportunities or acquisitions of
complementary businesses with sales in the $5 million to $50 million range.
INDUSTRY BACKGROUND
The Specialty Lock Business. KCI management estimates the market for
domestic locks to be over $3.0 billion in 1997. The lock manufacturing industry
is divided into three distinct market segments: high-security locks,
medium-security locks and low-security locks. The Company currently competes in
the medium-security lock segment where it believes its value-added design and
manufacturing expertise, along with its timely delivery, reliability and
customer service, enable it to differentiate itself from its competitors and
enhance profitability. The Company believes that the overall size of the
medium-security lock segment was approximately $200.0 million in 1997. In
addition, KCI management estimates that this market segment has grown by
approximately 33.0% since 1990 and will grow by an additional 6.0% to 8.0% per
year, to approximately $250.0 million by 2000. Medium-security locks are used in
applications that involve non-life threatening situations or when articles of
low to moderate financial value are being secured. Medium-security locks are
sold to OEM's across a wide variety of end product industries, such as the
office furniture, vending and gaming, computer, POS terminal and post office box
industries. Management believes customers in this segment of the lock market are
seeking custom lock suppliers who provide quality products designed to meet
precise customer specifications with reliable service and on time delivery.
High-security locks are used to protect life and property of great value.
Such locks are primarily used in residential and commercial doors, automotive
doors, ignition switches and other higher-security applications. Customers of
this segment are typically seeking suppliers with name recognition in the retail
marketplace. The high-security market segment is dominated by large
manufacturers such as Medeco Security Locks Inc., Yale Security Inc., Schlage
Lock Co., and Master Lock Co. The low-security market segment can be
characterized as a commodity-type market, with an emphasis placed on low cost
and high volume delivery capabilities. Low-security locks are sold to OEM's as
components in a variety of end products such as paper towel and toilet tissue
dispensers and certain types of luggage. Currently many manufacturers of
low-security locks are located outside the United States in countries such as
Mexico, China and Taiwan.
The Flexible Shaft Business. Flexible shaft products are a submarket
within the power transmission market. Based on data obtained from the United
States Bureau of the Census, management estimates the power transmission market
was approximately $2.5 billion in 1996. This market has experienced a compounded
annual growth rate of approximately 6.0% over the three year period ended
December 31, 1996. The Company estimates that sales of flexible shaft products
to the markets currently being addressed by the Company totaled approximately
$30.0 million in 1997, and that such markets had an estimated compounded annual
growth rate of approximately 6.3% over the three year period ended December 31,
1997. However, management believes that the potential market for flexible shaft
products is limited only by a manufacturer's ability to develop and manufacture
new product applications, as flexible shafts can be used in most low torque
(less than 10 horsepower) rotary power transmission applications of existing
rigid shaft technology. Often the application of the flexible shaft product
entails the replacement of existing rigid shaft technology (such as universal
joints). The industry related to flexible shaft products is therefore highly
fragmented as a result of the broad range of potential applications of both
rigid and flexible shaft technology. There are only three principal domestic
manufacturers of flexible shafts and the Company currently competes against the
other two manufacturers in all segments of the industry except the automotive
market segment. The Company does not address the automotive market, except in
certain after-market applications, due to the high volume, commodity nature of
the market segment. The Company believes that OEM's will continue to trend
towards outsourcing, streamlining of end products and one piece assembly.
Therefore, the Company anticipates continued expansion of flexible shaft product
applications and overall acceptance. Management estimates that the total
industry sales for flexible shaft products to markets currently being served by
the Company will expand to approximately $38.0 million by 2000 as a result of
the successful introduction of applications for new markets, as well as growth
in existing markets.
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<PAGE> 59
CUSTOMERS AND MARKETS
The Specialty Lock Business. The Company supplies specialty lock products
to a variety of customers and markets. The end-use markets comprising the
largest component of Specialty Lock Business sales are the office furniture and
POS terminal markets which accounted for 43.7% and 7.2%, respectively, of pro
forma 1997 segment net sales. No other end-use market accounted for greater than
5.0% of pro forma segment net sales for such period. The Company's top ten
customers comprised 49.1% of the Company's pro forma 1997 segment net sales and
no single customer comprised more than 9.5% of pro forma segment net sales.
Approximately 58.4% of Specialty Lock Business pro forma 1997 net sales were to
customers with which the Company had primary source relationships.
The following table summarizes the Company's sales of specialty locks by
end market:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
OFFICE FURNITURE POS TERMINALS OTHER
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PRODUCTS OR APPLICATIONS: Furniture locks Electronic cash registers Bank bags
Drawer locking systems Post office boxes
Gang locking systems Lockers
Gas pumps
Key blanks and hardware
- --------------------------------------------------------------------------------------------------------------
CUSTOMERS: Herman Miller, Inc. IBM Block & Co.
Steelcase, Inc. NCR Corp. Axxess Entry Technologies Inc.
Knoll, Inc. Gilbarco, Inc.
Hon Company Canada Post
- --------------------------------------------------------------------------------------------------------------
PERCENTAGE OF PRO FORMA
1997 SEGMENT NET SALES: 43.7% 7.2% 49.1%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
Office Furniture. The Business and Institutional Furniture Manufacturers
Association ("BIFMA") reported that domestic shipments of office furniture sales
grew by approximately 14.5% to approximately $11.5 billion during 1997. In
addition, from 1994 through 1997, office furniture sales were estimated to have
grown at a compounded annual rate of approximately 9.1%. Furthermore, domestic
office furniture shipments have experienced annual sales growth in 23 of the
past 25 years. By the end of 2000, BIFMA expects industry shipments to reach
approximately $14.5 billion, a 26.1% increase from 1997. Sales to this market
accounted for approximately $19.6 million, or approximately 43.7%, of the
Company's pro forma 1997 segment net sales. Net sales to this market have grown
rapidly, with a compounded annual growth rate of approximately 27.9% for the
three year period ended December 31, 1997. Management anticipates that sales to
this market will continue to represent a growing percentage of segment sales for
the near term.
POS Terminals. This market was estimated by Frost & Sullivan to total
approximately $1.1 billion in 1997. In addition, from 1994 through 1997, sales
in the POS terminal market were estimated by Frost & Sullivan to have grown at a
compounded annual rate of approximately 4.8%. Furthermore they have estimated
that this market will continue to grow through 2000 at a compounded annual rate
of approximately 4.8%. Management believes that the recent and future
anticipated growth in this market reflects the increasing reliance of retailers
on electronic cash registers and other electronic retail equipment to facilitate
the distribution of domestic goods and services. Sales by the Company to this
market accounted for approximately 7.2% of the Company's fiscal 1997 segment net
sales and have grown at a compounded annual rate of approximately 4.4% for the
three year period ended December 31, 1997. Management believes that sales to
this market will remain stable for the near term.
Other. Net sales to the banking and postal industries totaled
approximately $3.0 million in fiscal 1997, representing approximately 6.6% of
the Company's pro forma segment net sales. The balance of the Company's net
sales in this segment are comprised of sales to OEM customers in industries such
as the aerospace, automotive and electronic industries, none of which accounted
for more than 2.5% of 1997 pro forma segment net sales. In addition, the Company
also sells key blanks and hardware for use in a variety of
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<PAGE> 60
end markets, primarily through locksmith distribution channels. The Company's
pro forma net sales of key blanks and hardware totaled $5.4 million in fiscal
1997.
The Flexible Shaft Business. The Company currently supplies flexible shaft
products to the construction, lawn and garden power equipment, maritime,
aerospace and general industrial markets. However, the Company believes that
since flexible shafts can be used in most low torque applications (less than 10
horsepower) for rotary transmission, the markets available to the Company are
only limited by KCI's innovation and ability to develop new applications. The
construction market is the largest segment of the Company's flexible shaft
business, accounting for approximately 25.6% of the Company's fiscal 1997
segment net sales, and, along with the commercial segment of the aerospace
market, has been the fastest growing. Sales to these segments accounted for
approximately $3.6 million and $1.0 million, respectively, of the Company's
fiscal 1997 segment net sales, representing an increase over fiscal 1996 of
approximately 29.8% and 56.3%, respectively. The Company's top ten customers
comprised approximately 40.0% of the Company's fiscal 1997 segment net sales and
no single customer comprised more than approximately 12.0% of such net sales.
Approximately 72.6% of Flexible Shaft Business fiscal 1997 net sales were to
customers with which the Company believes it has primary source relationships.
The following table summarizes the Company's sales of flexible shaft
products by end market:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
LAWN AND GARDEN GENERAL
CONSTRUCTION POWER EQUIPMENT MARITIME AEROSPACE INDUSTRIAL
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PRODUCTS OR Concrete vibrator Combines Valve control Flap drives Conveyor belts
APPLICATIONS: shafts Weed trimmers systems Thrust reversers Valve control systems
Rubber casings Small tractors
Offroad construction Post hole diggers
vehicles Nylon liners
- ----------------------------------------------------------------------------------------------------------------------------
CUSTOMERS: Wacker Corporation John Deere Elcon Distributing Vickers, Inc. Goodway Technologies
Stow Manufacturing Poulan Weed Company, Inc. Hughes Corporation Corp.
Company, Inc. Eater, Inc. (U.S. Navy) Dowty Aerospace Emerson Electric
Multiquip Inc. Echo, Inc. Pearl Harbor Corp. Corp.
Caterpillar Inc. Ford New Holland Naval Shipyard General Dynamics Intermagnetics
Newport News Corporation General Corporation
Shipbuilding
Inc.
- ----------------------------------------------------------------------------------------------------------------------------
PERCENTAGE OF
PRO FORMA 1997
SEGMENT NET 25.6% 21.7% 13.9% 11.1% 27.7%
SALES:
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Construction. The United States Bureau of the Census estimates the total
construction market to have been approximately $600.9 billion in 1997. In
addition, from 1994 through 1997, sales in the construction market were
estimated to have grown at a compounded annual rate of approximately 4.9%. Sales
to the construction market accounted for approximately 25.6% of the Company's
1997 segment net sales, approximately 83.0% of which were the sale of flexible
shafts and rubber casings for use in concrete vibrators. The Company is
currently the primary supplier of flexible shafts and rubber casings to the
concrete vibrator segment, a subset of the general construction market. Company
net sales to the construction market grew rapidly in fiscal 1997 (29.8% over
fiscal 1996 net sales) due to a resurgence of construction activities in the
particular segments served by the Company; however, the compounded annual growth
rate for the three year period ended December 31, 1997 was 2.2%. The Company
anticipates that sales to this market will remain stable for the near term.
Lawn and Garden Power Equipment. This market was estimated by Find/SVP,
Inc. to total approximately $9.7 billion in 1997. In addition, from 1994 through
1997, sales in the lawn and garden power equipment market were estimated to have
grown at a compounded annual rate of approximately 4.5%. Furthermore, Find/SVP,
Inc. estimates that sales to the lawn and garden power equipment market will
grow at a compounded annual rate of approximately 4.8% to approximately $11.2
billion by 2000. The Company's flexible shaft products are used in weed
trimmers, post hole diggers, small garden tractors and similar equipment. Sales
to this market accounted for approximately 21.7% of the Company's 1997 net
segment sales,
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<PAGE> 61
approximately 68.2% of which were related to weed trimmers. Sales to this market
have remained relatively stable during the past three years; however, the
Company believes that this market will be a significant source of growth in the
near term due to its introduction of new products, including the nylon liner for
weed trimmers and steering assemblies in John Deere lawn tractors. In addition,
the Company anticipates an increase in overall market share in 1998 based on
first quarter results.
Maritime. This market was estimated by Marketline International to total
approximately $8.0 billion in 1997. In addition, Marketline International has
estimated this market to have remained relatively stable over the last three
years and expects it to remain relatively stable over the next several years.
The Company's valve control systems and products are used to control valves in
various applications on a variety of United States naval ships. Net sales to
this market accounted for approximately $2.0 million, or approximately 13.9% of
the Company's fiscal 1997 segment net sales. Management anticipates that sales
to this market will experience growth in the near term due to the Navy's
acceptance of certain value control systems manufactured by the Company on all
surface ship platforms in 1997.
Aerospace. Company sales to the aerospace market accounted for
approximately 11.1% of the Company's 1997 segment net sales, of which
approximately 62% was to the commercial segment and 38% was to the military
segment. The fastest growing segment of the Company's aerospace market has been
in the commercial segment where the Company's flexible shafts are used in a
variety of applications, including flap drive systems on small commuter jets and
thrust reverser systems for use on larger jumbo jets. This market segment was
estimated by the Aerospace Industries Association to total $25.8 billion in
1997. In addition, from 1994 through 1997, sales in the commercial segment were
estimated to have grown at a compounded annual rate of approximately 12.5%.
Company net sales to the commercial segment have grown rapidly, with a
compounded annual growth rate for the three year period ended December 31, 1997
of approximately 46.8%. The Company anticipates that the commercial segment will
continue to represent a growing percentage of the Company's business due to the
increased acceptance of the Company's flexible shaft products for commercial
aerospace applications.
General Industrial. The Company's flexible shaft products are used in a
wide range of other low torque (less than 10 horsepower) applications, such as
plant processing equipment in the food processing, packaging and printing
industries, as well as for use in the medical equipment market. Due to the
commodity nature of products sold to the automotive sector, the Company has
opted not to serve this market, with the exception of certain after-market
applications. Sales to the general industrial market accounted for approximately
$3.9 million or 27.7% of the Company's fiscal 1997 segment net sales. Although
sales to this market have been relatively stable, the Company anticipates that
the introduction of new products, such as flexible shafts for use in the
steering assemblies of golf carts, will result in growth for the near term.
PRODUCTS
Specialty Lock Products. The Company is a fully integrated manufacturer of
custom and specialty medium-security locks for use by OEM customers. The Company
custom designs and manufactures both pin-and wafer-tumbler locks. Tumbler locks
contain small movable parts, or tumblers, which must be brought to a particular
arrangement in order to enable the lock to be opened. In most cases, the
Company's lock products are small, low-cost but highly engineered essential
components of a much larger, more expensive end product. The primary markets
served by the Company's security products are the office furniture market and
the market relating to electronic retail devices such as POS registers and
computers.
The Company's primary lock product is its wafer-tumbler lock, which
consists of an outer cylinder that encases a rotating inner cylinder or plug.
Wafer-tumbler locks use a series of thin, flat movable metal wafers, engaged by
notches in one or both sides of a key. In a locked position, the wafers extend
partially within the plug, preventing the plug from turning. Insertion of the
correctly notched key lifts the wafers, which in turn raises the drivers to the
shear line between the plug and cylinder, allowing the plug to rotate and
release the locking bolt or turn the locking cam.
The Company also manufacturers and distributes pin-tumbler locks. This type
of lock uses rod-shaped movable pins, which are engaged by notches on one or
both sides of a key. Insertion of the correctly notched
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<PAGE> 62
key retracts the pins into the plug, allowing it to be turned. Except for the
substitution of pins for wafers, the mechanics of the pin-tumbler lock are
identical to the wafer-tumbler lock. The Company also produces the "Ultra-Track"
locking system, a safety feature used to prevent multiple drawers from being
opened simultaneously in filing cabinets and desks. In addition to wafer- and
pin-tumbler locks, the Company acts as a distributor of a small quantity of
imported locks in the United States and manufactures lock parts and related
hardware for sale to its customers, including washers, nuts, screws, bolts,
mounting clips, back plates and dust covers, as well as a selection of keys.
All of the Company's specialty lock products can be manufactured with a
number of varying features to suit the customized requirements of each
particular customer and end product. The Company has the ability to manufacture
its products, including locks, keys and related hardware, out of a number of
different base metals. Available metals include zinc alloy, steel, brass,
stainless steel, and aluminum. Zinc alloy locks can also be finished with a
variety of metal coatings, including chromium, brass, nickel, zinc, cadmium, or
powder. In addition, customers can request a key changeable core. This feature
allows OEM's and end users to change the core or plug of a lock on-site to code
or recode high-volume applications. Key changeable lock cores provide end-users
with an efficient and versatile method to manage their individual security
levels. Other variables which customers can specify include the size, strength,
internal mechanisms, mounting, and operation of the products.
While the Company is not involved with research and design of new specialty
lock product technologies, the nature of the niche markets that the Company
serves has required the continual development of new products, such as
"anti-riffing" devices, as solutions to customers' problems and needs. The
Company also gives office furniture manufacturers the ability to purchase
customized, changeable core locks which allow furniture manufacturers to ship
desks and cabinets to their customers with only the lock housing in place and
the end-user to decide how to tailor its security needs. The Company has
consistently focused on its ability to adapt products to the customers' needs.
Flexible Shaft Products. The Company designs and manufactures
approximately 2,200 flexible shaft products, all of which utilize wound wire
assemblies to transmit rotary power when applications render the predominant
rigid shaft technology less efficient or impossible. Flexible shaft products are
used in connection with the transmission of rotary power when the source of the
rotary power being generated and desired destination of that power are not
aligned. This occurs frequently in many designs and has been dealt with
historically by using several rigid shafts connected by gear boxes, universal
joints, chains and sprockets or belts and pulleys in order to change the
direction of the rotary power being transmitted. While such systems are
functional, they tend to be cumbersome and include multiple exposed rotating
components. The Company's flexible shaft products, which are intended for use in
low torque applications (using 10 horsepower or less), require less space and
have no exposed rotating components. Assembly time of the shaft portion of an
OEM's product is also greatly reduced. Additionally, there are certain flexible
shaft product applications where the use of rigid shaft technology is not only
inefficient, but not physically feasible. For example, in the aerospace market,
the wing profile of new regional jets has been reduced to improve fuel
efficiency, virtually eliminating the possible use of rigid shaft technology.
Each flexible shaft product is made of wound wire covered with a sheath and
is used for transmitting rotary power around, above or below obstacles and
corners. Because the shaft itself is flexible, these products can be snaked
through and around obstacles, improving many existing designs and increasing the
ability to create new, more compact and more complex designs to effect the
transmission of the rotary power. Since this whole rotary power system consists
of one shaft, it is also less cumbersome, easier to assemble and install and is
often lighter and less expensive than the conventional system of multiple
connecting rigid shafts which have a series of joints at each turn. The
Company's rotary power transmission products are utilized in connection with the
construction, lawn and garden power equipment, maritime, aerospace and general
industrial markets. See "Customers and Markets."
As with rotary power transmission, flexible shafts used for the remote
operation of valves are designed to be used when the valve and the mechanism for
controlling the valve are not aligned. Control valves in tight spaces or in
spaces where there are many obstacles to go around, such as on a ship, are not
easily accessed by
57
<PAGE> 63
rigid shafts. The flexible shafts can facilitate the control of such valves from
remote, hazardous or inaccessible locations as the shaft can be snaked up and
around obstacles. Currently, the three largest markets for the Company's remote
valve control products are ship building, including sales to the United States
Navy, power generation and miscellaneous industrial applications. The Company
designs and assembles valve control systems based upon the needs of a customer
for each specific application.
Elliott's engineers are focused on developing potential new applications
for its flexible shaft products. The Company's growth in the rotary power
transmission componentry market has been a function of both growth in its
current end-user markets as well as the Company's ability to expand applications
for flexible shaft products. The Company's success in this area has hinged on
the rapidity at which new applications can be created, accepted and implemented
by the customer. The Company has introduced over 100 flexible shaft products to
the marketplace over the last three years. New markets where flexible shaft
technology is rapidly gaining acceptance are in the production of steering shaft
assemblies in general industrial and lawn and garden power equipment markets, as
well as the use of flexible shaft technology for flap drives on smaller planes
in the aerospace market. The Company believes that it will be able to continue
to engineer and manufacture new and improved applications for its flexible shaft
technology, and that it will continue to be able to meet the precise design
specifications of its customers, which may vary as to weight, flexibility and
cost requirements.
MANUFACTURING AND OPERATIONS
The Company's production processes are designed to reduce costs and improve
overall profitability. Using its operating strategy, the Company endeavors to
design its manufacturing process so that machine and labor utilization are
optimized and total costs are reduced. Cost savings are generated through
effective management of monthly product line profit and loss. On a monthly
basis, gross margins of every product line within each product group are
reviewed. The Company monitors the progress of its efficiency efforts on an
ongoing basis, both monthly and quarterly, and reacts quickly to resolve
problems or exploit unanticipated opportunities.
Custom products are sold at a premium to direct manufacturing costs, based
on factors such as lot size and availability. Management believes it has a
thorough understanding of the products and customers in the markets it serves,
enabling the Company to utilize aggressive but competitive pricing practices.
Capacity
The Company's plants currently run on highly automated double, or single
and partial second shifts, to meet the demands of its customers. Management
believes that as it continues to expand its operations, the ability to increase
capacity and move to full second shifts, if required, could be accomplished
without compromising product quality or requiring significant additional capital
expenditures.
Inventory Management
The Company has implemented an inventory management program designed to
balance customer delivery requirements with economically optimal inventory
levels. In this program, each product is categorized based on characteristics
including order frequency, number of customers and sales volume. Using this
classification system, management's primary goal is to maintain a sufficient
supply of standard items while minimizing warehousing costs. In addition,
production cost savings are achieved by optimizing plant scheduling around
inventory levels and customer delivery requirements. This leads to more
efficient utilization of manufacturing facilities and minimized plant production
changes while maintaining sufficient inventories to service customer needs.
Integration of Acquisitions
The Company has demonstrated an ability to institute programs which improve
the performance of acquired companies. This process involves applying the
Company's operating strategy, rationalizing product offerings and appropriately
capitalizing the acquired business.
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<PAGE> 64
SALES AND MARKETING
The Company employs both salaried and commission-based sales personnel, as
well as independent sales representatives, to facilitate the marketing and sales
of its products. The Company's sales and marketing teams have adopted an
integrated approach to product development, marketing and sales. They seek to
work closely with the Company's engineers to address customer's specific design
requirements and the hurdles associated therewith, as well as potential product
profitability. In addition, the sales team is responsible for keeping the
Company's engineering, manufacturing and management personnel advised of
possible future trends and requirements of customers. The Company's sales and
marketing personnel also focus on bringing customers a level of personal service
the Company believes to be superior to its competitors.
COMPETITION
The Specialty Lock Business. The lock industry is divided into three
segments, high-security, medium-security and low-security. In the
medium-security lock segment, the Company has four primary competitors.
Generally, these competitors are either divisions of larger entities or family
owned and run operations. Competition in this segment is based on cost, as well
as such value-added services as timely delivery, consistency in quality and
design. In order to compete effectively, suppliers must be focused on each
customer's specific needs and must have the level of sophistication necessary to
meet their particular requirements. The Company believes its ability to focus on
these niche markets, coupled with the level of sophistication provided by its
experienced management team, enables KCI to compete effectively in the
medium-security lock segment. In addition, due to its vertically integrated
manufacturing processes, the Company believes that it is able to manufacture its
products at a lower cost with a higher quality and faster turnaround time than
its competitors.
The high-security segment, which produces locks used in residential,
commercial and automotive doors, as well as other high-security applications, is
dominated by such companies as Schlage Lock Co., Master Lock, Inc. and Medeco
Security Locks Inc. The Company believes competition in the high-security
segment is principally based on name recognition. The low-security lock industry
is a commodity-type business, in which competition is principally based on low
cost and high volume delivery capabilities and not timely delivery or service.
Competitors in this segment are generally located outside the United States in
countries such as Mexico, China and Taiwan. Due to the dramatically different
competitive dynamics of each market segment, management does not anticipate that
the lock industry will experience significant shifts from one segment to
another.
The Flexible Shaft Business. KCI is the leading supplier to most of its
end user markets, evidencing its ability to differentiate itself from its
competitors based on quality as well as its design and manufacturing
capabilities. Currently, there are two primary competing manufacturers of
flexible shafts serving the segments addressed by KCI, one of which primarily
competes in the weed trimmer market and the other of which primarily competes in
the aerospace and general industrial markets. KCI management believes that KCI's
competitor in the weed trimmer market currently focuses its resources in the
automotive market, a high volume commodity-type market in which the Company
chooses not to compete. In the aerospace and general industrial markets, the
Company's principal competitor specializes in small diameter flexible shaft
products, representing only a small segment of these markets. Although it is
possible other competitors may seek to serve these markets, the Company believes
that there exists today significant barriers to entry, including the
availability of the Company's automatic winding machinery, which is not
available for purchase and must be individually constructed, the availability of
rubber covered casings for use in the construction market, which are only
manufactured by the Company and the capital investment required to purchase the
other capital equipment needed to manufacture products of similar quality. The
Company also faces competition from companies that use the alternate rigid shaft
technology. Typically, such companies either have in-house machine shops that
manufacture the individual components needed for the rigid shaft or look to
small machine shops to manufacture the components. Once the components are
manufactured, the OEMs then assemble the rigid shaft systems needed for the
specific application themselves.
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<PAGE> 65
ENVIRONMENTAL MATTERS
The Company's operations are subject to numerous permitting and other
compliance obligations under Environmental Laws, including those regulating
discharges to air and water, and the storage, handling and disposal of solid and
hazardous waste. The Company believes that it is in substantial compliance with
such obligations. Changes in Environmental Laws and other adverse developments
could cause the Company's environmental capital expenditures and costs for
environmental compliance to increase in the future.
The Company has potential liability for the remediation of soil and
groundwater contamination at its Hudson, Massachusetts lock manufacturing
facility, which contains two separately reported and confirmed oil and hazardous
material "disposal sites" within the meaning of applicable Massachusetts laws
and regulations. As the owner and operator of these disposal sites, the Company
is required to undertake and complete response actions, and to document the
completion of such response actions in a "response action outcome" statement
("RAO"), to be filed with the Massachusetts Department of Environmental
Protection. With minor exceptions, the filing of an RAO is the final step in the
required response action. As required by law, the Company has engaged a licensed
site professional ("LSP") to oversee these response actions. The LSP is
currently performing remedial and investigative activities necessary to achieve
an RAO for each of the two disposal sites. The Company expects these steps to be
completed before the end of 1998 at an additional cost of no more than
approximately $25,000. However, there can be no assurance that such response
actions will be completed to the satisfaction of the relevant regulatory
authorities within such period or that the cost thereof will not be materially
greater than currently estimated.
In addition, remediation is required at the Company's Binghamton, New York
flexible shaft manufacturing facility, which is listed on the New York State
Registry of Inactive Hazardous Waste Sites. The Company believes that the
facility's former owner is responsible for completing such remediation to the
satisfaction of regulatory authorities and the former owner has contractually
agreed to indemnify Elliott in connection with such remediation. The Company has
also entered into a voluntary clean-up participation agreement with the New York
State Department of Environmental Conservation (the "DEC"). Management believes
it has taken all action required by this participation agreement and it expects
to receive a waiver from the State of New York holding it harmless from future
liability to the DEC. However, it is possible that the Company could incur costs
in connection with the required remediation or could incur liability to private
parties, the amount of which could be material.
RAW MATERIALS AND SUPPLIERS
The primary raw materials used by the Company are brass, zinc, stainless
steel, steel wire and rubber, all of which are commodity items, readily
available from a wide range of sources. The Company has enjoyed and continues to
enjoy good relations with its suppliers and has not suffered any material
interruptions in the delivery of its required materials. Additionally, the
Company is not dependent on any single supplier. In the event a supply
arrangement is terminated, the Company would be forced to look elsewhere for its
raw materials which alternative sources management believes can be obtained with
minimal, if any, business interruption. However, the prices for such materials
can fluctuate, and such fluctuations can be material. A material increase in raw
material prices could materially adversely effect the results of operations of
the Company.
FACILITIES
The Company owns a five-story, 208,000 square foot building in Hudson,
Massachusetts, which it uses as the corporate headquarters, manufacturing and
warehouse facilities for Hudson. In addition, the Company leases approximately
2,500 square feet in Hudsonville, Michigan, to serve as a distribution center
for Specialty Lock Business products. The lease, which expires on August 31,
2001, provides for an annual rent of $45,000, payable monthly. The Company
leases a 55,000 square foot building in Leominster, Massachusetts, which it uses
as the corporate headquarters and manufacturing facilities of ESP. The lease,
which expires on May 31, 2003, provides that beginning on June 1, 1998, the base
rent shall be $200,000 plus annual increases based on the Consumer Price Index
("CPI"), not to exceed $10,000 per year. Rental payments for 1997 were $225,000.
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<PAGE> 66
The Company also leases 10,800 square feet in Worcester, Massachusetts, which it
currently uses as the manufacturing facilities of RAD. This lease, which expires
November 30, 1998, provides for an annual rent of $28,127. The Company currently
does not intend to renew this lease.
The Company owns a 250,000 square foot facility in Binghamton, New York,
which serves as the corporate headquarters, manufacturing and warehouse
facilities for Elliott. In addition, the Company leases a 28,500 square foot
building in Binghamton, New York, which it formerly used as an office and
manufacturing facility. The lease, which expires on December 31, 2008, provides
that, the base rent shall be $130,734 plus 5.0% annual increases. Rental
payments for 1997 were $133,493. The Company currently sublets 5,947 square feet
to an unrelated third party. In 1997, the sublet generated $7,597 in lease
revenue. The Company also leases a 18,125 square foot building in Chenago
Bridge, New York, which it currently uses as a manufacturing facility. This
lease, which expires June 30, 2000, provides for an annual rent of $93,165, plus
a 1.5% annual increase. Rental payments for 1997 were $93,165.
EMPLOYEES
The Company currently employs 719 persons on a full-time basis. Neither the
Company nor any of its subsidiaries has any collective bargaining agreement and
no employee of the Company or any of its subsidiaries is represented by a labor
union. In addition, neither the Company nor any of its subsidiaries has ever had
a work stoppage and each of the Company and its subsidiaries considers its
relationship with its employees to be satisfactory.
LEGAL PROCEEDINGS
Except as disclosed under "Environmental Matters," there are no pending
material legal proceedings to which the Company or its properties is subject.
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<PAGE> 67
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth information with respect to the directors,
executive officers and other key employees of the Company and the Parent. All
directors and officers of the Company and the Parent hold office until the
annual meeting of stockholders next following their election, or until their
successors are elected and qualified.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
John S. Dyson............... 55 Chairman of the Board of Directors of the Parent, KC
LLC and Finance Corp., Director of Hudson, Director of
Elliott and Director of ESP
Clay B. Lifflander.......... 35 President and Director of the Parent, KC LLC and
Finance Corp., Vice President and Director of Hudson,
Director of Elliott and Vice President and Director of
ESP
Alan L. Rivera.............. 35 Vice President, Secretary and Director of the Parent,
KC LLC and Finance Corp., Vice President, Secretary and
Director of Hudson, Assistant Secretary and Director of
Elliott and Vice President, Secretary and Director of
ESP
David H. Bova............... 39 Vice President -- Development and Director of the
Parent, KC LLC and Finance Corp., Director of Hudson,
Director of Elliott and Director of ESP
George M. Scherer........... 44 Vice President -- Manufacturing and Director of the
Parent, KC LLC and Finance Corp., Vice President and
Director of Hudson, President and Director of Elliott
and Director of ESP
James D. Wilcox............. 49 Chief Financial Officer and Vice President of the
Parent, KC LLC, Finance Corp., Elliott, Hudson and ESP
and Treasurer of the Parent, KC LLC and Finance Corp.
Michael L. Colecchi......... 49 President of Hudson
August M. Boucher........... 46 President of ESP
</TABLE>
John S. Dyson has been Chairman of the Board of Directors of the Parent, KC
LLC and Finance Corp. since their inception. Since 1996, Mr. Dyson has been
Chairman of the Board of Directors of Millbrook, a management company providing
executive level services to the Company under the Management Agreement, and he
currently serves as Chairman of the Mayor of the City of New York's Council of
Economic Advisors. From 1994 to 1996, Mr. Dyson served as Deputy Mayor for
Finance and Economic Development for the City of New York. From 1982 to 1993 Mr.
Dyson was the Chairman of Dyson-Sinclair Associates, a management company and
the predecessor of Millbrook. From 1976 to 1979, he served as Commissioner of
the New York State Department of Commerce. Mr. Dyson was Vice Chairman of
Dyson-Kissner-Moran Corporation from 1970 to 1975, at which time he was
appointed to the position of Commissioner of the New York State Department of
Agriculture.
Clay B. Lifflander has been the President and a Director of the Parent, KC
LLC and Finance Corp. since their inception. Mr. Lifflander has been President
of Millbrook since 1995, and from 1994 to 1995, Mr. Lifflander was President of
the New York City Economic Development Corporation. Previously, Mr. Lifflander
was Managing Director in the Mergers and Acquisitions Group at Smith Barney
Inc., where he worked from 1984 to 1994.
Alan L. Rivera has been the Vice President, Secretary and a Director of the
Parent, KC LLC and Finance Corp. since their inception. Since September 1996,
Mr. Rivera has also been employed by Millbrook, where he serves as Chief
Financial Officer and General Counsel. From 1994 to 1996, Mr. Rivera served as
Executive Vice President of Finance and Administration and General Counsel of
the New York City Economic Development Corporation. From 1990 to 1994, Mr.
Rivera was an associate with the New York City law firm of Townley & Updike,
specializing in corporate finance matters, and from 1987 to 1990, Mr. Rivera was
an associate with Mudge, Rose, Guthrie, Alexander and Ferdon, specializing in
public finance matters.
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<PAGE> 68
David H. Bova has been the Vice President -- Development and a Director of
the Parent, KC LLC and Finance Corp., since their inception. He has also served
as President of Millbrook Vineyards Winery, Inc., and Pebble Ridge Vineyards,
Inc. since 1994 and 1992, respectively, and he has been Vice President --
Development of Millbrook since 1995.
George M. Scherer has been the Vice President -- Manufacturing and a
Director of the Parent and KC LLC since their inception. Mr. Scherer has been
with Elliott since 1978 when he began as Engineering Manager. He has served as
the President and a Director of Elliott since 1982. Prior to joining Elliott,
Mr. Scherer was a product application engineer for Stow Manufacturing Company,
Inc. in Binghamton, N.Y. from 1975 to 1978. Prior to his position at Stow
Manufacturing Company, Inc., Mr. Scherer was a plant engineer at GAF Corporation
in Binghamton, N.Y. from 1973 to 1975.
James D. Wilcox joined the Parent as Chief Financial Officer in April 1998.
Before joining the Company, Mr. Wilcox had, since 1992, been the Chief Financial
Officer of Systems Engineering and Manufacturing Corp., an international
manufacturer of automated capital equipment. From 1990 to 1992, Mr. Wilcox was
the Vice President -- Finance and Administration of Docktor Pet Holdings, Ltd.,
a national chain of specialty retail and franchised stores and a subsidiary of a
publicly held company.
Michael L. Colecchi has been with Hudson since 1970, when he began as a
tool and die maker. He subsequently assumed various positions of responsibility
in Hudson's manufacturing department until 1980, when he was appointed Plant
Manager. In 1984, Mr. Colecchi was promoted to Vice President of Manufacturing.
In 1989, Mr. Colecchi was promoted to Vice President and General Manager. Mr.
Colecchi has served as President of Hudson since 1996.
August M. Boucher has been with ESP since 1972, when he began as a tool
designer and manufacturing manager. He subsequently assumed various positions of
responsibility in ESP's manufacturing department until 1979 when he was
appointed Plant Manager. In 1982, Mr. Boucher was promoted to Vice President --
Manufacturing. Mr. Boucher has served as President of ESP since 1993.
EMPLOYMENT AGREEMENTS AND EXECUTIVE COMPENSATION
The Company has employment agreements with each of the Presidents of the
Operating Subsidiaries and James D. Wilcox, Chief Financial Officer of the
Company.
The employment agreement with George M. Scherer, President of Elliott, is
dated January 16, 1996, terminates on January 16, 2001 and provides Mr. Scherer
with a base salary of $225,000 per year, as well as an annual cash bonus in the
event Elliott reaches certain targeted levels of earnings. This agreement also
provides that Mr. Scherer (i) will not compete with Elliott for three years
after termination of his agreement, (ii) will keep all proprietary information
confidential and (iii) will assign to Elliott all innovations that may be
developed by Mr. Scherer during his employment. The employment agreement with
Michael L. Colecchi, President of Hudson, is dated as of May 15, 1997,
terminates on December 30, 2001 and provides Mr. Colecchi with a base salary of
$205,000 per year, subject to a yearly increase based on the CPI, as well as an
annual cash bonus based on Hudson attaining certain earnings targets. Pursuant
to an amendment to Mr. Colecchi's employment agreement, the Parent has granted
Mr. Colecchi a ten year option to purchase 1.5 shares of the Parent's common
stock pursuant to the Parent's 1998 Long-Term Incentive Plan (the "1998 Plan"),
which shall vest and become exercisable over a period of four years at an
exercise price of $250,000 per share, in consideration for the elimination of
certain contingent bonus provisions contained in Mr. Colecchi's agreement. See
"Certain Transactions." The employment agreement with August M. Boucher,
President of ESP, is dated as of December 10, 1997, terminates on December 31,
2002, and provides Mr. Boucher with a base salary of $165,000 per year, subject
to a yearly increase based on the CPI. Mr. Boucher is also eligible for bonuses,
in such amounts and at such times as ESP's Board of Directors may, in its sole
discretion, determine. Included in Mr. Colecchi's and Mr. Boucher's agreements
are provisions that the officers are not to compete with their respective
employers for five years after termination of their respective agreements as
well as confidentiality provisions.
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<PAGE> 69
The employment agreement with James D. Wilcox, Chief Financial Officer of
the Company, is dated as of April 17, 1998. The employment agreement terminates
on March 29, 2003 and provides Mr. Wilcox with a base salary of $130,000 per
year, subject to a yearly increase based on the CPI, as well as an annual cash
bonus subject to the sole discretion of the Board of Directors of the Company.
Pursuant to such agreement, Mr. Wilcox has been granted a five year option to
purchase 0.8 shares of the Parent's common stock under the Parent's 1998 Plan,
which shall vest and become exercisable over a period of four years at an
exercise price of $350,000 per share. Included in this agreement are provisions
that Mr. Wilcox is not to compete with the Company for two years after
termination of his agreement, as well as a confidentiality provision.
KC LLC was recently formed. Accordingly no historical executive
compensation information is included in this Prospectus.
LONG-TERM INCENTIVE PLAN
The Parent's 1998 Plan was adopted to attract and retain the best available
personnel for positions of substantial responsibility, to provide additional
incentive to employees, directors and consultants of the Parent, KC LLC and the
Operating Subsidiaries and to promote the success of the Parent's business.
Options granted under the 1998 Plan may be either incentive stock options, as
defined in Section 422A of the Internal Revenue Code of 1986, as amended, or
non-qualified stock options. In addition, stock appreciation rights, and
restricted stock awards and other stock-based awards may be granted under the
1998 Plan. The Parent has reserved 20 shares of its no par value common stock
(the "Common Stock") for issuance in respect of options and other awards granted
under the 1998 Plan. As of the date hereof, options to purchase an aggregate of
2.3 shares were outstanding under the 1998 Plan at a weighted average exercise
price of $284,783, of which options to purchase 0.4 shares are currently
exercisable. Such outstanding options consisted of an option granted to Michael
L. Colecchi in April 1998 in connection with an amendment to his employment
agreement and an option granted to James D. Wilcox pursuant to his employment
agreement with the Company. See "-- Employment Agreements and Executive
Compensation."
The 1998 Plan is administered by the Board of Directors, which has the
power to determine the terms of any options or awards granted thereunder,
including the exercise price, the number of shares subject to the option or
award, and the exercisability thereof. Options and awards granted under the 1998
Plan are generally not transferable, and each option or award is exercisable
during the lifetime of the optionee only by such optionee. The exercise price of
all incentive stock options granted under the 1998 Plan must be at least equal
to the fair market value of the shares of Common Stock on the date of grant.
With respect to any participant who owns stock possessing more than 10% of the
voting power of all classes of stock of the Parent, the exercise price of any
stock option granted must be equal to at least 110% of the fair market value on
the grant date and the maximum term of the option must not exceed five years.
The term of all other options or awards under the 1998 Plan may not exceed ten
years. The specific terms of each option grant or award are approved by the
Board of Directors and are reflected in a written stock option or award
agreement.
INDEMNIFICATION OF DIRECTORS
The Parent's Certificate of Incorporation authorizes it to indemnify its
officers and directors to the fullest extent permitted by New York law. The
By-laws of the Parent provide broad indemnification for directors against
reasonable expenses (including attorney fees, fines, judgments and amounts paid
in settlement) incurred in connection with any action or proceeding which arises
from serving as a director of the Parent. The By-laws also provide that the
Parent will indemnify such persons to the fullest extent permitted by law and
that the Parent may, in its discretion, indemnify other persons, including
officers of the Parent.
DIRECTORS
Directors of the Parent or the Company do not receive compensation for
acting in such capacity other than reimbursement for out-of-pocket expenses
incurred to attend meetings of the Board of Directors.
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<PAGE> 70
PRINCIPAL STOCKHOLDERS
Finance Corp. is a wholly-owned subsidiary of KC LLC and KC LLC is a
wholly-owned subsidiary of the Parent, which owns all the membership interests
to KC LLC. The following table sets forth information concerning the beneficial
ownership of the Parent's Common Stock as of August 1, 1998 by (i) each person
known to the Company to own beneficially more than 5.0% of the Parent's
outstanding Common Stock, (ii) each director, executive officer and key employee
of the Parent and/or the Company and (iii) all such directors, executive
officers, and key employees as a group. All shares are owned with sole voting
and investment power, unless otherwise indicated.
<TABLE>
<CAPTION>
COMMON STOCK
BENEFICIALLY OWNED
------------------
BENEFICIAL OWNER SHARES(1) %
- ---------------- --------- -----
<S> <C> <C>
John S. Dyson(a)........................................ 64.5(2) 63.0%
Charles H. Dyson Trust #1
F/B/O John S. Dyson
U/A DTD 8/2/68........................................ 10.75(2) 10.5%
Charles H. Dyson Trust #1
F/B/O John S. Dyson
U/A DTD 4/15/76....................................... 10.75(2) 10.5%
Margaret M. Dyson Trust #1
F/B/O John S. Dyson
U/A DTD 3/26/68....................................... 10.75(2) 10.5%
Clay B. Lifflander(b)................................... 50.25(3) 49.1%
George M. Scherer(b).................................... 10.00 9.8%
Alan L. Rivera(b)....................................... 4.50 4.4%
David H. Bova(b)........................................ 3.00 2.9%
August M. Boucher....................................... 2.00 2.0%
Michael L. Colecchi..................................... 0.40(4) 0.40%
James D. Wilcox(b)...................................... 0(5) 0%
All Officers and Directors (8 persons).................. 102.40(6) 100%
</TABLE>
- ---------------
(a) Affiliate of Millbrook, KC LLC and Finance Corp.
(b) Affiliate of KC LLC and Finance Corp.
(1) Unless otherwise indicated, the Company believes that the beneficial owners
of the securities have sole investment and voting power with respect to such
securities, subject to community property laws where applicable.
(2) Includes an aggregate of 32.25 shares of Common Stock owned of record by the
Charles H. Dyson Trust #1 F/B/O John S. Dyson U/A DTD 8/2/68, Charles H.
Dyson Trust #1 F/B/O John S. Dyson U/A DTD 4/15/76 and the Margaret M. Dyson
Trust #1 F/B/O John S. Dyson U/A DTD 3/26/68 (the "Dyson Trusts"), of which
Mr. Dyson is a beneficiary and trustee and as to which he has shared voting
and investment power.
(3) Includes 32.25 shares of Common Stock owned of record by the Dyson Trusts,
of which Mr. Lifflander is a trustee and as to which he has shared voting
and investment power.
(4) Consists of an option to purchase 1.5 shares of Common Stock, of which 0.4
shares is currently exercisable. See "Management -- Employment Agreements
and Executive Compensation."
(5) Mr. Wilcox has the right to acquire 0.8 shares of Common Stock pursuant to
options which become exercisable in part after March 30, 1999. See
"Management -- Employment Agreements and Executive Compensation."
(6) Includes 32.25 shares of Common Stock owned of record by the Dyson Trusts.
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<PAGE> 71
CERTAIN TRANSACTIONS
ESP Lease
The Company rents its Leominster, Massachusetts manufacturing facility
under an operating lease agreement entered into with a company that is co-owned
by an affiliate of August M. Boucher, an officer and shareholder of the Company.
