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Filed pursuant to Rule 424(b)(3)
Registration No. 333-58837 and 333-58837-01
PROSPECTUS
INTERNATIONAL COMFORT PRODUCTS HOLDINGS, INC.
OFFER TO EXCHANGE 8 5/8% SERIES B SENIOR NOTES DUE 2008 ISSUED BY INTERNATIONAL
COMFORT PRODUCTS HOLDINGS, INC., WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, FOR ANY AND ALL OF THE OUTSTANDING 8 5/8% SERIES A
SENIOR NOTES DUE 2008, ALSO ISSUED BY INTERNATIONAL COMFORT PRODUCTS HOLDINGS,
INC.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON OCTOBER 8, 1998, UNLESS EXTENDED.
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International Comfort Products Holdings, Inc. ("Holdings" or the "Issuer")
hereby offers, upon the terms and subject to the conditions set forth in this
Prospectus (the "Prospectus") and the accompanying Letter of Transmittal (the
"Letter of Transmittal" and, together with this Prospectus, the "Exchange
Offer"), to exchange $1,000 principal amount of its 8 5/8% Series B Senior Notes
due 2008 (the "New Notes"), which have been registered under the Securities Act
of 1933, as amended (the "Securities Act") pursuant to a registration statement
of which this Prospectus is a part (the "Registration Statement"), for each
$1,000 principal amount of its outstanding 8 5/8% Series A Senior Notes due 2008
(the "Old Notes"), of which $150,000,000 principal amount is outstanding as of
the date hereof. See "Purpose of The Exchange Offer" and "Terms of the Exchange
Offer." The Old Notes and the New Notes are sometimes collectively referred to
herein as the "Notes." The New Notes are senior unsecured obligations of the
Issuer and are fully and unconditionally guaranteed on a senior unsecured basis
(the "Parent Guarantee") by the Issuer's parent corporation, International
Comfort Products Corporation (the "Parent Guarantor").
The Issuer will accept for exchange any and all validly tendered Old Notes
prior to 5:00 p.m., New York City time, on October 8, 1998, unless extended by
the Issuer upon the terms and conditions described herein (such date, as it may
be extended, the "Expiration Date"). Old Notes may be tendered only in integral
multiples of $1,000. Tenders of Old Notes may be withdrawn at any time prior to
5:00 p.m., New York City time, on the Expiration Date. The Exchange Offer is not
conditioned upon any minimum principal amount of Old Notes being tendered for
exchange. The Exchange Offer, however, is subject to certain customary
conditions. In the event the Issuer terminates the Exchange Offer and does not
accept for exchange any Old Notes, the Issuer will promptly return previously
tendered Old Notes to the holders thereof. The Issuer will not receive any
proceeds from the Exchange Offer. See "Use of Proceeds -- The Exchange Offer."
A prospectus has not been and will not be filed under the securities laws
of any province or territory of Canada to qualify the sale of the New Notes in
such jurisdictions.
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THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL ARE FIRST BEING MAILED TO
HOLDERS OF OLD NOTES ON SEPTEMBER 15, 1998.
SEE "RISK FACTORS" BEGINNING ON PAGE 15 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH THE EXCHANGE OFFER.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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The Date of this Prospectus is September 10, 1998
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The New Notes will be obligations of the Issuer evidencing the same debt as
the Old Notes, and will be entitled to the benefits of the same indenture (the
"Indenture"). See "Description of Notes." The form and terms of the New Notes
are generally the same as the form and terms of the Old Notes in all material
respects except that the New Notes have been registered under the Securities Act
and hence do not include certain rights to registration thereunder and do not
contain transfer restrictions or terms with respect to certain special payments
applicable to the Old Notes. See "Purpose of the Exchange Offer."
The New Notes are being offered hereunder in order to satisfy certain
obligations under the Registration Rights Agreement, dated as of May 13, 1998
(the "Registration Rights Agreement"), among the Issuer, the Parent Guarantor,
and Salomon Brothers, Inc., Credit Suisse First Boston Corporation and First
Union Capital Markets, a division of Wheat First Securities, Inc. (collectively,
the "Initial Purchasers"), a copy of which has been filed as an exhibit to the
Registration Statement. The Exchange Offer is intended to satisfy the Issuer's
obligations under the Registration Rights Agreement to register the New Notes
and exchange them for the Old Notes under the Securities Act. If and when the
Exchange Offer is consummated, the Issuer will have no further obligations to
register any of the Old Notes tendered for exchange, except pursuant to a shelf
registration statement to be filed under certain limited circumstances discussed
under the caption "Purpose of the Exchange Offer." See "Risk
Factors -- Consequences to Non-Tendering Holders of Old Notes." The Issuer has
agreed to pay the expenses of the Exchange Offer.
Based on interpretations by the staff of the Securities and Exchange
Commission (the "Commission") set forth in several no-action letters issued to
third parties including Exxon Capital Holdings Corporation, SEC No-Action Letter
(available April 13, 1989) (the "Exxon Capital Letter"), Morgan Stanley & Co.
Incorporated, SEC No-Action Letter (available June 5, 1991) (the "Morgan Stanley
Letter") and Shearman & Sterling, SEC No-Action Letter (available July 2, 1993)
(the "Shearman & Sterling Letter") (collectively, the "Exchange Offer No-Action
Letters"), the Issuer believes 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 Holders (as defined on page 43) thereof who are not
affiliates of the Issuer (other than a broker-dealer who acquired such Old Notes
directly from the Issuer for resale pursuant to Rule 144A under the Securities
Act or any other available exemption under the Securities Act) without
compliance with the registration and prospectus delivery provisions of the
Securities Act; provided, however, that the Holder is acquiring New Notes in its
ordinary course of business and has no arrangement or understanding with any
person to participate in any distribution (within the meaning of the Securities
Act) of the New Notes. Persons wishing to exchange Old Notes in the Exchange
Offer must represent to the Issuer that such conditions have been met.
Nevertheless, any Holder who may be deemed an "affiliate" (as defined under Rule
405 of the Securities Act) of the Issuer or who tenders in the Exchange Offer
with the intention to participate, or for the purpose of participating, in a
distribution of the New Notes cannot rely on the interpretation by the staff of
the Commission set forth in such no-action letters, including, but not limited
to, the Exchange Offer No-Action Letters, and must comply with the registration
and prospectus delivery requirements of the Securities Act in connection with
any resale transaction. See "Purpose of The Exchange Offer." In addition, each
broker-dealer that receives New Notes for its own account pursuant to the
Exchange Offer in exchange for Old Notes that were acquired by such
broker-dealer for its own account as a result of market-making activities or
other trading activities (other than acquisitions directly from the Issuer) 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 that were acquired by such broker-dealer as a result of market-making
activities or other trading activities (other than acquisitions directly from
the Issuer). The Issuer has agreed that, for a period of 180 days after the
Exchange Offer is consummated, it will, upon reasonable request, make this
Prospectus available promptly to any broker-dealer for use in connection with
any such resale. See "Plan of Distribution." EXCEPT AS DESCRIBED IN THIS
PARAGRAPH, THIS PROSPECTUS MAY NOT BE USED FOR ANY OFFER TO RESELL, RESALE OR
OTHER TRANSFER OF NEW NOTES.
Old Notes were initially represented by a several Global Old Notes in fully
registered form, registered in the name of a nominee of The Depository Trust
Company ("DTC"), as depository. The New Notes exchanged for Old Notes
represented by the Global Old Notes will be represented by one or more Global
New Notes in fully registered form and registered in the name of the nominee of
DTC. The Global New Notes will
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be exchangeable for New Notes in registered form, in denominations of $1,000 and
integral multiples thereof as described herein. The New Notes in global form
will trade in DTC's Same-Day Funds Settlement System, and secondary market
trading activity of such New Notes therefore will settle in immediately
available funds. See "Book Entry, Delivery and Form."
The New Notes will bear interest at a rate equal to 8 5/8% per annum from
the last date on which interest was paid on the Old Notes surrendered in
exchange therefor, or if no interest has been paid, from the date of original
issue of such Old Notes. Interest on the New Notes is payable semi-annually on
May 15 and November 15 of each year, commencing November 15, 1998.
The New Notes are redeemable at the option of the Issuer, in whole or in
part, on or after May 15, 2003, at the redemption prices set forth herein, plus
accrued and unpaid interest thereon and Additional Interest (as defined on page
35), if any, payable pursuant to Section 4 of the Registration Rights Agreement
with respect to the Old Notes to the redemption date. Notwithstanding the
foregoing, at any time on or before May 15, 2001, the Issuer may redeem up to
35% of the principal amount of the New Notes with the net proceeds contributed
or otherwise made available to it by the Parent Guarantor from a public offering
of common stock of the Parent Guarantor at the redemption prices set forth
herein, plus accrued and unpaid interest thereon, if any, to the redemption
date. Upon a Change of Control (as defined on page 57), the Issuer will be
required to make an offer to repurchase all outstanding Notes at 101% of the
principal amount thereof plus accrued and unpaid interest thereon to the date of
repurchase. In the event of a Change in Control, there can be no assurance that
the Issuer or the Parent Guarantor would have sufficient funds to repurchase the
Notes. See "Risk Factors -- Consequences of Change of Control."
The New Notes and the Parent Guarantee will be senior unsecured obligations
of the Issuer and Parent Guarantor, respectively, and rank pari passu in right
of payment to all existing and future unsecured and unsubordinated indebtedness
of the Issuer and the Parent Guarantor, respectively, and senior in right of
payment to all subordinated indebtedness of the Issuer and the Parent Guarantor,
respectively. The New Notes and the Parent Guarantee will be effectively
subordinated to all existing and future indebtedness of the Parent Guarantor's
subsidiaries (other than the Issuer). As of June 30, 1998, such subsidiaries had
$200.3 million of total liabilities, including $68.1 million of indebtedness.
See "Description of Notes -- Parent Guarantee" with respect to enforcement of
civil liabilities against the Parent Guarantor and certain of its officers and
directors.
Prior to this offering, there has been no public market for the New Notes.
The Issuer does not intend to list the New Notes on a national securities
exchange or to seek approval for quotation through the NASDAQ National Market.
Because the Old Notes were issued and the New Notes are being issued primarily
to a limited number of institutions who typically hold similar securities for
investment, the Issuer does not expect that an active public market for the New
Notes will develop. In addition, resales by certain holders of the New Notes of
a substantial percentage of the aggregate principal amount of such New Notes
could constrain the ability of any market maker to develop or maintain a market
for the New Notes. To the extent that a market for the New Notes should develop,
the market value of the New Notes will depend on prevailing interest rates, the
market for similar securities and other factors, including the financial
condition, performance and prospects of the Issuer. Such factors might cause the
New Notes to trade at a discount from face value. See "Risk Factors -- Lack of
Public Market for the New Notes."
THE ISSUER WILL NOT RECEIVE ANY PROCEEDS FROM THE EXCHANGE OFFER. THE
ISSUER HAS AGREED TO PAY THE EXPENSES OF THE EXCHANGE OFFER, OTHER THAN CERTAIN
APPLICABLE TAXES. NO UNDERWRITER IS BEING USED IN CONNECTION WITH THE EXCHANGE
OFFER.
NOTICE TO CANADIAN INVESTORS
A PROSPECTUS HAS NOT BEEN AND WILL NOT BE FILED UNDER THE SECURITIES LAWS
OF ANY PROVINCE OR TERRITORY OF CANADA TO QUALIFY THE SALE OF THE NEW NOTES IN
SUCH JURISDICTIONS. THE NEW NOTES ARE NOT BEING OFFERED AND MAY NOT BE OFFERED
OR SOLD, DIRECTLY OR INDIRECTLY, IN CANADA OR TO OR FOR THE ACCOUNT OF ANY
RESIDENT OF CANADA IN CONTRAVENTION OF THE SECURITIES LAWS OF ANY PROVINCE OR
TERRITORY THEREOF.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission (File No. 1-7955) are
hereby incorporated by reference in this Prospectus:
(i) the Parent Guarantor's Annual Report on Form 10-K for the year
ended December 31, 1997 filed with the Commission on March 31, 1998;
(ii) the Parent Guarantor's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1998 filed with the Commission on May 15,
1998; and
(iii) the Parent Guarantor's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1998 filed with the Commission on August
14, 1998.
All reports and any definitive proxy or information statements filed by the
Parent Guarantor pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934 (the "Exchange Act") subsequent to the date of this
Prospectus and prior to the termination of the offering of the securities
offered hereby shall be deemed to be incorporated by reference into this
Prospectus and to be a part hereof from the date of filing of such documents.
Any statement contained in a document incorporated or deemed to be incorporated
herein by reference, or contained in this Prospectus, shall be deemed to be
modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE THAT ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE WITHOUT CHARGE TO
ANY PERSON TO WHOM A PROSPECTUS IS DELIVERED, UPON WRITTEN OR ORAL REQUEST OF
SUCH PERSON, FROM INTERNATIONAL COMFORT PRODUCTS CORPORATION, 501 CORPORATE
CENTRE DRIVE, SUITE 200, FRANKLIN, TENNESSEE 37067, ATTENTION: SECRETARY,
TELEPHONE (615)771-0200. IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS,
ANY REQUEST SHOULD BE MADE BY OCTOBER 1, 1998.
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PROSPECTUS SUMMARY
The following summary information is qualified in its entirety by, and
should be read in conjunction with, the financial statements and the more
detailed information included elsewhere or incorporated by reference in this
Prospectus. Unless the context requires otherwise, references to the "Company"
mean International Comfort Products Corporation and its subsidiaries. References
herein to various information on a "pro forma basis" give effect, for the year
ended December 31, 1997, to the acquisition of United Electric Company ("United
Electric"), the issuance of the Old Notes and the application of the net
proceeds, and for the six months ended June 30, 1998 to the issuance of the Old
Notes and the application of the net proceeds, all as described in the Notes to
Pro Forma Selected Financial Data contained herein.
THE COMPANY
The Company is one of the leading designers, manufacturers and marketers of
central air conditioning and heating products for residential and light
commercial use in the United States and Canada. The Company also has recently
expanded its presence in other international markets, primarily Latin America
and Europe. Its principal brand names are widely recognized in the industry and
include Heil, Tempstar, Comfortmaker, MagicAire and the recently added ICP
Commercial. Management believes that the Company and its products are known for
their quality, reliability and customer service. In 1997, the Company had, on a
pro forma basis, operating revenue of $655.7 million. During the six months
ended June 30, 1998, the Company had operating revenue of $351.3 million.
The Company's products are sold primarily through a network of
approximately 400 independent heating, ventilation and air conditioning ("HVAC")
distribution companies with over 1,800 locations in the United States, Canada
and other international markets. These distributors are the Company's link to
dealers and, in turn, to consumers. In 1997, sales of cooling products accounted
for approximately 61% of operating revenue, sales of heating products accounted
for approximately 26% of operating revenue and sales of service parts and other
income accounted for approximately 13% of operating revenue. Management believes
that in 1997 the Company derived approximately 70% of its operating revenue from
the replacement, repair and renovation market and approximately 30% from the new
construction market. In 1997, the Company derived approximately 84% of its
operating revenue from sales in the United States, approximately 12% of its
operating revenue from sales in Canada, and approximately 4% of its operating
revenue from sales in other international markets.
In late 1994, the Company's new management initiated a restructuring plan
to significantly improve the Company's manufacturing operations and marketing
strategy, allowing the Company to return to profitability in 1996 after
consecutive years of losses since 1991. Implementing this plan in 1995 caused a
significant dislocation in the Company's operations and severely depressed
financial performance for that year. The restructuring plan was designed to (i)
reduce manufacturing and overhead costs, (ii) reduce lead times for processing
customer orders to better control inventory levels and improve customer
relations, (iii) improve product quality and customer service and (iv)
rationalize and expand the Company's distribution network. The Company believes
that its dramatically improved operational and financial performance in 1996 and
1997 is a direct result of its restructuring plan. The Company's efforts to
reduce manufacturing costs have improved gross margin to 20.1% in 1997 from
17.8% in 1994. Manufacturing and other improvements have allowed the Company to
meet 98% of orders for residential product in 14 days in 1997 versus the
Company's standard order lead time of 90 days in 1994, increase the Company's
operating revenue per employee by 44% to approximately $249,000 in 1997 from
approximately $173,000 in 1994 (in a stable price environment for its products),
and decrease average raw and in process inventory 63% to approximately $6.5
million during 1997 from approximately $17.7 million during 1994.
INDUSTRY OVERVIEW
Management estimates that the residential and commercial HVAC industry
(measured by sales by manufacturers of product in the United States, excluding
applied systems and chillers) totals approximately $7.0 billion per year. The
production and sale of HVAC equipment by manufacturers is highly competitive.
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According to industry sources, in 1997 seven manufacturers (including the
Company) represented approximately 95% of this market, with individual market
shares ranging from approximately 10% to 22% and the Company having
approximately 11% of the residential and light commercial HVAC market.
Industry sources estimate that between 1993 and 1997, the HVAC market in
the United States and Canada has grown at an average compounded annual rate of
7% per year. Management believes that the HVAC market in the United States and
Canada will grow at an annual rate of approximately 3-4% per year through the
year 2000.
The Company believes the United States and Canadian markets will continue
to experience moderate growth, but that the industry will experience the
greatest rate of growth in other international markets. Management anticipates
that climatic and economic conditions in Latin America will lead to a higher
rate of growth in that region, and therefore is concentrating on expanding in
that region.
STRATEGY
In addition to continuing the Company's implementation of its 1995
initiatives, the Company is committed to (i) growing its operating revenue in
excess of industry growth rates, (ii) improving profitability and (iii) reducing
working capital requirements. The Company seeks to achieve these goals through
the implementation of the following strategies:
Increase residential market share in the United States and Canada. The
Company intends to increase its residential market share by (i) further
strengthening its relationship with its distributors by reducing customer order
lead times, and providing superior training and marketing support, (ii)
expanding the distribution network in low market share geographic areas and
rationalizing the existing distribution network, (iii) broadening its offering
of aftermarket parts and other HVAC-related supplies to provide distributors
with the benefits of one-stop shopping and (iv) developing strategic
relationships with national accounts, including builders, distributors,
contractors and private label resellers.
Expand its commercial market product offerings and gain market share. The
Company intends to increase its commercial product sales by (i) initiating a
"two-tier" product strategy (providing both higher priced main line HVAC
products distinguished by premium features and service and lower-priced entry
level HVAC products based on minimum energy efficiency standards targeted at the
low cost, entry-level market segment) to provide competitive commercial
products, (ii) establishing ICP Commercial distribution networks for national
distribution of the recently introduced ICP Commercial brand product, (iii)
strengthening the existing distribution network of the Company's other
commercial brands, (iv) initiating the use of independent manufacturers'
representatives to solicit sales of ICP Commercial brand product for
installation in commercial buildings, (v) expanding product offerings for
commercial applications and (vi) expanding commercial products to include those
with capacity of up to 40 tons.
Pursue international opportunities. The Company intends to continue
expansion of its operations outside the United States and Canada. In Latin
America and Europe, the Company initially establishes HVAC parts distribution
businesses, and introduces HVAC equipment after the parts business has
established cash flow and customer traffic. The Company believes this strategy
of overseas expansion creates the opportunity to generate early cash flow and a
market presence without risking a substantial amount of capital.
Augment internally generated growth by acquiring businesses with
complementary new products, technology and manufacturing resources. The Company
intends to consider acquisitions that support its growth strategy and leverage
and expand its distribution network, purchasing power and manufacturing
capabilities. The Company expects its acquisitions will be both domestic and
international. At this time the Company is not in the process of reviewing any
acquisition that is probable of occurring that would be material to the
Company's financial position or results of operations.
Continue to reduce manufacturing costs and standardize components. The
Company intends to increase profitability by continuing efforts to reduce costs
through product design improvements and increased manufacturing efficiencies.
Management believes that its positive results of operations for 1996 and 1997
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resulted in large part from structural cost reductions achieved between 1995 and
1997 and that further reductions will be an integral part of its continued
profitability.
CORPORATE STRUCTURE
The chart below reflects the structure of the Parent Guarantor, the Issuer
and their principal operating subsidiaries.
(CORPORATE STRUCTURE CHART)
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* All terms defined on page 34
The Company's principal executive offices are located at 501 Corporate
Centre Drive, Suite 200, Franklin, Tennessee, USA 37067. The Company's telephone
number is (615) 771-0200.
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PURPOSE AND TERMS OF THE EXCHANGE OFFER
THE EXCHANGE OFFER......... $1,000 principal amount of New Notes in exchange
for each $1,000 principal amount of Old Notes. As
of the date hereof, $150 million in aggregate
principal amount of Old Notes is outstanding. The
Issuer will issue the New Notes to tendering
holders of Old Notes on or promptly after the
Expiration Date. Based on interpretations by the
staff of the Commission set forth in several
no-action letters issued to third parties,
including, but not limited to, the Exchange Offer
No-Action Letters, the Company believes that New
Notes issued pursuant to the Exchange Offer in
exchange for Old Notes may be offered for resale,
resold and otherwise transferred by holders
thereof who are not affiliates of the Issuer
(other than a broker-dealer who acquired such Old
Notes directly from the Issuer for resale
pursuant to Rule 144A under the Securities Act or
any other available exemption under the
Securities Act) without compliance with the
registration and prospectus delivery provisions
of the Securities Act; provided, however, that
the holder of Old Notes is acquiring New Notes in
its ordinary course of business and has no
arrangement or understanding with any person to
participate in any distribution (within the
meaning of the Securities Act) of the New Notes.
Persons wishing to exchange Old Notes in the
Exchange Offer must represent to the Issuer that
such conditions have been met. Nevertheless, any
holder of Old Notes who is an affiliate of the
Issuer or who tenders in the Exchange Offer with
the intention to participate, or for the purpose
of participating, in a distribution of the New
Notes cannot rely on the interpretation by the
staff of the Commission set forth in such
no-action letters, including, but not limited to,
The Exchange Offer No-Action Letters, and must
comply with the registration and prospectus
delivery requirements of the Securities Act in
connection with any resale transaction. See
"Purpose 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 that were acquired by such broker-dealer
for its own account as a result of market-making
activities or other trading activities (other
than acquisitions directly from the Issuer). The
Issuer has agreed that, for a period of 180 days
after the Exchange Offer is consummated, it will,
upon reasonable request, make this Prospectus
available promptly to any broker-dealer for use
in connection with any such resale. See "Plan of
Distribution."
EXPIRATION DATE............ 5:00 p.m., New York City time, on October 8, 1998,
unless the Exchange Offer is extended by the
Issuer to the extent necessary to comply with
applicable laws, in which case the term
"Expiration Date" means the latest date and time
to which the Exchange Offer is extended.
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ACCRUED AMOUNTS ON THE NEW
NOTES.................... The New Notes will bear interest from the last date
on which interest was paid on the Old Notes
surrendered in exchange therefor or, if no
interest has been paid, from the date of original
issue of such Old Notes.
CONDITIONS TO THE EXCHANGE
OFFER.................... The Exchange Offer is subject to certain customary
conditions. The conditions are limited and relate
in general to laws or Commission policies that
might impair the ability of the Issuer to proceed
with the Exchange Offer. As of the date of this
Prospectus, none of these events had occurred,
and the Company believes their occurrence to be
unlikely. If any such conditions do exist prior
to the Expiration Date, the Issuer may (i) refuse
to accept any Old Notes and return all previously
tendered Old Notes, (ii) extend the Exchange
Offer upon the terms and conditions described
herein, or (iii) waive such conditions. See
"Terms of the Exchange Offer -- Conditions."
PROCEDURES FOR TENDERING... 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 such Old Notes to be exchanged and
any other required documentation to United States
Trust Company of New York, as Exchange Agent (the
"Exchange Agent"), at the address set forth
herein and therein or effect a tender of such Old
Notes pursuant to the procedures for book-entry
transfer as provided for herein and therein. By
executing the Letter of Transmittal, each holder
of Old Notes will represent to the Issuer that,
among other things, the New Notes acquired
pursuant to the Exchange Offer are being obtained
in the ordinary course of business of the person
receiving such New Notes (whether or not such
person is the holder of the tendered Old Notes),
that neither the holder of the tendered Old Notes
nor any such other person has an arrangement or
understanding with any person to participate in
the distribution of such New Notes and that
neither the holder of the tendered Old Notes nor
any such other person is an "affiliate," as
defined under Rule 405 of the Securities Act, of
the Issuer or any of its subsidiaries. Each
broker-dealer that receives New Notes for its own
account in exchange for Old Notes that were
acquired by such broker-dealer as a result of
market-making activities or other trading
activities must acknowledge that it will deliver
a prospectus in connection with any resale of
such New Notes. See "Terms of the Exchange
Offer -- Procedures for Tendering" and "Plan of
Distribution."
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 such Old Notes in the Exchange Offer
should contact such registered holder promptly
and instruct such registered holder to tender on
such beneficial owner's behalf. If such
beneficial owner wishes to tender on such owner's
own behalf, such owner must, prior to completing
and executing the Letter of Transmittal and
delivering its Old Notes, either make appropriate
arrangements to
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register ownership of the Old Notes in such
owner's name or obtain a properly completed bond
power from the registered holder thereof. The
transfer of registered ownership may take
considerable time and it may not be possible to
complete a transfer initiated shortly before the
Expiration Date. See "Terms of the Exchange
Offer -- Procedures for Tendering."
GUARANTEED DELIVERY
PROCEDURES................. Holders of Old Notes who wish to tender their Old
Notes and whose Old Notes are not immediately
available or who cannot deliver their Old Notes,
the Letter of Transmittal or any other documents
required by the Letter of Transmittal to the
Exchange Agent, or cannot complete the procedure
for book-entry transfer prior to 5:00 p.m. on the
Expiration Date, may tender their Old Notes
according to the guaranteed delivery procedures
discussed under the caption "Terms of 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.
ACCEPTANCE OF OLD NOTES AND
DELIVERY OF NEW NOTES.... The Issuer will accept for exchange 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. The New Notes issued
pursuant to the Exchange Offer will be delivered
promptly following the Expiration Date. Any Old
Notes not accepted for exchange will be returned
without expense to the tendering holder thereof
as promptly as practicable after the expiration
or termination of the Exchange Offer. See "Terms
of the Exchange Offer."
CERTAIN TAX
CONSIDERATIONS............. The exchange pursuant to the Exchange Offer should
not be a taxable event for United States or
Canadian federal income tax purposes. See
"Certain United States Federal Tax
Considerations" and "Certain Canadian Federal
Income Tax Considerations."
EXCHANGE AGENT............. United States Trust Company of New York is serving
as Exchange Agent in connection with the Exchange
Offer.
TERMS OF NEW NOTES
The Exchange Offer applies to the entire $150,000,000 aggregate principal
amount outstanding of the Old Notes. The New Notes will be obligations of the
Issuer evidencing the same debt as the Old Notes and will be entitled to the
benefits of the same Indenture. See "Description of Notes." The form and terms
of the New Notes are generally the same as the form and terms of the Old Notes
in all material respects except that the New Notes have been registered under
the Securities Act and hence do not include certain rights to registration
thereunder and do not contain transfer restrictions or terms with respect to
certain special payments applicable to the Old Notes. See "Description of
Notes."
THE NEW NOTES.............. $150,000,000 principal amount of 8 5/8% Series B
Senior Notes due 2008.
MATURITY DATE.............. May 15, 2008.
INTEREST RATE AND PAYMENT
DATES.................... The New Notes will bear interest at a rate of
8 5/8% per annum. Interest on the New Notes will
accrue from the last date on which interest was
paid on the Old Notes surrendered in exchange
therefor, or if no interest has been paid, from
the date of original issue of such Old
10
<PAGE> 11
Notes. Interest on the New Notes is payable
semi-annually in cash in arrears on May 15 and
November 15 of each year, commencing November 15,
1998.
OPTIONAL REDEMPTION........ Except as provided below, the New Notes are not
redeemable at the Issuer's option prior to May
15, 2003. Thereafter, the Issuer may redeem the
New Notes, in whole or in part, at the redemption
prices set forth herein, plus accrued and unpaid
interest thereon to the date of redemption. In
addition, prior to May 15, 2001, the Issuer may
redeem up to 35% of the principal amount of the
New Notes with the net proceeds contributed or
otherwise made available to it by the Parent
Guarantor from one or more Public Equity
Offerings (as defined on page 44) at the
redemption prices set forth herein, plus accrued
and unpaid interest thereon, if any, to the
redemption date. See "Description of
Notes -- Redemption."
RANKING.................... The New Notes and the Parent Guarantee will be
senior unsecured obligations of the Issuer and
the Parent Guarantor, respectively, ranking pari
passu in right of payment to all existing and
future unsecured and unsubordinated indebtedness
of the Issuer and the Parent Guarantor,
respectively, and senior in right of payment to
all subordinated indebtedness of the Issuer and
the Parent Guarantor, respectively. The New Notes
and the Parent Guarantee will be effectively
subordinated to all existing and future
indebtedness of the Parent Guarantor's
subsidiaries (other than the Issuer). The terms
of the Indenture permit the Company and its
subsidiaries to incur additional indebtedness
(including secured indebtedness), subject to
certain limitations. See "Description of Notes"
and "Description of Other Indebtedness." As of
June 30, 1998, such subsidiaries had $200.3
million of total liabilities, including $68.1
million of indebtedness.
PARENT GUARANTEE........... The New Notes are fully and unconditionally
guaranteed on a senior basis by the Parent
Guarantor, which owns all of the outstanding
capital stock of the Issuer.
CHANGE OF CONTROL.......... Upon a Change of Control (as defined on page 57),
the Issuer is required to make an offer to
repurchase all outstanding New Notes at 101% of
the principal amount thereof plus accrued and
unpaid interest thereon to the date of
repurchase. See "Description of Notes -- Change
of Control."
ASSET SALES................ The Issuer will be required in certain
circumstances to make an offer to purchase Notes
at a price equal to 100% of the principal amount
thereof, plus accrued and unpaid interest to the
date of purchase, with the net cash proceeds of
certain asset sales. See "Description of
Notes -- Certain Covenants -- Disposition of
Proceeds of Asset Sales."
CERTAIN COVENANTS.......... The Indenture contains covenants, including, but
not limited to, covenants with respect to
limitations on the following matters: (i)
incurrence of additional indebtedness by the
Parent Guarantor and its Restricted Subsidiaries
(as defined on page 65), (ii) issuance of
preferred stock by Restricted Subsidiaries of the
Parent Guarantor, (iii) creation of liens by the
Parent Guarantor, (iv) restricted payments by the
Parent Guarantor and its Restricted Subsidiaries,
11
<PAGE> 12
(v) sales of assets and subsidiary stock by the
Parent Guarantor and its Restricted Subsidiaries,
(vi) mergers and consolidations involving the
Parent Guarantor or the Issuer, (vii) payment
restrictions affecting Restricted Subsidiaries of
the Parent Guarantor and (ix) transactions with
affiliates. See "Description of Notes -- Certain
Covenants."
For additional information regarding the Notes, see "Description of Notes."
EXCHANGE RIGHTS............ Holders of New Notes are not entitled to any
exchange rights with respect to the New Notes.
Holders of Old Notes are entitled to certain
exchange rights pursuant to the Registration
Rights Agreement. Under the Registration Rights
Agreement, the Issuer is required to offer to
exchange the Old Notes for new notes having
substantially identical terms which have been
registered under the Securities Act. This
Exchange Offer is intended to satisfy such
obligation. If and when the Exchange Offer is
consummated, neither the Parent Guarantor nor the
Issuer will have any further obligations to
register any of the Old Notes not tendered by the
Holders for exchange, except pursuant to a shelf
registration statement to be filed under certain
limited circumstances described under the caption
"Purpose of the Exchange Offer." See "Risk
Factors -- Consequences to Non-Tendering Holders
of Old Notes."
USE OF PROCEEDS............ The Company will not receive any proceeds from the
Exchange Offer.
RISK FACTORS
See "Risk Factors" for a discussion of certain considerations that should
be considered in evaluating an investment in the Notes or participation in the
Exchange Offer.
12
<PAGE> 13
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
The following summary historical financial data has been derived from the
Company's audited consolidated financial statements for the years ended December
31, 1994, 1995, 1996 and 1997 and from the Company's unaudited consolidated
financial statements for the six months ended June 30, 1997 and 1998. The
unaudited financial statements include all adjustments, consisting of normal
recurring adjustments, which the Company considers necessary for a fair
presentation of its financial position and results of operations for these
periods. The following summary pro forma consolidated financial data for the
year ended December 31, 1997 and the six months ended June 30, 1998 has been
derived from the Company's unaudited pro forma condensed financial data. Neither
the summary historical consolidated financial data nor the summary pro forma
consolidated financial data are necessarily indicative of either the future
results of operations or the results of operations that would have occurred if
the events described had been consummated on any date. The following summary
historical and pro forma consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and the notes thereto,
the Pro Forma Consolidated Condensed Financial Data and notes thereto and the
other information contained elsewhere or incorporated by reference (including
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") contained in the Company's reports incorporated herein by
reference) in this Prospectus. The consolidated financial statements of the
Company are prepared by management in accordance with generally accepted
accounting principles ("GAAP") in Canada, which differ in certain respects with
accounting principles in the United States. The differences between GAAP in
Canada and the United States as they affect the Company are described in Note 19
of the Notes to Consolidated Financial Statements.
<TABLE>
<CAPTION>
HISTORICAL
---------------------------------------------------------
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------- -----------------
1994 1995 1996 1997 1997 1998
------- ------- ------- ------- ------- -------
(IN MILLIONS, EXCEPT FOR RATIOS)
UNAUDITED
-----------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Operating Revenue................................ $ 635.2 $ 532.8 $ 641.9 $ 630.7 $ 314.2 $ 351.3
Cost of Sales.................................... 522.3 467.4 517.8 503.7 247.9 275.0
------- ------- ------- ------- ------- -------
Gross Margin..................................... 112.9 65.4 124.1 127.0 66.3 76.3
Selling, General and Administrative Expenses..... 87.3 93.2 90.7 85.5 44.4 47.1
Asset Writedowns, Restructuring Costs and Other
Nonrecurring Charges........................... 8.0 15.5 -- -- -- --
------- ------- ------- ------- ------- -------
Operating Profit (Loss).......................... 17.6 (43.3) 33.4 41.5 21.9 29.2
------- ------- ------- ------- ------- -------
Financial Expenses
Interest expense............................... 20.2 21.7 19.4 18.2 9.6 9.5
Amortization of debt issuance costs............ 1.7 1.3 1.8 1.3 0.6 0.6
Refinancing costs.............................. -- -- -- -- -- 5.0
Write-off of debt issuance costs............... 1.2 2.1 0.6 -- -- --
------- ------- ------- ------- ------- -------
23.1 25.1 21.8 19.5 10.2 15.1
------- ------- ------- ------- ------- -------
Income (Loss) Before Income Taxes................ (5.5) (68.4) 11.6 22.0 11.7 14.1
Income Taxes..................................... 0.9 (12.8) -- -- -- --
------- ------- ------- ------- ------- -------
Income (Loss) From Continuing Operations......... (4.6) (81.2) 11.6 22.0 11.7 14.1
Loss From Discontinued Operations................ (2.9) (12.0) (3.1) -- -- --
------- ------- ------- ------- ------- -------
Net Income (Loss)................................ $ (7.5) $ (93.2) $ 8.5 $ 22.0 $ 11.7 $ 14.1
======= ======= ======= ======= ======= =======
OTHER DATA:
Capital Expenditures............................. $ 11.1 $ 24.5 $ 11.8 $ 8.5 $ 2.6 $ 6.6
Ratio of Earnings to Fixed Charges (1)........... 0.79x (1.50)x 1.49x 2.06x 2.08x 1.90x
STATEMENT OF INCOME DATA (U.S. GAAP):
Operating Revenue................................ $ 635.2 $ 532.8 $ 641.9 $ 630.7 $ 314.2 $ 351.3
Gross Margin..................................... 111.9 64.4 122.7 125.7 65.5 75.4
Income (Loss) From Continuing Operations......... (5.4) (75.7) 9.7 19.4 10.3 12.7
Income (Loss) Before Extraordinary Item.......... (10.3) (89.0) 6.6 19.4 10.3 12.7
Net Income (Loss)................................ (11.1) (89.9) 6.0 19.4 10.3 12.7
</TABLE>
13
<PAGE> 14
<TABLE>
<CAPTION>
HISTORICAL
---------------------------------------------------
AS AT DECEMBER 31, AS AT JUNE 30,
--------------------------------- ---------------
1994 1995 1996 1997 1997 1998
------ ------ ------ ------ ------ ------
UNAUDITED
---------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working Capital........................................ $153.0 $ 60.5 $103.8 $136.6 $126.3 $139.8
Total Assets........................................... 486.1 345.8 345.0 352.0 387.1 430.8
Total Debt............................................. 242.8 182.7 204.0 185.5 222.2 218.1
Shareholders' Equity................................... 110.3 18.5 28.8 51.5 41.7 79.9
BALANCE SHEET DATA (U.S. GAAP):
Working Capital........................................ $151.9 $ 57.7 $100.8 $135.3 $123.8 $138.9
Total Assets........................................... 433.7 347.7 351.8 358.7 394.9 439.1
Total Debt............................................. 181.8 176.7 204.0 185.5 222.2 218.1
Shareholders' Equity................................... 108.4 19.3 26.6 48.3 39.3 78.0
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
-------------------------
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1997(2) 1998(3)
------------ ----------
UNAUDITED
-------------------------
<S> <C> <C>
STATEMENT OF INCOME DATA:
Operating Revenue......................................... $655.7 $351.3
Cost of Sales............................................. 520.7 275.0
------ ------
Gross Margin.............................................. 135.0 76.3
Selling, General and Administrative Expenses.............. 90.3 47.1
------ ------
Operating Profit.......................................... 44.7 29.2
------ ------
Financial Expenses
Interest expense....................................... 18.5 9.1
Amortization of debt issuance costs.................... 1.0 0.5
Other.................................................. (0.1) --
------ ------
19.4 9.6
------ ------
Income Before Nonrecurring Charges Directly Attributable
to the Refinanced Debentures and Income Taxes.......... 25.3 19.6
Income Taxes.............................................. (0.4) --
------ ------
Income Before Nonrecurring Charges Directly Attributable
to the Refinanced Debentures........................... $ 24.9 $ 19.6
====== ======
OTHER DATA:
Capital Expenditures...................................... $ 9.6 $ 6.6
Ratio of Earnings to Fixed Charges(1)..................... 2.24x 2.92x
</TABLE>
- ---------------
(1) For purposes of computing the ratio of earnings to fixed charges, "earnings"
consists of income (loss) before income taxes, plus fixed charges. "Fixed
charges" consist of interest expense, amortization of debt issuance costs
and one-third of rental expense (the portion deemed representative of the
interest factor).
(2) To give pro forma effect to the statement of income data for the year ended
December 31, 1997 as though the acquisition of United Electric, the offering
of the Old Notes and application of the net proceeds had occurred as of
January 1, 1997.
(3) To give pro forma effect to the statement of income data for the six months
ended June 30, 1998 as though the offering of the Old Notes and the
application of the net proceeds had occurred on January 1, 1997.
14
<PAGE> 15
RISK FACTORS
In addition to the other information in this Prospectus, prospective
investors should carefully consider the following risk factors in evaluating the
Company and its business before investing in the Notes or participating in the
Exchange Offer.
HOLDING COMPANY STRUCTURE
Each of the Parent Guarantor and the Issuer is a holding company which
conducts all of its operations through its respective subsidiaries and currently
has no significant operating assets other than its respective direct and
indirect investments in its respective operating subsidiaries. The Parent
Guarantor and the Issuer will be the only obligors on the Notes. Each of the
Parent Guarantor and the Issuer must rely on dividends and other advances and
transfers of funds from its respective subsidiaries to provide the funds
necessary to meet its respective debt service obligations, including with
respect to payments on the Parent Guarantee and the Notes, respectively. The
ability of the subsidiaries of the Parent Guarantor and the subsidiaries of the
Issuer to pay dividends or make other advances and transfers of funds will
depend on their respective operating results and will be subject to applicable
laws and restrictions contained in agreements governing indebtedness and other
obligations of such subsidiaries. Although the Indenture limits the ability of
Restricted Subsidiaries to enter into consensual restrictions on their ability
to pay dividends or make other advances and transfers of funds, such limitations
are subject to a number of significant qualifications. See "Description of
Notes -- Certain Covenants -- Limitation on Dividend and Other Payment
Restrictions Affecting Restricted Subsidiaries." In addition, certain existing
credit agreements of subsidiaries of the Parent Guarantor include restrictions
on dividends and other advances and transfers of funds. See "Description of
Other Indebtedness." There can be no assurance that any agreement to which
subsidiaries of the Issuer or the Parent Guarantor are a party (or any
applicable law) will permit such subsidiaries to distribute funds to the Issuer
or the Parent Guarantor in amounts sufficient to pay the interest and principal
on the Notes.
The Notes and the Parent Guarantee will be effectively subordinated to all
existing and future claims of creditors of the Parent Guarantor's subsidiaries
(other than the Issuer). As of June 30, 1998, such subsidiaries had $200.3
million of total liabilities, including $68.1 million of indebtedness. The
rights of the holders of the Notes to realize upon the assets of any such
subsidiary will be subject to the prior claims of the creditors of such
subsidiary, including trade creditors. In such event, there may not be
sufficient assets remaining to pay amounts due on the Notes.