The lease, which expires on May 31, 2003, provides for annual rent increase
based on the CPI. Rental payments amounted to $225,000 in each of 1997 and 1996.
Management Agreement
The Company pays management fees to Millbrook, a party related to John S.
Dyson, Chairman of the Board and a shareholder of the Company. These management
and other administrative fees totaled $643,329 and $760,000 in 1996 and 1997,
respectively. To date, the Company has paid $371,000 in management and other
administrative fees for 1998. The Company has entered into the Management
Agreement with Millbrook. Pursuant to such Management Agreement, Millbrook
provides the Company with executive level services, for an annual base
management fee equal to $500,000 (the "Base Fee") payable in quarterly
installments, plus an additional fee of $300,000 per year (the "Additional
Fee"), payable following completion of the Company's audited financial
statements for such year. No portion of the Base Fee or the Additional Fee may
be paid at the time that any Event of Default (as defined) exists under the
Indenture. In addition, the Additional Fee may only be paid to the extent that,
after giving effect thereto, the Company's Consolidated Coverage Ratio (as
defined) exceeds 2.0:1, for the fiscal years ending on or prior to December 31,
1999, and 2.25:1 for the fiscal years ending after December 31, 1999. The
Additional Fee may be increased, beginning with the fiscal year ending December
31, 2000, by an amount up to 15% of the aggregate amount of the Base Fee and the
then current amount of the Additional Fee; provided, however, that the
percentage increase shall not exceed the percentage increase in pro forma EBITDA
for such fiscal year as compared to the prior fiscal year. Notwithstanding the
foregoing, total management fees payable under the Management Agreement may not
exceed $1.2 million in any fiscal year. Any management fees which are not
permitted to be paid at the time due will be deferred (without interest) and
will be paid as soon as permitted. Millbrook will also be entitled to be
reimbursed for its out of pocket expenses.
In 1997, the Company paid Millbrook $400,000 for advisory services related
to the acquisition of ESP. Pursuant to the Management Agreement, the Company
paid Millbrook an investment fee equal to $900,000 upon consummation of the
Initial Offering for financial advisory and other services rendered to the
Company in connection with the Initial Offering and the financing of ESP.
Employee Shareholder Agreements
On April 27, 1998, the Parent and August M. Boucher, President of ESP,
entered into a subscription agreement, pursuant to which Mr. Boucher purchased
two shares of the Parent's Common Stock for an aggregate purchase price of
$500,000. In addition, on April 27, 1998, the Parent entered into a separate
shareholder's agreement, with each of Messrs. Boucher, Michael L. Colecchi and
James D. Wilcox (each an "Employee Shareholder"). Each such shareholder's
agreement: (i) restricts the right of each Employee Shareholder to transfer any
shares of the Common Stock owned by him, (ii) gives the Parent the right to
cause each Employee Shareholder to sell all of his shares of the Common Stock
upon termination of his employment, and (iii) allows each Employee Shareholder
to cause the Parent to purchase all of the shares of the Common Stock still held
by him by April 27, 2001, in the case of Mr. Colecchi, or by March 30, 2003 in
the case of Mr. Wilcox or by April 27, 2003 in the case of Mr. Boucher, or upon
the death or disability of such Employee Shareholder, at a purchase price equal
to the fair market value thereof. Each shareholder's agreement also provides
that the Parent will use its best efforts to cause any person owning more than
50% of the outstanding stock of the Parent to refrain from disposing of its
shares of stock in an arm's length transaction with a third party unless such
third party also agrees to purchase an appropriately proportionate number of
shares of Common Stock from the Employee Shareholder, except in the case of a
merger or reorganization, in which case each of the Employee Shareholders shall
receive shares in the surviving entity on the same terms as any other
stockholder of the Parent that is deemed an "affiliate" of the Parent.
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On April 27, 1998, the Parent and Michael L. Colecchi, President of Hudson
entered into an amendment to Mr. Colecchi's employment agreement, pursuant to
which Mr. Colecchi agreed to waive his right to receive a bonus of $750,000 in
the year 2000 which would have been payable on a sale of Hudson or Hudson
achieving certain EBITDA targets, in exchange for an option to purchase 1.5
shares of Common Stock at an exercise price of $250,000 per share, which is
currently vested and exercisable as to 0.4 shares, the remainder of which shall
vest over the next three years, or immediately in the event of a sale of all or
substantially all of the assets of the Parent.
New Credit Facility
Societe Generale was agent and lender under the Old Credit Facility. In
addition, SGIC purchased the Original Notes and Warrants. In connection
therewith, Societe General and its affiliate, SGIC, received customary fees and
other expenses from the Company during fiscal 1997. The Company has entered into
the New Credit Facility and Societe Generale acts as agent and lender thereunder
and an affiliate thereof has acted as arranger in respect thereof. In connection
with the New Credit Facility, Societe Generale and its affiliates have received
customary fees. See "Description of Certain Indebtedness -- New Credit
Facility."
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THE LIMITED LIABILITY COMPANY AGREEMENT
GENERAL
The rights and obligations of the equityholders of the Company (the
"Members") are governed by an agreement (the "Limited Liability Company
Agreement") entered into concurrently with the Initial Offering. The Parent is
the sole Member of the Company. The Member's interest in the Company, including
its interest in the capital, profits, losses and distributions, have been issued
to it in consideration of shares of stock of the Operating Subsidiaries that
were contributed by the Member in exchange for its interest in the Company. The
Member has been credited with the capital associated with such shares on the
Company's books of account. The Member will also be credited and/or charged with
the profits, losses and distributions made with respect to or in respect of the
Operating Subsidiaries at any time while they are owned by the Company. The
Member will be credited or charged with any gain or loss on any capital
transaction, sale, exchange or other disposition of any assets of the Operating
Subsidiaries and with the proceeds of property received in exchange for such
assets in any transaction. The Member's interest will be adjusted from time to
time to take into account subsequent contributions to and all distributions from
the Company, and sales or other transfers of all or a part of the Member's
interest.
Voting Rights. The Company is also managed by the Member subject to the
right of the Member to delegate management authority to officers and directors
appointed by it. The Member has the right to direct in all respects the voting
of all capital stock of the Operating Subsidiaries and the directors of each
Operating Subsidiary so elected shall operate and manage each respective entity
in accordance with and with full rights and authority under applicable law.
CASH DISTRIBUTIONS
Subject to the prior rights of the Company's creditors, including but not
limited to the restrictions contained in the Indenture and the New Credit
Facility, the Company will make distributions to the Member from time to time of
its available cash.
Distributions Relating to Income Taxes. Subject to the prior rights of the
Company's creditors, including but not limited to the restrictions contained in
the Indenture and the New Credit Facility, the Company is required to distribute
to the Member each year an amount equal to the Company's taxable income
multiplied by the sum of the highest federal individual tax rate of that year
plus the New York state individual tax rate of that year, plus any additional
income tax liability incurred by the shareholders of the Member as a result of
the reporting of the Company's income, deductions, gains or losses on the
Member's federal or state income tax returns of such shareholders.
INDEMNIFICATION
The Limited Liability Company Agreement provides that the Company will
indemnify the Member, any former Member, any person who is or was an affiliate
of a Member or any former Member, any person who is or was a officer, director,
employee or agent of the Company or any Subsidiary, or any person who is or was
serving at the request of the Company, the Member or a director of the Company
as an officer, director, employee, member, partner, agent, fiduciary or trustee
of another person ("Indemnitees"), to the fullest extent permitted by law, from
and against any and all losses, claims, damages, liabilities (joint or several),
expenses (including, without limitation, legal fees and expenses), judgments,
fines, penalties, interest, settlements and other amounts arising from any and
all claims, demands, actions, suits or proceedings, whether civil, criminal,
administrative or investigative, in which any Indemnitee may be involved, or is
threatened to be involved, as a party or otherwise, by reason of its status as
an Indemnitee; provided that in each case the Indemnitee acted in good faith and
in a manner that such Indemnitee reasonably believed to be in or not opposed to
the best interests of the Company and, with respect to any criminal proceeding,
had no reasonable cause to believe its conduct was unlawful. Any indemnification
under these provisions will be only out of the assets of the Company, and the
Member shall not be personally liable for, or have any obligation to contribute
or loan funds or assets to the Company to enable it to effectuate, such
indemnification. The
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Company is authorized to purchase insurance against liabilities asserted against
and expenses incurred by such persons in connection with the Company's
activities, regardless of whether the Company would have the power to indemnify
such person against such liabilities under the provisions described above.
AMENDMENT OF LIMITED LIABILITY COMPANY AGREEMENT
The Limited Liability Company Agreement may be modified, altered, changed
or amended in accordance with the Delaware Limited Liability Company Act (the
"Act"), provided, however, that the Limited Liability Company Agreement may not
be amended as to matters which would: (i) change adversely any Member's rights
and interest in the income, expense, gains, losses or income tax allocations of
the Company or change any Member's rights with respect to liquidation of the
Company, without the unanimous affirmative vote of the Members; or (ii) cause
the Company to violate the terms of the Indenture or the New Credit Facility.
TERMINATION AND DISSOLUTION
Subject to the prior rights of the Company's creditors, including but not
limited to the restrictions contained in the New Credit Facility, the existence
of the Company shall terminate and the Company shall be dissolved upon the first
to occur of the following: (i) on December 31, 2048; (ii) the determination of
all the Members to dissolve the Company upon the written consent of all the
Members; (iii) as provided in the Operating Agreement; or (iv)as may be required
by the Act, as the same may be amended from time to time.
The Company shall be dissolved and its affairs shall be wound up upon the
occurrence of any of the following: (i) termination of the Company as set forth
in the immediately preceding paragraph or (ii) entry of a decree of judicial
dissolution.
Upon dissolution and winding up of the affairs of the Company, the assets
of the Company shall be distributed or sold for cash and any gain or loss
resulting therefrom shall be allocated among the Members as provided in the
Limited Liability Company Agreement, subject to the prior rights of the
Company's creditors. Such proceeds of the Company shall be distributed in the
following order of priority; (i) to creditors (including Members who are
creditors) in satisfaction of the liabilities of the Company (other than
liabilities to existing and former members of distributions from the Company);
(ii) to existing and former Members in satisfaction of liabilities to them, if
any, for distributions from the Company; and (iii) any remaining assets shall be
distributed to Members in accordance with their interests as set forth in the
Limited Liability Company Agreement, as the same may be amended from time to
time.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
NEW CREDIT FACILITY
KC LLC (the "Borrower") has entered into the New Credit Facility with
Societe Generale, as administrative agent (the "Agent") for the Lenders. The
following summary, which sets forth the material terms of the New Credit
Facility, does not purport to be complete and is subject to, and qualified by
reference to, all of the provisions of the New Credit Facility, including all of
the definitions therein of terms not defined in this Prospectus. See "Risk
Factors -- Substantial Leverage; Ability to Service Debt."
General. The New Credit Facility provides for borrowings in an aggregate
principal amount of $40,000,000 at any one time outstanding, comprised of up to
(i) $15.0 million under a revolving credit facility (the "Revolving Credit
Facility") and (ii) $25.0 million under an acquisition loan facility (the
"Acquisition Facility"). Borrowings under the Revolving Credit Facility may only
be used for acquisitions, working capital needs and other general corporate
purposes of the Borrower and its subsidiaries (as defined in the Credit
Agreement). Borrowings under the Acquisition Facility may only be used to fund
future acquisitions. Borrowings under the New Credit Facility are collectively
referred to herein as the "Loans." See "Capitalization" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
Interest. For purposes of calculating interest, the Loans can, at the
election of the Borrower, be Base Rate Loans or LIBOR Loans, or a combination
thereof. Base Rate Loans under the Revolving Credit Facility will bear interest
at Societe Generale's base rate plus 1.375% and LIBOR Loans under the Revolving
Credit Facility will bear interest at Societe Generale's LIBOR (Reserve
Adjusted) plus 2.375%. Base Rate Loans under the Acquisition Facility will bear
interest at Societe Generale's Base Rate plus 1.625% and LIBOR Loans under the
Acquisition Facility will bear interest at Societe Generale's LIBOR (Reserve
Adjusted) plus 2.625%. The foregoing interest rates will be effective through
December 31, 1998, and thereafter be subject to step downs based upon the
provisions of the New Credit Facility. Interest will be payable (i) on the last
day of each calendar quarter for Base Rate Loans and (ii) at the end of each
applicable Interest Period (and if such Interest Period shall exceed 90 days, on
the 90th day of such Interest Period).
Availability and Repayment. Subject to the provisions of the New Credit
Facility, the Borrower may, from time to time, borrow, repay and reborrow under
the Revolving Credit Facility, subject to a borrowing base consisting of
specified percentages of outstanding accounts receivable cash equivalents and
inventory on hand. Subject to the provisions of the New Credit Facility,
borrowings under the Acquisition Facility may be made up to the full amount
available thereunder, subject to certain financial and non-financial conditions
satisfactory to the Lenders. Availability under the Acquisition Facility shall
be permanently reduced by any amounts borrowed under the Acquisition Facility,
and amounts repaid under the Acquisition Facility may not be reborrowed. The New
Credit Facility will require, subject to certain exceptions, prepayments in the
amount of 50% of Excess Cash Flow (as defined in the New Credit Facility), 100%
of net cash proceeds from certain asset sales, and 100% of net cash proceeds
from certain offerings of debt and/or equity securities, with such prepayments
to be applied pro rata to the remaining maturities of acquisition loans, if any.
The entire unpaid balance under the New Credit Facility will be payable no later
than June 30, 2004.
Security. Borrowings under the New Credit Facility are secured, for the
ratable benefit of the Lenders, by a first priority perfected security interest
in favor of Societe Generale, as collateral agent (the "Collateral Agent"), in
(a) all of the capital stock of the Subsidiary Guarantors and all other direct
and indirect subsidiaries owned by the Company and (b) all present and future
tangible and intangible property and interests in property of the Borrowers,
Subsidiary Guarantors and the Borrowers' other direct and indirect subsidiaries.
Guarantees. The Borrowers' payment obligations under the New Credit
Facility are jointly and severally guaranteed, on a senior secured basis, by the
Subsidiary Guarantors. The terms of the New Credit Facility currently require
that the Borrowers' payment obligations be guaranteed by the Borrowers' future
direct and indirect operating subsidiaries.
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Covenants. The New Credit Facility contains financial covenants pursuant
to which the Company and its direct and indirect subsidiaries must, on a
consolidated basis, maintain (i) a Minimum Fixed Charge Coverage Ratio (as
defined in the New Credit Facility); (ii) a Minimum Interest Coverage Ratio (as
defined in the New Credit Facility) and (iii) a Maximum Funded Debt to EBITDA
Ratio (as defined in the New Credit Facility).
In addition, the New Credit Facility contains covenants pertaining to the
management and operation of the Company and its subsidiaries. These covenants
include, among others, requirements that each of the Parent, the Company and its
subsidiaries (i) preserve its corporate existence and not amend its charter or
by-laws; (ii) maintain adequate insurance coverage; (iii) maintain its
properties and all necessary licenses, permits and intellectual property; (iv)
perform its obligations under leases, related documents, material contracts and
other agreements; and (v) comply with applicable laws and regulations, including
those related to tax, employee, pension and environmental matters.
The New Credit Facility also subjects the Company and its subsidiaries to
significant limitations on indebtedness, guarantees, capital expenditures, liens
or encumbrances, mergers, consolidations, divestitures, acquisitions,
investments, capital contributions, joint ventures, partnerships, creation of
new subsidiaries, changes of business, loans and advances, dividends and other
stock payments, repurchases or redemptions of equity, asset sales or transfers,
leases, voluntary prepayments or repurchases or redemptions of debt,
transactions with affiliates, management fees, and changes in accounting
treatment.
Events of Default. The New Credit Facility provides for events of default
customarily found in facilities of this type, including: (i) non-payment of
principal or interest or fees when due; (ii) inaccuracy of any representation or
warranty in any material respect; (iii) failure to perform or observe covenants
after any applicable grace period; (iv) cross-defaults to other material
indebtedness; (v) bankruptcy or insolvency defaults; (vi) material judgment
defaults; (vii) change of control; (viii) ERISA defaults; and (ix) impairment of
security.
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THE EXCHANGE OFFER
The summary herein of certain provisions of the Exchange and Registration
Rights Agreement does not purport to be complete and reference is made to the
provisions of the Exchange and Registration Rights Agreement, which has been
filed as an exhibit to the Registration Statement, and a copy of which is
available as set forth under the heading "Available Information."
TERMS OF THE EXCHANGE OFFER
In connection with the issuance of the Old Notes pursuant to a Purchase
Agreement, dated as of May 20, 1998 between the Issuers and the Initial
Purchaser (the "Purchase Agreement"), the Initial Purchaser and its assignees
became entitled to the benefits of the Exchange and Registration Rights
Agreement.
Under the Exchange and Registration Rights Agreement, the Issuers have
agreed (i) to file with the Commission prior to 60 days after May 28, 1998, the
date the Old Notes were issued (the "Issue Date"), the Registration Statement of
which this Prospectus is a part with respect to a registered offer to exchange
the Old Notes for the New Notes, (ii) to use their best efforts to cause the
Registration Statement to be declared effective under the Securities Act within
150 days after the Issue Date and (iii) to use their best efforts to consummate
the Exchange Offer within 165 days after the Issue Date. The Company will keep
the Exchange Offer open for not less than 20 business days after the date notice
of the Exchange Offer is mailed to holders of the Old Notes. The Exchange Offer
being made hereby, if commenced and consummated within the time periods
described in this paragraph, will satisfy those requirements under the Exchange
and Registration Rights Agreement.
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, all Old Notes validly tendered and not
withdrawn prior to 5:00 p.m., New York City time, on the Expiration Date will be
accepted for exchange. New Notes will be issued in exchange for an equal
principal amount of outstanding Old Notes accepted in the Exchange Offer. Old
Notes may be tendered only in integral multiples of $1,000. This Prospectus,
together with the Letter of Transmittal, is being sent to all registered holders
as of , 1998. The Exchange Offer is not conditioned upon any
minimum principal amount of Old Notes being tendered for exchange. However, the
obligation to accept Old Notes for exchange pursuant to the Exchange Offer is
subject to certain conditions as set forth herein under "-- Conditions."
The form and terms of the New Notes are identical in all material respects
to the form and terms of the Old Notes, except that the New Notes will have been
registered under the Securities Act and, therefore the New Notes will not be
subject to certain transfer restrictions, registration rights and certain
related provisions applicable to the Old Notes. The New Notes will evidence the
same debt as the Old Notes (which they replace) and will be issued under and be
entitled to the benefits of the Indenture.
Old Notes shall be deemed to have been accepted as validly tendered when,
as and if the Issuers have given oral or written notice thereof to the Exchange
Agent. The Exchange Agent will act as agent for the tendering holders of Old
Notes for the purposes of receiving the New Notes and delivering New Notes to
such holders.
Based on interpretations by the staff of the Commission as set forth in
no-action letters issued to third parties in other transactions (including Exxon
Capital Holdings Corporation (available May 13, 1988), Morgan Stanley & Co.
Incorporated (available June 5, 1991), K-III Communications Corporation
(available May 14, 1993) and Shearman & Sterling (available July 2, 1993)), the
Issuers believe that the New Notes issued pursuant to the Exchange Offer may be
offered for resale, resold and otherwise transferred by any holder thereof
(other than any such holder that is a broker-dealer or an "affiliate" of the
Issuers within the meaning of Rule 405 under the Securities Act) without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that (i) such New Notes are acquired in the ordinary
course of business, (ii) at the time of the commencement of the Exchange Offer
such holder has no arrangement with any person to participate in a distribution
of such New Notes and (iii) such holder is not engaged in, and does not intend
to engage in, a distribution of such New Notes. The Issuers have not sought, and
do not intend to seek, a no-action letter from the Commission with respect to
the effects of the Exchange Offer, and there
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can be no assurance that the staff would make a similar determination with
respect to the New Notes as it has in such no-action letters.
By tendering Old Notes in exchange for New Notes and by executing the
Letter of Transmittal, each holder will represent to the Issuers that: (i) it is
not an affiliate of the Issuers, (ii) any New Notes to be received by it will be
acquired in the ordinary course of business and (iii) at the time of the
commencement of the Exchange Offer it had no arrangement with any person to
participate in a distribution of the New Notes and, if such holder is not a
broker-dealer, it is not engaged in, and does not intend to engage in, a
distribution of New Notes. If a holder of Old Notes is unable to make the
foregoing representations, such holder may not rely on the applicable
interpretations of the staff of the Commission, will not be able to tender its
Old Notes in the Exchange Offer and must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
secondary resale transaction unless such sale is made pursuant to an exemption
from such requirements.
Each broker-dealer that receives New Notes for its own account in exchange
for Old Notes, where such Old Notes were acquired by such broker-dealer as a
result of market-making or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such New Notes. See
"Plan of Distribution."
Upon consummation of the Exchange Offer, subject to certain limited
exceptions, holders of Old Notes who do not exchange their Old Notes for New
Notes in the Exchange Offer will no longer be entitled to registration rights
and will not be able to offer or sell their Old Notes, unless such Old Notes are
subsequently registered under the Securities Act (which, subject to certain
limited exceptions, the Issuers 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.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS; TERMINATION
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
, 1998 (20 business days following the commencement of the
Exchange Offer), unless the Issuers, in their sole discretion, extend the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date to which the Exchange Offer is extended. In no event, however, shall the
Expiration Date be later than November 9, 1998. Notwithstanding any extension of
the Exchange Offer, if the Exchange Offer is not consummated on or prior to
November 9, 1998, the Company must pay additional interest on the Notes until
the Exchange Offer is consummated, at a rate of 0.5% per annum, (increasing at
the rate of 0.5% per annum at the end of each 90-day period thereafter);
provided, however, that such additional interest on the Notes may not exceed, in
the aggregate, 1.0% per annum.
To extend the Expiration Date, the Issuers will notify the Exchange Agent
of any extension by oral or written notice and will notify the holders of the
Old Notes by means of a press release or other public announcement prior to 9:00
A.M., New York City time, on the next business day after the previously
scheduled Expiration Date. Such announcement may state that the Issuers are
extending the Exchange Offer for a specified period of time.
The Issuers reserve the right (i) to delay acceptance of any Old Notes, to
extend the Exchange Offer or to terminate the Exchange Offer and not permit
acceptance of Old Notes not previously accepted if any of the conditions set
forth herein under "-- Conditions" shall have occurred and shall not have been
waived by the Issuers, by giving oral or written notice of such delay, extension
or termination to each Exchange Agent, or (ii) to amend the terms of the
Exchange Offer in any manner. Any such delay in acceptance, extension,
termination or amendment will be followed as promptly as practicable by oral or
written notice thereof to each Exchange Agent. If the Exchange Offer is amended
in a manner determined by the Issuers to constitute a material change, the
Issuers will promptly disclose such amendment in a manner reasonably calculated
to inform the holders of the Old Notes of such amendment.
Without limiting the manner in which the Issuers may choose to make public
announcement of any delay, extension, amendment or termination of the Exchange
Offer, the Issuers shall have no obligations to
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publish, advertise, or otherwise communicate any such public announcement, other
than by making a timely release to an appropriate news agency.
SHELF REGISTRATION
If (i) because of any change in law or currently prevailing interpretations
of the staff of the Commission, the Issuers are not permitted to effect an
Exchange Offer, (ii) the Exchange Offer is not consummated within 165 days of
the Issue Date or (iii) any holder (A) is not eligible to participate in the
Exchange Offer, (B) participates in the Exchange Offer and does not receive
freely transferable New Notes in exchange for tendered Old Notes or (C) is a
broker-dealer that holds Old Notes acquired directly from the Issuers or one of
their affiliates, the Issuers shall (i) promptly upon becoming aware of any of
the foregoing matters deliver to the holders of the Old Notes and the Trustee
written notice thereof and (ii) use their best efforts to as promptly as
practicable file with the Commission a Shelf Registration Statement on or prior
to the 30th day after the Shelf Filing Date (as defined) to cover resales of
Transfer Restricted Securities by such holders who satisfy certain conditions
relating to, among other things, the provision of information in connection with
the Shelf Registration Statement (the date such filing obligation arises as
provided above is referred to herein as the "Shelf Filing Date"). For purposes
of the foregoing, "Transfer Restricted Securities" means each Old Note until the
earliest to occur of (i) the date on which such Old Notes has been exchanged for
a freely transferable New Note in the Exchange Offer, (ii) the date on which
such Old Note has been effectively registered under the Securities Act and
disposed of in accordance with the Shelf Registration Statement or (iii) the
date on which such Old Note is distributed to the public pursuant to Rule 144
under the Securities Act or is saleable pursuant to Rule 144(k) under the
Securities Act.
INTEREST ON THE NEW NOTES
The New Notes will accrue interest at the rate of 10 1/2% per annum from
the Issue Date of the Old Notes. Interest on the New Notes is payable on June 1
and December 1 of each year, commencing December 1, 1998.
PROCEDURES FOR TENDERING
To tender in the Exchange Offer, a holder must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by the Letter of Transmittal, and mail or otherwise
deliver such Letter of Transmittal or such facsimile, together with the Old
Notes to be exchanged any other required documents, to the Exchange Agent at the
address set forth herein and therein, or effect a tender of Old Notes pursuant
to the procedures for book-entry transfer as provided for herein and therein,
prior to 5:00 p.m., New York City time, on the Expiration Date. In addition,
either (i) a timely confirmation of a book-entry transfer (a "Book-Entry
Confirmation") of such Old Notes into the Exchange Agent's account at The
Depository Trust Company (the "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 (ii) the holder
must comply with the guaranteed delivery procedures described below. THE METHOD
OF DELIVERY OF LETTERS OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE
ELECTION AND RISK OF THE HOLDERS. IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED
THAT AN OVERNIGHT OR HAND DELIVERY SERVICE BE USED. IN ALL CASES, SUFFICIENT
TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR
OTHER REQUIRED DOCUMENTS SHOULD BE SENT TO THE ISSUERS. Delivery of all
documents must be made to the Exchange Agent, at its address set forth below.
Holders may also request their respective brokers, dealers, commercial banks,
trust companies or nominees to effect such tender for such holders in each case
as set forth herein and in the Letter of Transmittal.
The tender by a holder of Old Notes will constitute an agreement between
such holder and the Issuers in accordance with the terms and subject to the
conditions set forth herein and in the Letter of Transmittal. Any beneficial
owner whose Old Notes are registered in the name of a broker, dealer, commercial
bank, trust
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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.
By executing a Letter of Transmittal, each holder will make to the Issuers
the representations set forth above under the heading "-- Terms of the Exchange
Offer."
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by any member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
a commercial bank or trust company having an office or correspondent in the
United States or an "eligible guarantor' institution within the meaning of Rule
17Ad-15 under the Exchange Act (each an "Eligible Institution") unless the Old
Notes tendered pursuant thereto are tendered (i) by a registered holder of Old
Notes (or by a participant in DTC whose name appears on a security position
listing as owner of such Old Notes) who has not completed Box 3 ("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 trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations or others
acting in a fiduciary or representative capacity, such person should so indicate
when signing, and unless waived by the Issuers, evidence satisfactory to the
Issuers 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) acceptance and withdrawal of the tendered Old Notes will be determined
by the Company in its sole discretion, which determination will be final and
binding. The Issuers reserve the absolute right to reject any and all Old Notes
not properly tendered or any Old Notes which, if accepted, would, in the opinion
of counsel for the Issuers, be unlawful. The Issuers also reserve the absolute
right to waive any irregularities or conditions of tender as to particular Old
Notes. The Company's interpretation of the terms and conditions of the Exchange
Offer (including the instructions in the Letter of Transmittal) will be final
and binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Old Notes must be cured within such time as the
Issuers shall determine. Neither the Issuers, the Exchange Agents nor any other
person shall be under any duty to give notification of defects or irregularities
with respect to tenders of Old Notes, nor shall any of them incur any liability
for failure to give such notification. Tenders of Old Notes will not be deemed
to have been made until such irregularities have been cured or waived. Any Old
Notes received by the Exchange Agent that are not properly tendered and as to
which the defects or irregularities have not been cured or waived will be
returned without cost to such holder by the Exchange Agent or the Exchangeable
Preferred Stock Exchange Agent, as the case may be, unless otherwise provided in
the Letter of Transmittal, as soon as practicable following the Expiration Date.
In addition, the Company reserves the right in its sole discretion, subject
to the provisions of the Indenture, (i) to purchase or make offers for any Old
Notes that remains 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 Exchange and Registration Rights Agreement, (iii) to
redeem Old Notes as a whole or in part at any time and from time to time, as set
forth, with respect to the Old Notes, under "Description of the
Notes -- Optional Redemption" and (iv) to the extent permitted by applicable
law, to purchase Old Notes in the open market, in privately negotiated
transactions or otherwise. The terms of any such purchases or offers could
differ from the terms of the Exchange Offer.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
all Old Notes properly tendered will be accepted promptly after the Expiration
Date, and the New Notes will be issued promptly after acceptance of the Old
Notes. See "-- Conditions." For purposes of the Exchange Offer, Old Notes shall
be deemed to have been accepted as validly tendered for exchange when, as and if
the Issuers have given oral or written notice thereof to the Exchange Agent.
In all cases, issuances of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of a Book-Entry Confirmation
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<PAGE> 81
of such Old Notes into the Exchange Agent's account at the Book-Entry Transfer
Facility, a properly completed and duly executed Letter of Transmittal and all
other required documents. If any tendered Old Notes are not accepted for any
reason set forth in the terms and conditions of the Exchange Offer, such
unaccepted or such nonexchanged Old Notes will be credited to an account
maintained with such Book-Entry Transfer Facility as promptly as practicable
after the expiration or termination of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish accounts with respect
to the Old Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus. Any
financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Old Notes by causing the
Book-Entry Transfer Facility to transfer such Old Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility in accordance with such
Book-Entry Transfer Facility's procedures for transfer. However, 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 its address set forth below under "-- Exchange Agent" on
or prior to the Expiration Date or, if the guaranteed delivery procedures
described below are complied with, within the time period provided under such
procedures.
EXCHANGING BOOK-ENTRY NOTES
The Exchange Agent and the Book Entry Transfer Facility have confirmed that
any financial institution that is a participant in the Book Entry Transfer
Facility may utilize the Book-Entry Transfer Facility Automated Tender Offer
Program ("ATOP") procedures to tender Old Notes.
Any financial institution that is a participant in the Book Entry Transfer
Facility may make book-entry delivery of Old Notes by causing the Book Entry
Transfer Facility to transfer such Old Notes into the Exchange Agent's relevant
account in accordance with the Book Entry Transfer Facility's ATOP procedures
for transfer. However, the exchange for the Old Notes so tendered will only be
made after a Book-Entry Confirmation of such book-entry transfer of Old Notes
into the Exchange Agent's relevant account, and timely receipt by the Exchange
Agent of an Agent's Message (as such term is defined in the next sentence) and
any other documents required by the Letter of Transmittal. The term "Agent's
Message" means a message, transmitted by the Book Entry Transfer Facility and
received by the Exchange Agent and forming part of a Book-Entry Confirmation,
which states that the Book Entry Transfer Facility has received an express
acknowledgment from a participant tendering Old Notes that are the subject of
such Book-Entry Confirmation that such participant has received and agrees to be
bound by the terms of the Letter of Transmittal, and that the Issuers may
enforce such agreement against such participant.
GUARANTEED DELIVERY PROCEDURES
If 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 (or a facsimile thereof) and Notice of Guaranteed Delivery,
substantially in the form provided by the Issuers (by facsimile transmission,
mail or hand delivery), setting forth the name and address of the holder of Old
Notes and the amount of Old Notes tendered, stating that the tender is being
made thereby and guaranteeing that within three New York Stock Exchange ("NYSE")
trading days after the date of execution of the Notice of Guaranteed Delivery, a
Book-Entry Confirmation and any other documents required by the Letter of
Transmittal will be deposited by the Eligible Institution with the Exchange
Agent and (iii) a Book-Entry Confirmation 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.
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WITHDRAWAL OF TENDERS
Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New
York City time on the Expiration Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent prior to the Expiration Date at its respective
address set forth below under "-- Exchange Agent." Any such notice of withdrawal
must specify the name and number of the account at the Book-Entry Transfer
Facility from which the Old Notes were tendered, identify the principal amount
of the Old Notes to be withdrawn, and specify the name and number of the account
at the Book-Entry Transfer Facility to be credited with the withdrawn Old Notes
and otherwise comply with the procedures of such facility. All questions as to
the validity, form and eligibility (including time of receipt) of such notice
will be determined by the Issuers, whose determination shall be final and
binding on all parties. Any Old Notes so withdrawn will be deemed not to have
been validly tendered for exchange for purposes of the Exchange Offer. Any Old
Notes which have been tendered for exchange but which are not exchanged for any
reason will be credited to an account maintained with such Book-Entry Transfer
Facility for the Old Notes as soon as practicable after withdrawal, rejection of
tender or termination of the Exchange Offer. Properly withdrawn Old Notes may be
retendered by following one of the procedures described under "-- Procedures for
Tendering" and "-- Book-Entry Transfer" above at any time on or prior to the
Expiration Date.
CONDITIONS
The Issuers have no obligation to consummate the Exchange Offer if:
(i) any action or proceeding is instituted or threatened in any court
or by or before any governmental agency with respect to the Exchange Offer
which, in the sole judgment of the Company, might materially impair the
ability of the Company to proceed with the Exchange Offer or materially
impair the contemplated benefits of the Exchange Offer to the Company, or
any material adverse development has occurred in any existing action or
proceeding with respect to the Issuers or any of its subsidiaries; or
(ii) any law, statute, rule or regulation is proposed, adopted or
enacted, which, in the sole judgment of the Company, might materially
impair the ability of the Company to proceed with the Exchange Offer or
materially impair the contemplated benefits of the Exchange Offer to the
Company; or
(iii) any governmental approval has not been obtained, which approval
the Company shall, in its sole discretion, deem necessary for the
consummation of the Exchange Offer as contemplated hereby.
EXCHANGE AGENT
United States Trust Company of New York has been appointed as the 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:
<TABLE>
<S> <C>
By Mail or Overnight Delivery: United States Trust Company of New York
P.O. Box 843 Cooper Station
New York, New York 10276
Attention: Corporate Trust Services
By Hand to 4:30 p.m.: United States Trust Company of New York
111 Broadway
New York, New York 10006
Attention: Lower Level
Corporate Trust Window
Facsimile: (212) 780-0592
Attention: Customer Service
Confirm by Telephone to: (800) 548-6565
</TABLE>
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FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by the Company. 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 Company will not make any payments to brokers, dealers or other persons
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for their services and will
reimburse the Exchange Agent for its reasonable out-of-pocket expenses in
connection therewith. The Company may also pay brokerage houses and other
custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding copies of the Prospectus and related documents to
the beneficial owners of the Old Notes, and in handling or forwarding tenders
for exchange.
The expenses to be incurred in connection with the Exchange Offer will be
paid by the Company, including fees and expenses of the Exchange Agent and
Trustee and accounting, legal, printing and related fees and expenses.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, New Notes or Old Notes
for principal amounts or liquidation preferences, as the case may be, not
tendered or accepted for exchange are to be registered or issued in the name of
any person other than the registered holder of the Old Notes tendered, or if
tendered Old Notes are registered in the name of any person other than the
person signing the Letter of Transmittal, or if a transfer tax is imposed for
any reason other than the exchange of Old Notes pursuant to the Exchange Offer,
then the amount of any such transfer taxes (whether imposed on the registered
holder or any other persons) will be payable by the tendering holder. If
satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering holder.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in such applicable legend set forth
thereon as a consequence of the issuance of the Old Notes pursuant to exemptions
from, or in transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws. In general, the Old Notes
may not be offered or sold, unless registered under the Securities Act, except
pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. The Issuers does not
currently anticipate that it will register the Old Notes under the Securities
Act. To the extent that Old Notes are tendered and accepted in the Exchange
Offer, the trading market for untendered and tendered but unaccepted Old Notes
could be adversely affected.
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DESCRIPTION OF NOTES
GENERAL
The New Notes are issued under the Indenture, dated as of May 28, 1998 (the
"Indenture"), among the Issuers, the Subsidiary Guarantors and United States
Trust Company of New York, as trustee (the "Trustee"), a copy of which Indenture
has been filed as an exhibit to the Registration Statement of which this
Prospectus forms a part.
The following is an accurate summary of the material provisions of the
Indenture and the Notes but does not purport to be complete and is subject to,
and is qualified in its entirety by reference to, all the provisions of the
Indenture and the Notes, including the definitions of certain terms therein and
those terms made a part of the Indenture by the Trust Indenture Act of 1939, as
amended ("TIA"). Capitalized terms used herein and not otherwise defined have
the meanings set forth under "Certain Definitions." For purposes of this
summary, the term "Company" refers only to KC LLC and not to any of its
subsidiaries and the term "Issuers" collectively refers to KC LLC and Finance
Corp.
The Company is a holding company and has no material operations or assets
other than its 100% interest in the capital stock of each of its subsidiaries.
Finance Corp. was formed in connection with the Initial Offering, as a
wholly-owned subsidiary of the Company, and has no operations and assets and
will not have any revenues. As a result, prospective investors should not expect
Finance Corp. to participate in servicing the principal, interest, premium or
any other payment obligations on the Notes.
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes may be exchanged or transferred, at the office or agency of the
Company in the Borough of Manhattan, the City of New York (which initially shall
be the corporate trust office of the Trustee, at 114 West 47th Street, New York,
New York 10036), except that, at the option of the Company, payment of interest
may be made by check mailed to the registered holders of the Notes at such
addresses appearing in the Note Register.
The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 and any integral multiple of $1,000. No service charge
will be made for any registration of transfer or exchange of Notes, but the
Company may require payment of a sum sufficient to cover any transfer tax or
other similar governmental charge payable in connection therewith.
The definition of "Restricted Subsidiary" in the Indenture will exclude any
"Unrestricted Subsidiary" and, as a result, Unrestricted Subsidiaries generally
will not be bound by the restrictive provisions of the Indenture and will not be
Subsidiary Guarantors. As of the Issue Date, all of the Company's Subsidiaries
were Restricted Subsidiaries.
TERMS OF THE NOTES
The Notes will be unsecured, senior obligations of the Issuers, will be
guaranteed on a senior basis by the Subsidiary Guarantors, will be limited to
$80 million aggregate principal amount and will mature on June 1, 2008. Each
Note will bear interest at the rate per annum shown on the front cover of this
Prospectus from May 28, 1998, or from the most recent date to which interest has
been paid or provided for, payable semiannually to Holders of record at the
close of business on the May 15 or November 15 immediately preceding the
interest payment date on June 1 and December 1 of each year, commencing December
1, 1998. Interest on the Notes will be computed on the basis of a 360-day year
of twelve 30-day months.
OPTIONAL REDEMPTION
The Notes will be redeemable, at the Company's option, in whole or in part,
at any time and from time to time, on or after June 1, 2003, and prior to
maturity, upon not less than 30 nor more than 60 days' prior notice mailed by
first-class mail to each Holder's registered address, at the following
redemption prices (expressed as a percentage of principal amount), plus accrued
and unpaid interest, if any, to the redemption date (subject to
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<PAGE> 85
the right of Holders of record on the relevant record date to receive interest
due on the relevant interest payment date), if redeemed during the 12 month
period commencing on June 1 of the years set forth below:
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
- ------ ----------
<S> <C>
2003.............................................. 105.25%
2004.............................................. 103.50%
2005.............................................. 101.75%
2006 and thereafter............................... 100.000%
</TABLE>
In addition, at any time and from time to time prior to June 1, 2001, the
Company may redeem in the aggregate up to 33 1/3% of the original aggregate
principal amount of the Notes with the Net Cash Proceeds of one or more Equity
Offerings at a redemption price (expressed as a percentage of principal amount
thereof) of 110.50% plus accrued and unpaid interest, if any, to the redemption
date (subject to the right of Holders of record on the relevant record date to
receive interest due on the relevant interest payment date); provided, however,
that at least 66 2/3% of the original aggregate principal amount of the Notes
remains outstanding after each such redemption; and provided, further, that such
redemption shall occur within 60 days of the closing of any such Equity
Offering.
At any time on or prior to June 1, 2003, the Notes may also be redeemed as
a whole at the option of the Company upon the occurrence of a Change of Control,
upon not less than 30 nor more than 60 days' prior notice (but in no event more
than 180 days after the occurrence of such Change of Control) mailed by first-
class mail to each Holder's registered address, at a redemption price equal to
100% of the principal amount thereof plus the Applicable Premium as of, and
accrued but unpaid interest, if any, to, the date of redemption (the "Redemption
Date") (subject to the right of Holders of record on the relevant record date to
receive interest due on the relevant interest payment date).
In the case of any partial redemption, selection of the Notes for
redemption will be made by the Trustee on a pro rata basis, by lot or by such
other method as the Trustee in its sole discretion shall deem to be fair and
appropriate, although no Note of $1,000 in original principal amount will be
redeemed in part. If any Note is to be redeemed in part only, the notice of
redemption relating to such Note shall state the portion of the principal amount
thereof to be redeemed. A new Note in principal amount equal to the unredeemed
portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Note.
In addition, as more fully described under "-- Change of Control," each
Holder will have the right to require the Issuers to repurchase all or any part
of such Holder's Notes following a Change of Control at a purchase price in cash
equal to 101% of the principal amount thereof, plus accrued and unpaid interest,
if any, to the date of repurchase.
SUBSIDIARY GUARANTEES
Each Subsidiary Guarantor fully and unconditionally guarantees, jointly and
severally, to each Holder and the Trustee, on an unsecured, senior basis, the
full and prompt payment of principal of and interest on the Notes, and of all
other obligations of the Company under the Indenture.
The Indebtedness evidenced by each Subsidiary Guarantee (including the
payment of principal of, premium, if any, and interest on the Notes) will be
senior in right of payment to any subordinated indebtedness of the Subsidiary
Guarantors and pari passu in right of payment to all existing and future senior
indebtedness of the Subsidiary Guarantors. As of June 30, 1998, there would have
been approximately $1.5 million of senior indebtedness of the Subsidiary
Guarantors (other than the Subsidiary Guarantees), all of which is Secured
Indebtedness. Although the Indenture contains limitations on the amount of
additional Indebtedness that the Company's Restricted Subsidiaries, including
the Subsidiary Guarantors, may Incur, under certain circumstances the amount of
such Indebtedness could be substantial and, in any case, such Indebtedness may
be secured. See "-- Ranking" and "-- Certain Covenants -- Limitation on
Indebtedness and Preferred Stock" below.
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The obligations of each Subsidiary Guarantor will be limited to the maximum
amount as will, after giving effect to all other contingent and fixed
liabilities of such Subsidiary Guarantor (including, without limitation, any
guarantees under the New Credit Facility) and after giving effect to any
collections from or payments made by or on behalf of any other Subsidiary
Guarantor in respect of the obligations of such other Subsidiary Guarantor under
its Subsidiary Guarantee or pursuant to its contribution obligations under the
Indenture, result in the obligations of such Subsidiary Guarantor under the
Subsidiary Guarantee not constituting a fraudulent conveyance or fraudulent
transfer under federal or state law.
Each Subsidiary Guarantee is a continuing guarantee and shall (a) remain in
full force and effect until payment in full of the Notes, (b) be binding upon
such Subsidiary Guarantors, and (c) inure to the benefit of and be enforceable
by the Trustee, the Holders and their successors, transferees and assigns.
No Subsidiary Guarantor may consolidate with or merge with or into any
Person other than the Company or any other Subsidiary Guarantor or sell
substantially all of its assets unless: (i) subject to the provisions of the
following paragraph, the entity formed by or surviving any such consolidation or
merger (if other than the Subsidiary Guarantor) or to which such sale, lease,
conveyance or other disposition shall have been made is a corporation or a
limited liability company and existing under the laws of the United States or
any State thereof or the District of Columbia; (ii) subject to the provisions of
the following paragraph, such entity assumes by supplemental indenture all of
the obligations of the Subsidiary Guarantor under the Indenture and the
Subsidiary Guarantee; (iii) immediately after giving effect to such transaction,
no Default or Event of Default shall have occurred and be continuing; and (iv)
immediately after giving pro forma effect to such transaction the Company would
have been able to Incur $1.00 of additional Indebtedness pursuant to paragraph
(a) of the covenant "-- Limitation on Indebtedness and Preferred Stock."
Notwithstanding the foregoing, each Subsidiary Guarantor may consolidate with or
merge into or sell its assets to the Company or another Subsidiary Guarantor.
Notwithstanding the preceding paragraph, concurrently with any sale or
disposition (by merger or otherwise) of any Subsidiary Guarantor in accordance
with the terms of the Indenture (including the covenant described under
"-- Certain Covenants -- Limitation on Sales of Assets and Subsidiary Stock") by
the Company or a Restricted Subsidiary to any Person that is not an Affiliate of
the Company, such Subsidiary Guarantor will automatically and unconditionally be
released from all obligations under its Subsidiary Guarantee; provided, however,
that any such release shall occur only to the extent that all obligations of
such Subsidiary Guarantor under, and all of its guarantees of, and all of its
pledges of assets or other security interests which secure, any Bank
Indebtedness of the Company shall also terminate upon such release, sale or
transfer (other than with respect to any such Indebtedness that is assumed by
any Person that is not an Affiliate of the Company).
RANKING
The indebtedness evidenced by the Notes will be unsecured senior
indebtedness of the Company, will rank pari passu in right of payment with all
existing and future senior indebtedness of the Company and will rank senior in
right of payment to all existing and future Subordinated Obligations of the
Company. The Notes will also be effectively subordinated to all existing and
future Secured Indebtedness of the Company to the extent of the value of the
assets securing such Secured Indebtedness and structurally subordinated to all
existing and future Indebtedness of any Subsidiary of the Company that is not a
Subsidiary Guarantor.
As of June 30, 1998, the Issuers would have had no Secured Indebtedness and
$80 million of senior indebtedness (representing the outstanding Old Notes). As
of June 30, 1998, the Subsidiary Guarantors would have had $1.5 million of
senior indebtedness outstanding (other than the Subsidiary Guarantees), all of
which is Secured Indebtedness. Although the Indenture contains limitations on
the amount of additional Indebtedness which the Company may Incur, under certain
circumstances the amount of such Indebtedness could be substantial and, in any
case, such Indebtedness may be senior indebtedness, Secured Indebtedness or
Indebtedness of Subsidiaries which are no Subsidiary Guarantors. See "-- Certain
Covenants -- Limitation on Indebtedness and Preferred Stock."
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CHANGE OF CONTROL
Upon the occurrence of any of the following events (each a "Change of
Control") with respect to the Company or Parent, each Holder will have the right
to require the Issuers to repurchase all or any part (equal to $1,000 or an
integral multiple thereof) of such Holder's Notes at a purchase price in cash
equal to 101% of the principal amount thereof, plus accrued and unpaid interest,
if any, to the date of repurchase (subject to the right of Holders of record on
the relevant record date to receive interest due on the related interest payment
date):
(i) (A) the consummation of any transaction (including, without
limitation, any merger or consolidation) the result of which is that any
"person" (as such term is used in Sections 13(d) and 14(d) of the Exchange
Act), other than one or more Permitted Holders, is or becomes the
beneficial owner (as defined in Rules 13d-3 and 13d-5 under the Exchange
Act), directly or indirectly, of more than 35% of the total voting power of
the Voting Stock of the Company or Parent and (B) the Permitted Holders
"beneficially own" (as defined in Rules 13d-3 and 13d-5 under the Exchange
Act), directly or indirectly, in the aggregate a lesser percentage of the
total voting power of the Voting Stock of the Company or Parent than such
other person and do not have the right or ability by voting power, contract
or otherwise to elect or designate for election a majority of the Board of
Directors of the Company or Parent;
(ii) during any period of two consecutive years, individuals who at
the beginning of such period constituted the Board of Directors of the
Company or Parent (together with any new directors whose election by such
Board of Directors or whose nomination for election by the shareholders of
the Company or Parent, as the case may be, was approved by a vote of a
majority of the directors of the Company or Parent, as the case may be,
then still in office who were either directors at the beginning of such
period or whose election or nomination for election was previously so
approved) cease for any reason to constitute a majority of the Board of
Directors then in office;
(iii) any sale, lease, exchange or other transfer (in one transaction
or a series of related transactions) of all, or substantially all, the
assets of Parent, or the Company and its Restricted Subsidiaries taken as a
whole, to any "person" or group of "persons" for purposes of Section 13(d)
of the Exchange Act (other than to the Company or to any Wholly Owned
Subsidiary or to one or more Permitted Holders);
(iv) the merger or consolidation of the Company or Parent with or into
another Person or the merger of another person with or into the Company or
Parent and the securities of the Company or Parent that are outstanding
immediately prior to such transaction and which represent 100% of the
aggregate voting power of the Voting Stock of the Company or Parent are
changed into or exchanged for cash, securities or property, unless pursuant
to such transaction such securities are changed into or exchanged for, in
addition to any other consideration, securities of the surviving
corporation that represent immediately after such transaction, at least a
majority of the aggregate voting power of the Voting Stock of the surviving
corporation; or
(v) the adoption of a plan of liquidation of the Company.
Within 30 days following any Change of Control, the Company shall mail a
notice to each Holder with a copy to the Trustee stating: (1) that a Change of
Control has occurred and that such Holder has the right to require the Company
to purchase any or all of such Holder's Notes at a purchase price in cash equal
to 101% of the principal amount thereof, plus accrued and unpaid interest, if
any, to the date of repurchase (subject to the right of Holders of record on a
record date to receive interest on the relevant interest payment date); (2) the
circumstances and relevant facts regarding such Change of Control; (3) the
repurchase date (which shall be no earlier than 30 days nor later than 60 days
from the date such notice is mailed); and (4) the instructions determined by the
Company, consistent with this covenant, that a Holder must follow in order to
have its Notes purchased by the Company. Notwithstanding the occurrence of a
Change of Control, the Company shall not be obligated to repurchase the Notes
upon a Change of Control if the Company has
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<PAGE> 88
irrevocably elected to redeem all of the Notes under the provisions described
under "Optional Redemption" above; provided that the Company does not default in
its redemption obligations pursuant to such election.
The phrase "all or substantially all," as used with respect to a sale of
assets in the definition in the Indenture of "Change of Control," varies
according to the facts and circumstances of the subject transaction, has no
clearly established meaning under New York law (the law governing the Indenture)
and is subject to judicial interpretation. Accordingly, in certain
circumstances, there may be a degree of uncertainty in ascertaining whether a
particular transaction would involve a disposition of "all or substantially all"
of the assets of a Person and therefore it may be unclear whether a Change of
Control has occurred.
The Company will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Notes pursuant to this covenant, including
Rules 13e-4 and 14e-1, promulgated by the Commission under the Exchange Act. To
the extent that the provisions of any securities laws or regulations conflict
with provisions of this covenant, the Company will comply with the applicable
securities laws and regulations and will not be deemed to have breached its
obligations under this paragraph by virtue thereof.
The Change of Control purchase feature is a result of negotiations between
the Company and the Initial Purchasers. Management has no present intention to
engage in a transaction involving a Change of Control, although it is possible
that the Company or the Parent could decide to do so in the future. Subject to
the limitations discussed below, the Company could, in the future, enter into
certain transactions, including acquisitions, refinancings or other
recapitalizations, that would not constitute a Change of Control under the
Indenture, but that could increase the amount of Indebtedness outstanding at
such time or otherwise affect the Company's capital structure or credit rating.
The Holders of a majority of the outstanding Notes may waive the covenant
relating to the Issuers' obligation to repurchase the Notes upon a Change of
Control.
The New Credit Facility generally will prohibit the Company from
repurchasing any Notes and will also provide that change of control events with
respect to the Company would constitute a default thereunder. Any future credit
agreements or other agreements relating to senior indebtedness to which the
Company becomes a party may contain similar restrictions and provisions. In the
event a Change of Control occurs at a time when the Company is prohibited from
repurchasing Notes, the Company could seek the consent of its lenders to the
repurchase of Notes or could attempt to refinance or repay the borrowings that
contain such prohibition. If the Company does not obtain such a consent or repay
such borrowings, the Company will remain prohibited from repurchasing Notes. In
such case, the Company's failure to repurchase tendered Notes would constitute
an Event of Default under the Indenture which would, in turn, constitute a
default under the New Credit Facility. In such circumstances, the subordination
provisions in the Indenture would likely restrict payments to the Holders of
Notes. Moreover, the exercise by the Holders of their right to require the
Company to repurchase the Notes could cause a default under such Indebtedness,
even if the Change of Control itself does not, due to the financial effect of
such repurchase on the Company. Finally, the Company's ability to pay cash to
the Holders upon a repurchase may be limited by the Company's then existing
financial resources. There can be no assurance that sufficient funds will be
available when necessary to make any required repurchases.
CERTAIN COVENANTS
The Indenture contains covenants including, among others, the following:
Limitation on Indebtedness and Preferred Stock. (a)(i) The Company
will not Incur, and will not permit any Restricted Subsidiary to Incur, any
Indebtedness (including Acquired Indebtedness) or issue Disqualified Stock
and (ii) the Company will not permit any of its Restricted Subsidiaries
that are not Subsidiary Guarantors to issue any shares of Preferred Stock;
provided, however, that the Company or any Subsidiary Guarantor may Incur
Indebtedness (including Acquired Indebtedness) or issue Disqualified Stock
if on the date of such Incurrence (and after giving effect to the
application of proceeds therefrom) the Consolidated Coverage Ratio would be
greater than 2.0:1.
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(b) Notwithstanding the foregoing paragraph(a), the Company and its
Restricted Subsidiaries may Incur the following Indebtedness and issue the
following Disqualified Stock:
(i) Indebtedness (including, without limitation, letters of credit
and Guarantees) of the Company or any Subsidiary Guarantor Incurred
under the New Credit Facility in an aggregate principal amount
outstanding at any time not to exceed $40 million, less the aggregate
amount of all proceeds from all Asset Dispositions that have been
applied since the Issue Date to permanently reduce the outstanding
amount of such Indebtedness pursuant to the covenant "Limitation on Sale
of Assets and Subsidiary Stock";
(ii) Indebtedness of the Company owing to and held by any
Subsidiary Guarantor or Indebtedness of a Restricted Subsidiary owing to
and held by the Company or any Subsidiary Guarantor; provided, however,
that any subsequent issuance or transfer of any Capital Stock or any
other event which results in any such Subsidiary Guarantor ceasing to be
a Subsidiary Guarantor or any subsequent transfer of any such
Indebtedness (except to the Company or a Subsidiary Guarantor or a
pledge or other transfer thereof intended to create a security interest
therein) will be deemed to constitute the Incurrence of such
Indebtedness by the issuer thereof at the time of such transfer or such
event;
(iii) Indebtedness represented by the Notes (including the
Subsidiary Guarantees) and any Indebtedness or Disqualified Stock of the
Company or any Restricted Subsidiary (other than the Indebtedness
described in clauses (i) and (ii) above) outstanding on the Issue Date;
(iv) Indebtedness of any Restricted Subsidiary that is Indebtedness
of another Person assumed by such Restricted Subsidiary in connection
with its acquisition of assets from such Person and any Refinancing
Indebtedness with respect thereto; provided, however, that at the time
of such acquisition of assets the Company shall have been able to Incur
at least an additional $1.00 of Indebtedness under paragraph (a) above
after giving effect to such acquisition;
(v) Indebtedness of a Restricted Subsidiary issued and outstanding
on or prior to the date on which such Restricted Subsidiary was acquired
by the Company and any Refinancing Indebtedness with respect thereto;
provided, however, that on the date of any such acquisition, the Company
shall have been able to Incur at least $1.00 of Indebtedness under
paragraph (a) above after giving effect to such acquisition;
(vi) Indebtedness (A) in respect of performance bonds, bankers'
acceptances, workers' compensation claims, surety or appeal bonds,
payment obligations in connection with self-insurance or similar
obligations, and bank overdrafts (and letters of credit in respect
thereof) provided by the Company or any Subsidiary Guarantor in the
ordinary course of its business and which do not secure other
Indebtedness and (B) under Currency Agreements and Interest Rate
Agreements Incurred which, at the time of Incurrence, is in the ordinary
course of business; provided that such agreements are entered into for
bona fide hedging purposes, are not for speculation or trading purposes
and are designed to protect against fluctuations in interest rates or
currency exchange rates, as the case may be, and, in the case of
Interest Rate Agreements, any such Interest Rate Agreement has a
notional amount corresponding to the Indebtedness being hedged thereby;
(vii) Indebtedness represented by Guarantees by the Company of
Indebtedness otherwise permitted to be Incurred pursuant to this
covenant and Indebtedness represented by Guarantees by a Subsidiary
Guarantor of Indebtedness of the Company or of another Restricted
Subsidiary otherwise permitted to be Incurred pursuant to this covenant;
(viii) Indebtedness Incurred by the Company or any Subsidiary
Guarantor and arising from agreements providing for indemnification,
adjustment of purchase price or similar obligations, from guarantees or
letters of credit, surety bonds or performance bonds securing any
obligations of the Company or any Restricted Subsidiary pursuant to such
agreements, in each case Incurred in connection with the purchase or
sale of a business or assets otherwise permitted by the Indenture;
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(ix) the Incurrence by the Company or any Subsidiary Guarantor of
Indebtedness represented by Capitalized 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 improvement of property, plant or equipment used in the
business of the Company or such Subsidiary Guarantor, in an aggregate
principal amount not to exceed $5.0 million at any time outstanding;
(x) the issuance by the Company or any Subsidiary Guarantor of
Refinancing Indebtedness in exchange for, or the net proceeds which are
used to refund, refinance or replace, Indebtedness that was permitted by
paragraph (a) or by clauses (iii), (iv) and (v) of this paragraph (b) to
be Incurred; and
(xi) other Indebtedness in an aggregate principal amount which,
together with all other Indebtedness of the Company and the Restricted
Subsidiaries then outstanding (other than Indebtedness permitted by
clauses (i) through (x) of this paragraph (b) or by paragraph (a)) does
not exceed $5.0 million.
(c) Notwithstanding the foregoing, neither the Company nor any
Restricted Subsidiary shall Incur any Indebtedness pursuant to the
foregoing paragraph (b) if the proceeds thereof are used, directly or
indirectly, to Refinance any Subordinated Obligations of the Company unless
such new Indebtedness shall be subordinated to the Notes to at least the
same extent as such Subordinated Obligations being Refinanced. No
Subsidiary Guarantor shall Incur any Indebtedness pursuant to the foregoing
paragraph (b) if the proceeds thereof are used, directly or indirectly, to
Refinance any Guarantor Subordinated Obligation of such Subsidiary
Guarantor unless such Indebtedness shall be subordinated to the obligations
of such Subsidiary Guarantor under the Subsidiary Guarantee to at least the
same extent as such Guarantor Subordinated Obligation of such Subsidiary
Guarantor.
(d) The Company will not permit any Unrestricted Subsidiary to Incur
any Indebtedness other than Non-Recourse Debt; provided, however, if any
such Indebtedness ceases to be Non-Recourse Debt, such event shall be
deemed to constitute an Incurrence of Indebtedness by the Company or a
Restricted Subsidiary.
(e) For purposes of determining compliance with the foregoing
covenant, (i) in the event that an item of Indebtedness meets the criteria
of more than one of the types of Indebtedness described above, the Company
will classify (and may reclassify from time to time) such item of
Indebtedness and only be required to include the amount and type of such
Indebtedness in one of the above clauses and (ii) an item of Indebtedness
may be divided and classified in more than one of the types of Indebtedness
described above.
Limitation on Liens. The Indenture will provide that the Company will not,
and will not permit any of its Restricted Subsidiaries to, directly or
indirectly, Incur or suffer to exist any Lien (other than Permitted Liens) of
any nature whatsoever on any property or assets (including Capital Stock of a
Restricted Subsidiary, but excluding Capital Stock of an Unrestricted
Subsidiary) now owned or hereafter acquired, or any income or profits therefrom
or assign or convey any right to receive income therefrom, unless
contemporaneously therewith effective provision is made to secure the Notes
equally and ratably with (or prior to) such Indebtedness for so long as such
Indebtedness is secured by a Lien.
Limitation on Restricted Payments. (a) The Company will not, and will not
permit any Restricted Subsidiary to, directly or indirectly, (i) declare or pay
any dividend or make any distribution on or in respect of its Capital Stock
(including any payment in connection with any merger or consolidation involving
the Company) except (x) dividends or distributions payable solely in its Capital
Stock (other than Disqualified Stock) or in options, warrants or other rights to
purchase such Capital Stock and (y) dividends or distributions payable to the
Company or another Restricted Subsidiary (and, if such Restricted Subsidiary
making such dividend or distribution is not wholly-owned, to its other
shareholders on a pro rata basis), (ii) purchase, repurchase, redeem, retire or
otherwise acquire or retire for value any Capital Stock of the Company or any
Restricted Subsidiary held by Persons other than the Company or another
Restricted
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Subsidiary, (iii) purchase, repurchase, redeem, defease or otherwise acquire or
retire for value, prior to scheduled maturity, scheduled repayment or scheduled
sinking fund payment, any Subordinated Obligations (other than regular scheduled
payments of interest and the purchase, repurchase or other acquisition of
Subordinated Obligations in anticipation of satisfying a sinking fund
obligation, principal installment or final maturity, in each case due within one
year of the date of such purchase, repurchase or acquisition) or (iv) make any
Investment (other than a Permitted Investment) in any Person (any such dividend,
distribution, purchase, redemption, repurchase, defeasance, other acquisition,
retirement, payment or Investment which is prohibited by the foregoing
provisions of this paragraph (a) being herein referred to as a "Restricted
Payment") if at the time the Company or such Restricted Subsidiary makes such
Restricted Payment:
(1) a Default or Event of Default shall have occurred and be continuing (or
would result therefrom);
(2) the Company and its Restricted Subsidiaries could not Incur at least
$1.00 of additional Indebtedness under paragraph (a) of the covenant described
under "-- Limitation on Indebtedness and Preferred Stock;" or
(3) the aggregate amount of such Restricted Payment and all other
Restricted Payments (the amount so expended, if other than in cash, to be
determined in good faith by the Board of Directors of the Company) declared or
made subsequent to the Issue Date, would exceed the sum of:
(A) 50% of the Consolidated Net Income with respect to the period
(treated as one accounting period) from the beginning of the fiscal quarter
in which the Issue Date occurs, to the end of the most recent fiscal
quarter for which internal financial statements are available ending at
least 30 days prior to the date of such Restricted Payment (or, in case
such Consolidated Net Income is a deficit, minus 100% of such deficit);
(B) the aggregate Net Cash Proceeds received by the Company from the
issue or sale of Capital Stock (other than Disqualified Stock) subsequent
to the Issue Date (other than an issuance or sale to a Subsidiary) and,
without duplication, the aggregate amount of any other capital
contributions received by the Company in cash subsequent to the Issue Date
and on or prior to the date the Restricted Payment occurs;
(C) the amount by which Indebtedness of the Company or a Restricted
Subsidiary is reduced on the Company's consolidated balance sheet upon the
conversion or exchange (other than by a Restricted Subsidiary) subsequent
to the Issue Date of any Indebtedness of the Company or a Restricted
Subsidiary convertible or exchangeable for Capital Stock (other than
Disqualified Stock) of the Company (less the amount of any cash or other
property distributed by the Company upon such conversion or exchange); and
(D) the amount equal to the net reduction in Investments in
Unrestricted Subsidiaries resulting from (i) dividends, repayments of the
principal of loans or advances or other transfers of assets to the Company
or any Restricted Subsidiary from Unrestricted Subsidiaries or (ii) the
redesignation of Unrestricted Subsidiaries as Restricted Subsidiaries or
(iii) the sale or liquidation of any Unrestricted Subsidiaries (valued in
each case as provided in the definition of "Investment") not to exceed, in
the case of any Unrestricted Subsidiary, the amount of Investments
previously made by the Company or any Restricted Subsidiary in such
Unrestricted Subsidiary, which amount was previously included in the
calculation of the amount of Restricted Payments.
(b) The provisions of the foregoing paragraph (a) will not prohibit:
(i) any purchase, redemption, defeasance or other acquisition of
Capital Stock of the Company or the Parent or Subordinated Obligations made
by exchange for, or out of the net proceeds of the substantially concurrent
sale of, Capital Stock of the Company (other than Disqualified Stock and
other than Capital Stock issued or sold to a Subsidiary); provided,
however, that (A) such purchase, redemption, defeasance or other
acquisition will be excluded in the calculation of the amount of
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Restricted Payments pursuant to clause (3) of paragraph (a) above and (B)
the Net Cash Proceeds from such sale will be excluded from clause (3)(B) of
paragraph (a) above;
(ii) any purchase, redemption, defeasance or other acquisition of
Subordinated Obligations made by exchange for, or out of the net proceeds
of the substantially concurrent sale of, Subordinated Obligations of the
Company; provided, however, that (A) the principal amount of such new
Indebtedness does not exceed the principal amount (or accreted value, if
applicable) of the Subordinated Obligations being so redeemed, repurchased,
defeased, acquired or retired for value (plus the amount of any premium
required to be paid under the terms of the instrument governing the
Subordinated Obligations being so redeemed, repurchased, defeased, acquired
or retired and related fees and expenses) (except to the extent such excess
is a result of a simultaneous incurrence of additional Indebtedness
permitted to be incurred under the Indenture), (B) such new Indebtedness is
subordinated to the Notes on terms substantially the same as those
contained in the instrument or agreement governing or evidencing such
Subordinated Obligations so purchased, exchanged, redeemed, repurchased,
defeased, acquired or retired for value, (C) such new Indebtedness has a
final scheduled maturity date no earlier than the final scheduled maturity
date of such Subordinated Obligations (or, if earlier, the Notes)
purchased, exchanged, redeemed, repurchased, defeased, acquired or retired
for value and (D) such new Indebtedness has an Average Life equal to or
greater than the Average Life of such Subordinated Obligations purchased,
exchanged, redeemed, repurchased, defeased, acquired or retired for value;
provided further, however, that such purchase, redemption, defeasance or
other acquisition will be excluded in the calculation of the amount of
Restricted Payments pursuant to clause (3) of paragraph (a) above;
(iii) dividends paid within 60 days after the date of declaration
thereof if at such date of declaration such dividend would have complied
with this covenant; provided, however, that the amount of such dividend was
included in the calculation of the amount of Restricted Payments pursuant
to clause (3) of paragraph (a) above at the time of declaration;
(iv) Investments in securities not constituting cash or Temporary Cash
Investments received in connection with an Asset Disposition made pursuant
to the provisions of the covenant described under "-- Certain
Covenants -- Limitation on Sales of Assets and Subsidiary Stock" below;
provided that such amounts will be excluded in the calculation of the
amount of Restricted Payments pursuant to clause (3) of paragraph (a)
above;
(v) dividends to the Parent for the purpose of any repurchase,
redemption or other acquisition or retirement for value of any Capital
Stock of the Parent, or any options or warrants to acquire any Capital
Stock of the Parent, held by any member of the management of the Parent,
the Company or any of the Restricted Subsidiaries pursuant to employee
benefit plans or employment, option, warrant or other agreements; provided
that the aggregate amount of dividends to be used for all such repurchases
shall not exceed $400,000 in any fiscal year prior to 2001 and $750,000 in
any fiscal year thereafter; provided, however, that the Company may not
make any dividends in respect of this clause (v) after January 1, 2001
unless the Consolidated Coverage Ratio as of the date of distribution shall
equal or exceed 2.25:1 and provided, further, that the amount of such
repurchases will be included in the calculation of the amount of Restricted
Payments pursuant to clause (3) of paragraph (a) above. In addition,
payments and transactions permitted pursuant to clauses (v) and (vi) of
paragraph (b) under "-- Certain Covenants -- Limitation on Transactions
with Affiliates" below shall not be deemed to be Restricted Payments; and
(vi) during the period that the Company is disregarded or is treated
as a pass through entity for U.S. federal income tax purposes and after
such period to the extent relating to liability for such period, the
Company may make cash distributions to the Parent for the benefit of the
Taxpayers, in respect of each Estimation Period, in an aggregate amount not
to exceed the Permitted Quarterly Tax Distribution; provided, that the
amount of distributions made pursuant to this clause (vi) will be excluded
in the calculation of the amount of Restricted Payments pursuant to clause
(3) of paragraph (a) above.
Within 10 days following the Parent's filing of its required federal
income tax return for the immediately preceding taxable year, the Tax
Amounts CPA shall file with the Trustee a written
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statement indicating in reasonable detail the calculation of the True-up
Amount. In the case of a True-up Amount due to the Taxpayers, the Permitted
Quarterly Tax Distribution payable in respect of such Estimation Period
shall be increased by such True-up Amount. In the case of a True-up Amount
due to the Company, the Permitted Quarterly Tax Distribution payable in
respect of the immediately following Estimation Period shall be reduced by
such True-up Amount and the excess, if any, of the True-up Amount over such
Permitted Quarterly Tax Distribution shall be applied to reduce the
immediately following Permitted Quarterly Tax Distributions until such
True-up Amount is entirely offset.
Limitation on Restrictions on Distributions from Restricted
Subsidiaries. The Company will not, and will not permit any Restricted
Subsidiary to, create or otherwise cause or permit to exist or become effective
any consensual encumbrance or restriction on the ability of any Restricted
Subsidiary to (i) pay dividends or make any other distributions on its Capital
Stock or pay any Indebtedness or other obligation owed to the Company, (ii) make
any loans or advances to the Company or (iii) transfer any of its property or
assets to the Company or any Restricted Subsidiary, except:
(1) any encumbrance or restriction pursuant to an agreement in effect at or
entered into on the Issue Date or pursuant to the New Credit Facility;
(2) any encumbrance or restriction with respect to a Restricted Subsidiary
pursuant to an agreement relating to any Indebtedness Incurred by such
Restricted Subsidiary on or prior to the date on which such Restricted
Subsidiary was acquired by the Company or a Restricted Subsidiary and
outstanding on such date (other than Indebtedness Incurred in connection with,
or in contemplation of, the transaction or series of related transactions
pursuant to which such Restricted Subsidiary became a Restricted Subsidiary or
was acquired by the Company or a Restricted Subsidiary);
(3) any encumbrance or restriction contained in agreements or instruments
with respect to purchase money obligations for property acquired or capitalized
leases or mortgages entered into in the ordinary course of business that impose
restrictions of the nature described in clause (iii) above on the property so
acquired;
(4) any encumbrance or restriction pursuant to an agreement effecting a
Refinancing of Indebtedness Incurred pursuant to an agreement referred to in
clause (1), (2) or (3) of this covenant or contained in any amendment to an
agreement referred to in clause (1), (2) or (3) of this covenant; provided,
however, that the encumbrances and restrictions contained in any such
refinancing agreement or amendment are not, taken as a whole, materially less
favorable to the Noteholders than the encumbrances and restrictions contained in
any such agreement as determined in good faith by the Company;
(5) in the case of clause (iii), any encumbrance or restriction (A) that
restricts in a customary manner the subletting, assignment or transfer of any
property or asset that is subject to a lease, license or similar contract, (B)
by virtue of any transfer of, agreement to transfer, option or right with
respect to, or Lien on, any property or assets of the Company or any Restricted
Subsidiary not otherwise prohibited by the Indenture or (C) contained in
security agreements or mortgages securing Indebtedness of a Restricted
Subsidiary to the extent such encumbrance or restrictions restrict the transfer
of the property subject to such security agreements or mortgages;
(6) any restriction with respect to a Restricted Subsidiary imposed
pursuant to an agreement entered into for the sale or disposition of Capital
Stock or assets of such Restricted Subsidiary pending the closing of such sale
or disposition;
(7) any encumbrance or restriction arising under or by reason of applicable
law;
(8) any encumbrance or restriction contained in the Indenture; and
(9) customary net worth provisions contained in leases and other agreements
entered into by a Restricted Subsidiary in the ordinary course of business.
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Limitation on Sales of Assets and Subsidiary Stock. (a) The Company will
not, and will not permit any Restricted Subsidiary to, make any Asset
Disposition unless:
(i) the Company or such Restricted Subsidiary receives consideration
at the time of such Asset Disposition at least equal to the fair market
value, as determined in good faith by the Board of Directors of the Company
(including as to the value of all non cash consideration), of the shares
and assets subject to such Asset Disposition;
(ii) at least 75% of the consideration thereof received by the Company
or such Restricted Subsidiary is in the form of cash or Temporary Cash
Investments; and
(iii) an amount equal to 100% of the Net Available Cash from such
Asset Disposition is applied by the Company or such Restricted Subsidiary,
as the case may be, within 365 days from the later of the date of such
Asset Disposition or the receipt of such Net Available Cash,
(A) first, to the extent the Company or any Restricted Subsidiary,
as the case may be, elects (or is required by the terms of the New
Credit Facility or any Senior Indebtedness), to prepay, repay or
purchase Indebtedness under the New Credit Facility or other Senior
Indebtedness or Indebtedness (other than Disqualified Stock) of a Wholly
Owned Subsidiary (in each case other than Indebtedness owed to the
Company or an Affiliate of the Company);
(B) second, to the extent of any remaining balance of Net Available
Cash after any election in accordance with clause (A) (or in any
combination with clause (A)), to the extent the Company or such
Restricted Subsidiary, as the case may be, elects, to the investment by
the Company or any Wholly Owned Subsidiary in Additional Assets;
(C) third, to the extent of any remaining balance of such Net
Available Cash after any election in accordance with clauses (A) and
(B), to make an Offer (as defined below) to purchase Notes pursuant to
and subject to the conditions set forth in paragraph (b) of this
covenant within 45 days from the 365th day after the later of the date
of such Asset Disposition and the receipt of such Net Available Cash;
and
(D) fourth, to the extent of any remaining balance of such Net
Available Cash after election or application in accordance with clauses
(A), (B) and (C), to general corporate purposes;
provided, however, that in connection with any prepayment, repayment, purchase
or other acquisition of Indebtedness pursuant to clause (A) above, the Company
or such Restricted Subsidiary will retire such Indebtedness and will cause any
related loan commitment or availability (if any) to be permanently reduced in an
amount equal to the principal amount so prepaid, repaid or purchased.
Notwithstanding the foregoing provisions, the Company and its Restricted
Subsidiaries shall not be required to apply any Net Available Cash in accordance
herewith except to the extent that the aggregate Net Available Cash from all
Asset Dispositions exceeds $3.0 million.
For the purposes of this covenant, the following are deemed to be cash: (w)
Cash Equivalents, (x) the assumption by the transferee of Indebtedness of the
Company or any Restricted Subsidiary (other than Indebtedness that is
subordinated to the Notes or the Subsidiary Guarantees) and the release of the
Company or such Restricted Subsidiary from all liability on such Indebtedness in
connection with such Asset Disposition, (y) Indebtedness of any Restricted
Subsidiary that is no longer a Restricted Subsidiary as a result of such Asset
Disposition, to the extent that the Company and each other Restricted Subsidiary
is released from any Guarantee of such Indebtedness in connection with such
Asset Disposition, and (z) securities received by the Company or any Restricted
Subsidiary from the transferee that are promptly converted by the Company or
such Restricted Subsidiary into cash or Temporary Cash Investments.
(b) In the event of an Asset Disposition that requires the purchase of
Notes pursuant to clause (a)(iii)(C) of this covenant, the Company will be
required to purchase Notes tendered pursuant to an offer by the Company for the
Notes (the "Offer") at a purchase price of 100% of their principal amount plus
accrued interest, if any, to the date of purchase (but without premium) in
accordance with the procedures (including prorating in the event of
oversubscription) set forth in the Indenture. If the aggregate purchase price of
Notes tendered pursuant to the Offer is less than the Net Available Cash
allotted to the purchase of
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the Notes, the Company will apply the remaining Net Available Cash in accordance
with clause (a)(iii)(D) above.
(c) The Company will comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of Notes pursuant to this
covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Company will comply
with the applicable securities laws and regulations and will not be deemed to
have breached its obligations under this covenant by virtue thereof.
Limitation on Transactions with Affiliates. (a) The Company will not, and
will not permit any Restricted Subsidiary to, directly or indirectly, enter into
or conduct any transaction or series of transactions (including the purchase,
sale, lease or exchange of any property, or rendering of any service) with any
Affiliate of the Company or a Restricted Subsidiary (an "Affiliate Transaction")
unless the terms of such transaction shall have been approved by a majority of
the members of the Board of Directors of the Company and such majority
determines that the terms of such Affiliate Transaction are no less favorable to
the Company or such Restricted Subsidiary, as the case may be, than those that
could be obtained at the time of such transaction in arm's-length dealings with
a Person who is not such an Affiliate; provided, however, that if the Affiliate
Transaction involves an amount in excess of $2.5 million, then the Company shall
obtain a written opinion (a "Fairness Opinion") from a nationally recognized
independent investment banking, accounting or appraisal firm that such Affiliate
Transaction is (x) no less favorable to the Company or such Restricted
Subsidiary, as the case may be, than those that could be obtained at the time of
such transaction in arms-length dealings with a Person who is not an Affiliate
or (y) fair to the Company or such Restricted Subsidiary from a financial point
of view.
(b) The foregoing shall not apply to or prohibit (i) any Restricted Payment
permitted to be made pursuant to "Limitation on Restricted Payments," (ii) any
issuance of securities, or other payments, awards or grants in cash, securities
or otherwise pursuant to, or the funding of, employment arrangements, stock
options and stock ownership plans approved by the Board of Directors of the
Company, (iii) any fees, indemnities, loans or advances to employees in the
ordinary course of business, (iv) any transaction between the Company and a
Restricted Subsidiary or between Restricted Subsidiaries, (v) any amounts
payable on the Issue Date pursuant to agreements in effect on such date, and
(vi) so long as no Event of Default shall have occurred and be continuing,
payments in respect of the Management Fee in an amount not to exceed $500,000
(the "Base Fee") in any fiscal year, plus an annual additional payment (the
"Additional Fee") in respect of any fiscal year, which Additional Fee shall be
payable on the later of March 31 of the following year or the date of the
completion of the Company's audited financial statements for such year, and
which Additional Fee shall not exceed $300,000 with respect to fiscal 1998 or
fiscal 1999, provided, however, that at the time of payment of the Additional
Fee the Consolidated Coverage Ratio of the Company shall be equal to or greater
than (i) 2.0:1 for fiscal years ended on or prior to December 31, 1999 and (ii)
2.25:1 for fiscal years ended after December 31, 1999 after giving effect to
such payment, provided, further, that the Base Fee, the Additional Fee, or any
portion thereof, may be deferred until such time as payment is permitted
pursuant to the preceding clause; plus, in any case, reasonable out of pocket
expenses incurred in connection with services performed under the Management
Agreement. For each fiscal year, beginning in fiscal year 2000, the Additional
Fee may be increased by up to 15% of the aggregate amount of the Base Fee and
the then current amount of the Additional Fee; provided, however, that the
percentage increase to the aggregate amount of the Management Fees payable under
the Management Agreement in any fiscal year compared to the prior fiscal year
shall not exceed the percentage increase in Consolidated Cash Flow for such
fiscal year as compared to the prior fiscal year (consistent with the pro forma
adjustments allowed to "Consolidated Cash Flow" provided in the definition of
"Consolidated Coverage Ratio"). Notwithstanding the foregoing, the aggregate
amount of all increases to the Additional Fee shall not exceed $400,000.
Limitation on Sales of Subsidiary Capital Stock. The Company (i) will not,
and will not permit any Restricted Subsidiary of the Company to, transfer,
convey, sell, lease or otherwise dispose of any Capital Stock of any Restricted
Subsidiary to any Person (other than to the Company or a Wholly Owned
Subsidiary) and (ii) will not permit any Restricted Subsidiary to issue any of
its Capital Stock (other than to management of such Restricted Subsidiary and,
if necessary, shares of its Capital Stock constituting directors' qualifying
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shares) to any Person other than to the Company or a Wholly Owned Subsidiary,
unless (a) after any such transfer, conveyance, sale, lease, disposition or
issuance, such Restricted Subsidiary continues to be a Restricted Subsidiary and
(b) the net cash proceeds from such transfer, conveyance, sale, lease,
disposition or issuance are applied in accordance with the covenant described
above under "Limitation on Sales of Assets and Subsidiary Stock"; provided,
however, that this provision shall not prohibit (x) the transfer, conveyance,
sale, lease or other disposition of all of the Capital Stock of any Restricted
Subsidiary or the retention of Preferred Stock which is not Disqualified Stock
in connection with any such transfer, conveyance, sale, lease or other
disposition, (y) the transfer, conveyance, sale, lease or other disposition of
Preferred Stock of a Subsidiary in compliance with the terms of the covenant
described under "Limitation on Sale of Assets and Subsidiary Stock," and (z) the
issuance of any Preferred Stock of a Restricted Subsidiary if such issuance or
sale would be in compliance with the terms of the covenant described under
"Limitation on Indebtedness and Preferred Stock."
Limitation on Lines of Business. The Company and its Restricted
Subsidiaries will not engage in any business other than a Permitted Business.
Limitation on Business Activities of Finance Corp. In addition, to the
restrictions set forth above, Finance Corp. may not hold any material assets or
engage in any significant business activities; provided that Finance Corp. may
be a co-obligor with respect to Indebtedness permitted to be Incurred pursuant
to the covenant described under " -- Limitation on Indebtedness and Preferred
Stock" if the Company is a primary co-obligor or guarantor of such Indebtedness
and the net proceeds of such Indebtedness are lent to the Company or any of its
Restricted Subsidiaries, used to acquire outstanding debt securities issued by
the Company or any Restricted Subsidiary or used directly or indirectly to
refinance or discharge Indebtedness permitted under the limitation of this
paragraph.
SEC Reports. Notwithstanding that the Company may not be subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, so long as
any Notes are outstanding, the Company will furnish to the Trustee and the
holders of Notes (i) within 45 days after the end of each of the first three
fiscal quarters of each fiscal year and 90 days of the end of each fiscal year
all quarterly and annual financial information, as the case may be, that would
be required to be contained in a filing with the SEC on Forms 10-Q and 10-K if
the Company were required to file any such Forms, including a "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and,
with respect to the annual information only, a report thereon by the Company's
certified independent accountants and (ii) all current reports that would be
required to be filed with the Commission on Form 8-K if the Company were
required to file such reports. In addition, whether or not required by the rules
and regulations of the SEC, the Company will file with the SEC a copy of all
such information and make such information available to securities analysts and
prospective investors upon request. Furthermore, for so long as any of the Notes
remain outstanding, the Company has agreed to make available to any prospective
purchaser of the Notes or beneficial owner of the Notes, in connection with any
sale thereof, the information required by Rule 144(d)(4) under the Securities
Act.
Future Guarantors. The Company shall cause each new Subsidiary (other than
(i) a new Subsidiary designated as an Unrestricted Subsidiary and (ii) Foreign
Subsidiaries) to become a Subsidiary Guarantor under the Indenture and thereby
Guarantee the Notes on the terms and conditions set forth in the Indenture.
MERGER AND CONSOLIDATION
The Company will not consolidate with or merge with or into, or convey,
transfer or lease all or substantially all its consolidated assets to, any
Person, unless: (i) the resulting, surviving or transferee Person (the
"Successor Company") will be a corporation organized and existing under the laws
of the United States of America, any State thereof or the District of Columbia
and the Successor Company (if not the Company) will expressly assume, by
supplemental indenture, executed and delivered to the Trustee, in form
satisfactory to the Trustee, all the obligations of the Company under the Notes
and the Indenture; (ii) immediately after giving pro forma effect to such
transaction (and treating any Indebtedness which becomes an obligation of the
Successor Company or any Restricted Subsidiary as a result of such transaction
as having been Incurred by the Successor Company or such Restricted Subsidiary
at the time of such transaction), no Default or Event of
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Default will have occurred and be continuing; (iii) immediately after giving pro
forma effect to such transaction, the Successor Company would be able to Incur
an additional $1.00 of Indebtedness under paragraph (a) of the covenant
described under "-- Limitation on Indebtedness and Preferred Stock;" (iv)
immediately after giving effect to such transaction, the Successor Company will
have a Consolidated Net Worth in an amount which is not less than the
Consolidated Net Worth of the Company immediately prior to such transaction; and
(v) the Company will have delivered to the Trustee an Officers' Certificate and
an Opinion of Counsel, each stating that such consolidation, merger or transfer
and such supplemental indenture (if any) comply with the Indenture, as set forth
in the Indenture, provided, however, that clauses (ii) and (iv) shall not apply
to a merger or consolidation involving only the Company and one or more of the
Restricted Subsidiaries.
Finance Corp. may not consolidate with or merge with or into, or convey,
transfer or lease all or substantially all its consolidated assets to, any
Person, unless: (i) the Successor Company will be a corporation organized and
existing under the laws of the United States of America, any State thereof or
the District of Columbia and a Wholly-Owned Subsidiary of the Company; (ii) the
Successor Company (if not Finance Corp.) will expressly assume, by supplemental
indenture, executed and delivered to the Trustee, in form satisfactory to the
Trustee, all the obligations of Finance Corp. under the Notes and the Indenture;
and (iii) immediately after giving pro forma effect to such transaction (and
treating any Indebtedness which becomes an obligation of the Successor Company
or any Restricted Subsidiary as a result of such transaction as having been
Incurred by the Successor Company or such Restricted Subsidiary at the time of
such transaction), no Default or Event of Default will have occurred and be
continuing.
The Successor Company will succeed to, and be substituted for, and may
exercise every right and power of, the Company or Finance Corp., as the case may
be, under the Indenture, but the predecessor Company in the case of a lease of
all or substantially all its assets will not be released from the obligation to
pay the principal of and interest on the Notes.
DEFAULTS
An Event of Default is defined in the Indenture as (i) a default by the
Issuers or any Subsidiary Guarantor in any payment of interest on any Note when
due, and such default continues for a period of 30 days, (ii) a default by the
Issuers or any Subsidiary Guarantor in the payment of principal of any Note when
due at its Stated Maturity, upon optional redemption, upon required repurchase,
upon declaration or otherwise, (iii) the failure by the Issuers or any
Subsidiary Guarantor to comply with their obligations under "-- Merger and
Consolidation," (iv) the failure by the Issuers or any Subsidiary Guarantor to
comply for 30 days after notice with any of its obligations under the covenants
described under "-- Change of Control" or "-- Certain Covenants" (in each case,
other than a failure to purchase Notes), (v) the failure by the Issuers or any
Subsidiary Guarantor to comply for 60 days after notice with its other
agreements contained in the Indenture or the Notes, (vi) the failure by the
Company or any Significant Subsidiary of the Company to pay any interest or
principal of or premium on Indebtedness within any applicable grace period
provided in such Indebtedness after final maturity or the acceleration of any
such Indebtedness by the holders thereof because of a default and the total
amount of such Indebtedness unpaid or accelerated exceeds $5 million or its
foreign currency equivalent (the "cross acceleration provision"), (vii) certain
events of bankruptcy, insolvency or reorganization of the Issuers or any
Significant Subsidiary (the "bankruptcy provisions"), (viii) any final,
non-appealable judgment or decree by a court of competent jurisdiction for the
payment of money in excess of $5 million is rendered against the Company,
Finance Corp. or any Significant Subsidiary and such judgment or decree remains
outstanding for a period of 60 day following such judgment and is not
discharged, waived or stayed within such period (the "judgment default
provision"), (ix) except as permitted by the Indenture, a Subsidiary Guarantee
ceases to be in full force and effect or a Subsidiary Guarantor denies or
disaffirms its obligations under the Indenture or its Subsidiary Guarantee and
(x) Parent engaging in a line of business or activity other than the ownership
of the Capital Stock of the Company.
The foregoing will constitute Events of Default whatever the reason for any
such Event of Default and whether it is voluntary or involuntary or is effected
by operation of law or pursuant to any judgment, decree or order of any court or
any order, rule or regulation of any administrative or governmental body.