LEVERAGE
As of June 30, 1998, the Parent Guarantor had $218.1 million of
consolidated indebtedness and $79.9 million of consolidated stockholders'
equity.
The Parent Guarantor's and its subsidiaries' indebtedness will have several
important consequences for the holders of the Notes, including, but not limited
to, the following: (i) a substantial portion of the Parent Guarantor's
consolidated cash flow from operations must be dedicated to debt service
requirements and will not be available for other purposes; (ii) the Parent
Guarantor's and its subsidiaries' ability to obtain additional financing in the
future for working capital, capital expenditures, acquisitions, to refinance
other indebtedness or for general corporate purposes may be impaired; (iii) the
Parent Guarantor's consolidated leverage may increase its vulnerability to
economic downturns and limit its ability to withstand competitive pressures; and
(iv) the Parent Guarantor's and its subsidiaries' ability to capitalize on
significant business opportunities may be limited.
The ability of the Issuer and the Parent Guarantor to make payments with
respect to the Notes will depend on their future operating performance, which
will be affected by prevailing economic conditions and financial, business and
other factors, certain of which are beyond the control of the Issuer and the
Parent Guarantor. The Parent Guarantor and the Issuer believe, based on current
circumstances, that the Issuer's cash flow will be sufficient to permit the
Issuer to meet its operating expenses and to service its debt requirements as
they become due. Significant assumptions underlie this belief, including, among
other things, that the Company will succeed in continuing to implement its
business strategy and there will be no material
15
<PAGE> 16
adverse developments in the business, liquidity or capital requirements of the
Issuer. If the Issuer or Parent Guarantor is unable to service its indebtedness,
the Company will be forced to adopt an alternative strategy that may include
actions such as reducing or delaying capital expenditures, selling assets,
restructuring or refinancing its indebtedness or seeking additional equity
capital. There can be no assurance that any of these strategies could be
effected on satisfactory terms, if at all.
RESTRICTIONS IMPOSED BY TERMS OF INDEBTEDNESS
The Indenture restricts the ability of the Parent Guarantor and its
Restricted Subsidiaries (including the Issuer) to, among other things, incur
additional indebtedness, pay dividends or make certain other restricted payments
or investments, consummate certain asset sales, enter into certain transactions
with affiliates, incur liens, or merge or consolidate with any other person or
sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of their assets. In addition, certain indebtedness of
subsidiaries of the Parent Guarantor and of the Issuer contain other and more
restrictive covenants, including requirements for the maintenance of specified
financial ratios and the satisfaction of certain financial tests. The ability to
meet such financial ratios and tests may be affected by events beyond the
control of the Company, and there can be no assurance that the Company will meet
such tests. A breach of any of these covenants could result in an event of
default under such indebtedness. In an event of default under such indebtedness,
the lenders thereunder could elect to declare all amounts borrowed, together
with accrued interest, to be immediately due and payable and the lenders under
the such indebtedness could terminate all commitments thereunder. If any such
indebtedness were to be accelerated, there can be no assurance that the assets
of the Parent Guarantor and the Issuer would be sufficient to repay in full such
indebtedness and the Notes. See "Description of Other Indebtedness" and
"Description of Notes -- Certain Covenants."
CONSEQUENCES OF CHANGE OF CONTROL
Upon the occurrence of a Change of Control, the holders of the Notes would
be entitled to require the Issuer to repurchase up to all outstanding Notes of
the holders requiring such repurchase at a purchase price equal to 101% of the
principal amount of such Notes plus accrued and unpaid interest, if any, thereon
to the date of repurchase. Failure by the Issuer to make such a repurchase would
result in a default under the Indenture. In addition, certain indebtedness of
subsidiaries of the Parent Guarantor and of the Issuer currently contains, and
may contain in the future, prohibitions on the occurrence of certain events that
would constitute a Change of Control or require such indebtedness to be repaid
or repurchased upon a Change of Control. Moreover, the exercise by the holders
of the Notes of their right to require the Issuer to repurchase the Notes could
cause a default under such indebtedness due to the financial effect of such
repurchase on the Issuer or the Parent Guarantor or otherwise, even if the
Change of Control itself does not cause a default. In the event of a Change of
Control, there can be no assurance that the Issuer or the Parent Guarantor would
have sufficient funds to repurchase the Notes and to satisfy its other
obligations under the Notes and any such other indebtedness. Because the
Issuer's ability to repurchase the Notes following a Change of Control will
depend on the availability of sufficient funds and compliance with applicable
securities laws, no assurance can be given that the Issuer will repurchase Notes
following a Change of Control. See "Description of Notes -- Change of Control."
ENVIRONMENTAL REGULATION
Growing concern over potential ozone depletion has led to increased
regulation of high ozone depletion refrigerants, including the Montreal
Protocol, an international protocol limiting the use of certain ozone depleting
chemicals. On November 25, 1992, the Montreal Protocol was amended to phase-out
the production and use of hydrochlorofluorocarbons ("HCFCs"), beginning in 1996
and ending in 2030.
In the United States, the 1990 Clean Air Act Amendments implement the
Montreal Protocol by establishing a program for limiting the production and use
of ozone-depleting chemicals. Under the Clean Air Act, HCFC-22 (the only
refrigerant used in the Company's products) is designated as a "Class II
substance"; such substances are currently scheduled to be phased out under the
Clean Air Act Amendments between 2010 and 2020.
16
<PAGE> 17
As a result of the recent amendments to the Montreal Protocol, the U.S.
Environmental Protection Agency ("EPA"), which is authorized under the Clean Air
Act to accelerate the statutory phase-out schedule for any Class II substance,
is likely to promulgate regulations to implement those amendments.
Alternatively, the EPA could adopt proposals made by various groups to phase-out
Class II substances, including HCFC-22, substantially earlier than under the
schedule provided by either the Clean Air Act or the Montreal Protocol. It is
unclear which, if any, of these proposed schedules will be adopted by the EPA.
In Canada, the Ozone-depleting Substances Regulations, under the Canadian
Environmental Protection Act, regulate the consumption of HCFCs by a system of
allowances and permits and do not currently provide a statutory phase-out
schedule for HCFCs. However, it is anticipated that the Ozone-depleting
Substances Regulations will be amended in 1998 to provide for a gradual
phase-out of HCFCs between 2010 and 2020.
All cooling products manufactured by the Company contain HCFC-22. This
refrigerant is sealed inside the air conditioner and is expected to remain
within the unit throughout the operating life of the system without leakage to
the atmosphere. The Company believes that its operations comply with all current
legislation and regulations relating to refrigerants and that the Montreal
Protocol, the Clean Air Act Amendments and their implementing regulations as
currently in effect or any anticipated accelerated phase-out will not have a
material adverse impact on its operations over the next ten years. However, the
Company believes that the implementation of more severe restrictions on the use
of Class II refrigerants could have such an impact.
Prior to the phase-out of HCFC-22, the Company must identify substitute
refrigerants for use in cooling products. The Company has been working closely
with refrigerant manufacturers and others in the industry to develop new
refrigerants that are compatible with its existing cooling product lines. Such
new refrigerants may require the Company to modify the design of its cooling
products. The Company is unable to predict the precise extent of necessary
modifications or the costs associated with the use of alternative refrigerants,
but does not expect that either will have a material adverse effect on the
industry unless the phase-out is accelerated more rapidly than is currently
anticipated under the Clean Air Act, the Canadian Environmental Protection Act
or the Montreal Protocol.
The Company and its operations are subject to extensive foreign, federal,
provincial, state, municipal and local laws, codes, treaties and regulations
limiting the discharge of pollutants into the environment and establishing
requirements for the treatment, storage or disposal and remediation of releases
of solid and hazardous wastes and hazardous materials ("Environmental Laws").
The Company believes it is in substantial compliance in all material respects
with such Environmental Laws. Certain Environmental Laws impose strict, and in
some cases, joint and several liability on responsible parties to clean up, or
contribute to the cost of cleaning up, sites at which wastes or other hazardous
materials were released and for related damages to natural resources. The
Company is involved in response actions at certain facilities pursuant to these
laws.
Based upon its experience to date, the Company believes that the future
cost of compliance with existing Environmental Laws, and liability for known
environmental claims pursuant to such Environmental Laws, will not have a
material adverse effect on the Company's business, financial condition or
results of operations. However, no assurance can be given that future events,
such as the cost of complying with new or more stringent Environmental Laws, as
well as any related damage claims, newly identified sites requiring response
action or new, as well as more vigorous enforcement of existing Environmental
Laws will not be material. See "Business -- Government
Regulation -- Environmental Regulation and Proceedings."
FLUCTUATIONS IN OPERATING RESULTS
The Company's operations are subject to seasonal fluctuations.
Additionally, the Company's operations may be adversely affected by unseasonably
mild weather, which has the effect of diminishing customer demand. To reduce the
costs of exposure to short-term weather risks, the Company reduced the time it
takes to fulfill a customer's order to 14 days for most products.
Sales in the residential and commercial new construction market correlate
closely to the number of new homes and buildings that are built, which in turn
is influenced by cyclical factors such as interest rates,
17
<PAGE> 18
inflation, consumers' spending habits, employment rates, and other macroeconomic
factors. Management believes the Company derived approximately 70% of its sales
in 1997 from the repair, replacement and renovation market and approximately 30%
from the new construction market. Although macroeconomic factors, such as the
reluctance of consumers to make major purchases during recessionary periods,
also affect the replacement, repair and renovation market of the Company's
business, management believes that the replacement, repair and renovation market
is less prone to the effects of macroeconomic factors and mitigates the
Company's exposure to the effects of macroeconomic cycles.
Nevertheless, the effects of seasonality, weather fluctuations and
macroeconomic factors may adversely affect the Company's operating results and
the Company's ability to maintain revenues. Quarterly comparisons of the
Company's revenues and operating results should not be relied on as an
indication of future performance, and the results of any quarterly period may
not be indicative of a result to be expected for a full year.
COMPETITION
The production and sale of HVAC equipment by manufacturers is highly
competitive. According to industry sources, in 1997 seven manufacturers
(including the Company) represented approximately 95% of the market, with
individual market shares ranging from approximately 10% to 22% and the Company
having approximately 11% of the residential and light commercial HVAC market.
The Company's six largest competitors in this market are Carrier Corporation,
Goodman Manufacturing Corporation, Rheem Manufacturing, The Trane Company, York
International Corporation and Lennox Industries Inc. Several of the Company's
competitors have greater financial and other resources than the Company. There
can be no assurance that competitive pressures will not materially and adversely
affect the Company's business, financial condition or results of operations.
AVAILABILITY AND FLUCTUATION IN THE COST OF RAW MATERIALS
The Company's operations are dependent on the supply of various raw
materials, including steel, copper and aluminum, from domestic and foreign
suppliers. The Company does not typically enter into long-term supply contracts
relating to these raw materials. Although to date the Company has been able to
obtain sufficient quantities of steel, copper, aluminum and other raw materials
for its manufacturing processes at adequate prices, supply interruptions and/or
cost increases could adversely affect the Company's future results of
operations.
DEPENDENCIES ON CERTAIN SUPPLIERS
The Company is dependent on certain suppliers to supply parts and materials
included in the Company's finished products. The Company believes it has close
relations with the companies that provide the parts and material used in
manufacturing. If a key supplier were unable or unwilling to meet the Company's
supply requirements, the Company could experience supply interruptions and/or
cost increases which (to the extent that the Company is not able to pass these
costs onto its customers) could adversely affect the Company's future results of
operations.
LABOR RELATIONS
The Company is a party to five collective bargaining agreements with four
labor unions representing certain of the hourly employees of the Company
(approximately 1,900 in the aggregate) which are scheduled to expire between
September 1998 and May 2001. The renegotiation of these collective agreements
will occur between the years 1998 and 2001. With respect to the agreement that
expires in September 1998, the Company believes that negotiations are proceeding
satisfactorily; however, no assurances can be given as to the ultimate outcome
of the negotiations. The Company's inability to negotiate acceptable contracts
with one or more of these unions could result in a job action by the affected
workers. Any job action could disrupt the Company's operations and result in
increased operating costs as a result of higher wages or benefits paid to union
members.
18
<PAGE> 19
DEPENDENCE ON PRINCIPAL CUSTOMERS
During 1997, one customer accounted for approximately 11% of the Company's
operating revenue, and the Company's 10 largest customers accounted for
approximately 36% of the Company's operating revenue. Although the Company has
contracted with most of its distributors for a number of years, agreements with
distributors are reached annually and are subject to nonrenewal or termination
by either party. There can be no assurance that sales to principal distributors
will continue at the same levels. Furthermore, continuation of the Company's
relationships with its distributors is dependent upon the distributors' (and
ultimately with the dealers' and end users') satisfaction with the price,
quality and delivery of the Company's products. While management believes its
relationships with its distributors are good, in the event of the loss of a
significant distributor, the Company's results of operations would be adversely
effected in the event it were unable to satisfactorily replace the distributor.
PRODUCT LIABILITY
The Company's business exposes it to possible claims for property damage,
personal injury or death which may result from the use of allegedly defective
goods sold by it. The Company maintains what it believes to be adequate
liability insurance to protect it from such claims. While no material claims
have, to date, been made against the Company, no assurance can be given that
claims will not arise in the future or that such insurance coverage will be
adequate. Additionally, there can be no assurance that insurance coverages can
be maintained in the future at an acceptable cost. Any such liability not
covered by insurance could have a material adverse effect on the financial
condition of the Company.
LACK OF PUBLIC MARKET FOR THE NEW NOTES
There is no existing trading market for the New Notes, and there can be no
assurance regarding the future development of a market for the New Notes or the
ability of holders of the New Notes to sell their New Notes or the price at
which such holders may be able to sell their New Notes. If such a market were to
develop, the New Notes could trade at prices that may be higher or lower than
the initial offering price depending on many factors, including prevailing
interest rates, the Company's operating results and the market for similar
securities. The Initial Purchasers have advised the Company that they currently
intend to make a market in the New Notes. The Initial Purchasers are not
obligated to do so, however, and any market making with respect to the New Notes
may be discontinued at any time without notice. Therefore, there can be no
assurance as to the liquidity of any trading market for the New Notes or that an
active trading market for the New Notes will develop. The Issuer does not intend
to apply for listing or quotation of the New Notes on any securities exchange or
stock market.
Historically, the market for non-investment grade debt has been subject to
disruptions that have caused substantial volatility in the prices of such
securities. There can be no assurance that the market for the New Notes will not
be subject to similar disruptions. Any such disruptions may have an adverse
effect on holders of the New Notes.
RISKS OF DOING BUSINESS IN FOREIGN JURISDICTIONS
One of the Company's strategies is to increase its sales outside the United
States and Canada. In 1997, approximately 4% of the Company's sales were derived
from international (non-Canadian and non-U.S.) operations and export sales,
which are subject in varying degrees to risks inherent in doing business abroad.
Such risks include the possibility of unfavorable circumstances arising from
host country laws or regulations. In addition, foreign operations include risks
of partial or total expropriation; currency exchange rate fluctuations and
restrictions on currency repatriation; significant taxation or tariff policies;
the disruption of operations from labor and political disturbances; insurrection
or war; and the requirements of partial local ownership of operations in certain
countries. In addition, inflation and rapid fluctuation in exchange rates have
had and may continue to have negative effects on certain foreign economies and,
if the Company were doing business in these countries, could have an adverse
impact on the Company's business, financial condition and results of operations.
At the present time, any such circumstances would not be expected to have a
material
19
<PAGE> 20
adverse effect upon the Company; however, this risk will increase as the Company
implements its strategy to increase sales outside the United States and Canada.
CONSEQUENCES TO NON-TENDERING HOLDERS OF OLD NOTES
Upon consummation of the Exchange Offer, neither the Parent Guarantor nor
the Company will have any further obligation to register the New Notes except
pursuant to a shelf registration statement to be filed under certain limited
circumstances discussed under the caption "Purpose of the Exchange Offer."
Thereafter, subject to such exception, any Holder of Old Notes who does not
tender its Old Notes in the Exchange Offer will continue to hold restricted
securities which may not be offered, sold or otherwise transferred, pledged or
hypothecated except pursuant to Rule 144 and Rule 144A under the Securities Act
or pursuant to any other exemption from registration under the Securities Act
relating to the disposition of securities, in which case, an opinion of counsel
must be furnished to the Parent Guarantor and the Issuer that such an exemption
is available.
USE OF PROCEEDS
THE EXCHANGE OFFER
The Exchange Offer is intended to satisfy certain obligations of the Issuer
and the Parent Guarantor under the Registration Rights Agreement. The Company
will not receive any cash proceeds from the issuance of the New Notes offered in
the Exchange Offer. In consideration for issuing the New Notes as contemplated
in this Prospectus, the Issuer will receive in exchange Old Notes in like
principal amount, the form and terms of which are the same in all material
respects as the form and terms of the New Notes except that the New Notes have
been registered under the Securities Act and hence do not include certain rights
to registration thereunder or contain transfer restrictions or terms with
respect to Additional Interest. The Old Notes surrendered in exchange for the
New Notes will be retired and canceled and cannot be reissued. Accordingly,
issuance of the New Notes will not result in any proceeds to the Company or
increase in the indebtedness of the Company.
THE SALE OF THE OLD NOTES
The net proceeds to the Company from the sale of the Old Notes was
approximately $144.0 million, after deducting the Initial Purchasers' discount
and other costs of the offering. The Company applied a portion of the net
proceeds from the issuance of the Old Notes to redeem the Company's 9 3/4%
Senior Secured Notes due 2000 ("the Refinanced Debentures") which were
outstanding in the principal amount of $140.0 million, by depositing
approximately $143.4 million (including 30 days of interest on the outstanding
principal amount and $2.27 million in call premium) with United States Trust
Company of New York, as trustee for the holders of the Refinanced Debentures.
The Company used the remaining net proceeds from the issuance of the Old
Notes for general corporate purposes.
20
<PAGE> 21
CAPITALIZATION
The following table sets forth the consolidated historical cash and
short-term deposits and capitalization of the Company as of June 30, 1998. This
table should be read in conjunction with the Consolidated Financial Statements
of the Company and the notes thereto included elsewhere or incorporated by
reference in this Prospectus.
<TABLE>
<CAPTION>
AS AT
JUNE 30,
1998
----------
HISTORICAL
----------
(IN
MILLIONS)
<S> <C>
Cash and short-term deposits................................ $ 21.1
======
Debt(1):
Receivables Purchase Agreement............................ $ 32.0
Canadian Revolving Credit Facility........................ 9.2
8 5/8% Senior Notes due 2008.............................. 150.0
Term Bank Loan............................................ 25.0
Other..................................................... 1.9
------
Total Debt........................................ 218.1
Shareholders' Equity(2)..................................... 79.9
------
Total Capitalization.............................. $298.0
======
</TABLE>
- ---------------
(1) For a description of the Company's outstanding indebtedness, see
"Description of Other Indebtedness."
(2) See Note 9 of Notes to Consolidated Financial Statements for a discussion of
the Company's authorized shares, outstanding shares and option plan.
SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
The following selected historical financial data has been derived from the
Company's audited consolidated financial statements for the years ended December
31, 1993, 1994, 1995, 1996 and 1997 and from the Company's unaudited
consolidated financial statements for the six months ended June 30, 1997 and
1998. The unaudited financial statements include all adjustments, consisting of
normal recurring adjustments, that the Company considers necessary for a fair
presentation of its financial position and results of operations for those
periods. The following selected pro forma consolidated financial data for the
year ended December 31, 1997 and the six months ended June 30, 1998 has been
derived from the Company's unaudited pro forma condensed financial data. Neither
the selected historical consolidated financial data nor the selected pro forma
consolidated financial data are necessarily indicative of either the future
results of operations or the results of operations that would have occurred if
the events described had been consummated on any date. The following selected
historical and pro forma consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and the notes thereto,
the Pro Forma Consolidated Condensed Financial Data and notes thereto and the
other information contained elsewhere or incorporated by reference (including
MD&A contained in the Company's reports incorporated herein by reference) in
this Prospectus. The consolidated financial statements of the Company are
prepared by management in accordance with GAAP in Canada, which differ in
certain respects with accounting principles in the United States. The
differences
21
<PAGE> 22
between GAAP in Canada and the United States as they affect the Company are
described in Note 19 of the Notes to Consolidated Financial Statements.
<TABLE>
<CAPTION>
HISTORICAL
-------------------------------------------------------------------
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------- -----------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- ------- ------- -------
(IN MILLIONS, EXCEPT FOR RATIO AND PER SHARE DATA)
UNAUDITED
-----------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Operating Revenue....................... $ 598.0 $ 635.2 $ 532.8 $ 641.9 $ 630.7 $ 314.2 $ 351.3
Cost of Sales........................... 498.4 522.3 467.4 517.8 503.7 247.9 275.0
------- ------- ------- ------- ------- ------- -------
Gross Margin............................ 99.6 112.9 65.4 124.1 127.0 66.3 76.3
Selling, General and Administrative
Expenses.............................. 89.3 87.3 93.2 90.7 85.5 44.4 47.1
Asset Writedowns, Restructuring Costs
and Other Nonrecurring Charges........ 14.3 8.0 15.5 -- -- -- --
------- ------- ------- ------- ------- ------- -------
Operating Profit (Loss)................. (4.0) 17.6 (43.3) 33.4 41.5 21.9 29.2
------- ------- ------- ------- ------- ------- -------
Financial Expenses
Interest expense...................... 15.4 20.2 21.7 19.4 18.2 9.6 9.5
Amortization of debt issuance costs... 1.5 1.7 1.3 1.8 1.3 0.6 0.6
Refinancing costs..................... -- -- -- -- -- -- 5.0
Write-off of debt issuance costs...... 1.2 1.2 2.1 0.6 -- -- --
------- ------- ------- ------- ------- ------- -------
18.1 23.1 25.1 21.8 19.5 10.2 15.1
------- ------- ------- ------- ------- ------- -------
Income (Loss) Before Income Taxes....... (22.1) (5.5) (68.4) 11.6 22.0 11.7 14.1
Income Taxes............................ 4.3 0.9 (12.8) -- -- -- --
------- ------- ------- ------- ------- ------- -------
Income (Loss) From Continuing
Operations............................ (17.8) (4.6) (81.2) 11.6 22.0 11.7 14.1
Loss From Discontinued Operations....... (3.2) (2.9) (12.0) (3.1) -- -- --
------- ------- ------- ------- ------- ------- -------
Net Income (Loss)....................... $ (21.0) $ (7.5) $ (93.2) $ 8.5 $ 22.0 $ 11.7 $ 14.1
======= ======= ======= ======= ======= ======= =======
Net Income (Loss) Per Ordinary Share
From Continuing Operations............ $ (0.87) $ (0.20) $ (2.09) $ 0.30 $ 0.56 $ 0.30 $ 0.35
======= ======= ======= ======= ======= ======= =======
After Discontinued Operations......... $ (1.00) $ (0.29) $ (2.40) $ 0.22 $ 0.56 $ 0.30 $ 0.35
======= ======= ======= ======= ======= ======= =======
Weighted Average Number of Ordinary
Shares Outstanding.................... 24.745 31.832 38.828 39.161 39.664 39.530 40.134
======= ======= ======= ======= ======= ======= =======
OTHER DATA:
Capital Expenditures.................... $ 9.7 $ 11.1 $ 24.5 $ 11.8 $ 8.5 $ 2.6 $ 6.6
Ratio of Earnings to Fixed Charges
(1)................................... (.07)x 0.79x (1.50)x 1.49x 2.06x 2.08x 1.90x
STATEMENT OF INCOME DATA (U.S. GAAP):
Operating Revenue....................... $ 598.0 $ 635.2 $ 532.8 $ 641.9 $ 630.7 $ 314.2 $ 351.3
Gross Margin............................ 98.6 111.9 64.4 122.7 125.7 65.5 75.4
Income (Loss) From Continuing
Operations............................ (19.2) (5.4) (75.7) 9.7 19.4 10.3 12.7
Income (Loss) Before Extraordinary
Item.................................. (23.0) (10.3) (89.0) 6.6 19.4 10.3 12.7
Net Income (Loss)....................... (23.8) (11.1) (89.9) 6.0 19.4 10.3 12.7
Basic Earnings (Loss) Per Share
From Continuing Operations............ $ (0.93) $ (0.23) $ (1.95) $ 0.25 $ 0.49 $ 0.26 $ 0.32
Before Extraordinary Item............. $ (1.08) $ (0.38) $ (2.29) $ 0.17 $ 0.49 $ 0.26 $ 0.32
Net Income (Loss)..................... $ (1.11) $ (0.41) $ (2.32) $ 0.15 $ 0.49 $ 0.26 $ 0.32
</TABLE>
22
<PAGE> 23
<TABLE>
<CAPTION>
HISTORICAL
--------------------------------------------------------------------
AS AT DECEMBER 31, AS AT JUNE 30,
----------------------------------------------- ------------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- ------- ------- -------
UNAUDITED
------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working Capital....................... $ 167.5 $ 153.0 $ 60.5 $ 103.8 $ 136.6 $ 126.3 $ 139.8
Total Assets.......................... 490.2 486.1 345.8 345.0 352.0 387.1 430.8
Total Debt............................ 216.0 242.8 182.7 204.0 185.5 222.2 218.1
Shareholders' Equity.................. 119.5 110.3 18.5 28.8 51.5 41.7 79.9
BALANCE SHEET DATA (U.S. GAAP):
Working Capital....................... $ 166.0 $ 151.9 $ 57.7 $ 100.8 $ 135.3 $ 123.8 $ 138.9
Total Assets.......................... 498.5 433.7 347.7 351.8 358.7 394.9 439.1
Total Debt............................ 216.0 181.8 176.7 204.0 185.5 222.2 218.1
Shareholders' Equity.................. 121.7 108.4 19.3 26.6 48.3 39.3 78.0
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
-------------------------
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1997(2) 1998(3)
------------ ----------
UNAUDITED
-------------------------
<S> <C> <C>
STATEMENT OF INCOME DATA:
Operating Revenue......................................... $ 655.7 $ 351.3
Cost of Sales............................................. 520.7 275.0
------- -------
Gross Margin.............................................. 135.0 76.3
Selling, General and Administrative Expenses.............. 90.3 47.1
------- -------
Operating Profit.......................................... 44.7 29.2
------- -------
Financial Expenses
Interest expense........................................ 18.5 9.1
Amortization of debt issuance costs..................... 1.0 0.5
Other................................................... (0.1) --
------- -------
19.4 9.6
------- -------
Income Before Nonrecurring Charges Directly Attributable
to the Refinanced Debentures and Income Taxes........... 25.3 19.6
Income Taxes.............................................. (0.4) --
------- -------
Income Before Nonrecurring Charges Directly Attributable
to the Refinanced Debentures............................ $ 24.9 $ 19.6
======= =======
Income Before Nonrecurring Charges Directly Attributable
to the Refinanced Debentures Per Ordinary Share......... $ 0.63 $ 0.49
======= =======
Weighted Average Number of Ordinary Shares Outstanding.... 39.664 40.134
======= =======
OTHER DATA:
Capital Expenditures...................................... $ 9.6 $ 6.6
Ratio of Earnings to Fixed Charges(1)..................... 2.24x 2.92x
</TABLE>
- ---------------
(1) For purposes of computing the ratio of earnings to fixed charges, "earnings"
consists of income (loss) before income taxes, plus fixed charges. "Fixed
charges" consist of interest expense, amortization of debt issuance costs
and one-third of rental expense (the portion deemed representative of the
interest factor).
(2) To give pro forma effect to the statement of income data for the year ended
December 31, 1997 as though the acquisition of United Electric, the offering
of the Old Notes and application of the net proceeds had occurred as of
January 1, 1997.
(3) To give pro forma effect to the statement of income data for the six months
ended June 30, 1998 as though the offering of the Old Notes and the
application of the net proceeds had occurred on January 1, 1997.
23
<PAGE> 24
BUSINESS
The Company is one of the leading designers, manufacturers and marketers of
central air conditioning and heating products for residential and light
commercial use in the United States and Canada. The Company also has recently
expanded its presence in other international markets, primarily Latin America
and Europe. Its principal brand names are widely recognized in the industry and
include Heil, Tempstar, Comfortmaker, MagicAire and the recently added ICP
Commercial. Management believes that the Company and its products are known for
their quality, reliability and customer service. In 1997, the Company had, on a
pro forma basis, operating revenue of $655.7 million. For the six months ended
June 30, 1998, the Company had operating revenue of $351.3 million.
The Company's products are sold primarily through a network of
approximately 400 independent HVAC distribution companies with over 1,800
locations in the United States, Canada and other international markets. These
distributors are the Company's link to dealers and, in turn, to consumers. In
1997, sales of cooling products accounted for approximately 61% of operating
revenue, sales of heating products accounted for approximately 26% of operating
revenue and sales of service parts and other income accounted for approximately
13% of operating revenue. Management believes that in 1997 the Company derived
approximately 70% of its operating revenue from the replacement, repair and
renovation market and approximately 30% from the new construction market. In
1997, the Company derived approximately 84% of its operating revenue from sales
in the United States, approximately 12% of its operating revenue from sales in
Canada, and approximately 4% of its operating revenue from sales in other
international markets.
In late 1994, the Company's new management initiated a restructuring plan
to significantly improve the Company's manufacturing operations and marketing
strategy, allowing the Company to return to profitability in 1996 after
consecutive years of losses since 1991. Implementing this plan in 1995 caused a
significant dislocation in the Company's operations and severely depressed
financial performance for that year. The restructuring plan was designed to (i)
reduce manufacturing and overhead costs, (ii) reduce lead times for processing
customer orders to better control inventory levels and improve customer
relations, (iii) improve product quality and customer service and (iv)
rationalize and expand the Company's distribution network. To achieve these
goals management:
- consolidated its production at its Lewisburg, Tennessee manufacturing
facility;
- wrote off discontinued businesses and nonperforming assets;
- rationalized its management structure by removing a layer of management;
- decreased distributor credit terms from 90 days to 53 days;
- restructured its manufacturing process to improve efficiency and reduce
work-in-process;
- introduced a second tier, entry-level line of products;
- terminated underperforming distributors and added new distributors; and
- implemented effective monitoring systems to track working capital.
The Company believes that its dramatically improved operational and
financial performance in 1996 and 1997 is a direct result of its restructuring
plan. The Company's efforts to reduce manufacturing costs have improved gross
margin to 20.1% in 1997 from 17.8% in 1994. Manufacturing and other improvements
have allowed the Company to meet 98% of orders for residential product in 14
days in 1997 versus the Company's standard order lead time of 90 days in 1994,
increase the Company's operating revenue per employee by 44% to approximately
$249,000 in 1997 from approximately $173,000 in 1994 (in a stable price
environment for its products), and decrease average raw and in process inventory
63% to approximately $6.5 million during 1997 from approximately $17.7 million
during 1994.
INDUSTRY OVERVIEW
Management estimates that the residential and commercial HVAC industry
(measured by sales by manufacturers of product in the United States, excluding
applied systems and chillers) totals approximately $7.0 billion per year. The
production and sale of HVAC equipment by manufacturers is highly competitive.
According to industry sources, in 1997 seven manufacturers (including the
Company) represented approximately 95% of the market, with individual market
shares ranging from approximately 10% to 22% and the Company having
approximately 11% of the residential and light commercial HVAC market.
24
<PAGE> 25
Industry sources estimate that between 1993 and 1997, the HVAC market in
the United States and Canada has grown at an average compounded annual rate of
7% per year. Management believes that the HVAC market in the United States and
Canada will grow at an annual rate of approximately 3-4% per year through the
year 2000. The Company believes current and future domestic growth will be
driven by the need to replace or upgrade older systems installed during the
1970's and early 1980's with more energy efficient and environmentally friendly
units. Industry figures have estimated that on average approximately 65% of
industry sales of residential product are for replacement, renovation and
repair. The Company believes that approximately 70% of the demand for commercial
products in the United States and Canada is replacement and renovation, and that
as much as 30% of the heating and cooling systems in commercial buildings are 12
to 15 years old and in need of replacement. Although the replacement market is
not affected by the level of new construction it is affected by weather
fluctuations, as unseasonably mild weather diminishes customer demand for HVAC
replacement or repairs.
Additionally, management believes the continued penetration of central air
conditioning in new residential construction will contribute to present and
expected future growth in the sale of residential product. According to industry
estimates, from 1971 to 1994 the percentage of new homes completed with central
air conditioning rose from approximately 36% to 79%. Many new homes also are now
installing multiple units.
The Company believes the United States and Canadian markets will continue
to experience moderate growth, but that the industry will experience the
greatest rate of growth in other international markets. Management anticipates
that climatic and economic conditions in Latin America will lead to a higher
rate of growth in that region, and therefore is concentrating on expanding in
that region.
STRATEGY
In addition to continuing the Company's implementation of its 1995
initiatives, the Company is committed to (i) growing its operating revenue in
excess of industry growth rates, (ii) improving profitability and (iii) reducing
working capital requirements. The Company seeks to achieve these goals through
the implementation of the following strategies:
Increase residential market share in the United States and Canada. The
Company intends to increase its residential market share by (i) further
strengthening its relationship with its distributors by reducing customer order
lead times, and providing superior training and marketing support, (ii)
expanding the distribution network in low market share geographic areas and
rationalizing the existing distribution network, (iii) broadening its offering
of aftermarket parts and other HVAC related supplies to provide distributors
with the benefits of one-stop shopping, and (iv) developing strategic
relationships with national accounts, including builders, distributors,
contractors and private label resellers.
The Company believes it can increase its core residential sales in the
United States and Canada by strengthening its current substantial distributor
base by requiring annual sales quota commitments, participation in the Company's
marketing and promotional programs, staff training and mutually beneficial
business practices. The Company offers extensive training courses at its
national training center in LaVergne, Tennessee and other selected locations.
The courses are designed to help improve business and technical skills and
include small business management, dealer sales, distributor sales, residential
application and design, introduction to heating and air conditioning, heat pump
service and troubleshooting, gas furnace installation and service fundamentals
and troubleshooting. The Company helps distributors to recruit technical staff
by training 5,000 installers annually, including 500 a year at the training
center in LaVergne.
The Company also intends to further reduce the lead time required for
customer orders (the time from receipt of an order to the time the order is
shipped). Further reductions in lead time will reduce inventory requirements for
the Company's distributors and make the Company a more attractive supplier of
heating and cooling products. The Company also believes that shortened lead
times will enable it and its customers to react to market trends and
fluctuations in weather faster and with less impact than many of its
competitors. The Company currently is able to meet 98% of orders for residential
product in 14 days or less.
25
<PAGE> 26
The Company intends to seek additional distributors in markets where sales
are below market share targets. In addition the Company continually evaluates
existing distributors and its position with existing distributors (lead or
secondary product line) and replaces under-performing distributors with new
distributors. Since April 1996 to the present, the Company terminated 29
underperforming distributors, and added 60 new distributors.
In 1997, the Company organized its aftermarket parts business as a separate
business unit and charged it with the responsibility of aggressively pursuing
additional sales through the Company's independent distribution network. With
27,000 stockkeeping units, the Company provides distributors the benefit of
one-stop shopping for compressors, coils, motors, fans, valves, fasteners and
other repair items for HVAC equipment. The Company has provided each distributor
a communications package on CD-ROM to facilitate on-line ordering, with a goal
of shipping parts within 24 hours of receipt of the order. The availability of
this purchasing program appeals to many small and medium size distributors which
may not be able to purchase directly from many manufacturers and are seeking the
convenience of purchasing parts and supplies from one source.
The Company also intends to increase its core residential sales by building
relationships with national accounts, such as dealer buying groups, distributor
consolidators and major home builders. The Company currently has agreements to
supply certain products under its brand names or private labels to Pameco,
Watsco, American Residential Services and Sears. In addition, the Company has
purchase incentive programs established for over 20 national or regional home
builders and for over 80 small home builders. These purchase incentive programs
provide significant entry into the new construction market. Sales to
non-distributor national accounts are primarily made through independent
distributors.
Expand its commercial market product offerings and gain market share. In
1997, the Company formed a business unit devoted solely to designing,
manufacturing and marketing commercial air conditioning and heating products of
up to 20 tons. This business unit intends to increase the Company's commercial
product sales by (i) initiating a two-tier product strategy to provide
competitive entry level commercial products, (ii) establishing ICP Commercial
distribution networks for national distribution of the recently introduced ICP
Commercial brand product, (iii) strengthening the existing distribution network
of the Company's other commercial brands, (iv) initiating the use of independent
manufacturers' representatives to solicit sales of ICP Commercial brand product
for installation in commercial buildings, (v) expanding product offerings for
commercial applications and (vi) expanding commercial products to include those
with capacity of up to 40 tons. The Company's "two-tier" market strategy
consists of offering (i) higher priced HVAC products distinguished by premium
features and service; and (ii) lower priced HVAC products based on minimum
energy efficiency standards targeted at the low cost, entry-level market. This
strategy enables the Company to offer various product brands of residential and
commercial products at different price points.
In 1998, the Company introduced its ICP Commercial brand, which will be
offered through select distributors who meet business practice expectations,
sales targets and marketing and merchandising standards. The Company is
supporting the ICP Commercial distributors by engaging independent manufacturers
representatives to encourage engineers, designers and architects to specify ICP
Commercial brand product for installation in commercial buildings. The Company's
other commercial brand products will continue to be marketed throughout its
existing distribution network.
Pursue international opportunities. The Company intends to continue
expansion of its operations outside the United States and Canada. In Latin
America and Europe, the Company initially establishes HVAC parts distribution
businesses, and introduces HVAC equipment after the parts business has
established cash flow and customer traffic. The Company believes this strategy
of overseas expansion creates the opportunity to generate early cash flow and a
market presence without risking a substantial amount of capital.
The Company intends to continue expansion of its operations outside the
United States and Canada. In 1997, the Company opened two distribution
warehouses in Miami to service Latin American markets, two distribution
warehouses in Mexico and a parts distribution store in Brazil. The Company has
begun to use the network established by these parts outlets to distribute the
Company's heating and cooling units in their respective markets. Two more
Brazilian parts stores are scheduled to be opened in Rio de Janeiro and Porto
26
<PAGE> 27
Alegre in 1998. Late in 1997, the Company also acquired a distribution company
in Spain and currently is pursuing other opportunities for expansion in Europe.
The Company has a letter of intent to acquire 80% of a European HVAC equipment
manufacturer and has had discussions regarding acquiring varying percentages of
two other European HVAC equipment manufacturers. Although none of these
acquisitions would be material to the Company's current financial condition or
results of operations, they are integral parts of the Company's strategy to
increase international sales.
Augment internally generated growth by acquiring businesses with
complementary new products, technology and manufacturing resources. The Company
intends to consider acquisitions that support its growth strategy and leverage
and expand its distribution network, purchasing power and manufacturing
capabilities. The Company expects its acquisitions will be both domestic and
international. Examples of this strategy are the Company's recently completed
acquisition of United Electric and the acquisition of substantially all of the
assets and the assumption of certain liabilities of Watsco Components, Inc. and
P.E./Del Mar, Inc. (collectively "Watsco Components"). At this time, the Company
is not in the process of reviewing any acquisition that is probable of occurring
that would be material to the Company's financial condition or results of
operations.
United Electric, which is located in Wichita Falls, Texas is engaged
principally in the manufacture of air conditioning components for commercial
HVAC systems. With 1997 sales of approximately $25 million, United Electric is a
profitable company that manufactures components for commercial HVAC systems.
United Electric will continue to operate as an independent company leveraging
the Company's extensive independent distribution network.
On May 31, 1998, a wholly owned subsidiary of the Company acquired Watsco
Components for 1,488,162 shares of stock of the Company (valued as of the
closing date at $16.5 million). Watsco Components, which is located in Miami,
Florida, is principally engaged in the manufacture of component parts for the
HVAC industry. Watsco Components had 1997 sales of approximately $23 million.
Continue to reduce manufacturing costs and standardize components. The
Company intends to increase profitability by continuing efforts to reduce costs
through product design improvements and increased manufacturing efficiencies.
Management believes that its positive results of operations for 1996 and 1997
resulted in large part from structural cost reductions achieved between 1995 and
1997 and that further reductions will be an integral part of its continued
profitability.
PRODUCTS
The Company designs, manufactures and markets heating and cooling systems
for single family homes, mobile homes and multi-family apartment buildings, as
well as light commercial properties such as schools, restaurants, small business
offices, retail stores and other industrial and commercial buildings.
Air Conditioners. The Company's air conditioners consist of split system
and packaged air conditioners, split system and packaged heat pumps, and
combination gas/electric units. The Company's residential air conditioners range
in capacity from one to five tons, while its commercial packaged and split
systems range in capacity from three to 20 tons. The Company's longer term goal
is to manufacture and market a commercial system with a capacity of up to 40
tons.
Split System and Packaged Air Conditioners. A split system air conditioner
consists of an outdoor unit, containing a compressor, heat exchanger, air-flow
system and associated controls, connected to a heat exchanger/indoor blower
system. A packaged air conditioner consists of a self-contained cooling system
in a single weatherized cabinet.
Split System and Packaged Heat Pumps. These systems are used for heating
as well as cooling systems. A split system heat pump is similar to a split
system air conditioner, but also includes a refrigerant reversing valve, special
controls and auxiliary heat (usually electric). A packaged heat pump is similar
to a packaged air conditioner and includes a reversing valve, special controls
and auxiliary heat.