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However, a default under clauses (iv) or (v) of the first paragraph above
will not constitute an Event of Default until the Trustee or the Holders of 25%
in aggregate principal amount of the outstanding Notes notify the Issuers as
provided in the Indenture of the default and the Issuers do not cure such
default within the time specified in clauses (iv) and (v) hereof after receipt
of such notice.
If an Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in aggregate principal amount of the outstanding Notes by
written notice to the Issuers and the Trustee specifying the respective Event of
Default and that it is a notice of acceleration may declare the principal of and
accrued but unpaid interest on all the Notes to be due and payable. Upon such a
declaration, such principal and interest will be due and payable immediately. If
an Event of Default relating to certain events of bankruptcy, insolvency or
reorganization of the Issuers or a Significant Subsidiary occurs and is
continuing, the principal of and accrued interest on all the Notes will become
immediately due and payable without any declaration or other act on the part of
the Trustee or any Holders. Under certain circumstances, the Holders of a
majority in aggregate principal amount of the outstanding Notes may rescind any
such acceleration with respect to the Notes and its consequences.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee will
be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the Holders unless such Holders
shall have offered to the Trustee reasonable indemnity or security against any
loss, liability or expense. Except to enforce the right to receive payment of
principal, premium (if any) or interest when due, no Holder may pursue any
remedy with respect to the Indenture or the Notes unless (i) such Holder shall
have previously given the Trustee notice that an Event of Default is continuing,
(ii) Holders of at least 25% in aggregate principal amount of the outstanding
Notes shall have requested the Trustee to pursue the remedy, (iii) such Holders
shall have offered the Trustee reasonable security or indemnity against any
loss, liability or expense, (iv) the Trustee shall not have complied with such
request within 60 days after the receipt of the request and the offer of
security or indemnity, and (v) the Holders of a majority in principal amount of
the outstanding Notes shall not have given the Trustee a direction inconsistent
with such request within such 60-day period. Subject to certain restrictions,
the Holders of a majority in principal amount of the outstanding Notes are given
the right to direct the time, method and place of conducting any proceeding for
any remedy available to the Trustee or of exercising any trust or power
conferred on the Trustee. The Trustee, however, may refuse to follow any
direction that conflicts with law or the Indenture or that the Trustee
determines is unduly prejudicial to the rights of any other Holder or that would
involve the Trustee in personal liability. Prior to taking any action under the
Indenture, the Trustee will be entitled to indemnification satisfactory to it in
its sole discretion against all losses and expenses caused by taking or not
taking such action.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each Holder notice of the Default
within the earlier of 90 days after it occurs or 30 days after it is known to a
Trust Officer or written notice of it is received by the Trustee. Except in the
case of a Default in the payment of principal of, premium (if any) or interest
on any Note, the Trustee may withhold notice if and so long as a committee of
its Trust Officers in good faith determines that withholding notice is in the
interests of the Noteholders. In addition, the Company is required to deliver to
the Trustee, within 120 days after the end of each fiscal year, a certificate
indicating whether the signers thereof know of any Default that occurred during
the previous year. The Company also is required to deliver to the Trustee,
within 30 days after the occurrence thereof, written notice of any event which
would constitute certain Defaults, their status and what action the Company is
taking or proposes to take in respect thereof.
NO PERSONAL LIABILITY OF MEMBERS, DIRECTORS, OFFICERS, EMPLOYEES, PARTNERS AND
STOCKHOLDERS
No member of the Company or director, officer, employee, partner,
incorporator or stockholder of the Parent or Finance Corp., or any Subsidiary
Guarantor as such, shall have any liability for any obligations of the Issuers
under the Notes or the Indenture or for any claim based on, in respect of, or by
reason of, such obligations or their creation. Each holder of Notes by accepting
a Note waives and releases all such liability. The waiver and release are part
of the consideration for issuance of the Notes. Such waiver may not be
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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.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture may be amended with the
consent of the Holders of a majority in principal amount of the Notes then
outstanding (including, without limitation, consents obtained in connection with
the purchase of, or tender offer or exchange offer for, Notes) and any past
default or compliance with any provisions may be waived with the consent of the
Holders of a majority in principal amount of the Notes then outstanding
(including, without limitation, consents obtained in connection with the
purchase of, or tender offer or exchange offer for, Notes). However, without the
consent of each Holder of an outstanding Note affected, no amendment may, among
other things, (i) reduce the amount of Notes whose Holders must consent to an
amendment, supplement or waiver, (ii) reduce the rate of or extend the time for
payment of interest on any Note, (iii) reduce the principal of or extend the
Stated Maturity of any Note, (iv) reduce the premium payable upon the redemption
of any Note or change the time at which any Note may be redeemed as described
under "-- Optional Redemption," (v) make any Note payable in money other than
that stated in the Note, (vi) impair the right of any Holder to receive payment
of principal of and interest on such Holder's Notes on or after the due dates
therefor or to institute suit for the enforcement of any payment on or with
respect to such Holder's Notes, (vii) make any change in the foregoing amendment
provisions which require each Holder's consent or in the waiver provisions or
(viii) make any change in any Subsidiary Guaranty that could adversely affect
such holder.
Without the consent of any Holder, the Issuers and the Trustee may amend
the Indenture to cure any ambiguity, omission, defect or inconsistency, to
provide for the assumption by a successor corporation of the obligations of the
Issuers under the Indenture, to provide for uncertificated Notes in addition to
or in place of certificated Notes (provided that the uncertificated Notes are
issued in registered form for purposes of Section 163(f) of the Code, or in a
manner such that the uncertificated Notes are as described in Section
163(f)(2)(B) of the Code), to add additional Guarantees with respect to the
Notes, to secure the Notes, to add to the covenants of the Issuers for the
benefit of the Noteholders or to surrender any right or power conferred upon the
Issuers, to make any change that does not adversely affect the rights of any
Holder and to comply with any requirement of the SEC in connection with the
qualification of the Indenture under the TIA.
The consent of the Noteholders is not necessary under the Indenture to
approve the particular form of any proposed amendment. It is sufficient if such
consent approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, the Company is
required to mail to Noteholders a notice briefly describing such amendment.
However, the failure to give such notice to all Noteholders, or any defect
therein, will not impair or affect the validity of the amendment.
TRANSFER AND EXCHANGE
A Noteholder may transfer or exchange Notes in accordance with the
Indenture. Upon any transfer or exchange, the registrar and the Trustee may
require a Noteholder, among other things, to furnish appropriate endorsements
and transfer documents and the Company may require a Noteholder to pay any taxes
required by law or permitted by the Indenture, including any transfer tax or
other similar governmental charge payable in connection therewith. The Company
is not required to transfer or exchange any Note selected for redemption or to
transfer or exchange any Note for a period of 15 days prior to a selection of
Notes to be redeemed. The Notes will be issued in registered form and the
registered holder of a Note will be treated as the owner of such Note for all
purposes.
DEFEASANCE
The Issuers at any time may terminate all their obligations under the Notes
and the Indenture ("legal defeasance"), except for certain obligations,
including those with respect to the defeasance trust and obligations to register
the transfer or exchange of the Notes, to replace mutilated, destroyed, lost or
stolen
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Notes and to maintain a registrar and paying agent in respect of the Notes. The
Issuers at any time may terminate their obligations under the covenants
described under "-- Certain Covenants" and "-- Change of Control," the operation
of the cross acceleration provision, the bankruptcy provisions with respect to
Significant Subsidiaries and the judgment default provision described under
"-- Defaults" and the limitations contained in clauses (iii) and (iv) under
"-- Merger and Consolidation" will not be applicable ("covenant defeasance").
The Issuers may exercise their legal defeasance option notwithstanding the
prior exercise of their covenant defeasance option. If the Issuers exercise
their legal defeasance option, payment of the Notes may not be accelerated
because of an Event of Default with respect thereto. If the Issuers exercise
their covenant defeasance option, payment of the Notes may not be accelerated
because of an Event of Default specified in clause (iv), (v), (vi), (vii) (with
respect only to Significant Subsidiaries), (viii) or (x) under "-- Defaults"
above or because of the failure of the Issuers to comply with clause (iii) or
(iv) under "-- Merger and Consolidation" above.
In order to exercise either defeasance option, the Issuers must irrevocably
deposit or cause to be deposited in trust (the "defeasance trust") with the
Trustee money or U.S. Government Obligations which through the scheduled payment
of principal and interest in respect thereof in accordance with their terms will
provide cash at such times and in such amounts as will be sufficient to pay
principal and interest when due on all the Notes (except lost, stolen or
destroyed Notes which have been replaced or repaid) to maturity or redemption,
as the case may be, and must comply with certain other conditions, including
delivery to the Trustee of an Opinion of Counsel to the effect that holders of
the Notes will not recognize income, gain or loss for federal income tax
purposes as a result of such deposit and defeasance and will be subject to
federal income tax on the same amount and in the same manner and at the same
times as would have been the case if such deposit and defeasance had not
occurred (and, in the case of legal defeasance only, such Opinion of Counsel
must be based on a ruling of the Internal Revenue Service or other change in
applicable federal income tax law).
CONCERNING THE TRUSTEE
United States Trust Company of New York is to be the Trustee under the
Indenture and has been appointed by the Company as Registrar and Paying Agent
with regard to the Notes.
The Holders of a majority in principal amount of the outstanding Notes will
have the right to direct the time, method and place of conducting any proceeding
for exercising any remedy available to the Trustee, subject to certain
exceptions. The Indenture provides that if an Event of Default occurs (and is
not cured), the Trustee will be required, in the exercise of its power, to use
the degree of care of a prudent man in the conduct of his own affairs. Subject
to such provisions, the Trustee will be under no obligation to exercise any of
its rights or powers under the Indenture at the request of any Holder of Notes,
unless such Holder shall have offered to the Trustee security and indemnity
satisfactory to it against any loss, liability or expense and then only to the
extent required by the terms of the Indenture.
GOVERNING LAW
The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to applicable principles of conflicts of law to the extent that the
application of the law of another jurisdiction would be required thereby.
CERTAIN DEFINITIONS
"Acquired Indebtedness" of any specified Person means Indebtedness of any
other Person existing at the time such other Person is merged with or into or
becomes a Restricted Subsidiary of such specified Person, including Indebtedness
Incurred in connection with, or in contemplation of, such other Person's
becoming a Restricted Subsidiary of such specified Person.
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"Additional Assets" means, as of any date, (i) any property or assets
(other than Indebtedness and Capital Stock) used in connection with the business
of the Company or any of its Restricted Subsidiaries on such date or in a
Permitted Business or (ii) the Capital Stock of a Person that is a Restricted
Subsidiary prior to the acquisition of such Capital Stock or becomes a
Restricted Subsidiary as a result of the acquisition of such Capital Stock by
the Company or another Restricted Subsidiary; provided, however, that, in the
case of clause (ii), such Restricted Subsidiary is primarily engaged in a
Permitted Business.
"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 the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing;
provided that the beneficial ownership of more than 10% of the Voting Stock of a
Person shall be deemed to be control.
"Applicable Premium" means, with respect to a Note at any Redemption Date,
the greater of (i) 1.0% of the then outstanding principal amount of such Note
and (ii) the excess of (A) the present value at such time of (1) the redemption
price of such Note at June 1, 2003 plus (2) all required interest and principal
payments (excluding accrued but unpaid interest) due on such Note through June
1, 2003, computed using a discount rate equal to the Treasury Rate plus 50 basis
points, over (B) the then-outstanding principal amount of such Note.
"Asset Disposition" means any sale, lease, transfer or other disposition
(or series of related sales, leases, transfers or dispositions) of shares of
Capital Stock of a Restricted Subsidiary (other than directors' qualifying
shares), property or other assets, including by way of a Sale/Leaseback
Transaction (each referred to for the purposes of this definition as a
"disposition"), by the Company or any of its Restricted Subsidiaries, in each
case resulting in Net Available Cash of $300,000 or more (including any
disposition by means of a merger, consolidation or similar transaction, except
that the sale, lease, conveyance or other disposition of all or substantially
all of the assets of the Company and its Subsidiaries taken as a whole will be
governed by the provisions of the Indenture described above under the caption
"-- Change of Control" and/or the provisions described above under the caption
"-- Merger and Consolidation" and not by the provisions of the covenant
"Limitation on Sales of Assets and Subsidiary Stock") other than (i) a
disposition by a Restricted Subsidiary to the Company or by the Company or a
Restricted Subsidiary to a Restricted Subsidiary, (ii) a disposition of property
or assets in the ordinary course of business, (iii) dispositions of inventory in
the ordinary course of business, (iv) for purposes of the "Limitation on Sales
of Assets and Subsidiary Stock" covenant only, a disposition that constitutes a
Restricted Payment permitted by the "Limitation on Restricted Payments" covenant
and (v) dispositions of obsolete or worn-out equipment.
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the product of the numbers of years from the date of determination to the
dates of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied by
the amount of such payment by (ii) the sum of all such payments.
"Bank Indebtedness" means any and all Obligations, whether outstanding on
the Issue Date or thereafter Incurred, payable by the Company or its
Subsidiaries under or in respect of the New Credit Facility and any related
notes, collateral documents, letters of credit and guarantees, including,
without limitation, principal, premium (if any), interest (including interest
accruing on or after the filing of any petition in bankruptcy or for
reorganization relating to the Company whether or not a claim for post filing
interest is allowed in such proceedings), fees, charges, expenses, reimbursement
obligations, guarantees, indemnities and all other amounts payable thereunder or
in respect thereof.
"Board of Directors" means the Board of Directors or equivalent governing
body of a Person (or the general partner of such Person, as the case may be) or
any committee thereof duly authorized to act on behalf of such Board of
Directors or equivalent governing body.
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"Business Day" means a day other than a Saturday, Sunday or other day on
which banking institutions in New York State are authorized or required by law
to close.
"Capitalized Lease Obligation" of a Person means an obligation of such
Person that is required to be classified and accounted for on the balance sheet
of such Person as a capitalized lease for financial reporting purposes in
accordance with GAAP, and the amount of Indebtedness represented by such
obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment or
penalty.
"Capital Stock" of any Person 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, in each case, including Preferred Stock.
"Cash Equivalents" means any of the following: (a) securities issued or
fully guaranteed or insured by the United States Government or any agency or
instrumentality thereof, (b) time deposits, certificates of deposit or bankers'
acceptances of (i) any lender under the New Credit Facility or (ii) any
commercial bank having capital and surplus in excess of $500,000,000 and the
commercial paper of the holding company of which is rated at least A-1 or the
equivalent thereof by Standard & Poor's Ratings Group or at least P-1 or the
equivalent thereof by Moody's Investors Service, Inc. (or if at such time
neither is issuing ratings, then a comparable rating of another nationally
recognized rating agency), (c) commercial paper rated at least A-1 or the
equivalent thereof by Standard & Poor's Ratings Group or at least P-1 or the
equivalent thereof by Moody's Investors Service, Inc. (or if at such time
neither is issuing ratings, then a comparable rating of another nationally
recognized rating agency) and (d) investments in money market funds complying
with the risk limiting conditions under Rule 2a-7 or any successor rule of the
SEC under the Investment Company Act.
"Code" means the Internal Revenue Code of 1986, as amended,
"Consolidated Cash Flow" for any period means the Consolidated Net Income
for such period, plus the following (without duplication) to the extent deducted
in calculating such Consolidated Net Income: (i) provision for income taxes
based on income or profits of such Person and its Subsidiaries for such period,
to the extent that such provision for taxes was deducted in computing such
Consolidated Net Income, (ii) Consolidated Interest Expense, (iii) depreciation
expense, (iv) amortization expense (including amortization of goodwill and other
intangibles), (v) non-cash management compensation expense, (vi) Management
Fees; (vii) any increase in cost of sales resulting from the write-up of
inventory in accordance with Accounting Principles Board Opinion No. 16 (or a
successor provision) and (viii) all other non-cash items reducing Consolidated
Net Income (excluding any non-cash item to the extent it requires an accrual of
or reserve for cash disbursements for any future period), in each case for such
period, (ix) any extraordinary, non-recurring or unusual loss plus any net loss
realized in connection with an asset disposition and (x) all premiums or
prepayments of Indebtedness and minus (xi) all non-cash items increasing
Consolidated Net Income.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of Consolidated Cash Flow for the period of
the most recent four consecutive fiscal quarters for which internal financial
information is available ending at least 30 days prior to the date of such
determination to (ii) Consolidated Interest Expense for such four fiscal
quarters; provided, however, that, without duplication, (1) if the Company or
any Restricted Subsidiary has Incurred any Indebtedness (other than in the case
of Indebtedness arising under revolving credit borrowings, in which case
Consolidated Interest Expense shall be computed based upon the average daily
balance of such Indebtedness during the period) since the beginning of such
period that remains outstanding or if the transaction giving rise to the need to
calculate the Consolidated Coverage Ratio is an Incurrence of Indebtedness, or
both, Consolidated Cash Flow and Consolidated Interest Expense for such period
shall be calculated after giving effect on a pro forma basis to such
Indebtedness as if such Indebtedness had been Incurred on the first day of such
period and the discharge
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of any other Indebtedness repaid, repurchased, defeased or otherwise discharged
with the proceeds of such new Indebtedness as if such discharge had occurred on
the first day of such period, (2) if since the beginning of such period the
Company or any Restricted Subsidiary shall have made any Asset Disposition or if
the transaction giving rise to the need to calculate the Consolidated Coverage
Ratio is an Asset Disposition, the Consolidated Cash Flow for such period shall
be reduced by an amount equal to the Consolidated Cash Flow (if positive)
directly attributable to the assets which are the subject of such Asset
Disposition for such period, or increased by an amount equal to the Consolidated
Cash Flow (if negative) directly attributable thereto for such period and
Consolidated Interest Expense for such period shall be reduced by an amount
equal to the Consolidated Interest Expense directly attributable to any
Indebtedness of the Company or any Restricted Subsidiary repaid, repurchased,
defeased or otherwise discharged with respect to the Company and its continuing
Restricted Subsidiaries in connection with such Asset Disposition for such
period (and, if the Capital Stock of any Restricted Subsidiary is sold, the
Consolidated Interest Expense for such period directly attributable to the
Indebtedness of such Restricted Subsidiary to the extent the Company and its
continuing Restricted Subsidiaries are no longer liable for such Indebtedness
after such sale), (3) if since the beginning of such period the Company or any
Restricted Subsidiary (by merger or otherwise) shall have made an Investment in
any Restricted Subsidiary (or any Person which becomes a Restricted Subsidiary)
or an acquisition of assets, including any acquisition of assets occurring in
connection with a transaction causing a calculation to be made hereunder, which
constitutes all or substantially all of an operating unit of a business,
Consolidated Cash Flow and Consolidated Interest Expense for such period shall
be calculated after giving pro form effect thereto (including the Incurrence or
retirement of any Indebtedness) as if such Investment or acquisition occurred on
the first day of such period and Consolidated Cash Flow for such period shall be
calculated without giving effect to clause (ii) set forth in the definition of
Consolidated Net Income and (4) if since the beginning of such period any Person
(that subsequently became a Restricted Subsidiary or was merged with or into the
Company or any Restricted Subsidiary since the beginning of such period) shall
have made any Asset Disposition or any Investment that would have required an
adjustment pursuant to clause (2) or (3) above if made by the Company or a
Restricted Subsidiary during such period, Consolidated Cash Flow and
Consolidated Interest Expense for such period shall be calculated after giving
pro forma effect thereto as if such Asset Disposition or Investment occurred on
the first day of such period. For purposes of this definition, whenever pro
forma effect is to be given to an acquisition of assets, the amount of income or
earnings relating thereto and the amount of Consolidated Interest Expense
associated with any Indebtedness Incurred in connection therewith, the pro forma
calculations shall be determined in good faith by a responsible financial or
accounting officer of the Company. If any Indebtedness bears a floating rate of
interest and is being given pro forma effect, the interest expense on such
Indebtedness shall be calculated as if the rate in effect on the date of
determination had been the applicable rate for the entire period (taking into
account any Interest Rate Agreement applicable to such Indebtedness).
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and is consolidated Restricted Subsidiaries, plus, to the
extent not included in such interest expense, without duplication (i) interest
expense attributable to capital leases, (ii) amortization of debt discount and
debt issuance cost (excluding the amortization of deferred financing fees),
(iii) capitalized interest, (iv) non-cash interest expense, (v) commissions,
discounts and other fees and charges owed with respect to letters of credit and
bankers' acceptance financing, (vi) interest actually paid by the Company or any
such Restricted Subsidiary under any Guarantee of Indebtedness or other
obligation of any other Person, (vii) net costs associated with Hedging
Obligations (including amortization of fees), (viii) (A) Disqualified Stock
dividends and (B) Preferred Stock dividends of a Restricted Subsidiary that is
not a Subsidiary Guarantor, in each case other than dividends paid in Capital
Stock (except Disqualified Stock) and only in respect of such Disqualified Stock
or Preferred Stock held by Persons other than the Company or a Wholly Owned
Subsidiary and (ix) the cash contributions to any employee stock ownership plan
or similar trust to the extent such contributions are used by such plan or trust
to pay interest or fees to any Person (other than the Company) in connection
with Indebtedness Incurred by such plan or trust; provided, however, that there
shall be excluded therefrom any such interest expense of any Unrestricted
Subsidiary to the extent the related Indebtedness is not Guaranteed or paid by
the Company or any Restricted Subsidiary.
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"Consolidated Net Income" means, for any period, the net income (loss) of
the Company and its consolidated Subsidiaries; provided, however, that there
shall not be included in such Consolidated Net Income:
(i) any net income (loss) of any Person (other than the Company) if
such Person is not a Restricted Subsidiary, except that (A), subject to the
limitations contained in clause (iv) below, the Company's equity in the net
income of any such Person for such period shall be included in such
Consolidated Net Income up to the aggregate amount of cash actually
distributed by such Person during such period to the Company or a
Restricted Subsidiary as a dividend or other distribution (subject, in the
case of a dividend or other distribution paid to a Restricted Subsidiary,
to the limitations contained in clause (iii) below) and (B) the Company's
equity in a net loss of any such Person (other than an Unrestricted
Subsidiary) for such period shall be included in determining such
Consolidated Net Income,
(ii) any net income (loss) of any Person acquired by the Company or a
Subsidiary in a pooling of interests transaction for any period prior to
the date of such acquisition,
(iii) any net income of any Restricted Subsidiary to the extent such
Restricted Subsidiary is prohibited, directly or indirectly, from paying
dividends or distributions, directly or indirectly, to the Company or any
other Restricted Subsidiary (at the time of determination of Consolidated
Net Income), except that (A) subject to the exclusion contained in clause
(iv) below, the Company's equity in the net income of any such Restricted
Subsidiary for such period shall be included in such Consolidated Net
Income up to the aggregate amount of cash actually distributed by such
Restricted Subsidiary during such period to the Company or another
Restricted Subsidiary as a dividend or other distribution (subject, in the
case of a dividend paid to another Restricted Subsidiary, to the limitation
contained in this clause) and (B) the Company's equity in a net loss of any
such Restricted Subsidiary for such period shall be included in determining
such Consolidated Net Income,
(iv) any gain or loss realized upon the sale or other disposition of
any property, plant or equipment of the Company or its consolidated
Subsidiaries (including pursuant to any Sale/Leaseback Transaction) which
is not sold or otherwise disposed of in the ordinary course of business and
any gain or loss realized upon the sale or other disposition of any Capital
Stock of any Person,
(v) any extraordinary gain or loss,
(vi) the cumulative effect of a change in accounting principles,
(vii) foreign currency exchange gains and losses,
(viii) any income (loss) from discontinued operations, and
(ix) the tax effect of any of the items described in clauses (i) thru
(viii) above; provided further, however, that for purposes of any
determination pursuant to the covenant described under "Certain
Covenants -- Limitation on Restricted Payments" there will be deducted from
the Consolidated Net Income of the Company and the Restricted Subsidiaries
for such period an amount equal to the Permitted Quarterly Tax
Distributions for such period, whether or not distributed.
Notwithstanding the foregoing, for the purpose of the covenant described
under "-- Certain Covenants -- Limitation on Restricted Payments" only, there
shall be excluded from Consolidated Net Income any dividends, repayments of
loans or advances or other transfers of assets from Unrestricted Subsidiaries to
the Company or a Restricted Subsidiary to the extent such dividends, repayments
or transfers increase the amount of Restricted Payments permitted under such
covenant pursuant to clause (a)(3)(D) thereof.
"Consolidated Net Worth" means with respect to the Company and its
Restricted Subsidiaries at any date, determined on a consolidated basis in
accordance with GAAP, the consolidated stockholders' equity, partners' capital
or members' capital of the Company and its Restricted Subsidiaries less the
amount of such stockholders' equity, partners' capital or members' capital
attributable to Disqualified Stock.
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"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement designed to protect
such Person against fluctuations in currency values.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
which by its terms (or by the terms of any security into which it is convertible
or for which it is exchangeable) or upon the happening of any event (i) matures
or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise,
(ii) is convertible or exchangeable automatically or at the option of the holder
thereof, for Indebtedness or other Disqualified Stock or (iii) is redeemable by
such Person at the option of the holder thereof in whole or in part, in each
case on or prior to the 365th day following the Stated Maturity of the Notes.
"Dyson Family Member" means any of (i) John S. Dyson's spouse; (ii) his
issue; (iii) the respective executors, administrators, committees, conservators,
guardians or custodians or donees of powers during the minority of or with
respect to any of the Persons referred to in clauses (i) and (ii) of this
definition; or (iv) the trustee or trustees of any inter vivos or testamentary
trust created for the benefit of John S. Dyson or any of the persons in clauses
(i) and (ii) of this definition.
"Equity Offering" means a public or private offering of common stock (other
than public offerings with respect to the Company's or Parent's common stock
registered on Form S-8) of the Company or Parent for aggregate gross proceeds to
the Company or Parent of at least $15.0 million.
"Estimation Period" means the period for which a Taxpayer is required to
estimate for Federal income tax purposes his allocation of taxable income from
the Company during a calendar year in connection with determining his estimated
federal income tax liability for such period.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Foreign Subsidiary" means any Subsidiary which is incorporated or
otherwise organized under the laws of any jurisdiction other than the United
States of America, any state thereof or the District of Columbia.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the date of the Indenture, including those 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 approved by a significant segment of the
accounting profession. All ratios and computations based on GAAP contained in
the Indenture shall be computed in conformity with GAAP.
"Guarantee" means a guarantee, 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; provided, however,
that the term "Guarantee" shall not include endorsements for collection or
deposit in the ordinary course of business. The term "Guarantee" used as a verb
has a corresponding meaning.
"Guarantor Subordinated Obligation" means, with respect to a Subsidiary
Guarantor, any Indebtedness of such Subsidiary Guarantor (whether outstanding on
the Issue Date or thereafter Incurred) which is subordinate or junior in right
of payment to the obligations of such Subsidiary Guarantor under the Subsidiary
Guarantee pursuant to a written agreement.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.
"Holder" or "Noteholder" or "Securityholder" means the Person in whose name
a Note is registered on the Registrar's books.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness or Disqualified Stock of a Person
existing at the time such Person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be Incurred by such
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Subsidiary at the time it becomes a Subsidiary. The term "Incurrence" when used
as a noun shall have a correlative meaning.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication),
(i) the principal of and, if any is due and payable at such time,
premium in respect of indebtedness of such Person for borrowed money,
(ii) the principal of and, if any is due and payable at such time,
premium in respect of obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments,
(iii) all obligations of such Person in respect of unreimbursed
drawings under letters of credit or other similar instruments (including
reimbursement obligations with respect thereto) (other than letters of
credit securing obligations entered into in the ordinary course of business
to the extent any drawings thereunder are reimbursed no later than the
fifth Business Day following receipt by such Person of a demand for
reimbursement following payment on the letter of credit),
(iv) all obligations of such Person to pay the deferred and unpaid
purchase price of property or services (except Trade Payables), which
purchase price is due more than six months after the date of placing such
property in service or taking delivery and title thereto or the completion
of such services,
(v) all Capitalized Lease Obligations of such Person,
(vi) the amount of all obligations of such Person with respect to the
redemption, repayment or other repurchase of any Disqualified Stock or,
with respect to any Restricted Subsidiary that is not a Subsidiary
Guarantor, the aggregate liquidation preference of any Preferred Stock (but
excluding, in each case, any accrued dividends),
(vii) all Indebtedness of other Persons secured by a Lien on any asset
of such Person, whether or not such Indebtedness is assumed by such Person;
provided, however, that the amount of such Indebtedness shall be the lesser
of (A) the fair market value of such asset at such date of determination
and (B) the amount of such Indebtedness of such other Person,
(viii) all Indebtedness of other Persons to the extent Guaranteed by
such Person,
(ix) to the extent not otherwise included in this definition, Hedging
Obligations, and,
(x) Acquired Indebtedness.
The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date of all unconditional obligations as described
above (or the accreted value thereof, in the case of Indebtedness that does not
require current payments of interest) and the maximum liability, upon the
occurrence of the contingency giving rise to the obligation, of any contingent
obligations at such date. Indebtedness shall not include interest or commitment
or other fees.
"Interest Rate Agreement" means with respect to any Person any interest
rate protection agreement, interest rate future agreement, interest rate option
agreement, interest rate swap agreement, interest rate cap agreement, interest
rate collar agreement, interest rate hedge agreement or other similar agreement
or arrangement as to which such Person is party or a beneficiary.
"Investment" in any Person means any direct or indirect advance, loan
(other than advances to customers in the ordinary course of business that are
recorded as accounts receivable on the balance sheet of such Person and advances
to employees of such Person and its Restricted Subsidiaries made in the ordinary
course of business) or other extension of credit (including by way of Guarantee
or similar arrangement) or capital contribution to (by means of any transfer of
cash or other property to others or any payment for property or services for the
account or use of others), or any purchase or acquisition for consideration of
Capital Stock, Indebtedness or other similar instruments issued by such Person;
provided that if the sole consideration for any such investment is Capital Stock
of such Person or its Subsidiaries that is not Disqualified Stock, then such
investment shall not be deemed an Investment for purposes of the Indenture.
"Investment" shall exclude extensions of trade credit by the Company and its
Restricted Subsidiaries on
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commercially reasonable terms in accordance with such Person's normal trade
practices. For purposes of the definition of "Unrestricted Subsidiary" and the
"Limitation on Restricted Payments" covenant, (i) "Investment" shall include the
portion (proportionate to the Company's equity interest in such Subsidiary) of
the fair market value of the net assets of any Subsidiary of the Company at the
time that such Subsidiary is designated an Unrestricted Subsidiary; provided,
however, that upon a redesignation of such Subsidiary as a Restricted
Subsidiary, the Company shall be deemed to continue to have a permanent
"Investment" in an Unrestricted Subsidiary in an amount (if positive) equal to
(x) the Company's "Investment" in such Subsidiary at the time of such original
designation less (y) the portion (proportionate to the Company's equity interest
in such Subsidiary) of the fair market value of the net assets of such
Subsidiary at the time that such Subsidiary is so re-designated a Restricted
Subsidiary; and (ii) any property transferred to or from an Unrestricted
Subsidiary shall be valued at its fair market value at the time of such
transfer, in each case as determined in good faith by the Board of Directors.
For the purposes of calculating the amount of other "Investments," including
Permitted Investments, the amount of any Investment shall be the original cost
of such Investment plus the cost of all additional Investments by the Company or
any of its Restricted Subsidiaries, without any adjustments for increases or
decreases in value, or write-ups, write-downs or write-offs with respect to such
Investment, reduced by the payment of dividends or distributions in connection
with such Investment or any other amounts received in respect of such
Investment; provided that no such payment of dividends or distributions or
receipt of any such other amounts shall reduce the amount of any Investment if
such payment of dividends or distributions or receipt of any such amounts would
be included in Consolidated Net Income.
"Issue Date" means the date on which the Notes are originally issued.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Management Agreement" means the Management Agreement, dated May 28, 1998,
between the Company, certain of its Subsidiaries and Millbrook Capital
Management, Inc., as it may be amended, modified, supplemented or restated from
time to time. See "Certain Transactions."
"Management Fee" means those certain fees (excluding reimbursements of
out-of-pocket expenses) payable under the Management Agreement.
"Net Available Cash" from an Asset Disposition means cash payments received
(including any cash payments received by way of deferred payment of principal
pursuant to a Note or installment receivable or otherwise, but only as and when
received, but excluding any other consideration received in the form of
assumption by the acquiring Person of Indebtedness or other obligations relating
to such properties or assets or received in any other non-cash form) therefrom,
in each case net of (i) all legal, accounting, investment banking, financial
advisory, brokerage, consultant, title and recording tax expenses, commissions
and other fees and expenses incurred, and provision for all Federal, state,
provincial, foreign and local taxes payable (and all tax liability of the
Taxpayers determined without regard to any other tax items of the Company or the
Taxpayer and assuming the Taxpayer is subject to taxation at the highest
applicable marginal rates), in each such case as a consequence of such Asset
Disposition, (ii) all payments made on any Indebtedness which is secured by any
assets subject to such Asset Disposition, in accordance with the terms of any
Lien upon such assets, or which must by its terms, or in order to obtain a
necessary consent to such Asset Disposition, or by applicable law be repaid out
of the proceeds from such Asset Disposition, (iii) all distributions and other
payments required to be made to minority interest holders in Subsidiaries or
joint ventures as a result of such Asset Disposition, and (iv) the deduction of
appropriate amounts to be provided by the seller as a reserve, in accordance
with GAAP, against any liabilities associated with the assets disposed of in
such Asset Disposition and retained by the Company or any Restricted Subsidiary
after such Asset Disposition, including, without limitation, in respect of sales
price adjustments, pension and other post-employment benefit liabilities and
liabilities related to indemnification obligations associated with the assets
sold or disposed of in such Asset Disposition.
"Net Cash Proceeds," with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees,
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discounts or commissions and brokerage, consultant and other fees actually
incurred in connection with such issuance or sale and net of taxes paid or
payable (and all tax liability of the Taxpayers determined without regard to any
other tax items of the Company or the Taxpayer determined and assuming the
Taxpayer is subject to taxation at the highest applicable marginal rates) as a
result thereof.
"New Credit Facility" means that certain credit facility entered into in
July 1998 among the Company (as borrower), the Subsidiary Guarantors, and the
lenders from time to time party thereto, including all collateral documents,
instruments and agreements executed in connection therewith, and the term New
Credit Facility shall also include any amendments, supplements, modifications,
extensions, renewals, restatements or refundings thereof and any new or
subsequent loan or credit facilities or agreements that replace, refund or
refinance any part of the loans, other credit facilities or commitments
thereunder, including any such replacement, refunding or refinancing facility
that increases the amount borrowable thereunder or alters the maturity thereof,
and regardless of the lenders party thereto.
"Non-Recourse Debt" means Indebtedness (i) as to which neither the Company
nor any Restricted Subsidiary (a) provides any Guarantee or credit support of
any kind (including any undertaking, Guarantee, indemnity, agreement or
instrument that would constitute Indebtedness) or (b) is directly or indirectly
liable (as a guarantor or otherwise) and (ii) no default with respect to which
(including any rights that the holders thereof may have to take enforcement
action against an Unrestricted Subsidiary) would permit (upon notice, lapse of
time or both) any holder of any other Indebtedness of the Company or any
Restricted Subsidiary to declare a default under such other Indebtedness or
cause the payment thereof to be accelerated or payable prior to its stated
maturity.
"Obligations" means any principal, interest, penalties, fees, indemnities,
damages and other liabilities payable under the instruments governing, or under
agreements entered into in connection with, any Indebtedness.
"Permitted Business" means the business of the Company and the Restricted
Subsidiaries on the date of the Indenture and any business related, ancillary or
complementary thereto, or which is an extension thereof, or which involves the
light manufacturing of component products being sold to OEM markets. The
determination of whether a business is a Permitted Business shall be made by the
Company in good faith.
"Permitted Holders" means (i) John S. Dyson, (ii) any Dyson Family Member,
(iii) any trustee of any voting or "blind" trust established with respect to
investments of or assets held by John S. Dyson or any Dyson Family Member as a
consequence of or during the period of service by John S. Dyson as an appointed
or elected public official, of which Clay B. Lifflander (or, following his death
or disability, another member of the management of the Parent or the Company),
either individually or together with one or more additional trustees, are
trustees and (iv) Clay B. Lifflander.
"Permitted Investment" means an Investment by the Company or any Restricted
Subsidiary in (i) the Company or in a Restricted Subsidiary or a Person which
will, upon the making of such Investment, become a Restricted Subsidiary;
provided, however, that the primary business of such Restricted Subsidiary is a
Permitted Business; (ii) another Person if as a result of such Investment such
other Person is merged or consolidated with or into, or transfers or conveys all
or substantially all its assets to, the Company or a Restricted Subsidiary;
provided, however, that such Person's primary business is a Permitted Business;
(iii) Temporary Cash Investments; (iv) receivables owing to the Company or any
Restricted Subsidiary, if created or acquired in the ordinary course of business
and payable or dischargeable in accordance with customary trade terms; provided,
however, that such trade terms may include such concessionary trade terms as the
Company or any such Restricted Subsidiary deems reasonable under the
circumstances; (v) payroll, travel, relocation and similar advances to cover
matters that are expected at the time of such advances ultimately to be treated
as expenses for accounting purposes and that are made in the ordinary course of
business; (vi) loans or advances to employees made in the ordinary course of
business of the Company or such Restricted Subsidiary; (vii) stock, obligations
or securities received in settlement of debts created in the ordinary course of
business and owing to the Company or any Restricted Subsidiary or in
satisfaction of judgments; (viii) Guarantees permitted to be made pursuant to
the covenant "Limitation on Indebtedness and Preferred Stock"; (ix) Investments
in securities of trade creditors received in settlement of obligations or
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pursuant to any plan of reorganization or similar arrangement upon the
bankruptcy or insolvency of any trade creditors of customers, (x) Currency
Agreements and Interest Rate Agreements entered into in the ordinary course of
business; provided that such agreements are entered into for bona fide hedging
purposes, are not for speculation or trading purposes and are designed to
protect against fluctuations in interest rates, currency exchange rates or
commodity prices, as the case may be, and, in the case of Interest Rate
Agreements, any such Interest Rate Agreement has a notional amount corresponding
to the Indebtedness being hedged thereby, (xi) Investments made by the Company
or a Restricted Subsidiary in connection with an Asset Disposition made in
compliance with the covenant "Limitation on Sales of Assets and Subsidiary
Stock," (xii) any acquisition of assets of a Permitted Business solely in
exchange for the issuance of Capital Stock (other than Disqualified Stock) of
the Company; and (xiii) any Investment existing on the date of the Indenture.
"Permitted Liens" means (i) Liens securing Indebtedness under the New
Credit Facility; (ii) Liens securing Indebtedness Incurred for the purpose of
financing all or a part of the purchase price of Additional Assets; (iii) Liens
in favor of the Company or any Restricted Subsidiary; (iv) Liens on property of
a Person existing at the time such Person becomes a Subsidiary of the Company or
is merged into or consolidated with the Company or any Subsidiary of the
Company, provided that such Liens were in existence prior to the time such
Person becomes a Subsidiary or the contemplation of such merger or consolidation
and do not extend to any assets other than those of the Person merged into or
consolidated with the Company; (v) Liens on property existing at the time of
acquisition thereof by the Company or any Subsidiary of the Company, provided
that such Liens were in existence prior to the contemplation of such
acquisition; (vi) Liens to secure Indebtedness permitted by clauses (vi) and
(viii) of the second paragraph of the covenant entitled "-- Limitation on
Indebtedness and Preferred Stock;" (vii) Liens to secure Indebtedness (including
Capital Lease Obligations) permitted by clause (ix) of the second paragraph of
the covenant entitled "-- Limitation on Indebtedness and Preferred Stock"
covering only the assets acquired with such Indebtedness; (viii) Liens existing
on the date of the Indenture; (ix) Liens for taxes, assessments or governmental
charges or claims that are not yet delinquent or that are being contested in
good faith by appropriate proceedings promptly instituted and diligently
concluded, provided that any reserve or other appropriate provision as shall be
required in conformity with GAAP shall have been made therefor; (x) statutory
Liens or landlords', carriers', warehousemens', mechanics', suppliers' or
similar Liens Incurred in the ordinary course of business of the Company or any
Subsidiary of the Company; (xi) easements, minor title defects, irregularities
in title or other charges or encumbrances on property not interfering in any
material respect with the use of such property by the Company or a Subsidiary of
the Company; (xii) Liens Incurred or deposits made in the ordinary course of
business in connection with workers' compensation, unemployment insurance and
other types of social security; (xiii) liens securing industrial revenue bonds
or other tax-favored financing; (xiv) deposit arrangements entered into in
connection with acquisitions or in the ordinary course of business; and (xv) any
extensions, substitutions, replacements or renewals of the foregoing.
"Permitted Quarterly Tax Distributions" means quarterly distributions of
Tax Amounts determined on the basis of the annualized estimated taxable income
of the Company and its consolidated subsidiaries for the related Estimation
Period, but not less than the minimum amount, based upon the prior tax year's
tax liability (taking into account only tax items attributable to the Company)
required to avoid any underpayment penalties or interest, provided, however,
that (A) prior to any distributions of Tax Amounts the Company shall deliver an
officers' certificate certifying that the Tax Amounts to be distributed were
determined pursuant to the terms of the Indenture and stating to the effect that
the Company is disregarded or is treated as a pass-through entity for Federal
income tax purposes and whether or not the Parent is a pass-through entity for
the relevant period and (B) at the time of such distributions, the most recent
audited financial statements of the Company reflect that the Company was
disregarded or treated as a pass-through entity for Federal income tax purposes
for the period covered by such financial statements.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.
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"Preferred Stock", as applied to the Capital Stock of any corporation,
means Capital Stock of any class or classes (however designated) which is
preferred as to the payment of dividends, or as to the distribution of assets
upon any voluntary or involuntary liquidation or dissolution of such
corporation, over shares of Capital Stock of any other class of such
corporation.
"Refinancing Indebtedness" means Indebtedness issued in exchange for, or
that refunds, refinances, replaces, renews, repays or extends (including
pursuant to any defeasance or discharge mechanism) (collectively, "refinances,"
and "refinanced" shall have a correlative meaning) any Indebtedness existing on
the date of the Indenture or Incurred in compliance with the Indenture
(including Indebtedness of the Company that refinances Indebtedness of any
Restricted Subsidiary and Indebtedness of any Restricted Subsidiary that
refinances Indebtedness of another Restricted Subsidiary) including Indebtedness
that refinances other Refinancing Indebtedness; provided, however, that (i) the
Refinancing Indebtedness has a Stated Maturity no earlier than the Stated
Maturity of the Indebtedness being refinanced (or, if earlier, the Notes), (ii)
the Refinancing Indebtedness has an Average Life at the time such Refinancing
Indebtedness is Incurred that is equal to or greater than the Average Life of
the Indebtedness being refinanced, and (iii) such Refinancing Indebtedness is
Incurred in an aggregate principal amount (or if issued with original issue
discount, an aggregate issue price) that is equal to or less than the sum of the
aggregate principal amount (or if issued with original issue discount, the
aggregate accreted value) then outstanding of the Indebtedness being refinanced
plus the amount of reasonable fees and expenses and prepayment premiums Incurred
in connection with such refinancing; provided further, however, that Refinancing
Indebtedness shall not include (x) Indebtedness of a Restricted Subsidiary which
is not a Subsidiary Guarantor that refinances Indebtedness of the Company or (y)
Indebtedness of the Company or a Restricted Subsidiary that refinances
Indebtedness of an Unrestricted Subsidiary (unless such Unrestricted Subsidiary
is concurrently redesignated a Restricted Subsidiary).
"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby the Company or a Restricted Subsidiary
transfers such property to a Person (other than to the Company or a Restricted
Subsidiary) and the Company or a Restricted Subsidiary leases it from such
Person.
"SEC" means the U.S. Securities and Exchange Commission.
"Secured Indebtedness" means any Indebtedness of the Company or a
Subsidiary Guarantor secured by a Lien.