Combination Gas/Electric Units. A combination gas/electric unit is a
self-contained packaged air conditioner with a gas furnace heat exchanger and
special controls in a single weatherized cabinet.
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Gas, Oil and Electric Furnaces. The Company's residential furnaces range
in capacity from 50,000 to 150,000 British Thermal Units per hour ("BTU/hr"),
while its light commercial heating line features furnaces ranging in capacity up
to 290,000 BTU/hr currently and up to 355,000 BTU/hr by year end.
Parts and Accessories Business. The Company also conducts an active parts
business under the "FAST" (Factory Authorized Service Technology) trademark in
the United States and Canada. The parts business has shifted from a primary
emphasis on serving warranty claims to being a one-stop shopping counter that a
distributor, dealer or contractor might need to service heating and cooling
systems.
Brand Names. The Company offers its various products under several brand
names -- Heil, Tempstar, Arcoaire, Comfortmaker, Airquest, KeepRite, Lincoln and
the recently added ICP Commercial. United Electric sells its products under the
MagicAire brand. The Company believes that its products are widely recognized
for their quality, customer service, reliability and price competitiveness.
SALES AND DISTRIBUTION
The Company's products are sold primarily through a network of
approximately 400 independent HVAC distribution companies with over 1,800
locations in the United States, Canada and other international markets. These
distribution companies are the Company's primary link to dealers and, in turn,
to consumers. Distributors sell the Company's products to installers in the
replacement and renovation businesses as well as building contractors in the new
housing and light commercial construction sectors. Approximately 70% of the
Company's products are used to replace existing systems, with the balance
installed in new construction projects. The Company also is focused on building
relationships with national accounts, such as dealer buying groups, distributor
consolidators and major home builders.
The Company offers distributors a variety of advantages designed to promote
maximum profitability to the Company and its distributors. A network of regional
sales managers, field sales and customer service personnel is accessible to
distributors to coordinate promotional activities and to quickly resolve any
product problems. To improve communications with distributors, the Company has a
program designed to give them computer access to the Company's inventory levels.
Such improved communications will facilitate the Company's demand flow
production system, permitting the Company to tailor its manufacturing schedule
to the specific product lines in the greatest demand. Allowing distributors
access to available inventory levels has the additional benefit of permitting
distributors to reduce their inventory levels while being assured of an adequate
and timely supply of products. The on-line program also permits distributors to
process warranty claims through a computer network linked with the Company.
The Company monitors monthly shipments and inventory levels from a
representative sampling of distributors. This sampling allows the Company to
gauge future sales demand and improves the communication between the different
functions that are involved in forecasting and scheduling production.
In Canada, the Company markets its products through four primary channels.
KeepRite, Arcoaire and Comfortmaker brand residential central heating and air
conditioning products are sold through independent air conditioning and
refrigeration wholesalers and HVAC distributors in all provinces in Canada.
KeepRite brand commercial products are sold through independent distributors and
major commercial contractors across Canada. Heil brand residential products are
sold directly to distributors and installing dealers by distribution centers
which are wholly owned by the Company in Ontario, Quebec and the western
provinces. Tempstar brand products are sold through plumbing and heating
wholesaler outlets owned by Westburne Industrial Enterprises on an exclusive
basis in all provinces in Canada. Lincoln brand oil and electric furnaces and
oil storage tanks are sold by the Company's Lincoln Barriere division in Quebec.
In 1997, the Company generated approximately $26.7 million in operating
revenue from customers outside the United States and Canada (1996 -- $8.2
million; 1995 -- $6.4 million). The Company's principal markets for these
international sales are in Latin America and Europe. In 1997, the Company opened
two distribution warehouses in Miami to service Latin American markets, two
distribution warehouses in Mexico and a parts distribution store in Brazil. The
Company has begun to use the network established by these parts outlets to
distribute the Company's heating and cooling units in their respective markets.
Two more Brazilian
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parts stores are scheduled to be opened in Rio de Janeiro and Porto Alegre in
1998. Late in 1997, the Company also acquired a distribution company in Spain
and, as described above, currently is pursuing other opportunities for expansion
in Europe.
The Company also offers extensive training courses at its national training
center in LaVergne and other selected locations. The courses are designed to
help improve business and technical skills and include small business
management, dealer sales, distributor sales, residential application and design,
introduction to heating and air conditioning, heat pump service and
troubleshooting, gas furnace installation and service fundamentals and
troubleshooting.
The Company conducts advertising to enhance consumer awareness and to
position its principal brands as premier residential heating and cooling
products within their respective target markets. The advertising program is
complemented with trade advertising that focuses on dealers who install the
Company's products and who influence the sale of heating and cooling products at
the consumer level.
The Company offers a cooperative program to its distributors which
subsidizes local advertising, training and other promotional and developmental
costs. In addition, the Company enables its distributors to offer various
incentives to their dealer customers.
MANUFACTURING
Substantially all of the Company's residential cooling and heating products
are manufactured at a company-owned, 1,000,000 square foot facility located in
Lewisburg, TN. The Company focuses on lean production from its plant, supported
by the latest cost-cutting technology and a "just-in-time" production system.
This system is designed to minimize raw material and in-process inventories
through close coordination of delivery of raw materials and components from
outside suppliers at the manufacturing facility. The production process
facilitates the manufacturing of standardized products. By manufacturing
standardized products and using more adaptable equipment, the Company is able to
reduce the time necessary to set up the production line to manufacture a
particular model and to change the production line to manufacture other similar
models.
While most of the components used by the Company are purchased from outside
suppliers, the Company manufactures selected components where it is
cost-efficient. For example, the Company produces heat transfer surfaces, or
coils, for its air conditioners as well as patented heat exchangers used in its
furnaces. The Company imposes strict quality control standards through a Total
Quality Management Program covering all aspects of the manufacturing process.
This program includes being an ISO 9001 registered company utilizing "Lean
Thinking" techniques. These programs and philosophies allow the Company to
maintain consistent processes and procedures to ensure that quality standards
and goals are met. A majority of the units produced are tested and key
statistics from selected units are recorded prior to shipment. In addition,
several units are randomly selected each day for a quality audit of construction
and performance. In 1996, the Company adopted the ISO 9000 standards which set
quality guidelines for manufacturers and requires an independent party to audit
and document the compliance guidelines twice a year. The Company's Lewisburg and
LaVergne facilities received the Certificate of Registration to the ISO
9001:1994 Quality Standard on July 1, 1997.
RAW MATERIALS AND PURCHASED COMPONENTS
The Company purchases all raw materials and most components used in the
manufacturing process. Purchased materials and components include copper,
aluminum, steel, wire, paint, compressors, motors, capacitors, fasteners,
controls, valves and insulating materials. When practical, the Company
establishes multiple sources for the purchase of raw materials and components in
an attempt to ensure competitive pricing, supply flexibility and protection from
supply disruption. The Company works closely with major suppliers to ensure that
all major components meet quality and performance standards. The Company deals
with approximately 250 suppliers, of whom 65 firms represent 95% of its
purchasing expenditures. Typically, outside suppliers provide warranties on all
major purchased components. The Company believes that it has adequate sources of
raw materials and components for its manufacturing requirements.
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The Company purchases many of its components from suppliers who are
certified by the Company. Certified suppliers are judged by the Company to have
quality components that can be readily introduced into the production lines
without being inspected upon receipt. The Company believes that the process of
certification identifies a small number of quality suppliers, which allows the
Company to minimize raw material inventories.
RESEARCH AND DEVELOPMENT
The Company maintains an engineering staff of approximately 60 people who
are involved in laboratory testing and improvement of existing product lines and
in the development and testing of new products for the United States, Canadian
and international markets. These activities are conducted in the Company's
laboratory and manufacturing facilities located in LaVergne and Lewisburg, TN,
respectively. The Company is in the process of relocating its remaining
laboratory functions at its LaVergne facility to the Lewisburg plant. The
primary objective of the engineering department is to conduct research and
development to keep the Company's products competitive by improving product
cost, safety, reliability and performance and ensuring compliance with
environmental standards. The Company's goal is to respond to market needs and
the technological demands of government regulation. The engineering staff also
strives to reduce manufacturing costs through cost control programs,
standardization, size and weight reduction, the application of new technology,
and improvements in production techniques.
Close contact is maintained with marketing personnel to ensure that the
final product will meet customer needs, and with manufacturing personnel to
ensure that the product design is compatible with the Company's flexible
manufacturing process. The Company's engineers also work closely with major
component suppliers to improve manufacturing efficiencies and keep abreast of
new technological advances.
During the past three fiscal years, research and development costs
aggregated approximately $8.7 million.
PATENTS AND TRADEMARKS
The Company holds numerous patents relating to the design and use of its
products that it considers important. It is the Company's policy to obtain
patent protection for its new and developmental products and to enforce such
patent rights as appropriate. The Company owns several trademarks that it
considers important in the marketing of its products, including but not limited
to Heil, Tempstar, KeepRite, Arcoaire, Comfortmaker, Lincoln, Airquest,
MagicAire and FAST. The Company has filed an application with the U.S. Patent
and Trademark Office to register the trademark ICP Commercial. The Company
believes that its rights in these trademarks are adequately protected.
MAJOR CUSTOMERS
During 1997, one customer accounted for approximately 11% of the Company's
operating revenue, and the Company's 10 largest customers accounted for
approximately 36% of operating revenue. The loss of any one of the Company's
current customers would not have a material adverse effect on the Company's
business, although the loss of a major distributor in 1995 had a materially
adverse effect on short term operating revenue.
COMPETITION
According to industry sources, in 1997 seven manufacturers (including the
Company) represented approximately 95% of the market, with individual market
shares ranging from approximately 10% to 22% and the Company having
approximately 11% of the residential and light commercial HVAC market. The
Company's six largest competitors in this market are Carrier Corporation,
Goodman Manufacturing Corporation, Rheem Manufacturing, The Trane Company, York
International Corporation and Lennox Industries Inc. Several of the Company's
competitors have greater financial and other resources than the Company. There
can be no assurance that competitive pressures will not materially and adversely
affect the Company's business, financial condition or results of operations.
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GOVERNMENT REGULATION
Environmental Regulation and Proceedings. The Company and its operations
are subject to extensive foreign, federal, provincial, municipal, state and
local environmental laws, codes, treaties and regulations, including, among
others, the Clean Air Act, the Clean Water Act, the Comprehensive Environmental,
Response, Compensation and Liability Act, the Resource Conservation and Recovery
Act, the Occupational Health and Safety Act, and the Toxic Substances Control
Act in the United States and the Canadian Environmental Protection Act, the
Fisheries Act (Canada), the Waste Management Act (British Columbia), the
Ozone-depleting Substances Act (Manitoba), the Environmental Protection Act
(Ontario), and the Environment Quality Act (Quebec) in Canada. The Company
believes that it is in substantial compliance in all material respects with such
existing environmental laws and regulations.
Growing concern over potential ozone depletion has led to increased
regulation of high ozone depletion refrigerants, including the Montreal
Protocol. On November 25, 1992, the Montreal Protocol was amended to phase-out
the production and use of HCFCs, beginning in 1996 and ending in 2030.
In the United States, the 1990 Clean Air Act Amendments implement the
Montreal Protocol by establishing a program for limiting the production and use
of ozone-depleting chemicals. Under the Clean Air Act, HCFC-22 (the only
refrigerant used in the Company's products) is designated as a "Class II
substance"; such substances are currently scheduled to be phased-out under the
Clean Air Act Amendments between 2010 and 2020.
As a result of the recent amendments to the Montreal Protocol, the EPA,
which is authorized under the Clean Air Act to accelerate the statutory
phase-out schedule for any Class II substance, is likely to promulgate
regulations to implement those amendments. Alternatively, the EPA could adopt
proposals made by various groups to phase-out Class II substances, including
HCFC-22, substantially earlier than under the schedule provided by either the
Clean Air Act or the Montreal Protocol. It is unclear which, if any, of these
proposed schedules will be adopted by the EPA.
In Canada, the Ozone-depleting Substances Regulations under the Canadian
Environmental Protection Act regulate the consumption of HCFCs by a system of
allowances and permits. It is anticipated that the Ozone-depleting Substances
Regulations will be amended in 1998 to provide for a gradual phase-out of HCFCs
between 2010 and 2020.
All cooling products manufactured by the Company contain HCFC-22. This
refrigerant is sealed inside the air conditioner and is expected to remain
within the unit throughout the operating life of the system without leakage to
the atmosphere. The Company believes that its operations comply with all current
legislation and regulations relating to refrigerants and that the Montreal
Protocol, the Clean Air Act Amendments and their implementing regulations as
currently in effect or any anticipated accelerated phase-out will not have a
material adverse impact on its operations over the next ten years. However, the
Company believes that the implementation of more severe restrictions on the use
of Class II refrigerants could have such an impact.
Prior to the phase-out of HCFC-22, the Company must identify substitute
refrigerants for use in cooling products. The Company has been working closely
with refrigerant manufacturers and others in the industry to develop new
refrigerants that are compatible with its existing cooling product lines. Such
new refrigerants may require the Company to modify the design of its cooling
products. The Company is unable to predict the precise extent of necessary
modifications or the costs associated with the use of alternative refrigerants,
but does not expect that either will have a material adverse effect on the
industry unless the phase-out is accelerated more rapidly than is currently
anticipated under the Clean Air Act, the Canadian Environmental Protection Act
or the Montreal Protocol.
The Company and its operations are subject to extensive foreign, federal,
provincial, state, municipal and local laws, codes, treaties and regulations
that limit the discharge of pollutants into the environment and establish
requirements for the treatment, storage, disposal and remediation of solid and
hazardous wastes and hazardous materials. Certain federal, provincial and state
environmental laws and regulations impose liability on responsible parties,
including past and present owners and operators of sites, to clean up, or
contribute to
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the cost of cleaning up sites at which hazardous wastes or materials were
disposed or released. The Company is involved in remedial action at its
Lewisburg manufacturing facility pursuant to these laws, but, based on
information currently available, does not anticipate that such action will have
a material adverse effect on its financial condition or operations as further
described.
Pursuant to an order issued by the Tennessee Department of Environment and
Conservation, the Company is remediating soil and ground water contamination at
its Lewisburg manufacturing facility caused by a sudden and accidental spill of
trichloroethylene in 1980 by the previous owner of the property. At December 31,
1997, the Company had reserved approximately $3.1 million for the cost of this
project.
The Company is also contributing to the cost of addressing several off-site
locations where waste drums were sent by the former owner of the Lewisburg
facility pursuant to a cost-sharing agreement with the previous owner. This
agreement provides for each entity to bear fifty percent of covered costs at
existing sites and for the Company and the previous owner to bear costs of new
sites at a ratio of sixty percent and forty percent, respectively. The estimated
costs to cleanup the existing drum storage sites are included in the $3.1
million reserve for Lewisburg.
In December 1991, the Company and Flying J, Inc. ("Flying J") entered into
a cost-sharing agreement whereby the Company participates with Flying J in the
financing of responses to environmental contamination at various refinery sites
sold by the Company to Flying J in 1980. At the same time, the Company reached a
settlement with several of its insurance carriers whereby the insurers reimburse
the Company for a portion of its expenses at the refineries. Ongoing cleanup
activities at four refinery sites are at different regulatory stages and it is
not possible to definitively estimate the ultimate cost of remediation. At
December 31, 1997 the Company had an accrual of $11.0 million for its estimated
share of future cleanup costs. The Company has an offsetting receivable due from
insurers of $6.8 million included in its consolidated balance sheet. Based on
current information prepared by independent environmental consultants, the
Company's share of the cost of environmental cleanup, discounted at 5.5%, is
currently estimated to be approximately $7.2 million over the next 21 years. At
December 31, 1997, the expected insurance recoveries of $5.5 million are
included in the consolidated balance sheet. The expected insurance recoveries
discounted at 5.5% are currently estimated to be approximately $3.6 million over
the next 21 years.
Based upon its experience to date, the Company believes that the future
cost of compliance with existing environmental laws, and liability for known
environmental claims pursuant to such laws, will not have a material adverse
effect on the Company's business, financial condition or results of operations.
However, no assurance can be given that future events, such as the cost of
complying with new or more stringent environmental laws, as well as any related
damage claims, newly identified sites requiring response action or new, as well
as more vigorous enforcement of existing environmental laws will not be
material. See "Risk Factors -- Environmental Regulation."
Other Governmental Regulations. The Company is subject to regulations in
the United States promulgated under the 1987 National Appliance Energy
Conservation Act, as amended, and various state regulations concerning the
energy efficiency of its products. The Company has developed and continues to
develop products which will comply with these regulations, and does not believe
that such regulations will have a material adverse effect on its business. The
Company is also subject to the energy efficiency requirements contained in the
Energy Policy Act of 1992, which became effective in 1994. All of the Company's
products comply with these standards.
BACKLOG ORDERS
The backlog of orders for the heating and cooling business was
approximately $24.2 million at December 31, 1997 (1996 -- approximately $63.4
million, 1995 -- approximately $71.6 million). The decline in backlog of orders
reflects the Company's shift away from advanced orders and pre-season sales
programs due to significantly shorter lead times on customer orders over the
past three years.
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EXPORT SALES
Export sales, being sales from the Company's North American operations to
foreign customers amounted to approximately $26.7 million in 1997
(1996 -- approximately $8.2 million; 1995 -- approximately $6.4 million).
EMPLOYEES
The Company currently employs approximately 3,000 employees. The Company is
a party to five collective bargaining agreements with four labor unions
representing certain of the hourly employees of the Company (approximately 1,900
in the aggregate) which are scheduled to expire between September 1998 and May
2001. The renegotiation of these collective agreements will occur between the
years 1998 and 2001. With respect to the agreement that expires in September
1998, the Company believes that negotiations are proceeding satisfactorily;
however, no assurances can be given as to the ultimate outcome of the
negotiations. The Company's inability to negotiate acceptable contracts with one
or more of these unions could result in strikes by the affected workers and
increasing operating costs as a result of higher wages or benefits paid to union
members. The Company considers its labor relations to be satisfactory.
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DESCRIPTION OF OTHER INDEBTEDNESS
ICP (USA) has entered into a Loan and Security Agreement dated as of July
23, 1997 (the "U.S. Credit Facility") with NationsBank, N. A., which consists of
a $15 million revolving loan and letter of credit facility, subject to an
availability calculation based on the eligible borrowing base. The eligible
borrowing base consists of certain inventories of ICP (USA). The interest rate
on the U.S. Credit Facility is, at the option of the Company, (a) prime, or (b)
LIBOR plus a margin, where the margin determination is made based upon the ratio
of the ICP (USA)'s funded indebtedness to EBITDA for the preceding fiscal
quarter (ranging from 150 to 200 basis points). At December 31, 1997, the margin
was 1.50% for LIBOR rate loans.
The U.S. Credit Facility contains certain financial covenants regarding the
financial performance of ICP (USA) and certain other covenants which restrict
the incurrence of additional debt, and provides for the suspension of the U.S.
Credit Facility and repayment of all debt in the event of a material adverse
change in the business or a change in control. In connection with the issuance
of the Notes, the U.S. Credit Facility has been amended to subordinate
intercompany loans to ICP (USA) and to permit ICP (USA) to distribute or
otherwise make available funds to the Issuer to pay interest on the Notes as
long as no default or event of default exists or would result from such
payments. Substantially all of ICP (USA)'s inventory is pledged as collateral
for amounts borrowed. The U.S. Credit Facility will terminate on July 23, 1999,
at which time all amounts outstanding under it will mature. At December 31,
1997, ICP (USA) was in compliance with all covenants of the U.S. Credit
Facility. At June 30, 1998, the outstanding balance under the U.S. Credit
Facility was $-0-.
In July 1996, ICP (USA) has entered into a receivables facility (the
"Receivables Facility"), a five year agreement to sell on a revolving basis up
to a $70 million undivided participation ownership interest in its accounts
receivable, with a United States lender. The receivables purchase agreement
requires ICP (USA) to pay fees plus certain administrative costs in connection
with this financing. At December 31, 1997, the marginal cost of borrowings under
the receivable facility was approximately 6.4%. At December 31, 1997, ICP (USA)
was in compliance with all covenants of the Receivables Facility. Substantially
all of ICP (USA)'s accounts receivable are pledged as collateral for amounts
borrowed under the Receivables Facility.
ICP (Canada) has a Cdn. $30 million revolving credit facility (the
"Canadian Revolving Credit Facility"), of which Cdn. $12.6 million was utilized
as of December 31, 1997. This credit facility is a three year facility, which
was established on December 19, 1996. The Canadian Revolving Credit Facility
accrues interest at prime plus 1% per annum or at banker's acceptance rates,
plus a stamping fee of 2%, as selected by ICP (Canada). All of the assets of ICP
(Canada) are pledged as collateral under this facility. This facility contains
restrictive covenants, including those requiring it to maintain a minimum
interest coverage and net worth. It also precludes the payment of dividends. ICP
(Canada) obtained a waiver of a covenant breach for the minimum interest
coverage ratio which existed at December 31, 1997. In connection with the
issuance of the Notes, the Canadian Revolving Credit Facility has been amended
to change the minimum interest coverage ratio and to permit ICP (Canada) to
distribute or otherwise make available to the Parent Guarantor amounts equal to
available cash flow (earnings before interest, taxes, depreciation and
amortization, less interest, capital expenditures and taxes paid) from the prior
year's operations, to the extent available cash flow from ICP (USA) is
insufficient for such purpose and so long as no default or event of default
would result from such payment, (i) to pay interest on the Notes, and (ii) to
make principal payments on the Notes if no amounts are outstanding under the
facility at the time or as a result of the payment.
ICP (USA) also has an unsecured term bank loan (the "Term Loan") in the
amount of $25 million, which matures October 15, 2001. $15 million of this
indebtedness is due in 2000, with the balance due 2001. ICP (USA) has entered
into an interest rate swap agreement that effectively sets the interest rate on
this facility at 5.97% for the remainder of the term of the facility. The loan
is a term loan accruing interest at LIBOR plus 0.25% and has been guaranteed by
an unaffiliated third party. The guarantor holds a subordinated security
interest in ICP (Canada) receivables and inventories as collateral for $15
million of the indebtedness under the Term Loan. The Parent Guarantor has
guaranteed all amounts advanced by the third party. The third party has not
advanced any amounts pursuant to its guaranty of the Term Loan. Additionally,
the Parent Guarantor has pledged the shares of ICP (Canada) in support of the
guarantee of the third party. The pledge agreement contains certain covenants,
including the requirement of ICP (Canada) to maintain a minimum level of
receivables and inventories in excess of its borrowings.
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PURPOSE OF THE EXCHANGE OFFER
The Old Notes were sold by the Issuer on May 13, 1998 (the "Closing Date")
through the Initial Purchasers to "qualified institutional buyers" (as defined
in Rule 144A under the Securities Act). In connection with the sale of the Old
Notes, the Issuer, the Parent Guarantor and the Initial Purchasers entered into
the Registration Rights Agreement pursuant to which the Company and the Parent
Guarantor agreed to cause to be filed with the Commission within 60 days after
the Closing Date, and use their best efforts to cause to become effective on or
prior to 120 days after the Closing Date, a registration statement with respect
to the Exchange Offer (the "Exchange Offer Registration Statement"). However, if
(i) the Issuer is not permitted to file the Exchange Offer Registration
Statement or to consummate the Exchange Offer because the Exchange Offer is not
permitted by applicable law or Commission policy or (ii) if the Issuer has not
consummated the Exchange Offer within 150 days of the Closing Date, or (iii) if
any Holder of Old Notes shall notify the Issuer on or before the Expiration Date
(A) that such Holder is prohibited by applicable law or Commission policy from
participating in the Exchange Offer, or (B) that such Holder may not resell the
New Notes to be acquired by it in the Exchange Offer to the public without
delivering a prospectus and that the Prospectus contained in the Exchange Offer
Registration Statement is not appropriate or available for such resales by such
Holder, or (C) that such Holder is a broker-dealer and holds Old Notes acquired
directly from the Issuer or one of its affiliates, then within six months of
such date, the Issuer and the Parent Guarantor shall (A) use their best efforts
to cause to become effective a shelf registration statement (the "Shelf
Registration Statement") with respect to resales of the Old Notes, and (B) keep
the Shelf Registration Statement effective for a period of at least two years
following the date on which the Shelf Registration Statement was initially
declared effective or (if sooner) the date immediately following the date that
all Transfer Restricted Securities (as defined in the Registration Rights
Agreement) covered by the Shelf Registration Statement have been sold pursuant
thereto.
If (a) the Company fails to file any of the registration statements
required by the Registration Rights Agreement on or before the date specified
for such filing, (b) any of such registration statements are not declared
effective by the Commission on or prior to the date specified for such
effectiveness (the "Effectiveness Target Date"), (c) the Issuer fails to
consummate the Exchange Offer within 20 business days of the Effectiveness
Target Date with respect to the Exchange Offer Registration Statement, or (d)
the Shelf Registration Statement or the Exchange Offer Registration Statement is
declared effective but, thereafter, subject to certain exceptions, ceases to be
effective or usable in connection with the Exchange Offer or resales of Transfer
Restricted Notes (as defined in the Registration Rights Agreement), as the case
may be, during the periods specified in the Registration Rights Agreement (each
such event referred to in clauses (a) through (d) above, a "Registration
Default"), then the interest rate on Transfer Restricted Notes will increase
("Additional Interest"), with respect to the first 90-day period immediately
following the occurrence of such Registration Default by 0.50% per annum and
will increase by an additional 0.50% per annum with respect to each subsequent
90-day period until all Registration Defaults have been cured, up to a maximum
amount of 1.50% per annum. Following the cure of all Registration Defaults, the
accrual of Additional Interest will cease and the interest rate will revert to
the original rate.
The Exchange Offer is being made by the Issuer to satisfy the obligations
of the Issuer and the Parent Guarantor pursuant to the Registration Rights
Agreement. A copy of the Registration Rights Agreement has been filed as an
exhibit to the Registration Statement. If and when the Exchange Offer is
consummated, neither the Issuer nor the Parent Guarantor will have any further
obligations to register any of the Old Notes not tendered by the Holders for
exchange, except pursuant to a Shelf Registration Statement filed under the
limited circumstances described above. Thereafter, any Holder of Old Notes who
does not tender its Old Notes in the Exchange Offer and which is not eligible to
use such a Shelf Registration Statement will continue to hold restricted
securities which may not be offered, sold or otherwise transferred, pledged or
hypothecated except pursuant to Rule 144 and Rule 144A under the Securities Act
or pursuant to any other exemption from registration under the Securities Act
relating to the disposition of securities.
Based on interpretations by the staff of the Commission set forth in
several no-action letters issued to third parties, including, but not limited
to, the Exchange Offer No-Action Letters, the Company believes that New Notes
issued pursuant to the Exchange Offer in exchange for Old Notes may be offered
for resale, resold
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and otherwise transferred by Holders thereof who are not affiliates of the
Issuer (other than a broker-dealer who acquired such Old Notes directly from the
Issuer for resale pursuant to Rule 144A under the Securities Act or any other
available exemption under the Securities Act) without compliance with the
registration and prospectus delivery provisions of the Securities Act; provided,
however, that the Holder is acquiring New Notes in its ordinary course of
business and has no arrangement or understanding with any person to participate
in any distribution (within the meaning of the Securities Act) of the New Notes.
Persons wishing to exchange Old Notes in the Exchange Offer must represent to
the Issuer that such conditions have been met. Nevertheless, any Holder who may
be deemed an "affiliate" (as defined under Rule 405 of the Securities Act) of
the Issuer or who tenders in the Exchange Offer with the intention to
participate, or for the purpose of participating, in a distribution of the New
Notes cannot rely on the interpretation by the staff of the Commission set forth
in such no-action letters, including, but not limited to, the Exchange Offer
No-Action Letters, and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction. In
addition, any such resale transaction should be covered by an effective
registration statement containing the selling security holders information
required by Item 507 of Regulation S-K of the Securities Act. 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 (other than
acquisitions directly from the Issuer) 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 as aforesaid. The Issuer and the Parent
Guarantor have agreed that for a period of 180 days after the Exchange Offer is
consummated, it will, upon reasonable request, make this Prospectus available
promptly to such broker-dealers for use in connection with any such resale. See
"Plan of Distribution."
Except as set forth above, this Prospectus may not be used for an offer to
resell, or for a resale or other transfer of New Notes.
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<PAGE> 37
TERMS OF THE EXCHANGE OFFER
GENERAL
Upon the terms and subject to the conditions of the Exchange Offer set
forth in this Prospectus and in the Letter of Transmittal, the Issuer will
accept any and all Old Notes validly tendered and not withdrawn prior to 5:00
p.m., New York City time, on the Expiration Date. The Issuer will issue $1,000
principal amount of New Notes in exchange for each $1,000 principal amount of
outstanding Old Notes accepted in the Exchange Offer. Holders may tender some or
all of their Old Notes pursuant to the Exchange Offer. Old Notes may be
tendered, however, only in integral multiples of $1,000. As of September 10,
1998, there was $150 million aggregate principal amount of the Old Notes
outstanding. This Prospectus, together with the Letter of Transmittal, is being
sent to all registered Holders of Old Notes as of September 15, 1998.
In connection with the issuance of the Old Notes, the Issuer arranged for
the Old Notes to be issued and transferable in book-entry form through the
facilities of DTC, acting as depository. The New Notes exchanged for the Old
Notes will initially be issued and transferable in book-entry form through DTC.
See "Book-Entry; Delivery and Form."
The Issuer shall be deemed to have accepted validly tendered Old Notes
when, as and if the Issuer has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering Holders
of Old Notes for the purpose of receiving the New Notes from the Issuer.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering Holder thereof as promptly as practicable
after the Expiration Date.
Holders of Old Notes who tender in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Issuer will pay the expenses, other than
certain applicable taxes, of the Exchange Offer. See "-- Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The Issuer has the right to extend the Exchange Offer, but only to the
extent necessary to comply with applicable laws or if 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 reasonable judgment of the
Issuer, might impair the ability of the Issuer to proceed with the Exchange
Offer. In order to extend the Expiration Date, the Issuer will notify the
Exchange Agent and the record Holders of Old Notes of any extension by oral or
written notice, each prior to 9:00 a.m., New York City time, on the next
business day after the previously scheduled Expiration Date.
The Issuer reserves the right to delay accepting any Old Notes, to extend
the Exchange Offer, to amend the Exchange Offer or to terminate the Exchange
Offer and not accept Old Notes not previously accepted if the applicable
conditions set forth herein under "Conditions" shall have occurred and shall not
have been waived by the Issuer by giving oral or written notice of such delay,
extension, amendment or termination to the Exchange Agent. Any such delay in
acceptance, extension, amendment or termination will be followed as promptly as
practicable by oral or written notice thereof. If the Exchange Offer is amended
in a manner determined by the Issuer to constitute a material change, the Issuer
will promptly disclose such amendment in a manner reasonably calculated to
inform the Holders of such amendment and the Issuer will extend the Exchange
Offer as necessary to provide to such Holders a period of five to ten business
days after such amendment, depending upon the significance of the amendment and
the manner of disclosure to Holders of the Old Notes, if the Exchange Offer
would otherwise expire during such five to ten business day period.
Without limiting the manner in which the Issuer may choose to make public
announcement of any extension, amendment or termination of the Exchange Offer,
the Issuer shall have no obligation to publish, advertise or otherwise
communicate any such public announcement, other than by making a timely release
to the Dow Jones News Service.
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<PAGE> 38
ACCRUED AMOUNTS OF THE NEW NOTES
The New Notes will bear interest at a rate equal to 8 5/8% per annum from
the last date on which interest was paid on the Old Notes surrendered in
exchange therefor or, if no interest has been paid, from the date of original
issue of such Old Notes. Interest on the New Notes is payable semi-annually on
May 15 and November 15 of each year, commencing on November 15, 1998.
PROCEDURES FOR TENDERING
To tender in the Exchange Offer, a Holder of Old Notes must complete, sign
and date the Letter of Transmittal, or a facsimile thereof, have the signatures
thereon guaranteed if required by the instructions to the Letter of Transmittal,
and mail or otherwise deliver such Letter of Transmittal or such facsimile,
together with the Old Notes and any other required documents, so that they are
received by the Exchange Agent prior to 5:00 p.m., New York City time, on the
Expiration Date.
Any financial institution that is a participant in DTC (the "Book-Entry
Transfer Facility") may make book-entry delivery of the Old Notes by causing the
Book-Entry Transfer Facility to transfer such Old Notes into the Exchange
Agent's account in accordance with the Book-Entry Transfer Facility procedure
for such transfer. Although delivery of Old Notes may be effected through
book-entry transfer into the Exchange Agent's account at the Book-Entry Transfer
Facility, the Letter of Transmittal (or facsimile thereof), with any required
signature guarantees and any other required documents, must, in any case, be
transmitted to and received or confirmed by the Exchange Agent at its address
set forth below under the caption "-- Exchange Agent" prior to 5:00 p.m., New
York City time, on the Expiration Date. DELIVERY OF DOCUMENTS TO THE COMPANY
DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
The tender by a Holder of Old Notes will constitute an agreement between
such Holder and the Issuer in accordance with the terms and subject to the
conditions set forth herein and in the Letter of Transmittal. Only a Holder of
Old Notes may tender such Old Notes in the Exchange Offer. The term "Holder"
with respect to the Exchange Offer means any person in whose name Old Notes are
registered on the books of the Issuer or any other person who has obtained a
properly completed bond power from the registered Holder. Delivery of all
documents must be made to the Exchange Agent at its address set forth below.
Holders also may request their respective brokers, dealers, commercial banks,
trust companies or nominees to effect the above transactions for such Holders.
The method of delivery of tendered Old Notes, the Letter of Transmittal and
all other required documents to the Exchange Agent is at the election and risk
of the Holder. Instead of delivery by mail, it is recommended that the Holder
use an overnight or hand delivery service. In all cases, sufficient time should
be allowed to assure timely delivery. No Letter of Transmittal or Old Notes
should be sent to the Company.
ANY BENEFICIAL HOLDER WHOSE OLD NOTES ARE REGISTERED IN THE NAME OF ITS
BROKER, DEALER, COMMERCIAL BANK, TRUST COMPANY OR OTHER NOMINEE AND WHO WISHES
TO TENDER SHOULD CONTACT SUCH REGISTERED HOLDER PROMPTLY AND INSTRUCT SUCH
REGISTERED HOLDER TO TENDER ON ITS BEHALF. IF SUCH BENEFICIAL HOLDER WISHES TO
TENDER ON ITS OWN BEHALF, SUCH BENEFICIAL HOLDER MUST, PRIOR TO COMPLETING AND
EXECUTING THE LETTER OF TRANSMITTAL AND DELIVERING ITS OLD NOTES, EITHER MAKE
APPROPRIATE ARRANGEMENTS TO REGISTER OWNERSHIP OF THE OLD NOTES IN SUCH HOLDER'S
NAME OR OBTAIN A PROPERLY COMPLETED BOND POWER FROM THE REGISTERED HOLDER. THE
TRANSFER OF RECORD OWNERSHIP MAY TAKE CONSIDERABLE TIME.
Signatures on a Letter of Transmittal (or a facsimile thereof) or a notice
of withdrawal, as the case may be, must be guaranteed by an Eligible Institution
(as defined on page 39) unless the Old Notes tendered pursuant thereto are
tendered (i) by a registered Holder who has not completed the box entitled
"Special Payment Instructions" or "Special Delivery Instructions" on the Letter
of Transmittal or (ii) for the account of an Eligible Institution. In the event
that signatures on a Letter of Transmittal (or a facsimile thereof) or a notice
of withdrawal, as the case may be, are required to be guaranteed, such guarantee
must be by or through
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<PAGE> 39
a 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 institution which
falls within the definition of "Eligible Guarantor Institution" contained in
Rule 17Ad-15 promulgated by the Commission under the Exchange Act (each an
"Eligible Institution").
If the Letter of Transmittal (or facsimile thereof) is signed by a person
other than the registered Holder of the Old Notes tendered thereby, such Old
Notes must be endorsed or accompanied by appropriate bond powers signed as the
name of the registered Holder or Holders appears on the Old Notes, with the
signatures on the endorsement or bond power guaranteed by an Eligible
Institution.
If the Letter of Transmittal (or facsimile thereof) or any Old Notes or
bond powers are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, officers of corporations or others acting in a fiduciary or
representative capacity, such persons should so indicate when signing, and,
unless waived by the Issuer, evidence satisfactory to the Issuer of their
authority to so act must be submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of tendered Old Notes and withdrawal of tendered Old
Notes will be determined by the Issuer in its sole discretion, which
determination will be final and binding on all parties. The Issuer reserves the
absolute right to reject any and all Old Notes not properly tendered or any Old
Notes the Issuer's acceptance of which would, in the opinion of counsel for the
Issuer, be unlawful. The Issuer also reserves the right to waive any defects,
irregularities or conditions of tender as to the Exchange Offer and/or
particular Old Notes. The Issuer's interpretation of the terms and conditions of
the Exchange Offer (including the instructions in the Letter of Transmittal)
will be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of Old Notes must be cured within such
time as the Issuer shall determine. None of the Issuer, the Exchange Agent nor
any other person shall be under any duty to give notification of defect 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 defects or irregularities have been
cured or waived. Any Old Notes received by the Exchange Agent that are not
properly tendered and as to which any defects or irregularities have not been
cured or waived will be returned by the Exchange Agent to the tendering
Holder(s) of Old Notes, unless otherwise provided in the Letter of Transmittal,
as soon as practicable following the Expiration Date.
By tendering, each Holder of Old Notes will represent to the Issuer that,
among other things, the New Notes acquired pursuant to the Exchange Offer are
being acquired in the ordinary course of such Holder's business, that such
Holder has no arrangement or understanding with any person to participate in the
distribution of such New Notes, and that such Holder is not an "affiliate" (as
defined under Rule 405 of the Securities Act) of the Issuer. If the Holder is a
broker-dealer that will receive New Notes for is own account in exchange for Old
Notes that were acquired as a result of market-making activities or other
trading activities, such Holder by tendering will acknowledge that it will
deliver a Prospectus in connection with any resale of such New Notes. See "Plan
of Distribution."
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available, or (ii) who cannot deliver their Old Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent, or cannot
complete the procedure for book-entry transfer, prior to 5:00 p.m. on the
Expiration Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the Holder of the Old Notes and the
principal amount of Old Notes tendered, stating that the tender is being
made thereby and guaranteeing that, within three New York Stock Exchange
trading days after the date of execution of the Notice of
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<PAGE> 40
Guaranteed Delivery, the Letter of Transmittal (or facsimile thereof)
together with the certificate(s) representing the Old Notes to be tendered
in proper form for transfer (or a confirmation of a book-entry transfer
into the Exchange Agent's account at the Book-Entry Transfer Facility of
Old Notes delivered electronically) and any other documents required by the
Letter of Transmittal will be deposited by the Eligible Institution with
the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all tendered
Old Notes in proper form for transfer (or a confirmation of a book-entry
transfer into the Exchange Agent's account at the Book-Entry Transfer
Facility of Old Notes delivered electronically) and all other documents
required by the Letter of Transmittal are received by the Exchange Agent
within three New York Stock Exchange trading days after the date of
execution of the Notice of Guaranteed Delivery. Upon request to the
Exchange Agent, a Notice of Guaranteed Delivery will be sent to Holders who
wish to tender their Old Notes according to the guaranteed delivery
procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, 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 in the Exchange Offer, a written or facsimile
transmission notice of withdrawal must be received by the Exchange Agent at its
address set forth herein prior to 5:00 p.m., New York City time, on the
Expiration Date. Any such notice of withdrawal must (i) specify the name of the
person having deposited the Old Notes to be withdrawn (the "Depositor"), (ii)
identify the Old Notes to be withdrawn (including the principal amount of such
Old Notes), (iii) be signed by the Holder in the same manner as the original
signature on the Letter of Transmittal by which such Old Notes were tendered
(including any required signature guarantees) or be accompanied by documents of
transfer sufficient to have the trustee with respect to the Old Notes register
the transfer of such Old Notes into the name of the person withdrawing the
tender, and (iv) specify the name in which any such Old Notes are to be
registered, if different from that of the Depositor. All questions as to the
validity, form and eligibility (including time of receipt) of such notices will
be determined by the Issuer, which determination shall be final and binding on
all parties. Any Old Notes so withdrawn will be deemed not to have been validly
tendered for purposes of the Exchange Offer and no New Notes will be issued with
respect thereto unless the Old Notes so withdrawn are validly re-tendered. Any
Old Notes that have been tendered but which are not accepted for payment will be
returned to the Holder thereof without cost to such Holder as soon as
practicable after withdrawal, rejection of tender or termination of the Exchange
Offer. Properly withdrawn Old Notes may be re-tendered by following one of the
procedures discussed above under the caption "-- Procedures for Tendering" at
any time prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Issuer may
terminate or amend the Exchange Offer as provided herein and will not be
required to accept for exchange, or exchange New Notes for, any Old Notes not
theretofore accepted for exchange, if any of the following conditions exist:
(a) the Exchange Offer, or the making of any exchange by a Holder,
violates applicable law or any applicable policy of the Commission; or
(b) any action or proceeding is instituted or threatened in any court
or by or before any governmental agency with respect to the Exchange Offer
which, in the reasonable judgment of the Issuer, might impair the ability
of the Issuer to proceed with the Exchange Offer; or
(c) there shall have been adopted or enacted any law, statute, rule or
regulation which, in the reasonable judgment of the Issuer, might
materially impair the ability of the Issuer to proceed with the Exchange
Offer.
If any such conditions exist, the Issuer may (i) refuse to accept any Old
Notes and return all tendered Old Notes to tendering Holders, (ii) extend the
Exchange Offer and retain all Old Notes tendered prior to the
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<PAGE> 41
expiration of the Exchange Offer, subject, however, to the rights of Holders to
withdraw such Old Notes (see "-- Withdrawal of Tenders") or (iii) waive certain
of such conditions with respect to the Exchange Offer and accept all properly
tendered Old Notes which have not been withdrawn or revoked. If such waiver
constitutes a material change to the Exchange Offer, the Issuer will promptly
disclose such waiver in a manner reasonably calculated to inform Holders of Old
Notes of such waiver.
The foregoing conditions are for the sole benefit of the Issuer and the
Parent Guarantor and may be asserted by the Issuer regardless of the
circumstances giving rise to any such condition or may be waived by the Issuer
in whole or in part at any time and from time to time in its sole discretion.
The failure by the Issuer at any time to exercise any of the foregoing rights
shall not be deemed a waiver of any such right and each such right shall be
deemed an ongoing right which may be asserted at any time and from time to time.
EXCHANGE AGENT
United States Trust Company of New York has been appointed as Exchange
Agent for the Exchange Offer. Questions and requests for assistance, requests
for additional copies of this Prospectus or of the Letter of Transmittal and
requests for Notices of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
By Facsimile:
(212) 780-0592
Attention: Customer Service
Confirm by Telephone to:
(800) 548-6565
By Mail:
United States Trust Company
of New York
P.O. Box 843 Cooper Station
New York, New York 10276
Attention: Corporate Trust Services
By Hand before 4:30 p.m.:
United States Trust Company of New York
111 Broadway
New York, New York 10006
Attention:
Lower Level
Corporate Trust Window
By Overnight Courier and By Hand after 4:30 p.m. on the expiration date only:
United States Trust Company of New York
770 Broadway, 13th Floor
New York, New York 10003
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by facsimile, telephone or in person by officers and regular
employees of the Company and its affiliates.
The Company will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith. The
Company 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 cash expenses to be incurred in connection with the Exchange Offer,
together with those expenses incurred in connection with the issuance of the Old
Notes, will be paid by the Company, are estimated in the aggregate not to exceed
$500,000, and include fees and expenses of the Exchange Agent and Trustee (as
defined on page 43) under the Indenture and accounting and legal fees.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, certificates
representing New Notes or Old Notes for principal amounts not tendered or
accepted for exchange are to be delivered to, or are to be registered or issued
in the name of, any person other than the 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
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<PAGE> 42
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 Holder or any
other person(s)) will be payable by the tendering Holder. If satisfactory
evidence of payment of such taxes or exemption therefrom is not submitted with
the Letter of Transmittal, the amount of such transfer taxes will be billed
directly to such tendering Holder.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes,
that is, face value less unamortized original issue discount, if any, as
reflected in the Company's accounting records on the date of the exchange.
Accordingly, no gain or loss for accounting purposes will be recognized upon the
consummation of the Exchange Offer. The issuance costs incurred in connection
with the Exchange Offer will be capitalized and amortized over the term of the
New Notes.
A copy of the Indenture has been filed as an exhibit to the Registration
Statement.
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<PAGE> 43
DESCRIPTION OF NOTES
GENERAL
The New Notes will be issued under an indenture (the "Indenture") dated as
of May 13, 1998 by and among the Issuer, the Parent Guarantor and United States
Trust Company of New York, as Trustee (the "Trustee"). The following summary of
certain provisions of the Indenture does not purport to be complete and is
subject to, and is qualified in its entirety by reference to, the Trust
Indenture Act of 1939, as amended (the "TIA"), and to all of the provisions of
the Indenture, including the definitions of certain terms therein and those
terms made a part of the Indenture by reference to the TIA as in effect on the
date of the Indenture. The definitions of certain capitalized terms used in the
following summary are set forth below under " -- Certain Definitions." For
purposes of this section, references to the "Issuer" include only International
Comfort Products Holdings, Inc. and not its Subsidiaries, and references to the
"Parent Guarantor" include only International Comfort Products Corporation and
not its Subsidiaries.
The Notes will be senior unsecured obligations of the Issuer, ranking pari
passu in right of payment with all unsecured unsubordinated obligations of the
Issuer and senior in right of payment to all subordinated obligations of the
Issuer. The Parent Guarantee will be a senior unsecured obligation of the Parent
Guarantor, ranking pari passu in right of payment with all unsecured
unsubordinated obligations of the Parent Guarantor and senior in right of
payment to all subordinated obligations of the Parent Guarantor. The Notes and
the Parent Guarantee will be effectively subordinated to all existing and future
indebtedness of the Parent Guarantor's Subsidiaries (other than the Issuer).
The Notes will be issued in fully registered form only, without coupons, in
denominations of $1,000 and integral multiples thereof. Initially, the Trustee
will act as Paying Agent and Registrar for the Notes. The Notes may be presented
for registration or transfer and exchange at the offices of the Registrar, which
initially will be the Trustee's corporate trust office. The Issuer may change
any Paying Agent and Registrar without notice to holders of the Notes (the
"Holders"). The Issuer will pay principal (and premium, if any) on the Notes at
the Trustee's corporate office in New York, New York. At the Issuer's option,
interest may be paid at the Trustee's corporate trust office or by check mailed
to the registered address of Holders. Any Notes that remain outstanding after
the completion of the Exchange Offer, together with the Exchange Notes issued in
connection with the Exchange Offer, will be treated as a single class of
securities under the Indenture.
PRINCIPAL, MATURITY AND INTEREST
The Notes are limited in aggregate principal amount to $225.0 million, of
which up to $150.0 million may be issued pursuant to the Exchange Offer, and
will mature on May 15, 2008. Interest on the Notes will accrue at the rate of
8 5/8% per annum and will be payable semiannually in cash on each May 15 and
November 15 commencing on November 15, 1998, to the persons who are registered
Holders at the close of business on the May 1 and November 1 immediately
preceding the applicable interest payment date. Interest on the Notes will
accrue from and including the most recent date to which interest has been paid
or, if no interest has been paid, from and including the date of issuance.
The Notes will not be entitled to the benefit of any mandatory sinking
fund.
REDEMPTION
Optional Redemption. The Notes will be redeemable, at the Issuer's option,
in whole at any time or in part from time to time, on and after May 15, 2003,
upon not less than 30 nor more than 60 days' notice, at the following redemption
prices (expressed as percentages of the principal amount thereof) if redeemed
during the twelve-month period commencing on May 15 of the applicable year set
forth below, plus, in each case, accrued and unpaid interest, if any, thereon to
the date of redemption:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---- ----------
<S> <C>
2003........................................................ 104.313%
2004........................................................ 102.875%
2005........................................................ 101.438%
2006 and thereafter......................................... 100.000%
</TABLE>
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<PAGE> 44
Optional Redemption upon Public Equity Offerings. At any time, or from
time to time, on or prior to May 15, 2001, the Issuer may, at its option, use
the net cash proceeds of one or more Public Equity Offerings (as defined in the
paragraph below) contributed or otherwise made available to it from the Parent
Guarantor to redeem up to 35% of the Notes issued at a redemption price equal to
108.625% of the principal amount thereof plus accrued and unpaid interest, if
any, thereon to the date of redemption; provided that at least 65% of the
principal amount of Notes originally issued remains outstanding immediately
after any such redemption. In order to effect the foregoing redemption with the
proceeds of any Public Equity Offering, the Issuer shall make such redemption
not more than 180 days after the consummation of any such Public Equity
Offering.
As used in the preceding paragraph, "Public Equity Offering" means an
underwritten public offering of Qualified Capital Stock (as defined on page 65)
of the Parent Guarantor.
SELECTION AND NOTICE OF REDEMPTION
In the event that less than all of the Notes are to be redeemed at any
time, selection of such Notes for redemption will be made by the Trustee in
compliance with the requirements of the principal national securities exchange,
if any, on which such Notes are listed or, if such Notes are not then listed on
a national securities exchange, on a pro rata basis, by lot or by such method as
the Trustee shall deem fair and appropriate; provided, however, that no Notes of
a principal amount of $1,000 or less shall be redeemed in part; provided,
further, that if a partial redemption is made with the proceeds of a Public
Equity Offering, selection of the Notes or portions thereof for redemption shall
be made by the Trustee only a pro rata basis or on as nearly a pro rata basis as
is practicable (subject to DTC procedures), unless such method is otherwise
prohibited. Notice of redemption shall be mailed by first-class mail at least 30
but not more than 60 days before the redemption date to each Holder of Notes to
be redeemed at its registered address. If any Note is to be redeemed in part
only, the notice of redemption that relates to such Note shall state the portion
of the principal amount thereof to be redeemed. A new Note in a principal amount
equal to the unredeemed portion thereof will be issued in the name of the Holder
thereof upon cancellation of the original Note. On and after the redemption
date, interest will cease to accrue on Notes or portions thereof called for
redemption as long as the Issuer has deposited with the Paying Agent funds in
satisfaction of the applicable redemption price pursuant to the Indenture.
PARENT GUARANTEE
The Notes will be fully and unconditionally guaranteed, on a senior
unsecured basis, by the Parent Guarantor. The Parent Guarantor will guarantee
all of the obligations of the Issuer under the Indenture, including its
obligations to pay principal, premium, if any, and interest with respect to the
Notes.
All payments made by the Parent Guarantor with respect to the Parent
Guarantee will be made free and clear of and without withholding or deduction
for or on account of any present or future Taxes (as defined on page 66), unless
the Parent Guarantor is required to withhold or deduct Taxes by law or by the
interpretation or administration thereof. If the Parent Guarantor is required to
withhold or deduct any amount for or on account of Taxes from any payment made
under or with respect to the Parent Guarantee, the Parent Guarantor will pay
such additional amounts ("Additional Amounts") as may be necessary so that the
net amount received by each holder of Notes (including Additional Amounts) after
such withholding or deduction will not be less than the amount the Holder would
have received if such Taxes had not been withheld or deducted; provided that no
Additional Amounts will be payable with respect to a payment made to a holder of
Notes (an "Excluded Holder") (i) with which the Parent Guarantor does not deal
at arm's length (within the meaning of the Income Tax Act (Canada)) at the time
of making such payment or at the time that any such payment is deemed to be paid
or credited or (ii) which is subject to Taxes by reason of its being connected
with Canada or any province or territory thereof otherwise than by the mere
acquisition, holding or disposition of the Notes or the receipt of payments
thereunder. The Parent Guarantor will also (i) make such withholding or
deduction and (ii) remit the full amount deducted or withheld to the relevant
authority in accordance with applicable law. The Parent Guarantor will furnish
to the holders of the Notes that are outstanding on the date of any withholding
or deduction, within 30 days after the date of the payment of any
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Taxes due pursuant to applicable law, certified copies of tax receipts
evidencing such payment by the Parent Guarantor.
The Parent Guarantor will indemnify and hold harmless each holder of Notes
(other than an Excluded Holder), and upon written request of any holder of Notes
(other than an Excluded Holder), reimburse each such Holder, for the amount of
(i) any such Taxes so levied or imposed and paid by such Holder as a result of
payments made under or with respect to the Parent Guarantee; and (ii) any Taxes
so levied or imposed with respect to any reimbursement under the foregoing
clause (i) so that the net amount received by such Holder after such
reimbursement will not be less than the net amount the Holder would have
received if Taxes on such reimbursement had not been imposed.
Since significant assets of the Parent Guarantor are outside the United
States, any judgment obtained in the United States against the Parent Guarantor,
including judgments with respect to the payment of interest, principal or
premium owing with respect to the Parent Guarantee, may not be collectible
within the United States.
The Parent Guarantor has been informed by its Canadian counsel, Osler,
Hoskin & Harcourt, that the laws of the Province of Ontario and the federal laws
of Canada applicable therein permit an action to be brought in a court of
competent jurisdiction in the Province of Ontario (a "Canadian Court") on any
final and conclusive judgment in personam of any federal or state court located
in the Borough of Manhattan in The City of New York ("New York Court") that is
not impeachable as void or voidable under the internal laws of the State of New
York for a sum certain if (i) the court rendering such judgment had jurisdiction
over the judgment debtor, as recognized by a Canadian Court (and submission by
the Parent Guarantor in the Indenture to the jurisdiction of the New York Court
will be sufficient for the purpose); (ii) such judgment was not obtained by
fraud or in a manner contrary to natural justice and the enforcement thereof
would not be inconsistent with public policy, as such term is applied by a
Canadian Court, or contrary to any order made by the Attorney General of Canada
under the Foreign Extraterritorial Measures Act (Canada); (iii) the enforcement
of such judgment does not constitute, directly or indirectly, the enforcement of
foreign revenue, expropriatory or penal laws; and (iv) the action to enforce
such judgment is commenced within the applicable limitation period. The Parent
Guarantor has been informed by its Canadian counsel that such counsel knows of
no reason, based upon public policy under the laws of the Province of Ontario
and the federal laws of Canada applicable therein, for a Canadian Court to avoid
recognition of a judgment of a New York Court to enforce the Indenture or Parent
Guarantee.
Pursuant to the Indenture, the Parent Guarantor has appointed Osler, Hoskin
& Harcourt as its agent for service of process in any suit, action or proceeding
with respect to the Indenture, the Parent Guarantee or the Registration Rights
Agreement and for actions brought under federal or state securities laws in any
federal or state court located in The City of New York and will submit to the
jurisdiction of such courts.
CHANGE OF CONTROL
The Indenture provides that upon the occurrence of a Change of Control,
each Holder will have the right to require that the Issuer purchase all or a
portion of such Holder's Notes pursuant to the offer described below (the
"Change of Control Offer"), at a purchase price equal to 101% of the principal
amount thereof plus accrued interest, if any, thereon to the date of purchase.
If a Change of Control Offer is made, there can be no assurance that the
Issuer will have available funds sufficient to pay the Change of Control
purchase price for all the Notes that might be delivered by Holders seeking to
accept the Change of Control Offer. In the event the Issuer is required to
purchase outstanding Notes pursuant to a Change of Control Offer, the Issuer
expects that it would seek third party financing to the extent it does not have
available funds to meet its purchase obligations. However, there can be no
assurance that the Issuer would be able to obtain such financing.
Neither the Board of Directors of the Issuer nor the Trustee may waive the
covenant relating to a Holder's right to require the purchase of Notes upon a
Change of Control. Restrictions in the Indenture described herein on the ability
of the Parent Guarantor and the Restricted Subsidiaries to incur additional
Indebtedness, to make Restricted Payments (as defined on page 65) and to make
Asset Sales (as defined on
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page 57) may also make more difficult or discourage a takeover of the Issuer,
whether favored or opposed by the management of the Issuer. Consummation of any
such transaction in certain circumstances may require the purchase of the Notes,
and there can be no assurance that the Issuer or the acquiring party will have
sufficient financial resources to effect such purchase. Such restrictions and
the restrictions on transactions with Affiliates (as defined on page 56) may, in
certain circumstances, make more difficult or discourage any leveraged buyout of
the Issuer or any of its Subsidiaries (as defined on page 66) by the management
of the Issuer. While such restrictions cover a wide variety of arrangements
which have traditionally been used to effect highly leveraged transactions, the
Indenture may not afford the Holders of Notes protection in all circumstances
from the adverse aspects of a highly leveraged transactions, reorganization,
restructuring, merger or similar transaction.
The Issuer will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with a Change of
Control Offer. To the extent that the provisions of any securities laws or
regulations conflict with the "Change of Control" provisions of the Indenture,
the Issuer shall comply with the applicable securities laws and regulations and
shall not be deemed to have breached its obligations under the "Change of
Control" provisions of the Indenture by virtue thereof.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
Limitation on Incurrence of Additional Indebtedness. The Parent
Guarantor will not, and will not permit any of the Restricted Subsidiaries
to, directly or indirectly, create, incur, assume, guarantee, acquire,
become liable, contingently or otherwise, with respect to, or otherwise
become responsible for payment of (collectively, "incur") any Indebtedness
(other than Permitted Indebtedness); provided, however, that if no Default
or Event of Default shall have occurred and be continuing at the time of or
as a consequence of the incurrence of any such Indebtedness, the Parent
Guarantor or any Restricted Subsidiary may incur Indebtedness (including,
without limitation, Acquired Indebtedness) if on the date of the incurrence
of such Indebtedness, after giving effect to the incurrence thereof, the
Consolidated Fixed Charge Coverage Ratio of the Parent Guarantor is greater
than (a) 2.0 to 1.0 if such incurrence occurs on or prior to May 15, 2000
or (b) 2.25 to 1.0 if such incurrence occurs after May 15, 2000.
No Indebtedness incurred pursuant to the Consolidated Fixed Charge
Coverage Ratio test of the preceding paragraph shall reduce the amount of
Indebtedness which may be incurred pursuant to any clause of the definition
of Permitted Indebtedness (including without limitation, Indebtedness
pursuant to clause (ii) of the definition of Permitted Indebtedness).
The Parent Guarantor shall not incur any Indebtedness which is
subordinated in right of payment to any other Indebtedness of the Parent
Guarantor unless such Indebtedness is subordinated in right of payment to
the Parent Guarantee at least to the same extent as such Indebtedness is
subordinated to such other Indebtedness.
Limitation on Restricted Payments. The Parent Guarantor will not, and
will not cause or permit any of the Restricted Subsidiaries to, directly or
indirectly, (a) declare or pay any dividend or make any distribution (other
than dividends or distributions, payable in Qualified Capital Stock of the
Parent Guarantor) on or in respect of shares of the Parent Guarantor's
Capital Stock to holders of such Capital Stock, (b) purchase, redeem or
otherwise acquire or retire for value any Capital Stock of the Parent
Guarantor or any warrants, rights or options to purchase or acquire shares
of any class of such Capital Stock or (c) make any Investment (other than
Permitted Investments) (each of the foregoing actions set forth in clauses
(a), (b) and (c) being referred to as a "Restricted Payment"), if at the
time of such Restricted Payment or immediately after giving effect thereto,
(i) a Default or an Event of Default shall have occurred and be continuing
or (ii) the Parent Guarantor is not able to incur at least $1.00 of
additional Indebtedness (other than Permitted Indebtedness) in compliance
with the covenant described under "-- Limitation on Incurrence of
Additional Indebtedness" or (iii) the aggregate amount of Restricted
Payments (including such proposed Restricted Payment) made subsequent to
the Issue Date
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(the amount expended for such purpose, if other than in cash, being the
fair market value of such property as determined reasonably and in good
faith by the Board of Directors of the Parent Guarantor) shall exceed the
sum of: (w) 50% of the cumulative Consolidated Net Income (or if cumulative
Consolidated Net Income shall be a loss, minus 100% of such loss) of the
Parent Guarantor earned subsequent to the Issue Date and on or prior to the
date the Restricted Payment occurs (the "Reference Date" (treating such
period as a single accounting period); plus (x) 100% of the fair market
value of the aggregate net proceeds received by the Parent Guarantor from
any Person (other than a Subsidiary of the Parent Guarantor) from the
issuance and sale subsequent to the Issue Date and on or prior to the
Reference Date of Qualified Capital Stock of the Parent Guarantor; plus (y)
without duplication of any amounts included in clause (iii)(x) above, 100%
of the fair market value of the aggregate net proceeds of any contribution
to the common equity capital of the Parent Guarantor received by the Parent
Guarantor from a holder of the Parent Guarantor's Capital Stock (excluding,
in the case of clauses (iii)(x) and (y), any net proceeds from a Public
Equity Offering to the extent used to redeem the Notes); plus (z) an amount
equal to the lesser of (A) the sum of the fair market value of the Capital
Stock of an Unrestricted Subsidiary owned by the Parent Guarantor and the
Restricted Subsidiaries and the aggregate amount of all Indebtedness of
such Unrestricted Subsidiary owed to the Parent Guarantor and the
Restricted Subsidiaries on the date of Revocation of such Unrestricted
Subsidiary as an Unrestricted Subsidiary in accordance with the covenant
described under "-- Limitation on Designations of Unrestricted
Subsidiaries" or (B) the Designation Amount with respect to such
Unrestricted Subsidiary on the date of the Designation of such Subsidiary
as an Unrestricted Subsidiary in accordance with the covenant described
under "-- Limitation on Designations of Unrestricted Subsidiaries."
Notwithstanding the foregoing, the provisions set forth in the
immediately preceding paragraph do not prohibit: (1) the payment of any
dividend within 60 days after the date of declaration of such dividend if
the dividend would have been permitted on the date of declaration; (2) if
no Default or Event of Default shall have occurred and be continuing, the
acquisition of any shares of Capital Stock of the Parent Guarantor, either
(i) solely in exchange for shares of Qualified Capital Stock of the Parent
Guarantor or of an Assuming Party in a Domestication Event or (ii) through
the application of net proceeds of a substantially concurrent sale for cash
(other than to a Subsidiary of the Parent Guarantor) of shares of Qualified
Capital Stock of the Parent Guarantor; (3) so long as no Default of Event
of Default shall have occurred and be continuing, repurchases of Capital
Stock of the Parent Guarantor from officers, directors, employees or
consultants pursuant to equity ownership or compensation plans not to
exceed $1.0 million in any year; and (4) so long as no Default or Event of
Default shall have occurred and be continuing, other Restricted Payments in
an aggregate amount not to exceed $10.0 million. In determining the
aggregate amount of Restricted Payments made subsequent to the Issue Date
in accordance with clause (iii) of the immediately preceding paragraph,
amounts expended pursuant to clauses (1) through (4) shall be included in
such calculation.
Limitation on Asset Sales. The Parent Guarantor will not, and will
not permit any of the Restricted Subsidiaries to, consummate an Asset Sale
unless (i) the Parent Guarantor or the applicable Restricted Subsidiary, as
the case may be, receives consideration at the time of such Asset Sale at
least equal to the fair market value of the assets sold or otherwise
disposed of (as determined in good faith by the Parent Guarantor's Board of
Directors), (ii) at least 75% of the consideration received by the Parent
Guarantor or the Restricted Subsidiary, as the case may be, from such Asset
Sale shall be in the form of cash or Cash Equivalents and is received at
the time of such disposition (with the principal amount or accreted value,
as the case may be, of Indebtedness of the Parent Guarantor and the
Restricted Subsidiaries assumed by the transferee in connection with such
Asset Sale treated as cash for purposes of this clause (ii)); and (iii)
upon the consummation of an Asset Sale, the Parent Guarantor shall apply,
or cause such Restricted Subsidiary to apply, the Net Cash Proceeds
relating to such Asset Sale within 360 days of receipt thereof either (A)
to prepay any Indebtedness of a Restricted Subsidiary or Indebtedness of
the Parent Guarantor which is not subordinated in right of payment to any
other Indebtedness of the Parent Guarantor, (B) to purchase or make an
investment in properties and assets (including inventory) that will be used
in the business of the Parent Guarantor or the Restricted Subsidiaries as
existing on the Issue Date or in businesses reasonably related thereto, or
(C) a combination of prepayment and investment
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permitted by the foregoing clauses (iii)(A) and (iii)(B). On the 361st day
after an Asset Sale or such earlier date, if any, as the Board of Directors
of the Parent Guarantor or of such Restricted Subsidiary determines not to
apply the Net Cash Proceeds relating to such Asset Sale as set forth in
clauses (iii)(A), (iii)(B) and (iii)(C) of the next preceding sentence
(each, a "Net Proceeds Offer Trigger Date"), such aggregate amount of Net
Cash Proceeds which have not been applied on or before such Net Proceeds
Offer Trigger Date as permitted in clauses (iii)(A), (iii)(B) and (iii)(C)
of the next preceding sentence (each a "Net Proceeds Offer Amount") shall
be applied by the Issuer to make an offer to purchase (the "Net Proceeds
Offer") on a date (the "Net Proceeds Offer Payment Date") not less than 30
nor more than 60 days following the applicable Net Proceeds Offer Trigger
Date, from all Holders who validly accept such offer on a pro rata basis,
that principal amount of Notes equal to the Net Proceeds Offer Amount at a
price equal to 100% of the principal amount of the Notes to be purchased,
plus accrued and unpaid interest, if any, thereon to the date of purchase;
provided, however, that if at any time any non-cash consideration received
by the Parent Guarantor or any Restricted Subsidiary, as the case may be,
in connection with any Asset Sale is converted into or sold or otherwise
disposed of for cash (other than interest received with respect to any such
non-cash consideration), then such conversion or disposition shall be
deemed to constitute an Asset Sale hereunder and the Net Cash Proceeds
thereof shall be applied in accordance with this covenant. The Issuer may
defer the Net Proceeds Offer until there is an aggregate unutilized Net
Proceeds Offer Amount equal to or in excess of $5,000,000 resulting from
one or more Asset Sales (at which time, the entire unutilized Net Proceeds
Offer Amount, and not just the amount in excess of $5,000,000 shall be
applied as required pursuant to this paragraph).
In the event of the transfer of substantially all (but not all) of the
property and assets of the Parent Guarantor and the Restricted Subsidiaries
as an entirety to a Person in a transaction permitted under "-- Merger,
Amalgamation, Consolidation and Sale of Assets," the successor corporation
shall be deemed to have sold the properties and assets of the Parent
Guarantor and the Restricted Subsidiaries not so transferred for purposes
of this covenant, and shall comply with the provisions of this covenant
with respect to such deemed sale as if it were an Asset Sale. In addition,
the fair market value of such properties and assets of the Parent Guarantor
or the Restricted Subsidiaries deemed to be sold shall be deemed to be Net
Cash Proceeds for purposes of this covenant.
Each Net Proceeds Offer will be mailed to the record Holders as shown
on the register of Holders within 30 days following the Net Proceeds Offer
Trigger Date, with a copy to the Trustee, and shall comply with the
procedures set forth in the Indenture. Upon receiving notice of the Net
Proceeds Offer, Holders may elect to tender their Notes in whole or in part
in integral multiples of $1,000 in exchange for cash. To the extent Holders
properly tender Notes in an amount exceeding the Net Proceeds Offer Amount,
Notes of tendering Holders will be purchased on a pro rata basis (based on
amounts tendered). A Net Proceeds Offer shall remain open for a period of
20 business days or such longer period as may be required by law.
The Issuer will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to
the extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Net Proceeds Offer. To the extent that
the provisions of any securities laws or regulations conflict with the
"Asset Sale" provisions of the Indenture, the Issuer shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under the "Asset Sale" provisions of the Indenture
by virtue thereof.
Limitation on Dividend and Other Payment Restrictions Affecting
Restricted Subsidiaries. The Parent Guarantor will not, and will not cause
or permit any of the Restricted Subsidiaries to, directly or indirectly,
create or otherwise cause or permit to exist or become effective any
encumbrance or restriction on the ability of any Restricted Subsidiary to
(a) pay dividends or make any other distributions on or in respect of its
Capital Stock; (b) make loans or advances or to pay any Indebtedness or
other obligation owed to the Parent Guarantor or any other Restricted
Subsidiary; or (c) transfer any of its property or assets to the Parent
Guarantor or any other Restricted Subsidiary, except for such encumbrances
or restrictions existing under or by reasons of: (1) applicable law; (2)
the Indenture; (3) customary non-assignment provisions of any contract or
any lease governing a leasehold interest of any Restricted
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Subsidiary; (4) any instrument governing Acquired Indebtedness, which
encumbrance or restriction is not applicable to any Person, or the
properties or assets of any Person, other than the Person or the properties
or assets of the Person so acquired; (5) agreements existing on the Issue
Date to the extent and in the manner such agreements are in effect on the
Issue Date; (6) any other agreement entered into after the Issue Date which
contains encumbrances and restrictions which are no more restrictive with
respect to any Restricted Subsidiary than those in effect with respect to
such Restricted Subsidiary pursuant to agreements as in effect on the Issue
Date; (7) an agreement governing Refinancing Indebtedness incurred to
Refinance the Indebtedness issued, assumed or incurred pursuant to an
agreement referred to in clause (2), (4) or (5) above; provided, however,
that the provisions relating to such encumbrance or restriction contained
in any such Refinancing Indebtedness are no more restrictive than the
provisions relating to such encumbrance or restriction contained in
agreements referred to in such clause (2), (4) or (5); and (8) restrictions
applicable only to an Accounts Receivable Subsidiary.
Limitation on Preferred Stock of Restricted Subsidiaries. The Parent
Guarantor will not permit any of the Restricted Subsidiaries to issue any
Preferred Stock (other than to the Parent Guarantor or to a Restricted
Subsidiary) or permit any Person (other than the Parent Guarantor or a
Restricted Subsidiary) to own any Preferred Stock of any Restricted
Subsidiary.
Limitation on Liens. The Parent Guarantor will not, directly or
indirectly, create, incur, assume or permit or suffer to exist any Liens of
any kind against or upon any property or assets of the Parent Guarantor,
whether owned on the Issue Date or acquired after the Issue Date, or any
proceeds therefrom, or assign or otherwise convey any right to receive
income or profits therefrom unless (i) in the case of Liens securing
Indebtedness that is expressly subordinate or junior in right of payment to
the Parent Guarantee, the Parent Guarantee is secured by a Lien on such
property, assets or proceeds that is senior in priority to such Liens and
(ii) in all other cases, the Parent Guarantee is equally and ratably
secured, except for (A) Liens securing the Parent Guarantee; (B) Liens in
favor of the Issuer or the Parent Guarantor; (C) Liens securing Refinancing
Indebtedness which is incurred to Refinance any Indebtedness which has been
secured by a Lien permitted under the Indenture and which has been incurred
in accordance with the provisions of the Indenture; provided, however, that
such Liens do not extend to or cover any property or assets of the Parent
Guarantor not securing the Indebtedness so Refinanced; and (D) Permitted
Liens.
Merger, Amalgamation, Consolidation and Sale of Assets. The Parent
Guarantor will not, in a single transaction or series of related
transactions, consolidate, amalgamate or merge with or into any Person, or
sell, assign, transfer, lease, convey or otherwise dispose of (or cause or
permit any Restricted Subsidiary to sell, assign, transfer, lease, convey
or otherwise dispose of) all or substantially all of the Parent Guarantor's
assets (determined on a consolidated basis for the Parent Guarantor and the
Restricted Subsidiaries) whether as an entirety or substantially as an
entirety to any Person unless: (a) pursuant to a Domestication Event or
(b)(i) either (1) the Parent Guarantor shall be the surviving or continuing
corporation or (2) the Person (if other than the Parent Guarantor) formed
by such amalgamation, consolidation or into which the Parent Guarantor is
merged or the Person which acquires by sale, assignment, transfer, lease,
conveyance or other disposition the properties and assets of the Parent
Guarantor and the Restricted Subsidiaries substantially as an entirety (the
"Surviving Entity") (x) shall be a corporation organized and validly
existing under the laws of (l) the United States or any State thereof or
the District of Columbia or (2) Canada or any Province thereof and (y)
shall expressly assume, by supplemental indenture (in form and substance
satisfactory to the Trustee), executed and delivered to the Trustee, all
obligations of the Parent Guarantor under the Parent Guarantee and the
performance of every covenant of the Parent Guarantor, the Indenture and
the Registration Rights Agreement on the part of the Parent Guarantor to be
performed or observed; (ii) immediately after giving effect to such
transaction and the assumption contemplated by clause (i)(2)(y) above
(including giving effect to any Indebtedness and Acquired Indebtedness
incurred or anticipated to be incurred in connection with or in respect of
such transaction), the Parent Guarantor or such Surviving Entity, as the
case may be, shall be able to incur at least $1.00 of additional
Indebtedness (other than Permitted Indebtedness) pursuant to the covenant
described under "-- Limitation on Incurrence of Additional
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Indebtedness"; (iii) immediately before and immediately after giving effect
to such transaction and the assumption contemplated by clause (i)(2)(y)
above (including, without limitation, giving effect to any Indebtedness and
Acquired Indebtedness incurred or anticipated to be incurred and any Lien
granted in connection with or in respect of the transaction), no Default or
Event of Default shall have occurred or be continuing; and (iv) the Parent
Guarantor or the Surviving Entity shall have delivered to the Trustee an
officers' certificate and an opinion of counsel, each stating that such
consolidation, amalgamation, merger, sale, assignment, transfer, lease,
conveyance or other disposition and, if a supplemental indenture is
required in connection with such transaction, such supplemental indenture
comply with the applicable provisions of the Indenture and that all
conditions precedent in the Indenture relating to such transaction have
been satisfied.
For purposes of the foregoing, the transfer (by lease, assignment,
sale or otherwise, in a single transaction or series of transactions) of
all or substantially all of the properties or assets of one or more
Restricted Subsidiaries the Capital Stock of which constitutes all or
substantially all of the properties and assets of the Parent Guarantor
shall be deemed to be the transfer of all or substantially all of the
properties and assets of the Parent Guarantor.
The Indenture will provide that upon any amalgamation, consolidation,
combination or merger or any transfer of all or substantially all of the
assets of the Parent Guarantor in accordance with the foregoing in which
the Parent Guarantor is not the continuing corporation, the successor
Person formed by such consolidation or amalgamation or into which the
Parent Guarantor is merged or to which such conveyance, lease or transfer
is made shall succeed to, and be substituted for, and may exercise every
right and power of, the Parent Guarantor under the Indenture and the Parent
Guarantee with the same effect as if such surviving entity had been named
as such.
The Issuer will not consolidate with or merge with or into any Person
other than the Parent Guarantor unless: (i) the entity formed by or
surviving any such consolidation or merger (if other than the Issuer) is a
corporation organized and existing under the laws of the United States or
any State thereof or the District of Columbia; (ii) such entity explicitly
assumes by supplemental indenture (in form reasonably satisfactory to the
Trustee), executed and delivered to the Trustee, the due and punctual
payment of the principal of and premium, if any, and interest on the Notes
and the performance of any covenant of the Notes, the Indenture and the
Registration Rights Agreement; (iii) immediately after giving effect to
such transaction, no Default or Event of Default shall have occurred and be
continuing; (iv) immediately after giving effect to such transaction and
the use of any net proceeds therefrom on a pro forma basis, the Parent
Guarantor could satisfy the provisions of clause (ii) of the first
paragraph of this covenant; and (v) the Issuer shall have delivered to the
Trustee an officers' certificate and Opinion of Counsel, each stating that
such consolidation or merger and, if a supplemental indenture is required
in connection with such transaction, such supplemental indenture comply
with the applicable provisions of the Indenture and that all conditions
precedent in the Indenture relating to such transaction have been
satisfied.
The Indenture will provide that upon any amalgamation, consolidation,
combination, merger, conveyance, lease or transfer of all or substantially
all of the assets of the Issuer in accordance with the foregoing, if the
Issuer is not the continuing corporation, the successor Person formed by
such consolidation or into which the Issuer is merged or to which such
amalgamation, consolidation, merger, conveyance, lease or transfer is made
shall succeed to, and be substituted for, and may exercise every right and
power of, the Issuer under the Indenture and the Notes with the same effect
as if such surviving entity had been named as such.
Limitations on Transactions with Affiliates. (a) The Parent Guarantor
will not, and will not permit any of the Restricted Subsidiaries to,
directly or indirectly, enter into or permit to exist any transaction or
series of related transactions (including, without limitation, the
purchase, sale, lease or exchange of any property or the rendering of any
service) with, or for the benefit of, any of its Affiliates (each an
"Affiliate Transaction"), other than (x) Affiliate Transactions permitted
under paragraph (b) below and (y) Affiliate Transactions on terms that are
no less favorable than those that might reasonably
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have been obtained in a comparable transaction at such time on an
arm's-length basis from a Person that is not an Affiliate of the Parent
Guarantor or such Restricted Subsidiary. All Affiliate Transactions (and
each series of related Affiliate Transactions which are similar or part of
a common plan) involving aggregate payments or other property with a fair
market value in excess of $1.0 million shall be approved by the Board of
Directors of the Parent Guarantor or such Restricted Subsidiary, as the
case may be, such approval to be evidenced by a Broad Resolution stating
that such Board of Directors has determined that such transaction complies
with the foregoing provisions. If the Parent Guarantor or any Restricted
Subsidiary enters into an Affiliate Transaction (or series of related
Affiliate Transactions related to a common plan) that involves an aggregate
fair market value of more than $5.0 million, the Parent Guarantor or such
Restricted Subsidiary, as the case may be, shall, prior to the consummation
thereof, obtain a favorable opinion as to the fairness of such transaction
or series of related transactions to the Parent Guarantor or the relevant
Restricted Subsidiary, as the case may be, from a financial point of view,
from an Independent Financial Advisor and file the same with the Trustee.
(b) The restrictions set forth in clause (a) shall not apply to (i)
employment, consulting and compensation arrangements and agreements of the
Parent Guarantor as in effect on the Issue Date; (ii) reasonable fees and
compensation paid to and indemnity provided on behalf of, officers,
directors, employees or consultants of the Parent Guarantor or any
Restricted Subsidiary as determined in good faith by the Parent Guarantor's
Board of Directors or senior management; (iii) transactions exclusively
between or among the Parent Guarantor and any of the Restricted
Subsidiaries or exclusively between or among such Restricted Subsidiaries;
(iv) Restricted Payments permitted by the Indenture; and (v) a
Domestication Event.
Conduct of Business. The Parent Guarantor and the Restricted
Subsidiaries will not engage in any businesses which are not either: (i)
the same, similar or reasonably related to the businesses in which the
Parent Guarantor or any of the Restricted Subsidiaries are engaged on the
Issue Date; (ii) Permitted Investments; or (iii) businesses acquired
through an acquisition after the Issue Date which are not material to the
Parent Guarantor and the Restricted Subsidiaries, taken as a whole.
Payments for Consent. The Parent Guarantor will not, and will not
cause or permit any of its Subsidiaries to, directly or indirectly, pay or
cause to be paid any consideration, whether by way of interest, fee or
otherwise, to any Holder of any Notes for or as an inducement to any
consent, waiver or amendment of any of the terms or provisions of the
Indenture, the Notes or the Parent Guarantee unless such consideration is
offered to be paid to all Holders of the Notes who so consent, waive or
agree to amend in the time frame set forth in solicitation documents
relating to such consent, waiver or agreement.
Limitation on Designations of Unrestricted Subsidiaries. The Parent
Guarantor may designate any Subsidiary of the Parent Guarantor (other than
the Company or a Subsidiary of the Parent Guarantor which owns Capital
Stock of a Restricted Subsidiary) as an "Unrestricted Subsidiary" under the
Indenture (a "Designation") only if:
(a) no Default shall have occurred and be continuing at the time of
or after giving effect to such Designation; and
(b) the Parent Guarantor would be permitted under the Indenture to
make an Investment at the time of Designation (assuming the
effectiveness of such Designation) in an amount (the "Designation
Amount") equal to the sum of (i) fair market value of the Capital Stock
of such Subsidiary owned by the Parent Guarantor and the Restricted
Subsidiaries on such date and (ii) the aggregate amount of Indebtedness
of such Subsidiary owed to the Parent Guarantor and the Restricted
Subsidiaries on such date; provided that in connection with a
Domestication Event and a Designation by the Assuming Party of
International Comfort Products Corporation (the "Former Guarantor") as
an Unrestricted Subsidiary, in calculating the amount of the Investment
deemed to be made pursuant to this clause (b), Qualified Capital Stock
of the Assuming Party held by the Former Guarantor shall be excluded
from such calculation; and
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(c) the Parent Guarantor would be permitted to incur $1.00 of
additional Indebtedness (other than Permitted Indebtedness) pursuant to
the covenant described under "-- Limitation on Incurrence of Additional
Indebtedness" at the time of Designation (assuming the effectiveness of
such Designation); provided that in connection with a Domestication
Event and a Designation by the Assuming Party of the Former Guarantor as
an Unrestricted Subsidiary, the Designation need not comply with this
clause (c).
In the event of any such Designation, the Parent Guarantor shall be
deemed to have made an Investment constituting a Restricted Payment in the
Designation Amount pursuant to the covenant described under "-- Limitation
on Restricted Payments" for all purposes of the Indenture. The Indenture
will further provide that the Parent Guarantor shall not, and shall not
permit any Restricted Subsidiary to, at any time (x) provide direct or
indirect credit support for or a guarantee of any Indebtedness of any
Unrestricted Subsidiary (including of any undertaking agreement or
instrument evidencing such Indebtedness), (y) be directly or indirectly
liable for any Indebtedness of any Unrestricted Subsidiary or (z) be
directly or indirectly liable for any Indebtedness which provides that the
holder thereof may (upon notice, lapse of time or both) declare a default
thereon or cause the payment thereof to be accelerated or payable prior to
its final scheduled maturity upon the occurrence of a default with respect
to any Indebtedness of any Unrestricted Subsidiary (including any right to
take enforcement action against such Unrestricted Subsidiary), except, in
the case of clause (x) or (y), to the extent permitted under the covenant
described under "-- Limitation on Restricted Payments."