"Senior Indebtedness" means all Indebtedness of the Company including
interest thereon, whether outstanding on the Issue Date or thereafter Incurred,
unless in the instrument creating or evidencing the same or pursuant to which
the same is outstanding it is provided that such obligations are subordinated in
right of payment to the Notes; provided, however, that Senior Indebtedness shall
not include (1) any obligation of the Company to any subsidiary, (2) any
liability for Federal, state, local or other taxes owed or owing by the Company,
(3) any accounts payable or other liability to trade creditors arising in the
ordinary course of business (including Guarantees thereof or instruments
evidencing such liabilities), (4) any Indebtedness, Guarantee or obligation of
the Company which is subordinate or junior in any respect to any other
Indebtedness, Guarantee or obligation of the Company, including any Subordinated
Obligations, (5) any obligations with respect to any Capital Stock, (6)
Indebtedness which, when Incurred and without respect to any election under
Section 1111(b) of Title 11, United States code, is without recourse to the
Company, or (7) any Indebtedness Incurred in violation of the Indenture.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at
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the option of the holder thereof upon the happening of any contingency unless
such contingency has occurred).
"Subordinated Obligation" means any Indebtedness of the Company (whether
outstanding on the Issue Date or thereafter Incurred) which is subordinate or
junior in right of payment to the Notes pursuant to a written agreement.
"Subsidiary" of any Person means any corporation, association, partnership
or other business entity of which more than 50% of the total voting power of
shares of Capital Stock or other interests (including partnership interests)
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by (i) such Person, (ii) such Person and one
or more Subsidiaries of such Person or (iii) one or more Subsidiaries of such
Person.
"Subsidiary Guarantee" means the Guarantee by a Subsidiary Guarantor of the
Company's obligations with respect to the Notes.
"Subsidiary Guarantor" means each Subsidiary of the Company existing on the
Issue Date and each new Subsidiary (other than Foreign Subsidiaries and
Unrestricted Subsidiaries) that guarantees the Company's obligations with
respect to the Notes.
"Tax Amounts" with respect to any taxable period shall not exceed an amount
equal to (A) the product of (x) the taxable income of the Company and its
consolidated Subsidiaries for such period as determined by the Tax Amounts CPA
and (y) the Tax Percentage reduced by (B) to the extent not previously taken
into account, any income tax benefit attributable to the tax items of the
Company and its consolidated Subsidiaries which could legally be realized
(without regard to the actual realization) by the Taxpayers with respect to tax
items of the Company and its consolidated subsidiaries in the current or any
prior taxable year, or portion thereof, commencing on or after the Issue Date
(including any tax losses or tax credits up to the aggregate amount of income
tax benefits previously legally realizable by the Taxpayers), computed at the
applicable Tax Percentage for the year that such benefit is taken into account
for purposes of this computation.
"Tax Amounts CPA" means a nationally recognized certified public accounting
firm.
"Taxpayer(s)" means, (i) for any period when Parent is a pass through
entity for federal income tax purposes, the stockholders of Parent and (ii) for
any period when the Parent is not a pass through entity for federal income tax
purposes, the Parent.
"Tax Percentage" means, for a particular taxable year, the highest
effective marginal combined rate of Federal, state and local income tax, imposed
on any Taxpayer, as certified by the Tax Amounts CPA in a certificate filed with
the Trustee. The rate of "state income tax" to be taken into account for
purposes of determining the Tax Percentage for a particular taxable year shall
be deemed to be the highest state marginal tax rate applicable to any Taxpayer.
"Temporary Cash Investments" means any of the following: (i) any investment
in direct obligations of the United States of America or any agency thereof or
obligations Guaranteed by the United States of America or any agency thereof,
(ii) investments in time deposit accounts, certificates of deposit, eurodollar
time deposits, bankers' acceptances and money market deposits maturing within
360 days of the date of acquisition thereof issued by a bank or trust company
which is organized under the laws of the United States of America, any state
thereof or any foreign country recognized by the United States of America having
capital, surplus and undivided profits aggregating in excess of $500,000,000 (or
the foreign currency equivalent thereof) and whose long-term debt is rated "A"
(or such similar equivalent rating) or higher by at least one nationally
recognized statistical rating organization (as defined in Rule 436 under the
Securities Act), (iii) repurchase obligations with a term of not more than 30
days for underlying securities of the types described in clause (i) above
entered into with a bank meeting the qualifications described in clause (ii)
above, (iv) investments in commercial paper, maturing not more than 270 days
after the date of acquisition, issued by a corporation (other than an Affiliate
of the Company) organized and in existence under the laws of the United States
of America or any foreign country recognized by the United States of America
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with a rating at the time as of which any investment therein is made of "P-1"
(or higher) according to Moody's Investors Service, Inc. or "A-1" (or higher)
according to Standard & Poor's Ratings Group, (v) investments in securities with
maturities of six months or less from the date of acquisition issued or fully
guaranteed by any state, commonwealth or territory of the United States of
America, or by any political subdivision or taxing authority thereof, and rated
at least "A" by Standard & Poor's Ratings Group or "A" by Moody's Investors
Service, Inc. and (vi) investment funds registered under the Investment Company
Act of 1940, as amended, investing at least 95% of their assets in securities of
any of the types described in clauses (i) through (v) above.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C.
sec.sec.77aaa-77bbbb) as in effect on the date of the Indenture.
"Trade Payables" means, with respect to any Person, any accounts payable or
any indebtedness or monetary obligation to trade creditors created, assumed or
Guaranteed by such Person arising in the ordinary course of business in
connection with the acquisition of goods or services.
"Treasury Rate" means the yield to maturity at the time of computation of
United States Treasury securities with a constant maturity (as compiled and
published in the most recent Federal Reserve Statistical Release H:15(519) which
has become publicly available at least two Business Days prior to the Redemption
Date (or, if such Statistical Release is no longer published, any publicly
available source or similar market data)) most nearly equal to the period from
the Redemption Date to the Stated Maturity; provided, however, that if the
period from the Redemption Date to the Stated Maturity is not equal to the
constant maturity of a United States Treasury security for which a weekly
average yield is given, the Treasury Rate shall be obtained by linear
interpolation (calculated to the nearest one-twelfth of a year) from the weekly
average yields of United States Treasury securities for which such yields are
given, except that if the period from the Redemption Date to the Stated Maturity
is less than one year, the weekly average yield on actually traded United States
Treasury securities adjusted to a constant maturity of one year shall be used.
"True-up Amount" means, in respect of a particular taxable year, an amount
determined by the Tax Amounts CPA equal to the difference between (i) the
aggregate Permitted Quarterly Tax Distributions actually distributed in respect
of such taxable year and (ii) the actual Tax Amounts for such year. For purposes
of this Agreement, the amount equal to the excess, if any, of the amount
described in clause (i) over the amount described in clause (ii) above shall be
referred to as the "True-up Amount due to the Company" and the excess, if any,
of the amount described in clause (ii) over the amount described in clause (i)
above shall be referred to as the "True-up Amount due to the Taxpayers."
"True-up Determination Date" means the date on which the Tax Amounts CPA
delivers a statement to the Trustee indicating the True-up Amount.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of
the Company (including any newly acquired or newly formed Subsidiary of the
Company) to be an Unrestricted Subsidiary unless such Subsidiary or any of its
Subsidiaries owns any Capital Stock or Indebtedness of, or owns or holds any
Lien on any property of, the Company or any other Subsidiary of the Company that
is not a Subsidiary of the Subsidiary to be so designated; provided, however,
that either (A) the Subsidiary to be so designated has total consolidated assets
of $10,000 or less or (B) if such Subsidiary has consolidated assets greater
than $10,000, then such designation would be permitted under "Limitation on
Restricted Payments." The Board of Directors may designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; provided, however, that immediately
after giving effect to such designation (x) the Company could Incur $1.00 of
additional Indebtedness under clause (a) of "Limitation on Indebtedness and
Preferred Stock" and (y) no Default shall have occurred and be continuing. Any
such designation by the Board of Directors shall be evidenced to the Trustee by
promptly filing with the Trustee a copy of the Board Resolution giving effect to
such designation and an Officers' Certificate certifying that such designation
complied with the foregoing provisions. Notwithstanding the foregoing, Finance
Corp. may not be designated an Unrestricted Subsidiary.
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"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable or redeemable at the issuer's option.
"Voting Stock" of a corporation means all classes of Capital Stock of such
corporation then outstanding and normally entitled to vote in the election of
directors.
"Wholly Owned Subsidiary" means a Restricted Subsidiary of the Company all
the Capital Stock of which (other than directors' qualifying shares) is owned by
the Company or another Wholly Owned Subsidiary.
BOOK-ENTRY; DELIVERY AND FORM
Except as set forth below, the New Notes will initially be issued in the
form of one or more registered notes in global form without coupons (each a
"Global Note"). Each Global Security will be deposited with the Trustee as
custodian (the "Custodian") for DTC, and registered in the name of the DTC or a
nominee thereof. The Global Notes will be subject to certain restrictions on
transfer set forth in the Indenture.
DTC has advised the Company that it is (i) a limited purpose trust company
organized under the laws of the State of New York, (ii) a member of the Federal
Reserve System, (iii) a "clearing corporation" within the meaning of the Uniform
Commercial Code, as amended, and (iv) a "Clearing Agency" registered pursuant to
Section 17A of the Exchange Act. DTC was created to hold securities for its
participants (collectively, the "Participants") and facilitates the clearance
and settlement of securities transactions between Participants through
electronic book-entry changes to the accounts of its Participants, thereby
eliminating the need for physical transfer and delivery of certificates. DTC's
Participants include securities brokers and dealers (including the Initial
Purchaser), banks and trust companies, clearing corporations and certain other
organizations. Indirect access to DTC's system is also available to other
entities such as banks, brokers, dealers and trust companies (collectively, the
"Indirect Participants") that clear through or maintain a custodial relationship
with a Participant, either directly or indirectly.
The Company expects that pursuant to procedures established by DTC (i) upon
deposit of the Global Notes, DTC will credit the accounts of Participants
designated by the Initial Purchasers with an interest in the Global Note and
(ii) ownership of the Notes will be shown on, and the transfer of ownership
thereof will be effected only through, records maintained by DTC (with respect
to the interest of Participants), the Participants and the Indirect
Participants. The laws of some states require that certain persons take physical
delivery in definitive form of securities that they own and that security
interests in negotiable instruments can only be perfected by delivery of
certificates representing the instruments. Consequently, the ability to transfer
interests in the New Notes represented by a Global Note to such persons in such
states may be limited.
Transfers between Participants will be effected in the ordinary way through
DTC's same-day funds systems in accordance with DTC rules and will be settled in
same-day funds. If a holder requires Certificated Securities for any reason,
including to sell Notes to persons in jurisdictions which require physical
delivery of Notes or to pledge such securities, such holder must transfer its
interest in a Global Note in accordance with the normal procedures of DTC and
with the procedures set forth in the Indenture. Consequently, the ability to
transfer Notes or to pledge the Notes as collateral will be limited to such
extent.
So long as DTC or its nominee is the registered owner of the Global Note,
DTC or such nominee, as the case may be, will be considered the sole owner or
Holder of the Notes represented by the Global Note for all purposes under the
Indenture. Except as provided below, owners of beneficial interests in a Global
Note will not be entitled to have Notes represented by such Global Note
registered in their names, will not receive or be entitled to receive physical
delivery of Certificated Securities, and will not be considered the owners or
holders thereof under the Indenture for any purpose, including with respect to
giving of any directions, instruction or approval to the Trustee thereunder. As
a result, the ability of a person having a beneficial interest in Notes
represented by a Global Note to pledge such interest to persons or entities that
do not participate in DTC's
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system or to otherwise take action with respect to such interest, may be
affected by the lack of a physical certificate evidencing such interest.
Each owner of a beneficial interest in a Global Note must rely on the
procedures of DTC and, if such owner is not a Participant or an Indirect
Participant, on the procedures of the Participant through which such owner owns
its interest, to exercise any rights of a Holder under the Indenture or such
Global Note. The Company understands that under existing industry practice, in
the event the Company requests any action of holders or an owner of a beneficial
interest in a Global Note desires to take any action that DTC, as the Holder of
such Global Note, is entitled to take, DTC would authorize the Participants to
take such action and the Participant would authorize persons owning through such
Participants to take such action or would otherwise act upon the instruction of
such person. Neither the Company nor the Trustee will have any responsibility or
liability for any aspect of the records relating to or payments made on account
of Notes by DTC, or for maintaining, supervising or reviewing any records of DTC
relating to such Notes.
Payments with respect to the principal of, premium, if any, and interest on
any Notes represented by a Global Note registered in the name of DTC or its
nominee on the applicable record date will be payable by the Trustee to or at
the direction of DTC or its nominee in its capacity as the registered Holder of
the Global Note representing such Notes under the Indenture. Under the terms of
the Indenture, the Company and the Trustee may treat the persons in whose names
the Notes, including the Global Notes, are registered as the owners thereof for
the purpose of receiving such payment and for any and all other purposes
whatsoever. Consequently, neither the Company nor the Trustee has or will have
any responsibility or liability for the payment of such amounts to beneficial
owners of Notes (including principal, premium, if any, and interest), or to
immediately credit the accounts of the relevant Participants with such payment,
in amounts proportionate to their respective holdings in principal amount of
beneficial interest in the Global Note as shown on the records of DTC. Payments
by the Participants and the Indirect Participants to the beneficial owners of
Notes will be governed by standing instructions and customary practice and will
be the responsibility of the Participants or the Indirect Participants.
Neither the Issuers nor the Trustee shall be liable for any delay by DTC or
any Participant or Indirect Participant in identifying the beneficial owners of
the related Notes and each such person may conclusively rely on, and shall be
protected in relying on, instructions from DTC for all purposes (including with
respect to the registration and delivery, and the respective principal amounts,
of the Notes to be issued).
CERTIFICATED SECURITIES
If (i) the Company notifies the Trustee in writing that DTC is no longer
willing or able to act as a depository and the Company is unable to locate a
qualified successor within 90 days, (ii) the Company, at its option, notifies
the Trustee in writing that it elects to cause the issuance of Notes in
definitive form under the Indenture or (iii) upon the occurrence of certain
other events, then, upon surrender by DTC of its Global Notes, Certificated
Securities will be issued to each person that DTC identifies as the beneficial
owner of the Notes represented by the Global Note. Upon any such issuance, the
Trustee is required to register such Certificated Securities in the name of such
person or persons (or the nominee of any thereof), and cause the same to be
delivered thereto.
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UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following presents the material United States Federal income tax
consequences of the acquisition, ownership and disposition of the Notes. This
summary applies only to a beneficial owner of a Note who acquires the Note at
the initial offering and for the original offering price thereof.
This summary is based on provisions of the "Code" existing and proposed
Treasury regulations promulgated thereunder (the "Treasury Regulations") and
administrative and judicial interpretations thereof, all as of the date hereof
and all of which are subject to change, possibly on a retroactive basis.
This summary does not address the tax consequences to subsequent purchasers
of the Notes and is limited to Notes that are held as capital assets. This
summary is for general information only and does not address all of the tax
consequences that may be relevant to particular acquirors in light of their
personal circumstances, or to certain types of acquirors (such as banks and
other financial institutions, real estate investment trusts, regulated
investment companies, insurance companies, tax-exempt organizations, dealers in
securities, persons who have hedged the interest rate on the Notes or persons
whose functional currency is not the U.S. dollar). In addition, this summary
does not include any description of the tax laws of any state, local or non-U.S.
government that may be applicable to a particular acquiror.
As used herein, the term "U.S. Holder" means a holder that is, for U.S.
Federal income tax purposes, (a) a citizen or resident of the United States, (b)
a corporation or partnership created or organized in the United States or under
the laws of the United States or of any state of the United States, (c) an
estate whose income is includable in gross income for U.S. Federal income tax
purposes regardless of its source or (d) a trust if (i) a court within the
United States is able to exercise primary supervision over the administration of
the trust and (ii) at least one U.S. person has authority to control all
substantial decisions of the trust.
PROSPECTIVE PURCHASERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS WITH
RESPECT TO THE PARTICULAR U.S. FEDERAL INCOME AND ESTATE TAX CONSEQUENCES TO
THEM OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF THE NOTES, AS WELL AS THE
TAX CONSEQUENCES UNDER STATE, LOCAL, NON-U.S. AND OTHER U.S. FEDERAL TAX LAWS
AND THE POSSIBLE EFFECTS OF CHANGES IN TAX LAWS.
TAXATION OF U.S. HOLDERS
Payment of Interest on the Notes. In general, interest paid on a Note will
be taxable to a U.S. Holder as ordinary interest income, as received or accrued,
in accordance with such holder's method of accounting for U.S. Federal income
tax purposes. If original issue discount on a Note is not greater than a de
minimis amount equal to 0.25% of its stated principal amount multiplied by the
number of complete years to its maturity, any such discount will be deemed to be
equal to zero, and a holder will not be required to accrue a portion of such
discount as income in each taxable year.
Sale, Exchange or Retirement of Notes. Upon the sale, exchange,
redemption, retirement at maturity or other disposition of a Note, a U.S. Holder
will generally recognize taxable gain or loss equal to the difference between
the sum of the cash and the fair market value of all other property received on
such disposition (except to the extent such cash or property is attributable to
accrued interest, which will be taxable as ordinary income) and such holder's
adjusted tax basis in the Note.
Gain or loss recognized on the disposition of a Note generally will be
capital gain or loss, and will be long-term capital gain or loss if, at the time
of such disposition, the holder's holding period for the Note is more than one
year. Under recently enacted legislation, a reduced tax rate on capital gain
will apply to a U.S. Holder that is an individual, estate or trust if such
holder's holding period for the Note is more than eighteen months at the time of
disposition.
The exchange of an Old Note by a holder for a New Note should not
constitute a taxable exchange of the Note. As a result, the New Notes should
have the same issue price (and adjusted issue price immediately
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after the exchange) as the Old Notes, and each holder should have the same
adjusted tax basis and holding period in the New Notes as it had in the Notes
immediately before the exchange.
Backup Withholding and Information Reporting. In general, a U.S. Holder
will be subject to backup withholding at the rate of 31% with respect to
interest, principal and premium, if any, paid on a Note, and the proceeds of a
sale of a Note, unless the holder (a) is an entity that is exempt from
withholding (including corporations, tax-exempt organizations and certain
qualified nominees) and, when required, demonstrates this fact, or (b) provides
the payor with its taxpayer identification number ("TIN") (which for an
individual would be the holder's social security number), certifies that the TIN
provided to the payor is correct and that the holder has not been notified by
the Internal Revenue Service (the "IRS") that it is subject to backup
withholding due to underreporting of interest or dividends, and otherwise
complies with applicable requirements of the backup withholding rules. In
addition, such payments of principal, premium and interest to, and the proceeds
of a sale of a Note by, U.S. Holders that are not exempt entities will generally
be subject to information reporting requirements. A U.S. Holder who does not
provide the payor with his correct TIN may be subject to penalties imposed by
the IRS.
The Company will report to U.S. Holders and the IRS the amount of any
"reportable payments" (including any interest paid) and any amounts withheld
with respect to the Notes during the calendar year.
The amount of any backup withholding from a payment to a U.S. Holder will
be allowed as a credit against such holder's U.S. Federal income tax liability
and may entitle such holder to a refund, provided that the required information
is furnished to the IRS.
TAXATION OF NON-U.S. HOLDERS
Payment of Interest on the Notes. In general, payments of interest
received by any holder of a Note that is not a U.S. Holder (a "Non-U.S. Holder")
will not be subject to a U.S. Federal income tax (or any withholding thereof,
except as described below under "Backup Withholding and Information Reporting"),
provided that (a) under an exemption for certain portfolio interest, (i) the
Non-U.S. Holder does not actually or constructively own 10% or more of the total
combined voting power of all classes of stock of the Parent entitled to vote,
(ii) the Non-U.S. Holder is not a "controlled foreign corporation" (generally, a
non-U.S. corporation controlled by U.S. shareholders) that is related to the
Parent actually or constructively through stock ownership and (iii) either (x)
the beneficial owner of the Note, under penalties of perjury, provides the
Company or its agent with the beneficial owner's name and address and certifies
that it is not a U.S. person on IRS Form W-8 (or a suitable substitute form) or
(y) a securities clearing organization, bank or other financial institution that
holds customers' securities in the ordinary course of its trade or business
holds the Note and certifies to the Company or its agent under penalties of
perjury that such a Form W-8 (or suitable substitute form) has been received by
it from the beneficial owner or qualifying intermediary and furnishes the payor
a copy thereof, (b) the Non-U.S. Holder is subject to U.S. Federal income tax
with respect to the Note on a net basis because payments received with respect
to the Note are effectively connected with the conduct of a trade or business
within the United States by the holder (in which case the holder may also be
subject to U.S. "branch profits tax") and provides the Company with a properly
executed IRS Form 4224, or (c) the Non-U.S. Holder is entitled to the benefits
of an income tax treaty under which the interest is exempt from U.S. withholding
tax and the holder or such holder's agent provides a properly executed IRS Form
1001 claiming the exemption. Payments of interest not exempt from U.S. Federal
income tax as described above will be subject to withholding at the rate of 30%
(subject to reduction under any applicable income tax treaty).
Recently issued Treasury Regulations (the "New Withholding Regulations")
generally will be effective with respect to payments made after December 31,
1999, regardless of the issue date of the instrument with respect to which such
payments are made. The New Withholding Regulations generally will not affect the
certification rules described in the preceding paragraph, but will provide
alternative methods for satisfying such requirements. The New Withholding
Regulations also generally will require, in the case of Notes held by a non-U.S.
partnership, that (a) the certification described in the preceding paragraph be
provided by the partners rather than the foreign partnership and (b) the
partnership provide certain information. A
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lookthrough rule will apply in the case of tiered partnerships. In addition, the
New Withholding Regulations may require that a Non-U.S. Holder (including a
non-U.S. partnership or a partner thereof) obtain a taxpayer identification
number and make certain certifications if interest in respect of a Note is not
portfolio interest and the Non-U.S. Holder wishes to claim a reduced rate of
withholding under an income tax treaty. Each Non-U.S. Holder should consult its
own tax advisor regarding the application of the New Withholding Regulations.
Sale, Exchange or Retirement of the Notes. A Non-U.S. Holder generally
will not be subject to U.S. Federal income tax (or withholding thereof) in
respect of gain realized on the sale, exchange, redemption, retirement at
maturity or other disposition of Notes, unless (a) the gain is effectively
connected with the conduct of a trade or business within the United States by
the holder, or (b) the holder is an individual who is present in the United
States for a period or periods aggregating 183 or more days in the taxable year
of the disposition and certain other conditions are met.
With respect to a Non-U.S. Holder subject to U.S. Federal income tax as
described in the preceding paragraph, an exchange of a Note for an Exchange Note
should not be treated as a taxable exchange of the Note.
Backup Withholding and Information Reporting. Under current Treasury
Regulations, backup withholding and information reporting do not apply to
payments made by the Company or a paying agent to Non-U.S. Holders if the
certification described under "Payment of Interest on the Notes" is received,
provided that the payor does not have actual knowledge that the holder is a U.S.
person. If any payments of principal and interest are made to the beneficial
owner of a Note by or through the non-U.S. office of a non-U.S. custodian,
non-U.S. nominee or other non-U.S. agent of such beneficial owner, or if the
non-U.S. office of a non-U.S. "broker" (as defined in applicable Treasury
Regulations) pays the proceeds of the sale of a Note or a coupon to the seller
thereof, backup withholding and information reporting will not apply.
Information reporting requirements (but not backup withholding) will apply,
however, to a payment by a non-U.S. office of a broker that is a U.S. person
that derives 50% or more of its gross income for certain periods from the
conduct of a trade or business in the United States, or that is a "controlled
foreign corporation" (generally, a non-U.S. corporation controlled by U.S.
shareholders) with respect to the United States, unless the broker has
documentary evidence in its records that the holder is a non-U.S. person and
certain other conditions are met, or the holder otherwise establishes an
exemption. Payment by a U.S. office of a broker is subject to both backup
withholding at a rate of 31% and information reporting unless the holder
certifies under penalties of perjury that it is a non-U.S. person, or otherwise
establishes an exemption. A Non-U.S. Holder may obtain a refund or a credit
against such Holder's U.S. Federal income tax liability of any amounts withheld
under the backup withholding rules, provided the required information is
furnished to the IRS. In addition, in certain circumstances, interest on a Note
owned by a Non-U.S. Holder will be required to be reported annually on IRS Form
1042S, in which case such form will be filed with the IRS and furnished to the
holder.
The New Withholding Regulations revise (substantially in certain respects)
the procedures that withholding agents and payees must follow to comply with, or
to establish an exemption from, these information reporting and backup
withholding provisions for payments after December 31, 1999. Each Non-U.S.
Holder should consult its own tax advisor regarding the application to such
holder of the New Withholding Regulations.
Estate Tax. Subject to applicable estate tax treaty provisions, Notes held
at the time of death (or theretofore transferred subject to certain retained
rights or powers) by an individual who at the time of death is a Non-U.S. Holder
will not be included in such holder's gross estate for U.S. Federal estate tax
purposes, provided that (a) the individual does not actually or constructively
own 10% or more of the total combined voting power of all classes of stock of
the Parent entitled to vote and (b) the income on the Notes is not effectively
connected with the conduct of a U.S. trade or business by the individual.
112
<PAGE> 118
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired as a result of market-making activities or other
trading activities. The Issuers have agreed that, for a period of 90 days after
the Expiration Date, it will make this Prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resale. In
addition, until , 1998, all dealers effecting transactions in the
New Notes may be required to deliver a prospectus.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices 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 or the purchasers of any such New Notes. Any broker-dealer that
resells New Notes that were received by it for its own account pursuant to the
Exchange Offer and any broker or dealer that participates in a distribution of
such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit or any such resale of New Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that, by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 90 days after the Expiration Date the Issuers 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 Issuers have agreed to pay all expenses incident to the
Exchange Offer (including the expenses of one firm of attorneys for the Holders
of the Old Notes) other than commissions or concessions of any brokers-dealers
and will indemnify the holders of the Old Notes (including any broker-dealers)
against certain liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
The legality of the New Notes being offered hereby will be passed upon for
the Company by Rubin Baum Levin Constant & Friedman (a partnership which
includes professional corporations), New York, New York.
EXPERTS
The consolidated financial statements of Key Components, Inc. as of
December 31, 1997 and 1996 and for the years then ended included in this
Prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The financial statements of B.W. Elliott Manufacturing Co., Inc. as of
December 31, 1995 and for the year then ended included in this Prospectus have
been so included in reliance on the report of by Fulgieri & Randall, LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The financial statements of Hudson Lock, Inc. (a wholly-owned subsidiary of
Jordan Industries, Inc.) as of May 15, 1997, December 28, 1996 and December 30,
1995 and for the periods December 29, 1996 through May 15, 1997, December 31,
1995 through December 28, 1996, and January 1, 1995 through December 30, 1995
included in this Prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
113
<PAGE> 119
The financial statements of ESP Lock Products, Inc. as of December 10, 1997
and for the period January 1, 1997 through December 10, 1997 included in this
Prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The financial statements of ESP Lock Products, Inc. as of December 31, 1996
and 1995 and for the years then ended included in this Prospectus have been so
included in reliance on the report of BDO Seidman, LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
The financial statements of RAD Lock, Inc. as of June 22, 1997 and December
31, 1996 and for the periods January 1, 1997 through June 22, 1997 and January
1, 1996 through December 31, 1996 included in this Prospectus have been so
included in reliance on the report of Greenberg, Rosenblatt, Kull & Bitsoli,
P.C., independent accountants, given on the authority of said firm as experts in
auditing and accounting.
114
<PAGE> 120
INDEX TO THE FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
KEY COMPONENTS, INC.
Report of Independent Accountants......................... F-3
Consolidated Balance Sheet as of December 31, 1997 and
1996................................................... F-4
Consolidated Statement of Income for the years ended
December 31, 1997, 1996 and 1995....................... F-5
Consolidated Statement of Stockholders' Equity for the
years ended
December 31, 1997, 1996 and 1995....................... F-6
Statement of Cash Flows for the years ended December 31,
1997, 1996 and 1995.................................... F-7
Notes to Consolidated Financial Statements................ F-8
UNAUDITED KEY COMPONENTS, INC.
Consolidated Balance Sheet as of June 30, 1998 and
December 31, 1997...................................... F-16
Consolidated Statement of Income for the six months ended
June 30, 1998 and 1997................................. F-17
Consolidated Statement of Cash Flows for the six months
ended June 30, 1998 and 1997........................... F-18
Notes to Consolidated Financial Statements................ F-19
B.W. ELLIOTT MANUFACTURING CO., INC.
Independent Auditor's Report.............................. F-22
Balance Sheet as of December 31, 1995..................... F-23
Statement of Income and Retained Earnings for the year
ended December 31, 1995................................ F-24
Statement of Cash Flows for the year ended December 31,
1995................................................... F-25
Notes to Financial Statements............................. F-26
HUDSON LOCK, INC. (a wholly-owned subsidiary of Jordan
Industries, Inc.)
Report of Independent Accountants......................... F-33
Balance Sheet as of May 15, 1997 and December 28, 1996.... F-34
Statement of Income and Retained Earnings for the periods
December 29, 1996 through May 15, 1997 and December 31,
1995 through December 28, 1996......................... F-35
Statement of Cash Flows for the periods December 29, 1996
through May 15, 1997 and December 31, 1995 through
December 28, 1996...................................... F-36
Notes to Financial Statements............................. F-37
Report to Independent Accounts............................ F-41
Balance Sheet as of December 30, 1995..................... F-42
Statement of Income and Retained Earnings for the period
January 1, 1995 through December 30, 1995.............. F-43
Statement of Cash Flows for the period January 1, 1995
through December 30, 1995.............................. F-44
Notes to Financial Statements............................. F-45
</TABLE>
F-1
<PAGE> 121
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ESP LOCK PRODUCTS, INC.
Report of Independent Accountants......................... F-49
Balance Sheet as of December 10, 1997..................... F-50
Statement of Income and Retained Earnings for the period
January 1, 1997 through December 10, 1997.............. F-51
Statement of Cash Flows for the period January 1, 1997
through December 10, 1997.............................. F-52
Notes to Financial Statements............................. F-53
Independent Accountants' Report........................... F-57
Balance Sheets as of December 31, 1996 and 1995........... F-58
Statements of Income and Retained Earnings for the years
ended December 31, 1996 and 1995....................... F-59
Statements of Cash Flows for the years ended December 31,
1996 and 1995.......................................... F-60
Summary of Accounting Policies............................ F-61
Notes to Financial Statements............................. F-63
RAD LOCK, INC.
Independent Auditors' Report.............................. F-67
Balance Sheet as of June 22, 1997 and December 31, 1996... F-68
Statements of Income and Accumulated Deficit for the
period ended June 22, 1997 and the year ended December
31, 1996............................................... F-69
Statements of Cash Flows for the period ended June 22,
1997 and the year ended
December 31, 1996...................................... F-70
Notes to Financial Statements............................. F-71
</TABLE>
F-2
<PAGE> 122
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Key Components, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of stockholders' equity, and of cash flows
present fairly, in all material respects, the financial position of Key
Components, Inc. (formerly B.W. Elliott Manufacturing Co., Inc.) (the Company)
and its subsidiaries at December 31, 1997 and 1996 and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above. The financial statements of the Company for the year ended December 31,
1995 were audited by other independent accountants whose report dated February
9, 1996, expressed an unqualified opinion on those statements.
As discussed in Note 11 to the financial statements, the Company changed
the composition of costs included in inventory in 1996.
PRICE WATERHOUSE LLP
Syracuse, New York
February 20, 1998
F-3
<PAGE> 123
KEY COMPONENTS, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS:
Current assets
Cash...................................................... $ 1,440,452 $ 331,338
Accounts receivable, net of allowance for doubtful
accounts of $80,882 and $36,337 in 1997 and 1996,
respectively........................................... 7,762,631 1,780,500
Inventories (Note 3)...................................... 8,432,074 3,749,594
Prepaid expenses and other current assets................. 576,127 472,768
Deferred income taxes (Notes 1 and 5)..................... -- 17,028
----------- -----------
Total current assets.............................. 18,211,284 6,351,228
----------- -----------
Property and equipment at cost less accumulated depreciation
(Notes 1 and 4)........................................... 11,980,074 4,053,183
----------- -----------
Deferred income taxes (Notes 1 and 5)....................... -- 216,435
Deferred financing costs (Note 1)........................... 2,100,761 --
Goodwill (Note 1)........................................... 45,206,386 --
Intangibles (Note 1)........................................ 2,197,499 775,907
Other assets................................................ 60,597 57,380
----------- -----------
49,565,243 1,049,722
----------- -----------
Total assets...................................... $79,756,601 $11,454,133
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities
Notes payable -- current (Note 6)......................... $ 3,395,187 $ 596,588
Capital lease obligation (Note 7)......................... 66,981 --
Accrued lease costs -- current (Note 7)................... 14,757 --
Accounts payable.......................................... 1,702,328 789,270
Accrued expenses.......................................... 2,351,228 263,118
----------- -----------
Total current liabilities......................... 7,530,481 1,648,976
Notes payable -- long term (Note 6)....................... 62,557,990 2,190,290
Capital lease obligation (Note 7)......................... 194,031 --
Accrued lease costs (Note 7).............................. 626,398 641,155
----------- -----------
Total liabilities................................. 70,908,900 4,480,421
----------- -----------
Commitments (Note 7)
Stockholders' equity (Note 8)
Capital stock, no par value; 200 shares authorized; 100
shares issued and outstanding in 1997................. 1,036,254 1,066,500
Paid-in capital........................................ 738,600 13,000
Retained earnings...................................... 7,072,847 7,312,707
Less treasury stock.................................... -- (1,418,495)
----------- -----------
Total stockholders' equity........................ 8,847,701 6,973,712
----------- -----------
Total liabilities and stockholders' equity........ $79,756,601 $11,454,133
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 124
KEY COMPONENTS, INC.
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Net sales........................................... $27,317,808 $13,449,447 $13,184,944
Cost of goods sold.................................. 15,798,171 8,360,984 7,355,650
----------- ----------- -----------
Gross profit.............................. 11,519,637 5,088,463 5,829,294
Selling, general and administrative expenses........ 5,560,420 3,212,197 3,197,358
Related party management fees (Note 10)............. 760,000 643,329 259,992
Non-recurring business consolidation charges (Note
12)............................................... 84,069 785,718 --
----------- ----------- -----------
Income from operations.................... 5,115,148 447,219 2,371,944
Other income (expense)
Other income...................................... 31,252 5,074 25,830
Interest expense.................................. (3,007,459) (254,124) (426,550)
----------- ----------- -----------
2,138,941 198,169 1,971,224
----------- ----------- -----------
Provision (benefit) for income taxes (Notes 1 and 5)
Current........................................... 655,190 600,740 751,256
Deferred.......................................... 233,463 (579,586) (27,547)
----------- ----------- -----------
Total income taxes........................ 888,653 21,154 723,709
----------- ----------- -----------
Income before cumulative effect of change in
accounting principle.............................. 1,250,288 177,015 1,247,515
Cumulative effect of change in accounting principle
(Note 11)......................................... -- 313,256 --
----------- ----------- -----------
Net income................................ $ 1,250,288 $ 490,271 $ 1,247,515
=========== =========== ===========
Earnings per share:
Basic............................................. $ 12,503 $ 4,903 $ 12,475
=========== =========== ===========
Diluted........................................... $ 11,471 $ 4,903 $ 12,475
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 125
KEY COMPONENTS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
TOTAL
CAPITAL PAID-IN RETAINED TREASURY STOCKHOLDERS'
STOCK CAPITAL EARNINGS STOCK EQUITY
---------- -------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
December 31, 1994........... $1,066,500 $ 13,000 $ 5,574,921 $(1,418,495) $5,235,926
Net income.................. -- -- 1,247,515 -- 1,247,515
---------- -------- ----------- ----------- ----------
December 31, 1995........... 1,066,500 13,000 6,822,436 (1,418,495) 6,483,441
Net income.................. -- -- 490,271 -- 490,271
---------- -------- ----------- ----------- ----------
December 31, 1996........... 1,066,500 13,000 7,312,707 (1,418,495) 6,973,712
Issuance of warrants to
purchase 14.2857 shares... -- 738,600 -- -- 738,600
Retirement of treasury
stock..................... (30,246) (13,000) (1,375,249) 1,418,495 --
Stockholder distributions... -- -- (114,899) -- (114,899)
Net income.................. -- -- 1,250,288 -- 1,250,288
---------- -------- ----------- ----------- ----------
December 31, 1997........... $1,036,254 $738,600 $ 7,072,847 $ -- $8,847,701
========== ======== =========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 126
KEY COMPONENTS, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................ $ 1,250,288 $ 490,271 $ 1,247,515
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................. 1,817,296 740,866 713,147
Bond discount amortization..................... 61,550 -- --
Deferred income taxes.......................... 233,463 (367,514) (27,547)
Loss on disposal of assets..................... 53,331 96,500 7,471
Net increase (decrease) in cash caused by
changes in assets and liabilities:
Accounts receivable.......................... (212,174) (17,726) 380,447
Inventories.................................. 597,246 (419,083) 475,178
Prepaid expenses and other assets............ 259,969 (124,266) (137,860)
Accounts payable............................. (474,680) 470,653 (250,047)
Accrued expenses............................. 442,169 109,803 (307,632)
Accrued lease costs.......................... -- 641,155 --
----------- ----------- -----------
Net cash provided by operating activities.... 4,028,458 1,620,659 2,100,672
----------- ----------- -----------
Cash flows from investing activities:
Business acquisitions (Note 2).................... (55,441,916) -- --
Capital expenditures.............................. (695,670) (1,297,536) (345,135)
Proceeds from sale of equipment................... 4,800 8,600 16,570
----------- ----------- -----------
Net cash used in investing activities........ (56,132,786) (1,288,936) (328,565)
----------- ----------- -----------
Cash flows from financing activities:
Repayment of notes payable........................ (12,422,978) (2,885,937) (1,396,704)
Additional borrowing.............................. 68,071,500 2,065,000 --
Repayment of capital lease obligation............. (45,094) -- --
Deferred financing costs.......................... (2,275,087) -- --
Dividends to stockholders......................... (114,899) -- --
----------- ----------- -----------
Net cash provided (used) by financing
activities................................ 53,213,442 (820,937) (1,396,704)
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents....................................... 1,109,114 (489,214) 375,403
Cash and cash equivalents, beginning of year........ 331,338 820,552 445,149
----------- ----------- -----------
Cash and cash equivalents, end of year.............. $ 1,440,452 $ 331,338 $ 820,552
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year:
Interest.......................................... $ 2,632,130 $ 252,115 $ 429,749
Income taxes...................................... 451,030 711,160 842,358
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 127
KEY COMPONENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements as of and for the two years ended
December 31, 1997 relate to Key Components, Inc. (the Company), a parent holding
company of the wholly-owned subsidiaries, B.W. Elliott Manufacturing Co., Inc.
(Elliott), Hudson Lock, Inc. (Hudson), and ESP Lock Products, Inc. (ESP). All
significant intercompany transactions have been eliminated.
On May 15, 1997, in conjunction with the Hudson acquisition, all of the
Elliott shareholders exchanged their ownership interests for an interest in the
Company. The Company had no operations of its own prior to the exchange of
ownership interests with Elliott. The exchange ratio was determined to leave the
shareholders of Elliott with the same pro rata interests in the Company as they
had in Elliott. The ownership transfer is between entities under common control
and accounted for at historical cost.
NATURE OF OPERATIONS
The Company is engaged in the manufacturing of medium-security custom and
specialty locks, keys and locking systems, primarily for original equipment
manufacturers and flexible shafting and remote valve control components used for
power transmission applications.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For the purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost or market, on a first-in,
first-out basis.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and depreciated using the
straight-line method over useful lives ranging from three to forty years.
Expenditures for repairs and maintenance are charged to expense as incurred.
When assets are retired or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts and any resultant gain or
loss is recognized.
INCOME TAXES
The Company has elected to be treated as a Subchapter S corporation under
the Internal Revenue Code effective May 31, 1997. As an S Corporation, the
stockholders are personally liable for taxes on the income of the Company.
Accordingly, no provision for income taxes has been recognized in the financial
statements subsequent to May 31, 1997. Prior to the conversion to a subchapter S
Corporation, Elliott provided income taxes based on the liability method of
accounting pursuant to Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes. Deferred income taxes had been recorded to reflect
the tax consequences on future years of temporary differences between the tax
basis of assets and liabilities and their financial reporting amount at each
year end.
F-8
<PAGE> 128
KEY COMPONENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INTANGIBLES
Intangibles at December 31, 1997 primarily consist of costs associated with
a licensing agreement and a covenant not to compete arising from business
acquisitions. These assets are being amortized on a straight-line basis over the
life of the related agreements which range from five to seven years. Accumulated
amortization at December 31, 1997 and 1996 was $1,255,850 and $948,217,
respectively.
GOODWILL
Goodwill represents the excess of the cost of acquired businesses over the
fair market value of their net tangible assets. Goodwill is being amortized on
the straight-line method over forty years. Amortization charged to continuing
operations amount to $505,130 for the year ended December 31, 1997. At each
balance sheet date, the Company evaluates the realizability of goodwill based on
expectations of non-discounted cash flows and operating income for each
operation having a material goodwill balance. Based on its most recent analysis,
the Company believes that no impairment of goodwill exists at December 31, 1997.
DEFERRED FINANCING COSTS
Debt issuance costs have been deferred and are being amortized on a
straight-line basis over the lives of the related agreements which range from
five to eight years.
INTEREST RATE SWAP AGREEMENT
The Company has entered into an interest rate swap agreement as a means of
managing its interest rate exposure. This agreement has the effect of converting
certain of the Company's variable rate obligations to fixed rate obligations.
Net amounts paid or received are reflected as adjustments to interest expense.
REVENUE RECOGNITION
The Company recognizes revenue upon shipment of products to customers.
EARNINGS PER SHARE
Earnings per share (EPS) is computed based on the weighted average number
of common shares outstanding during the period in accordance with Statement of
Financial Accounting Standards No. 128, Earnings Per Share. The number of shares
outstanding for 1996 and 1995 have been restated to give retroactive effect to
the change in corporate structure discussed in Note 1. Shares used in the
calculation of basic and diluted EPS were:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Shares used in the calculation of basic EPS (weighted
average shares outstanding)............................... 100 100 100
Effect of dilutive potential securities (weighted average
shares issuable upon conversion of warrants).............. 9 -- --
--- --- ---
Shares used in the calculation of diluted EPS............... 109 100 100
=== === ===
</TABLE>
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Company to
concentrations of credit risk consist primarily of trade accounts receivable.
The Company's customer base includes a significant number involved with the
domestic lawn and garden and furniture industries. Although the Company is
directly affected by the well-being of these industries, management does not
believe that a significant concentration credit risk exists at December 31,
1997.
F-9
<PAGE> 129
KEY COMPONENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
For certain of the Company's financial instruments, including cash,
accounts receivable, accounts payable and accrued expenses, management believes
that the carrying amounts approximate fair value due to their short maturities.
The estimated fair value of the Company's long-term debt is based on the current
rates offered to the Company for debt of similar maturities and approximates
carrying value at December 31, 1997. The approximate fair value of the Company's
interest rate swap agreement at December 31, 1997 is an $108,000 obligation.
2. ACQUISITIONS OF BUSINESSES
During 1997, the Company acquired the entities described below, which were
accounted for by the purchase method of accounting, and the results of
operations have been included in the consolidated financial statements since the
date of acquisition.
On May 15, 1997, the Company acquired all of the outstanding shares of
Hudson Lock, Inc. (Hudson) for a cash purchase price of $39.1 million and
assumed liabilities of approximately $1.2 million. Hudson manufactures
medium-security custom and specialty locks, primarily for original equipment
manufacturers. The purchase price was allocated based on estimated fair values
at the date of acquisition resulting in a negative fair value adjustment to
property and equipment of $565,000. The excess of purchase price over assets
acquired of $31 million is being amortized on a straight-line basis over forty
years.