The Indenture will further provide that the Parent Guarantor may
revoke any Designation of a Subsidiary as an Unrestricted Subsidiary
("Revocation"), whereupon such Subsidiary shall then constitute a
Restricted Subsidiary, if
(a) no Default shall have occurred and be continuing at the time
and after giving effect to such Revocation; and
(b) all Liens and Indebtedness of such Unrestricted Subsidiaries
outstanding immediately following such Revocation would, if incurred at
such time, have been permitted to be incurred for all purposes of the
Indenture.
All Designations and Revocations must be evidenced by Board
Resolutions of the Parent Guarantor delivered to the Trustee certifying
compliance with the foregoing provisions.
Reports to Holders. The Indenture will provide that the Parent
Guarantor will deliver to the Trustee within 15 days after the filing of
the same with the Commission, copies of the quarterly and annual reports
and of the information, documents and other reports, if any, which the
Parent Guarantor is required to file with the Commission pursuant to
Section 13 or 15(d) of the Exchange Act. The Indenture further provides
that, notwithstanding that the Parent Guarantor may not be subject to the
reporting requirements of Sections 13 or 15(d) of the Exchange Act, the
Parent Guarantor will file with the Commission, to the extent permitted,
and provide the Trustee and Holders with such annual and quarterly reports
and such information, documents and other reports specified in Section 13
and 15(d) of the Exchange Act. The Parent Guarantor will also comply with
the other provisions of TIA sec. 314(a).
EVENTS OF DEFAULT
The following events are defined in the Indenture as "Events of Default."
(i) the failure to pay interest on any Notes when the same becomes due
and payable and the default continues for a period of 30 days;
(ii) the failure to pay the principal on any Notes, when such
principal becomes due and payable, at maturity, upon redemption or
otherwise (including the failure to make a payment to purchase Notes
tendered pursuant to a Change of Control Offer or a Net Proceeds Offer);
(iii) a default in the observance or performance of any other covenant
or agreement contained in the Indenture which default continues for a
period of 30 days after the Issuer receives written notice
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specifying the default (and demanding that such default be remedied) from
the Trustee or the Holders of at least 25% of the outstanding principal
amount of the Notes (except in the case of a default with respect to the
covenant described under "-- Certain Covenants -- Merger, Amalgamation,
Consolidation and Sale of Assets," which will constitute an Event of
Default with such notice requirement but without such passage of time
requirement);
(iv) a default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness of the Parent Guarantor or of any Restricted Subsidiary (or
the payment of which is guaranteed by the Parent Guarantor or any
Restricted Subsidiary), whether such Indebtedness now exists or is created
after the Issue Date, which default (a) is caused by a failure to pay
principal of such Indebtedness after any applicable grace period provided
in such Indebtedness on the date of such default (a "payment default") or
(b) results in the acceleration of such Indebtedness prior to its express
maturity (and such acceleration is not rescinded, or such Indebtedness is
not repaid, within 30 days) and, in each case, the principal amount of any
such Indebtedness, together with the principal amount of any other such
Indebtedness under which there has been a payment default or the maturity
of which has been so accelerated (and such acceleration is not rescinded,
or such Indebtedness is not repaid, within 30 days), aggregates $5.0
million;
(v) one or more judgments in an aggregate amount in excess of $5.0
million shall have been rendered against the Parent Guarantor or any of the
Restricted Subsidiaries and such judgments remain undischarged, unpaid or
unstayed for a period of 60 days after such judgment or judgments become
final and nonappealable;
(vi) certain events of bankruptcy affecting the Parent Guarantor or
any of its Significant Subsidiaries; or
(vii) the Parent Guarantee ceases to be in full force and effect or
the Parent Guarantee declared to be null and void and unenforceable or the
Parent Guarantee is found to be invalid or the Parent Guarantor denies its
liability under the Parent Guarantee.
If an Event of Default (other than an Event of Default specified in clause
(vi) above) shall occur and be continuing, the Trustee or the Holders of at
least 25% in principal amount of outstanding Notes may declare the principal of,
premium, if any, and accrued interest on all the Notes to be due and payable by
notice in writing to the Issuer and the Trustee specifying the respective Events
of Default and that it is a "notice of acceleration," and the same shall become
immediately due and payable. If an Event of Default specified in clause (vi)
above occurs and is continuing, then all unpaid principal of, premium, if any,
and accrued and unpaid interest on all of the outstanding Notes shall ipso facto
become and be immediately due and payable without any declaration or other act
on the part of the Trustee or any Holder.
The Indenture will provide that, at any time after a declaration of
acceleration with respect to the Notes as described in the preceding paragraph,
the Holders of a majority in principal amount of the Notes may rescind and
cancel such declaration and its consequences (i) if the rescission would not
conflict with any judgment or decree, (ii) if all existing Events of Default
have been cured or waived except nonpayment of principal or interest that has
become due solely because of the acceleration, (iii) to the extent the payment
of such interest is lawful, interest on overdue installments of interest and
overdue principal, which has become due otherwise than by such declaration of
acceleration, has been paid, (iv) if the Issuer has paid the Trustee its
reasonable compensation and reimbursed the Trustee for its expenses,
disbursements and advances and (v) in the event of the cure or waiver of an
Event of Default of the type described in clause (vi) of the description above
of Events of Default, the Trustee shall have received an officers' certificate
and an opinion of counsel that such Event of Default has been cured or waived.
No such rescission shall affect any subsequent Default or impair any right
consequent thereto.
The Holders of a majority in principal amount of the Notes may waive any
existing Default or Event of Default under the Indenture, and its consequences,
except a default in the payment of the principal of or interest on any Notes.
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Holders of the Notes may not enforce the Indenture or the Notes except as
provided in the Indenture and under the TIA. Subject to the provisions of the
Indenture relating to the duties of the Trustee, the Trustee is under no
obligation to exercise any of its rights or powers under the Indenture at the
request, order or direction of any of the Holders, unless such Holders have
offered to the Trustee reasonable indemnity. Subject to all provisions of the
Indenture and applicable law, the Holders of a majority in aggregate principal
amount of the then outstanding Notes have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee
or exercising any trust or power conferred on the Trustee.
Under the Indenture, the Issuer is required to provide an officers'
certificate to the Trustee promptly upon the Issuer obtaining knowledge of any
Default or Event of Default (provided that the Issuer shall provide such
certification at least annually whether or not it knows of any Default or Event
of Default) that has occurred and, if applicable, describe such Default or Event
of Default and the status thereof.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Issuer may, at its option and at any time, elect to have its
obligations and the obligations of the Parent Guarantor discharged with respect
to the outstanding Notes ("Legal Defeasance"). Such Legal Defeasance means that
the Issuer shall be deemed to have paid and discharged the entire indebtedness
represented by the outstanding Notes, except for (i) the rights of Holders to
receive payments in respect of the principal of, premium, if any, and interest
on the Notes when such payments are due, (ii) the Issuer's obligations with
respect to the Notes concerning issuing temporary Notes, registration of Notes,
mutilated, destroyed, lost or stolen Notes and the maintenance of an office or
agency for payments, (iii) the rights, powers, trust, duties and immunities of
the Trustee and the Issuer's obligations in connection therewith and (iv) the
Legal Defeasance provisions of the Indenture. In addition, the Issuer may, at
its option and at any time, elect to have the obligations of the Parent
Guarantor released with respect to certain covenants that are described in the
Indenture ("Covenant Defeasance") and thereafter any omission or failure to
comply with such obligations shall not constitute a Default or Event of Default
with respect to the Notes. In the event Covenant Defeasance occurs, certain
events (not including non-payment, bankruptcy, receivership, reorganization and
insolvency events) described under "-- Event of Default" will no longer
constitute an Event of Default with respect to the Notes.
In order to exercise Legal Defeasance or Covenant Defeasance, (i) the
Issuer must irrevocably deposit with the Trustee, in trust, for the benefit of
the Holders cash in U.S. dollars, non-callable U.S. government obligations, or a
combination thereof, in such amounts as will be sufficient, in the opinion of a
nationally recognized firm of independent public accountants, to pay the
principal of, premium, if any, and interest on the Notes on the stated date of
payment thereof or on the applicable redemption date, as the case may be; (ii)
in the case of Legal Defeasance, the Issuer shall have delivered to the Trustee
an opinion of counsel in the United States reasonably acceptable to the Trustees
confirming that (A) the Issuer has received from, or there has been published
by, the Internal Revenue Service a ruling or (B) since the date of the
Indenture, there has been a change in the applicable federal income tax law, in
either case to the effect that, and based thereon such opinion of counsel shall
confirm that, the Holders will not recognize income gain or loss for federal
income tax purposes as a result of such Legal Defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same times
as would have been the case if such Legal Defeasance had not occurred; (iii) in
the case of Covenant Defeasance, the Issuer shall have delivered to the Trustee
an opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that the Holders will not recognize income gain or loss for federal
income tax purposes as a result of such Covenant Defeasance and will be subject
to federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Covenant Defeasance had not occurred;
(iv) no Default or Event of Default shall have occurred and be continuing on the
date of such deposit or insofar as Events of Default from bankruptcy or
insolvency events are concerned, at any time in the period ending on the 91st
day after the date of deposit; (v) such Legal Defeasance or Covenant Defeasance
shall not result in a breach or violation of, or constitute a default under the
Indenture or any other material agreement or instrument to which the Parent
Guarantor or any of its Subsidiaries is a party or by which the Parent Guarantor
or any of its Subsidiaries is bound; (vi) the Issuer shall have delivered to the
Trustee an officers' certificate stating that the
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deposit was not made by the Issuer with the intent of preferring the Holders
over any other creditors of the Issuer or with the intent of defeating,
hindering, delaying or defrauding any other creditors of the Issuer or others;
(vii) the Issuer shall have delivered to the Trustee an officers' certificate
and an opinion of counsel, each stating that all conditions precedent provided
for or relating to the Legal Defeasance or the Covenant Defeasance have been
complied with; (viii) the Issuer shall have delivered to the Trustee an opinion
of counsel to the effect that after the 91st day following the deposit, the
trust funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally; and (ix) certain other customary conditions precedent are satisfied.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of the
Notes, as expressly provided for in the Indenture) as to all outstanding Notes
when (i) either (a) all the Notes theretofore authenticated and delivered
(except lost, stolen or destroyed Notes which have been replaced or paid and
Notes for whose payment money has theretofore been deposited in trust or
segregated and held in trust by the Issuer and thereafter repaid to the Issuer
or discharged from such trust) have been delivered to the Trustee for
cancellation or (b) all Notes not theretofore delivered to the Trustee for
cancellation have become due and payable and the Issuer has irrevocably
deposited or caused to be deposited with the Trustee funds in an amount
sufficient to pay and discharge the entire Indebtedness on the Notes not
heretofore delivered to the Trustee for cancellation, for principal of, premium,
if any, and interest on the Notes to the date of deposit together with
irrevocable instructions from the Issuer directing the Trustee to apply such
funds to the payment thereof at maturity or redemption, as the case may be; (ii)
the Issuer has paid all other sums payable under the Indenture by the Issuer;
and (iii) the Issuer has delivered to the Trustee an officers' certificate and
an opinion of counsel stating that all conditions precedent under the Indenture
relating to the satisfaction and discharge of the Indenture have been complied
with.
MODIFICATION OF THE INDENTURE
From time to time, the Issuer, the Parent Guarantor and the Trustee,
without the consent of the Holders, may amend the Indenture for certain
specified purposes, including curing ambiguities, defects or inconsistencies, so
long as such charge does not adversely affect the rights of any of the Holders
in any material respect. In formulating its opinion on such matters, the Trustee
will be entitled to rely on such evidence as it deems appropriate, including,
without limitation, solely on an opinion of counsel. Other modifications and
amendments of the Indenture may be made with the consent of the Holders of a
majority in principal amount of the then outstanding Notes issued under the
Indenture, except that, without the consent of each Holder affected thereby, no
amendment may: (i) reduce the amount of Notes whose holders must consent to an
amendment; (ii) reduce the rate of or change or have the effect of changing the
time for payment of interest, including defaulted interest, on any Notes; (iii)
reduce the principal of or change or have the effect of changing the fixed
maturity of any Notes, or change the date on which any Notes may be subject to
redemption or repurchase, or reduce the redemption of repurchase price therefor;
(iv) make any Notes payable in money other than that stated in the Notes; (v)
make any change in provisions of the Indenture protecting the right of each
Holder to receive payment or principal of and interest on such Notes on or after
the due date thereof or to bring suit to enforce such payment, or permitting
Holders of a majority in principal amount of Notes to waive Defaults or Events
of Default; (vi) amend, change or modify in any material respect the obligation
of the Issuer to make and consummate a Change of Control Offer after a Change of
Control shall have occurred or make and consummate a Net Proceeds Offer with
respect to any Asset Sale that has been consummated or modify any of the
provisions or definitions with respect thereto; (vii) modify or change any
provision of the Indenture or the related definitions affecting the ranking of
the Notes or the Parent Guarantee in a manner which adversely affects the
Holders; (viii) release the Parent Guarantor from any of its obligations under
the Parent Guarantee or the Indenture or (ix) make any change that would
adversely affect the rights of holders to receive Additional Amounts.
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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 but 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.
The Parent Guarantee will be governed by the laws of Ontario, except that upon a
substitution of an Assuming Party for the Parent Guarantor in a Domestication
Event, the Parent Guarantee will be governed by the laws of New York.
THE TRUSTEE
The Indenture will provide that, except during the continuance of an Event
of Default, the Trustee will perform only such duties as are specifically set
forth in the Indenture. During the existence of an Event of Default, the Trustee
will exercise such rights and powers vested in it by the Indenture, and use the
same degree of care and skill in its exercise as a prudent man would exercise or
use under the circumstances in the conduct of his own affairs.
The Indenture and the provisions of the TIA contain certain limitations on
the rights of the Trustee, should it become a creditor of the Issuer or the
Parent Guarantor, to obtain payments of claims in certain cases or to realize on
certain property received in respect of any such claim as security or otherwise.
Subject to the TIA, the Trustee will be permitted to engage in other
transactions; provided that if the Trustee acquires any conflicting interest as
described in the TIA, it must eliminate such conflict or resign.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"Accounts Receivable Subsidiary" means any Restricted Subsidiary that is
organized solely for the purpose of and engaged solely in (i) purchasing,
financing and collecting accounts receivable obligations of customers of the
Parent Guarantor and its Restricted Subsidiaries; (ii) the sale or financing of
such accounts receivable; and (iii) other activities incident thereto.
"Acquired Indebtedness" means Indebtedness of a Person or any of its
Subsidiaries existing at the time such Person becomes a Restricted Subsidiary or
at the time it merges or consolidates with the Parent Guarantor or any of the
Restricted Subsidiaries or assumed in connection with the acquisition of assets
from such Person and in each case not incurred by such Person in connection
with, or in anticipation or contemplation of, such Person becoming a Restricted
Subsidiary or such acquisition, merger or consolidation.
"Affiliate" means, with respect to any specified Person, any other Person
who directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, such specified Person. The term
"control" means the possession, directly or indirectly, of the power to direct
or cause the direction of the management and policies of a Person, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative of the foregoing.
"Affiliate Transaction" has the meaning set forth under "-- Certain
Covenants -- Limitations on Transactions with Affiliates."
"Asset Acquisition" means (a) an Investment by the Parent Guarantor or any
Restricted Subsidiary in any other Person pursuant to which such Person shall
become a Restricted Subsidiary, or shall be merged with or into the Parent
Guarantor or any Restricted Subsidiary, or (b) the acquisition by the Parent
Guarantor or any Restricted Subsidiary of the assets of any Person (other than a
Restricted Subsidiary) which constitute all or substantially all of the assets
of such Person or comprises any division or line of business of such Person or
any other properties or assets of such Person other than in the ordinary course
of business.
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"Assuming Party" means a corporation organized by the Parent Guarantor
under the laws of the United States, any State thereof, or the District of
Columbia for the purpose of succeeding to the business of the Parent Guarantor
in a Domestication Event.
"Asset Sale" means any direct or indirect sale, issuance, conveyance,
transfer, lease (other than operating leases entered into in the ordinary course
of business), assignment or other transfer for value by the Parent Guarantor or
any of the Restricted Subsidiaries (including any Sale and Leaseback
Transaction) to any Person other than the Parent Guarantor or a Restricted
Subsidiary of (a) any Capital Stock of any Restricted Subsidiary other than of
an Assuming Party in connection with a Domestication Event; or (b) any other
property or assets of the Parent Guarantor or any Restricted Subsidiary other
than in the ordinary course of business; provided, however, that Asset Sales
shall not include (i) a transaction or series of related transactions for which
the Parent Guarantor or the Restricted Subsidiaries receive aggregate
consideration of less than $1.0 million, (ii) the sale, lease, conveyance,
disposition or other transfer of all or substantially all of the assets of the
Parent Guarantor as permitted by the covenant described under "-- Certain
Covenants -- Merger, Amalgamation, Consolidation and Sale of Assets;" (iii) any
sale of accounts receivable or inventories in the normal course of business
(including sales by an Accounts Receivable Subsidiary) or in connection with the
sale of a distribution business or a sale of a Restricted Subsidiary principally
engaged in a distribution business; (iv) any sale of Excluded Assets.
"Board of Directors" means, as to any Person, the board of directors of
such Person or any duly authorized committee thereof.
"Board Resolution" means, with respect to any Person, a copy of a
resolution certified by the Secretary or an Assistant Secretary of such Person
to have been duly adopted by the Board of Directors of such Person and to be in
full force and effect on the date of such certification, and delivered to the
Trustee.
"Capitalized Lease Obligation" means, as to any Person, the obligations of
such Person under a lease that are required to be classified and accounted for
as capital lease obligations under GAAP and, for purposes of this definition,
the amount of such obligations at any date shall be the capitalized amount of
such obligations at such date, determined in accordance with GAAP.
"Capital Stock" means (i) with respect to any Person that is a corporation,
any and all shares, interests, participations or other equivalents (however
designated and whether or not voting) of corporate stock, including each class
of Common Stock and Preferred Stock of such Person and options, warrants or
other rights to acquire the same and (ii) with respect to any Person that is not
a corporation, any and all partnership or other equity interests of such Person.
"Cash Equivalents" means (i) marketable direct obligations issued by, or
unconditionally guaranteed by, the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States, in
each case maturing within one year from the date of acquisition thereof; (ii)
marketable direct obligations issued by any state of the United States of
America or any political subdivision of any such state or any public
instrumentality thereof maturing within one year from the date of acquisition
thereof and, at the time of acquisition, having one of the two highest ratings
obtainable from either Standard & Poor's Corporation ("S&P") or Moody's
Investors Service, Inc. ("Moody's"); (iii) commercial paper maturing no more
than one year from the date of creation thereof and, at the time of acquisition,
having a rating of at least A-1 from S&P or at least P-1 from Moody's; (iv)
certificates of deposit or bankers' acceptances maturing within one year from
the date of acquisition thereof issued by any bank organized under the laws of
the United States of America or any state thereof or the District of Columbia or
any U.S. branch of a foreign bank having at the date of acquisition thereof
combined capital and surplus of not less than $250,000,000; (v) repurchase
obligations with a term of not more than seven days for underlying securities of
the types described in clause (i) above entered into with any bank meeting the
qualifications specified in clause (iv) above; and (vi) investments in money
market funds which invest substantially all their assets in securities of the
types described in clauses (i) through (v) above.
"Change of Control" means the occurrence of one or more of the following
events: (i) any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all or substantially all of
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the assets of the Parent Guarantor (other than to an Assuming Party in a
Domestication Event) to any Person or group of related Persons for purposes of
Section 13(d) of the Exchange Act (a "Group"), together with any Affiliates
thereof (whether or not otherwise in compliance with the provisions of the
Indenture); (ii) the approval by the holders of Capital Stock of the Parent
Guarantor of any plan or proposal for the liquidation or dissolution of the
Parent Guarantor (whether or not otherwise in compliance with the provisions of
the Indenture) (other than in connection with a Domestication Event if (x) such
plan or proposal will not be effected until after the Assuming Party has been
substituted for the Parent Guarantor as provided for in the Indenture and (y)
after giving effect to such Domestication Event, no Person or Group shall become
the beneficial owner, directly or indirectly, of more than 50% of the aggregate
voting power represented by the issued and outstanding Capital Stock of the
Assuming Party); or (iii) any Person or Group shall become the beneficial owner,
directly or indirectly, of shares representing more than 50% of the aggregate
ordinary voting power represented by the issued and outstanding Capital Stock of
the Parent Guarantor, other than shares of Capital Stock of the Parent Guarantor
acquired by the Assuming Party in connection with a Domestication Event.
"Change of Control Offer" has the meaning set forth under "-- Change of
Control."
"Change of Control Payment Date" has the meaning set forth under "-- Change
of Control."
"Common Stock" of any Person means any and all shares, interests or other
participations in, and other equivalents (however designated and whether voting
or non-voting) of such Person's common stock, whether outstanding on the Issue
Date or issued after the Issue Date, and includes, without limitation, all
series and classes of such common stock.
"Consolidated EBITDA" means, with respect to the Parent Guarantor, for any
period, the sum (without duplication) of (i) Consolidated Net Income and (ii) to
the extent Consolidated Net Income has been reduced thereby, (A) all income
taxes of the Parent Guarantor and the Restricted Subsidiaries paid or accrued in
accordance with GAAP for such period (other than income taxes attributable to
extraordinary, unusual or nonrecurring gains or losses or taxes attributable to
sale or dispositions outside the ordinary course of business), (B) Consolidated
Interest Expense and (C) Consolidated Non-cash Charges, less any non-cash items
increasing Consolidated Net Income in excess of $3.0 million for such period,
all as determined on a consolidated basis for the Parent Guarantor and the
Restricted Subsidiaries in accordance with GAAP.
"Consolidated Fixed Charge Coverage Ratio" means, with respect to the
Parent Guarantor, the ratio of Consolidated EBITDA of the Parent Guarantor
during the four full fiscal quarters (the "Four Quarter Period") ending on or
prior to the date of the transaction giving rise to the need to calculate the
Consolidated Fixed Charge Coverage Ratio (the "Transaction Date") to
Consolidated Fixed Charges of the Parent Guarantor for the Four Quarter Period.
In addition to and without limitation of the foregoing, for purposes of this
definition, "Consolidated EBITDA" and "Consolidated Fixed Charges" shall be
calculated after giving effect on a pro forma basis for the period of such
calculation to (i) the incurrence or repayment of any Indebtedness of the Parent
Guarantor or any of the Restricted Subsidiaries (and the application of the
proceeds thereof) giving rise to the need to make such calculation and any
incurrence or repayment of other Indebtedness (and the application of the
proceeds thereof), other than the incurrence or repayment of Indebtedness in the
ordinary course of business for working capital purposes pursuant to working
capital facilities, occurring during the Four Quarter Period or at any time
subsequent to the last day of the Four Quarter Period and on or prior to the
Transaction Date, as if such incurrence or repayment, as the case may be (and
the application of the proceeds thereof), occurred on the first day of the Four
Quarter Period and (ii) any asset sales or other disposition or Asset
Acquisitions (including, without limitation, any Asset Acquisition giving rise
to the need to make such calculation as a result of the Parent Guarantor or one
of the Restricted Subsidiaries (including any person who becomes a Restricted
Subsidiary as a result of the Asset Acquisition) incurring, assuming or
otherwise being liable for Acquired Indebtedness and also including any
Consolidated EBITDA (provided that such Consolidated EBITDA shall be included
only to the extent includable pursuant to the definition of "Consolidated Net
Income" attributable to the assets which are the subject of the Asset
Acquisition or asset sale or other disposition during the Four Quarter Period)
occurring during the Four Quarter Period or at any time subsequent to the last
day of the Four Quarter Period and on or
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prior to the Transaction Date as if such Asset Acquisition or asset sale or
other disposition (including the incurrence, assumption or liability for any
such Acquired Indebtedness) occurred on the first day of the Four Quarter
Period. If the Parent Guarantor or any of the Restricted Subsidiaries directly
or indirectly guarantees Indebtedness of a third Person, the preceding sentence
shall give effect to the incurrence of such guaranteed Indebtedness as if the
Parent Guarantor or any Restricted Subsidiary had directly incurred or otherwise
assumed such guaranteed Indebtedness. Furthermore, in calculating "Consolidated
Fixed Charges" for purposes of determining the denominator (but not the
numerator) of this "Consolidated Fixed Charge Coverage Ratio," (1) interest on
outstanding Indebtedness determined on a fluctuating basis as of the Transaction
Date and which will continue to be so determined thereafter shall be deemed to
have accrued at a fixed rate per annum equal to the rate of interest on such
Indebtedness in effect on the Transaction Date; (2) if interest on any
Indebtedness actually incurred on the Transaction Date may optionally be
determined at an interest rate based upon a factor of a prime or similar rate, a
eurocurrency interbank offered rate, or other rates, then the interest rate in
effect on the Transaction Date will be deemed to have been in effect during the
Four Quarter Period; and (3) notwithstanding clause (1) above, interest on
Indebtedness determined on a fluctuating basis, to the extent such interest is
covered by agreements relating to Interest Swap Obligations, shall be deemed to
accrue at the rate per annum resulting after giving effect to the operation of
such agreements.
"Consolidated Fixed Charges" means, with respect to the Parent Guarantor
for any period, the sum, without duplication, of (i) Consolidated Interest
Expense, plus (ii) the product of (x) the amount of all dividend payments on any
series of Preferred Stock of the Parent Guarantor (other than dividends paid in
Qualified Capital Stock) paid, accrued or scheduled to be paid or accrued during
such period times (y) a fraction, the numerator of which is one and the
denominator of which is one minus the then current effective consolidated
foreign, federal, state, provincial and local income tax rate of the Parent
Guarantor, expressed as a decimal.
"Consolidated Interest Expense" means, with respect to the Parent Guarantor
for any period, the sum of, without duplication: (i) the aggregate of the
interest expense (net of interest income) of the Parent Guarantor and the
Restricted Subsidiaries for such period determined on a consolidated basis in
accordance with GAAP, including without limitation, (a) any amortization of debt
discount, (b) the net costs under Interest Swap Obligations, (c) all capitalized
interest and (d) the interest portion of any deferred payment obligation; and
(ii) the interest component of Capitalized Lease Obligations paid, accrued
and/or scheduled to be paid or accrued by the Parent Guarantor and the
Restricted Subsidiaries during such period as determined on a consolidated basis
in accordance with GAAP.
"Consolidated Net Income" means, with respect to the Parent Guarantor, for
any period, the aggregate net income (or loss) of the Parent Guarantor and the
Restricted Subsidiaries for such period on a consolidated basis, determined in
accordance with GAAP; provided that there shall be excluded therefrom (i)
after-tax gains and losses from Asset Sales or abandonments or reserves relating
thereto, (ii) extraordinary or nonrecurring gains, (iii) the net income of any
Person acquired in a "pooling of interests" transaction accrued prior to the
date it becomes a Restricted Subsidiary or is merged or consolidated with the
Parent Guarantor or any Restricted Subsidiary, (iv) the net income (but not
loss) of any Restricted Subsidiary to the extent that the declaration of
dividends or similar distributions by that Restricted Subsidiary of that income
is restricted by a contract, operation of law or otherwise (other than any such
restriction permitted pursuant to clauses (5), (6) and (7) of the covenant
described under "-- Certain Covenants -- Limitation on Dividend and Other
Payment Restrictions Affecting Restricted Subsidiaries"), (v) the net income of
any Person, other than a Restricted Subsidiary, except to the extent of cash
dividends or distributions paid to the Parent Guarantor or to a Restricted
Subsidiary by such person, (vi) any restoration to income of any contingency
reserve, except to the extent that provision for such reserve was made out of
Consolidated Net Income accrued at any time following the Issue Date, (vii)
income or loss attributable to discontinued operations (including, without
limitation, operations disposed of during such period whether or not such
operations were classified as discontinued) and (viii) in the case of a
successor to the Parent Guarantor by consolidation or merger or as a transferee
of the Parent Guarantor's assets, any earnings of the successor corporation
prior to such consolidation, merger or transfer of assets.
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"Consolidated Non-cash Charges" means, with respect to the Parent
Guarantor, for any period, the aggregate depreciation, amortization and other
non-cash expenses of the Parent Guarantor and the Restricted Subsidiaries
reducing Consolidated Net Income of the Parent Guarantor for such period,
determined on a consolidated basis in accordance with GAAP (excluding any such
charges in excess of $3.0 million in the aggregate during such period which
require an accrual of or a reserve for cash charges for any future period).
"Covenant Defeasance" has the meaning set forth under "-- Legal Defeasance
and Covenant Defeasance."
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Parent Guarantor or any Restricted Subsidiary against fluctuations in currency
values.
"Default" means an event or condition the occurrence of which is, or with
the lapse of time or the giving of notice of both would be, an Event of Default.
"Designation" has the meaning set forth under "-- Certain
Covenants -- Limitation on Designations of Unrestricted Subsidiaries."
"Designation Amount" has the meaning set forth under "-- Certain
Covenants -- Limitation on Designations of Unrestricted Subsidiaries."
"Disqualified Capital Stock" means that portion of 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, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is mandatorily exchangeable for Indebtedness, or is redeemable, or exchangeable
for Indebtedness, at the sole option of the holder thereof on or prior to the
final maturity date of the Notes, in each case other than redemptions or
exchanges in which the consideration to be received is Qualified Capital Stock.
"Domestication Event" means a transaction or series of transactions
pursuant to which an Assuming Party succeeds to the business of the Parent
Guarantor, through the direct or indirect acquisition of the Parent Guarantor or
by which the Parent Guarantor becomes a Subsidiary of the Assuming Party or the
Assuming Party otherwise acquires directly or indirectly all or substantially
all the assets of the Parent Guarantor, and in any case assumes the liabilities
of the Parent Guarantor, provided that (i) the Assuming Party concurrently
assumes the obligations of the Parent Guarantor under the Parent Guarantee and
the Indenture pursuant to a supplemental indenture (in form reasonably
satisfactory to the Trustee) executed and delivered to the Trustee, (ii)
immediately before and immediately after giving effect to such transaction and
the assumption contemplated by clause (i) above, no Default or Event of Default
shall have occurred and be continuing, and (iii) the Parent Guarantor and the
Assuming Party shall have delivered to the Trustee an Officers' Certificate and
an Opinion of Counsel stating that the Domestication Event and the supplemental
indenture required in connection with the Domestication Event comply with the
applicable provisions of the Indenture and that all conditions precedent in the
Indenture relating to the Domestication Event have been satisfied.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or
any successor statute or statutes thereto.
"Excluded Assets" means the property and assets located at the research,
development and training center in LaVergne, Tennessee and the distribution
facility in Brantford, Ontario.
"fair market value" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction, for cash,
between a willing seller and a willing and able buyer, neither of whom is under
undue pressure or compulsion to complete the transaction. Fair market value
shall be determined by the Board of Directors of the Issuer acting reasonably
and in good faith and shall be evidenced by a Board Resolution of the Board of
Directors of the Issuer delivered to the Trustee.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Canadian Institute of Chartered Accountants.
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"incur" has the meaning set forth under "-- Certain Covenants -- Limitation
on Incurrence on Additional Indebtedness."
"Indebtedness" means, with respect to any Person, without duplication, (i)
all Obligations of such Person for borrowed money, (ii) all Obligations of such
Person evidenced by bonds, debentures, notes or other similar instruments, (iii)
all Capitalized Lease Obligations of such Person, (iv) all Obligations of such
Person issued or assumed as the deferred purchase price of property, all
conditional sale obligations and all Obligations under any title retention
agreement (but excluding trade accounts payable and other accrued liabilities
arising in the ordinary course of business that are not overdue by 90 days or
more or are being contested in good faith by appropriate proceedings promptly
instituted and diligently conducted), (v) all Obligations for the reimbursement
of any obligor on any letter of credit, banker's acceptance or similar credit
transaction, (vi) guarantees and other contingent obligations in respect of
Indebtedness referred to in clauses (i) through (v) above and clause (viii)
below, (vii) all Obligations of any other Person of the type referred to in
clauses (i) through (vi) which are secured by any Lien on any property or asset
of such Person, the amount of such Obligation being deemed to be the lesser of
the fair market value of such property or asset or the amount of the Obligation
so secured, (viii) all Obligations under currency agreements and interest swap
agreements of such Person and (ix) all Disqualified Capital Stock issued by such
Person with the amount of Indebtedness represented by such Disqualified Capital
Stock being equal to the greater of its voluntary or involuntary liquidation
preference and its maximum fixed repurchase price, but excluding accrued
dividends, if any. For purposes hereof, the "maximum fixed repurchase price" of
any Disqualified Capital Stock which does not have a fixed repurchase price
shall be calculated in accordance with the terms of such Disqualified Capital
Stock as if such Disqualified Capital Stock were purchased on any date on which
Indebtedness shall be required to be determined pursuant to the Indenture, and
if such price is based upon, or measured by, the fair market value of such
Disqualified Capital Stock, such fair market value shall be determined
reasonably and in good faith by the Board of Directors of the issuer of such
Disqualified Capital Stock. "Indebtedness," shall not be deemed to include
customary indemnity obligations of the Parent Guarantor or a Restricted
Subsidiary incurred in connection with an Asset Sale or warranty obligations of
the Parent Guarantor or a Restricted Subsidiary incurred in the ordinary course
of business.
"Independent Financial Advisor" means a firm (i) which does not, and whose
directors, officers and employees and Affiliates do not, have a direct or
indirect financial interest in the Parent Guarantor or any of the Restricted
Subsidiaries and (ii) which, in the judgment of the Board of Directors of the
Parent Guarantor, is otherwise independent and qualified to perform the task for
which it is to be engaged.
"Initial Purchasers" means Salomon Brothers Inc, Credit Suisse First Boston
Corporation and First Union Capital Markets, a division of Wheat First
Securities, Inc.
"Interest Swap Obligations" means the obligations of any Person pursuant to
any arrangement with any other Person, whereby, directly or indirectly, such
Person is entitled to receive from time to time periodic payments calculated by
applying either a floating or a fixed rate of interest on a stated notional
amount in exchange for periodic payments made by such other Person calculated by
applying a fixed or a floating rate of interest on the same notional amount and
shall include, without limitation, interest rate swaps, caps, floors, collars
and similar agreements.
"Investment" means, with respect to any Person, (i) any direct or indirect
loan or other extension of credit (including, without limitation, a guarantee)
to 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 by such Person of any Capital
Stock, bonds, notes, debentures or other securities or evidences of Indebtedness
issued by, any Person. "Investment" shall exclude extensions of trade credit by
the Parent Guarantor and the Restricted Subsidiaries on commercially reasonable
terms in accordance with normal trade practices of the Parent Guarantor or such
Restricted Subsidiary, as the case may be. If the Parent Guarantor or any
Restricted Subsidiary sells or otherwise disposes of any Capital Stock of any
Restricted Subsidiary (the "Referent Subsidiary") such that, after giving effect
to any such sale or disposition the Referent Subsidiary shall cease to be a
Restricted Subsidiary, the Parent Guarantor shall be deemed to
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have made an Investment on the date of any such sale or disposition equal to the
fair market value of the Capital Stock of the Referent Subsidiary not sold or
disposed of.
"Issue Date" means the date of original issuance of the Notes.
"Legal Defeasance" has the meaning set forth under "-- Legal Defeasance and
Covenant Defeasance."
"Lien" means any lien, mortgage, deed of trust, pledge, security interest,
charge or encumbrance of any kind (including any conditional sale or other title
retention agreement, any lease in the nature thereof and any agreement to give
any security interest).
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds in
the form of cash or Cash Equivalents, including payments in respect of deferred
payment obligations, when received in the form of cash or Cash Equivalents
(other than the portion of any such deferred payment constituting interest)
received by the Parent Guarantor or any of the Restricted Subsidiaries from such
Asset Sale net of (a) reasonable out-of-pocket expenses and fees relating to
such Asset Sale (including, without limitation, legal, accounting and investment
banking fees and sales commissions), (b) taxes paid or payable after taking into
account any reduction in consolidated tax liability due to available tax credits
or deductions and any tax sharing arrangements, (c) repayments of Indebtedness
secured by the property or assets subject to such Asset Sale that is required to
be repaid in connection with such Asset Sale and (d) appropriate amounts to be
provided by the Parent Guarantor or any Restricted Subsidiary, as the case may
be, as a reserve, in accordance with GAAP, against any liabilities associated
with such Asset Sale and retained by the Parent Guarantor or any Restricted
Subsidiary, as the case may be, after such Asset Sale, including, without
limitation, pension and other post-employment benefit liabilities, liabilities
related to environmental matters and liabilities under any indemnification
obligations associated with such Asset Sale.
"Net Proceeds Offer" has the meaning set forth under "-- Certain
Covenants -- Limitation on Asset Sales."
"Net Proceeds Offer Amount" has the meaning set forth under "-- Certain
Covenants -- Limitation on Asset Sales."
"Net Proceeds Offer Payment Date" had the meaning set forth under
"-- Certain Covenants -- Limitation on Asset Sales."
"Net Proceeds Offer Trigger Date" has the meaning set forth under
"-- Certain Covenants -- Limitation on Asset Sales."
"Obligations" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other liabilities
payable under the documentation governing any Indebtedness.
"Permitted Indebtedness" means, without duplication, each of the following:
(i) Indebtedness under the Notes, the Indenture and the Parent
Guarantee in an aggregate principal amount not to exceed $150.0 million;
(ii) Indebtedness in an aggregate principal amount at any time
outstanding not to exceed on the date of incurrence the greater of (x)
$100.0 million, and (y) the sum of (a) 85% of the net book value of
accounts receivable of the Parent Guarantor and the Restricted Subsidiaries
and (b) 65% of the net book value of the inventory of the Parent Guarantor
and the Restricted Subsidiaries;
(iii) Interest Swap Obligations of the Parent Guarantor and the
Restricted Subsidiaries covering Indebtedness of the Parent Guarantor or
any Restricted Subsidiary; provided, however, that such Interest Swap
Obligations are entered into to protect the Parent Guarantor and the
Restricted Subsidiaries from fluctuations in interest rates on Indebtedness
incurred in accordance with the Indenture to the extent the notional
principal amount of such Interest Swap Obligations does not exceed the
principal amount of the Indebtedness to which such Interest Swap
Obligations relates;
(iv) Indebtedness under Currency Agreements; provided that in the case
of Currency Agreements which relate to Indebtedness, such Currency
Agreements do not increase the Indebtedness of the Parent
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Guarantor and the Restricted Subsidiaries outstanding other than as a
result of fluctuations in foreign currency exchange rates or by reason of
fees, indemnities and compensation payable thereunder;
(v) Indebtedness of a Restricted Subsidiary to the Parent Guarantor or
a Restricted Subsidiary for so long as such Indebtedness is held by the
Parent Guarantor or a Restricted Subsidiary, in each case subject to no
Lien held by a Person other than the Parent Guarantor or a Restricted
Subsidiary; provided that if as of any date any Person other than the
Parent Guarantor or a Restricted Subsidiary owns or holds any such
Indebtedness or holds a Lien in respect of such Indebtedness, such date
shall be deemed the incurrence of Indebtedness not constituting Permitted
Indebtedness by the issuer of such Indebtedness.
(vi) Indebtedness of the Parent Guarantor to a Restricted Subsidiary
for so long as such Indebtedness is held by a Restricted Subsidiary, in
each case subject to no Lien; provided that (a) any Indebtedness of the
Parent Guarantor to any Restricted Subsidiary is unsecured and
subordinated, pursuant to a written agreement, to the Parent Guarantor's
obligations under the Indenture and the Parent Guarantee and (b) if as of
any date any person other than a Restricted Subsidiary owns or holds any
such Indebtedness or any Person holds a Lien in respect of such
Indebtedness, such date shall be deemed the incurrence of Indebtedness not
constituting Permitted Indebtedness by the Parent Guarantor;
(vii) Indebtedness arising from the honoring by a bank or other
financial institution of a check, draft or similar instrument inadvertently
(except in the case of daylight overdrafts) drawn against insufficient
funds in the ordinary course of business; provided, however, that such
Indebtedness is extinguished within five business days of incurrence;
(viii) Indebtedness of the Parent Guarantor or any of the Restricted
Subsidiaries represented by letters of credit for the account of the Parent
Guarantor or such Restricted Subsidiary, as the case may be, in order to
provide security for workers' compensation claims, payment obligations in
connection with self-insurance or similar requirements in the ordinary
course of business;
(ix) Refinancing Indebtedness;
(x) Purchase Money Indebtedness and Capitalized Lease Obligations (and
any Indebtedness incurred to Refinance such Purchase Money Indebtedness or
Capitalized Lease Obligations) not to exceed $15.0 million at any one time
outstanding; and
(xi) Indebtedness of the Parent Guarantor and the Restricted
Subsidiaries in an aggregate principal amount not to exceed $20.0 million
at any one time outstanding.
"Permitted Investments" means (i) Investments by the Parent Guarantor or
any Restricted Subsidiary in any Person that is or will become immediately after
such Investment a Restricted Subsidiary or that will merge or consolidate into
the Parent Guarantor or a Restricted Subsidiary; (ii) Investments in the Parent
Guarantor by any Restricted Subsidiary; provided that any Indebtedness
evidencing such Investment is unsecured and subordinated, pursuant to a written
agreement, to the Parent Guarantor's obligations under the Parent Guarantee and
the Indenture; (iii) Investments in cash and Cash Equivalents; (iv) loans and
advances to employees and officers of the Parent Guarantor and the Restricted
Subsidiaries in the ordinary course of business for bona fide business purposes
not in excess of $2.0 million at any time outstanding; (v) Currency Agreements
and Interest Swap Obligations entered into in the ordinary course of the Parent
Guarantor's or a Restricted Subsidiary's businesses and otherwise in compliance
with the Indenture; (vi) Investments in securities of trade creditors or
customers received pursuant to any plan of reorganization or similar arrangement
upon the bankruptcy or insolvency of such trade creditors or customers, or the
refinancing of, or a settlement of amounts due under, one or more trade accounts
extended in the normal course of business to customers of the Parent Guarantor
or a Restricted Subsidiary which are in default under their standard credit
terms; (vii) Investments made by the Parent Guarantor or the Restricted
Subsidiaries as a result of consideration received in connection with an Asset
Sale made in compliance with the covenant described under "-- Certain
Covenants -- Limitation on Asset Sales"; (viii) Investments of the Parent
Guarantor in Qualified Capital Stock of an Assuming Party and (ix) Investments
in Persons, including, without limitation, Unrestricted Subsidiaries and joint
ventures, engaged in a business similar or related to the businesses in
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which the Parent Guarantor and the Restricted Subsidiaries are engaged on the
Issue Date not to exceed $15.0 million at any one time outstanding.
"Permitted Liens" means the following types of Liens:
(i) Liens for taxes, assessments or governmental charges or claims
either (a) not delinquent or (b) contested in good faith by appropriate
proceedings and as to which the Parent Guarantor shall have set aside on
its books such reserves as may be required pursuant to GAAP;
(ii) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen and other Liens imposed by law
incurred in the ordinary course of business for sums not yet delinquent or
being contested in good faith, if such reserve or other appropriate
provision, if any, as shall be required by GAAP shall have been made in
respect thereof;
(iii) Liens incurred or deposits made in the ordinary course of
business in connection with workers' compensation, unemployment insurance
and other types of social security, including any Lien securing letters of
credit issued in the ordinary course of business consistent with past
practice in connection therewith, or to secure the performance of tenders,
statutory obligations, surety and appeal bonds, bids, leases, government
contracts, performance and return-of-money bonds and other similar
obligations (exclusive of obligations for the payment of borrowed money);
(iv) judgment Liens not giving rise to an Event of Default so long as
such Lien is adequately bonded and any appropriate legal proceeds which may
have been duly initiated for the review of such judgment shall not have
been finally terminated or the period within which such proceedings may be
initiated shall not have expired;
(v) easements, rights-of-way, zoning restrictions and other similar
charges or encumbrances in respect of real property not interfering in any
material respect with the ordinary conduct of the business of the Parent
Guarantor;
(vi) purchase money Liens securing Indebtedness to finance property or
assets of the Parent Guarantor, and Liens securing Indebtedness which
Refinances any such Indebtedness; provided, however, that (A) the related
purchase money Indebtedness (or Refinancing Indebtedness) shall not exceed
the cost of such property or assets and shall not be secured by any
property or assets of the Parent Guarantor other than the property and
assets so acquired and (B) the Lien securing the purchase money
Indebtedness shall be created within 90 days of such acquisition;
(vii) Liens upon specific items of inventory or other goods and
proceeds of any Person securing such Person's obligations in respect of
bankers' acceptances issued or created for the account of such Person to
facilitate the purchase, shipment or storage of such inventory or other
goods;
(viii) Liens securing reimbursement obligations with respect to
commercial letters of credit which encumber documents and other property
relating to such letters of credit and products and proceeds thereof;
(ix) Liens encumbering deposits made to secure obligations arising
from statutory, regulatory, contractual or warranty requirements of the
Parent Guarantor, including rights of offset and set-off;
(x) Liens securing Interest Swap Obligations which Interest Swap
Obligations related to Indebtedness that is otherwise permitted under the
Indenture;
(xi) Liens securing Indebtedness under Currency Agreements; and
(xii) Liens securing Acquired Indebtedness (and any Indebtedness which
Refinances such Acquired Indebtedness) incurred in accordance with the
covenant described under "-- Certain Covenants -- Limitation on Incurrence
of Additional Indebtedness"; provided that (A) such Liens secured the
Acquired Indebtedness at the time of and prior to the incurrence of such
Acquired Indebtedness by the Parent Guarantor and were not granted in
connection with, or in anticipation of the incurrence of such Acquired
Indebtedness by the Parent Guarantor and (B) such Liens do not extend to or
cover any
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property or assets of the Parent Guarantor other than the property or
assets that secured the Acquired Indebtedness prior to the time such
Indebtedness became Acquired Indebtedness of the Parent Guarantor.
"Person" means an individual, partnership, corporation, limited liability
company, unincorporated organization, trust or joint venture, or a governmental
agency or political subdivision thereof.
"Preferred Stock" of any Person means any Capital Stock of such Person that
has preferential rights to any other Capital Stock of such Person with respect
to dividends or redemptions or upon liquidation.
"Public Equity Offering" has the meaning set forth under
"-- Redemption -- Optional Redemption upon Public Equity Offerings."
"Purchase Money Indebtedness" means Indebtedness of the Parent Guarantor or
any Restricted Subsidiary incurred for the purpose of financing all or any part
of the purchase price or the cost of construction or improvement of any
property, provided that the aggregate principal amount of such Indebtedness does
not exceed the lesser of the fair market value of such property or such purchase
price or cost.
"Qualified Capital Stock" means any Capital Stock that is not Disqualified
Capital Stock.
"Reference Date" has the meaning set forth under "-- Certain
Covenants -- Limitation on Restricted Payments."
"Refinance" means in respect of any security or Indebtedness, to refinance,
extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue a
security or Indebtedness in exchange or replacement for, such security or
Indebtedness in whole or in part. "Refinanced" and "Refinancing" shall have
correlative meanings.
"Refinancing Indebtedness" means any Refinancing by the Parent Guarantor or
any Restricted Subsidiary of Indebtedness incurred in accordance with the
covenant described under "-- Certain Covenants Limitation on Incurrence of
Additional Indebtedness" (other than pursuant to clause (ii), (iii), (iv), (v),
(vi), (vii), (viii), (x) or (xi) of the definition of Permitted Indebtedness),
in each case that does not (1) result in an increase in the aggregated principal
amount of any of Indebtedness of such Person as of the date of such proposed
Refinancing (plus the amount of any premium required to be paid under the terms
of the instrument governing such Indebtedness and plus the amount of reasonable
expenses incurred in connection with such Refinancing) or (2) create
Indebtedness with (A) a Weighted Average Life to Maturity that is less than the
Weighted Average Life to Maturity of the Indebtedness being Refinanced or (B) a
final maturity earlier than the final maturity of the Indebtedness being
Refinanced; provided that if such Indebtedness being Refinanced is Indebtedness
of the Issuer and/or the Parent Guarantor, then such Refinancing Indebtedness
shall be Indebtedness solely of the Issuer and/or the Parent Guarantor.
"Registration Rights Agreement" means (i) the Registration Rights Agreement
dated the Issue Date among the Issuer, the Parent Guarantor and the Initial
Purchasers, and (ii) any registration rights agreement by and among the Issuer,
the Parent Guarantor and purchasers of Notes issued after the Issue Date.
"Restricted Payment" has the meaning set forth under "-- Certain
Covenants -- Limitation on Restricted Payments."
"Restricted Subsidiary" means any Subsidiary of the Parent Guarantor that
has not been designated by the Board of Directors of the Parent Guarantor, by a
Board Resolution delivered to the Trustee, as an Unrestricted Subsidiary
pursuant to and in compliance with the covenant described under "-- Certain
Covenants -- Limitation on Designations of Unrestricted Subsidiaries." Any such
Designation may be revoked by a Board Resolution of the Parent Guarantor
delivered to the Trustee, subject to the provisions of such covenant.
"Revocation" has the meaning set forth under "-- Certain
Covenants -- Limitation on Designations of Unrestricted Subsidiaries."
"Sale and Leaseback Transaction" means any direct or indirect arrangement
with any Person or to which any such Person is a party, providing for the
leasing to the Parent Guarantor or a Restricted Subsidiary of any
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property, whether owned by the Parent Guarantor or any Restricted Subsidiary at
the Issue Date or later acquired, which has been or is to be sold or transferred
by the Parent Guarantor or such Restricted Subsidiary to such Person or to any
other Person from whom funds have been or are to be advanced by such Person on
the security of such Property.
"Significant Subsidiary" means any Restricted Subsidiary that satisfies the
criteria for a "significant subsidiary" set forth in Rule 1.02(w) of Regulation
S-X under the Exchange Act.
"Subsidiary," with respect to any Person, means (i) any corporation of
which the outstanding Capital Stock having at least a majority of the votes
entitled to be cast in the election of directors under ordinary circumstances
shall at the time be owned, directly or indirectly, by such Person or (ii) any
other Person of which at least a majority of the voting interest under ordinary
circumstances is at the time, directly or indirectly, owned by such Person.
"Surviving Entity" has the meaning set forth under "-- Certain
Covenants -- Merger, Amalgamation, Consolidation and Sale of Assets."
"Tax" means any tax, duty, assessment or governmental charge of whatever
nature (or interest on, or penalties or other additions to, any of the
foregoing) imposed or levied by or on behalf of, or within, Canada or any
Province of Canada or any political subdivision or taxing authority of Canada or
any Province of Canada.
"Unrestricted Subsidiary" means any Subsidiary of the Parent Guarantor
designated as such pursuant to and in compliance with the covenant described
under "-- Certain Covenants -- Limitation on Designations of Unrestricted
Subsidiaries." Any such designation may be revoked by a Board Resolution of the
Parent Guarantor delivered to the Trustee, subject to the provisions of such
covenant.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the then outstanding
aggregate principal amount of such Indebtedness into (b) the sum of the total of
the products obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required payment of
principal, including payment at final maturity, in respect thereof, by (ii) the
number of years (calculated to the nearest one-twelfth) which will elapse
between such date the making of such payment.
BOOK ENTRY; DELIVERY AND FORM
Except as described in the next paragraph, the Notes initially will be
issued in one or more global certificates in definitive, fully registered form
(the "Global Notes"). The Global Notes will be deposited on the Issue Date with,
or on behalf of, DTC and registered in the name of a nominee of DTC.
Notes held by QIBs who elect to take physical delivery of their
certificates instead of holding their interest through the Global Notes (and
which are thus ineligible to trade through DTC) (collectively referred to herein
as the "Non-Global Purchasers") will be issued in registered certificated form
("Certificated Securities"). Upon the transfer to a QIB of any Certificated
Security initially issued to a Non-Global Purchaser, such Certificated Security
will, unless the transferee requests otherwise or the Global Notes have
previously been exchanged in whole for Certificated Securities, be exchanged for
an interest in a Global Note.
THE GLOBAL NOTES
The Issuer expects that pursuant to procedures established by DTC (i) upon
the issuance of the Global Notes, DTC or its custodian will credit, on its
internal system, the principal amount of Notes of the individual beneficial
interest represented by such Global Notes to the respective accounts for persons
who have accounts with DTC ("participants") and (ii) ownership of beneficial
interest in the Global Notes will be shown on, and the transfer of such
ownership will be effected only through, records maintained by DTC or its
nominee (with respect to interests of participants) and the records of
participants (with respect to interests of persons other than participants).
Such accounts initially will be designated by or on behalf of the Initial
Purchasers and ownership of beneficial interests in the Global Notes will be
limited to participants or persons who hold interest through participants. QIBs
hold their interests in the Global Notes directly through DTC, if they are
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participants, or indirectly through organizations which are participants. Any
person acquiring an interest in a Global Note through an offshore transaction in
reliance on Regulation S of the Securities Act may hold such interest through
Cedel or Euroclear. The laws of some jurisdictions require that certain
purchasers of securities take physical delivery of such securities in definitive
form. Such limits and such laws may impair the ability to transfer beneficial
interests in a Global Note.
So long as DTC or its nominee is the registered owner or holder of the
Notes, DTC or such nominee, as the case may be, will be considered the sole
owner or holder of the Notes represented by such Global Note for all purposes
under the Indenture. No beneficial owner of an interest in any Global Note will
be able to transfer that interest except in accordance with DTC's procedures, in
addition to those provided for under the Indenture.
Payments of the principal of, premium, if any, and interest (including
Additional Interest) on, the Global Notes will be made to DTC or its nominee, as
the case may be, as the registered owner thereof. None of the Issuer, the
Trustee or any paying agent of the Trustee will have any responsibility or
liability for any aspect of the records relating to or payments made on account
of beneficial ownership interests in the Global Notes or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interest.
The Issuer expects that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, or interest (including Additional Interest) in
respect of the Global Notes, will credit participants' accounts with payments in
amounts proportionate to their respective beneficial interests in the principal
amount of the Global Notes as shown on the records of DTC or its nominee. The
Issuer also expects that payments by participants to owners of beneficial
interest in the Global Notes held through such participants will be governed by
standing instructions and customary practice, as is now the case with securities
held for the accounts of customers registered in the names of nominees for such
customers. Such payments will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in same-day funds. Transfers
between participants in Euroclear and Cedel will be effected in accordance with
their respective rules and operating procedures. If a holder requires physical
delivery of a Certificated Security for any reason, including to sell Notes to
persons in states which require physical delivery of the Certificated
Securities, or to pledge such securities, such holder must transfer its interest
in the Global Notes in accordance with the normal procedures of DTC and with the
procedures set forth in the Indenture.
DTC has advised the Issuer that it will take any action permitted to be
taken by a holder of Notes (including the presentation of Notes for exchange as
described below) only at the direction of one or more participants to whose
account the DTC interests in the Global Notes are credited and only in respect
of such portion of the aggregate principal amount of Notes as to which such
participant or participants has or have given such direction. However, if there
is an Event of Default under the Indenture, DTC will exchange the Global Notes
for Certificated Securities, which it will distribute to its participants.
DTC has advised the Issuer as follows: DTC is a limited purpose trust
company organized under the Banking Laws of the State of New York, a member of
the Federal Reserve System, a "clearing corporation" within the meaning of the
New York Uniform Commercial Code and a "clearing agency" registered pursuant to
the provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participants and facilitate the clearance and settlement of
securities transactions between participants through electronic book entry
changes in accounts of its participants, thereby eliminating the need for
physical movement of securities certificates. Participants include securities
brokers and dealers, banks, trust companies and clearing corporations and
certain other organizations, some of whom (or their representatives) own DTC.
Access to the DTC system is available to others such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship with
a participant, either directly or indirectly ("indirect participants").
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Note among participants of DTC, it is under
no obligation to perform and continue to perform such procedures, and such
procedures may be discontinued at any time. None of the Issuer, the Initial
Purchasers
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or the Trustee will have any responsibility for the performance by DTC or its
participants or indirect participants of their respective obligations under the
rules and procedures governing their operations.
CERTIFICATED SECURITIES
If DTC is at any time unwilling or unable to continue as a depositary for
the Global Notes and a successor depositary is not appointed by the Issuer
within 90 days, Certificated Securities will be issued in exchange for the
Global Notes.
CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
EXCHANGE OF OLD NOTES FOR NEW NOTES
The following is a summary of the material generally applicable U.S.
federal income tax consequences resulting from the exchange of Old Notes for New
Notes pursuant to the Exchange Offer.
The exchange of the Old Notes for the New Notes pursuant to the Exchange
Offer should not be treated as a taxable transaction for federal income tax
purposes because the New Notes do not differ materially in kind or extent from
the Old Notes. Accordingly, no gain or loss should be recognized by a Holder who
exchanges an Old Note for a New Note pursuant to the Exchange Offer, and each
New Note should be viewed as a continuation of the corresponding Old Note. For
purposes of determining gain or loss upon a subsequent sale or exchange of the
New Notes, a holder's initial basis in the New Notes will be the same as such
holder's adjusted basis in the Old Notes exchanged therefor, and the holding
period of a holder for the New Note should include the period during which such
holder held such corresponding Old Note.
The following is a general discussion of certain U.S. federal income and
estate tax considerations relevant to original persons who hold the Notes as
capital assets (within the meaning of Section 1221 of the Internal Revenue Code
of 1986, as amended (the "Code"). This discussion in based upon the Code,
Treasury Regulations, Internal Revenue Service ("IRS") rulings and judicial
decisions now in effect, all of which are subject to change (possibly with
retroactive effect) or different interpretations. There can be no assurance that
the IRS will not challenge one or more of the conclusions described herein, and
the Company has not obtained, nor does it intend to obtain, a ruling from the
IRS or an opinion of counsel with respect to the U.S. federal income or estate
tax consequences of acquiring, holding or disposing of Notes.
This discussion is for general information only and does not purport to
address all aspects of U.S. federal income or estate taxation that may be
relevant to a particular holder, including, without limitation, the treatment of
certain categories of holders, some of which may be subject to special rules
(including, for example, dealers in securities, banks, insurance companies,
tax-exempt organizations, foreign persons that are hybrid entities, persons
holding Notes as part of a hedging or conversion transaction, straddle or other
risk reduction transactions, persons who actually or constructively own 10% or
more of the total combined voting power of the Company's stock, controlled
foreign corporations (within the meaning of Section 957 of the Code), and U.S.
expatriates (including former citizens or residents of the U.S.)). In addition,
it does not discuss all of the consequences that may be relevant to a holder of
Notes in light of the holder's particular tax circumstances (including, for
example, persons subject to the alternative minimum tax provisions of the Code).
The discussion also does not discuss any aspect of state, local or foreign tax
law, or U.S. federal estate and gift tax law other than certain U.S. federal
estate tax provisions relating to non-resident alien individuals.
PROSPECTIVE PURCHASERS OF THE NOTES ARE ADVISED TO CONSULT THEIR OWN TAX
ADVISORS REGARDING THE U.S. FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES
OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF NOTES.
U.S. HOLDERS
The following discussion is limited to a noteholder that for U.S. federal
income tax purposes is (i) a citizen or resident (as defined in Section 7701(b)
of the Code) of the United States, (ii) a corporation, partnership or limited
liability company formed under the laws of the United States or any political
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subdivision thereof, (iii) an estate the income of which is subject to U.S.
federal income taxation regardless of its source or (iv) a trust, if a U.S.
court is able to exercise primary supervision over its administration and one or
more U.S. persons have the authority to control all substantial decisions of the
trust (each a "U.S. Holder").
Interest and Original Issue Discount
Notes. Stated interest on the Notes will generally be includable in a U.S.
Holder's gross income and taxable as ordinary income for U.S. federal income tax
purposes at the time it is paid or accrued in accordance with the U.S. Holder's
regular method of accounting. The Notes do not have any original issue discount
("OID").
Sale, Exchange or Retirement of a Note
Each U.S. Holder generally will recognize capital gain or loss upon the
sale, exchange, redemption, retirement or other taxable disposition of a Note
equal to the difference (if any) between (i) the sum of the amount of cash and
the fair market value of any property received (except to the extent that such
cash or other property is attributable to the payment of accrued interest not
previously included in income, which amount will be taxable as ordinary income)
and (ii) such holder's adjusted tax basis in the Note. Gain on most capital
assets held (or deemed held) by a noncorporate U.S. Holder for more than 18
months is subject to tax at a maximum rate of 20%, and gain on most capital
assets held by a noncorporate U.S. Holder for more than one year and up to 18
months is subject to tax at a maximum rate of 28%. A U.S. Holder's initial tax
basis in a Note will be the amount paid therefor.
A U.S. Holder will not recognize any taxable gain or loss on the exchange
of a Note for an Exchange Note pursuant to an Exchange Offer.
Additional Amounts. As more fully described in "Purpose of the Exchange
Offer," in the event of a Registration Default with respect to the Notes, the
Company will be required to pay additional amounts to the holders of such Notes
as Additional Interest. According to Treasury Regulations, additional payments
will not affect the amount of interest income recognized by a U.S. Holder (or
the timing of such recognition) if the likelihood of such additional payment, as
of the date the debt obligations are issued, is remote. The Company believes
that the likelihood of the imposition of liquidated damages is remote and does
not intend to treat the possibility of such payment as affecting the yield to
maturity of any Note. Similarly, the Company intends to take the position that
the likelihood of a redemption or a repurchase upon a "Change of Control" or
"Asset Sale" is remote under the Treasury Regulations. Accordingly, such
payments should be included in the U.S. Holder's income in accordance with it
regular method of accounting. In this regard, the Company's determination is
binding on a U.S. Holder unless the U.S. Holder explicitly discloses on its
timely filed U.S. federal income tax return for the year in which the Note was
acquired that it is taking a position contrary to the Company.
Backup Withholding
A U.S. Holder of a Note may be subject to "backup withholding" at a rate of
31% with respect to certain "reportable payments," including payments of
interest (and OID) and, under certain circumstances, principal payments on the
Notes. These backup withholding rules apply if the U.S. Holder, among other
things, (i) fails to furnish the Company with his or its social security number
or other taxpayer identification number ("TIN"), certified under penalties of
perjury, within a reasonable time after the request therefor, (ii) furnishes an
incorrect TIN, (iii) fails to properly report the receipt of interest, or (iv)
under certain circumstances, fails to provide a certified statement, signed
under penalties of perjury, that the TIN furnished is the correct number and
that such holder is not subject to backup withholding. Any amount withheld from
a payment to a U.S. Holder under the backup withholding rules is creditable
against the U.S. Holder's U.S. federal income tax liability, provided that the
required information is furnished to the IRS. Backup withholding will not apply,
however, with respect to payments made to certain holders (including
corporations and tax-exempt organizations), provided their exemptions from
backup withholding are properly established.
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A U.S. Holder who does not provide the Company with its correct TIN also may be
subject to penalties imposed by the IRS.
NON-U.S. HOLDERS
The following discussion is limited to the U.S. federal income tax
consequences relevant to a Non-U.S. Holder and certain U.S. federal estate tax
consequences of a nonresident alien individual (for U.S. federal estate tax
purposes). As used herein, a "Non-U.S. Holder" is any holder other than a U.S.
Holder. For purposes of the U.S. withholding tax on interest discussed below, a
Non-U.S. Holder includes a non-resident fiduciary of an estate or trust. For
purposes of this discussion, interest and gain on the sale, exchange or other
disposition of a Note will generally be considered to be "U.S. trade or business
income" if such income or gain is (i) effectively connected with the conduct of
a U.S. trade or business of the holder or (ii) in the case of most treaty
residents, attributable to a permanent establishment (or, in the case of an
individual, a fixed base) in the U.S.
Interest
Generally, any interest of a Non-U.S. Holder on a Note that is not U.S.
trade or business income will not be subject to U.S. federal income tax if the
interest qualifies as "portfolio interest." Interest on the Notes will generally
qualify as portfolio interest if either (a) the beneficial owner of a Note
certifies, under penalties of perjury, to the Company or its Paying Agent, as
the case may be, that such owner is a non-U.S. person and provides such owner's
name and address or (b) a securities clearing organization, bank or other
financial institution that holds customer securities in the ordinary course of
its trade or business (a "Financial Institution") and holds the Note on behalf
of a beneficial owner thereof, certifies, under penalties of perjury, that such
certificate has been received by it or by a Financial Institution between it and
the beneficial owner and furnishes the payor with a copy thereof. Recently
adopted Treasury Regulations that will be effective beginning January 1, 2000
(the "New Regulations") provide alternative methods for satisfying the
certification requirement. The New Regulations will generally require, in the
case of Notes held by a foreign partnership, that the certificate be provided by
the partners rather than by the foreign partnership, and that the partnership
provide certain information including a U.S. TIN.
The gross amount of payments to a Non-U.S. Holder of interest that do not
qualify for the portfolio interest exemption and that are not U.S. trade or
business income will be subject to withholding of U.S. federal income tax at a
30% rate, unless a U.S. income tax treaty applies to reduce or eliminate such
withholding. U.S. trade or business income will be subject to U.S. federal
income tax on a net income basis at applicable graduated tax rates in the same
manner as a U.S. Holder and would be exempt from the 30% withholding tax
described above. In the case of a Non-U.S. Holder that is a corporation, such
U.S. trade or business income may also, under certain circumstances, be subject
to an additional branch profits tax at a 30% rate (or, if applicable, a lower
treaty rate).
To claim the benefit of a tax treaty or to claim an exemption from
withholding because interest income is U.S. trade or business income, a Non-U.S.
Holder must provide the Company with a properly executed Form 1001 or 4224, as
applicable, prior to the payment of interest. These forms must be periodically
updated. Under the New Regulations, a holder claiming either such exemption will
be required to provide a Form W-8, subject to certain transition rules, and may
be required to provide a TIN. Special procedures are provided in the New
Regulations for payments through qualified intermediaries. Prospective investors
should consult their own tax advisors regarding the effect to them, if any, of
the New Regulations.
A Non-U.S. Holder of a Note that is eligible for a reduced rate of U.S.
withholding tax pursuant to an income tax treaty may obtain a refund of any
amounts currently withheld by filing an appropriate claim for a refund with the
IRS.
Sale, Exchange or Retirement of a Note
Subject to the discussion concerning backup withholding, any gain realized
by a Non-U.S. Holder on the sale, exchange, redemption, retirement or other
taxable disposition of a Note generally will not be subject to
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U.S. federal income tax unless (i) such gain is U.S. trade or business income or
(ii) subject to certain exceptions, the Non-U.S. Holder is an individual who is
present in the U.S. for 183 days or more in the taxable year of the disposition.
Information Reporting and Backup Withholding
The Company must report annually to the IRS and to each Non-U.S. Holder any
interest that is subject to withholding, or that is exempt from U.S. withholding
tax pursuant to a tax treaty, or interest that is exempt from U.S. federal
income tax under the portfolio interest exception. Copies of these information
returns may also be made available under the provisions of a specific treaty or
agreement to the tax authorities of the country in which the Non-U.S. Holder
resides.
Treasury Regulations provide that backup withholding and additional
information reporting will not apply to payments of principal on the Notes by
the Company to a Non-U.S. Holder if the holder certifies as to its non-U.S.
status under penalties of perjury or otherwise establishes an exemption
(provided that neither the Company nor its Paying Agent has actual knowledge
that the holder is a U.S. person or that the conditions of any other exemption
are not, in fact, satisfied).
The payment of the proceeds from the disposition of Notes to or through the
U.S. office of any broker, U.S. or foreign, will be subject to information
reporting and possible backup withholding at a rate of 31% unless the owner
certifies as to its non-U.S. status under penalty of perjury or otherwise
establishes an exemption, provided that the broker does not have actual
knowledge that the holder is a U.S. person or that the conditions of any other
exemption are not, in fact, satisfied. The payment of the proceeds from the
disposition of a Note to or through a non-U.S. office of a non-U.S. broker that
is not a U.S. related person will not be subject to information reporting or
backup withholding. In the case of the payment of proceeds from the disposition
of a Note to or through a non-U.S. office of a broker that is either a U.S.
person or a U.S. related person, information reporting is required on the
payment unless the broker has documentary evidence in its files that the owner
is a Non-U.S. Holder and the broker has no knowledge to the contrary. Backup
withholding will not apply to payments made through foreign offices of a broker
that is not a U.S. person or a U.S. related person (absent actual knowledge that
the payee is a U.S. person). For purposes of this section, a "U.S. related
person" is (i) a controlled foreign corporation for U.S. federal income tax
purposes, (ii) a foreign person 50% or more of whose gross income from all
sources for the three-year period ending with the close of its taxable year
preceding the payment (or for such part of the period that the broker has been
in existence) is derived from activities that are effectively connected with the
conduct of a U.S. trade or business or (iii) with respect to payments made after
December 31, 1999, a foreign partnership that, at any time during its taxable
year, is 50% or more (by income or capital interest) owned by U.S. persons or is
engaged in the conduct of a U.S. trade or business. The New Regulations provide
certain presumptions under which a Non-U.S. Holder will be subject to backup
withholding and information reporting unless the Non-U.S. Holder provides a
certification as to its non-U.S. Holder status.
Any amounts withheld under the backup withholding rules from a payment to a
Non-U.S. Holder will be allowed as a refund or a credit against such Non-U.S.
Holder's U.S. federal income tax liability, provided that the requisite
procedures are followed.
U.S. Federal Estate Tax
A Note that is held, or treated as held, by a non-resident alien individual
(as specifically determined under residence rules for U.S. federal estate tax
purposes) at the time of death will not be subject to U.S. federal estate tax
provided that the interest thereon qualifies as portfolio interest (without
regard to the certification requirement) and was not U.S. trade or business
income. Otherwise, the Non-U.S. Holder could be subject to a U.S. federal estate
tax of up to 55% on the value of his Notes at the time of his death (subject to
reduction by treaty, if applicable).
THE PRECEDING DISCUSSION OF CERTAIN U.S. FEDERAL INCOME AND ESTATE TAX
CONSEQUENCES IS FOR GENERAL INFORMATION ONLY, AND DOES NOT CONSTITUTE TAX
ADVICE. ACCORDINGLY, EACH INVESTOR SHOULD CONSULT ITS OWN TAX ADVI-
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SOR AS TO THE PARTICULAR TAX CONSEQUENCES TO IT OF PURCHASING, HOLDING AND
DISPOSING OF NOTES, INCLUDING THE APPLICABILITY AND EFFECT OF ANY U.S. FEDERAL,
STATE, LOCAL OR FOREIGN TAX LAWS, AS WELL AS ANY POSSIBLE CHANGES IN THE TAX
LAWS.
CERTAIN CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
The following general summary describes the principal Canadian federal
income tax considerations applicable to a holder of Notes acquired under this
Offering (a "Holder") who, at all relevant times, for purposes of the Income Tax
Act (Canada) (the "Canadian Tax Act"), is a non-resident or is deemed to be a
non-resident of Canada, deals at arm's length with the Parent Guarantor, does
not use or hold and is not deemed to use or hold the Notes in carrying on a
business in Canada, and, in the case of a Holder that is an insurer, whose Notes
are not designated insurance property. This summary is based upon the current
provisions of the Canadian Tax Act and the regulations thereunder (the
"Regulations"), all specific proposals to amend the Canadian Tax Act and
Regulations publicly announced by the Minister of Finance (Canada) prior to the
date hereof and counsel's understanding of the current administrative practices
of Revenue Canada in effect as of the date hereof. This summary is not
exhaustive of all possible Canadian federal income tax considerations and,
except as mentioned above, does not anticipate any changes in law whether by
legislative, governmental or judicial decision or action, nor does it take into
account provincial, territorial or foreign tax considerations, which may differ
significantly from those discussed herein.
This summary is of a general nature only and is not intended to be legal or
tax advice to any particular Holder of Notes and no representation with respect
to the income tax consequences to any particular Holder is made. Consequently,
prospective purchasers of Notes should consult their own tax advisors with
respect to their particular circumstances.
The exchange of an Old Note for a New Note is not a taxable event for the
purposes of the Canadian Tax Act.
Where a person resident in Canada pays or credits, or is deemed to pay or
credit, amounts on account, in lieu of payment, or in satisfaction of interest
to non-residents of Canada, such amounts are generally subject to a 25%
non-resident withholding tax under the Canadian Tax Act. Such rate of tax may be
reduced by the application of international tax treaties to which Canada is a
party. For example, the Canada-U.S. Income Tax Convention generally reduces the
rate of withholding tax on interest to 10%.
On the assumption that the Issuer is and continues to be a non-resident of
Canada which does not carry on business in Canada for purposes of the Canadian
Tax Act, payments by the Issuer on the Notes will not be subject to Canadian
non-resident withholding tax. However, in the event that the Parent Guarantor
pays amounts in accordance with the Parent Guarantee in satisfaction of any
amounts that may reasonably be regarded as being or being attributable to
interest payable under the Notes, such amounts may be subject to non-resident
withholding tax at a rate determined pursuant to the Canadian Tax Act and any
applicable income tax treaty to which Canada is a party. The Parent Guarantor
has agreed to gross up any such payment made by it pursuant to the Parent
Guarantee. See "Description of Notes -- Parent Guarantee."
No other taxes on income (including taxable capital gains) are payable
under the Canadian Tax Act in respect of the Notes or interest thereon by
Holders of Notes.
LEGAL MATTERS
The legality of the New Notes and of the Parent Guarantee will be passed
upon by Tuke Yopp & Sweeney, PLC, Nashville, Tennessee with respect to matters
of the United States law and by Osler, Hoskin & Harcourt, Toronto, Ontario, with
respect to matters of Canadian law.
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EXPERTS
The consolidated financial statements and schedules of the Parent
Guarantor, as of December 31, 1997, and for the year then ended, included and/or
incorporated by reference herein and elsewhere in the Registration Statement
have been audited by Arthur Andersen & Co., Chartered Accountants, as indicated
in their reports with respect thereto, and have been incorporated and/or
included herein in reliance upon the authority of said firm as experts in giving
said reports.
The consolidated financial statements and schedules of the Parent
Guarantor, as of December 31, 1996, and for each of the two years in the period
ended December 31, 1996, included and/or incorporated by reference herein and
elsewhere in the Registration Statement have been incorporated herein in
reliance on the report of PricewaterhouseCoopers, Chartered Accountants, given
on the authority of that firm as experts in accounting and auditing.
Any financial statements and schedules hereafter incorporated by reference
in the registration statement that have been audited and are the subject of a
report by independent accountants will be so incorporated by reference in
reliance upon such reports and upon the authority of such firms as experts in
accounting and auditing to the extent covered by consents filed with the
Commission.
AVAILABLE INFORMATION
The Issuer and the Parent Guarantor have filed with the Commission a
Registration Statement on Form S-4 under the Securities Act for the registration
of the New Notes offered hereby. As permitted by the rules and regulations of
the Commission, this Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits thereto. For further
information with respect to the Issuer, the Parent Guarantor and the New Notes
offered hereby, reference is made to the Registration Statement and to the
exhibits filed therewith. Statements contained in this Prospectus concerning the
contents of any contract or other document are not necessarily complete. With
respect to each such contract or other document filed with the Commission as an
exhibit to the Registration Statement, reference is made to the exhibit for a
more complete description of the matter involved, and each such statement shall
be deemed qualified in its entirety by such reference.
The Parent Guarantor is subject to the informational requirements of the
Exchange Act, and in accordance therewith files periodic reports and other
information with the Commission. Such periodic reports and other information
filed with the Commission may be inspected without charge at the Public
Reference Section of the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and will also be available for inspection and copying at
the regional offices of the Commission located at Seven World Trade Center, 13th
Floor, New York, New York 10048; and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of all or any portion of such
material also may be obtained at prescribed rate from the Public Reference
Section of the Commission upon payment of certain prescribed fees. In addition,
the Commission maintains a website that contains periodic reports and other
information filed by the Parent Guarantor. This website can be accessed at
www.sec.gov. Copies of such material can also be obtained from the Company upon
request. In addition, such material can be inspected at the offices of the
American Stock Exchange, Inc., 86 Trinity Place, New York, New York 10006-1881.
The Company expects that the Issuer will not become subject to the
informational requirements of the Exchange Act. The Company has filed a request
with the Commission seeking to exempt the Issuer from these requirements and, in
view of the Parent Guarantee and the fact that the Parent Guarantor is subject
to these requirements, expects this request to be granted. Instead, the Company
will include in a footnote to its financial statements, summarized financial
information regarding the Issuer.
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PLAN OF DISTRIBUTION
Each broker-dealer who holds Old Notes that are Transfer Restricted
Securities that were acquired for its own account as a result of market-making
activities or other trading activities (other than Transfer Restricted
Securities acquired directly from the Issuer) may exchange such Old Notes
pursuant to the Exchange Offer; however, such broker-dealer may be deemed an
"underwriter" within the meaning of the Securities Act and must, therefore,
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 for such purpose. The Issuer and the
Parent Guarantor have agreed that for a period of 180 days after the Exchange
Offer is consummated, it will, upon reasonable request, make this Prospectus, as
amended or supplemented, available promptly to any broker-dealer for use in
connection with any such resale.
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 and/or the purchasers of any such New Notes. Any broker-dealer
that resells New Notes that were received by it for its own account pursuant to
the Exchange Offer and any broker or dealer that participates in a distribution
of such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act, and any profit on any such resale of New Notes and any
commissions and concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 180 days after the effective date of the Registration
Statement of which this Prospectus is a part, the Issuer and the Parent
Guarantor will promptly send additional copies of this Prospectus and any
amendment or supplement to this Prospectus to any broker-dealer that requests
such documents in the Letter of Transmittal. The Issuer and the Parent Guarantor
have agreed to pay the expenses incident to the Exchange Offer and will
indemnify the Holders of the Old Notes against certain liabilities, including
certain liabilities under the Securities Act, in connection with the Exchange
Offer.
74
<PAGE> 75
INTERNATIONAL COMFORT PRODUCTS CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PRO FORMA PAGE
- --------- ----
<S> <C>
Pro Forma Selected Financial Data........................... F-2
Pro Forma Statement of Income Data.......................... F-3
Notes to Pro Forma Selected Financial Data.................. F-4
HISTORICAL
Audited Financial Statements
Auditors' Report -- 1997.................................. F-5
Auditors' Report -- 1996 and 1995......................... F-6
Consolidated Statements of Income (Loss) and Deficit for
the years ended December 31, 1995, 1996 and 1997....... F-7
Consolidated Balance Sheets as at December 31, 1996 and
1997................................................... F-8
Consolidated Statements of Changes in Financial Position
for the years ended December 31, 1995, 1996 and 1997... F-9
Notes to Consolidated Financial Statements................ F-10
Unaudited Financial Statements
Consolidated Statements of Income for the three months
ended June 30, 1997 and 1998........................... F-32
Consolidated Statements of Income for the six months ended
June 30, 1997 and 1998................................. F-33
Consolidated Balance Sheets as at June 30, 1997 and 1998,
and December 31, 1997.................................. F-34
Consolidated Statements of Changes in Financial Position
for the six months ended June 30, 1997 and 1998........ F-35
Notes to Consolidated Financial Statements................ F-36
</TABLE>
F-1
<PAGE> 76
INTERNATIONAL COMFORT PRODUCTS CORPORATION
PRO FORMA SELECTED FINANCIAL DATA
(UNAUDITED)
Effective January 31, 1998, International Comfort Products Corporation and
its subsidiaries (the "Company") completed the purchase of the stock of United
Electric Company ("United Electric").
The unaudited pro forma statement of income data for the year ended
December 31, 1997 has been prepared based on the historical income statements of
the Company, as adjusted to reflect the acquisition of the operations of United
Electric, the issuance of the Company's 8 5/8% Senior Notes due 2008 (the
"Notes"), and the application of the estimated net proceeds, as if the
acquisition had occurred and the Notes had been issued on January 1, 1997. The
unaudited pro forma statement of income data for the six months ended June 30,
1998 has been prepared based on the historical income statements of the Company,
as adjusted to reflect the issuance of the Notes and the application of the
estimated net proceeds as if the Notes had been issued on January 1, 1997. The
pro forma statement of income data may not be indicative of the future results
of operations and what the actual results of operations would have been had the
transactions described above been effective January 1, 1997. The pro forma
selected financial data should be read in connection with the consolidated
financial statements and notes thereto included herein.
F-2
<PAGE> 77
INTERNATIONAL COMFORT PRODUCTS CORPORATION
PRO FORMA STATEMENT OF INCOME DATA
(UNAUDITED, IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
FOR THE YEAR ENDED DECEMBER 31, 1997 JUNE 30, 1998
---------------------------------------------- ----------------------------------
UNITED
ICP ELECTRIC ADJUSTMENTS PRO FORMA ICP ADJUSTMENTS PRO FORMA
-------- -------- ----------- --------- ------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Revenue......... $ 630.7 $25.0 -- $ 655.7 $ 351.3 -- $ 351.3
Cost of Sales............. 503.7 17.0 -- 520.7 275.0 -- 275.0
-------- ----- ----- ------- ------- ----- -------
Gross Margin.............. 127.0 8.0 -- 135.0 76.3 -- 76.3
Selling, General and
Administrative
Expenses................ 85.5 4.5 $ 0.3(a) 90.3 47.1 -- 47.1
-------- ----- ----- ------- ------- ----- -------
Operating Profit.......... 41.5 3.5 (0.3) 44.7 29.2 -- 29.2
-------- ----- ----- ------- ------- ----- -------
Financial Expenses
Interest expense........ 18.2 0.3 --(b) 18.5 9.5 $(0.4)(f) 9.1
Amortization of debt
issuance costs....... 1.3 -- (0.3)(c) 1.0 0.6 (0.1)(g) 0.5
Refinancing costs....... -- -- -- -- 5.0 (5.0)(h) --
Other................... -- (0.5) 0.4(d) (0.1) -- --
-------- ----- ----- ------- ------- ----- -------
19.5 (0.2) 0.1 19.4 15.1 (5.5) 9.6
-------- ----- ----- ------- ------- ----- -------
Income Before Nonrecurring
Charges Directly
Attributable to the
Refinanced Debentures
and Income Taxes........ 22.0 3.7 (0.4) 25.3 14.1 5.5 19.6
Income Taxes.............. -- (1.3) 0.9(e) (0.4) -- -- --
-------- ----- ----- ------- ------- ----- -------
Income Before Nonrecurring
Charges Directly
Attributable to the
Refinanced Debentures... $ 22.0 $ 2.4 $ 0.5 $ 24.9 $ 14.1 $ 5.5 $ 19.6
======== ===== ===== ======= ======= ===== =======
Income Before Nonrecurring
Charges Directly
Attributable to the
Refinanced Debentures
Per Ordinary Share...... $ 0.56 $ 0.63 $ 0.35 $ 0.49
======== ======= ======= =======
Weighted Average Number of
Ordinary Shares (in
millions)............... 39.664 39.664 40.134 40.134
======== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of this statement.