On December 10, 1997, the Company acquired all of the outstanding shares of
ESP Lock Products, Inc. (ESP) for a cash purchase price of $16.3 million and
assumed liabilities of approximately $10.4 million. ESP primarily manufactures
medium-security custom and specialty locks, and key blanks. The purchase price
was allocated based on estimated fair values at the date of acquisition and
included $1.2 million for a covenant not to compete. This resulted in an excess
of purchase price over assets acquired of $14.7 million, which is being
amortized on a straight-line basis over forty years.
On an unaudited pro-forma basis, assuming the Hudson Lock and ESP
acquisitions had occurred as of the beginning of the periods presented, the
consolidated results of the Company would have been as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Pro forma net sales....................................... $58,975,000 $53,019,000
Pro forma income before taxes and change in accounting
principle............................................... 3,760,000 (9,000)
</TABLE>
The unaudited pro-forma financial information presented above is not
necessarily indicative of the results that would have actually occurred had the
companies been combined for the periods presented.
The following is summarized financial information for the two acquired
subsidiaries as of and for the period ended from the dates of their respective
acquisitions through December 31, 1997:
<TABLE>
<CAPTION>
HUDSON ESP
----------- -----------
<S> <C> <C>
Current assets............................................ $ 4,286,453 $ 6,737,482
Noncurrent assets......................................... 36,820,920 19,647,526
Current liabilities....................................... 2,634,150 2,811,117
Noncurrent liabilities.................................... 24,164,031 23,951,688
Net sales................................................. 11,956,963 1,187,697
Gross profit.............................................. 5,191,297 8,333
Net income................................................ 1,869,724 (644,892)
</TABLE>
F-10
<PAGE> 130
KEY COMPONENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Raw materials............................................... $2,810,259 $1,202,443
Work-in-process............................................. 3,609,454 1,317,598
Finished goods.............................................. 2,012,361 1,229,553
---------- ----------
Total inventory................................... $8,432,074 $3,749,594
========== ==========
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Land, building and improvements............................ $ 3,266,131 $1,203,652
Equipment, furniture and fixtures.......................... 12,344,556 5,873,921
Leasehold improvements..................................... 172,236 89,988
Construction-in-progress................................... 340,664 215,069
----------- ----------
16,123,587 7,382,630
Less accumulated depreciation.............................. (4,143,513) (3,329,447)
----------- ----------
Total property, plant and equipment.............. $11,980,074 $4,053,183
=========== ==========
</TABLE>
Depreciation expense amounted to $835,890, $490,412 and $462,173 for the
years ended December 31, 1997, 1996 and 1995, respectively.
5. FEDERAL AND STATE INCOME TAXES
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Federal taxes...................................... $781,356 $ 50,611 $646,613
New York State..................................... 107,297 (29,457) 77,096
-------- -------- --------
Total income tax expense................. $888,653 $ 21,154 $723,709
======== ======== ========
</TABLE>
A reconciliation between income taxes computed at the statutory federal
rate and income tax expense is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Federal income tax rate..................................... 34.0% 34.0% 34.0%
State income taxes, net of federal.......................... 3.3 (9.8) 2.6
Write-off of net deferred tax asset......................... 21.9 -- --
Income taxed directly to shareholders....................... (20.7) -- --
Adjustment to prior year tax liabilities.................... -- (15.4) --
Other, net.................................................. 3.0 1.9 .1
----- ----- -----
41.5% 10.7% 36.7%
===== ===== =====
</TABLE>
As discussed in Note 1, the Company elected to be treated as a subchapter S
Corporation effective May 31, 1997 and as such income is taxed directly to the
stockholders. Due to the change in tax status, the 1997 deferred tax provision
includes a charge of $468,986 representing net deferred tax assets that were
F-11
<PAGE> 131
KEY COMPONENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
eliminated. At December 31, 1997, the Company's net assets for financial
reporting purposes were approximately $11,997,000 greater than the related tax
basis of such net assets, principally related to the goodwill generated from the
acquisition of ESP which is not deductible for tax purposes.
The Company has earned New York State investment tax credits and economic
development zone investment tax credits. The current tax provision was reduced
by $32,752 in 1997 and $89,887 in 1996 reflecting the benefit of these credits.
The tax effects of the significant temporary differences which comprise
deferred tax assets and liabilities at December 31, 1996 are as follows:
<TABLE>
<S> <C>
Assets:
Intangible amortization................................... $ 453,346
Accrued costs............................................. 296,090
Inventory provisions...................................... 38,100
---------
787,536
---------
Liabilities:
Depreciation.............................................. (554,073)
---------
Net deferred tax asset...................................... $ 233,463
---------
</TABLE>
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Term loan, payable in quarterly instalments ranging from
$500,000 to $1,750,000 through May 2004.................. $29,000,000 $ --
Acquisition loan, payable in quarterly instalments ranging
from $250,000 to $1,500,000 through June 30, 2004........ 20,000,000 --
Senior Subordinated Notes, due May 15, 2005; interest paid
semi-annually at 11.25%, net of unamortized discount of
$677,050................................................. 9,322,950 --
Revolving credit facility, payable at May 15, 2004......... 6,771,500 --
Obligation under licensing agreement, discounted at 7.85%,
quarterly payments of $87,500, including principal and
interest through December 1999........................... 641,227 926,462
Obligation under covenant not to compete agreement, monthly
principal instalments of $7,250 payable through June
2000..................................................... 217,500 --
Bank note at 7.85%......................................... -- 1,843,750
Other notes payable........................................ -- 16,666
----------- ----------
65,953,177 2,786,878
Less current portion....................................... (3,395,187) (596,588)
----------- ----------
Total long-term debt....................................... $62,557,990 $2,190,290
----------- ----------
</TABLE>
On May 15, 1997, the Company issued $10 million of 11.25% Senior
Subordinated Notes due May 15, 2005 with interest payable semi-annually. The
Notes have detachable warrants which are convertible into 14.2857 shares of
common stock at $.01 per share at any time prior to maturity. The warrants were
valued at $738,600 and recorded as a debt discount which is being amortized over
the life of the notes.
On May 15, 1997, the Company entered into a $60 million credit agreement
with a group of financial institutions which was used in part to finance the
acquisition of Hudson Lock, Inc. and ESP Lock Products, Inc., (see Note 2), to
repay existing debt and provide working capital. The agreement provides for a
seven
F-12
<PAGE> 132
KEY COMPONENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
year $30 million term loan, a seven year $10 million revolving credit facility,
and a seven year $20 million acquisition loan. As of September 26, 1997, the
revolving credit facility was amended and increased to $13 million in
conjunction with the ESP Lock Products, Inc. acquisition. Borrowings under the
revolver are subject to borrowing base limitation measured by eligible inventory
and accounts receivable. Additional availability under the revolver was
$4,642,000 at December 31, 1997. The credit agreement is collateralized by
receivables, inventories, equipment and certain intangible property.
The credit agreement provides for a continuation and conversion election
whereby the Company can elect to have the borrowings outstanding under a base
rate loan or a LIBOR based rate loan. The base rate loan bears interest at a
fluctuating interest rate determined by reference to the agent's base rate plus
1.50% with respect to the term loan and revolving credit facility, and 2% for
the acquisition loan. The LIBOR based rate loan bears interest during an
applicable period not to exceed six months at a fixed rate of interest
determined by reference to the LIBOR rate, plus a margin of 2.75% for the term
loan and revolving credit facility and 3.25% for the acquisition loan.
Currently, the Company has elected the LIBOR based rate loan for all borrowings
outstanding under the credit agreement. At December 31, 1997, the interest rate
was 8.6875% for the revolving credit facility and term loan and 9.1875% for the
acquisition loan.
The credit agreement and Senior Subordinated Notes contain certain
affirmative and negative covenants and restrictions which require the
maintenance of financial ratios, and restrict or limit dividends and other
stockholder distributions, capital expenditures, rental obligations, incurrence
of indebtedness and business acquisitions. At December 31, 1997, the Company was
in compliance with these covenants and restrictions.
As of August 15, 1997, the Company had entered into an interest rate swap
agreement with the agent for the lenders providing bank financing. The agreement
effectively fixed the interest rate on a portion of the floating rate debt at a
rate of 6.24% for a notional principal amount of $14,750,000 through September
30, 2000.
At December 31, 1997, aggregate principal payments required on all amounts
due after one year, excluding the unamortized debt discount of $694,010, are as
follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- -----------
<S> <C>
1999............................................ $ 4,437,000
2000............................................ 5,543,500
2001............................................ 8,000,000
2002............................................ 10,000,000
Thereafter...................................... $35,271,500
-----------
$63,252,000
===========
</TABLE>
7. LEASE COMMITMENTS
The Company rents several manufacturing and warehouse facilities under
operating lease agreements, one of which is with a related party (Note 10).
Rental payments under all lease agreements amounted to $253,000, $333,178 and
$316,152 in 1997, 1996 and 1995, respectively.
The Company also leases certain machinery and equipment with a bargain
purchase option. These leases are classified as capital leases and expire at
various dates through 2002.
During 1996, the Company initiated a program to consolidate manufacturing
and administrative facilities (Note 12). As a result, the Company has determined
that a leased facility will not be used for operating purposes beyond 1997.
Accordingly, the Company has established a liability of $641,155 representing
the discounted future rental payments net of estimated sublease income.
F-13
<PAGE> 133
KEY COMPONENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a schedule of the future minimum lease payments (net of
sublease income) required under operating and capital leases:
<TABLE>
<CAPTION>
MINIMUM ESTIMATED
YEAR ENDED RENTAL SUBLEASE CAPITAL
MAY 15, PAYMENTS INCOME NET LEASES
---------- ---------- --------- ---------- --------
<S> <C> <C> <C> <C>
1998................................. $ 463,315 $ 77,000 $ 386,315 $ 91,164
1999................................. 468,043 78,540 389,503 91,368
2000................................. 427,703 80,111 347,592 79,778
2001................................. 387,013 81,713 305,300 42,292
2002................................. 395,052 83,347 311,705 10,188
Thereafter........................... 1,306,726 536,277 770,449 --
---------- -------- ---------- --------
Total minimum lease payments......... $3,447,852 $936,988 $2,510,864 314,790
========== ======== ==========
Less: Estimated amount representing
interest........................... (53,778)
--------
Present value of net minimum lease
payments........................... 261,012
Less: Current portion................ (66,981)
--------
Long-term obligation under capital
lease.............................. $194,031
========
</TABLE>
8. STOCKHOLDERS' EQUITY
The Company's capital stock consists of 200 authorized shares of common
stock, without par value, of which 100 shares are issued and outstanding at
December 31, 1997. At December 31, 1996, Elliott's capital stock consisted of
3,000 authorized shares, of which 500 shares are $100 par value, 5% cumulative
preferred stock and the remaining 2,500 shares are common stock, without par
value. At December 31, 1996, 815 shares of common stock were issued and 512.54
were outstanding. Effective May 15, 1997, B.W. Elliott Manufacturing Co., Inc.
shareholders exchanged their shares of common stock for shares in the Company.
On May 15, 1997, detachable warrants for the purchase of 14.2857 shares of
the Company's common stock at $.01 per share were issued in connection with $10
million of subordinated debt. The approximate fair value of the warrants was
$738,600 at May 15, 1997. The warrants are exercisable at any time and expire on
May 15, 2005.
9. RETIREMENT PLANS
The Company has defined contribution plans covering substantially all
employees of the Company. The Company's contribution expense was $46,634,
$46,784 and $48,588 in 1997, 1996 and 1995, respectively.
10. RELATED PARTY TRANSACTIONS
The Company rents one of its manufacturing facilities under an operating
lease agreement entered into with a company which is co-owned by one of the
Company's stockholders. The terms of the lease, which expires December 31, 2008,
provide for annual rent increases of 5%. Rental payments amounted to $130,734,
$124,509 and $118,580 in 1997, 1996 and 1995, respectively.
The Company pays management fees to Millbrook Capital Management, Inc.,
(Millbrook) a party related to John Dyson, who is a Company stockholder. These
management fees amounted to $660,000, $643,329 and $259,992 in 1997, 1996 and
1995, respectively. The Company paid $100,000 to Millbrook for administrative
support services in 1997. Additionally, in 1997 Millbrook was compensated
$400,000 for advisory services related to the financing and acquisition of ESP
Lock Products, Inc., which is included as part of the deferred financing and
acquisition costs.
11. CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 1996, Elliott changed the composition of costs
included in inventory. Prior to 1997, nonproductive time and benefit pay related
to production workers had not been included in the cost of inventory. Elliott
believes that including such costs more accurately reflects inventory at cost.
Accordingly, Elliott has recorded an adjustment to inventory cost at January 1,
1997 as the cumulative effect of a change in
F-14
<PAGE> 134
KEY COMPONENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
accounting principle. The effect of this adjustment was to increase net income
for the year ended December 31, 1996 by $313,256 (net of income taxes of
$212,072). This change had an immaterial effect on income before income taxes
for the year ended December 31, 1996. Had the Company applied this new
accounting principle in the year ended December 31, 1995, income before income
taxes and net income would not have been materially affected.
12. NON-RECURRING BUSINESS CONSOLIDATION CHARGES
During 1996, the Company initiated a program at Elliott to consolidate
manufacturing and administrative facilities. In connection with the program and
in accordance with EITF 94-3 "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)" the Company recorded provisions during 1996
for the write-down of certain leasehold improvement totaling $76,897 and the
accrual of lease costs on facilities which have no substantive future use to the
Company of $641,155 (Note 7). Additionally, the Company expensed as incurred
moving costs of $84,068 and $67,666 during 1997 and 1996, respectively.
Non-recurring business consolidation charges aggregated $84,069 and $785,718 in
1997 and 1996, respectively.
13. OPERATING SEGMENTS
The Company's operations have been classified into two reportable business
segments: the flexible shaft business and the specialty lock business. The
specialty lock business was formed with the 1997 acquisitions of Hudson and ESP.
The flexible shaft business was the single operating segment of the Company
prior to the acquisitions in 1997. Accordingly, operating segment information
for 1996 and 1995 is not presented. Segment information for 1997 is as follows:
<TABLE>
<CAPTION>
SPECIALTY FLEXIBLE
LOCK SHAFT
BUSINESS BUSINESS ADJUSTMENTS CONSOLIDATED
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Revenue from external
customers...................... $13,144,660 $14,173,148 $ -- $27,317,808
Income from operations........... 3,057,477 2,831,546 (773,875) 5,115,148
Depreciation and amortization.... 992,367 824,879 -- 1,817,246
Segment assets................... 67,492,391 12,259,510 4,700 79,756,601
Capital expenditures............. 276,598 419,072 -- 695,670
</TABLE>
The adjustments represent management fees and other corporate and
administrative expenses and assets.
14. SUBSEQUENT EVENTS (UNAUDITED)
In May 1998, a newly formed wholly-owned subsidiary of the Company, Key
Components, LLC (KC LLC), along with its wholly-owned subsidiary Key Components
Finance Corp. (KCFC), completed the sale of $80,000,000 principal amount of
unsecured 10 1/2% senior notes due 2008. The notes may be redeemed by KC LLC
beginning June 1, 2003 at premiums which range from 105.25% to 100% of the
principal amount. In addition, prior to June 1, 2001 up to one-third of the
notes may be redeemed by KC LLC with the proceeds of one or more equity
offerings at a premium of 110.5% of the principal amount. There are also
redemption provisions in the event of a change in control.
The net proceeds from the notes were used in part to repay the outstanding
principal and interest on the Term Loan, Acquisition Loan, Revolving Credit
Facility and Senior Subordinated Notes (including a redemption premium) and to
repurchase warrants for the purchase of 14.2857 shares of common stock.
The Indenture relating to the notes contains certain covenants and
restrictions which limit dividends and other stockholder distributions,
transactions with affiliates, capital expenditures, rental obligations,
incurrence of indebtedness, and the issuance of preferred stock, among others.
The notes are fully and unconditionally guaranteed, on a joint and several
basis, by certain Subsidiary Guarantors, (as defined). At the date of issuance,
guarantees were provided by Elliott, Hudson and ESP (Subsidiary Guarantors),
each a wholly-owned subsidiary of the Company. At December 31, 1997, the parent
company (Key Components, Inc.) has no assets or operations other than its
investment in the Subsidiary Guarantors. Accordingly, the consolidated financial
statements present the combined assets and operations of the Subsidiary
Guarantors.
F-15
<PAGE> 135
KEY COMPONENTS, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Current assets
Cash...................................................... $10,525,174 $ 1,440,452
Accounts receivable, net of allowance for doubtful
accounts of $85,493 and $80,882 at June 30, 1998 and
December 31, 1997 respectively......................... 9,055,311 7,762,631
Inventories............................................... 8,544,155 8,432,074
Prepaid expenses and other current assets................. 527,175 576,127
----------- -----------
Total current assets.............................. 28,651,815 18,211,284
Property and equipment at cost less accumulated
depreciation.............................................. 11,865,622 11,980,074
Deferred financing costs.................................... 4,264,167 2,100,761
Goodwill.................................................... 44,638,802 45,206,386
Intangibles................................................. 1,672,155 2,197,499
Other assets................................................ 73,597 60,597
----------- -----------
Total assets...................................... $91,166,158 $79,756,601
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities
Current portion of notes payable.......................... $ -- $ 3,000,000
Current portion of other long term obligations............ 498,698 476,925
Accounts payable.......................................... 2,026,013 1,702,328
Accrued expenses and other current liabilities............ 2,992,663 2,351,228
----------- -----------
Total current liabilities......................... 5,517,374 7,530,481
10 1/2% Senior Notes due 2008............................... 80,000,000 --
Notes payable -- long term.................................. -- 62,094,450
Other long term obligations................................. 1,023,152 1,283,969
----------- -----------
Total liabilities................................. 86,540,526 70,908,900
----------- -----------
Stockholders' equity
Capital stock, no par value; 200 shares authorized; 102
and 100 shares issued and outstanding at June 30, 1998
and December 31, 1997, respectively.................... 1,536,254 1,036,254
Paid-in capital........................................... -- 738,600
Retained earnings......................................... 3,089,378 7,072,847
----------- -----------
Total stockholders' equity........................ 4,625,632 8,847,701
----------- -----------
Total liabilities and stockholders' equity........ $91,166,158 $79,756,601
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-16
<PAGE> 136
KEY COMPONENTS, INC.
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
---------------------------
1998 1997
----------- ----------
(UNAUDITED)
<S> <C> <C>
Net sales................................................... $33,015,561 $9,781,285
Cost of goods sold.......................................... 20,578,794 5,253,353
----------- ----------
Gross profit........................................... 12,436,767 4,527,932
Selling, general and administrative expenses................ 5,158,953 2,076,370
Related party management fees............................... 400,000 280,000
----------- ----------
Income from operations................................. 6,877,814 2,171,562
Other income (expense):
Other income.............................................. 127,847 15,773
Interest expense.......................................... (3,294,345) (644,868)
----------- ----------
Income before income taxes and extraordinary charge......... 3,711,316 1,542,467
Provision for income taxes.................................. 139,966 828,003
----------- ----------
Income before extraordinary charge.......................... 3,571,350 714,464
Extraordinary charge -- early repayment of debt............. 4,616,363 --
----------- ----------
Net income (loss)........................................... $(1,045,013) $ 714,464
=========== ==========
Earnings (loss) per share:
Basic earnings (loss) per share:
Income before extraordinary charge..................... $ 35,360 $ 7,115
Extraordinary charge................................... (45,707) --
----------- ----------
Net Income............................................. $ (10,347) $ 7,115
=========== ==========
Diluted earnings (loss) per share:
Income before extraordinary charge..................... $ 31,887 $ 6,870
Extraordinary charge................................... (41,217) --
----------- ----------
Net Income............................................. $ (9,330) $ 6,870
=========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-17
<PAGE> 137
KEY COMPONENTS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
SIX MONTH PERIOD ENDED
JUNE 30,
---------------------------
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $(1,045,013) $ 714,464
Adjustments to reconcile net income to net cash provided
by operating activities:
Extraordinary charge -- early repayment of debt........ 4,616,363 --
Depreciation and amortization.......................... 2,067,734 558,761
Bond discount amortization............................. 30,775 --
Deferred income taxes.................................. -- 216,435
Net increase (decrease) in cash caused by changes in
assets and liabilities:
Accounts receivable.................................. (1,292,680) (714,372)
Inventories.......................................... (112,081) 193,896
Prepaid expenses and other assets.................... 31,750 335,227
Accounts payable..................................... 323,685 (337,937)
Accrued expenses..................................... 641,435 786,384
----------- ------------
Net cash provided by operations................... 5,261,968 1,752,858
----------- ------------
Cash flows from investing activities:
Business acquisition...................................... -- (39,142,795)
Capital expenditures...................................... (710,671) (282,048)
----------- ------------
Net cash used in investing activities............. (710,671) (39,424,843)
----------- ------------
Cash flows from financing activities:
Repayment of debt......................................... (66,010,543) (2,392,282)
Costs associated with early repayment of debt............. (1,978,976) --
Sale of Old Notes......................................... 80,000,000 --
Debt issued............................................... -- 43,838,093
Deferred financing costs.................................. (4,300,000) (1,907,116)
Sale of common stock...................................... 500,000 --
Repurchase of warrants.................................... (1,650,000) --
Dividends to stockholders................................. (2,027,056) --
----------- ------------
Net cash provided by investing activities......... 4,533,425 39,538,695
----------- ------------
Net increase in cash and cash equivalents................... 9,084,722 1,866,710
Cash and cash equivalents, beginning of period.............. 1,440,452 331,338
----------- ------------
Cash and cash equivalents, end of period.................... $10,525,174 $ 2,198,048
=========== ============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest.................................................. $ 2,843,168 $ 250,335
=========== ============
Income taxes.............................................. $ 37,450 $ 237,880
=========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-18
<PAGE> 138
KEY COMPONENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements are for Key
Components, Inc. ("KCI"), its wholly owned subsidiary, Key Components, LLC
("KCLLC") and the wholly owned subsidiaries of KCLLC, one of which is Key
Components Finance Corp. On May 28, 1998 (the "Formation Date"), KCLLC acquired
all of the assets and assumed all of the liabilities of KCI, including all
right, title and interest of KCI in and to all of the outstanding equity
securities of B.W. Elliot Manufacturing Co., Inc., Hudson Lock, Inc. and ESP
Lock Products, Inc. KCI has no assets or operations other than its investment in
KCLLC. Accordingly, the accompanying consolidated financial statements represent
the operations and financial position of KCLLC. Unless otherwise indicated, all
references to "KCI" or the "Company" refer to collectively, at all times prior
to the Formation Date, to KCI and its predecessors and subsidiaries and at all
times on and after the Formation Date, to KCLLC and its predecessors and
subsidiaries.
The accompanying unaudited financial statements of the Company contain all
adjustments which are, in the opinion of management, necessary for a fair
statement of results for the interim periods presented. While certain
information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted, the Company believes that the disclosures herein
are adequate to make the information not misleading. The results of operations
for the three months and six months ended June 30, 1998, are not necessarily
indicative of the results for the full year. These statements should be read in
conjunction with the consolidated financial statements and notes thereto for the
year ended December 31, 1997.
2. ACQUISITIONS OF BUSINESSES
KCI was formed in April 1997 as a holding company for B.W. Elliot
Manufacturing Co., Inc. ("Elliot") Effective May 15, 1997, the shareholders of
Elliot (the "Shareholders") exchanged their shares of Elliot common stock for
shares of KCI's common stock. KCI had no operations of its own prior to the
exchange of ownership interests with Elliott. The exchange ratio was determined
to leave the Shareholders with the same pro rata interests in the Parent as they
had in Elliott. The ownership transfer was between entities under common control
and is accounted for at historical costs. Elliot is the manufacturer and
distributor of flexible shaft products (the Company's "Flexible Shaft
Business").
During 1997, the Company acquired the entities described below (the
"Acquisitions"), which were accounted for by the purchase method of accounting,
and the results of operations have been included in the consolidated financial
statements since the date of acquisition.
On May 15, 1997, the Company acquired all of the outstanding shares of
Hudson Lock, Inc. ("Hudson") for a cash purchase price of $39.1 million and
assumed liabilities of approximately $1.2 million. Hudson manufactures
medium-security custom and specialty locks, primarily for original equipment
manufacturers (the Company's "Specialty Lock Business"). The purchase price was
allocated based on estimated fair values at the date of acquisition. This
resulted in an excess of purchase price over assets acquired of $31 million,
which is being amortized on a straight-line basis over forty years.
On December 10, 1997, the Company acquired all of the outstanding shares of
ESP Lock Products, Inc. ("ESP") for a cash purchase price of $16.3 million and
assumed liabilities of approximately $10.4 million. ESP primarily manufactures
medium-security custom and specialty locks for the Specialty Lock Business. The
purchase price was allocated based on estimated fair values at the date of
acquisition and included $1.2 million for a covenant not to compete. This
resulted in an excess of purchase price over assets acquired of $14.7 million,
which is being amortized on a straight-line basis over forty years.
F-19
<PAGE> 139
KEY COMPONENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On an unaudited pro-forma basis, assuming the Hudson and ESP acquisitions
had occurred as of January 1, 1997, the consolidated results of the Company for
the six months ended June 30, 1997 would have been as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1997
-------------
<S> <C>
Pro forma net sales......................................... $29,599,000
Pro forma income before taxes............................... 2,175,000
</TABLE>
The unaudited pro-forma financial information presented above is not
necessarily indicative of the results that would have actually occurred had the
companies been combined for the periods presented.
The following is summarized financial information for the two acquired
subsidiaries as of and for the six months ended June 30, 1998:
<TABLE>
<CAPTION>
HUDSON ESP
----------- -----------
<S> <C> <C>
Current assets.............................................. $ 5,043,290 $ 6,510,737
Noncurrent assets........................................... 35,854,282 17,913,608
Current liabilities......................................... 1,096,116 1,516,971
Noncurrent liabilities...................................... 506,447 258,993
Net sales................................................... 11,498,859 12,986,998
Gross profit................................................ 4,854,903 4,095,703
Income before extraordinary charge.......................... 2,196,657 1,307,425
Net Income.................................................. 1,183,210 970,835
</TABLE>
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
---------- ------------
<S> <C> <C>
Raw materials............................................... $2,760,194 $2,810,259
Work-in-process............................................. 4,173,007 3,609,454
Finished goods.............................................. 1,610,954 2,012,361
---------- ----------
Total inventory............................................. $8,544,155 $8,432,074
========== ==========
</TABLE>
4. OPERATING SEGMENTS
The Company's operations have been classified into two reportable business
segments: the Flexible Shaft Business and the Specialty Lock Business. The
Specialty Lock Business was formed with the 1997 acquisitions of Hudson and ESP.
The Flexible Shaft Business was the single operating segment of the Company
prior to the acquisitions in 1997. Segment information for the six months ended
June 30, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
SPECIALTY LOCK FLEXIBLE SHAFT
BUSINESS BUSINESS ADJUSTMENTS CONSOLIDATED
-------------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
Six months ended June 30, 1998:
Net sales........................ $24,485,857 $ 8,529,704 $33,015,561
Income from operations........... 5,688,704 1,736,642 $ (547,532) 6,877,814
Depreciation and amortization.... 1,626,516 404,353 1,032 2,031,901
Segment assets................... 65,321,917 21,570,261 4,273,980 91,166,158
Capital expenditures............. 282,392 417,433 10,846 710,671
</TABLE>
F-20
<PAGE> 140
KEY COMPONENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
SPECIALTY LOCK FLEXIBLE SHAFT
BUSINESS BUSINESS ADJUSTMENTS CONSOLIDATED
-------------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
Six months ended June 30, 1997:
Net sales........................ 2,411,963 7,369,322 9,781,285
Income from operations........... 911,636 1,539,926 (280,000) 2,171,562
Depreciation and amortization.... 165,497 393,264 558,761
Segment assets................... 41,792,309 13,355,813 55,148,122
Capital expenditures............. -- 282,048 282,048
</TABLE>
The adjustments represent management fees and other corporate and
administrative expenses and assets.
5. SALE OF NOTES
In May 1998, KCLLC, along with one of its wholly-owned subsidiaries, Key
Components Finance Corp. (Finance Corp.), completed the sale (the "Initial
Offering") of $80,000,000 principal amount of unsecured 10 1/2% senior notes due
2008 (the "Old Notes"). The Old Notes may be redeemed by KCLLC beginning June 1,
2003 at premiums which range from 105.25% to 100% of the principal amount. In
addition, prior to June 1, 2001 up to one-third of the notes may be redeemed by
KCLLC with the proceeds of one or more equity offerings at a premium of 110.5%
of the principal amount. There are also redemption provisions in the event of a
change in control.
The net proceeds from the notes were used in part to repay certain
indebtedness, including a redemption, premium and to repurchase warrants for the
purchase of 14.2857 shares of common stock.
The Indenture relating to the Old Notes contains certain covenants and
restrictions which limit dividends and other stockholder distributions,
transactions with affiliates, capital expenditures, rental obligations,
incurrence of indebtedness, and the issuance of preferred stock, among others.
The Old Notes are fully and unconditionally guaranteed on a joint and
several basis by the Subsidiary Guarantors (as defined). At the date of
issuance, guarantees were provided by Elliott, Hudson and ESP (Subsidiary
Guarantors), each a wholly-owned subsidiary of the Company. At June 30, 1998,
KCI has no assets or operations other than its membership interests in KCLLC and
Finance Corp. has no assets or operations. Accordingly, the consolidated
financial statements present the combined assets and operations of KCLLC and the
Subsidiary Guarantors.
6. EARNINGS PER SHARE
Earnings per share (EPS) is computed based on the weighted average number
of common shares outstanding during the period in accordance with Statement of
Financial Accounting Standards No. 128, Earnings Per Share. The number of shares
outstanding for the six months ended June 30, 1997 have been restated to give
retroactive effect to the change in corporate structure discussed in Note 1.
Shares used in the calculation of basic and diluted EPS were:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------
1998 1997
---- ----
<S> <C> <C>
Shares used in the calculation of basic EPS (weighted
average shares outstanding)............................. 101 100
Effect of dilutive potential securities (weighted average
shares issuable upon conversion of warrants)............ 11 4
---- ----
Shares used in the calculation of diluted EPS............. 112 104
==== ====
</TABLE>
F-21
<PAGE> 141
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders,
B.W. Elliott Manufacturing Co., Inc.
We have audited the accompanying balance sheets of B.W. Elliott
Manufacturing Co., Inc. as of December 31, 1995, and the related statements of
income and retained earnings and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the accompanying financial statements present fairly after
the restatement referred to in Note 8, in all material respects, the financial
position of B.W. Elliott Manufacturing Co., Inc. as of December 31, 1995 and the
results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplementary information is
presented for the purposes of additional analysis and is not a required part of
the basic financial statements. Such information has been subjected to the
auditing procedures applied in the audit of the basic financial statements, and,
in our opinion, is fairly stated in all material respects in relation to the
basic financial statements taken as a whole.
Fulgieri & Randall, LLP
Binghamton, New York
February 9, 1996, except for
Note 8 and Note 4, which are as of
February 21, 1997
F-22
<PAGE> 142
B. W. ELLIOTT MANUFACTURING CO., INC.
BALANCE SHEET
DECEMBER 31, 1995
<TABLE>
<S> <C>
ASSETS
Current Assets
Cash...................................................... $ 820,552
Accounts receivable....................................... 1,762,774
Inventory................................................. 3,330,511
Prepaid expenses.......................................... 209,928
Prepaid income taxes...................................... 187,744
Deferred income taxes..................................... 12,155
-----------
Total Current Assets.............................. 6,323,664
-----------
Property and Equipment -- Net............................... 3,351,159
-----------
Other Assets
Deposits with vendors..................................... 8,210
Unamortized intangibles................................... 1,026,362
-----------
Total Other Assets................................ 1,034,572
-----------
Total Assets...................................... $10,709,395
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable -- current.................................. $ 1,113,496
Accounts payable.......................................... 318,617
Payroll taxes payable..................................... 12,073
Accrued expenses.......................................... 141,242
-----------
Total Current Liabilities......................... 1,585,428
Other Liabilities
Notes payable -- long-term................................ 2,494,319
Deferred income taxes payable............................. 146,207
-----------
Total Liabilities................................. 4,225,954
-----------
Shareholders' Equity
Capital stock............................................. 1,066,500
Paid in capital........................................... 13,000
Retained earnings......................................... 6,822,436
-----------
7,901,936
Less treasury stock....................................... (1,418,495)
-----------
Total Shareholders' Equity........................ 6,483,441
-----------
Total Liabilities and Shareholders' Equity........ $10,709,395
===========
</TABLE>
See notes to financial statements and accountant's report.
F-23
<PAGE> 143
B.W. ELLIOTT MANUFACTURING CO., INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
Net Sales................................................... $13,184,944
Cost of Goods Sold.......................................... 7,355,650
-----------
Gross Profit................................................ 5,829,294
Selling, General and Administrative Expenses................ 3,457,350
-----------
Income from Operations...................................... 2,371,944
-----------
Other Income (Expense)
Other income.............................................. 25,830
Interest expense.......................................... (426,550)
-----------
Total Other Income (Expense)................................ (400,720)
-----------
Income before Income Taxes.................................. 1,971,224
-----------
Provision for Income Taxes
Current................................................... 751,256
Deferred.................................................. (27,547)
-----------
Total Income Taxes.......................................... 723,709
-----------
Net Income................................................ 1,247,515
-----------
Retained Earnings, beginning of year
As reported............................................... 5,680,759
Adjustments............................................... (105,838)
-----------
As restated............................................... 5,574,921
-----------
Retained Earnings, end of year.............................. $ 6,822,436
===========
</TABLE>
See notes to financial statements and accountant's report.
F-24
<PAGE> 144
B.W. ELLIOTT MANUFACTURING CO., INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
Cash Flows from Operating Activities
Net income................................................ $ 1,247,515
Adjustments to reconcile net income to net cash from
operating activities
Depreciation and amortization.......................... 713,147
Deferred income taxes.................................. (27,547)
Loss on sale of assets................................. 7,471
(Increase) decrease in assets
Accounts receivable.................................. 380,447
Inventory............................................ 475,178
Prepaid expenses..................................... (57,207)
Prepaid income taxes................................. (87,668)
Other assets......................................... 7,015
Increase (decrease) in liabilities
Accounts payable..................................... (250,047)
Payroll taxes payable................................ (2,671)
Accrued expenses..................................... (304,961)
-----------
Net Cash Flows from Operating Activities.......... 2,100,672
-----------
Cash Flows from Investing Activities
Purchase of assets........................................ (345,135)
Proceeds from sale of equipment........................... 16,570
-----------
Net Cash Flows from Investing Activities.......... (328,565)
-----------
Cash Flows from Financing Activities
Repayment of notes payable................................ (1,396,704)
-----------
Net Cash Flows from Financing Activities.......... (1,396,704)
-----------
Net Increase in Cash........................................ 375,403
Cash, Beginning of Year..................................... 445,149
-----------
Cash, End of Year........................................... $ 820,552
===========
Supplemental Disclosure
Cash paid during the year for:
Interest............................................... $ 429,749
===========
Income taxes........................................... $ 842,358
===========
</TABLE>
See notes to financial statements and accountant's report.
F-25
<PAGE> 145
B.W. ELLIOTT MANUFACTURING CO., INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 1 NATURE OF OPERATIONS
The Company primarily manufactures flexible shafting and remote valve
control components used for power-transmission applications. Of these product
lines, the sales volume of flexible shafting is much larger than that of remote
valve control components. The principal markets for flexible shafting are the
lawn and garden, construction equipment and defense industries and general
industrial users. Remote valve control components are sold primarily to
commercial and military shipbuilders and to the nuclear industry. Although the
majority of sales are to domestic markets, overseas sales are increasing.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTING METHOD -- The Company uses the accrual basis method for both
financial reporting and tax purposes. Revenue is recorded when earned and
expenses are recorded when incurred.
CASH AND CASH EQUIVALENTS -- For the purposes of the statement of cash
flows, cash and cash equivalents are defined as demand deposits at banks and
cash on hand.
ACCOUNTS RECEIVABLE -- The Company uses the allowance method to provide for
uncollectible accounts. The allowance is two percent of the accounts receivable
balance as follows:
<TABLE>
<CAPTION>
1995
----------
<S> <C>
Accounts receivable......................................... $1,798,749
Allowance for bad debts..................................... 35,975
----------
Accounts Receivable -- Net................................ $1,762,774
==========
</TABLE>
INVENTORY -- Inventory is stated at the lower of cost or market, on a
first-in, first-out basis under the full absorption method. The components of
inventory are as follows:
<TABLE>
<CAPTION>
1995
----------
<S> <C>
Raw materials............................................... $1,178,313
Work in process............................................. 1,159,671
Finished goods.............................................. 992,527
----------
Total Inventory........................................... $3,330,511
==========
</TABLE>
PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost and
consist of the following:
<TABLE>
<CAPTION>
1995
----------
<S> <C>
Land, building and improvements............................. $ 420,005
Equipment, furniture and fixtures........................... 5,596,240
Leasehold improvements...................................... 223,152
Construction in progress.................................... 28,921
----------
6,268,318
Less accumulated depreciation............................... 2,917,159
----------
Total Property and Equipment.............................. $3,351,159
==========
</TABLE>
F-26
<PAGE> 146
B.W. ELLIOTT MANUFACTURING CO., INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation is computed as follows:
<TABLE>
<CAPTION>
YEARS OF
ASSET METHOD(S) USEFUL LIFE
----- --------- -----------
<S> <C> <C>
Building and Improvements.................... Straight-line 31.5 and 39
Office Equipment, Furniture and Fixtures..... Straight-line 5-10
Machinery and Equipment...................... Straight-line and Double 3-10
Declining Balance
Vehicles..................................... Straight-Line and Double 3-5
Declining Balance
Leasehold Improvements....................... Straight-line 10
</TABLE>
The depreciation expense amounted to $462,173 in 1995.
DEFERRED INCOME TAXES -- Statement of Financial Accounting Standards (SFAS)
109, Accounting for Income Taxes, requires an asset and liability approach to
financial accounting and reporting for income taxes. Deferred income tax assets
and liabilities are computed annually for differences between the financial
statement and tax bases of assets and liabilities that will result in taxable or
deductible amounts in the future based on enacted tax laws and rates applicable
to the periods in which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. Income tax expense is the tax
payable or refundable for the period plus or minus the change during the period
in deferred tax assets and liabilities. The temporary differences relate
primarily to the use of, for tax purposes, an accelerated cost recovery system
of depreciation, additional amortization, inventoried Section 263A costs, and
direct write-off of bad debts.
INTANGIBLES -- Intangibles consist primarily of costs associated with a
brand name licensing agreement the Company entered into in 1993 in connection
with its acquisition of certain assets of Stow Manufacturing Co. Under the
agreement, the Company is permitted to use any and all Stow brand names and
trademarks related to the acquired assets. The cost of agreement is being
amortized on a straight-line basis over seven years, the life of the agreement.
Amortization expense amounts to $250,974.
INCOME TAX CREDITS -- Tax credits reduce the provision for taxes in the
year in which they are recognized under the flow-through method.
The Company has earned and used New York State tax credits during the
period as follows:
<TABLE>
<CAPTION>
1995
--------------------------------
FEDERAL NEW YORK TOTAL
-------- -------- --------
<S> <C> <C> <C>
Current Tax Provision before Credits............... $669,658 $190,250 $859,908
Credit Used to Reduce Tax Provision................ -- 108,652 108,652
-------- -------- --------
Current Tax Provision.............................. $669,658 $ 81,598 $751,256
======== ======== ========
</TABLE>
The Company earned New York State investment tax credits of $60,779 and New
York State economic development zone investment tax credits of $23,108 in 1995
and had $75,223 in carryover credits from 1994 for a total of $159,110. The tax
provision was reduced by $108,652 resulting in a carryover of $50,458. Of this
carryover, $19,677 will expire in 2005 and the balance of $30,781 will be
carried forward indefinitely.
CONCENTRATION OF CREDIT RISK -- Demand deposits held by one banking
institution are in excess of federally insured limits. A potential credit risk
exists for the amount in excess of $100,000.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial
F-27
<PAGE> 147
B.W. ELLIOTT MANUFACTURING CO., INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
MAJOR CUSTOMERS AND SUPPLIERS -- Approximately 56% of the Company's income
from operations resulted from sales to twenty customers. Approximately 65% of
direct material purchases were from ten suppliers. The Company does not expect
any adverse changes in these business relationships.
NOTE 3 RELATED PARTY TRANSACTIONS
On January 1, 1986, the Company entered into a long-tern lease with Empire
Realty Company (owned by Michael Urda, an employee and prior shareholder, and
George Scherer, a shareholder) for general and manufacturing facility located at
35 Milford Street, Binghamton, New York. The terms of the lease provide for
annual increases of 5%. The lease expires December 31, 2008. Rental payments
amount to $118,580 in 1995.
The Company pays management fees in the amount of $259,992 to Millbrook
Management, Inc. (formerly Dyson Sinclair Associates, Inc.), a related party to
Whitehall -- Dyson Company, LLC (formerly Whitehall -- Dyson Partners, L.P.),
which is the majority shareholder.
NOTE 4 NOTES PAYABLE
The Company is liable at December 31, 1995 for the following notes payable:
<TABLE>
<S> <C>
BANK NOTES
BSB BANK & TRUST (FORMERLY BINGHAMTON SAVINGS BANK)
Note Payable -- Term Note. On March 17, 1993, the Company
borrowed $2,100,000 for the asset-based purchase of certain
divisions of Stow Manufacturing Co. The monthly payment is
$29,167 plus interest at a rate of prime plus .75% (9.25%)
for six years. The note is scheduled to mature in March
1999. ...................................................... $1,137,500
Note Payable -- Term Note. On March 17, 1993, the Company
borrowed $1,550,000 to refinance all outstanding debt with
Chemical Bank. The monthly payment is $25,833 plus interest
at a rate of prime plus .75% (9.25%) for five years. The
note is scheduled to mature in March 1998. ................. 697,500
RELATED PARTY NOTE
WHITEHALL-DYSON COMPANY, LLC
Note Payable -- Term Note. On April 1, 1992, the company
borrowed $1,430,000 for the purchase of treasury stock. On
March 17, 1993, the Company borrowed an additional $250,000
related to the asset-based purchase of certain divisions of
Stow Manufacturing Co. On October 20, 1994, an additional
$125,000 was borrowed. The monthly payment is $17,024 plus
interest at a rate of prime plus 5.00% (13.50%) for seven
years. The note is scheduled to mature in November 1998. ... 580,477
OTHER NOTE
TAMREN TOOL, INC.
Note Payable -- Term Note. On November 1, 1989, the Company
financed $160,000 of it asset-based purchase of Tamren Tool,
Inc. The monthly payment is $1,667 plus interest at a rate
of prime plus 1% (9.50%) for eight years. The note is
scheduled to mature in November 1997. ...................... 36,664
</TABLE>
F-28
<PAGE> 148
B.W. ELLIOTT MANUFACTURING CO., INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<S> <C>
STOW MANUFACTURING COMPANY
Installment obligation discounted at 7.85% quarterly
payments of $87,500 including principle and interest through
December 1997. ............................................. 1,155,674
----------
3,607,815
Less Current................................................ 1,113,496
----------
Long-term................................................... $2,493,319
==========
</TABLE>
Based on current interest rates, scheduled maturities for the above notes
are as follows:
<TABLE>
<CAPTION>
PRINCIPAL
----------
<S> <C>
1996............................................. $1,113,496
1997............................................. 1,165,874
1998............................................. 907,592
1999............................................. 420,853
----------
$3,607,815
==========
</TABLE>
Interest expense amounted to $316,152 in 1995
The Company has pledged to BSB Bank & Trust all of its tangible and
intangible property as a security interest for all debt to BSB Bank & Trust,
along with life insurance on George Scherer. Also John Dyson is a limited
guarantor to BSB Bank & Trust.
The BSB Bank & Trust debt contains covenants, certain of which require the
maintenance of working capital, net worth, debt service coverage levels and
restricts asset purchases. The Company complied with all covenants except
capital expenditures, which exceeded the $300,000 limitation, for the period
ended December 31, 1995. Management received a waiver of the capital expenditure
covenant.