F-3
<PAGE> 78
INTERNATIONAL COMFORT PRODUCTS CORPORATION
NOTES TO PRO FORMA SELECTED FINANCIAL DATA
(UNAUDITED, IN MILLIONS OF U.S. DOLLARS)
(a) Reflects the elimination of certain expenses associated with the previous
owners of United Electric offset by amortization of goodwill recorded in
connection with the acquisition over thirty years.
<TABLE>
<S> <C>
Previous owner expenses..................................... $ (0.2)
Amortization of goodwill.................................... 0.5
-------
$ 0.3
=======
</TABLE>
(b) Reflects the reduced interest expense under the Notes as compared with the
9 3/4% Senior Secured Notes due 2000 (the "Refinanced Debentures"), offset
by imputed interest expense on the acquisition purchase price.
<TABLE>
<S> <C>
Reduced interest expense.................................... $ (1.2)
Interest expense on purchase price.......................... 1.2
-------
$ --
=======
</TABLE>
(c) Reflects the reduced amortization of debt issuance costs under the Notes as
compared with the Refinanced Debentures.
<TABLE>
<S> <C>
Notes amortization.......................................... $ 0.5
Refinanced Debenture amortization........................... (0.8)
-------
$ (0.3)
=======
</TABLE>
(d) Reflects the elimination of income earned by United Electric on an
investment retained by the previous owners of United Electric.
(e) Reflects adjustment of income taxes due to earnings of United Electric.
(f) Reflects the reduced interest expense under the Notes as compared with the
Refinanced Debentures.
(g) Reflects the reduced amortization of debt issuance costs under the Notes as
compared with the Refinanced Debentures.
<TABLE>
<S> <C>
Notes amortization.......................................... $ 0.2
Refinanced Debenture amortization........................... (0.3)
-------
$ (0.1)
=======
</TABLE>
(h) Reflects the elimination of the write-off of nonrecurring expenses
associated with the Refinanced Debentures.
NOTE The pro forma statement of income data does not include nonrecurring
expenses which were recorded by the Company in connection with the
repurchase of the Refinanced Debentures related to the required repurchase
premium and the write-off of deferred costs ($5.0 at June 30, 1998).
F-4
<PAGE> 79
AUDITORS' REPORT
To The Shareholders
International Comfort Products Corporation
We have audited the consolidated balance sheet of International Comfort
Products Corporation (formerly Inter-City Products Corporation) as at December
31, 1997 and the consolidated statements of income (loss) and deficit and
changes in financial position for the year then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in Canada. Those standards require that we plan and perform an audit to
obtain reasonable assurance 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.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of International Comfort Products
Corporation as at December 31, 1997 and the results of its operations and the
changes in its financial position for the year then ended in accordance with
accounting principles generally accepted in Canada.
/s/ Arthur Andersen & Co.
Chartered Accountants
February 9, 1998 (except as to
Note 20, which is as of July 10, 1998)
Mississauga, Canada
F-5
<PAGE> 80
<TABLE>
<S> <C> <C>
Coopers & Lybrand 145 King Street West tel.: (416) 869-1130
Chartered Accountants Toronto, Ontario fax: (416) 863-0926
Canada M5H 1V8 direct tel.: 941-8237
direct fax: 941-8446
</TABLE>
AUDITORS' REPORT
To The Shareholders
Inter-City Products Corporation
We have audited the consolidated balance sheet of Inter-City Products
Corporation as at December 31, 1996 and the consolidated statements of income
and deficit and changes in financial position for the years ended December 31,
1996 and 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance 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.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of Inter-City Products Corporation
as at December 31, 1996 and the results of its operations and the changes in its
financial position for the years ended December 31, 1996 and 1995 in accordance
with generally accepted accounting principles.
/s/ Coopers & Lybrand
Coopers & Lybrand
Chartered Accountants
Toronto, Ontario
February 11, 1997
F-6
<PAGE> 81
INTERNATIONAL COMFORT PRODUCTS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
(IN MILLIONS OF U.S. DOLLARS)
<S> <C> <C> <C>
OPERATING REVENUE........................................... $ 532.8 $ 641.9 $ 630.7
Cost of Sales............................................... 467.4 517.8 503.7
------- ------- -------
Gross Margin................................................ 65.4 124.1 127.0
Selling, General and Administrative Expenses................ 93.2 90.7 85.5
Asset Writedowns and Restructuring Costs(Note 17)........... 15.5 -- --
------- ------- -------
OPERATING PROFIT (LOSS)..................................... (43.3) 33.4 41.5
------- ------- -------
Financial Expenses
Interest expense.......................................... 21.7 19.4 18.2
Amortization of debt issuance costs....................... 1.3 1.8 1.3
Write-off of debt issuance costs.......................... 2.1 .6 --
------- ------- -------
25.1 21.8 19.5
------- ------- -------
Income (Loss) Before Income Taxes........................... (68.4) 11.6 22.0
Income Taxes(Note 11)....................................... (12.8) -- --
------- ------- -------
Income (Loss) From Continuing Operations.................... (81.2) 11.6 22.0
Loss From Discontinued Operations(Note 16).................. (12.0) (3.1) --
------- ------- -------
NET INCOME (LOSS)........................................... (93.2) 8.5 22.0
Deficit -- Beginning of the Year............................ (53.7) (146.9) (138.4)
------- ------- -------
Deficit -- End of the Year.................................. $(146.9) $(138.4) $(116.4)
======= ======= =======
Income (Loss) Per Ordinary Share(Note 12)
</TABLE>
see accompanying notes
F-7
<PAGE> 82
INTERNATIONAL COMFORT PRODUCTS CORPORATION
CONSOLIDATED BALANCE SHEETS
AS AT DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
------- -------
(IN MILLIONS OF
U.S. DOLLARS)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and short-term deposits................................ $ $17.6 $ 31.0
Accounts receivable -- trade (less allowance for doubtful
accounts; 1996 -- $7.7; 1997 -- $6.0)..................... 78.0 96.5
Note receivable(Note 2)..................................... -- 7.7
Inventories(Note 3)......................................... 117.7 94.5
Prepaid expenses and other.................................. 6.0 7.6
------- -------
219.3 237.3
------- -------
FIXED ASSETS(NOTE 4)
Property, plant and equipment -- at cost.................... 213.2 214.3
Accumulated depreciation.................................... 113.0 120.7
------- -------
100.2 93.6
------- -------
INTANGIBLE ASSETS, NET(NOTE 5).............................. 12.1 11.0
OTHER ASSETS, NET(NOTE 6)................................... 13.4 10.1
------- -------
$ 345.0 $ 352.0
======= =======
LIABILITIES
CURRENT LIABILITIES
Short-term borrowings(Note 7)............................... $ 39.0 $ 19.7
Accounts payable............................................ 39.6 44.8
Accrued liabilities......................................... 28.2 26.5
Product warranty............................................ 8.7 9.5
Current portion of long-term debt(Note 8)................... -- .2
------- -------
115.5 100.7
------- -------
LONG-TERM DEBT(NOTE 8)...................................... 165.0 165.6
PRODUCT WARRANTY............................................ 17.9 16.2
ENVIRONMENTAL LIABILITIES................................... 13.6 12.9
OTHER LONG-TERM LIABILITIES................................. 4.2 5.1
------- -------
316.2 300.5
------- -------
Commitments and Contingencies(Note 15)
SHAREHOLDERS' EQUITY
ORDINARY SHARES(NOTE 9)..................................... 169.2 171.2
DEFICIT..................................................... (138.4) (116.4)
FOREIGN CURRENCY TRANSLATION ADJUSTMENT(NOTE 10)............ (2.0) (3.3)
------- -------
28.8 51.5
------- -------
$ 345.0 $ 352.0
======= =======
</TABLE>
see accompanying notes
F-8
<PAGE> 83
INTERNATIONAL COMFORT PRODUCTS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
(IN MILLIONS OF U.S. DOLLARS)
<S> <C> <C> <C>
Cash provided by (used for):
OPERATIONS
Income (loss) from continuing operations.................... $(81.2) $ 11.6 $ 22.0
Items not involving current cash flows(Note 18a)............ 54.4 20.9 17.3
Changes in working capital(Note 18b)........................ 97.3 (18.4) (20.1)
------ ------ ------
70.5 14.1 19.2
Discontinued Steel Pipe Operation........................... (.2) .5 --
------ ------ ------
70.3 14.6 19.2
------ ------ ------
INVESTING
Property, plant and equipment............................... (24.5) (11.8) (8.5)
Proceeds on sale of fixed assets............................ 11.8 1.6 .2
Proceeds from sale of/(acquisition of) Coastline and
General(Note 2)........................................... -- (15.3) 24.6
Acquisitions of distribution companies(Note 2).............. -- -- (5.6)
Discontinued operations..................................... 1.9 6.5 --
------ ------ ------
(10.8) (19.0) 10.7
------ ------ ------
FINANCING
Ordinary shares issued...................................... .6 .5 2.0
Long-term debt issued....................................... -- -- .8
Refinancing costs........................................... (.9) (4.5) --
Discontinued Steel Pipe Operation........................... (1.4) (2.1) --
Other....................................................... -- 2.2 --
------ ------ ------
(1.7) (3.9) 2.8
------ ------ ------
Increase (Decrease) in Cash (Net Borrowings)................ 57.8 (8.3) 32.7
Net Borrowings -- Beginning of the Year..................... (70.9) (13.1) (21.4)
------ ------ ------
Net Cash (Borrowings) -- End of the Year.................... $(13.1) $(21.4) $ 11.3
====== ====== ======
Represented by
Cash and short-term deposits.............................. $ 13.0 $ 17.6 $ 31.0
Less: Short-term borrowings............................... (17.7) (39.0) (19.7)
------ ------ ------
(4.7) (21.4) 11.3
Discontinued operations................................... (8.4) -- --
------ ------ ------
$(13.1) $(21.4) $ 11.3
====== ====== ======
</TABLE>
see accompanying notes
F-9
<PAGE> 84
INTERNATIONAL COMFORT PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN MILLIONS OF U.S. DOLLARS UNLESS OTHERWISE STATED)
1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
International Comfort Products Corporation, formerly Inter-City Products
Corporation, is a Canadian holding company which has two primary operating
subsidiaries: International Comfort Products Corporation (USA) ("ICP (USA)"),
and International Comfort Products Corporation (Canada) ("ICP (Canada)").
These financial statements have been prepared in accordance with generally
accepted accounting principles ("GAAP") in Canada which differ in certain
respects with accounting principles in the United States. The differences
between GAAP in Canada and the United States as they affect the Company are
described in note 19.
CONSOLIDATION
The consolidated financial statements include the assets, liabilities and
operating results of all subsidiary companies from the dates of acquisition, on
the basis of purchase accounting. All significant intercompany transactions have
been eliminated.
NATURE OF OPERATIONS
The Company manufactures and markets central air conditioning and heating
products for residential and light commercial use primarily in the United States
and Canada. At the end of 1997, the Company's network consisted of approximately
400 independent distributors, of which one distributor accounted for
approximately 11% of the Company's operating revenue. The Company's network also
includes company-owned distribution centers in Canada, Mexico, Brazil and Spain.
FOREIGN CURRENCY TRANSLATION
The assets and liabilities of the Company's Canadian and foreign operations
are translated into United States dollars at the rate of exchange in effect at
the balance sheet date. Revenues and expenses are translated at the average
exchange rates prevailing during the year. The unrealized translation gains and
losses are accumulated in a separate component of shareholders' equity.
REVENUE AND EXPENSE RECOGNITION
Product sales are recognized at the time of shipment. Selling, general and
administrative costs are charged to expense as incurred. Service contract
revenue is deferred and amortized into income over the life of the contract on a
straight-line basis.
INVENTORIES
Raw materials and supplies, work in process and finished goods, are valued
at the lower of cost (first-in, first-out) or net realizable value.
F-10
<PAGE> 85
INTERNATIONAL COMFORT PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIXED ASSETS
Fixed assets are recorded at cost less accumulated depreciation.
Depreciation is provided on a straight-line basis at the following annual rates
based on the estimated useful lives of the applicable assets:
<TABLE>
<S> <C>
Buildings................................................... 2.5% - 10%
Machinery, equipment and furniture.......................... 5% - 20%
Tooling and drawings........................................ 10% - 33%
Land improvements........................................... 5% - 10%
</TABLE>
INTANGIBLE AND OTHER ASSETS
Intangible and other assets include amounts paid for patents, tradenames,
goodwill and debt issuance costs. Amortization of intangible assets is provided
on a straight-line basis over various periods, not exceeding twenty years. The
realizability of goodwill and other intangibles is evaluated periodically as
events and circumstances indicate a possible inability to recover their carrying
amount. Such evaluation is based on undiscounted cash flow projections. The
analyses necessarily involve significant management judgment regarding such
projections and the actual results could differ materially from these
projections. Amortization of debt issuance costs is provided on a straight-line
basis over the term of the related debt.
INCOME TAXES
The Company follows the deferral method of tax allocation in accounting for
income taxes. Under this method, timing differences between accounting and
taxable income result in the recording of deferred income taxes.
PRODUCT WARRANTIES
A liability for estimated warranty expense is established by a charge
against operations at the time products are sold. The subsequent costs incurred
for warranty claims serve to reduce the product warranty liability. The actual
warranty costs the Company will ultimately pay could differ materially from this
estimate. The Company offers and sells extended warranty contracts for its
products through certain distributors. The revenue for such contracts is
deferred and recognized over the life of the contract on a straight-line basis.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides certain retirement benefits for its retired employees.
Retirement benefits include health care benefits and life insurance. The Company
accounts for these benefit payments on a cash basis.
FINANCIAL INSTRUMENTS
Periodically, the Company enters into interest rate swap agreements and
forward rate agreements to hedge its interest exposure. The fair values of swap
and forward rate agreements are based on current interest rates and any payments
and receipts relating to these agreements are recognized in interest expense
over the period of the respective agreement. All interest rate swaps are subject
to market risks as interest rates fluctuate. The Company is exposed to credit
risk in the event of nonperformance by counterparties. The Company was not party
to any interest rate swap or forward rate agreements during 1997.
MANAGEMENT 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
F-11
<PAGE> 86
INTERNATIONAL COMFORT PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
reported amounts of revenues and expenses during the reporting period. Such
estimates include, but are not limited to, allowance for doubtful accounts,
product warranty, product liability, environmental liability, sales returns and
allowances, inventory obsolescence, pension obligation assumptions, and
self-insured medical claims. Actual results could differ from these estimates.
RECLASSIFICATIONS
Certain comparative figures have been reclassified to conform with current
financial statement presentations.
2. ACQUISITIONS AND DIVESTITURES
Effective January 31, 1998, ICP (USA) acquired United Electric Company
("United Electric") of Wichita Falls, Texas, a manufacturer of air conditioning
components for commercial HVAC systems through a cash payment of approximately
$25.0. United Electric's estimated 1997 sales were approximately $25.0. This
acquisition will be included in the consolidated financial statements of the
Company upon the acquisition date.
During 1997, the Company acquired four distributors for a total
consideration of approximately $5.6, comprised of cash payments of $3.6 and
assumption of debt of $2.0. The total goodwill recorded on these transactions
was approximately $2.8.
On September 30, 1997, ICP (USA) sold substantially all of the assets and
liabilities of General Heating and Cooling Company ("General"), a heating and
cooling products distributor, and a company-owned factory branch for net book
value of approximately $10.0. The total consideration is comprised of a cash
payment of $2.3 and a current note receivable of $7.7. In 1997, General and the
factory branch contributed operating revenue of approximately $19.2.
On January 27, 1997, ICP (USA) sold Coastline Distribution, Inc.
("Coastline"), a heating and cooling products distributor, and four
company-owned factory branches for net book value of approximately $22.3, the
proceeds of which were used to repay short-term borrowings.
On July 25, 1996, ICP (USA) acquired all of the outstanding shares of
Coastline and General. The purchase price was allocated on the basis of the fair
market value estimates of the net assets acquired as follows:
<TABLE>
<CAPTION>
NET ASSETS ACQUIRED
- -------------------
<S> <C>
Accounts receivable......................................... $ 12.8
Inventories................................................. 18.1
Fixed assets................................................ 1.4
Intangible and other assets................................. 4.2
Current liabilities......................................... (20.0)
Long-term debt assumed...................................... (16.5)
------
Net purchase price.......................................... $ --
======
</TABLE>
F-12
<PAGE> 87
INTERNATIONAL COMFORT PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. INVENTORIES
Inventories are classified as follows:
<TABLE>
<CAPTION>
1996 1997
------ -----
<S> <C> <C>
Finished goods.............................................. $ 86.3 $58.8
Raw materials and work in process........................... 15.7 13.4
Service parts............................................... 15.7 22.3
------ -----
$117.7 $94.5
====== =====
</TABLE>
4. FIXED ASSETS
Fixed assets are classified as follows:
<TABLE>
<CAPTION>
1996 1997
--------------------------------- ---------------------------------
ACCUMULATED NET BOOK ACCUMULATED NET BOOK
COST DEPRECIATION VALUE COST DEPRECIATION VALUE
------ ------------ --------- ------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Machinery, equipment and
furniture................ $101.7 $ 58.4 $ 43.3 $100.2 $ 59.7 $40.5
Buildings and
improvements............. 51.2 16.6 34.6 51.3 18.0 33.3
Tooling and drawings....... 49.0 34.3 14.7 51.3 38.9 12.4
Land and land
improvements............. 11.3 3.7 7.6 11.5 4.1 7.4
------ ------ ------ ------ ------ -----
$213.2 $113.0 $100.2 $214.3 $120.7 $93.6
====== ====== ====== ====== ====== =====
</TABLE>
Depreciation expense for the year amounted to $14.2 (1996 -- $14.1;
1995 -- $14.8).
5. INTANGIBLE ASSETS
Intangible assets, net of accumulated amortization, are classified as
follows:
<TABLE>
<CAPTION>
1996 1997
----- -----
<S> <C> <C>
Goodwill.................................................... $ 4.7 $ 7.0
Patents..................................................... 2.8 2.4
Tradenames.................................................. 1.7 1.6
Customer lists.............................................. 2.8 --
Other intangible assets..................................... .1 --
----- -----
$12.1 $11.0
===== =====
</TABLE>
Amortization of intangible assets during the year was $.9 (1996 -- $1.6;
1995 -- $4.0). The accumulated amortization of intangible assets at December 31,
1997, was $10.5 (1996 -- $9.6).
In 1995, the Company reengineered various business processes which led to a
change in the extent to which certain intangibles were used in the Company's
operations. Impairments were recognized when the undiscounted expected future
operating cash flows derived from such intangible assets were less than their
carrying values or in the case of certain patents and technology, on the
discontinued use of such identifiable intangibles. The 1995 operating loss
included a $1.3 million loss on the impairment of such intangible assets.
F-13
<PAGE> 88
INTERNATIONAL COMFORT PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. OTHER ASSETS
Other assets are classified as follows:
<TABLE>
<CAPTION>
1996 1997
----- -----
<S> <C> <C>
Debt issuance costs, less accumulated amortization.......... $ 5.7 $ 4.3
Due from insurers on environmental claim(Note 15(b))........ 5.6 5.0
Other....................................................... 2.1 .8
----- -----
$13.4 $10.1
===== =====
</TABLE>
7. SHORT-TERM BORROWINGS
The details of short-term borrowings at December 31 are as follows:
<TABLE>
<CAPTION>
1996 1997
----- -----
<S> <C> <C>
ICP (USA) -- Receivables Purchase Agreement................. $27.0 $10.0
ICP (Canada)................................................ 12.0 8.8
Industrias HVH, S.A. -- Line of Credit...................... -- .9
----- -----
$39.0 $19.7
===== =====
</TABLE>
(A) ICP (USA)
RECEIVABLES PURCHASE AGREEMENT
On July 25, 1996, ICP (USA) entered into a five year agreement to sell on a
revolving basis, up to a $70.0 undivided participation ownership interest in a
designated pool of its accounts receivable. This transfer of receivables does
not constitute a sale for accounting purposes on the basis that all the
significant risks and rewards of ownership of the receivables are not
transferred to the purchaser. Accordingly, the pool of receivables of $10.0 is
included in accounts receivable at December 31, 1997 (1996 -- $27.0). In
connection with the significant change in and amendment to previous financing
agreements, ICP (USA) recorded a write-off of debt issuance costs of $2.1 in the
1995 consolidated statement of loss.
The receivables purchase agreement requires ICP (USA) to pay fees plus
certain administrative costs. At December 31, 1997, the cost of the receivable
facility including unused line fees was 10.4% (1996 -- 9.8%). The unamortized
transaction fees of $1.1 are included in Other Assets at December 31, 1997.
REVOLVING CREDIT FACILITY
On July 18, 1997, ICP (USA) entered into a two year $15.0 million revolving
credit facility secured by inventories. This revolving credit facility accrues
interest at prime or LIBOR plus 1.5%. As of December 31, 1997, the Company has
no outstanding balance owing on this facility.
(B) ICP (CANADA)
ICP (Canada) has a Cdn. $30.0 million revolving credit facility, of which
$8.8 (Cdn. $12.6 million) was utilized at December 31, 1997. This three year
facility was established on December 19, 1996. ICP (Canada)'s revolving credit
facility accrues interest at prime plus 1.0% per annum or at Bankers' Acceptance
rates plus a stamping fee of 2.0% as selected by the Company (7.0% at December
31, 1997). All of ICP (Canada)'s assets are pledged as collateral under its
facility which contains covenants, the most restrictive of which require it to
maintain a certain minimum interest coverage and net worth and precludes the
payment of dividends. At December 31, 1997, the restricted net assets of ICP
(Canada) were approximately $13.0.
F-14
<PAGE> 89
INTERNATIONAL COMFORT PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Subsequent to year end, ICP (Canada) obtained a waiver of its covenant breach
for the minimum interest coverage ratio which existed at December 31, 1997.
(C) The maximum amount of short-term borrowings outstanding, including the
advances received under the receivables purchase agreement at any month-end
during the year ended December 31, 1997, was $65.9 (1996 -- $64.4). The average
short-term borrowings outstanding, including the advances received under the
receivables purchase agreement, calculated by averaging month-end balances,
during the year ended December 31, 1997, was $39.2 (1996 -- $46.0).
The weighted average interest rate on the outstanding short-term borrowings
at December 31, 1997, was 8.2% (1996 -- 7.9%). Weighted average interest rates
are calculated based on actual interest rates in effect and the short-term
borrowings outstanding as at December 31.
8. LONG-TERM DEBT
(A) The details of long-term debt are as follows:
<TABLE>
<CAPTION>
1996 1997
------ ------
<S> <C> <C>
9.75% Senior Notes due March 1, 2000........................ $140.0 $140.0
Term bank loan, due 2000 and 2001........................... 25.0 25.0
Note payable................................................ -- .8
------ ------
165.0 165.8
Current portion of note payable included in current
liabilities............................................... -- .2
------ ------
$165.0 $165.6
====== ======
</TABLE>
(B) ICP (USA)
On March 11, 1993, ICP (USA) issued $140.0 of 9.75% senior secured notes
("Senior Notes") which are repayable on March 1, 2000. The Senior Notes require
mandatory prepayments if ICP (USA) has certain cash proceeds from asset sales as
defined in the Senior Note agreement. Interest on the Senior Notes is payable
semi-annually in March and September. The Senior Notes were trading 101.50/102
(bid/offer) at December 31, 1997.
The Senior Notes are collateralized by substantially all the real and
personal property of ICP (USA), other than accounts receivable and inventories.
The Senior Notes indenture contains covenants which limit certain transactions
including the payment of dividends.
On July 25, 1996, ICP (USA) terminated $20.0 notional amount of interest
rate swaps which had effectively converted this amount of the Senior Notes to a
variable rate of interest. In connection with the termination of this interest
rate swap, ICP (USA) incurred costs of $1.9 which were deferred and are being
amortized over the remaining term of the Senior Notes. As of December 31, 1997,
the entire $140.0 Senior Notes are fixed at a rate of 9.75% through the maturity
date of March 1, 2000.
(C) CHL HOLDINGS INC.
On December 19, 1996, CHL Holdings Inc., a wholly owned United States
subsidiary of the Company, arranged an unsecured term bank loan in the amount of
$25.0 due in full by October 15, 2001. The Company is required to repay $15.0 in
2000 and $10.0 in 2001. The term bank loan accrues interest at LIBOR plus 0.25%
(6.2% at December 31, 1997) and has been guaranteed by a third party. The
guarantor holds a $15.0 subordinated security interest in ICP (Canada)'s
receivables and inventories, and the shares of ICP (Canada) have been pledged in
support of the guarantee. The pledge agreement contains certain covenants, the
most
F-15
<PAGE> 90
INTERNATIONAL COMFORT PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
restrictive of which requires ICP (Canada) to maintain a minimum level of
receivables and inventories in excess of its borrowings.
(D) Under the provisions of the various loan agreements and indentures, the
Company is required to make installments of $.2, $.2, $155.2, $10.2, and nil
during the next five years beginning in 1998.
9. SHARE CAPITAL
(A) ORDINARY SHARES
(i) Authorized and Outstanding
The Company is authorized to issue an unlimited number of ordinary shares.
Changes in the issued and outstanding ordinary shares for the years 1995, 1996
and 1997 are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------------------- ------------------- -------------------
NUMBER AMOUNT NUMBER AMOUNT NUMBER AMOUNT
---------- ------ ---------- ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Issued and outstanding
Beginning of the year..... 38,649,949 $165.9 39,042,574 $166.5 39,260,322 $169.2
Issued under the Employee
Stock Option Plan......... -- -- -- -- 474,200 1.3
Issued under the Share
Ownership Savings Plan.... 392,625 .6 201,763 .5 95,920 .6
Issued under the Directors
Share Compensation
Arrangement............... -- -- 15,985 -- 16,670 .1
Receipt of Funds from
Trustee for 1990 Plan of
Arrangement............... -- -- -- 2.2 -- --
---------- ------ ---------- ------ ---------- ------
Issued and outstanding
End of the year........... 39,042,574 $166.5 39,260,322 $169.2 39,847,112 $171.2
========== ====== ========== ====== ========== ======
</TABLE>
(ii) Employee Stock Option Plan
A maximum of 2,500,000 ordinary shares have been reserved for issuance to
officers and employees of the Company under the Employee Stock Option Plan. The
term of all options cannot exceed ten years from the date the option is granted
and are vested at an annual rate of 20% per year on a cumulative basis, except
in certain circumstances where the exercise of such options would be
accelerated.
The option exercise price is fixed by the Board of Directors at the time
each option is authorized and cannot be less than the weighted average sales
price per share on The Toronto Stock Exchange on the business day preceding the
date of authorization.
Changes in the share options outstanding from January 1, 1995 to December
31, 1997 are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Balance -- Beginning of the year...................... 1,281,400 776,000 1,720,000
Granted............................................... -- 1,000,000 770,000
Exercised............................................. -- -- (474,200)
Canceled.............................................. (515,400) (56,000) (56,000)
1990 LTIP units converted............................. 10,000 -- --
--------- --------- ---------
Balance -- End of the year............................ 776,000 1,720,000 1,959,800
========= ========= =========
</TABLE>
F-16
<PAGE> 91
INTERNATIONAL COMFORT PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The details of the options outstanding at December 31, 1997, at each exercise
price are as follows:
<TABLE>
<CAPTION>
NUMBER
EXERCISE PRICE (CDN.$) EXPIRY DATE OF SHARES
---------------------- ----------- ---------
<C> <S> <C>
$3.10 February 29, 2000..................................... 25,000
$3.10 May 30, 2000.......................................... 25,000
$3.50 August 24, 2001 ...................................... 65,000
$3.10 December 19, 2001..................................... 211,000
$2.80 April 16, 2003........................................ 723,800
$3.90 July 11, 2003......................................... 105,000
$4.20 July 31, 2003......................................... 10,000
$4.10 August 23, 2003 ...................................... 15,000
$3.83 November 29, 2003..................................... 10,000
$5.20 January 31, 2004...................................... 45,000
$5.80 February 28, 2004..................................... 15,000
$7.05 April 29, 2004........................................ 710,000
---------
1,959,800
=========
</TABLE>
(iii) Share Ownership Savings Plan
Effective July 1, 1992, certain employees of the Company were eligible to
participate in the Company's Share Ownership Savings Plan (the "Savings Plan").
Generally, the Savings Plan is available to all non-union employees following
the completion of one year of continuous service with the Company. The Savings
Plan allows eligible employees to contribute from one to six percent of their
salary to the Savings Plan. The Company is required to match 25% of the
employees' contributions and may make additional annual contributions of up to
75% of the employees' contribution at its discretion. In February 1997, the
hourly employees began participating in a hourly savings plan with no matching
company contributions. In 1997, the Company's expense with respect to both
savings plans was $.3 (1996 -- $.1).
(iv) Long-Term Incentive Plans
Effective April 29, 1997, the Company adopted the 1997 Long-Term Incentive
Plan (the "1997 Plan") which will provide deferred compensation opportunities to
certain senior managers of the Company. This deferred cash compensation plan is
based on the awarding of Performance Units, the value of which is related to the
appreciation in the value of the ordinary shares of the Company.
The 1997 Plan is comprised of (i) Three year Performance Units which are
awarded, valued and paid at the end of a three calendar year period (the
"Performance Period") as designated by the Pension and Compensation Committee
(the "Committee") of the Board of Directors, and (ii) Long-term Performance
Units which are awarded at the end of the Performance Period, but paid upon
retirement, according to a vesting schedule, and subject to forfeiture. The
initial grant price of the Performance Units is the value established by the
Committee at the beginning of the Performance Period, to which the future
ordinary share price shall be compared to determine the appreciated value for
purposes of determining the value of Performance Units attributable to that
Performance Period. At the end of the Performance Period, the number of
Performance Units earned, if any, will be based on the extent to which the
established objectives of average three year earnings per share goals have been
achieved. If the threshold objective is not met, no Performance Units are
earned. If the target objective is exceeded, additional Performance Units can be
earned, up to a predetermined maximum level.
Performance Units shall be valued in the currency of the resident country
of the participant. The value of a Three year Performance Unit is calculated as
the equivalent of the difference in price of the Company's
F-17
<PAGE> 92
INTERNATIONAL COMFORT PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ordinary shares for the average of the last five business days of the last
calendar year of the Performance Period, less the Grant Price. The value of a
Long-term Performance Unit is calculated as the equivalent of the difference in
price of the Company's ordinary shares for the average of the six months prior
to termination or retirement, less the grant price.
On April 29, 1997, the Company awarded target thresholds of 177,500
Performance Units and 180,000 Long-term Performance Units to senior management
at a grant price of Cdn. $7.05. The expense for 1997 relating to the 1997 Plan
based upon the increase in the Company's stock price since the date of grant is
$.4.
In 1990, the Company adopted a long-term incentive plan (the "1990 Plan").
Under the 1990 Plan, certain key officers and employees of the Company were
granted long-term incentive compensation units ("1990 LTIP Units") the value of
which shall be determined by reference to the appreciation in the market value
of the ordinary shares over stated periods of time. Based on the discretion of
the Board of Directors of the Company, the appreciation in the market value of
the ordinary shares will be distributed to the holder thereof by payment of
cash, issuance of ordinary shares or a combination thereof.
As at December 31, 1997, 34,000 units from the February 1, 1993 granting
were outstanding under the 1990 Plan with an initial value per unit of Cdn.
$7.125 and a valuation date of February 1, 1998. In 1997, the Company's expense
with respect to the 1990 Plan was approximately $.1.
(B) PREFERENCE SHARES
The Company is authorized to issue an unlimited number of Class A
preference shares issuable in series and rank senior to the Class B preference
shares and ordinary shares as to dividends and participation in certain
distributions of assets on liquidation. Any series of the shares may be made
convertible into ordinary shares and have no voting rights as a class. The
Company is also authorized to issue an unlimited number of Class B preference
shares issuable in series and rank senior to ordinary shares and junior to the
Class A preference shares as to dividends and participation in certain
distributions of assets on liquidation. Any series of the shares may be made
convertible into ordinary shares and have no voting rights as a class.
As of December 31, 1997, the Company has not issued any Class A or B
preference shares.
10. FOREIGN CURRENCY TRANSLATION ADJUSTMENT
The Company adopted the United States dollar as its reporting currency,
effective January 1, 1994. Accordingly, the foreign currency translation
adjustment which is included as a component of shareholders' equity, represents
the unrealized gain or loss on translation of financial statements of
self-sustaining operations up to December 31, 1997. Prior to 1994, this
adjustment represented the unrealized gain or loss on translation of financial
statements of self-sustaining operations in the United States. Changes during
the respective years are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Cumulative unrealized loss at January 1..................... $(1.9) $(1.1) $(2.0)
Unrealized gain (loss) on translation of net assets......... .8 (.9) (1.3)
----- ----- -----
Cumulative unrealized loss at December 31................... $(1.1) $(2.0) $(3.3)
===== ===== =====
</TABLE>
The rate of exchange as at December 31, 1997 was U.S. $1.00 = Cdn. $1.4291
(1996 -- U.S. $1.00 = Cdn. $1.3706), and the average rate for the year was U.S.
$1.00 = Cdn. $1.3847 (1996 -- U.S. $1.00 = Cdn. $1.3636; 1995 -- U.S. $1.00 =
Cdn. $1.3727).
F-18
<PAGE> 93
INTERNATIONAL COMFORT PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. INCOME TAXES
The components of income (loss) before income taxes and the income tax
provision (recovery) are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------ ----- -----
<S> <C> <C> <C>
Income (loss) before income taxes
Canada.................................................... $ (1.3) $ 2.0 $ (.3)
United States............................................. (67.1) 9.6 22.3
------ ----- -----
$(68.4) $11.6 $22.0
====== ===== =====
Current income tax provision (recovery)
Canada.................................................... $ 1.8 $ -- $ --
United States............................................. (.4) -- .6
------ ----- -----
1.4 -- .6
------ ----- -----
Deferred income tax provision (recovery)
Canada.................................................... 3.9 -- --
United States............................................. 7.5 -- (.6)
------ ----- -----
11.4 -- (.6)
------ ----- -----
Total income tax provision (recovery)............. $ 12.8 $ -- $ --
====== ===== =====
</TABLE>
In 1995, the deferred income tax provision of $11.4 represented the
write-off of accumulated deferred income tax debits recorded as of December 31,
1994. This write-off was required since there was no longer reasonable assurance
as of December 31, 1995, that the timing differences supporting these deferred
tax debits would reverse.
A reconciliation between the combined statutory and the effective rate of
income tax is provided below:
<TABLE>
<CAPTION>
1995 1996 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Income (loss) before income taxes... $(68.4) $11.6 $22.0
Combined statutory tax rate......... 38.8% 38.8% 38.8%
-------------- -------------- --------------
Computed income tax provision
(recovery)........................ (26.5) 4.5 8.5
Increase (decrease) resulting from:
Non-deductible depreciation....... .8 .3 .3
Unrecognized (recognized) benefit
of losses and expenses......... 25.7 (1.6) (.8)
Prior years' deferred taxes
written-off.................... 11.4 -- --
Utilization of loss
carryforwards.................. -- (3.4) (7.7)
Other............................. 1.4 .2 (.3)
-------------- -------------- --------------
Actual income tax provision
(recovery)........................ $ 12.8 $ -- $ --
============== ============== ==============
Effective rate of income tax
recovery.......................... not meaningful not meaningful not meaningful
============== ============== ==============
</TABLE>
F-19
<PAGE> 94
INTERNATIONAL COMFORT PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1997, the Corporation and its subsidiaries had the
following approximate amounts available to reduce future years' earnings for
income tax purposes, the effect of which has not been recognized in the
financial statements.
<TABLE>
<CAPTION>
UNITED
LOSSES FOR TAX PURPOSES EXPIRING IN CANADA STATES TOTAL
- ----------------------------------- ------ ------ -----
<S> <C> <C> <C>
1998........................................................ $ 3.5 $ -- $ 3.5
1999........................................................ 6.5 -- 6.5
2000........................................................ .5 -- .5
2001........................................................ 7.9 -- 7.9
2002........................................................ 5.5 -- 5.5
2003........................................................ 2.9 -- 2.9
2004........................................................ 1.6 -- 1.6
2010........................................................ -- 21.0 21.0
2011........................................................ -- 4.6 4.6
----- ----- -----
Total losses...................................... 28.4 25.6 54.0
Other deductions and basis differences not yet taken as a
deduction for income tax purposes......................... 9.6 32.1 41.7
----- ----- -----
$38.0 $57.7 $95.7
===== ===== =====
</TABLE>
12. INCOME (LOSS) PER ORDINARY SHARE
The basic income (loss) per ordinary share is calculated on the weighted
average number of shares outstanding during the respective years as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Income (loss) to ordinary shareholders before discontinued
operations.............................................. $ (81.2) $ 11.6 $ 22.0
Loss from discontinued operations......................... (12.0) (3.1) --
------- ------- -------
Net income (loss) to ordinary shareholders................ $ (93.2) $ 8.50 $ 22.0
======= ======= =======
Weighted average number of ordinary shares outstanding
during the year (in millions)........................... 38.828 39.161 39.664
======= ======= =======
Income (loss) per ordinary share
From continuing operations.............................. $ (2.09) $ 0.30 $ 0.56
After discontinued operations........................... $ (2.40) $ 0.22 $ 0.56
======= ======= =======
</TABLE>
The calculation of net income per ordinary share on a fully diluted basis
assumes the exercise of outstanding stock options if such action would result in
dilution of earnings per share. In 1997, fully diluted net income per ordinary
share was approximately $0.54.
F-20
<PAGE> 95
INTERNATIONAL COMFORT PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. PENSION PLANS
The Company and its subsidiaries have various defined benefit pension plans
available to substantially all permanent full-time employees. The total pension
expense for 1997 amounted to $2.9 (1996 -- $2.8; 1995 -- $3.5) and is comprised
of the following:
<TABLE>
<CAPTION>
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Current service costs....................................... $ 2.3 $ 2.3 $ 2.4
Interest costs on projected benefit obligation.............. 4.5 4.1 4.5
Return on assets held in the plans.......................... (6.2) (4.5) (4.3)
Net amortization and deferral............................... 2.9 .9 .3
----- ----- -----
$ 3.5 $ 2.8 $ 2.9
===== ===== =====
</TABLE>
The actuarial present value of accrued pension benefits represents the
discounted value of benefits expected to be paid to plan members, based on
projected salaries prorated on service. No escalation of salaries is used to
determine the actuarial present value of accrued pension benefits where the
pension benefit is fixed and subject to renegotiation.
Certain key assumptions used in determining both the pension expense for
1997, and the actuarial present value of accrued pension benefits as at December
31, 1997, are as follows:
<TABLE>
<CAPTION>
CANADIAN
PLANS U.S. PLANS
-------- ----------
<S> <C> <C>
Discount rate............................................... 8.0% 7.5%
Rate of increase of compensation levels..................... 6.0 4.5
Expected long-term rates of return on plan assets........... 8.0 9.0
--- ---
</TABLE>
The status of pension plans at December 31, 1997, is as follows:
<TABLE>
<CAPTION>
CANADIAN
PLANS U.S. PLANS
-------- -----------
<S> <C> <C>
Actuarial present value of
Vested benefit obligations................................ $13.6 $36.9
Nonvested benefit obligations............................. -- 3.2
----- -----
Accumulated benefit obligations............................. 13.6 40.1
Additional amounts related to projected salary and wage
increases................................................. .5 9.2
----- -----
Total projected benefit obligations......................... 14.1 49.3
Plan assets at market value................................. 16.6 43.7
----- -----
Plan assets in excess of (less than) projected benefit
obligations............................................... 2.5 (5.6)
Unrecognized net (gain) loss................................ (1.5) 2.7
Unrecognized prior service cost............................. .2 1.4
Unrecognized net (asset) obligation......................... (.6) 1.1
----- -----
Prepaid (accrued) pension cost.............................. $ .6 $ (.4)
===== =====
</TABLE>
F-21
<PAGE> 96
INTERNATIONAL COMFORT PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. BUSINESS SEGMENTS
The following is an analysis of certain financial information by business
lines and geographical areas for the three years ended December 31, 1995, 1996
and 1997 as it relates to operating revenue, operating profit (loss),
identifiable assets, capital expenditures and depreciation and amortization of
intangibles. Operating profit is total revenue less operating expenses which
includes an allocation of corporate expenses. Identifiable assets include only
those assets directly identifiable with those operations.