NOTE 5 RETIREMENT PLAN
The Company contributes to a deferred compensation plan. The contribution
is equal to 1/2% of the annual compensation to all full time employee with more
than one year of service who have chosen to be covered by the plan. An
additional contribution of up to 1% may be made at the discretion of the
Company's management. Vesting is full and immediate. The Company's contribution
is invested at the employee's discretion. Any contribution made by the employees
are also invested at their discretion. The Company's plan expense amounts to
$48,588.
The Company has established a deferred compensation plan for certain key
employees in which benefits began to accrue in 1995.
NOTE 6 LEASE COMMITMENTS
The Company leases a manufacturing facility located at 57 Front Street,
Binghamton, New York from Colonial Plaza Associates (formerly Route 12A
Associates). The lease is classified as an operating lease and provides for
monthly rental payments of $7,592 plus certain expenses including real estate
taxes, utilities, and insurance. Rental payments amount to $90,432.
The Company entered into a three-year lease for manufacturing space located
on Brandywine Highway, Binghamton, New York from Stow Manufacturing Co. The
lease is classified as an operating lease and provides for monthly rental
payments of $9,740, plus certain expenses including a portion of special
assessments, utilities, maintenance, and insurance. Rental payments amount to
$107,140.
F-29
<PAGE> 149
B.W. ELLIOTT MANUFACTURING CO., INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following is a schedule of the future minimum lease payments required
under all operating real estate leases (includes related party lease):
<TABLE>
<S> <C>
1996............................................. $ 245,518
1997............................................. 223,900
1998............................................. 232,284
1999............................................. 240,116
2000............................................. 199,689
----------
Total.................................. $1,141,507
==========
</TABLE>
NOTE 7 SHAREHOLDERS' EQUITY
The Company's capital stock consists of 3,000 authorized shares of which
500 shares are $100 par value, 5% cumulative preferred stock, and the remaining
2,500 shares are common stock, without par value. At December 31, 1995, 815
shares of common stock are issued and 512.54 are outstanding.
The Company's treasury stock consists of 302.46 shares, redeemed at cost,
133 shares on December 19, 1986 and 169.46 shares (net) on April 1, 1992. The
later transaction provided an excess of $13,000, which is recorded as pain in
capital.
NOTE 8 RESTATEMENT OF FINANCIAL STATEMENTS
The Company has restated its financial statements for the year ended
December 31, 1995. This restatement is a result of a determination by the
Company that its method of accounting for cost associated with a brand name
licensing agreement the Company entered into in 1993 in connection with its
acquisition of certain assets of Stow Manufacturing Company (Stow) was
incorrect. Under the agreement, the Company is permitted to use any and all of
Stow's brand names and trademarks related to the acquired assets for a period of
seven years in exchange for specified quarterly payments through December 1999,
aggregated $2.2 million. The Company had previously recorded expense when each
payment was due.
During 1996, the Company changed its accounting for the agreement,
recording an intangible asset of $1,658,053, net of accumulated amortization of
$661,248 and other adjustments with a net change to retained earnings of
$105,838.
F-30
<PAGE> 150
B.W. ELLIOTT MANUFACTURING CO., INC.
SUPPLEMENTARY INFORMATION
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
SCHEDULES OF NET SALES
Sales....................................................... $13,215,759
Less sales returns and discounts............................ 30,815
-----------
Net Sales................................................. $13,184,944
===========
SCHEDULES OF COST OF GOODS SOLD
Inventory, Beginning of Year
Raw materials............................................. $ 1,443,311
Work in process........................................... 1,227,958
Finished goods............................................ 1,134,420
-----------
Total Beginning Inventory............................ 3,805,689
-----------
Direct Material Purchases, Includes Freight-in of
$101,814.................................................. 2,636,261
Direct Labor................................................ 1,491,572
Indirect Expenses
Indirect labor............................................ 621,320
Group insurance........................................... 423,407
Equipment depreciation.................................... 369,895
Plant, shipping and janitorial supplies................... 273,307
Building -- rent, repairs, and maintenance................ 266,573
Utilities................................................. 229,121
Payroll taxes............................................. 199,561
Equipment -- rent, repairs, and maintenance............... 140,441
Tooling................................................... 108,910
Real estate taxes......................................... 37,445
Indirect materials........................................ 29,482
Outside services.......................................... 29,295
Building depreciation..................................... 18,459
Other expenses............................................ 5,423
-----------
Total Direct and Indirect Expenses................... 6,880,472
-----------
Total Cost of Goods Available for Sale............ 10,686,161
-----------
Less Inventory, End of Year
Raw materials............................................. 1,178,313
Work in process........................................... 1,159,671
Finished goods............................................ 992,527
-----------
Total Ending Inventory............................... 3,330,511
-----------
Total Cost of Goods Sold.......................... $ 7,355,650
===========
</TABLE>
See accountant's report.
F-31
<PAGE> 151
B.W. ELLIOTT MANUFACTURING CO., INC.
SUPPLEMENTARY INFORMATION
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
SCHEDULES OF SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Officers' and office salaries............................... $1,815,487
Management fees............................................. 409,992
Amortization................................................ 250,974
Payroll taxes............................................... 121,758
General insurance........................................... 93,155
Group insurance and dental plan............................. 86,908
Advertising................................................. 84,004
Occupancy................................................... 80,882
Travel and entertainment.................................... 59,876
Equipment depreciation...................................... 58,787
Office supplies and expense................................. 57,455
Retirement plan............................................. 48,588
Commissions................................................. 46,606
Bad debts................................................... 40,774
Professional fees........................................... 38,701
Outside services............................................ 36,519
Telephone................................................... 34,766
Employee relations and education............................ 33,541
Miscellaneous............................................... 19,695
Equipment -- rent, repair and maintenance................... 15,831
Building depreciation....................................... 15,032
Freight-out................................................. 4,732
Officers' life insurance.................................... 3,287
----------
Total Selling, General and Administrative
Expenses.......................................... $3,457,350
==========
</TABLE>
See accountant's report.
F-32
<PAGE> 152
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Key Components, Inc.
In our opinion, the accompanying balance sheet and the related statements
of income and retained earnings and of cash flows present fairly, in all
material respects, the financial position of Hudson Lock, Inc. (a wholly-owned
subsidiary of Jordan Industries, Inc.) (the Company) at May 15, 1997 and
December 28, 1996, and the results of its operations and its cash flows for the
periods December 29, 1996 through May 15, 1997 and December 31, 1995 through
December 28, 1996, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audit of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
As described in Note 8, on May 15, 1997, all of the outstanding shares of
the Company were acquired by Key Components, Inc.
PRICE WATERHOUSE LLP
Syracuse, New York
February 20, 1998
F-33
<PAGE> 153
HUDSON LOCK, INC.
(A WHOLLY-OWNED SUBSIDIARY OF JORDAN INDUSTRIES, INC.)
BALANCE SHEET
<TABLE>
<CAPTION>
MAY 15, 1997 DECEMBER 28, 1996
------------ -----------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets
Cash...................................................... $ 91 $ 209
Accounts receivable, net of allowance for doubtful
accounts of $23 and $23, respectively.................. 2,230 1,928
Inventories (Notes 1 and 2)............................... 1,589 1,287
Prepaid expenses.......................................... 123 272
------- -------
Total current assets.............................. 4,033 3,696
Property and equipment, less accumulated depreciation
(Notes 1 and 3)........................................ 5,925 5,967
Goodwill, net (Note 1).................................... 3,920 3,965
------- -------
Total assets...................................... $13,878 $13,628
======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Accounts payable.......................................... $ 136 $ 440
Accrued liabilities....................................... 706 355
Due to related party (Note 7)............................. 12,166 13,133
Current portion of obligation under capital leases (Note
4)..................................................... 62 38
Income tax payable........................................ 428 --
------- -------
Total current liabilities......................... 13,498 13,966
Obligation under capital leases (Note 4).................... 245 122
Deferred income taxes (Note 5).............................. 1,725 1,722
------- -------
Total liabilities................................. 15,468 15,810
------- -------
Stockholder's equity (deficit)
Common stock, $1 par value, 10,000 shares authorized;
1,000 shares subscribed................................ 1 1
Retained deficit.......................................... (1,590) (2,182)
Common stock subscriptions receivable..................... (1) (1)
------- -------
Total stockholder's (deficit)..................... (1,590) (2,182)
------- -------
Total liabilities and stockholder's equity........ $13,878 $13,628
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE> 154
HUDSON LOCK, INC.
(A WHOLLY-OWNED SUBSIDIARY OF JORDAN INDUSTRIES, INC.)
STATEMENT OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
FOR THE PERIOD
--------------------------------------
DECEMBER 29, 1996 DECEMBER 31, 1995
THROUGH THROUGH
MAY 15, 1997 DECEMBER 28, 1996
----------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Net sales.................................................. $ 6,809 $15,402
Cost of goods sold......................................... 3,877 9,230
------- -------
Gross profit............................................... 2,932 6,172
Selling, general and administrative expenses............... 1,217 2,584
------- -------
Income from operations................................... 1,715 3,588
------- -------
Other expense.............................................. -- 12
Interest expense........................................... 663 2,015
------- -------
663 2,027
------- -------
Income before income taxes................................. 1,052 1,561
------- -------
Provision for income taxes (Notes 1 and 5)
Current.................................................. 457 133
Deferred................................................. 3 531
------- -------
Total income taxes....................................... 460 664
------- -------
Net income............................................... 592 897
Retained deficit:
Beginning of year........................................ (2,182) (3,079)
------- -------
End of year.............................................. $(1,590) $(2,182)
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-35
<PAGE> 155
HUDSON LOCK, INC.
(A WHOLLY-OWNED SUBSIDIARY OF JORDAN INDUSTRIES, INC.)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
--------------------------------------
DECEMBER 29, 1996 DECEMBER 31, 1995
THROUGH THROUGH
MAY 15, 1997 DECEMBER 28, 1996
----------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net income............................................... $ 592 $ 897
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization......................... 249 819
Loss on disposal of property, plant and equipment..... 64 --
Net increase (decrease) in cash caused by changes in
assets and liabilities:
Accounts receivable................................. (302) 85
Inventories......................................... (302) 151
Prepaid expenses.................................... 149 (125)
Accounts payable.................................... (304) 110
Accrued expenses.................................... 351 (326)
Income tax payable.................................. 428 74
Deferred income taxes............................... 3 446
----- -------
Net cash provided by operating activities........... 928 2,131
----- -------
Cash flows from investing activities:
Acquisition of property, plant and equipment............. (67) (316)
----- -------
Net cash used in investing activities............... (67) (316)
----- -------
Cash flows from financing activities:
Repayment of due to related party........................ (967) (1,699)
Repayment of obligation under capital lease.............. (12) (15)
----- -------
Net cash used by financing activities............... (979) (1,714)
----- -------
Net increase (decrease) in cash and cash equivalents....... (118) 101
Cash and cash equivalents, beginning of year............... 209 108
----- -------
Cash and cash equivalents, end of year..................... $ 91 $ 209
===== =======
Supplemental disclosure of cash flow information:
Cash paid during the year for interest................... $ 630 $ 2,078
Cash paid during the year for income taxes............... 15 147
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-36
<PAGE> 156
HUDSON LOCK, INC.
(A WHOLLY-OWNED SUBSIDIARY OF JORDAN INDUSTRIES, INC.)
NOTES TO FINANCIAL STATEMENTS
MAY 15, 1997 AND DECEMBER 28, 1996
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Hudson Lock, Inc. (the Company) (a wholly-owned subsidiary of Jordan
Industries, Inc.) manufactures medium-security custom and specialty locks
primarily for original equipment manufacturers (OEM). The majority of the
Company's sales is derived from a small number of significant customers.
REVENUE RECOGNITION
Revenue and related cost of sales are recognized upon shipment of products.
INVENTORIES
Inventories are stated at the lower of cost or market, cost being
determined using the first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Repairs, maintenance
and tooling cost are expensed in the year incurred. Expenditures which result in
betterments or extensions of the useful lives of assets are capitalized and
depreciated over the remaining lives of such assets. Depreciation expense is
computed using the straight-line method over the estimated useful lives ranging
from four to thirty one and a half years.
GOODWILL
The excess of purchase price over the fair market value of net assets when
the Company was acquired in 1989 by Jordan Industries, Inc. represents goodwill
which is being amortized over forty years using the straight-line method.
Amortization expense for the periods ended May 15, 1997 and December 28, 1996
was $46 and $123, respectively. Accumulated amortization amounted to $900 and
$854 at May 15, 1997 and December 28, 1996, respectively.
INCOME TAXES
The Company joins with Jordan Industries, Inc. in the filing of a
consolidated federal income tax return for the periods reflected in the
financial statements. However, for purposes of computing the tax accounts of the
Company, Statement of Accounting Standards No. 109, Accounting for Income Taxes,
was applied as if the Company were a separate taxpayer.
The income tax provision included in the statement of income is based upon
pre-tax income for financial reporting purposes and includes an appropriate
provision for the effect of temporary differences between the amount of assets
and liabilities recognized for financial reporting purposes and such amounts
recognized for tax purposes.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-37
<PAGE> 157
HUDSON LOCK, INC.
(A WHOLLY-OWNED SUBSIDIARY OF JORDAN INDUSTRIES, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
MAY 15, 1997 DECEMBER 28, 1996
------------ -----------------
<S> <C> <C>
Raw materials.......................................... $ 425 $ 239
Work-in-process........................................ 869 810
Finished goods......................................... 295 238
------ ------
Total........................................ $1,589 $1,287
====== ======
</TABLE>
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
MAY 15, 1997 DECEMBER 28, 1996
------------ -----------------
<S> <C> <C>
Land................................................... $ 308 $ 308
Building and improvements.............................. 3,280 3,127
Equipment, furniture and fixtures...................... 5,670 5,789
Office and automotive equipment........................ 442 434
------- -------
9,700 9,658
Less accumulated depreciation.......................... (3,775) (3,691)
------- -------
Total property, plant and equipment.......... $ 5,925 $ 5,967
======= =======
</TABLE>
Depreciation expense was $267 and $696 for the periods ended May 15, 1997
and December 28, 1996, respectively.
4. LEASES
The Company leases certain machinery and equipment with a bargain purchase
option. These are classified as capital leases and expire at various dates
through 2002. The Company also has an operating lease for warehouse space which
expires in 1998. Remaining future minimum payments for noncancellable capital
and operating leases with initial or remaining terms in excess of one year are
as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED MAY 15, TOTAL OPERATING CAPITAL
------------------ ----- --------- -------
<S> <C> <C> <C>
1998...................................................... $104 $12 $ 92
1999...................................................... 91 -- 91
2000...................................................... 88 -- 88
2001...................................................... 63 -- 63
2002...................................................... 34 -- 34
Thereafter................................................ -- -- --
---- --- ----
Total minimum lease payments.................... $380 $12 368
==== ===
Less: Estimated amount representing interest.............. (61)
----
Present value of net minimum lease payments............... 307
Less: Current portion..................................... (62)
----
Long-term obligation under capital lease at May 15,
1997.................................................... $245
====
</TABLE>
F-38
<PAGE> 158
HUDSON LOCK, INC.
(A WHOLLY-OWNED SUBSIDIARY OF JORDAN INDUSTRIES, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. INCOME TAXES
Deferred tax liabilities and (assets) are comprised of the following (in
thousands):
<TABLE>
<CAPTION>
MAY 15, 1997 DECEMBER 28, 1996
------------ -----------------
<S> <C> <C>
Accrued bonus.......................................... $ (45) $ --
Accrued vacation....................................... (90) (78)
Net operating loss carryforward........................ -- (66)
Other.................................................. (19) (14)
------ ------
Total deferred tax assets.............................. (154) (158)
------ ------
Depreciation........................................... 1,879 1,880
------ ------
Total deferred tax liabilities......................... 1,879 1,880
------ ------
Net deferred tax liability............................. $1,725 $1,722
====== ======
</TABLE>
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
FOR THE PERIOD
--------------------------------------
DECEMBER 29, 1996 DECEMBER 31, 1995
THROUGH THROUGH
MAY 15, 1997 DECEMBER 28, 1996
----------------- -----------------
<S> <C> <C>
Federal taxes -- current........................... $336 $ --
State taxes -- current............................. 121 133
Federal taxes -- deferred.......................... 3 451
State taxes -- deferred............................ -- 80
---- ----
$460 $664
==== ====
</TABLE>
6. EMPLOYEE BENEFIT PLAN
Employees who worked at least 1,000 hours during the previous consecutive
twelve-month period and who are 21 years of age are eligible to participate in a
401(k) plan sponsored by Jordan Industries, Inc. Employees can contribute up to
15% of pretax income or the yearly maximum determined by the Internal Revenue
Service. The Company does not contribute to the plan.
7. RELATED PARTY TRANSACTIONS
The Company pays certain fees to Jordan Industries, Inc. principally to
cover general management consulting services performed by Jordan Industries,
Inc. on behalf of the Company.
The Company also has a revolving demand loan payable to Jordan Industries,
Inc. which bears interest at 14.50% per annum. Interest is payable on a
quarterly basis.
The related party account balances with Jordan Industries, Inc. are
summarized below (in thousands):
<TABLE>
<CAPTION>
MAY 15, 1997 DECEMBER 28, 1996
------------ -----------------
<S> <C> <C>
Consulting fee payable................................. $ 92 $ 177
Interest expense payable............................... 512 479
Loan payable........................................... 11,562 12,477
------- -------
$12,166 $13,133
======= =======
</TABLE>
F-39
<PAGE> 159
HUDSON LOCK, INC.
(A WHOLLY-OWNED SUBSIDIARY OF JORDAN INDUSTRIES, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Consulting fees and interest expense amounted to $277 and $654,
respectively, for the period ended May 15, 1997, and $706 and $2,001,
respectively, for the period ended December 28, 1996.
8. SUBSEQUENT EVENTS
On May 15, 1997, Key Components, Inc. acquired all of the outstanding
shares of the Company for $34.1 million.
F-40
<PAGE> 160
REPORT OF INDEPENDENT ACCOUNTANTS
September 22, 1998
To the Board of Directors and Stockholders
of Key Components, Inc.
In our opinion, the accompanying balance sheet and the related statements
of income and retained earnings and of cash flows present fairly, in all
material respects, the financial position of Hudson Lock, Inc. (a wholly-owned
subsidiary of Jordan Industries, Inc.) (the Company) at December 30, 1995 and
the results of its operations and its cash flows for the period January 1, 1995
through December 30, 1995, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audit of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for the opinion expressed
above.
As described in Note 8, on May 15, 1997, all of the outstanding shares of
the Company were acquired by Key Components, Inc.
PRICEWATERHOUSECOOPERS LLP
F-41
<PAGE> 161
HUDSON LOCK, INC.
(A WHOLLY-OWNED SUBSIDIARY OF JORDAN INDUSTRIES, INC.)
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 30, 1995
-----------------
<S> <C>
ASSETS
Current assets
Cash...................................................... $ 107,534
Accounts receivable, net of allowance for doubtful
accounts of $9,654..................................... 2,012,674
Inventories (Notes 1 and 2)............................... 1,437,595
Prepaid expenses.......................................... 124,705
-----------
Total current assets.............................. 3,682,508
Property and equipment, less accumulated depreciation
(Notes 1 and 3)........................................ 6,319,447
Goodwill, net (Note 1).................................... 4,087,625
-----------
Total assets...................................... $14,089,580
===========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities
Accounts payable.......................................... $ 330,386
Accrued liabilities....................................... 681,462
Current portion of due to related party (Note 7).......... 1,698,311
Current portion of obligation under capital leases (Note
4)..................................................... 24,567
Income tax payable........................................ 6,247
-----------
Total current liabilities......................... 2,740,973
Obligation under capital leases (Note 4).................... 120,149
Due to related party (Note 7)............................... 13,133,373
Deferred income taxes (Note 5).............................. 1,173,410
-----------
Total liabilities................................. 17,167,905
-----------
Stockholder's equity (deficit)
Common stock, $1 par value, 10,000 shares authorized;
1,000 shares subscribed................................ 1,000
Retained deficit.......................................... (3,078,325)
Common stock subscriptions receivable..................... (1,000)
-----------
Total stockholder's deficit....................... (3,078,325)
-----------
Total liabilities and stockholder's deficit....... $14,089,580
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-42
<PAGE> 162
HUDSON LOCK, INC.
(A WHOLLY-OWNED SUBSIDIARY OF JORDAN INDUSTRIES, INC.)
STATEMENT OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
FOR THE PERIOD
JANUARY 1, 1995
THROUGH
DECEMBER 30, 1995
-----------------
<S> <C>
Net sales................................................... $16,149,829
Cost of goods sold.......................................... 9,194,924
-----------
Gross profit................................................ 6,954,905
Selling, general and administrative expenses................ 2,762,594
-----------
Income from operations................................. 4,192,311
-----------
Other income................................................ (772)
Interest expense............................................ 2,269,419
-----------
2,268,647
-----------
Income before income taxes.................................. 1,923,664
-----------
Provision for income taxes
(Notes 1 and 5)
Current................................................... 20,303
Deferred.................................................. 813,909
-----------
Total income taxes..................................... 834,212
-----------
Net income............................................. 1,089,452
Retained deficit:
Beginning of year......................................... (4,167,777)
-----------
End of year............................................... $(3,078,325)
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-43
<PAGE> 163
HUDSON LOCK, INC.
(A WHOLLY-OWNED SUBSIDIARY OF JORDAN INDUSTRIES, INC.)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
JANUARY 1, 1995
THROUGH
DECEMBER 30, 1995
-----------------
<S> <C>
Cash flows from operating activities:
Net income................................................ $ 1,089,452
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 757,835
Net increase (decrease) in cash caused by changes in
assets and liabilities:
Accounts receivable.................................. (306,037)
Inventories.......................................... 163,502
Prepaid expenses..................................... 13,188
Accounts payable..................................... 178,280
Accrued expenses..................................... 26,208
Income tax payable................................... 5,847
Deferred income taxes................................ 807,264
-----------
Net cash provided by operating activities............ 2,735,539
-----------
Cash flows from investing activities:
Acquisition of property, plant and equipment.............. (392,557)
-----------
Net cash used in investing activities................ (392,557)
-----------
Cash flows from financing activities:
Borrowing from related party.............................. 173,527
Repayment of due to related party......................... (2,392,858)
Repayment of obligation under capital lease............... (25,105)
Net cash used by financing activities................ (2,244,436)
-----------
Net increase (decrease) in cash and cash equivalents........ 98,546
Cash and cash equivalents, beginning of year................ 8,988
-----------
Cash and cash equivalents, end of year...................... $ 107,534
===========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest.................... $ 2,335,390
Cash paid during the year for income taxes................ 14,456
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-44
<PAGE> 164
HUDSON LOCK, INC.
(WHOLLY-OWNED SUBSIDIARY OF JORDAN INDUSTRIES, INC.)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 30, 1995
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Hudson Lock, Inc. (the Company) (a wholly-owned subsidiary of Jordan
Industries, Inc.) manufactures medium-security custom and specialty locks
primarily for original equipment manufacturers (OEM). The majority of the
Company's sales is derived from a small number of significant customers.
REVENUE RECOGNITION
Revenue and related cost of sales are recognized upon shipment of products.
INVENTORIES
Inventories are stated at the lower of cost or market, cost being
determined using the first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Repairs, maintenance
and tooling cost are expensed in the year incurred. Expenditures which result in
betterments or extensions of the useful lives of assets are capitalized and
depreciated over the remaining lives of such assets. Depreciation expense is
computed using the straight-line method over the estimated useful lives ranging
from four to thirty one and a half years.
GOODWILL
The excess of purchase price over the fair market value of net assets when
the Company was acquired in 1989 by Jordan Industries, Inc. represents goodwill
which is being amortized over forty years using the straight-line method.
Amortization expense for the period ended December 30, 1995 was $122,639.
Accumulated amortization amounted to $730,125 at December 30, 1995.
INCOME TAXES
The Company joins with Jordan Industries, Inc. in the filing of a
consolidated federal income tax return for the periods reflected in the
financial statements. However, for purposes of computing the tax accounts of the
Company, Statement of Accounting Standards No. 109, Accounting for Income Taxes,
was applied as if the Company were a separate taxpayer.
The income tax provision included in the statement of income is based upon
pre-tax income for financial reporting purposes and includes an appropriate
provision for the effect of temporary differences between the amount of assets
and liabilities recognized for financial reporting purposes and such amounts
recognized for tax purposes.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-45
<PAGE> 165
HUDSON LOCK, INC.
(WHOLLY-OWNED SUBSIDIARY OF JORDAN INDUSTRIES, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 30, 1995
-----------------
<S> <C>
Raw materials.............................................. $ 450,840
Work-in-process............................................ 818,594
Finished goods............................................. 168,161
----------
Total...................................................... $1,437,595
==========
</TABLE>
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 30, 1995
-----------------
<S> <C>
Land....................................................... $ 308,500
Building and improvements.................................. 5,738,010
Equipment, furniture and fixtures.......................... 2,895,993
Office and automotive equipment............................ 373,385
-----------
9,315,888
Less accumulated depreciation.............................. (2,996,441)
-----------
Total property, plant and equipment........................ $ 6,319,447
===========
</TABLE>
Depreciation expense was $635,196 for the period ended December 30, 1995.
4. LEASES
The Company leases certain machinery and equipment with bargain purchase
option. These leases are classified as capital leases and expire at various
dates through 2000. The Company also has an operating lease for warehouse space
which expires in 1996. Remaining future minimum payments for noncancellable
capital and operating leases with initial or remaining terms in excess of one
year are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 30, TOTAL OPERATING CAPITAL
----------------------- -------- --------- --------
<S> <C> <C> <C>
1996.............................................. $ 54,468 $18,756 $ 35,712
1997.............................................. 35,712 -- 35,712
1998.............................................. 35,712 -- 35,712
1999.............................................. 35,712 -- 35,712
2000.............................................. 35,712 -- 35,712
-------- ------- --------
Total minimum lease payments...................... $197,316 $18,756 178,560
======== =======
Less: Estimated amount representing interest...... (33,844)
--------
Present value of net minimum lease payments....... 144,716
Less: Current portion............................. (24,567)
--------
Long-term obligation under capital lease at
December 30, 1995............................... $120,149
========
</TABLE>
F-46
<PAGE> 166
HUDSON LOCK, INC.
(WHOLLY-OWNED SUBSIDIARY OF JORDAN INDUSTRIES, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. INCOME TAXES
Deferred tax liabilities and (assets) are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 30, 1995
-----------------
<S> <C>
Accrued vacation........................................... $ (68,397)
Net operating loss carryforward............................ (713,019)
Other...................................................... (21,846)
----------
Total deferred tax assets.................................. (803,262)
----------
Depreciation............................................... 1,976,672
----------
Total deferred tax liabilities............................. 1,976,672
----------
Net deferred tax liability................................. $1,173,410
==========
</TABLE>
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
FOR THE PERIOD
JANUARY 1, 1995
THROUGH
DECEMBER 30, 1995
-----------------
<S> <C>
Federal taxes -- current................................... $ --
State taxes -- current..................................... 20,303
Federal taxes -- deferred.................................. 691,823
State taxes -- deferred.................................... 122,086
--------
$834,212
========
</TABLE>
6. EMPLOYEE BENEFIT PLAN
Employees who worked at least 1,000 hours during the previous consecutive
twelve-month period and who are 21 years of age are eligible to participate in a
401(k) plan sponsored by Jordan Industries, Inc. Employees can contribute up to
15% of pretax income or the yearly maximum determined by the Internal Revenue
Service. The Company does not contribute to the plan.
7. RELATED PARTY TRANSACTIONS
The Company pays certain fees to Jordan Industries, Inc. principally to
cover general management consulting services performed by Jordan Industries,
Inc. on behalf of the Company.
The Company also has a revolving demand loan payable to Jordan Industries,
Inc. which bears interest at 14.50% per annum. Interest is payable on a
quarterly basis.
F-47
<PAGE> 167
HUDSON LOCK, INC.
(WHOLLY-OWNED SUBSIDIARY OF JORDAN INDUSTRIES, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The related party account balances with Jordan Industries, Inc. are
summarized below:
<TABLE>
<CAPTION>
DECEMBER 30, 1995
-----------------
<S> <C>
Consulting fee payable...................................... $ 168,182
Interest expense payable.................................... 542,144
Loan payable................................................ 14,121,358
-----------
14,831,684
Less: Current portion....................................... (1,698,311)
-----------
$13,133,373
-----------
</TABLE>
Consulting fees and interest expense amounted to $672,727 and $2,266,731,
respectively, for the period ended December 30, 1995.
8. SUBSEQUENT EVENTS
On May 15, 1997, Key Components, Inc. acquired all of the outstanding
shares of the Company for $34.1 million.
F-48
<PAGE> 168
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Key Components Inc.
In our opinion, the accompanying balance sheet and the related statements
of income and retained earnings and of cash flows present fairly, in all
material respects, the financial position of ESP Lock Products, Inc. at December
10, 1997 and the results of its operations and its cash flows for the period
January 1, 1997 through December 10, 1997 in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
As discussed in Note 1, there was a change in ownership of the Company
effective December 10, 1997.
PRICE WATERHOUSE LLP
Syracuse, New York
January 16, 1998
F-49
<PAGE> 169
ESP LOCK PRODUCTS, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 10, 1997
-----------------
<S> <C>
ASSETS
Current assets
Cash...................................................... $ 430,282
Accounts receivable, net of allowance for doubtful
accounts of $36,468.................................... 3,539,465
Inventory (Note 2)........................................ 3,904,296
Prepaid expenses.......................................... 96,840
-----------
Total current assets.............................. 7,970,883
Property and equipment, less accumulated depreciation
(Notes 1 and 3)........................................ 2,911,594
Goodwill, net............................................. 2,780,014
Covenant not to compete, net.............................. 518,771
Other intangibles......................................... 38,240
Deferred income taxes (Notes 1 and 4)..................... 30,100
-----------
Total assets...................................... $14,249,602
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank line of credit (Note 5).............................. $ 3,232,485
Notes payable -- current (Note 6)......................... 711,996
Accounts payable.......................................... 1,251,410
Accrued payroll and withholdings.......................... 510,048
Accrued expenses.......................................... 210,648
-----------
Total current liabilities......................... 5,916,587
Notes payable -- long term (Note 6)......................... 4,250,346
-----------
Total liabilities................................. 10,166,933
-----------
Stockholders' equity
Common stock, $.01 par value, 20,000 shares authorized;
10,000 shares issued and outstanding................... 100
Paid in capital........................................... 1,249,900
Retained earnings......................................... 2,832,669
-----------
Total stockholders' equity........................ 4,082,669
-----------
Total liabilities and stockholders' equity........ $14,249,602
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-50
<PAGE> 170
ESP LOCK PRODUCTS, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
FOR THE PERIOD
JANUARY 1, 1997
THROUGH
DECEMBER 10, 1997
-----------------
<S> <C>
Net sales................................................... $23,259,783
Cost of goods sold.......................................... 17,299,297
-----------
Gross profit................................................ 5,960,486
Selling, general and administrative expenses................ 3,557,553
-----------
Income from operations................................. 2,402,933
-----------
Other income (expense):
Other income.............................................. 51,492
Interest expense.......................................... (614,612)
-----------
(563,120)
-----------
Income before income taxes.................................. 1,839,813
-----------
Provision for income taxes (Notes 1 and 4):
Current................................................... 891,700
Deferred.................................................. (119,100)
-----------
Total income taxes..................................... 772,600
-----------
Net income............................................. 1,067,213
Retained earnings:
Beginning of year......................................... 1,765,456
-----------
End of year............................................... $ 2,832,669
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-51
<PAGE> 171
ESP LOCK PRODUCTS, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
JANUARY 1, 1997
THROUGH
DECEMBER 10, 1997
-----------------
<S> <C>
Cash flows from operating activities:
Net income................................................ $ 1,067,213
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 1,586,900
Deferred income taxes.................................. (119,100)
Net increase (decrease) in cash caused by changes in
assets and liabilities:
Accounts receivable.................................. (737,504)
Inventory............................................ (644,826)
Prepaid expenses..................................... 18,853
Accounts payable..................................... (43,327)
Accrued payroll...................................... 186,349
Accrued expenses..................................... 22,326
-----------
Net cash provided by operating activities............ 1,336,884
-----------
Cash flows from investing activities:
Acquisition of property, plant and equipment.............. (1,022,829)
Business acquisition, net of cash acquired................ (2,959,834)
Other..................................................... (35,620)
-----------
Net cash used in investing activities................ (4,018,283)
-----------
Cash flows from financing activities:
Proceeds from notes....................................... 5,000,000
Repayment of notes payable................................ (2,449,525)
Net borrowings (repayments) on line of credit............. 552,706
-----------
Net cash provided by financing activities............ 3,103,181
-----------
Net increase in cash and cash equivalents................... 421,782
Cash and cash equivalents, beginning of year................ 8,500
-----------
Cash and cash equivalents, end of year...................... $ 430,282
===========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest.................... $ 608,851
Cash paid during the year for income taxes................ 936,321
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-52
<PAGE> 172
ESP LOCK PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 10, 1997
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
ESP Lock Products, Inc. (the Company) primarily manufactures
medium-security custom and specialty locks and key blanks. The sales volume of
the lock products is substantially larger than that of key blanks and other
products. The custom and specialty lock product line is manufactured primarily
for original equipment manufacturers (OEM) throughout the U.S. and Canada. The
key blanks product line is marketed mainly to distributors.
BASIS OF ACCOUNTING
On December 10, 1997, the shareholders of the Company sold their shares of
common stock to Key Components, Inc. These financial statements are presented on
the Company's historic basis of accounting and do not give effect to the change
in ownership.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For the purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost or market, on a first-in,
first-out basis.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and depreciated using the
straight-line method over useful lives ranging from five to twenty years.
Expenditures for repairs and maintenance are charged to expense as incurred.
When assets are retired or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts and any resultant gain or
loss is recognized.
INCOME TAXES
Income taxes are provided based on the liability method of accounting
pursuant to Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes. Deferred income taxes are recorded to reflect the tax consequences
on future years of temporary differences between the tax basis of assets and
liabilities and their financial reporting amount at each year end.
GOODWILL
The excess of purchase price over the fair market value of net assets when
the Company was acquired in 1993 and when the Company acquired RAD Lock, Inc. in
1997 represents goodwill which is being amortized using the straight-line method
over periods ranging from fifteen to twenty years. Amortization expense for the
period was $116,230 and accumulated amortization amounted to $333,466 at
December 10, 1997.
F-53
<PAGE> 173
ESP LOCK PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
COVENANT NOT TO COMPETE
The cost of the covenant agreement is being amortized using the
straight-line method over the five-year term of the agreement. Amortization
expense for the period was $592,229 and accumulated amortization amounted to
$2,742,229 at December 10, 1997.
DEFERRED FINANCING COSTS
During the period, $286,554 in deferred financing costs were written off
when the related debt was refinanced. Additionally, amortization expense for the
period was $56,537.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Company to
concentrations of credit risk consist primarily of trade accounts receivable.
This risk is limited due to the large number of customers comprising the
Company's customer base and their dispersion across different business and
geographic regions. The Company has insurance for certain larger customer
balances.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<S> <C>
Raw materials............................................... $1,419,790
Work-in-process............................................. 1,650,090
Finished goods.............................................. 834,416
----------
Total....................................................... $3,904,296
==========
</TABLE>
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<S> <C>
Land........................................................ $ 60,000
Equipment, furniture and fixtures........................... 6,938,302
Leasehold improvements...................................... 771,948
----------
7,770,250
Less accumulated depreciation............................... (4,858,656)
----------
Total property, plant and equipment......................... $2,911,594
==========
</TABLE>
Depreciation expense amounted to $540,568 for the period.
4. FEDERAL AND STATE INCOME TAXES
Income tax expense for the period ended consists of the following:
<TABLE>
<S> <C>
Federal..................................................... $572,200
State....................................................... 200,400
--------
Total income tax expense.................................... $772,600
========
</TABLE>
The gross income tax assets recognized at December 10, 1997 were $387,000.
Gross deferred income tax liabilities recognized at December 10, 1997 were
$312,000. The gross deferred income tax assets are primarily the result of
temporary differences relating to inventory, allowance for doubtful accounts,
accrued lease costs and amortization of intangible assets. The gross deferred
income tax liabilities are primarily the result of
F-54
<PAGE> 174
ESP LOCK PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
temporary difference related to fixed assets. These amounts have been netted and
aggregated by current and non-current components for financial statement
presentation.
5. BANK LINE-OF-CREDIT
The Company has a $4,500,000 bank line of credit which is collateralized by
all assets and expires on May 31, 1998. Credit available under the line is based
on a percentage of eligible accounts receivable and inventory. Interest is at
the bank's prime rate plus .5% (9.00% at December 10, 1997). Availability at
December 10, 1997 totaled $3,701,548 of which $3,232,485 was outstanding.
This debt was refinanced after the change in ownership discussed in Note 1.
6. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<S> <C>
Bank note at 9.25%, monthly principal instalments of
$52,083, collateralized by machinery and equipment,
payable through May 2003.................................. $4,740,280
Obligation under covenant not to compete agreement,
discounted at 9.25%, monthly principal instalments of
$7,250 payable through June 2000.......................... 222,062
Current portion............................................. (711,996)
----------
Total long-term............................................. $4,250,346
==========
</TABLE>
The bank note was refinanced after the change in ownership discussed in
Note 1.
Aggregate principal payments required on all amounts due after one year,
before giving effect to the refinancing, are as follows:
<TABLE>
YEAR AMOUNT
- ------------------------------------------------- ----------
<S> <C>
1999............................................. $ 711,996
2000............................................. 673,058
2001............................................. 624,996
2002............................................. 624,996
Thereafter....................................... 1,615,300
----------
$4,250,346
==========
</TABLE>
7. COMMITMENTS
OPERATING LEASE
The Company rents a facility under an operating lease which expires in May
2003. The lease requires annual rental payments of $225,000.
8. EMPLOYEE BENEFIT PLAN
Employees who are 21 years of age and have completed at least one year of
service are eligible to participate in a 401(k) and profit sharing plan
sponsored by the Company. Employees may elect to contribute up to 15% of pre-tax
income or the yearly maximum determined by the Internal Revenue Service. The
Company may make matching and/or profit sharing contributions at the discretion
of the Board of Directors. Company contributions were $57,353 for the period.
F-55
<PAGE> 175
ESP LOCK PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. BUSINESS ACQUISITION
On June 24, 1997, the Company acquired the assets and certain obligations
of RAD Lock, Inc. The acquisition was accounted for as a purchase. Accordingly,
the aggregate purchase price of $2,959,997 was assigned to the fair value of
assets acquired and liabilities assumed, and the excess of $1,901,000 was
recorded as goodwill. The operating results of RAD Lock have been included in
the Company's results from the acquisition date.
10. CONTINGENCIES
In the normal course of business, the Company is subject to lawsuits and
claims. It is the Company's practice to accrue for any probable losses. At
December 10, 1997, there were no such losses which management considers probable
or reasonably possible.
F-56
<PAGE> 176
INDEPENDENT ACCOUNTANTS' REPORT
To the Stockholders and Directors
ESP Lock Products, Inc.
We have audited the accompanying balance sheets of ESP Lock Products, Inc.
as of December 31, 1996 and 1995, and the related statements of income and
retained earnings and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ESP Lock Products, Inc. as
of December 31, 1996 and 1995, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
BDO Seidman, LLP
Gardner, Massachusetts
February 7, 1997
F-57
<PAGE> 177
ESP LOCK PRODUCTS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1995
---------- -----------
<S> <C> <C>
ASSETS (Notes 3 and 6)
Current:
Cash and cash equivalents................................. $ 8,500 $ 37,308
Accounts receivable, less allowance for doubtful accounts
of $20,000 in 1996..................................... 2,398,430 2,759,974
Inventories (Note 1)...................................... 3,013,158 2,770,754
Prepaid expenses and other................................ 107,537 91,764
---------- -----------
Total current assets................................... 5,527,625 5,659,800
---------- -----------
Property and equipment, less accumulated depreciation and
amortization (Note 2)..................................... 1,826,300 1,856,515
---------- -----------
Other:
Noncompetition agreement.................................. 3,000,000 3,000,000
Goodwill.................................................. 1,212,480 1,212,480
Deferred debt expenses.................................... 668,589 668,589
Organization expenses..................................... 49,918 49,918
---------- -----------
4,930,987 4,930,987
Less accumulated amortization.......................... 2,745,252 1,979,136
---------- -----------
Net other assets....................................... 2,185,735 2,951,851
---------- -----------
Total assets........................................... $9,539,660 $10,468,166
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit (Note 3)................................... $2,679,779 $ 2,659,751
Checks issued against future deposits..................... 378,560 701,058
Accounts payable.......................................... 847,284 801,405
Accrued liabilities (Note 4).............................. 417,602 346,868
Current maturities of long-term bank debt (Note 5)........ 43,752 43,752
Current maturities of subordinated notes payable (Note
6)..................................................... 100,000 150,000
---------- -----------
Total current liabilities.............................. 4,466,977 4,702,834
Long-term subordinated notes payable, less current
maturities (Note 6)....................................... 1,950,000 3,250,000
Long-term bank debt, less current maturities (Note 5)....... 18,227 65,623
Deferred income taxes (Note 7).............................. 89,000 64,000
---------- -----------
Total liabilities...................................... 6,524,204 8,082,457
---------- -----------
Commitments (Note 8)
Stockholders' equity:
Common stock, voting, $.01 par value, 20,000 shares
authorized 10,000 shares issued and outstanding........ 100 100
Additional paid-in capital................................ 1,249,900 1,249,900
Retained earnings......................................... 1,765,456 1,135,709
---------- -----------
Total stockholders' equity............................. 3,015,456 2,385,709
---------- -----------
Total liabilities and stockholders' equity............. $9,539,660 $10,468,166
========== ===========
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-58
<PAGE> 178
ESP LOCK PRODUCTS, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995
----------- -----------
<S> <C> <C>
Net sales................................................... $21,264,792 $20,287,940
Cost of sales............................................... 16,472,606 15,488,892
----------- -----------
Gross profit................................................ 4,792,186 4,799,048
Operating expenses.......................................... 3,004,550 2,839,485
----------- -----------
Operating income............................................ 1,787,636 1,959,563
Other income (expense):
Interest.................................................. (701,593) (1,015,287)
Miscellaneous............................................. 34,704 (11,053)
----------- -----------
Total other expense............................... (666,889) (1,026,340)
----------- -----------
Income before taxes on income............................... 1,120,747 933,223
Taxes on income (Note 7).................................... 491,000 421,000
----------- -----------
Net income.................................................. 629,747 512,223
Retained earnings, beginning of year........................ 1,135,709 623,486
----------- -----------
Retained earnings, end of year.............................. $ 1,765,456 $ 1,135,709
=========== ===========
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-59
<PAGE> 179
ESP LOCK PRODUCTS, INC.
STATEMENTS OF CASH FLOWS (NOTE 9)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 629,747 $ 512,223
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation........................................... 371,636 331,555
Amortization........................................... 766,116 766,116
Deferred income taxes.................................. 25,000 34,000
Changes in operating assets and liabilities:
Accounts receivable.................................. 361,544 (401,569)
Inventories.......................................... (242,404) 41,191
Prepaid expenses and other........................... (15,773) 7,859
Refundable income taxes.............................. -- 11,000
Checks issued against future deposits................ (322,498) 289,108
Accounts payable and accrued expenses................ 116,613 43,653
----------- -----------
Net cash provided by operating activities......... 1,689,981 1,635,136
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions.......................... (341,421) (538,631)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings(repayments) on line of credit.............. 20,028 (404)
Payments on notes payable................................. (47,396) (43,750)
Payments of subordinated notes payable.................... (1,350,000) (1,100,000)
----------- -----------
Net cash used by financing activities............. (1,377,368) (1,144,154)
----------- -----------
Net decrease in cash and cash equivalents................... (28,808) (47,649)
Cash and cash equivalents, beginning of year................ 37,308 84,957
----------- -----------
Cash and cash equivalents, end of year...................... $ 8,500 $ 37,308
=========== ===========
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-60
<PAGE> 180
ESP LOCK PRODUCTS, INC.
SUMMARY OF ACCOUNTING POLICIES
Operations................. ESP Lock Products, Inc. (the "Company") is a
manufacturer of locks and key blanks which are
marketed throughout the United States.
Cash Equivalents........... For purposes of the statement of cash flows, the
Company considers all highly liquid debt
instruments purchased with a maturity of three
months or less to be cash equivalents.
Inventories................ Inventories are valued at the lower of cost
(first-in, first-out) or market.
Property, Equipment and
Depreciation............. Property and equipment are stated at cost.
Depreciation is computed over the estimated useful
lives of the related assets using both straight-
line and accelerated methods. The estimated useful
lives are as follows:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Machinery and equipment................................ 5-10
Furniture and fixtures................................. 5-10
Leasehold improvements................................. 5-20
</TABLE>
Income Taxes............... Deferred income taxes are recognized for the tax
consequences of temporary differences between the
financial reporting bases and the tax bases of the
Company's assets and liabilities. Valuation
allowances are established when necessary to reduce
deferred tax assets to the amount expected to be
realized. Income tax expense is the tax payable for
the period and the change during the period in
deferred tax assets and liabilities.
Concentration of Credit
Risk....................... Concentration of credit risk consists principally
of trade receivables. This risk is limited due to
the large number of customers comprising the
Company's customer base and their dispersion across
different business and geographic regions. Ongoing
credit reviews of customers' financial condition
are performed, and collateral is not required. The
Company also has insurance against certain larger
customer balances.
Estimates and
Assumptions................ The preparation of financial statements in
conformity with generally accepted accounting
principles requires Company management to make
estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of
the financial statements and the reported amounts
of revenues and expenses during the reporting
period. Actual results could differ from those
estimates and assumptions.
Noncompetition Agreement... The cost of the noncompetition agreement is being
amortized on a straight-line basis over the five
year term of the agreement.
Goodwill................... Goodwill, representing the excess of the purchase
price over the fair value of net assets acquired is
being amortized on a straight-line basis over the
period of expected benefit of twenty years.
Deferred Debt Expenses..... Costs incurred in connection with obtaining
financing have been capitalized and are being
amortized over the seven year term of the financing
arrangement.
Organization Expenses...... Certain costs in connection with the organization
of the Company have been capitalized and are being
amortized over five years.
F-61
<PAGE> 181
Long-Lived Assets.......... The Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 121
"Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of" during
the year ended December 31, 1996. SFAS 121
establishes accounting standards for the impairment
of long-lived assets, certain identifiable
intangibles and goodwill related to those assets to
be held and used for long-lived assets and certain
identifiable intangibles to be disposed of.
The Company reviews the carrying values of its
long-lived and identifiable intangible assets for
possible impairment whenever events or changes in
circumstances indicate that the carrying amount of
the assets may not be recoverable. Any long-lived
assets held for disposal are reported at the lower
of their carrying amounts or fair value less cost
to sell.
Reclassifications.......... Prior year amounts have been reclassified to
reflect 1996 changes in reporting classifications.
F-62
<PAGE> 182
ESP LOCK PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
1. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Finished goods...................................... $ 777,397 $ 703,309
Work-in-process..................................... 1,254,636 1,227,940
Raw materials....................................... 981,125 839,505
---------- ----------
Total..................................... $3,013,158 $2,770,754
========== ==========
</TABLE>
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Land................................................ $ 60,000 $ 60,000
Machinery and equipment............................. 5,074,005 4,832,551
Furniture and fixtures.............................. 187,204 162,273
Leasehold improvements.............................. 751,038 748,143
Machinery and equipment deposits.................... 72,141 --
---------- ----------
Total............................................... 6,144,388 5,802,967
Less accumulated depreciation and amortization...... 4,318,088 3,946,452
---------- ----------
Net property and equipment.......................... $1,826,300 $1,856,515
========== ==========
</TABLE>
3. LINE-OF-CREDIT
The Company has a $3,400,000 bank line of credit which is collateralized by
all assets and expires on May 31, 1997. The credit line is advanced based on 80%
of qualified accounts receivable, 50% of raw materials inventory, eligible
finished goods and work-in-process inventories not to exceed $1,200,000, plus
$550,000 advanced against the machinery and equipment. The $550,000 declines by
$110,000 per year. Interest is at the bank's prime rate plus 1.25% (9.25% at
December 31, 1996). The line of credit contains covenants relating to
profitability, minimum equity, liquidity, leverage and restricts capital
expenditures in excess of $150,000. The Company was not in compliance with the
capital expenditures covenant. Noncompliance has been waived by the bank.
Outstanding borrowings amounted to $2,679,779 and $2,659,751 at December 31,
1996 and 1995, respectively.
4. ACCRUED LIABILITIES
Accrued liabilities consists of the following:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Payroll and payroll taxes.............................. $290,610 $229,153
Income taxes........................................... 88,795 77,722
Other.................................................. 38,197 39,993
-------- --------
$417,602 $346,868
======== ========
</TABLE>
F-63
<PAGE> 183
ESP LOCK PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG-TERM BANK DEBT
<TABLE>
<CAPTION>
1996 1995
------- --------
<S> <C> <C>
Note payable in monthly installments of $3,646 plus
interest at the bank's prime rate plus 1.25% (9.25% at
December 31, 1996) through June, 1998. Collateralized
by machinery and equipment. .......................... $61,979 $109,375
Less current maturities................................. 43,752 43,752
------- --------
Long-term portion....................................... $18,227 $ 65,623
======= ========
</TABLE>
Maturities of long-term bank debt are:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
<S> <C> <C>
1997............................................ $43,752
1998............................................ 18,227
-------
$61,979
=======
</TABLE>
6. SUBORDINATED NOTES PAYABLE
In connection with the acquisition of ESP Lock Corporation common stock,
the Company issued notes payable as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
$5,000,000 senior subordinated note payable to
Churchill Capital Limited Partners II with
interest at 21%, principal payments of $150,000
due quarterly beginning in August, 1995 through
May, 2000, reduced by prepayments of $3,100,000.
Collateralized by a second security position in
all assets. ...................................... $1,000,000 $2,200,000
$1,200,000 junior subordinated notes payable to
Massachusetts Colony Corporation with interest at
the prime rate plus 1.0% (9.75% at December 31,
1996) through May, 1988 and prime plus 2%
thereafter, due in quarterly installments of
$25,000 through June, 1998 and $37,500 beginning
September, 1998 through March, 2001. Balance of
$487,500 due June 1, 2001. Collateralized by third
security position in all assets. ................. 1,050,000 1,200,000
---------- ----------
Total............................................... 2,050,000 3,400,000
Less current maturities............................. 100,000 150,000
---------- ----------
Long-term subordinated notes payable................ $1,950,000 $3,250,000
========== ==========
</TABLE>
The notes are subordinated to bank indebtedness and contain financial
covenants which the Company must maintain relating to profitability, equity
liquidity, leverage, and restricts capital expenditures in excess of $300,000.
The Company was not in compliance with the capital expenditures covenant.
Noncompliance has been waived by the lenders.
The amounts of subordinated debt maturing in each of the next five years
have been reduced by $3,100,000 of prepayments on the senior subordinated note,
and are as follows: 1997, $100,000; 1998, $125,000; 1999, $150,000; 2000,
$1,150,000; and 2001 $525,000.
F-64
<PAGE> 184
ESP LOCK PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. TAXES ON INCOME
Taxes on income consist of the following components:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
CURRENT:
Federal.............................................. $346,000 $297,000
State................................................ 120,000 90,000
-------- --------
466,000 387,000
-------- --------
DEFERRED:
Federal.............................................. 19,000 25,500
State................................................ 6,000 8,500
-------- --------
25,000 34,000
-------- --------
Total taxes on income.................................. $491,000 $421,000
======== ========
</TABLE>
The following summary reconciles taxes at the federal statutory tax rate to
the effective rate:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Federal statutory income tax rate........................... 34.0% 34.0%
State income taxes, net of federal income tax benefit....... 7.4 7.0
Other, net.................................................. 2.4 4.1
---- ----
43.8% 45.1%
==== ====
</TABLE>
Deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Assets................................................. $(36,000) $(40,000)
Liabilities............................................ 125,000 104,000
-------- --------
Net deferred tax liability............................. $ 89 000 $ 64 000
======== ========
</TABLE>
Deferred tax liabilities are primarily due to tax depreciation deductions
greater than book depreciation. Deferred tax assets are primarily the result of
the vacation accrual, which is not currently deductible for tax purposes.
8. COMMITMENTS
Retirement Plan
The Company established a 401k and profit sharing plan during 1996 which
replaced a previous profit sharing plan. Employees who have obtained age 21 and
have at least one year of service may elect to contribute up to 15 percent of
their compensation. The Company may make matching and/or profit sharing
contributions at the discretion of the board of directors. Company contributions
were $24,851 in 1996. Company contributions to the previous profit sharing plan
were $50,000 in 1995.
Operating Lease
The Company rents its facility under an operating lease with a company that
is co-owned by an affiliate of an officer and stockholder of the Company. The
lease expires in May, 1998 and has a renewal option for an additional 5 years,
through May, 2003. The lease calls for annual rent of $225,000 paid in equal
monthly installments.
F-65
<PAGE> 185
ESP LOCK PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum rental payments required under the operating lease that has
remaining non-cancelable terms in excess of one year, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------
<S> <C>
1997......................................... $225,000
1998......................................... 93,750
--------
$318,750
========
</TABLE>
The lease includes a provision for the payment of real estate taxes and
additional expenses, which are not included in the above amounts. Rent expense
was $225,000 in 1996 and 1995.
Employment Agreement
The Company has an employment agreement with a key employee, which expires
in May, 1998. The agreement provides for an annual base salary of $125,000.
9. SUPPLEMENTAL CASH FLOW INFORMATION
The Company paid interest of $703,499 in 1996 and $1,016,576 in 1995.
F-66
<PAGE> 186
INDEPENDENT AUDITORS' REPORT
The Shareholder and Board of Directors
RAD Lock, Inc.
We have audited the accompanying balance sheets of RAD Lock, Inc. (an S
Corporation) as of June 22, 1997 and December 31, 1996, and the related
statements of income and accumulated deficit and cash flows for the period ended
June 22, 1997 and year ended December 31, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of RAD Lock, Inc. as of June
22, 1997 and December 31, 1996, and the results of its operations and cash flows
for the period ended June 22, 1997 and year ended December 31, 1996 in
conformity with generally accepted accounting principles.
GREENBERG, ROSENBLATT, KULL & BITSOLI, P.C.
Worcester, Massachusetts
July 9, 1997
F-67
<PAGE> 187
RAD LOCK, INC.
BALANCE SHEETS
JUNE 22, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 72,469 $ 64,438
Accounts receivable....................................... 403,898 313,367
Inventories............................................... 246,312 211,170
Prepaid expenses and other................................ 22,456 1,380
----------- -----------
Total current assets................................. 745,135 590,355
----------- -----------
Property and equipment:
Jigs, fixtures and tools.................................. 736,567 705,077
Machinery and equipment................................... 731,918 718,542
Furniture, fixtures and office equipment.................. 116,796 108,636
Motor vehicle............................................. -- 19,148
Leasehold improvements.................................... 55,580 55,580
----------- -----------
1,640,861 1,606,983
Accumulated depreciation.................................. (1,037,827) (961,518)
----------- -----------
Net property and equipment........................... 603,034 645,465
----------- -----------
Total assets...................................... $ 1,348,169 $ 1,235,820
=========== ===========
LIABILITIES AND SHAREHOLDER'S DEFICIENCY
Current liabilities:
Notes payable -- bank..................................... $ 525,771 $ 525,000
Current maturities of capital lease obligations........... 47,394 52,600
Accounts payable.......................................... 125,158 107,296
Accrued liabilities....................................... 427,750 335,242
----------- -----------
Total current liabilities............................ 1,126,073 1,020,138
----------- -----------
Long-term liabilities:
Capital lease obligations................................. 112,165 131,514
Notes payable -- shareholder.............................. 723,000 723,000
----------- -----------
Total long-term liabilities.......................... 835,165 854,514
----------- -----------
Shareholder's deficiency:
Common stock, no par value; 10,000 shares authorized; 500
shares issued; 400 shares outstanding.................. 10,000 10,000
Additional paid-in capital................................ 1,498,500 1,498,500
Accumulated deficit....................................... (2,121,568) (2,147,331)
----------- -----------
(613,068) (638,831)
Treasury stock, 100 shares at cost........................ (1) (1)
----------- -----------
Total shareholder's deficiency....................... (613,069) (638,832)
----------- -----------
Total liabilities and shareholder's deficiency.... $ 1,348,169 $ 1,235,820
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
F-68
<PAGE> 188
RAD LOCK, INC.
STATEMENTS OF INCOME AND ACCUMULATED DEFICIT
PERIOD ENDED JUNE 22, 1997 AND YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Sales....................................................... $ 1,587,811 $ 2,903,125
Cost of goods sold.......................................... 1,153,946 2,132,930
----------- -----------
Gross profit................................................ 433,865 770,195
Operating expenses.......................................... 257,797 487,041
----------- -----------
Income from operations...................................... 176,068 283,154
----------- -----------
Other expense:
Interest expense.......................................... 78,654 164,588
Other..................................................... 4,026 32,452
----------- -----------
Total other expense............................... 82,680 197,040
----------- -----------
Net income.................................................. 93,388 86,114
S Corporation dividend...................................... 67,625 --
----------- -----------
25,763 86,114
Accumulated deficit -- beginning............................ (2,147,331) (2,233,445)
----------- -----------
Accumulated deficit -- ending............................... $(2,121,568) $(2,147,331)
----------- -----------
</TABLE>
The accompanying notes are an integral part of the financial statements
F-69
<PAGE> 189
RAD LOCK, INC.
STATEMENTS OF CASH FLOWS
PERIOD ENDED JUNE 22, 1997 AND YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
1997 1996
-------- ---------
<S> <C> <C>
Operating activities:
Net income................................................ $ 93,388 $ 86,114
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 91,172 174,038
Interest accrued on amounts due to shareholder......... 48,156 85,882
Changes in assets and liabilities:
Accounts receivable.................................. (90,531) 19,009
Inventories.......................................... (35,142) (21,237)
Prepaid expenses and other........................... (21,076) 5,858
Accounts payable..................................... 17,862 4,918
Accrued liabilities.................................. 44,352 (73,108)
-------- ---------
Net cash provided by operating activities......... 148,181 281,474
-------- ---------
Investing activities:
Property and equipment additions, (net)................... (48,741) (172,001)
-------- ---------
Financing activities:
Net proceeds (repayments) of notes payable -- bank........ 771 (94,784)
Repayment of capital lease obligations.................... (24,555) (46,586)
S Corporation dividend.................................... (67,625) --
-------- ---------
Net cash used in financing activities............. (91,409) (141,370)
-------- ---------
Net increase (decrease) in cash............................. 8,031 (31,897)
Cash -- beginning........................................... 64,438 96,335
-------- ---------
Cash -- ending.............................................. $ 72,469 $ 64,438
======== =========
Supplemental Disclosure of Cash Flow Information
Cash paid during the year for
interest.......................................... $ 28,475 $ 78,706
======== =========
Supplemental Disclosure of Noncash Investing and Financing
Transactions
Property and equipment additions financed............ $ -- $ 168,101
======== =========
</TABLE>
The accompanying notes are an integral part of the financial statements
F-70
<PAGE> 190
RAD LOCK, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 22, 1997 AND DECEMBER 31, 1996
(1) SUBSEQUENT EVENT AND PURPOSE OF THE FINANCIAL STATEMENTS
The Company and its sole shareholder entered into an agreement with ESP
Lock Products, Inc. (ESP) to sell substantially all cash, accounts receivable,
inventories, prepaid expenses, property and equipment and certain assumed
liabilities. Under the terms of the agreement, on June 24, 1997, the Company
will provide ESP a net asset value of approximately $949,000.
The terms of the transaction require a closing balance sheet and a
statement of income excluding the effect of this transaction.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business:
RAD Lock, Inc., located in Worcester, Massachusetts, is a manufacturer of
metal products and a supplier of such products to industrial customers. Credit
is extended to the customers, substantially all of whom are located in the
United States.
Revenues:
The Company had sales of approximately $1,061,000 and $1,900,000 to one
customer in the period ended June 22, 1997 and year ended December 31, 1996,
respectively. Included in accounts receivable are amounts due from this customer
totalling $271,000 and $219,000 at June 22, 1997 and December 31, 1996,
respectively.
Cash:
The Company maintains its cash with high credit quality financial
institutions. At times, such balances may exceed Federal Deposit Insurance
Corporation (FDIC) insurance limits.
Inventories:
Inventories are valued at the lower of cost or market on the first-in,
first-out (FIFO) method.
Property and Equipment:
Property and equipment are recorded at cost and depreciated using the
straight-line and double declining balance methods for financial reporting
purposes and accelerated methods for income tax purposes. Depreciation is based
upon the following estimated useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Jigs, fixtures and tools.............................. 3 to 7
Machinery and equipment............................... 5 to 7
Furniture, fixtures and office equipment.............. 5 to 7
Motor vehicle......................................... 3
Lesser of estimated
useful life or remaining
Leasehold improvements................................ term of the lease
</TABLE>
Included in property and equipment are capital lease assets of
approximately $250,000 at June 22, 1997 and December 31, 1996.
F-71
<PAGE> 191
RAD LOCK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation expense for the period June 22, 1997 and year ended December
31, 1996 was $91,172 and $174,038, respectively, including amortization of
equipment under capital leases of $15,219 and $23,018 in 1997 and 1996,
respectively.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates that affect
the reported amounts of assets, liabilities, revenues and expenses, and
disclosure of contingent assets and liabilities. Actual results could differ
from these estimates.
Income Taxes:
The Company, with the consent of its shareholder, elected to be treated as
an S Corporation effective January 1, 1994. In accordance with the provisions of
such election, the Company's income and losses are passed through to its
shareholder. Accordingly, no provision for federal or state income taxes is
included in these financial statements.
(3) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating fair value disclosures for financial instruments:
Cash, accounts receivable and notes payable: The carrying amounts
reported in the balance sheet approximate fair value.
Capital lease obligations: These amounts have been discounted to
present value using the applicable discount rate as designated in the lease
agreement.
(4) INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Raw materials.......................................... $141,518 $119,308
Work in process........................................ 97,724 83,136
Finished good.......................................... 7,070 8,726
-------- --------
$246,312 $211,170
======== ========
</TABLE>
(5) NOTES PAYABLE -- BANK
The Company is obligated pursuant to a revolving loan agreement with a
commercial bank. The demand notes are secured personally by the shareholder of
the Company. The interest rate at June 22, 1997 and December 31, 1996 was 8 1/2%
and 8 1/4%, respectively.
(6) CAPITAL LEASE OBLIGATIONS
At June 22, 1997 and December 31, 1996, the Company is obligated under
noncancellable leases in the amount of $159,559 and $184,114, respectively.
There were no capital lease acquisitions in 1997. Capital lease obligations
incurred during 1996 for the acquisition of equipment totaled approximately
$168,000.
F-72
<PAGE> 192
RAD LOCK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Aggregate maturities of capital lease obligations are as follows:
<TABLE>
<S> <C>
1998........................................................ $ 67,287
1999........................................................ 57,152
2000........................................................ 46,295
2001........................................................ 28,904
--------
Total minimum lease payments................................ 199,638
Less amount representing interest........................... 40,079
--------
Present value of net minimum less payments.................. 159,559
Less current maturities..................................... 47,394
--------
Long-term capital lease obligation.......................... $112,165
========
</TABLE>
(7) NOTES PAYABLE -- SHAREHOLDER
The Company's shareholder has made advances to the Company for working
capital purposes. The advances bear interest at prime plus 2% and are
subordinated to the bank debt. The balance outstanding at June 22, 1997 and
December 31, 1996 amounted to $723,000. The advances have been classified as
long-term as it is the shareholder's intent not to demand payment within twelve
months of the balance sheet date.
Included in accrued liabilities is accrued interest on these advances
totalling approximately $304,000 and $256,000, at June 22, 1997 and December 31,
1996, respectively.
(8) INCENTIVE COMPENSATION
The Company has incentive compensation agreements with certain key
employees. The incentive calculations are based primarily on operating income
and net sales. The 1997 incentive compensation reflected in cost of goods sold
and operating expenses amounted to $26,031 and $12,596, respectively, and is
included in accrued liabilities at June 22, 1997. The amounts for 1996 were
$4,474 and $14,070, respectively, and were included in accrued liabilities at
December 31, 1996.
(9) COMMITMENTS AND RELATED PARTY TRANSACTIONS
RAD Lock, Inc. leases office and warehouse facilities from an officer of
the Company pursuant to a six-year lease agreement which expires on November 30,
1998. The lease provides for monthly rent of $2,344, the payment of real estate
taxes, insurance and certain other charges. The base rent expense amounted to
approximately $14,000 in 1997 and $28,000 in 1996.
Approximate future minimum rental payments under this lease agreement are
as follows and are based on a calendar year:
<TABLE>
<S> <C>
1997........................................................ $14,000
1998........................................................ 26,000
-------
$40,000
=======
</TABLE>
F-73
<PAGE> 193
- ------------------------------------------------------
- ------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
- ----------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. i
Prospectus Summary.................... 1
Risk Factors.......................... 16
The Issuers........................... 23
The Formation......................... 24
Use of Proceeds....................... 25
Capitalization........................ 26
Unaudited Pro Forma Consolidated
Financial Data...................... 27
Selected Historical Consolidated
Financial Data...................... 33
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 37
Business.............................. 47
Management............................ 62
Principal Stockholders................ 65
Certain Transactions.................. 66
The Limited Liability Company
Agreement........................... 68
Description of Certain Indebtedness... 70
The Exchange Offer.................... 72
Description of Notes.................. 79
United States Federal Income Tax
Consequences........................ 110
Plan of Distribution.................. 113
Legal Matters......................... 113
Experts............................... 113
Index to Financial Statements......... F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
[KCI LOGO]
KEY COMPONENTS, LLC
KEY COMPONENTS FINANCE CORP.
$80,000,000
OFFER TO EXCHANGE
10 1/2% SENIOR NOTES DUE 2008,
FOR ANY AND ALL OUTSTANDING
10 1/2% SENIOR NOTES DUE 2008
---------------------------
PROSPECTUS
---------------------------
, 1998
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 194
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
(a) Pursuant to the terms of the Limited Liability Company Agreement of the
Company, the Company shall indemnify the Members, any former Members, any person
who is or was an affiliate of any Member or former Member, any person who is or
was an officer, director, employee or agent of the Registrant or any subsidiary
thereof, and any person who is or was serving at the request of the Company, the
Members or a director of the Company as an officer, director, employee, member,
partner, agent, fiduciary or trustee of another person ("Indemnitees"), to the
fullest extent of the law, from and against any and all losses, claims, damages,
liabilities (joint or several), expenses (including, without limitation, legal
fees and expenses), judgments, fines, penalties, interest, settlements and other
amounts arising from any and all claims, demands, actions, suits or proceedings,
whether civil, criminal, administrative or investigative, in which any
Indemnitee may be involved, or is threatened to be involved, as party or
otherwise, by reason of its status as an Indemnitee; provided that in each case
the Indemnitee acted in good faith and in a manner that such Indemnitee
reasonably believed to be in or not opposed to the best interests of the Company
and, with respect to any criminal proceeding, had no reasonable cause to believe
its conduct was unlawful. Any indemnification under this Agreement will be only
out of the assets of the Company, and the Members shall not be personally liable
for, or have any obligation to contribute or loan funds or assets to the Company
to enable it to effectuate, such indemnification. The Company is authorized to
purchase insurance against liabilities asserted against and expenses incurred by
such persons in connection with the Company's activities, regardless of whether
the Company would have the power to indemnify such persons against such
liabilities under the provisions of this paragraph.
(b) See the Purchase Agreement (the form of which is included as Exhibit
10.1 to this Registration Statement) for provisions regarding the
indemnification under certain circumstances of the Issuers, their directors and
certain of their officers by the Initial Purchaser.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<C> <S>
3.1 Certificate of Formation of the Company.*
3.2 Limited Liability Company Agreement of Company.*
3.3 Certificate of Incorporation of Finance Corp.*
3.4 By-Laws of Finance Corp.*
4.1 Indenture, dated as of May 28, 1998, by and among the
Issuers, the Subsidiary Guarantors and United States Trust
Company of New York, as trustee.*
4.2 Form of 10 1/2% Senior Notes, Due 2008 (filed as part of
Exhibit 4.1).*
4.3 Exchange and Registration Rights Agreement, dated May 20,
1998, among the Issuers, the Subsidiary Guarantors and
Societe Generale Securities Corporation.*
5.1 Opinion of Counsel to the Issuers concerning the legality of
the Securities being offered.
10.1 Purchase Agreement among the Issuers, the Subsidiary
Guarantors and Societe Generale Securities Corporation,
dated May 20, 1998.*
10.2 Form of 10 1/2% Senior Notes, issued by the Issuers to
certain purchasers, and dated as of May 28, 1998 (filed as
part of Exhibit 4.1).*
10.3 Employment Agreement between Elliott and George M. Scherer,
dated as of January 16, 1996, as amended March 16, 1996.*
10.4 Employment Agreement between Parent and Michael L. Colecchi,
dated as of May 15, 1997, as amended April 27, 1998.*
</TABLE>
II-1
<PAGE> 195
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<C> <S>
10.5 Employment Agreement between ESP and August M. Boucher,
dated as of December 10, 1997.*
10.6 Employment Agreement between the Company and James D.
Wilcox, dated as of April 17, 1998.*
10.7 1998 Long-Term Incentive Plan of the Parent.*
10.8 Management Agreement, dated May 28, 1998, with Millbrook
Capital Management Inc.*
10.9 Lease, dated January 1, 1989, between Elliot and Empire
Realty Company.*
10.10 Lease, dated December 1, 1992, between RAD and S&S
Properties, Inc.*
10.11 Lease Agreement, dated June 7, 1990, between Elliott and
Route 12A Associates, as amended.*
10.12 Lease of Real Property, dated June 1, 1993, between ESP and
Massachusetts Colony Corporation.*
10.13 Commercial Lease and Deposit Receipt, dated August 17, 1998,
between Hudson and Jim Jelsema.*
10.14 Credit and Guaranty Agreement, dated as of July 27, 1998,
among the Issuers, Elliott, Hudson, ESP, Societe Generale,
as agent and certain financial institutions named therein.*
10.15 Guarantor Security Agreement, dated as of July 27, 1998,
among Elliott, Hudson, Finance Corp., ESP and Societe
Generale.*
10.16 Borrower Security Agreement, dated as of July 27, 1998,
between KC LLC and Societe Generale.*
10.17 Pledge Agreement, dated as of July 27, 1998, between KC LLC
and Societe Generale.*
12.1 Statements re Computation of Ratios.*
21.1 List of the Company's Subsidiaries.*
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Fulgieri & Randall, LLP
23.3 Consent of Greenberg, Rosenblatt, Kull & Bitsoli, PC
23.4 Consent of BDO Seidman, LLP.
23.5 Consent of Rubin Baum Levin Constant & Friedman (contained
in the opinion filed as Exhibit 5.1).
25.1 Form T-1 Statement of Eligibility of Trustee.*
99.1 Form of Letter of Transmittal for 10 1/2% Senior Notes with
respect to the Exchange Offer.*
99.2 Form of Notice of Guaranteed Delivery with respect to the
Exchange Offer.*
99.3 Form of Instruction to Registered Holder and/or Book-Entry
Transfer Participant from Beneficial Owner relating to the
10 1/2% Senior Notes.*
99.4 Form of Letter to Registered Holders and The Depository
Trust Company.*
99.5 Form of Client Letter.*
</TABLE>
- ---------------
* Previously filed with the registration statement
ITEM 22. UNDERTAKINGS
The undersigned Registrants hereby undertake:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change
in the maximum aggregate
II-2
<PAGE> 196
offering price set forth in the "Calculation of Registration Fee" table
in the effective Registration Statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new Registration Statement relating to the Securities offered therein, and
the offering of such Securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the Securities being registered which remain unsold at the
termination of the Offering.
(4) That, for purposes of determining any liability under the
Securities Act, each filing of the Registrants' Annual Report pursuant to
Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and,
where applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the Registration Statement shall be deemed to
be a new Registration Statement relating to the Securities offering
therein, and the offering of such Securities at the time shall be deemed to
be the initial bona fide offering thereof.
(5) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11 or 13 of this
Form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
date of the Registration Statement through the date of responding to the
request.
(6) To supply by means of a post-effective amendment all information
concerning a transaction, and company being acquired involved therein, that
was not the subject of and included in the Registration Statement when it
became effective.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrants pursuant to the foregoing provisions, or otherwise, the Registrants
have been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrants of expenses incurred or
paid by a director, officer or controlling person of the Registrants in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrants will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
II-3
<PAGE> 197
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on September 29, 1998.
KEY COMPONENTS, LLC
By: /s/ CLAY B. LIFFLANDER
------------------------------------
Clay B. Lifflander
President
By: /s/ JAMES D. WILCOX
------------------------------------
James D. Wilcox
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby severally constitutes appoints Alan L. Rivera and Clay B.
Lifflander and each of them, his true and lawful attorneys-in-fact and agents,
each acting alone, with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration Statement
and all documents relating thereto, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, each
acting alone, full power and authority to do and perform each and every act and
thing necessary or advisable to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities indicated
on the 29th day of September, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
Director , 1998
- ---------------------------------------------------
John S. Dyson
/s/ CLAY B. LIFFLANDER Director September 29, 1998
- ---------------------------------------------------
Clay B. Lifflander
/s/ ALAN L. RIVERA Director September 29, 1998
- ---------------------------------------------------
Alan L. Rivera
/s/ DAVID H. BOVA Director September 29, 1998
- ---------------------------------------------------
David H. Bova
/s/ GEORGE M. SCHERER Director September 29, 1998
- ---------------------------------------------------
George M. Scherer
</TABLE>
II-4
<PAGE> 198
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on September 29, 1998.
KEY COMPONENTS FINANCE CORP.
By: /s/ CLAY B. LIFFLANDER
------------------------------------
Clay B. Lifflander
President
By: /s/ JAMES D. WILCOX
------------------------------------
James D. Wilcox
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby severally constitutes appoints Alan L. Rivera and Clay B.
Lifflander and each of them, his true and lawful attorneys-in-fact and agents,
each acting alone, with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration Statement
and all documents relating thereto, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, each
acting alone, full power and authority to do and perform each and every act and
thing necessary or advisable to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities indicated
on the 29th day of September, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
Director , 1998
- ---------------------------------------------------
John S. Dyson
/s/ CLAY B. LIFFLANDER Director September 29, 1998
- ---------------------------------------------------
Clay B. Lifflander
/s/ ALAN L. RIVERA Director September 29, 1998
- ---------------------------------------------------
Alan L. Rivera
/s/ DAVID H. BOVA Director September 29, 1998
- ---------------------------------------------------
David H. Bova
/s/ GEORGE M. SCHERER Director September 29, 1998
- ---------------------------------------------------
George M. Scherer
</TABLE>
II-5
<PAGE> 199
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on September 29, 1998.
B.W. ELLIOTT MANUFACTURING CO., INC.
By: /s/ GEORGE M. SCHERER
------------------------------------
George M. Scherer
President
By: /s/ JAMES D. WILCOX
------------------------------------
James D. Wilcox
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby severally constitutes appoints Alan L. Rivera and Clay B.
Lifflander and each of them, his true and lawful attorneys-in-fact and agents,
each acting alone, with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration Statement
and all documents relating thereto, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, each
acting alone, full power and authority to do and perform each and every act and
thing necessary or advisable to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities indicated
on the 29th day of September, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
Director , 1998
- ---------------------------------------------------
John S. Dyson
/s/ CLAY B. LIFFLANDER Director September 29, 1998
- ---------------------------------------------------
Clay B. Lifflander
/s/ ALAN L. RIVERA Director September 29, 1998
- ---------------------------------------------------
Alan L. Rivera
/s/ DAVID H. BOVA Director September 29, 1998
- ---------------------------------------------------
David H. Bova
/s/ GEORGE M. SCHERER Director September 29, 1998
- ---------------------------------------------------
George M. Scherer
</TABLE>
II-6
<PAGE> 200
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on September 29, 1998.
HUDSON LOCK, INC.
By: /s/ MICHAEL L. COLECCHI
------------------------------------
Michael L. Colecchi
President
By: /s/ JAMES D. WILCOX
------------------------------------
James D. Wilcox
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby severally constitutes appoints Alan L. Rivera and Clay B.
Lifflander and each of them, his true and lawful attorneys-in-fact and agents,
each acting alone, with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration Statement
and all documents relating thereto, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, each
acting alone, full power and authority to do and perform each and every act and
thing necessary or advisable to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities indicated
on the 29th day of September, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
Director , 1998
- ---------------------------------------------------
John S. Dyson
/s/ CLAY B. LIFFLANDER Director September 29, 1998
- ---------------------------------------------------
Clay B. Lifflander
/s/ ALAN L. RIVERA Director September 29, 1998
- ---------------------------------------------------
Alan L. Rivera
/s/ DAVID H. BOVA Director September 29, 1998
- ---------------------------------------------------
David H. Bova
/s/ GEORGE M. SCHERER Director September 29, 1998
- ---------------------------------------------------
George M. Scherer
</TABLE>
II-7
<PAGE> 201
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on September 29, 1998.
ESP LOCK PRODUCTS, INC.
By: /s/ AUGUST M. BOUCHER
------------------------------------
August M. Boucher
President
By: /s/ JAMES D. WILCOX
------------------------------------
James D. Wilcox
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby severally constitutes appoints Alan L. Rivera and Clay B.
Lifflander and each of them, his true and lawful attorneys-in-fact and agents,
each acting alone, with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration Statement
and all documents relating thereto, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, each
acting alone, full power and authority to do and perform each and every act and
thing necessary or advisable to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities indicated
on the 29th day of September, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
Director , 1998
- ---------------------------------------------------
John S. Dyson
/s/ CLAY B. LIFFLANDER Director September 29, 1998
- ---------------------------------------------------
Clay B. Lifflander
/s/ ALAN L. RIVERA Director September 29, 1998
- ---------------------------------------------------
Alan L. Rivera
/s/ DAVID H. BOVA Director September 29, 1998
- ---------------------------------------------------
David H. Bova
/s/ GEORGE M. SCHERER Director September 29, 1998
- ---------------------------------------------------
George M. Scherer
</TABLE>
II-8
<PAGE> 202
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<C> <S>
3.1 Certificate of Formation of the Company.*
3.2 Limited Liability Company Agreement of Company.*
3.3 Certificate of Incorporation of Finance Corp.*
3.4 By-Laws of Finance Corp.*
4.1 Indenture, dated as of May 28, 1998, by and among the
Issuers, the Subsidiary Guarantors and United States Trust
Company of New York, as trustee.*
4.2 Form of 10 1/2% Senior Notes, Due 2008 (filed as part of
Exhibit 4.1).*
4.3 Exchange and Registration Rights Agreement, dated May 20,
1998, among the Issuers, the Subsidiary Guarantors and
Societe Generale Securities Corporation.*
5.1 Opinion of Counsel to the Issuers concerning the legality of
the Securities being offered.
10.1 Purchase Agreement among the Issuers, the Subsidiary
Guarantors and Societe Generale Securities Corporation,
dated May 20, 1998.*
10.2 Form of 10 1/2% Senior Notes, issued by the Issuers to
certain purchasers, and dated as of May 28, 1998 (filed as
part of Exhibit 4.1).*
10.3 Employment Agreement between Elliott and George M. Scherer,
dated as of January 16, 1996, as amended March 16, 1996.*
10.4 Employment Agreement between Parent and Michael L. Colecchi,
dated as of May 15, 1997, as amended April 27, 1998.*
10.5 Employment Agreement between ESP and August M. Boucher,
dated as of December 10, 1997.*
10.6 Employment Agreement between the Company and James D.
Wilcox, dated as of April 17, 1998.*
10.7 1998 Long-Term Incentive Plan of the Parent.*
10.8 Management Agreement, dated May 28, 1998, with Millbrook
Capital Management Inc.*
10.9 Lease, dated January 1, 1989, between Elliot and Empire
Realty Company.*
10.10 Lease, dated December 1, 1992, between RAD and S&S
Properties, Inc.*
10.11 Lease Agreement, dated June 7, 1990, between Elliott and
Route 12A Associates, as amended.*
10.12 Lease of Real Property, dated June 1, 1993, between ESP and
Massachusetts Colony Corporation.*
10.13 Commercial Lease and Deposit Receipt, dated August 27, 1998,
between Hudson and Jim Jelsema.*
10.14 Credit and Guaranty Agreement, dated as of July 27, 1998,
among the Issuers, Elliott, Hudson, ESP, Societe Generale,
as agent and certain financial institutions named therein.*
10.15 Guarantor Security Agreement, dated as of July 27, 1998,
among Elliott, Hudson, Finance Corp., ESP and Societe
Generale.*
10.16 Borrower Security Agreement, dated as of July 27, 1998,
between KC LLC and Societe Generale.*
10.17 Pledge Agreement, dated as of July 27, 1998, between KC LLC
and Societe Generale.*
12.1 Statements re Computation of Ratios.*
21.1 List of the Company's Subsidiaries.*
23.1 Consent of PricewaterhouseCoopers, LLP.
23.2 Consent of Fulgieri & Randall, LLP
23.3 Consent of Greenberg, Rosenblatt, Kull & Bitsoli, PC
23.4 Consent of BDO Seidman, LLP.
23.5 Consent of Rubin Baum Levin Constant & Friedman (contained
in the opinion filed as Exhibit 5.1).
25.1 Form T-1 Statement of Eligibility of Trustee.*
99.1 Form of Letter of Transmittal for 10 1/2% Senior Notes with
respect to the Exchange Offer.*
99.2 Form of Notice of Guaranteed Delivery with respect to the
Exchange Offer.*
99.3 Form of Instruction to Registered Holder and/or Book-Entry
Transfer Participant from Beneficial Owner relating to the
10 1/2% Senior Notes.*
99.4 Form of Letter to Registered Holders and The Depository
Trust Company.*
99.5 Form of Client Letter.*
</TABLE>
- ---------------
* Previously filed with the registration statement
<PAGE> 1
Exhibit 5.1
RUBIN BAUM LEVIN CONSTANT AND FRIEDMAN
30 ROCKEFELLER PLAZA
NEW YORK, NEW YORK 10112
September 29, 1998
Key Components, LLC
Key Components Finance Corp.
Wing Road
RR 1, Box 167D
Millbrook, New York 12545
Re: 10 1/2% Senior Notes due 2008 (the "New Notes")
Gentlemen:
We have acted as counsel to Key Components, LLC, a Delaware limited
liability Company (the "Company") and Key Components Finance Corp., a Delaware
corporation (together with the Company, the "Issuers") in connection with the
Issuers' exchange offer (the "Exchange Offer") for its 10 1/2% Senior Notes due
2008 (collectively the "Old Notes") as described in the Prospectus (the
"Prospectus") contained in Amendment No. 2 to the Registration Statement on Form
S-4 (the "Registration Statement"), to be filed with the Securities and Exchange
Commission.
In furnishing this opinion, we have examined the Certificate of
Formation and the Limited Liability Company Agreement and the Certificate of
Incorporation and By-laws of the Issuers, as each may have been amended, as well
as the originals or photostatic or certified copies of such documents, records,
certificates, agreements and other papers as we have deemed necessary for the
purposes of this opinion. In such examination, we have assumed the genuineness
of all signatures, the authenticity of all documents submitted to us as
originals, the conformity to executed documents of all unexecuted copies
submitted to us, and the authenticity of, and the conformity to, original
documents of all documents submitted to us as certified or photostatic copies.
As to various questions of fact material to our opinion, we have relied upon
oral statements, written information and certificates of officials and
representatives of the Issuers and others.
Based upon the foregoing, we are of the opinion that the New Notes to
be offered and issued by the Issuers have been duly authorized and, when
executed and authenticated in accordance with the terms of the Indenture
pursuant to which they will be issued and delivered in exchange for the
<PAGE> 2
Key Components, LLC
Key Components Finance Corp.
September 29, 1998
Page 2
applicable Old Notes in accordance with the Exchange Offer will be validly
issued and constitute binding obligations of the Issuers, except as the
enforceability thereof may be limited by bankruptcy, insolvency, reorganization
or similar laws affecting creditors' rights generally or by general equitable
principles.
As members of the Bar of the State of New York, we do not purport to be
experts on any laws other than those of the United States and New York, and the
General Corporation Law of Delaware.
We consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference made to this firm under the caption
"Legal Matters" in the Prospectus. In giving this consent, we do not thereby
admit that we are included within the category of persons whose consent is
required under Section 7 of the Securities Act of 1933 or the rules and
regulations of the Securities and Exchange Commission promulgated thereunder.
This opinion is rendered solely to you in connection with the above
matter. This opinion may not be relied upon by you for any other purpose or
relied upon by or furnished to any other person without our prior written
consent.
Very truly yours,
/s/ Rubin Baum Levin Constant & Friedman
RUBIN BAUM LEVIN CONSTANT & FRIEDMAN
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Amendment No. 2 to Registration Statement on Form S-4 of Key Components, LLC,
Key Components Finance Corp., B.W. Elliott Manufacturing Co., Inc., Hudson Lock,
Inc. and ESP Lock Products, Inc. of our report dated February 20, 1998 relating
to the financial statements of Key Components, Inc., of our reports dated
September 22, 1998 and February 20, 1998 relating to the financial statements of
Hudson Lock, Inc. and of our report dated January 16, 1998 relating to the
financial statements of ESP Lock Products, Inc., which appear in such
Prospectus. We also consent to the references to us under the heading "Experts"
in such Prospectus.
/s/ PricewaterhouseCoopers LLP
Syracuse, New York
September 29, 1998
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
of Key Components, Inc.
We hereby consent to the use in the Prospectus constituting part of this
Amendment No. 2 to the Registration Statement on Form S-4 of Key Components,
LLC, Key Components Finance Corp., B.W. Elliott Manufacturing Co., Inc., Hudson
Lock, Inc. and ESP Lock Products, Inc. of our report dated February 9, 1996
(except for Note 8 and Note 4, which is as of February 21, 1997) relating to the
financial statements of B.W. Elliott Manufacturing Co., Inc., which appears in
such Prospectus. We also consent to the reference to us under the heading
"Experts" in such Prospectus.
/s/ Fulgieri & Randall, LLP
Binghamton, New York
September 29, 1998
<PAGE> 1
Exhibit 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the use in the Prospectus constituting part of this Amendment No.
2 to the Registration Statement on Form S-4 of Key Components, LLC, Key
Components Finance Corp., B.W. Elliott Manufacturing Co., Inc., Hudson Lock,
Inc. and ESP Lock Products, Inc. of our report dated July 9, 1997 relating to
the financial statements of RAD Lock, Inc., which appears in such Prospectus.
We also consent to the reference made to us under the heading "Experts" in such
Prospectus.
/s/ Greenberg, Rosenblatt, Kull & Bitsoli, P.C.
GREENBERG, ROSENBLATT, KULL & BITSOLI, P.C.
Worcester, Massachusetts
September 28, 1998
<PAGE> 1
Exhibit 23.4
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Key Components, LLC
Key Components Finance Corp.
B.W. Elliott Manufacturing Co., Inc.
Hudson Lock, Inc.
ESP Lock Products, Inc.
We hereby consent to the use in the Prospectus constituting a part
of this Amendment No. 2 to the Registration Statement of our report dated
February 7, 1997, relating to the financial statements of ESP Lock Products,
Inc. as of December 31, 1996 and 1995 and for the years then ended, which is
contained in that Prospectus.
We also consent to the reference to us under the caption "Experts" in
the Prospectus.
/s/ BDO Seidman, LLP
Gardner, Massachusetts
September 29, 1998