<TABLE>
<CAPTION>
OPERATING REVENUE OPERATING PROFIT (LOSS)
------------------------ -------------------------
1995 1996 1997 1995 1996 1997
------ ------ ------ ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Heating and cooling
Canada......................................... $ 79.0 $ 76.8 $ 74.0 $ (1.0) $ 3.3 $ .3
United States.................................. 453.6 564.7 556.3 (38.3) 30.2 41.2
------ ------ ------ ------ ----- -----
532.6 641.5 630.3 (39.3) 33.5 41.5
Corporate........................................ .2 .4 .4 (4.0) (.1) --
------ ------ ------ ------ ----- -----
$532.8 $641.9 $630.7 $(43.3) $33.4 $41.5
====== ====== ====== ====== ===== =====
</TABLE>
<TABLE>
<CAPTION>
AMORTIZATION OF
INTANGIBLES AND
IDENTIFIABLE ASSETS CAPITAL EXPENDITURES DEPRECIATION
------------------------ -------------------- ---------------------
1995 1996 1997 1995 1996 1997 1995 1996 1997
------ ------ ------ ----- ----- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Heating and cooling
Canada....................... $ 42.2 $ 46.5 $ 43.8 $ .6 $ .4 $1.4 $ .6 $ .6 $ .9
United States................ 251.0 280.4 293.1 23.9 11.4 7.1 17.7 15.1 14.2
------ ------ ------ ----- ----- ---- ----- ----- -----
293.2 326.9 336.9 24.5 11.8 8.5 18.3 15.7 15.1
Corporate...................... 25.0 18.1 15.1 -- -- -- .5 -- --
------ ------ ------ ----- ----- ---- ----- ----- -----
318.2 345.0 352.0 $24.5 $11.8 $8.5 $18.8 $15.7 $15.1
===== ===== ==== ===== ===== =====
Discontinued Steel Pipe
Operation.................... 27.6 -- --
------ ------ ------
$345.8 $345.0 $352.0
====== ====== ======
</TABLE>
15. COMMITMENTS AND CONTINGENCIES
(a) ICP (USA) has been involved in paying the costs of assessing the extent
of, and remediating, environmental contamination at its Lewisburg manufacturing
facility caused by a sudden and accidental spill in 1980. ICP (USA) has paid for
certain investigative activities and remediation at the manufacturing facility
as well as off-site drum storage locations. At December 31, 1997, the costs of
the remainder of the environmental cleanup, which management believes are
reasonably determinable over a ten year period, were discounted at 5.5%. At
December 31, 1997, ICP (USA) has an accrual of $3.1 for the cost of this
cleanup, of which $2.7 is included in Environmental Liabilities and $.4 in
Accrued liabilities.
The undiscounted cash flows are estimated to be as follows:
<TABLE>
<CAPTION>
YEAR
----
<S> <C>
1998..................................................... $ .4
1999..................................................... .7
2000..................................................... .2
2001..................................................... .2
2002..................................................... .2
Thereafter.................................................. 1.6
----
$3.3
====
</TABLE>
F-22
<PAGE> 97
INTERNATIONAL COMFORT PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the environmental remediation at the off-site drum
storage locations, ICP (USA) has entered into a cost-sharing agreement with the
previous owner. This agreement calls for each entity to bear fifty percent of
the investigation, cleanup, monitoring, removal and treatment of the existing
drum storage sites. Additionally, in the event that other drum storage sites are
discovered, ICP (USA) and the previous owner shall bear the additional costs at
a ratio of sixty percent to forty percent, respectively. The estimated costs to
clean up the existing drum storage sites are included in the amounts detailed
above.
(b) In 1991, the Company and Flying J, Inc. ("Flying J") entered into a
cost sharing agreement whereby the Company will participate with Flying J in the
financing of future cleanup activities for environmental contamination at
various refinery sites sold by the Company to Flying J in 1980. This settlement
does not affect claims by Flying J or the Company against third parties who may
be responsible for contribution to refinery cleanup costs. In 1991, the Company
also reached a settlement with several of its insurance carriers whereby the
insurers will reimburse the Company for a portion of the expenses the Company
will incur in the cleanup activities at the refineries. Ongoing cleanup
activities at four refinery sites are at different regulatory stages.
Although the scope of the projects is becoming better understood and
defined with the various regulatory agencies, the ultimate scope of the projects
remains uncertain and it is not possible to definitively estimate the ultimate
costs of remediation of such environmental contamination. At December 31, 1997,
the Company has an accrual of $11.0 for its estimated share of future cleanup
costs, of which $10.2 is included in Environmental Liabilities and $.8 in
Accrued liabilities. The Company has offsetting receivables due from insurers of
$5.0 and $1.8 which are included in Other Assets and Accounts receivable,
respectively.
The undiscounted cash flows are expected to be as follows:
<TABLE>
<CAPTION>
YEAR
----
<S> <C>
1998..................................................... $ .8
1999..................................................... .8
2000..................................................... 1.5
2001..................................................... .5
2002..................................................... .5
Thereafter.................................................. 6.9
-----
$11.0
=====
</TABLE>
Based on current information prepared by independent environmental
consultants, the Company's share of the cost of environmental cleanup,
discounted at 5.5% is currently estimated to be approximately $7.2 over the next
21 years. The expected insurance recoveries discounted at 5.5% are currently
estimated to be approximately $3.6 over the next 21 years.
(c) In February 1995, an action was commenced against ICP (Canada) in the
Ontario Court (General Division) (the "Court"), for damages for breach of
contract or negligence in the amount of $4.9 (Cdn. $7.0 million), plus interest
and costs, arising out of alleged defective cooling banks which were designed,
manufactured and delivered by Unifin International, a former division of ICP
(Canada) ("Unifin"), to the plaintiffs between 1981 and 1984.
The Company has filed a statement of Defense with the Court that denies the
plaintiffs' allegations and intends to vigorously defend its position against
the claim. The Company has notified its primary and umbrella liability insurance
carriers for their possible involvement with this claim. The Company believes
that it has insurance coverage for this claim.
In a similar action, ICP (Canada) was served with an Amended Summons on
January 22, 1998, in an action commenced in the Supreme Court of New South
Wales, Sydney Registry ("Supreme Court"),
F-23
<PAGE> 98
INTERNATIONAL COMFORT PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
alleging that Unifin designed, manufactured and supplied defective oil coolers
to a generator/transformer project in Australia. The plaintiff pleads that
Unifin's negligence caused the oil coolers to produce aluminum alloy metal
contamination of the transformer cooling oil, in turn causing major damage to
the generators/transformers necessitating major repairs in the amount of at
least approximately $9.0 (Aus $14.0 million).
The Company was not represented on the hearing of an application for leave
to amend the Summons and intends to move the Supreme Court to contest its
jurisdiction, and set aside the substitution and service of the Amended Summons.
While it is too early to evaluate the merits of the plaintiff's claim against
it, the Company believes that the plaintiff's action should be heard in the
Ontario Court, if at all, and consolidated with the similar February 1995 action
brought in Ontario which is based on substantially the same allegations of fact.
(d) The Company leases certain facilities and equipment under noncancelable
operating leases. Lease rental expense during the current year amounted to $4.0
(1996 -- $5.9; 1995 -- $6.8). The approximate aggregate minimum annual rentals
under long-term leases in future years, excluding capital leases, at December
31, 1997, are as follows:
<TABLE>
<CAPTION>
YEAR
----
<S> <C>
1998................................................... $2.8
1999................................................... 2.0
2000................................................... 1.6
2001................................................... .6
2002................................................... .4
Thereafter.................................................. .6
----
$8.0
====
</TABLE>
(e) The Company and its subsidiaries are parties to various other claims
and lawsuits. The Company believes that such proceedings will not have a
material effect on the Company's financial position or future operating results,
although no assurance can be given with respect to the ultimate outcome for any
such litigation.
16. DISCONTINUED OPERATIONS
There were no discontinued operations in 1997. In the consolidated
statements of income (loss), discontinued operations consisted of the following:
<TABLE>
<CAPTION>
1995 1996
------ -----
<S> <C> <C>
Steel Pipe Operations....................................... $(14.3) $(3.1)
Settlement of Former Resources Claim ....................... 2.9 --
Utilization of Prior Years' Tax Losses...................... 1.3 --
Write-off of Deferred Tax Debit -- Flying J Environmental
Provision................................................. (1.9) --
------ -----
$(12.0) $(3.1)
====== =====
</TABLE>
(i) Steel Pipe Operations
On May 30, 1996, the Company sold Thompson Pipe and Steel Company, its
wholly owned steel pipe manufacturing subsidiary, for total consideration of
approximately $6.5, including the assumption of bank indebtedness of
approximately $6.1.
F-24
<PAGE> 99
INTERNATIONAL COMFORT PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Operating results of the Steel Pipe Operation for the year ended December
31, 1995 and the five months ended May 30, 1996 are as follows:
<TABLE>
<CAPTION>
1995 1996
------ -----
<S> <C> <C>
Operating revenue........................................... $ 37.9 $10.9
====== =====
Loss before income taxes.................................... (8.0) (3.1)
Provision for income taxes.................................. (.3) --
------ -----
Loss from Steel Pipe Operations............................. (8.3) (3.1)
Write-down to estimated net realizable value................ (5.4) --
Estimated disposal costs.................................... (.6) --
------ -----
$(14.3) $(3.1)
====== =====
</TABLE>
(ii) Settlement of Former Resources Claim
In December 1995, the Company received a final cash settlement resulting
from a favorable judgment relating to the Company's former Resources Operations,
which were sold in 1989. The $2.9 received has been recorded as income from
discontinued operations.
(iii) Utilization of Prior Years' Tax Losses
The Company has utilized prior years' tax losses which resulted from the
costs incurred on the sale of the Company's Utilities and Propane Operations in
1990 to reduce current taxes otherwise payable from continuing operations.
(iv) Write-off of Deferred Tax Debit -- Flying J Environmental Provision
In 1995, the deferred tax provision of $1.9 represents the write-off of a
deferred tax debit established in prior years. This write-off was required since
there was no longer reasonable assurance as of December 31, 1995, that the
timing differences supporting this deferred tax debit would reverse.
17. ASSET WRITEDOWNS AND RESTRUCTURING COSTS
Through the continuation of the business process reengineering efforts
which began in 1993, ICP (USA) identified in 1995 certain fixed assets which
were no longer considered to be economically viable to the production process.
These assets included a coil delivery system with a carrying value of $3.4, an
automated paint system with a carrying value of $4.1, and other idle assets with
a carrying value of $1.2. ICP (USA) recognized an impairment loss on these
assets of $8.7 which was included in asset writedowns and restructuring costs in
1995.
In 1995, ICP (Canada) wrote down the carrying value of idle assets,
comprised of machinery and equipment by $1.4 to orderly liquidation value. This
writedown was also included in asset writedowns and restructuring costs for
1995.
During 1995, the restructuring and reengineering programs resulted in $2.2
of severance and benefits expense at ICP (USA). In addition, reductions in
salaried personnel at ICP (Canada) resulted in severance costs of $1.1. Finally,
the Company's decision in December 1995 to move its Canadian Corporate head
office to Lewisburg, Tennessee, resulted in severance and other retirement
benefits of $2.8. The restructuring costs totaling $6.1 were partially offset by
a reduction of prior years' restructuring accruals of $.7, resulting in a 1995
restructuring charge of $5.4 which was included in asset writedowns and
restructuring costs.
F-25
<PAGE> 100
INTERNATIONAL COMFORT PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A rollforward of the restructuring cost accrual is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
----- ----- ----
<S> <C> <C> <C>
Balance -- Beginning of the year............................ $ 3.6 $ 6.1 $2.4
Restructuring cost provision................................ 6.1 -- --
Reversals of prior years' accruals.......................... (.7) -- (.4)
Payments.................................................... (2.9) (3.7) (.6)
----- ----- ----
Balance -- End of the year.................................. $ 6.1 $ 2.4 $1.4
===== ===== ====
</TABLE>
18. DETAILS OF CASH PROVIDED BY (USED FOR) OPERATIONS
<TABLE>
<CAPTION>
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
(a) ITEMS NOT INVOLVING CURRENT CASH FLOWS
Depreciation and amortization........................... $20.1 $17.5 $16.4
Deferred income taxes................................... 11.4 -- --
Asset writedowns........................................ 10.1 -- --
Provision for bad debts................................. 9.7 2.8 .9
Write-off of debt issuance costs........................ 2.1 .6 --
Other................................................... 1.0 -- --
----- ----- -----
$54.4 $20.9 $17.3
===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
1995 1996 1997
----- ------ ------
<S> <C> <C> <C>
(b) CHANGES IN WORKING CAPITAL
Accounts and note receivable........................... $33.8 $ 5.7 $(37.5)
Inventories............................................ 59.9 (14.1) 10.2
Accounts payable, accrued liabilities and product
warranty................................................ 8.3 (15.3) 10.2
Other.................................................. (4.7) 5.3 (3.0)
----- ------ ------
$97.3 $(18.4) $(20.1)
===== ====== ======
</TABLE>
F-26
<PAGE> 101
INTERNATIONAL COMFORT PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. SIGNIFICANT DIFFERENCES BETWEEN CANADIAN AND U.S. ACCOUNTING
PRACTICES
Accounting principles adopted by the Company as reflected in these
consolidated financial statements in accordance with Canadian GAAP are generally
consistent with accounting principles accepted in the United States ("U.S.
GAAP") with certain exceptions. The following reconciliations reflect the
differences in these accounting principles where applicable to the Company. If
accounting principles generally accepted in the United States were followed, the
effect on the consolidated financial statements would be:
(a) Net income (loss) in accordance with U.S. GAAP
<TABLE>
<CAPTION>
1995 1996 1997
------ ------- ------
<S> <C> <C> <C>
Income (loss) from continuing operations (as reported)...... $(81.2) $ 11.6 $ 22.0
U.S. GAAP adjustments
Accounting for income taxes(1)............................ 2.8 (.7) (.7)
Postretirement benefits, net of income tax recovery of nil
in 1997 (1996 -- nil; 1995 -- $.5)(2).................. (.8) (1.8) (1.9)
Loss on early extinguishment of debt, net of income tax
recovery of nil in 1996 and 1995(3).................... .9 .6 --
Utilization of prior years' tax losses from discontinued
operations(4).......................................... 1.3 -- --
Discount on sale of receivables, net of income tax
provision of $.8 in 1995(5)............................ 1.3 -- --
------ ------- ------
Adjusted income (loss) from continuing operations........... (75.7) 9.7 19.4
Loss from discontinued operations, net of income taxes...... (13.3) (3.1) --
------ ------- ------
Income (loss) before extraordinary item..................... (89.0) 6.6 19.4
Extraordinary item
Loss on early extinguishment of debt, net of income tax
recovery of nil in 1996 and 1995(3).................... (.9) (.6) --
------ ------- ------
Net income (loss) under U.S. GAAP........................... $(89.9) $ 6.0 $ 19.4
====== ======= ======
Weighted average number of ordinary shares outstanding
during the year under U.S. GAAP (in millions)
Basic..................................................... 38.828 39.161 39.664
Diluted................................................... 38.828 39.254 40.549
Basic income (loss) per ordinary share under U.S. GAAP (in
dollars)
From continuing operations................................ $(1.95) $ 0.25 $ 0.49
Before extraordinary item................................. $(2.29) $ 0.17 $ 0.49
After extraordinary item.................................. $(2.32) $ 0.15 $ 0.49
Diluted income (loss) per ordinary share under U.S. GAAP (in
dollars)
From continuing operations................................ $(1.95) $ 0.25 $ 0.48
Before extraordinary item................................. $(2.29) $ 0.17 $ 0.48
After extraordinary item.................................. $(2.32) $ 0.15 $ 0.48
</TABLE>
- ---------------
(1) This reconciliation reflects the application of Statement of Financial
Accounting Standard ("SFAS") No. 109 "Accounting for Income Taxes".
Additionally, the following table outlines the significant components of the
Company's deferred tax assets (liabilities) as at December 31, 1996 and
1997, under U.S. GAAP disclosure requirements.
F-27
<PAGE> 102
INTERNATIONAL COMFORT PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
UNITED
DECEMBER 31, 1996 STATES CANADA TOTAL
- ----------------- ------- ------ ------
<S> <C> <C> <C>
Deferred tax assets
Net operating losses and other carryforwards.............. $ 14.0 $ 12.5 $ 26.5
Product liability and warranty............................ 10.1 .9 11.0
Allowance for doubtful accounts........................... 2.0 -- 2.0
Other tax assets.......................................... 14.1 1.9 16.0
------ ------ ------
Total deferred tax assets before allowance........ 40.2 15.3 55.5
Valuation allowance for deferred tax assets................. (26.3) (14.8) (41.1)
------ ------ ------
Deferred tax assets......................................... 13.9 .5 14.4
------ ------ ------
Deferred tax liabilities
Tax over book depreciation................................ (12.7) -- (12.7)
Other tax liabilities..................................... (1.2) (.5) (1.7)
------ ------ ------
Total deferred tax liabilities.................... (13.9) (.5) (14.4)
------ ------ ------
Net deferred tax assets........................... $ -- $ -- $ --
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
UNITED
DECEMBER 31, 1997 STATES CANADA TOTAL
- ----------------- ------- ------ ------
<S> <C> <C> <C>
Deferred tax assets
Net operating losses and other carryforwards.............. $ 8.7 $ 12.3 $ 21.0
Product liability and warranty............................ 10.6 .8 11.4
Allowance for doubtful accounts........................... 1.6 -- 1.6
Other tax assets.......................................... 11.9 1.7 13.6
------ ------ ------
Total deferred tax assets before allowance........ 32.8 14.8 47.6
Valuation allowance for deferred tax assets................. (18.2) (14.3) (32.5)
------ ------ ------
Deferred tax assets......................................... 14.6 .5 15.1
------ ------ ------
Deferred tax liabilities
Tax over book depreciation................................ (12.6) -- (12.6)
Other tax liabilities..................................... (1.4) (.5) (1.9)
------ ------ ------
Total deferred tax liabilities.................... (14.0) (.5) (14.5)
------ ------ ------
Net deferred tax assets........................... $ .6 $ -- $ .6
====== ====== ======
</TABLE>
(2) This reconciliation reflects the application of SFAS No. 106 "Employers'
Accounting for Postretirement Benefits Other Than Pensions", for the
Company's U.S. plans. The standard requires, among other things, the
recognition of postretirement benefits on an accrual basis as opposed to the
practice of recognizing the expense on a cash basis. The application of the
new accounting method, prospectively, results in the transition obligation
of U.S. $9.7 million being amortized on a straight-line basis over 25 years
for hourly employees and 21 years for salaried employees. The effect of
applying SFAS 106 was to decrease net income by $1.9 and $1.8 for 1997 and
1996, respectively, and increase the net loss by $.8 in 1995. Under Canadian
GAAP, the Company expenses such benefits as incurred.
The net periodic cost for postretirement health care benefits during 1995,
1996 and 1997, includes the following:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Service cost................................................ $ .7 $1.1 $1.0
Interest cost............................................... 1.3 1.4 1.4
Amortization of transition obligation....................... .5 .6 .6
---- ---- ----
$2.5 $3.1 $3.0
==== ==== ====
</TABLE>
F-28
<PAGE> 103
INTERNATIONAL COMFORT PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In general, retiree health benefits are paid as covered expenses are
incurred. The following table sets forth the funded status for the
Company's postretirement health care plan at December 31, 1996 and 1997.
<TABLE>
<CAPTION>
1996 1997
----- -----
<S> <C> <C>
Accumulated postretirement benefit obligations:
Retirees.................................................. $ 6.2 $ 8.8
Fully eligible active plan participants................... 2.5 2.7
Other active plan participants............................ 10.3 10.5
----- -----
Total obligation.................................. 19.0 22.0
Unrecognized:
Transition obligation..................................... (8.1) (6.8)
Change in actuarial assumptions........................... (5.0) (7.1)
----- -----
Accrued postretirement benefit.............................. $ 5.9 $ 8.1
===== =====
</TABLE>
The assumed discount rate was 7.5% and 7.75% at December 31, 1997 and 1996,
respectively, and the rate of increase in per capita costs of covered health
care benefits is assumed to be 6% in 1997, decreasing gradually to 5% by the
year 1999. Increasing the assumed health care cost trend rate by 1
percentage point would increase the accumulated postretirement benefit
obligation as of December 31, 1997, by approximately 13% and increase net
periodic postretirement benefit cost by approximately 16% in 1997.
(3) Under Canadian GAAP, this item is included in loss from continuing
operations. Under U.S. GAAP, such an item is treated as an extraordinary
item.
(4) Under U.S. GAAP, the utilization of prior years' tax losses is included in
loss from continuing operations in 1995.
(5) In 1995, there were differences between Canadian and U.S. GAAP in the
recognition of a transfer of receivables as a sale. Under Canadian GAAP, for
a transfer of receivables to be recognized as a sale, the transferor must
transfer the significant risks and rewards of ownership of the receivables,
whereas U.S. GAAP focuses on the control of the assets involved.
(b) Additional disclosure required under U.S. GAAP
(1) SFAS 123 permits the Company to continue to apply the recognition and
measurement principles of Accounting Principles Board Opinion No. 25.,
"Accounting for Stock Issued to Employees," to its stock option plan. If the
compensation cost for the Company's stock option plan had been determined based
on the fair value at the grant dates for the 1997 and 1996 options, consistent
with the method provided in SFAS 123, the Company's 1997 and 1996 pro forma net
income and earnings per share would have been $18.5 and $5.7, and $0.47 and
$0.15, respectively. The weighted average fair values of the 1997 and 1996
option grants are estimated on the dates of grant using the Black-Scholes option
pricing model with the following assumptions: expected volatility for 1997 and
1996 was 70 percent and 53 percent, respectively; risk-free interest rates for
1997 and 1996 were 5.7% and 6.6%, respectively; and expected lives of seven
years for both years. The weighted average fair values of the options granted in
1997 and 1996 were Cdn. $4.39 and Cdn. $1.46, respectively.
(2) Research and development expenses in 1997, 1996 and 1995 were $3.0,
$2.9 and $2.8, respectively.
F-29
<PAGE> 104
INTERNATIONAL COMFORT PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) Under U.S. GAAP, comprehensive income (loss), as defined by SFAS 130,
for the Company was $(89.8), $4.7 and $19.7 for the years ended December 31,
1995, 1996 and 1997, respectively, as outlined below:
<TABLE>
<CAPTION>
1995 1996 1997
------ ----- -----
<S> <C> <C> <C>
Net income (loss) under U.S. GAAP........................... $(89.9) $ 6.0 $19.4
------ ----- -----
Other comprehensive income
Foreign currency translation adjustment................... 0.8 (0.9) (1.3)
Minimum pension liability adjustment...................... (0.7) (0.4) 1.6
------ ----- -----
Other comprehensive income................................ 0.1 (1.3) 0.3
------ ----- -----
Comprehensive income (loss) under U.S. GAAP................. $(89.8) $ 4.7 $19.7
====== ===== =====
</TABLE>
(c) Consolidated Balance Sheets
<TABLE>
<CAPTION>
AMOUNTS AS ADJUSTED
AMOUNTS REPORTED TO
UNDER CONFORM WITH
CANADIAN GAAP U.S. GAAP
----------------- -------------------
1996 1997 1996 1997
------- ------- -------- --------
<S> <C> <C> <C> <C>
Prepaid expenses and other (see note 19(c)(1))............ $ 6.0 $ 7.6 $ 7.2 $ 8.8
Fixed assets (see note 19(c)(2)).......................... 100.2 93.6 102.3 95.5
Intangible assets (see note 19(c)(2))..................... 12.1 11.0 16.3 14.8
Accrued liabilities (see notes 19(a)(2) and 19(c)(1))..... 28.2 26.5 32.4 28.9
Other long-term liabilities (see note 19(a)(2))........... 4.2 5.1 9.0 12.6
Deficit................................................... (138.4) (116.4) (140.6) (119.6)
Shareholders' equity...................................... 28.8 51.5 26.6 48.3
</TABLE>
- ---------------
(1) Under SFAS No. 87 "Employers' Accounting for Pensions," the amount of the
unfunded accumulated benefit obligation is calculated and separately
recorded in the balance sheet as a liability, offset by a prepaid intangible
asset and resulting reduction in shareholders' equity.
(2) Under SFAS No. 109, the Company was required to reflect additional deferred
tax liabilities on the purchase accounting acquisition of ICP (USA) which
were allocated to fixed assets and goodwill.
(d) There are differences between Canadian and U.S. GAAP in the
presentation of the Statement of Changes in Financial Position. The following
discloses cash flows information in accordance with SFAS 95:
<TABLE>
<CAPTION>
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Net cash provided by (used in) operating activities......... $70.3 $(0.7) $19.2
Net cash provided by (used in) investing activities......... (10.8) (3.7) 10.7
Net cash provided by (used in) financing activities......... (59.3) 9.0 (16.5)
----- ----- -----
Increase in cash and cash equivalents....................... 0.2 4.6 13.4
Cash and cash equivalents -- beginning of the year.......... 12.8 13.0 17.6
----- ----- -----
Cash and cash equivalents -- end of the year................ $13.0 $17.6 $31.0
===== ===== =====
</TABLE>
Non-cash transactions:
During 1996, the Company acquired Coastline and General for consideration
of the assumption of debt in the amount of $15.3.
F-30
<PAGE> 105
INTERNATIONAL COMFORT PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
20. SUMMARIZED FINANCIAL INFORMATION OF SUBSIDIARY
Effective May 13, 1998, International Comfort Products Holdings, Inc. ("ICP
Holdings"), a wholly owned subsidiary of the Company, issued $150 million of its
8 5/8% Senior Notes due 2008, for which a Registration Statement has been filed
under the Securities Act of 1933. CHL Holdings, Inc. ("CHL") is the predecessor
to ICP Holdings. CHL (prior to its merger with International Comfort Products
Corporation (USA)) was, and ICP Holdings, is a wholly-owned subsidiary of the
Company. Upon the Registration Statement being declared effective, ICP Holdings
would be subject to the reporting requirements under Section 13 or 15(d) of the
Securities Exchange Act of 1934 (the "Exchange Act"). Because the Notes,
however, are fully and unconditionally guaranteed by the Company and management
has determined that such information is not material to the holders of the
Notes, the Company and ICP Holdings have filed with the Commission a request
that ICP Holdings be exempted from the reporting requirements of the Exchange
Act. Financial information relating to CHL (predecessor to ICP Holdings) is
presented herein in accordance with Staff Accounting Bulletin No. 53 as an
addition to the notes to the financial statements of the Company.
The following reflects the summarized consolidated financial information of
CHL, a wholly-owned subsidiary of the Company (predecessor to ICP Holdings):
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Statement of Income Data:
Operating Revenue...................................... $470.4 $587.6 $577.0
Gross Margin........................................... 51.6 111.0 113.9
Income (Loss) From Continuing Operations............... (73.4) 9.3 22.8
Discontinued Operations................................ (16.2) (3.1) --
Net Income (Loss)...................................... (89.6) 6.2 22.8
</TABLE>
<TABLE>
<CAPTION>
1996 1997
------ ------
<S> <C> <C>
Balance Sheet Data:
Current Assets......................................... $182.8 $207.3
Total Assets........................................... 306.2 316.1
Current Liabilities.................................... 104.8 94.2
Total Liabilities...................................... 302.2 289.3
Shareholders' Equity................................... 4.0 26.8
</TABLE>
F-31
<PAGE> 106
INTERNATIONAL COMFORT PRODUCTS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 1997 AND 1998 -- UNAUDITED
(IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS) -- CANADIAN GAAP
<TABLE>
<CAPTION>
1997 1998
------ ------
<S> <C> <C>
Operating Revenues.......................................... $177.6 $218.5
Cost of Sales............................................... 139.2 170.7
------ ------
Gross Margin................................................ 38.4 47.8
Selling, General and Administrative Expenses................ 22.9 26.9
------ ------
Operating Profit............................................ 15.5 20.9
------ ------
Financial Expenses
Interest expense.......................................... 4.9 5.0
Amortization of debt issuance costs....................... 0.3 0.3
Refinancing costs......................................... -- 5.0
------ ------
5.2 10.3
------ ------
Net Income.................................................. $ 10.3 $ 10.6
====== ======
Average number of shares (in millions)...................... 39.7 40.4
====== ======
Earnings Per Ordinary Share
Basic..................................................... $ 0.26 $ 0.26
Fully diluted............................................. $ 0.25 $ 0.25
====== ======
</TABLE>
see accompanying notes
F-32
<PAGE> 107
INTERNATIONAL COMFORT PRODUCTS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 -- UNAUDITED
(IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS) -- CANADIAN GAAP
<TABLE>
<CAPTION>
1997 1998
------ ------
<S> <C> <C>
Operating Revenues.......................................... $314.2 $351.3
Cost of Sales............................................... 247.9 275.0
------ ------
Gross Margin................................................ 66.3 76.3
Selling, General and Administrative Expenses................ 44.4 47.1
------ ------
Operating Profit............................................ 21.9 29.2
------ ------
Financial Expenses
Interest expense.......................................... 9.6 9.5
Amortization of debt issuance costs....................... 0.6 0.6
Refinancing costs......................................... -- 5.0
------ ------
10.2 15.1
------ ------
Net Income.................................................. $ 11.7 $ 14.1
====== ======
Average number of shares (in millions)...................... 39.5 40.1
====== ======
Earnings Per Ordinary Share
Basic..................................................... $ 0.30 $ 0.35
Fully diluted............................................. $ 0.28 $ 0.34
====== ======
</TABLE>
see accompanying notes
F-33
<PAGE> 108
INTERNATIONAL COMFORT PRODUCTS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS OF U.S. DOLLARS) -- CANADIAN GAAP (UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30
---------------- DECEMBER 31,
1997 1998 1997
------ ------ ------------
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and short-term deposits.............................. $ 17.7 $ 21.1 $ 31.0
Accounts receivable....................................... 113.4 140.5 96.5
Note receivable........................................... -- -- 7.7
Inventories............................................... 134.4 116.6 94.5
Prepaid expenses and other................................ 5.7 6.5 7.6
------ ------ ------
271.2 284.7 237.3
------ ------ ------
Fixed Assets
Property, plant and equipment............................. 213.7 228.7 214.3
Accumulated depreciation.................................. 119.6 127.7 120.7
------ ------ ------
94.1 101.0 93.6
------ ------ ------
Intangible Assets, net...................................... 9.2 30.9 11.0
Other Assets, net........................................... 12.6 14.2 10.1
------ ------ ------
$387.1 $430.8 $352.0
====== ====== ======
LIABILITIES
Current Liabilities
Short-term borrowings..................................... $ 57.2 $ 42.5 $ 19.7
Accounts payable.......................................... 50.3 60.8 44.8
Accrued liabilities....................................... 28.8 31.7 26.5
Product warranty.......................................... 8.6 9.7 9.5
Current portion of long-term debt......................... -- 0.2 0.2
------ ------ ------
144.9 144.9 100.7
Long-Term Debt.............................................. 165.0 175.4 165.6
Product Warranty............................................ 18.0 14.8 16.2
Other Long-Term Liabilities................................. 17.5 15.8 18.0
------ ------ ------
345.4 350.9 300.5
------ ------ ------
SHAREHOLDERS' EQUITY
Ordinary Shares............................................. 170.7 186.1 171.2
Deficit..................................................... (126.8) (102.3) (116.4)
Foreign Currency Translation Adjustment..................... (2.2) (3.9) (3.3)
------ ------ ------
41.7 79.9 51.5
------ ------ ------
$387.1 $430.8 $352.0
====== ====== ======
</TABLE>
see accompanying notes
F-34
<PAGE> 109
INTERNATIONAL COMFORT PRODUCTS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 -- UNAUDITED
(IN MILLIONS OF U.S. DOLLARS) -- CANADIAN GAAP
<TABLE>
<CAPTION>
CASH PROVIDED BY (USED FOR): 1997 1998
---------------------------- ------ ------
<S> <C> <C>
OPERATIONS
Net income.................................................. $ 11.7 $ 14.1
Items not involving current cash flows
Depreciation and amortization............................. 8.5 8.7
Refinancing costs......................................... -- 2.3
Changes in working capital
Accounts receivable....................................... (40.7) (29.5)
Inventories............................................... (34.4) (10.3)
Prepaid expenses and other................................ (0.5) 1.5
Accounts payable, accrued liabilities, and product
warranty............................................... 17.1 10.9
------ ------
(38.3) (2.3)
------ ------
INVESTING
Property, plant and equipment............................. (2.6) (6.6)
Acquisition of United Electric Company.................... -- (25.6)
Acquisition of Watsco Components.......................... -- (14.3)
Acquisition of distribution company....................... (1.8) --
Proceeds from sale of Coastline and factory branches...... 23.1 --
------ ------
18.7 (46.5)
------ ------
FINANCING
Long-term debt issued..................................... -- 150.0
Ordinary shares issued.................................... 1.5 14.9
Repayment of long-term debt............................... -- (140.2)
Refinancing costs......................................... -- (8.6)
------ ------
1.5 16.1
------ ------
Increase in Borrowings...................................... (18.1) (32.7)
Net Cash (Borrowings) -- Beginning of the Period.......... (21.4) 11.3
------ ------
Net Borrowings -- End of the Period....................... $(39.5) $(21.4)
====== ======
Represented by
Short-term borrowings.................................. $(57.2) $(42.5)
Less: Cash and short-term deposits..................... 17.7 21.1
------ ------
$(39.5) $(21.4)
====== ======
</TABLE>
see accompanying notes
F-35
<PAGE> 110
INTERNATIONAL COMFORT PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 -- UNAUDITED
(IN MILLIONS OF DOLLARS) -- CANADIAN GAAP
1. Reference should be made to the consolidated financial statements for
the year ended December 31, 1997 included in Form 10-K filed on March 31, 1998,
for details of significant accounting policies. Certain comparative figures have
been reclassified to conform with current financial statement presentation.
2. In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position as of
June 30, 1997 and 1998, the results of operations and changes in financial
position for the periods then ended. The interim results are not necessarily
indicative of the results to be expected for the full year.
3. Details of inventories are as follows:
<TABLE>
<CAPTION>
JUNE 30
---------------- DECEMBER 31,
1997 1998 1997
------ ------ ------------
<S> <C> <C> <C>
Finished goods................................. $ 98.0 $ 74.9 $ 58.8
Raw materials and work in process.............. 11.4 17.8 13.4
Service parts.................................. 25.0 23.9 22.3
------ ------ ------
$134.4 $116.6 $ 94.5
====== ====== ======
</TABLE>
4. Significant Differences Between Canadian and U.S. Accounting Practices
Accounting principles adopted by the Company as reflected in these
consolidated financial statements are generally consistent with accounting
principles accepted in the United States ("U.S. GAAP"). The following
reconciliations reflect the approximate differences in these accounting
principles where applicable to the Company. If accounting principles generally
accepted in the United States were followed, the effect on the consolidated
financial statements would be:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30 JUNE 30
-------------- --------------
1997 1998 1997 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net income (as reported)........................... $10.3 $10.6 $11.7 $14.1
Accounting for income taxes........................ (.1) (.1) (.3) (.3)
Post-retirement benefits........................... (.6) (.4) (1.1) (1.1)
----- ----- ----- -----
Net income under U.S. GAAP......................... $ 9.6 $10.1 $10.3 $12.7
===== ===== ===== =====
Weighted average number of ordinary shares
outstanding during the period under U.S. GAAP (in
millions)
Basic............................................ 39.7 40.4 39.5 40.1
Diluted.......................................... 41.8 42.4 41.6 42.1
Net income per share under U.S. GAAP (in dollars)
Basic............................................ $0.24 $0.25 $0.26 $0.32
Diluted.......................................... $0.23 $0.24 $0.25 $0.31
</TABLE>
F-36
<PAGE> 111
INTERNATIONAL COMFORT PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Consolidated Balance Sheets:
<TABLE>
<CAPTION>
JUNE 30
---------------- DECEMBER 31,
1997 1998 1997
------ ------ ------------
<S> <C> <C> <C>
Total assets (as reported).................................. $387.1 $430.8 $352.0
Items increasing reported total assets
Deferred income taxes..................................... 3.7 3.7 3.5
Post-retirement and pension benefits...................... 4.1 4.6 3.2
------ ------ ------
Total assets -- U.S. GAAP................................... $394.9 $439.1 $358.7
====== ====== ======
Shareholders' equity (as reported).......................... 41.7 79.9 51.5
Items increasing (decreasing) reported shareholders' equity
Deferred income taxes.................................. 3.7 3.7 3.0
Post-retirement and pension benefits................... (6.1) (5.6) (6.2)
------ ------ ------
Shareholders' equity -- U.S. GAAP........................... $ 39.3 $ 78.0 $ 48.3
====== ====== ======
</TABLE>
Consolidated Cash Flows (U.S. GAAP):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
----------------
1997 1998
------ ------
<S> <C> <C>
Net cash used in operating activities..................... $(38.3) $ (2.3)
Net cash provided by (used in) investing activities....... 18.7 (32.2)
Net cash provided by financing activities................. 19.7 24.6
------ ------
Increase (decrease) in cash and cash equivalents.......... 0.1 (9.9)
Cash and cash equivalents -- beginning of the period...... 17.6 31.0
------ ------
Cash and cash equivalents -- end of the period............ $ 17.7 $ 21.1
====== ======
</TABLE>
Non-cash transactions:
In 1998, the Company acquired Watsco Components in exchange for the
issuance of ordinary shares in the amount of $14.3.
5. Summarized Financial Information
International Comfort Products Holdings, Inc. ("ICP Holdings") is a
wholly-owned subsidiary of the Company. ICP Holdings is the issuer of certain
securities as to which a registration statement now has been filed under the
Securities Act of 1933. Upon that registration statement being declared
effective, ICP Holdings would be subject to the reporting requirements under
Section 13 or 15 (d) of the Securities Exchange Act of 1934 (the "Exchange
Act"). Because these securities, however, are fully and unconditionally
guaranteed by the Company and management has determined that such information is
not material to the holder of such securities, the Company and ICP Holdings have
filed with the Commission a request that ICP Holdings be exempted from the
reporting requirements of the Exchange Act. Financial information relating to
ICP Holdings is presented herein in accordance with Staff Accounting Bulletin
No. 53 as an addition to the notes to the financial statements of the Company.
Summarized financial information for ICP Holdings is as follows:
F-37
<PAGE> 112
INTERNATIONAL COMFORT PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Condensed Income Statement Information:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------ ----------------
1997 1998 1997 1998
------- ------- ------ ------
<S> <C> <C> <C> <C>
Operating revenues..................... $165.9 $206.2 $292.1 $329.7
Gross margin........................... 35.0 43.6 61.4 69.5
Net income............................. 10.5 11.9 13.4 16.5
</TABLE>
Condensed Balance Sheet Information:
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1998 1997
-------- ------------
<S> <C> <C>
Current assets.......................................... $254.6 $207.3
Total assets............................................ 395.4 316.1
Current liabilities..................................... 134.8 94.2
Total liabilities....................................... 337.3 289.3
Shareholders' equity.................................... 58.1 26.8
</TABLE>
The agreements governing the terms of certain of the Company's debt contain
certain covenants which, among other things, place limitations on the ability of
subsidiaries of ICP Holdings to pay dividends and make other restricted
payments, as defined, to ICP Holdings. Pursuant to the terms of the most
restrictive covenant regarding restricted payments, as of June 30, 1998, $110
million of net assets of subsidiaries of ICP Holdings were not available for
payment of dividends to ICP Holdings.
F-38
<PAGE> 113
- ------------------------------------------------------
- ------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THE OFFER CONTAINED HEREIN OTHER THAN THOSE
CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS AND THE ACCOMPANYING
LETTER OF TRANSMITTAL AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE ISSUER OR THE PARENT
GUARANTOR. NEITHER THIS PROSPECTUS NOR THE ACCOMPANYING LETTER OF TRANSMITTAL,
OR BOTH TOGETHER, CONSTITUTE AN OFFER OR A SOLICITATION OF ANY OFFER TO BUY ANY
SECURITY OTHER THAN THOSE TO WHICH THEY RELATE, NOR DO THEY CONSTITUTE AN OFFER
TO SELL, OR THE SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR THE ACCOMPANYING LETTER OF TRANSMITTAL, OR
BOTH TOGETHER, NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE ISSUER
OR THE PARENT GUARANTOR SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. UNTIL DECEMBER
10, 1998 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING
TRANSACTIONS IN THE NEW NOTES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF THE DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Incorporation of Certain Documents by
Reference............................ 4
Prospectus Summary..................... 5
Historical and Pro Forma Consolidated
Financial Data....................... 13
Risk Factors........................... 15
Use of Proceeds........................ 20
Capitalization......................... 21
Selected Historical and Pro Forma
Consolidated Financial Data.......... 21
Business............................... 24
Description of Other Indebtedness...... 34
Purpose of the Exchange Offer.......... 35
Terms of the Exchange Offer............ 37
Description of Notes................... 43
Book Entry; Delivery and Form.......... 66
Certain U.S. Federal Tax
Considerations....................... 68
Certain Canadian Federal Income Tax
Considerations....................... 72
Legal Matters.......................... 72
Experts................................ 73
Available Information.................. 73
Plan of Distribution................... 74
Index to Financials.................... F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
$150,000,000
(ICP LOGO)
INTERNATIONAL COMFORT PRODUCTS
HOLDINGS, INC.
8 5/8% SENIOR NOTES DUE 2008
GUARANTEED ON A SENIOR BASIS BY
INTERNATIONAL COMFORT PRODUCTS
CORPORATION
------------------
PROSPECTUS
SEPTEMBER 10, 1998
------------------
- ------------------------------------------------------
- ------------------------------------------------------
